The Chancellor's Pre-Budget Statement on 5 December
2005 was interesting from a real estate perspective, both in what it
did and did not mention.
Stamp Duty Land Tax and Unit Trusts
to opinion expressed by a number of commentators, the Chancellor did
not announce any change to the unit trust seeding relief from stamp
duty land tax (section 64A Finance Act 2003). However, our recent
experience is that HM Revenue and Customs are beginning to enquire into
some land transaction returns where section 64A relief has been
claimed. Care should, therefore, be taken to plan any potential
use of this relief to ensure that the requirements are fully complied
Real Estate Investment Trusts ("UK REITS")
remained on Mr Brown's agenda for the last year or so, we finally
received confirmation that draft legislation regarding UK REITS was to
be published before the end of 2005 for consultation. This has
now appeared on the HM Revenue and Customs website, although a number
of key issues remain unanswered such as the amount of any conversion
charge and how the regime will work in relation to groups and
companies. However, we do know that, broadly speaking, a UK REIT
qualifying property letting business will be ring-fenced from other
activities undertaken by the company (for example ancillary services
associated with the property letting business). Furthermore UK
resident companies publicly listed on a "recognised stock exchange",
assuming that they fulfil the prescribed requirements (for example in
relation to the share ownership), will not pay corporation tax on
qualifying rental income and capital gains relating to the ring-fenced
business, provided that at least 95% of the net taxable profits from
the property rental business are distributed during the accounting
period or the first 6 months of the next accounting period. Basic
rate tax will be required to be withheld from such distributions.
The majority (at least 75%) of the UK REIT's activity must relate to
the ring-fenced business by reference to both its total income and
UK REIT's will also be subject to an
"interest-cover" test on the ring-fenced part of the business.
The failure to comply with this test would result in an additional tax
charge on the amount by which the interest payable by the UK REIT in
relation to the ring-fenced business causes the ratio to exceed 2.5
(the ratio being the taxable profits of the property business divided
by the interest payable in respect of the property business).
is now underway, although the Treasury has indicated this will not
impact on the rate or mechanism of the conversion charge, the aspects
of which will be announced in Budget 2006. We will publish a more
in-depth review of the new UK REITs regime in due course.
Planning Gain Supplement
other major announcement relating to the property industry was the
possible introduction of a "Planning Gains Supplement" ("PSG") no
earlier than 2008. A consultation document has been published for
discussion and it is expected that many representations will be made to
HM Revenue and Customs by the property industry. PSG is aimed at
taxing the uplift in the value of land that has received full planning
permission (for either residential or non-residential development) and
the consultation suggests that PSG will be payable by the developer
once the development commences. The rate of PSG has not been
announced although the consultation document does acknowledge the
importance of encouraging development and hence the rate is expected to
be "modest" (and may be lower for brown-field development). PGS
will be levied on the difference between the value of the existing land
use and the value of the land with further planning permission.
It is anticipated that at least part of the PSG raised will be directed
locally to improve the local infrastructure to cope with the increased
burden resulting from new development.
The consultation document is available on the HM Revenue and Customs website at: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_ConsultationDocuments&propertyType=document&columns=1&id=HMCE_PROD1_024845
Self-Invested Personal Pension Schemes ("SIPPS")
Revenue and Customs also announced that, contrary to the previous
expectation, SIPPS will be prohibited from obtaining tax benefits
through investing in residential property directly.
in residential property can still be made indirectly through qualifying
investments (for example the proposed REITs as discussed above) but
direct investment in, for example, a holiday home, will now be outlawed.
Value Added Tax – Option to Tax
Revenue and Customs have also published a consultation document aimed
at simplifying the current "option to tax" legislation (Schedule 10
Value Added Tax Act 1994), rather than making wholesale changes.