Residential investors and developers: tax legislation
30 April 2015
Rosalind Rowe provides an update on changes in UK tax legislation that affect residential investors and developers
The tax regime for investors and developers of residential property has become more complex with the changes introduced during 2014.
We have seen a wholesale transformation of the application of stamp duty land tax (SDLT) not only in relation to the calculation but also in relation to the location of the property. At present, only Scotland will have a different tax regime but Wales may also opt for its own, although not for at least a couple of years.
Changes to SDLT
SDLT, previously a ‘slab’ tax, was replaced by a progressive rate tax for residential property in the UK from midnight on 3 December 2014.
Under the slab tax, if the house price fell within a band then SDLT was applied at that rate; the result was a ‘dead zone’ around £250,000 given SDLT was levied on a house selling for £250,000 at 1% but the rate rose to 3% (an increase of £5,000) if the price rose by just £1.
Now the price is allocated to bands (from 0% up to £125,000 with a top rate of 12% for any proceeds above £1.5m). Here is an example of how the new rules work: Under the old rules if you bought a house for £185,000, you would have had to pay 1% tax on the full amount – a total of £1,850.
Under the new rules, for the same property you will pay nothing on the first £125,000 and 2% on the remaining £60,000. This works out as £1,200, a saving of £650 (HMRC factsheet December 2014).
In addition, from 1 April 2015 buyers of residential property located in Scotland will face a further change when the land and buildings transaction tax (LBTT) comes into force. LBTT will also be a progressive tax but there are differences from SDLT in the rest of the UK. For example, the entry point is at a higher value (£135,000) but the highest rate of 12% will apply to the value over £1m (compared with £1.5m outside Scotland).
There are also differences in multiple dwellings relief (MDR). In the UK, when the slab tax was in place the SDLT was calculated by taking the average of a portfolio’s value and determining what band this fell into. That rate (minimum 1%) was then applied to the whole portfolio. Under the new UK (not Scotland) regime, the SDLT on a portfolio will be determined by identifying the average value and then calculating the rate of SDLT payable, using the new bandsThis effective rate would then be applied to the portfolio, retaining the 1% minimum rate.
In Scotland, while there is to be a similar calculation for MDR using the Scottish bands, the minimum tax has just been determined. The Scottish Government had proposed there be a ‘floor’ of 40% of what the LBTT would have been without the relief; respondents said this was too high and it has now been set at 25%.
In both Scotland and the rest of the UK, if the tax exceeds the commercial rate it is worth considering the relief for commercial letting. Where six or more separate dwellings are purchased in one transaction, the units are not treated as residential. The benefit is that the SDLT (UK not Scotland) will be capped at 4%; in Scotland LBTT rates are also progressive for commercial property with a top rate of 4.5%.
Offshore residential investors
The government has confirmed that the disposal of certain residential accommodation by investors will be subject to tax on capital gains realised on or after 6 April 2015. Draft clauses have been issued for consultation with final legislation expected in the Finance Bill 2015.
The key themes are:
- diversely held investors (widely held companies, unit trusts etc) may be exempt from the charge
- the meaning of ‘residential accommodation’ excludes certain types of property such as accommodation for those who are being educated (including a new definition of student accommodation), are in the armed forces, who are ill or disabled
- the charge will only apply to gains accruing after 5 April 2015; taxpayers can revalue their property at that date or time-apportion the gain to work out the taxable element
- companies will pay tax at 20% and individuals will pay tax at 18%/28%
- where the Annual Tax on Enveloped Dwellings (ATED) legislation applies (this is where a residential property is held in a vehicle such as a company) then the tax rate will remain at 28%; where both ATED and capital gains tax could apply then ATED takes preference
- the disposal must be reported in 30 days. While a withholding of tax had been proposed, payment must now be made at the same time unless the vendor is known to the tax authorities (eg registered as a non-resident landlord) when tax can be paid under the self-assessment regime.
Rosalind Rowe is a Partner in the real estate team at PricewaterhouseCoopers LLP
This feature is taken from the RICS Property journal (March/April 2015)