Various taxes can be applied under certain circumstances to property transactions and occupation in the UK, for example inheritance tax, capital gains tax, stamp duty land tax, value added tax, income tax, business rates and even corporation tax.
Some taxes complement each other whilst others produce diametrically opposed consequences. The biggest mistake that can be made is to assume because one particular tax is benign or neutral that all others must be the same. Sometimes, the advisor needs to be aware of upcoming or potential changes in tax that could affect the investment decision. Any owner of, or investor in, property and his/her tax advisor overlooks tax at his or her peril.
Change is an ever-present feature of the world of property taxation; in recent years there have been changes already to the new rules on Real Estate Investment Trusts (REITs) affecting joint ventures and takeovers, together with guidance from HM Revenue & Customs (HMRC) on how REIT exit provisions apply. More changes to REITs tax rules can be anticipated in the future.
Case law also constantly changes the complexion of land and property transactions, sometimes challenging long held principles and beliefs. Just what is an 'interest in land'? What is the scope of a 'right over land'? Can we assimilate UK land law with EU concepts? How do you distinguish between trading and investing? Which allowances are available for capital expenditure? What tax charges arise when you dispose of an interest in a property? Can you have tax on tax?
As important as changes in law are, any owner of an interest in property or a builder or developer must also keep abreast of case law developments, as well as any changes in policy in interpreting legislation and case law. Never before have taxpayers been so litigious; never before has so much information and material been available to the taxpayer.
It is also necessary to know how best to hold an interest in a property. The introduction of the UK-REIT regime has added another dimension to the manner in which an investment can be held and taxed. If property is to be jointly owned what is the most beneficial and practical way?
If that is not enough, it is also necessary to consider the manner in which financing is obtained for any development or investment programme. Trading conditions change also – how will property investment and development evolve in light of the credit crunch? Some house-builders have been looking to lease new homes on short-term tenancies rather than have them sitting empty as a wasting asset. What are the tax consequences? What incentives will be offered by sellers to potential buyers and investors? Again HMRC have been proactive in consulting on law and policy changes to assist property developers and owners in these uncertain times. Reliefs, often only temporary, may not be around indefinitely – what are they and when do they apply?
There are tax consequences and hidden costs for the unwary. In some cases provisions could make the transaction simply not viable – could you afford to lose 20% of the cost of buying or developing a property? If not you should read the VAT provisions covering the option to tax and what is treated as in effect a connected person. Sometimes innocuous transactions fall into the traps set by legislation for more nefarious deals. Even some forms of financing provided by a third party from a legitimate source can be construed as a possible indicator of tax avoidance.
If you buy a property in the UK over a certain purchase price you have to pay stamp duty land tax, which is charged on all purchases of houses, flats and other land and buildings.
There are various rates for stamp duty land tax, but the rates and thresholds with regard to residential land or property are as follows:
|1st £125,000 of purchase price/transfer value/lease premium||
|Next £125,000 of purchase price/transfer value/lease premium||
|Next £675,000 of purchase price/transfer value/lease premium||
|Next £575,000 of purchase price/transfer value/lease premium||
For example, if a house is bought for £275,000, £125,000 of this is charged at 0%, the next £125,000 is charged at 2% and the remaining £25,000 is charged at 5%, so stamp duty land tax of £3,750 in total is payable.
SDLT is charged at 15% on interests in residential dwellings costing more than £500,000 purchased by certain non-natural persons. This broadly includes bodies corporate, for example companies, collective investment schemes and all partnerships with one or more members who are either a body corporate or a collective investment scheme. There are exclusions for companies acting in their capacity as trustees for a settlement and property developers who meet certain conditions.
Stamp Duty Land Tax is also payable in other circumstances, for example when a new residential lease has a substantial annual rent on both the lease premium (purchase price) and the 'net present value' of the rent payable.
An annual tax charge is payable on high value UK properties owned by companies and other non natural persons.
Residential property value
> £1m - ≤ 2m
> £2m – ≤ 5m(2)
> £5m – ≤ 10m
> £10m – ≤ 20m
The value of the property for these purposes is the value at 1st April 2012 or the date of acquisition if later.
The disposal of a property subject to the annual tax on enveloped dwelling is subject to capital gains tax at 28%. The charge applies to gains accruing from 6 April 2013.