Against a backdrop of high inflation and low growth, the first UK Budget for 18 months sees the Chancellor of the Exchequer, Jeremy Hunt, setting out the UK Government’s vision for delivering on three of the five key priorities announced by the Prime Minister in January.   

These three key priorities are 1) halving inflation, 2) growing the economy and 3) reducing the UK’s debt burden – with the remaining two relating to the NHS and immigration.   

1. Halving inflation – October 2022 saw inflation in the UK peak at 11.1%. However, in news that will be welcome for investors into UK real estate, The Office for Budget Responsibility (OBR) is now forecasting inflation to fall to 2.9% by the end of 2023. 
2. Growing the economy – the Budget set out the government’s strategy for delivering long term sustainable growth in the UK, focusing on four key priorities of employment, education, enterprise and everywhere.  Policy announcements in these areas were focused on ensuring there is an appropriate framework to attract people who have recently left the workplace back to employment, how the UK’s educational system can facilitate this through the introduction of ‘Returnerships’ (a new offer targeted at the over 50s), ensuring the UK has an enterprise-focused economy that attracts and supports the most dynamic and productive companies and finally levelling up across the UK and spreading opportunity everywhere. 
3. Reducing the UK’s debt burden - public debt now stands at £2.5 trillion, or 98.9% of GDP, however the latest forecast from the OBR confirms the government is on track to meet its debt to GBP fiscal rale in 2027-28 with headroom of £6.5 billion and borrowing falling in every year of the forecast. 

The UK Government today announces a number of new tax policies for achieving these priorities - we have set out some highlights that may be of particular interest investors into UK real estate. 

Rate of corporation tax 

In the Spring Statement 2021, the government announced changes to corporation tax rates from 1 April 2023 onward, which were included in the Finance Act 2021 for FY22 and FY23. 

The Chancellor confirmed these changes to corporation tax rates would continue from 1 April 2024, being a main rate of corporation tax of 25% and a small profits rate of 19%. 

Capital allowances 

With the super-deduction coming to an end on 31 March 2023, the Chancellor announced a number of changes to the current capital allowances regime. 

Companies within the charge to corporation tax, incurring qualifying expenditure between 1 April 2023 and 31 March 2026 will be able to claim one of two temporary first-year allowances, being: 

• A 100% first-year allowance for main rate expenditure (full expensing); and 
• A 50% first-year allowance for special rate expenditure 

Disposals of plant or machinery for which full expensing or a first-year allowance has been claimed will be subject to immediate balancing charges, equal to 100% of the disposal value in the case of full expending and 50% of the disposal value in the case of the 50% first-year allowance. 

The temporary £1,000,000 limit for the annual investment allowance (AIA) will be made permanent with effect from 1 April 2023. This allowance is available to most businesses, covering expenditure on most plant and machinery, including second-hand assets and those acquired for leasing. It should be noted that the transition period from the temporary £1,000,000 AIA to the permanent £1,000,000 had a potential pitfall on claiming the full £1,000,000 if the accounting period straddled 31 March 2023. This pitfall will be resolved by abolishing the transition rules within the legislation. 

The first-year allowance for electric vehicle charge-points will also be extended by two years to 31 March 2025. 

Sovereign immunity from direct taxation  

The government had previously published a consultation on Sovereign Immunity in July last year. Following consideration of the responses, the government has decided that there will no changes to the current exemption and that it will continue to operate as it does now. 

Investment zones

The Chancellor confirmed that the government will establish 12 Investment Zones across the UK, each having access to £80m over 5 years. These sites are expected to be in Scotland, Wales, Northern Ireland, East Midlands, Greater Manchester, Liverpool City Region, North East, South Yorkshire, Tees Valley, West Midlands and West Yorkshire. 

These sites will benefit from a number of tax reliefs, including: 

• Stamp duty land tax (SDLT) relief for purchases of land or buildings on special tax sites in England (subject to the property being acquired for qualifying commercial purposes and used for such purposes in a control period of up to 3 years) 
• Enhanced capital allowances of 100% for qualifying plant and machinery primarily for use in a special tax site 
• Enhanced rate of structures and buildings allowance of 10% per annum for 10 years for qualifying expenditure on non-residential structures and buildings situated in special tax sites 
• Secondary Class 1 NICs relief to be available for employers on the earnings of new employees who spend 60% or more of their working time within special tax sites. This can be applied on the earnings of all new hires up to £25,000 per year for up to 3 years 

Real estate investment trusts (REITs)

As expected, the government will make several amendments via the Finance Bill which it hopes will enhance the competitiveness of the REIT regime. Specifically:  

1. The previous requirement for a REIT to own at least three properties will be removed where the REIT holds a single commercial property worth at least £20million  
2. There will be an amendment to the current rules which deem that where a property is significantly developed by the REIT and disposed of within 3 years, this will fall outside of the REIT’s property rental business 
3. There will also be an amendment to the rules for the deduction of tax from PIDs paid to partnerships – specifically, it will be possible for a PID to be paid partly gross (to the extent that it is income of partners that would be entitled to gross payment if they were to hold a direct interest in the REIT) and partly with tax withheld 

The changes in respect of the three year development rule will apply to disposals made from 1 April 2023. All other changes will apply from the Royal Assent of the Spring Finance Bill 2023.  

