Summary 2016 budget impacts on property
Well George Osborne’s 2016 budget definitely caught a few people out particularly with the hike in the top slice for commercial Stamp Duty from 4% to 5%. It seems quite a long time ago since we had a fixed 1% SDLT on property transactions but once this easy target was attacked ……….
However, it’s not all bad………
The Positives for Real Estate
Business Rates
Retailers in particular, and small businesses in general, will be pleased with the more generous exemptions on business rates, even if they didn’t get some of the more radical measures they were asking for. Changing from RPI to CPI indexation from 2020 will take a little pain out of the future tax burden as RPI is expected to grow by 1% ahead of CPI although they will have to wait until 2020 for this to be implemented. The move to a 3-year valuation cycle will also be welcome and there will be calls for the Scottish Government to implement similar measures north of the border.
VAT
There will be a clampdown on overseas online retailers selling into the UK but avoiding UK VAT. This will also be a benefit to UK retailers and will help to level the playing field in the competition between on-line and store-based retailers.
London will also get more control of business rates revenue – brought forward to April 2017. This is a significant measure as it allows London to keep the fiscal benefits of economic growth and property development, which encourages growth friendly policies at the local level. We may well see this become the blueprint for similar plans extended to other parts of the UK.
However,here are the Negatives.
Stamp Duty and Land Tax (Commercial)
Under the disguise of removing distortions in the same way as last year’s residential SDLT reforms and the LBTT system in Scotland, changes to commercial SDLT have pushed up the top rate from 4% to 5%, increasing transaction costs of all properties costing more than £1m and have increased the expected tax take by over £500m (over 10%) by 2017-18. Theory says that a tax increase is born partly by the vendor and partly by the buyer with the share partly depending on market conditions. With today’s cooling of the market in the lead up to the Brexit referendum, the odds are that the bulk of the cost will be pushed on to the vendor. This will also encourage more creative avoidance strategies to be considered. Has the chancellor got the balance right or has he over estimated the revenue generation of this increase?
There is also a new 2% rate for very large leasehold transactions (where the net present value is above £5 million). This is only likely to affect very large central London transactions. Other new leases will be unaffected.
Anti-Tax Evasion Measures
Aimed at limiting tax evasion and avoidance by offshore property developers – expected to raise £640m by 2019-20. Companies located in Guernsey, the Isle of Man and Jersey will also be treated as being in the UK for all Corporation and Capital Gains tax purposes.
Interest relief
A limit on interest payments that can be offset against profits for Corporation Tax purposes is to be limited to 30%. It is not clear how much this will affect property companies or, indeed, if it is aimed at property companies at all, but many companies are highly geared and have substantial interest costs.
Summary
There are some positives on tax rates and business rates, but it does look like a tax grab on property transactions to help in the chancelors medium term aim of seeking to balance the books.
