The Property Round

July 2020 The Property Round

In This Issue

EDITORIAL Welcome to our first property sector update where we bring you the latest sector insights, news and advice.

With features from industry experts, we hope this newsletter will provide guidance and a little light to all those who are working in the industry, from landlords to construction site owners and tenants.

At the beginning of 2020, the housing market got off to a relatively Amal Shah strong start, with increasing house price growth fuelled by more certainty over Brexit following the Conservatives’ election victory. TAX DIRECTOR That was until the coronavirus hit.

The last few months have been tough, particularly for commercial landlords. Although, positive change is on the horizon. The government has released the Code of Practice to assist with the communications and negotiations between commercial landlords and tenants (see our response on page 19), The prime central London market is still a destination of choice for non-resident landlords (see page 9) and the mini-budget 2020 saw new measures announced that are targeted at helping the housing and construction sector (see page 14).

Within our own client base, it has been interesting to see the Sonal Shah innovation that is taking place, such as residential apartment blocks INTERNATIONAL TAX PARTNER incorporating hot desking areas. This will give tenants a communal space where they can work from home. Will this be the future for all residential blocks?

Should you have any feedback on our property update or would like to contribute to our next edition we would love to hear from you. Richard Kleiner

Richard Kleiner

Richard Staunton PARTNER

Plus articles from Fraser Slater, CEO of Ludgrove City of London Office Property Ltd, David Kaye, Founder of Ebury Holdings, and Martyn Green, Managing Director of Landstones 73 Cornhill, London, EC3V 3QQ +44 (0)20 7299 1400 [email protected]

GERALD EDELMAN 2 The Property Round July 2020 GERALD EDELMAN 3 The Property Round July 2020 HOW IS THE PROPERTY SECTOR PERFORMING?

AVERAGE HOUSE PRICE, UK, JANUARY 2005 TO MARCH 2020 www.geraldedelman.com

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HOW IS THE PROPERTY -5 SECTOR PERFORMING? -10 Since 23 March 2020, when the UK went into a lockdown, restrictions on -15 property viewings and moving home brought the housing market to a grinding halt. -20 Sep Mar Sep Mar Sep Mar Sep Mar Sep Mar It is difficult to predict what impact this will have HOUSE PRICES 2006 2008 2009 2011 2012 2014 2015 2017 2018 2020 long-term on the sector, but promisingly, on the 13 May, some restrictions were eased, allowing the Growth in UK house prices has slowed since sector to begin to reopen, albeit with new social 2016, primarily due to the uncertainty over the THE COMMERCIAL SECTOR Warehouses and logistics centres distancing rules and restrictions. UK’s impending exit from the EU. However, UK government data suggested that house prices were Commercial property represents a significant In contrast to the retail sector, warehouses and Since reopening, there has been a surge in activity. beginning to grow again towards the end of 2019, proportion of the overall property market, with 15% logistics centres are experenicing a surge in growth Zoopla reported an 88% spike in buyer demand in with strong growth continuing into 2020. of the market dominated by institutional investors. due to the same phenomineum. The demand and May and Rightmove claimed that website traffic The three key industries that dominate the market prices of these venues is expected to continue to had returned to pre-lockdown levels. These figures However, in March 2020, when the coronavirus hit, are: retail, warehouses and logistics centres and increase in the long-term. suggest that pent up demand from the lockdown the monthly change in house prices fell by 0.2%. This office space. is being released. However, experts warn that was followed by a further fall in April by 0.6%. April Office space this surge is likely to be temporary, with demand figures represent the biggest monthly fall in prices Retail expected to level off shortly. in two years. The demand for office space has been stable in It has long been documented that the rise of online recent years, especially in London. However, as firms Research by the Centre for Economics and Business shopping is leading to the demise of the high steet. and workers adapt to working at home and are Research (CEBR) estimates UK house prices will Cosequently, many retail stores were struggling faced with reduced revenue, it is likely companies fall by 13% by the end of 2020, driven by a lack of before the cornavirus, but now, some brands have will adopt flexible working, reducing the need for transactions, high uncertainty and falling incomes. been pushed into administration. office spaces.

