Property - tax Flashcards
CGT arises when:
- there is a chargeable disposal
- of a chargeable asset
- by a chargeable person
- which gives rise to a chargeable gain
In calculating the chargeable gain, the taxpayer can take into account allowable expenditure.
In the case of property, this may include:
- costs incurred in acquiring the asset (such as conveyancers’ fees for the purchase)
- costs incurred that contribute to the value of the asset (such as the cost of building an extension but not costs of maintenance or repair)
- costs incurred in disposing of the asset (such as conveyancers’ fees for the sale and estate agents’ commission)
CGT annual exemption?
£6,000
When does Private Residence Relief apply?
Private Residence Relief applies so that a person does not pay Capital Gains Tax if they sell or dispose of their home, provided the following conditions are met:
* it has been the person’s main home for all the time that they lived in it
* they have not let it out (other than taking a lodger)
* it has not been used for business purposes (using a room as a temporary office is ok)
* the grounds including all buildings are less than 5,000 square metres
* it was not bought just to make a gain
If any of these conditions are not met, then Private Residence Relief may be reduced or not available at all.
Married couples and civil partners can only treat one property as their main home between them (they can’t have one each).
VAT treatment of different types of property
Exempt supplies: Residential property, except for newly constructed property.
Commercial property over 3 years old, and the owner has not opted to tax.
Zero-rated supplies: Newly constructed residential property is a zero-rated supply.
The buyer doesn’t pay VAT, but because the output is taxable, the seller can recover its input tax from HM Revenue & Customs.
Standard-rated supplies (20%):
Newly constructed commercial property (less than 3 years old) is standard rated.
Older commercial property is standard rated if the seller has opted to tax.
Transfer Of a Going Concern?
a Transfer Of a Going Concern is a transaction where the seller uses the property for the business of letting to produce rental income, the buyer will do the same, and meets certain other requirements. A transaction that qualifies as a TOGC is not a taxable supply for VAT.
What happens if the property is standard-rated?
Standard condition 2:
* The seller warrants that the property is a standard-rated supply
* The buyer agrees to pay the VAT over the purchase price in exchange for a VAT invoice from the seller
What happens if the property is sold as an exempt supply?
A1 – exempt supply
Under the Part 2, A1 conditions:
* The seller warrants that the property is not subject to VAT
* The seller agrees not to exercise the option to tax
What happens if the property is sold as a transfer of ongoing concern?
A2 – TOGC
Under the Part 2, A2 conditions:
* The seller warrants that it is using the property for the business of letting to produce rental income
* The parties agree various other matters necessary to the transaction being treated as a TOGC
The first provision of both the A1 conditions and the A2 conditions is that standard condition 2 does not apply.
The A1 and A2 conditions only apply if the relevant tick box is ticked.
Differences between standard, exempt and zero- rated supplies
*
Standard rated supplies attract VAT at the standard rate, currently 20%.
*
There is a reduced rate of 5% for items such as domestic fuel supplies and certain
construction, conversion and renovation services.
*
Zero- rated supplies are still taxable supplies, but are charged at a zero rate
*
Exempt supplies are non- VATable. However, sometimes a supplier of land has the option
to charge VAT (‘the option to tax’).
What constitutes a taxable supply in property transactions?
The vast majority of residential transactions do not involve the payment of VAT. The sale of
a new build house by a developer is zero rated so the buyer will not pay any VAT, and the
subsequent sale of a residential property by a private individual will not be in the course of a
business, so the seller will not be charging VAT to the buyer in addition to the purchase price.
The situation is more complicated with commercial properties. There is a difference between
‘old’ and ‘new’ commercial properties for VAT purposes. A new commercial property is one
which is within three years from completion of the building. Supplies of interests in, rights or
licences to occupy commercial land or buildings are generally exempt. However, the following
supplies are taxable supplies, or can be made into taxable supplies by the seller exercising
the ‘option to tax’ (ie to charge VAT):
*
The sale of a greenfield site is exempt, subject to the option to tax.
*
The supply of construction services is standard rated.
*
Professional services, provided by an architect or surveyor for example, are
standard rated.
*
The sale of a new freehold building is standard rated.
*
The sale of an old freehold building is exempt, subject to the option to tax.
*
The grant of a lease is exempt, subject to the option to tax.
Reasons why a client would make an option to tax and the effect that it has?
The seller of a new commercial building has no choice but to charge the buyer VAT. The
seller of an old commercial building does have a choice. The effect of that seller opting to
tax is to turn what would have been an exempt supply into a taxable supply. A seller of an
old building may want to do this to enable recovery of the input tax incurred in relation to the
building, for example on building work costs and professional fees incurred in renovating the
building to get it ready to sell.
A possible disadvantage of opting to tax the supply of an old building is that the seller has
to charge VAT on the purchase price. This will not be a problem if the buyer makes taxable
supplies and is therefore able to recover its input tax VAT. However, if the buyer cannot
recover its input tax VAT, or can only make a partial recovery, then the purchase price is, in
effect, increased; there will be a real cost to the buyer’s business and the building will be
unattractive. Thus, if the target market for the building includes ‘VAT- sensitive’ financial buyers
(as in the City of London), the seller will try very hard to avoid opting to tax the supply of the
building. If it does so, there may be a detrimental effect on the sale price of the property that
can be charged because the potential buyer will seek to claw back some of the irrecoverable
input tax VAT by reducing its offer for the purchase price. Also, if the option to tax has been made before the date of transaction (or indeed if there is a VAT element in the price because
the building is new), the VAT will count as chargeable consideration for SDLT/ LTT purposes so
there will be extra SDLT/ LTT to pay, which is ‘tax on tax’.
Is the SDLT calculation affected if VAT is paid?
Where VAT is payable on the purchase price, the SDLT calculation is based on the purchase price including VAT.
How SDLT is paid on residential transactions?
- Up to £250,000, there is no SDLT payable.
- Over £250,000 up to £925,000, SDLT of 5% is payable
- Over £925,000 up to £1.5 million, SDLT of 10% is payable
- Over £1.5 million, SDLT of 12% is payable
SDLT on residential transactions – first time buyers?
£625,000. If there is more than one person buying, all must be first-time buyers.
If the relief applies, there is no SDLT for the first £425,000 of the purchase price, and 5% on any part of the price over £425,000 (but not exceeding £625,000). In the example given on the previous slide, the buyer who paid £2,500 on a £300,000 purchase would pay no SDLT if a first-time buyer.
