March 2010 Budget: implications for property | Practical Law

March 2010 Budget: implications for property | Practical Law

An update on the March 2010 Budget proposals affecting property.

March 2010 Budget: implications for property

Practical Law UK Legal Update 5-501-7837 (Approx. 16 pages)

March 2010 Budget: implications for property

by PLC Property
Published on 24 Mar 2010 • England, Wales
An update on the March 2010 Budget proposals affecting property.
Speedread

Speedread

The March 2010 Budget was an "election budget", intended to demonstrate an ability to manage the economy and reassure the electorate.
For the Property industry, the most noteworthy issue is the doubling of the stamp duty land tax threshold for first-time buyers from £125,000 to £250,000 with effect from midnight on 24 March 2010. This could save a first-time buyer up to £2,500, as the bottom rate of the tax is 1%. The move will be funded by an increase in the tax on properties above £1 million from 4 to 5%. At first glance, the relief appears attractive but it raises many practical issues that have not been addressed. The overall interpretation, therefore, is "nice idea, shame about the detail".
This legal update looks only at the issues of primary interest to property lawyers. A full analysis of all other aspects is provided in:

Introduction

This legal update covers the main budget proposals affecting the property industry. For information on other aspects of the March 2010 Budget, see:

Defined terms

The following defined terms are used in this Update:

Stamp Duty Land Tax

SDLT rates and thresholds

In the March 2010 Budget, the Government announced a new SDLT rate of 5% for purchases of residential property, where the consideration exceeds £1 million and the effective date is on or after 6 April 2011.
The previous highest rate was 4% for purchases where the consideration exceeds £500,000. All other SDLT rates and thresholds remain unchanged.
This move is likely to be viewed as yet another disproportionate tax, hitting those in the South-East the hardest, where house prices are higher. The housing market is already suffering from an imbalance of more sellers than buyers and relatively few houses in the £1 million price bracket were sold last year. This move is likely to further stagnate the market whilst also failing to provide a significant rise in revenue for the Government.
For further information, see Practice note, SDLT reliefs for residential property.
(See March 2010 Budget - BN24 - Stamp Duty Land Tax: Rates and thresholds.)

First-time buyer "holiday"

The Government has announced another "holiday" in the March 2010 Budget, this time for first-time buyers of residential property. The relief will apply where all of the following conditions are met:
  • An individual or individuals jointly purchase a major interest in residential property.
    A "major interest" is defined as a freehold interest or a leasehold interest with more than 21 years left to run.
    Mixed use property does not qualify and neither do purchases by corporate bodies, partnerships or, with limited exceptions, trustees.
  • The consideration is more than £125,000 but not more than £250,000.
  • The individual (or all of them) intends to occupy the property as their only or main home.
  • The individual or individuals have not previously purchased a major interest (or its equivalent) anywhere in the world.
    If there is more than one buyer, all of them must be first-time buyers. Similarly, if a person has previously owned inherited property they are not a first-time buyer.
  • The effective date of the transaction is on, or after, 25 March 2010 but before 25 March 2012.
This relief may be claimed in addition to those reliefs already in place for shared ownership leases and the discounted prices under Right to Buy schemes. However, relief can only be claimed on shared ownership transactions if a market value election is made and not if it is taxed as a lease.
At present the SDLT rate for the purchase of residential property where the consideration is more than £125,000 but not more than £250,000, is 1% and applies to all buyers.
Whilst this move makes for good headlines, the reality is that the majority of first-time buyers struggling to save the deposits now required by major lenders, will still be unable to benefit from the relief. Whether the threshold is £125,000 or £250,000, the problem of saving the necessary deposit remains the same.
The Government appears to have ignored the practicalities involved in administering the relief. The Council of Mortgage Lenders (CML) has already expressed concern as to how the proposals will be implemented.
The qualifying criteria "first-time buyer" seems open to abuse. For example, if the family home has been purchased by the husband and was purchased in the husband's sole name, potentially the next property could be funded by the husband but if it is purchased in the name of the wife, she could be eligible for this relief.
From a conveyancer's point of view, there are concerns as to how the SDLT forms are to be completed despite the HMRC advice that all that is required is for code 28 to be entered at box 9 of the SDLT return. Is a conveyancer to rely on the client's statement that it is their first purchase or must the conveyancer undertake some form of investigation? And who is to investigate the transactions and when? How will HMRC be alerted to potential fraud?
The CML has estimated that 92% of first-time buyers last year purchased properties worth less than £250,000 and (had the new relief been in place) would have been exempt from paying SDLT. Of this proportion, 90% of the transactions involved properties in the North.
On these figures, the relief would result in a significant reduction in revenue, which the Government hopes will be off-set by the rise in the top SDLT rate of 5% for properties worth in excess of £1 million. Critics argue that it will be London that bears the brunt of the tax changes although arguably, that is the Government's intention; to tax the "rich" in the South and help the "poor" in the North.
Practitioners should note that this "holiday" is not an extension to the SDLT "holiday" announced in the 2009 Budget, that temporarily increased the threshold at which SDLT was payable on residential property purchases, to £175,000. That "holiday" applied to all residential purchases where the consideration was no greater than £175,000 and ended on 31 December 2009.
The lower rate threshold for residential property purchases returned to £125,000 for transactions with an effective date of 1 January 2010 or later and remains at £125,000 for second-time property purchases.
(See March 2010 Budget - BN25 - Stamp Duty Land Tax: First time buyers.)

