The pre-Brexit Budget: Hammond hands relief to property market

Nick Stobbs
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In the last Budget before Brexit, the elephant in the room remained silent, even as the Chancellor set aside yet more money to pay for ongoing negotiations. In generally upbeat mood, Hammond referred to the opportunity for increased generosity in the next Budget, which he referred to as “Spreadsheet Phil’s double-deal dividend”.

Whether that will transpire after 29 March 2019 is uncertain, but this Budget certainly provided welcome investment stimulus for certain areas of the economy. In this commentary, we highlight the main areas of interest for the property and construction sector.

[Speed Read: a 450-word summary available at the end of this article]

Increase to Annual Investment Allowance (AIA)

The Annual Investment Allowance (AIA) for qualifying expenditure incurred on plant and machinery will be temporarily increased from £200,000 to £1,000,000 with effect from 1 January 2019. Responding to demands from industry, this increased amount was greater than expected and will apply for two years until 31 December 2020 with a specific aim of stimulating investment during the Brexit transition phase. The government has estimated that the cost of the temporary increase to the AIA will be £1.24bn to the end of the tax year 2020/21.

This temporary increase will benefit all businesses that generally invest annually above the current AIA level. Property investors will be able to utilise the increased AIA against the cost of the inherent plant and machinery within their property acquisitions, developments and refurbishments. For a corporate taxpayer, this will represent an additional tax saving of £142,880 in the year of expenditure, with the tax saving for income taxpayers being as high as £345,600 assuming the full utilisation of the increased AIA.

New Structures and Building Allowance (SBA)

One of the bigger surprises buried in the documentation was the announcement of a new capital allowances relief in the form of a Structures and Building Allowance (SBA) for expenditure incurred on non-residential buildings and structures.

The SBA will apply to new capital expenditure contracted on or after 29 October 2018. Allowances will be claimed at 2% per annum on a straight-line basis over a 50 year period.

This relief will also be available when expenditure is incurred on the acquisition of a property that qualifies for SBA. The new owner will claim 2% per annum based on original construction cost and there will be no balancing allowances or charges on the seller. There will, however, be an interaction between SBA and CGT which will mean that the CGT base cost is adjusted for the allowances claimed.

At face value, the new allowance appears generous and, unlike historic buildings allowances, covers a much broader range of property types and structures, with only dwellings excluded.

There are a number of uncertainties that we believe need to be ironed out before the legislation is enacted, including the definition of ‘dwelling’ for the purposes of SBA; and we will be seeking to clarify these issues with HMRC and HMT via correspondence and meetings before the deadline for feedback on 31 January 2019.

Reduction to Special Rate Pool (SRP)

The special rate pool for expenditure incurred on plant and machinery which are integral features of a building, such as most of the mechanical and electrical installations, as well as long life assets, solar PV and thermal insulation of buildings, will be reduced from 8% to 6% on a writing-down basis from April 2019. The slowing effect on benefit will help the Chancellor pay for the SBA and should be more than compensated for by the new allowance in most cases.

In fact, the government estimate that the additional revenue raised by the reduction to the special rate pool will be £1.63bn by the end of the tax year 2023/24 whereas the cost of the SBA is estimated as £1.905bn over the same period.

Abolition of Enhanced Capital Allowances (ECAs)

The Government has decided that the rules for Enhanced Capital Allowances (ECA) on energy and water-saving plant and machinery technologies are too complicated and the first year allowance will be abolished with effect from April 2020. This will also result in the end of the payable tax credit for ECA qualifying expenditure incurred by a loss-making company.

The savings, estimated to be £315m by the end of the 2023/24 tax year, will be reinvested in an Industrial Energy Transformation Fund, which the government believes will support significant energy users to cut their energy bills and transition UK industry to a low carbon future.

In contrast, the ECA available for expenditure incurred on electric vehicle charging points will be extended for a further four years to April 2023.

Costs of altering land for installing plant

The government will legislate in the Finance Bill 2019 to clarify the exclusions from plant and machinery allowances for buildings, structures and alterations to land. Sections 21 and 22 of the Capital Allowances Act 2001 will be amended to make it clear that any reference to “plant” in List C of section 23 does not apply to assets listed in sections 21 and 22.

This measure is obviously in direct response to the decision by the First-tier Tribunal in SSE Generation Limited v the commissioners for Her Majesty’s Revenue and Customs(2018), where substantial expenditure incurred on works involving the alteration of land for an underground hydroelectric power scheme was held to qualify as plant.

It was held that even though certain items fell within section 22, the items could nevertheless qualify as plant because section 22 does not define plant but only excludes certain items from qualifying for an allowance.

Therefore, an item covered by section 22 could still be plant and if alterations to land were made solely to install such an item then the cost of the alterations to land would qualify because such expenditure is included in List C of section 23.

On the face of it, the logic of the decision was quite difficult to follow but, whether HMRC decides to appeal the decision or not, no similar decision will be possible in the future.

Research and Development (R&D)

As part of the National Productivity Investment Fund, established in 2016, the government expects to spend £7.09bn funding research and development (R&D) from the 2017/18 tax year up to the end of the 2021/22 tax year. This Budget included an announcement of an additional £1.6bn for R&D funding.

