London's Heathrow Airport is demanding a complete “rethink” of the business rates system, under which it faces a substantially increased bill in the near future.
Changes to the way business rates are calculated mean Heathrow could be subjected to a bill of almost £1 billion ($1.26 billion) in the coming years, according to new research.
Rules brought in last year mean that from 2026, Heathrow could be charged more in line with its profitability in 2024, because the Valuation Office Agency is moving towards a “receipts and expenditure” model for calculating business rate charges.
With passenger numbers already breaking records so far this year, Heathrow faces being a victim of its own success in terms of business rates.
“Huge hikes in business rates simply increase costs for consumers without adding a single pound of investment to the services they are using,” a Heathrow official said.
“The whole sector wants to see more joined up thinking between government departments to avoid decisions like this, which only curb our ability to compete internationally and meet consumers’ demands for smooth, safe journeys and progress on sustainability.”
After crunching the numbers, The Sunday Times found that Europe's busiest airport is facing a £900m business rates bill – which could be passed on to passengers.
Business rates are distinct from corporation taxes and normally in the UK are charged on the properties used by companies from which they conduct their operations.
Heathrow is already the UK's largest business rates payer, but under the new rules it could see its bill rise from the current £200 million a year to £300 million a year between 2026 and 2029.
If passed on to passengers through the airlines, the £900 million bill could mean Heathrow's estimated 80 million annual passengers pay an additional charge of £3.75 each.
Heathrow's major client airlines – especially British Airways and Virgin Atlantic, which already have a tense relationship with the airport – would baulk at passing the business rates cost on to customers.
If Heathrow absorbs the cost itself, the airport's wide-ranging expansion plans could be affected.
However, there may be some hope on the radar for the west London airport. If the UK's opposition Labour Party wins the general election in three weeks – which it is widely expected to do – it has pledged to significantly reform the business rates system. That said, it's still unclear how this would affect airports.
Strong Q1 numbers
The business rates bill would be a potential headache for Heathrow's new investors as well.
Having struck a deal last week, Saudi Arabia's Public Investment Fund and the French private equity fund Ardian will together now own 37.6 per cent of Heathrow as part of a £3.26 billion deal.
The two companies had previously planned to buy the 25 per cent stake that Spanish infrastructure firm Ferrovial put up for sale, but have ended up with larger slices after other shareholders exercise so-called “tag-along” rights.
Ferrovial will retain a 5.25 per cent stake in the airport.
Heathrow had a very strong start to 2024, with a record 18.5 million passengers travelling through its terminals in the first quarter.
The airport predicted a busy summer and recently increased its full-year passenger number outlook to 82.4 million for 2024.
Heathrow made an adjusted profit of £83 million in the first three months of this, compared with a loss of £139 million in the same period in 2023.
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Key changes
Commission caps
For life insurance products with a savings component, Peter Hodgins of Clyde & Co said different caps apply to the saving and protection elements:
• For the saving component, a cap of 4.5 per cent of the annualised premium per year (which may not exceed 90 per cent of the annualised premium over the policy term).
• On the protection component, there is a cap of 10 per cent of the annualised premium per year (which may not exceed 160 per cent of the annualised premium over the policy term).
• Indemnity commission, the amount of commission that can be advanced to a product salesperson, can be 50 per cent of the annualised premium for the first year or 50 per cent of the total commissions on the policy calculated.
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Customers must now be provided with a full illustration of the product they are buying to ensure they understand the potential returns on savings products as well as the effects of any charges. There is also a “free-look” period of 30 days, where insurers must provide a full refund if the buyer wishes to cancel the policy.
“The illustration should provide for at least two scenarios to illustrate the performance of the product,” said Mr Hodgins. “All illustrations are required to be signed by the customer.”
Another illustration must outline surrender charges to ensure they understand the costs of exiting a fixed-term product early.
Illustrations must also be kept updatedand insurers must provide information on the top five investment funds available annually, including at least five years' performance data.
“This may be segregated based on the risk appetite of the customer (in which case, the top five funds for each segment must be provided),” said Mr Hodgins.
Product providers must also disclose the ratio of protection benefit to savings benefits. If a protection benefit ratio is less than 10 per cent "the product must carry a warning stating that it has limited or no protection benefit" Mr Hodgins added.
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