PKF Francis Clark invites you to attend our annual Property Sector Update at Exeter Racecourse on Thursday 28 September.
The results of the snap General Election in June has undoubtedly caused more uncertainty to a property sector still waiting for an induction as to where things will stand in a post-Brexit economic environment.
Despite all of the uncertainty, property remains a key asset, giving strong income returns and in many cases proving to be a refuge of capital preservation for the investor and the wider family.
Against this backdrop, we will be exploring key taxation, wealth planning and accounting issues affecting the property sector today.
The seminar, chaired by Head of Tax, John Endacott, will be particular interest to landowners, developers, commercial and residential investors and landlords.
3. pkf-francisclark.co.uk
.
Whatās hot in the property sector?!
ā¢ Housing crisis? Government or industry solution?
ā¢ Continuing taxation squeeze on landlords?
ā¢ Autumn budget ā any good news likely?
ā¢ The elephant in the roomā¦Brexit of course!
4. Programme
Structuring property development SPVs ā Ian Pring
Accounting issues for property companies ā Stephanie Henshaw
VAT update ā Julie Towers
Capital allowances ā Heather Britton
Property incorporation ā Julian Smith
pkf-francisclark.co.uk
6. pkf-francisclark.co.uk
Structuring property development SPVs
ā¢ Some tax considerations for developers when determining land
ownership structure
ā¢ Individual or company?
ā¢ Structure used in the past
ā¢ New anti avoidance rules
ā¢ Possible future structure
ā¢ Stamp duty land tax on purchase and key reliefs available
ā¢ SDLT rates
ā¢ Mixed-use property
ā¢ Multiple Dwellings Relief
ā¢ Pre completion transactions
7. pkf-francisclark.co.uk
Individual or company ownership
structure ā tax considerations
Take for example a business with profits of Ā£100,000
Structure Type of tax Tax Total Net in hand
Individual Income tax (40%) Ā£40,000
National insurance (2%) Ā£2,000 Ā£42,000 Ā£58,000
Company Corporation tax (19%) Ā£19,000
Plus dividend to shareholders (32.5%) Ā£26,325 Ā£45,325 Ā£54,675
Or liquidation with Entrepreneursā Relief:
Plus capital gains tax (10%) Ā£8,100 Ā£27,100 Ā£72,900
Or liquidation without ER
Plus capital gains tax (20%) Ā£16,200 Ā£35,200 Ā£64,800
8. pkf-francisclark.co.uk
Individual or company ownership
structure ā tax considerations
Company more tax efficient where:
ā¢ profit extraction by way of liquidation distribution or
ā¢ if profits to be retained for re-investment
9. pkf-francisclark.co.uk
Special purpose vehicles (SPVs)
In development and construction, SPVs are
ā¢ legal entities
ā¢ set up for a specific purpose to isolate risk
Commonly in the form of a company
11. pkf-francisclark.co.uk
Profit extraction
As each development completes in turn:
ā¢ Development sale proceeds received by SPV and corporation
tax paid
ā¢ SPV liquidated and liquidation distribution paid to individual
shareholders(s)
ā¢ Where Entrepreneursā Relief conditions satisfied ā 5% share
ownership held and employee/director for at least 12 months
ā¢ Liquidation distribution taxed as capital gain at 10% up to
lifetime allowance, currently Ā£10m
12. pkf-francisclark.co.uk
Targeted anti-avoidance rule (TAAR)
Aimed at phoenixing businesses:
ā¢ New rule intended to impact serial entrepreneurs who repeatedly
accumulate profits in a company, liquidate company with low rate of
tax, and then recommence activities in new company
ā¢ With effect for liquidation distributions paid on or after 6 April 2016,
the liquidation distribution is taxed in the hands of the shareholders
as income not capital if four conditions met
13. pkf-francisclark.co.uk
TAAR conditions
ā¢ Condition A ā The individual receiving the distribution held at least 5% of the
company being liquidated.
ā¢ Condition B ā The company being wound up was a āclose companyā at any time
within two years of the start of the liquidation process.
ā¢ Condition C ā Within two years the individual continues or commences a
similar activity. This is very widely drawn and includes being a shareholder,
sole trader or partner in a similar business. It also includes being connected to
such an individual.
ā¢ Condition D ā The main purpose, or one of the main purposes, of the winding
up is to secure a reduction in income tax.
14. pkf-francisclark.co.uk
Consequences of TAAR biting
Liquidation distribution subject to income tax at dividend tax
rates:
ā¢ 32.5% for higher rate taxpayers and/or 38.1% for additional rate
taxpayers
ā¢ Instead of capital gains tax at 10% with Entrepreneursā Relief
available or 20% otherwise
15. pkf-francisclark.co.uk
HMRC guidance
ā¢ HMRC guidance issued Summer 2017 - not very helpful!
