If you are a landlord letting out property in the UK, then it is important to consider your responsibilities with respect to reporting income and/or gains on your property and paying any tax due.
By taking pro-active advice, you may be able to reduce your tax bill – particularly where you are selling property or considering expanding your property portfolio.
Stamp duty land tax (SDLT) was introduced in 2003* and since then has been subject to extensive reform.
SDLT is charged on the purchase of interests in land and is payable by the purchaser. It is calculated based on the consideration paid, and includes not only money but also money’s worth (e.g. the assumption of a mortgage).
SDLT is currently charged on a ‘slice’ basis (like income tax). This means that SDLT is charged at increasing rates for the amount of consideration that falls into the different SDLT bands.
Different rates apply depending upon whether or not the property is residential or mixed/commercial and whether the individual buying the property is an individual or non-natural person (e.g. a company).
Higher SDLT Rates
Since 1 April 2016, all purchases of residential properties have been subject to an extra 3% on SDLT in each band where the purchaser is either:
These new rates are subject to a number of special rules and transitional provisions. Extra care must be taken when considering whether the higher rates will apply as these rules can catch taxpayers by surprise leaving them with unexpected tax bills or having paid the higher rates when they aren’t applicable.
Since 2012, a special rate of 15% on the total consideration may apply to the purchase of residential properties by non-natural persons in certain circumstances. This special rate is separate to the recent 3% increase to each SDLT band.
The threshold for this special 15% rate was originally set at £2 million but from 2014 has been reduced to £500,000.
* From 1 April 2015 land in Scotland is subject to the Land and Buildings Transaction Tax. From 1 April 2018 land in Wales is subject to the Land transaction Tax. Neither of these taxes are covered here.
The Problem
A husband and wife owned a portfolio of 28 rental properties comprising both residential and commercial properties.
They were keen to transfer the properties into a newly incorporated company but were unsure of the capital gains tax (CGT) and stamp duty land tax (SDLT) implications of the arrangement or the availability of reliefs.
The Solution
We set out the tax implications of the proposed transfer and calculated the estimated tax due.
We considered the availability of SDLT reliefs, with a particular focus on the “partnership exemption”. As part of this advice, it was necessary to examine whether there was a partnership in place and whether the activities undertaken amounted to a “business”.
In terms of the couple’s CGT liability, we determined the most tax efficient way to allocate losses and the availability of incorporation relief.
The taxpayers’ compliance obligations were also considered, such as the time frames for making the relief claims and reporting the transfer on their tax returns.
The Result
The level of activities carried on by the taxpayers in respect of their properties was significant, therefore there was a strong claim that incorporation relief would be available. As a result, the gain was deferred and there was no immediate charge to CGT on the transfer.
In terms of the SDLT partnership exemption, whilst the level of activities carried on were likely sufficient to amount to a business, as partnership returns had not been submitted and there was no partnership agreement there was a risk that HMRC would challenge the position that the couple ran their property business as a partnership. With this in mind, we provided advice on how they may be able to strengthen their claim.
We also considered an alternative scenario where the taxpayers did not make a claim for the exemption. Whilst the 3% surcharge would apply on the acquisition of the properties by the company, multiple dwellings relief should be available in respect of the residential properties to reduce the overall SDLT liability.