Real Estate monthly digest - October 2018

Real Estate monthly digest pebbles
  • Submitted 31 October 2018
  • Applicable Law UK
  • Topic Real Estate

UK Budget 29 October 2018: Overview

Despite the Chancellor’s best efforts to avoid this late October Budget being tainted by its association with Halloween, the first Monday Budget since 1962 seems set to be seen as the “phantom” Budget if the UK’s negotiations with the EU fail to bear fruit.

The Chancellor has candidly admitted that a no-deal Brexit would require a new Budget that “set out a different strategy for the future”. The admission - that some will no doubt dismiss, not inappropriately at this time of year, as part of Project Fear - compounded by the very real uncertainties surrounding the Brexit negotiations, means that the Budget may well be a temporary indication of the Government’s fiscal planning for 2019 and beyond.

In terms of immediate measures, there was the announcement of extra money for housing, transport, education and infrastructure projects, such as road building and pot hole repairs - perhaps the Chancellor is hoping to ensure it is not too bumpy a road to Brexit! The wider issue of Governmental Department budgets, and whether austerity is really at an end, will have to wait until the Spending Review in 2019 once the final Brexit deal - if there is one - is known. However, fears over major tax rises in the near future to pay for any fiscal loosening foisted on the Chancellor by No. 10 appear to have receded due to the better than expected Office for Budget Responsibility figures. In fact, the Chancellor was able to announce that the Conservative pledge to increase the personal allowance to £12,500 and the higher rate threshold to £50,000 would be met a year early in 2019.

Probably the most eye-catching tax measure - though one likely to affect very few businesses in practice - was the announcement that the UK would go it alone with the introduction of a digital services tax. The “painfully slow” process at the international level meant that the UK would introduce the new levy from 2020 following consultation on the detail. A number of other measures also tackle the challenges presented by multinational businesses operating in the UK, a constant theme for this Chancellor. More broadly, there were a range of announcements on capital allowances, including a temporary increase in the annual investment allowance to £1m to stimulate business investment in the economy.

Tax raising measures were mostly limited to environmental tax measures and the usual plethora of anti-avoidance and anti-evasion measures, without which no Budget would be complete and which are projected to raise £2bn over 5 years.

Ultimately, however, this was a Budget overshadowed by the spectre of Brexit. The Chancellor has made it abundantly clear that he regards it as essential that the UK avoids the nightmare of a no-deal Brexit and his predictions for the public finances are highly dependent on a smooth transition. In the meantime, this potentially “phantom” Budget holds out the prospect of better times ahead should the UK avoid being haunted by a disorderly Brexit in the years to come.

UK Budget 29 October 2018: Tax

Please click here for full coverage of Simmons & Simmons' expert commentary on those tax aspects of the 2018 UK Budget, released on 29 October 2018, which are of particular interest to the business community.

Some real estate specific measures are set out below:

Taxing gains by non-residents from UK residential and non-residential property

The Government has confirmed it will be implementing previously announced proposals to bring non-UK residents into the charge to UK tax on gains from direct, and certain indirect, disposals of UK immovable property - whether residential and non-residential - from 06 April 2019. The announcements accompanying the Budget add nothing significant to the detailed proposals published in July this year, except to confirm that funds, other than partnerships, which meet the definitions of a “collective investment scheme” or an “Alternative Investment Fund” under applicable regulatory definitions will be treated as companies for capital gains purposes. Detailed further rules specific to funds have been developed by the Government in consultation with stakeholders since July, but not yet published. The outcome of this exercise is expected to be made public on 07 November 2018.

Bringing UK property income of non-residents into UK corporation tax

The Government has confirmed that it will be implementing previously announced proposals to bring non-UK resident companies into the charge to UK corporation tax on UK property income from 06 April 2020. A number of transitional arrangements were also announced, including the confirmation that some form of non-resident landlord scheme will continue after April 2020, with income tax being withheld on gross rental income.

