Tag Archives: stamp duty land tax

Stamp Duty Land Tax – Losing the relief

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An interesting case on SDLT was concluded recently, whereby HMRC were successful in overturning a claim for relief from the 15% rate of SDLT, but unsuccessful in their attempts to charge penalties for an incorrectly filed SDLT return.

By way of a very brief background to what was set out in the case, a property developer, through his limited company bought a house to demolish and re-develop for resale. The company claimed relief from the 15% SDLT rate on the grounds of the re-development but after it was built, a number of events transpired, and he ended up occupying the house personally with his wife for a few months.

HMRC raised an enquiry. This led to the developer subsequently paying over the extra SDLT (which was 150% more than the SDLT originally paid). The grounds for this were that as a non-qualifying individual, the company would lose the relief, if he lived in the home for any period of time.

HMRC were not successful however, in their attempts to claim the penalties of circa 25% of the tax. The reason being that they failed to prove that the developer had intended to live in the property all along.

Lessons for Property Developers

The interesting points for me here are:
• HMRC did and do regularly raise enquiries for SDLT relief claims;
• The developer ended up paying the extra SDLT to 15%, on the basis that as soon as he took occupation (in the 3 year controlled period), he lost the right to that relief;
• The burden of proof was on HMRC to prove that the SDLT return had been inaccurately completed, which they couldn’t;
• a large part of that failure was due to their inability to disprove the developer’s intentions at the very start of the process, ie, when he acquired the property. Intentions are often irrelevant for SDLT purposes, which are more based on actual facts at the time of completion, but this is an interesting departure in the case of a relief to be claimed;
• it was suggested that if the company had not been ordinarily engaged in property development, HMRC would have had a stronger case.

I do feel for this developer.

Whilst he ended up paying the right amount of tax based on what actually happened, he paid a high price for not spotting, or being advised of the dangers that occupation of the property would bring, however innocent the reasoning for that was.

The message can only therefore be that one should always take advice before acting, and put all the facts on the table so the advisor can fully consider these.

And of course, the warning is that whenever a relief has been claimed, an extra cautious approach is needed. This applies across all taxes.

A recent history of property taxation – 2016

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CGT
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.

Capital Allowances

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.

Rental income

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.

Mortgage Interest

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.

 

Property owned in Corporate Structures – the net widens following 2014 Budget announcements

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I previously wrote on this blog a post suggesting that HMRC were keen to widen the net to bring more properties into the tax rules concerning residential property owned within a Limited company, or other “non-natural person” wrapper.

I did some research at that time and concluded that with property price inflation, even if the rules were not changed, the day wouldn’t be too far away before many “modestly” priced London properties were worth over £2m and therefore liable to the full range of tax measures.

I needn’t have bothered! Whilst not completely out of the blue, one of the announcements made in yesterday’s budget was the reduction of the £2m threshold to £500k for:

– the 15% Stamp Duty Land Tax on acquisitions,
– the Annual Tax on Enveloped Dwellings (ATED) charge, and
– the liability to Capital Gains Tax at 28% on gains.

The Stamp Duty Land Tax change is effective immediately, with the other two aspects following from 1 April 2016 onwards for properties worth between £500k and £2m. An interim provision will bring properties worth between £1m and £2m into the ATED regime from 1 April 2015. Current proposals are for the ATED to be set at £7,000 per annum for properties worth £1m to £2m, and £3,500 per annum for those worth between £500k and £1m.

HMRC state that these new measures are designed to tackle tax avoidance and not damage commercial enterprises. The Chancellor also states an intention to bring back into use large numbers of property currently sitting empty, and I can’t argue that that isn’t a good idea. For these reasons I would expect reliefs will be available in the same way as the current reliefs for property businesses. We’ll know more when the Finance Bill is released.

However, even though there may not be an actual tax impact on genuine property businesses, one cannot escape the fact that for many situations a Limited company is an attractive structure in which to acquire property. The regime as it currently operates is geared so that such property owners are presumed guilty of using their company for tax avoidance and liable for the taxes until they declare their innocence by submitting the annual ATED return, and claim one of the available reliefs. So that’s yet a further piece of annual compliance for the diary (together with a requirement to make various disclosures regarding values etc) and it comes with the usual threat of penalties for non-compliance.

Now, given that one-bedroomed flats are commanding over £500k in parts of London, and according to thisismoney.co.uk, 50% of London homes are worth more than £1m, this is not simply a “widening of the net” but more akin to sending a super-trawler up the Thames – and as Eric Cantona of Manchester United fame once said – “the seagulls follow the trawler because they think sardines will be thrown into the sea”!

Growing pains – A fly in the ointment when deciding on UK property ownership structure?

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Property investors generally look for growth in the value of their assets, so how could that growth bring them into a charge to tax that they did not expect?

Well, first some context – according to the UK Land Registry, the average house price in the Royal Borough of Kensington & Chelsea increased from £490,000 in 2003 to £1,078,000 in 2013.  That’s an increase of more than double in a 10 year period.  If that rate of growth continued, it would mean that a property currently worth around £900,000 in that Borough would be worth £2m in 2023.

