2008 Pre-Budget Report - implications for Property | Practical Law

2008 Pre-Budget Report - implications for Property | Practical Law

The 2008 Pre-Budget Report was delivered by the Chancellor on 24 November 2008. This Legal update examines those implications that will be of particular interest to property lawyers.

2008 Pre-Budget Report - implications for Property

Practical Law UK Legal Update 5-384-1845 (Approx. 17 pages)

2008 Pre-Budget Report - implications for Property

by PLC Property
Published on 25 Nov 2008 • England, United Kingdom, Wales
The 2008 Pre-Budget Report was delivered by the Chancellor on 24 November 2008. This Legal update examines those implications that will be of particular interest to property lawyers.
Speedread

Speedread

The 2008 Pre-Budget Report (2008 PBR) was delivered by the Chancellor on 24 November 2008. This Legal update examines those implications that will be of particular interest to property lawyers.
The PBR 2008 aims to support the economy and protect incomes during the economic downturn by "fiscal stimulus" channelled predominantly through:
  • A temporary reduction in the VAT rate to 15 per cent with effect from 1 December 2008 lasting until 31 December 2009.
  • Bringing forward £3 billion of capital spending from the capital budget of 2010-2011, increasing the capital budgets for 2008-2010, the years when the impact of the downturn is likely to be felt most strongly.
These two measures, in addition to the other measures announced, are aimed to reduce the extent of the downturn by around half a percentage point. The intention being that by 2010-2011 the economy will be back on its feet and the total capital budgets over the Comprehensive Spending Review period will be no higher than originally intended.

Defined terms

Overview

The 2008 PBR covers a mixture of taxation proposals, Government policy and strategy, and statements clarifying how the Government's objectives will be achieved.
For the property industry, the following tax issues are particularly relevant:
In addition, there are a number of policy and strategic issues, which are of interest to the property industry:
For a full list of links to all relevant materials supporting the 2008 PBR, see note, Sources.

VAT

Temporary reduction in VAT standard rate

With effect from 1 December 2008, the standard rate of VAT will be reduced from 17.5% to 15%. This temporary reduction will remain in place until 31 December 2009, after which the standard rate will revert to 17.5%.
The reduced rate of 15% must be charged on sales of standard rated goods and services made on or after 1 December 2008. However, where payment has been received or a VAT invoice issued before 1 December 2008, the supplier can choose to apply the 15% rate, but they are not obliged to do so. These "special change of rate rules" may affect both leasehold and freehold properties.

Leasehold properties

In relation to leasehold properties, the special change of rate rules may apply as follows:
  • The landlord of a property that is subject to VAT at the standard rate issued an invoice for rent in advance on 1 September 2008, for the quarter from 29 September 2008 to 24 December 2008.
  • The invoice charged VAT at the rate of 17.5%.
  • The landlord can now choose to apportion the quarter's rent and charge VAT at 17.5% from 29 September to 30 November 2008 and at the new rate of 15% from 1 December to 24 December 2008.
  • The landlord would need to issue a credit note to the tenant within 45 days after 1 December 2008.
Where the tenant can recover the VAT, it is unlikely that the landlord would want to go to the administrative cost of applying the new rate. Tenants such as banks, who are unlikely to be unable to recover the VAT, may be keen to benefit from the reduced rate of 15%.

Freehold properties

In relation to sales of freehold properties, the tax point is usually the date of completion of the conveyance. An earlier tax point arises if a VAT invoice is issued before completion, or all (or part) of the purchase price is received before completion.
The special change of rate rules would apply where a VAT invoice has been issued, or payment received, before 1 December 2008, but completion does not take place until after 1 December 2008. The seller can choose to recalculate the VAT on the amount invoiced or paid at 15% and issue a credit note to the buyer.
For more information, see:

Taxing exempt supplies of land

The PBR 2008 announces that, as part of its tax simplification measures, the Government intends to make it easier to tax otherwise exempt supplies of land and property from early 2009 (see paragraph 4.26, 2008 Pre-Budget Report - Chapter 4: Supporting Business).
There do not appear to be any further details relating to this announcement in the PBR 2008.

SDLT

SDLT: Islamic finance

There has been increasing demand in the UK for alternative finance arrangements (Islamic finance structures) that allow people to invest in accordance with Sharia law. Since 2003, the Government has been committed to creating a "level playing field" in the UK for Islamic finance structures and has implemented a programme of tax and regulatory measures to enable their use.
For details of the Islamic finance structures that are available, see Practice note, Introduction to Islamic finance.
For information on the tax treatment of Islamic finance, and amendments made to existing legislation so that Islamic finance is more accessible, see Practice note, Sharia-compliant transactions: tax.

