Chapter 18 Property businesses Flashcards
1.1 Residential property letting – buy-to-let investments.
Property owned by individual Property owned by company
SDLT:
Residential property rates payable.
Additional 3% added to applicable rates
(assuming own property already). Additional
2% added to applicable rates for non-residents
investing in UK property from April 2021
Residential property rates payable.
Additional 3% charge even if first property
owned (unless 15% rate applies if single
dwelling cost more than £500k). additional 2%
added to applicable rates for non-residents
from April 2021
ATED: N/A for individuals Payable if dwelling worth more than £500k
unless property business exemption applies
VAT:
Zero-rated if purchase/sale of new
residential property. Exempt if purchase/sale
of existing residential property. Exempt is lease
of residential property. No OTT on residential property
As for individuals
Tax on income: Cash basis is default method if property
receipts do not exceed £150k. allow deduction
for replacement of domestic items, no deduction
for finance costs. If property being let out is also
owner’s home rent-a-room relief up to £7,500 available.
Property allowance of £1,000 per year in place of expenses.
Subject to 20%/40%/45%
Profits always calculated on the
accrual’s basis. When calculating profit
allowable deduction for replacement of
domestic items, finance costs are NTLR
debits allowable in full. Profits subject to CT.
further tax when profits extracted
Losses:
Property profits and losses in a tax year
are netted off. If overall loss carry forward
against future property profits.
Property profits and losses in AP are
netted off. If overall loss offset against total
profits in the same period, then carry
forward against future total profits
Tax on gains on disposal:
Subject to CGT at 18%/28%, payable
within 60 days of completion
Usually subject to CT. non-resident
companies also pay CT on gains but only on
post April 2015 gain
IHT:
Property included in death estate. No
RNRB unless it was owner’s resident. BPR not available
Shares included in death estate. RNRB
and BPR not available
2.2 Finance costs for residential properties
If an individual incurs finance costs in respect of a residential rental property those costs cannot be deducted from property income. These costs attract tax relief at 20% as a tax reducer when calculating the individual’s tax liability.
There is a cap to the amount of relief claimed as finance costs in any single tax year. The amount of interest relieved as a tax reducer cannot exceed the lower of the property income itself and taxable NSI for the year (after the deduction of the PA). any unrelieved amounts can be carried forward and added to the amount qualifying for relief in future years.
The restriction on finance costs does not apply to letting commercial property, letting furnished holiday accommodation, a business dealing in property or developing it for resale and companies letting property.
This restriction may cause landlords to restructure their property business by:
- Selling one property to reduce the loans on others.
- In a business which has buy-to-let properties and also property development, structuring the loans so that they relate to the property development business.
- Letting the property as furnished holiday accommodation
- Incorporating their business
- Selling residential property and investing in commercial property or a property development business
2.3 Furnished holiday accommodation
Accommodation qualifies as FHA only if it:
- Is available for commercial letting for at least 210 days in the tax year.
- Is actually let for at least 105 days in the tax year.
- Any period where the same person occupies for more than 31 days consecutively must not be included in the 105-day qualifying period.
If a property is treated as FHA, its rental profits are kept separate from non-FHA profits and treated like a trade. The implications are:
- Profits treated as relevant earnings for pension purposes.
- CAs are available on plant and machinery if using the accruals basis.
- Finance costs are allowable in full when calculating property income.
- For CGT purposes FHAs are treated as business property and as such are qualifying assets for rollover relief, gift relief and BADR.
- For IHT, BPR is available if the owner has substantial involvement during the letting.
2.4 Incorporation of a buy-to-let business.
Landlord can incorporate the business to mitigate against the restriction of finance costs. The implications of this are:
- Extraction of profits: subject to corporation tax followed by a charge to income tax when extracted from the business.
- Capital gains tax: chargeable gains arising when business incorporated, calculating the market value of the properties transferred. If the business was actively managed incorporation relief may be available
- SDLT: charged when property is transferred to a company for nil consideration if the individual is connected to the company. SLDT rate is based on the total value of the properties transferred and can be up to 15%. Multiple dwellings relief can be available. SLDT calculated based on average value of the properties if this relief is claimed then multiplied by the number of dwellings. This can be claimed if six or month properties are transferred. Alternatively, the transaction can be treated as non-residential and SDLT will be charged at the non-residential rates (up to 5% rather than up to 15%).
3.1 Residential property development by individual
This is when a taxpayer buys a property and aims to sell it for a profit, leads to similar tax implications to those of owning buy-to-let properties. There is no restriction on the amount of finance costs that can be deducted when calculating the taxable profits of the business.
When an individual sells a property CGT applies at 18%/28%. PRR may be available if the property was the owner’s private residence at some point. PRR for deemed ownership and the last nine months of ownership is always deemed as living in. Therefore, if the taxpayer buys the property and sells within 9 months the gain will be fully exempt. The election to make the new residence their main home must be made within two years of purchase in order for that property to benefit from PRR on its future disposal.
If an individual repeatedly flips properties, HMRC may conclude that this represents a trade. In that case the disposals are not within the scope of CGT. In this case, income tax is charged on profits made.
3.2 Residential property development – inheritance tax
BPR is not usually available for an investment business. If the business is held to be carrying on a genuine building and construction trade and the properties are held as inventory for this trade, then BPR will be available.
3.3 Residential property development – SDLT
When an individual buys a second residential property an extra 3% is added to the relevant rate of SDLT. An additional 2% if they are not UK resident. When the property being flipped has been the taxpayer’s private residence:
- The additional 3% will not be charged if the second property is bought on the same day as the first property is sold, providing the second property is to be the taxpayer’s main/only residence.
- The 3% will be refunded if the second property is to be the taxpayer’s main/only residence and the first property is sold within three years of the purchase of the second home.
3.4 Residential property development – ownership by a company
Ownership through a company may be seen as more advantageous as:
- No restriction on the deduction of finance cost
- Any profits or gains are subject to CT at 19% rather than income tax or capital gains tax.
The benefits of those are offset by:
- SLDT charges being higher if owned through a company (additional 3% rate plus if property costs more than £500,000 the higher rate of 15% SLDT is payable)
- Residential property developer tax could be payable.
If the business is set up as a company, it may be treated as an investment company for CT purposes. For IHT, BPR may be available on the shares in the company in the same way for an individual. Further tax will also be payable when the shareholders extract profits from the company.
3.5 Residential property developer tax
Introduced on 1 April 2022. Tax applies to UK resident and non-UK resident companies but not individuals. The tax is at a rate of 4% on UK property development profits, but only on profits in excess of a £25 million annual allowance. Properties such as student accommodation and hospitals are exempt.
4.1 Investing in commercial property.
The implications of investing in commercial property are the same for companies and individuals. SLDT will be charged on the purchase of property at non-residential rates.
VAT: construction/ sale of new (less than 3 years old) commercial building is standard rated, as it work on an existing commercial building. Sale of an old commercial building is exempt as is rent of any commercial building. For exempt supplies regarding commercial buildings, an option to tax can be made. If made it means that input tax relating to the sale/lease can be recovered, but output tax must be charged on any subsequent rent/sale.