SDLT anti-avoidance rules extended to partnership transactions

The March 2010 Budget announced that legislation will be introduced in the Finance Bill 2010 to disapply the SDLT partnerships rules where the SDLT is assessed as a "notional land transaction" under section 75A to the FA 2003.
Sections 75A to 75C to the FA 2003 set out the SDLT anti-avoidance measures that apply to schemes under which one person disposes of a chargeable interest to another, but does so by way of a number of transactions, rather than direct. If the resultant SDLT is less than would have been payable if the disposal had been made direct, then a "notional land transaction" is used to assess the SDLT. For more details, see Practice note, Stamp duty land tax: Stamp duty land tax: Scheme transactions: an anti-avoidance measure.
Where land is transferred from partners into a partnership or vice versa, or partnership interests are transferred, special rules apply to determine (and usually reduce) the consideration chargeable to SDLT. For more details, see Practice note, SDLT and partnerships.
The change announced in the March 2010 Budget is directed against SDLT avoidance schemes, which contrive a partnership relationship between the seller and the buyer, in order to take advantage of the reduced chargeable consideration applicable under the SDLT partnership rules. It may be that HMRC has noticed, through disclosure of tax avoidance schemes, an increase in schemes that use the partnership rules in this way. For more details on disclosure of schemes, see Practice note, SDLT disclosure regime.
(See March 2010 Budget - BN26 - Stamp Duty Land Tax Partnerships.)

Relief for overpayments of SDLT

The Government intends to amend the rules dealing with the recovery of overpaid SDLT so that a single statutory regime applies.
A person who has paid an excessive amount of SDLT, whether by way of assessment, determination or through a contractually binding settlement, will be able to make a claim for repayment using a single statutory remedy.
Claims will need to be made no later than four years from the effective date of the transaction. The current time limit is six years.
The change will take effect for claims made on or after 1 April 2011, subject to transitional provisions.
The Government intends to introduce legislation as soon as possible in the next Parliament.
For more information, see:
(See March 2010 Budget - BN65 - Relief for Overpayments of Stamp Duty Land Tax and Petroleum Revenue Tax).

Value Added Tax

From 1 April 2010, the Government will:
  • Increase the VAT registration threshold in line with inflation from £68,000 to £70,000, which will ensure that fewer small businesses have to join the VAT system.
  • Make changes to simplify the partial exemption de minimis rules and to simplify the option to tax legislation. For details, see Legal update, HMRC guidance on amended option to tax rules.

Business rates

Multipliers

The DCLG in England (and the Welsh Assembly Government in Wales) have set the multipliers for business rates for 2010-2011, which take effect from 1 April 2010. For a brief explanation of multipliers, see Legal update, Business rates: consultation on transitional arrangements following 2010 revaluation (England): Multiplier.
There are two multipliers, one for qualifying small properties, and the other for all other properties. For more information on small business relief, see the Valuation Office Agency website.
For 2010-11, the multiplier is:
  • 40.7 pence for qualifying small properties.
  • 41.4 pence for all other properties.
For more information, see March 2010 Budget - Press Notice 02: Rates and allowances in 2010-11.

