Can a Property Flipper or Developer use Entrepreneurs Relief?

City Developer

Property Flipping and Development are Trades (not investments), so YES, they could qualify for Entrepreneurs Relief.

You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business.

Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets.

Work out if you qualify

You’ll qualify if you dispose of any of the following:

all or part of your business as a sole trader or business partner – including the business’s assets after it closed
shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’)

https://www.gov.uk/entrepreneurs-relief/eligibility

5 Pitfalls to avoid with Entrepreneurs Tax Relief

How does Entrepreneurs Relief help?

Let’s take an example using a Company

Flipping or Development Profit £100,000

Corporation 20% £20,000

Profit after Tax £80,000

If close the business and you apply Entrepreneurs Relief the you will pay 10% tax = £8,000

You will also get your CGT allowance of £11k deducted first.

Without Entrepreneurs Relief the tax would 20% or even more if the distribution was via dividends or salary. For unincorporated businesses the tax could be 20%, 40% or 45%!

What are the rules for ending a business?

The business has ceased.
The assets were in use at the time of cessation.
The business was owned for 1 year by the individual prior to cessation.
The assets were disposed of within 3 years of cessation.
The assets are not held as investments.

However, if you do the same thing within 2 years HMRC may consider that you are only doing this to gain a tax advantage and it could then be treated as income.

steve@bicknells.net

When do you pay Capital Gains Tax on a Property Sale?

One family house for sale

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

So it doesn’t apply to Property Developers, their profits are trading income not investment income.

Disposing of an asset includes:

selling it
giving it away as a gift, or transferring it to someone else
swapping it for something else

If you sell a property that your have lived in you will probably qualify for Principle Private Residence Relief

How does Principle Private Residence Relief work?

Even it it wasn’t your Principle Private Residence but you did own it personally you will still get an allowance of £11,100 tax free.

Companies get an indexation allowance

Capital Gains Tax for Companies

Residential properties don’t qualify for business asset rollover relief.

Once you have worked out your gain, the choices for individuals are:

Report your gain and pay straight away

You can use the Report Capital Gains Tax online service for the 2016 to 2017 tax year (6 April 2016 to 5 April 2017) if you’re a UK resident.

You’ll need a Government Gateway account – you can set one up from the sign-in page.

You don’t need to wait for the end of the tax year – you can use this service as soon as you’ve calculated your gains and the tax you owe.

Report in a Self Assessment tax return

Use Self Assessment to report your gain in the tax year after you disposed of assets.

If you don’t usually send a tax return, register for Self Assessment by 5 October following the tax year you disposed of your chargeable assets.

If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October.

You must send your return by 31 January (31 October if you send paper forms).

Report Company Capital Gains in a Corporation Tax Return

Report your gains to HM Revenue and Customs (HMRC) when you file your Company Tax Return. How much tax you pay depends on any allowances and reliefs you claim.

steve@bicknells.net

Are my costs Capital or Revenue expenditure?

Stress business woman

It makes a big difference to your tax whether you can offset costs as revenue expenditure or remove costs because they are capital expenditure

HMRC published a guide on this in September 2016 and have circulated in in their Agent Alert Self Assessment Special January 2016.

https://www.gov.uk/government/publications/hmrc-capital-vs-revenue-expenditure-toolkit

The Toolkit is really useful and covers lots of problem areas:

Acquisition, improvement and alterations to assets – highly relevant to property investors
Legal and Professional – including how to handle unsuccessful property purchases – which are a capital cost – and Business Owner Training Costs
Finance Costs
IT Costs – including websites
Intangible assets – such as Goodwill

steve@bicknells.net

Why would you create a Family Investment LLP for property?

immobilier

With all the recent changes in Property Investment Tax rules some investors have sought to move their property investments into LLP’s

Limited Liability Partnerships have largely been ignored by HMRC and untested with case law (so there is a risk that HMRC will start to pay more attention to them if they grow in popularity).

LLPs could have some benefits, especially for Inheritance, let’s look at the advantages:

If you had a property portfolio with potentially large capital gain you could move the property to the LLP as equity capital introduced (be careful on how the LLP agreement is written) and in theory this wouldn’t create a capital gain (CGT)
The LLP will show the full value in their accounts including the gain
Then you can add other family members

LLP’s are also being used as a stepping stone to incorporation.

