This rule is in VAT Notice 708 and is useful for Residential Property Developers.
Sections 6.3.2 and 6.3.3
You cannot normally zero-rate work to a property that has previously been lived in. The exception to this is where, in the 10 years immediately before you start your work, it has not been lived in and following the work it is ‘designed as a dwelling’ or intended for use solely for a ‘relevant residential purpose’.
If the property starts being ‘used as dwelling’ or for a ‘relevant residential purpose’ whilst your work is being carried out, then any work that takes place after that point is not zero-rated.
How do I know if the building has been unoccupied for 10 years?
You may be required to show that that the building has not been lived in during the 10 years immediately before you start your work. Proof of such can be obtained from Electoral Roll and Council Tax records, utilities companies, Empty Property Officers in local authorities, or any other source that can be considered reliable.
If you hold a letter from an Empty Property Officer certifying that the property has not been lived in for ten years, you do not need any other evidence. If an Empty Property Officer is unsure about when a property was last lived in he should write with his best estimate. We may then call for other supporting evidence.
Above is the diagram from Consultation
But what if you own properties in Companies and Partnerships (registered with HMRC with UTR’s)? Does that mean you own multiple properties?
I spoke to the HMRC SDLT Office about this and they said properties owned by other entities are not owned by an individual so shouldn’t count.
Call HMRC for help with Stamp Duty Land Tax queries.
8.30am to 5pm, Monday to Friday
We all want to get things right and follow the rules, so if you file an SDLT return you have 12 months to amend it and during that time you can write to HMRC and set out the exact circumstances, so if you have made a mistake it can be corrected.
The address to write to is
BT – Stamp Duty Land Tax
HM Revenue and Customs
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
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
a building designed as a dwelling or number of dwellings or intended for use solely for a relevant residential purpose
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.
Landlords need to register for Self Assessment .
They will need to keep track of the rental income and claim allowable expenses
- Mortgage or Loan Interest (but not capital)
- Repairs and maintenance (but not improvements)
- 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
Rent less expenses will either produce a profit or a loss.
Making a loss
If you have residential buy to let properties that you own personally you can deduct any losses from your property letting profit and enter the figure on your Self Assessment form.
You can offset your loss against:
- future profits by carrying it forward to a later year
- profits from other properties (if you have them)
You can only offset losses against future profits in the same business.
If you incorporate your Buy to Let business, see our blog in incorporation tax relief..
If you transfer your business in exchange for shares to another company, you can use any unused losses against your income from the new company.
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..
Building work can be charged at 5% in the following circumstances:
- Renovating residential property that has been empty for more than 2 years
- Where the number of dwellings is being increased such as converting a house into flats
- Converting a commercial building into residential
- Converting a house into an HMO
VAT Notice 708 has the exact details and whether or not the 5% rate can be used is a matter of fact not opinion. HMRC will not give specific clearance, they will refer you to the rules and ask you to check the rules with your builder for your project.
The property owner doesn’t issue a certificate (as would be needed to Zero Rating), its for the builder/developer to determine whether and on what the 5% VAT rate can be applied.
The only exceptions (when a reduced rate certificate would be needed) are
(a) a home or other institution providing residential accommodation for children
(b) a home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present mental disorder
residential accommodation for students or school pupils
residential accommodation for members of any of the armed forces
a monastery, nunnery or similar establishment or
an institution which is the sole or main residence of at least 90 per cent of its residents
and will not be used as a hospital, prison or similar institution or an hotel, inn or similar establishment.
Restriction of Mortgage Interest Tax Relief
The governments’ 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.
What could a Property Investor do to reduce the impact of these changes?
Here are a few ideas….
- 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 anther type of commercial property on which the restriction won’t apply
- Increasing the Rent – Could you charge more to cover the extra tax?
- 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
What do you plan to do when the changes take effect?
Its a common mis-understanding that many Buy to Let investors think that they can rollover the gains under business asset rollover reliefs.
Residential Property Investment is not a trading activity, whenever you sell a property that isn’t your main residence you will be liable to capital gains tax.
If you want to release cash from your property portfolio its better to consider other options such as re-financing to take advantage of capital growth.
Also joint ownership (particularly between spouses) will increase the available Capital Gains Allowance you have, individuals currently have £11,000 per year. This allowance might cover your gain?