Tax on land disposals
As the pressure to build new houses increases and councils are able to relax planning rules, the possibility of realising the development potential on long held land banks has grown.
The tax payable on the realisation of these banks can be a complicated area with differences depending on what the land has been used for, who owns it and how the eventual sale is structured. Additionally, HMRC have recently tightened the rules surrounding disposals of land.
We would always recommend advice is taken well in advance of a sale, to ensure that any tax reliefs available are maximised.
A disposal of land is usually taxed as a capital disposal, which typically means Capital Gains Tax (CGT) of 20%, although a higher rate of 28% will apply to a disposal of residential property. However, new legislation can be used to tax gains on disposal of property as trading income, if it was originally bought for capital growth and not an income – this could mean tax rates of up to 45%.
If the land is part of the curtilage of your main home, the disposal may qualify for relief from tax entirely. Similarly, if the land has been used for business purposes, it may qualify for Entrepreneur’s Relief, which means that a tax rate of only 10% will apply. There are various conditions which need to be met for this relief to apply.
Individuals with a potentially valuable parcel of land may look to transfer the ownership of the land to other family members, trusts or a family investment company, which can achieve Inheritance Tax savings although care must be taken to not lose valuable CGT reliefs if the ownership structure is changed.
Other commercial aspects such as receiving an option payment or entering into a joint venture arrangement with a developer, can also complicate the tax position – not to mention VAT and Stamp Duty Land Tax (SDLT) which can both also have a bearing on land transactions.
As the tax rate can vary between 0% and 45% we would always recommend that you seek advice in advance of a property disposal. Ideally, this would be before planning is granted and at least a year in advance of a disposal, however there is still some planning that can be considered with shorter time spans.
At BHP, we have a wealth of experience of advising on the property sector and our team includes specialists on income and capital taxes, VAT and SDLT and how they affect property transactions. Please contact Zoe Roberts or your usual BHP tax contact if you want to discuss further.
Buying a home to live in should escape the 3% SDLT…… shouldn’t it?
Most people are now aware that if you purchase a second dwelling for more than £40,000, Stamp Duty Land Tax (SDLT) will become payable at a rate of 3%, over and above the usual SDLT liability. However, buying the home that you intend to live in as a main residence should avoid this charge.
However, this is not as straightforward as it first appears, and the actual calculations can become very complex, very quickly. Care should be taken and advice sought if more than one property is involved.
If you are purchasing a new main residence whilst still owning your previous main residence you will be charged the additional 3% SDLT. However, if your previous main residence is sold within three years, you may be able to reclaim the additional SDLT. Similarly, if you have already sold your main residence, then the purchase of a replacement main residence (subject to conditions) may escape the 3% charge.
The 3% additional liability also applies if you purchase a property in joint names, and only one of the joint owners already has a property.
If married couples or civil partners separate and need to purchase a new property for one party, as long as this is done as part of the divorce, in contemplation of the divorce or under a court order, then the additional 3% SDLT should not apply.
However, if a married couple or civil partners simply separate and one party purchases a new main residence, whilst still owning a share in the matrimonial home, the 3% additional rate will be payable. If the matrimonial home is sold within three years, then the additional charge can be repaid.
If a co-habiting couple separate, and they own two or more properties between them, then this can become complex for SDLT purposes. If one party buys the other out of two or more of the properties, then the 3% additional charge could become payable in respect of all of the properties, including the main residence. This is because the “buyer” will have more than one property, has not replaced their main residence and the relief on divorce does not apply.
There are many different possible combinations of circumstances and is it important to take advice. You should be aware that a charge may arise, and check with our Tax Partner, David Charlton or your usual BHP tax contact to see if by making slight changes to the arrangements, a charge may be avoided.
Principal Private Residence (PPR) Relief
For a number of years, PPR relief has been available in respect of your main residence, so that on disposal it is completely exempt from Capital Gains Tax (CGT). It has also been possible (to an extent) to choose which residence was your main residence if you held more than one property. However, HMRC have started to take a firmer stance on perceived abuse of this.
Where more than one residence is owned, to some extent, you have been able to choose which residence was to be treated as your main residence for CGT purposes. As long as at some point the property has been a residence, then an election could be made to nominate this as the main residence to maximise the amount of tax relief available.
HMRC are increasingly vigilant when it comes to reviewing claims to relief. If you dispose of a property and (broadly) your period of occupation was not intended to be permanent, then they may refuse to give the PPR relief.