S162 Incorporation Tax Relief would probably be available once the LLP has been trading for a while

Can a Residential Property Investor use Incorporation Tax Relief?

SDLT will probably not apply

Where the transferor is a partnership, this normal rule is overridden by the prescriptive rules in FA 2003 Sch 15. The impact of these provisions can be that to the extent the company is connected with the partners making the transfer, no SDLT may arise. https://www.taxjournal.com/articles/incorporation-buy-let-business-10062015

There are specialists offering solutions such as Property 118 – but the fees may out way the benefits for many investors

LLP structure reduces landlords tax bill by 85% – CASE STUDY

Holding property in companies is definitely the future for residential property investment

5 reasons why you need a Property Investment Company!

I would recommend a company for each property as this should make it easier for lenders to take a charge and creates the opportunity to sell the company rather than the property within it.

You can then have a holding company.

steve@bicknells.net

What are the tax changes for Residential Investors?

But to Let Stamp Duty

Prop Value	Std Rate	B2L Rate
< £125,000	0%	3%
£125k to £250k	2%	5%
£250k to £925k	5%	8%
£925k to £1.5m	10%	13%
Over £1.5m	12%	15%

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

But, commercial property investors, with more than 15 properties, will be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

Mortgage Interest

Mortgage Interest offset against property income will be restricted

2017/18

75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19

50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20

25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21

100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

Capital Gains

From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.

There will be an additional 8% surcharge to be paid on residential property.

Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).

Wear & Tear

Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

What could a Property Investor do to reduce the impact of these changes?

Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
Increasing the Rent – Could you charge more to cover the extra taxes?
Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

steve@bicknells.net

How developing your home could mean you lose Principle Private Residence Relief

We all try to improve our properties, but are we doing it with a profit motive?

TCGA92/S224 (3)

The purpose of private residence relief is to relieve gains arising on the disposal of an individual’s residence so that the whole of the disposal proceeds are available to be used to buy a new residence of a similar standard. It is not intended to relieve speculative gains or gains arising from development.

The exclusion of speculative or development gains is achieved by TCGA92/S224 (3). It is important to understand the scope and limitations of this subsection so that you can apply it in suitable cases.

The subsection applies

where a dwelling house is acquired wholly or partly for the purpose of realising a gain from its disposal, or

where there is subsequent expenditure on the dwelling house wholly or partly for the purpose of realising a gain from its disposal.

Where the first part of the subsection applies no relief is due on any gain accruing from the disposal of the dwelling house. Where the second part of the subsection applies no relief is due on any part of the gain attributable to the expenditure.

If you plan to develop your property prior to sale it could be worth transferring it to company before any work is carried out, this could help to ensure that any gain to the date of transfer will be exempt from tax.

There is a further potential risk that HMRC may view the property development as a trading activity.

steve@bicknells.net

Can you assign your property rents to a company?

This is a hot topic at the moment, here is the scenario…

You own a Buy to Let property personally but want to assign the rent to a specifically created company which you own. You are a higher rate tax payer where as Corporation Tax is 20%.

You want to retain ownership personally. You can’t transfer the property to company because Capital Gains Tax and Stamp Duty would apply. Incorporation Tax Relief isn’t available.

Can the Rents be assigned?

Rents

There isn’t a tax rule that says you must lease a property at Market Rent, so in theory, you could create a lease to your company for a period to match the letting period the company will give to its tenant and charge the company a nominal rent.

There are some issues with this for example PIM2220

Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes ( PIM2010).

Another potential problem is the mortgage which will be in the Landlords name, not the Company name, so the rent would have to cover the mortgage payments, which means it won’t help with the new interest restrictions coming in soon.

SDLT

This will be a connected party lease and subject to SDLT at market value but as the period will be short its unlikely that SDLT will be payable.

However (SDLTM17035), the renewal of a lease will not be treated as linked with the original lease at all for stamp duty land tax (SDLT) purposes if it can be shown (with appropriate evidence) to have been negotiated at arm’s length, for example if the original or earlier lease:

expired naturally

contained no right or compulsion of either party to renew and/ or

was renewed following entirely new negotiations, as would apply to a new tenant.

