The chancellor surprised the property industry in both welcome and unwelcome ways with this year’s Budget.
The bad news first: the rate of SDLT payable by most commercial real estate investors has increased by 1% and we are moving from a ‘slab’ to a ‘slice’ system for calculating our tax liability. This brings the SDLT treatment of commercial and residential property into line and, according to the chancellor, will result in more than 90% of taxpayers being better off. Apparently it came recommended by the IMF.
This all sounds positive, but ultimately this is a revenue raising measure (£500m a year, thank you very much) that will affect all but the smallest commercial real estate investors and owners. People may find it hard to sympathise with large landlords, but the 1% fall in the value of real estate investments this effectively entails is really a 1% hit to the value of property in people’s pension funds. It is the person on the street that will be penalised, not some fat cat.
The other blow is a 3% SDLT surcharge on ‘additional residential property’. Aimed at tilting the playing field in favour of owner-occupiers, this measure could throw a spanner in the works of our nascent build-to-rent sector. Despite commitments of more than £4bn this year, build-to-rent remains in its infancy and viability is marginal in many cases. Paying an additional 3% on a transaction before the rental income even starts flowing in could seriously affect a business model that is starting to show some real commercial promise and could play a key role in our housing crisis.
Measures to restrict the tax deductibility of interest came as no surprise but, given the complexities involved, it was a shock that the rules will be in place in just over a year’s time. Cue a lot of work for both us and officials over the coming months.
But it’s not all doom and gloom. We have fought a long campaign to reform business rates and have finally met with success. The government will look into carrying out more frequent revaluations and will move from retail price index to consumer price index as the basis for calculating the business rates multiplier (albeit only from 2020). Bills will more closely reflect actual values. In the long run, it will also reduce the overall burden of business rates because CPI is lower than RPI.
The rates burden will also fall because relief for small business is being considerably extended in a way that will cost the government almost £6bn over the next five years. This may sound like a victory for occupiers rather than landlords, but changes in rates to a large extent feed through to rents. The fall could improve returns for many investors and may also encourage further development activity.
The government also took up another of our recent recommendations: to review the Substantial Shareholding Exemption. Admittedly, it is rather arcane, but if the government gets this right, it would boost UK fund managers and make it much easier for real estate groups to restructure their businesses.
The chancellor often talks about the need to balance the books. It seems that a balanced Budget means taking with one hand and giving with the other.
