Real Estate Focus: January 2024

Register of Overseas Entities: further registration and reporting requirements

New compliance duty: 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. Currently, to be validly registered in the ROE, an overseas entity (OE) must comply with the initial registration requirement and must  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 for an OE to be validly registered in the ROE. That duty is to provide information to the registrar of companies in accordance with a notice served under a new section 1092A of the Companies Act 2006. This new duty is not yet in force but we can expect its likely implementation in 2024.

Trustees and nominees - additional registration obligations: The ECCTA reforms also include additional requirements - some retrospective -  to registration obligations where OEs hold property in the UK as a trustee or nominee. Some of these changes aim to close what have been seen as loopholes in the beneficial ownership disclosure regime. Again we do not yet have a commencement date for these changes and regulations on how they will operate are expected in 2024. Once in force, they will have a significant impact on affected OEs.   

Other disclosure and transparency proposals in the pipeline

The Levelling-up and Regeneration Act 2023 includes proposals to give the Secretary of State power to require disclosure of information on the ownership and control of land, rights concerning land and land transactions, in each case for “permitted purposes”.

It is clear that the scope of the powers is intended to be wide-reaching, and regulations are anticipated in 2024 setting out exactly what that scope will be.

On 27 December 2023 the government published a consultation entitled Transparency of land ownership involving trusts. This seeks views on options to widen access to trust information held on the Register of Overseas Entities and also, more generally, on how ownership of UK land involving trusts can be made more transparent. The aim is to “strike the right balance between transparency and privacy”. The consultation closes on 21 February 2024. 

Landlord and tenant - commercial property

Reform of the Landlord and Tenant Act 1954. A Law Commission consultation on the reform of the Landlord and Tenant Act 1954, initially promised by the end of 2023, is now expected in early 2024. The consultation will examine the problems that commonly arise in relation to the provisions  in that Act relating to business tenancies, including security of tenure and contracting out, with a view to developing a more modern and workable regime in its place.

Minimum Energy Efficiency Standards: in limbo. Since 1 April 2023, landlords of non-domestic premises have not able to continue to let a property unless it has an EPC rating of at least “E”.  The government had intended to go further and proposed a minimum EPC “B” by 2030, with a phased implementation beforehand. However, it has recently indicated that it will review this to ensure that it is “fair and proportionate”. We may hear more over the coming months.

“High street auctions” on the horizon. The Levelling-up and Regeneration Act 2023 grants controversial powers to local authorities allowing them to instigate rental auctions for vacant high street premises and to compel the landlord to let out the premises to the successful bidder. The premises that are at risk of local authority intervention are those which the local authority considers to be suitable for ‘high street use’.

A consultation on the detail of the auction process closed on 23 June 2023 and we should hear more in 2024.

Business rates avoidance: the government consulted last year on business rates avoidance schemes, focusing in particular on empty property relief: evidence suggests that abuse of that  relief is the most common form of rates avoidance. Currently, responses to the consultation are “being analysed”.  

Landlord and tenant – residential property

The Leasehold and Freehold Reform Bill aims to reform home ownership law in England and Wales. The proposals in the Bill are wide-ranging and fall into two broad categories. The first is aimed at empowering leaseholders (for example by making it cheaper and easier for existing leaseholders to extend their lease or buy their freehold); and the second at improving leaseholder consumer rights (for example by requiring greater transparency in relation to service charges).

Surprisingly, given what was said in the advance publicity, the Bill does not include a ban on the sale of new leasehold houses. However, the government has indicated that this is likely to be added to the Bill as it progresses through parliament.

Existing ground rents to go? Following the Leasehold Reform (Ground Rent) Act 2022, which limits ground rents in new qualifying long residential leases to a peppercorn, the government has consulted on a retrospective cap on ground rents in existing long residential leases. The consultation ended on 17 January 2024 and, given that the proposals have already proved to be highly controversial, numerous responses are likely.

Renters Reform Bill – will section 21 “no fault” evictions be abolished? The much-heralded Renters (Reform) Bill is slowly making its way through parliament. The Bill seeks, amongst other things, to abolish  fixed term tenancies and to introduce a single system of periodic tenancies. More controversial still, it seeks to abolish section 21 ‘no fault’ evictions. 

Apparently, assurances have been given that the ban will not come into force until “sufficient progress” has been made to reform the processes for recovering possession through the courts. We suspect that will be a long wait.

Reforms to the regulation of social housing. The Social Housing (Regulation) Act 2023 is coming into force piecemeal. It is intended to establish a new approach to regulating social housing landlords. The overarching aim is to “reform the regulatory regime to drive significant change in landlord behaviour to focus on the needs of their tenants and ensure landlords are held to account for their performance”. Implementation has already begun and we can expect considerable progress in 2024, including new consumer standards for registered social housing providers.

Minimum Energy Efficiency Standards: U-turn on proposed increase. It was announced in September last year that the government is no longer going ahead with its plans to introduce a minimum EPC “C” rating for residential tenancies from 2025. 

Building safety

The Building Safety Act 2022 (BSA), which has been coming into force piecemeal, imposes extensive new legal responsibilities on:

• those who commission building work and participate in the design and construction process in relation to “higher-risk” buildings; and 
• those who are responsible for managing structural and fire safety in higher-risk  buildings when they are occupied.  

