Budget 2006: implications for property | Practical Law

Budget 2006: implications for property | Practical Law

A note of the main Budget 2006 proposals affecting property and the environment.

Budget 2006: implications for property

Practical Law UK Legal Update 7-202-1304 (Approx. 22 pages)

Budget 2006: implications for property

by PLC Property and PLC Environment
Law stated as at 22 Mar 2006 • United Kingdom
A note of the main Budget 2006 proposals affecting property and the environment.
For information on other aspects of this year's budget, see PLC Corporate Legal update, The 2006 Budget: main points.
NOTE ADDED: The Finance (No. 2) Bill and explanatory notes were published on 7 April 2006.
NOTE ADDED 20 July 2006:The Finance Act 2006 received Royal Assent on 19 July 2006.
Property

Defined terms

The following abbreviations are used throughout this update:

Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) are vehicles which are aimed at combining some of the benefits of holding shares in a property company with those of holding property assets directly. The fact that the profits of a company are subject to corporation tax at the rate of 30% (which may not be the rate of tax applicable if the properties were held directly) has been a disadvantage to investors wishing to invest in property companies.
REITs have been successfully introduced abroad, particularly in the United States and are seen as a way of improving the efficiency of both residential and commercial property investment markets. This is intended, in turn, to encourage increased investment to support the creation of new homes.
Legislation for a UK REITs scheme will be published in the Finance Bill 2006. Commentary on the draft legislation and regulations has been published alongside the Budget Report see, UK REITs - commentary on draft legislation and regulations.
Draft legislation was published in December 2005 and January 2006 together with updated partial regulatory impact assessments. The legislation applies to both individual companies and groups. For more information see Legal updates:
Companies and groups can elect to join the regime with effect from January 2007.
The government have taken on a number of the concerns that have been voiced by the industry and the following are now the key features of the regime:
  • Companies or groups that meet the UK REIT eligibility criteria will not pay corporation tax on qualifying property rental income or qualifying chargeable gains. Profits and gains on other activities will be subject to corporation tax in the normal way.
  • Dividends that are paid by companies within the regime, to the extent they relate to tax-exempt profits will be treated as income from UK property and will be paid out to investors under deduction of basic rate income tax. Dividends paid out of other profits will be treated as normal dividends for UK tax purposes.
  • It is open to companies, resident in the UK for tax purposes, that are publicly listed on a recognised stock exchange.
  • No one investor may be beneficially entitled to 10% or more of distributions or control (directly or indirectly) 10% or more of the share capital or voting rights.
  • A requirement to distribute at least 90% of net taxable profits on rental income to investors, who will then pay tax at their marginal rate. This rate was reduced from 95% allowing more companies to operate within the regime following industry responses to the consultations.
  • 75% or more of the company's assets must be in investment property and 75% or more of its income must come from rents. In addition the ratio of interest on loans to rental income of the company must be less than 1.25:1. Again, this was reduced from 2.5:1 in response to requests from consultees.
  • The conversion charge applying to companies joining the regime has been set at 2% of the market value of their investment property portfolio at the date they join the regime. This is less than had been expected by some in the industry. This will be collected at the same time as any corporation tax due in the first accounting period following entry into the regime. There is also an option to spread the charge over four years if the company or group prefers.
  • Most breaches of the regulations and criteria will not result in automatic removal from the regime but will instead attract a tax charge in the REIT.
Sections 508A and 508B of the Income and Corporation Tax Act 1988, relating to Housing Investment Trusts, are to be repealed.
For more background information on these issues, see:

Stamp Duty Land Tax (SDLT)

With effect from 1 December 2003, the stamp duty regime, in so far as it applied to UK land and buildings, underwent a radical transformation with the introduction of SDLT, which is a tax on land transactions.
The speed with which SDLT was introduced and its complexity, has resulted in frustration and concern on the part of practitioners and representations have been made by a number of lobby groups to get areas of law and practice relating to SDLT changed or clarified. For details of the Law Society campaign, see Legal update, Law Society's SDLT Campaign.
Many of the measures announced in the Budget 2006 in relation to SDLT are an attempt at dealing with some of these issues.
See Further information, for a list of practice notes SDLT.

SDLT rates

Starting threshold for SDLT on residential transactions is raised

The starting threshold for SDLT on residential transactions has been raised to £125,000 from the current limit of £120,000.
This means that in relation to a residential land transaction where the chargeable consideration is £125,000 or less, there will be no charge to SDLT.
The change will take effect where the "effective date" of the transaction is on or after 23 March 2006. The "effective date" will normally be the date of completion of the transaction, rather than the date of exchange of contracts. However, the effective date may be earlier than the completion date if the contract is "substantially performed". The contract may be substantially performed if, for example, the purchaser takes possession of the property or pays the purchase price or a substantial part of the purchase price prior to completion. Most residential transactions will not be substantially performed before completion.
For more information on "substantial performance", see Practice note, Stamp duty land tax: Substantial performance.
This information is contained in BN20 - Stamp Duty Land Tax: Raising the Threshold for Residential Transactions.

No change to threshold for non-residential or mixed use property

There are no changes to the thresholds for SDLT chargeable in relation to non-residential property and property which is a combination of residential and non-residential property.

