Osborne Looks Back in Anger
In delivering his first Budget today, George Osborne criticised the previous administration for alleged failures which have forced him to cut public expenditure and raise taxes. Most of the bad news in the Budget had, however, been trailed well in advance leaving many with the feeling that the Budget could have been much worse. The aspect that caused most uproar during the Chancellor's speech was the increase in VAT to 20%, albeit deferred until next year.
Details of the changes affecting the property sector are:
VAT will be increased to 20%. This increase will apply to all supplies made on or after 4 January 2011 but will not affect any goods or services which are currently exempt from VAT or taxed at the zero or reduced rates. HMRC has today published guidance for businesses on how to deal with the rate change. The guidance includes advice for special VAT accounting schemes and also explains how to apply the rate change to supplies of goods or services which span 4 January 2011.
Along with the increased rate, anti-forestalling legislation (now a familiar term) is being introduced to prevent the 17.5% rate being applied to goods or services actually supplied after 4 January 2011. This legislation will apply to any supplies made on or after 22 June 2010 to customers who cannot fully recover VAT where certain conditions are met. While this is expected to affect only a few businesses, it may, for example, prevent tenants who cannot recover VAT in full from prepaying quarterly rents due after January 2011 in order to obtain the benefit of the lower VAT rate, which might otherwise have been a prudent tax planning move.
The guidance produced by HMRC and anti-forestalling measures are similar to those which applied on the increase of VAT from 15% to 17.5% earlier this year, and accordingly should already be familiar to businesses.
It was also confirmed that the prohibition against the use of Lennartz accounting for immoveable property, boats and airplanes, and the removal of the legislation on directors' accommodation, would take effect from 1 January 2011.
Capital Gains Tax ("CGT")
We had been warned that the rate of CGT on non-business assets would increase to 'similar or close' to income tax rates. So the announcement that CGT rates will increase to 28% for higher rate taxpayers will result in a sigh of relief from many. The current rate of 18% will remain for basic rate taxpayers to the extent that their total taxable income and gains fall below the threshold for higher rate tax with the 28% rate applying to any excess. Gains realised up to and including today will be ignored in determining which rate applies. For trustees, the rate increases to 28% unless entrepreneurs' relief is available. The new rate will have effect from midnight tonight, leaving limited opportunity to implement any planning.
The annual exemption will remain at £10,100 but can be applied against gains realised this year in the most tax efficient manner.
Gains qualifying for entrepreneurs' relief will continue to be taxed at 10% but the lifetime limit will increase from £2m to £5m for disposals after today. Those who have already used up the previous £2m limit (or £1m limit before 6 April 2010) will be entitled to claim further relief but only on qualifying gains arising in future.
This means that entrepreneurs are the winners from today's Budget. The maximum value of entrepreneurs' relief increases from £160k to £900k. So if a company or business sale is on the horizon, it becomes even more important to take early advice to ensure that the relief is available. The conditions which need to be satisfied to qualify for the relief must be met throughout the period of 12 months ending on the date of disposal. It remains the position that the relief is only available on a disposal of shares where the individual selling the shares holds at least 5% of the ordinary share capital. Sadly, the relief has not been extended to employees who have smaller shareholdings.
Stamp Duty Land Tax ("SDLT")
There was little affecting SDLT in today's Budget. Accordingly, for residential property:
- the holiday for first-time buyers remains (at least for now) until 24 March 2012 for purchases up to £250,000; and
- a new 5% rate will be introduced on purchases for more than £1m after 5 April 2011.
SDLT is charged on the VAT inclusive amount where VAT applies. The increase in VAT to 20% from 4 January 2011 will therefore result in higher SDLT liabilities in some cases. So you may want to complete any planned acquisitions before 4 January 2011.
Today's Budget contained some good news for companies with an announcement that both the main rate and small companies' rate of corporation tax will be reduced from 1 April 2011.
The main rate of corporation tax, currently 28%, will be reduced to 27% from 1 April 2011 and then by a further 1% each year until 1 April 2014 when it reaches 24%. The small companies' rate was due to rise to 22% on 1 April 2011 but will now instead reduce to 20% from that date.
In order to counteract the loss of revenue due to the reduction in the rates of corporation tax, capital allowances for expenditure on plant and machinery are also to be reduced. Currently businesses are entitled to writing down allowances of 20% for assets in their main pool and 10% for assets in their special rate pool, e.g. long life assets and integral features. These allowances will be reduced to 18% and 8% respectively from 1 April 2012 for corporation tax purposes and 6 April 2012 for income tax purposes. A hybrid rate will apply to businesses whose chargeable period of account spans these dates.
The annual investment allowance will be reduced from £100,000 to £25,000 from the same dates. The reason for this change is to target the relief more effectively at smaller businesses.
Furnished Holiday Lettings ("FHLs")
Those with FHLs are likely to welcome the news that the reliefs for FHLs will continue to apply until April 2011 for UK taxpayers with qualifying FHLs situated in the UK or elsewhere in the European Economic Area. However, this may just be a short reprieve as the Government has announced that it will consult over the summer about plans to change the tax treatment of FHLs from April 2011.
Real Estate Investment Trusts ("REITS")
It was confirmed today that the earlier proposal to allow a UK REIT to use stock dividends as well as cash dividends to satisfy the requirement to distribute 90% of the profits from its property rental business in each accounting period will go ahead. This measure will come into effect after the next Finance Bill receives Royal Assent.
Authorised Investment Funds ("AIFs")
Anti-avoidance provisions will counter the use of AIFs to generate UK tax credits for investors subject to corporation tax. This measure takes effect from today and will apply to the extent that a distribution from the AIF is in respect of income on which it has not suffered UK tax.
In summary, there was little good news for the property sector in the Budget, although there was perhaps some relief that SDLT rates did not increase, as had been mooted in some quarters, given the higher rate already planned for residential property costing over £1m.
The increase in VAT to 20% from 4 January 2011 will come as unwelcome news to retailers, who are already hard pressed although the Christmas sales should be good. Equally, landlords of shopping centres will see this as further pressure on margins for their already toiling retail tenants.
The greater pain to come is from further measures flagged in the Budget press releases. The government is considering a General Anti-avoidance Rule. More ominously, it is also to examine the need to change the rules on SDLT on "high value property transactions" to prevent avoidance.
One point worth emphasising is that by laying out his tax plans not just for this year but also for the next few years, the Chancellor has tried to reduce the uncertainty that has had a negative impact on the economy of late. If that doesn't add any cheer in the battered property sector, then perhaps the best thing is simply to drown your sorrows... in cider.
If you think your business may be affected by any of the above or if you have any other questions, please contact:
0141 303 2427
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