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Property Update

 

Are you a landlord looking to grow your portfolio?

Rental income generated personally is subject to Income Tax rates as high as 45%. This means that for individuals looking to grow their portfolio, for every £1 they reinvest or use to repay financing, they must generate rental income of up to £1.82.  For individuals with excessive income, this also means they are losing a substantial part of their income unnecessarily.

However, rental income generated within a company is subject to Corporation Tax at 20%.  Using the example above, the cost of generating £1 for re-investment in the company is £1.25. Restructuring your portfolio within a company structure could therefore create tax savings, accelerate capital growth and increase the rate at which financing can be repaid.

Some investors may be reluctant to re-finance on the basis that they previously secured financing with very low rates of interest.  However, it is often the case that additional interest costs are more than offset by the potential tax savings.

From an Inheritance Tax (IHT) perspective, investment properties do not benefit from any form of IHT relief.  This means that the full market value will be subject to 40% IHT on death (assuming that the nil rate band is exhausted elsewhere).  Incorporating the portfolio does not change the nature of the asset, but it does create additional opportunities for planning.  For example, equity can be released to make investments or commence other businesses which do qualify for IHT reliefs.  If the nature of the company can be changed so that it becomes a trading company, then it is possible to remove a substantial part of the equity value from the charge to IHT.

Of course, any planning of this type is not universal and there are other considerations which must be taken into account, such as potential capital gains and Stamp Duty Land Tax (SDLT) charges.  If you would like to speak to one of our experts about whether incorporation could save you money, then please let us know.

 

Are you considering a new purchase?

Suppose that the decision has been taken to acquire new premises for the family business, which is operated as a limited company. Suppose also that the proposed new premises will be too large initially, and so part will be let out to a third party. In addition, the situation may change over time. What are the tax considerations?

Tax on rental income: Corporation Tax rates are lower than the higher rates of Income Tax, so the capital part of a loan can be paid down more quickly if the purchase is in a company.

Tax on capital gains: maximising the opportunity to secure Entrepreneurs’ Relief on the disposal of shares and/or the property would be an important factor in the analysis – this would be complicated by the external letting of part of the property; in addition, the letting can impact on the ability to hold over capital gains on gifts of shares.

Inheritance Tax: most trading businesses qualify for Business Property Relief, meaning that no Inheritance Tax falls due on the value of the shares held at death, although this can be restricted in certain circumstances; if a property is held outside of the company, the maximum relief is 50% of the property value.

Different factors will carry different weight for different clients. For example, if the intention is always to sell the property, then Capital Gains Tax factors may predominate.  Alternatively, if the owners want to keep the property to generate additional income, then the benefit of lower corporate tax rates within the company may be illusory. Renting the property to the company could be more tax efficient in this scenario, especially if the owners intend to retain the property in retirement.

In short, every situation will be different, and it will be appropriate to consider all the tax factors (including Stamp Duty Land Tax, VAT and capital allowances) as part of the decision-making process. If you are considering a purchase and would like to know more about your options, please let us know.

 

Are you restructuring your current portfolio?

As you may already be aware, the rules affecting capital allowances and property transactions were amended in April 2014.  In order to enable a buyer to claim capital allowances relating to fixtures within a property, the seller of that property must now have pooled the expenditure relating to those fixtures. 

However, what may be overlooked is that these new rules also apply to transfers that might otherwise be tax neutral such as transfers between group companies as well as transfers between spouses and civil partners.  These rules will also apply to any adjustment of the capital shares e.g. a change from 50:50 ownership to a 75:25 split.

Anybody considering a property transaction is advised to seak advice regarding their capital allowances position before any transaction.  This is the case even if you do not intend to claim capital allowances, as a future owner may, and it is important to get the right documents and assurances in place at the outset to avoid compromising your position on a future sale.

 

VAT update: CLP Holding Company Ltd V R Singh & P Kaur

This case concerned a dispute between the parties to a property sale regarding whether or not the price stated in the contract was inclusive or exclusive of VAT.

The transaction in point involved the sale of a commercial property for £130,000 in 2006.  The seller was VAT registered and had exercised an option to tax on the property in 1989.  However, at no point during the sale negotiations or immediately thereafter did the parties discuss VAT.  When HMRC visited the seller in 2007, the matter was brought to light and HMRC issued a ruling that VAT should have been charged on the sale and subsequently raised an assessment for £22,750 (VAT).

The basis position is that the price is VAT inclusive unless the contract states otherwise. However, the contract in this instance was contradictory.  In particular, paragraph 1.4 of the general conditions stated that all sums under this contract are exclusive of VAT and that the buyer will pay any VAT due to HMRC.  However, in the special conditions the consideration of the sale was defined as £130,000 with no mention of VAT. 

The buyer refused to pay and the seller applied for summary judgement.  The case ultimately reached the Court of Appeal. The Court decided after taking all matters into consideration that a reasonable person with all the background knowledge to the case would conclude that nothing was payable over and above the stated purchase price – consequently if VAT was charged on the property it was included within the £130,000 purchase price.

The lesson to be learned from this case is that it is vital that property sales contracts are absolutely clear as to the question of whether VAT is due on the sale.  If you have any questions, please contact a member of our VAT team.

 

ATED extended

The ATED charge is an annual charge which is levied on residential property owned by a non-natural person, eg a company. Reliefs are available for properties that are held as rental investments, property developers, farmers and homes open to the public but the reliefs must be claimed in the return. Currently a return needs to be completed for each property owned although concessions have been allowed for large property landlords to file a list of properties on a single return.