At the same time, the government is concerned about abuse of R&D tax relief for small and medium-sized enterprises (SMEs). Apparently, HMRC has identified and prevented fraudulent claims for payable R&D tax credit amounting to £300m. As a result, it was announced in the Budget that from 1 April 2020, the amount of payable R&D tax credit will be restricted to three times the company's total PAYE and NICs liability for that year. There will be consultation on this proposed change.

Other measures affecting property and construction

In a boost to house builders, the Chancellor confirmed that first-time buyer’s relief from Stamp Duty Land Tax (SDLT) will be extended to include all purchasers of qualifying shared ownership property.

The first £300,000 of an initial share purchased will not be liable to SDLT. Relief is not available on any further shares purchased or to purchasers of properties valued over £500,000.

This measure will apply to relevant transactions with an effective date on or after 29 October 2018.

It will also be backdated to 22 November 2017 to cover earlier transactions that would now qualify for this relief, which will allow those first-time buyers to amend their SDLT returns and claim a refund.

Also of interest to house builders will be the announcement that from April 2021 a new Help to Buy Equity Loan scheme will run for two years solely for first-time buyers and for houses with a market value up to new regional property price caps. These caps will be set at 1.5 times the current forecast regional average first-time buyer price, up to a maximum of £600,000 in London.

As previously announced, the charge to CGT will be extended to non-resident owners of non-residential property for disposals from 6 April 2019. It is to be hoped that this measure will be better signposted for non-resident taxpayers than was the case for the introduction in April 2015 of CGT for non-resident owners of residential property in the UK, especially the requirements concerning notifications via returns.

Non-resident owners of UK commercial property will also be subject to the various capital allowances changes mentioned above, which includes the interaction between CGT and SBA.

Also confirmed was the previously announced intention to charge the UK property income of non-resident companies to corporation tax rather than income tax from 6 April 2020. This will also mean that non-resident companies will be subject to the corporate interest restriction rules as well as the amended rules for relief in respect of carry-forward losses.

The government has decided that the Private Finance Initiative (PFI) model is too inflexible and overly complex, as well as being too expensive. The PFI model will no longer be used for new projects and the Department of Health and Social Care will improve the management of existing PFI contracts. Existing contracts will be honoured.

However, the government remain committed to the use of the private sector to protect an existing pipeline of projects, as there is insufficient exchequer funding in isolation.

In a possible precursor to a further reduction to the attractiveness of UK residential property to non-resident investors, the government announced a consultation on an SDLT surcharge of 1% for non-residents buying residential property in England and Northern Ireland. The consultation will be published in January 2019.

Speed read summary

Following the summer publication of the Office of Tax Simplification’s (OTS) report on capital allowances, change to the regime was expected, but not necessarily so quickly.

There had been many calls to review the AIA in the run-up to the Budget; and whilst the increase was greater than expected, the two-year window clearly shows that the Chancellor is keen to see businesses continuing to invest during the Brexit transition period. The Chancellor’sproposals around business rates certainly underpin this view for SMEs.

The introduction of SBA will be welcomed by the industry for helping to relieve the burden of investment in buildings and infrastructure assets through the taxation system; and whilst the measure is far-reaching, the implementation and detail will naturally be subject to further scrutiny and discussion with both HMT and HMRC.

When the special rate pool was first introduced in 2008, capturing integral features and long life assets, the (then) annual writing down allowance was set at 10% per annum to bring the tax treatment of those plant and machinery assets “into line with economic depreciation”. The rate was reduced to 8% in 2012, and will drop to 6% as a result of this Budget “to more closely match average accounts depreciation”. Clearly, assets are not built to last anymore.

The withdrawal of ECA for energy and water-saving technologies could be seen as disappointing on first reading; however, OTS reported that taxpayers found the scheme overly complex and a more effective incentive will be required to encourage investment in energy and water efficiency. It will be interesting to see how the government intends to encourage the property industry to reduce carbon emissions as owners and occupiers tackle the challenge of Minimum Energy Efficiency Standards (MEES) that took effect in April this year.

Elsewhere, the government continues to try to stimulate housebuilding but faces the dichotomy of encouraging first- time buyers whilst cooling the impact of non-resident ownership.

The Chancellor’s pledge to abolish the use of PFI and PF2contracts for future procurement will provide a challenge given his prior acknowledgement that “half of the UK’s £600bn infrastructure pipeline will be built and financed by the private sector”. The Spending Review next spring will clearly make for interesting viewing.

To round off this Budget summary, it should be mentioned that the Chancellor made it quite clear that if there is a “no-deal” or a “hard” Brexit next year, then it will be necessary to upgrade next year’s Spring Statement to an emergency Budget to deal with the consequences. This appears to be the Chancellor’s “sword of Damocles”, despite the generally upbeat tone of this Budget. Hopefully, it will be more like a calendar year before we are reviewing the measures announced within the next Budget.

About Nick Stobbs


I specialise in fiscal incentives and business valuations, with a particular focus on advising entrepreneurs, SMEs, high net worth (HNW) individuals and private investors in the UK (see Experience).

Alongside my professional career in tax, I am a semi-professional FA referee, which has allowed me to develop three main transferable skills: concentration, discipline and excellent communication. I am passionate about FinTech, a keen supporter of Liverpool FC, and enjoy watching the England rugby and cricket teams both at home and away.


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