ā¢ Of concern, guidance doesnāt cover off whether HMRC would
take the view that condition D is met in cases such as the
traditional SPV structure described
ā¢ No HMRC clearance given on whether tax avoidance is the
main purpose or one of the main purposes or whether trades
are the same as, or similar to, one another
ā¢ Document commercial reasons for winding-up!
17. pkf-francisclark.co.uk
Group structure
ā¢ Commercial requirements ā segregation of risk ā still met
ā¢ Liquidation distribution on winding up SPV is exempt from tax in the
hands of holding company
ā¢ Beneficial if post tax proceeds to be re-invested in new
developments
ā¢ Recent changes to tax legislation may mean that any profit on
disposal of shares in SPV to a third party are exempt from tax in the
hands of holding company
18. pkf-francisclark.co.uk
Stamp Duty Land Tax (āSDLTā)
rates of charge ā non residential
Purchase price/lease premium or
transfer value
SDLT rate paid on the part
of the property price
within each tax band
So much as does not exceed
Ā£150,000
0%
So much as exceeds Ā£150,000, but
does not exceed Ā£250,000
2%
The remainder (if any) 5%
20. pkf-francisclark.co.uk
What is residential property?
ā¢ Residential property is any building that is used or suitable for use as
a dwelling or which is in the process of being constructed or adapted
for such use along with the garden or grounds
ā¢ Non residential property is anything which is not entirely residential
ā¢ Any single transaction involving the acquisition of six or more
residential properties is deemed a non-residential transaction
ā¢ A residential property transaction which includes land that is not
residential property is āmixed useā and therefore non-residential
22. pkf-francisclark.co.uk
What is mixed use property?
Legislation: āLand which includes land that is not residential
propertyā
Helpful factors:
ļ Recent evidence of commercial use
ļ Different title numbers
ļ Use restriction
26. pkf-francisclark.co.uk
Mixed use property
Gardens and grounds are residential where needed for the
reasonable enjoyment of the dwelling (having regard to the size
and nature of the dwelling). But what lies beyond? What is
actually being acquired?
SDLT ā residential rates: Ā£47,600
Filing position taken:
SDLT ā commercial rates: Ā£25,500
Ā£22,100 SDLT saving to client
27. pkf-francisclark.co.uk
Multiple dwellings relief
ā¢ Transactions the main subject matter of which includes
interests in a least two dwellings
ā¢ Dwelling means a building or part of a building which is
suitable for use as a single dwelling or is in the process of
being constructed or adapted to such use
29. pkf-francisclark.co.uk
Multiple dwellings relief
ā¢ Purchase of building for Ā£2m, comprising 24 flats
ā¢ Each flat qualified as a self-contained dwelling
ā¢ Default non-residential SDLT treatment = Ā£89,500 SDLT
ā¢ MDR claim = Ā£60,000 SDLT
ā¢ 2,000,000/24 = 83,333
ā¢ 83,333 x 3% = 2,500
ā¢ 2,500 x 24 = 60,000
ā¢ Ā£29,500 SDLT saving with MDR claim (via SDLT return)
30. pkf-francisclark.co.uk
Multiple dwellings relief
ā¢ Purchase of hotel by developer
ā¢ Sold with vacant possession, with detailed planning to convert
to 14 apartments
ā¢ Intended as purchase of residential units, negotiated surveyor
access pre-completion, ground works undertaken
ā¢ Hotel is non-residential but process of adaption to residential
use clearly underway at completion combined with marketing
and planning
ā¢ If non-residential rates applied, SDLT of Ā£79,500
ā¢ Filing position taken that MDR applied resulting in SDLT of
Ā£55,000 = Ā£24,500 SDLT saving
32. pkf-francisclark.co.uk
SDLT amendment & overpayment claims
ā¢ Purchaser may amend a land transaction return within 12
months of its filing date
ā¢ Overpayment relief claim (re āerror or mistakeā) can be made
within 4 years
34. Programme
ā¢ Valuations ā how has FRS 102 changed the
landscape?
ā¢ Deferred tax and property
ā¢ New rules for below market rate loans
ā¢ Leases under FRS 102
ā¢ Treatment of incentives
ā¢ When to provide for potential costs
pkf-francisclark.co.uk
36. pkf-francisclark.co.uk
Valuations: how has FRS 102 changed the landscape?
ā¢ What is āinvestment
propertyā?
Definition
ā¢ Requirements
ā¢ Impact on accountsValuation
37. pkf-francisclark.co.uk
Property held for earning rentals or capital appreciation
rather than use in business or sale in ordinary course of
business
Land or building,
or both, or part
thereof
Held by owner or
lessee under
finance lease
Choice ā landlord
holding property
under operating
lease, subject to
conditions,
property by
property basis
What is āinvestment propertyā for accounting purposes?