No doubt, this is one of the reasons why there is a well-trodden path towards UK property investment, and it would look like this trend is set to continue.  Savills, for example, have recently issued their forecast for house prices Savills 5-year house price forecast.  They forecast growth of up to 25% in the next 5 years across the UK as a whole, so parts of the country could be far in excess of that.

Now to ownership structures.  The options for the structure in which property is owned are numerous and there are a variety of tax and non-tax issues to consider.  The relative importance of each will be different to each individual investor.

It is essential to consider the ownership structure from the outset as Stamp Duty Land Tax rates of up to 15% make it costly to change afterwards.  The need to take advice is clear, but what if that advice suggests ownership in a corporate vehicle?

Much has already been written about the tax rules which apply to properties worth more than £2m, and owned in a corporate vehicle (enveloped dwellings).  In a nutshell, the rules include a headline Stamp Duty Land Tax rate of 15%, Capital Gains Tax charges for properties sold using such vehicles and an Annual Tax charge dependent upon value.

Properties costing less than £2m are currently outside of this regime, and many investors are buying such properties – so what does the “anti-avoidance” legislation hold in store for them?

Well, HMRC have launched a consultation to explore the possibility of extending the capital gains tax aspects of the “over £2m” rules, so that they apply to lower value properties held in corporate vehicles.

The outcome of this consultation cannot be predicted, but my view is that HMRC are looking to squeeze as many properties into this taxation regime as possible.  Time will tell if they do, but even if HMRC don’t pass new legislation, we can be reasonably confident that, growth in property values will at some point push many more properties into the “over £2m” rules.

Given that investors in property invariably seek capital gains, this may in time prove to be a fly in the ointment for many.  However, until then it just adds one more factor to consider when deciding upon property ownership structures; whether you are a UK taxpayer or not.

Tax on high value residential property

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On 31 January 2013 the long expected draft legislation on the taxation of high value residential property was released. Properties are high value if they are worth more than £2 million.

Modern Apartment Balcony with Wooden Decking

The draft legislation covers the 15% stamp duty land tax charge that has applied to the acquisition of high value residential property since Spring 2012 and it confirms proposals for the Annual Residential Property Tax (ARPT) that will apply from 6 April 2013. In addition there are changes to the capital gains tax regime from 6 April 2013.

The legislation applies to “non-natural persons” which includes companies and partnerships (if one or more of the partners is a company). Trusts are excluded from this legislation.  Also excluded are genuine businesses carrying on a genuine commercial activity such as property rental or development and properties owned by charities for charitable purposes.
Stamp Duty Land Tax

Non-natural persons who purchase high value residential property have been subject to a 15% SDLT rate since March 2012.  Although the draft legislation confirms this proposal it also provides relief against the charge for genuine businesses carrying on a genuine commercial activity.  Those entities would be subject to a 7% rate of SDLT.
Annual Residential Property Tax (ARPT)

Non-natural persons who hold UK residential property valued at more than £2m on certain specified dates will pay ARPT of between £15,000 and £140,000, depending on the value of the property.  The £15,000 charge applies to properties whose value is between £2m and £5m.  The measure takes effect from 1 April 2013 and the annual tax is payable on 31 October 2013 for 2013/14 and  on 30 April for each subsequent year.

The amount of the ARPT will increase every year on an index-linked basis.  The value bands will not be adjusted for inflation.  Residential properties within the charge will need to be revalued every five years.
Capital Gains Tax

Capital Gains Tax will be chargeable on both UK and non-UK non-natural persons when they dispose of interest in high value residential property that is subject to ARPT.  Capital Gains Tax will apply to disposals on or after 6 April 2013 at a rate of 28%.  The tax will only apply to increases in value of the property from 6 April 2013.  This therefore rebases the property values to that date.  Current indications are that the 28% will be subject to a form of taper relief where the property is just over the £2m mark.  This is to prevent distortion in the property market for properties worth marginally more than £2m.

Taxation at a 28% rate is higher than the standard corporation tax rate for UK companies. It is felt that very few UK companies will fall into the ARPT charge and therefore the impact of this tax anomaly is believed to be minimal.

The draft proposals permit the sale of offshore companies which hold high value residential property to remain free of UK Capital Gains Tax. However the purchaser of the company shares will inherit the Capital Gains Tax base cost of the property which is owned by the company. This may lead to considerable Capital Gains Tax at a future time if the property was sold by the company.

 

Conclusion

The impact of the proposals is to provide a disincentive for future purchases of high value residential property to be made using a wrapper such as an offshore company. The disincentive is the 15% rate of stamp duty land tax and the ARPT, whose minimum annual charge is £15,000.

Non UK owners of existing structures will need to weigh up the cost of the ARPT compared to the possible saving of capital gains tax by sale of the wrapper free of CGT.   There is also protection against UK Inheritance (Death) Tax by holding high value property in offshore structures. Owning properties in these wrappers is not just for tax reasons.  For example, some individuals hold them in offshore companies for privacy reasons.

If an existing structure is going to be caught be the new provisions then consideration should be given to restructuring the way property is owned before 1 April 2013.