As restrictions lift, the retail sector is expected to In May 2020, non-residential transactions fell by experience a surge in demand. However, this is 46.3%, when compared to the same month in 2019 UK house prices will only expected in the short-term, as consumers are (HMRC data). However, the long-term impact of the expected to continue to utilise online shops. This in coronavirus is still unknown; many businesses still fall by 13% by the end turn will have a significant effect on the demand for value the office space, especially those wanting to retail property spaces in the future. build a close team culture. We will have to watch of 2020 this space!

GERALD EDELMAN 4 The Property Round July 2020 GERALD EDELMAN 5 The Property Round July 2020 HOW IS THE PROPERTY SECTOR PERFORMING? HOW IS THE PROPERTY SECTOR PERFORMING?

QUARTERLY SALES AND RENTAL EXPECTATIONS IN COMMERCIAL PROPERTY SECTORS HISTORIC UK RESIDENTIAL PROPERTY TRANSACTIONS (2005 TO 2020) www.geraldedelman.com 80% 200,000

60% 180,000 160,000 40% 140,000 20% 120,000 100,000 0% 80,000 -20% 60,000

-40% 40,000 20,000 -60% Office 0 Industrial -80% Retail Apr05Oct05Apr06Oct06Apr07Oct07Apr08Oct08Apr09Oct09Apr10Oct10Apr11Oct11Apr12Oct12Apr13Oct13Apr14Oct14Apr15Oct15Apr16Oct16Apr17Oct17Apr18Oct18Apr19Oct19Apr20 -100% 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 Non-Seasonally Adjusted Seasonally Adjusted

ESTATE AGENTS However, there is some good news for the sector: CONSTRUCTION SECTOR As the impact of the pandemic continues to play out, a new normal is being ushered in. This could From March 2019 to April 2020, the UK estate agent 1. The easing of restrictions on house viewings Industry revenue is forecast to decline by 8.3% in affect the type of projects that will be built, such as industry generated an estimated £12.3 billion, a fall has enabled growth in transactions numbers. 2021-22 and it is feared firms will initiate redundancy less hospitality and retail projects, and instead retail in revenue of approximately 3% from 2019. Ibisworld The seasonal adjusted May 2020 transactions programmes amid market downturn. warehouses and health care buildings. We will be predicts that the coronavirus will continue to were reportedly 14.1% higher than April 2020 Currently, critical construction activity is permitted monitoring the market closely. damage industry revenue in the short term, with levels. to continue, and activity encouraged, as per revenue in 2021 forecast to drop to £10.3 billion. government instruction, contractors are required M&A Activity 2. Falling mortgage rates because of the to follow stringent ‘Site Operating Procedures’. The fall in revenue is likely to be driven by coronavirus has reduced the cost of borrowing Although, this has not prevented a marked decline The past five years has seen substantial M&A activity. the impact of the strict lockdown measures for potential homeowners and increased in activity being recorded. Since 1 January 2020, there have been 44 deals implemented during April and May, lower industry demand. in the UK, with 19 deals occurring since 23 March residential property transactions, reduced However, if, investment markets correct, and the 2020, when the UK ‘lockdown’ was imposed. This business capital expenditure on office space Whilst a decline in industry revenue is forecast for wider economy enters a recovery phase, a revival in has been driven by acquisitions by existing firms and commercial property, and low consumer the year ended April 2021, the long-term prospects the commercial construction market could come to in the market, with many real estate companies confidence. of the industry are promising. Ibisworld predicts fruition. looking to consolidate their position in the industry revenue over the five years through to market, grow their market share, and expand their Traditional estate agents are also still facing 2025-26 will increase at a compound annual growth geographical reach. challenges from cheaper online agents, who benefit rate of 6.2% to £13.9 billion. from lower costs and higher profit margins. Since 1 January 2020, there By 2026, estate have been 44 deals in the agencies market will UK, with 19 deals occurring be worth £13.9 billion since 23 March 2020 Ibisworld

GERALD EDELMAN 6 The Property Round July 2020 GERALD EDELMAN 7 The Property Round July 2020 HOW IS THE PROPERTY SECTOR PERFORMING?

