Your browser is no longer supported

For the best possible experience using our website we recommend you upgrade to a newer version or another browser.

Your browser appears to have cookies disabled. For the best experience of this website, please enable cookies in your browser

We'll assume we have your consent to use cookies, for example so you won't need to log in each time you visit our site.
Learn more

BUDGET: MODERNISING THE TAXATION OF PROPERTY

  • Comment
Budget 2003 confirms the details of and changes to a package of ...
Budget 2003 confirms the details of and changes to a package of

reforms to the taxation of residential, commercial and investment

property. These reforms are a major step towards modernising the tax

treatment of UK property, and will close loopholes, remove

distortions and enhance the sector's contribution to economic growth,

development and regeneration.

Financial Secretary Ruth Kelly, said:

'The Government recognises the important contribution of the property

sector to the UK's economic and social well-being. Commercial

property is an important factor of production, contributing directly

to economic growth, and making possible the renewal of the urban

landscape. The Government's long-term aim is to remove tax

distortions and facilitate an efficient property sector that can

better support its economic and social objectives. This package of

proposals and measures is a major step forward'.

This Budget confirms the details of and changes to the modernised

regime for stamp duty announced in Budget 2002, including:

- rolling out the modernised stamp duty regime for UK land and

buildings, including new compliance and enforcement powers, tougher

anti-avoidance measures, and a proposed new regime for leases, from

1 December 2003;

- subject to further consultation, the existing charge applying to

leases will be replaced with a single one per cent charge on the

net present value of rental payments, and a new exemption for

commercial leases under £150,000 will be introduced;

- further consultation on the stamp duty treatment of complex

commercial transactions including on property held through

partnerships, to ensure the charge is levied fairly;

- from 15 April, changes to strengthen the anti-avoidance measures

involving group and acquisition relief clawbacks in the existing

stamp duty regime;

- significant changes for commercial property transactions,

includin g:

- from 10 April, relieving stamp duty on all non-residential property

transactions in the 2,000 Enterprise Areas;

- from 1 December, an increased zero rate band upper threshold of

£150,000 for commercial property transfers and leases; and

- a commitment to consider the commercial and residential markets

separately in future decisions on stamp duty;

- retrospectively exempting from stamp duty tenancy agreements

between Registered Social Landlords and tenants entered into under

arrangements with housing authorities to house the homeless;

- from 1 December, ensuring that property purchases by individuals

funded through alternative financing arrangements are put on a

level footing for stamp duty purposes with purchases funded through

conventional mortgages;

- from 1 December, abolition of stamp duty on transactions involving

property other than land, shares and interests in partnerships; and

- from 6 April 2004, a more generous capital gains tax regime for let

property used in a business, extending business assets taper relief

to let propertyused by unincorporated traders.

DETAILS

Modernising stamp duty

Budget 2003 confirms the details of and changes to the modernised

regime for stamp duty announced in Budget 2002. The revised regime,

which will apply from 1 December 2003, will have a reinforced legal

basis and modern enforcement powers commensurate with other taxes. It

will stop the abuse that has been pervasive in high-value commercial

transactions, while reducing the burden on smaller businesses and

modernising the administration of the tax for individuals.

The new regime will expand a range of anti-avoidance powers to

discourage the transfer of properties into companies (sometimes

called special purpose vehicles) in certain circumstances. A number

of changes to the group and acquisition relief clawback provisions

will be introduced with immediate effect, including extending the

period in which these clawbacks can be withdrawn to three years.

The Government proposes further consultation on the transfer of land

into and out of a partnership by a partner, and the need for a stamp

duty charge on transfers of interests in partnerships that hold UK

land. This is in order to prevent the use of partnerships to transfer

property without incurring a stamp duty charge. Pending introduction

of the new measures, the stamp duty treatment of partnership

interests will continue as now.

The modernised regime comes into force for transactions completed on

or after 1 December 2003, where those transactions relate to

contracts entered into after Royal Assent of the Finance Bill. This

means that transactions enacting contracts entered into on or before

Royal Assent will broadly always be chargeable under the existing

stamp duty regime, no matter when completed. There will be special

rules for certain options made after 16 April - transactions arising

from those options may be subject to modernised stamp duty if they

arise after implementation of the new regime. Full details about

transitional provisions will be available when the Finance Bill is

published on 16 April.