39. pkf-francisclark.co.uk
How is investment property valued?
ā¢ Purchase or construction
price
ā¢ Legal fees, taxesInitially
ā¢ Fair value at reporting date
ā¢ Unless undue cost or effort
to obtain reliable valueSubsequently
40. pkf-francisclark.co.uk
Assessing fair value
ā¢ Broadly, fair value = open market value
ā¢ No specific accounting requirements as to who should value
ā¢ Must disclose in notes to accounts if valuer is not independent
ā¢ Valuation for bank purposes may not be appropriate
ā¢ No specified frequency for revaluation
ā¢ Provided valuation in accounts is materially correct
ā¢ Covenant implications ā net worth or LTV (valuation for
bank)
41. pkf-francisclark.co.uk
Reporting valuations ā how the rules have changed
Old rules FRS 102
Profit and loss Ā£000s Profit and loss Ā£000s
Rental income 2,500 Rental income 2,500
Property expenses (650) Property expenses (650)
Operating profit 1,850 Operating profit 1,850
Interest (50) Increase in fair value
of investment property
900
Tax (300) Interest (50)
Profit for year 1,500 Tax (300)
Statement of gains and
losses
Profit for year 2,400
Profit on revaluation of
investment property
900
42. pkf-francisclark.co.uk
Changes in value of investment property
ā¢ Reported directly within profit and loss account, not via
revaluation reserve
ā¢ Impacts reported profit for year (whether gain or loss)
ā¢ Communication with users of accounts
ā¢ Ongoing profit from rental activities v valuation gains/ losses
ā¢ Impact on profit-related bank covenants
ā¢ Impact on value-sharing agreements ā JVs/SPVs,
shareholder agreements
43. pkf-francisclark.co.uk
Reporting valuations ā balance sheet impact
Old rules FRS 102
Ā£000s Ā£000s
Investment
property
14,500 Investment
property
14,500
Other net
assets
1,810 Other net
assets
1,810
16,310 16,310
Share capital 10 Share capital 10
Revaluation
reserve
11,500
Profit and loss
account
4,800 Profit and loss
account
16,300
16,310 16,310
44. pkf-francisclark.co.uk
ā¢ Distributions = dividends, share buybacks
ā¢ Must be supported by ārealisedā (cash) profit
ā¢ Property valuation is āunrealisedā profit
ā¢ Extent of ārealisedā profit may not be evident from
accounts under FRS 102 ā no requirement for disclosure
ā¢ Directors need to know to avoid potential illegal
distribution (and personal liability)
ā¢ Options?
Practical implications - distributions
46. pkf-francisclark.co.uk
Presenting an āotherā reserve
Original FRS
102
After reserve
transfer
Ā£000s Ā£000s
Investment
property
14,500 Investment
property
14,500
Other net
assets
1,810 Other net
assets
1,810
16,310 16,310
Share capital 10 Share capital 10
Investment
property
reserve
11,500
Profit and loss
account
16,300 Profit and loss
account
4,800
16,310 16,310
47. pkf-francisclark.co.uk
Accessing unrealised profit
Squeezed Limited wants to redeem some shares for Ā£1m. It
has Ā£14m of retained profit of which Ā£13.8m relates to
unrealised property valuation gains.
Ā£000s
Net assets 15,000
Share
capital
1,000
P&L 14,000
15,000 Realised
profit
Ā£0.2m
Unrealised
profit
Ā£13.8m
<Ā£1m
buyback
price
Potential solution:
1. Capitalise Ā£1m (say) of
unrealised profit as a
bonus issue of shares
2. Undertake a capital
reduction exercise on
those same shares
3. Legal process creates
Ā£1m of realised profit to
support buyback
48. pkf-francisclark.co.uk
ā¢ Deferred Tax = accounting device to recognise tax effect
of timing differences between accounting and taxable
profit
ā¢ Property examples:
ā¢ Capital allowances (tax) v depreciation (accounts)
ā¢ Property valuation movements recognised in P&L, not
taxable
ā¢ Historically, disclosure only for deferred tax on valuations
ā¢ Post FRS 102, provide for tax in full
Deferred tax and property
49. pkf-francisclark.co.uk
Deferred tax on valuations ā balance sheet impact
Old rules FRS 102
Ā£000s Ā£000s
Investment property 14,500 Investment property 14,500
Other net assets 1,810 Other net assets 1,810
16,310 Deferred tax on
property valuations
(1,955)
Share capital 10 14,355
Revaluation reserve 11,500 Share capital 10
Profit and loss account 4,800 Profit and loss account 14,345
16,310 14,355
Reduces net worth and profit
50. pkf-francisclark.co.uk
ā¢ Increase in liabilities, although no cash impact
ā¢ Potential mitigation via indexation of original cost
ā¢ Impact of reduced net worth on bank covenant
compliance?
