Key tax changes for the real estate sector – Autumn Budget 2021 and the Finance Bill 2021-22

United Kingdom

Against the backdrop of several consultations covering real estate taxes – such as the review of business rates and the VAT land exemption – it may not have been a surprise if Budget day heralded fundamental changes for those in the property sector. However, as was clear in the Chancellor’s speech, and confirmed by the publication of the draft Finance Bill 2021-22 on 4 November, the amendments which have been announced tend to fall short of wholesale changes.

That is not to say that the changes to be made are not significant for taxpayers in the real estate space – including extensions to certain reliefs introduced as part of Covid-19 measures, relaxations of the REIT regime, and an announcement of the rate of the residential property developer tax (“RPDT”).


The key announcement for residential property developers was the announcement of the RPDT rate (4%) and the annual RPDT-free allowance (£25 million).

The design and scope of the tax, and key policy decisions such as:

  • removing build-to-rent investors from the scope of the tax, by (broadly) requiring that the developer holds land as trading stock;

  • carving-out student accommodation from the definition of “residential”; and

  • excluding non-profit housing companies, and their wholly owned subsidiaries

were published and widely known before the Budget.

The version of the legislation included in the Finance Bill is largely the same as those previously published, with some minor amendments which have been included as a result of the most recent consultation with stakeholders. This includes a relaxation of the provision which causes a developer to be within scope where they carry on residential property development activities on land over which they previously had an interest. In brief, formerly holding an interest in land will now only cause a developer to be within scope where the activities the developer is undertaking on that land:

  • are limited to designing, seeking planning permission, or constructing or adapting (and ancillary activities);

  • were planned or anticipated at the time the developer ceased to have an interest; and

  • do not relate to non-residential areas of the land.


As expected, the Finance Bill contains REIT changes which are effective from 1 April 2022. These include:

  • a relaxation of the listing condition for REITs owned by ‘institutional investors’;

  • an amendment to the definition of ‘overseas equivalent of a UK REIT’ for the purposes of the relaxation of the close company condition for REITs owned by institutional investors;

  • simplified balance of business profits and assets tests utilising an 80% gateway test, and an exclusion for profits resulting from various planning obligations; and

  • a relaxation of the holder of excessive rights provisions (commonly known as the ‘10% rule’) for shareholders who are entitled to receive gross ‘property income distributions’ from a REIT.

The Finance Bill published on 4 November contained a revised version of the listing condition relaxation for private REITs, which is more fit for purpose than that originally published:

  • the listing condition relaxation now applies where at least 70% of a REIT’s share capital is owned by one or more institutional investors;

  • there are tracing rules to cater for indirect ownership by institutional investors; and

  • a limited partnership which is a collective investment scheme that meets a genuine diversity of ownership (“GDO”) condition, is treated as an institutional investor for these purposes without the need to trace through the partnership

This is a significant improvement on the original draft legislation which required 99% ownership by institutional investors; had no tracing rules; and required every limited partnership to meet a GDO condition.

The draft legislation in the Finance Bill should mean that substantially all of the existing private REITs (and potential ones) will no longer need to list from 1 April 2022.

Qualifying Asset Holding Companies (“QAHCs”)

The Finance Bill contains an expanded version of the earlier draft legislation on which we commented in July.

It creates a generous new tax regime for UK holding companies owned, as to at least 70%, by qualifying institutional investors and investment funds and seeks to emulate or exceed the tax exemptions enjoyed by holding companies in jurisdictions such as Luxembourg. These exemptions will not apply to UK real estate, but will apply to real estate investments outside the UK and to shares and securities in companies which are not “UK-property rich”. The tax exempt business will be ring-fenced and the QAHC’s other activities taxed under normal corporation tax rules.

In addition to corporation tax exemptions on gains and income from qualifying investments, there will also be exemptions from withholding tax on interest and the usual UK tax rules treating profits on share buy-backs as income distributions will be disapplied if funded from proceeds within the tax exempt ringfence business. New features of the regime recently announced include:

  • disapplication of certain “late paid interest” rules which delay tax deductions until interest is paid and of similar rules for deeply discounted securities; and,

  • a provision allowing foreign source income and gains of the QAHC to retain their foreign source for the purposes of the remittance basis when paid out to its shareholders.

We will publish a separate article with further details on QAHCs.

Business rates

The Chancellor was clear in his Budget speech that, in his view, the abolition of business rates would be an irresponsible move. Following the “bad” news with the “good”, he announced an array of new reliefs as well as an extension of existing ones. These include:

  • the introduction of a new green investment relief to encourage investment in green technologies;

  • from 2023 to 2028, a new business rates “improvement” relief, where no increased rate will be payable for the initial twelve-month period post-property improvement (for example, increasing the number of rooms in a hotel);

  • a one-year 50% discount in business rates for the hospitality, retail and leisure sectors (capped at £110,000 of relief per eligible business); and

  • freezing the business rates multiplier for the next year (2022/2023); and

  • a confirmation that business rates revaluations will occur every three years in England.

Leading up to the Budget, there were calls from ratepayers to shift the tax burden away from bricks-and-mortar businesses to those relying on online sales, largely to reduce any market distortion between the two caused by business rates. While it is clear that, under this government, business rates are here to stay, a consultation on a new online sales tax has been announced.

Annual investment allowance

In order to encourage greater investment, the temporary £1,000,000 level of the Annual Investment Allowance is extended until 31 March 2023. This higher level was previously due to end on 1 January 2022.

This package of measures is a “mixed bag” for those in the real estate sector. Certain measures – such as the REIT changes and the extension of the annual investment allowance – are clearly designed to encourage investment in UK real estate. On the other hand, the Chancellor’s commitment to the continuation of business rates, and the introduction of the RPDT, are reflective of the government’s hesitancy to cut taxes while the economy still recovers from the impact of the pandemic.