Alternative finance investment bonds or "sukuk"

One Islamic finance structure is sukuk (singular "sakk"). A sakk is a certificate or note that represents a share in an underlying asset held by the issuer. This entitles the sakk holder to a proportionate share of the returns generated by the asset. It has the same economic effect as a conventional bond and can be used to entitle people to receive rent from let property without contravening sharia law.
In the 2007 Budget, the Government announced that sukuk would be taxed in a similar manner to conventional securities (see Legal update, Budget 2007: Islamic finance). This was implemented by FA 2007.
For more information on sukuk and their tax treatment, see:

Sukuk and SDLT

Where the underlying assets are interests in UK land, SDLT would be due at various stages of the operation of sukuk (see Legal update, HMRC consults on SDLT relief for commercial sukuk).
On 26 June 2008, HMRC launched a consultation on a proposed relief from SDLT that would apply to the creation, issue and transfer of commercial sukuk where the underlying interest is UK land. The relief would be subject to conditions designed to minimise the risk of SDLT avoidance. For more information, see:
In the 2008 PBR, the Government confirmed that, in January 2009, it will publish a response to its consultation. It also announced that it will introduce a relief from SDLT for alternative finance investment bonds (or sukuk) in the FB 2009. The details of the relief have not been made available in the 2008 PBR.
In the 2008 PBR, the Government also confirmed that:
  • It will examine the regulatory treatment of sukuk in the UK in conjunction with the Financial Services Authority, and will consult accordingly in the near future.
  • It has carefully considered the case for issuing sovereign sukuk and concluded that doing so would not offer value for money. It will keep this possibility under review.
See 2008 Pre-Budget Report - Chapter 4: Supporting Business.

SDLT: SDLT disclosure regime and residential property

There is evidence that some high value residential property transactions are being taken outside the scope of SDLT by the use of special purpose vehicles (SPVs). A typical SPV is a company created for a specific purpose, such as a holding company in place of the beneficial owner.
If a buyer acquires an SPV that holds land, rather than directly acquiring the land itself, the buyer will pay a lower rate of stamp duty on the transfer of ownership of the SPV than the rate of SDLT that would apply to a transfer of land.
Certain SDLT arrangements must be disclosed to HMRC, to give HMRC information on the types of schemes used to gain a tax advantage and to enable HMRC to block certain schemes that avoid SDLT. The SDLT disclosure regime applies where at least some non-residential property is involved and the value of that property is at least £5 million.
For more information, see:
In December 2007, the Government consulted on proposals to extend the disclosure regime to residential transactions where the value of the transaction is over £1 million (see Legal update, Consultation on SDLT avoidance and disclosure).
In April 2008, the Government announced that the SDLT disclosure regime would be extended to residential property transactions with a value over £1 million (see Legal update, Consultation on SDLT avoidance: government responses).
The disclosure schemes that relate to other forms of tax involve the use of scheme reference numbers (SRNs) to identify the users of disclosed schemes. For more information on the use of SRNs, see PLC Tax, Practice note, Direct tax disclosure regime.
Currently, there is no requirement on users of SDLT schemes to report the SRN on documentation submitted to HMRC. So far, HMRC have been concerned with identifying the SDLT schemes rather than the scheme users (see Practice note, SDLT disclosure regime: Notification and reference numbers under the SDLT disclosure regime).
In the 2008 PBR, the Government confirmed that it will introduce a means to identify SDLT scheme users. Draft regulations implementing this will be published for consultation.
See 2008 Pre-Budget Report - Chapter 5: Helping People Fairly.

Business rates

Empty property rates

The Rating (Empty Properties) Act 2007 (R(EP)A 2007) removed business rates relief for most unoccupied properties with effect from 1 April 2008. Industrial and warehouse premises now have 100% business rates relief for the first six months of vacancy, while most other commercial properties have only 3 months of 100% rates relief. After the initial period of vacancy, full business rates are payable, bringing the rates liability to the same level as occupied properties.
The R(EP)A 2007 has been widely criticised by the property industry as an additional strain on businesses at a time of economic difficulty.
For more information on the R(EP)A 2007, see:
The Government has announced that it is temporarily increasing the threshold at which an empty property becomes liable for business rates. From April 2009 until March 2010, empty properties with a rateable value of less than £15,000 will be exempt from business rates. The Government estimates that this change will exempt 70% of empty properties from business rates.
However, the Government maintains that, in the long term, beyond an initial rate-free period, it is right to charge rates on empty properties, as this increases incentives to re-let and re-use empty property. This view indicates that there are no current plans to reverse the effects of the R(EP)A 2007.
For more information, see:

