Closing the Books November 2021 – The UK’s Autumn Budget 2021: Implications for Real Estate | Cadwalader, Wickersham & Taft LLP

As we near the end of the year, let’s take a moment to review some of the tax changes announced in the fall budget, some of which will be implemented in the upcoming tax year in April 2022 think are of the greatest interest to Cadwalader’s real estate clients. For discussions about other tax measures, readers can also refer to our memo published on October 28, 2021.

New tax system for asset holding companies

As part of the broader government review of the UK fund regime to strengthen the UK’s competitiveness as an asset management location, the government will legislate to introduce a tailored tax regime for Qualifying Asset Holding Companies (“QAHC”). This regime is aimed at UK resident intermediate holding companies acting between investors and underlying assets. Taxation in the new regime will be based on existing UK tax rules, but with some targeted changes to address specific tax barriers that are believed to have deterred the market from setting up asset holding companies in the UK.

The government held two consultations on this regime and published its response to the second phase of consultation on July 20, 2021, along with some of the draft laws necessary for the new regime to work. The bill prescribes a robust set of eligibility criteria to limit access to the benefits of the new regime only to intended users, and requires a QAHC to be at least 70 percent owned by variously owned funds or certain institutional investors and investing activities without more than insignificant secondary trade. In addition, the benefits of the proposed scheme apply only to the QAHC’s investment activity in relation to certain asset classes, such as

According to the draft law and accompanying policy paper, these benefits include certain changes to corporate tax rules (e.g. UK property and exempt profits from a QAHC’s non-UK real estate business if those profits are taxable in a non-UK jurisdiction), withholding tax rules (through exemption from withholding tax in relation to interest on securities issued by investors in this QAHC) and stamp duty rules (by exempting the repurchase of stocks and debt by a QAHC that previously issued them from stamp duty and stamp duty reserve).

The budget confirms that this regulation is to be enshrined in the Finance Act 2021-22 and refers to the two consultations and the draft law. The strategy paper in the budget sets out other benefits that a QAHC will enjoy under the regime (in addition to those mentioned in the strategy paper published on July 20, 2021). These additional benefits include the exemption of related profits arising from loan relationships and derivative contracts and the ability to treat certain amounts paid by a QAHC to certain “non-resident” residents as a source outside the UK, if such persons claim the remittance base for these purposes UK income tax and capital gains tax.

The publications accompanying the autumn budget do not contain completely revised draft laws for the QAHC regime. It therefore remains to be seen what further legislative changes will be made in relation to the items still under consideration by the government in accordance with its response to the second stage of the consultation in July 2021 and the additional changes in the budget. With regard to the VAT treatment of fund management fees, the government announced in the autumn budget that it would discuss options to simplify the VAT treatment of fund management fees, with a critical remainder of the regulation being reached before a successful introduction.

Real Estate Investment Trusts (“REITs”)

The reactions to the consultation of the asset holding company regarding investments in real estate led to proposals for changes to the REIT regime. Effective April 1, 2022, the government announced that it would change the rules governing REITs, including easing or removing some of the conditions that determine whether a company is a UK REIT.

The proposed changes remove, among other things, the requirement that REIT shares be admitted to trading on a recognized stock exchange where institutional investors hold at least 70 percent of the registered capital of the REIT, and the “excessive rights holder” fee will be removed when property income distributions are made paid to gross payable investors and introduce a new simplified “balance of business” test so a REIT may not be required to produce the additional declarations required if the full test is otherwise passed.

These changes will undoubtedly be welcomed by the real estate investment sector and will ease certain constraints and administrative burdens, making the UK REIT system even more attractive.

Property developer tax for residential properties (“RPDT”)

The government deliberated on the political design of the new property development tax for residential property (“RPDT”) and carried out a technical consultation on the draft law in 2021. In the 2021 budget, the government confirmed the introduction of the RPDT, effective April 1, 2022, for companies or groups of companies developing UK residential real estate with an annual profit of more than £ 25 million. The government announced in the 2021 budget that the RPDT rate would be 4 percent. The £ 25 million allowance can be shared by the group between its companies.

While mortgage taxes are not a common feature of the UK tax system, the proceeds from the RPDT are intended to be used to finance the renovation of siding and therefore the RPDT is expected to be a temporary tax. However, there is no sunset clause in the bill and those surveyed noted that the expected revenues (estimated £ 2 billion over 10 years) may be insufficient.

Non-profit housing companies and property developers for rent have been excluded from the scope of the RPDT.

Residential real estate development companies and groups must carefully consider activities within the scope and any facilities that may be available (e.g., in relation to loss offsetting or group offsetting).