The Autumn Budget and the real estate sector

27 Oct 2021

budget 2021

Sean McGinness, head of the Real Estate Group at Saffery Champness examines the impact of the Chancellor’s announcements on the UK real estate sector:

“With the Chancellor previously mooting a potential range of 4%-7% for the Residential Property Developers Tax (RPDT), many in the industry will be breathing a sigh of relief at today’s confirmation of the tax being set at the lower end of the scale. Even so, the expectation is that the tax will raise £2 billion over the next ten years, meaning the government is anticipating £5 billion of profit per year will be subject to the tax. A policy decision was made to exclude those building to rent from the levy, although it is indicated that this will be kept under review, presumably if the tax fails to deliver the expected minimum of £200 million per year.

“With the tax scheduled to come into effect on 1 April 2022 there is not long for businesses to consider the implications and prepare for the impact on their tax position and cash flow.

“What is needed now is urgent clarity over how the tax will work in practice. There are key issues which remain real areas of complexity, not least how to define and identify who a ‘residential property developer’ is, or was, on particular projects given what are often complicated structures and supply chains.

“The government also announced changes to the Real Estate Investment Trust (REIT) rules with the aim of simplifying compliance, particularly for institutional investors. According to government there are 92 UK REITs and the indication is that the government wishes to simplify the regime to increase the attractiveness of establishing a UK REIT. REITs are exempt from UK tax on income and gains although distributions are taxed. The changes will remove the requirement for a REIT to be listed on a recognised stock exchange where at least 70% of the REIT is owned by institutional investors.

“The government continues to pledge to support the development of new homes, particularly affordable homes and reconfirmed its support to build an additional 180,000 affordable homes through £11.5 billion investment. An additional £1.8 billion was also committed to support with the development of brownfield sites included a package to provide local authorities with funds to provide grants for smaller developments on brownfield sites. With this sort of commitment to creating more homes and the need to provide funding for cladding remediation (which is estimated at £5 billion) it is no surprise that the government pressed ahead with the RPDT introduction. The tax is to be in force for 10 years to raise £2 billion. However, there is no sunset clause in the legislation and with other levies such as Petroleum Revenue Tax and the banking levy, the RPDT could be here to stay.

“Occupiers will have welcomed the pledge to provide business rates relief, supporting investment in making property improvements, including those geared towards carbon footprint mitigation and net-zero. However, given the impending COP26 summit and the wide ranging support provided elsewhere for sustainable innovation and investment, it was perhaps a little disappointing not to see additional tax incentives tabled such as the VAT cost of retrofitting and refurbishing older properties to bring them up to modern standards to assist with the drive to net zero.”