Backdated rates bills

When properties are identified that should have been subject to business rates, but that have not previously received bills, business rates bills backdated to 2005 are currently issued for immediate payment.
To reduce the cash flow impact on businesses, the Government has announced that it will legislate to give businesses more time to pay certain backdated business rates bills issued before 31 March 2010. Businesses facing such bills will be able to pay their liability for previous years in equal interest-free instalments over eight years, rather than immediately.
According to the 2008 PBR, the DCLG will publish further details shortly, including the qualifying conditions.
For more information, see:

Environment

The 2008 PBR contains a number of measures that are designed to contribute towards the UK's long-term environmental goals. For details of the main environmental announcements, see:

Energy efficiency

The 2008 PBR states that the Government will bring forward proposals to support householders and businesses in heating their property efficiently. Additional funding has been committed to the Home Energy Saving Programme (see note, Support for homeowners).
In the 2008 PBR, the Government also calls on the European Commission to reduce VAT rates on energy efficient products.
For an overview of existing measures aimed at increasing energy efficiency in buildings, see Practice note, Energy efficiency in buildings: overview.

Landlord's Energy Saving Allowance

Expenditure on certain categories of energy-saving items is eligible for tax relief for property businesses and known as the Landlord's Energy Saving Allowance (LESA). From 8 July 2008, LESA became available to corporate landlords of residential property. For more information on LESA, see Practice note, Tax savings for energy-saving measures in homes: Landlord's Energy Saving Allowance.
The Government has indicated that it intends to continue to raise awareness of LESA.

Zero-carbon buildings

The Government will "shortly" set out its proposals for new zero-carbon homes and buildings. For more information, see Practice note, Zero carbon buildings.

Land remediation relief

Following the announcement in the 2008 Budget, the Government has published draft legislation on extending land remediation relief to expenditure on long-term derelict land. For more information, see Legal update, 2008 Pre-Budget Report: environmental announcements: Land remediation relief.

Landfill tax

The 2008 PBR sets out details of the changes to the rate of landfill tax over the coming years. For information on the Government's proposals, see Legal update, 2008 Pre-Budget Report: environmental announcements: Landfill tax.

Housing

Mortgages

On 2 September 2008, the Government responded to current housing market conditions by announcing a package of schemes designed to increase stability and fairness in the housing market (the Housing Package).
The Housing Package was aimed at:
  • Helping first time buyers.
  • Supporting vulnerable home owners at risk of repossession.
  • Supporting the house-building industry.
Details of the Housing Package can be found on the DCLG website: Billion pound package for housing (DCLG).

Assistance to borrowers

The Government has taken further steps in the 2008 PBR to assist borrowers having difficulty with payments by:
  • Providing direct support to individuals through the mortgage rescue scheme. For background information on mortgage rescue schemes, see Legal update, Government housing initiatives: risk of mortgage fraud for conveyancers and clients. The mortgage rescue scheme will now be extended to include second charge mortgages, to help more vulnerable households.
  • Strengthening the Support for Mortgage Interest schemes (SMIs). The Government announced reforms to SMIs in September 2008 but it has increased eligibility for SMIs in the 2008 PBR.
  • Increasing Government funding so that free and impartial debt advice is readily available at the earliest opportunity.

Lending panel

The Government has also announced the creation of a new Lending Panel. The Lending Panel will report to the Chancellor of the Exchequer and the Secretary of State for Business Enterprise and Regulatory Reform. It will:
  • Monitor lending to both businesses and households with a view to improving industry standards and awareness.
  • Bring together lenders, trade bodies consumer groups, the Government, regulators and the Bank of England.
The aim of the Lending Panel is to explore alternatives to repossession and allow borrowers in financial difficulties to stay in their homes. This builds on steps taken in October 2008, when the Council of Mortgage Lenders published a protocol that set out clear guidance on the steps that lenders are expected to take before commencing a claim in the courts. The protocol aims to ensure that repossession actions are a last resort (see Legal update, Mortgage repossession pre-action protocol applies from 19 November 2008).

Repossession proceedings stayed for three months

The 2008 PBR announces that the Government has exacted a commitment from major mortgage lenders on the Lending Panel, not to initiate repossession action within at least three months of an owner-occupier going into arrears.

