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Property Tax update
Presented by Robert Maas of CBW Tax
March 2015
Property Taxes 2014/15
Bloomsbury Professional
• Introduction• Rents• Premiums• Relief for interest payable• Investment or dealing?• Tax aspects of property dealing companies • Tax aspects of property investment companies.• Problems of development
• Refurbishments• Allowances for capital expenditure• Tax on chargeable gains• Business occupation of property• Private residences• Artificial transactions in land• Use of overseas companies to acquire UK properties
• VAT on residential property• VAT on commercial property• Inheritance Tax• Stamp Duty Land Tax• Annual Tax on Enveloped Dwellings• The Council Tax• Landfill Tax• Miscellaneous
• No special tax regime• Number of taxes to consider• The requirements can conflict• Basic questions
- Investment or dealing- Best structure- What is the client trying to achieve?
Basic principles
Investment or dealing?
• What is the distinction?• It is not always readily apparent• The basic tests to apply• Decided cases
Rental Income
• UK property business• Profit calculated on trading income principles
- Furnished lettings- Furnished holiday lettings
• Losses- Income tax
- Corporation tax
Lease premiums
• Income tax charge on leases of under 50 years• Obligations to carry out works• ‘Premium’ for an assignment
Reverse Premiums
• Taxable as income if- Paid as an inducement- Tenant becomes entitled to an interest in land- Payment is by grantor of lease or a connected
person- Spread under UITF 12
• Probably non-taxable if above conditions not met• But may be a capital gain
Overseas properties
• Separate overseas property business• No deduction for travel• Interest is deductible in the normal way• EEA furnished holiday lettings
Non-resident landlords
• Tenant or agent must deduct tax• Unless landlord opts into self-assessment• Tax deduction is on income less allowable expenses paid by
the tenant/agent• Why opt?• Tenant/agent must account for tax quarterly• Return by agents
Choosing the structure
• Effect of reliefs on corporation tax• Individual pays only 18% or 28% CGT• Is a company a sensible vehicle?• Not normally for investment properties• But may be for trading ventures• Appropriations to and from trading stock
Capital Allowances
Plant and machinery - 1
• 100% annual investment allowance• 100% first year allowance on certain expenditure• 18% pa writing down allowance
- Except for integral features which is 8%
Capital Allowances
• What is machinery?• What is plant?• Yarmouth v France• J Lyons & Co v AG• Cole Brothers v Phillips• CIR v Scottish & Newcastle• Hunt v Henry Quick Ltd• J D Wetherspoon v HMRC• Other cases
Plant and machinery - 2
Interest rate changes
• Lessons to be drawn- Functional test is key- Specially designed is irrelevant- The first-tier tribunal is sole arbiter of facts- If you don’t ask you won’t get (probably)- Don’t look at what is being bought; look at why it is being bought
Plant and machinery - 3
Capital Allowances
Plant and machinery - 4
• Ought related items to be looked at individually or as a whole?
• Plant in buildings, CAA 2002, ss 21-23
• On acquisition of a building, remember you are buying the plant in it
- But allowances are restricted to vendor’s cost- Plus possibly cost of any items on which he did
not claim allowances• Joint election as to how much of purchase price is plant• Anti-avoidance rule
Capital Allowances
Plant and machinery - 5
• Cannot claim for fixtures in a dwelling house• Purchaser and vendor cannot normally claim under
different heads• Landlord’s fixtures• Sale and leasebacks• Landlord can pass right to allowances to tenant who pays a
premium
Plant and machinery - 6
Capital Allowances
• Only deductible items are- Cost- Incidental costs of acquisition- Enhancement expenditure- Expenditure on defending title- Disposal costs
• Interest is not deductible
Capital Gains Tax - 1
Capital Gains Tax - 2
• Date of disposal is contract date (unless it is conditional)• What is a conditional contract?• Use of options• Marren v Ingles
- Do you want it to apply?