Highlights in M&A activity since 1 January 2020

Date Company Lead Investor Amount THE LONDON 1 January Gallaghers FBC Manby Bowdler Undisclosed

3 January Lindon Homes Bovis Homes Group £1.075m PROPERTY MARKET

13 January King Wilkinson & Company Vickery Holman Undisclosed

14 January Planet Smart City Oltre Venture £20.6m FRASER SLATER CEO OF LUDGROVE PROPERTY LTD 20 January Trussle Goldman Sachs Growth £7.5m 0207 889 2860 [email protected] www.ludgroveproperty.com 20 January Lovelle Estate Agency Newtom Fallowell £2.0m

3 February Marriotts Commercial Barndales Undisclosed 2 March London Stone Properties Foxtons £2.2m The mainstream property market has made an impressive rebound since 31 March Wallace and Co Property Management Gilson Gray Undisclosed estate agencies re-opened on 13 May, although the extent to which this is a 17 April Foxtons Plantium Asset Management £20m sustainable trend is questionable. 5 May London Metric Property PLC Undisclosed £120m

28 May Daisy Property Seekers Undisclosed Much of the strength has come from the release of in April 2021. Secondly, enquiries from Hong Kong 9 June Dawson Wake Linley & Simpson Undisclosed pent-up demand in the aftermath of the lockdown buyers are rising, spurred-on by the urge to beat and when the Government backed furlough the Stamp Duty surcharge as well as the possible Conclusion scheme ends and redundancies are made, we “pathway to citizenship” visa-free access scheme. expect the market to soften. It is also important London as a financial centre with a remarkably large The property market is forecast to suffer in the short to appreciate how much the mainstream market amount of green space is currently a destination of term from the outbreak of the coronavirus. Social is driven by First Time Buyers and higher LTV choice for Hong Kong buyers. distancing measures and uncertainty are expected The property mortgages. 20% of homebuyers in 2019 acquired to drive down the number of transactions over the property with a deposit of 10% or less. With Banks In terms of behavioural themes, Ludgrove has next year, resulting in falling house prices and lower having withdrawn more risky loans and the stock unsurprisingly seen a material increase in Buyers industry revenue. Although it is still premature to industry will market falls having dented “The Bank of Mum looking for outside space. More Central London draw any significant inferences on the impact of the and Dad’s” equity savings, we are cautious on the Buyers are looking for houses or apartments with virus, economists believe that the property industry, mainstream property market in 2020. gardens, balconies, terraces and patios. For those and the economy as a whole, will ‘bounce back’ in ‘bounce back’ in looking further afield, there is also increased the first half of 2021. In comparison, we are sanguine on the outlook for appetite to buy in the wealthy commuter zones the first half of the Prime Central London (PCL) market. The near as opposed to the “deepest darkest countryside”. 30% real-term decline in prices since the peak in Buyers moving from London want good WiFi 2014 is comparable to peak to trough declines seen access, a range of local amenities (such as pubs, bars 2021 in the 1989-92 and 2008-09 property crashes. The and restaurants) as well as a reasonable commute six-year bear market in PCL is also not the backdrop into Central London. for a sustained fall in prices going forward as many distressed and leveraged players have already been Popular areas for buyers, which have seen prices fall purged from the market. Furthermore, Sterling by up to 40% since the market peak in 2014: weakness, high levels of equity and a significant proportion of cash buyers means there is likely to be St George’s Hill in Weybridge limited downside in this part of the market. The Crown Estate in Oxshott Parts of Cobham Two additional factors are also starting to provide impetus to the PCL market. Firstly, Ludgrove has Contact Ludgrove if you would like to seen a significant uptick in enquiries by Overseas discuss any of the above or discuss your Buyers keen to transact ahead of the introduction of a 2% stamp duty surcharge for non-resident buyers property search.

