2013 Budget: property implications

Practical Law UK Legal Update 6-525-3013 (Approx. 13 pages)

2013 Budget: property implications

by PLC Property

2013 Budget

On 20 March 2013, Chancellor of the Exchequer, George Osborne, presented the 2013 Budget.

This update analyses the key implications for the property industry. For an analysis of other aspects of the 2013 Budget, see Further reading.

Supporting infrastructure, job creation and home ownership aspirations are key features of the 2013 Budget that will be of particular interest to the property industry.

The Royal Institution of Chartered Surveyors (RICS) has welcomed the commitment to invest in infrastructure but has pointed out that infrastructure projects do not need to be big to be effective in creating growth. The British Property Federation (BPF) is frustrated that the government "keeps fixating on nationally significant economic infrastructure projects, which inevitably involve a long, slow decision making process and very large numbers - and that a lack of decisiveness has led to the disappointment of a decision on London airport capacity being pushed back beyond 2015".

There is a general welcome of measures to help the housing market but some concern that the measures may serve to push up prices still further and even to create another housing bubble.

The 2013 Budget does not provide for the reform of business rates and in particular on empty property rates. BPF maintains that empty property rates cost property owners more than £1 billion a year, money which could be used to support jobs to enable the empty properties to be put back into use. BPF has been campaigning for reform of the business rates system to address the unfairness in the system that favours the internet retailer over the high street retailer. However, the government has committed to looking at measures that might introduce greater flexibility between certain agricultural and retail uses to residential use.

BPF welcomed the government's decision to take forward Lord Heseltine's recommendations that aim to devolve significant funding to Local Enterprise Partnerships (LEPs) that are intended to address the barriers to growth holding back the private sector. The BPF is concerned, however, that LEPs may not have the necessary resources and authority to do the job.

The Chancellor announced a new tax regime and planning guidance to promote investment in shale gas, that are intended to allow local communities to benefit. Shale gas is seen as a new source of low-cost energy and a potential boom for the UK economy but environmentalists point out that shale gas is unlikely to bring down energy bills in the UK.

Green campaigners are also concerned that whilst the government is supporting home-buyers with loans to buy that are interest free for five years, people who use the Green Deal to insulate their home have to borrow at about 7%. There is disappointment generally at the lack of mention of renewable energy while at the same time the government exempted some energy-intensive firms from the climate change levy.

The Chancellor also announced that the government is acting on the warning in the 2012 Budget to introduce retrospective legislation to address aggressive SDLT avoidance schemes.

Defined terms

Budget Report: 2013 Budget, HM Treasury.
2012 Budget: 2012 Budget delivered on 21 March 2012.
Infrastructure delivery update: National Infrastructure Plan: Infrastructure delivery update (March 2013).
Plan for Growth update 2013: Plan for Growth implementation update (March 2013)
Overview: Overview of Tax Legislation and Rates.
HMRC: HM Revenue & Customs.
SDLT: stamp duty land tax.

Housing

Help to Buy: equity loan and mortgage guarantee

The government announced a £5.4 billion package of financial support to tackle long-term problems in the housing market. This included the launch of Help to Buy, which offers two new schemes:

Equity loan scheme.
Mortgage guarantee .

Both schemes are aimed at helping those who want to get on, or move up, the housing ladder and will be available to home movers as well as first-time buyers, who are seeking to purchase residential properties in the United Kingdom. There are no income cap constraints.

The new initiatives will only be available where each of the following conditions are fulfilled:

Where home buyers meet the lenders' appropriate tests to ensure they can pay back the mortgage, as well as passing their chosen lender's credit and affordability checks.
On capital repayment mortgages, and not interest-only mortgages.
On properties that will be occupied by the individual or individuals taking out the mortgage: they will not be available to home buyers purchasing through incorporated companies.

The Help to Buy schemes should not be confused with the government's NewBuy scheme, which still remains in place (see Legal update, NewBuy scheme launched).

For more information, see:

Budget Report, paragraphs 1.86, 1.100-1.104 and 2.20.
HM Treasury: Help to Buy.

Equity loan scheme

The equity loan scheme will be available for three years from 1 April 2013. Home buyers purchasing properties will be able to access this scheme through participating house builders and HomeBuy agents.

Home buyers must have a 5% deposit, and the value of the property that they are seeking to purchase must not exceed £600,000.

The government will provide buyers with an equity loan of up to 20% of the value of a new build property.

