A Tax Checklist on buying a property
A clear guide on the tax implications of buying a property.
Lee Farrington of Amber mortgage solutions recommends this article by Alan Pink of Tax Insiders for anyone wanting a clear guide on the tax implications of buying a property.
This checklist will help you ask the right questions regarding tax planning when considering a property purchase.
- Are you financing the purchase in a tax-efficient way?
If the money is coming from a company that you own, for example, have you considered buying the property in the company, rather than taking income out of the company (possibly heavily taxed) to fund the purchase? Is it worth considering buying the property in an LLP in which your company is a member?
- Is the buy-to-let loan interest relief restriction a problem?
This has been very much in the news recently, and in many cases those affected by the restriction of loan interest relief to the basic rate (which is being phased in over four years starting in April 2017) is going to mean that they are paying an effective rate of tax of more than 50%, or even, in some cases, more than 100%.As is reasonably well known, this loan interest relief restriction doesn’t apply to limited companies. So, should you be considering buying the property in a company rather than individual names, if this is a practical option?
- Might you be caught by the new 3% stamp duty land tax surcharge?
This 3% surcharge applies to all company purchasers, and individual purchasers who have another property, and are not buying the property in question as their main residence. Is there scope, though (e.g. if there are other individuals such as family members around), for the property to be bought in the name of someone who doesn’t own any other residential property, and therefore won’t be caught by the 3% surcharge even if the property isn’t their main residence?
- Is there any ‘non-SDLTable’ element in the purchase?
For example, are you buying things like carpets and curtains in addition to the bricks and mortar? If the property you’re buying is trade related, such as a nursing home, pub or restaurant (just to take three examples) is there an element of ‘goodwill’ in what you are paying, on the basis that you are buying a business as a going concern? If so, it’s a good idea to agree with the vendor how much of the purchase price relates to these ‘non-SDLTable’ elements, if you possibly can.
This is relevant if what you are buying isn’t a ‘dwelling house’. Almost any property you buy will consist not just of bricks and mortar (or steel framework and cladding) but also fixtures like heating, lighting, plumbing, ventilation, fitted furniture and sanitary fittings, etc., which are actually eligible for allowances. In this day and age, the tax red tape is much greater than it used to be, and it’s absolutely essential that the fixtures element is determined in advance, before you buy the property. For properties bought before 6 April 2014, you can still have a punt at claiming a fixtures element against your tax (it’s written off over a period under the ‘capital allowances’ regime) even if the fixtures element hasn’t been agreed with the vendor.
- Does the property need work done on it?
This question is relevant if you’re buying a property that you’re planning to let out or occupy for the purpose of some business. In this situation, budgeting to carry out the work gradually over a period, laying out small amounts at any one time, is both easier on your cash flow and more tax-efficient, because it’s less likely to be disallowed by HMRC as ‘capital’ improvement works.
- Can you ‘spread’ the future capital gain?
Most people who buy property have a view to its possible future growth in value, and this obviously involves potentially paying capital gains tax (CGT). CGT is charged at a rate of 28% for residential properties and 20% for non-residential, but each individual has available an annual CGT exemption, which is currently worth just over £11,000. So how about considering spreading the ownership of the property so that, on disposal, as many people as possible are likely to have annual exemptions to offset?The classic example of where this might be a good idea is where there is a family situation and a number of children. Arranging for children to receive a proportion of the gain has financial implications as well, of course, but if you’re a close-knit family that shouldn’t be a problem, and in a family of five, of course, a gain of up to around £55,000 can be completely tax free. Note that the rules about ‘settling’ income on minor children (those under 18) don’t apply to CGT.Bear in mind that all of these points, which relate to making sure that you have the right ownership structure, are impacted on by the fact that it’s difficult to change the ownership structure later on, when the property may have increased in value.
- Does anyone have capital losses?
If there is anyone who has made an unsuccessful investment of any kind in the past, and has capital losses carried forward, it makes a lot of sense for that person to have at least an interest in the property, such that, that element of the gain, at least, can be tax-free when it’s ultimately sold. Capital losses are notoriously difficult to use, so don’t miss this opportunity if you have it!
- Does anyone have rental losses?
A similar question arises with rental losses (what used to be ‘Schedule A’ losses). If someone with these losses brought forward can be brought into ownership, and the property counts as part of the same property ‘business’ as the one where they’ve made the losses, you could be enjoying an income tax ‘holiday’ on the rents from the new property.
- Can you structure the purchase to get rollover relief?
This is a CGT relief, which is available where someone who uses a property for the purposes of a trade (for example an office that they occupy for their trade, a factory, a farm, etc.) sells that property, making a gain. A new property acquired in the same ownership (not necessarily the same trade) can mean that you can postpone indefinitely (sometimes forever) paying tax on the original gain. But you have to be careful to ensure that the person making the gain is the same as the person buying the new property.
- Can you structure the purchase to maximise inheritance tax business property relief?
This is another question about who should own the property, and the impact of the answer to this question on inheritance tax (IHT) can be major. If, for example, the property is one you are buying as an investment, can you domicile it within your trading business and make use of the ‘50% rule’? This rule broadly states that, if you have investment and trading activities mixed in the same business, you can still get 100% IHT business property relief (so no tax thereon on your death) if at least 50% of the business is trading in nature.
- Could you be moving the value of the property out of your inheritance taxable estate?
Again, this is a question of whose name you buy the property in. One way of planning against your own IHT exposure on death would be to buy the property in trust, such that future increases in value go to the trust rather than to you (for example, by making a loan to the trust).
- Are you buying the property for someone else to live in?
If you are, consider whether you can extend the availability of main residence CGT relief by putting the property in a trust for that person.
- Should you be making a main residence election?
If the property you’re buying is a residence for you and your family, even if it isn’t the first home but only a second (or third, etc.) home, acquiring it means that you have a new two year ‘window’ to claim for main residence treatment, that is CGT relief – for any of your other properties.
- Are any of the proposed owners in financial trouble, or could they be in the future?
This isn’t strictly a tax planning point, but do be careful, when considering property ownership, that you don’t give a share to somebody who could go bankrupt, or be divorced with punishing financial settlements made against them. Trust or possibly even LLP ownership can help guard against this, and can also have beneficial tax consequences to boot.
Source: A Tax Checklist On Buying A Property, Tax Property Insider, February 2017