Massive changes under discussion for the tax of Property Investors!!

woman in white shirt showing frustration

First we had the OTS Property Income Review dated 25th October 2022, since then the Policy Paper has been issued (1st November 2022) so it looks like we will see the adoption of at least some of the recommendations in Autumn Statement on 17th November 2022.

Key findings and priority recommendations

Furnished holiday lettings

  • Short-term rentals meeting the conditions fall into the furnished holiday lettings regime. This regime provides more favourable tax treatment than the main property income rules, with more tax relief for costs, including interest, and potentially a reduced Capital Gains Tax bill on disposal.
  • The OTS recommends that the government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.
  • If the furnished holiday lettings regime is abolished the OTS recommends that the government consider whether certain property letting activities subject to Income Tax should be treated as trading and whether it would be appropriate to introduce a statutory ‘brightline’ test to define when a property trading business is being carried on.
  • If the regime is retained, the introduction of a private use restriction may allow for relaxation of other requirements to enter the regime, making it simpler to understand and predict whether one is in scope.
  • Should the government conclude that the furnished holiday lettings regime be retained, the OTS recommends that the government then consider:
    • removing the current distortion of allowing the regime for properties in the European Economic Area, either by permitting worldwide properties to qualify, or by limiting the regime to UK properties
    • restricting the regime to properties used for commercial letting by removing the potential for personal occupation. This would permit a simpler approach to defining the regime

Repairs, replacements, and improvements

  • A long-standing area of complexity for taxation of property is whether costs are allowable straight away as repairs and replacements, or represent capital expenditure as improvements and should be disallowed for Income Tax.
  • The OTS recommends that HMRC should enhance the guidance in respect of the boundary between repairs and improvements to include clear examples of common situations, perhaps using flow-charts to lead towards case-by-case answers.
  • The OTS recommends that the government consider introducing a broader immediate Income Tax relief for all property costs – other than where work is part of the capital cost of the building, such as the initial fit-out of properties bought in a dilapidated state or structural work such as extensions to the property.

Jointly owned property

  • HMRC data indicates that almost half (1.5 million) of all taxpayers renting out property do so jointly, mainly with a spouse or civil partner, or with others.
  • Those not married nor in civil partnership will by default declare the split of income based on beneficial ownership, but can instead choose any other split they like without any form of election.
  • Conversely, spouses and civil partners, (providing they are living together) default to equal 50:50 shares for property other than furnished holiday lets, and respondents made very clear that the process to instead use a split based on beneficial ownership (using form 17) is complex and burdensome even for advisers, and taxpayers themselves are normally unaware of the need. This creates an unnecessary complexity and burden, and potentially accidental non-compliance.
  • The OTS recommends that the government should consider removing the anachronistic 50:50 rule for spouses and civil partners and aligning treatment to that of other joint owners and to the position for spouses under Capital Gains Tax and Inheritance Tax. To prevent abuse, the default beneficial ownership position should not be capable of being displaced.
  • The government may also wish to consider removing the ability for joint owners to decide on a split other than beneficial ownership.

Making Tax Digital for Income Tax

  • From April 2024, landlords in scope of Making Tax Digital (MTD) for Income Tax will need to keep digital records and file updates quarterly using compatible software. There was a very high level of concern common to all respondents about how the rules would apply to landlords.
  • The OTS recommends that HMRC should establish a system to deal with MTD for Income Tax for jointly owned properties, for example by making a jointly owned property the MTD filing entity.
  • Landlords may rely on multiple parties to provide information and potentially to support submitting reports.
  • HMRC needs to be able to authorise MTD for Income Tax filing agents alongside tax agents. This is needed because letting agents and bookkeepers will maintain digital records and may support quarterly submissions on behalf of some landlords. Specific professional standards and responsibilities will be needed for MTD for Income Tax filing agents.
  • The gross rental limit for being required to adopt MTD for Income Tax has been set at £10,000. The evidence suggests that a landlord with such low gross rentals will have a modest net profit, if any. The OTS acknowledges that, although there would be an Exchequer impact on raising the threshold, this could be outweighed by lower customer costs, higher levels of compliance and better taxpayer and agent engagement.
  • The OTS recommends that HMRC give consideration to increasing the minimum gross income threshold for MTD for Income Tax for landlords above £10,000, at least for the medium term.
  • As is clear from the points above there are unresolved complexities within MTD for Income Tax.
  • The OTS recommends that MTD for Income Tax should not apply to landlords until these major points have been dealt with by HMRC and by a range of software providers. Time will be needed to test new systems before adoption.