Capital Gains Tax - 3
• The grant of a lease is a part disposal- So need to value the reversion
• A lease of under 50 years is a wasting asset• The part of a premium charged to income tax is excluded
from the consideration
Capital Gains Tax – Entrepreneur’s Relief
• Must have a disposal of a business - Or of assets of a ceased business
- Or shares in a trading company• Must be individual’s family company and he must be a
director or employee• No relief for a discretionary trust• Limited relief for an IIP trust• Assets held outside company or partnership
Refurbishments
• Much of the expenditure by a tenant is likely to be revenue
• Capital expenditure will normally be enhancement expenditure
• Has there been an appropriation to trading?• Can be better to give tenant a rent free period and let
him incur the expenditure
Use of Overseas Structures - 1
• An overseas company is liable to corporation tax if it is either
- Resident in the UK - Trading in the UK• Residence = central control and management• There are a large number of anti-avoidance provisions
Use of Overseas Structures - 2
• There is little scope for avoidance by a person who is resident and domiciled in the UK
• Can achieve a deferral by excluding everyone you might want to benefit!
• There is scope for CGT avoidance where settlor and beneficiaries are non-UK domiciled
Value Added Tax - 1
• There are two distinct VAT regimes
1. Residential and relevant charitable buildings2. Commercial property and land
Value Added Tax - 2
Residential
• Zero-rating applies on- The first grant by a person constructing a
building of a major interest in it if it is either- Designed as a dwelling, or- Intended for use solely for a relevant
residential or relevant charitable purpose
- The grant of a major interest by a person converting a non-residential building into a dwelling
Value Added Tax - 3
- The supply in the course of construction of a dwelling of building services- Supplies of building services to a housing
association in the course of the conversion of a non-residential building
- The supply of building materials to a person to whom the builder is also supplying the above and
is incorporating them in the building
Residential (cont’d)
Value Added Tax - 4
• Meaning of residential• First receipt of rent can trigger the disposal• What is a building designed as a dwelling?• Construction of a building does not include the conversion of
an existing building• Must be entitled to occupy throughout the year
Residential (cont’d)
Value Added Tax - 5
Residential (cont’d)
• If building is intended for use for a relevant residential or charitable purpose the builder must get a certificate from the proposed occupier
• Change of use within 10 years triggers a deemed taxable disposal
• Other disposals of residential land are exempt• Rents are always exempt – or virtually always
Value Added Tax - 6
Commercial
• The grant of an interest in land is normally exempt• Other than
- The disposal of a new non-residential building
- Certain leisure-related items- Where the option to tax is exercised
Value Added Tax - 7
• What is a new building?• The grant of a lease is normally exempt• Land sales are exempt (subject to the option to tax)• Building and civil engineering work is VAT-able• Demolition is normally VAT-able
Commercial (cont’d)
Value Added Tax - 8
• Election is building by building• Applies to all supplies in relation to the building by the optor
or a relevant associate- And may extend to adjoining buildings
• Cannot apply to a part of the building intended for residential or relevant charitable purposes (other than as an office)
The option to tax
Value Added Tax - 9
The option to tax (cont’d)
• Anti-avoidance rule re exempt occupation• Option is irrevocable
- Except in limited circumstances• Takes effect from day it is notified• May need consent of HMRC• Must notify on Form VAT 1614A
• Tenant cannot stop landlord electing- Unless lease prevents this
• If the building is demolished a fresh election is needed• A purchaser is not bound by his vendor’s election• One group company is not bound by an election by
another (unless they are a VAT group)
Value Added Tax - 10
The option to tax (cont’d)
• Why elect?- To recover input tax suffered
• Input tax incurred before the election is not normally recoverable
- Unless there have been no exempt supplies- Watch the normal 6 month time limit
• The option can extend to goodwill and fixtures
The option to tax (cont’d)
Value Added Tax - 11
Value Added Tax - 12
• Reverse surrenders• Reverse premiums• Rent free periods• Date of the supply• VAT and SDLT• Temporary licences• Change of mind• The capital goods scheme
Special problems
Value Added Tax - 13
• Partial exemption• Goods owned at deregistration• Transfer of a going concern
- Purchaser must opt to tax before the disposal• Service charges• Variations of leases• Payments under planning agreements• Joint ownership
Special problems (cont’d)
Value Added Tax - 14
• Options• Listed buildings• Payment of another party’s costs• Payments by guarantors• Apportionments on completion• Input tax incurred by company on domestic
accommodation for a director
Special problems (cont’d)
Robert Maas
Tax Consultant & Tax Expert Robert is a giant in the tax world. He is widely regarded as one of the leading tax practitioners in the UK and is a long-standing tax commentator. He has authored extensively on tax and is always a draw card speaker. The announcement that Robert had won the 2013 Lifetime Achievement Award was met with a standing ovation. Robert is well-loved and much respected – with good reason.
Amongst other roles, Robert is a member of the Technical Committee of the ICAEW Tax Faculty.
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