The Chancellor, George Osborne, delivered his 2013 Budget Report on 20 March 2013. This update summarises the key announcements for lawyers advising on finance transactions, including:
Government initiatives to boost access to finance.
Measures to stimulate the housing market and development finance.
Increasing investment in infrastructure and the energy sector.
Changes to the taxation of certain finance transactions.
Proposals to address tax avoidance.
The Chancellor, George Osborne, delivered his 2013 Budget Report on 20 March 2013. This update summarises the key announcements for lawyers advising on finance transactions.
For details of PLC's comprehensive coverage of the 2013 Budget, including tailored practice area updates, see PLC 2013 Budget.
Access to finance
Funding for Lending Scheme
The government reported in the 2013 Budget that there are currently 39 banks and building societies (who make up over 80% of the stock of loans) participating in its Funding for Lending Scheme (FLS), the aim of which is to encourage banks and building societies to increase their lending to UK households and non-financial companies. The government contends that the FLS has contributed to an increase in the availability of credit and a reduction in wholesale funding costs, reducing the borrower's lending cost.
The government also announced that HM Treasury and the Bank of England are actively considering whether there are potential extensions to the FLS.
(See 2013 Budget Report, paragraphs 1.32 to 1.36.)
Business Bank
Last year, the government announced it would establish a state investment bank, known as the Business Bank, to help small and medium-sized enterprises (SMEs) access finance.
The government published the first business strategy for the Bank on 21 March 2013 (see BIS: Building the Business Bank: Strategy Update). This sets out an accelerated timetable for how it will deploy £1 billion of new capital to improve access to existing SME support schemes and develop a lasting new institution to support SME growth by the end of 2014.
The government also announced that the Bank will (among other things):
Launch a £300 million investment scheme in spring 2013 to invest alongside private investors in financial institutions and non-bank lending channels to help diversify and expand the supply of lending to SMEs and mid-sized businesses.
Support more lenders to increase SME lending through the Enterprise Finance Guarantee scheme by maintaining the lenders' guarantee cap of 20%.
Provide support through £30 million of funding for a trade credit pilot with Kingfisher to extend credit to wholesale customers of B&Q, TradePoint and Screwfix.
(See 2013 Budget Report, paragraphs 1.151 to 1.153 and paragraph 2.245.)
Start-Up Loans
The government announced that £30 million of additional funding has been given to expand the Start-Up Loans scheme in England and the age limit has increased to 30, up from 24.
The government announced that it will investigate options for improving access to credit data on SMEs to make it easier for new lenders to assess prospective loans to small businesses.
(See 2013 Budget Report, paragraph 2.259.)
Lender guarantee scheme for residential mortgages
While the FLS aims to increase lending to households (see Funding for Lending Scheme), the government has announced that it will create a mortgage guarantee scheme to increase the availability of mortgages on new or existing properties for those with small deposits of between 5% and 20%. The Help to Buy: mortgage guarantee scheme will be a temporary scheme that will run for three years from January 2014. It aims to increase the supply of high loan-to-value residential mortgages to individuals by offering a government guarantee to certain lenders who offer mortgages that meet particular criteria (see Mortgage eligibility and Lender eligibility).
HM Treasury provided a technical paper outlining how it intends the scheme would work (see Scheme mechanics). However it cautioned that the scheme, as outlined, was not in its final form and will be developed following further analysis and discussion with the industry.
(See 2013 Budget Report, paragraphs 1.103 to 1.104 and 2.19 and HM Treasury: Help to Buy: mortgage guarantee scheme - Scheme outline.)
Scheme mechanics
From the technical paper it is understood the scheme mechanics are:
The government will provide lenders with the option to purchase a guarantee that effectively compensates the lender for a portion of the net loss suffered in the event of a repossession. The guarantee would apply down to 80% of the purchase value of the property.
The guarantee would only compensate lenders for those losses and "reasonable costs" (defined in the Mortgage Conduct of Business rules) that a lender is entitle to recover from its borrower.
To ensure that lenders are not incentivised to originate poor quality loans, they will be required to take a 5% share of net losses above the 80% guarantee threshold.
The guarantee would be valid for up to seven years after the mortgage is originated.
The lender will pool loans that they wish to place in the scheme and the guarantee shall apply to that loan pool. A cap (expressed as a proportion of the overall loan pool size) will apply on the total level of guarantees provided to each pool.
Mortgage eligibility
According to the technical paper, a mortgage eligible for a guarantee under the scheme will need to:
Be a residential mortgage, and not buy-to-let.
Be taken out by an individual rather than a company.
Be on UK property with a purchase value of £600,000 or less.
Have a loan-to-value of between 80% and 95%.
Be originated between certain dates specified by the scheme.
Be a repayment mortgage, and not interest-only.
