Property Update Seminar Chester Racecourse – 27 June 2019 www.mitchellcharlesworth.co.uk
Property Update Seminar - Tax Chester Racecourse - 27 June 2019 Tim Adcock - Partner Phil Hartley - Manager www.mitchellcharlesworth.co.uk
Contents Pro’s and Con’s of different property business structures • Sole Trader • Partnership/Limited Liability Partnership (LLP) • Limited Company Incorporation of a property business • What is this? • Possible tax consequences • How to minimize the tax consequences
Pro’s and Con’s of different property business structures – Sole Trader Pro’s • If only source of income, no Income Tax will be due until profits are above £12,500 per annum • No Capital Gains Tax on sale of property if total net gains from sale are below £12,000. Con’s • Pay Income Tax at 20%/40%/45% of profits depending on the tax band they fall into • Capital Gains Tax payable on gains on sale of 10%/20% (Commercial) or 18%/28% (Residential) • Potentially, interest costs on mortgage will not be fully allowable against profits • Additional Stamp Duty to pay on further property acquisitions.
Pro’s and Con’s of different property business structures – Partnership/LLP Pro’s • If only source of income, no Income Tax will be due until profits are above £25,000 per annum • No Capital Gains Tax on sale of property if total net gains from sale are below £24,000 • If through LLP , liability on wind up or insolvency will be restricted. Con’s • Although operating as an LLP , still required to pay Income Tax at 20%/40%/45% of profits depending on the tax band they fall into • Capital Gains Tax payable on gains on sale of 10%/20% (Commercial) or 18%/28% (Residential) • Potentially, interest costs on mortgage will not be fully allowable against profits • Additional Stamp Duty to pay on further property acquisitions.
Pro’s and Con’s of different property business structures – Limited Company Pro’s • Would pay Corporation Tax at 19% on the profits of the business, reducing to 17% from April 2020 • No Mortgage Interest restriction for limited companies – therefore cost would be fully allowable against profits. • Limited liability if company is wound up – restricted to amount of share capital subscribed for • Salary received from company would qualify for state pension credit. Con’s • Income Tax/Capital Gains Tax to pay on extraction of profits from the company – although this can be planned for. • No threshold before pay tax on profits • Additional Stamp Duty to pay on initial property acquisition.
Incorporation of a property business What is this? • In simple terms, this is the transfer of a sole trade or partnership/LLP into a limited company • Instead of the limited company buying the properties for cash they issue shares to the current owners • This then provides the shareholders with limited liability in respect of the property • Also provides a lower tax base on the profits the business makes.
Incorporation of a property business The consequences of incorporating: • The transfer of the business is treated as a disposal at market value of the properties, triggering a Capital Gain • Stamp Duty could also be triggered on the disposal of the property, calculated based on the market value • If transferring commercial properties, will need to consider the VAT implications and Capital Allowance implications – this will require specific advice • Bank/Lender consent required prior to transfer – could result in higher cost of borrowing once company becomes borrower. • Additional administration requirements as a result of operating through a company.
Incorporation of a property business There are ways to mitigate the tax burden on incorporation: • Capital Gains Tax – could claim Incorporation Relief • This would allow the company to inherit the cost of the property as incurred by the sole trader/partnership/LLP • To obtain relief, need to demonstrate that activities are being carried out as a business rather than purely a trade. This can be done by completing sole trade/partnership pages on tax return • Stamp Duty - the transfer could be exempt from Stamp Duty • To obtain this exemption, need to be operating as a partnership/LLP . HMRC clearance needs to be obtain to demonstrate its not purely for the avoidance of tax • If not available, will need to consider Multiple Dwellings Relief to reduce rate of Stamp Duty.
VAT Chester Racecourse – 27 June 2019 Alison Birch, VAT Partner www.mitchellcharlesworth.co.uk
Agenda Property development Leasing of property Sale of property Domestic reverse charge Words of warning
Property Development Zero-rate • Construction of a dwelling • Construction of a property to be used for a relevant residential purpose • Construction of a property to be used for a relevant charitable purpose Reduced rate • Conversion of a non-residential building to a dwelling • Conversion which changes the number of dwellings • Conversion or refurbishment of an empty dwelling Standard rate • Construction of commercial property • Construction of any other property
Letting of property Short term assured tenancy • The letting of residential property is exempt from VAT. The option to tax cannot be applied to residential property. Holiday lets • Holiday lets are specifically excluded from the exemption and are subject to VAT at 20%. Commercial lease • The letting of commercial property is exempt from VAT. However it is possible to opt to tax your interest in the property which means it is subject to VAT at 20%. This will allow any VAT on costs to be reclaimed.
Sale of Property The first grant of a major interest (freehold sale or lease over 21 years) is zero-rated for the following: • residential property • property to be used for a relevant residential purpose • property to be used for a relevant charitable purpose • dwelling converted from a non-residential building • sale of a property that has been vacant for at least 10 years Commerical property • Older than 3 years and not opted to tax – exempt • Sale of a commercial property less than 3 years old – standard rated • Sale of a commercial property which is opted to tax – standard rated Sale of an existing residential property – exempt Sale of a tenanted property where the tenants remain in situ – outside the scope of VAT.
Domestic Reverse Charge Does the supply fall within the scope of CIS? Is the supply subject to VAT at the standard or reduced rate? Is your customer VAT registered? Is your customer registered for CIS? Has your customer provided confirmation that it is not an end user? If you answer yes to all of these, the domestic reverse charge applies. If you answer no to any of these, normal VAT rules apply.
Words of warning VAT can only be reclaimed on costs if it relates to a taxable supply – 0%, 5% or 20% If only exempt supplies are made, no VAT can be claimed If you have a portfolio of property that generates both taxable and exempt income, you will need to undertake partial exemption calculations The option to tax lasts 20 years – think about who may wish to lease or buy it The option to tax cannot be backdated so consider this early Capital spend over £250k falls within the capital goods scheme and the taxable use of the property needs to be reviewed over a 10 year period If you are selling a new dwelling or property to be used for a relevant residential or charitable purpose there are statutorily blocked items – for example, white goods and carpets
Legal Updates
HMOs • Occupied by five or more persons • Occupied by persons living in two or more separate householders • Over three or more stories • Minimum room standards • Local Authority conditions
Assured Shorthold Tenancies • New rules for all ASTs to evict tenants and gain possession of property • Tenant Fees Act 2019 (England only) • Wales Act 2019
Energy Performance Certificate • The property must have an EPC of E or better • Time limits for compliance differ for residential and commercial properties • Implications for Landlords • Exemptions • Things to watch out for
Schedules of Condition/Dilapidation ‘ The Tenant shall keep the Property in good repair and condition ’ OR ‘ The Tenant shall keep the Property in good repair and condition except that the Tenant shall not be required to put the Property into any better state of repair or condition than it was at the date of this lease as evidenced in the Schedule of Condition ’
Other Changes • Service charge requirements • End to ‘no fault’ termination of residential tenancies • Brexit
Speakers – Matt Davies and Martin Johnson
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