Property industry neither thanks nor bemoans
Budget
21 March 2007
The Chancellor played his normal game with the property industry
giving a bit here and taking a bit there.
CAPITAL ALLOWANCES REFORM
While the
reduction in the main rate of corporation tax is welcome, the
overhaul of the capital allowances regime is an unwelcome change
for all property investors. From 2008/9, the existing regime for
capital allowances is to be replaced by allowances for fixtures
integral to buildings to 10%. However, the full budget report
indicates that following consultation with business, allowances
could be withdrawn or restricted for assets which appreciate in
value, including land and buildings.
Clare Hartnell, Head of Property & Construction for Grant
Thornton commented "This announcement is unwelcome. Capital
allowances for fixtures is a very valuable relief which is factored
into property investment decisions. The removal or restriction of
allowances could have an adverse impact on property values and
introduces uncertainty. We hope the Government will see sense
following consultation and not make any significant changes. "
For REITs, the impact will be to increase the dividend required
to be paid with less cash available for reinvestment and
refurbishment of property portfolios.
Industrial (and agricultural) buildings allowances are also to
be phased out over the next four years which will be unwelcome news
for industrial investors.
Hartnell also commented "It's unclear if the enhanced energy
efficient allowances will still be available. This would be
counter-intuitive given the Government's green agenda and the
importance of eco-friendly buildings to the environmental debate.
We hope further clarification of the details will confirm that
these allowances remain."
There is some measure of good news in the announcement that
business premises renovation allowances are now finally to come in
to give 100% allowances for expenditure incurred on or after 11
April 2007 on the renovation or conversion of business properties
in designated disadvantaged areas which have been vacant for one
year or more.
PROPERTY AUTHORISED INVESTMENT FUNDS
Grant
Thornton welcomes today's announcement that the Government intends
to give Property Authorised Investment Funds (" Property AIFs")
broadly the same tax status as UK Real Estate Investment Trusts
("REITS"). The joint Investment Management Association, HM Treasury
and HM Revenue & Customs Working Group will use the framework
proposed as a basis for further discussion with a view to the
publication of a technical paper in the summer either with or to be
followed by draft regulations.
Since the introduction of the REIT regime on 1 January 2007
property funds established as authorised investment funds have been
at a disadvantage. They are currently subject to corporation tax at
20% of their income profits, although capital gains are exempt from
tax. This has meant the AIF regime has not been widely used because
the regime is unattractive to exempt investors including pension
funds and ISA investors.
The announcement that the Property AIFs which are established as
open ended investment companies (OEICs) will be able to elect for
what will be effectively the same tax status as REITs will widen
their investment appeal.
The point of taxation will be moved from the AIF to the investor
who will be taxed on property income distributions under tax rules
applicable to that source of income (ie as Schedule A income) at
their normal rates. Like REITs, Property AIFs will be exempt from
tax on both income profits and capital gains arising from property
investment, however, qualifying property investments will include
shares in UK REITs. Similar measures will be introduced in order to
protect UK tax revenues as those applying to REITs, restricting
corporate ownership to less than 10% of the AIF and limiting access
to the regime to AIFs which are not closely controlled.
Marion Cane, Director of Grant Thornton's Property Group
commented, "This is a change in tax treatment which the industry
has been hoping for. This should lead to wider choice for retail
investors looking to benefit from the returns which come from
investment in property."
AIFs which are structured as unit trusts will need to convert to
open ended investment companies to take advantage of the new
regime. The changes will also need to be considered by fund
managers of unauthorised property unit trusts established including
the many offshore unit trusts which have been established in recent
years.
Cane continued "It will be interesting to observe over the
coming months whether this change in tax treatment will cause any
of the larger property unit trusts based in jurisdictions such as
Jersey and Guernsey to move their residence to the UK with a view
to conversion to a Property AIF which, as a retail fund, can be
marketed to the public."
STAMP DUTY
The introduction of a time
limited stamp duty land tax (SDLT) exemption on the purchase of a
zero carbon home up to a price of £500,000 will be welcome news for
housing developers. Relief will be available for the first £15,000
of SDLT payable where the purchase price is in excess of £500,000.
The relief will apply from 1 October 2007 to 30 September 2012.
Related changes mean that a landlord who buys a portfolios of
£500,000 zero carbon homes for letting will be able to snap them up
at no SDLT cost . This could make them attractive to funds or
residential REITs.
Hartnell said, "It is a shame that the Government did not take
the opportunity to further its green credentials by extending a
greater measure of relief to all zero-carbon homes as larger homes
tend to be the most carbon inefficient."
The SDLT anti-avoidance rules that were announced in the
pre-budget report and introduced into regulations are to be
incorporated into the Finance Bill 2007 but will incorporate
amendments to take account of representations.