GERALD EDELMAN 8 The Property Round July 2020 GERALD EDELMAN 9 The Property Round July 2020 RESIDENTIAL PROPERTY LANDLORDS: THE SECTOR SNAPSHOT FUTURE LOOKS BRIGHT

DAVID KAYE MARTYN GREEN FOUNDER OF EBURY HOLDINGS MANAGING DIRECTOR OF LANDSTONES ESTATE AGENTS 0207 935 1474 [email protected] www.eburyholdings.com 020 7096 9476 [email protected] www.landstones.co.uk

The COVID-19 emergency has had a tremendous impact on the property market. Since restrictions have been relaxed, the lettings market has kickstarted at a However, economic forecasters agree that the disruption to residential property frenetic pace. Landstones has noticed a real buzz in the lettings market with is likely to be short term, so we can expect to start seeing an increase in activity both landlords and tenants in a highly focused period of action. relatively soon. Confidence in the sector and market sentiment lettings sector as many buyers choose a rental remain strong in a period of uncertainty and market option for one or two years while they make a Expect to see an increase of home buying at Here is a snapshot of what has happened upheaval. strategic decision as to buy or not to buy at the the beginning of 2021 as Britain returns to more so far, along with predictions. current time. normality. Tenants have higher expectations and want We have followed all the main residential quality properties. With higher stock levels than Planning permission. In response to the crisis Contact Landstones if you would like to property auctions and they are showing strong normal at this time of year, tenants are using their the Government has endeavoured to ease results. Allsop’s had an 82% success rate, with collective power to seek out the very best deals. discuss any of the above or discuss your the broken planning system by introducing buyers being a mixture of investors and owner/ Many landlords have recognised the increased property search. permitted development on unused industrial and occupiers. competition and are taking proactive steps to make commercial buildings for residential purposes and sure their properties are in top condition in order to in some cases allowing extra height on existing There wasn’t so much softening of pricing in the capitalise and secure a very good tenant. Landlords buildings. However, the devil is in the detail. More period of lockdown, but more the case of low with standout properties in the market will secure information will be revealed shortly. transaction volume. Although sellers were not good tenants for a tenancy period that suits their in abundance in June, confidence has returned particular portfolio needs best. Opportunities. Whilst these remain scant, banks and the recent stamp duty changes coupled with Confidence in the sector are still lending, in some cases at a reduced loan low interest rates are leading to a mini boom As economic uncertainty slowly moves into market to value. However unlike 2008 there is a distinct and market sentiment among investors. Despite the concern of recession recovery in the housing market, many potential lack of distressed sellers under pressure. and growing numbers of unemployment over buyers are watching with increased intensity for remain strong in a period the coming months, sales markets appear to be any signs that this should be the time to enter the holding up well. Contact David Kaye at Ebury Holdings to market. This period always spells a boom for the of uncertainty and market discuss any opportunities you may have. Economists expect interest rates to remain at the upheaval current level for years to come.

GERALD EDELMAN 10 The Property Round July 2020 GERALD EDELMAN 11 The Property Round July 2020 SPECIALIST

SURVIVING THE PROPERTY CORONAVIRUS

The government has released various support packages to support those ADVISERS working in the property sector. Here is a review of the key funding schemes Our team has over 50 years of experience still available: working with individuals and businesses in the

The Coronavirus Job Retention Scheme to-let investors, will not be eligible for this as property and construction sector. businesses must generate more than 50% of Businesses have been able to take advantage of its turnover from trading activity to be eligible. 60% of our client base comprises of entities operating within this scheme to furlough staff, with the Government However, development companies and support this industry, which means our team has the knowledge and paying up to 80% of employee salaries until the 1 services may be able to apply. The scheme is open experience to help you overcome challenges, capitalise on August, when the scheme will begin to be tapered. until 20 October 2020. opportunities and ultimately, achieve your aspirations. The scheme was closed for new entrants on 30 June. However, since 1 July, employees can now come Deferral of VAT payments We support all those working in the sector, from property back to work on a part-time basis. The scheme will developers and landlords to professionals, such as surveyors, remain open until the end of October. On 20 March 2020, HMRC announced a deferral architects and letting and estate agents. scheme for VAT for all UK businesses to help them Self Employed Income Support Scheme manage the impact of the coronavirus. The VAT We offer a one stop shop for our clients, delivering compliance deferral ended on 30 June 2020. If direct debits (audit, business strategy and direct tax advice) and beyond The scheme allows those self-employed to claim a have been cancelled please ensure that they are compliance (M&A and Deal Advisory, Asset finance and taxable grant worth 80% of their average monthly reinstated so that any payments due after 30 June specialist and indirect tax advice) support. You can expect to trading profits. Applications for the first grant are made on time. work with a dedicated team that is committed to your success. deadline must have been made on or before 13 July. Code of Practice We are founding members of XLNC, an association of There is also now a second and final grant, which independent accounting, law and management consulting allows those self-employed to apply for a taxable The government has published a code of practice practices from across the globe. grant that will cover 70% of their average monthly to help commercial landlords and tenants map out profits for three months, capped at £6,570. plans for economic recovery during the coronavirus With locations across Europe, USA, Canada, South America, Asia, Applications will open in August 2020. pandemic. The code is voluntary and encourages the Middle East and Australia, we can connect you with local tenants to continue to pay their rent in full if they knowledge to ensure any overseas property transactions are Coronavirus Business Interruption Loan are able to do so and advises that others should pay structured correctly and efficiently. Scheme what they can. See page 19 for our response.