Meet certain minimum requirements in terms of the assessment of the borrower's ability to pay the mortgage.
The scheme will also be designed so that lenders cannot use the guarantee to restructure the riskiest part of their existing loan book. For that reason, the government envisages that there will be some types of remortgage transactions that will not be eligible for the scheme. In particular, a lender will not be able to access the scheme when a borrower is remortgaging a loan which is already part of the lender’s existing loan book. However, a borrower remortgaging with a new lending institution would be able to benefit.
Lender eligibility
The scheme will be open to any lender that has permission to enter into regulated mortgage contracts (see PLC Financial Services, Practice note, Regulated activities: mortgage-related activities). The government has also indicated that there will be "lender-level limits" to restrict take-up in the scheme. These limits are to be linked to the size of the lender.
Fees
Lenders will be expected to pay the government a fee for each mortgage receiving a guarantee under the scheme. The fee will be subject to regular review.
The government has indicated that there is likely to be differentiated pricing for the fee at different loan-to-value brackets, to reflect the varying levels of risk mitigation offered by the scheme according to the mortgage loan-to-value.
The timing of the fee, and in particular whether it will be charged up-front or on an annual basis, is to be determined following more detailed discussions.
Real estate finance
The 2013 Budget included announcements of interest to finance lawyers advising clients in both real estate investment and development.
Investment property finance
The government reiterated a theme of recent Budgets in targeting the taxation of transactions involving certain property held by non-natural persons. For changes announced in the 2013 Budget to the way such transactions are taxed, see:
The government announced various measures to stimulate property development, predominantly house building and the long-term supply of housing stock. Finance lawyers advising property developers and their funders may find the proposals of interest.
For more information on the government initiatives, including industry comment from the construction and property sector, see:
(See 2013 Budget Report, paragraphs 1.101 to 1.117 and paragraphs 2.20, 2.26 and 2.28.)
Help to Buy schemes
Under the Help to Buy scheme, the government will, among other things, provide prospective homeowners with an equity loan worth up to 20% of the value of a new build home, repayable once the home is sold. The Help to Buy: equity loan scheme is in addition to the Help to Buy: mortgage guarantee scheme that aims to increase the availability of mortgages on new or existing properties for those with small deposits (see Lender guarantee scheme for residential mortgages).
(See 2013 Budget Report, paragraphs 1.86 and 1.100 to 1.104 and paragraph 2.20.)
Build to Rent and affordable housing
The government also announced increased investment in the existing Build to Rent and affordable homes guarantee programmes, expanding the Build to Rent fund from £200 million to £1 billion and providing up to an additional £225 million to support a further 15,000 affordable homes in England by 2015. The Build to Rent fund, announced in the 2012 Autumn Statement, provides equity or loan finance to support the development finance stage of building new homes for the private rental market.
(See 2013 Budget Report, paragraphs 1.107 to 1.108 and 1.111 and paragraph 2.21.)
Pension investment rules changed to encourage conversion of space in commercial property
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.
(See 2013 Budget Report, paragraph 2.18.)
Reform of planning system
The 2013 Budget reiterates existing government measures and initiatives to reform the planning system, such as the National Planning Policy Framework. By reforming the planning system the government hopes to stimulate further property development.
(See 2013 Budget Report, paragraphs 2.241 to 2.243.)
Project finance
The 2013 Budget included a number of announcements of interest to project finance practitioners including measures to support infrastructure and investment in the energy sector.
Following the theme of recent Budgets and Autumn Statements, the government announced an increase in capital spending on infrastructure projects in line with its National Infrastructure Plan (NIP). The government also intends to implement reforms to improve the planning and delivery of major infrastructure projects, to encourage investment.
(See 2013 Budget Report, paragraphs 1.87 to 1.89 and paragraph 1.96 and paragraphs 2.230 to 2.233.)
Energy sector
The 2013 Budget included measures to encourage private investment in the energy sector, particularly low-carbon energy and carbon capture and storage projects.
The government also announced initiatives to promote investment in the UK shale gas industry including tax support and planning guidance.
(See 2013 Budget Report, paragraphs 1.90 to 1.94 and paragraphs 2.129 to 2.133.)
Asset purchase facility
The government has confirmed that the asset purchase facility will remain in place for the 2013-14 financial year. Since 2 February 2009, under the asset purchase facility, a wholly owned subsidiary of the Bank of England has been authorised by the government to purchase "high quality private sector assets", including corporate bonds, syndicated loans and certain asset-backed securities created in "viable securitisation structures" from banks, other financial institutions and financial markets. At present, the ceiling on asset purchases is £375 billion.
The 2013 Budget Report reiterates existing measures and initiatives to reform the UK financial system, including the government's intention to seek to amend the Financial Services (Banking Reform) Bill to include provisions giving regulators the power to enforce full separation between retail and wholesale banking in a specified group (subject to HM Treasury approval).
