There is clear encouragement in today’s Budget for the property sector to provide the infrastructure that UK businesses need to deliver the “bright prosperous future” the Chancellor predicted at the end of his speech.
The measures to attempt to revive our High Streets were picked up over the weekend; we welcome the short term rates relief for small retailers, which we hope will give many a chance to refocus their businesses and hopefully survive in the High Street of the future.
For us, investors in commercial property were the big winners in today’s Budget, with the introduction of a Structures and Buildings Allowance and a fivefold increase in the Annual Investment Allowance to £1,000,000. More details of these measures are given below. All is not rosy though, with a restriction on the offset of capital losses and more complexity in the taxation of contractors coming in in 2020.
We will be giving more details at our breakfast seminar tomorrow, and look forward to seeing some of you there.
Small Business Rates Relief and Future High Street Fund
The Chancellor confirmed the rates relief for small retailers announced over the weekend. An estimated 496,000 small business owners (whose property has a rateable value of £51,000 or less) will get a reduction of up to 33% on their rates bill for two years starting April 2019.
Local Authorities are going to be able to apply for funds from a £650m fund to rejuvenate their High Streets. Funding can be used to improve transport links and bring historic buildings back into use. The government’s objective is to facilitate the reinvention of High Streets. This measure is being bought in with a commitment to ease the planning rules to allow home and office building on empty High Street sites, which should also assist in achieving this aim.
This is welcome news for the struggling High Street but it is only a short term reduction and does nothing to help larger chains. Individual retailers should use this window of opportunity to review their business model in light of the changes in consumer behaviour and invest in making changes required for their business to survive in the long term.
The reinvention of our High Streets, with the expansion of occupiers from shops to homes for all generations and offices, is essential to breathe life back into the backbone of many communities. A fund to facilitate this is therefore to be welcomed, and we hope SME developers will find opportunities to work with Local Authorities to be part of this project.
All retailers, small or large, will also welcome the government commitment to introduce taxation of digital platforms to level the playing field with traditional retailers.
The Annual Investment Allowance (AIA) is set to be increased from £200,000 to £1m for two years commencing 1 January 2019.
In addition, a new fixed rate tax deduction for non-residential buildings is to be introduced representing a 2% tax write off per annum of construction costs for those holding and investing in commercial buildings after 29 October 2019. This new deduction is in addition to the capital allowances currently available for qualifying plant within buildings. However the allowance rate for integral fixtures and fittings drops from 8% to 6% in 2019 and the special rates for energy efficient assets are abolished in 2020.
The significant increase in AIA means property businesses spending on plant and machinery can write off significantly more against their tax bills. This is welcome news and thought might be given to delaying spend to benefit from the increase from the start of 2019.
The new 2% allowance is a major increase in tax relief for those holding and investing in commercial property. It will mean that the whole cost of the building (but not land) can be written off for tax purposes over the life of the building.
Both giveaways are slightly countered by the reduction in capital allowances on integral plant from 8% to 6% and the abolition of higher rates of allowances on energy efficient assets, but on balance these announcements are excellent news for the property sector.
From April 2020 property investors subject to UK corporation tax will only be able to offset gains with capital losses from previous years up to a maximum of £5m or 50% of the gain (whichever is higher).
These measures apply across all corporation tax paying entities, not just those in property. The Chancellor stated that 99% of companies will be unaffected by this change; however, it seems likely to us that the 1% that will be impacted might very well be in the property investment sector. Corporate investors with brought forward losses should think very carefully about the timing of disposals planned for the next 24 months.
Off Payroll working
The property sector uses consultants and contractors extensively. Many of these operate through personal service companies, which should be subject to IR35. From April 2020 the obligation to identify and account for IR35 tax will switch from the personal service companies to those engaging them.
This measure has already been introduced in the public sector and has had a substantial impact. We thought this measure might have been applied from April 2019 to the private sector, so the delayed introduction is welcome. There will, however, be a significant impact on the property industry as business models change and more compliance obligations fall on larger businesses. The ultimate result (and government objective) has to be that we will see more workers on payroll and an increase in associated payroll taxes.
The qualifying holding period for shares has been increased from 12 months to 24 for disposals from April 2019. In addition (and applying immediately), shareholdings will now also need an entitlement to 5% of distributable profits and 5% of company net assets to qualify.
Prior to the Budget speculation was rife that Entrepreneurs’ Relief was a likely target for change. The measures announced are fairly mild compared to recent speculation. We anticipate the impact will be minimal in the property sector.
No immediate major changes were announced in respect of SDLT, although first time buyer relief has been extended to those taking advantage of shared ownership on properties worth up to £500,000. This relief is also retrospective and backdated to November 2017.
The government will also consult in January 2019 on the possible levy of an additional 1% SDLT on foreign buyers of UK residential property.
First time buyers taking advantage of shared ownership will clearly be pleased; however, the suggestion of a consultation to penalise overseas buyers is likely to be highly contentious and of particular concern to developers of super prime London properties.
VAT Construction Industry Reverse Charge proposals
The government will introduce domestic VAT reverse charging on construction services from 1 October 2019. VAT will become payable by the supplier of construction services from this date.
VAT reporting will become more complex, but more importantly contractors employing subcontractors will need to look carefully at the impact on their cash flows. Bankers have already advised us that they will be revising the terms of invoice discount funding for contractors.
Principle Private Residence Relief (PPR)
The rules around PPR will be tightened from April 2020. Firstly, the exemption allowed for letting your PPR will be curtailed such that it only applies to periods where the owner is also in occupation. Secondly, the exemption for gains from the last of 18 months of any property which has been your PPR is reduced to 9 months.
Certain aspects of PPR have been perceived as over generous, allowing people to take advantage of letting their homes and not pay tax on associated gains. These new rules will address this and also encourage those selling to accelerate their sale processes and put more stock on the market.