Otherwise, where leases of the same premises are granted:

between the same or connected parties

to take effect one immediately after the other

whether at the same time or not

these are successive linked leases for SDLT purposes, with tax calculated under the provisions of FA03/SCH17A/PARA5. Refer to SDLTM17040 for details.

Other Problem Areas

The company will be a closed company so if it carried out improvements to the property these could be taxable benefits to shareholders
Once the company has the rents and the profits how will you extract them tax efficiently

steve@bicknells.net

Can a Residential Property Investor use Incorporation Tax Relief?

There are many reasons why residential property investors are now rushing to incorporate, the biggest reason being the Restriction of Mortgage Interest Tax Relief.

Clause 24 of the Finance Bill sets out plans is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows

2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21 100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

When you sell or give a residential property to your Company you will incur Capital Gains Tax if you make a gain, its for this reason many investors and their advisers believe that they are ‘automatically’ entitled to claim Incorporation Tax Relief, but in many cases Incorporation Tax Relief will NOT be available!

In summary Incorporation Tax Relief allows Sole Traders to postpone/hold over a gain by transferring all their business assets into a limited company in return for Shares.

The key problem area is the Property Investment is generally not considered to be a Trade.

Some of the issues were resolved in EM Ramsay v HMRC [2013] UKUT 0226 (TCC)

Mrs Ramsey carried out the following activities

Mr & Mrs Ramsey personally met potential tenants
Mrs Ramsey check the quarterly electric bills
Mrs Ramsey arranged insurance
Mrs Ramsey arranged and attended to maintenance issues (drains)
Mrs Ramsey and her son maintained the garages and cleared rubbish
Mrs Ramsey dealt with post
Mrs Ramsey dealt with fire regulation issues
Mrs Ramsey arranged for a fence to be erected
Mrs Ramsey created a flower bed
Shrubs were pruned and leaves swept
The parking area was cleared of weeds
The flag stones were bleached
Communal areas were vacuumed
Security checks were carried out
She took rubbish to tip
She cleaned vacant flats
she helped elderly tenants with utilities

This work equated to at least 20 hours per week and Mrs Ramsey had no other employment.

It is because she did the work herself that her property investment was considered a ‘Business’ and eligible for Incorporation Tax Relief. In summing up the Judge said…

If Mrs Ramsay had employed a Property Management Company or Letting Agent to do the work she would NOT have been able to claim ‘Incorporation Tax Relief’.

Most Buy to Let Landlords with one or two properties are Passive Investors who delegate all the responsibilities to professional letting agents, they will not be doing enough to comprise a business!

Steve@bicknells.net

10 ways to pay less Property Tax (Investors)

Here are my top 10 ways that property investors can save tax

1 Property Investment Companies

Restriction of Mortgage Interest Tax Relief – this doesn’t apply to companies
Corporation Tax Rates – falling to 18% by 2020
Capital Gains Tax – Capital Gains Tax indexation
Stamp Duty – lower on share sales
Inheritance Tax (IHT) and Potentially Exempt Transfers planning – better with shares

Further details in our blog http://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

2 Commercial Property should be in a Pension Scheme

Self Invested Personal Pension (SIPP) Schemes and Small Self Administered Schemes (SSAS) can invest in commercial property, no tax on the rental income, no capital gains, you only pay tax when you draw your pension.

You also get tax relief on money paid into your Pension.

3 Claim tax deductible expenses

Claim allowable expenses

Mortgage or Loan Interest (but not capital)
Repairs and maintenance (but not improvements)
Decorating
Gardening
Cleaning
Travel costs to and from your properties for lettings or meetings
Advertising costs
Agents fees
Buildings and contents insurance
Ground Rent
Accountants Fees
Rent insurance (if you claim the income will need to be declared)
Legal fees relating to eviction

If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year

Claim for repair and advertising expenses incurred in getting the property ready for renting

4 Use a Property Development Company to Save VAT

Property Development is a trade, where as Property Investment isn’t – renting out a residential property is a VAT exempt supply.

If you are planning significant building work, setting up a Development Company or using a building contractor might save VAT.

