Property developers across Britain will be hoping that as someone who has previously held an interest in a property development business (Castlemead Homes), Chancellor Philip Hammond will take steps to relax the fiscal stranglehold on the sector.
The Chancellor has already hinted that he plans to create a £3bn Home Building Fund to help small businesses build around 25,000 new homes by 2020, with up to 225,000 homes planned for the longer term. If reports are right, a further £2bn will be set aside for house building on surplus public sector land and encouraging the use of modern building techniques.
Giving the green light to these initiatives would be a major boost for property developers and could provide the impetus needed to address the current housing shortage. However, property developers will also be hoping for other changes to limit their tax liabilities, reduce administration and make it easier for them to find sites for development.
1 – Stamp Duty Land Tax: an exemption for residential property developers
With effect from 1 April 2016, all companies purchasing residential property and individuals buying a second home have been required to pay a 3% Stamp Duty Land Tax surcharge. For residential property developers, this has added a significant cost to land purchases.
By exempting residential property developers from this surcharge, the Chancellor could signal his support of the industry and increase the number of projects coming online.
2 – Annual Tax on Enveloped Dwellings (ATED): a blanket exemption is needed
Since April 2013, companies that own residential property that is used for non-commercial purposes have been required to pay an annual tax charge, based on the value of the property.
Property developers can claim relief from this charge but must do so by filing a return. The rules for determining when a return is due can be fairly complex, but failing to do this within the deadlines can lead to penalties for late filing.
This system is widely misunderstood and many smaller residential developers are unaware that they must file a return to claim relief from the tax charge. Some businesses have incurred penalties amounting to several thousand pounds as a result. It would be far simpler for all concerned if the Chancellor allowed property developers a blanket exemption.
3 – Smaller developers and Special Purpose Vehicles: urgent clarification is needed
It has become common practice for smaller property developers buying land to redevelop to establish a corporate structure, known as a Special Purpose Vehicle, to ring fence risk and provide security for third-party investors. Once the development is completed and property is sold, the company is liquidated and funds distributed among its shareholders. A new anti-avoidance measure is now threatening to treat these funds as ‘income’ rather than ‘capital gains’ which would make them liable for a much higher rate of tax – up to 38.1%, instead of 10% in some cases.
Smaller property developers should not have to pay this higher rate of tax if they can show HMRC that the SPV was established for genuine commercial reasons. However, HMRC has not yet provided guidance in this area and, until they do, there is an element of uncertainty, which is off-putting for developers and private investors alike. The Chancellor needs to clarify the rules for smaller property developers as soon as possible.
4 – VAT: introduce a new reduced rate of VAT for all works to existing residential buildings
The current zero rating for VAT purposes that applies to all costs associated with the construction of new residential buildings, especially care homes and student accommodation, needs to be simplified.
The rules that apply to VAT in this area are incredibly complex and require simplification. The Chancellor should also consider building on recent initiatives by applying a new 5% reduced rate of VAT to all works to existing private dwellings, other than those already eligible for zero rating.
Rebecca Wilkinson is a member of Menzies Property and Construction Sector team. Find out more about the Menzies Property & Construction sector team.
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