Real estate avoids crackdown in UK emergency budget

Real estate investors in the UK breathed a sigh of relief today as the country’s coalition government largely bypassed the industry as it looked for revenue-generating measures to pay down the budget deficit.

Despite increasing capital gains tax from 18 percent to 28 percent as from midnight tonight, the Conservative/Liberal Democrat government introduced few measures that directly affected the British property market.

However, the Chancellor George Osbourne opened the door for reform of the UK’s stamp duty land tax saying the government would examine “whether further changes to the rules on stamp duty land tax on high value property transactions are needed to prevent avoidance in this area”.

Stamp duty land tax (SDLT) is payable on the purchase or transfer of commercial and residential property or land in the UK above a certain threshold.

There is the general threat out there. We will just have to see what the government means by this examination. David Saleh, partner at Clifford Chance and head of the London-based law firm’s real estate tax group

There had been widespread fears the government could extend the tax to cover the sale of corporations owing property or land, as well as the transfer of shares involving such companies, after it appeared in the Liberal Democrats’ election manifesto.

Such a move could capture many listed real estate companies as well as private equity real estate firms. Limited partnership structures already pay SDLT, however private equity firms often employ a variety of corporate “wrapper” vehicles to avoid the tax.

David Saleh, partner at Clifford Chance and head of the London-based law firm’s real estate tax group, said the review of SDLT raised numerous questions for real estate investors. “We don’t know at this stage whether this statement differentiates between residential and commercial real estate; whether the review would target UK residents or non-UK residents or whether it’s a focus on corporate vehicles or individuals,” he said.

Although any extension of SDLT to cover property-owning corporations would be “extremely complicated and difficult” to implement in practice, Saleh warned: “There is the general threat out there. We will just have to see what the government means by this examination.”

The UK government’s tax-collection agency, Her Majesty’s Revenue and Customs (HMRC), though was already “actively” challenging SDLT avoidance measures through the British courts, according to Saleh.

The Conservative/Liberal Democrat coalition also maintained a previously-announced hike in stamp duty for residential properties worth more than £1 million, introduced by the former Labour government in March. From April 2011, the top rate of stamp duty will rise to 5 percent from 4 percent.