2009 Pre-Budget Report: implications for Property
The Chancellor delivered the 2009 Pre-Budget Report on 9 December 2009. This Legal update examines those implications that will be of particular interest to property lawyers.
The Chancellor delivered the 2009 Pre-Budget Report on 9 December 2009.
The 2009 PBR is concerned primarily to:
Provide targeted support for businesses and households during the recession.
Support the recovery of the economy.
Tackle climate change by promoting low-carbon growth and energy efficiency.
As might be expected of a pre-election pre-budget report, there are no real surprises in the 2009 PBR, but the implications are clear. While the Chancellor is anxious to keep as much pain at bay now, as soon as the economy has picked up (and certainly after the next general election), the Government will need to tighten up and collect in more taxes. Specific mention was made of the drop in revenues from SDLT. The Chancellor emphasised, as a sweetener, the Government's support for various infrastructure projects and the championing of "green" buildings. However, the real questions remain how will new infrastructure be funded in the future and how will the country tackle refurbishment of existing building stock.
This Legal update contains links to further summaries of the 2009 PBR prepared by PLC Environment, PLC Private Client and PLC Tax.Close speedread
Links and defined terms
For a summary of the announcements of particular interest to environmental lawyers, see:
For a summary of the most important private client tax announcements, see Legal update, 2009 Pre-Budget Report: key private client tax announcements (www.practicallaw.com/0-500-9383).
For a summary of the key business tax announcements see Legal update, 2009 Pre-Budget Report: key business tax announcements (www.practicallaw.com/4-500-9404).
The following abbreviated terms have been used in this Legal update:
- 2009 PBR: 2009 Pre-Budget Report.
- HMRC: HM Revenue & Customs (www.practicallaw.com/6-200-6399).
- HM Treasury: HM Treasury (www.practicallaw.com/0-106-3218).
- SDLT: Stamp Duty Land Tax (www.practicallaw.com/2-107-7304).
- VAT: Value added tax (VAT) (www.practicallaw.com/5-107-7468).
The 2008 Pre-Budget Report announced a temporary reduction in the standard rate of VAT from 17.5% to 15%. This measure was to last until 31 December 2009 (see Legal update, 2008 Pre-Budget Report - implications for Property: Temporary reduction in VAT standard rate (www.practicallaw.com/5-384-1845)).
In spite of calls for an extension of the VAT reduction period, the 2009 PBR confirms that the standard rate of VAT will revert to 17.5% on 1 January 2010.
For more information on dealing with the property aspects of the VAT increase, see Practice note, How to deal with the VAT increase on 1 January 2010: property aspects (www.practicallaw.com/6-500-7753).
SDLT: "holiday" over
The 2009 Budget stated that the temporary increase in the SDLT threshold to £175,000 for residential properties (announced on 2 September 2008) would be extended until 31 December 2009, instead of ending on 2 September 2009 (see Legal update, 2009 Budget: implications for property: SDLT "holiday" extended (www.practicallaw.com/5-385-8360) and SDLT threshold on residential property increased to £175,000 and other housing measures announced (www.practicallaw.com/2-383-1503)).
It was hoped that the Government would extend this SDLT "holiday" further, but the 2009 PBR confirms that the SDLT threshold will revert to £125,000 for residential properties on 1 January 2010.
For more information on SDLT reliefs on residential property, see Practice note, SDLT reliefs for residential property (www.practicallaw.com/6-107-4822).
SDLT: disclosure regime and residential property
The Government has announced that regulations will be introduced to extend the Disclosure of Tax Avoidance Schemes (DOTAS) rules to require the disclosure of certain SDLT avoidance schemes that concern residential property with a value of at least £1 million.
Since 1 August 2005, promoters of certain schemes aimed at avoiding SDLT on commercial property transactions with a value of at least £5 million have been obliged to disclose those schemes to HMRC. The SDLT disclosure regime adopts the same basic form, (and is implemented under the same primary legislation, as the direct tax disclosure regime).
The regime does not currently require the disclosure of pure residential property SDLT avoidance schemes (although schemes to save SDLT on transactions involving both residential and non-residential property are discloseable if the value of the non-residential property is at least £5 million). Nor does the regime currently require users of SDLT schemes to identify themselves to HMRC through the scheme reference number (SRN) system, a requirement that does apply to users of direct tax avoidance schemes.
