Welcome to The Leathers LLP Property Taxes Seminar. Thursday 3 November 2016

Transcription

1 Welcome to The Leathers LLP Property Taxes Seminar Thursday 3 November 2016

2 Topical Issues for Residential Property Ryan Harrison

3 Topical Issues Affecting Residential Property Taxation A number of new measures have been enacted (or are due to be enacted) which affect the taxation of residential property, as follows: Residential Property SDLT Surcharge of 3% from 1 April 2016 The abolition of the Wear and Tear Allowance with a new replacement furniture relief from 6 April 2016 Capital Gains Tax rates frozen at 28% for residential property sales from 6 April 2016 Sale of residential property by non-residents brought within the scope of UK Capital Gains Tax from 6 April 2015 Increased online reporting to HMRC phased in from April 2018

4 Finance Costs Restriction One significant change was introduced in The Finance Act (No.2) 2015 From April 2020, a deduction for Finance Costs will be limited to basic rate tax relief The new rules will be phased in from 6 April 2017 Year Old Regime New Regime % % 2017/ / / /

5 Finance Costs Restriction Taking No Action before 2020 Example Mr & Mrs Y run a sizeable rental property business which generates 500,000 gross rents. Their 2016/17 tax position in comparison to 2020/21 is as follows: 2016/ /21 Gross Rents 500, ,000 Less: Expenses (150,000) (150,000) Less: Mortgage Interest (300,000) - Net Rental Profit 50, ,000 Less: Personal Allowance (x2) (22,000) - Taxable Income 28, ,000 Continued

6 Finance Costs Restriction Continued 2016/ /21 Taxable Income 28, ,000 Tax at 20% 5,600 15,000 Tax at 40% - 90,000 Tax at 45% - 22,500 Less: Mortgage Interest Relief (300,000 x 20%) - (60,000) Tax Liability 5,600 67,500 Mr and Mrs Y face a tax increase of 61,900 and are now paying more tax than their rental profits (an effective rate of 135%)!

7 Recap SDLT Property Surcharge Key Notes Any property above 40,000 Joint purchases included Main residence exception 36 Month grace period Applies even if first residence outside UK Tax Band (purchase price) Standard Rate (First residential property or your main residence) Higher Rate (Additional properties) 0-125,000 0% 3%* 125, ,000 2% 5% 250, ,000 5% 8% 925, m 10% 13% 1.5m 12% 15%

8 Some Planning Thoughts

9 Planning Tax on Property Income Income tax v CT & Dividends SDLT Costs Exemption? Incorporation? Capital Gains Tax Incorporation relief? Future Use of Property Benefit in Kind and ATED? Overall Cost Benefit Compliance, administration and remortgage?

10 Planning Owning Properties in Joint Names? Consider Mitigate income tax exposure if income divided Must consider actual beneficial ownership Exempt Spouse Transfer Married couples ITA 2007 section 836 Form 17

11 Residential Property and Capital Gains Tax 28% on residential property gains wherever situated PPR Valuable relief but need to establish the facts How to maximise the relief? PPR Elections overseas property

12 Non Residents and Capital Taxes Further amendments to the capital gains tax legislation to ensure level playing field : Non-residents now pay CGT on sales and gifts of residential property at 28% Charge applies from gains arising on or after 6 April 2015 PPR in limited circumstances (90 midnights) Report to HMRC within 30 days Responsibility to Inform Client? Residential property held at death also subject to IHT at 40%

13 VAT Considerations for Land & Property Alex Newsham

14 VAT Issues Transfer of Going Concern ( TOGC ) The sale of a business will usually be a TOGC, meaning it is outside the scope of VAT Conditions to be met are set out at Art. 5(1) SI 1995/1268 Transfer of whole business, or part of business capable of operating on its own Same kind of business must be carried out by transferee If vendor is VAT registered, purchaser must also be VAT registered or registerable No significant break in trading, and no immediate onward transfer Further conditions if assets transferred include property with Option To Tax at Art. 5(2) SI 1995/1268 Purchaser must make their own OTT & notify this to HMRC prior to transfer OTT will not be disapplied by anti-avoidance provisions Payment of a deposit would crystallise a VAT point therefore conditions must be met at this point

