Commercial Property News February 2020 Compiled by Hayven Property Tax
Commercial property is always a very newsworthy topic. Here is a roundup of the latest news (February 2020) concerning commercial property and investments in the UK, including the new tax relief on commercial buildings and structure in Ireland.
New tax relief for commercial structures and buildings in Ireland
It has long been a frustration of businesses that most capital expenditure on commercial premises didn’t benefit from any tax relief because the assets were not ‘machinery’ or ‘plant’ under tax law. Therefore, when the 2018 Budget unexpectedly announced plans to introduce a new capital allowance for certain costs incurred in purchasing, constructing or renovating commercial structures and buildings, to be known as the “Structures and Buildings Allowance” (SBA), this new relief was very much welcomed, reports The Irish News.
Capital allowances can be a useful tax relief for businesses which incur a lot of capital expenditure (for example on equipment, machinery or business vehicles), as the relief enables a business to deduct some or all of the value of the capital item from its profits before it pays tax. The aim of introducing the SBA is to support business investment in constructing new structures and buildings, and improving existing ones, as well as increasing the international competitiveness of the UK’s capital allowances system.
The legislation introducing the SBA came into force on July 5 last, and it applies retrospectively to all qualifying expenditure incurred under contracts entered into on or after the 2018 Budget that October.
The SBA provides an annual two per cent writing down allowance at a flat rate over a 50-year period on the costs of constructing, renovating or converting new commercial structures and buildings under contracts entered into on or after October 29 2018.
Unlike other capital allowances, the SBA is an annual flat rate based on qualifying expenditure (rather than being claimed on a reducing balance) and there will be no system of balancing charges or balancing allowances on a subsequent disposal of the building or structure. Any remaining years of the 50 year period will pass to a new purchaser if and when the building or structure is sold. The amount of SBA claimed by the vendor in respect of that building or structure will be added to the proceeds of sale when calculating its gain on the disposal of the asset.
There are also various conditions which must be met. In broad terms, SBAs can only be claimed on “qualifying expenditure” when a building or structure is in non-residential use for the purposes of a “qualifying activity” carried out by the person who has a relevant interest in the building or structure. A relevant interest includes taking a lease of the building or structure, although the position is more complex with leases. Qualifying activities include trades and UK or overseas property businesses but only to the extent that the profits or gains from the activity are, or (if there were any profits) would be, chargeable to UK tax.
Qualifying expenditure is, broadly, the amount of direct costs related to physically constructing new structures and buildings, or the cost of converting or renovating them. It also includes the costs of purchasing the relevant interest in the structure or building.
Expenditure incurred on the acquisition of land, land reclamation and remediation, landscaping and altering of land (unless altered for preparing land for a building or structure), and on plant or machinery is specifically excluded.
Therefore, tax relief should be available on all capital expenditure incurred on constructing new structures and buildings or converting existing facilities. The new SBA should be a welcome tax relief for anyone considering a capital expenditure project and early advice should be sought from your accountant or tax adviser to ensure all reliefs are maximised.
Middle East investors target $5.3bn London commercial property spend in 2020
Middle East investors are set to increase commercial real estate investment in London this year, according to Knight Frank and reported by “Arabian Business”.
Investors from the region, led by UAE and Saudi Arabia, are forecast to spend £4.1 billion ($5.3 billion) in the UK capital this year, up by £100 million compared to 2019.
However the total represents a fall from £4.7 billion seen in 2018.
China remains by far the biggest potential investor in London, with £12.7 billion of capital ready to buy assets in 2020, up 25 percent, followed by Singapore.
Overall, London is set for an increase in commercial real estate investment in 2020 as international investors target the capital’s high-yielding office market, following the decisive 2019 UK General Election result.
According to Knight Frank, global investors have increased the total capital targeting London commercial assets to £48.4 billion, a 21 percent rise on 2019 and £2 billion higher than 2018.
However, with just £2.3 billion of buildings for sale, Knight Frank said investors will face strong competition, which is expected to drive values higher in 2020.
Knight Frank’s annual London Report reveals that in 2019 London investment activity fell 15 percent to £13.9 billion, down from £16.8 billion in 2018, as Brexit uncertainty and a shortage of available assets constrained the number of deals.
Nick Braybrook, head of London Capital Markets, said: “Despite the fall in activity, London remained the second largest market for commercial office real estate investment in 2019, topped only by Paris and ahead of New York, Hong Kong and Berlin.
“London’s stability and global status is attracting international investors who see a competitive economy, strong occupier market and high office yields, compared with other global cities. We expect the sheer weight of international demand for London assets to push prices on, and we have already seen an increase in transactions as activity ramps up following the UK General Election result.”
Faisal Durrani, head of London Commercial Research, added: “One of London’s underlying strengths is its vibrant labour market, which is reflected in resilient leasing activity. New office development has not been able to keep pace with this demand, and almost half of the space currently under construction is already spoken for. This supply crunch is most significant for those businesses seeking large amounts of space.
