Posted on: 12/07/2018
The Government has turned its attention very much to maximising its tax revenue from property over recent years.
Generally, one needs to have one eye on the bigger picture (will the activity be treated as an investment or as a trade?) and the other on the finer detail, including the type of property.
1. Are you a property investor or a property trader?
One might think that this is a matter of semantics.
However, it is not.
We do not have a flat property tax. Like most of the UK tax system it is not the underlying asset which is determinative but what you do with it.
If you buy properties for the long term to harvest the rents and hope for capital appreciation then you are likely to be a property investor and subject to the capital gains regime on a disposal. If you buy the same properties, add a new bathroom and kitchen, a quick lick of paint and then sell shortly after then it is likely you will be a property developer / trader and subject to tax as an income profit.
For an individual this can make a huge difference with the difference in tax rate being as much as 25%.
2. Don’t forget to document your intentions
Once you have been able to make the distinction above then you should record your intentions and ensure that the correct accounting disclosures etc have been made. Recent case law has shown that a dispute can turn on such paper trails.
3. Determine whether you are a commercial or residential landlord
Once you have determined that your planned activity makes you an investor we then see material differences between the treatment of residential and commercial property.
For example, where the rate of CGT fell to 20% recently (including for commercial property investors) residential landlords were left with their gains subject to 28%.
Additionally, commercial landlords investing in their own names may still receive full relief for interest paid against their taxable income. For residential investors, this is now restricted and may result in phantom taxable profits.
One should also note that the Stamp Duty Land Tax (“SDLT’) rates are rather different for residential and non-residential properties. The latter usually being lower than the former.
4. Don’t forget to claim capital allowances
Under general UK tax principles, a business which incurs expenditure on capital assets for use in its business is unable to obtain a tax deduction for that expenditure against its profits. However, special allowances, known as capital allowances, might be available in some scenarios, including the purchase of commercial property.
The basic premise of the capital allowance regime is to provide tax relief in respect of the reduction in value by letting the business write off the cost of the assets over a number of years against the taxable income of the business.
In the context of a property purchase, the purchase of the bricks and mortar itself will not usually qualify for capital allowances. However, it is likely that the purchase price will contain items of plant and machinery such as heating systems, air conditioning, lifts and other fittings that might qualify for allowances.
5. Manchester’s Non-resident property investors should seek fresh advice
Prior to 2012, the advice that one might give to a non-resident investor in UK property would be clean and simple.
However, the Government has over the last half decade switched its attention to property. Initially this was in relation to non-resident investors but this policy has expanded its horizons.
One significant development was the extension of UK CGT to non-resident investor’s direct holdings in UK residential property. There is also currently a consultation on extending this to direct commercial holdings and ALL holdings in property rich companies.
The north west has increasingly over the years seen foreign investment in property. As such, these non-resident investors should take up to date advice.
6. Be aware that consideration for SDLT purposes can be deemed consideration
As many people will be aware, SDLT is a charge levied on the purchased on chargeable consideration paid, or deemed to be paid.
As such, a gift will not usually result in SDLT.
However, there are two main exceptions to this. The first is where the recipient also assumes the responsibility for debt. Where he or she takes over a mortgage the value of that mortgage will be deemed consideration.
The other exception is where properties are transferred to a connected company. Here, a deemed market value will apply and the company is likely to have to pay SDLT.
7. Don’t forget SDLT Multiple Dwellings Relief (“MDR”) etc for bulk residential purchases
Where one is buying multiple residential properties then you should be aware of the potential relevant SDLT reliefs.
One of these is Multiple Dwellings Relief (MDR). MDR works by calculating the SDLT on each dwelling by reference to the average price of all the dwellings.
Secondly, there is a provision in the legislation which, if one is buying six or more residential properties, one can apply the generally lower rate for non-residential properties.
8. Deal properly with the 3% additional SDLT rate for residential properties
With effect from 2016, an additional SDLT rate (and an additional cost of doing business) was introduced by the Government where a person acquired a residential property and they would own other residential properties at midnight on the date of completion. This additional rate is 3% and is added to the ordinary rate where the consideration exceeds £40k.
The legislation is far from simple and, unfortunately, we have seen many examples where the additional 3% rate has not been dealt with properly. Either paid when it should not have been or not paid when it should.
9. Seek VAT advice early on
Unfortunately, and for reasons I am unclear about, VAT is often overlooked on property transactions. Ensure that one is aware of the VAT implications of proposed transactions at the outset.
10. Don’t consider tax in a vacuum
Tax is important but it is not (and as a tax adviser I don’t say this too loud!) the most important thing. The commercial and personal objectives should drive any transaction and the tax should follow behind.
For example, how the property is financed may influence the method of ownership. In addition, also consider the legal implications of a transaction. For instance, if a deal involves incumbent tenants, then explore their rights and any party’s obligations to them.
About the author
Andy Wood, Founder – Enterprise Tax
Andy is a tax professional, helping entrepreneurs, and other individuals to structure their affairs in the most tax-efficient manner.
He holds a number of postgraduate qualifications, including his membership of the Chartered Institute of Taxation as a ‘Chartered Tax Adviser’ and also membership of the Association of Tax Technicians (ATT.)
Andy is also a qualified member of the Society of Trust and Estate Practitioners (TEP) and hold what used to be called the Advanced Financial Planning Certificate (AFPC).Go back to Top Ten Tips