Opting to tax property

Usually property is exempt from VAT which makes things simple because you don’t have to register for VAT and worry about VAT returns.

However some people will “opt to tax” which means they will register for VAT and complete returns, why do they do this you may ask?

The short answer is to be entitled to claim input VAT on costs when selling a property.

Basically the VAT rate depends on the type of land being sold as shown below.

Sale/Lease of land: Exempt

Sale/Lease of commercial property: Exempt

Sale of a new (less than 3 years old) commercial property: Standard Rated (20%)

Sale/Lease of a dwelling: Exempt

Sale (including lease over 21 years) of a new (first sale) dwelling: Zero-rated

If you incur any VAT on costs in the course of making a taxable (standard or zero-rated) property sale you can reclaim that VAT. However if it is an exempt sale you cannot.

By “opting to tax” you would change most sales and leases of non-dwellings into Standard rated taxable sales. This allows the business purchasing the property to recover the associated VAT (on construction, purchase renovation and ancillary costs).

A business will not need to “Opt to tax” in order to recover VAT if it is using the property for business purposes, e.g. a factory for the purpose of manufacturing goods.

Most developers will already know that if a residential property has remained vacant for two years, the VAT rate associated with its refurbishment stands at 5%. this, of course, helps to mitigate the developers irrecoverable VAT cost as the sale of refurbished houses is exempt from VAT.

What is less known is the fact that a property that has been vacant for ten years or more can be treated as if the building was new and therefore its disposal - freehold or a lease exceeding 21 years - is taxable at a zero rate.

This enables developers to recover the 5% VAT rate charged by subcontractors as well as a VAT rate of 20% charged on legal and professional services. This is a major saving and is something that should always be kept in mind when buying derelict properties with the potential for refurbishment and re-sale.

If you feel the above would be useful to you and that you would like some more information, please make sure to contact me.

Mark

Property tax - an introduction

Recent trends in the housing market have served to boost the popularity of investing in property – while also leaving an increasing number of homeowners liable to taxes such as inheritance tax (IHT)

Property ownership has a number of different tax implications, which is why it is essential to put in place adequate tax planning measures now. This guide sets out some of the key aspects of tax and your property.

Capital gains tax

Your main residence is exempt from capital gains tax (CGT) when you sell it, provided it has been your only or main residence during the whole period of ownership. Various rules allow periods of temporary absence to be disregarded.

Owning more than one property

If you have more than one home, you may elect which is to be your main residence (i.e. exempt for CGT) within two years of acquiring the additional residence. As long as a home has at least some time been your main residence for CGT, the last three years of ownership are added to your exempt period. It may be beneficial for a married couple to own the non-exempt residence jointly as each will be entitled to capital gains tax exemption, on sale of the property.

Disposal

If the purchase and sale of properties amounts to a trade then profits will be taxed as income in the normal way. In all other cases, disposal will be subject to the normal rules for the calculation of capital gains.

The situation may be complicated where a principle private residence has been let for some time during the period of ownership

Allowable expenses

Expenses allowable in calculating income include interest incurred on loans used towards the purchase of the property (adjusted for any part of private use), rents, rates, insurance, repairs, management and professional fees.

Expenses on improving the property (such as extensions), or those which were necessary to bring newly acquired property to a useable state, all form part of the capital cost of the property.

Tax aspects of property investment

Income arising from land and buildings is generally treated as investment income unless it is from furnished holiday lettings or from property development, or the provision of services such as hotels and guesthouses, in which case it would be classified as trading income. From an accounting and tax point of view, all rental income (except furnished holiday lettings) is treated together as from one ‘property’ business, regardless of the terms of letting. Profits and losses are calculated using the same general accounting rules as for trading, including accruals to cover the timing difference of rent or expenses in advance or arrears.

Allowances for equipment

In general it is not possible to claim capital allowances for fixtures and fittings in a dwelling house. By concession, an allowance is available to cover wear and tear on certain items (such as suites, beds, carpets, curtains, linen, crockery, cutlery, cookers, washing machines, and dishwashers). For such items it is possible to claim either the cost of replacement (not original purchase) or alternatively a global annual wear and tear allowance equal to 10% of the rents received (less certain expenses) on furnished lettings. It is also possible to claim a deduction for the costs of renewal of fixtures, such as baths, toilets and washbasins.

For commercial properties, capital allowances may be claimed in respect of plant and machinery supplied by the landlord.

VAT

VAT on land and buildings is a complicated area. Generally sales of commercial buildings less than three years old are standard rated, sales of new residential properties are zero-rated and most other sales and leases are exempt. The VAT provisions on property letting are particularly complex.

If your thinking about investing in property for your business, or just so a bit of extra income on the side, then get in touch so we can discuss the best way for you to proceed.

Mark