The scheme helps SMEs access loans and other kinds of finance up to £5 million. Note that many property investment companies, including buy- City of London Office 73 Cornhill, London, EC3V 3QQ +44 (0)20 7299 1400 [email protected] GERALD EDELMAN 12 The Property Round July 2020 MINI-BUDGET 2020 REVIEW

The Government will expect that increasing activity A £1 billion investment over the next year in a Public-

in the housing sector will have a knock-on effect Sector Decarbonisation Scheme that will offer www.geraldedelman.com for associated services such as agents, retailers grants to public sector bodies, including schools and and mortgage lenders, which will also bring in hospitals, to fund both energy efficiency and low an increase in VAT revenue on these associated carbon heat upgrades. services. Short-Term Home Building Fund The problem we foresee is it could encourage people planning to buy next year to accelerate their An additional £450 million in development finance plans to take advantage of the tax break, leading will be made available to smaller firms that are to a potential property demand slump when the unable to access private finance. stamp duty holiday is over. Brownfield Housing Fund As the stamp duty holiday applies to companies as well, we expect to see investors that were waiting for £400 million will be allocated via this fund to seven MINI-BUDGET lockdown to end and take advantage of the current Mayoral Combined Authorities to bring forward land climate to expand their portfolios further over the 2020 REVIEW for development of homes in England. coming months.

AMAL SHAH Social Housing Decarbonisation Fund OTHER ‘CREATING JOBS’ MEASURES TAX DIRECTOR, GERALD EDELMAN This new fund will help social landlords improve +44(0)20 8492 5653 +44 (0)7786 241 604 [email protected] Green Homes Grant the least energy-efficient social rented homes. It will start in 2020/21 with a £50 million demonstrator project. Wednesday 8 July saw Rishi Sunak present his mini-budget, or ‘Plan for Jobs’, A £2 billion Green Homes Grant will be introduced, providing at least £2 for every £1 up to £5,000 per New legislation which was composed of three elements: supporting, protecting and creating. It household to homeowners and landlords who spend on making their residential properties more was this final element, creating jobs, that was of most interest to the property, New legislation will be introduced to make it easier energy efficient. housing and construction industries. to convert buildings for different uses, including Infrastructure investment housing, without the need for planning permission. In July 2020, the Government will launch a policy Stamp Duty Land Tax (SDLT) The cut to SDLT was not a surprise and is seen as paper setting out its plan for comprehensive £5.6 billion of accelerated infrastructure investment, a positive move by the Chancellor to boost the reforms of England’s planning system. From 8 July 2020 to 31 March 2021, there will be no housing market. As soon as the announcement was covering hospitals, schools, courts, prisons, town SDLT on the first £500,000 slice of property value, made Rightmove reported a surge in the number of centre improvements and local road maintenance. creating a maximum saving of £15,000. However, people looking for properties on their platform. the 3% additional rate will still apply to additional properties. This means that nine out of 10 people buying a main home between now and the end of March will pay The revised SDLT table for residential property is no stamp duty at all, and the average stamp duty shown below. bill will fall by £4,500. However, we have seen the market already come to life following the easing of lockdown with individuals, developers and investors Residential property % actively looking for acquisitions, which begs the question if the cut was needed. Up to £500,000 0

£500,001 – £925,000 5 ** Residential properties bought by companies etc. over £500,000: £925,001 – £1,500,000 10 15% of total consideration, subject to certain exemptions. Additional residential and all corporate residential properties Over £1,500,000 12 ** £40,000 or more – add 3% to relevant SDLT rate(s).