ā¢ Additional tax charge element, reducing profit for year
ā¢ Deferred tax on investment property valuation gains is
unrealised so no impact on distributions
ā¢ Impact on bank covenant compliance?
Practical implications
51. pkf-francisclark.co.uk
FRS 102 and interest free loans
Old rules
Ā£000s
Investment property 20,500
Other net assets 1,810
Interest free loan (6,000)
16,310
Share capital 10
Revaluation reserve 11,500
Profit and loss account 4,800
16,310
52. pkf-francisclark.co.uk
ā¢ Particularly relevant to non-small companies (turnover
>Ā£10.2m, total assets > Ā£5.1m)
ā¢ Exemption for small companies with loans from director
shareholders
ā¢ Non-market rate loans (interest free or below market rate)
ā¢ Not repayable on demand
ā¢ Discount over life of loan
ā¢ Using estimated market rate of interest for loan of size and
duration
ā¢ Discount element is initially treated as capital contribution
ā¢ Discount āunwindsā over life loan as P&L expense
FRS 102: non-market rate loan treatment
53. pkf-francisclark.co.uk
FRS 102 and interest free loans
(borrower)
Old rules FRS 102
Ā£000s Ā£000s
Investment property 20,500 Investment property 20,500
Other net assets 1,810 Other net assets 1,810
Interest free loan (6,000) Interest free loan (discounted) (4,700)
16,310 17,610
Share capital 10 Share capital 10
Revaluation reserve 11,500 Capital contribution (not
distributable)
1,300
Profit and loss account 4,800 Profit and loss account 16,300
16,310 17,610
54. pkf-francisclark.co.uk
Overall impact of FRS 102 changes
Old rules FRS 102
Ā£000s Ā£000s
Investment property 20,500 Investment property 20,500
Other net assets 1,810 Other net assets 1,810
Interest free loan (6,000) Interest free loan (discounted) (4,700)
Deferred tax on property valuations (1,955)
16,310 15,655
Share capital 10 Share capital 10
Revaluation reserve 11,500 Investment property reserve (not
distributable)
9,545
Capital contribution (not distributable) 1,300
Profit and loss account 4,800 Profit and loss account 4,800
16,310 15,655
55. pkf-francisclark.co.uk
ā¢ Rent free periods, reverse premiums, contribution to fit out
ā¢ Spread on a straight line basis in accounts, not as cash
received/ paid
Impact:
ā¢ Longer period of spread
ā¢ Mismatch of profit impact v cash
ā¢ Tax follows the profit impact, not the cash
Lease incentives
Old rules FRS 102
Incentives spread over period to
first rent review
Incentives spread over term of
lease
56. pkf-francisclark.co.uk
Nature of
dilapidation
Timing of
provision
Amount
(best
estimate)
Recognition Tax impact
General wear
and tear
As wear and
tear occurs
Cost of
rectifying
wear and tear
at reporting
date
P&L charge
as wear and
tear occurs
Deductible
Aspects to be
replaced with
new items
regardless of
condition
At the
inception of
the lease
Replacement
cost
In first period
from
inception
Deductible
Removal of
specific
features (e.g.
mezzanine)
When the
feature is
installed
Cost to
remove and
restore
As part of
cost of asset,
then
depreciate
No tax
deduction
Lease dilapidations: how do tenants provide?
58. Agenda
ā¢ VAT and commercial property
ā¢ Common issues with transfer of going concern
ā¢ Hot topics with HMRC
pkf-francisclark.co.uk
59. pkf-francisclark.co.uk
.
VAT and commercial property
Builders Merchants purchased land
for Ā£100k plus VAT in 2015
Engaged contractor to build new
commercial building Ā£200K plus VAT
Building completed in May 2016 and
used by the builders merchants
61. pkf-francisclark.co.uk
During 2017 licence granted to a
third party to use part of the
building for storage
ā¢ Storage automatically standard rated
ā¢ No clawback under the Capital Goods
Scheme
VAT and commercial property
62. pkf-francisclark.co.uk
VAT and commercial property
2018 the third
party is no longer
a tenant
Builders
merchant sells
the freehold to a
pension fund for
Ā£350K plus VAT.
Pension fund
grants a lease to
builders
merchant on part
of the building
Can the pension fund
recover the VAT?