For further detail, see Practice note, SDLT disclosure regime (www.practicallaw.com/6-201-2437).
As part of the 2009 Budget, HMRC issued a consultation paper indicating that the Government intended to introduce regulations extending the SDLT disclosure regime to residential property transactions with a value of at least £1 million of the regime would include a mechanism for identifying users of the schemes that were disclosed. For further detail, see Legal update, Extending the SDLT disclosure regime for high value residential properties.
The Government has announced that it is to go ahead with the proposed extension of the SDLT disclosure regime. Regulations will be made in early 2010 and will come into effect no later than 1 April 2010.
The regulations will amend the Stamp Duty Land Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations (SI 2005/1868) so that:
The disclosure provisions will apply to schemes that concern either:
non-residential property with an aggregate value of at least £5 million; or
residential property with an aggregate value of at least £1 million.
The disclosure provisions will also apply to schemes that concern mixed non-residential and residential property where either:
the value of the residential property is at least £1 million; or
the value of all the property is at least £5 million.
Grandfathering provisions will apply so that there will be no obligation to disclose schemes made available for implementation before these changes come into effect. This rule will also apply to grandfather schemes that are "substantially the same" as schemes made available before the start date.
In addition, if a user of a SDLT avoidance scheme (in relation to commercial or residential property), expects to obtain a SDLT advantage from the scheme, they will be required to report the scheme to HMRC. This must be done (before the start date) using a form that will be published on HMRC's website.
Empty property relief
For the year 2010/11, empty commercial properties with rateable values of up to £18,000 will be exempt from business rates.
The Rating (Empty Properties) Act 2007 (www.practicallaw.com/1-373-2966) (REPA 2007) removed business rates relief for most unoccupied properties with effect from 1 April 2008. REPA 2007 was widely criticised by the property industry as an additional strain on businesses in a time of economic difficulty.
In response to this criticism, the 2008 Pre-Budget Report (www.practicallaw.com/5-384-1845) announced that empty properties with rateable values of up to £15,000 would be exempt from business rates for the year 2009/10. The exemption was implemented with effect from 1 April 2009 by the Non-Domestic Rating (Unoccupied Property) (England) Regulations 2009 (www.practicallaw.com/8-385-3573) and the Non-Domestic Rating (Unoccupied Property) (Wales) (Amendment) Regulations 2009 (www.practicallaw.com/6-385-3574).
This resulted in an estimated 70% of empty commercial properties being exempt from paying business rates.
The 2009 PBR announces that the temporary increase in the threshold for empty property relief will be extended for a further year and the threshold increased to £18,000. This higher threshold reflects the effects of the 2010 business rates revaluation (see Legal update, Guidance for 2010 business rates revaluation (www.practicallaw.com/3-500-6335)).
However, despite pressure from the property industry, the Government continues to assert that, in the long term, it is right to charge rates when properties stand empty. A rating charge encourages owners to re-let and reuse empty property, and owners of empty properties should not expect subsidy.
Energy efficiency and fuel poverty
In the 2009 PBR, the Government has announced that £200 million will be made available to improve energy efficiency and tackle fuel poverty by:
Offering a £400 incentive to help up to 125,000 households upgrade their old boilers. The scheme is available for those who replace their current working G-rated boiler with either:
a new boiler; or
a renewable heat unit.
The Government hopes to launch the scheme during 2010.
Providing cavity wall insulation for 108,000 properties in the social sector by the end of 2011.
This restates the Government's commitment, announced in the 2009 Budget (www.practicallaw.com/2-385-8253), to improve insulation in 150,000 social sector homes.
Providing an extra £150 million for Warm Front (www.practicallaw.com/2-384-2097) to help 75,000 of the most vulnerable households with heating and insulation.
Households that generate low-carbon electricity on a small scale through renewable technology (such as micro wind turbines and solar panels), will now benefit from preferential rates when selling the electricity back to the national grid.
The feed-in tariff (FIT) for microgeneration, worth an average of £900, is aimed at encouraging homeowners to use renewable technology to meet their own energy requirements.