GERALD EDELMAN 14 The Property Round July 2020 GERALD EDELMAN 15 The Property Round July 2020 TAX NOTES FOR NON-RESIDENTS

CORPORATION TAX Where a disposal of an interest in a UK real estate

or in a property-rich company produces a gain, the www.geraldedelman.com Since 6 April 2019, Corporation Tax rather than CGT applicable tax charge will depend on the nature is charged on gains arising from disposal of UK of the vendor. Similarly, the basis of calculating property or land for all non-resident companies. This the gain also varies depending on the nature of includes direct and indirect disposals (i.e. property- the underlying UK property that was disposed. For rich entities) as defined on the opposite page. further clarity, please refer to the table below.

Direct disposal Direct disposal Indirect disposal (of Non-Resident Applicable tax of residential of residential shares in a “property- property property rich company”

Tax at 18%/28% Tax at 10%/20% Tax at 10%/20% Individuals NRCGT on gain since 6 on gain since on gain since 6 TAX NOTES FOR NON- April 2015 6 April 2019 April 2019 Tax at 28% on Tax at 20% on Tax at 20% on RESIDENTS Trustee NRCGT gain since 6 gain since 6 gain since 6 April 2015 April 2015 April 2019

SONAL SHAH Tax at 19% on Tax at 19% on Tax at 19% on Company NRCGT gain since 6 gain since 6 gain since 6 INTERNATIONAL TAX PARTNER, GERALD EDELMAN April 2015 April 2019 April 2015 +44(0)20 7299 1409 +44 (0)7775 703 015 [email protected] Note that, since 6 April 2020, non-resident landlords (NRLs) are now subject to the UK’s corporation tax regime currently at 19% on all UK rental income received. The past few months have brought significant changes to the taxation on

purchases, rentals and disposals of UK properties by non-residents. Here are OPPORTUNITY FOR NON-RESIDENT such as CGT, Inheritance Tax and possibly SDLT, the key points to be aware of. PROPERTY OWNERS all based upon the property’s value at the date of restructuring. So, the lower the value, the lower the One expected consequence of the coronavirus is the potential tax liabilities are. Given the expectation Stamp Duty Land Tax (SDLT) Please note, due to the coronavirus outbreak, HMRC almost certain, and substantial, fall in UK residential that prices will rise again soon, this could be a rare has confirmed that taxpayers will not get a late property values – probably short-term. This could but short opportunity to restructure. As of 1 April 2021, non-UK residents will face a filing penalty for any transactions completed on or create a window of opportunity for non-UK resident 2% SDLT surcharge when purchasing residential after 6 April 2020 to 1 July 2020 and reported up to 31 property owners considering de-enveloping. For further information on any of the tax July 2020. property in England and Northern Ireland. It is De-enveloping is the procedure whereby traditional changes discussed in this article, or to important to note that this surcharge will be in property-owning structures are re-organised due discuss your property portfolio, contact addition to the 3% surcharge for second homes, The disposals falling under these new rules include: to the relatively new and high taxes on offshore taking the possible top rate of SDLT for overseas companies/trusts owning UK residential properties. Sonal Shah. buyers to 17%. Direct disposals – Disposals of all real estate This procedure often involves incurring taxes, located in the UK, not just residential property. Following the consultation in 2019, which included a change in the definition of a non-resident, we Indirect disposals – Disposals of assets (such expect the surcharge will apply to people who as shares in a company) which derive at least have spent fewer than 183 days in the UK in the 12 75% of their value from UK land (UK property- months ending with the date of the purchase. rich entities) and where the vendor has had a substantial interest (25% or more) at any time in Capital Gains Tax (CGT) and Non-resident the two years before the sale. Capital Gains Tax (NRCGT)

Since 6 April 2020, all disposals of UK immovable property must be reported to HMRC and a payment on account made for the CGT due, within 30 days of the date of completion.

