Mercer & Hole Property Plus - January 2015

INTRODUCTIONThese articles give an overview of some of the property issues that we are typically dealing with. These range from commercial property investment, to families buying property for their children to occupy, a second home investment, maybe a buy to let or a wealthy non UK domiciled individual acquiring a home or investment in the UK.

Right now, commercial property seems to be perceived as offering attractive income and long term returns. Capital allowances can be extremely valuable and may be critical in coming to an investment decision. We include a separate note on these and can give advice on this very important area.

It is increasingly common that children live at home for longer because they cannot afford to buy their first home. Even if parents can afford to give them the funds to do so, they may not wish to do so for many reasons. Parents may be anxious to keep control of the asset but want their children to have the benefit of occupation. These circumstances are very common and there is more than one possible solution. We consider the possibilities and evaluate the merits of using a trust in the right circumstances.

It is a well known fact that wealthy foreigners have invested into some pockets of London. If a non UK domiciled individual

is seeking to buy investment properties or a main residence in the UK, taking appropriate UK tax advice from the outset is key. The first question is how best to own it, personally or in a structure. The tax implications change depending on which route is chosen. Going down the wrong path can be very expensive and our team will guide you to the most effective choice to meet your overall needs.

A major change takes place in the VAT treatment on student accommodation on 1 April 2015. HMRC’s current concessions enable zero-rating but the new legislation will see these being withdrawn, which will significantly impact on developers and educational institutions. Our specialist VAT team are able to advise on approaches which can alleviate the VAT impact of these changes.

Whatever your property question is, we will work with you to advise on solutions that meet your overall needs now and long term.

property plusJanuary 2015

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IN THIS ISSUE: 02: Buying property for children 03: Capital allowances in commercial property 04: Commercial property investment

05: VAT on student accommodation: 1 April 2015 changes 06: Non UK domiciliaries owning UK property

07: UK residential property – buy to let 08: Residential service charge accounts

Liz CuthbertsonPartner020 7236 [email protected]

mercer & hole

property plus: january 2015

Buying Property for ChildrenIn many parts of London, property price growth now means many young people cannot easily buy. However, the idea of giving large capital gifts to a young adult can be daunting. What if they sell the property and use the cash unwisely or what happens if they marry and the relationship breaks down? These and other potential pitfalls are some of the reasons that outright large gifts are not always attractive.

Sometimes clients therefore own the property directly themselves and allow the children to occupy it; However, if the parents already have a large estate for inheritance tax, this has done nothing to reduce that problem. The property is owned by them and still in their own estate. In addition, any future gain on disposal of the property is not subject to main residence relief since this will not be available in these circumstances.

The solution is sometimes to consider the use of a trust. Each parent can transfer up to the nil rate band for inheritance tax into trust for the trustees to purchase property. The nil rate band is currently £325,000 and this means parents can together transfer £650,000 into a trust. If the purchase price is more than this, the parents can always loan monies in addition to the trustees or the trustees can take out a mortgage subject to finding a suitable lending facility.

There can be many benefits in using a trust.

The parents will be excluded from benefitting from the trust. After seven years from the date of transfer of funds to the trust, those funds have fallen out of the parents’ own estates thus reducing their overall inheritance tax liability.

There can be IHT charges within the trust on each tenth anniversary or when property leaves the trust but these are often much smaller than in the parents’ estates.

The property which has been acquired by the trustees is not part of the children’s estate but is owned by the trustees and they control that asset. They can allow a child right to occupy the property for example.

The trust offers protection of the asset in question. The asset belongs to the trustees and not to the child personally. Consequently, the trustees and not the child has control over the asset and the child has a

right to occupy it only. This can be invaluable in a situation where a child’s relationship with a partner may break down, for example.

The future disposal of the property will give rise to a capital gain if the property has risen in value. The gain will be sheltered from capital gains tax to the extent that Principal Private Residence relief is available. PPR relief should be available if a child occupies the property.

There are some formalities involved but if you would like to talk to us further on this point please contact a member of our team or your usual Mercer & Hole contact.


