March 16th, 2016 / Insight posted in Articles, MKS Comments

Budget 2016: Property Tax

The Chancellor’s Budget concentrated very much on spending cuts, returning to a budget surplus and the continued drive to counter tax avoidance and evasion. The impact on the property sector was very much forewarned and what generally what was given with one hand was taken back with the other. The draft legislation for the additional rates of Stamp Duty Land Tax introduced a new measure that arose from the consultation as well as tightening the scope of the tax.

Specific points of relevant to the sector are set out below:

Stamp Duty Land Tax (SDLT)

On non-residential and mixed use property transaction

The Budget introduces changes to the way in which SDLT is calculated for non-residential and mixed property transactions and builds on reforms to residential SDLT introduced in the Autumn Statement 2014. The changes will mean that rather than charging a single rate of tax on a transaction, each rate of tax is payable on the portion of the chargeable consideration which falls within each rate band.

New rates and bands have also been introduced. The changes eliminate the “cliff edge” increases in SDLT liability which occurred under the old rules as prices rose above a rate threshold.

The new rates are:

  • 0% – up to £150,000
  • 2% – £150,001 to £250,000
  • 5% over £250,000

These changes are immediate and apply from 17 March 2016. Where contracts have been exchanged but transactions have not completed before 17 March 2016 purchasers will have a choice of whether the old or new structure and rates apply.

KS comment: The Government states that 90% of non-residential property transactions will pay the same or lower amounts of SDLT. This will be good news for buyers of smaller properties but clearly larger commercial property investors and developers will now be subject to a higher tax cost when acquiring commercial property. The breakeven point is at £1,050,000 with purchases above this level incurring a higher SDLT charge under the new rules.

On new leasehold transactions

The Budget also reforms SDLT for new leasehold transactions; SDLT is already charged on the portion of the net present value (NPV) of the rent which falls within each band. On and after 17 March 2016 a new 2% rate for rent paid under a non-residential lease will be introduced where the NPV of the rent is above £5 million.

The new rates bands and thresholds for rent paid under a lease are:

  • 0% – up to £150,000
  • 1% – £150,001 to £5,000,000
  • 2% over £5,000,001

KS comment: This is simply a revenue raising exercise on larger leasehold transactions. This would double the tax cost of a 20 year lease with an annual rental of more than £250,000.

Stamp Duty Land Tax – Higher Rates on Purchases of Additional Residential Properties

Following an announcement in 2015, it has been confirmed that from 1 April 2016 higher rates of Stamp Duty Land Tax will be charged on the purchase by individuals’ “additional residential properties”. The same higher rates – which are 3% above the current rates – will also apply where companies purchase residential property (except where the flat 15% rate applies).

As far as individuals are concerned, the higher rates will apply where at the end of the day of the purchase the individual owns two or more properties, although individuals who are replacing their main residence will be excluded. Properties purchased for less than £40,000, caravans, mobile homes and houseboats will not be subject to the higher rates.

KS comment: When this proposal was originally announced, it was intended that the higher rate would not apply to “significant investors” (i.e. those who were considered to “positively contribute to an overall increase in housing supply”) but this has been quietly dropped and so the new rate will apply more widely than originally thought.

This measure is likely to deter some residential property investors and in addition it may cause a few headaches for those individuals who need to work out whether or not they can be classed as “replacing their main residence”.

Offshore Property Developers

Some property developers use offshore structures to avoid UK tax on their profits from trading in property in the UK.   New rules have been announced with the aim of ensuring that non-resident developers of UK property will always be brought into UK tax on the profits from that development.

The new legislation puts in place a specific set of rules to tax trading profits derived from land in the UK. Those rules will apply equally to resident and non-resident businesses and will not depend on the existence of a ‘permanent establishment’ in the UK.

The measure will come into effect from Report Stage of Finance Bill 2016. Anti-avoidance rules will take effect from Budget Day to counteract arrangements put in place between Budget Day and the date the new legislation is introduced that are designed to get around the charge.

The majority of the UK’s international double taxation agreements (DTAs) preserve the UK’s taxing rights over land in the UK and are therefore in line with the proposed changes. However, a small number of older DTAs will require some changes to put the position beyond doubt. Protocols have been agreed with Guernsey, the Isle of Man and Jersey, amending those DTAs and these changes will have effect from Budget Day.

KS comment: The intended effect of the measure will be to level the playing field between UK and offshore property developers by ensuring that an offshore developer of UK land is taxed in the same way as a UK developer and cannot benefit from a more favourable treatment.

Landfill tax

The Budget increases both the standard and lower rates of Landfill Tax in line with the Retail Prices Index rounded to the nearest 5 pence, for taxable disposals of waste made at authorised landfill from April 2017 and again from April 2018. Legislation will be introduced to increase the standard rate per tonne from 1 April 2016 to £84.40, from 1 April 2017 to £86.10 and from 1 April 2018 to £88.95.

KS comment: An increase to reflect inflation.