No other changes to bands or rates

There are no other changes either to the bands or rates of SDLT, which therefore will be, as from 23 March 2006:
Residential
Non-residential/mixed
Consideration
Rate
Consideration
Rate
Not more than £125,000
0%
Not more than £150,000
0%
More than £125,000 but not more than £250,000
1%
More than £150,000 but not more than £250,000
1%
More than £250,000 but not more than £500,000
3%
More than £250,000 but not more than £500,000
3%
More than £500,000
4%
More than £500,000
4%
NOTE ADDED: The Stamp Taxes Internet Calculator and the Calculator for SDLT on lease transactions have been updated to reflect changes announced in the Budget 2006.

Extension of alternative finance reliefs

The reliefs that give parity of SDLT treatment to individuals acquiring property with the help of certain financial schemes ("Islamic mortgages") are to be extended to anyone wishing to use these financial schemes, including companies, clubs and trustees.
The effective date for the extension of these reliefs will be the date of Royal Assent of the Finance Bill 2006.
This information is contained in BN21 - Stamp Duty Land Tax: Extension of Alternative Finance Reliefs.

Schemes covered

The alternative finance schemes covered are those where:
  • A financial institution purchases a property for a buyer, then leases it to the buyer and finally transfers the freehold to the buyer.
  • A financial institution purchases a property for a buyer, leases it to them and then transfers the freehold to the buyer in small, regular tranches.
  • A financial institution purchases a property for a buyer and re-sells it the buyer at a higher price with an interest free mortgage.
These schemes allow for the acquisition of a property with finance that does not require the payment or receipt of interest, which is strictly forbidden under Islamic law.
The schemes rely on the involvement of a financier who buys the property, and then sells it on to the buyer, collecting instalment payments (similar to traditional mortgage payments) for the repayment of the capital. Rather than charging interest, the financier either sells on the property at a higher price, or sells it for the same price but then charges additional rent on the property for a specified period of time.
Unless SDLT relief is given, these transactions would attract a double charge to SDLT, first when the property is transferred to the financier and second when the property is transferred to the ultimate buyer.
Currently, the SDLT relief is given under section 71A, section 72, section 72A and section 73 of the FA 2003. The relief is available only where the ultimate purchase of the property is by an individual.
For more information see:

Simplification and clarification of SDLT

  • The Finance Bill 2006 will include a number of measures to simplify and clarify the law relating to SDLT.
  • Treasury regulations will be made under existing powers that will take a number of transactions outside the scope of SDLT. These will take effect on 12 April 2006.
This information is contained in BN22 - Stamp Duty Land Tax: Simplification and Clarification of the Law .

Treasury regulations take some forms of consideration outside the charge to SDLT

With effect from 12 April 2006, the following will be deemed not to be "chargeable consideration" and so will not attract a charge to SDLT:
As at 22 March 2006, the drafts of these regulations have not been made available by the Treasury.
NOTE ADDED: The Stamp Duty Land Tax (Amendment to the Finance Act 2003) Regulations 2006 are now available. For more information, see Legal update, Amendments to scope of chargeable consideration for SDLT purposes.

SDLT and partnerships

No SDLT on the transfer of a partnership interest where the partnership is a profession or trade
The Finance Bill 2006 will provide that where partnership property includes land, there will be no SDLT charged on the transfer of an interest in that partnership where the main activity of the partnership is one of the following:
  • The carrying on of a profession.
  • The carrying on of a trade (other than a trade of dealing in or developing land).
At present, where there is a transfer of an interest in a partnership, there will be a charge to SDLT if the partnership property includes land, regardless of the main activity of the partnership.
For more information, see Practice note, SDLT and partnerships.
Removal of potential double charge to SDLT
The FA 2003 expressly excluded certain partnership transactions from the SDLT regime, but the position was changed by the FA 2004, which amended the FA 2003.
Under Schedule 15 to the FA 2003, there is the potential for a transaction involving the transfer of property to be caught, and therefore chargeable to SDLT, under a number of provisions:
  • Paragraph 10 of Schedule 15.
  • Paragraphs 14, 17 and 17A of Schedule 15.
There is nothing to prevent a double charge to SDLT.
The Finance Bill 2006 will remove this potential double charge.

Successive linked leases and agreements for lease

The Finance Bill 2006 will provide that the rules on "successive linked leases" will not apply where an agreement for a lease is followed by the grant of a lease.
As the law currently stands, the same lease arrangement appears to constitute two separate charging events but with a credit being given in respect of the SDLT charged on the first occasion. The implications of this are significant.
Most agreements for lease will provide for the execution of a formal lease and so the special rules for determining the effective date will apply. The effective date will be the date that either a substantial proportion of any premium is paid or the tenant takes possession of the whole or substantially the whole of the premises, or first pays rent.
If this date is not simultaneous with the grant of the lease:
  • The agreement for lease is treated as a deemed grant, and
  • The grant of the lease is a chargeable event involving the surrender of the deemed lease and the grant of a new lease.
As yet, no details have been published as to the proposed wording of the provisions in the Finance Bill 2006.