Capital allowances

This year's Budget included a bumper crop of changes to the UK’s capital allowances regime. Some of the announced changes favour the taxpayer and some are detrimental, so it is appropriate to view the measures as a package. The eye-catching headline is that Government will legislate in a Finance Bill for introduction of a “Structure and Buildings Allowance” or SBA, which those with longer memories might rightly conclude represents the return of the old Industrial Buildings Allowance in a new guise. Full details of this and other changes to existing capital allowances measures can be found via the link above.

Lease accounting changes

After a lengthy consultation process concerning the impact of IFRS 16 and the impact of lessees ceasing to recognise the difference between operating and finance leases, the broad outcome of that process is to maintain the tax status quo.

A finance lease and an operating lease will continue to be taxed depending on their legal and contractual terms not by reference to the accounting treatment. There will be some modifications to the definition of a long funding lease and the long funding lease rules themselves where capital allowances are claimed by the lessee rather than the lessor.

The requirement for businesses to prepare their tax calculations based on old accounting treatment will be repealed. Where this leads to a change in the basis of taxation, any additional profits and tax will be spread over the average remaining life of the leases that gave rise to the adjustment.

Consequential amendments are also to be made to other areas of legislation where the leasing rules have an impact, including the corporate interest restrictions rules, REITs and the sale of lessor company rules.

The changes will take effect for accounting periods beginning on or after 01 January 2019.

Capital gains tax payment windows for residential property gains

As originally announced in the Autumn Statement 2015, but subsequently deferred until April 2020, the reporting and tax payment windows for UK residents realising capital gains from residential property are to be substantially shortened.

With effect from 06 April 2020, UK residents disposing of residential property will need to report their disposals via prescribed returns within 30 days of completion and to make a payment on account of tax due at the same time. This substantially brings forward the reporting and payment obligations for gains from residential property; for a disposal within a tax year ended 06 April, a UK individual would currently have until the following 31 January to report the gain, ie approximately 10 months.

The new reporting and payment obligations will not apply where the gain realised by the UK resident is not chargeable to capital gains tax - most obviously, where private residence relief is available because an individual is disposing of their main residence. However, it will impose an additional tax compliance burden and impact on cash requirements where disposals are taxable, such as disposals by individuals who are not owner-occupiers.

Except, broadly, for certain widely held funds and companies, non-UK residents are currently already required to report disposals of UK residential property and to make payments on account of tax due within 30 days of the disposal being completed. However, an exception from the obligation to make a payment on account applies where the non-UK resident is already within the scope of self-assessment, for example, a landlord registered under the non-resident landlord scheme.

As announced in the Budget 2017, from 06 April 2019, existing exemptions for gains from disposals of UK residential property by non-residents which are widely held funds and companies will cease to apply. For disposals before 06 April 2020, a non-UK resident within self-assessment will need to comply with the reporting obligation, but not the payment on account obligation, within 30 days. However, for disposals after 06 April 2020, the obligation to make a payment on account within 30 days will also be extended to non-UK residents within self-assessment. Inconsistencies in the Budget announcements leave some uncertainty as to whether non-resident companies will be outside the 30 day reporting and/or payment on account obligations.

Changes to private residence relief

Changes will be made from April 2020 to restrict the availability of private residence relief from capital gains tax on disposals of residential property. The purpose of these changes is to better focus the relief on owner-occupiers, trimming certain reliefs that can benefit those not living in their residential properties.

Private residence relief exempts gains from an individual’s only or main residence. Where the residence has not been used as the individual’s main residence throughout the individual’s period of ownership, effectively only a proportion of the gain is exempt. Prior to April 2014, the last 36 months of ownership counted as a period for which the property was a main residence (so counting towards exemption), regardless of the actual status of the property. From April 2014, this 36 month period was reduced to 18 months, except in limited circumstances. The Government has now announced that from April 2020 this period will be reduced to only 9 months. The Government considers the 9 month period sufficient to benefit owner-occupiers who find themselves moving into a new property but who are unable to sell their old property immediately.