The modernised stamp duty regime will see the abolition of stamp duty

on transactions involving property other than land, shares and

interests in partnerships. This de-regulation will take many

transactions out of stamp duty altogether, significantly transfers of

book debts and other receivables.

The vast majority of individuals buying or renting residential

property will see no immediate changes under the new regime, though

there will be some administrative changes (such as a redesigned form)

which their solicitors or conveyancers will handle for them, as they

do now. Over time, modernisation will offer new electronic ways of

notifying liability and paying stamp duty, and help speed up the

house-buying process.

In future, and once improvements to the administration of stamp duty

have been implemented, the Government is prepared to consider

additional changes that differentiate between the commercial and

residential markets; taking into account the economic circumstances

of the two sectors, and the need to ensure fairness between

taxpayers.

Stamp duty on new leases

Under the modernised regime, the Government also proposes to update

the existing charge on the grant of new leases (known as 'lease

duty') to bring it closer into line with the charge on transfers of

freehold land and buildings. Legislation to achieve this will be

included in the Finance Bill and the changes will have effect from 1

December, subject to further consultation.

At present the charge is calculated by reference to lease length and

the average annual rent, with four different rates applying. This

approach does not properly reflect the value of the lease over time,

and creates distortions, particularly around the points where rates

change. Under the proposals, the new charge will follow modern

commercial practice in valuing the rent payable over the term of the

lease at its discounted net present value (NPV) and there will be a

single rate of 1 per cent of the NPV of rental payments, where the

NPV exceeds the zero rate band threshold of £60,000 (for residential

property) or £150,000 (for non-residential property). Premiums will

continue to be taxed as now at the same rates as freehold transfers.

This will reduce the tax distortion between holding property as

leasehold and as freehold, and between different types of leases.

In addition, from 1 December 2003, VAT will be excluded from

treatment as consideration for a new lease provided the landlord has

not opted to charge VAT by the time the lease is granted. Under the

current regime, lease duty is calculated on the assumption that VAT

is charged on rent, unless the lease s pecifically prohibits the

charging of VAT.

Threshold for non-residential property

The Budget introduces a measure designed to exclude more small

businesses from charge to stamp duty from 1 December 2003. The stamp

duty zero rate band threshold will be significantly increased from

£60,000 to £150,000 for non-residential purchases, eliminating the

charge on around 18 per cent of commercial property acquisitions. The

new zero rate threshold will apply to non-residential new leases

where the NPV of rents is not more than £150,000, taking around 60

per cent of new commercial leases out of charge altogether.

Alternative property finance arrangements

Modernisation allows for fairer treatment of property purchases by

individuals financed by certain types of alternative mortgage

products. From 1 December 2003, and in certain circumstances before

then, individuals using such products will be able to benefit from

this fairer treatment, putting the stamp duty treatment of purchases

financed this way on a level footing with purchases financed by

conventional mortgage products. The Government believes that a range

of individual consumers will benefit from increased choice in the

mortgage market.

Disadvantaged areas

>From 10 April, stamp duty will no longer have to be paid on certain

non-residential property transactions in disadvantaged areas.

Regulations build on the existing exemption from stamp duty on all

property in disadvantaged areas where the consideration does not

exceed £150,000. The move takes forward the Government's aim of

regenerating the most deprived areas in the UK. The Inland Revenue is

today publishing a Statement of Practice, SP1/2003 which sets out

detailed guidance on the relief from stamp duty in disadvantaged

areas.

Registered Social Landlords

Registered Social Landlords enter in to contracts with housing

authorities to house the homeless. Budget 2003 rem oves the obligation

on Registered Social Landlords and tenants to pay stamp duty on

certain tenancy agreements. The measure will apply retrospectively to

tenancy agreements entered into on or after 1st January 2000. This

supports the Government's policy on housing the homeless.

Other commercial property measures

The extension of capital gains tax business assets taper relief

improves access to let property for unincorporated traders from 6

April 2004, thereby meeting a recommendation of the Curry Report

(Policy Commission on Farming and Food).

Inflexible lease terms can restrain businesses growth and expose them

to undue risk. The Government is working with all parts of the

industry to promote a voluntary Code of Conduct on Commercial Leases

to improve the flexibility of lease terms. The effectiveness of this

is being independently evaluated. Should the interim evaluation show

that there has been little progress towards greater flexibility, the

Government will consult later this year on possible legislative

options.