“Indeed, the supply shortage is helping to underpin our rental growth projections over the next five years. These show that headline office rents will rise by 15.7 percent in core West End locations such as Mayfair and St James’s by the end of 2024. Elsewhere, we forecast rents in the City core to grow by 20% in the next five years.”
How do criminals use a commercial property to launder money?
When it comes to money laundering, London and residential property take the lion’s share of headlines, but making dirty money clean is an activity that is widespread across the UK, with prosecutions associated with commercial property common, reports Property Week.
More than £90bn is estimated to be laundered through the UK each year. Research from Transparency International, the not-for-profit organisation that combats corruption, has identified real estate worth more than £5bn as still being in ownership after having been bought with ‘suspicious wealth’.
In November, the National Crime Agency (NCA) recovered property worth £8.1m in the West Country, including a seven-bedroom converted barn and mill holiday-let property in Somerset, a Georgian townhouse in Bath run as a small hotel and a former telephone repeater station. These businesses generated a combined rental and commercial income of more than £2m. NCA investigators believe the portfolio was acquired through mortgage fraud and drug dealing.
This is not an isolated case. Despite a slowdown over recent years, rising property prices mean bricks and mortar is a safe bet for criminals. Commercial property has an advantage over residential in that it generates income while offering a presentable front behind which fraudulent activities can hide.
Criminals tend to target struggling businesses and rundown shops. Cash-based businesses such as restaurants and pubs, nail bars and tanning shops provide an income for their owner while acting as a cover for monies derived from drugs, people trafficking or prostitution. Often many businesses hide behind one company, with so-called ‘ghost’ invoices passing between them to release more cash to spend.
In 2014, a Bradford businessman used profits from laundering millions of pounds to fund a property portfolio including a local landmark – a former tram shed bought for £2.5m, which he said he planned to turn into a retail park. But it became a front for multiple businesses and fraudulent activity that led to a six-year jail sentence for its owner.
Whether it is a hotel, a holiday let, a retail park, an office block or even a golf course, commercial property is subject to the same level of due diligence as residential. Layered companies, trusts and venture capitalists undoubtedly make commercial property fraud harder to unravel – but this often leads to the recovery of larger sums of money and more players.
HMRC is stepping up efforts to crackdown on money laundering, including estate agents who may be unwittingly non-compliant – this is no defence and the fines for those who are found out are large.
West Midlands to see commercial property boom
Three out of five small and medium-sized businesses in the West Midlands are looking to expand in the next two years reports the Express & Star
Research by finance specialist Together shows nationally 58 per cent – nearly 3.4 million firms across the UK – say a boost in business is driving a need to move or extend their existing site for additional staff and equipment as well as space for storage.
In the West Midlands it is 60 per cent and also 20 per cent of SMEs in the region say they are worried that their ambitions to grow could be hampered by a shortage of suitable property.
Across the UK among firms with property plans, 30 per cent are looking to move to bigger premises while one in six (16 per cent) aim to extend their existing facilities. Another one in eight (12 per cent) will buy additional buildings or construct them from scratch.
Andrew Charnley, head of corporate relationships at Together, said: “There is real evidence of a property boom getting underway as business owners finally feel assured enough to commit investment into a move or to extend where they are. It is great to see that SMEs are genuinely on the move now that business confidence is returning.
“However, finding the right property may be tough for some. Firms will need to make sure they can move quickly once they spot an opportunity, so it’s advisable to have clear plans in place first – including finances, lenders and lawyers – to enable them to push ahead with their growth ambitions.”
UK property transactions soar after General Election
UK property transactions soared at the end of last year, according to government data, as both sellers and buyers made the most of renewed confidence following the General Election result, reports CityAM.
Residential property transactions in December jumped 6.8 per cent year-on-year to 104,670, a 6.2 per cent rise on November’s number.
The total number of non-residential UK property transactions reached 10,690 in December, which was 13.4 per cent higher than November and 0.8 per cent more than December 2018, HM Revenue and Customs data showed.
Private Finance director Shaun Church said: “The end of 2019 saw a surge in property transactions, and this increase in activity looks set to continue into early 2020.
“The decisive outcome of the General Election has generated a surge in interest from buyers and sells, who now with greater clarity and certainty on the UK’s political future, are ready to make their move.”
The HMRC transaction data is the latest research that shows that both the residential and commercial property markets benefited from a “Boris bounce” following the Conservative election victory.
Yesterday, Rightmove’s House Price Index showed that the decisive result of the election sparked a record-breaking 2.3 per cent surge in UK house prices in December and January, the largest since the property platform’s records began in 2002.
Meanwhile, research by Rics showed that in December, 31 per cent of London surveyors saw a rise rather than a fall in enquires from new buyers, a jump from minus 12 the previous month.
Andrew Southern, chairman of property developer Southern Grove, said: “The entire industry will be hoping this jump will be a sign of things to come.”
“It was a blistering finishing to the year and bodes well for 2020 as the full effect of a mercifully decisive general election won’t have fully filtered through yet.”
About Hayven Property Tax:
Hayven Property Tax is an independent commercial property tax consulting company who are experts in capital allowance claims for commercial properties.
Based in Cardiff, Hayven Property Tax are able to service clients across the United Kingdom.