15 TOGC Basic Example Mr & Mrs Smith run a Post Office & general store Sell the premises, stock and goodwill to a third party who will keep running the business All employees transferred to new owners YES TOGC treatment applies

16 TOGC Property Rental Business XYZ Property Limited owns the freehold of a block of offices Each floor let out to different tenants Decides to sell whole building to an unconnected pension fund YES TOGC treatment applies A tenanted rental property can be a business for VAT purposes Transfer of freehold Assignment of lease Grant of lease/sub-lease providing the interest retained is minor ( 1% of value)

17 TOGC Transfer Not Qualifying Mr & Mrs Jones run a public house Mr & Mrs Jones lease the premises from ABC Property Limited, which owns the freehold Mr & Mrs Jones decide to buy the freehold from ABC Properties Limited Mr & Mrs Jones continue to run the pub as normal NO TOGC treatment does not apply Not same business rental vs pub Alternative Mr & Mrs Jones buy freehold in separate property company

18 TOGC Property Development Business GHI Trading Limited owns a former trading premises Intends to build 10 additional floors, and sell the completed building to a third party to let out Opts To Tax in advance of development Early on in development, transfers property to related party at market value to segregate activities Is this a TOGC? Depends on level of activity already undertaken Planning permission on its own would not be enough Actual building work started? Contract with developers in place? Refer to cases of Golden Oak Partnership and Gulf Trading And Management Limited

19 Option To Tax ( OTT ) By default, supplies of land are exempt from VAT But a taxpayer can Opt To Tax the land and treat supplies as standard rated (Para 2 Sch 10 VATA 1994) Allows for recovery of Input VAT on purchases OTT needs to be notified to HMRC What does OTT cover Covers entirety of building OTT over a building will also apply to the land it stands on OTT over land will apply to buildings subsequently constructed, unless election is made otherwise May need HMRC s permission to OTT on existing buildings if exempt supplies already made OTT is specific to the person who made it, and will not pass on to any new owner of the land

20 OTT Pitfalls (Schedule 10 VATA 1994) OTT does not have any effect on the following (i.e. they will remain exempt supplies): Dwellings Paras 5(a) Other property with a relevant resident purpose Para 5(b) certificate required Property to be converted to dwellings Para 6 certificate required Property with a relevant charitable purpose Para 7 certificate required Property sold to a relevant housing association Para 10 certificate required Land sold to individual building own home Para 11 Anti-avoidance provisions for supplies to related parties Para 12 Disapplies OTT if related party will occupy land to make exempt supplies Also applies to land occupied by anyone financing the purchase of the land OTT remains in place for six years after disposal of interest in property Para 24

21 OTT Thinking Points Think about OTT when acquiring property not afterwards May need HMRC permission to OTT if exempt supplies already made May need OTT in place prior to purchase if TOGC treatment required Don t make an OTT if you don t need it restricts options in the future e.g. trade premises not to be let out Can revoke OTT after 20 years Useful if new tenant is an exempt business Or on sale of rental property Need to consider impact of no longer recovering Input VAT

22 Capital Goods Scheme Risks on Sale of Property Background Widgets Limited runs a manufacturing business (i.e. 100% taxable supplies) acquires a new factory for 10m + 2m VAT Recovers 2m as Input VAT moves to new premises, sells old factory for 15m No VAT charged as no OTT in place Problem Widgets Limited has forgotten about the Capital Goods Scheme Applies to property acquired for 250,000 (ex VAT) or more, as capital asset Need to make adjustments in respect of any change of use over first ten years of ownership In this case, sale crystallises use of property for remaining four year of CGS lifespan Needs to repay 0.8m to HMRC (i.e. 2m x 4/10) Could have been avoided if OTT made prior to sale would have been treated as taxable supply Would not apply if sold with rest of business as TOGC

