In this update we have rounded up some of the recent tax changes which will affect the Property Sector. We will also be reporting on the specific Budget measures which will affect the sector as they are announced next week. If you would like to sign up to receive our Property Budget update please click here and you can find all of our Budget coverage on our website here.
Consultation on new VAT and CIS regime for construction sector
HMRC is concerned at the level of tax fraud in the construction industry and are currently consulting on introducing a VAT reverse charge for the construction sector and tightening the rules around gross payment status in the Construction Industry Scheme.
A similar domestic reverse charge has helped to tackle VAT fraud in the telecoms and energy sectors, and HMRC believe it could be equally successful within the construction sector. If the system is introduced, it will mean the supplier of goods or services is not involved in the payment of VAT to HMRC, and instead the liability for VAT payments will shift to the customer.
Although this is a straightforward concept in theory, if it’s introduced, it could end up adding an extra layer of complexity to an already complex area due to the differing rates of VAT that can apply to the sector.
If you have any queries please contact Simon Buchan and look out for further updates as more information is available.
Stamp Duty Land Tax (SDLT) returns under scrutiny
With the introduction of the 3% surcharge and the highest rate of 15% applying to “enveloped dwellings” SDLT has gone from being a relatively simple tax to somewhat of a minefield over the last few years. We have seen and heard from others in the sector that HMRC are more routinely enquiring into SDLT returns so care should be taken in particular where the 3% surcharge or 15% rates could apply.
Mixed use properties and the 3% rate
The 3% surcharge applies to second homes or any residential property acquired by a company.
Where a property is used for both residential and non residential, then the 3% surcharge does not apply. We understand that HMRC are looking more closely at purchases of houses with land where the land is returned as being used for non residential purposes and hence the commercial property SDLT rates applied. For example, a house being acquired with farmland, woodland.
Where mixed use has been claimed HMRC are querying in some detail what the land is used for and asserting that it is part of the grounds of the house even where quite large areas of land are in question.
We would advise that anyone with a purchasing a mixed property takes appropriate advice and retains appropriate evidence documenting the use of the land to ensure that they have a robust position.
15% rate for residential properties over £500k
The 15% rate is chargeable if chargeable consideration of more than £500,000 is attributable to the acquisition of an interest in a single dwelling and the purchaser is a company, a partnership which includes one or more companies or a collective investment scheme.
Reliefs from the 15% rate will apply if the property is acquired exclusively for one or more of the purposes of:
- a property rental business;
- development or redevelopment and resale in the course of a property development trade;
- resale in the course of a property trading business.
In each of the above cases the business must be run on a commercial basis and with a view to profit.
Although most SDLT reliefs must be claimed, there is no requirement to claim relief from the 15% rate. However, HMRC has added code “35” (relief from 15% rate of SDLT) to the list of reliefs to be entered in response to “Question 9” of the SDLT 1 return. It will usually be advisable for such relief to be claimed if the purchaser wishes to avoid prompting an enquiry into its return.
Relief is denied if it is intended that a “non-qualifying” individual will be permitted to occupy the dwelling, even if such an individual were to pay a commercial rent.
In addition, the reliefs can be withdrawn. Each category of relief has its own withdrawal rules, but in each case the period during which reliefs can be withdrawn is three years from the date of the transaction.
In the case of the relief for letting, trading in or redeveloping properties, the relief is withdrawn if, during the above three year period,
- the property is not held exclusively for one or more of the above purposes; or
- a non-qualifying individual is permitted to occupy the dwelling.
In addition, where, during the three-year period, the letting, trade or redevelopment has not yet begun or has ceased, the relief will be withdrawn unless reasonable steps are being taken to ensure that the qualifying purpose is carried out.
We have seen examples of HMRC raising enquiries on corporate purchasers of residential property and so you should ensure that you have evidence to show the reliefs apply and to protect against any withdrawals.
HMRC retrospective changes to relief for interest on remortgages
HMRC appears to have changed its long held views on the availability of tax relief on interest charged on borrowings by property business owners who refinance their property business, linked to a withdrawal of capital from their business, and this change may well impact on thousands of buy-to-let owners.
HMRC’s previous guidance to landlords who wish to remortgage their letting property was that they could withdraw funds from their capital accounts, up to the value of the property when first let, and use this money for any purposes and obtain tax relief on the interest cost of this refinancing of the business.
The additional interest charged on the increased borrowing would only be tax deductible if the funds from the new loan are used wholly and exclusively for the purposes of the letting business, and the ‘change of view’ appears to relate to what HMMRC now accept as ‘wholly and exclusively’.
Worryingly, HMRC have not dated the change, which suggests that in their view previously claimed interest relief may not have been allowable. However, the generally held view is that if a tax return is not under enquiry, and it was completed based on HMRC’s clearly stated guidance understanding at the time, then HMRC should not be able to reopen earlier years.
The position remains unclear and it is to be hoped that HMRC will issue some clarification of their position.
