Property Update Autumn 2018
In this Issue
Changes to Non-Residents and UK Property Changes to take effect from 6 April 2019
Private Residence and PPR Relief
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Several changes to the way non-residents that hold UK land and property are taxed were included in the draft legislation for the Finance Bill 2018-19, which was published on 6 July 2018. The first of these changes is that to the scope of nonresident capital gains tax (NRCGT), which will now tax gains on shares in property rich entities. Since April 2015, all non-UK resident individuals, closely held companies, trustees, personal representatives and funds have been subject to NRCGT when disposing of a UK residential property. With effect from April 2019, the scope of NRCGT will expand and tax will now apply to gains made from:
House Price Index: Steady Growth Continues
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• Non-residential (i.e. commercial) UK property; and • “Substantial” interests in “UK property rich entities”, called “indirect disposals”. Where an asset is brought into NRCGT for the first time, its value can be rebased as at April 2019, so that only the increase from April 2019 will be chargeable to tax. Non-resident companies and unit-trusts will be taxed at the corporation tax rate (currently at 19%), while individuals and other entities will be taxed at the capital gains tax rates (10% for basic rate payers and 20% for higher and additional rate payers). Property Rich Entities – Definition
Tax Relief for Buy-to-Let Landlords
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The extended NRCGT regime defines a property rich vehicle as one which derives at least 75% of the total gross market value of its assets from interests in UK real estate and has a “substantial indirect interest” in that land. Assets matched by an intercompany liability are excluded from this definition, so related party transactions should be reviewed when calculating gross assets to ensure these balances are not included.
Gains on shares in property rich entities are to be taxed from April 2019. Substantial indirect interest – Definition Gains on disposal of shares will be chargeable to tax where the person making the disposal holds, or has held in the last two years, a substantial indirect interest, being 25% or greater interest in the company or other corporate vehicle. There is an exemption though – if all the UK property (or all but an insignificant value) has been used for trading purposes throughout the year leading up to the disposal, and it is reasonable to conclude it will continue to be so used after the disposal, then the NRCGT rules will not apply. This should mean for example, that most investments by non-resident investors in UK retail and hospitality businesses are exempt. Interaction with certain double tax treaties There are certain double tax treaties at present that preclude the UK from taxing gains realised by non-residents on sales of “vehicles holding UK land”. Those treaties would override UK legislation which means investors based in those jurisdictions may escape the new regime if they dispose of the vehicle holding the land rather than the land itself. There are, as expected, anti-avoidance provisions which counteract any transactions from November 2017 attempting to restructure property holdings in a way that takes advantage of tax favourable treaties. By Andrew Coney Partner and Property Specialist 020 3146 1602 andrew.coney@raffiingers.co.uk
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House Price Index: Steady Growth Continues
Private Residence and PPR Relief
According to Nationwide’s House Price Index for the quarter JulySeptember 2018, UK annual house price growth remained steady at 2%. However, for the fifth month in a row, house prices for London fell. Robert Gardner, Economist said:
Nationwide’s
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“Overall, UK house price growth remained broadly stable, but regional house price developments were more varied. “For the fifth quarter in a row London prices fell in annual terms, though the decline remained modest at just -0.7%. Indeed, prices in the capital are only c3% below the all time high recorded in Q1 2017 and are still more than 50% above their 2007 levels.” The average house price in London is now £468,544, with the average price in England being £260,481. Regional house price growth was slightly more varied for the quarter though it remained the case that the regions of Southern England continued to see more subdued rates of growth. The Outer Metropolitan, London and North all saw small year-on-year price falls, with the North the weakest performing region with prices down 1.7% year on year. Yorkshire and Humberside were at the top end, experiencing a rise of 5.8% - the first time since 2005 that the region had seen the fastest growth. Overall price growth in the South did slow to just 0.3%. Although average prices in Southern England are still around twice those in Northern England. So, what do these fluctuations mean? Many are still priced out of the market due to discrepancies between household incomes and house prices. The Bank of England has also begun to increase interest rates, increasing them to 0.75% in August - the first time in close to a decade it has been above 0.5%. The combination of rising costs, as well as the political uncertainty surrounding Brexit, means demand is falling and growth is slowing. It is expected that the housing market will remain subdued for the next 6 months until the outcome of Brexit is clear.