“It is often the case that clients want to help their children get

their first home.”

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property plus: january 2015 03

Businesses that incur expenditure on qualifying assets in let property may be entitled to capital allowances. Typically the assets will be plant & machinery and fixtures & fittings.

There are a number of different categories and allowances available: -

Annual Investment Allowance (AIA)This is a capped 100% allowance for plant, fixtures, etc but excludes cars. The allocation of AIA between the assets is at the business’ discretion; it is normally advantageous to allocate the AIA against assets otherwise entitled to lower rates of relief.

For accounting periods that fall wholly between 1 April 2014 and 31 December 2015, the AIA is £500,000. Accounting periods straddling these dates, or of less than twelve months, have a pro-rated entitlement.

The allowance has to be shared between groups or related companies and businesses.

AIA cannot be claimed on an asset acquired from a connected person nor in partnerships with any member other than an individual.

Enhanced Capital Allowances100% relief is given on ‘green’ assets including energy and water efficiency - see www.eca.gov.uk

General poolThis covers plant & machinery and fixtures & fittings that are not integral features (as below) and qualifies for writing down allowances at 18% on a reducing balance basis.

Short life assets (SLAs)These are assets that are expected to be sold or scrapped within eight years. Businesses owning SLAs may make an election such that, if the proceeds of disposal within the eight year period are less than the tax written down value, a balancing allowance is available. This can significantly advance tax relief.

Long life assetsThese are assets with an expected useful economic life of at least 25 years; they qualify for a reduced writing down allowance of 8%.

Integral features poolThis provides for writing down allowances at 8%, it includes assets in the following list:

• Electrical systems (including lighting).• Cold water systems.• Lifts, escalators and moving walkways.• Space or water heating systems, ventilation,

air cooling and air purification systems.• External solar shading.• Active facades.

Toilet and kitchen facilities are not included in the list so therefore qualify for the 18% rate available on general pool assets.

Second-hand commercial propertyGenerally, a buyer of previously used commercial property must agree with the seller the value of the fixed plant in the building - this cannot exceed the original cost claimed. The agreement is evidenced by an election that must be made within two years. If agreement cannot be reached the purchaser will have to go to a Tax Tribunal for a ruling if it wishes to pursue a claim.

If the seller did not claim allowances and is not prepared to make a claim before the sale, the purchaser (and any subsequent purchaser) is debarred from claiming relief.

However, integral features were introduced only from April 2008 and so for some older properties these costs are not subject to the election but may be claimed on a proportion of the price.

Capital allowances in commercial property

Cathy CornsCorporate Tax Partner01908 605552 [email protected]

mercer & hole


Commercial Property InvestmentCONTINUED LOW INTEREST RATES, STRONG

RECENT ECONOMIC PERFORMANCE, LIQUIDITY

IN THE MARKET AND INCREASED INVESTOR

CONFIDENCE HAS RESULTED IN STRONG DEMAND

FOR COMMERCIAL PROPERTY, WITH RETURNS

FORECAST TO BE THE HIGHEST THE UK HAS SEEN

SINCE BEFORE THE FINANCIAL CRISIS.

Economic surveys and reports rarely agree, with one commentator’s view often contradicting the next. However, in the area of commercial property investment in the UK, in particular in the South East of England, most agree that this represents a good place to be with good rentals, attractive pricing in relation to other asset classes and strong total returns.

The strong demand for prime and good quality secondary property is easy to understand. Interest returns on cash deposits remain pitifully low and the long expected rise in interest rates is still to be seen. Indeed, even when rates do rise, it is likely to be some time before we see base rates reach even 2%, the lowest rate in place before 2009. At the same time, the improving strength of the UK economy has resulted in increased demand for property, particularly in the office and industrial sectors. This, coupled with the reduction in construction during the financial crisis has resulted in demand outstripping supply in some areas. Add into the mix overseas investment and the rise in capital values currently being experienced is not a surprise.