Empty property relief

The March 2010 Budget announced that empty commercial properties with rateable values of up to £18,000 will continue to be exempt from business rates. This will be welcomed by business occupiers.
The Rating (Empty Properties) Act 2007 (REPA 2007) removed business rates relief for most unoccupied properties with effect from 1 April 2008. REPA 2007 was widely criticised by the property industry as an additional strain on businesses in a time of economic difficulty.
In response to this criticism, the 2008 Pre-Budget Report announced that empty properties with rateable values of up to £15,000 would be exempt from business rates for the year 2009-10.
The exemption was implemented with effect from 1 April 2009 by the The Non-Domestic Rating (Unoccupied Property) (England) Regulations 2009 and The Non-Domestic Rating (Unoccupied Property) (Wales) (Amendment) Regulations 2009.
This resulted in an estimated 70% of empty commercial properties being exempt from paying business rates.
The 2009 Pre-Budget Report announced that the temporary increase in the threshold for empty property relief would be extended for a further year and the threshold increased to £18,000. See Legal updates,
The Non-Domestic Rating (Unoccupied Property) (England) (Amendment) Regulations 2010 (SI 2010/408) provided that the threshold would reduce to £2,600 for financial years beginning on and after 1 April 2011 for properties in England and to £2,200 for properties in Wales (see Non-Domestic Rating (Unoccupied Property) (Wales) (Amendment) Regulations 2010 (SI 2010/272 (W.35)).

Small business rate relief

Revaluation of business rates takes place every five years and the next revaluation will take effect from 1 April 2010. For guidance on the 2010 revaluation, see Legal update, Guidance for 2010 business rates revaluation.
The March 2010 Budget announced that the Government will fund a temporary increase in the level of small business rate relief in England, so that eligible small businesses occupying properties with rateable values up to £6,000 will pay no business rates for one year from October 2010. Small businesses that benefit from the rate relief taper (that is, rateable values up to £12,000) will be entitled to significant reductions.
For more information on small business rate relief, see the Valuation Office Agency website.
HMRC estimates that around three quarters of all small business units, two thirds of smaller shops and over half of offices and smaller industrial premises, occupied by an eligible business, will qualify.

Housing

Local Housing Allowance

The March 2010 Budget announced that, from October 2011, the highest rents across the country will be excluded from the calculation of Local Housing Allowance (LHA).
The LHA was introduced in April 2008 to give Housing Benefit recipients more control over, and responsibility for, their choice of housing.
Prior to the introduction of the LHA, tenants had their maximum benefit entitlement restricted by an individual assessment of their accommodation made by rent officers. Under the LHA, restrictions are no longer based on individual rent officer assessments but on typical rents for the area. If the recipient can find accommodation at less than this rate they can keep the difference, up to £15 each week.
However, the way that rates were calculated in the LHA meant that very high payments were being made to a small number of tenants living in the most expensive areas.
This discrepancy was blamed for driving up the costs compared with the previous housing benefit scheme. In order to control these rising costs, the 2009 Budget announced that from April 2010, households would no longer be able to retain any of the surplus if the LHA that they received was higher than their rent.
However, further consultation suggested that there could be disadvantages to withdrawing the excess and in the 2009 Pre-Budget Report the Government decided to reconsider the options and delay that reform until April 2011.
In December 2009, the Department of Work and Pensions (DWP) issued a further consultation on its approach to housing benefit reform and affordability, see DWP: Supporting people into work: the next stage of Housing Benefit reform.
Following that consultation, the March 2010 Budget announced that, from October 2011, the highest rents across the country will be excluded from the calculation of LHA in each area. In respect of London that will mean that the most expensive 8% of properties will be removed from the calculation. It is estimated that this will result in a saving of £125 million by 2014-15.

Mortgages

Support for mortgage interest

The Government has cautiously welcomed the emergence of the economy from recession and is taking steps it believes will safeguard a continuing recovery. It clearly views the assistance that it has given to home owners struggling to pay their mortgages as a success. The rate of repossessions has been 39% lower than was forecast by the CML at the beginning of 2009. The Government is keen that repossession continues to be a measure of last resort.
The March 2010 Budget has announced a further freeze in the Standard Interest Rate used to calculate Support for Mortgage Interest at 6.08% until December 2010, benefiting an estimated 220,000 homeowners.
The Mortgage Rescue Scheme and Homeowner Mortgage Support Scheme will continue to provide targeted help until 2011 for those who have exhausted all other options.
For more information on assistance for borrowers, see Practice note, Help for residential borrowers struggling with mortgage repayments.

Mortgage regulation

The Government is planning to take action to strengthen mortgage regulation following a consultation paper published in November 2009. For more information, see Legal update, Consultation on extending FSA mortgage regulation: sale of mortgages.
The March 2010 Budget announced the Government's intention to transfer the regulation of second-charge mortgages to the FSA. This will include the regulation of existing second charge loans.
By becoming the single regulator for residential mortgages, the FSA will be able to ensure consistent standards of consumer protection for all mortgage products. The regulatory environment will also become more straightforward for lenders.
The Government will also consider further measures to protect consumers in the buy-to-let market and those whose mortgages are sold to unregulated firms.
In addition, the HMRC will discuss with lenders the introduction of an income verification service. This is intended to give lenders greater confidence in the people to whom they advance money.

