Real Estate Focus: March 2021

Real estate tax: Budget update

Key highlights

The key highlights in the Budget on March 3, 2021 for UK real estate and infrastructure are:

• General corporation tax rate to be increased to 25 per cent from April 2023 for businesses with annual profits of £250,000 or more;
• A new “super deduction” to be available for expenditure on plant and machinery between April 2021 and April 2023, giving tax relief of up to 13 per cent in the year the expenditure is incurred;
• An extension of the SDLT “holiday” for acquisitions of residential property;
• Confirmation of the SDLT 2 per cent surcharge for non-UK resident purchasers of residential property; and
• More detail on the beneficial tax regime that will apply to the UK’s Freeports.

Corporation tax rise

The main rate of corporation tax will rise to 25 per cent from April 1, 2023. The existing 19 per cent rate will be preserved for companies with small profits (less than £50,000). This will have an impact on corporate property investors and developers of UK land who are within the charge to UK corporation tax on both income and gains.

Super deduction

New categories of expenditure qualifying for enhanced capital allowances have been introduced. These will only apply to expenditure incurred between April 1, 2021 and April 1, 2023 which is not previously committed as at March 3, 2021. The rates are designed to encourage investment in a period when investment may otherwise be stagnant or even deferred, especially as depreciation would otherwise be more valuable because of the corporation tax rate rise.

The two main new categories are:

• A 130 per cent allowance for expenditure that would otherwise qualify for the main rate capital allowances pool.
• A 50 per cent allowance for expenditure that would otherwise fall within the special rate pool.

The long-term nature of most infrastructure projects means that changes in tax rates during the life of the project can have a disproportionate impact on returns. This is particularly the case where the rate at which tax relief for initial capital expenditure is given in the early years of a project is less than the rate at which the profits from the project are taxed in the later years. In recent times, this has generally worked in favour of project companies as tax rates have fallen but this Budget will reverse that trend. There are, however, changes that are intended to encourage new expenditure where developers will have a very real choice to make as to whether to accept the timing benefit of enhanced tax depreciation at the expense of higher tax rates in the future.

The rules will also be subject to anti-avoidance provisions that will need to be considered carefully, particularly where they relate to the timing of when expenditure is regarded as being incurred. Nonetheless, for companies that are making investment decisions and can satisfy the conditions, this is likely to prove a valuable incentive.

Extension of the SDLT holiday

The temporary increase in the nil rate band for residential purchases in England and Northern Ireland has been extended:

• The £500,000 nil rate band will be in place until June 30, 2021 (rather than ending on March 31, 2021);
• A nil rate band of £250,000 will be in place between July 1, 2021 and September 30, 2021; and
• The nil rate band will return to the standard amount of £125,000 from October 1, 2021.

First Time Buyers’ Relief, which has no effect while the nil rate band is £500,000, will resume from July 1, 2021.

The online SDLT calculator has been updated for the new rates of SDLT.

Non-resident SDLT

As announced in the 2020 Budget, a 2 per cent SDLT surcharge on residential property purchased by non-residents will commence for transactions which complete or substantially perform on or after April 1, 2021. The legislation has now been published in the Finance Bill and guidance was published on March 8, 2021.

Freeports

As reported in earlier editions of Real Estate Focus, a consultation has been running on the form of the UK’s Freeport regime. Confirmation of the detail of this important tool in the post-Brexit landscape has now emerged. In particular:

• Expenditure on buildings in a Freeport will qualify for an enhanced structures and buildings allowance rate of 10 per cent;
• Expenditure on plant and machinery for use in Freeports will qualify for an enhanced plant and machinery allowance of 100 per cent; and
• SDLT relief will be available for purchases of land within Freeports until September 30, 2026, subject to the land acquired being used in a “qualifying manner” during a control period (three years or, if sooner, until a disposal to an unconnected party).

Please contact partner Julia Lloyd in our real estate tax team if you could like to discuss any of the above.