As a Trustee of a large, asset backed charity I know from experience the difficulty in finding good quality commercial property to buy. This has led a number of investors to consider alternative means to increase their portfolios, including funding new developments, refurbishing older stock and in offering sale and leaseback arrangements to owner businesses. Whatever the tactic employed, it is essential to get good advice across a range of areas and this is where the Mercer & Hole property team can help. Particular areas include:

• Raising finance: whilst opportunities for investing may look compelling, raising bank finance remains challenging. Our corporate finance specialists can help, from preparing business plans and forecasts to support borrowing proposals to considering other forms of raising finance.

• Taxes: aside from stamp duty, VAT always has to be considered and properly managed for all property transactions – at a rate of 20% getting it wrong can be costly! Recent changes to rules governing capital allowances also have to be understood and applied, both for new builds/refurbishments and in purchasing second hand properties. Our VAT and tax specialists will guide you through these complex areas.

• Holding structures: options might include a corporate holding, a partnership/LLP, a personal holding, a trust etc. Short term and long term objectives need to be considered, both from an earnings and a capital appreciation point-of-view, together with the impact on other business activities undertaken. Again, we will help you identify the best structure for your particular circumstances.

To discuss your commercial property investment activities and how Mercer & Hole can help, please give me a call or send me an email to the address shown alongside.

Andrew LawesGeneral Practice Partner01908 605552 [email protected]

mercer & hole


1 April 2015 will see a major change in the VAT treatment of student accommodation, IMPACTING ON DEVELOPERS and institutions such as universities and colleges. HMRC’s existing concessions, facilitating zero-rating, are being withdrawn but certain approaches can mitigate the VAT impact.

VAT on Student Accommodation: 1 April 2015 Changes

Student Accommodation ConcessionFirstly, the construction of new student accommodation can be zero-rated by a developer provided the usage of the property qualifies under the Relevant Residential Purpose (RRP) rules. This requires that the accommodation be genuinely and solely for students, with student usage being at least 95%.

This 95% usage has been difficult to meet due to the long student holidays and the desire of owning institutions to supplement their income with holiday rentals. To date, an HMRC concession has permitted holiday usage by Higher Education Institutions (HEIs) to be ignored in determining the 95%, but no longer.

Thus institutional acquirers of such properties may no longer be able to certify to developers that they will meet the 95% criteria, forcing the developers to charge VAT. Alternatively, any certified VAT-free purchases could face VAT claw backs in future years where usage does not comply.

Dining Rooms & Kitchens Concession Secondly, a similar issue arises in relation to dining rooms and kitchens (which are often in separate buildings). HMRC’s concession has allowed construction of these to be zero-rated if used predominantly by the live-in students, if constructed at the same time as the student accommodation and if at least 50% of diners are the student residents. From 1 April HEIs will face the same certification challenges as above.

Solutions Abandoning holiday rentals and restricting rentals to ‘students’ are commercially disadvantageous. Alternatively, developers and HEIs can agree designs that target zero-rating under a separate VAT provision for dwellings. The term “dwelling” has been much litigated in VAT so careful attention is required.

Dining rooms and kitchens could still qualify for zero-rating where they are constructed at the same time as the student accommodation and are intended to be used solely (95%) for the resident students, guests and those working to look after the property. However, the interaction between this approach to zero-rating and pursuing the zero-rating for ‘dwellings’ will need to be considered.

DEFINITION OF ‘STUDENTS’HMRC have also tightened their definition of qualifying students, which will affect the above, notably holiday lets. HEIs will need to review their holiday letting market to try to maximise “student” lets and minimise non-qualifying lets. This may not be so straightforward commercially.

Transitional MeasuresThe above changes will apply to new properties constructed after 1 April 2015. There are transitional measures that will permit the continuation of the current treatment beyond 1 April 2015 for existing properties, projects currently underway or those just starting.

The conditions applicable to these transitional rules need to be checked as assumptions could prove expensive, particularly for those just commencing.

Seeking specialist advice at the planning stage is essential; VAT treatments are difficult to reverse once the concrete starts to set.