By way of example, a recent case which the taxpayer lost at a tribunal involved a co-habiting couple, who then split up. One of the parties purchased another property and claimed to live there. Within three months, they had reconciled and moved back in together, and put the property on the market. PPR relief was claimed on the disposal of the second property, but this claim was refused by HMRC and the decision was upheld by the Tribunal.
As part of their evidence, HMRC discovered that within a short time of purchasing the property, it had been placed for sale, before the reconciliation. In addition, the property had not been occupied fully, with just a few clothes being moved in. The address held by banks, etc had not been changed to the new property. They therefore argued that the property was never considered to be a permanent place of residence, and so PPR relief was not available.
If you find yourself in a similar situation, or if you are considering changing PPR to another residence, you should take advice, to maximise the opportunity for the valuable PPR tax relief to be secured. If this is the case please contact Elaine Skelton or your usual BHP contact.
Investment in commercial vs. residential
According to some reports, the number of buy-to let investors moving to commercial property has tripled in the past three years. With only a few weeks to go until mortgaged buy-to-let properties become subject to a tougher tax regime, this number is likely to continue to grow and so we’ve taken a more detailed look at the pros and cons of investing in a commercial property.
As it has been residential buy-to-lets which have become a focus for additional regulation and increased tax rates, many investors may now be considering commercial property investments.
A lower rate of 20% CGT applies to gains on disposal of commercial properties, compared to the rate of 28% on residential property gains. Commercial property and semi-commercial or mixed property (eg. a property with a shop and a flat above) are also exempt from the extra 3% Stamp Duty surcharge. Finally, individual landlords who buy commercial properties can continue to claim loan interest relief after the new regime is introduced, making these investments an even more attractive prospect for the future.
Typically, it will be possible to make a claim for capital allowances on fixtures within a commercial property, although it is to be noted that the rules in this area are some of the most complex on the statute book. Capital allowances are not generally available on residential property.
Another benefit is that pension funds can acquire commercial properties as investments (they cannot acquire residential properties). Acquiring in a pension fund can mean that income and capital growth are effectively tax free and the investment can be passed on Inheritance Tax-free.
So the tax might be better but what are some of the other differences?
While commercial property usually costs a great deal more than residential property, it can also bring in a greater yield. Business property is often less “hands on” than its residential rival as the occupier will typically maintain the space and refurbish it to suit their business needs. However, whilst the commercial yield may be higher for rent, capital value increases are less reliable. Also, tenants take on many of the costs that a landlord would have to deal with in the residential market such as cost of insurance and repairs as well as business rates. Tenants typically sign up for longer leases, meaning a more reliable income, but void periods can also be longer.
The cost of a commercial mortgage can vary dramatically depending on the size and type of the property that you wish to buy, and investors can have significantly less protection with commercial mortgages than with buy-to-let or residential mortgages. Lenders can call in the loans at any point and hike rates depending on market conditions. Mortgages also tend to be variable, with a margin over Bank Rate or Libor rather than fixed rates.
As can be seen, investing in commercial property has significantly different risks and rewards to residential property but with the changes to the tax regime it may be worth further consideration. For further information, please contact Zoe Roberts, David Charlton or your usual BHP contact.
Making Tax Digital
On 31 January HMRC announced further details of the Making Tax Digital initiative which is coming in for individuals from April 2017 and for most businesses including landlords from April 2018. They have also confirmed plans to undertake a year-long pilot of Making Tax Digital for “hundreds of thousands” of taxpayers despite criticisms from MPs in the Treasury Committee.
On 31 January 2017, HMRC confirmed that the quarterly updating and reporting for sole traders, partnerships and buy-to-let landlords with income in excess of £10,000 is to go ahead from April 2018 as planned, with a large pilot starting this April.
HMRC’s plan is that, from April 2018, landlords, partnerships and the self-employed will need to keep their records in a suitable digital format and file information to HMRC on a quarterly basis.
The requirement to keep records digitally will be a large shift for many businesses and landlords and is likely to increase the administrative burden and costs for many – at least in the short to medium term. At BHP, we are advising clients on how they can make the move work best for them. For some, embracing the technology may mean that they can save time and be able to access financial information about their businesses more readily. Others, however, may see little additional benefit and will simply require advice as to how to meet the requirements in the easiest way.
There is going to be a soft landing penalty regime in the first twelve months of operation, with HMRC stating that penalties will not be enforced during the initial launch period, although the detail will go out for consultation this spring.