If you feel you may have been affected by the change, please speak to your usual BHP contact.
Landlord jailed for tax evasion
HMRC’s is continuing its crackdown on tax evasion amongst landlords across the UK. They have a property taskforce using data, including that found on the Land Registry and the electoral roll, to identify landlords who may be underpaying tax. Landlords should be aware of the risks associated with tax evasion, which can lead to large penalties, and, in extreme cases, criminal prosecution.
In a recent case, a Hampshire landlord has been given a two-year jail sentence after failing to declare Capital Gains Tax (CGT) on the disposal of a rental property. He evaded over £157,000 in CGT when he sold two of his rental properties and failed to declare the gain to HMRC. It is also expected that he will be the subject of asset forfeiture proceedings to recoup the tax owed.
As he did not declare the gain himself via his self-assessment tax return, it is likely that HMRC discovered the property sales by checking the Land Registry records. Property owners should be aware that HMRC have these and other records at their disposal, which they can and will cross check to client’s records to ensure they are correct. Any discrepancies will then be investigated.
If you have any concerns about undeclared capital gains, please speak to Elaine Skelton, or your usual BHP contact.
Private residence and permitted area
Most individuals are aware that when they sell their home, the disposal proceeds are exempt from capital gains tax. However, they may not be aware that if the property and grounds are more than 0.5 hectares, approximately 1.2 acres, then there may be capital gains tax payable on any excess garden or land. A recent case has upheld this view, so anyone with grounds in excess of this area should take advice before a disposal
The legislation states that garden or land in excess of the permitted area above can be exempt from Capital Gains Tax, if it is required for the reasonable enjoyment of the property. If any of the excess land is sold for property development, it may prove difficult to then declare that it is required.
In a recent case, an individual owned a property with garden more than 1.2 acres, which consisted of land with an old agricultural building that the owner used as a garden shed. He was made an offer of £2 million for the property and land by a property developer, who wanted access to the field behind the property.
As he considered this to be the sale of his main residence, he did not declare the disposal on his tax return. Six years later, HMRC raised a discovery assessment. They had no doubt checked the land registry and discovered the sale. The assessment was raised as the land sold with the property was more than the permitted area of 1.2 acres.
The case went to Tribunal and they found that “required for the reasonable enjoyment of the property” equated to necessary, and not just desirable. The case then became “what amount of grounds and garden are necessary for the enjoyment of the property?”
The decision was that only the permitted area of 1.2 acres was necessary, and the assessments on the excess land were therefore correct.
Therefore, if you are selling a property which has large garden or grounds, please speak to your usual contact to discuss the position.
Furnished Holiday Lettings
Many landlords are now considering furnished holiday lettings as another option in their property portfolios. A further case has now gone before the Tribunal and lost on a claim for business property relief which gives 100% relief from Inheritance Tax (IHT). Anyone with Furnished Holiday Lets or other investment properties should ensure they take appropriate advice to manage their IHT liabilities.
The furnished holidays letting in this case was a substantial business of 8 holiday cottages and 2 flats, with a long itinerary of services provided, so many practitioners were hopeful that the taxpayer in this case would win.
Unfortunately, the Tribunal found in favour of HMRC, and concluded that however high the standard, and however broad the range of services provided, what guests really wanted was access to a property in a beautiful setting, so in essence, the right to rent land. This is an activity that consists mainly of investment in property, so the claim for business property relief was not allowed.
The decision on this case may now make it virtually impossible to claim business property relief on furnished holiday lettings, unless the taxpayer makes a successful appeal against the decision.
Tenants Fees ban
The British Government has set out its approach to banning letting fees in England in a new draft bill that has been introduced to Parliament.
Communities Secretary Sajid Javid said that it will help millions of renters by bringing an end to costly upfront payments. Letting fees are already banned in Scotland but not yet in Wales.
The draft Tenant Fees Bill will cap holding deposits at no more than one week’s rent and security deposits at no more than six weeks’ rent. The draft bill also sets out the proposed requirements on landlords and agents to return a holding deposit to a tenant.
A new civil offence will be created with a fine of £5,000 for an initial breach of the ban on letting agent fees and creating a criminal offence where a person has been fined or convicted of the same offence within the last five years. Civil penalties of up to £30,000 can be issued as an alternative to prosecution.
It will require Trading Standards to enforce the ban and to make provision for tenants to be able to recover unlawfully charged fees, and a lead enforcement authority will be appointed in the lettings sector.
There will be an amendment to the Consumer Rights Act 2015 to specify that the letting agent transparency requirements should apply to property portals such as Rightmove and Zoopla.
Recent HMO case clarifies how to count to 3
Woking Borough Council recently won a case where a two storey flat above a shop was held to be a three storey building for the purposes of requiring an HMO licence, even though the ground floor was separate from the residential property and used as a restaurant.
Whilst initially the justices had found that the ground floor should not be counted, the council’s position was allowed on appeal.
