Brown sugars Budget’s bitter pill

News

Piers Wehner

12 April 2003

Chancellor Gordon Brown has threatened that all leases worth over £150,000 will be liable for an up-front stamp duty charge of 1%, but did not raise stamp duty as feared.

Brown had good news in his budget speech – stamp duty for commercial and residential property will be frozen for another year and the government will decouple residential and commercial stamp duty.

He also confirmed stamp duty exemptions for commercial property in 2,000 enterprise areas (Finance, p45).

However, he then announced that the planned stamp duty would be triggered on 1 December, but only if, “after consultation with the industry, there is no effective alternative for tackling avoidance”.

The move could cost the industry up to £600m a year, and will “devastate high street business”, according to the CBI.

RICS chief executive Louis Armstrong said: “The government is using a carrot and stick on the industry that aren’t really related. Unless the industry finds a way to increase the Chancellor’s stamp duty take, it will be penalised. But the policy won’t penalise tax evasion. It will penalise people for making a prudent business choice.”

As an added sweetener, Brown said the base rate for the tax on commercial property, though not houses, would be increased from £60,000 to £150,000.

BPF’s chief executive Liz Peace said: “We feared something a lot worse. The 1% duty is about a quarter of what the government was originally proposing. But at least they’ve left the basic rates of stamp alone.”

She added: “What’s driving all this is not really tax avoidance. The government is going to modernise lease duties to avoid distortion, and as an incentive for shorter leases. How it happens is now up for negotiation.”

The change to lease duty was “a scary detail in an otherwise turgid budget”, according to Strutt & Parker chairman James Donald. “It makes little sense to do even more damage to an already depressed leasing market for the sake of closing the net on a few loopholes.”

Claire Higgins, an associate director in Colliers CRE’s research department, said: “The retail property sector as a whole will be the worst affected – in particular retail warehousing, as it is the only sector where lease lengths are consistently above 15 years.”

David Coffer, chairman of leisure agency Davis Coffer Lyons, said: “We will see short-term schemes such as much shorter leases with an option to extend, shared profit partnerships between landlords and tenants, or corporate sales instead of lease assignments. But these will be trumped by the government as soon as it spots the loopholes.”

What’s in the new policy

If the policy is implemented, stamp duty will be charged at the rate of 1% of the net present value of all the rental payments over the lifetime of the lease.

The new regime will demand a one-off, up-front payment with annual rents discounted at 3.5% pa. The charge will also apply to sub-leases and will not alter the tax payable on premiums.

Residential leases with a NPV of under £60,000 and commercial leases with an NPV of under £150,000 – around 60% of all leases – will be exempt. Commercial leases – of any length – will not incur stamp duty if the annual rent is under £5,250 and a 25-year lease will be exempt if the rent is under £9,100 pa.

Chancellor Gordon Brown has threatened that all leases worth over £150,000 will be liable for an up-front stamp duty charge of 1%, but did not raise stamp duty as feared. Brown had good news in his budget speech – stamp duty for commercial and residential property will be frozen for another year and the government will decouple residential and commercial stamp duty. He also confirmed stamp duty exemptions for commercial property in 2,000 enterprise areas (Finance, p45). However, he then announced that the planned stamp duty would be triggered on 1 December, but only if, “after consultation with the industry, there is no effective alternative for tackling avoidance”. The move could cost the industry up to £600m a year, and will “devastate high street business”, according to the CBI. RICS chief executive Louis Armstrong said: “The government is using a carrot and stick on the industry that aren’t really related. Unless the industry finds a way to increase the Chancellor’s stamp duty take, it will be penalised. But the policy won’t penalise tax evasion. It will penalise people for making a prudent business choice.” As an added sweetener, Brown said the base rate for the tax on commercial property, though not houses, would be increased from £60,000 to £150,000. BPF’s chief executive Liz Peace said: “We feared something a lot worse. The 1% duty is about a quarter of what the government was originally proposing. But at least they’ve left the basic rates of stamp alone.” She added: “What’s driving all this is not really tax avoidance. The government is going to modernise lease duties to avoid distortion, and as an incentive for shorter leases. How it happens is now up for negotiation.” The change to lease duty was “a scary detail in an otherwise turgid budget”, according to Strutt & Parker chairman James Donald. “It makes little sense to do even more damage to an already depressed leasing market for the sake of closing the net on a few loopholes.” Claire Higgins, an associate director in Colliers CRE’s research department, said: “The retail property sector as a whole will be the worst affected – in particular retail warehousing, as it is the only sector where lease lengths are consistently above 15 years.” David Coffer, chairman of leisure agency Davis Coffer Lyons, said: “We will see short-term schemes such as much shorter leases with an option to extend, shared profit partnerships between landlords and tenants, or corporate sales instead of lease assignments. But these will be trumped by the government as soon as it spots the loopholes.” What’s in the new policy If the policy is implemented, stamp duty will be charged at the rate of 1% of the net present value of all the rental payments over the lifetime of the lease. The new regime will demand a one-off, up-front payment with annual rents discounted at 3.5% pa. The charge will also apply to sub-leases and will not alter the tax payable on premiums. Residential leases with a NPV of under £60,000 and commercial leases with an NPV of under £150,000 – around 60% of all leases – will be exempt. Commercial leases – of any length – will not incur stamp duty if the annual rent is under £5,250 and a 25-year lease will be exempt if the rent is under £9,100 pa.