Property

Historically the price of a fixed supply such as land has risen over time as demand has increased with an increasing population and, as its value has risen, governments have continually sought new ways to tax the profits of landowners.

Incorporate a rental business

It may be possible to 'roll over' a capital gain on incorporating a rental business by transferring the property to a company in exchange for shares.

A company will pay 19-25% Corporation Tax on the profits of the rental business as opposed to up to 45% Income Tax payable by an individual. However, it must be a 'business' and not a mere 'investment', but a 'business' does not need to be as active as a 'trade'.

This distinction has been the subject of recent legal challenges by HMRC considering the incorporation of a rental business. Advice should be sought on both the Capital Gains Tax and Stamp Duty Land Tax (SDLT) implications of such a transfer.

Beware of the restriction of an interest deduction against rent from a let property

Interest is not fully deductible against rent received by an individual, whereas rent received by a company may attract a full interest deduction. Therefore consider whether a rental property purchased with the help of borrowed funds should be owned personally or via a company.

Avoid paying the annual tax on enveloped dwellings (ATED)

If you own UK residential property that will be 'owner occupied' through a company the Annual Tax on Enveloped Dwellings (or ATED) will become due. The annual charge is paid at the start of each chargeable period commencing 1 April. For the year commencing 1 April 2025, the charge starts at £4,450 and rises to £292,350 depending on the value of the property, if the property is available for personal use.

Always consider owning a personal home in individual names.

Be aware of non-residents' capital gains tax

Non-residents now pay Capital Gains Tax (CGT) or Corporation Tax on disposals of UK residential property. Individuals must file a tax return and pay the tax within 60 days of completion. Companies retain their normal Corporation Tax filing and payment dates.

If the property was owned before 5 April 2015 by a non-resident (individual or company), the cost can be 'rebased' to its 5 April 2015 value when calculating the gain on sale.

Commercial real estate is similarly taxed, but its rebasing is to its value on 5 April 2019.

VAT and Property

Construction services are generally subject to VAT at the standard rate of 20%. However, in certain circumstances the services may qualify for the zero (0%) or reduced (5%) rate of VAT.

The sale or letting of existing residential property is generally exempt from VAT, which means that there is no entitlement to recover VAT incurred in connection with the property. However, there is a temporary entitlement to the zero rate of VAT for the installation of Energy-Saving Materials to residential accommodation This relief expires on 31 March 2027 and will revert to the reduced rate of VAT i.e. 5% thereafter.

The sale or letting of commercial property is also generally exempt from VAT unless the seller opts to tax it, which will convert an exempt supply to one which is subject to VAT at the standard rate. This should entitle the business to recover VAT incurred in connection with the property.

Stamp Duty Land Tax (SDLT) is now a significant cost of the cost of buying property

Stamp taxes are a favoured method of raising revenue for many governments because they are efficient to collect. They are paid when something needs to be registered, such as a transfer of ownership of land. They are amongst our older taxes.

To buy an interest in land or buildings in England or Northern Ireland, you usually have to pay SDLT. Rates vary from 0% to 19% depending on a number of factors, including the type of buyer (eg, a company or an individual), the SDLT classification of the land or buildings, the ownership of any other dwelling by the buyer and the SDLT residence status of the buyer. In some cases, a “mixed” transaction (residential and non-residential property) is taxed at the lower commercial rates; and in some cases an exclusively residential property transaction is taxed at the same rates.

Scotland and Wales have equivalent taxes – Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT), respectively.

Always seek SDLT advice as the rules are complex. For example, the tax can be charged on the market value of the land or buildings transferred; partial or full reliefs can be claimed; and a widely drafted anti-avoidance rule can apply to responsible tax planning, or even arrangements that are not tax driven.

Furnished holiday lets - the end is nigh

2024/25 will be the last year that a taxpayer can claim a distinction between furnished holiday lets and other rental properties. Going forward the concept of furnished holday lets will be abolished.

After 5 April 2025 furnished holiday let will be taxed in the same way as your UK or overseas residential properties. From 6 April 2025, the favourable tax breaks that are given to qualifying furnished holiday lettings (FHL) will be abolished.

Until then, where a property does qualify, an individual can claim full relief on loan interest, claim capital allowances, and claim certain capital gains reliefs including Business Asset Disposal Relief (BADR) so only 10% Capital Gains Tax might be payable on a sale. The profits also count as earnings for pension purposes.

To qualify in 2024/25, the property must be available for letting for 210 days in a tax year and actually let for 105 days. If letting commences in 2024/25, the test is applied for the 12 months from the first day of letting (notwithstanding that the test period ends post-6 April 2025).

It should be noted that the legislation which abolishes the FHL reliefs from 6 April 2025 includes a rule which can prevent the obtaining of a Capital Gains Tax advantage using unconditional contacts made on or after 6 March 2024 for sales which complete on or after 6 April 2025. We recommend you speak to your adviser if this is likely to affect you.