Assuming you employ a builder…

The VAT Rules are in VAT Notice 708 Buildings & Construction

Your builder may be able to charge you VAT at the reduced rate of 5 per cent if you are converting premises into:

a ‘single household dwelling’
a different number of ‘single household dwellings’
a ‘multiple occupancy dwelling’, such as bed-sits, or
premises intended for use solely for a ‘relevant residential purpose’

As your builder will be VAT registered, they reclaim the VAT they are charged and then charge you VAT at 5%.

If your business is property rental and you do the work yourself, you can’t take advantage of the 5% rate.

If your Development Company is VAT registered you can reclaim all the VAT.

Get your existing business or your property development company to convert the property and then sell it to another company that you own (may be an SPV) will be a VAT Zero Rated transaction. The other company then carries on the rental business.

5 Principle Private Residence Relief and Lettings Relief

Principle Private Residence Relief (PPR) is useful relief that saves you capital gains tax (18% for basic rate tax payers and 28% for higher rates tax payers) on your main residence.

You may also qualify for lettings relief after you have moved out.

6 Give away your Property in Stages

As long as the home you give away is your main home, Capital Gains Tax won’t be payable.

However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.

If you sell your second home and give the money to your children, the gift won’t be included in your estate for Inheritance Tax purposes, provided you live for 7 years after you make the gift.

It is possible to to gift property in stages.

Your solicitor will draw up the required documents to conveyance a percentage of the property and register the transactions with the Land Registry.

In order to calculate the capital gain you will need to know the acquisition cost and any reliefs such as PPR.

Giving away your property in stages could save you from having to pay capital gains tax.

7 Claim Capital Allowances and Claim Tax Relief on Integral Features

FA2008 introduced a new classification of integral features of a building or structure, expenditure on the provision or replacement of which qualifies for WDAs at the 10% special rate. The new classification applies to qualifying expenditure incurred on or after 1 April 2008 (CT) or 6 April 2008 (IT).

http://www.hmrc.gov.uk/manuals/camanual/CA22300.htm

The rules on integral features apply where a person carrying on a qualifying activity incurs expenditure on the provision or replacement of an integral feature for the purposes of that qualifying activity. Each of the following is an integral feature of a building or structure –

an electrical system (including a lighting system),
a cold water system,
a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
a lift, an escalator or a moving walkway,
external solar shading

Only assets that are on the list are integral features for PMA purposes; if an asset is not one of those included in the list, the integral features rules are not in point.

However, Plant and Machinery includes….

other building fixtures, such as shop fittings, kitchen and bathroom fittings

Many businesses have never claimed capital allowances for these items.

8 Consider Joint Ownership

If you own property personally you could double up your tax free Capital Gains Tax Allowance if you switch to owning property jointly with your spouse.

9 Check if you qualify for relief from ATED

Most residential properties (dwellings) are owned directly by individuals. But in some cases a dwelling may be owned by a company, a partnership with a corporate member or other collective investment vehicle. In these circumstances the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.

ATED is a tax payable by companies on high value residential property (a dwelling).

There are reliefs that might lead to you not having to pay any ATED. You can only claim these by completing and sending an ATED return.

A dwelling might get relief from ATED if it is:

let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
open to the public for at least 28 days per annum, if part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will apply to the whole property
part of a property trading business and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
part of a property developers trade where the dwelling is acquired as part of a property development business the property was purchased with the intention to re-develop and sell it on and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
for the use of employees of the company, for the company’s commercial business and where the employee does not have an interest (directly or indirectly) in the company of more than 10%, the employee’s duties must not include services for any present or future occupation of the property by someone connected with the company, the relief is also available where a partner in a partnership does not have an interest of more than 10% in the partnership
a farmhouse, if it is occupied by a qualifying farm worker who farms the associated farmland, a former long-serving farm worker or their surviving spouse or civil partner
a dwelling acquired by a financial institution in the course of lending
owned by a provider of social housing

10 Take dividends this tax year

When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try our Dividend Calculator to see how much difference it could make.