With some exemptions, a higher-risk building is defined for these purposes as a structure that has at least seven floors or is at least 18 metres in height and has at least two residential units. A building will qualify as a higher-risk building if it complies with this definition even if it is not exclusively residential. 

Existing higher-risk buildings that are occupied, or could be occupied, were required to be registered in a register maintained by the new Building Safety Regulator (BSR) by 30 September  2023. New higher-risk buildings completed after 1 October 2023 must (amongst other things) be issued with a completion certificate by the BSR and be registered in the BSR register before the building is occupied.   

Other BSA reforms include the extension of limitation periods within which legal claims can be brought against developers and contractors and measures to compel remediation of unsafe cladding, to compel contributions towards the costs of doing so and to shield certain leaseholders from such costs.

We predict a significant number of cases in 2024 on various aspects of the BSA regime, most notably on responsibility for, and the cost of, remediation. 

Building Safety Levy. The government published a second consultation on the implementation of a new Building Safety Levy on 23 January 2024. The proposed Levy will raise revenue to replace defective cladding and remediate other historical building safety defects. It will apply to all new residential buildings in England requiring building control approval, regardless of their height.  

The proposals outlined in the consultation include that:

• the Levy will be charged on a square metre basis and a differential geographic rate for the Levy will be applied based on local authority boundaries;
• A lower Levy rate will apply to buildings on previously developed land;
• Levy rates will be reviewed every three years; and
• The consequence for non-payment will be that a building control completion certificate cannot be issued by the local authority or the Building Safety Regulator.

The consultation closes on 20 February 2024.

Planning and environmental

Biodiversity net gain (BNG) is a concept that aims to leave the natural environment in a measurably better state than it was before development. BNG requires a biodiversity gain plan to be submitted and approved by the local planning authority before a development can lawfully commence. The plan must demonstrate a proposed increase in biodiversity of at least 10%.

It was announced on 18 January 2024 that BNG will be mandatory for developers in England from 12 February 2024 in relation to most major developments and  from 2 April 2024 for “small sites” (as defined). It is expected to be mandatory for nationally significant infrastructure projects from November 2025. 

Extensive changes to the planning system are introduced by the Levelling-up and Regeneration Act 2023 and we anticipate significant progress in this respect during 2024.

Real estate tax

Construction Industry Scheme reform. In 2023, HMRC conducted a consultation on reforms to the Construction Industry Scheme (CIS). 

Currently, the scope of the CIS extends to certain landlord contributions to a tenant to carry out works, particularly where they include “Cat. A” works which benefit the reversion. This can cause considerable complexity in new lettings if the landlord is a “contractor”, as most retail and office tenants will not be registered to receive payments gross under the CIS, so that the landlord may need to deduct 30% from the contribution and pay it to HMRC.  

The government has indicated that it intends to introduce regulations to remove “the majority of landlord to tenant payments from the scope of the CIS” from 6 April 2024.  The CIS has long been a challenging area for landlord/tenant contributions and removing the majority of landlord to tenant payments from the scope of the CIS will be a welcome change. 

Separately, the government has confirmed that it will: (1) add compliance with VAT obligations to the Gross Payment Status compliance test; (2) expand the grounds for ‘immediate cancellation’ of Gross Payment Status to include fraudulent provision of incorrect returns or information in respect of VAT, income tax, corporation tax and PAYE; and (3) introduce digital applications for CIS registrations.

Real Estate Investment Trusts. Further amendments to the Real Estate Investment Trust (REIT) regime were proposed over the course of 2023, as set out in an HMRC policy paper published in July and later in November as part of the 2023 Autumn Statement. The combined proposals are welcome as they continue to improve the operation of the tax rules for REITS following the favourable changes already made in 2022 and 2023. 

The current intention is that these changes will, broadly, take effect from the date that the Finance Bill 2023-2024 receives Royal Assent, likely to be in Spring 2024. They are: 

• enabling co-ownership authorised contractual schemes (CoACS) to qualify as institutional investors; 
• removing the REIT’s exposure to corporation tax when it distributes to holders entitled to 10% or more of the income, if such holders are taxed at a double tax treaty rate;
• enabling insurance companies to own a 75% or more interest in a group REIT;
• allowing exemption for gains on disposals of interests in CoACS that are UK property rich;
• requiring certain institutional investors of a REIT to be widely held where they are themselves members of a closely held REIT;
• confirming that it is possible to trace through an intermediate holding company that is placed between a REIT and an institutional investor; 
• clarifying that the leverage rules work off property finance costs in the UK, rather than (as currently) property finance costs anywhere in the world; and
• confirming that gains from disposals of UK property rich companies are not included in calculations for corporate interest restriction purposes. 

Updated UK-Luxembourg double tax treaty expected to come into force. The new UK-Luxembourg double tax treaty was signed in 2022, and will become effective in the UK for capital gains purposes from April 2024. 

In summary, the key change that real estate investors should be aware of is the change to allow the UK to tax Luxembourg entities on direct or indirect disposals of UK land, provided that the entity derives its value as to at least 75% from UK land. Generally, a base cost uplift is available as at 5 April 2019 if the UK land was held at that time.

Budget 2024: it has been announced that this will take place on 6 March 2024.