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16 March 2016
A troubling Budget for CRE from the UK Treasury

Peter Cosmetatos, CEO, CREFC Europe, said:
"While there are a few positives in this budget – such as certain business rate changes – there is further evidence that the government doesn't fully appreciate the essential role large-scale, strategic property investment plays in our economy.
The stamp duty announcements in particular will surely end up hitting regeneration and mixed-use place making, so even small businesses will suffer indirectly from higher rates for bigger transactions. If we are serious about re-booting our economy by being a nation of builders, hitting the institutional PRS and commercial investment with extra SDLT makes no sense. The government risks stifling interest in our economy and driving much-needed investment away.”

On BEPS and interest deductibilityPeter Cosmetatos, CEO, CREFC Europe, said:
“By rushing to adopt OECD plans restricting interest deductibility the chancellor risks undermining investment just when we need it most. Capital-intensive businesses like commercial property rely on debt to fund investment.  While we support OECD and G20 efforts to counter international tax avoidance, rushing in such measures could be harmful to investment in UK cities.”
On the stamp duty land tax changes for CREPeter Cosmetatos, CEO, CREFC Europe, said:
“For investors in larger properties, the change to the SDLT rules effectively means that their stamp duty tax bills will go up by almost 25 per cent overnight. The likelihood is that this cost will ultimately be passed on to tenants. Small businesses may find themselves the unintended victims of a tax change that was said to be directed at helping them.”

Additional notes:
BEPS and interest deductibility
Responding to today’s Budget announcement that the UK intends to adopt the OECD’s BEPS recommendations on interest deductibility in April 2017, the trade body for commercial real estate finance expresses concern about the effect of the government rushing in such a fundamental change to the UK tax rules on interest.
The Chancellor used his Budget today to set out the UK government’s plans to restrict the tax deductibility of interest for companies operating in the UK with effect from April 2017. The proposals, set out in a new Business Tax Roadmap, appear to be a wholesale endorsement of the measures recommended by the OECD as part of its Base Erosion and Profit Shifting (BEPS) project.  
Today’s announcement follows on from a consultation on how to implement the OECD’s proposed measures within the UK launched by HM Treasury in October 2015. CREFC Europe responded to that consultation in January this year, urging the government to take its time before introducing new measures.  In its response, CREFC Europe argued for the need to safeguard the treatment of genuine third party debt, where BEPS risk is especially low.
The Chancellor has announced that, from April 2017, interest relief will generally be restricted to the greater of (a) 30 per cent of EBITDA or (b) a worldwide group ratio, calculated on the basis of net interest to group EBITDA. There will also be an annual de minimis that should exclude groups with net interest expense of £2m or less from the rules.
CREFC Europe welcomes the fact that the UK government has not only set the fixed ratio at the upper limit of the range set by the OECD but has accepted the case for a group ratio, which should help those groups that rely on higher leverage as part of their business structure, such as investors in commercial real estate. However the trade body is concerned that a start date of April 2017 is far too soon for business to be able to make the required adjustments to adapt the new rules.
As a capital-intensive business, often investing over the long-term, commercial real estate (CRE) businesses traditionally look to a mix of debt and equity to fund their investment in the built environment.
Restricting interest deductibility so much more dramatically then under current UK rules will effectively increase the cost of capital for this entire industry sector. Not only could this impact future investment in the UK’s built environment (by reducing the amount of debt that CRE investors are willing to deploy), but the changes could also result in significant market disruption as borrowers look to restructure existing funding arrangements.
Stamp duty land tax
In addition to the measures announced on interest costs, CREFC Europe is also concerned about the impact of the changes to stamp duty land tax (SDLT) on commercial property.
The Chancellor announced changes to the way SDLT will be charged on commercial property, introducing a new marginal “slice” system that mirrors the rules that apply to residential property.  The effect of the change is that, from 17 March 2016, investors in properties costing over £1.05m will be paying more in SDLT than previously on new acquisitions.
For more information, please contact:
Peter Cosmetatos at CREFC Europe / +44 7931 588451 /
Andrew Teacher at Blackstock / +44 7968 124545 /

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