Simplification of the rules on variations in rent

SDLT is charged on the net present value (NPV) of the rent over the term of the lease. The position becomes complicated where rent is reviewed under the lease and even more complicated where the rent is increased by agreement and not pursuant to a term in the lease. For details, see Practice note, SDLT and the grant of a lease: Stamp duty land charge on rent.
The Finance Bill 2006 will provide that the current SDLT charge (under paragraph 13 of Schedule 17A to the FA 2003) on rent increases that are not provided for in the lease will be restricted to increases in the first five years of the lease.
All rent increases after the end of the fifth year, whether provided for in the lease or not, will be subject to the "abnormal increase" rules in paragraphs 14 and 15 of Schedule 17A.
The formula for what is an "abnormal increase" will be simplified.
As at 22 March, no details of the provisions to be contained in the Finance Bill 2006 have been made available.

Clarification of the SDLT treatment of agricultural tenancy rent reviews and interim rents for business tenancies

The Finance Bill 2006 will clarify the SDLT position in relation to:
  • Rent reviews under the legislation governing agricultural tenancies.
  • Interim rents under the legislation governing business tenancies.
As at 22 March, no details of the provisions to be contained in the Finance Bill 2006 have been made available.

Simplification of rules for "backdated" leases

The Finance Bill 2006 will simplify and clarify the rules relating to the SDLT treatment of leases that are "backdated" and expressed to commence immediately after the expiry of a former lease.
As at 22 March, no details of the provisions to be contained in the Finance Bill 2006 have been made available.

Clarification of the rules for notifying assignments

The Finance Bill 2006 will clarify the rules that cover notifying assignments of leases. It will be made clear that where a lease was originally granted for less than seven years, its assignment need be notified only if there is SDLT to pay or if there is a relief to be claimed.
As at 22 March, no details of the provisions to be contained in the Finance Bill 2006 have been made available.

No SDLT where assets are transferred between sub-funds of a settlement

The Finance Bill 2006 will make it clear that a transfer of assets between sub-funds of a settlement will not attract a charge to SDLT.
As at 22 March, no details of the provisions to be contained in the Finance Bill 2006 have been made available.

Withdrawal of Unit Trust "seeding relief"

"Seeding relief" is withdrawn with immediate effect.
The initial transfer of a chargeable interest to the trustees of a unit trust scheme was exempt from a charge to SDLT pursuant to section 64A of the FA 2003. This exemption was commonly referred to as "seeding relief". It provided that the acquisition of a chargeable interest by trustees of a unit trust scheme will be exempt from charge to SDLT if the certain conditions were met. The conditions were that:
  • Immediately before the acquisition:
    • there were no assets held by the trustees for the purposes of the scheme; and
    • there were no units of the scheme in issue.
  • The only consideration for the acquisition was the issue of units in the scheme to the vendor.
  • Immediately after the acquisition the vendor is the only unit holder to the scheme.
For more details, see Practice note, Stamp duty land tax: Seeding relief.
"Seeding relief" has been withdrawn with immediate effect for all land transfers into unit trusts on or after 22 March 2006, subject to transitional provisions to protect contracts that were entered into before 2.00 pm on 22 March 2006. The relief remains available where the transfer to the trustees was effected:
  • Either in pursuance of a contract entered into and substantially performed before 2.00 pm on 22 March 2006 (the "relevant time").
  • Or, in pursuance of any other contract entered into before the relevant time, provided that the transfer to the trustees was not an "excluded transaction".
For details of what constitutes an excluded transaction, see BN23 - Stamp Duty Land Tax: Withdrawal of Unit Trust "Seeding Relief".
Where land is transferred to a unit trust, SDLT will be payable on the market value of the land and buildings. Section 53 of the FA 2003 currently provides that the chargeable consideration on a transfer of property to a company "connected" with the transferor, or in consideration of the issue of shares of a company "connected" with the transferor, should not be less than the market value of the chargeable interest transferred. Section 53 is to be extended to apply to transfers to trustees of a unit trust scheme.
The main target of this measure is the recent volume of commercial property transactions using offshore property unit trusts.

Further information

VAT

VAT grant schemes extended

In the Budget 2004, the government introduced an interim grant scheme to allow VAT on the costs of building repairs and maintenance carried out to listed places of worship to be reclaimed (see Legal update, Budget 2004 - interim grant scheme for listed places of worship). This was originally due to end in March 2006 but was extended by the Budget 2005 to 2007/8.
A similar scheme was introduced in the Budget 2005 to cover the VAT costs incurred by charities in connection with the construction, renovation and maintenance of memorials (see Legal update, Budget 2005: implications for property: VAT grant scheme for memorials).
The government is now extending the period for which funding will be available for the listed places of worship and memorials VAT refund schemes for three further years until 2010/11. The scope of both schemes is being extended to cover the VAT costs incurred on professional fees and include fixtures and fittings for listed places of worship, such as bells, pews, clocks and organs.

