Property and Vehicles?

Do you hold UK property? In July 2015 we highlighted the increasing complexity of the UK’s property tax system, and covered a few significant changes that had been announced at that time. Now we briefly revisit some of those changes and highlight another, having had time to consider the potential impact.


Introduction

The general theme with property is that you have always had to consider all taxes separately, as different rules apply for each. For example, is VAT or stamp duty payable on the purchase? Will VAT be due on any future rental streams and what is the impact on VAT recoverability? How will income and future gains be taxed? Are you intending to hold the property long term, or sell it on quickly, and if so how is the gain taxed?


So – which vehicle?

Once the various taxes have been considered, the question of what “vehicle” should hold the property arises e.g. personally, through a company etc? It is important to ensure that this question is properly addressed at the outset, firstly to ensure it is commercially appropriate, and then to make it as tax efficient as possible throughout ownership, and when the venture comes to an end. Also, unwinding the structure is likely to be messy and have a tax cost.

Following the changes that we highlighted last July, coupled with the phased in restrictions ahead for buy-to-let investors (see below), there is now even more to think about before deciding which vehicle to use. We can only touch on the issues here, but suffice it to say that each situation will be different depending on your individual circumstances.

For example, if you can demonstrate that you own a substantial property “business” rather than mere passive letting of one or two properties, there may be beneficial tax reliefs for transferring your portfolio into a company, but you also need to consider how much of the annual rental profits you intend to reinvest. You then need to bear in mind the Annual tax on enveloped dwellings (“ATED”) which we mentioned last July. Very broadly, residential properties worth more than £500,000 are now within this regime to some degree, including property investors who, although should not have tax to pay, are likely to have to file nil returns within a tight timescale.


Buy to let interest

At present full income tax relief is normally available for interest on a loan taken out in connection with an individual’s buy-to-let property. With effect from next April interest relief will be progressively restricted so that by 2020 onwards there will only be a basic rate tax reducer available.

We have been appraising the tax effect for some clients and have found in certain instances, particularly high borrowings clients, that their forecast income tax liabilities will increase substantially (some fivefold).

The changes do not at present affect furnished holiday let operations nor corporate entities. Therefore, the choice or change of investment vehicle is critical.

Capital Gains Tax

Eventual sales of properties are of course subjected to tax.

For individuals the main rate of tax applying on gains made on residential property is 28%. It is important to realise that tax is now due on gains made even if the individual owner is not living or based in the UK. In fact, the timeline for reporting and paying any tax is far more restrictive than for those living and based here.

It will also be important to consider the calculation of the gain and making sure that you make the most beneficial claims for costs and reliefs. This is an area that we are constantly advising clients on, particularly as these transactions are coming under ever more intense scrutiny from H M Revenue and Customs.

If you own, or are about to acquire property, and need advice on your specific circumstances, please contact Jon Miles to arrange an initial discussion.