Real estate focus – June 2019

Introduction

In this edition we take a look at new restrictions on residential letting fees; an investigation into the leasehold housing market; a worrying stamp duty land tax case; and the new structures and buildings allowance.

Ban on unfair letting fees now in force

The Tenant Fees Act 2019 came into force on June 1, 2019.

The Act bans landlords of “tenancies of housing” in England and their agents from demanding any payments from tenants, licensees and their guarantors other than those specified. The phrase “tenancies of housing” covers assured shorthold tenancies (other than of social housing and long leases), lettings to students and occupational licences.

The specified payments are

• rent
• a security deposit, capped at five weeks’ rent where the annual rent is less than £50,000 and at six weeks if it is £50,000 or more
• a holding deposit capped at one week’s rent (and refundable except where the tenant withdraws, fails a right-to-rent check or provides false/ misleading information)
• capped payments in respect of “relevant defaults” by the tenant, defined as the loss of a key or failure to pay rent in full within 14 days of the due date
• capped payments if the tenant requests an assignment, variation or early termination of the tenancy
• payments in respect of council tax, utilities, television licences and communication services.

There is also a ban on landlords (and their agents) requiring fees to be paid to third parties, such as reference or inventory providers, or requiring tenants to sign up to insurance or a service contract with a third party, unless the contract is for the provision of a utility or communication service to the tenant.

The consequences of non-compliance are severe: a term in a tenancy in breach of the ban is void and a demand for a prohibited fee can incur a financial penalty of up to £5000. A subsequent breach within five years is a criminal offence, with enforcement authorities having the option of imposing a financial penalty of up to £30,000 as an alternative to prosecution.

Landlords are also banned from recovering possession of the property under the fast-track procedure in section 21 Housing Act 1988 if they have not reimbursed a prohibited payment that has been made, or refunded a holding deposit.*

Significantly, while the Act currently applies only to agreements entered into on or after June 1, 2019, the reprieve for “pre-commencement” tenancies and licences does not last long: the Act will also apply to them from June 1, 2020.

*A revised section 21 notice, amended in the light of the above ban, must be used on and after June 1, 2019.

SDLT anti-avoidance: Hannover Leasing

The First-tier Tax Tribunal has found in favour of HMRC in a “section 75A” (stamp duty land tax: anti avoidance) case. In the case, SDLT was applied to the full consideration given for the acquisition of units in a unit trust, following a pre-sale reorganisation involving a transfer of the property to the unit trust from a wholly-owned partnership.

The decision could have important implications for corporate disposals of UK land which involve any element of pre-sale (or in some circumstances, post-sale) restructuring, even where such restructuring may be considered “routine” and as including transactions which HMRC has previously confirmed would not amount to “avoidance”.

The facts of the case were that the taxpayer (H) wanted to acquire UK commercial property, and hold the property through a German partnership (KG). The seller (G) held the property through a limited partnership of which a unit trust was the main partner. For commercial reasons, H did not want to acquire the partnership so G transferred the property out of the partnership, SDLT was paid on the element transferred to the unit trust, and the partnership was removed. H purchased the unit trust, wound it up, and took the property out. A couple of months later, the property was contributed to the KG.

Despite a transfer of units not being subject to SDLT, HMRC argued that the s.75A targeted anti-avoidance provision meant that the transaction should be recharacterised as a land transfer from the partnership to H, with SDLT payable on the consideration given for the units. Given the transparency of the partnership, this result is surprising. It is also noteworthy that HMRC distanced itself from its own guidance on the application of s.75A, and has since added a note that the guidance is being updated (we are expecting updated guidance to be published shortly, and will keep readers updated).

At this stage, it remains unclear whether the taxpayer will appeal the decision.

This is a First-tier decision and as such it is not binding on other cases. Nevertheless, it is the first case since the Supreme Court decision in Project Blue to consider s.75A and it has relevance to transactions where there is another, less SDLT-efficient route to achieving the same commercial outcome.

If you have any questions, please contact Tax of counsel Julia Lloyd.

Structures and Buildings Allowance – update

As reported in our February 2019 edition of Real Estate Focus, a new structures and buildings allowance is now available in relation to expenditure incurred on new non-residential structures and buildings intended for commercial use, provided that the contract for the works was entered in to on or after October 29, 2019.

Draft legislation was published for consultation on March 13, 2019, as part of the 2019 Spring Statement, and on June 17, 2019 HMRC published a revised draft of the Capital Allowances (Structures and Buildings Allowances) Regulations 2019. There are a number of changes to the draft regulations, including some amendments to the information that will be required on an “allowance statement”. HMRC has also said that it expects to publish guidance at the same time as the regulations are made, to clarify the legislation and its intended effect in a number of areas.

We are reviewing the revised draft regulations, and will provide an update in due course.

If you have any questions, please contact Tax Of counsel Julia Lloyd.

CMA investigates the residential leasehold market

The Competition and Markets Authority (CMA) launched an investigation into the residential leasehold market on June 11, 2019.

This follows a scathing report entitled Leasehold Reform published in March 2019 by the Housing, Communities and Local Government Committee. The report was prompted by government concerns that “the leasehold system is not working in consumers’ best interests and needs to be reformed”. Onerous ground rents, high and opaque service and other charges and the sale of houses on a leasehold basis have been particularly highlighted as problem areas.

The report concluded (amongst many other things) that the CMA should “investigate mis-selling in the leasehold sector and make recommendations for appropriate compensation” and “indicate its view as to whether onerous leasehold terms constitute “unfair terms” and would be, therefore, unenforceable”.

The CMA’s investigation will focus on two key areas

• Potential mis-selling: whether people who have bought a leasehold property are given the information they need to understand the obligations they are taking on and whether they have an accurate understanding of their ability to buy their freehold
• Potential unfair terms: whether people are paying excessive ground rents and fees due to unfair contract terms.

In the first instance the CMA is writing to companies across the sector, including developers, lenders and freeholders, requiring information to understand how leaseholds are sold and managed and the terms contained in contracts. It has also issued a “Call for views”.

The CMA has warned that it may take enforcement action if it considers that a company’s practices are misleading or that its contracts contain unfair clauses.