Safe as Houses? – Buying, Selling Or Investing In Property

With the current property boom, I am sure that amongst the readers of this document there is a significant proportion of people who are buying, selling, or investing in property. There are lots of tax implications out there which are not straight forward and lots of areas you should seek advice on. On that basis, I have listed a number of common thoughts around residential property which might spark some thought.

• Stamp Duty Land Tax (SDLT) Surcharges – don’t forget that buyers of second properties or purchases into companies have to pay a surcharge of 3% of the purchase price in addition to the ‘normal’ SDLT. It is possible to avoid this surcharge totally or to reclaim this after it has been paid in limited circumstances. The surcharge can broadly be avoided if you either purchase your first property or if you purchase a new home and sell your old home, but this isn’t possible if you are purchasing investment properties or if a company makes the purchase. Please remember to factor this into your budget!
• SDLT on residential property purchased in companies – If a company purchases a property worth more than £500k then a special 15% rate of SDLT may apply unless the property is only used for approved purposes in the three years following its purchase.  Broadly approved purposes are that no person connected to the company resides in the property.
• Restriction on Tax Relief for Mortgage Interest – following a period of being phased in, from 6 April 2020 landlords who are individuals only receive basic rate tax relief on mortgage interest. The mechanism of this can also have unintended consequences of landlords income unexpectedly rising into super rates of tax. This has driven lots of people to own rental properties in companies.
• Corporate Ownership – companies get around the personal restrictions on tax relief above, but they do have lots of downsides. They are very inflexible and cost a fair amount to administer each year. However, you are potentially able to involve family members as shareholders and use this as tax efficient method of passing on wealth to the next generation. Company ownership will become less tax efficient going forward as a result of dividend tax rates increasing from 6 April 2022 and corporation tax is also scheduled to increase from 1 April 2023, although this may not apply to companies with low profits.
• Stamp Duty Land Tax Reliefs – purchasing more than one dwelling (i.e. flats or buildings with habitable annexes) or purchasing properties with a mixed use (i.e. commercial elements) can lead to huge SDLT savings, but these have to be claimed and are not automatic! However, do be warned, HMRC are currently challenging a number of these reliefs at the moment, so make sure your claim is watertight.
• Principle Private Residence Relief – there is normally no Capital Gains Tax on selling your own home, but this is only the case if you have always lived there and it has always been your main home. If you have lived away from home for any reason, or if the property was rented in its past, then tax could be due, although additional reliefs may apply, and this should be calculated correctly.
• Properties with lots of land – please note that Principle Private Residence Relief only applies to the house and the associated land up to 0.5 hectares (including the property site) which is required for ‘the reasonable enjoyment of your home’. Capital gains tax will apply to land in excess of this.  Consideration of the layout of grounds attached to your home may enable a larger claim to be made.
• Timing of tax due – for any residential property owned by individuals subject to capital gains tax, since 6 April 2020 a return must be filed and the tax must be paid within 30 days of the sale of the property. Make sure you are aware of this deadline!
• Individuals pay capital gains tax on residential properties at 28% (18% for any gain that falls within the basic rate band of income tax). Companies pay at corporate tax rate of 19% (rising to 25% from April 2023 for ‘larger’ companies), but then subsequently if this money needs to be paid out to the shareholders, income tax will need to be paid at dividend rates, unless it is retained within the company until it is liquidated.
• Annual Tax on Enveloped Dwellings – this is a tax largely unknown by the general public which seeks to prevent corporate ownership of high value properties, typically aimed at preventing SDLT avoidance by selling shares rather than property. There are a number of exemptions from the charge but any company holding residential property valued at over £500k should at very least be submitting annual returns and could potentially be incurring tax charges too.

For more information please feel free to contact Ben Powell on 01905 794 504 or email ben.powell@ballardsllp.com

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