These changes are huge, if implemented there will be widespread confusion about how to report property income, this is already a complex area of tax, most of these changes will probably mean property owners end up paying more tax!

steve@bicknells.net

Sole Directors – time to change your model articles – Hashmi v Lorimer-Wing 2022

UK Companies are normally formed using model articles, they are contained in the Companies Act 2006 and replaced the previous Table A articles.

Model Articles were designed a ‘one size fits all’ solution and until now pretty much everyone including sole director companies have adopted them. The recent high court judgement has changed that!

In the model articles section 11(2) states

The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

Model articles for private companies limited by shares – GOV.UK (www.gov.uk)

The case of Hashmi v Lorimer-Wing 2022 was the result of a dispute between directors, leaving the company with one director. The High Court Judge decided in the case that Model Articles are not suitable for single director companies.

What should sole director companies do now?

Appoint another Director

It sounds obvious but might not work for everyone, the company probably has a sole director for a good reason so appointing another director isn’t probably a good idea?

Change the Articles

Assuming you don’t appoint another director, then you have to do this. Following the High Court decision hundreds of thousands of companies will now be doing this. But it won’t fix decisions already taken by a sole director!

How do you deal with decisions already taken by a Sole Director?

You will need a written shareholders resolution to ratify decisions taken by you as a sole director.

You have 15 days from signing the resolution to file at companies house!

So don’t panic, if you have model articles and you are a sole director, a resolution and new articles will fix the situation.

steve@bicknells.net

Can you get the company to buy your solar panels?

aerial view of two houses with roof tiles

At the moment the UK like other countries is in the depth of an energy crisis, mainly caused by the price of gas and lack of gas supplies.

Energy prices are higher than they have ever been, even with potential government intervention the costs will still be high. On top of that we have climate change, if we are to avoid climate disasters, we need to use renewable energy, such as Solar.

There has never been a better time to make your home more energy efficient.

Solar Panels and Batteries could mean you could become close to self-sufficient for energy, harnessing sunlight in the daytime, storing it in batteries and using it at night.

What if your company purchased a solar system for your home as benefit in kind, what would the tax be?

VAT

From 1 April 2022 until 31 March 2027 a zero rate applies to the installation of certain specified energy-saving materials in, or in the curtilage, of residential accommodation in Great Britain 

Energy-saving materials and heating equipment (VAT Notice 708/6) – GOV.UK (www.gov.uk)

It makes no difference whether your company purchases the system or whether an individual purchases it.

Solar panels include all systems that are installed in, or on the site of, a building and that are:

  • solar collectors such as evacuated tube or flat plate systems, together with associated pipework and equipment, such as circulation systems, pump, storage cylinder, control panel and heat exchanger
  • photovoltaic (PV) panels with cabling, control panel and AC/DC inverter

Capital Allowances

Expenditure on solar panels is special rate expenditure on the basis they are integral features of buildings or structures.

Integral features expenditure can also qualify for AIA, they do not unfortunately qualify for the super deduction (must also be a company to qualify for the super deduction).

https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca22335

To qualify for the allowance the conditions at S33A (1) and (2) etc must be met, please see the link below

EXPENDITURE ON INTEGRAL FEATURES (s. 33A) | Croner-i Tax and Accounting (croneri.co.uk)

Ownership of the property is not a requirement to qualify however the person that incurs the expenditure must own the P&M because of incurring it.

Benefit In Kind

As an employee, with the use of a company assets comes a chargeable BIK. The basic calculation is 20% of market value when first available less any unavailability and any contribution. 

Example – Solar Panel System Cost = £16,000 x 20% BIK = £3,200 BIK on which the tax is 20% = £640 per year or 40% = £1,280 per year in addition to the tax there is also Class 1A NI at 13.8% (£441.60), but the overall costs is still below the energy cap of £3,500 and even below the Governments suggested cap of £2,500.

In our particular case we have electric cars and work from home and use significantly more than the average levels.

The benefit in kind is reported in section L (assets placed at the disposal of the employee) of the P11D.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21873

steve@bicknells.net

When does the Corporate Bodies 15% SDLT Rate Apply?

modern building against sky

Most people aren’t aware of the 15% which can apply to corporate property purchases over £500k and expect to pay the rates below (these are the rates with the extra 3%)

Property or lease premium or transfer valueSDLT rate
Up to £125,0003%
The next £125,000 (the portion from £125,001 to £250,000)5%
The next £675,000 (the portion from £250,001 to £925,000)8%
The next £575,000 (the portion from £925,001 to £1.5 million)13%
The remaining amount (the portion above £1.5 million)15%

Stamp Duty Land Tax (SDLT) is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies or ‘non-natural persons’. These include:

  • companies
  • partnerships including companies
  • collective investment schemes

These bodies may also need to pay Annual Tax on Enveloped Dwellings.

