£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
Returns must be submitted on or after 1 April in any chargeable period.
Some properties are not classed as dwellings. These include:
hotels
guest houses
boarding school accommodation
hospitals
student halls of residence
military accommodation
care homes
prisons
It is possible that dwellings contained within the same building can be treated as a single dwelling, and the aggregate value applied. The details can be found in Section 117 FA 2013.
However, for a standard HMO property, where each of the dwellings is separately accessible, and none can be accessed privately via any of the other dwellings in the property, then none of the property values may need to be aggregated for the £500k threshold.
There are many reasons why using a company to invest in residential property is good idea and Summer Budget 2015 made companies an even more attractive option.
1. Restriction of Mortgage Interest Tax Relief
Currently this is just a ‘Policy Paper’ but the plan 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.
Most investors will have multiple properties and high levels of borrowing.
Furnished Holiday Lets are excluded from the restriction – Official Policy
2. Corporation Tax Rates
The current rate of Corporation Tax is 20% but its falling year on year and by 2020 it will be 18%.
Not only that, its the same rate no matter how many companies you have, previously when there were multiple Corporation Rate if you had associated companies the small companies rate was reduce in a marginal rate calculation.
Individual tax rates are
Basic rate
20%
Up to £31,785
Higher rate
40%
£31,786 to £150,000
Additional rate
45%
Over £150,001
3. Capital Gains Tax
Capital Gains Tax is at 20% in companies (falling to 18% by 2020) and companies are allowed to apply HMRC Indexation Allowance to offset the effect of inflation.
Individuals get an annual allowance of £11,100 and basic rate tax payers pay 18% with higher rate tax payers paying a massive 28% with no indexation.
There are special rules for UK Companies owned by Non UK Residents.
There is no rollover relief for companies or individuals investing in Residential Property because investment isn’t a trading activity.
4. Stamp Duty
Stamp Duty (SDLT) on selling Shares is 0.5%.
Example – So £1,995 × 0.5% = £9.97. This is rounded up to the nearest £5, which means you pay £10 Stamp Duty.
Stamp Duty on Property Sales is calculated as follows
• No stamp duty will be paid on the first £125,000 of a property
• 2% will be paid on the portion up to £250,000
• 5% is paid for the portion up to £925,000
• 10% is paid on the portion up to £1.5m
• 12% is paid on anything above that
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
The 15% rate doesn’t apply to property bought by trustees of a settlement or bought by a company to be used for:
a property rental business
property developers and trader
property made available to the public
financial institutions acquiring property in the course of lending
property occupied by employees
farmhouses
The standard residential rate of SDLT applies in these cases. These exclusions are subject to specific conditions.
If 6 or more properties form part of a single transaction the rules, rates and thresholds for non-residential properties apply.
5. Inheritance Tax (IHT) and Potentially Exempt Transfers planning
One of the big benefits of Shares is that its easy to split ownership.
Potentially Exempt Transfers (PET’s) allow you to give away shares provided you survive more that 7 years after the transfer, shares make PETs easy and simple.
When you give away shares it will potentially trigger a capital gain but you will be able to use your personal capital gains allowance of £11,100 to offset this gain.
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). It came into effect from 1 April 2013 and is payable each year.
Budget 2014 announced a reduction in the threshold from £2 million to £500,000 to be introduced over 2 years. From 1 April 2015 a new band will come into effect for properties with a value greater than £1 million but not more than £2 million with an annual charge of £7,000. From 1 April 2016 a further new band will come into effect for properties with a value greater than £500,000 but not more than £1 million with an annual charge of £3,500.
Chargeable amounts for chargeable period 1 April 2014 to 31 March 2015
Property value
Annual chargeable amount 2014 to 15
More than £2 million but not more than £5 million
£15,400
More than £5 million but not more than £10 million
£35,900
More than £10 million but not more than £20 million
£71,850
More than £20 million
£143,750
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
Alternatively in some cases it might be better to own the property as an individual or jointly with other individuals.
Joint tenants
As joint tenants (sometimes called ‘beneficial joint tenants’):
you have equal rights to the whole property
the property automatically goes to the other owners if you die
you can’t pass on your ownership of the property in your will
you can only sell or remortgage the property with the other owners’ agreement
Tenants in common
As tenants in common:
you can own different shares of the property
you can pass on your share of the property in your will
you can stop one owner from selling or remortgaging the property without the other owners’ agreement
In the Autumn Statement 2013 it was announced that a CGT charge will be introduced from April 2015 on ‘future’ capital gains made by non-UK residents disposing of UK residential property. George Osborne said…
“Britain is an open country that welcomes investment from all over the world, including investment in our residential property”
“But it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not. That is unfair.”
UK Residents typically pay capital gains tax at 28% on any profit from selling property that is not considered their primary residence.
Property lawyers and estate agents said foreign owners would be relieved the tax will not apply to historic gains before 2015. But they cautioned that the overall impact could be marginal as many foreign investors see London property as a safe and profitable place to park capital.
“Tax is not the primary driver for the majority of international buyers of residential property in London,” Knight Frank’s head of global research, Liam Bailey, said.
“It is important to note that the change to CGT rules brings the UK in line with other key investor markets, such as New York and Paris, where equivalent taxes can approach 35-50 percent depending on the owner’s residency status.”
It was not immediately clear how the tax would be collected and how it would apply if foreign owners used a domestic company to purchase property.
When a company disposes of an asset and makes a capital gain, as the main rate of corporation tax in 2014 is 21% (20% small profits rate) there could be a future tax saving opportunity for overseas investors to transfer property to limited companies.
There are other tax implications for example ATED (Annual Tax on Enveloped Dwellings) and SDLT (Stamp Duty Land Tax) but now could be a good time to consider your options.
