Whilst the effect of Brexit on the property market may take months to become clear, life does go on. We’ve summarised below a few of the recent changes which will affect the property sector.
SDLT 3% surcharge – “mixed use” exemption
Landlords will be well aware of the 3% surcharge introduced from 1 April 2016 to apply to purchase of residential property, however there is an exemption from this for mixed use properties which should not be overlooked.
This does not apply to non-residential properties and transactions involving a mixture of residential and non-residential property which are treated as non residential. There could be a crucial saving to be found here where instead of up to 15% SDLT, a mixed use property will only have up to a 5% charge.
Non-residential property includes –
- Commercial property eg. Offices
- Agricultural land
- Any other land or property which is not used as a residence
Clients should look carefully as to whether their property could qualify for mixed use SDLT.
Shops with flats above for example would be mixed use and would avoid the 3% surcharge and also qualify for the lower non residential rates.
Acquisitions of 6 or more dwellings are also treated as non residential property.
Gardens and grounds that are needed for “the reasonable enjoyment of a dwelling” fall into the definition of residential property but any land in excess of that can be considered as non-residential therefore making it a mixed use.
Similarly, if a property includes holiday cottages, or the land is used for agricultural purposes, then the property may be classed as mixed use and a lower charge will apply.
There is no official definition of “mixed use” so it would have to be argued with the taxman. The burden of proof is on the buyer of the property and so, advice should be sought if there is an argument for being a mixed use property.
Considering incorporating your property portfolio?
With so many tax changes for landlords on the horizon, many are wondering whether now is the time to move their property rental business into a company. Companies can provide an effective tax shelter, particularly for those who want to keep their net rental profit in the business, and the forthcoming changes to interest relief, as well as reducing Corporation Tax rates, could make this an increasingly attractive option. There are however various pitfalls which need to be considered.
The transfer of rental properties to a company is a disposal for Capital Gains Tax (CGT) purposes although this can be deferred if there is an active rental business.
SDLT is another potential pitfall, particularly with the new 3% additional rate for residential properties as the company would be treated as acquiring the properties at market value. There is a possible mitigation when the properties are currently owned by a partnership, but again certain conditions need to be met, and a partnership needs to be distinguished from mere joint ownership.
There are other practical considerations, primarily financing. If the rental properties being transferred to a company have significant borrowings on them, this finance would also need to be transferred to the company, which may prove costly, and in some circumstances impractical.
Therefore, whilst for some, incorporating the property business may be a good way forward, detailed advice should always be sought.
From April 2016, it is a requirement to file CIS returns online and you will no longer be able to submit paper ones. Deemed contractors should also be aware that if they carry on any activities which would make them a contractor they will become liable to apply the CIS requirements to all the irrelevant work subcontracted work.
For example, a retail company which has various properties on which it subcontracts the repairs/maintenance work would not need to apply CIS as long as its expenditure remains below the average £1m requirement. If the same company also carried out a small property development project or provided construction services it would have to apply CIS not only to the property development activity but would also have to apply the CIS requirements to all of the other construction work.
The Construction Industry Scheme is a taxation scheme for individuals and businesses in the construction industry. It sets out the rules for how subcontractors payments must be managed by the contractors. A contractor is a business that pays a subcontractor for construction work. For example, a building company paying for electrician.
You must register as a contractor with the Construction Industry Scheme (CIS) if:
- You pay subcontractors to do construction work
- Your business doesn’t do construction work but you usually spend an average of more than £1million a year on construction over 3 years (deemed contractor).
CIS is a scheme where tax is deducted at source from payments relating to construction work. The rate at which tax is deducted depends on the registration status of the subcontractor.
There is a relatively large administration burden attached to this activity. BHP would be able to advise on your status as a subcontractor or employee and correctly register you with HMRC. We can also verify that your subcontractors are registered with HMRC for the correct deduction.
If you would like to discuss this please contact either your usual BHP contact or Christine Robinson.
Death of the Green Deal
The government has stopped funding the failed Green Deal, which was designed as a pay-as-you-save scheme to fund energy efficiency in homes. The initiative suffered from low uptake due to an overly complicated system coupled with high interest charges. The government has no new schemes in place to succeed the Green Deal but has said it will work with the building industry and consumer groups on energy efficiency policies.
Non Resident Capital Gains Tax on UK Residential Property
Many clients are not aware that if they are non-resident and they sell a UK residential property, they now have to pay capital gains tax on the disposal proceeds and file a return with HMRC within 30 days of the date of conveyance, whether or not any capital gains tax is actually payable. This includes companies and trusts, as well as individuals.