Dividend tax rates before April 2016

Tax band	Effective dividend tax rate
Basic rate (20%) (and non-taxpayers)	0%
Higher rate (40%)	25%
Additional rate (45%)	30.56%

This will change from April 2016, see the table below

Dividend tax rates after April 2016

Tax band	Effective dividend tax rate
Tax Free £5,000	0%
Basic Rate Tax Payers (20%)	7.5%
Higher Rate Tax Payers (40%)	32.5%
Additional Rate Tax Payers (45%)	38.1%

The new rules are easier to follow, the 10% tax credit in the current rules is hard for most people to follow.

There is a Dividend Allowance factsheet which helps to explain how dividend tax will be calculated.

But be warned!

While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.

So far we don’t know how much more!

steve@bicknells.net

What if you write off an intercompany or directors loan?

Connected party loans are a problem area especially if the loan is impaired (ie the borrower may not be able to repay the debt)

Individual Loans written-off

If an individual makes a loan to a company and this is subsequently written-off, the company will have a non-trading loan relationship credit equal to the amount written off.

If the loan was made to an unquoted trading company, the individual will crystalise a capital loss equal to the amount of the loan written off. This will be available to set off against capital gains arising in the year of write-off or in subsequent years.ACCA

The situation, however, becomes more complicated where the parties are connected. The general rule is that where the debtor and creditor in a loan relationship are connected in any part of an accounting period and the whole or part of a loan is written off, then this is effectively a ‘tax nothing’, ie the creditor company cannot claim relief for the amount of the loan written off and the debtor company does not incur a taxable loan relationship credit.

There is, however, an exception to the above when the creditor company is in insolvent liquidation; a creditor company may claim an impairment loss in these circumstances.

Loans swapped for Shares

Often Loans are swapped for equity and then subsequently a claim for negligible value is made.

A negligible value claim enables you to set a capital loss against your income (or against other capital gains if you have them) for earlier years and claim a tax refund.

Many negligible value claims are made by shareholder directors whose company has failed. Their claim is to offset the loss on the shares in their company against their directors’ wages for earlier tax years.

When a taxpayer owns shares which become of negligible value the taxpayer may make a claim under s24 TCGA 1992, resulting in a deemed disposal and reacquisition, which crystallises a capital loss.

Intercompany Loans

Accounting standards require companies to assess their assets at the end of each period to ascertain whether there is objective evidence that particular assets are impaired. So if a loan can’t be repaid it would be impaired and may require a provision for bad or doubtful debts at the year-end which may well lead to the eventual release of the loans in question.

The problem is that for connected businesses this can create a double whammy on tax! tax relief is denied in respect of the debit to the creditor company’s profit and loss account. The credit recognised in the debtor company’s accounts can be taxable.

Where the creditor and debtor are connected companies, the connected party rules will apply to the release. This means that the release debit in the creditor’s accounts will not be allowable, because of CTA09/S354. Similarly, the credit in the debtor company’s accounts will not be taxable, since CTA09/S358 applies, unless the release is a ‘deemed release’ as defined in CTA09/S358(3) (CFM35440) or a ‘release of relevant rights’ under CTA09/S358(4) (CFM35510).

Since the release is, for both parties, dealt with under loan relationships, the priority rule in CTA09/S464 means that the creditor’s loss cannot be claimed, nor the debtor’s profit taxed, under the normal provisions for trading income. Nor can the credit in the debtor’s accounts be taxed under CTA09/S94 (debts incurred and later released).

Trade debts or loans between companies within a group may not uncommonly be released when either the debtor or the creditor company (or both) is dormant, as part of a ‘tidying-up’ exercise to enable dormant companies to be struck off. If this is all that happens, HMRC would take the view that the recording of an accounts profit – which is not taxed – in a dormant debtor company does not result in that company starting to carry on a business, and therefore does not start an accounting period under CTA09/S9. HMRC CFM41070

Two companies are connected for an accounting period if one controls the other or both are under the control of the same person (s 466) and companies are connected for the whole of their respective accounting periods if the control test is met at any time during those periods.

One possible solution could be a Deed of Release or Waiver executed in the accounting period in which the loan is released, but this would need to be properly drafted. The credit to the debtor company’s profit and loss account will then be able to be treated as non-taxable and as such avoid the double tax treatment.

steve@bicknells.net