(More or less to the tune of "Madeira, m’dear" by Flanders and Swann)
She was young, she was pure,
She was new, she was nice,
She’d never been north of King’s Cross.
You’ll love it, I’m sure,
It is all half the price
Was the email she got from the boss
As she studied the map
And muttered “oh crap”
“I wonder if anything’s there”.
To make it look sound
We need feet on the ground
We’re sending up anyone spare
You’ll migrate like a starling
It won’t be for long I would hope
I expect they drink Carling
I’m sure you’ll be able to cope.
This is a brief newsletter, as it has only been just over a week since the previous one, but we always like to produce a brief budget summary. This edition is therefore mainly a few observations on the Budget, plus a couple of other things, and, as ever, a tenuously related historical trivia.
As usual we are not providing a comprehensive analysis, but instead picking a few items that struck us as being of interest to real estate investment managers. Apart from the announcement that the Treasury is opening up a northern campus in Darlington, what captured our attention in the Budget?
This has grabbed a lot of headlines.
For expenditure incurred from 1 April 2021 until the end of March 2023, companies can claim 130% capital allowances on qualifying plant and machinery investments.
Within Freeport tax sites (more on this below), companies can access new Enhanced Capital Allowances (ECA+) and companies, individuals and partnerships can benefit from an increased level of Structures & Buildings Allowance (SBA+) for investments until 30 September 2026. This had already been announced last year.
You can find the summary from HMT here and more detailed information here.
This is the latest step on an ongoing process for the re-introduction of Freeports in the UK. These existed up until 2012, although the current iteration goes well beyond what previously existed. Some detail was provided last year. On 10th February 2020 the government published a consultation on Freeport policy, setting out its plans to introduce at least 10 Freeports. The government published a response to the consultation on 7th October 2020. This was followed by a Freeport bidding prospectus on 16th November 2020, which included plans for the introduction of the tax reliefs to be offered. This goes into considerable detail and can be found here.
This is illustrated in the Freeport bidding prospectus with the following example plan which highlights the interaction of the customs areas, which are usual in a Freeport and the tax areas, which are not:
The Freeport bidding prospectus explains that this "shows a hypothetical Freeport bid focused around a sea port. It is demarcated with an Outer Boundary containing:
a. A primary customs site around the sea port – site a) which, in this case, is not within the tax site, so businesses inside benefit from the customs measures, but not tax measures
b. Additional “underdeveloped” land separate from the primary customs site – sites b) and c) where businesses in both sites will benefit from the tax measures
c. An additional customs subzone - site c) which is also part of a tax site so businesses inside benefit from both the customs measures and the tax measures
d. A nearby factory site – site d) which is an additional customs subzone but is not covered by the tax site, so businesses inside site d) benefit from customs measures but do not benefit from tax measures – as per site a)
e. A distant factory – site e) which is outside the Outer Boundary, so cannot be a customs subzone or part of a tax site without a special economic case for inclusion"
The Freeport bidding prospectus also explicitly outlines that local authorities will be able to borrow against future tax receipts to be generated by the increased activity, tax increment financing (TIF).
There will also be new regulatory arrangements for the Freeports, details of which are yet to be announced.
The proposals are controversial, and as many have commented go well beyond the traditional concept of a Freeport, hence the suggestion from some that they will be more like semi-autonomous charter cities. Although the detail is yet to be made available, there is plenty of scope within what has been published already to see significant distortions in the market between businesses in the Freeport and businesses outside. We will be watching this with interest.
The locations of England's eight new freeports announced in the Budget are:
- East Midlands Airport
- Felixstowe and Harwich
- Humber region
- Liverpool City Region
The measures announced in the Budget come into effect today, 9th March 2021, but are really only a stepping stone as they establish a power that will enable HM Treasury to designate through secondary legislation, tax sites within a Freeport area .
Hybrid mismatch rules
This is a very geeky topic that we have been covering for some time. The UK hybrids legislation which came into effect on 1 January 2017 implemented the OECD Base Erosion and Profit Shifting (BEPS) Action 2 recommendations. A consultation on technical changes to the rules, which had been announced at last year’s Spring Budget, was carried out between 19th March and 29th August 2020. A summary of responses to the consultation was published on 12th November 2020 alongside draft legislation which was subject to a further, technical consultation, between 12th November 2020 and 7th January 2021.
The changes, which are very technical, are published here.
If you are likely to be affected, please read the legislation. If not, probably best to leave it alone as it might cause your head to explode.
Extension of the Social Investment Tax Relief for Venture Capital Schemes
This is something we have covered before and for which Big Society Capital has been campaigning vigorously. The measure extends the operation of the SITR from April 2021 to April 2023
You can find details here.
Pension cap change
It was announced that there would be a further consultation in the next month on changes to the pension charge cap to make it easier for defined contribution pension schemes to invest in funds with performance fees, as well as other changes to facilitate investment in illiquid assets by defined contribution pensions schemes. This is a follow up to a Department of Work & Pensions consultation that ran from 11th September to 30th October last year.
John fed into the Association of Real Estate Funds, Investment Association and British Venture Capital Association responses to the original consultation. We also submitted our own response, which you can find here.
We will provide an update as soon as the new consultation is published.
A couple of other bits of tax news
SDLT for non-residents
This is not new. The 2% SDLT surcharge for non-residents purchasing UK residential property announced at the 2020 Budget comes into effect on 1st April.
As covered in our newsletter in August last year, in the context of funds, it will apply to:
- Non UK equivalents of a UK Co-ACS, including the Luxembourg FCP;
- Non UK unit trusts such as a JPUT;
- Non UK funds in the form of a company, such as a Luxembourg SICAV;
- Partnerships, including UK partnerships, if any of the partners is non-resident. The SDLT surcharge will effectively apply to all the partners if there is a single non UK partner;
- UK companies that are controlled by non-residents unless the company is a REIT or UK OEIC, such as a PAIF.
