This article appeared in the Yorkshire Post on Thursday 3rd January 2008.

Taxing Times: Ahead for Property Sector

Jeremy Oliver Property Services Director

Jeremy Oliver asks if the proposed tax changes could provide some liquidity in the Property Sector to compensate for the “credit crunch”.

At first sight the current outlook for property developers and investors may seem gloomy.   The credit crunch crisis and related loss of confidence in the financial markets is having a knock on effect on the regions developers and investors.   Sweeping changes to the capital gains tax regime for property owners planned to come in from April 2008, which amongst other changes will abolish indexation allowances on properties purchased before 1998 is also on the agenda.

The outlook for 2008 is taking up many column inches with some commentators predicting a major correction in the property markets.  Commercial property yields at current low levels do not seem sustainable even with the recent reduction in bank base rates.  We consider there will be a realignment in 2008 as a result of the current slow down however we expect new stock will come onto the market which will affect the supply/demand balance as owners seek to optimise their positions in view of the current climate and proposed taxation changes.

As always, within the property sector, there are opportunities and threats in time of turmoil and winners and losers from changes in the taxation environment.  There are still opportunities with the right advice to maximise wealth and minimise tax associated with property ownership.

The fallout from the USA sub-prime mortgage market has made the UK property funders review their current lending criteria with regard to both development finance and funding for investment.  The tightening of funding criteria is impacting on the ability of investors and occupiers to raise the necessary funds to secure real estate.  This has a knock on effect on our region’s developers who are faced with a slow down in the rate of completions with the resulting cashflow implications this creates.  Developers need to review their facilities to meet their current and on-going cashflow requirements, whilst some of the current uncertainties in the economy exist.  There are a number of funders who, in the right circumstances, are prepared to lend up to 100% of the costs associated with a project to take pressure of developers’ working capital requirements during the slow down. 

The flip side of the coin is that there are developers and investors with liquid resources who are able to take advantage of short term market fluctuations to secure sites and property acquisitions on more favourable terms than they have historically been able to. We work with a number of developers who have secure credit lines and sufficient financial resources to move quickly in the right circumstances.  These companies are also interested in joint venture opportunities to share the risks and rewards associated with property opportunities.

In the recent pre-budget report The Chancellor announced sweeping changes to the capital gains tax regime, which applies to property owners.  The current regime which will cease in April 2008 has different rules depending on the type of property asset owned which gives rise to taxation liabilities between 10% and 40%.  This is going to be replaced with one regime which will apply capital gains tax at the rate of 18%.   Current owners who own Business property and are entitled to full Business Asset Taper Relief (BATR), may have a capital gains tax exposure at the rate of 10% and steps can be taken now to crystallise these gains at the current low rate before it rises to 18% next April.  We are currently helping a number of our clients restructure their property holdings to take advantage of the current more generous regime for business property before the changes come in.

For properties acquired by individuals prior to April 1998 the proposed abolition of indexation allowances is a key concern.   Between 1982 and 1998 the indexation allowance effectively doubled the base cost of assets owed pre 1982.  As an example for an asset which was worth £100,000 in March 1982 under the current rules the indexed base cost for calculating the tax liability would be £204,700.  Under the proposals the uplift of £104,700 will be subject to tax after April 2008, giving an extra tax liability of £18,846.

For property owners who currently own non-business property, or are unsure as to whether the property they own is business property or not, then they should be taking advice with regard to any imminent disposals which they are contemplating.   Anyone contemplating a disposal of non-business property in the near future should consider a structure which will allow the gain to be taxed in the new regime at the lower rate of 18% rather than 40%.  For property acquired before 1998 there may be a trade off against the loss of indexation allowance.  Advice should be sought.  It is still possible under certain circumstances for gains and income from property to be completely outside the scope of UK taxation for example in a self administered pension scheme, which should not be overlooked. 

Whilst these are interesting and challenging times for the property sector we consider that the taxation proposals will influence activity levels with some stock which has previously been unavailable coming onto the market as owners seek to crystallise their indexation allowances before they disappear, or take advantage of capital gains tax at the rate of 10%.  After April we may see an influx of residential property coming onto the market as residential landlords take advantage of the more favourable taxation regime applying to them.  A reduction in taxation liabilities may persuade residential landlords to accept lower prices for their properties and still be better off and this may encourage first time buyers and other new entrants into the residential property market.

If you are interested in discussing any of the issues in this article please contact Jeremy Oliver at Garbutt & Elliott on 01904 464100 or joliver@garbutt-elliott.co.uk