GERALD EDELMAN 16 The Property Round July 2020 GERALD EDELMAN 17 The Property Round July 2020 CONSTRUCTION SUPPLIERS “WE SHOULD ALL GET OUT TO STOP CHARGING VAT OF THIS TOGETHER” TO CUSTOMERS RESPONSE TO THE CODE OF PRACTICE

RICHARD STAUNTON RICHARD KLEINER PARTNER, GERALD EDELMAN CEO, GERALD EDELMAN +44(0)20 7299 1400 +44 (0)7841 207 370 [email protected] +44(0)20 7299 1405 +44 (0)7768 920 220 [email protected]

From 1 March 2021, the Domestic Reverse Charge (DRC) will be implemented. High street businesses and, consequently, commercial landlords have faced an This will change the way in which building and construction service providers immense amount of pressure over the last few months. The government has will charge VAT. stepped in to help through its various support schemes, but these have not always been able to ease the challenges faced by landlords. From 1 March 2021, in most cases, VAT will not be We advise that suppliers ensure that VAT is not charged by the supplier of building or construction charged, and customers ensure that they are not Now, with the announcement of the government’s Whilst the efforts of the government are to be services but instead the customer will account for charged VAT when they receive services affected by Code of Practice to further support high street applauded, the absence of the banking community the VAT under the reverse charge mechanism. In the change. businesses and landlords, I share my views and from the discussions is stark and clearly must be effect, this means that customers will declare VAT suggested solution. included to ensure that landlord obligations to on their VAT return and, subject to the normal While HMRC may apply a ‘light touch’ to their funders are also taken into consideration in a rules, will recover that VAT as input tax on the same assessments and penalties, for errors made after I have thought for some time that the words echoed collaborative and transparent way. return. 1 March 2021 this cannot be guaranteed. We urge by Boris Johnson at the beginning of the lockdown, anyone likely to be affected to check that their “We are all in this together”, are inspiring and true. Also, it is crucial that the Code of Practice is in place Where the services are supplied to the final systems and procedures are able to meet these new But now we need an upgrade, along the lines of, for long enough to enable the high street to recover. customer, or the ‘end user’, VAT should be charged rules. “We should all get out of this together”. Meanwhile, one area that will need to be addressed in the usual way. VAT should also be charged if is to what extent any underpayments, sometimes the customer is either not registered for VAT or is These are the changes as they currently referred to as deferrals, are part of the obligation registered for CIS. Employment businesses are not THE CODE OF PRACTICE stand. We will continue to monitor all to make good in the future. Sufficient time will affected by the change. updates from the government. be needed to ensure that such obligations can be The government has worked with businesses and afforded (and funded) out of future profits when The DRC was set to be implemented in 2019, then trade associations to publish a code of practice indeed those profits start to arise again. This could October 2020. However, it has been postponed once to support high street businesses through the mean that, like the CBILS arrangement, landlords again as the construction sector has been hugely coronavirus. The code encourages landlords and and banks allow for loans to be paid off over a five or impacted by the coronavirus. high street businesses to work together to protect six-year period. each other.

GERALD EDELMAN 18 The Property Round July 2020 GERALD EDELMAN 19 The Property Round July 2020 WE SHOULD ALL GET OUT OF THIS TOGETHER THE LANDLORD AND TENANT RELATIONSHIP

BANKS TO BECOME MORE INVOLVED www.geraldedelman.com At Gerald Edelman, we have been advising clients to carry out a very open and transparent negotiation with landlords, but it is clear to me that banks The code of are required to be part of that open discussion. One suggestion could be for landlords to accept practice encourages only surplus cash that is generated from tenants’ activities even though this would be less than the landlords and high full rent charge. street businesses to For this to succeed, banks would need to be supportive of their landlord clients to accept the work together to same flow of funds, which may well be lower than the agreed repayment and interest obligations protect each other behind such loan agreements.

It is also important that it is not only the high street that needs support in terms of the retail unit but also hotels and other similar establishments, including accommodation for students and others where there is a tenant, landlord and bank triangular relationship.