Mortgage lending commitments

Lloyds Banking Group (LBG) and Royal Bank of Scotland (RBS) both entered into lending commitments with the Government in exchange for the Government's financial support in 2008. The Government sought these commitments to ensure that individuals continued to have access to mortgage finance during the recession.
Both LBG and RBS have exceeded their lending commitments for mortgage lending: LBG by £1.4 billion and RBS by £2.7 billion. However, both have underperformed in respect of their business lending commitments (see note, Business lending commitments).
The March 2010 Budget has announced that LBG and RBS have entered into new legally binding lending commitments for the 12 month period from March 2010. LBG have agreed to £3 billion additional mortgage lending and RBS to £8 billion.

Business lending commitments

As part of their lending commitments (see note, Mortgage lending commitments), over the 12 months from March 2009:
  • LBG committed to lend an additional £14 billion on commercial terms.
  • RBS committed to lend an additional £25 billion on commercial terms.
Both banks also agreed to a new customer charter for lending to small and medium sized enterprises (SMEs), which include, for example, a commitment to a 1.5% arrangement fee cap.
Both LBG and RBS have underperformed in respect of these business lending commitments. As part of their new legally binding lending commitments for the 12 month period from March 2010, LBG have agreed to £44 billion of additional business lending and RBS to £50 billion.

Small business credit adjudicator

The March 2010 Budget announced the creation of a small business credit adjudicator, who will:
  • Work with an enhanced Business Link "Financial Intermediary Service" to ensure that small businesses are treated fairly when applying for bank finance.
  • Be given statutory powers, as soon as possible, to enforce its judgments.
The new adjudicator is part of the Government's drive to support viable SMEs by ensuring that they have access to the finance that they need to expand.

Infrastructure and development

Infrastructure UK

The 2009 Pre-Budget Report confirmed the establishment of Infrastructure UK, a body that would identify and manage the UK's infrastructure needs.
On 24 March 2010, Infrastructure UK published Strategy for national infrastructure (the strategy). The strategy looks at the UK's infrastructure networks, which enable people, goods, energy, information, water and waste to move around the UK, and even across its borders in some cases.
Infrastructure UK and others have identified a possible lack of equity capital for large complex infrastructure projects within the next few years, leading the Government to announce its intention to establish a Green Investment Bank (GIB). The GIB will invest in the low-carbon sector, in particular energy and transport projects.
For more information on Infrastructure UK and the strategy, see:

Low-carbon growth

The March 2010 Budget contains a chapter on securing low-carbon growth, which has a number of implications for infrastructure, including green transport (see note, Transport).
For more information on this chapter, see March 2010 Budget: environmental announcements.

Transport

The March 2010 Budget contained a statement that the Government continues to support the local transport needed to maintain growth and help regenerate the UK's cities and regions. The plans for improving transport include Crossrail, and a high-speed rail link between London and the Midlands.
The low-carbon growth measures discussed in the March 2010 Budget include ones aimed at promoting green transport, including low-carbon cars and buses and a new test centre that could help to reduce road congestion. These measures may have an impact on both existing and future developments.

Roads

The Government has announced that £100 million will be provided to fund repairs to local roads damaged by the snow and ice at the end of 2009 and the beginning of 2010. Many local highways authorities were thought to be facing problems paying for extensive repair work, so this money will be welcomed not only by them and drivers, but also by developers and retailers who rely on road users for custom.
The March 2010 Budget also announced a £285 million investment to enable further progress on the Managed Motorways programme and other major road projects. The Managed Motorways programme is a Highways Agency scheme designed to increase the capacity of the UK's motorway network. The March 2010 Budget Report also refers to "investing £250 million in the road network to improve capacity", but it seems likely that this sum forms part of that £285 million.

Energy

On 24 March 2010, the Department of Energy and Climate Change and HM Treasury published the interim report on the Energy Market Assessment. This report may be of interest to property practitioners as energy supply may have an impact on new and existing developments.
For more information, see Legal update, DECC and HM Treasury publish Energy Market Assessment.

City-regions

The March 2010 Budget refers to the proposed publication of Total Place: A whole area approach to public services on 25 March 2010. This is intended to "set a new direction for public services", and the March 2010 Budget details the Government's commitments to the new approach. The Government has announced its intention to strengthen the role of city-regions to deliver economic growth.
Regional ministers will play a stronger role in regional planning and the allocation of funds to regions and city-regions.
For more information on city-regions, see:

Regional Development Agencies

A regional growth fund will be established by the Regional Development Agencies (RDAs) within their capital budgets for 2011-12. The fund will promote high-value investment in support of regional and national growth and industrial policy.