Landlords will be able to use the cash basis for the first time if they are reporting annual income under £150,000. This will mean that they only have to declare income if they actually receive it, rather than using the accruals accounting basis. This means they will be able to pay tax based simply on the difference between the money they have taken in and what they have paid out. However, they will also only be able to claim relief for expenses they have actually paid out rather than expenses that have been incurred but not yet paid for. Whilst this measure is meant to simplify accounting, it actually means that each landlord will need to consider which rules they will be better off under. In order to use accruals accounting, landlords will have to formally opt out of the cash basis.
The Treasury Committee criticised HMRC and called for a delay to the project’s implementation in order to have more substantive and wide-ranging pilot scheme. The committee raised concerns that HMRC have only undertaken pilots using businesses invited by them and very little information has been made publically available about the outcome.
The Committee also recommended that the threshold for reporting should be raised from £10,000 to match the VAT threshold of £83,000. The logic to this being that £10,000 is even lower than the basic tax free allowance of £11,000 for 2016/17. As a compromise, the Government has agreed to review the proposed £10,000 exemption threshold and the deferral threshold.
Further consultations on the Making Tax Digital rules are due to be published in Spring 2017.
Restriction on interest relief on residential buy-to-lets
At present, full Income Tax relief is normally available for interest paid on a loan taken out by an individual for use in his property letting business. With effect from 6 April 2017, tax relief on interest relating to ordinary residential property business will be restricted.
By 2020/21, interest paid on loans taken to acquire residential let properties will no longer be an allowable deduction against rental profits, but instead will only be given as (at most) a 20% income tax deduction. Please note that these new rules do not apply to owners of furnished holiday accommodation nor to landlords of rented commercial property.
The restriction on deductibility of interest and the replacement “tax reducer” will be phased in over four years as follows:
- 75% deduction against rental income, 25% tax reducer for 2017/18
- 50% deduction against rental income, 50% tax reducer for 2018/19
- 25% deduction against rental income, 75% tax reducer for 2019/20
- 0% deduction against rental income, 100% tax reducer for 2020/21 onwards
The tax reduction for each property business is based on the smaller of the finance costs disallowed from deduction against the rental profits or the rental profits for the year.
To illustrate how this could affect you, take the example of a 40% tax payer who has current rental income of £20,000 and pays £10,000 of interest. Currently he has rental profits of £10,000 and pays tax of £4,000.
Assuming steady income and interest payments, his tax will increase by £500 each year until by 2020/21 onwards he will be paying tax of £6,000 – an effective tax rate of 60% on his £10,000 actual profit.
More heavily geared property owners will suffer even more and can face tax charges of over 100%.
The new affordability threshold which was imposed this year is seen to help self-guard rental cover for landlords over the years, and in advance of the forthcoming changes to mortgage interest tax relief may mean fewer landlords are so heavily geared.
Whilst the affordability criteria was set with stress tests of 25% interest cover to rates of up to 5.5%, some banks such as Nationwide had voluntarily tightened their criteria, refusing to lend to landlords making rental profits of less than 45 per cent of their mortgage repayments.
There are opportunities to mitigate this additional tax. Incorporating your property portfolio can reduce the impact as companies (at least for the time being) can still claim tax relief against 100% of their interest charges. Incorporating a property portfolio can trigger CGT or SDLT and so advice should be taken.
For further information on how this could affect you, please contact Zoe Roberts, David Charlton or your usual BHP contact.
Housing White Paper released
The Secretary of State for Communities and Local Government, Sajid Javid, has released the Housing White Paper. The emphasis was placed more on the rental market as an alternative to home ownership.
The new housing strategy for England includes giving councils powers to pressurise developers to start building on the land they own. Ministers also pledged to make renting “family friendly” by offering longer tenancies. A number of the measures include:
- Expecting developers to avoid “low density” housing where land available is short.
- A “lifetime ISA” to help first time buyers save for a deposit.
- Introducing banning orders “to remove the worst landlords or agents from operating”
- Using a £3bn fund to help smaller building companies challenge major developers, including support for off-site construction, where parts of the buildings are assembled in a factory.
- Reduction in the time allowed between planning permission and the start of building from three years to two years.
- Forcing councils to produce an up-to-date plan for housing demand.
- “Starter homes” will be aimed at those with combined incomes of less than £80,000 (or £90,000 in London). They will be built for first time buyers aged between 23 and 40 and sold at least 20% below market value. The maximum price after the discount has been applied is £250,000 outside London and £450,000 in London. Some or all of the discount will have to be repaid if the property is resold within 15 years.