Rewrite of Schedule 10

The rules on the option to tax land and property are contained in Schedule 10 to VATA 1994. Over the years, Schedule 10 has been expanded to accommodate changes in the legislation, in particular to provide for anti-avoidance measures.
In December 2005, the government issued a consultation paper, Buildings and land: Rewrite of existing tax law, setting out its intention to simplify the language and structure of Schedule 10. The consultation paper included draft legislation to replace paragraphs 1, 2, 3 and 3A of Schedule 10 of VATA 1994 in their current form. While the primary objective was to make the existing provisions clearer and easier to use, the consultation paper also proposed some substantive changes comprising deletions, clarifications and additions.
NOTE ADDED: The government announced in July 2006 that it will not make the changes to Schedule 10, paragraph 8 (which dealt with situations where the legal and beneficial ownership of property was held by different parties) contained in the consultation paper. For more information, see VAT Act 1994: Schedule 10, Paragraph 8: Outcome of December 2005 consultation announced.

Deletions

The government intends to remove provisions from Schedule 10 that are no longer relevant:
  • Those relating to input tax contained in paragraphs 2(4)–(9).
  • Those concerned with the developers' self-supply charge in paragraphs 5, 6 and 7.

Clarifications

The revised form of Schedule 10 contained in the consultation paper included provisions to clarify the following:
  • "Intended for use" in paragraphs 2(2)(a) and (b) of the existing Schedule means the intended use only of the grantee of the relevant supply.
  • "Wholly or mainly for eligible purposes" in paragraph 3A(7) is to be amended to "wholly, or almost wholly, for eligible purposes".
    This is intended to reflect more closely the practical application of this provision as meaning 80 per cent or more. Occupation of land other than "wholly or mainly for eligible purposes" (broadly speaking, occupation other than for the purposes of making taxable business supplies) triggers the anti-avoidance disapplication provisions (see Practice note, VAT and property: the election to waive exemption: Disapplication of the election to waive the exemption).

Additions

The consultation paper proposed the addition of provisions to deal with the following:
  • The creation of a right of appeal against a decision of the Commissioners under paragraph 3(9) to withhold permission to make an election – amendment to section 83. No details of this were included in consultation document.
  • The setting up of a framework for making applications under paragraph 3(9) for the written permission of the Commissioners to make an election – see new paragraph 21.
  • The introduction of a power enabling the Commissioners to treat an election as valid from the time specified in the notice given to them under the existing paragraph 3(6), in circumstances where prior permission was required but not obtained – see new paragraph 23.
  • A change to allow an option to tax to take effect from the day on which application was made in circumstances where a taxpayer applies for prior written permission but it is given after the date from which the taxpayer wanted the option to take effect – see new paragraph 22.

Implementation of revised Schedule 10

The government has announced that appropriate enabling legislation will be included in the Finance Bill 2006. An order containing the new Schedule 10 will be laid after Royal Assent.
The Finance Bill 2006 will also provide for the repeal of rules on developmental tenancies contained in Schedule 9 Group 1 paragraph 1(b) and introduce transitional provisions. This would coincide with the repeal of provisions relating to the developers' self-supply charge in Schedule 10.
See also BN45 - VAT: Schedule 10 - Buildings and Land: Rewrite of Existing Tax Law.

Disapplication of the option to tax

Where a landlord or a seller of a building has opted to tax, the option may be disapplied in relation to the supply of that building if, before the supply in relation to the building is made, the tenant or buyer (as applicable) certifies that the building will be used for a relevant charitable or relevant residential purpose (paragraph 2(2), Schedule 10, VATA 1994).
In March 2004, the government issued a Consultation paper on the disapplication of VAT in such circumstances (see Legal update, Budget 2004: implications for property: Consultation on disapplication of option to tax).
A summary of responses to the consultation paper has now been published. Following the consultation, the government has decided not to make any changes to the current legislation.

Revocation of the option to tax

With the exception of the requirement for HMRC's consent, VATA 1994 does not specify any other conditions that will apply in relation to the revocation of the option to tax after the expiry of 20 years (paragraph 3(5), Schedule 10, VATA 1994). As it has been possible to elect to waive the exemption since 1 August 1989, the earliest time that an election can be revoked under paragraph 3(5) will be 1 August 2009.
In December 2004, HMRC launched a consultation paper on the conditions to be applied in these circumstances (see Practice note, VAT and property: the election to waive exemption: New consultation). A summary of responses to the consultation paper was published in December 2005.
The government has announced that a package of measures will be introduced between 2006 and 2009 to implement changes necessary to facilitate the revocation of the option to tax.

