Monday 05.12.2005

Response to Pre Budget Report

Chancellor Gordon Brown announced in today's pre-Budget report that Real-Estate Investment Trusts (REITs) would, at last, feature in next year's Finance Bill, which will come out after the next Budget.

But will this open the floodgates for investment in property in the UK?

"It may very well bring about a shake-up in the structure of a number of listed property companies," says Tony Hennessy, head of tax at law firm Halliwells.

"However, it is unlikely to alter the structure of the large number of private syndicated property investment opportunities currently available."

Details of the tax proposals will be published by Revenue and Customs before the end of 2005 and will include the following key features:

- The regime will be open to companies, resident in the UK, that are publicly listed on a recognised stock exchange.

- Companies or groups that meet the UK REIT eligibility criteria will not pay Corporation Tax on rental income or chargeable gains.

- A requirement to distribute at least 95% of net taxable profits on rental income to investors, who will then pay tax at their marginal rate.

Tony Hennessy believes the Government has "missed a trick" by insisting that companies are publicly listed.

"This is an example of the Government making a gesture to the property sector but not going as far as it could, or should.

"While this may very well be of benefit to publicly quoted property companies and their (particularly non-tax paying) investors, many property collective investment schemes will not necessarily wish to go to the trouble (and expense) of seeking such a listing."

Continues Tony:

"Strangely, this is an example of the Government favouring big business over small.

"There are already a number of competing products on the market that do not rely on a company being publicly listed."

Brown also unveiled plans to consult on the introduction of a planning gain supplement, a tax on the capital gains from the development of land.

The announcement will allay some fears, however, that the chancellor would impose the tax without consultation. The consultation means the tax is unlikely to be introduced for several years.

"Taxing the 'development gains' arising out of the enhanced value of land from the obtaining of planning permission will have one of two effects," says Tony.

"It will either result in a rush of planning applications over the next couple of years which will put pressure on local authority planning departments or it will result in a number of developers putting their plans on hold for the forseeable future."

Adds Tony:

"Some involved in the property sector may have long enough memories to recall Development Land Tax ("DLT") abolished over twenty years ago. This was a highly complex tax which, for those, who could not engineer tax avoidance acted as a positive disincentive for property development."

He concludes:

"One bonus for the property sector is that the pre-Budget report appears to be silent on Stamp Duty Land Tax. Accordingly, the existing opportunities for managing its impact would still appear to be available."

About Halliwells

Halliwells is one of the UK's leading multi-disciplinary law firms with over 1000 people and offices in Manchester, Liverpool, London and Sheffield



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