The loan is interest free for the first five years. From year six, a fee of 1.75% is payable on the equity loan, which rises annually by RPI inflation plus 1%.

The equity loan can be repaid at any time within 25 years (or the terms of the mortgage), or on sale of the property.

Mortgage guarantee

The mortgage guarantee scheme will be available from January 2014 for three years, and will not be restricted to those buying new residential properties: those seeking to buy an existing property will also be eligible subject to satisfying their lender's requisite criteria.

The intention of this scheme is that lenders will be incentivised to offer a greater number of mortgages to home buyers with small deposits. However, do note that lenders will not be obliged to offer applicants a guaranteed mortgage: they may choose whether they wish to do so.

The scheme will only be available to those buyers with deposits between 5% and 20%, and as with the equity loan scheme, the value of the property that they are seeking to purchase must not exceed £600,000.

Lenders will set the interest rates. The government will not be involved in this. It will be a commercial decision for lenders.

The government will not be guaranteeing a borrower's mortgage payments. Instead, the government will provide lenders with the option to purchase a guarantee on the high loan-to-value portion of the mortgage, for which the government will charge a commercial fee.

If a borrower’s property is repossessed, the government will cover a proportion of the losses suffered by lenders. The guarantee will be valid for up to seven years after the grant of the mortgage (evidence has shown that borrowers are unlikely to default after this time).

The government will provide further details on how to get a mortgage guarantee later in 2013.

For a more detailed outline of the scheme, see HM Treasury: Help to buy: mortgage guarantee: scheme outline (20 March 2013). A final and detailed scheme design will be published following further discussions with the property industry, regulators, consumer groups and other interested parties.

Right to Buy

The government will introduce changes to the Right to Buy scheme under the Housing Act 1985 to enable more social housing tenants to benefit from the opportunity of home ownership. The Right to Buy scheme was first introduced in the 1980s and was reinvigorated in April 2012 (see Legal update, Final plans for reform of Right to Buy published).

To encourage take up of the Right to Buy scheme, the government will:

Reduce the qualifying period from five years to three years before tenants become eligible for the scheme.
Increase the maximum discount cash cap in London from £75,000 to £100,000 from 25 March 2013.
Simplify the application process for both local authorities and prospective tenants.

These changes are expected to increase property sales, with the intention that additional receipts will be used to reduce housing debt and support the government's commitment to replace every home sold under the scheme on a one for one basis with a new affordable home for rent.

(Budget Report, paragraphs 1.105-1.106 and 2.23-2.25.)

Affordable housing

The Housing Guarantee Scheme was announced in September 2012. The scheme is intended to assist developers and registered providers who are constructing affordable housing to obtain less expensive debt as it is backed by government guarantee (see Legal update, Government publishes Housing Guarantee Scheme Rules).

The government will provide up to an additional £225 million to support the construction of a further 15,000 affordable homes by 2015.

(Budget Report, paragraph 1.111.)

Social Rental Policy

The government recognised that social landlords are concerned about the lack of certainty on social rents after 2014-15. Therefore, in the 2015-16 Spending Round, the government will lay out a social rental policy that gives social landlords certainty on social rents until 2025.

(Budget Report, paragraphs 1.112 and 2.21.)

Build to Rent

The government will expand the Build to Rent fund announced in the 2012 Autumn Statement from £200 million to £1 billion to support the supply of new housing in England.

(Budget Report, paragraphs 1.107, 1.108 and 2.26.)

Changes to pension investment rules to encourage the conversion of unused space in commercial properties

The government will consider with interested parties whether amending the rules for Investment Regulated Pensions Schemes will promote the conversion to residential use, of unused space in commercial properties in high streets and town centres.

(Budget Report, paragraph 2.18.)

Anti-avoidance

Stamp Duty Land Tax avoidance

The Finance Bill 2013 contains provisions amending section 45 of the Finance Act 2003 (FA 2003). Section 45 deals with SDLT as it applies to "transfers of rights", which are what property lawyers commonly refer to as sub-sales. These changes to section 45 of the FA 2003 will take effect when the Bill receives Royal Assent.

For more information on how SDLT applies to sub-sales and the changes set out in the Finance Bill 2013, see Legal update, SDLT transfer of rights: draft Finance Bill 2013.