64. pkf-francisclark.co.uk
Buyer must
purchase a
business/part
Buyer should run
āsame kind of
businessā
Must not be
immediately
consecutive
transfers
VAT registration
No significant
break in trading
Issues with land
and property
Common issues with transfer of going concern (TOGC)
65. pkf-francisclark.co.uk
Common issues with TOGC
Example1
ā¢ Vendor operates car park, option to tax
made
ā¢ Issue ā vendor does not actually run the
car park, subsidiary does
ā¢ Vendor has no business to sell therefore
no TOGC
ā¢ VAT will be charged unless vendor can
revoke his option to tax
66. pkf-francisclark.co.uk
Common issues with TOGC
Example2
ā¢ Vendor operates pub
ā¢ Property held in property company, option to
tax made
ā¢ Buyer will run pub
ā¢ Issue ā property company runs property rental
business, buyer will run pub, not the same kind
of business
ā¢ VAT will be charged on sale of property unless
vendor can revoke his option to tax
67. pkf-francisclark.co.uk
Common issues with TOGC
Example3
ā¢ Vendor owns freehold interest and has tenant
with 25 year lease. Option to tax made
ā¢ Vendor to grant new 999 year lease
ā¢ Vendor says VAT must be charged as per
HMRCās Notice 700/9
ā¢ Incorrect following Robinson Family case
ā¢ Can be TOGC as long as Buyer makes option
to tax and tenant remains in situ
68. pkf-francisclark.co.uk
Common issues with TOGC
ā¢ Issue ā transfers from A>B>C. B
does not trade. A has opted to
tax. Neither transfer can be
TOGC
ā¢ Possible solutions
ā¢ Could A and B or B and C form
a VAT group?
ā¢ Could B trade for a period?
ā¢ Could A revoke its option to
tax
ā¢ Where B is nominee for C
adopt statement of practice
Immediately
consecutive
transfers
Example4
69. pkf-francisclark.co.uk
Issue ā Vendor and buyer are
connected. HMRC challenged
whether buyer had made
notification to landlord to
confirm the anti-avoidance
provisions did not apply
Solutions
ā¢ Include as warranty in SPA
ā¢ Ensure notification otherwise
made in writing
ā¢ Verbal notification
Common issues with TOGCExample5
70. pkf-francisclark.co.uk
Pre-registration input tax
From 2014 to 2016 changed their previous
view on the recovery of VAT on goods held
at the date of registration
VAT may have been disallowed
November 2016 HMRC accepted they were
wrong
Hot topics with HMRC
71. pkf-francisclark.co.uk
Hot topics with HMRC
Definition of dwelling ā separate use and disposal must not
be prohibited
If restriction on certain class of person this is not a
prohibition on use
Connection with a specific building or property is a
prohibition. Could be land, dwelling or commercial
Problem for some independent living units at care homes if
have to be used in conjunction with the care home
72. pkf-francisclark.co.uk
Definition of dwelling ā statutory planning
consent has been granted
Issue with backdated planning consent
Tribunal in Nigel Williams case held that it
was the position at the time the work was
carried out that mattered not the position at
the completion of the project
Hot topics with HMRC
73. pkf-francisclark.co.uk
Historically goods or services
undertaken not seen as a supply
Associated expenditure seen as an
overhead of the development for
which the planning was given and
recoverable if the development
resulted in taxable income
Iberdrola case ā Advocate
Generalās opinion contrary to
HMRCās view on similar facts
What will happen when we leave
the EU?
S106 agreements
Hot topics with HMRC
75. pkf-francisclark.co.uk
.
Focus areas
ā¢ What are fixtures and who should be interested?
ā¢ Practical points on sale & purchase
ā¢ Commercial negotiations & elections
ā¢ Review of existing property portfolio
ā¢ Reduce risk & maximize reliefs
76. pkf-francisclark.co.uk
What are capital allowances?
ā¢ Tax relief for spend on qualifying capital items
ā¢ Depreciation in accounts = not tax deductible
ā¢ Annual Investment Allowance = 100% tax relief
ā¢ Maximum Ā£200,000
ā¢ Writing Down Allowance
ā¢ 18% plant and machinery & 8% for integral features
ā¢ First Year Allowances (100%) for energy or water efficient
technology
ā¢ If no capital allowances then no tax relief until building sold
78. pkf-francisclark.co.uk
Typical values of fixtures in buildings
Building type Qualifying for capital allowances
Offices ā air conditioned 25% - 35%
Retail ā shopping centres 10% - 30%
Hotels 25% - 40%
Industrial units ā landlordās shell 10% - 15%
Nursing homes 25% - 40%
Bars, pubs, restaurants 20% - 40%
79. pkf-francisclark.co.uk
.
Fixtures
ā¢ Fixtures = plant and machinery installed/fixed to building or land
ā¢ New rules from 2014
ā¢ Fixed value, pooling & disposal value requirements
Integral features Plant & machinery
Hot & cold water systems Fitted kitchens
Heating systems Bathroom equipment
Electrical systems & lighting Fire alarms
Air conditioning Data cabling
80. pkf-francisclark.co.uk
ā¢ s198 election (Capital Allowances Act 2001)
ā¢ Sets price of fixtures within building
ā¢ Binds both parties
What is it?
