Property Uncategorized


The 5 year valuation rule trap

The Annual Tax on Enveloped Dwellings (ATED) contains a trap which can blow-up in your client’s face: the five-year valuation rule.

When a residential property is held through a company (or other non-natural person eg a trust) it must be valued on acquisition to determine whether it is worth over £500,000, and thus may be subject to ATED. However, the property must also be revalued every five years after acquisition, with the valuation undertaken on 1 April in 2012, 2017, 2022, 2027 etc.

The new valuation takes effect for the ATED reporting year starting on the following 1 April. Thus, the ATED return and payment for 2023/24 is based on the open market value of the property as assessed at 1 April 2022.

HMRC is writing to taxpayers who are currently paying ATED, to remind them to revalue their properties at 1 April 2022 using an open-market value.

This could result in the property moving up a valuation band for 2023/24, say from the £500,000 to £1m band, into the £1m to £2m band. Although the ATED charges for 2023/24 have not been announced yet, moving up a band will at least double the amount of ATED due, which needs to be budgeted for.

The bigger trap is when the property becomes subject to ATED for the first time, as the property value has exceeded £500,000. Even if the property is exempt from ATED, because it is commercially let to people unconnected with the company owners, an ATED relief return must be submitted by 30 April within the year. There are a number of other situations which give full relief from the ATED charge.

Failure to submit an ATED return on time will result in automatic late filing penalties. Also, failure to pay the right amount of ATED charge on time will generate a late payment penalty and an interest charge.

Capital Gains Tax Property

CGT on Property

30 Day Reporting

In spite of the coronavirus crisis, the new system for paying and declaring CGT within 30 days of the completion of a UK property transaction came into effect for property completions on and after 6 April 2020.

There are exceptions from the 30-day regime for transactions where there is a loss, the gain is fully covered by a CGT relief or annual exemption, and where the contracts were exchanged prior to 6th April 2020. Otherwise if the CGT is not reported and paid within 30 days of completion, late filing penalties will be imposed in the same manner as for late Self Assessment tax returns.

However, HMRC has introduced a soft landing for the new CGT regime, such that disposals made from 6 April to 30 June 2020 inclusive can be reported by 31 July 2020 with no penalties due. Transactions completed on or after 1 July 2020 must be reported within 30 days through the taxpayer’s “CGT on UK property account”.

See here for details of how to report and pay CGT on property, and here on how to manage a UK property account.

Property SDLT

SDLT Higher Rate

Home selling deadline relaxed

Second homes have been subject to a 3% SDLT surcharge since April 2016, and similar surcharges apply in Wales (3% LTT) and Scotland (4% LBTT). These surcharges are not supposed to apply to the purchase of a main home, but purchasers can be caught out if they buy a replacement main home before completing the sale on their old home.

Where the buyer holds two or more homes at the end of the day of completion the surcharge applies. But this surcharge can be reclaimed if the old home is sold within a specified window, set at three years for property purchases in England, Wales and Northern Ireland, but just 18 months in Scotland.

As the UK property market was effectively frozen due to the coronavirus shut-down many sales fell through and some buyers have been left holding two homes for longer than expected. The UK and Scottish Governments have reacted by extending the window for sale of the old home in slightly different ways.

Scottish home-owners can enjoy a limited extension to the window for sale to three years, where the new home was purchased between 24 September 2018 and 24 March 2020. This is legislated for in the Coronavirus (Scotland) (No.2) Act 2020, Schedule 4 part 5.

Home-owners in England or Northern Ireland have been given an open-ended flexibility for the sales window where the new home was purchased on or after 1 January 2017. If the buyer can show that exceptional circumstances applied to prevent the sale of the old home, such as the covid-19 pandemic, the sales window for the old home is extended.

The taxpayer will be expected to complete the sale of their old home as soon as reasonably possible after the exceptional circumstances have ceased. HMRC will only make a judgement on whether the exceptional circumstances condition applies once the former home is sold and a SDLT refund application has been submitted.

The Welsh Government has made no similar adjustment to the rules for the LTT surcharge.


Let properties – Interest Relief Restriction

The proportion of finance and interest charges which can be deducted from residential property income is gradually being reduced to nil as follows:

Tax Year in which interest is paidProportion of finance charges
2020/21 and laterNil

The landlord will have a tax credit (20% x blocked interest) that reduces his income tax bill. This 20% rate applies irrespective the landlord’s actual marginal tax rate.

Some landlords will get a nasty shock when they see their tax bill for 2017/18 is much higher than what they paid on a similar level of profit for 2016/17.  Their tax bill for 2018/19 may be even higher.

There are four ways out of this bind, but they all require careful thought around the knock-on tax implications;

  • Sell some residential property and reduce the level of debt for the remaining property business.
  • Let the property in such a fashion so it qualifies as furnished holiday lets for tax purposes.
  • Sell all residential property and reinvest in commercial property.
  • Transfer the let properties to a company controlled by the landlord.

