property tax update by robert maas

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


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


Capital Allowances


• 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


• 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


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


• 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?


• 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


Value Added Tax - 5


• 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


• 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




• 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


• 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)


• 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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