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The majority of people buy a house to live in, not with a view to make a profit on it when it is sold. For people who buy a house with the intention of living in it with some degree of permanence and meaningful occupation, this counts as their principal private residence, i.e. the main place where they live. For tax purposes you can only have one private residence. Any gain on your private residence is exempt from capital gains tax, this is known as PPR Relief (Principle Private Residence Relief). Relatively straightforward right? But what happens if there is a period of time when a person is not resident at the property? Answer: unless there are periods where you can be deemed resident even through you were not living at the property, for example times away from home connected to your employment, then the proportion of any gain will not be exempt from capital gains tax. Say for example, you owned a property for 10 years, and for six years of that time, you lived there and for four years you lived elsewhere, 4/10th of the gain would be subject to capital gains tax. As you would take 6/10ths of the gain (this is your PPR relief) and deduct it from your gain. So, is that the end of the story? No, not really. HMRC accept that it takes time to sell a property, and so there may be times when you are living in your new house, but your other house is waiting to be sold. In this instance, you don’t own two properties because you are looking to make a profit on the sale of the property, it just hasn’t sold yet. Therefore, the last 18 months of property ownership are “deemed residence”, i.e. it doesn’t matter where you lived in that period. In the case of the 10-year example, the PPR would increase to 7.5 years with the additional 18 months. If the property had been let out then a claim for lettings relief could reduce the gain still further. But these issues do not address the highly important question of when a residence is not a residence for tax purposes. It is a common misconception that to qualify for PPR Relief and avoid capital gains tax you simply need to move into a property and live there for a short while. This is not true and HMRC has had a series of victories in cases where it could be seen that the property owners had moved in
solely to renovate and sell, or simply to justify a claim for PPR. In the Gibson case, Mr. Gibson bought a house and moved into it, claiming that he intended to extend the house for future use as his matrimonial home. Owing to the cost of alterations of the house, he instead ended up demolishing it and rebuilding from scratch. However, for financial reasons he then had to sell the property. Prior to sale, although he ‘camped’ in the property with basic furniture for four or five months, the ‘quality’ of occupation of the house was not sufficient to make it his sole or main residence – it being accepted that he no longer intended to make the house his permanent residence. The tribunal also heard that a significant proportion of the financing was provided by a friend, and that Mr Gibson paid him a £50,000 fee. The Gibson case follows on from two other PPR cases, Moore and Morgan where the owners lived in their properties only for short times. Mr. Morgan bought and occupied a house intending it to be his future matrimonial home but ceased to occupy it after his fiancée broke off the engagement. He then let out the property for a long time before eventually selling it. Mr. Moore moved into a property that he already owned and had previously rented out. At that point he did not know whether he would want to make that property his permanent home but soon decided that it would not suit his future needs, so he sold it. The difference between the two cases was that: • Morgan did occupy his house with the intention that it would be his home; • Moore never formed the intention of making that house his permanent home. The difference in intention was crucial: Mr Morgan was able to claim PPR relief but Mr. Moore was not. There are many facets and complexities to PPR relief for which this article has touched on only a few. It should never simply be assumed that you will qualify for PPR, particularly in cases of short occupancy. By Neill Staff Tax Partner 020 3146 1605 neill.staff@raffiingers.co.uk
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Tax Relief for Buy-to-Let Landlords There have been a number of changes to the way buy-to-let landlords’ income is taxed, most significantly, the phased restriction in relief for mortgage interest. By 2020/21 relief will be restricted to a basic tax reduction only. In addition to this major change in legislation, HMRC appear to have changed its “view” on whether or not tax relief is available for “new” borrowings taken out on buy-to-let properties. Previous guidance issued by HMRC in its tax guidance manuals was clear in addressing a common scenario: if a landlord buys a property with, say, a 65% loan to value mortgage and pays the balance of the purchase price from their own funds. (E.g. A property is purchased for £200,000 with a mortgage of £130,000). Sometime later the property increases in value and the landlord re-mortgages, using
the increased funds available to repay some, or all, of the original capital they had used to pay the balance of the original purchase price. (E.g. The property is revalued at £300,000 and is re-mortgaged for £195,000, with the original mortgage being redeemed and the “additional” £65,000 used to repay most of the capital originally provided by the landlord). In such a case, HMRC’s guidance was clear in that, if the total borrowings did not exceed the original purchase price (£200,000 in our example) then the entire mortgage interest paid on the new loan would be available to offset against the income received from the property (this would of course now be subject to the basic rate restriction referred to above). However, HMRC have moved the goalpost.