Planning Gain Supplement

The budget report reaffirms, in general terms, the government's continuing interest in the introduction of a Planning Gain Supplement (PGS) although it does not provide much in the way of further detail. Discussions with stakeholders are continuing and further announcements on PGS implementation are promised by the end of the year.
The government has been looking at proposals for a PGS since 2003 and the advantages of a PGS were promoted in the document, Barker Review of Housing Supply, Delivering stability: securing our future housing needs. In particular, the Barker review saw a PGS as a way to help fund additional infrastructure and social housing putting benefit back into the community.
In conjunction with the Pre-Budget Report 2005, the government published its response to the Barker review (see Government's response to Kate Barker's Review of Housing Supply). The response was accompanied by a Consultation paper (see Legal update,Consultation paper on planning gain supplement) which restated the case for a PGS and described how the scheme might work in practice.
The consultation set out options for the way in which PGS revenue might be used. The objectives highlighted in the budget report seem to have remained broadly the same:
  • PGS is an essentially local measure, to help the community share the benefits and manage the impact of development.
  • PGS revenue will be used to finance investment necessary to support growth in the local and strategic infrastructure, whilst preserving incentives to develop. A significant proportion of the revenue will be retained for infrastructure priorities within the local authority area from where the revenue comes.
  • PGS should provide a fairer, more efficient and more transparent means of capturing a modest proportion of land value uplift.
  • PGS should be a flexible value capture system that is able to respond to market conditions and not differentiate between different types of development.
  • PGS revenues can go to fund strategic regional, as well as local, infrastructure to ensure that growth is properly supported by efficient infrastructure.
The consultation period only ended on 27 February 2006 and it is clear that the government has not had time to consider any further specific measures. Various organisations within the property industry responded to the consultation both voicing concerns about and supporting the introduction of a PGS. The government is considering these. For more information see Legal update, City of London Law Society response to planning gain supplement consultation and Trends and developments tracker: Barker Review.
As recommended in the Barker review, the intention is that PGS will be accompanied by a scaling back of planning obligations to make the planning system more efficient and transparent. Reforms to the planning obligation system were also set out in the consultation.

Barker review of land use planning

It is clear the government is committed to further planning reform. It was announced in the Pre-Budget Report 2005 that Kate Barker had been asked to conduct a further review, this time of land use planning (see Legal update, Pre-budget report 2005: Property: planning gain supplement, housing and real estate investment trusts). Very little detail was given at the time. The Budget report gives a little more detail of the scope of the review:
  • Building on the reforms already in place in England, and in the context of globalisation, it will consider how planning policies and procedures can deliver economic growth and prosperity alongside other sustainable development goals.
  • The focus will be on the town and country planning system, but can extend to wider aspects of land use regulation.
  • To ensure a "joined-up" approach it will take account of other reports such as the Eddington study of transport, the government's energy review and the Lyons Inquiry on the future role and function of local government.
  • It will concentrate upon the economic impact of land use planning, but if improvements that would achieve wider social or environmental objectives are identified, these will be considered.
The intention is that an interim report will be ready in summer 2006.

Housing

Miscellaneous proposals have been announced which impact upon the provision of housing.

Code for sustainable homes

Measures to maximise the environmental sustainability of new housing have been announced following the consultation on introducing a code for sustainable homes (see, Proposals for Introducing a Code for Sustainable Homes - A Consultation Paper).
The code will set five standards, or levels, for new homes to encourage sustainable building and give homeowners clear information about running costs.
The government is considering:
  • Making energy efficiency ratings mandatory for new and existing homes.
  • Setting minimum standards of water and energy efficiency.
  • Raising the lowest standards in the code above the requirements of mandatory building regulation.

Building regulations

The new Part L building regulations come into force on 6 April 2006, and are intended to increase the energy efficiency of buildings by a further 20% (see Legal updates, Revisions to building regulations to improve energy efficiency and Transitional arrangements governing new energy efficiency building regulations).
This may be a signal from government that it intends to continue to improve the sustainability of new housing by further, tougher building regulations.

Relief from special trust rates for service charges held by social landlords

There is to be a new relief for income arising on service charges and sinking funds held on trust by Registered Social Landlords (RSLs) and local authorities. Most landlords have to hold service charge payments made by tenants in trust. RSLs and local authorities are exempt from this requirement, but in practice often hold service charge funds in trust. If they hold service charge funds on trust and the income can accumulate, the income will be taxed at the special trust rates (40%/32.5%).
The new measure will exempt the income arising from service charges held on trust by RSLs and local authorities from the special trust rates. Instead, such income will be taxed at lower, basic or dividend ordinary rate, as appropriate.
This relief will apply to all of the UK and will be available not only to RSLs and local authorities, but also housing associations in Northern Ireland, charitable housing trusts, charitable housing associations, housing action trusts and the Housing Corporation. The changes will take effect for income arising from 6 April 2006.
For more information, see HM Revenue & Customs 2006 Budget Note 34 - Relief from Special Trust Rates for Service Charges Held by Social Landlords.

Extension of Landlord's Energy Saving Allowance

Under section 312 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA), landlords who pay income tax may claim a deduction: the Landlord's Energy Saving Allowance (the LESA). Landlords may claim the LESA for expenditure incurred in installing loft insulation or cavity wall insulation in a dwelling-house which they let. The LESA was extended to cover solid wall insulation in 2005 (see Legal update, Budget 2005: implications for property: Landlord’s energy saving allowance). The maximum amount which may be claimed is £1,500 per building.
Regulations will be made under section 312(5)(c) of ITTOIA to enable landlords to claim the LESA for expenditure to draught proof and install insulation for hot water systems in dwelling-houses which they let. The latest extension is to have effect from 6 April 2006.
For more information on the LESA see, HM Revenue & Customs 2005 Budget Note 37 - Landlord's Energy Saving Allowance.
For more information on the proposed extension, see HM Revenue & Customs 2006 Budget Note 50 - Landlord's Energy Saving Allowance.

