2021 Autumn Budget: Real Estate
October 27, 2021
2021 Autumn Budget: Real EstateDownloads
With signals towards a stronger than anticipated recovery the Autumn Budget 2021 continued to focus on investment, net zero and levelling up. Although draft legislation and consultations for some of the items relevant to the Real Estate sector had previously been released, there were some key announcements made as part of the Autumn Budget in relation to the underlying details.
Residential Property Developer Tax
As announced on 10 February 2021, the Government will introduce a new tax on company profits derived from UK residential property development. This will take effect from 1 April 2022 for relevant profits arising on or after this date.
Draft legislation was released on 20 September 2021 which confirmed that the tax will apply to profits as calculated for corporation tax purposes but subject to certain adjustments, notably disallowing any deductions for financing costs. The tax broadly applies to profits realised by residential property developers who have an interest in land and hold the property as trading stock for sale. This includes situations where one company carries on the development activities and a related company owns the land. We would note that profits on residential properties developed and held for investment purposes (e.g. build to rent properties) should be outside the scope from the perspective of the investor. Typically construction contractors who would have no interest in the land would also not be caught. However, it is possible that profits realised by the developer in forward funding transactions could be caught in scenarios where they previously owned the land and then sold it, whilst continuing to carry out development works thereafter.
The draft legislation did not include details of the tax rate or annual allowance threshold, however, as announced at the Autumn Budget 2021, the tax rate will be 4% and will apply to profits in excess of an annual threshold of £25 million on a group basis. This will be included in the corporation tax returns of those companies liable to the new tax.
The new tax was announced earlier this year as a measure to recover some of the cost of the £3.5 billion fund to replace unsafe cladding on high rise buildings. While the headline rate of 4% appears low, the exclusion of finance costs will increase the effective tax rate. Further, the application of these rules to forward funding transactions may need to be factored into pricing of such deals.
Amendments to Real Estate Investment Trusts (REITs) Regime
As announced on 20 July 2021, the Government will legislate in the Finance Bill 2021-22 to make changes to the rules applying to Real Estate Investment Trusts (“REITs”). These changes will have effect from 1 April 2022 and are aimed at removing certain constraints and administrative burdens of the regime as summarised below:
- Removal of the requirement for shares to be admitted to trading on a recognised stock exchange in scenarios where institutional investors hold at least 70% of the ordinary share capital in the REIT.
- Amendment of the definition of an overseas equivalent of a UK REIT meaning the overseas entity itself needs to meet the equivalence test, rather than the overseas regime to which it is subject.
- Removal of the ‘holders of excessive rights’ charge where property income distributions (“PIDs”) are paid to investors who are entitled to receive gross payments.
- Amendment of the rules that require that at least 75% of a REIT’s profits and assets relate to the property rental business (the ‘balance of business test’) to disregard non-rental profits arising because a REIT has to comply with certain planning obligations and to ensure the items currently specified as excluded from the profits part of the test are disregarded in all parts of the test.
- Introduce a new simplified balance of business test so that, if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not have to prepare the additional statements which would be required to meet the full test.
We welcome HMRC’s changes to the REIT regime which will remove some of the unnecessary costs and administrative burden for existing REITs and barriers to entry for new REITs, thus making the regime more accessible to potential investors.
Additionally, the 70% threshold for the non-listing condition is lower than originally anticipated which further increases the potential attractiveness of the regime.
Asset Holding Companies
Following on from the release of the Consultation Response and draft legislation in July 2021, the Government has reaffirmed that a specific Asset Holding Company regime will be introduced from 1 April 2022. Whilst final legislation is yet to be released (expected in the draft Finance Bill 2021-22 on 4 November 2021), the regime is expected to include the following for Qualifying Asset Holding Companies ("QAHCs"):
- Exempting gains on disposals of certain shares and overseas property by QAHCs.
- Exempting profits of an overseas property business of a QAHC, where those profits are subject to tax in an overseas jurisdiction and also exempting the associated profits that arise from loan relationships and derivative contracts.
- Allowing deductions for certain interest payments that would usually be disallowed as distributions (along with necessary consequential changes to the hybrids rules).
- Switching off the late paid interest rules so that, in certain situations, interest payments are relieved in the QAHC on the accruals basis rather than the paid basis.
- Switching off the deeply discounted securities rules for corporates so that, in certain situations, the discount arising on any such security issued by the QAHC is relieved on the accruals basis rather than the paid basis.
- Disapplying the obligation to deduct a sum representing income tax at the basic rate on payments of interest.
- Switching off the transfer pricing exemption for small and medium-sized enterprises and adjusting the participation condition to ensure the transfer pricing rules apply appropriately in relation to a QAHC.
- Allowing premiums paid, when a QAHC repurchases its share capital from an individual, to be treated as capital rather than income distributions.
- Allowing certain amounts paid to qualifying remittance basis users by a QAHC to be treated as non-UK source, reflecting the underlying mix of UK and overseas income and gains.
- Exempting repurchases by a QAHC of share and loan capital which it previously issued from Stamp Duty and Stamp Duty Reserve Tax (“SDRT”).
- Entry and exit provisions, including the rebasing of certain assets and the creation of a new accounting period when a company enters and exits the regime.
The introduction of the specific Asset Holding Company regime is welcome and should place the UK on a level playing field with other common Asset Holding Company jurisdictions (such as Luxembourg and Ireland). We consider that this should reinforce the UK as a key jurisdiction for investment management activities by incentivising collective investment schemes / institutional investors to hold their assets within UK structures. We look forward to reviewing the detailed provisions once the final legislation is released.