ā¢ Submit to HMRC < 2 years of completion
ā¢ Methods to keep transactions movingWhen?
ā¢ Tax clawback for seller
ā¢ Loss of tax relief for buyer
ā¢ Alternative = first-tier tax tribunal (unlikely)
ā¢ Doing nothing is expensive for both parties
If no
election?
Election to āfixā fixtures
81. pkf-francisclark.co.uk
Scenario Basis from April
2014
Commentary
Seller has claimed
allowances
Include in s198
election
Negotiate, agree a value & ensure
election submitted
Seller could have claimed
allowances but has not
Must make the
vendor pool
Then agree s198
election
Commercial negotiation
Responsibility for costs/ HMRC enquiry
Timing re transaction
Seller could not claim
allowances
Current replacement
value
Surveyor required
Opportunity for āpre-commencement
integral featuresā?
Summary of rules on disposal of property
82. pkf-francisclark.co.uk
.
Example ā no previous claim
ā¢ Client bought a dilapidated building from a college for Ā£1m
ā¢ Fixtures all very old so not much thought given by buyer in
purchase process
ā¢ Fact find
ā¢ No-one could have claimed allowances
ā¢ Capital allowances available to buyer based on replacement costs
83. pkf-francisclark.co.uk
.
Example ā no previous claim (contād)
ā¢ Surveyor appointed to value:
ā¢ Bare value of land
ā¢ Replacement cost of plant and machinery
ā¢ Replacement cost of building
ā¢ Result for client
ā¢ Ā£50k plant and machinery
ā¢ Ā£120k integral features
85. pkf-francisclark.co.uk
Practical considerations when selling
Sellerās
aims
Establish
allowance history
Include in sales
particulars
Maximise
chattels element
CPSE Q32 ā
address early
Aim = low fixtures
value
Any tenantās
fixtures?
Minimise tax clawback
Maximise sale price
86. pkf-francisclark.co.uk
Transaction hold-up - example
ā¢ Furnished holiday let being sold for Ā£800k
ā¢ No capital allowance responses originally provided
ā¢ Seller had not claimed allowances on fixtures
ā¢ Unaware they were able
ā¢ Little/no tax paid on FHL profits ā jointly owned
87. pkf-francisclark.co.uk
Transaction hold-up ā example (2)
ā¢ Seller could have claimed
ā¢ Need to āforceā to pool to access any allowances
ā¢ Then elect
ā¢ Sales contract can deal with this
ā¢ Survey can take place shortly after purchase
ā¢ Buyer paid for survey but retained all of the allowances
ā¢ Nearly Ā£200k of purchase price eligible
ā¢ Election signed shortly afterwards to secure relief
88. pkf-francisclark.co.uk
ā¢ Commercial Property Standard Enquiries
ā¢ Information provided by seller to buyerWhat is it?
ā¢ Capital allowances on fixtures
ā¢ Last question ā ensure not left until lastQuestion 32
ā¢ Ensure responses appropriate
ā¢ Ensure any previous elections identified
ā¢ History of property required
Practical
points
CPSE
89. pkf-francisclark.co.uk
CPSE responses
āNot applicableā is not acceptable for most questions
Question
no.
Question Comment
32.1 Do you hold the property on capital
account as an investor/ owner-occupier
or on revenue account as a developer/
property trader as part of your trading
stock?
It is one or the other!
If stock then cannot claim
capital allowances
32.2 Have you claimed capital allowancesā¦.
on fixturesā¦?
Only N/A if trading stock
If not, provide information
90. pkf-francisclark.co.uk
Practical considerations when buying
Buyerās
aims
Review CPSE to
assess level of
allowances
Impact on
purchase price
Negotiate early
What is basis of
claim?
Aim = high
fixtures value
Options if seller
not claimed?
Maximise capital allowances
Minimise sale price
91. pkf-francisclark.co.uk
Existing portfolio review
Review of
portfolio
ā¢ Beneficial to review existing properties in
portfolio / used in the trade
ā¢ If tax-paying, beneficial to review now
ā¢ Even if loss-making consider claim, for
example if refurbishing
ā¢ May be forced to make claims CAs on sale
92. pkf-francisclark.co.uk
2017 landscape
ā¢ Capital allowance and VAT on transactions need
early consideration
ā¢ Early negotiation is key
ā¢ Missed opportunities for making claims ā 2 year
window is vital
ā¢ Lost tax relief & litigious environment
ā¢ Office of Tax Simplification review
94. pkf-francisclark.co.uk
ā¢ Separate legal entity ā debt
ā¢ Changes to loan interest relief
ā¢ Lower rates of tax on profit
ā¢ Planning opportunities
Why incorporate?
95. pkf-francisclark.co.uk
.
