The March 2011 budget was declared to be fiscally neutral by the chancellor, and the general consensus is that there were no large shocks relating to property tax reform. However, whilst the surprises may have been lacking, those changes and consultations which were announced have been generally well received by the sector.

The government took the opportunity to re-enforce its position regarding SDLT avoidance, and announced that legislation is to be passed to address three significant types of SDLT avoidance scheme. Announcements were also made in relation to Real Estate Investment Trusts and the administration of planning applications and processing - although such changes will not take effect until 2012 at the earliest, these reforms could become both significant and wide-ranging.

Stamp Duty Land Tax ("SDLT")

The main changes to SDLT are as follows:

  • Where portfolios of residential properties are being purchased, new reforms will allow the purchaser to use a rate of SDLT applicable on the mean, rather than aggregate, value of the properties in the portfolio (subject to a 1% minimum rate). This is intended to encourage and facilitate larger-scale residential property acquisitions, and will come into force once the Finance Bill receives Royal Assent (expected to be circa June 2011);
  • Following previous announcements made by both the current and previous governments, it has now been formally confirmed that the most significant areas of SDLT avoidance are to be closed down through new legislation. The three areas in which changes will be effected are; the rules relating to subsales, rules relating to exchanges of land, and the Alternative Finance provisions, all of which will be restricted with effect from 24 March 2011. According to the published budgetary figures, the government anticipates that these changes will produce £30m of extra tax revenue in the tax year after introduction, rising to £50m in the 2015-16 tax year; and
  • Whilst not strictly a 2011 budgetary provision, it is also worth noting that the previously announced 5% SDLT rate, effective on residential properties over £1m, will come into effect on 6 April 2011.

Real Estate Investment Trusts ("REITs")

The government has also announced that it will be consulting on the position of REITs, in an effort to encourage investment and remove difficulties for companies entering the REIT regime. Whilst the changes to the regime are subject to this consultation and provisionally scheduled for introduction in 2012, there is potential for significant impact upon implementation. Areas to be addressed in the consultation include:

  • Abolishing the 2% conversion charge, payable by property companies upon conversion into a REIT
  • Introducing a diverse ownership rule, which will allow institutional investors to satisfy the 'non-close company' REIT requirement, and set up UK REITs;
  • Relaxing the requirement for a UK REIT to be listed on a recognised stock exchange (the definition of which does not include the Alternative Investment Market ("AIM")). This should encourage entry into the REIT system for many companies, particularly start-up property investment companies, as entry onto AIM is ordinarily cheaper than onto the main market;
  • A fixed grace period for new REITs to meet the 'non-close company' requirement, which will enable start-up UK REITs to build a sufficient reputation in order to attract shareholders; and
  • Allowing cash to be a "good" asset, in order to allow UK REITs to make investment decisions on a commercial basis, rather than an obligation to invest.

Changes to the Planning System

The budget also contained some proposed reforms to the planning system, with the intention of reducing bureaucracy and expediting planning applications. A number of measures will be introduced to streamline the planning process, including:

  • A 12 month guarantee for the processing of planning applications (including appeals);
  • Consultation on proposals to make conversion of premises (from commercial to residential) easier; and
  • Introducing a new presumption in favour of sustainable development, to increase development volume.

As highlighted above, many of the areas highlighted by the chancellor for change, including REITs and planning reform, are subject to consultation periods and a 2012 implementation target. Therefore, Charles Russell will continue to monitor all property law consultations, and will provide further update and analysis as and when further developments occur.

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