The Government has also confirmed that the income received by those who generate small-scale renewable electricity mainly for their own use, will not be subject to income tax on the FIT. Legislation will be introduced with effect from 1 April 2010 to ensure the tax-free treatment of such income.
For more information, see Practice note, Microgeneration: Electricity: feed-in tariffs (www.practicallaw.com/2-385-0884).
The Government has confirmed that, in line with the announcement by the Department of Energy and Climate Change (DECC) on 2 December 2009, smart meters will be rolled out to every home and small business by the end of 2020.
For further information on smart meters, see Legal updates:
The Government wants to ensure that repossession is a measure of last resort. The Mortgage Rescue Scheme and Homeowner Mortgage Support scheme provide targeted help for those who have exhausted all other options.
There will be a freeze in the Standard Interest Rate used to calculate Support for Mortgage Interest at 6.08% for a further six months, benefiting an estimated 220,000 homeowners.
For more information on assistance for borrowers, see Practice note, Help for residential borrowers struggling with mortgage repayments: Where can the borrower get financial help? (www.practicallaw.com/4-422-4476).
Lifetime homes standard
Lifetime homes standard (LHS) is part of a new sustainable housing strategy designed to give older people greater choice in the housing market and to address the challenges for housing an ageing population.
Early in 2010, the Government will consider the case for regulation of LHS and what form any regulation should take. Any move to make LHS mandatory is not expected until 2013 at the earliest.
For more information on LHS, see Legal update, Lifetime homes, lifetime neighbourhoods - what you need to know (www.practicallaw.com/7-380-8289).
Improving the supply of housing
In the 2009 Budget, the Government confirmed its commitment to address the long term challenge of increasing housing supply, and to achieve its target of 240,000 new homes per annum by 2016.
The Government confirmed its support for increasing the supply of social and affordable housing in Building Britain's Future (www.practicallaw.com/0-386-3415).
The 2009 PBR states that the Government will:
Make more land available for development through improving local authorities' five year land supplies by undertaking comprehensive checks, publishing results and withholding incentive funding if they are not in place, to ensure an efficient and effective supply of viable land for development.
Ensure that house building is not unduly constrained by regulation.
Examine the scope for local authorities to borrow against revenues from new council homes to support delivery of housing where this offers value for money.
Consider wider reforms to the council housing finance system.
Study the drivers of housing growth and the steps it, or the industry, could take to improve diversity and innovation. The Government will report by the 2010 Budget.
Private rented sector
The 2009 PBR announces that the Government will issue a consultation document early in 2010 which will build on the work of the Rugg Review (www.practicallaw.com/6-383-6773). The consultation will consider the contribution the private rented sector could make to addressing demand and increasing housing supply, and any barriers to investment.
The Government believes that a growing private rented sector can play an important role in increasing housing supply and meeting the need for a range of high quality housing tenure choices.
The Government's aim is to provide a long term strategy for:
Developing a quality alternative to buying.
Providing a safety net for the vulnerable and those on low incomes.
Striking a balance between the rights and responsibilities of both landlords and tenants.
Encouraging private investment in the private rented sector.
For more information, see Legal update, Rugg Review response and consultation announced (www.practicallaw.com/2-386-1458).
Local authority rent increases
The 2009 PBR announces that the average guideline rent increase for 2010/11 will be reduced from 6.1% to 3.1% for all local authority residential tenants.
This is intended to encourage local authorities to set rents that are affordable and fair for their tenants but at the same time ensuring that local authorities have sufficient resources for the coming financial year.
Local housing allowance
The Local Housing Allowance (LHA) was introduced in April 2008 to give Housing Benefit recipients more control over, and responsibility for, their choice of housing.
However, the way that rates were set in the LHA meant that tenants in some areas benefited more than tenants in others.
This discrepancy was blamed for driving up the costs compared with the previous housing benefit scheme. To control these rising costs, the 2009 Budget (www.practicallaw.com/5-385-8360) announced that, from April 2010, households would no longer be able to retain any of the surplus if the LHA that they received was higher than their rent.
However, recent consultation suggests that there are disadvantages to withdrawing the excess. The Government will therefore delay the reform until April 2011, and will launch an immediate consultation on its approach to housing benefit reform and affordability.