Personal v corporate
Issues
ā¢ Tax liabilities
ā¢ Maximising reliefs
ā¢ Loan interest relief
ā¢ Loss relief
ā¢ Costs of incorporation
ā¢ Company formation and administration
ā¢ Transfer of property
97. pkf-francisclark.co.uk
.
Tax liabilities
ā¢ Income tax
ā¢ Personal Allowance and rates of income tax ā
20%/40%/45%
ā¢ Capital gains tax
ā¢ Annual exemption and 4 rates of tax on property
disposal ā max 28%
ā¢ Corporation tax
ā¢ 19% and indexation allowance on gains
98. pkf-francisclark.co.uk
.
Tax liabilities
Stamp Duty Land Tax - residential
ā¢ 3% surcharge
ā¢ 15% rate of SDLT - more than Ā£500,000 by non-natural
persons
Consideration (Ā£) SDLT rate (%) SDLT rate (%) for company
acquisitions and additional
residential properties
0-125,000 0 3
125,001-250,000 2 5
250,001-925,000 5 8
925,001-1,500,000 10 13
1,500,001 + 12 15
99. pkf-francisclark.co.uk
Stamp Duty Land Tax ā non-residential
ā¢ 6 or more dwellings
ā¢ Mixed use property
Tax liabilities
Consideration (Ā£) SDLT rate (%)
0-150,000 0
150,001-250,000 2
250,001 + 5
100. pkf-francisclark.co.uk
.
Loan interest relief
Example:
Higher rate tax payer
Rental income Ā£50,000
General expenses Ā£10,000
Finance interest Ā£20,000
Tax year 2016/17 2020/21
Gross rental income Ā£50,000 Ā£50,000
General expenses -Ā£10,000 -Ā£10,000
Allowable interest -Ā£20,000 -
Rental profit Ā£20,000 Ā£40,000
Tax at 40% Ā£8,000 Ā£16,000
Less tax reducer - -Ā£4,000
Tax liability on rental
income
Ā£8,000 Ā£12,000
101. pkf-francisclark.co.uk
ā¢ Backdated to 1 April 2017
ā¢ Ā£2m de-minimis for interest deductions
ā¢ Restricted interest deductibility where above Ā£2m de-
minimis
ā¢ Excess interest carried forward
Corporate interest relief
102. pkf-francisclark.co.uk
ā¢ Pre & post 1 April 2017
ā¢ Different methods of calculation for deductible
interest
ā¢ Exemptions available ā elections must be made
ā¢ Applies before loss relief rules
Corporate interest relief
103. pkf-francisclark.co.uk
ā¢ New flexible corporation tax loss regime
ā¢ New rules are backdated to 1 April 2017
ā¢ More flexibility - carry forward of losses and group
relief
ā¢ Trading now set against total profits or group relieved
Corporate loss relief
104. pkf-francisclark.co.uk
ā¢ Property and management expenses available for group
relief
ā¢ Non trade loan relationship deficits available against total
profits and group relief
ā¢ Restrictions:
ā¢ Trade small or negligible
ā¢ Investment business becomes small or negligible
ā¢ Groups where profits >Ā£5m
Corporate loss relief
106. pkf-francisclark.co.uk
.
Incorporation ā pitfalls
ā¢ Capital Gains Tax
ā¢ Connected parties ā deemed MV
ā¢ S.162 incorporation relief?
ā¢ Ramsay v Revenue and Customs [2012]
ā¢ What constitutes a ābusinessā?
ā¢ 20 hours per week
ā¢ Shares v loan account
107. pkf-francisclark.co.uk
ā¢ Stamp Duty Land Tax
ā¢ Market value ā s.53
ā¢ Linked transactions
ā¢ Multiple Dwellings Relief
ā¢ Non-residential rates
ā¢ Partnership incorporation
ā¢ Beware of anti avoidance legislation ā s.75A
Incorporation ā pitfalls
108. pkf-francisclark.co.uk
ā¢ Profit extraction
ā¢ Dividends
ā¢ Ā£5,000 dividend allowance (reducing to Ā£2,000)
ā¢ Salary
ā¢ Income Tax and NIC
ā¢ Pension contributions
ā¢ Loan repayment
Incorporation ā pitfalls
109. pkf-francisclark.co.uk
.
ā¢ Historically, investment companies subject to higher
rates of corporation tax
ā¢ No longer applies
ā¢ Subject to future changes in legislation
ā¢ Proven track record - investment companies work!
