In this edition we look at the Spring Budget 2024 from a real estate perspective; the first Remediation Contribution Order under the Building Safety Act 2022; new compliance and disclosure requirements in relation to the Register of Overseas Entities; and current leasing trends and drivers in the UK market.
Spring Budget 2024 - real estate tax update
While this was an election year Budget, with the focus being on personal taxation and reforms to the “non-dom” regime rather than on the corporate tax side, there were a few important announcements to be aware of from a real estate tax perspective:
- Stamp Duty Land Tax – abolition of multiple dwellings relief. Importantly, it was announced that multiple dwellings relief will be abolished with effect from 1 June 2024 (with grandfathering of contracts already exchanged on or before 6 March 2024 and that complete on or after 1 June 2024). While we had long been awaiting the outcome of a consultation on reforming this relief, its complete abolition was not something that had been mooted during that consultation process and comes as a surprise. Particularly likely to be affected are the build to rent and student housing sectors.
- Stamp Duty Land Tax – no change to the mixed use rules. Separately, while the “mixed use” provisions were also under consultation, no changes have been announced in relation to this area, meaning that an acquisition of a chargeable interest in land which is not entirely residential remains taxable at the non-residential rates, for now at least.
- Rate change for disposals of residential property. With effect from 6 April 2024, the higher rate of capital gains tax payable by an individual on gains realised on a disposal of residential property will decrease from 28% to 24%. The basic rate of 18% will remain unchanged. It is expected that this reduction in tax will in fact increase tax revenues, as buy to let landlords (for example) are likely to consider selling to take advantage of this lowered rate.
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Abolition of non-dom status. Of wider interest is the abolition of non-domiciled status and its replacement with a residency-based regime for individuals, representing a significant change to the UK’s personal tax system with effect from 6 April 2025. Currently, a person who is non-domiciled but UK tax resident can elect to be taxed on the “remittance basis”, which means that they are only taxed on their non-UK source income and gains to the extent that they are remitted to the UK.
From 6 April 2025, this election will no longer be available and instead, individuals who come to the UK for the first time after this date will have a four year beneficial period, and will then be taxable on their worldwide income and gains. In the first four years, they will not be subject to UK tax on foreign income and gains (FIG) even if remitted to the UK (the new FIG regime).
For non-domiciled individuals who are already tax resident in the UK, some may be able to benefit from the FIG regime for a period, depending on when they arrived in the UK. For others, who currently elect to be taxed on the remittance basis, they will be subject to tax on 50% of their non-UK income in tax years 2025/2026, and can elect to rebase certain assets that are personally held to their April 2019 values. To encourage remittance of historic FIG, there will be a temporary repatriation facility, allowing FIG earned personally to be remitted at a reduced rate of 12% for 2025/2026 and 2026/2027. The position for trusts is complex.
There will be a separate consultation on the impacts of the removal of the domicile concept from an inheritance tax perspective, and how the rules are applied in the context of residential property will be of particular interest.
- New Reserved Investor Funds (RIFs). In welcome news, it has been confirmed that the government will introduce a new type of unauthorised investor fund vehicle for professional and institutional investors, predominantly designed for investment into commercial real estate. Draft legislation is promised in the Spring Finance Bill 2024.
- Changes to the Construction Industry Scheme (CIS). While not strictly a “Spring Budget” item, readers should be aware that, with effect from 6 April 2024, the rules relating to the application of the CIS to payments by landlords to tenants is changing (currently, only reverse premiums are specifically out of scope). The statutory instrument which brings these changes into effect was published on 8 March 2024.
Payments from a landlord to a tenant will now fall outside the scope of the CIS where certain tests are met, including that the works being carried out have been agreed between the parties as part of the negotiations for a lease; that the tenant either does the works or engages a sub-contractor to do so (via a written contract); and that the works are carried out within the tenant’s demise (and not to the common parts, for example). Care will need to be taken to confirm whether payments fall within the prescribed carve-out from the CIS regime, and certain landlord to tenant contributions will remain within the scope of CIS.
For further information please contact real estate tax partner Julia Lloyd.
First-Tier Tribunal issues first Remediation Contribution Order under the Building Safety Act 2022
In Triathlon Homes LLP v Stratford Village Development Partnership and others [2024] UKFTT 26 (PC) the Upper Tribunal of the Lands Chamber (sitting as the First-Tier Tribunal) has handed down its first decision relating to remediation contribution orders (RCO) under section 124 of the Building Safety Act 2022 (BSA).
The subject premises comprise five towers of residential apartments at Stratford in East London, which were originally constructed as part of the former athletes’ village for the London 2012 Olympic Games, but which now form part of a large permanent residential estate known as East Village London. Following the identification of serious fire safety defects at the premises in 2020, the applicant (which owned the affordable housing apartments within the premises) sought RCOs against (i) the original developer and (ii) the current owner of the private rented apartments forming part of the premises, in order to require them to contribute towards the estimated £24million cost of the remedial works.