Ongoing measures

The 2008 PBR also states that:
  • The Government will bring forward a consultation on extending the scope of regulation by the Financial Services Authority (FSA) to include the sale and rent back market. For background information on the sale and rent back sector, see Legal update, OFT publishes market study on sale and rent back.
  • The Office of Fair Trading will also bring forward guidance early in 2009 to ensure that lenders of second charges only repossess as a last resort.
  • The Government will continue to work with stakeholders and experts on how it can promote a deeper market in longer-term fixed rate mortgages. For background information, see Legal update, Budget 2008: implications for property: Long-term fixed-rate mortgages.
  • The Government is now considering whether it needs to do more to help first time buyers save for their first home by creating a new tax-relieved savings scheme targeted at first time buyers.
For further information, see 2008 Pre- Budget Report - Chapter 5: Helping People Fairly.

Social housing

The Government remains committed to increasing the supply of affordable and social housing. For further details, see Legal update, Government report on the supply of social housing.
In September 2008, the Government announced a £1 billion package to support the housing industry. Part of the package included allocating £400 million to provide up to 5,500 new social rented homes over the next 18 months.
The Government has announced that it is now bringing forward a further £775 million of housing and regeneration investment including:
The measures are aimed at helping the social rented housing sector play a full role in the creation of sustainable communities and be available to a wider range of people.
For further information, see 2008 Pre- Budget Report - Chapter 5: Helping People Fairly.

The Crosby Review

In April 2008, the Government asked Sir James Crosby to advise it on how to improve the way in which mortgage finance markets operated.
The final recommendations have now been published. For more information, see HM Treasury - Mortgage finance: final report and recommendations (the Report).
Securitisation markets have traditionally been an important source of finance for mortgage lenders. They involve the packaging and re-selling of mortgage assets to investors.
Developments in the US sub-prime market have led to significant reviews and re-pricing of financial risk in the financial markets. As a result, large numbers of investors have disappeared, resulting in a sharp drop in demand for UK mortgage backed bonds, with new lenders reluctant to enter the market.
Primary markets remain closed to new issuance and the secondary markets are illiquid. The Government's priorities are therefore to:
  • Secure the stability of the financial systems in the face of the prolonged closure of wholesale money markets.
  • Contain the impact of the credit shortage of credit on the real economy.
In the past twelve months the Government has launched a number of initiatives designed to help banks cope with the closure of wholesale money markets. In an effort to restore liquidity to the financial markets and restore confidence in the banks, the Government implemented the:
  • Special Liquidity Scheme.
  • Bank re-capitalisation plan.
  • Credit Guarantee Scheme.
For further information, see:
By giving the banks security of access to funding, the Government has removed the immediate threat to financial stability but mortgage lenders are not expected to have access to asset-backed funding until 2010.
The shortage of mortgage finance has had an immediate and severe impact on house builders, some of whom rely heavily on the buyers' ability to obtain high Loan to Value mortgages.
Since building in the social housing sector generally relies on some form of subsidy from the private sector, a decrease in activity in the private sector will undoubtedly have a knock-on effect on the social sector.
The Report recommends that the Government should:
  • Encourage the industry to adopt new standards of transparency and standardisation in the mortgage-backed securities markets. This will help these markets function more effectively in the long term.
  • Encourage international discussion on the application of fair value accounting without compromising the principle of transparent disclosure.
  • Subject to resolving the practical issues, guarantee the interest and principal sum (at a commercial rate), on residential mortgage-backed securities or covered bonds backed by new mortgage lending.
For more information, see 2008 Pre-Budget Report - Chapter 5: Helping People Fairly.

Support for homeowners

The Government has announced various measures to incentivise householders to improve the energy efficiency of their properties and reduce carbon emissions. As part of a "green stimulus" the Government will provide:
  • £100 million of new funding for Warm Front, to help 60,000 low income households cut their energy bills through insulation and heating system improvements funded by the Warm Front grant scheme. For more information, see Practice note, Energy efficiency in buildings: overview: Warm Front Scheme and Decent Homes programme.
  • £20 million of funding for flood defences. This will be brought forward to 2009-2010 to provide earlier protection for 27,000 homes. In spring 2009, the Government will publish a draft Floods and Water Bill to deliver improved flood risk protection and management. For more information, see Practice note, Managing flood risk.
The Government has committed additional funding to the Home Energy Saving Programme. For example, loft and cavity wall insulation are now available to all households at a 50 per cent discount, and are available free of charge to 11 million vulnerable households.
For more information, see 2008 Pre-Budget Report - Chapter 7: Delivering on Environmental Goals.