Richard CollierVAT Manager01727 [email protected]

mercer & hole


It is well known that wealthy foreigners often own very valuable properties in the UK. If it is their main residence then buying in their own name is usually the most appropriate form of ownership but there are many other issues to think about including the UK tax implications.

Funding the acquisitionIf the non domiciliary is bringing funds to the UK to buy a property then we need to plan the remittance of the funds carefully to minimise any UK tax charge. After that, there are other aspects to also think about.

Inheritance taxThe house will be a UK asset and within the scope of the non domiciliary’s UK estate for UK inheritance tax. The non domiciliary may often want to reduce their inheritance tax exposure with a mortgage. If they obtain a mortgage then careful consideration of how to service the interest is required. Additionally, how best to charge the debt is important to avoid unexpected UK tax charges. HMRC has recently announced that security taken on the non domiciliary’s foreign income or gains will bring about a remittance of those income or gains. Maybe the non domiciliary will simply choose to accept the tax cost and take out some life cover to provide a sum on their death to cover the tax charge. We will identify the best solution by consulting with the client on his overall circumstances.

Using a corporate structureHistorically, UK property was often owned through a non UK corporate. High value residential properties owned through corporate entities are now subject to an annual tax charge – ATED (Annual Tax on Enveloped Dwellings). With effect from 1 April 2013, the charge was levied at £15,400 for enveloped properties worth over £2m, rising to £143,750 for a property worth more than £70m. These charges are due to rise significantly following the Autumn Statement. So, for properties caught by ATED in valuation band £2m and over, the charges will be set as follows:

The ATED regime will also be extended from 1 April 2015 to properties that were worth more than £1m at 1 April 2012 (or on acquisition, if later) with an ATED charge of £7,000. In addition, with effect from 1 April 2016, it will also be extended again to properties worth in excess of £500,000 at 1 April 2012 (or on acquisition, if later), with an ATED charge of £3,500. In view of the above, corporate ownership of UK residential property, that is not let commercially to unconnected parties, may carry an expensive tag but there are many circumstances that may make that worthwhile and we can guide you through those and the consequences.

Buying a residential investment portfolio to let outThere is no ATED charge where the property is let on commercial terms. The non domiciled client therefore needs to consider the benefits of using a corporate structure if they are is buying residential let property.

If a non UK company owns the UK property, the inheritance tax exposure can vanish. Sometimes, the non domiciliary needs to put a trust above the company and that is also very effective for UK inheritance tax.

Capital gains tax will be payable on disposal of the UK property and the rate payable will depend on which structure is chosen. No one solution fits everyone and again we discuss the long term goals at the outset to fund the most appropriate long term plan.

Non UK Domiciliaries owning UK Property


Value of property 2013/14 2015/16 on relevant valuation date ATED charge ATED charge

More than £2 million £15,400 £23,350 but not more than £5 million



In excess of £20 million £143,750 £218,200

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UK RESIDENTIAL PROPERTY – BUY TO LETOWNING MORE THAN ONE PROPERTY IS BECOMING MORE POPULAR IN THE UK. PEOPLE LOOK TO

INVEST IN THE UK RESIDENTIAL PROPERTY MARKET BECAUSE THEY GENERALLY HAVE A GREATER

UNDERSTANDING OF THE MARKET PLACE AND ARE MORE FAMILIAR WITH THE TERMINOLOGY THAN

THAT OF THE OBVIOUS ALTERNATIVE INVESTMENT CHOICE OF STOCKS AND SHARES.

Some people will buy a property to let at the outset whilst others may develop property with the intention of selling but change their mind as a result of market conditions. The property developer, trader and/or investor will have distinct accounting and tax issues to consider. Trading is classified differently to investment for tax purposes.

In order to fully assess the financial return on a potential property investment the total costs including any tax payable will need to be assessed and factored into the decision making process.

The tax position is not always straightforward as the expenses that are allowable for tax purposes throughout ownership and on any future sale have to be reviewed and analysed between capital and revenue to assess the correct tax treatment.