In the 2013 Budget, the government announced that it had become aware of certain schemes that made use of the transfer of rights provisions to avoid SDLT. The nature of the schemes are explained in HMRC: Stamp duty land tax avoidance: retrospective changes to section 45 of Finance Act 2003 (20 March 2013), but in short:

A is the proprietor of land (A's land) and enters into a contract for sale with B (contract AB). This will usually be a regular sale and purchase transaction at market value.
C (who is connected with B) then enters into a sub-sale arrangement with B. B agrees to sell A's land to C in, say, 125 years' time (contract BC). This agreement is usually for a low sum, for example, £10,000.
At the same time as contract AB completes (or is substantially performed), contract BC will be substantially performed by C paying the due consideration (£10,000 in this example) to B. The transaction between B and C will not complete.
The idea is that B has no SDLT liability because section 45 of the FA 2003 operates to disregard the sale from A to B for SDLT purposes. C pays no SDLT because the consideration it provides is beneath the threshold for a charge to SDLT.

HMRC states that it believes that these schemes do not achieve the desired tax result, but further changes will be made to section 45 to put this matter beyond doubt. These changes will apply retroactively to transfers of rights entered into on or after 21 March 2012 (the date of the 2012 Budget), but before the date on which the Finance Bill 2013 receives Royal Assent. At that point, the current provisions of the Finance Bill 2013 that amend section 45 will come into force.

The changes to section 45 of the FA 2003 announced in the 2013 Budget will mean that the original contract (contract AB in the previous example) will not be disregarded for SDLT purposes where all of the following conditions are met:

The sub-sale contract (contract BC in the example) is substantially performed, but not completed, at the same time as the original contract is substantially performed or completed.
The purchaser under the original contract (or a person connected with them) is in possession of the land after that date.
The main purpose (or one of the main purposes) of the transfer of rights is for the original purchaser to obtain a tax advantage.

Where these criteria are met, the purchaser under the original contract will have to notify HMRC of any SDLT due by September 2013 by either amending an SDLT return that they have already made or, if no return has yet been made, by submitting one.

(Budget Report, paragraphs 1.211, 2.187 and 2.188, Overview, paragraphs 142-143 and HMRC: Stamp duty land tax avoidance (20 March 2013).)

High value UK residential property held by non-natural persons

A package of tax measures aimed at high value residential properties held by certain non-natural persons (NNPs) was announced in the 2012 Budget (see Legal update, 2012 Budget: property implications). The government's main concern was that high value residential properties were being held by NNPs as a method of avoiding charges to tax. For example, there could be substantial tax savings if land was held by an NNP and ownership of the NNP was transferred, rather than the land itself.

In short, the measures proposed in the 2012 Budget were:

An SDLT rate of 15% on the acquisition of residential property by NNPs. This came into effect on 21 March 2012.
An annual tax on "enveloped" dwellings (ATED). When this tax was first mentioned, it was commonly referred to as the annual residential property tax, or ARPT, but the new name makes the tax's nature clearer.
Capital Gains Tax (CGT) at 28% on any gain made on a disposal by an NNP.

ATED is to come into effect on 1 April 2013, with the CGT changes operative from 6 April 2013. Some reliefs in respect of the increased SDLT charge are contained in the Finance Bill 2013 and will come into force when that Bill receives Royal Assent. For more detailed information on these measures, including what sort of bodies and transactions are caught by them, see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: Property.

There were concerns that these measures might catch properties that were held by NNPs for genuine commercial reasons, and not simply for minimising tax liability. Some reliefs reflecting commercial concerns have already been announced, but the 2013 Budget confirmed that further reliefs will be brought in for all three of these measures, covering:

Property development, investment rental and trading businesses.
Residential properties that are open to the public for at least 28 days a year on a commercial basis.
Residential properties held for employee accommodation.
Residential properties owned by a charity and held for charitable purposes.
Working farmhouses.
Diplomatic properties.
Certain other publicly-owned residential properties.

(Budget report, paragraphs 2.67, 2.185 and 2.186, Overview, paragraphs 1.39-1.41 and HMRC: Taxation of high-value UK residential property held by certain non-natural persons (20 March 2013).)

Amendments to the transfer of assets abroad legislation

As announced in the 2012 Budget, the Finance Act 2013 will amend the anti-avoidance legislation that deals with transfers of assets abroad (Chapter 2, Part 13, Income Tax Act 2007). This legislation can apply to the transfer of ownership of real property, if all the conditions are met (for example, if the rental income from a UK property became payable to an offshore company or trustees of an offshore trust).

