What is an Option to Tax on Property? Reply

Office Building An office building with glass windows on a sunny day.

Opting to Tax refers to Commercial Properties and VAT.

Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.

However, you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You don’t need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies.

https://www.gov.uk/government/publications/vat-notice-742a-opting-to-tax-land-and-buildings/vat-notice-742a-opting-to-tax-land-and-buildings

If you are buying a building for your business to use and your business is VAT registered you may be able to recover the VAT without opting to Tax.

However, most commercial landlords will opt to tax so that they can recover their VAT. They will then charge VAT to their tenants.

When you sell the building as an investment its generally the case that the buyer will want to register for VAT so that the transfer will be within the Transfer of a Going Concern (TOGC) rules to avoid getting stuck with a VAT bill.

If your buyer is a pension scheme they can register for VAT to benefit from TOGC.

If you sell to a developer who will be converting from Commercial to Residential TOGC will not apply but the developer will be able to recover the VAT as they will be developing the a Zero rated Residential Property.

It is also possible to ask for a belated Option to Tax (Section 4.2.1 Notice 742A)

HMRC will normally accept a belated notification if you provide:

  • direct documentary evidence that the decision was made at the relevant time (eg copies of correspondence with third parties referring to the option to tax)
  • evidence that output tax has been charged and accounted for and input tax claimed in accordance with the option and a responsible person (such as a director) provides a written declaration that the decision to opt was made at the relevant time and that all relevant facts have been given

HMRC might accept a belated notification in other circumstances. This will depend on the facts of your case.

The option is applied for using VAT 1614A.

steve@bicknells.net

 

 

At what point does a commercial property become residential? 2

immobilier

This blog relates to sale/purchase transactions, its common for developers to get planning consent before purchasing.

Just getting planning consent doesn’t trigger a change, its the use at the effective date of the transaction that overrides any past or intended future uses for the property.

The Rules are in

http://www.legislation.gov.uk/ukpga/2003/14/section/116

Meaning of “residential property”

(1)In this Part “residential property” means—

(a)a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use

http://www.legislation.gov.uk/ukpga/1994/23/schedule/8/part/II/chapter/5/paragraph/2

a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose

https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm20076

In most cases, there will be no difficulty in establishing whether or not a property is residential property.

Use at the effective date of the transaction overrides any past or intended future uses for this purpose.

steve@bicknells.net

What are the VAT implications of converting commercial buildings to residential? Reply

foreman builder and construction worker with blueprint in indoor apartment

There are several issues to watch out for:

Transfer Of a Going Concern (TOGC)

Before you buy a commercial property you will need to find out if the current owner has opted to tax.

Supplies of land and buildings, such as freehold sales, leasing or renting, are normally exempt from VAT. This means that no VAT is payable, but the person making the supply cannot normally recover any of the VAT incurred on their own expenses.

However, you can opt to tax land. For the purposes of VAT, the term ‘land’ includes any buildings or structures permanently affixed to it. You don’t need to own the land in order to opt to tax. Once you have opted to tax all the supplies you make of your interest in the land or buildings will normally be standard rated, and you will normally be able to recover any VAT you incur in making those supplies. VAT Notice 742A

If an Option to Tax is in place the seller will charge VAT when they sell the property.

If the purchaser is not registered for VAT they get a very large VAT bill to pay, however, if they register for VAT or are registered for VAT before the sale takes place then its possible to use the TOGC rules to avoid having to pay VAT on the purchase.

The main conditions are:

  • the assets must be sold as part of the transfer of a ‘business’ as a ‘going concern’
  • the assets are to be used by the purchaser with the intention of carrying on the same kind of ‘business’ as the seller (but not necessarily identical) – for example commercial property rental
  • where the seller is a taxable person, the purchaser must be a taxable person already or become one as the result of the transfer
  • in respect of land which would be standard rated if it were supplied, the purchaser must notify HMRC that he has opted to tax the land by the relevant date, and must notify the seller that their option has not been disapplied by the same date

The TOGC rules are compulsory. You cannot choose to ‘opt out’. So, it is very important that you establish from the outset whether the business property is being sold as a TOGC. Incorrect treatment could result in corrective action by HMRC which may attract a penalty and or interest.