THE LANDLORD AND TENANT Not just in the literal sense, but also to perhaps RELATIONSHIP offset marketing costs. I can see a situation where consumers will go to a traditional shop, and whilst Following the lockdown caused by the coronavirus, they will be able to touch and even try on the the landlord and tenant relationship has certainly merchandise, the ordering and purchase will be changed. In many respects, it has become quite done online (perhaps from within the shop). prickly due to many tenants unable, or in some cases refusing, to pay their rent demands. To Clearly, tenants in the retail space would not want support tenants, some landlords have been to enter into a turnover lease where the bulk of their pragmatic and agreed rent free periods of between sales are actually online. Therefore, it may well be, as three and six months. Sometimes with the grant predicted by many commentators, that in an effort of an additional reversionary lease to be tagged to reach an economic equilibrium between landlord to the end of the existing lease. However, other and tenants, that landlords will end up with an landlords have not had the means to be quite so equity stake in many of their tenants’ businesses. In accommodating. this way, landlords would be much more supportive of the changing methodology behind how the The turnover lease retailer’s business operates and unperturbed as to whether turnover is affected online or otherwise. Many commentators have predicted that the turnover lease may well become something of a If this new state of affairs is the future, a partnership standard going forward. with private equity may also be necessary in order for landlords to have a clear exit strategy around My view is that shopping habits have changed and how they can realise their equity stake. will continue to change. Whilst it may be the case that retailers will still want to have a high street presence, this could well be as a “shop window”.

GERALD EDELMAN 20 The Property Round July 2020 GERALD EDELMAN 21 The Property Round July 2020 HOW WE SUPPORTED ONE PROPERTY INVESTOR TO REDUCE THEIR TAX EXPOSURE

Restructuring the property portfolio and Finally, the team considered commercial rates, managing residency multiple dwellings relief and linked transactions to www.geraldedelman.com reduce the client’s SDLT liability. The team considered the residency position and advised on the best time for the client to move Result abroad, in addition to helping manage ties to the UK to ensure the client complied with the Statutory Through better management of the client’s Residence Test. The team also liaised with valuers, assets, the client reduced her SDLT liability by half, solicitors and international advisors to prepare the eliminated her CGT liability and has started to property portfolio and ensure a smooth transition. reduce her IHT liability through ‘taper relief’.

Next, the team advised that the client should gift If you would like to have a discussion on some properties to her children and set up asset potential tax strategies to maximise the tax protection for their associated companies. Gifting efficiencies of your portfolio, contact Amal CASE STUDY properties as a non-resident meant that the client received a tax free based cost to April 2015 values, Shah. HOW WE SUPPORTED ONE mitigating exposure to CGT on transfer. PROPERTY INVESTOR TO REDUCE THEIR TAX EXPOSURE

AMAL SHAH Through better management TAX DIRECTOR, GERALD EDELMAN of the client’s assets, the client +44(0)20 8492 5653 +44 (0)7786 241 604 [email protected] reduced her SDLT liability by A client of ours inherited a large property portfolio. For many years, she half, eliminated her CGT managed her own tax affairs, but began to consider how to better manage her portfolio and reduce her exposure to Inheritance Tax (IHT) after she decided liability and has started to to move abroad. reduce her IHT liability through

Challenge How we supported our client ‘taper relief’

The client’s portfolio was worth upwards of £10 Led by Amal Shah, our tax team created a proposal million and with the structuring she had in place at with various options for the client, which allowed that time, beneficiaries would have been liable to her to identify the most suitable choice for her pay 40% IHT on death. family, including:

Our challenge was to reduce her exposure to Incorporation relief IHT and find a solution that suited her family Putting the properties into trusts requirements, whilst being mindful of the income tax, Capital Gains Tax (CGT) and Stamp Duty Land Becoming a non-UK resident Tax (SDLT) implications on any planning. Selling or gifting the properties

Transferring the properties into her pension

Our client was already planning a move abroad, which meant becoming a non-UK resident was the best and most fitting option.

GERALD EDELMAN 22 The Property Round July 2020 GERALD EDELMAN 23 The Property Round July 2020 City of London Office 73 Cornhill, London, EC3V 3QQ +44 (0)20 7299 1400 [email protected]