Real Estate Focus – October 2021

Autumn Budget highlights for the real estate sector

The 2021 Autumn Budget did not bring much in the way of sweeping tax changes, but a few items which were previously trailed have been confirmed and there are some welcome reforms to business rates.

Residential property developer tax

The Government has now announced that the rate of residential property developer tax (RPDT) is to be 4% and confirmed that the allowance (below which profits are out of scope of RPDT) is to be £25 million per corporate group.

Since our previous update on RPDT, the Government has published revised draft legislation. The draft legislation now introduces an exemption from RPDT for non-profit housing companies, which are defined as non-profit registered providers of social housing (or registered social landlords in Scotland and registered housing associations in Northern Ireland). In addition, the revised draft legislation includes a clawback provision where a company ceases to be a non-profit housing company. This will charge RPDT so as to eliminate the benefit of the exemption for the four years prior to it ceasing to be a non-profit housing company unless it distributes its assets to another non-profit housing company.

It is notable that the exemption operates by reference to the developer, not the development activity in which it is engaged. Non-profit housing companies will benefit from the exemption where they participate in the development of private houses. Developers that are not non-profit housing companies will not benefit from the exemption even where they are involved in the development of affordable housing.

Although the publication of the tax rate will allow developers to progress their forecasting for the coming year, they will be keen to see the final legislation to assess the impact of RPDT fully. The final legislation is due to be published in the Finance Bill 2021-22 on November 4, 2021.

It is also worth noting that the Government has previously suggested that RPDT will be time-limited to a decade from the date of implementation. No such deadline is currently included in the draft legislation.

Annual investment allowance

The annual investment allowance (AIA) provides an enhanced deduction of 100% of the cost of qualifying expenditure on plant and machinery. The AIA was introduced with a £200,000 annual cap from January 1, 2016. In 2018 the cap was temporarily increased to £1m for two years from January 1, 2019 and extended for a further year (to January 1, 2022) in 2020. The Chancellor has now announced that the £1m AIA threshold will be extended for a further 15 months until March 31, 2023.

Business rates measures

The Chancellor announced new business rates reliefs. These include a property improvement relief, ensuring improvements to a property occupied by a business are not taken into account for 12 months; a new exemption for renewable energy and heat to support decarbonisation; a freezing of the business rates multiplier for 2022-23; and a one-year relief for retail, hospitality, and leisure.

A consultation is also proposed on an online sales tax which would be used to reduce business rates for retailers – this is different from the UK digital services tax which is already in place but which, it has been announced, will be phased out once global tax reforms come in.

Capital gains tax filing window

In 2019, non-resident individuals disposing of UK land or interests in UK property-rich entities became subject to a shortened 30-day time limit to notify HMRC of the disposal and to pay the associated capital gains tax (CGT). With effect from April 2020 this was extended to UK resident individuals who disposed of UK residential property.

Following the recommendation of the Office of Tax Simplification, this reporting and payment window for both UK-resident individuals disposing of UK residential property and non-resident individuals disposing of an interest in UK land or in a UK property-rich entity is being extended to 60 days following the date of the disposal.

REIT and QAHCs

Whilst not mentioned in the Chancellor’s speech, the Budget documentation also includes draft legislation for previously-trailed reforms to the rules governing real estate investment trusts (REITs) and further detail about the new tax regime for qualifying asset-holding companies (QAHCs).

The changes to the REIT rules will, among other things, remove the requirement for the REIT to be listed if it is owned by institutional investors. The QAHC regime will disapply a number of existing tax rules to enhance the UK’s attractiveness as a location for asset-holding vehicles.

For further information please contact Tax partner Julia Lloyd or another member of the Norton Rose Fulbright Tax Team.

Building safety reforms: “Early key messages”

As previously reported, the Building Safety Bill was introduced to Parliament in July 2021 in response to the Grenfell disaster (see our July Real Estate Focus and August Real Estate Focus for a summary of some of its key provisions). The Bill is currently at Committee stage in the House of Commons.

Despite the fact that the Bill has not yet been enacted and will undoubtedly be subject to amendment as it makes its way through Parliament, a wealth of accompanying guidance is already being produced. This includes Building safety reform – Early key messages: Safety case principles for high rise residential buildings, published by the Health and Safety Executive on September 29, 2021.

A key element of the Bill’s proposals to change building safety law is to place new duties on those who are responsible for the safety of “higher-risk buildings”. “Higher-risk buildings” are defined as those at least 18 metres in height, or have at least seven storeys and contain at least two residential units. This includes multi-use buildings (buildings with residential dwellings and other uses, such as retail).

As currently drafted, the Bill provides that those who manage or are responsible for higher-risk buildings will have to take all reasonable steps to ensure that their buildings are safe, put together a safety case and produce a safety case report. The HSE guidance is intended to help those managers understand the scope of these duties. While acknowledging that the precise requirements of the proposed new legislation are not yet confirmed, the guidance states that: “you may want to start preparing for the proposed new regime now to make sure you have laid the foundations of the systems and procedures you may need to have in place for your building, if and when the new law takes effect.”

Earlier this month the Government also published six sets of draft regulations on the implementation of the proposed new safety regime and 25 factsheets, explaining how aspects of the regime will operate in practice. These are all certain to be just the tip of the iceberg.

The final form of the Bill may be a long way from being set in stone but those involved in the industry already have their work cut out.

The Electronic Communications Code: where are we now?

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 land.

The Code, which was substantially reformed in December 2017, seeks to encourage such access through commercial negotiation and voluntary agreements, with the imposition of agreements by a tribunal as a back-stop. However, the recent proliferation of cases on the operation of the Code indicates that, overall, this has not been achieved.

We are currently awaiting the outcome of two recent Government consultations aimed at improving the situation. The first, published at the end of January of this year (see our February Real Estate Focus), identified three main problem areas:

• issues relating to negotiations and the operation of completed agreements;
• lack of clarity in relation to rights to upgrade and share; and
• difficulties relating to the renewal of expired agreements.

Any changes made as a result of the consultation will complement those in the Telecommunications Infrastructure (Leasehold Property) Act 2021 (The Act - see our March Real Estate Focus), which received Royal Assent in March. The Act seeks to address the difficulties that operators face when wanting to install apparatus in apartment blocks and landlords fail to respond. The Act grants operators interim Code rights to access “multiple dwelling buildings” where landlords are genuinely unresponsive and there is a request for a service from a tenant.

The Act will not come into force until regulations to underpin it are made. A second Government consultation over the summer focussed on those regulations. It sought views on:

• the terms that should accompany the interim Code rights;
• the duration for which those rights should remain valid and the process for making an application to the Tribunal; and
• (perhaps most worrying for some commercial landlords) the extension of such powers to other property types such as business parks and office blocks.

In both cases the Government is currently analysing the responses to the consultations before publishing its conclusions. It is to be hoped that the end result will be a Code and regime that are fit for purpose.