This part of our Budget report focuses on the changes announced to SDLT, VAT and the taxation of businesses
Yesterday we all awoke to a new SDLT world order, in which:
- A rate of 7% SDLT will be charged on the acquisition of
residential property for more than £2m.
The new rate applies to transactions where the effective date (normally completion) is on or after 22nd March 2012. Transitional provisions aim to ensure that the old rates continue to apply to contracts entered into before 22nd March and completed afterwards, unless (for example) the contract has been varied subsequently or there is an assignment to someone other than the original purchaser. In some cases, triggering a 7% charge where otherwise a 15% charge would arise may be worthwhile.
- A rate of 15% will apply from 21st March 2012 to the
acquisition of residential property by certain
'non-natural' persons for more than £2m.
Non-natural persons include companies, collective investment schemes (such as unit trusts) and partnerships that have at least one company as a partner, although companies acting as trustees are excluded. However, the draft legislation proposes that for the purposes of the 15% charge, the normal rules for bare trustees will apply. Therefore if a company acquires a chargeable interest as a bare trustee, it would be treated as if it is the beneficiary of the bare trust who has acquired that interest.
There is a helpful exclusion for existing "non-natural person" property developers which have carried on a bona fide property, development business for at least two years before the purchase of the property and intend to develop and resell the relevant land. How HMRC will recapture the 15% charge if the land is not sold remains to be seen.
There is also a new definition of 'dwelling', to include buildings which are to be constructed or adapted for use as a single dwelling even if works have not as yet commenced. The current SDLT rule is that one looks to the existing (or immediately preceding) use of the site to determine whether its status is residential or commercial.
- The Government has announced that it will close down future SDLT avoidance schemes. The Chancellor said that he would act swiftly and, where necessary, with retrospective effect.
- The Government has announced that the general anti-abuse rule (GAAR) will now apply to SDLT. Further consultations with the public will be undertaken and legislation will be introduced in the Finance Act 2013.
- The Government has moved to block a further SDLT avoidance
scheme that purports to rely on the sub-sale rules where the
"other transaction" is the grant of an
option to purchase land.
SDLT sub-sale relief may apply where: Mr A enters into a contract to sell land to the buyer, Mr B, for a price of £1m. That contract is to be completed by a conveyance, but before the effective date, Mr B assigns to C (typically an offshore SPV) his rights under that contract for £1. As a result of the assignment, C calls for the conveyance of the land to C.
Where the sub-sale rules apply, then Mr B pays no SDLT at all and C would be obliged to pay SDLT but for the fact that the chargeable consideration is a de minimis amount.
A recent popular scheme has been for C to be granted an option to purchase the land from Mr B at some point in the future at the then market value. The expectation is that the option would never be exercised by C and thus neither C nor Mr B pays SDLT. While the Government does not believe that this scheme works, it proposes amending the legislation to make it clear that "other transaction" cannot include the grant or assignment of an option. This amendment takes effect from 21st March 2012.
- Subject to consultation the following annual charges are going to be introduced from April 2013 for non-natural persons which own a residential property worth £2 million or above.
£2m to £5m
£5m to £10m
£10m to £20m
Greater than £20m
- Subject to consultation, there is likely to be a CGT charge on any gain when the residential property is sold by a non-UK non-natural person. We are actively lobbying for a step up in base cost to April 2013, and we are also concerned that in this context there may not be an exemption for corporate trustees.
The Government proposed various changes to VAT to correct what are seen as anomalies.
Self-storage has become a highly profitable business but there has not been a level VAT playing field. Some providers have been allocating their clients a particular area in which to store items, and are thus subject to the usual rules on VAT for land supplies (exempt, unless the supplier has exercised the option to tax). Other suppliers not offering customers discrete storage areas have to charge VAT at the standard rate, as they are supplying services. In view of this inconsistent VAT treatment, and the fact that some storage providers are using avoidance arrangements to convert taxable supplies to exempt supplies and retaining their reclaimed VAT, the Government has decided to legislate for supplies on or after 1st October 2012, but subject to anti-forestalling measures.
The change is not intended to remove the VAT exemption for supplies of premises that are to be used for providing a self-storage facility, such as a lease to a self-storage company.
Alterations to listed buildings
Fine distinctions can arise between repairs and approved alterations. A repair is standard rated, whereas an alteration will either be standard rated (if made to an ordinary dwelling) or zero rated (if to a protected building). But there is no distinction drawn between those alterations which restore or enhance protected buildings, and extensions that may have no relevance to preserving a building's heritage.
The Government's view is that arguably this creates an incentive to alter protected buildings rather than to repair them, and that the distinction between repairs and alterations is often unclear.
The Government intends to remove zero-rating from building materials and construction services supplied in the course of making approved alterations to protected buildings with effect from 1st October 2012 (subject to transitional rules).
Zero-rating can also apply to the first grant by a developer of a "major interest" (a sale or the grant of a lease in excess of 21 years) in a substantially reconstructed protected building. Substantial reconstruction applies (a) where 60% or more of the reconstruction costs are approved alterations and (b) the reconstructed building retains no more of the original building than external walls and other external features of architecture or historic interest. After 1st October 2012, only the latter type of reconstruction will benefit from zero rating, subject to some rather narrowly phrased transitional provisions.
Is this a first step towards abandoning zero-rating altogether, and should developers who rely on zero-rating for residential development be anxious about further changes to come?
A number of changes are occurring here, some of which have been heralded in the past.
The Government has announced that enhanced capital allowances will be available for designated sites in:
- The London Royal Docks Enterprise Zone;
- The Enterprise Zones in Irvine, Nigg and Dundee in Scotland; and
- Deeside, North Wales.
Business premises renovation allowance
The Government has confirmed that the business premises renovation allowance (BPRA) will be extended for a further five years until April 2017. BPRA is a 100% first year tax allowance which provides an incentive to renovate derelict or unused properties in disadvantaged areas and bring them back into use.
However, the 100% Flat Conversion Allowance (FCA) will be abolished from 6th April 2013. This relief has enabled property owners and occupiers to claim immediate tax relief on the whole of their capital spending on the renovation or conversion of vacant or underused space above shops and other commercial premises to provide flats for rent. Any qualifying works should be undertaken and paid for before the relief ceases.
Capital allowances: fixtures
The Government has reaffirmed the announcement in the 2011 Budget that the rules governing capital allowances on fixtures in second hand buildings will be tightened up, so that a claim where the seller is a taxpayer will only be possible if the expenditure is identified in the seller's capital allowances pool, and the parties either sign an election fixing the value, or the buyer obtains a ruling from the First Tier Tribunal.
As well as the cut in the top rate of personal tax from 50% to 45% from 6th April 2013, measures to encourage business and enterprise include:
- The main corporation tax rate will be 24% from April 2012, reduced to 22% by April 2014.
- Enterprise management incentives (EMI): The limit on the value of shares over which options may be held by an employee under the EMI will be increased from £120,000 to £250,000, subject to State aid approval.
- The annual amount that an individual can invest in a qualifying company will become £1m under the EIS.
- Again subject to State aid approval, companies qualifying for the EIS and VCT schemes will be permitted to have gross assets of no more than £15m before the share issue and £16m afterwards. The previous limits were respectively £7m and £8m.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.