Budget 2003 Press Notice PN 05: Modernising the Taxation of Property
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Budget 2003 confirms the details of and changes to a package of reforms to the taxation of residential, commercial and investment property. These reforms are a major step towards modernising the tax treatment of UK property, and will close loopholes, remove distortions and enhance the sector’s contribution to economic growth, development and regeneration. Financial Secretary Ruth Kelly, said:
“The Government recognises the important contribution of the property sector to the UK’s economic and social well-being. Commercial property is an important factor of production, contributing directly to economic growth, and making possible the renewal of the urban landscape. The Government’s long-term aim is to remove tax distortions and facilitate an efficient property sector that can better support its economic and social objectives. This package of proposals and measures is a major step forward”. This Budget confirms the details of and changes to the modernised regime for stamp duty announced in Budget 2002, including:
Details Modernising stamp duty Budget 2003 confirms the details of and changes to the modernised regime for stamp duty announced in Budget 2002. The revised regime, which will apply from 1 December 2003, will have a reinforced legal basis and modern enforcement powers commensurate with other taxes. It will stop the abuse that has been pervasive in high-value commercial transactions, while reducing the burden on smaller businesses and modernising the administration of the tax for individuals. The new regime will expand a range of anti-avoidance powers to discourage the transfer of properties into companies (sometimes called special purpose vehicles) in certain circumstances. A number of changes to the group and acquisition relief clawback provisions will be introduced with immediate effect, including extending the period in which these clawbacks can be withdrawn to three years. The Government proposes further consultation on the transfer of land
into and out of a partnership by a partner, and the need for a stamp duty
charge on transfers of interests in partnerships that hold UK land. This
is in order to prevent the use of partnerships to transfer property without
incurring a stamp The modernised regime comes into force for transactions completed on
or after 1 December 2003, where those transactions relate to contracts
entered into after Royal Assent of the Finance Bill. This means that transactions
enacting contracts entered into on or before Royal Assent will broadly
always be chargeable under the existing stamp duty regime, no matter when
completed. There will be special rules for certain options made after
16 April - transactions arising from those options may be subject to modernised
stamp The modernised stamp duty regime will see the abolition of stamp duty on transactions involving property other than land, shares and interests in partnerships. This de-regulation will take many transactions out of stamp duty altogether, significantly transfers of book debts and other receivables. The vast majority of individuals buying or renting residential property will see no immediate changes under the new regime, though there will be some administrative changes (such as a redesigned form) which their solicitors or conveyancers will handle for them, as they do now. Over time, modernisation will offer new electronic ways of notifying liability and paying stamp duty, and help speed up the house-buying process. In future, and once improvements to the administration of stamp duty have been implemented, the Government is prepared to consider additional changes that differentiate between the commercial and residential markets; taking into account the economic circumstances of the two sectors, and the need to ensure fairness between taxpayers. Stamp duty on new leases Under the modernised regime, the Government also proposes to update the existing charge on the grant of new leases (known as “lease duty”) to bring it closer into line with the charge on transfers of freehold land and buildings. Legislation to achieve this will be included in the Finance Bill and the changes will have effect from 1 December, subject to further consultation. At present the charge is calculated by reference to lease length and
the average annual rent, with four different rates applying. This approach
does not properly reflect the value of the lease over time, and creates
distortions, particularly around the points where rates change. Under
the proposals, the new charge will follow modern commercial practice in
valuing the rent payable over the term of the lease at its discounted
net present value (NPV) and there will be a single rate of 1 per cent
of the NPV of rental payments, where the In addition, from 1 December 2003, VAT will be excluded from treatment
as consideration for a new lease provided the landlord has not opted to
charge VAT by the time the lease is granted. Under the current regime,
lease duty is calculated on the assumption that VAT is charged on rent,
unless the lease Threshold for non-residential property The Budget introduces a measure designed to exclude more small businesses from charge to stamp duty from 1 December 2003. The stamp duty zero rate band threshold will be significantly increased from £60,000 to £150,000 for non-residential purchases, eliminating the charge on around 18 per cent of commercial property acquisitions. The new zero rate threshold will apply to non-residential new leases where the NPV of rents is not more than £150,000, taking around 60 per cent of new commercial leases out of charge altogether. Alternative property finance arrangements Modernisation allows for fairer treatment of property purchases by individuals financed by certain types of alternative mortgage products. From 1 December 2003, and in certain circumstances before then, individuals using such products will be able to benefit from this fairer treatment, putting the stamp duty treatment of purchases