23 Recent VAT Cases on Land & Property Astral Construction Limited and J3 Building Solutions Limited Whether building works are conversion/enlargement/extension of existing building Languard New Homes Limited Conversion of mixed residential/non-residential building to four separate flats whether the sale of each flat could be zero-rated as a new dwelling Yes but HMRC are appealing Kati Zombory-Moldovan (t/a Craft Carnival) Organiser of craft fairs supplies to stallholders held not to be supplies of land, therefore not exempt Upper Tribunal case therefore binding precedent set

24 Capital Allowances How Leathers LLP Can Help Improve Your Fee Income (and Reduce Litigation Risk)!!! Michael Leather

25 Capital Allowances Purchase / Sale of Buildings Now You See Me Is it Capital Allowances?

26 Capital Allowances Seizing the Opportunity Many in the profession are not fully up to speed with their new obligations, and are exposing themselves to risks ranging from loss of fee income to litigation. Very few commercial property transactions giving rise to capital allowances appear to be handled in line with best practice. This is not merely a matter of risk to the profession. It s a missed opportunity to build expertise, relationships and new business. The Law Society Capital Allowances: Seizing the Opportunity Capital Allowances Report 2015

27 Capital Allowances Seizing the Opportunity The Finance Act 2012 section 43 and Schedule 10, introduced as section 187A and 187B of the Capital Allowance Act 2001, set out the requirements in relation to the availability of capital allowances on the purchase of second-hand buildings. These new fixtures rules (NFRs) were introduced with a requirement that the required steps must be met within 2 years of the purchase date; and an increasing risk of both confrontation (with vendors) and litigation (from purchasers). The Law Society estimated that between 1 April 2014 and 31 December billion of capital allowances were lost by not reacting to the legislation; and increasingly, we are seeing situations where the capital allowances information in relation to section 32 of CPSE.1 is 1.

28 Capital Allowances Seizing the Opportunity So what are the key Capital Allowance points to be considered on the sale/purchase of a building? Have all available Capital Allowances been claimed on the building? Has a value been agreed for the fixtures of the building as part of the sale agreement? How will the agreement affect your client? However, a couple of points to think about:- a) For buildings sold for a gain, capital allowances claims do not reduce the capital gains base cost there is no adverse impact to claiming capital allowances b) For buildings sold at a loss, the interaction of the capital allowance and capital gains rules means that there may be scope to adjust the mixture of capital losses/capital allowances for the seller This can give rise to tax planning opportunities what type of relief is more valuable to the seller?

29 Capital Allowances Seizing the Opportunity In terms of deadlines, we would recommend that:- The value of the qualifying expenditure must be considered as part of the sale. This affects the value of the building. Qualifying Capital Allowance expenditure must be pooled by vendor prior to the sale. This can be reflected after the sale date in the next relevant tax return. A section 198 election must be agreed within two years of the sale. Otherwise the qualifying assets are deemed to have nil value to the purchaser.

30 Capital Allowances Seizing the Opportunity The requirements of a section 198 election are set out in section 201 of CAA 2001 and must include: The amount fixed by the election Names of the parties making the election Information sufficient to identify the plant and machinery Information sufficient to identify the relevant land Particulars of the land interest Tax reference and relevant HMRC contact details for each party We would also recommend seeking to obtain copies of the previous claim that underpins the proposed numbers so that the claim can be validated and any scope for additional claims on items not previously claimed might be considered.

31 Capital Allowances Seizing the Opportunity

32 Capital Allowances But Do We Understand Capital Allowances? Now You See Me!!

33 The Normal View Fixtures and Fittings (e.g. shelving, CCTV system, fire alarm) Buildings, Structures & Land Integral Features (e.g. lifts, air conditioning system, heating) Other Plant and Machinery (e.g. other assets used as part of the business) Assets Treated as Buildings (e.g. walls, floors, ceilings, doors, windows, stairs, mains services)

34 What Can Be Claimed Plant: c 70,000 Buildings: c 70,000

35 How can claims be maximised? Capital Allowances Act 2001 section 25 Building alterations connected with installation of plant or machinery If a person carrying on a qualifying activity incurs capital expenditure on alterations to an existing building incidental to the installation of plant or machinery for the purposes of the qualifying activity, this Part applies as if (a) (b) the expenditure were expenditure on the provision of the plant or machinery, and the works representing the expenditure formed part of the plant or machinery.

