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Online Property Tax Advice: Signpost

Author

Andy Wood

Andy is a practical, creative tax adviser who assists a variety of clients in achieving their personal and commercial objectives in the most tax efficient manner.

Property Tax: Signpost – Advice & Guides

Our property tax signpost is where to find everything you need to know about property tax.

Introduction – Landlords, Rental Properties, Developers & Investors

The fact that every Englishman’s home is his castle was an idiom on which Kirsty & Phil and Sarah Beeny have built careers. However, the UK taxman has also noticed that there is serious wealth in the bricks and mortar business. The UK over recent years has shifted its emphasis from taxing income to capital and, in particular, property.

As with the rest of the tax system, there is no such thing as a property tax. The basis on which one is taxed is not directly related to the underlying asset but is dictated by what one is doing with the asset and also the profile of the person doing it.

The first of distinction is whether the transactions concerned is:

Once determined, it will then depend on who is transacting in the property. Are they an individual or are they a Company?

Finally, is that person based in the UK or elsewhere?

Your main residence – property tax

For most people, their main / private residence will be by far their most valuable asset. In many cases, this will be due to the UK property market which has seen incredible growth over the last few decades.

With this in mind, the Government provides valuable reliefs where a property has been used as a person’s main / principal private residence exempting periods of actual and deemed occupation.

Simply, if a property has always been occupied as one’s main residence then there will be no CGT on disposal.

See our full Signpost on main / private residence relief.

Landlord tax – property tax

Over the years, many property professionals have built up sizeable property portfolios, based on cheap borrowing, growing values and a shortage in housing.

However, over the last half decade, the Government has seen residential buy to let (“B2L”) landlords as a rich source of tax revenue. As such, they have introduced a number of measures that seek to raise the tax contribution from these people.

This part of the toolkit is aimed at B2L residential landlords and the tax issues and opportunities that they face.

Capital Gains tax (“CGT”)

Where it is determined that an owner of property does so as an investor (rather than a trader) then he, she or it will pay tax under the capital gains regime on the profits on any sale.

Where the owner of the property is an individual then those capital gains, in the absence of appropriate reliefs, will be subject to CGT.

Where the property is residential property then the rate of CGT is 18% / 28% (even though the rate for most other assets was reduced to 10%/20% for most other assets.

Where the owner of the property is a Company then, generally speaking, the company will be subject to corporation tax on the capital gains.

Where the property is held via a partnership or via a Limited Liability Partnership then the gains are attributed directly to the partnership or member.

CGT reliefs may apply where there is a transfer of a property to a new company. See our note on the transfer of buy to let portfolio to a limited company.

Income tax and corporation tax

Of course, as well as profit on the appreciation in value of the property, a landlord will be looking to obtain a rental yield from his or her property. Of course, the net rental income is taxable.

For an individual, partnership, LLP or trust then this net profit will be subject to income tax.

For a company, this will be subject to corporation tax – although see below regarding non-resident companies.

Revenue costs are allowable against the gross rental income in arriving at that net figure. Historically, this has included finance costs and, in particular, interest costs on mortgages. This makes sense as it is a legitimate cost of doing business.

However, the Government decided to restrict the amount that could be deducted in respect of these finance costs in relation to income tax payers (excluding non-resident companies). Over the course of the next few years this will slowly become restricted to ‘tax relief at the basic rate’.

It in effect creates phantom profits.

The restriction is not relevant for companies who will continue to obtain interest relief in full against gross income (albeit the corporation tax rates are lower).

More information on the taxation of rented property

Capital allowances

Commercial property investors can obtain tax relief where they incur expenditure on fixtures and fittings that form part of the building.

More information on capital allowances.

Inheritance Tax (“IHT”)

The most attractive exemption generally available to business with regards to IHT will be Business Property Relief (“BPR”).

As we have seen above, a property investment portfolio can be a business. However, despite the name, more than a business is required to obtain BPR. Instead, there must be a trade.

Generally speaking, a landlord’s activities will not constitute an adventure in the nature of trade and BPR will not be available.

However, a property held in an individual’s name and used in their business can qualify for BPR.

More information on IHT and investment property.

A Discussion of property investment v trading v dealing.

Miscellaneous

Top ten tips for property investors.

Furnished Holiday Lets (“FHL”)

The FHL is a special category of investment property. They are properties that are let on a more commercial basis and, as such, can qualify for various business tax reliefs such as  Entrepreneurs’ Relief (“ER”) and also, in some cases, BPR.

More on FHLs.

Property development tax

The tax on profits

Property development will usually involve construction activities on land.

Where the property project constitutes a property development, as opposed to a property investment play, then the profits will be trading profits and subject to:

  • Income tax for an individual or unincorporated entity; or
  • Corporation tax for a Company

Clearly, where the property developer is an individual, then the difference between the tax rate on a disposal could be significant where a property play is a development rather than an investment.

A developer should therefore consider looking at using a Company where this meets their personal and commercial objectives.

CGT

CGT might be relevant where the shareholder in a property development company disposes of the shares in their company.

Note, that there are now anti-avoidance provisions which will stop someone selling the shares in a Company rather than the property to a third party to avoid taxes. This is covered under the new Transactions in UK Land provisions introduced in the last few years.

A disposal of the shares in a property development company may qualify for Entrepreneurs’ Relief (“ER”).

IHT

Property development is likely to be a trade and therefore will qualify usually qualify for BPR subject to the normal tests that a company will have to satisfy in order to obtain relief.

A discussion of property investment v trading v dealing.

Property dealing tax

The tax on profits

Property dealing usually involves the flipping of land and property without any construction activities.

Where the property project constitutes a property dealing (as opposed to a property investment or development plays), then the profits will be trading profits and subject to:

  • Income tax for an individual or unincorporated entity; or
  • Corporation tax for a Company

Clearly, where the property dealer is an individual, then the difference between the tax rate on a disposal could be significant where a property play is classed as dealing rather than an investment.

A property dealer should therefore consider looking at using a Company where this meets their personal and commercial objectives.

CGT

CGT might be relevant where the shareholder in a property dealing company disposes of the shares in their company.

Note, that there are now anti-avoidance provisions which will stop someone selling the shares in a Company rather than the property to a third party to avoid taxes. This is covered under the new Transactions in UK Land provisions introduced in the last few years.

A disposal of the shares in a property dealing company may qualify for Entrepreneurs’ Relief (“ER”).

IHT

Dealing in land is specifically excluded from qualifying from BPR.

Non-resident property investors

Non-resident Capital Gains Tax (“NRCGT”)

A discussion of Non-UK Capital Gains Tax for Property Investors.

Income tax and NRL scheme

A discussion of Non-Resident Landlord scheme

A discussion of compliance for non-UK property investors

Recent changes to the Non-Resident Landlord scheme for Companies.

Inheritance Tax (“IHT”)

A discussion of IHT for non-resident property investors.

Stamp Duty Land Tax (“SDLT”)

Our Stamp Duty Land Tax (“SDLT”) signpost

Annual Tax on Enveloped Dwellings (“ATED”)

A discussion of the Annual Tax on Enveloped Dwellings (“ATED”) which applies to certain residential properties generally held through Companies and other wrappers.

New TUKL rules

A discussion of the Transactions in UK Land (“TUKL”) rules

Stamp Duty Land Tax (“SDLT”)

SDLT is a tax paid by the Purchaser of a UK interest in land. The tax is chargeable at different rates depending on:

  • the amount of chargeable consideration – whether actual or deemed;
  • the legal status of the person acquiring the property; and
  • the availability of any reliefs

Our Stamp Duty Land Tax (“SDLT”) signpost

VAT and property

A general discussion of VAT and property.

 

If you have any queries about property tax, or tax matters in general, then please do not hesitate to get in touch.

 

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