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As specialists in tax Advisory and Accountancy we are aware of the challenges faced by property investors/landlords/developers in the UK, with ever-changing legislation and complex regulations. Here are some of the main tax concerns that we frequently help our clients navigate.
Key Aspects of Real Estate Taxes
Our team offers comprehensive advice on managing the implications of Capital Gains Tax when selling, gifting or transferring an investment property. We provide comprehensive advice on CGT, including calculations, reporting, and payment. Moreover, we can guide you on claiming valorous reliefs and address potential complexities:
- Change of Use: Changes in the use of a property during the period of ownership can add complexity to Capital Gains Tax calculations. For instance, if a property initially bought as a primary residence is later turned into a rental property (or vice versa), or if a part of the property is used for business, it could impact the amount of tax due.
- Private Residence Relief: If a property has been the owner’s main residence at any point during ownership, Private Residence Relief may apply, reducing the Capital Gains Tax. Calculating this can be tricky if the property hasn’t been the main residence for the entire period of ownership.
- Lettings Relief: Previously, landlords could benefit from Lettings Relief on properties that were once their main residence. However, since April 2020, Lettings Relief is only available to landlords who share occupancy with their tenants, making the situation more complex for those who used to live in their rental property.
- Ownership Structure: The way the property is owned can affect the Capital Gains Tax. For instance, if the property is owned jointly or in a partnership, or if it’s held in a company structure, the tax calculations and implications can be quite complex.
- Periods of Absence: Different rules may apply for periods of absence, for instance, if the property was empty, or if the owner lived abroad, which could affect Private Residence Relief and the final Capital Gains Tax calculation.
- Renovations and Improvements: Costs of improvements can be used to reduce the gain and thereby reduce the Capital Gains Tax. However, distinguishing between ‘repairs’ (which are a revenue expense deductible from rental income) and ‘improvements’ (which can be offset against Capital Gains Tax) can be complex.
- Calculating the ‘Gain’: Determining the actual ‘gain’ from the property sale can be complex. This needs to account for the original purchase price, associated purchase costs, improvement costs, and costs at the time of sale.
- Use of Losses: If a landlord makes a loss on the sale of one property, this can be offset against gains on other properties. The rules around this are unique and proper recording and reporting of losses are critical.
Buying a property in the UK often entails payment of Stamp Duty Land Tax. The amount payable varies depending on factors such as the property’s value, its use, and the buyer’s circumstances. We can help you navigate SDLT obligations, considering various reliefs and exemptions that might be applicable, to ensure you are not overpaying:
- Standard SDLT Rates: the basic threshold for residential properties is £250,000, and for non-residential (commercial) properties, it is £150,000. The tax rates then increase in bands depending on the property value. We can guide our clients on the most current thresholds and rates.
- 3% Higher Rate for Additional Properties: A key complexity is the 3% higher SDLT rate that applies to purchases of additional residential properties, such as buy-to-let properties or second homes, costing more than £40,000. We ensure our clients understand when this surcharge applies and how it can affect their property investments. In addition, this rate applies to all residential properties purchased within a Limited company structure.
- Non-UK Resident SDLT: Non-UK residents purchasing residential property in England or Northern Ireland are required to pay a 2% surcharge on top of the standard SDLT rates. Scotland and Wales do not have an equivalent surcharge for non-UK residents at the moment. We can assist in understanding and calculating these additional costs.
- Various SDLT Reliefs: We provide comprehensive advice on available SDLT reliefs such as Multiple Dwellings Relief (MDR), First-Time Buyers Relief, Relief for Mixed-use Properties, and others that could potentially reduce SDLT liabilities. Each relief has its specific rules and eligibility criteria, and we ensure our clients are well-informed to benefit from any applicable reliefs.
This is often referred to as the ‘tenant tax’. Previously, landlords could deduct the cost of their mortgage interest (and some other property-related finance costs) from their rental income before calculating their tax liability. As of April 2020, this relief has been scaled back to a basic rate tax reduction. We help you to understand and mitigate this tax where possible.
Prior to 2016, landlords could deduct 10% from rental profits for ‘wear and tear’. This has been superseded by Replacement Relief.
Inheritance tax planning is crucial for anyone owning valuable property. We assist in devising strategies to mitigate potential IHT liabilities, such as the use of trusts and lifetime gifts. Additionally, we can guide you through the intricacies of the seven-year rule, business restructuring and other reliefs available.
