A busy year for property tax changes
Last year was one of the busiest for the housing market in over a decade. According to Zoopla, estimates show there were 1.5million sales in 2021, with the total value of homes changing hands at £473billion, some £95billion more than in 2020. As a result, we expect HMRC to become more proactive on property tax recovery.
As real estate transactions tend to involve high values, if there is an issue with VAT it usually involves a large sum. It is therefore very important that owners, developers and renovators are aware of the latest changes.
Residential mortgage relief restriction is in full effect
Property investors are no longer eligible for residential mortgage relief when calculating income tax.
It is tempting to think that a government only levies taxes on the profits made by a company. Unfortunately, in some cases, this also leaves you paying taxes on money that has already been spent on genuine business expenses. This is the case with residential mortgage interest in the UK. Although the money was paid to cover interest costs, you may still have to pay higher or additional rate tax on the income that was used to cover these costs.
As the UK operates a self-assessment system, it may be tempting for some homeowners to declare mortgage interest as a non-residential expense or as an “other” expense, thus getting full tax relief for the expenses they have incurred. . While trying it like this may have gone unnoticed in the past, HMRC is getting smarter every year.
With interest disallowance fully integrated and more data now available for HMRC’s risk profiling software, it is expected that these practices will become more visible to HMRC, who will open investigations and penalize taxpayers for their incorrect statements, probably over several years. With more taxpayers moving to higher tax rates and HMRC able to cross reference information from external sources, such as rental agencies, any soft landing of the rules should be considered over.
Capital gains tax for residential real estate transactions can now be paid within 60 days
It cannot be considered unreasonable for HMRC to ensure that taxpayers pay the correct tax and information is becoming increasingly important in reducing the tax gap resulting from both avoidance and error. Information must be accurate to be used to its best advantage and it must be as easy as possible for taxpayers to provide data both in a timely and correct manner.
It is clearly with this in mind that reporting requirements for disposals of property in the UK have been relaxed from 30 days to a more acceptable 60 days. This relaxation also reminds lawyers that there may be tax reporting required for sellers as well as buyers, but with more time to gather information and get the necessary connections, there is less opportunity for penalties to be put in place. aside for ‘reasonable excuse’.
Reminder to real estate developers, new taxes will come into force from April
From 1 April 2022, 4% will be levied on profits from residential property development activities in excess of £25 million from accounting periods ending after 31 March 2022.
No more reduced VAT rates on seasonal rentals
Remember that the temporary reduced rate of VAT for deliveries of holiday accommodation has increased from 5% to 12.5% on October 1, 2021. Even if a holiday is taken after October 1, the 5% can still be applied if a tax point is previously created.
Commercial to Residential VAT Conversion – Understanding where the 5% rate on housing applies
There have been changes regarding the conversion of VAT from commercial to residential, and it is important to clearly understand where the 5% rate on dwellings applies. The reduced rate applies:
- Transformation of a non-residential building into dwellings;
- Conversions involving a change in the number of dwellings in the building, for example, converting a house which creates additional dwellings or converting multiple occupancy dwellings into a single house
- Renovation of a dwelling that has been unoccupied for more than two years
However, certain conditions apply. For example, a scheduling condition that prevents the separate disposal of a dwelling. Such a condition would prevent the application of the 5%.
The 5% rate applies to fees such as:
- Work on the fabric of buildings, including walls, roofs, floors, stairs, windows, doors, wiring and plumbing;
- The supply of facilities such as water, electricity, heating and drainage and the installation of fitted kitchen units, sanitary appliances, central heating and lighting fixtures.
- In addition, if the builder undertakes the work and purchases the materials on behalf of the owner, the 5% also applies to the materials.
The 5% rate does not apply to professional fees such as architects or surveyors.
Developers should not miss the opportunity to put the difference between 20% and 5% VAT on their development profit.
A word of warning – builders are prone to quoting VAT at 20% by default. Ask and question always, because a default value of 20% makes life easier for the builder! We recommend that builders submitting quotes for works be asked to confirm that they have considered whether VAT at a rate other than 20% might be applicable. Providing a brief VAT analysis as part of the bidding process could save headaches later.
Once converted, there are two options:
- Selling the Converted Homes – the first grant of a major interest in a converted home from a commercial building is zero-rated, allowing VAT registration and reclaiming VAT on most costs.
- Renting the converted dwellings – the rental of dwellings is exempt from VAT. Because the rent is exempt from VAT, the VAT on costs and general expenses of the property rental activity is not recoverable. Careful structuring can lead to full VAT recovery
Beware of proposed changes to property tax on stamp duty
Currently, if you buy the classic ground floor shop property with an apartment above, you only pay commercial stamp duty rates. HMRC proposes to us that the cost should be split so that only the shop benefits from the commercial rates, with the apartment incurring the higher residential rates.
HMRC is currently consulting on these proposed changes, while considering changes to reduce the growing number of incorrect multi-unit repair claims. The exam is due to end on February 22, 2022.
Purchases of mixed real estate consisting of residential and non-residential properties are subject to lower stamp duty rates than those for wholly residential properties only.
Examples of offenses cited by HMRC include renting a garage attached to a semi-detached house for storage to a third party, grazing rights and use of an enclosure attached to a substantial residential property, granting of a right of way over the land of a country house, even though the path was part of the land of the house, or claiming that the purchase of a large property in a rural area that included a small wooded area ( not forming part of the garden or land) was a purchase of non-residential property.
There may be genuine business reasons for passing title to both items, but HMRC has seen an increase in salvage agents extending mixed-use claims (the caterpillar) and is looking to establish ‘clearer rules’. [which] will improve administrative efficiency and the customer experience. Rather than apply the current statutory rules of the game, HMRC simply wants to change them to a new apportionment basis for mixed properties in an efficient way.
A more vigorous citation process is also offered to those seeking multiple unit relief when purchasing residential property. Understanding the new rules and advising on the SDLT implications of real estate transactions early will be essential.
Tim Walford-Fitzgerald is a Private Client Partner at HW Fisher