36 Section 25 Claim Example 1) Construction of a Control Room to House Surveillance and Monitoring Equipment B&E Security Systems Limited v HMRC [2010] Modification of the building to facilitate a new control room. This included: Independent power supply for the room Raising the floor to allow for the new electrics Strengthening the walls, floor and ceiling Replace doors with fire proof security doors Construct independent washroom and kitchen 2) Planning Possibilities?

37 What to Claim?

38 What to Claim? Installation of a Warehouse Crane The crane qualifies for capital allowances as an asset used in the business. If capital expenditure on alterations to the existing building incidental to the installation of the crane also qualifies for capital allowances under s.25. But is it a building?

39 Is it Capital Allowances? Building Contracts Repair or Capital? What is the entirety? Timing of review Before or after? A tile can make the difference the words you use.

40 Some Final (But Important) Thoughts.Beware of the Changing Landscape

41 Beware of the Changing Landscape.. Numerous recent changes to UK property taxation Two changes that we have been watching very closely at Leathers: - New Transactions in Land legislation - New legislation in relation to Phoenixism Government consultation process subject to widespread criticism Do we have unintended consequences in the new legislation? (we hope so!) Little HMRC or professional guidance has been available Uncertainty continues Don t take things for granted

42 New Transactions in Land Legislation - Are Offshore Structures Still Effective? Previously possible to avoid UK taxation on UK land deals by use of offshore structures without UK Permanent Establishment Finance Bill 2016 brought in measure to ensure equal tax treatment for UK and non-uk resident property investors the new Transactions in Land legislation Introduction of Deemed UK property trades for non-resident developers meaning that HMRC no longer require a Permanent Establishment to apply a UK tax charge Government s intention for UK tax to be payable on all deals involving UK land Do investors need to re-visit offshore structures? IMPORTANTLY: Are there also consequences for UK resident investors.?

43 New Transactions in Land Legislation What about UK Investors? Surely UK investors should not be impacted by changes apparently aimed at offshore developers..? Literal or Purposive review of the legislation? Literal review of FB2016 gives a surprising outcome and raises numerous concerns (not just at Leathers!) - Are capital UK property transactions now taxable as income? - Why were the changes not made clearer in the consultation? - Can the tax cost really have increased two-fold in some cases? - Has there been an unintended consequence in the legislation? (.surely?) Law Society Press Release, 24 August 2016: Significant amendments to the Finance Bill slipped in at committee stage set a disturbing precedent of avoiding proper consultation and scrutiny, the Law Society said today. The changes, which alter the way buy-to-let properties will be taxed, may result in many investors paying income tax rather than a capital gains tax on their investment, creating uncertainty for taxpayers

44 Is It Still Possible to Pay CGT Rates of Tax on Property Transactions? HMRC issued a response: HMRC considers that generally property investors that buy properties to let out to generate property income and some years later sell the properties will be subject to capital gains tax on their disposals rather than being charged to income tax on the disposal Can we rely on HMRC statement for buy-to-let? But what about our wider concerns for commercial property/shares in companies holding property? When will we see the legislation being tested? Should a purposive approach be applied - the changes were apparently aimed at offshore developers? Are capital UK property transactions now taxable as income?

45 Phoenixism Is This a Further Land Tax for Developers? Use of Special Purpose Vehicles ( SPVs ) for land transactions Extraction of profits at end of project - liquidation of SPV Entrepreneurs relief for trading companies (10%) BUT: Significant changes to Transactions in Securities Legislation from April 2016 Serial use of trading companies Same or similar trade? HMRC have issued limited examples but no clearance procedure is available Will HMRC issue a counteraction notice? Will the transaction be subject to income tax rather than capital gains tax?

46 Get in Touch These notes have been prepared for discussion/illustration purposes only. Please contact any of the speakers or members of the Leathers LLP team for detailed advice. Leathers LLP 17 th Floor Cale Cross House Pilgrim Street Newcastle upon Tyne NE1 6SU Tel: Fax: