Autumn Budget 2021: Real Estate & Construction Sector

3 November 2021 / Insight posted in Articles

Autumn Budget 2021: Real Estate & Construction Sector

The Autumn Budget 2021 was delivered by the Chancellor of the Exchequer last week. He acknowledged there will still be challenging months ahead but a quicker recovery from the pandemic is now expected. He took the opportunity to announce significant increases in spending, without announcing any significant new tax rises.

Below, we have highlighted the key Budget, and pre-Budget announcements most relevant to the Real Estate & Construction sector.

Residential Property Developer Tax

Residential Property Developer Tax (RDPT) will be introduced in April 2022. The aim of this new tax is to raise at least £2 billion to contribute towards the cost of cladding remediation.

The new tax will apply to companies with profits from UK residential property development activities in excess of a group-wide annual profits allowance of £25 million. The rate of the RDPT will be 4% on RDPT activity profits in excess of the £25 million allowance. This excludes profits from build-to-rent activities, although this will be kept under review. The tax will be administered by means of extension to the existing corporation tax rate for affected companies.

Moore Kingston Smith comment

It is good news that the government has decided to target the tax at larger companies. The threshold of £25m will cut out most residential property developers. We also welcome the simplicity of aligning the administration of RDPT with corporation tax self-assessment.

The affected companies will not have much time to get to grips with the new rules before they come into effect in April 2022. They will have to ascertain what activities are RDPT activities, make the required profit adjustments and ensure that the group-wide allowance is allocated effectively.

The tax was originally announced as temporary, but the absence of a “sunset clause” gives uncertainty as to how long the tax will apply.

Capital gains tax

The rates on capital gains have not changed.

The deadline for reporting disposals of residential property and for paying tax on any capital gains has been increased from 30 to 60 days from completion, for disposals on or after 27 October 2021.

Moore Kingston Smith comment

Many will be reassured that no announcements on capital gains tax have been made, particularly in the real estate sector where may investors hope to exit real estate developments/investments at the lowest possible tax rate.

Some may take the Chancellor’s commitment to reduce taxes by the end of the parliament as a sign that capital gains tax rates are safe. However, given that most of the voting public don’t pay this tax, it would be a very easy target to raise this tax and win votes should either be needed.

The 30-day CGT payment window was criticised as soon as it was announced for being too tight. It is good to see a more sensible timeframe being brought in with immediate effect.

Corporation tax rates

The Chancellor confirmed that the previously announced increase in the rate of corporation tax from 19% to 25% will take effect as planned from 1 April 2023. He also announced that the surcharge on banking companies will be reduced from 8% to 3% (meaning banks will pay corporation tax at 28%, a slight increase over the current 27%).

Moore Kingston Smith comment
Whilst many hoped corporation tax rates would not increase, the rate of 25% will still be the lowest rate in the G7. Although, the tax ‘competitiveness’ of the UK is not just about corporation tax; separate research shows that, when all taxes are considered, the UK ranks 22nd overall on the 2020 International Tax Competitiveness Index, one place lower than in 2019. This is something the Chancellor will need to watch in the future.

Small businesses with profits before £50k, will still benefit from the 19% rate. Only those businesses with £250k plus profits will pay the full 25%. However, for those businesses with profits about £25m, with the residential developer property tax added, that means a total rate of 28%, putting them back to pre-Global Financial Crisis levels.

Annual investment allowance

The annual investment allowance (AIA), which gives businesses a 100% first year write down for qualifying capital expenditure, has a ‘permanent’ level of £200,000. A temporary increase to £1 million has been in place since 1 January 2019 and was due to expire at the end of December 2021. The government’s plan is to extend the increase for a further 15 months, until 31 March 2023.

Moore Kingston Smith comment
The extension of the AIA limit of £1 million for a further 15 months is welcomed. To a large extent, its benefit will be limited by the “superdeduction” for capital allowances which will also be in place until 31 March 2023. But it will benefit some businesses, and for some types of expenditure, and perhaps encourage businesses to make investments that otherwise they would not.

There was no widening of what expenditure can be claimed, so real estate owners and occupiers will still need to look carefully at what expenditure incurred can actually benefit from this relief.

VAT and indirect taxes

No substantial changes were made regarding VAT and real estate.

Moore Kingston Smith comment

VAT continues to be a hugely complex area for real estate. Many are advocating for significant simplification but, it does not look like such implication will be coming very soon. Indeed, some commentators expect it to increase in complexity.

Therefore, VAT will continue to be a major consideration for real estate investors and developers for the foreseeable future.

Business rates

As well as announcing that the rates review period will shorten to three years, the government announced two targeted reliefs to business rates:

  1. 50% relief for the retail, hospitality, and leisure sectors; and
  2. Business rates improvement relief given a 12 month holiday from increase in rates due to improvements made.

Moore Kingston Smith comment

Business rates have been criticised as a tax for many years, particularly in the retail sector due to the inherent discrepancy they create between traditional bricks and mortar retailers vs online retailers.

Many will be disappointed that the Chancellor opted for targeted reliefs rather than whole-scale reform.

The reliefs are targeted to the benefit of occupiers rather than owners. However, the reliefs may still benefit owners to some degree as they can help tenants to remain viable and pay rent. In addition, the owners can facilitate improvement works to be carried out and, therefore, potentially benefit from them beyond the occupiers tenancy.

Conclusion

In conclusion, other than the residential property developer tax, there were relatively few announcements that specifically impact the Real Estate and Construction sector from a tax point of view. To some degree, this is welcome. For some, there will be a sigh of relief, and for others, frustration that not enough is being done to support a sector trying to both meet high housing demand and environmental considerations.

If you would like to know more about how any of these factors will affect your business, please get in touch.

Watch Moore Kingston Smith’s Head of Tax Tim Stovold’s initial reaction to the Budget