Changes to the Corporate Interest Restriction rules 

It was confirmed that the government will make various changes (which are largely expected to apply from 1 April 2023) to the current Corporate Interest Restriction (CIR) rules in an effort to remove “unfair outcomes” and reduce administrative burden. Some of the key announcements which we expect to be relevant to the property sector include:  

• Changes will be introduced to ensure that brought forward Income Tax losses of a Non-resident Landlord (NRL) which is now subject to Corporation Tax will not reduce tax-EBITDA (this will bring the treatment in line with Corporation Tax Losses) 
• Ensure that capitalised interest on assets which are appropriated from trading stock to investment assets is treated appropriately where the “alternative calculation” election applies 
• Allow interest allowance (non-consolidated investment) elections to be made for interests in certain transparent entities e.g. property unit trusts and limited partnerships 
• Bring the deadline for making a joint public infrastructure election in line with the deadline for individual companies  
• Ensure that where a building is under construction for use in a UK property business, this is not precluded from being a qualifying asset for the purpose of the public infrastructure rules 
• Treat certain finance costs payable by an infrastructure company as deductible to the extent that they are paid to third parties via an overseas group company  
• Clarify the scenarios where separate CIR groups may arise under the special rules for investment managers  

Genuine Diversity of Ownership (GDO) condition 

It was confirmed that form the date of Royal Ascent of the Spring Finance Bill 2023, the GDO definition will be amended in the Qualifying Asset Holding Company (QAHC), REIT and Non-Resident Chargeable Gains (NRCG) rules. In summary, and as a result of the changes, where an individual entity forms part of a wider fund arrangement, that entity can satisfy the GDO condition by reference to the arrangements as a whole (even if the individual entity would not itself satisfy the condition if looked at in isolation). 

Qualifying Asset Holding Companies rules 

There will be changes to ensure that the conditions that must be satisfied in order to qualify are more aligned to the intended scope of the regime. In summary, the amendments will –  

• Extend the existing anti-fragmentation rule 
• Confirm that a securitisation company cannot be a QAHC 
• Facilitate the entry into the QAHC regime of certain types of fund entity  
• Allow an investment fund to be treated as meeting the “diversity of ownership” condition when it is closely associated with another investment fund which meets that condition  

Note that the changes will take effect from the Royal Assent of the Spring Finance Bill 2023, 20 July 2022 and 15 March 2023, or are deemed to have always had effect.  

Other points to note 

Confirmation of commitment to legislating Pillar 2 

As announced in the Autumn Statement 2022, the government will legislate in the Spring Finance Bill 2023 to implement the globally agreed G20-OCED Pillar 2 framework in the UK. This will introduce a multi-national top-up tax and a supplementary domestic top-up tax where certain operations have an effective tax rate of less than 15%. 

Carried interest election

In the UK, carried interest is chargeable to capital gains tax (CGT) at the time it arises to an individual, making them potentially liable to tax in more than one country on the same gain. It was therefore announced that a new elective accruals basis of taxation for carried interest would be available from 6 April 2022. This will allow UK resident investment managers to accelerate their tax liabilities in order to align their timing with the position in other jurisdictions, where they may obtain double taxation relief. 

VAT: fund management review 

Following the consultation on proposed reform of the VAT rules on fund management to improve legal clarity and certainty, the government is considering the responses and continuing to discuss the proposals with interested stakeholders. The government will publish its response to the consultation in the coming months. 

Transfer pricing 

As announced on 20 July 2022, the government will introduce legislation in the Spring Finance Bill 2023 to require businesses operating in the UK which are part of a large multi-national enterprise to prepare for transfer pricing documentation in accordance with the OECD transfer pricing guidelines.  This measure will apply to accounting periods beginning on or after 1 April 2023. 

Abolition of the Office of Tax Simplification 

As announced on 23 September 2022, the government will legislate to abolish the Office of Tax Simplification. The government has previously acknowledged the need for simplification in the UK tax system, however it believes this is better achieved through mandating HMT and HMRC to focus on simplifying the tax system, rather than achieving this through an arm’s length body. 

Agricultural property relief and woodlands relief from inheritance tax 

The government will be restricting the scope of agricultural property relief and woodlands relief for inheritance tax purposes to property in the UK. The changes will take effect from 6 April 2024. 

VAT: DIY Housebuilders Scheme Digitisation Project 

The government will look to digitise the VAT DIY Housebuilders Scheme and will also extend the time limit for making claims from 3 to 6 months. 

Capital gains assessment time period 

This will close an avoidance loophole where an asset is disposed of under an unconditional contract, which will apply to contracts entered into on or after 1 April 2023. 

Relief on disposal of joint interest in land for an LLP 

This will amend the CGT roll-over relief and private residence relief to ensure that LLPs and Scottish partnerships which hold title to land are included, in respect of disposals on or after 6 April 2023. 

Consultations commenced - VAT energy saving materials relief 

The Government has today published a new call for evidence in respect of options to reform the VAT relief for the installation of energy saving materials. The consultation will close on 31 May 2023 and the aim is that it will consider the inclusion of additional technologies and the possible extension of the relief to include buildings used for a relevant charitable purpose. 

Some continued notable absences  

There continue to a number of consultations for which we continue to wait for an update. The key consultations that are relevant for the real estate sector are –   

• Further detail in respect of the review of the UK funds regime – call for input (published 26 January 2021 with responses previously shared in February 2022) – although as mentioned above, responses in respect of the VAT consultation on fund management should be published in the coming months 
• SDLT consultation on mixed property purchases and Multiple Dwellings Relief (published 30 November 2021, closed 22 February 2022)  

We will continue to monitor progress and keep you informed as and when we receive any further updates. 

Author: Jessica Patel

Partner, Real Estate & Construction, Tax

Grant Thornton UK LLP