Compared to today, property investment taxation before 2013 was relatively straightforward with one of the more complex discussions being convincing non-residents that they really could realise profits on investment sites without UK Capital Gains Tax. Changes were made in 2013 which proved to be the start of a wholesale reform to various aspects of property taxation.
Introduction of Annual Tax on Enveloped Dwellings (ATED)
2013 heralded the introduction of the ATED (Annual Tax on Enveloped Dwellings) legislation which applied to high value UK residential property “enveloped” in certain structures. The tax implications were an annual ATED charge, a 15% rate of Stamp Duty Land Tax and Capital Gains Tax at 28% on increases in value from April 2013. When ATED was first introduced the definition of high value was property worth more than £2m. Since then the definition has fallen to property worth more than £500,000 with subtle differences between ATED, CGT and SDLT thresholds.
There are exemptions against the ATED regulations but these exemptions need to be claimed and therefore many ATED Returns are submitted to HMRC which do not result in tax liabilities. Based on our client base we submit far greater numbers of “relief” returns than “charging” returns.
One year after the introduction of ATED there was a change in the regulations governing capital allowances. In order for the purchaser of a commercial property to claim capital allowances on the site’s fixtures and fittings the vendor must have already claimed allowances on those assets. This has led to commercial discussions about purchasers paying professionals to determine the claims which the vendor makes for pre-completion periods or reductions in purchase price to reflect the tax relief that the purchaser will not be able to claim as the vendor has not maximised their claims.
Stamp Duty Land Tax
Later in 2014 the SDLT rates for residential properties moved from a slab system to a progressive rate. This was to help avoid artificial ceilings on prices caused by purchasers not being willing to pay £1 more for a property as that £1 would result in greater SDLT. The slab system still operates for properties charged under the commercial property rules.
ATED brought certain non-residents into the Capital Gains Tax net. From April 2015 that net was widened with the introduction of Capital Gains Tax on non-residents who dispose of UK residential property. The chargeable gain only applies to value generated from April 2015. For properties owned prior to April 2015 the chargeable gain can be determined by either a time apportionment of the gain or determining the actual increase in value from April 2015. If the latter is adopted then an April 2015 valuation would be necessary to determine the post 2015 gain. A connected change was the requirement for non-residents to report the gain within 30 days of conveyance. Unless the non-resident had an existing relationship with HMRC then the Capital Gains Tax may also have to be paid within the 30 day period.
Although UK Capital Gains Tax rates fell on 6 April 2016 the reduction did not apply to gains from residential property. A further change on 6 April 2016 impacted residential landlords. Traditionally these landlords claimed a 10% wear and tear allowance against furnished rental income to reflect the cost of repair and replacement of furnishings and white goods within a property. Although this was an optional treatment it was the method widely used by landlords. From 6 April wear and tear allowance has been abolished and landlords should claim tax relief on the actual cost of replacing these assets.
New rules for purchases of second homes or buy-to-lets
April 2016 was also the month in which new rules were introduced which resulted in higher SDLT rates on purchases of second homes or residential buy to lets. For effected properties SDLT is 3% higher than the rate of SDLT which would otherwise apply, but there are exemptions for lower value properties, caravans, mobile homes and boat houses. There is a specific relief for individuals who move home and buy their new home before selling their previous home. These individuals will need to pay the higher rate of SDLT on the purchase of a second home and then recover the excess SDLT on sale of the first home. There is a time limit to sell the former home and a time limit to claim a refund.
Offshore property developers
Offshore property developers of UK sites have been able to structure their affairs so that part of the development profit is charged to UK tax. This does not allow for a level playing field between the domestic developer, who is fully charged to UK tax, and the offshore developer. Legislation was introduced on 5 July 2016 to level this playing field.
Individuals who receive income from renting out rooms in their home could receive up to £4,250 per year without tax. From April 2016 this has been increased to receipt up to £7,500 per year. The Government accept that some people can generate small amounts of income from rentals of, for example, their homes whilst on holiday. From April 2017 there will be a new £1,000 allowance for property income with individuals not needing to declare, or pay tax, on sums less than the allowance.
From April 2017 mortgage interest on loans to acquire buy to let properties will only be tax deductible as if the landlord is a basic rate taxpayer. This tax relief restriction is being phased in over 4 years with the full restriction applying from April 2020. The mechanism to generate the relief is a credit against tax liabilities and not a deduction from rental profits. This can result in taxpayers falling into higher rates of tax and therefore being unexpectedly subject to the restriction. As the changes only apply to those paying income tax this has led to questions about the benefit of holding these properties in a company. Such a change in structure needs to be carefully thought through as it leads to other considerations.
From 6 April 2017 it is anticipated that there will be changes to the non-domicile legislation which will bring more individuals into the UK Inheritance Tax net and could result in properties which they own through offshore structures being subject to UK Inheritance Tax for the first time ever.
The ATED legislation was introduced in 2013 and was a major shift in the UK property tax base. Who would have believed that it would be the start of a number of changes? Further changes are expected in 2017.