Key Highlights from the ‘Build Back Better’ Budget Breakdown

Jake Pearlman is the Director at Haysmacintyre. In this article, he talks about the “Build Back Better” budget and its implications on the property sector.

On 27 October the Chancellor, Rishi Sunak, presented his “Build Back Better” budget with ambitions to level up and reduce regional inequality. Compared to previous budgets, where the property sector suffered both new and increase taxes, this time the sector, other than the large residential property developers, escaped relatively lightly.

That being said, the industry has plenty to consider with the previously announced increase in corporation tax to 25% from 2023 and national insurance and dividend increases of 1.25% from April 2022.

Key highlights for the property sector:

Residential property developer tax

From 1 April 2022, a new tax will be applied on company profits derived from UK residential property development. The tax will be charged at 4% on profits exceeding £25m. For companies that are part of a group, the £25m allowance will be allocated by the group between its companies. Where property business covers a number of activities, it will be necessary to identify the profits arising from the residential property development.

The Government has pitched this at large corporate residential property developers. However, the £25m allowance excludes any relief for finance costs or losses from other activities, which will increase the number of companies subject to this tax.

It has been confirmed that investment properties built to rent will not be within the scope of this new tax. There are also exclusions for developments by charities and their subsidiaries and some communal dwellings such as care homes and student accommodation.

Business rates reform

The Government announced at Budget 2020 that it would conduct a fundamental review of the business rates system in England. The Government’s objectives for the review were reducing the overall burden on business, improving the current business rates system and allowing the consideration of more fundamental changes in the long term.

The Government published its Final Report on 27 October 2021, which included some of the commitments below:

- Supporting local high streets as they adapt and recover from the pandemic by introducing a new temporary business rates relief in England for eligible retail, hospitality and leisure property for 2022/23. Over 90% of retail, hospitality and leisure businesses will receive at least 50% off their business rates bills in 2022/23.

- Cutting the burden of business rates for all businesses by freezing the multiplier for 2022 to 2023.

- Introducing a new relief to support investment in property improvements, enabling occupying businesses to invest in expanding their properties and making them work better for customers and employees.

- Introducing new measures to support green investment and the decarbonisation of non-domestic buildings.

- Making the system fairer by moving to three yearly revaluations from 2023.

Extension of time to pay Capital Gains Tax (CGT)

No changes to the current rates of CGT were announced, but changes have been made to the timing of filing of CGT returns.

UK residents who dispose of UK residential property are sometimes required to deliver a CGT return to HMRC and make a payment on account of CGT within 30 days of completion of the property disposal. Broadly, this only applies where the property disposal gives rise to a CGT liability and as such usually excludes the disposal of a property to which private residence relief applies. Non-UK residents are subject to similar deadlines in respect of the disposal of all types of UK land and property.

In both cases, for disposals that complete on or after 27 October 2021, the reporting and payment deadline is doubled to 60 days following the completion of the disposal. From the same date, changes will clarify that for UK residents disposing of a mixed-use property, only the portion of the gain that is the residential property gain is required to be reported and paid.

£1m annual investment allowance extension until 31 March 2023

Most corporate and unincorporated businesses were able to utilise a £200,000 annual investment allowance (AIA) to claim 100% tax relief on their qualifying expenditure on plant and machinery. The allowance was temporarily increased to £1 million for expenditure incurred on or after 1 January 2019 and was due to revert back to £200,000 from 1 January 2022 but will now be retained until 31 March 2023. This aligns with the end of the super deduction announced in the March 2021 Budget.

Annual Tax on Enveloped Dwellings (ATED)

The ATED charges automatically increase each year in line with inflation. The ATED annual charges will rise by 3.1% from 1 April 2022 in line with the September 2021 Consumer Price Index. However, with the next fixed revaluation date to determine the appropriate ATED band also being 1 April 2022, the increased charge could be accompanied with an increase in the relevant ATED band.

REITs

The Government reiterated the first phase of, mostly technical, REIT changes announced earlier in the year due to be introduced from April 2022. In summary, the changes include:

- Removing the requirement for REIT shares to be admitted on a recognised stock exchange where institutional investors hold at least 70% of the ordinary share capital in the REIT.

- Amending the definition of an overseas equivalent of a UK REIT so that the overseas entity itself, rather than the overseas regime to which it is subject, needs to meet the equivalence test.

- Amending the rules requiring that at least 75% of an REIT’s profits and assets relate to property rental business to disregard non-rental profits arising, because an REIT has to comply with certain planning obligations, and to ensure the items currently specified as excluded from the profits part of the test are disregarded in all parts of the test.

- Introducing a new simplified balance of business test so that, if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, an REIT will not have to prepare the additional statements that would be required to meet the full test.

The Government is considering a further set of REIT changes as they undergo a review of the REIT regime.

What does this mean?

The majority of those involved in the real estate sector are unlikely to suffer significant change because of this budget, with tax hikes being focussed on large residential developers. However, whilst there remains uncertainty in areas, such as what rates reform will actually look like, the highest Government spending in real terms since the 1970s should provide plenty of opportunities for the sector in the year ahead.