In granting the RCO against both respondents, who were required to contribute £18million towards the cost of remedial works, the Tribunal’s comprehensive decision provides new authority for two key issues in granting RCOs under the BSA:
- The retrospective effect of RCOs. The Tribunal was in no doubt that RCOs could be made in respect of costs incurred before the BSA came into effect on 28 June 2022. This was clear from the language used within section 124 of the BSA, which authorises a RCO to be made “for the purposes of meeting costs incurred or to be incurred in remedying relevant defects” (emphasis added). To preclude leaseholders from the protections under the BSA by arbitrary distinctions in time would be entirely contrary to Parliament’s intention to protect leaseholders by bringing the BSA into force following the Grenfell tragedy.
- The factors relevant to the ‘just and equitable’ test for whether an RCO should be granted. In deciding to grant an RCO under section 124, the Tribunal must be satisfied that such an order is “just and equitable”. The BSA does not provide guidance on how the Tribunal is to decide whether it is “just and equitable” in any particular case, but having satisfied itself that it has sufficient experience in exercising discretion as to what is just and equitable in other equivalent property contexts, the Tribunal determined that the most important factors as to whether it is “just and equitable” to make an RCO include:
- The fundamental policy of the BSA, which is that primary responsibility for the cost of remediation should fall on the original developer. Others who may have a liability to contribute may pass on the costs they incur to the developer.
- That RCOs could also be sought against those ‘associated’ with developers, with the obvious purpose behind the association provisions in section 124 being to ensure that where a development has been carried out by a thinly capitalised or insolvent development company, a more solvent parent company or other entity which is caught by the association provisions cannot be sheltered from responsibility for meeting the cost of remedying the relevant defects because of the separate legal personality of the development company.
- The potential uncertainty if the Building Safety Fund refuses further advances and the possibility of further proceedings before the Tribunal to resolve that uncertainty.
The Tribunal also determined various factors that would not be decisive in determining whether a RCO would be “just and equitable”, including:
- The applicant’s motivation in bringing the application;
- The availability of other potential claims against various parties in relation to the defects; and
- Whether the works were already funded (for example by payments from the Building Safety Fund) and/or underway.
Having weighed the relevant factors and concluding that it was “just and equitable” to grant RCOs in this case, the Tribunal commented that it was difficult to see how it could ever be just and equitable for a party falling within the list of potentially liable entities identified by section 124, and well able to fund the relevant remediation works, to be able to claim that the works should instead be funded by the public purse via the Building Safety Fund.
This concluding remark reinforces previous commentary to the effect that the BSA is significantly increasing scrutiny on developers and associated companies in a number of areas, particularly in relation to RCOs, and that the number of applications before the Tribunal is expected to increase appreciably over the next few years.
For further information please contact real estate litigation partner David Stevens or senior associate Greg Rouse.
Register of Overseas Entities: further compliance and disclosure requirements now in force
The Economic Crime and Corporate Transparency Act 2023 (ECCTA) contains wide-ranging reforms to help tackle economic crime in the UK. The reforms include extending the scope and requirements of the Register of Overseas Entities (ROE) regime.
Regulations were made at the end of February 2024 bringing certain provisions of ECCTA relating to the ROE into force on 4 March 2024, somewhat earlier than anticipated. These provisions include:
- A new duty to comply with a formal request for information from the Registrar of Companies. Previously, to be validly registered in the ROE, an overseas entity (OE) had to comply with the initial registration requirement and then annually update the information lodged with that initial application, or confirm that such information has not changed.
ECCTA adds a third duty that must be complied with: to provide information to the Registrar of Companies in accordance with a notice served under a new section 1092A of the Companies Act 2006. A failure to comply means that an OE will not be regarded as validly registered in the ROE until it remedies the failure. We await guidance as to how compliance with the new duty can be verified.
- Additional disclosure requirements where trustees or nominees are involved. The ECCTA reforms also include extended disclosure requirements when applying to register OEs holding land in the UK as nominee, or where a trust is involved.
Some of these changes aim to close what have been seen as loopholes in the beneficial ownership disclosure regime. For example, if there is a trust arrangement anywhere in the chain of beneficial ownership of the OE, the trustees are now required to be registered as registrable beneficial owners - previously, the ROE disclosure requirements generally stopped with the first registrable beneficial owner. In the case of an OE holding land as nominee for X, X is now treated as a registrable beneficial owner, with no minimum threshold.
Where an OE was registered in the ROE before 4 March 2024, the extended disclosure requirements apply on the first occasion after 4 June 2024 that the OE is required to comply with the updating duty.
Not all the provisions in ECCTA that relate to the ROE have come into force and there are further disclosure requirements for trusts and their beneficiaries on the horizon, some retrospective - watch this space for further updates.
Global Leasing Trends
There is much discussion in the market as to the future of offices amidst a challenging few years for the market. However, despite challenges like rising rental costs and global economic uncertainties, prime office space in major cities remains highly valued by businesses as they focus on expansion and growth following on from the pandemic.
In this new series, our partners from all corners of the firm delve into the leasing market within their respective jurisdictions. These interviews evaluate the primary market drivers and the prevailing trends that impact landlords, occupiers, and investors alike.
In our first interview, London real estate partner Louisa Roe details the current trends and drivers in the UK market:
Real Estate Focus: Global Leasing Trends | Global law firm | Norton Rose Fulbright