Regional growth

The Government has announced that £120 million will be made available for the introduction of an Accelerated Development Zone (ADZ) pilot programme in 2011-12.
The aim of this pilot is to support infrastructure investment in cities.
The Government will use the pilots to assess the impact of investment on business rates growth within the defined ADZ areas to further understand the case for the introduction of Tax Increment Financing.

Raising capital through operational efficiency

The Government recognises that significant economic and social value can be delivered by managing its asset base more effectively.

Sale of assets and property

The Government intends to raise £16 billion from asset and property sales by the end of 2014. The March 2010 Budget announced that:
  • The process for the sale of the Tote will start in summer 2010 and be concluded by spring 2011.
  • Advisors will be appointed to develop a proposal for the sale of the £25 billion student loans portfolio.
  • The Government is considering the Dartford Crossing sale options. It will provide a fuller update in the 2010 Pre-Budget Report.
  • The process for the sale of High Speed 1 will start in summer 2010 and complete within a year.
  • The Government is exploring options to realise value from its stake in the URENCO group.
  • British Waterways will move to mutual status. A report will be published in the near future.
For more information, see Legal update, 2009 Pre-Budget Report: implications for Property.

Strategic property management

The Government will create strategic property vehicles by April 2011 to assist the Government in managing its estate. The vehicles will help the Government to achieve substantial savings in running costs and raise £20 billion through disposals by 2020.
To encourage more effective asset management, the DCLG will test a depreciation-based funding scheme with a small group of local authorities in 2010-11.

Relocations

The Government intends to relocate 15,000 civil service jobs from London, and the Ministry of Justice will move at least 50% of its posts out of central London by 2015. The Ministry of Justice will reduce its London estate from 18 buildings to four, resulting in annual savings of £41 million. It will explore opportunities for creating regional hubs.
(See March 2010 Budget - Chapter 6: Protecting public services.)

Improving the supply of housing

The Government remains committed to improving the supply of housing. The Government will:
  • Consult on plans to replace the council housing finance system with a self-financing system.
  • Work with industry to address the challenges facing the housing industry. For example, it recently published consultations on improving housing standards and encouraging investment. See:
  • Withhold part of the Housing and Planning Delivery Grant in 2010-11 from local authorities that fail to produce satisfactory five-year land supply assessments.
  • Consider introducing targets for the number of homes to be built on public land.
  • Reduce regulatory costs for the house building industry.
  • Work with local authorities to ensure that local requirements do not unduly restrain development. It will shortly consult on how a scaled back section 106 agreement would operate.
(See paragraphs 5.48-5.51 of Chapter 5: Achieving fairness and providing opportunity.)

Furnished holiday lettings

Repeal of the furnished holiday letting rules

The furnished holiday lettings rules (FHL rules) will be repealed:
  • From 6 April 2010, for income tax and capital gains tax purposes.
  • From 1 April 2010, for corporation tax purposes.
In general, income generated from letting is taxed under the rules for property businesses. The FHL rules allow furnished holiday lets to be treated as a trade for some tax purposes, subject to certain conditions. In the 2009 Budget, the Government announced that the FHL rules:
  • Would be temporarily extended, so that, for tax year 2009-2010, all furnished holiday lettings in the EEA would have the same tax treatment as furnished holiday lettings in the UK.
  • Would be repealed for the tax year 2010-2011.
(See Legal update, 2009 Budget: implications for property: Furnished holiday lettings in the European Economic Area.)
In the 2009 Pre-Budget Report, the Government published an impact assessment, draft legislation and a technical note on the withdrawal of the FHL rules for comment (see Legal update, 2009 Pre-Budget Report: implications for Property: Repeal of the furnished holiday letting rules).
HMRC has published an Impact Assessment alongside the March 2010 Budget, which:
  • Details how the repeal of the FHL rules will affect various aspects of the tax system, including:
    • loss relief;
    • wear and tear allowance;
    • Landlord's Energy Saving Allowance;
    • certain capital gains reliefs (including rollover relief and entrepreneurs' relief); and
    • pensions relief.
  • Confirms that legislation will be introduced in the Finance Bill 2010 to withdraw the FHL rules.
  • Advises that further guidance will be published shortly.
(See HMRC: Withdrawing the Furnished Holiday Letting Rules - Impact Assessment.)

Sources