Among the amendments is an exemption for genuine transactions that operates where the EU treaty freedoms are engaged. Following consultation, the government has revised its previous draft of the Finance Bill 2013 by adding a further element to the exemption. This will enable HMRC to make an apportionment between the genuine and non-genuine (artificial) parts of a transaction and exempt the income attributable to the genuine part from liability. The exemption will have retrospective effect from 6 April 2012.

Other changes to the transfer of assets abroad regime will take effect from 6 April 2013. These amendments aim to clarify the prevention of double charging and the operation of the regime in relation to reliefs under double taxation agreements.

For detailed information about the previous draft of the Finance Bill 2013, see PLC Private Client, Legal update, Transfer of assets and attribution of gains rules: draft Finance Bill 2013 legislation revised.

In the 2013 Budget, the government announced the postponement of its proposed changes to the matching rules until the Finance Bill 2014, pending further consultation. The matching rules are rules to match income arising to a person abroad with benefits received by a non-transferor.

For HMRC's updated guidance note, see HMRC: Amendments to the transfer of assets abroad legislation (20 March 2013).

(Budget report, paragraph 2.195 and Overview, paragraph 1.15.)

VAT

Charitable buildings

As announced in the 2012 Budget, the government will withdraw charitable buildings from the scope of the VAT reduced rate for the supply and installation of energy-saving materials, with effect from 1 August 2013 (Budget Report, paragraph 2.174).

For background information, see Legal updates:

Real Estate Investment Trusts (REITs)

The government announced in December 2012 that legislation will be introduced to allow the income from a UK Real Estate Investment Trust (REIT) investing in another UK REIT to be treated as income of the investing REIT's tax exempt property rental business (see Legal update, Draft Finance Bill 2013 legislation: key business tax measures: UK REITs).

In the 2013 Budget, the government announced that it is further considering whether REITs should be included within the definition of "institutional investor".

(Budget Report, paragraph 2.190.)

Planning reform

Despite the many reforms over the last ten years, the planning system in the UK is still considered to be cumbersome, slow, expensive and bureaucratic. The government believes that the current system has resulted in investment being diverted elsewhere in Europe because of the problems in obtaining planning permission. To address these concerns, the government announced a number of measures to streamline the planning system.

(Budget Report, paragraphs 1.114-1.117 and 2.241 - 2.244 and Plan for Growth update 2013, paragraphs 1.18 and 47-72.)

National Planning Policy Framework

On 27 March 2012, the National Planning Policy Framework (NPPF) was published, see Practice note, National Planning Policy Framework (NPPF): an overview. The government announced that the NPPF is already having an effect. The proportion of planning applications being approved is at a ten year high and 70% of councils now have a published development plan.

(Budget Report, paragraph 1.115.)

Deregulating and simplifying the planning system

The government announced that it will:

Publish significantly reduced planning guidance by summer 2013.
Ask local areas to put in place bespoke pro-growth planning policies and delivery arrangements.
Consult on allowing further flexibilities between use classes to support change of use from certain agricultural and retail uses to residential use to increase responsiveness within the planning system.
Develop further measures to streamline the process for planning judicial reviews.

(Budget Report, paragraphs 1.115, 1.117 and 2.241-2.243.)

Planning guidance for shale gas

The government announced that it will by:

July 2013, produce planning guidance on shale gas to provide clarity around planning for shale gas during the exploration phase for industry.
December 2013, produce guidance for the industry to ensure the planning system is properly aligned with the licensing regime and regulatory regimes.

The government will keep under review whether the largest shale gas projects should have the option to apply to the major infrastructure regime.

(Budget Report, paragraph 2.130.)

Land auctions

In the 2011 Budget, the government confirmed its intention to pilot some sort of land auction model on public sector land (see Legal update, 2011 Budget: property implications: Land auctions). In line with the 2012 Budget commitment, two sites, Hastings and St Leonard's were put on the market in December 2012. In the 2013 Budget, the government announced that the public sector land auctions model is progressing and that it will work with HM Treasury to conduct a feasibility study into the wider use of the model.

(Budget Report, paragraphs 1.116 and 2.244 and Plan for Growth update 2013, paragraph 51.)