This is another reason why we need a viable onshore UK funds regime, see comments on the UK Funds Review below.
Detailed guidance on the new rules was published yesterday. You can find it here.
Funds portfolio exemption
We covered this issue in our newsletters in March and November last year. The problem to be addressed arises as a result of the rules for property funds under the capital gains tax changes for non-residents holding UK property that came into effect in April 2019. The administrative burden of complying was a particular issue for offshore life companies. The Investment Association had proposed a portfolio exemption which it had been hoped would be announced in the Budget in March 2020. HMRC proposed changes to address this in November last year, with a consultation until 16th December.
The final legislation, The UK Property Rich Collective Investment Vehicles (Amendment of the Taxation of Chargeable Gains Act 1992) Regulations 2021, was laid before the House of Commons on 2nd March and comes into effect on 24th March 2021. You can find it here.
UK Funds Review
We covered this in detail in our newsletter at the beginning of February, which you can find here.
We are strongly supportive of two key proposals covered in the consultation, both of which we think are important for the development of UK real estate funds:
- The Investment Association proposal for a Long Term Asset Fund (LTAF). This is intended for defined contribution pension schemes and hopefully also for retail investors although the extent of this is not yet clear. Although it is unlikely to be the preferred choice of fund vehicle for a traditional direct property fund, it would potentially facilitate other forms of private market investment in real estate, for example real estate debt.
- The Association of Real Estate Funds (AREF) proposal for a Professional Investor Fund (PIF). This would help fill a major gap where the UK lacks a suitable onshore fund vehicle for professional investors investing in real estate. The business case for it was set out in the AREF proposal for the PIF which you can find here.
Melville Rodrigues, who has been leading the charge on the PIF, has added new material to his website on this, which you can find here.
As we have previously mentioned, there is an AREF/INREV/IPF webinar on this on 23rd March, details later in this newsletter.
We will be posting additional materials on this subject on our website here.
IOSCO Liquidity Review
The International Organization of Securities Commissions (IOSCO) published two documents "Recommendations for Liquidity Risk Management for Collective Investment Schemes” and "Open-ended Fund Liquidity and Risk Management – Good Practices and Issues for Consideration” in 2018. You can find our commentary on them from the time here.
On 5th March, IOSCO launched a Thematic Review of the 2018 recommendations, to be published in Autumn 2022.
Alongside the Thematic Review, IOSCO and the Financial Stability Board (FSB) are currently conducting a joint analysis of the availability, use and impact of liquidity risk management tools for open-ended funds.
To inform both the Thematic Review and the Joint Analysis, on 5th March IOSCO also launched a market participants’ survey, which runs until 16th April.
You can find the IOSCO press release and link to the market participants’ survey here.
FCA MiFID II: product governance review
On 26th February, the FCA published this review, which looked at product governance in a sample of eight asset management firms. Real estate was not covered as an asset class and the sample was only small. However, the FCA believe that the review suggests that some asset managers are not undertaking activities in line with MiFID II’s product governance regime. The FCA summary concludes "We will continue to focus on product governance, which is relevant to both our customer protection and market integrity objectives. Part of our work will be to consider whether we need to make further changes to our product governance rules and guidance, for both asset managers/manufacturers and distributors and whether these changes will better address the key sources of harm throughout the product lifecycle."
We will monitor developments.
You can find the review here.
A reminder of a couple of forthcoming events at which John is speaking.
AREF funds consultation webinar
As mentioned above, there is an AREF/INREV/IPF webinar on this which John is moderating on 23rd March.
AREF members can find details and register here
INREV members can find details and register here
IPF members can find details and register here
This will focus on the proposed new fund vehicles, the Long Term Asset Fund and the Professional Investor Fund.
The Institute of Chartered Accountants webinar on on the future of retail on which John is speaking has been rearranged from 16th February to Wednesday 21st April. You can find details here.
If you are not a chartered accountant but would never-the-less like details, please let me know.
Thank you for your responses to our concerns regarding the possibility that we have been, to use the words of the Culture Secretary, "soiling our colonial past". In view of your comments, we will continue our mission to soil and to this end have commenced detailed research on the subject. Unfortunately the first historical trivia we have uncovered as a result of this exercise is too disgusting to share, even with the lamentably low standards that we maintain. Once parties are allowed again, after a few beers John might be prepared to provide you with details.
In the meantime, in this historical trivia, we cover the possibly slightly less controversial topic of charter cities. As indicated in our comments above on Freeports, there is some concern that the new Freeports might actually be charter cities. This we find somewhat confusing as city status in the UK is generally granted by royal charter so the majority of cities are charter cities. Anomalies arise due to the different rules in Scotland, where royal charters historically granted the status of royal burgh rather than city. The first city in Scotland was therefore technically Dundee which received its royal charter from Queen Victoria in February 1889, followed by Aberdeen in 1891. Glasgow and Edinburgh have never received royal charters to become cities, but in local government legislation in 1929 were regarded as cities in Scotland along with Dundee and Aberdeen. This would appear to be on the basis that everyone assumed that they were already cities. We know from previous experience that our readers in those two municipalities are fiercely patriotic, so we do not intend to venture onto the blood-soaked battlefield of suggesting that they might be mere towns, unlike the great cities of Dundee and Aberdeen.
We have previously covered Brechin in the historical trivia in this newsletter. Although its local government is "the City of Brechin and District Community Council” and its football team is 'Brechin City Football Club”, Brechin is in fact very clearly only a town. We know that this is a contentious matter there, but having checked our database, we do not believe that we have any subscribers in Brechin to offend.