For individuals who let or licence out their main residence for part of their period of ownership and, as a result cannot qualify for private residence relief on some or all of their gain, lettings relief can assist in reducing the gain on which capital gains tax is due. Currently lettings relief can exempt up to £40,000 of any gain from capital gains tax and applies whether or not the owner remains in occupation of the property. As a further refocussing of private residence relief on owner-occupiers, lettings relief will be narrowed to apply only to properties in which the owner shares occupancy with the tenant.

Changes to the higher rates of stamp duty land tax for additional dwellings

Minor amendments have been made to the higher rates of stamp duty land tax (SDLT) for additional dwellings. These amendments make it clear that an undivided share in a dwelling held as a tenant in common is a major interest in a dwelling for these purposes (and therefore within the scope of the higher rates charge). They also extend the time for filing a return to claim back the higher rates surcharge in circumstances where a taxpayer is replacing their main home but the acquisition of their new home takes place before the disposal of their old home.

Consultation on SDLT charge for non-residents

The Budget announced that the Government will publish a consultation in January 2019 on an SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland. It is unclear whether similar proposals will in due course be announced in respect of Scottish LBTT or Welsh land transaction tax.

UK Budget 29 October 2018: Other points of note

Some other points of note which may be of interest to those involved in real estate are covered below:

Business rates

The Government is cutting bills by one-third for retail properties with a rateable value below £51,000, for 2 years from April 2019.

Development Corporations

The government will consult on the legal framework for Development Corporations and it will launch a £10m competitive fund to enable local areas to generate locally-led proposals for new business-backed Development Corporations and similar delivery bodies.

Permitted development

The Budget announced the publication of a consultation on new permitted development rights to allow upward extensions above commercial premises and residential properties, including blocks of flats, and to allow commercial buildings to be demolished and replaced with homes.

Electric vehicle charging points

Capital allowances will be extended until 2023 for companies investing in electric vehicle charging points.

Transport investment

Money has been allocated to provide transport investment in cities across the UK, including £90m from the Northern Powerhouse Investment Fund towards future mobility zones.

Energy-intensive businesses

An Industrial Energy Transformation Fund backed by up to £315m of investment will be established to support energy-intensive businesses improve efficiency and adopt low-carbon technology. The money will come from ending in 2020 enhanced capital allowances and first year tax credits for technologies on the energy technology list (which includes boilers, electric motors, air conditioning and refrigeration systems) and from the water technology list (comprised of products that promote sustainable water use).

Energy efficiency scheme

A new energy efficiency scheme for businesses will be consulted on, with the aim of reducing energy bills for smaller companies.

Waste clean-up

A pilot scheme will provide the Environment Agency with £10m to work with its partners for clearing up the worst abandoned waste sites.

Woodland Carbon Guarantee

A woodland carbon guarantee scheme will be set up to purchase £50m of carbon credits from property owners planting new trees. A further £10m funding will be provided for urban trees over the next two years.

Future High Streets Fund

A new Future High Streets Fund will be launched to invest £675m in England to support local areas to develop and fund plans “that make high streets fit for the future”. This will be targeted at town centre infrastructure including redevelopment and densification around high streets. A new High Street Taskforce will also disseminate best practice amongst local leasers.

Housing Infrastructure Fund

An extra £500m will be provided for the Housing Infrastructure Fund and will support the building of 650,000 homes. A £1bn of British Business Bank guarantees will support SME housebuilders and £653m will be provided between 2021-22 for strategic partnerships with nine housing associations to deliver over 13,000 homes.

Neighbourhood planning

£8.5m will be made available for 500 parishes to allocate land for homes sold at a discount and that these will be subject to a form of Neighbourhood Development Order. This reiterates a shift in emphasising neighbourhood planning as a key platform from which to deliver housing and growth.

Housing Revenue Account cap

The Housing Revenue Account cap that controls local authority borrowing for house building is abolished from 29 October 2018 in England. This is intended to enable local authorities to build around 10,000 homes per year. Similar steps will be taken by the Welsh Government.