Shared equity housing

The government intends to extend home ownership to another million people over the next five years. The government will be directly assist over 100,000 households that could not otherwise afford a home of their own, with subsidised shared equity products, including a joint shared equity scheme operated in partnership with lenders.
A Shared Equity Task Force is being established to consider the scope for shared equity products to assist more households. The government will work with the finance industry, house builders, local authorities, housing associations and others to determine whether there are market or state failures holding back the development of affordable shared equity products for the "intermediate" housing sector.

Miscellaneous

Alternative finance arrangements

The FA 2005 introduced legislation to deal with finance arrangements that are structured so that they do not involve the payment or receipt of interest. It enabled certain financial arrangements to be taxed in a manner similar to those involving interest and ensured that other rules relating to interest, such as deduction of tax at source, apply in the same way.
The new provisions provide for two additional alternative finance arrangements to be taxed in an equivalent way to arrangements involving interest. These are an agency-style contract, which is equivalent to a savings account, and a partnership-style arrangement used to finance the purchase of property or other assets. Where certain conditions are met, amounts equating economically to interest, which are paid by the financial institution to the investor or received by the financial institution, will be charged to tax on the same basis as interest.
The proposed revision also amends FA 2005 to provide that low-cost alternative finance arrangements provided by employers to employees are treated in the same way as conventional low-interest loans to employees. There was some uncertainty as to whether the existing legislation includes such alternative finance arrangements and the proposed revision will make it clear that such arrangements will be taxed on a par with conventional loans.
The provision relating to alternative finance arrangements made available to employees will apply to arrangements entered into on or after 22 March 2006. The remaining provisions apply to arrangements entered into on or after 6 April 2006 for income tax purposes and 1 April 2006 for corporation tax purposes.
The new measures will allow similar arrangements, which equate in substance to a loan or deposit, but do not give rise to a payment or receipt of interest, to be brought into the existing legislation by Treasury Order.
For more information on previous legislation, see Legal update, Budget 2005: implications for property: Alternative finance arrangements.
For more information on the new provisions, see HM Revenue & Customs 2006 Budget Note 06 - Alternative Financial Arrangements.

Business premises renovation allowance

The government intends to introduce a business premises renovation allowance scheme, to provide 100% capital allowances for the costs of bringing empty business properties in disadvantaged areas back into use. The scheme will be introduced as soon as state aids approval is received.

Review of HMRC powers and online services

HMRC

In 2005, the government launched a review of HMRC powers and safeguards. For details, see Legal update, Consultation on the legal powers of HM Revenue and Customs and Legal update, Consultation on the powers for the new revenue department.
A further consultation document will be issued shortly to consider:
  • How HMRC might intervene more quickly and cheaply, while tackling non-compliance more effectively.
  • How HMRC might develop a more responsive penalty framework.

Online services

The Carter review of the use of HMRC's online services was published today (see, Review of HMRC Online Services (HMRC)). The report concludes that "well-designed online filing services" can bring benefits to taxpayers and the government. The government agrees with the goal of universal electronic delivery and accepts the recommendation that there should be "continued investment in online infrastructure and supporting systems to deliver robust, high capacity services, which should be rigorously tested".
Environment

Summary of environmental announcements

The following is a summary of the key environmental announcements made in the Budget 2006:
  • Increase in the rate of the climate change levy.
  • Release of further details on the forthcoming Renewable Transport Fuel Obligation and enhanced capital allowances scheme for biofuel production plants.
  • Publication of a consultation document on carbon capture and storage.
  • Increase in the standard rate of landfill tax and the value of the landfill tax credit scheme.
  • Freeze in the rate of aggregates levy.
  • Announcement of further measures to improve energy efficiency in buildings.
See below for more detail on these key announcements and for a brief summary of some of the other, less significant, environmental announcements.
For further details of all environmental announcements made in the Budget 2006, see Chapter 7 of the Budget 2006.

Background

With climate change currently riding high on the government's agenda, it comes as no surprise that the Budget 2006 includes a number of measures designed to help reduce greenhouse gas emissions and encourage the use of renewable energy.
Under the Kyoto Protocol, the UK is committed to achieving a 12.5% reduction in emissions of greenhouse gases, by reference to 1990 levels, in the period 2008-12 (see Legal update, EU emissions trading scheme: an overview).
In addition, the government in its 2003 Energy White Paper committed itself to further, more onerous, domestic emission targets:
  • 20% reduction of 1990 levels by 2010.
  • 60% reduction of 1990 levels by 2050.
The Climate Change Programme (CCP), which was published in 2000, details how the UK plans to deliver its international and domestic targets.
A review of the CCP was launched in 2004 to assess the performance of existing policies and a range of policies that might be put in place in the future. The government has announced that the revised CCP will be published sometime in the week commencing 27 March 2006. It is envisaged that the revised CCP will reflect the announcements made in the Budget 2006. The revised CCP will in turn be taken into account in the energy review which is currently under way (see Legal update, Government announces energy review).
One of the ways envisaged in the CCP to achieve reductions of carbon dioxide emissions is through the use of renewable energy and biofuels.
Renewable energy is energy derived from resources that cannot be depleted, such as energy from solar, wind and tidal power and biomass. "Biofuels" are transport fuels produced from biomass.
"Biomass" is essentially vegetation and other organic material, such as wood and crops (for example, rapeseed, sugar beet and cereals). The burning of biomass to produce energy (in the form of electricity, heat and liquid fuels) is generally thought of as being carbon-neutral because the carbon dioxide released during the generation of energy from biomass is balanced by that absorbed by the biomass during its growth. However, this may not necessarily be the case when assessed on a life-cycle basis (for example, account should be taken of the emission of carbon dioxide from the harvesting and transportation of biomass).
The government estimates that, by 2050, the UK could produce as much as one third of its transport energy needs from biomass, with the ultimate aim being the development an energy source which generates zero carbon emissions (such as hydrogen).
At present, the two most common biofuels are biodiesel and bioethanol, which can be mixed with petrol and diesel and used in ordinary cars. Biofuels currently account for approximately 0.25% of all road transport fuel sales in the UK. It is expected that, by 2020, "second generation" biofuels, which will be capable of offering higher levels of carbon savings, should become available (such as biofuels produced from organic waste).
The government has committed itself to ensuring that, by 2020, 20% of the electricity produced in the UK will be generated from renewable sources. To give effect to this, the government introduced in 2002 a Renewables Obligation, which requires all licensed electricity suppliers in England and Wales to supply a specified, and increasing, proportion of their electricity from renewable sources and provides financial incentives for them to do so.
The government has also committed itself to introducing further measures to encourage the use of biofuels (see Biofuels).