(See 2013 Budget Report, paragraphs 1.81 to 1.84.)
Taxation of finance transactions
The following business tax announcements in the 2013 Budget may be of interest to finance lawyers. For detailed information on the business tax implications of the 2013 Budget, see Legal update, 2013 Budget: key business tax announcements.
A number of the measures announced in the 2013 Budget Report have previously been announced or are in the process of being legislated. For details of proposed legislation relating to the taxation of finance transactions, see PLC Tax, Practice note, Tax legislation tracker: finance. For a summary of the tax issues that frequently arise in respect of commercial lending, see Practice note, Tax for banking lawyers.
FATCA implementation
The government will include legislation in the Finance Bill 2013 to implement the UK-US agreement to improve international tax compliance and to implement the US Foreign Account Tax Compliance Act (FATCA). Final regulations will be issued shortly. The Isle of Man, Guernsey and Jersey have agreed to enter into similar automatic exchange agreements with the UK (see also Offshore tax evasion).
The 2013 Budget Report confirmed that, to take account of the benefit to the banking sector of the additional reductions in corporation tax, the rate of the bank levy will increase to 0.142% (for long-term equity and liabilities) and 0.071% (for short-term liabilities) from 1 January 2014. This increase was announced before 2013 Budget.
In addition, as announced in the 2012 Autumn Statement, the Finance Bill 2013 aims to clarify that foreign bank levies do not qualify for UK tax deductions.
(See 2013 Budget Report, paragraphs 2.114 and 2.115.)
Corporation tax
The government announced that it will reduce the main rate of corporation tax by an additional 1% in April 2015, to 20%. This reduction is in addition to cuts previously announced that take the rate to 23% from April 2013 and 21% from April 2014. The small profits rate and the main rate of corporation tax will also be unified in 2015, when the main rate is reduced to 20%.
(See 2013 Budget Report, paragraphs 1.119 and 1.121 and paragraphs 2.88 to 2.90.)
Taxation of regulatory capital instruments
The government announced that, following the conclusion of the Capital Requirements Directive IV (CRD IV), it will issue secondary legislation to confirm and ensure that banks' additional tier one debt capital instruments will be deductible in calculating the bank's profits for corporation tax purposes, whether the instrument is already in issue or has yet to be issued.
(See 2013 Budget Report, paragraphs 2.116 to 2.118.)
Stamp duty on shares and units
Stamp duty on shares in AIM and ISDX listed companies
The government announced that, following consultation, it plans to abolish stamp taxes from April 2014 on dealings in shares in companies listed on growth markets including the Alternative Investment Market (AIM) and the ISDX Growth Market.
Stamp duty abolished on dealings in units in collective investment schemes
The government announced that, from 1 April 2014, it will abolish the stamp duty reserve tax (SDRT) charge contained in Schedule 19 to the Finance Act 1999 on surrenders of units in collective investment schemes (CISs). A CIS (and other forms of unit trusts) may be used as a property-holding vehicle in some finance structures as a means to enable participants in that scheme to receive profits or income out of property. Currently SDRT is charged at 0.5% on the market value of a unit if it is "chargeable security" (as defined in the legislation) and is surrendered.
A number of announcements were made in the 2013 Budget concerning stamp duty land tax (SDLT) including changes to certain SDLT rates and measures to address SDLT avoidance schemes.
SDLT rates
As previously announced, the Finance Bill 2013 will include a number of reliefs that reduce the SDLT rate from 15% to 7% on acquisitions of high-value residential property by non-natural persons, including companies.
The government confirmed its plans (announced in the 2012 Budget) to address SDLT avoidance schemes, in particular those seeking to exploit so-called sub-sales and transfer of rights relief. Draft legislation is to be included in the Finance Bill 2013 and will have limited retrospective effect.
The government also announced its intention to simplify the SDLT treatment of leases.
(See 2013 Budget Report, paragraphs 2.187 to 2.189.)
High-value residential property held by non-natural persons
As foreshadowed in the 2012 Budget, the government continued its initiatives to target high-value residential property owned by non-natural persons (NNPs) including companies, so-called "enveloped" property. However the government has sought to address 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, covering, among others:
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.
For more information on the taxation of enveloped residential property, see:
(See 2013 Budget report, paragraphs 2.67, 2.185 and 2.186.)
Income tax rules on interest
The 2013 Budget confirms the government's intention to introduce legislation in the Finance Bill 2013 on disguised interest and on the deduction of income tax from interest on compensation payments, specialty debt and interest in kind.