Relief from the 15% higher rate charge

The 15% rate does not apply to property bought by a company that is acting as a trustee of a settlement or bought by a company to be used for:

  • a property rental business
  • property developers and traders

FA03/S55/SCH4A: property rental businesses FA03/SCH4A/PARA5

Where the acquisition of a chargeable interest is exclusively for the purpose of exploitation as a source of rents or other receipts in the course of a qualifying property rental business, the 15% higher rate charge will not apply to the transaction. Instead, SDLT will be charged at the higher rates (the ones with the extra 3% in the table above) – see SDLTM09835 for more information on companies and the higher rates.

To qualify as a qualifying property rental business, the business must meet two conditions:-

  • it must be a property rental business as defined in Chapter 2 of Part 4, CTA 2009 (excluding the condition that the profits are chargeable to corporation tax – see PIM1020 onwards for more information), and
  • it must be carried on a commercial basis and with a view to a profit.

https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09555

This relief may be withdrawn in certain circumstances:-

https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09660

So thankfully most companies won’t have to pay 15% but this has been a source of confusion for some clients.

steve@bicknells.net

Don’t buy a holiday let in a company if you want stay in it!

interior of contemporary house on lake on cloudy day

Generally companies are great because corporation tax rates are lower than income tax rates, however, for Holiday Lets company ownership can be a problem if you have personal use for the following reasons (of course if you don’t want to stay there these don’t apply):

ATED

ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.

You’ll need to complete an ATED return if your property:

  • is a dwelling — find out the meaning of ‘dwelling’ in the next section
  • is in the UK
  • was valued at more than:
    • £2 million (for returns from 2013 to 2014 onwards)
    • £1 million (for returns from 2015 to 2016 onwards)
    • £500,000 (for returns from 2016 to 2017 onwards)
  • is owned completely or partly by a:
    • company
    • partnership where any of the partners is a company
    • ­collective investment scheme — for example a unit trust or an open ended investment vehicle

Chargeable amounts for 1 April 2022 to 31 March 2023

Property valueAnnual charge
More than £500,000 up to £1 million£3,800
More than £1 million up to £2 million£7,700
More than £2 million up to £5 million£26,050
More than £5 million up to £10 million£60,900
More than £10 million up to £20 million£122,250
More than £20 million£244,750

Benefit in Kind

Here is an example from HMRC

A UK company purchases a flat in a French ski resort for £200,000. It is agreed that a market rental for the property would be £500 per week during the 6 month skiing season and £100 per week during the rest of the year. A husband and wife who are both directors of the company use the flat for holidays with their children for 3 weeks during the ski season and one week in the rest of the year. Their children are neither employees nor directors of the company. The employer advises that the sole reason the property was bought was as a holiday home for the husband and wife. It has only been used by them as a holiday home.

We would argue in this case that provided is equivalent to available for use. Assuming that the flat was habitable for the whole of the year we would seek a benefit under Part 3 Chapter 5 measured on availability for the whole of the year. The employer may argue that the husband and wife work full time and that this prevents them using the flat for more than the 4 weeks in the year of actual use and so they are effectively only provided with it for 4 weeks. We do not accept that argument.

If the cost of the accommodation exceeds £75,000, then the amount of the cash equivalent would be calculated in accordance with Section 106 ITEPA 2003 (see EIM11472). As the annual value is based on the open market rental, under ESC A91 the cash equivalent of the benefit is restricted to step 1 of Section 106. This would mean that the cash equivalent for the tax year would be £15,600 (£500 x 26 + £100 x 26). Under Section 108 that would be split between the husband and wife in whatever way was just and reasonable, presumably half each in this case (see EIM11472).

The amount of the benefit under section 106 is:

•Step 1 – the cash equivalent as if section 105 ITEPA 2003 applied (see EIM11431)

•Step 2 – ORI × (C – £75,000) (this amount is called the additional yearly rent), where:

•C is the cost of providing the living accommodation (see point three above) and

•ORI is the official rate of interest

•Step 3 – calculate the rent that would have been payable if the property had been let for the taxable period at that additional yearly rent (see EIM11428 for taxable period)

•Step 4 – add together the amounts calculated under step 1 and step 3. From this total subtract any excess rent paid by the employee. The answer is the amount of the benefit.

FLM Indicator have a calculator to work this out if you need it.

What would be the tax if its personally owned?

If the property is owned personally then a SA105 Box 10 Private Use Adjustment is made, this excludes a % of the property costs for the period of private use. If you only stay there for a short period its going to be a much lower cost.

steve@bicknells.net

Main and Special Rate Capital Allowances – how do you clear the pools down?

high rise building with green glass windows

When Capital Allowances are assessed on commercial property and holiday lets they will be split into 3 categories. We use specialists to make the assessments and they are able to maximise the claims. The categories are:

Annual Investment Allowance

You can only claim AIA in the period you bought the item.

