Out-Law / Your Daily Need-To-Know

Budget 2016: UK Chancellor makes major changes to commercial property tax

Out-Law News | 16 Mar 2016 | 5:05 pm | 2 min. read

Major changes are being introduced to stamp duty land tax (SDLT) on commercial property from midnight tonight, the UK chancellor announced in today's Budget speech.

SDLT on purchases of commercial property is currently charged at varying rates depending on the purchase price of property, with a single rate payable on the entire transaction. Under the new regime, SDLT will be payable at each rate on the portion of the purchase price that falls within each rate band. This move away from a 'slab' system to a new 'slice' system, mirrors changes that were introduced to the SDLT system for residential property in November 2014.

The rates of SDLT are also being amended, with the top rate increasing from 4% to 5% on the portion of the price that exceeds £250,000.

Real Estate Tax expert John Christian of Pinsent Masons, the law firm behind Out-law.com said: “The Government’s revenue raising spotlight in the property sector has switched from buy- to let to commercial property. The increase in rates on purchase price and lease premiums to 5% will catch virtually all investment acquisitions and reduce returns in investment appraisals."

Changes are also being introduced to the rates for leasehold transactions, where SDLT is already charged using a 'slice' system. From midnight tonight a new 2% rate will apply to rent paid on leases of commercial property, where the net present value (NPV) of the rent is above £5 million. The current 1% rate will continue to apply where the NPV of the rent is between £150,001 and £5 million.

For these purposes, commercial property transactions include those that involve a mixture of both residential and non-residential property. Transitional provisions will be introduced for transactions that have already exchanged contracts but not completed before midnight tonight to enable purchasers to choose which rate system to apply.

The government has calculated that all non-residential freehold and lease premium transactions worth less than £1.05 million will pay the same SDLT or less compared to the current system.     

The main objection to these changes is likely to be from commercial occupiers who face higher SDLT on new leases said Christian. The new 2% lease rate will apply to NPVs above £5m, which roughly equates to a 20 year lease at an annual starting rent of £300,000 plus VAT he said.

HM Treasury also announced changes to the proposed supplementary 3% SDLT rate on purchases of additional residential properties being introduced in April 2016. Institutional and corporate investors will not be exempt from this additional SDLT charge on purchases of multiple residential properties, HM Treasury confirmed in a response document to the consultation document published at the end of December 2015. 

The UK government had considered exempting major corporate investors from this additional charge where either, they had an existing residential property portfolio of at least 15 properties at the time of the transaction, or were purchasing 15 or more residential properties. However, today HM Treasury confirmed that the government had decided to apply the higher rates equally to all purchasers of additional residential properties.

Christian said that the absence of an institutional investor exemption from the additional SDLT rate for multiple residences is a real surprise. This was included in the original proposal and the consultation sessions and in line with the apparent desire of Government to encourage institutional investment in housing.

Significant cuts to business rates were also announced today. There will be an extension of the doubling of small business rate relief to April 2017, meaning that over 400,000 properties continue to receive 100% business rate relief. From April 2017, business rates will be cut for half of all properties and small businesses that occupy property with a rateable value of no more than £12,000 will pay no business rates. The government asserts that these changes will result in 600,000 small businesses paying no business rates at all.

The reduction of business rates for smaller businesses is welcome, but the government’s own figures show there is limited saving for medium or larger occupiers who still face significant rates burdens, as well as potentially higher SDLT on leasing new premises. said Christian.