Are you dwelling on your UK property investment?

Are you dwelling on your UK property investment?

Investors are reconsidering both the nature of their investment and the suitability of holding structures

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Are you dwelling on your UK property investment?

In recent years, the ownership of UK residential property has been affected by a number of new tax measures. For those investing in residential property, the choice of ownership structure needs to be reconsidered as the tax changes can apply differently to corporate and personal ownership.

UK residential property

Recent tax changes which impact investment in residential property include:

  • From 6 April 2016, a higher rate of capital gains tax (CGT) for individuals and trustees disposing of residential property compared to most other assets — 28% instead of 20%.
  • Since April 2016 a new 3% SDLT surcharge applies when purchasing buy to let or second homes.
  • Restrictions on the tax deductibility of finance costs for let residential property apply for some taxpayers from 6 April 2017.
  • Non-resident CGT has applied since 5 April 2015 for non-UK residents disposing of UK residential property.

The combined effects of these changes can significantly increase the tax costs of acquiring, holding and disposing of residential properties.For most tax purposes, property is residential if it is used or suitable for use as a dwelling.

Commercial property as an alternative to investment in residential property

Some residential property investors are now considering investing in commercial rather than residential property. Very broadly, commercial property in this context is any property that is not suitable for use as a dwelling. Such properties are not affected by the 3% SDLT surcharge, or the 28% CGT rate, or non-resident CGT for non-UK resident investors. The above restrictions on tax deductibility of finance costs are also not applicable to commercial property investments.

Clearly investment in commercial property has a range of different investment considerations compared to residential property, besides tax.

Company ownership of residential property

The ownership structure for investing in residential property may need to be reviewed in light of the recent tax changes. In many cases, corporate ownership may now be more cost effective as the higher rate of CGT does not apply to companies, although restrictions on corporate tax deductions for finance costs need to be taken into account.

However, there is no ‘one size fits all’ structure and there are at least two sides to the story. Whilst in some instances the use of a company to invest in residential property will be attractive this will need to be weighed against the potential pitfalls, such as:

  • Increased administration — accounts and company tax returns will be required as well as potentially ATED tax returns;
  • Two ‘layers’ of tax on profits — rental profits would be subject to corporation tax and then income tax if profits are paid to UK resident shareholders as a dividend.

Existing residential buy-to-let landlords thinking about the use of a company need to be aware of potential CGT and SDLT costs of moving their property portfolio into a company. However, in some circumstances tax reliefs may be available. Again there are other considerations, such the rights of tenants and secured lenders.

Conclusion

As with every property acquisition, careful thought needs to be given to the commercial objectives and the specific circumstances. Anyone already holding property or considering an acquisition should take professional tax advice as the tax rules are complex and the potential tax costs could be significant.

Find out more on our UK Residential Property page here

Contact: 

Paul Day. Senior Manager, Private Client

Lisa Oakes. Director, Corporate tax

Personal Perspectives - July 2016

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