Chancellor George Osborne’s Budget 2016 changes to stamp duty land tax are a nasty surprise for the legal profession, and could hit commercial real estate and the private rented sector, lawyers have warned.
Ashurst real estate partner Richard Vernon said: “Osborne is known for keeping a few Budget surprises up his sleeve and the announcement of the reform of SDLT did not disappoint. The new rates will start at 0% up to £150,000, with 2% on the next £100,000, rising to 5% above £250,000. The new rates will come into force from midnight tonight, but transitional arrangements will be in place where contracts have been exchanged.
“This will have an adverse effect on commercial property investment where the new top rate significantly increases the tax bill.”
Alex Barnes, tax partner at Irwin Mitchell, said that the Budget would be welcomed by many small businesses, the self-employed and entrepreneurs, but that big businesses – particularly those in the property industry – were unlikely to view it favourably.
He said: “Despite the proposed cut to corporation tax, stamp duty land tax on large commercial property transactions will increase, in some cases significantly, especially for investors in London and the South East. Interest relief will also be cut, which could have a dramatic effect on the UK property industry, given its reliance on debt funding.
“The commercial property industry was an easy target for the chancellor because of the attractiveness over recent years of UK commercial property. However, this may, like the high-end residential property market, now stall and ultimately cause tax revenues to decrease, leaving a bigger hole for the chancellor to fill going forward.
“The chancellor appears to have failed to recognise the contribution the commercial real estate industry has made to his coffers over recent years.”
Angela Savin, partner at global law firm Norton Rose Fulbright, said that these were “significant changes” to the taxation of UK real estate, which, for the first time in this government, affect commercial land and commercial investors in property.
She said: “The scope of the taxation of the profits derived from trading in and developing both commercial and residential land has been extended to prevent efforts to keep such profits offshore. Anti-forestalling measures mean that this change has immediate impact. The rate of SDLT for commercial property has also been increased by 1%, and commercial investors in residential property will not be exempt from the additional 3% rate of SDLT on purchases of multiple residential properties.”
Ashurst planning partner Lucy Thomas described the hike in SDLT as a “surprise U-turn”, adding: “This delivers a significant blow to the burgeoning private rented sector and is at odds with the government’s ambition to nurture this element of the housing market.”
Jason Tann, partner and head of commercial real estate at Pemberton Greenish, said that it was probably expected that at some point the slab system would be replaced with a residential-style sliding scale, but not in this Budget.
He said: “The change effectively means that most commercial property transactions of any size will incur another 1% in SDLT after today. This is a 25% increase in the amount of that tax at a time when there is considerable nervousness in the market with Brexit and China, among other factors, and it will not be welcomed by the industry.”
“As far as the taxation of offshore vehicles is concerned we await the details in the legislation. It is in line with the government’s mission to target UK tax avoidance through offshore structures. However, politicians need to be careful. A huge amount of much-needed investment into UK property development comes from overseas, from non-UK taxpayers, and if they make it too unattractive or difficult for this investment to come into the UK, they will go elsewhere.”
Ellen James, partner at Bircham Dyson Bell, said that an increased window of 36 months rather than the proposed 18 months to claim a refund was “very welcome”, but that there had been a “missed opportunity” to address the unintended impact of the higher rate.
She said: “The decision not to provide an exemption from the higher rates for significant investors and the fact that it catches all properties bought by companies are liketly to affect the private rented sector.
“Additionally, in a fiercely contested commercial property market in London and its outlying regions, this rise in SDLT will push the prudent UK institutional investor even further out of the marketplace.”
Suzanne Gill, partner in the commercial property and planning team at Wedlake Bell, said that, like changes to SDLT on residential property, the burden of these announcements will fall most heavily on London and the South East.
She said: “Today’s changes do the same for commercial property, both freehold and leasehold. The increased SDLT on rent is a further blow to high streets already struggling with taxes which online retailers do not pay.
“Commercial property has been a stable asset class for many pension funds. Any changes that increase transaction costs impede the smooth functioning of the market.”
Turning to a dramatic reduction in capital gains tax, James Ward, partner and head of private clients at Seddons, described this step as “a bit of a bolt from the blue”, albeit one that will be welcomed by many.
But he continued: “Notably absent, however, was any relief for second home owners. It would seem that the 8% reduction will not be applicable to residential property where principal private residence relief does not apply, making the benefit apply only to gains on other assets such as investments.
“Once again, the chancellor has demonstrated his quite clear disdain for people making money out of the property market.”
John Dean, partner in Seddons’ commercial property team, reacted positively to changes to business rates, which he said would be “a breath of fresh air for small businesses”, as well as HS3 and Crossrail.
He said: “Hopefully these changes will lead to renewed optimism and increased letting activity. For all the growth in internet shopping and large shopping centres and retail parks, smaller retailers and their personalised service are still highly valued by the public and anything that makes their continuing existence more viable is likely to be welcomed.”
“As we have seen with Crossrail 1, the green light for HS3 and Crossrail 2 is likely to lead to further increases in property values in the areas through which they will run. Wily investors have already been active in speculatively scooping up such properties, and many have already seen a significant enhancement in the value of their investments.
“On the other side of the fence, owner-occupiers who may find their properties targeted by CPOs will quickly need to get up to speed on their rights. Very often, more favourable contractual rights can be negotiated over and above the statutory rights conferred by the transport and works orders that will need to be enacted for these transport schemes to proceed.”