Infrastructure

Flooding

The CSR 2007 budgeted for expenditure by the Department for Environment, Food and Rural Affairs on flood and coastal erosion risk management, to rise from £600 million in 2007-2008 to £800 million in 2010-2011.
This was in response to the findings of the Stern Review on the Economics of Climate Change (Stern Review) and Foresight Future Flooding, the 2004 report by the Office of Science and Technology, which both highlighted that climate change in the UK is likely to increase the severity and frequency of flooding events.
For more information on the Stern Review, see Legal update, Government publishes Stern Report on the economics of climate change.
The Government has announced that £20 million of the investment on flood defences and adaptation measures will be brought forward to 2009-2010.
For more information on flooding, including the Government's proposals for a Floods and Water Bill, see Practice note, Managing flood risk.

Transport

In the CSR 2007, the Government announced 30 new Public Service Agreements (PSAs), which set out the Government's key priority objectives for the spending period 2008-2011 (see Legal update, 2007 Pre-Budget Report - implications for Property: Public Service Agreements).
In PSA 5: Deliver reliable and efficient transport networks that support economic growth, the Government signalled that it would focus investment in transport on supporting sustainable economic growth. This followed on from the advice given in the Eddington Transport Study, Transport's role in sustaining the UK's productivity and competitiveness (the Eddington Transport Study) regarding the role of transport in sustaining the UK's productivity and competitiveness.
For information on the Eddington Transport Study, see Legal update, The Eddington Transport Study.
The Government has announced that, as part of the fiscal stimulus, it will bring forward the following elements of the Department for Transport's plans for capital spending:
  • Increasing capacity on the motorways and other critical highways.
  • Delivering up to 200 new carriages on the rail network, with the aim of relieving congestion on the road network.
  • Investing £5 million in improvements to the British Waterways network infrastructure.
    A separate measure, related to British Waterways, is the review of its model for managing its canal-side property portfolio. This will assess how best public value might be derived from these assets. The review forms part of the Operational Efficiency Programme, which was launched in the 2008 Budget, to examine opportunities for efficiency savings.
The Government has also announced that, on 27 November 2008, the Department for Transport will publish a consultation on the transport goals and priorities for 2014-2019 and beyond (see 2008 Pre-Budget Report - Chapter 4: Supporting Business).
The consultation is part of the Government's continuing response to the Stern Review and the Eddington Transport Study, which both highlight the need for transport policy to help tackle climate change and contribute to economic growth.
Transport is also one of the key areas that the Government is focusing on in connection with the environmental measures set out in the 2008 PBR. For further information, see Legal update, 2008 Pre-Budget Report: environmental announcements: Transport.

Crossrail

The Crossrail Act 2008 received Royal Assent on 22 July 2008 (see Legal updates, Crossrail gets the green light and Crossrail for conveyancers).
The 2008 PBR reiterates the Government's continuing support for Crossrail, with services starting in 2017 (see 2008 Pre-Budget Report - Chapter 4: Supporting Business).

Energy generation

While the 2008 PBR does not include any new announcements that concern energy infrastructure specifically, it refers to existing measures relating to:
  • Grid infrastructure. A major investment is already underway in Britain's energy networks that will provide infrastructure which will:
    • deliver security of supply for electricity and gas; and
    • support the move to a low-carbon economy.
      The 2008 PBR signals that further investment in electricity networks will be needed to connect new renewable and other low-carbon and conventional electricity generation.
  • Nuclear power. New nuclear build represents a key element of the Government's energy policy.
It is hoped that the announcement confirming that the Renewables Obligation is to be extended to at least 2037, will allow for increased confidence in investing in renewable electricity. For further details, see Legal update, 2008 Pre-Budget Report: environmental announcements: Renewables Obligation.

Regional Policy

Regional development

One of the ways in which the Government aims to raise the rate of sustainable growth is by devolving decision making power to local level.
The Review of Sub-National Economic Development and Regeneration (SNR) made recommendations for neighbourhood renewal and wider regeneration strategies. Building on the SNR, the 2008 PBR provides that the Government will devolve responsibility for capacity, governance and accountability at the city-region level to Regional Development Agencies (RDAs).
RDAs will play a key role supporting sustainable growth within city regions and in formulating regional strategies.
The Government will announce new agreements with at least two forerunner city-regions at Budget 2009. There will also be new statutory arrangements for sub-regional cooperation between local authorities.
For more information, see:

Sources