Withholding: interest distributions from bond funds
The government confirmed that it intends to consult on a proposal to remove the requirement to withhold tax on interest distributions on UK-domiciled bond funds when sold via reputable intermediaries and marketed only to non-UK investors. If this proposal is taken forward, subject to the final details, this is likely to increase the attractiveness of UK bond funds for overseas investors.
The government confirmed that, as announced on 11 December 2012 (see Legal update, Finance Bill 2013: implications for finance lawyers: Debt cap rules), with effect from that date, changes to the debt cap rules aim to ensure that only income and expenses arising from genuine group treasury functions benefit from the exclusion from the debt cap rules.
The government announced that it will consult with a view to making technical changes to the Limited Partnership Act 1907 as it applies to funds, including the possibility of allowing limited partnerships to elect to have legal personality. This is in order to accommodate their use more effectively for private equity and venture capital investments.
(See 2013 Budget Report, paragraphs 1.145 and 2.124.)
Asset finance: capital allowances
The government announced that legislation will be introduced in the Finance Bill 2013 to remove the general exclusion to first year capital allowances for expenditure incurred on railway assets and ships. These changes will have effect from 1 April 2013. The availability (or otherwise) of capital allowances is often a key factor in the choice of financing structure, such as leasing, when acquiring assets.
Asset finance: chargeable gains and foreign currency losses extended to disposals of ships and aircraft
The Finance Bill 2013 is to include legislation allowing chargeable gains (or allowable losses) arising on disposals of ships, aircraft and interests in shares to be calculated in a foreign (that is, non-sterling) currency and the gain (or loss) then converted into sterling (using the exchange rate at the time of the disposal). The measure was originally intended to cover shares however, following consultation it has been extended to ships and aircraft.
The government confirmed its previously announced plans to introduce a "disincorporation relief" for five years from April 2013. The relief will allow a company to transfer goodwill and an interest in land to its shareholders so that no corporation tax charge arises on the company on the transfer. The relief will be available to businesses with total qualifying assets not exceeding £100,000, which may include certain special purpose vehicles used in finance structures.
The government continued with the theme of recent Budgets and Autumn Statements (and subsequent legislation) in targeting tax avoidance schemes. A number of the anti-avoidance and evasion measures announced will be of interest to finance lawyers who may be involved in structuring transactions, including in offshore locations.
The government announced that, in addition to the US-UK agreement (see FATCA implementation), the Isle of Man, Guernsey and Jersey have agreed to enter automatic tax information exchange agreements with the UK. These agreements will increase the amount of information on potentially taxable income that is automatically exchanged, in order to clamp down on tax evasion. The Isle of Man, Guernsey and Jersey are jurisdictions that are frequently used when structuring finance transactions, particularly in real estate financing.
HM Revenue & Customs (HMRC) has also put disclosure facilities in place to allow investors with accounts in the Isle of Man, Guernsey or Jersey to settle their past tax affairs in advance of the information being automatically exchanged. The government will look to sign similar agreements with other jurisdictions including Overseas Territories.
General Anti-Abuse Rule and disclosure of tax avoidance schemes
The 2013 Budget Report reiterates that the General Anti-Abuse Rule (GAAR) will be introduced in Finance Bill 2013 as a deterrent to abusive avoidance schemes and enhance HMRC's ability to tackle them.
The government also announced that it aims to consult on proposals to target the promoters of tax avoidance schemes, including proposals to "name and shame" users and promoters of such schemes (who may include lawyers and law firms, banks and other finance providers) alongside targeted disclosure requirements.
The government will introduce legislation in the Finance Bill 2014 to provide for the publication by HMRC of an annual report, from 2015, on the operation of the Code of Practice on Taxation of Banks. The government will consult on the governance process around determining non-compliance and the nature of the report published by HMRC.
The government confirmed that it intends to introduce retrospective legislation to address aggressive SDLT avoidance schemes, including schemes that exploit "transfer of rights" rules (see also SDLT reform).
(See 2013 Budget Report, paragraphs 2.187 and 2.188.)
Project finance: declaration of tax non-compliance by bidders
Potential suppliers bidding for government contracts will be required to declare specified non-compliance with tax obligations, allowing government departments to exclude bidders that have not been compliant. Government guidance on public procurement will be updated on 1 April 2013.
As announced in the Autumn Statement 2012, the government will legislate to close down tax avoidance schemes that seek to exploit the loan relationship and derivative contract rules with effect from 5 December 2012.
(See 2013 Budget Report, paragraphs 2.111 and 2.215.)
Close company loans
The government announced that it intends to close three loopholes used to attempt to avoid the tax charge on loans from close companies to individuals with a share or interest in the company. This measure will have effect from 20 March 2013.
As previously announced, the government confirmed in the Report that legislation will be introduced to simplify the rules for manufactured payments and make them less vulnerable to avoidance. The new rules will have effect from 1 January 2014.