The Government will also introduce a package of administrative reforms covering the LHA scheme, which is estimated to save around £100 million per year by 2012/2013. This includes measures to reduce the scope for fraud and error across the benefits system to ensure recipients receive the correct payments.
HomeBuy Direct and social housing investment
The Government is to extend the shared equity scheme, HomeBuy Direct, providing further help for first-time buyers. Over £150 million total investment for HomeBuy Direct will be made available in 2010/2011, by bringing forward funding from 2009 and prioritising housing for first-time buyers within the Kickstart programme.
Repeal of the furnished holiday letting rules
In general, the income generated from letting is taxed under the rules for property businesses. However, the furnished holiday letting rules (FHL rules) allow furnished holiday lets to be treated as a trade for some tax purposes, subject to certain conditions.
As part of the 2009 Budget, the Government published a technical note on furnished holiday lettings (FHL) in the European Economic Area (EEA). The Government acknowledged that:
Landlords with income from furnished holiday lettings within the EEA (but outside the UK) did not qualify for the same tax treatment as those with furnished holiday letting properties within the UK.
The different tax treatment might not comply with European law.
The Government's approach to dealing with this inconsistency was temporarily to allow furnished holiday lettings in the EEA to have the same tax treatment as furnished holiday lettings in the UK, with a view to repealing the FHL rules for the tax year 2010-2011.
For more information, see Legal update, 2009 Budget: implications for property: Furnished holiday lettings in the European Economic Area (www.practicallaw.com/5-385-8360).
In the 2009 PBR, the Government confirmed that legislation will be introduced in the Finance Bill 2010 to withdraw the FHL rules. The change will take effect on 6 April 2010 (1 April 2010 for companies) and, from then on, businesses that let furnished holiday properties will be subject to the same tax treatment as other property businesses.
Implementing the repeal
HMRC has published the following documents relating to the repeal of the FHL rules:
- Draft Legislation to Repeal the Furnished Holiday Lettings Rules from 2010-11 (www.practicallaw.com/5-500-9804) (draft FHL legislation).
- Technical note, Withdrawing the Furnished Holiday Lettings Rules from 2010-11 (www.practicallaw.com/0-500-9806) (2009 PBR FHL technical note).
- Impact Assessment of Withdrawing the Furnished Holiday Letting Rules (www.practicallaw.com/8-500-9807) (FHL impact assessment).
The repeal of the FHL rules will affect various aspects of the tax system, including:
- Capital allowances (www.practicallaw.com/4-107-5846).
- Wear and tear allowance.
- Loss relief.
- Landlord's Energy Saving Allowance.
- Certain capital gains reliefs.
- Relevant UK earnings when calculating the maximum relief due for an individual's pension contributions.
For further information on the effects on the repeal, see the 2009 PBR FHL technical note and the explanatory notes in the draft FHL legislation.
The FHL impact assessment is a consultation impact assessment and HMRC states that it welcomes any information that is relevant to the final version of the impact assessment. HMRC is also seeking comments on the draft legislation, in particular views on how effectively it implements the Government’s decision to repeal the FHL rules. Details of how to respond are contained in the draft FHL legislation and the FHL impact assessment. Comments on these documents should be sent by 26 February 2010.
Asset management and sales of public buildings
The Government intends to realise £16 billion from asset and property sales by the end of 2014. For more information, see Legal update, 2009 Budget: implications for property: Raising capital through operational efficiency (www.practicallaw.com/5-385-8360).
The Government has concluded that a partial or full sale of the Dartford Crossing and High Speed 1 is the right approach. The necessary processes for the sale of the Dartford Crossing will start in summer 2010. Preparations for sale of High Speed 1 are advanced and the sale process is to be launched as soon as practicable following the introduction of domestic services on the line in December 2009.
The Government has created a strategic property team within the Shareholder Executive to undertake a strategic review of different public sector estates management and ownership options. This includes assessing the feasibility of creating one or more property companies to own and manage portfolios of public sector properties to maximising efficiency.
To improve the incentive for more effective asset management planning and to lock-in the benefits of the significant growth in capital investment since 1997/98, the Department for Communities and Local Government will:
Progress the technical aspects of introducing a formal depreciation-based funding scheme in the local government sector.
Report on progress in the 2010 Budget.