Re-domiciliation of Companies to the UK
The Government has published a consultation at the Autumn Budget 2021 containing proposals for enabling the re-domiciliation of companies to the UK.
It is currently unclear what the tax consequences will be on a company re-domiciling to the UK. The Government is considering whether to update the legislation to ensure that, subject to any double tax agreements, the company will be treated as UK resident by virtue of the re-domiciliation or only be treated as UK resident for tax purposes if the central management and control is also in the UK.
This may facilitate the onshoring of non-UK entities holding UK property following the recent changes to the tax landscape for non-resident landlords.
Hybrid Mismatch Provisions
Following on from the announcement at the Spring Budget 2021, the Government has confirmed that the final change arising out of the Consultation in 2020 will be made in Finance Bill 2021-22. This change seeks to ensure that the rules apply proportionately to entities that are transparent in their jurisdiction of formation but treated as taxable persons in other jurisdictions (e.g., US LLCs or S-Corps). The change will be retrospective to 1 January 2017.
This is a welcome but long overdue change having initially been included in the draft Finance Bill 2021 but removed due to concerns regarding the drafting. Based on the draft legislation released in July 2021, these changes are expected to achieve the intended policy intent.
The implementation of this change should remove a number of perverse outcomes in the legislation as well as provide certainty to taxpayers on historic positions, although taxpayers should consider whether historic returns should be amended to reflect the impact of this change.
Extension to Temporary Increase in the Annual Investment Allowance
The £1 million Annual Investment Allowance (“AIA”) limit for investment in plant and machinery will be temporarily extended to 31 March 2023.
The AIA limit is set at £200,000, but that limit was temporarily increased for calendar years 2019 and 2020 and subsequently extended to 31 December 2021.
Extending the temporary AIA limit is aimed as an investment stimulus by incentivising business to accelerate their investment plans to take advantage of the additional deduction available for expenditure on plant and machinery in the year it is incurred.
Rules apply to group companies or businesses under common control which share a single AIA.
Whilst welcomed, the importance of AIA has been slightly diminished following the introduction of the temporary 130% super-deduction and 50% special rate first year allowances allowing businesses to claim higher rates of relief than otherwise would be available.
Restructuring Property Leases (IFRS 16) and Reform of Loss Relief Rules
The corporate loss reform rules enacted in 2017 provided for an additional deductions allowance for companies in financial distress where an onerous lease provision reversed. Changes in lease accounting under IFRS 16 means the exemption for distressed companies is no longer available.
Amendments will be made to the legislation such that the exemption is available following the change to IFRS 16 and therefore allowing the loss reform rules to continue to operate as intended.
The change is welcomed and will benefit occupiers seeking to restructure their financial liabilities including lease obligations to avoid insolvency and that have tax losses brought forward which include lease provision or impairment deductions taken in previous accounting periods. The changes will apply retrospectively with effect for accounting periods beginning on or after 1 January 2019; this aligns with the introduction of IFRS 16. Companies which restructured their leases to avoid insolvency since 1 January 2019 may wish to reconsider if this change may benefit them and seek to amend their tax returns.
Capital Gains Tax - Property Disposal Time Limit Extension
The Government is extending the deadline for residents to report and pay Capital Gains Tax arising from disposals of UK residential property from 30 days to 60 days after completion. This deadline will also apply to non-UK resident individuals disposing of property in the UK. This measure will apply to transactions that complete on or after 27 October 2021 and legislation will be included in Finance Bill 2021-22.
It is welcome that HMRC have reduced the administrative burden for taxpayers by providing sufficient time to report and pay.
Annual Tax on Enveloped Dwellings (“ATED”) - Annual Chargeable Amounts for 2020-21 Chargeable Period
ATED charges increase automatically each year in line with inflation. The ATED charges will rise by 3.1% from 1 April 2022 in line with the September 2021 CPI.
A number of Freeport tax sites will be designated in Teesside, Humber and Thames by a Statutory Instrument on 29 October 2021. This will bring into force the enhanced structures and buildings allowance, enhanced capital allowances and relief on stamp duty land tax provided by Finance Act 2021 from a specified date in November 2021.
Business Rates Relief
The Government have introduced a number of measures to business rates as summarised below:
- Freeze the business rates multiplier from 1 April 2022 until 31 March 2020 for a second year.
- Provide relief for eligible retail, hospitality and leisure properties in England for 2022-23 with 50% business rates relief up to a £110,000 per business cap.
- A 100% improvement relief will be available which will provide 12 months relief from higher bills for occupiers where eligible improvements to an existing property increase the rateable value. The Government will consult on how this will be implemented in due course and will take effect in 2023 and be reviewed in 2028.
- Introduce from 1 April 2023 until 31 March 2035 targeted business rate exemptions for eligible plant and machinery used in onsite renewable energy generation and storage, and a 100% relief for eligible heat networks, to support the decarbonisation of non-domestic buildings.
- Increase the frequency of business rates revaluations so that they take place every 3 years instead of every 5 years, starting in 2023.
- Provide additional funding to the Valuation Office Agency to support the delivery of the new revaluation cycle.
- Extend transitional relief for small and medium-sized businesses and the supporting small business scheme, for 1 year. This will restrict bill increases to 15% for small properties (up to a rateable value of £20,000 or £28,000 in Greater London) and 25% for medium properties (up to a rateable value of £100,000), subject to subsidy control limit.
Whilst certain businesses may welcome the temporary reliefs provided by the Government, the impact may be limited due to the caps and temporary time frames.
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October 27, 2021
Senior Managing Director, Head of EMEA Tax Advisory & Real Estate