Tax reforms may also have a role to play in improving the efficiency

and flexibility of the property investment market. The Government

will discuss with the industry the appropriate tax treatment of new

property derivative products. Consultation on corporation tax reform

also provides an opportunity to consider the tax treatment of

commercial property. The Government will explore with the industry

evidence for the effectiveness of further measures to improve the

efficiency and flexibility of commercial property.

NOTES

Stamp duty measures with immediate effect

This Budget confirms the details of and changes to the modernised

regime for stamp duty announced in Budget 2002.

A number of changes to the group and acquisition relief clawback

provisions will be introduced with immediate effect. These are:

- Extending the period in which group and acquisition relief

clawback s can be withdrawn to three years;

- Closing a loophole whereby the clawback could have been avoided by

transferring the land into a connected company before selling the

original company together with the connected company;

- Ensuring that group or acquisition relief will be withdrawn unless

stamp duty has been paid on the market value of land that is

subsequently reacquired by the original company.

The changes will generally apply to documents executed after 14

April. The existing rules will continue to apply where the document

gives effect to a contract made on or before 9 April, unless the

document results from the exercise of an option, an assignment, or

further contract made after 9 April. Equivalent provisions will apply

from 1 December in the modernised regime.

Modernising stamp duty - new regime for leases

Both before and after the implementation of the modernised regime:

- stamp duty applies to the grant of a new lease (including

sub-leases);

- lease duty applies to the rent payable under a new lease;

- where a premium is payable for the grant of a lease, this is at the

same rates as freehold transfers, except that where rent of over

£600 a year is also payable, in which case the zero rate does not

apply to the premium; and

- where an existing lease is transferred, this is charged at the same

rates as freehold transfers.

New regime for the rental element of leases

Currently, stamp duty on the rental element of new leases (often

called 'lease duty') is calculated by reference to the average annual

rent and charged at 1, 2, 12 or 24 per cent depending on lease

length. This regime produces distortions with very steep jumps

between rates for certain lease lengths. From December, the proposed

charge will be based on the net present value (NPV) of all the rental

payments due over the term of the lease. Using NPV recognises the

time value of money - r ental payments received in the future are

worth less than equivalent payments received now. The new regime will

discount future rents at 3.5 per cent per annum as recommended in the

Treasury's 'Green Book'.

Example: a ten-year lease with £10,000 rent per annum. Rental

payments total £100,000 over the life of the lease, but once

discounted the NPV is £83,166.

Under the proposed relief for smaller leases, non-residential rental

leases where the NPV of rents over the life of the lease does not

exceed £150,000 will be exempt from charge. This will take around 60

per cent of all commercial leases out of charge.

Examples:

- a 10-year commercial lease will be exempt if rent is below £18,000

each year;

- a 25-year commercial lease will be exempt if rent is below £9,100

each year; and

- a commercial lease of any length will be exempt if rent is below

£5,250 each year.

Many short residential leases are already exempt from lease duty on

the rental element because very low rents, such as ground rents, are

payable. Leases of furnished property for a term of less than a year

currently attract only a £5 stamp. From December stamp duty at 0 per

cent will apply where the NPV of rents is below £60,000. This means

that a 2-year rental lease will be exempt if rent is below £31,500

each year, a 5-year rental lease will be exempt if rent is below

£13,250 each year and a rental lease of any length will be exempt if

rent is below £2,100 each year. This approach keeps over 90 per cent

of all residential leases out of the charge.

Relief for disadvantaged areas

The existing exemption for all property in disadvantaged areas where

the consideration does not exceed £150,000 was introduced on 30

November 2001. At the time the Chancellor announced that, subject to

State Aid approval, he intended to substantially increase or abolish

the limit for non-residential property. Approval was given on 21

January 2003, and takes effect from 10 April.

Capital gains tax (CGT)

CGT taper relief reduces the amount of CGT payable by bringing only a

proportion of the gain into charge. The longer an asset has been

owned before it is sold, the smaller the proportion. A more generous

taper applies for business assets than other assets, and the

effective rate of tax for gains on business assets for higher-rate

taxpayers who have held the assets for at least two years is 10 per

cent.

  • Comment

Have your say

You must sign in to make a comment

Please remember that the submission of any material is governed by our Terms and Conditions and by submitting material you confirm your agreement to these Terms and Conditions.

Links may be included in your comments but HTML is not permitted.