financed this way on a level footing with purchases financed by conventional mortgage products. The Government believes that a range of individual consumers will benefit from increased choice in the mortgage market. Disadvantaged areas From 10 April, stamp duty will no longer have to be paid on certain nonresidential property transactions in disadvantaged areas. Regulations build on the existing exemption from stamp duty on all property in disadvantaged areas where the consideration does not exceed £150,000. The move takes forward the Government’s aim of regenerating the most deprived areas in the UK. The Inland Revenue is today publishing a Statement of Practice, SP1/2003 which sets out detailed guidance on the relief from stamp duty in disadvantaged areas. Registered Social Landlords Registered Social Landlords enter in to contracts with housing authorities to house the homeless. Budget 2003 removes the obligation on Registered Social Landlords and tenants to pay stamp duty on certain tenancy agreements. The measure will apply retrospectively to tenancy agreements entered into on or after 1st January 2000. This supports the Government’s policy on housing the homeless. Other commercial property measures The extension of capital gains tax business assets taper relief improves access to let property for unincorporated traders from 6 April 2004, thereby meeting a recommendation of the Curry Report (Policy Commission on Farming and Food). Inflexible lease terms can restrain businesses growth and expose them to undue risk. The Government is working with all parts of the industry to promote a voluntary Code of Conduct on Commercial Leases to improve the flexibility of lease terms. The effectiveness of this is being independently evaluated. Should the interim evaluation show that there has been little progress towards greater flexibility, the Government will consult later this year on possible legislative options. Tax reforms may also have a role to play in improving the efficiency and flexibility of the property investment market. The Government will discuss with the industry the appropriate tax treatment of new property derivative products. Consultation on corporation tax reform also provides an opportunity to consider the tax treatment of commercial property. The Government will explore with the industry evidence for the effectiveness of further measures to improve the efficiency and flexibility of commercial property. Notes for Editors Stamp duty measures with immediate effect This Budget confirms the details of and changes to the modernised regime for stamp duty announced in Budget 2002. A number of changes to the group and acquisition relief clawback provisions will be introduced with immediate effect. These are:
The changes will generally apply to documents executed after 14 April.
The existing rules will continue to apply where the document gives effect
to a contract made on or before 9 April, unless the document results from
the exercise of an option, an assignment, or further contract made after
9 April. Modernising stamp duty – new regime for leases Both before and after the implementation of the modernised regime:
New regime for the rental element of leases Currently, stamp duty on the rental element of new leases (often called “lease duty”) is calculated by reference to the average annual rent and charged at 1, 2, 12 or 24 per cent depending on lease length. This regime produces distortions with very steep jumps between rates for certain lease lengths. From December, the proposed charge will be based on the net present value (NPV) of all the rental payments due over the term of the lease. Using NPV recognises the time value of money – rental payments received in the future are worth less than equivalent payments received now. The new regime will discount future rents at 3.5 per cent per annum as recommended in the Treasury’s “Green Book”. Example: a ten-year lease with £10,000 rent per annum. Rental payments total £100,000 over the life of the lease, but once discounted the NPV is £83,166. Under the proposed relief for smaller leases, non-residential rental leases where the NPV of rents over the life of the lease does not exceed £150,000 will be exempt from charge. This will take around 60 per cent of all commercial leases out of charge. Examples:
Many short residential leases are already exempt from lease duty on the
rental element because very low rents, such as ground rents, are payable.
Leases of furnished property for a term of less than a year currently
attract only a £5 stamp. From December stamp duty at 0 per cent
will apply where the NPV of rents is below £60,000. This means that
a 2-year rental lease will be exempt if rent is below £31,500 each
year, a 5-year rental lease will be exempt if rent is below £13,250
each year and a rental lease of any length will Relief for disadvantaged areas The existing exemption for all property in disadvantaged areas where the consideration does not exceed £150,000 was introduced on 30 November 2001. At the time the Chancellor announced that, subject to State Aid approval, he intended to substantially increase or abolish the limit for nonresidential property. Approval was given on 21 January 2003, and takes effect from 10 April. Capital gains tax (CGT) CGT taper relief reduces the amount of CGT payable by bringing only a proportion of the gain into charge. The longer an asset has been owned before it is sold, the smaller the proportion. A more generous taper applies for business assets than other assets, and the effective rate of tax for gains on business assets for higher-rate taxpayers who have held the assets for at least two years is 10 per cent. HM Treasury Press Office Press enquiries: 020 7270 5238 Inland Revenue Press Office Press enquiries: 020 7438 6692 / 6706 / 7327 HM Customs and Excise Press Office Press enquiries: 020 7865 4775 / 5472 Government Department Internet Sites Further information and all published documents relating to the Budget
may HM Treasury - www.hm-treasury.gov.uk |
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