June 2017 Tax Club meeting – property taxes
There has been a plethora of changes to property taxes recently. Gabelle partner Caroline Fleet spoke about the new rules at June 2017’s Tax Club meeting, covering anti-avoidance measures, buy-to-let properties, CGT, IHT and SDLT. Randeep Dhaliwal reports
Caroline began by discussing the new anti-avoidance measure introduced in Finance Act 2016 (ss76-82) regarding the treatment of property development. The effect of the legislation is to ensure that overseas property developers (with no UK permanent establishment) will be within the scope of UK income tax or corporate tax on profits realised from the disposal of the properties, where the disposal takes place on or after 5 July 2016. But what is the catch? If certain conditions are met, UK property investors could also find themselves caught by the rules which would result in a chargeable gain subject to income tax and national insurance.
In Caroline’s view this measure, and the amalgamation of the old ‘transactions in land’ legislation into this tax, are likely to mean an increase in the number of enquiries that HMRC will open in the future, especially around the thorny distinction between whether a business’s principal activity is property trading or property investment. This is important, as the consequent tax treatment differs.
Legislation and consultations
A number of measures in Finance Bill 2017 (FB 2017) were not enacted due to the announcement of the general election, although they are expected to be re-introduced in a Finance Bill later this year, including the £1,000 property allowance for individuals letting out property. There were also provisions to legislate for the cash basis to become the default method for calculating the profits of a property business where rental income does not exceed £150,000. This would apply to income tax payers only and Caroline said this would be a simplification as many landlords will have been reporting profits under a pseudo cash basis anyway. It would be possible for landlords to opt out and adopt the accruals basis instead.
Clause 44 of FB 2017 introduced a charge to inheritance tax on all UK residential property whether held directly or indirectly. This would prevent the interests of participators in close companies and members of overseas partnerships being treated as excluded property where there is value attributable to UK residential property.
Some landlords will be unaware that when Making Tax Digital comes along, they will be among the first taxpayers to be reporting income and expenditure on a quarterly basis. The rules would apply from 6 April 2018 onwards for landlords with rental income over the VAT threshold (currently £85,000) and from 6 April 2019 onwards for landlords with rental income in excess of £10,000. Landlords will need to acquire third party software to record rental income and expenses, though spreadsheets can be used to some degree.
The government recently consulted on whether to bring non-resident companies with UK-source income or gains within the charge to corporation tax, to which ICAEW responded in ICAEW REP 67/17. The consultation considered whether non-UK-resident companies with UK property income or gains should be within the corporation tax net to ensure that the new (but not yet enacted) loss relief and interest restrictions apply in all cases.
One of the ways that the government has addressed concerns about the buy-to-let (BTL) market has been to introduce interest relief restrictions on landlords subject to income tax relating to residential property who have dwelling-related loans. These measures apply from 6 April 2017 and reduce the relief available on loan interest to the basic rate of income tax. The changes, which the government has phased in over a four-year period, will result in many landlords losing out.
An area of great interest is the potential to incorporate the BTL portfolio, using incorporation relief to roll over the gains. One of the key conditions of this relief is that there is an ongoing business. What is a valid property business? In the case Elizabeth Ramsay v HMRC  UKUT 226 (TCC), HMRC looked at the number of hours worked and the level of involvement of the taxpayer and found the residential letting was a business for capital gains purposes. If there is any doubt whether there is a business, it is advisable to get advance clearance from HMRC.
Stamp duty land tax (SDLT) costs of incorporating also need to be considered, as transfers from an individual to a connected company are deemed to be for market value consideration. Caroline outlined some of the ways to reduce the charges and highlighted the need for planning in this area. If there is a transfer of two or more dwellings then it may be possible to utilise multiple dwellings relief to mitigate some of the SDLT, a relief often overlooked. It is also important to consider the possible annual tax on enveloped dwellings and inheritance tax consequences of the incorporation of the BTL portfolio.
Capital gains tax
Caroline explained the changes relating to capital gains tax (CGT) which were introduced in Finance Act 2016. From 6 April 2016, with the exception of residential property, the rates of CGT fell from 28% to 20% and 18% to 10% for higher rate taxpayers and basic rate taxpayers respectively. Residential property is still subject to the 28% and 18% rates.
With effect from 6 April 2017, the residential nil rate band is available where an individual passes their main residence on death to a direct descendant, including adopted and fostered children. The implementation is phased in over four years and will ultimately mean that a husband and wife can have a total allowance of £1m. It is possible for some of the benefit to be retained if an individual downsizes their property, though good records will need to be kept to assist the personal representatives of the deceased to make the claim.
Stamp duty land tax
There are now 11 different rates of SDLT. Higher rates of SDLT apply to purchases of second residential properties on or after 1 April 2016, adding an extra 3%. Caroline highlighted scenarios in which individuals might not think they would be liable to the higher rate, such as where a husband and wife jointly own a property and one acquires a second property, or where an individual acquires BTL property, or inherits a property in addition to their main residence.
Where a property is transferred between spouses or civil partners, it is possible to be caught by the higher rate of SDLT on the transfer. The higher rate of SDLT can also apply to lease extensions. Again, MDR is available in some situations, for example where an individual buys a property which, on closer inspection, contains three separate flats.
Caroline reminded the audience that changes to the SDLT filing deadline, from 30 days to 14 days, will not kick in until after April 2018.
About the author
Randeep Dhaliwal is a member of the ICAEW Tax Faculty’s SME Business Tax Committee and chairman of the Younger Members’ Tax Club