Revenue costs include expenses such as maintenance and agency fees. These expenses can be offset against the rental income to arrive at the net profit figure on which tax is calculated. The interest element on any finance on acquisition is also allowable for tax revenue expense.

Expenditure on the improvement or enhancement of the property will be classed as capital and therefore will not be an allowable expense to offset against the rental income. In some cases it will be allowable against any gain arising on the sale of the property.

Additionally if you own more than one investment property i.e. you have a portfolio then specific tax rules exists to deal with the offset of any losses on one property against the profits of another. The tax treatment can also vary depending on whether the property is let unfurnished or furnished and/or as a holiday letting.

It is also important to consider who will own the property as this will impact on any tax payable. Ownership could be individually, jointly, in a partnership or within a corporate vehicle. For example if property is held in a corporate vehicle any gain arising on a

sale will be taxed at corporate tax rates and tax will also apply on any extraction of profits from the company. Also if the property is owned by an overseas buyer then specific rules and compliance requirements exist for non resident landlords.

Property investment may be a key part of your financial plan for the future and as with any major financial decision you need to consider the post tax return on your investment. Inevitably the accounting and tax treatment is crucial to arriving at the true financial outcome of any such investment

Here we aim only to highlight some points for consideration. The location and cost of finance is important but being aware of the accounting and tax issues as mentioned above should also help when deciding on a property investment.

Helen CainPartner020 7236 [email protected]

“Ownership could be individually, jointly, in a partnership or within

a corporate vehicle.”

St Albanst +44 (0)1727 869141 e [email protected]

Londont +44 (0)20 7236 2601 e [email protected]

Milton Keynest +44 (0)1908 605552 e [email protected]

www.mercerhole.co.uk

Newsletter Disclaimer:This newsletter is a short selection of items extracted from complex legislation. Further specific advice on any matters referred to must be taken at all times. The information is given for general guidance only and publication is without responsibility for loss occasioned to any person acting or refraining from acting as a result of the information given. No part of this publication may be reproduced without the prior permission of Mercer & Hole. Firm Disclaimer:Mercer & Hole is registered by the Institute of Chartered Accountants In England & Wales to carry out company audit work. M&H Financial Planning is the trading name of M&H LLP which is authorised and regulated by the Financial Conduct Authority. M&H LLP is a Limited Liability Partnership registered in England No. OC335040.

IF YOU ARE a residential tenant paying a variable service charge what should you expect from your landlord and when should you expect to receive it?

Residential Service Charge accountsWhere a number of let properties share a communal area, such as in the case of a block of flats, the costs of running these communal areas (such as repairs, maintenance, security, insurance and utilities) are usually shared by paying a service charge at a pre agreed ratio between tenants (variable rate) or at a predetermined amount (fixed rate).

Variable rate service charges are normally managed by a property management company who arrange for the expenditure to be made and collect the service charges from which they are paid. They are collected normally at a fixed monthly/quarterly rate with a ‘correction’ once the total expenditure is known. This correction can result in a refund or a further payment being due.

Accounting for these variable service charges usually follows the best practice set out by a joint working group of accounting and surveying bodies and the Association of Residential Managing Agents (ARMA).

This best practice includes:• All leasees should receive an annual statement, within six

months of the year end.• This statement should be prepared in accordance with

the Lease, on an accruals basis and should include a Balance Sheet and an Income and Expenditure account.

• The annual statement should be examined by an independent accountant.

It is always best to check the Lease for any additional requirements. For instance some leases require that the service charge accounts are audited. Others may set a different timetable or format of the accounts.

Also, if the service charge statement is prepared on behalf of a Residents’ Management Company or a Right to Manage Company then this needs to be filed, in addition to the usual accounts at Companies House.

And for the landlords out there, do not forget that variable service charge fees are held in trust for the tenants and hence any service charge bank balances are not part of your assets when preparing your own accounts.

Gary FarnesPartner01908 [email protected]

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Mercer & Hole Property Plus - January 2015