Some landlords have no debt in their property businesses, and they are not affected by the interest and finance restrictions.

However, individual landlords (of all types of property), should draw up their accounts for 2017/18 using the cash basis for landlords (different to the cash basis for trading businesses).

Where the total receipts of the property business exceed £150,000 for the tax year, the cash basis should not be used, and GAAP accounting can be used instead. Any individual landlord can elect to use GAAP accounting rather than the cash basis, by ticking a box on the 2017/18 tax return.

We can help you advise your clients on restructuring, but time is running out for residential property businesses which are supported by large mortgages.


Cash basis for landlords

A voluntary form of cash basis accounting was introduced from 6 April 2013, but only for unincorporated trading businesses with turnover under the VAT threshold. Until 6 April 2017 landlords were required to use accruals accounting for property income.

From 6 April 2017 the tables are turned as smaller unincorporated property businesses are required to use a form of cash basis accounting. The landlord can opt to use the cash basis for one property business and not for another different and separate property business. Say he has some property let as furnished holiday lettings, and other property let as normal residential lettings, the FHL accounts could be drawn up on an accruals basis and the other lettings on the cash basis.

The following unincorporated landlords are not permitted to use the cash basis:

  • those with annual turnover exceeding £150,000;
  • where business premises renovation allowance has been claimed and there is a balancing adjustment in the year;
  • LLPs, trustees, personal representatives or partnerships including a corporate member;
  • where the property is jointly held by spouses/ civil partners and one person does not use the cash basis.

If the landlord doesn’t fall into one of the exemptions listed above, he can opt to use accruals accounting by electing in his tax return for the relevant tax year, or by the deadline for amending that return: 31 January 2020 for the 2017/18 returns.

The cash basis for property business differs from the cash basis for trading businesses on these points:

  • security deposits are not counted as income while the funds are available to be returned to the tenant.
  • the cost of replacing domestic items in residential properties may be deducted, but not the cost of the original items.
  • interest and finance costs are not capped at £500 per year.

Finance costs are capped under the cash basis for property businesses, but the disallowed charges are based on the portion of loans which exceed the value of the let properties when they were first let by that landlord. This cap applies before, and in addition to, the restriction of deductions for finance charges relating to letting of residential property, which is phased in from 6 April 2017.

Guidance on the cash basis for landlords


Incorporating a property portfolio business

There is now huge pressure on indebted landlords to incorporate their property businesses, to avoid the restriction on the deduction of interest and other finance charges which has applied since 6 April 2017.

Where an actively-managed property portfolio is transferred to a company the gains arising maybe rolled into the value of the shares received, using incorporation relief (TCGA 1992, s 162), if it can be shown that the letting activity is a “business”. This was the essence of the EM Ramsey case, as decided by the Upper Tribunal in 2013. Following that case HMRC amended the guidance in its Capital Gains manual (para CG65715).

The new guidance sets out the reasoning of the judge in the EM Ramsey case, and HMRC believes that should be sufficient for any taxpayer to make a judgment on whether their business constitutes a “business” for incorporation relief. HMRC has also stated that it will no longer give a ruling on this point under the non-statutory clearance service.

We can help you decide whether the business you are planning to incorporate does fall within the boundaries of “business” for incorporation relief, and guide you through the other conditions required for that relief.

EM Ramsey v HMRC [2013] UKUTT 0226(TCC)

HMRC guidance on what is a business CG65715


Trading and property allowances

These £1,000 annual allowances were introduced by F(no 2)A 2017, and backdated to apply from 6 April 2017. However, the detailed guidance on exactly how each allowance works has only just been published in HMRC’s Business Income Manual (BIM) and the Property Income Manual (PIM).

The trading allowance and miscellaneous income allowance (TMIA), and the Property Income Allowance (PIA) operate in a similar fashion, but on different categories of income received by individuals. The PIA can’t apply to rental income which qualifies for rent a room relief. Also neither allowance can be set against income from a connected party, such as a close company in which the taxpayer is a participator or an associate of a participator, or a partnership in which he is a partner or connected with a partner.

Where the qualifying income, before deduction of expenses, is no more than £1000 per year, he will automatically be given full relief, and the trading or property income is treated as nil. The taxpayer also is relieved from having to report that income to HMRC.

If the taxpayer doesn’t want the allowance to be set against his qualifying income, he must make an election for it not to apply. This may be the desired outcome where the taxpayer has made a loss, after deduction of expenses, which he wishes to set against his other income (for a trade), or carry the loss forward or back.

If the taxpayer’s gross qualifying income is more than £1,000 he can opt in to be given partial relief and not deduct any expenses, or not elect for the allowance not to apply at all and then deduct all allowable expenses as normal.

These elections are made as part of the taxpayer’s SA return, so you need to watch out for the opting out and opting in elections when completing the 2017/18 returns.

Trading income allowance guidance

Property income allowance guidance