Problem areas:

  1. Gap in trading – for TOGC to apply there must be no significant gap in trading between the sale and purchase
  2. VAT registration – If the vendor is VAT registered, there can only be a VAT-free TOGC if the purchaser is registered at or before the transfer

TOGC Intended for Residential Use

Schedule 10 para 6 VATA 1994 Notice 742A para 3.4

Your option to tax will not apply if you supply a building or part of a building that is not designed or adapted as a dwelling (or number of dwellings) or for a relevant residential purpose but you receive a certificate (VAT1614D) from the recipient of your supply (by the time described in paragraph 3.4.3 and paragraph 3.4.4) certifying that it is intended for use as a dwelling or number of dwellings or solely for a relevant residential purpose. This can apply where the building, or relevant part, is either intended for such use:

  • without conversion work being undertaken
  • after conversion

Conversion of Commercial to Residential for Sale – Zero Rating

VAT notice 708 (Schedule 8 Group 5 item 1 VATA 1994)

5.5.1 What ‘person converting’ means

You are a ‘person converting’ a building if, in relation to that building, you are acting as, or have, at any point in the past, acted as:

  • a developer – you physically converted, or commissioned another person to physically convert, a building (in whole or in part) that you own or have an interest in
  • a contractor or subcontractor – you provided construction services to the developer or another contractor for the conversion of the building, sub-contracting work as necessary

5.5.6 TOGC of converted developments of dwellings, relevant residential buildings

A person acquiring a residential development that has been subject to a qualifying conversion as part of a TOGC inherits ‘person converting’ status and is capable of making a zero rated first major interest grant in that building or part of it as long as:

a) a zero rated grant has not already been made of the converted building or relevant part by a previous owner (not including the grant that gives rise to the TOGC)

b) the person acquiring the building as a TOGC would suffer an unfair VAT disadvantage if its first major interest grants were treated as exempt (for example, a developer restructures its business. This entails the transfer (as a TOGC) of its entire property portfolio of newly constructed or converted qualifying buildings to an associated company, which will make first major interest grants. If these were treated as exempt, the transferee might become liable to repay input tax recovered by the original owner on development costs under the Capital Goods Scheme or partial exemption “claw back” provisions and would incur input tax restrictions on selling fees that would not be suffered by businesses in similar circumstances – we would consider this to be an unfair disadvantage)

c) that person would not obtain an unfair VAT advantage by being in a position to make zero rated supplies (for example, by recovering input tax on a refurbishment of an existing building)

A recent case suggests the rules even apply to Houses of Multiple Occupancy (HMO’s) and that HMO’s can also be Zero Rated

https://www.gov.uk/government/publications/vat-notice-708-buildings-and-construction/vat-notice-708-buildings-and-construction#zero-rating-the-sale-of-or-long-lease-in-non-residential-buildings-converted-to-residential-use

The case is Capital Focus Limited v HMRC TC05193 Appeal number TC/2015/04891.

Capital Focus purchased Tintern House in Banbury, Oxfordshire in August 1994, it was a commercial building and they intended to create one large residential building so they started work and reclaimed the VAT, however, they changed their mind and decided to create an HMO instead.

HMRC allowed the £45,000 input tax claim on the basis that it would be supply of a non-residential building converted to residential use and therefore zero-rated under Item 1(b), Group 5 of schedule 8 to the Value Added Tax Act 1994 (“VATA”)
On 22 April 2015 HMRC wrote to the Company stating that, because it had been converted for multiple occupancy, the sale of Tintern House
was not a zero-rated but an exempt supply and any input tax incurred that was directly attributable to it was not recoverable.
HMRC lost the case, here is the result..
VAT Zero HMO

Reduced Rate VAT for Conversion from Commercial to Residential

The rules are in VAT Notice 708

Using the reduced rate of 5% is useful for Residential property (exempt from VAT) but is also useful for commercial buildings where there is no option to tax in place.

Conversions into single household dwellings

A qualifying conversion includes the conversion of:

  • a property that has never been lived in, such as an office block or a barn
  • a multiple occupancy building such as a bedsit block
  • living accommodation which is not self-contained, such as a pub containing staff accommodation that is not self-contained
  • any dwelling which had previously been adapted in its entirety to another use, such as to offices or a dental practice

It does not include:

  • the creation of living accommodation that is not a ‘single household dwelling’, such as most ‘granny’ annexes or additional bedrooms at a care home, and
  • the renovation or alteration of living accommodation that had been used for other purposes without the premises being adapted, such as a flat above a shop that has been used for storage. If the living accommodation has not been lived in for two years or more, the reduced rate explained in section 8 may apply

Conversions into multiple occupancy dwellings

A qualifying conversion includes the conversion into a multiple occupancy dwelling of:

  • a single household dwelling
  • a building used for a relevant residential purpose, such as a care home, and
  • a property that has never been lived in

It does not include, for example, the creation of additional bedrooms at a dwelling consisting of bed-sits.