Pre-emptive strike for development site

A recent high court case concerned an application for a final injunction to prevent persons from unlawfully entering and remaining on the claimant’s development site (the site of the former Tetley Brewery in Leeds). The claimant’s concerns related to trespass, both by vehicles and individuals, at the site. The site had been previously accessed unlawfully and the claimant had taken steps to secure its site.

Before making an order, an established two-limb test was applied. Firstly, it had to be established that there was a serious probability of infiltration (ie acting in breach of the claimant’s rights) and, secondly, that such breach was of a nature likely to cause harm that could not be adequately remediated by an award of damages or intervention after the event.

On the facts, Marcus J found that the test was met. In the first instance, the previous unlawful entry onto the site by persons with caravans indicated a likelihood of repeated infringement and there was a strong possibility that the site could be used for illegal raves. In respect of the second limb, the court found that there was a real and serious possibility that trespass could result in serious risk to the health and wellbeing of individuals by reason of its use as a development site and the inherent dangers that accompany such use.

A quia timet (since he fears) injunction was granted in respect of the threat of “persons unknown” occupying the site for purposes that were not purely transient in nature or the use of the site by such persons for arranging and/or participating in raves. This type of injunctive relief is both an anticipatory and preventative measure and seeks to protect against the occurrence or repetition of an actionable wrong despite such wrong not yet having been committed. The application of this to “persons unknown” provides protection in instances where the potential defendant’s identity is as yet unknown and which would be established by a future act of infringement.

This case demonstrates that, in certain circumstances, it is possible for landowners and developers to seek an order where trespass is anticipated. This, in turn, may reduce the costs and potential disruption to development programmes associated with removal of unlawful occupiers. However, the narrow application of quia timet injunctive relief must be acknowledged and developers should continue to take practical steps to secure their sites to deter the possibility of trespass and to ensure that infringement does not happen.

For a more detailed summary please click here.

Vastint Leeds BV v Persons Unknown Entering or Remaining Without the Consent of the Claimant on Land and Buildings Comprising Part of a Development Site Known as the Former Tetley Brewery Site, Leeds [2018] EWHC 2456 (Ch)

Consultation: Implementing reforms to the leasehold system in England

Following the Government’s announcement in December 2017 that it intended to:

  • ban leaseholds for almost all new build houses
  • make changes so that ground rents on new long leases were set to zero, and
  • generally improve the leasehold experience for the consumer,

the Government has now issued a consultation on how to implement these reforms. Specifically, the consultation is seeking views on how to implement:

  • a ban on the unjustified use of leasehold for new houses
  • the reduction of future ground rents to a nominal value
  • measures to ensure that the charges that freeholders must pay towards the maintenance of communal areas are fairer and more transparent, and
  • measures to improve how leasehold properties are sold.

The consultation notes that “Where aspects of the December announcement, including the commitment to legislate to address loopholes in legislation to protect leaseholders and freeholders, are not referenced in this document, we are able to take the action we need outside of the consultation”.

James Brokenshire, Secretary of State for Housing, Communities and Local Government has stated that he “will introduce new legislation, when Parliamentary time allows, making the leasehold system in England fairer and more transparent”.
The proposals relate to England only and the consultation closes on 26 November 2018.

For further details on these proposals please click here.

Breakfast briefing: Buildings and operational liabilities - are you covered?

Our November breakfast briefing will look at the operational responsibilities and associated liabilities of those parties who let, finance and manage real estate.

There will be a specific focus on property which has recently been constructed and the options for recourse for the different parties where fire and life safety (FLS) issues subsequently arise. The session will also highlight gaps where parties may find themselves exposed.

The briefing will also cover the latest developments in relation to cladding systems, and in particular those which include Aluminium Composite Materials. The session will address the challenges which may be faced where design and workmanship issues are identified during cladding related investigations.

The different roles insurance can play in relation to these issues will be discussed as well as highlighting practical steps which can be taken when these difficulties arise during the course of a transaction.

Simmons & Simmons partners John Kelsey and Felix Zimmermann will be joined by David Lyle of Lockton to discuss these issues.

Please click here for registration details.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.