COVID-19: Restrictions on landlords of commercial premises extended (yet again)

The Government announced on March 10, 2021 that temporary restrictions imposed on landlords of commercial premises seeking to take action against tenants in England for non-payment of rent are to be extended again to protect tenants with arrears that have accumulated during the pandemic.

As a reminder, Section 82 of the Coronavirus Act 2020 (the Act) creates a moratorium on landlords forfeiting a business lease for non-payment of rent (which is defined as including any sum the tenant is liable to pay under a business tenancy).

The moratorium applies during the “relevant period”. This began on March 26, 2020 and initially lasted until June 30, 2020, but has already been extended three times to March 31, 2021.

Despite the Government saying that the latest of these was the “final extension”, new regulations in force on March 31, 2021 will further extend the moratorium in England to June 30, 2021. A similar extension will take effect in Wales.

Another restriction on landlords’ rights of enforcement is also to be extended. Commercial Rent Arrears Recovery (CRAR) is a statutory method of enforcement to recover rent arrears relating to commercial property. Regulations in force since April 25, 2020 prevent landlords using CRAR unless they are owed a certain amount of rent. That amount was originally at least 90 days’ unpaid rent but this was subsequently increased. Under regulations coming into force on March 25, 2021, the amount is set to increase again to at least 457 days’ unpaid rent where CRAR is used between March 25 and June 23, 2021, and 554 days when used between June 24 and June 30, 2021.

At the time of writing it remains to be seen whether the third in the trio of restrictions on landlords will also be extended. The Corporate Insolvency and Governance Act 2020 imposes temporary restrictions on the use of statutory demands and winding-up petitions by creditors pursuing sums owed by corporate debtors, including landlords pursuing outstanding rent from tenants. Those temporary restrictions have also previously been extended to March 31, 2021 and the expectation is that they will be extended again.

Government review of the landlord and tenant relationship

In addition to announcing the extension of restrictions on landlords, the Government also stated on March 10, 2021 that it is launching a call for evidence on commercial rents to “help monitor the overall progress of negotiations between tenants and landlords during the pandemic”.

The Government has been keen to encourage transparency and collaboration in negotiations between landlords and tenants to help protect viable businesses that have suffered financially during the pandemic. In June 2020 it published a Code of Practice for commercial leases to promote good practice in these circumstances. The Code is voluntary but the Government has warned that, if it has not been followed, it is prepared to take further action.

The call for evidence will also set out potential steps that the Government could take after June 30, 2021 – when the restrictions on forfeiture and the use of CRAR are set to end – ranging from a phased withdrawal of current tenant protections, to legislative options targeted at those businesses most impacted by COVID-19.

The Government also took the opportunity to confirm that a review of commercial landlord and tenant legislation, first mentioned at the end of last year, will be launched later in 2021. This will consider a broad range of issues including the Landlord & Tenant Act 1954 Part II, different models of rent payment and the impact of coronavirus on the market.

All in all, 2021 promises to be a landmark year for commercial leases.

Reforms to the Electronic Communications Code

The Electronic Communications Code (The Code) governs the relationship between network operators and site occupiers in respect of access rights to install and keep electronic communications apparatus on public and private land.

The Code seeks to encourage such access by way of commercial negotiation and voluntary agreements, with the imposition of agreements by the court as a last resort. However the Government has acknowledged that the Code is not as effective as it was intended to be. Evidence indicates that one particular “barrier to deployment” is that operators face significant difficulties in providing broadband services to apartment blocks because landlords ignore requests for access in about 40 per cent of cases.

The Telecommunications Infrastructure (Leasehold Property) Act 2021 addresses this. It amends the Code to allow the court to impose code rights enabling an operator to provide an electronic communications service to leased premises in “multiple dwelling buildings” (blocks of residential flats and apartments). The court may do so where a tenant has requested such a service but the landlord has repeatedly failed to respond to an operator’s requests for access.

The Act received Royal Assent on March 15, 2021, but the new power will not come into force until supporting regulations are made.

Further Code reforms are on the horizon: as discussed in our February Focus, the Government published a consultation in January 2021 proposing further changes to the Code to address other problematic areas. Let us hope that the end result will be a Code that is fit for purpose.