Budget 2014 announced that whilst the charge was initially introduced for properties worth in excess of £2m, the charge will also apply to properties worth over £1m from April 2015 and to properties worth over £500k from April 2016.

For many property owners, whilst they may qualify for the reliefs, there may be a significant administrative burden. HMRC is therefore consulting on how to make the system simpler. Recent suggestions have been to extend the filing dates for the return or amendments to the return, or to introduce an exempt status such that returns do not need to be filed on an annual basis.

The consultation period has recently closed and we will keep you posted as it develops. However anyone who may be affected by the lower rates of ATED will need to note the filing dates of 1 October 2015 for properties valued between £1m and £2m and 30 April 2016 for properties valued between £500k and £1m.

 

Travel expenses – could HMRC start querying travel costs for property businesses?

HMRC’s published guidance on travel expenses for landlords currently states that travel costs of travelling between different properties solely for the purposes of the rental business is an allowable deduction in computing rental business profits. However, the cost of travel between home and the let property will only be allowable if the purpose in making the journey is exclusively a business one. In other words, the journey should not be combined with a personal trip.

However, the recent case of Dr Samadian has prompted HMRC to review the position for medical and other sectors. The case concerned a consultant undertaking a mixture of NHS employment and private practice.  Dr Samadian’s private practice was conducted primarily at two private hospitals, although he did make regular visits to other care locations, such as the patients’ homes. It was accepted that Dr Samadian maintained a home office which was a place of business. 

The issue before the Upper Tribunal was which of Dr Samadian’s travel expenses were allowable costs of his business and which were ordinary commuting from home to a regular place of business.

The Upper Tribunal ruled that both private hospitals which Dr Samadian attended regularly were places of business, as well as his home office.  Therefore travel expenses between Dr Samadian’s home and the private hospitals were not allowable, although the travel between the two private hospitals was allowable. Travel to other locations where Dr Samadian carried out his practice on an irregular basis were also allowable.

All claims for travel expenses, regardless of the type of business, are subject to the same general rules. Some commentators have suggested that it may only be a matter of time before HMRC seeks to apply the ruling to property businesses and landlords attending the same property (or properties) on a regular basis.

For landlords, the current position is therefore a slightly uncertain one. Our advice is to continue claiming on the same basis, but to ensure that proper records are kept of all business journeys as this will be key in the event of HMRC enquiries. If you would like to discuss further, please let us know.

 

Lettings agents required to supply information to HMRC

The Government’s Let Property Campaign was launched as an opportunity for residential landlords to bring their tax affairs up to date.  Landlords who have not declared and paid all tax on their rental income are being asked to make a voluntary disclosure to HMRC in order to benefit from a more generous penalty regime.

However, this is not the only means by which HMRC is targeting residential landlords.  We are aware of at least one example of letting agents who have been formally asked to provide information to HMRC concerning landlords they act for and the properties which they manage.  The implication being that if landlords don’t confess all, they will find out from their agent anyway.

A formal information request is usually preceded by a letter of notice asking for more information about the type of work undertaken by the agent.  This is designed to identify those agents of particular interest to HMRC.  These agents will then receive a formal information request under HMRC’s statutory powers.

Experience suggests that this formal request will require landlords to prepare and submit an electronic copy of a spreadsheet setting out each landlord’s name and address as well the gross rental income received for each property. This will be required for non-UK landlords as well as UK landlords.

Agents are reminded that these formal requests are compulsory and agents who fail to comply within the 60 day time frame given could be subject to penalties.  If you have any questions regarding either the voluntary disclosure procedure or the agent information request, please let us know.

 

Scotland announces new Land and Buildings Transaction Tax (LBTT) rates

From 1 April 2015, Stamp Duty Land Tax (SDLT) will no longer apply to land transactions in Scotland.  Instead, the Scottish Government is introducing a new regime, known as the Land and Buildings Transaction Tax (LBTT).

The current SDLT regime is a slab system. This means that if the consideration for a property crosses a particular threshold, the entire consideration is taxed at the higher rate.  For example, the SDLT charge for a property sold for £249,999 is £2,500, but increasing the sale price to £250,001 triples the SDLT charge to £7,500 because the rate increases from 1% to 3% of the full amount. This leads to large groupings of properties for sale just under the boundary for the next threshold and is often a cause for criticism of the current system.

The new Scottish system will not work on this slab basis and instead the applicable rate will be payable only the proportion of the consideration which falls into each bracket as follows:

Residential Property

   Commercial Property

Up to £135,000

Nil

   Up to £150,000

Nil

Above £135,000 to £250,000

2%

   Above £150,000 to £350,000

3%

Above £250,000 to £1 million

10%

   Above £350,000

4.5%

Above £1 million

12%

 

 

 

In general this means that for properties at the lower end of the market, the new LBTT will be cheaper than SDLT. Given the average price for a residential property is Scotland in around £160,000, this will be good news for many Scottish residents, particularly first time buyers.

However, for those looking to move up the residential property ladder or for those living in high value areas, the news is not so good. Once the sale proceeds for a residential property exceed around £325,000, LBTT becomes the more expensive charge.  For example, on a property selling at £500,000, the rate of LBTT will be £27,300 but the equivalent SDLT charge would be nearly half that at £15,000.

For commercial properties, the upper rates of LBTT are markedly less and therefore the difference is less significant. In fact, LBTT will be the lesser charge until the sale proceeds for a commercial property reach around £2 million.

Anyone considering a property purchase in Scotland is reminded to carefully consider the effect that these changes will have on their budget.

For more information on any of the issues raised in this piece please call 0333 123 7171 and ask to speak with your usual advisor or a member of the property team.