Climate Change Levy

The climate change levy (CCL) is a tax on electricity, gas, coal and liquified petroleum gas used for energy by the non-domestic sector. The aim of the CCL is to encourage businesses to use energy more efficiently and help the UK meet its Kyoto and domestic targets for reduction of greenhouse gases.
The introduction of the CCL was accompanied by a 0.3% cut in employers' National Insurance contributions, thus ensuring that overall taxation on the business sector was not increased. Climate change agreements (CCAs) enable energy-intensive industry sectors to obtain an 80% reduction on their CCL in return for introducing energy-saving measures.
The government has published a report setting out the full impact of the CCL and CCAs, which indicates that:
  • The CCL is playing a crucial role in enabling the UK to meet its Kyoto targets and has been the most effective measure to date for reducing emissions from the business sector.
  • It is estimated that, by 2010, the CCL will reduce energy demand as a whole by 2.9% a year, as compared to what would be achieved if the CCL were not in place.
  • CCAs have increased carbon savings above the level that would have been achieved if all the relevant businesses has paid the full CCL rate.
The list of energy-intensive industry sectors eligible to apply for a CCA continues to grow. In January 2006, CCAs were approved for four new industry sectors. EU state aid approval has now also been given for the horticulture sector to enter into a CCA and a further five industry sectors are expected to enter into CCAs shortly.
To ensure the UK continues to make progress in tackling climate change, the government has announced that CCL rates will increase in line with inflation from 1 April 2007. CCL rates have not been increased since its introduction in 2001, to allow the levy to bed.
For further details on the CCL and CCAs, see PLC Article, The climate change levy: Taxing energy (PLC magazine, May 2001).

Biofuels

Renewable Transport Fuel Obligation

The transport sector is currently responsible for approximately 25% of carbon dioxide emissions in the UK. The government considers that significant reductions of these emissions can be achieved through the use of biofuels.
The Directive 2003/30/EC on the promotion of the use of biofuels or other renewable fuels for transport (Biofuels Directive) requires Member States to set national targets for increased sales of renewable transport fuels by reference to a indicative, non-legally binding, targets (2% by 2005 and 5.75% by 2010). The purpose of the Biofuels Directive is to promote the use of renewable fuels (such as biofuels) as a substitute for conventional fuels (such as petrol and diesel) in the transport sector and to reduce the EU's reliance on external energy sources.
Although the targets set out in the Biofuels Directive are intended to be reference values only, the Directive requires Member States to justify to the Commission any deviation from these values. The UK government is currently in discussions with the Commission over why the current UK target (0.3%, calculated on the basis of volume of sales) is lower than the Directive's indicative target for 2005 (2%, calculated on the basis of energy content).
Up until now, the government has encouraged the use of biofuels by means of a lower rate of excise duty than that which applies to conventional transport fuels. The government has announced that this lower rate of duty will continue in place until 2008-09.
The government has also announced that it will be introducing a Renewable Transport Fuels Obligation (RTFO) in 2008-09. The RTFO will require suppliers of transport fuels to ensure that a certain percentage of their sales is from a renewable fuel source (such as biofuels). The RTFO is intended to be a key measure that will help the UK meet its targets under the Biofuels Directive.
The following RTFO targets have been set in the Budget 2006 (calculated on the basis of volume of sales):
  • 2.5% in 2008-09.
  • 3.75% in 2009-10.
  • 5% in 2010-11.
Primary legislation giving the Secretary of State the power to introduce an RTFO is already in place (see section 124 of the Energy Act 2004). The next step will therefore be for the Department of Transport to draft the necessary order and consult on this. Consultation is expected to take place by the end of 2006.
The RTFO will be modelled on the existing Renewables Obligation. Suppliers (that is, refiners and importers) of transport fuels will be required to demonstrate to an administrator (to be appointed) how much biofuel they have sold. Compliance will be assessed at the existing "duty point" administered by HM Revenue and Customs for fuel excise duties. A supplier will therefore be able to demonstrate that it has met its RTFO target by reference to how much excise duty it has paid on biofuels supplied that year. The administrator will then issue the supplier with the appropriate number of RTFO certificates.
Suppliers that exceed their targets will be able to sell their additional certificates to other suppliers. Suppliers that are unable to meet their targets will be required to make "buy-out" payments which will be fed into a "buy-out fund" which in turn will be recycled amongst those suppliers that have met their targets. The Budget 2006 has set the RTFO buy-out price at 15 pence per litre for 2008-09.
See Background for further details on biofuels and renewable energy.