Local Enterprise Partnerships

Government response to Heseltine Review

Lord Heseltine published his independent review, No Stone Unturned in Pursuit of Growth, in October 2012. The review set out a comprehensive economic plan to improve the UK’s ability to create wealth and promote growth. His proposals included increasing the devolution of economic powers from central government to Local Enterprise Partnerships (LEPs) and an increased role for the private sector in promoting growth. For more information, see Legal update, Lord Heseltine's independent review published.

The government confirmed its acceptance of the majority of Lord Heseltine's recommendations. In particular, the government will implement Lord Heseltine’s recommendation for the creation of a Single Local Growth Fund.

The funding will be allocated to LEPs on the basis of strategic plans for local growth as part of new Local Growth Deals. By providing more funding and flexibilities to those LEPs that offer the most, the government will incentivise LEPs to develop strategic plans which will drive improvements in local areas.

The Single Local Growth Fund will be operational by April 2015. Further details will be set out in the 2015-16 Spending Round to be announced on 26 June 2013.

(Budget Report, paragraphs 1.86, 1.148, 1.149 and 2.256.)

Infrastructure

The government announced the following measures to support infrastructure:

A commitment to increase capital spending by £3 billion a year from 2015-16 (Budget Report, paragraph 1.86). This will mean £18 billion additional capital spending over the next Parliament.
Drax Power has been offered a guarantee worth up to £75 million to help raise finance for the partial conversion of their power station from coal to biomass.
Making use of independent expertise in developing the government's infrastructure strategy.
Reforming the government's approach to infrastructure delivery (see Infrastructure planning and delivery).

(Budget Report, paragraphs 1.86 and 2.230-2.233 and Infrastructure delivery update, paragraph 1.7.)

Infrastructure planning and delivery

The government proposes to change its approach to infrastructure delivery. The reforms include:

Creating a central group of commercial infrastructure experts who will be deployed into infrastructure projects across government.
Establishing, by summer 2013, new infrastructure capacity plans to drive forward progress in key government departments.

(Budget Report, paragraphs 2.230 and 2.231.)

The government published an update on the progress made in delivering the 40 priority infrastructure investment projects, which it identified in the 2011 National Infrastructure Plan. The 40 projects include:

High Speed Two (HS2). The announcement was made in January 2013 on the Phase 2 (north of Birmingham) initial preferred route and station options (see Legal update, HS2: the prefered route to Leeds, Manchester and beyond).
Crossrail. The scheme is now moving into peak tunnelling period.
Rail electrification programme. In March 2013, the Department for Transport announced plans worth £704 million to electrify the Great Western Main Line between Cardiff, Bristol and Didcot.
Carbon capture and storage investment. On 20 March 2013, the Department of Energy and Climate Change announced that it would take forward two preferred bidders to a detailed planning and design stage. The Peterhead project in Aberdeenshire and the White Rose Project in Yorkshire, will proceed to the next stage of development. This is the next step in the £1 billion carbon capture and storage commercialisation programme.
Super-connected cities. On 5 December 2012, a further twelve cities were selected to become super-connected cities. Both commercial and residential users are intended to benefit from the £150 million investment in ultrafast broadband and high-speed wireless broadband.

The progress of each project is set out in Annex A to the Infrastructure delivery update.

For background information, see Practice note, National Infrastructure Plans: construction, environment and property implications.

(Infrastructure delivery update.)

Public land disposals

The Department for Communities and Local Government has requested that eligible public landholders bid for the £290 million funding allocated in the 2012 Autumn Statement to speed up the disposal of surplus public land.

Also, approximately 30 sites will transfer to the Homes and Communities Agency for quick disposal.

(Budget Report, paragraph 2.29.)

Energy and buildings

Zero carbon homes

The 2013 Budget confirms that the government aims to achieve zero carbon new homes in England by 2016 (Budget Report, paragraph 1.109).

In part, it will achieve this through the Building Regulations 2010 (SI 2010/2214) (BR 2010) and, in particular, Part L (which deals with energy efficiency requirements).

The government confirmed that it will:

Publish a detailed plan setting out its response to its 2012 consultation on the energy efficiency requirements in building regulations before May 2013 (see Legal update, Consultations on changes to the Building Regulations 2010).
Consult on the next steps before Parliament's summer recess.

For more detailed information on the government's targets and proposals for zero carbon homes and other buildings in England and Wales, see Practice note, Zero carbon buildings.

Reaction from the property industry

To see the reaction from the property industry, see:

2013 Budget: property implications | Practical Law