The new rules came into force from 5 April 2015 and it is only the value of the property since that date that is subject to capital gains tax. If the property was owned before 5 April 2015, then it would be advisable to obtain a property valuation at the 5 April 2015 date asap, so you have the value for future disposals.
An election can be made to either tax the gain arising since 5 April 2015 or time apportion the gain over the whole period. Calculations can be made of both of these gains to see which is most tax beneficial. This is particularly relevant if losses are involved.
The capital gains tax is either paid via self-assessment or directly to HMRC within the 30 day period. However, even though the gain is under self-assessment, a further return still needs to be filed within 30 days of the conveyancing. The gain cannot simply be included on the self-assessment return.
We would be happy to help with the filing of the non-residents capital gains tax forms, please contact Elaine Skelton or your usual BHP contact if you have disposed of a property or if you have any queries.
New UK Accounting policies – impact on investment property businesses
For accounting periods commencing on or after 1 January 2015 and for companies that are not small, current UK GAAP has been replaced by FRS 102. There are significant differences which can affect the accounting for investment properties.
The main differences are summarised below.
- Investment properties will still be shown at valuation and revalued at each reporting date. However, whereas under SSAP19 movements were usually recognised through a separate revaluation reserve FRS 102 requires the movement to be reflected in the profit and loss account for the year.
- Movements in valuation, although reflected in profit, are not available for distribution until the property is sold. Additional disclosure is therefore required in the financial statements so as to keep track of distributable reserves.
- FRS 102 requires deferred tax to be recognised on movements in valuation rather than only when there is an agreement to sell a revalued asset as under old UK GAAP. The deferred tax expense will be reflected in profit and will effectively reduce the movement in valuation. This element of FRS 102 could have quite an impact on the balance sheet and could have a commercial impact.
- Properties held by one Group company and occupied by another have previously been prohibited from being treated as investment properties in both the lessor entity accounts and the Group accounts. Under FRS 102 treatment as investment property would still not be permitted in the Group accounts but is required in the lessor entity accounts if the property meets the definition of investment property. However, there is an exemption for ‘undue cost and effort’ that should be explored particularly in cases where valuations need to be obtained.
In addition, a new accounting standard FRS105 can be used for micro entities which has significantly reduced disclosure requirements however the disadvantage is that you cannot choose to revalue your properties which could have a negative impact on your balance sheet and ability to raise finance.
What is a micro entity?
A company meets the qualifying conditions for a micro-entity if it meets at least two out of three of the following thresholds:
Turnover: Not more than £632,000
Balance sheet total: Not more than £316,000
Average number of employees: Not more than 10
What are the main features of the micro-entities regime?
- A simpler balance sheet and profit and loss account.
- A micro-entity is not required to prepare a directors’ report.
- No notes to the accounts are required. Instead, where applicable, details of any advances, credit and guarantees with directors and details of any other charges, contingent liabilities, capital commitments, other additional guarantees and/or certain other financial commitments should be disclosed at the foot of the balance sheet. This reduced information is referred to as the ‘minimum accounting items’.
- The fair value accounting and alternative accounting rules as set out in The Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 cannot be applied in micro-entity accounts. This means that no revaluations or subsequent measurement at fair value is permitted under the micro-entities regime. For example, a micro-entity with an investment property, choosing to adopt the micro-entities regime, would be required to measure the property at cost and not fair value.
- Only the balance sheet, including the information disclosed at the foot, needs to be filed at Companies House. It is not necessary to file the profit and loss account, or where relevant, the directors’ report.
Business rates on rooftop solar installations set to rise?
As reported in the FT and Clean Energy news in July, according to the Solar Trade Association (STA), HM Revenue and Customs’ Valuation Office Agency (VOA) are undertaking their 5 yearly review of business rates which will affect both new and existing solar PV installations.
The STA has said that the VOA’s methodology calculates the rateable value for solar PV based on capital costs of installation and multiplies by a factor of 0.4 to calculate the amount a company has to pay each year.
As both costs and subsidies have dropped significantly over the past five years, the STA is concerned that this will not be reflected by the new rates. It has estimated that rateable value for solar could increase from £8kWp to anywhere between £48.40-61.60kWp.
Click here to read the full article http://www.cleanenergynews.co.uk/news/solar/business-rates-tax-hike-expected-for-commercial-rooftop-solar