The Budget 2016: a taxing time for property investors?

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In the Budget 2016 the Chancellor announced changes to the method of calculation and rates of Stamp Duty Land Tax for non-residential property and also a reduction in the rates of Capital Gains Tax. This WM Insight looks in more detail at those changes and the reasoning behind them.

In an announcement that may have come as a surprise to some people, with the aim of delivering tax cuts for small businesses, the Chancellor has re-aligned the method of calculating Stamp Duty Land Tax (SDLT) charged on the acquisition of non-residential properties, as well as transactions involving a mix of residential and non-residential properties. In addition, in an attempt to stimulate investment, cuts in the rates of Capital Gains Tax (CGT) have also been announced.

Changes to SDLT

From its introduction in 2003 SDLT on both residential and non-residential property acquisitions had been charged on the basis of the ‘slab’ system with the amount of tax being charged by reference to a fixed percentage of the chargeable consideration. In December 2014, SDLT on residential property changed to the ‘slice’ system whereby a different rate is applied to the portion of chargeable consideration falling within each tax band. The Budget announcement on 16 March 2016 means that the SDLT charged on non-residential property acquisitions will also be calculated by reference to the slice system. In addition to the changes in the method of calculation, the Chancellor announced changes to the rates and thresholds for SDLT. The aim of these changes is to ensure that businesses purchasing the highest value properties will make a larger contribution whilst reducing the tax burden for purchasers of less expensive properties.

From today the rates on freehold purchases and leasehold premiums will be as follows:

  • 0% for the portion of the transaction value between £0 and £150,000
  • 2% for the portion of the transaction value between £150,001 and £250,000
  • 5% for any value above £250,000.

In addition a new 2% rate for rent payable under a non-residential lease has been introduced where the net present value of that rent exceeds £5,000,000. Therefore the rates applicable to non-residential rent are now:

  • 0% for a net present value between £0 and £150,000
  • 1% for a net present value between £150,001 and £5,000,000
  • 2% for a net present value exceeding £5,000,000.

For transactions where contracts have already been exchanged but completion has not yet occurred, transitional rules will apply which will permit purchasers to choose whether to pay SDLT under the old or new rates, subject to certain exceptions.

It has been stated that as a result of these changes over 90% of non-residential property transactions will pay the same or less in SDLT with only 9% now paying more tax.

CGT changes

In an effort to create a strong enterprise and investment culture and to assist companies in accessing the capital required to grow, the Chancellor has announced cuts to CGT, reducing the 18% rate to 10% and the 28% rate to 20%. These reductions will not however apply in relation to chargeable gains accruing on the disposal of residential properties (which do not qualify for private residence relief). By retaining the higher rates for residential properties the government hopes to incentivise individuals to invest in companies over property.

The changes will be brought into effect by legislation introduced in the Finance Bill 2016 which will amend the relevant provisions of the Taxation of Chargeable Gains Act 1992. The measures will have effect for relevant gains accruing on or after 6 April 2016.