Impact of 2011 Budget on the Property sector

Property update – Budget Report 23 March 2011

The Chancellor’s stated in today’s budget speech that the key objectives of his second Budget were to create strong, sustained and balanced growth in the economy balanced across the country and to encourage private sector investment.

Some of the measures announced are specifically targeted at house builders. The property sector as a whole will benefit from some of the measures announced to make the UK a more attractive place to do business including a 2% decrease in the corporation tax rate to 26% from 1 April 2011 (1% to 20% for small companies). The announcement that the main corporation tax rate will fall by a further 1% a year to 23% in 2014 should give directors’ confidence when planning for future investment in the UK.

An incentive to owners of shares in trading companies, including property developers and traders, is the doubling of the life time allowance under the entrepreneur’s relief provisions to £10m.Capital gains qualifying for entrepreneurs relief are taxed at 10%. The incentive to build a business of substantial value is now significant as the relief represents a saving in capital gains tax of £1.8m for those who realise a gain that qualifies for the full £10m allowance.When this relief was originally introduced the net benefit for an individual was only £80,000.

Specific incentives for those involved in the Residential Sector

The rate of Stamp Duty Land Tax (SDLT) on purchases of multiple residential properties will be determined by the average value of the dwellings purchased (subject to a minimum rate of 1%) as opposed to the current system of aggregating the property values to ascertain the appropriate SDLT rate. The current rate is 4% for all transactions over £500,000 (increasing to 5% for transactions over £1m from April 2011).House builders endeavouring to sell residential property portfolios should benefit as this will reduce the costs for investors who purchase several residential properties in one transaction.

The £250m programme to provide help for first time buyers of new-build property will assist 10,000 families, and thus the sale of 10,000 new homes, another benefit for residential developers.

Investors in property

The creation of 21 new Enterprise Zones, and increase in the reliefs available to investors in these zones, generate an opportunity for property investors. The benefits include a 100% deduction for building costs, enhanced capital allowances and 100% business rate discount.

Capital Gains Tax, which is payable by individuals who invest in property either in their own name or through tax transparent entities such as LLP’s, remains at 28% making it the tax of choice for the majority of property investors. The structuring of property ownership is of continued importance if this is to be achieved.

The Office of Fair Taxation report (published on 4 March 2011) announced consultation on the removal of Indexation Allowances for companies.Investors who hold investment property in a company need to consider the impact of the potential removal of these allowances. If commercial factors, such as funding terms allow, restructuring to lock in indexation allowances earned to date should be considered.

Anti-avoidance

Anti-avoidance has, as anticipated, been raised further up the agenda.The Chancellor announced the elimination of 3 SDLT schemes that have been actively promoted, and consultation on ensuring that the owners of “very high value” property pay an appropriate rate of tax.

Other schemes, such as the use of EBT and EFURBS, have effectively been closed by the announcement that remittances to individuals from these structures will be taxed as remuneration.

The focus on this area, and closure of “After the event planning” makes it imperative that property developers and investors consider taxation and the best way to structure property owners before starting a project.The top rate of tax is now 57.8% which may be significantly reduced by proper planning.

A final thought for individuals

The Chancellor made it clear that he wishes the UK to remain a competitive location for individuals to do business – and that he wants to reduce the 50% top income tax rate in the future.Whilst no dates were announced for a reduction in this rate it is clear that a future reduction is planned. Individuals may therefore like to consider retaining profits from trading operations within a company until the income tax rates fall.

Conclusion

Whilst kick starting the property sector was not the main target of this budget the sector will benefit from the fall in corporation tax rates and the doubling of entrepreneurs relief. The funding to assist first time buyers to purchase new homes and the SDLT changes relating to the bulk purchases of property should further prime the recovery of the residential market.

All property developers and investors need to be aware of the different rates oftax payable on projects depending on the structure adopted, and the need to plan before starting a project as opportunities to minimise taxes on completion are being reduced.