ATED is a yearly tax payable by companies that own UK residential property valued above a certain threshold. It’s a complex tax with many potential reliefs and exemptions, and non-compliance can result in hefty penalties. We help clients understand their ATED obligations and guide them through the process of completing and submitting their returns.
One of the complex areas in property taxation lies in distinguishing between revenue (also known as operating) expenses and capital expenses.
- Revenue expenses are those costs incurred in the day-to-day running and maintenance of the property and can be deducted from rental income in the year they occur. These include costs like repairs, insurance, and management fees.
- On the other hand, capital expenses relate to improvements that increase the property’s value or prolong its useful life and cannot be deducted from rental income for income tax purposes. Instead, these costs may be used to reduce the capital gains tax when the property is sold.
Our expertise lies in providing clear, practical guidance on how to distinguish and record these costs correctly. This ensures our clients maximise their allowable deductions, maintain accurate financial records, and avoid potential disputes with HMRC.
Capital allowances can provide significant tax relief for commercial property investors. They enable you to deduct the cost of certain capital expenditure from your taxable profits, reducing your overall tax bill. The types of capital expenditure that may qualify for relief include, but are not limited to, equipment, machinery, and certain fixtures integral to the building.
However, it’s crucial to note that capital allowances are not applicable to residential property investments. This is primarily because residential properties are generally not used for a qualifying activity that generates taxable profits. These allowances are designed for expenditure on assets that are used in the business, such as plant and machinery in a commercial property context.
Find more information on Capital Allowance for commercial properties →
If a commercial property is owned by an individual or a partnership and it’s used for trading purposes, then it’s possible to utilise any trading losses against other income through what’s known as Sideways Loss Relief.
Capital allowances can often create a trading loss as they are deducted from the trading profits. This is where Sideways Loss Relief comes into play. Sideways Loss Relief allows you to offset these trading losses against your other income in the same or previous tax year, reducing your overall tax liability.
For instance, if you’ve claimed capital allowances on a commercial property which created a trading loss, you could offset this loss against your other taxable income (e.g., employment income or rental income from other properties). And if you are a higher (40%) or an additional (45%) rate taxpayer, your saving is at this rate. While within a limited company your saving would be limited to maximum of 25%.
However, there are several restrictions and conditions to be met for this relief, and it can be complex to navigate these rules. For example, there are limits on the amount of income that can be relieved and restrictions relating to ‘non-commercial’ trades or ‘hobby’ businesses.
VAT is another essential tax consideration in property transactions. The application of VAT depends on the type of property and the nature of the transaction. Here’s a summary:
- Residential Properties: Generally, the sale or rent of residential property is exempt from VAT. However, some conversions of residential property may be eligible for reduced-rate VAT, such as converting a non-residential property into a residential one.
- Commercial Properties: Commercial property transactions can be more complex. Generally, commercial property rent is exempt from VAT, but the landlord can choose to charge VAT (known as ‘opting to tax’). The sale of a commercial property is usually exempt, unless the owner has ‘opted to tax’. We can provide guidance on the implications and process of ‘opting to tax’.
- New Builds: The first sale of a newly built residential property is zero-rated, meaning VAT is charged at 0%. This allows developers to reclaim the VAT they have paid on their costs.
- Renovations: Major renovations on residential properties that have been empty for two years or more are also zero-rated, and conversions between different types of premises can sometimes attract a reduced rate of 5%.
- Holiday Lets: If the property is used for holiday lets, it’s treated as a business service and standard VAT rates apply, subject to the VAT registration threshold.
- VAT on Professional Services: Remember that VAT will generally be charged on professional services connected with your property transaction, such as estate agent fees or solicitor charges.
- Tour Operators’ Margin Scheme (TOMS) and VAT: The Tour Operators’ Margin Scheme (TOMS) is a special VAT scheme applicable to businesses that buy-in and re-sell travel, accommodation, and certain other services as principal or undisclosed agent (i.e., the customer regards the seller as the supplier, with no knowledge of the actual principal). It’s primarily designed for travel agents and tour operators but can also apply to other businesses that make supplies of travel services, such as Rent 2 Rent strategy.
Why work with us?
Our services go beyond these areas, covering all aspects of property tax. We are dedicated to helping you make informed decisions and ensure tax efficiency in all your property dealings.