Autumn Budget 2021 - Real Estate

The Real Estate team looks closely at what direct effects the Autumn Budget will have on Residential Property Developers Tax and Real Estate Investment Trusts.

Residential Property Developers Tax

This tax is ostensibly part of the Government’s targeted approach to deal with unsafe cladding following the tragic Grenfell Tower fire.

The Treasury response to the latest consultation on the tax was published today. Although this has been trailed for some time now (with draft legislation having been published last month following previous consultations), the rate was confirmed at 4% of adjusted profits exceeding £25m per year across a group.

Conspicuous by its absence was any time limit to the measure; when the Government first announced the measure, it had been at pains to note that the measure was specifically targeted at raising £2bn over 10 years. This is also mentioned in the response to the consultation published today, however, the document notes that a “sunset provision” to time limit the application of the tax was considered inappropriate. Developers will have to wait and see what happens when the £2bn has finally been raised…

Real Estate Investment Trusts (“REITs”)

Following the consultations into the tax treatment of Asset Holding Companies, a number of issues in relation to the REIT regime were highlighted in responses. As a result, changes to the regime are to be introduced to reduce constraints and administrative burdens. The key changes are:

  • Allow more entities to fall within the regime by removing the requirement for shares to be admitted to trading on a recognised stock exchange where institutional investors hold at least 70% of the share capital.
  • Change the definition for overseas equivalents of UK REITs so that it is only the overseas entity itself that needs to meet the equivalence test (not the overseas regime).
  • Removal of the ‘holders of excessive rights’ charge where property income distributions are paid to investors entitled to gross payment.
  • The rules requiring at least 75% of a REIT’s profits and assets to relate to property rental business (the “balance of business test”) will be amended to:
    • disregard non-rental profits arising because a REIT has to comply with certain planning obligations, and
    • to ensure the items currently specified as excluded from the profits part of the test are disregarded in all parts of the test.
    • Introduction of a new simplified balance of business test. The new test will provide that where group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not have to prepare the additional statements.

The removal of the requirement for shares to be admitted to trading (and the burdens that imposes), could result in more entities electing into the rules.