Enhanced capital allowances for biofuel plants

The government has, since 2001, offered 100% first-year enhanced capital allowances (ECAs) for spending by businesses on designated energy-saving technologies.
The government announced in the Pre-Budget Report 2005 that, subject to EU state aids clearance, it would be going ahead with ECAs for the cleanest biofuel production plants. The biofuels ECA scheme is intended to work alongside the RTFO to create an additional incentive for the development of biofuels.
The Budget 2006 indicates that the government has now applied for state aids clearance and that, subject to this, it envisages that the scheme will be in place in early 2007.

Carbon capture and storage

It is thought that carbon abatement technologies, such as carbon capture and storage (CCS), have the potential to make a significant contribution to reducing carbon emissions. CCS involves capturing carbon in fossil fuels as carbon dioxide, either before or after combustion in coal and gas power stations, and storing this in geological formations (such as depleted oil fields in the North Sea). This would enable fossil fuels to be used with substantially reduced carbon dioxide emissions.
The government announced in the Pre-Budget Report 2005 that it planned to collaborate with Norway to pool research and develop common principles on the regulation of CCS under the North Sea.
The government has announced that the North Sea Basin Task Force has now been established in collaboration with Norway and that further discussions will take place with all relevant stakeholders later this year to share information on the feasibility of carbon capture and storage.
In addition, the government has published a consultation document on barriers to the wide-scale commercial use of CCS in the UK and on the potential role of economic incentives to address those barriers. The closing date for responses is 11 May 2006.

Landfill tax and waste

The government announced in 2003 that, from 2005-06, the standard rate of landfill tax covering active wastes would increase by at least £3 per tonne each year, towards a medium to long-term rate of £35 per tonne.
The government has indicated that increases in the standard rate of landfill tax have contributed to a sharp fall in the volume of waste disposed to landfill and, as a result, it has confirmed that the standard rate of landfill tax will increase to £21 per tonne from 1 April 2006. The lower rate which applies to inactive wastes will be remain unchanged at £2 per tonne.
The Landfill Tax Credit Scheme allows landfill site operators to claim against their landfill tax liability by means of contributions made to certain bodies involved in environmental projects. The maximum credit that landfill operators will be able to claim will be changed from 6% to 6.7%, which should result in an additional £10 million being available to the scheme in 2006-07.
The government is exploring the potential to introduce an enhanced capital allowances scheme to support new waste management facilities. The government has announced that it will continue to consult with the relevant stakeholders to assess the potential of this proposal.

Aggregates levy

The aggregates levy, which was introduced in 2002, is designed to encourage better use of recycled aggregates and ensure that the environmental impacts associated with the exploitation of aggregates (primarily sand, gravel and crushed rock) is reflected in the price of the aggregate.
The government has announced that the rate of the aggregates levy will be frozen at £1.60 per tonne.
For more details on the aggregates levy, see Legal update, Aggregates levy.

Energy efficiency in buildings

See Housing.

Other environmental announcements

The following is a brief summary of some of the other, less significant, environmental announcements made in the Budget 2006.

Vehicle excise duty

The government will be introducing:
  • A zero rate of vehicle excise duty for cars with the lowest carbon emissions.
  • A new top band of vehicle excise duty for cars with the highest carbon emissions.
According to the Budget 2006, vehicle and fuel excise duties, combined with technological improvements in car manufacturing, have contributed to significant reductions in key air pollutants.

Microgeneration technologies

Microgeneration involves the generation of electricity and heat by individual consumers or groups of consumers using energy sources such as solar energy and micro-wind turbines.
The government has already committed £30 million over the next three years to fund microgeneration installations. The government announced in the Budget 2006 that it will be committing an additional £50 million for the Department of Industry's Low Carbon Buildings Programme to help fund the installation of microgeneration technologies in a range of buildings, including schools, social and local authority housing, businesses and public buildings.
For details on legislative proposals in respect of microgeneration, see Legal updates, Renewable Energy Bill published and Climate Change and Sustainable Energy Bill.

National Institute for Energy Technologies

The government believes that the UK has the capacity to be a world leader in energy technologies and so, in January 2006, it launched the Energy Research Partnership, which is designed to give strategic direction to UK energy research and development.
The Energy Research Partnership has announced that it will be committing itself to raising substantial sums of private investment to develop a new National Institute for Energy Technologies, which will be a 50:50 public-private partnership. The objective of the new Institute will be to build on existing funding structures to better leverage already substantial funding for energy research. BP, Shell, E.On and EDF Energy have already announced their intention to be involved.