The date you bought it is:

  • when you signed the contract, if payment is due within less than 4 months
  • when payment’s due, if it’s due more than 4 months later

If you buy something under a hire purchase contract you can claim for the payments you have not made yet when you start using the item. You cannot claim on the interest payments.

Since 2019 the AIA has been capped at £1m but that’s more than enough for most businesses.

AIA is not available for partnerships where one of the partners is a company or another partnership.

Main Rate and Special Rate Pools

The 3 types of pool are the:

  • main pool with a rate of 18%
  • special rate pool with a rate of 6%
  • single asset pools with a rate of 18% or 6% depending on the item

Special rate pool

You can claim a lower rate of 6% on:

  • parts of a building considered integral – known as ‘integral features’
  • items with a long life
  • thermal insulation of buildings

Integral features

Integral features are:

  • lifts, escalators and moving walkways
  • space and water heating systems
  • air-conditioning and air cooling systems
  • hot and cold water systems (but not toilet and kitchen facilities)
  • electrical systems, including lighting systems
  • external solar shading

What happens to the Pools if the Asset is disposed of?

The main and special rate pools will continue to qualify for WDAs until the business ceases, even though all the assets in the pool have been sold, transferred or scrapped. When the business ceases there will be a balancing adjustment. This will be either a balancing charge, i.e. taxable amount, if proceeds received for the assets (or their market value if they are not sold) exceed the value of the pool, or a balancing allowance, i.e. extra tax deduction, if the proceeds (or value) are less than the value of the pool. (Indicator FLM)

So you carry on taking 18% or 6% WDA until the business ceases.

If the property is being sold or has been sold and the company is to be wound up, then a balancing allowance of the CA pools can be received in the final accounting period.  Usually, there will be a value attributed to capital allowances via the s198 election in the contract.

steve@bicknells.net

How do you create a Group using Share Exchange/Swap? Why is it done?

photo of man holding pen

Share for Share exchange is often used when you are re-organising or creating a group and benefits from tax relief.

Basically if you don’t do a share exchange you would need to sell the shares at market value creating both Capital Gains and Stamp Duty costs.

In order to do a Share exchange you must have bona fide commercial reasons for doing it and it can’t be just to avoid tax. So for example you might want to create a group in order to separate trading and investment activities and enable an investment company to obtain mortgage finance (most lenders probably would not lend to a single company doing both trading and investment in the same company as it puts the investment at risk).

Why?

Here is a common scenario, a developer buys a commercial property to develop into residential and sell, but when the project completes the market conditions have changed they want to keep the residential properties and rent them out.

During the development they will have reclaimed VAT and the first grant of residential is Zero Rated, so they get full recovery. An investor would not get this.

So to avoid partial exemption for VAT its best to move to a new company and there are bona fide Commercial Reasons too as previously noted.

Although the reclassification to investment will create a profit and tax charge a group structure will provide Group SDLT relief. See these blogs for details.

What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction – Steve J Bicknell Tel 01202 025252

Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

How?

The process basically has 4 stages.

Stage 1 – Form the new companies

Assuming you are now creating a new Holding Company with a New Investment Company, these need to be formed first.

Stage 2 – HMRC Clearance

Its not mandatory but it is best practice How to apply for clearance or approval of a transaction from HMRC – GOV.UK (www.gov.uk)

To get clearance you need to write a letter to HMRC setting out all the facts, the group structure and the commercial reasons, typically the letter is 6 to 10 pages long.

You can request advance clearances by sending an email to reconstructions@hmrc.gov.uk. You do not need to send a paper copy.

Attachments should be no larger than 2MB. Do not send self-extracting zip files as HMRC software will block them.

If possible we would like to reply by email, but we need your permission to do so by including the following statement:

‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)….’

If you’re making the application on behalf of yourself or your company adapt this wording as necessary.

Stage 3 – The Contract

This is normally done by a solicitor.

The contract deals with the acquiring company and the shareholders of the target company under which the shares are to be acquired with the consideration being shares in the acquiring company.

Stage 4 – Stamp Duty Relief

As the acquiring company is paying consideration for the shares (the issue of its own shares), then the transaction is subject to Stamp Duty. However, relief can be claimed under s77 FA 1986 if the conditions are met and the anti-avoidance rule of s77A FA 1986 does not apply. HMRC guidance is at STSM042000 starting at STSM042410. After the conditions have been checked and a claim prepared, see “How to Claim Relief” on GOV.UK. The claim needs to be made within 30 days of the contract date and, as HMRC outline, various information will need to be attached to the e-mail claim including the stock transfer form.

steve@bicknells.net