Conversions into premises intended for use for a relevant residential purpose

A qualifying conversion includes the conversion of:

  • a single household dwelling
  • a multiple occupancy dwelling, and
  • a property that has never been lived in

into premises that will be used solely for a relevant residential purpose.

It does not include:

  • the remodelling of an existing ‘relevant residential purpose’ building, such as a care home, and
  • any conversion where a new qualifying residential ‘home’ or ‘institution’ is not created in its entirety, such as the conversion of outbuildings into additional bedrooms for an existing care home

What services can I reduced-rate?

Other than installing goods that are not building materials, you can reduced-rate any works of repair, maintenance (such as redecoration), or improvement (such as the construction of an extension or the installation of double glazing) carried out to the fabric of the building.

You can also reduced-rate works within the immediate site of the premises being converted that are in connection with the:

  • means of providing water, power, heat or access
  • means of providing drainage or security, or
  • provision of means of waste disposal

All other services are standard-rated. For example, you must standard-rate:

  • the installation of goods that are not building materials, such as carpets and fitted bedroom furniture
  • the erection and dismantling of scaffolding
  • the hire of goods
  • landscaping
  • the provision of professional services, such as those provided by architects, surveyors, consultants and supervisors

 

steve@bicknells.net

HMO Landmark VAT Case allowing Zero Rating Reply

mounting thermal insulation boards

VAT Zero HMO 1

 

This is definitely a case which will be of interest to anyone converting commercial property to residential use.

The case is Capital Focus Limited v HMRC TC05193 Appeal number TC/2015/04891.

Capital Focus purchased Tintern House in Banbury, Oxfordshire in August 1994, it was a commercial building and they intended to create one large residential building so they started work and reclaimed the VAT, however, they changed their mind and decided to create an HMO instead.

HMRC allowed the £45,000 input tax claim on the basis that it would be supply of a non-residential building converted to residential use and therefore zero-rated under Item 1(b), Group 5 of schedule 8 to the Value Added Tax Act 1994 (“VATA”)
On 22 April 2015 HMRC wrote to the Company stating that, because it had been converted for multiple occupancy, the sale of Tintern House
was not a zero-rated but an exempt supply and any input tax incurred that was directly attributable to it was not recoverable.
HMRC lost the case, here is the result..
VAT Zero HMO

What types of property can a SIPP or SSAS Pension invest in? Reply

Buildings in the isometric

Pensions are highly tax efficient and you can purchase Commercial Property, the main examples of types of property your pension could buy are

  • Industrial units
  • Offices and shops
  • Farmland and forestry
  • Public houses
  • Nursing homes
  • Hotels
  • Marine berth

The things you can’t buy are residential property, holiday property, caravans, beach huts, basically, if you can live in it then it will probably be difficult to put it your pension.

Buying a commercial property can be a great investment opportunity, I have been investing in property since 2002 as part of a small pension syndicate of friends and family we are currently invested in an Office Block and 6 Retail Units, we also bought some properties into separate companies and did originally have HMO’s too.

The yield on commercial property is often around 8% to 10% and you can borrow into your pension to help fund the purchase.

Your business can rent a commercial property from you and many owner managed businesses have transferred company owned premises to a SIPP or SSAS.

There have been some very interesting deals done for example

From a music studio in Costa Rica to a yacht berth in the south of France, Sipp (self-invested personal pension) providers report an ever-growing list of exotic assets being bought with pension money to fund investors’ dream business ventures.

Yacht de luxe.

For aviation-mad Tony Fowler, a property developer from West Sussex, the acquisition of a 50pc stake in the Isle of Wight airport through his Sipp means he can fulfil his passion for flight while at the same time investing for his retirement.

Plane and Airport Flat Design Illustration Icons Objects

“A friend and I have paid half each of the total purchase cost of £635,000,” he said. “I was delighted when I found I could use money in my pension to buy the airport. It had been taken over by the receivers and was going to be closed down, but now it is being renovated and improved. We like to think it will bring something to the local economy as well.”

http://www.telegraph.co.uk/finance/personalfinance/pensions/10451405/How-I-bought-an-airport-with-my-pension.html

steve@bicknells.net

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