Community Infrastructure Levy
To support local infrastructure provision, the Government has indicated that it will shortly announce detailed arrangements for the implementation of the Community Infrastructure Levy (CIL) from April 2010. For further information on CIL, see Practice note, Community Infrastructure Levy (www.practicallaw.com/6-385-1570).
The Government is also interested in exploring what further finance mechanisms, powers and flexibilities could support local authorities to drive growth effectively. In particular, the Government will examine the scope for local authorities to borrow against the following:
Future CIL revenues.
Renewable Heat Incentive and Feed-in Tariff (FIT) revenue streams.
Revenues from new council homes.
After a transitional period, it is intended that section 106 requirements will be scaled back, as part of CIL implementation. The Government will consult early in 2010 on the appropriate use of section 106 agreements.
Revised Planning Policy Statement for Economic Development
The Government will soon publish a revised Planning Policy Statement for economic development to ensure that planning applications that secure sustainable economic growth are given favourable consideration.
In the Government's draft legislative programme published in June 2009 (see Legal update, Government announces the Draft Legislative Programme 2009/10 (www.practicallaw.com/3-386-5371)), the Government announces its intention to establish an advisory body "Infrastructure UK" to identify the country's long term infrastructure needs across a 5 to 50 year horizon.
The 2009 PBR confirms that the Government will establish Infrastructure UK, which will work with government departments, private sector infrastructure investors, contractors, operators and independent regulators. Infrastructure UK will bring together The Infrastructure Finance Unit (TIFU), HM Treasury's Public-Private Partnership (PPP) policy team and Partnerships UK (PUK). Infrastructure UK will be based in HM Treasury.
The following are the immediate priorities for Infrastructure UK:
To develop a strategy for the UK's infrastructure over the next 5 to 50 years. This will be published in 2010 Budget.
To work with infrastructure developers and funders to make recommendations in the 2010 Budget to stimulate increased private sector investment in infrastructure, with a particular focus on "unlocking new sources of private capital and developing new funding models".
To manage the Government's investment in the 2020 European Fund for Energy, Climate Change and Infrastructure.
To support HM Treasury in prioritising the Government's investment in infrastructure, to ensure "value for money is achieved".
To work with the Office of Government Commerce and other government departments to "support the delivery of major infrastructure projects and programmes and to build stronger infrastructure delivery capability across government".
To support HM Treasury and the Department of Energy and Climate Change to report on how to ensure the electricity market framework can most effectively deliver low-carbon investment, and to explore the need for a low-carbon institution.
To work with the Department for Transport on responding to proposals for a new high speed line to the West Midlands.
To support the Department for Business, Innovation and Skills (BIS) in delivering a Universal Service Commitment in broadband by 2012 and providing further support to achieve private sector roll-out of next generation broadband to 90% of the population by 2017.
Support for investments
To support and facilitate investment that enables economic growth, the Government will proceed with the following:
A £1.1 billion rail electrification programme for the Great Western Main Line and Liverpool to Manchester line.
The £400 million M1 improvement scheme (work to begin in December 2009).
The Government will also:
Continue to evaluate the case for electrificaion of the Midland Main Line from London to Sheffield.
Respond in the first quarter of 2010 to proposals for a new high speed line from London to the West Midlands and to Scotland. The Government will be assisted in this by the proposed Infrastructure UK (see note, Establishing Infrastructure UK).
Publish measures to reform the economic regulation of airports to encourage investment in airport infrastructure.
The Government is currently in discussions with industry about the economics of developing infrastructure to exploit oil and gas reserves in the area to the west of the Shetland Islands.
In the 2009 Budget, the Government announced two new pilot city-regions in Greater Manchester and Leeds. The Government was to work with the pilots (and interested local authorities) to assess how regeneration could be financed from property taxes, and to report on its findings in the 2009 PBR. For details see Legal update, 2009 Budget: implications for property: Pilot City-Regions (www.practicallaw.com/5-385-8360).
The 2009 PBR reports on the early findings and indicates that further reports will be given in the 2010 Budget.
Agreements have been reached with:
Greater Manchester, which is designated as the UK's fourth low-carbon economic area specialising in the built environment.
Leeds, which is given greater control over housing and regeneration funding.