state, “If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.” HMRC do not appear to have clarified anywhere what they mean by “.. wholly and exclusively for the purposes of the letting business”, but it does seem to leave the door open to them being able to challenge claims for interest relief where landlords seek to re-mortgage to repay some of their original capital investment. By Gary Inglis Managing Partner 020 3146 1600 gary.inglis@raffiingers.co.uk
In HMRC’s property income guidance they
High-Value UK Residential Properties Liable for ATED ATED’s were introduced as part of a range of measures aimed at making it less attractive to hold high-value UK residential property indirectly. Consequently, if you are a company (or other type of entity) that holds a UK residential property valued at £500,000 or more, you will need to complete an ATED return. The value originally started as £2,000,000 and dropped to £1,000,000 and has now dropped to £500,000. Residential properties valued at £500,000 or more as at 1 April 2012, or at date of purchase if later, are liable. The value of the property is used for the five years starting from 1 April 2012. In most cases there will be no actual tax due, but a return will need to be filed in order to claim relief from the charge and avoid a penalty. The return is submitted a year in advance and assumes the property will be held for that year ahead. Where the property is disposed of
or there has been a change, a further return would need to be submitted to HMRC. So, when do you need to complete an ATED return? If your company owns a residential property valued at more than £500,000, a return and payment (if required) must be submitted by 30 April in the ATED period. For example, if your company has a property that falls within the limit, the ATED return for the period ended 31 March 2018 would be due on 30 April 2017. If your company has acquired a property valued at more than £500,000, a return and payment (if required) must be submitted within 30 days of acquisition of the property. For example, if your company purchases a property on 1 June 2018, the return and tax would be due on 1 July 2018, for the period ended 31 March 2019. If your company has acquired a new build valued at more than £500,000, a return and payment (if required) must be submitted within 90 days of the purchase.
Are you exempt from the ATED tax charge? In most cases there will be no tax payable even where a return is required. However, if you are required to pay tax, relief is available for: • property rental businesses • property developers • property traders carrying on a property trading business There are also other reliefs available, which are less commonly applied. It is vital to ensure that your ‘company’ is and does meet the required submission deadlines of the return and if required payment of the tax charge, to prevent being penalised by HMRC. If you would like to see if you are liable, please contact Barry Soraff with details of any residential properties held or acquired by your company. Barry Soraff Partner 020 3146 1603 barry.soraff@raffiingers.co.uk
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#TaxFromTheTrenches
“I haven’t slept in two years” Recently, we have dealt with several disclosures under the HMRC Let Property Campaign. The circumstances behind the disclosures were very different, but in each case, the client had been worrying themselves senseless. The reasons for someone not being accurate about their tax affairs are varied. However, a common source of omitted taxable income is property rental. Many people believe that they do not make any profit from their rental property or properties because everything they received goes into paying the mortgage and the managing agent fees. In these cases, there are four practical stages for dealing with disclosures and getting straight with HMRC Find the accountant who best suits you and gives you confidence. Ideally, they should have experience in dealing with HMRC disclosures and should have a good knowledge of preparing income and expenditure accounts and knowing what expenditure is allowable for tax each year. The accountant should also be completely familiar with HMRC’s penalty regime as the disclosures require the taxpayer to self-assess the penalty chargeable with appropriate reasons.
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Begin identifying the rental income received for each tax year. This can be obtained from tenancy agreements, bank statements or statements from your managing agent, if you have one. In some cases, it might require reasonable estimates to be made. You should also start thinking about what expenses can be claimed against the rental income, such as repairs to the property, managing agent’s fees, loan interest, utility
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payments, safety certificates and mileage costs for business journeys. By this stage, your accountant will have registered you for the HMRC Let Property Campaign and you will have three months to finalise the figures and complete the disclosure. As soon as you have the information together, or as much as you can find, your accountant will start work preparing the rental income schedules based on what you have provided. The agent will need to establish the level of your taxable income in each of the years for which a disclosure is being made so that the income can be taxed at the correct rate. HMRC will normally expect a taxpayer to pay the settlement figure soon after the disclosure is made although we have, on occasions, managed to secure a time to pay agreement with HMRC
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Going forward, lest we not forget, that if you still have rental income then you will need to complete a tax return each year.
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We always encourage anyone about to use a HMRC disclosure facility to appoint an accountant. DIY tax attempts are fraught with danger and you should only take this on if you have a good understanding of tax law, including assessing time limits and penalties.
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If you are considering bringing your tax affairs up to date, or if you have had a letter from HMRC inviting you to make a disclosure, contact us.
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By Neill Staff Tax Partner 020 3146 1605 neill.staff@raffiingers.co.uk
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