Business: Building on strong foundations
PUBLISHED: 17:12 08 November 2013 | UPDATED: 17:28 08 November 2013
Property values are rising, but what does it mean for your long term investments?
Crowe Clark Whitehill's Martin Regan discusses the issues
Property values in the Cotswolds are rising and many people are now investing in property to supplement their income or provide for their retirement. Investing via a company can limit personal liability and take advantage of the lower corporation tax rates of 20-23%.
Strong foundations are critical in the property sector and managing your tax and making the most of your returns is equally important. Obtaining professional advice should help you to avoid your empire crumbling, but here are a few tax-related tips for those involved with property:
• Is it a trade or an investment?
If a company acquires land or buildings to develop and sell, this is property development and is regarded as trade; the property will be treated as the company’s trading stock. Costs to develop the property are tax deductible expenses at the point of sale and the company will pay corporation tax on the trading profit once the property is sold.
If a company acquires land or buildings for rental and long term capital appreciation it is regarded as an investment and the property will be a fixed asset of the company. The company will be taxed each year on the rental income received less expenses incurred. When the property is sold the company will incur a capital gain which will be subject to corporation tax.
• Rental property – claim all deductions
For companies renting out property some expenses can be offset against income. Capital expenses – those involved in buying and selling the property – don’t count for this purpose, but revenue costs associated with the property’s day-to-day running and management are tax deductible.
Whilst rental income is generally exempt from VAT, the costs incurred running a property may have VAT added. Most expenditure is tax deductible; this includes letting or managing agents’ fees, service charges and ground rent, buildings insurance if it’s a freehold house, maintenance and repairs for ‘wear and tear’ during the tenancy. You can offset cleaning costs, accountancy charges and mortgage interest.
• Capital allowances – maximise your claims
Don’t miss opportunities to claim tax relief. Features integral to a building such as the electrics, water, heating, ventilation, lifts, etc. generally qualify for capital allowances.
In addition to claiming allowances, a purchaser can also claim capital allowances on the fixtures within a property when it is acquired, rather than when they are added to the building. For fixtures acquired on or after 6 April 2012 the seller and purchaser have to fix the value of the fixtures. In the vast majority of cases the procedure will be for both parties of the sale to make an election setting the value of the fixtures for tax purposes.
• Beware of ATED (Annual Tax on Enveloped Dwellings)
From April 1, 2013, there is a new tax on non-natural persons (e.g. companies, partnerships with a corporate partner or a collective investment scheme) that hold at least one single residential property worth more than £2 million at the valuation date.
The amount of ATED is calculated using a banding system based on property value.
Taxpayers liable to pay the ATED must complete a return to accompany their payment to HMRC by 1 October 2013. Even those who are exempt from ATED still need to file a return, and there is a risk that many property investors and developers may face penalties for non-submission.
• Business Property Relief: What can it do for you?
Business property relief (BPR) is a tax relief to help those who own companies, or shares in companies, pass on part of the business free of tax. If you own part or all of a business this will be included in your estate for Inheritance Tax (IHT) purposes, however many people explore BPR to reduce the amount of IHT payable so that their families might benefit.
As a business owner, you may be able to benefit from investigating BPR, either during your lifetime, for example pre-retirement, or after your death as part of your will. BPR is one of the most valuable tools for IHT purposes because if all the qualifying conditions are met it can be worth the entire value of the shares in the company – however, it is not without its pitfalls and recent changes to legislation mean that business owners need to be aware of a number of conditions which could counteract all your hard work.