ā¢ Alternative to traditional trust structure
ā¢ Flexibility, control and asset protection
ā¢ Estate planning benefits
Family investment companies
110. pkf-francisclark.co.uk
Family investment companies
Company Trust
Capital gains tax and stamp duty
land tax on transfer
Inheritance tax and capital gains
tax on initial transfer
Corporation tax on profits - 19% Income tax on profits ā 45%
Corporation tax on gains (19%),
Indexation allowance
Capital gains tax on gains ā
(20%/28%), annual exemption
(Ā£5,650)
Income Tax/Capital gains tax on
company distributions
Inheritance tax on distributions
and 10 yearly anniversary of trust
creation
Shareholders Beneficiaries
Company directors Trustees
111. pkf-francisclark.co.uk
Family investment companies
Family Investment
company
Lenders
(e.g. parents)
Shareholders
(e.g. parents, children and
grandchildren)
Transfer of property in
return for loan of Ā£1m
Loan repayment of Ā£1m
From post tax profits
Shares
Dividends
112. pkf-francisclark.co.uk
ā¢ Share structure
ā¢ Different share classes
ā¢ Voting v Non-voting
ā¢ Golden share
ā¢ Company constitution
ā¢ Restrictions
ā¢ Pre-emption rights
ā¢ Directors
ā¢ Day to day control
Family investment companies
113. pkf-francisclark.co.uk
ā¢ Loan arrangement
ā¢ Debenture - protect initial investment
ā¢ Interest v non-interest repayment terms
ā¢ Is the loan a āchargeable lifetime transferā?
ā¢ If yes, immediate IHT charge ā 20%
ā¢ Seek professional advice
ā¢ Accounting under FRS 102
ā¢ Small entities
Family investment companies
114. pkf-francisclark.co.uk
ā¢ Inheritance Tax
ā¢ Gift of shares from outset
ā¢ No IHT consequence ā no value
ā¢ Loan account
ā¢ Frozen asset value
ā¢ Spend it!
ā¢ Gift of loan account
ā¢ Potentially exempt transfer
ā¢ 7 year clock
Family investment companies
115. pkf-francisclark.co.uk
ā¢ Growth in asset value
ā¢ Outside estate for IHT purposes
ā¢ No BPR on shares ā investment v trade
ā¢ BUT do nothing = 40% IHT on value of personally
owned properties
Family investment companies
116. pkf-francisclark.co.uk
ā¢ Planning re profit extraction
ā¢ Adult family members
ā¢ Utilise personal allowances and dividend allowances
ā¢ Retain profits in the company
Family investment companies
117. pkf-francisclark.co.uk
EXAMPLE
ā¢ In 2017, Dad incorporates 3 rental properties ā
ā¢ Property A - Ā£200k MV
ā¢ Property B - Ā£450k MV
ā¢ Property C - Ā£350k MV
ā¢ Sets up company:
ā¢ 2 adult children as shareholders ā 50 ord. shares each
ā¢ Children and Dad as directors
ā¢ Loan account of Ā£1m to Dad
Family investment companies
118. pkf-francisclark.co.uk
EXAMPLE (cont)
ā¢ Annual post tax profits Ā£40,000
ā¢ Annual loan repayment to Dad of Ā£40,000 and residue
retained in company
ā¢ 10 years later, properties are worth Ā£1.4m and Dad
owed Ā£600k
ā¢ Net company value Ā£800k
ā¢ Outside of Dadās estate
ā¢ IHT saving on Ā£800k x Ā£40% = 320k
Family investment companies
120. (c) copyright PKF Francis Clark, 2017
You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically, publish, broadcast or otherwise
circulate either within your business or for public or commercial purposes any of (or any part of) these materials and / or any services provided by PKF Francis
Clark in any format whatsoever unless you have obtained prior written consent from PKF Francis Clark to do so and entered into a licence.
To the maximum extent permitted by applicable law PKF Francis Clark excludes all representations, warranties and conditions (including, without limitation,
the conditions implied by law) in respect of these materials and /or any services provided by PKF Francis Clark.
These materials and /or any services provided by PKF Francis Clark are designed solely for the benefit of delegates of PKF Francis Clark.
The content of these materials and / or any services provided by PKF Francis Clark does not constitute advice and whilst PKF Francis Clark endeavours to
ensure that the materials and / or any services provided by PKF Francis Clark are correct, we do not warrant the completeness or accuracy of the materials
and /or any services provided by PKF Francis Clark; nor do we commit to ensuring that these materials and / or any services provided by PKF Francis Clark
are up-to-date or error or omission-free.
Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protected material is subject to current law
and related regulations on the re-use of Crown copyright extracts in England and Wales.
These materials and / or any services provided by PKF Francis Clark are subject to our terms and conditions of business as amended from time to time, a
copy of which is available on request.
Our liability is limited and to the maximum extent permitted under applicable law PKF Francis Clark will not be liable for any direct, indirect or consequential
loss or damage arising in connection with these materials and / or any services provided by PKF Francis Clark, whether arising in tort, contract, or otherwise,
including, without limitation, any loss of profit, contracts, business, goodwill, data, income or revenue. Please note however, that our liability for fraud, for
death or personal injury caused by our negligence, or for any other liability is not excluded or limited.
PKF Francis Clark is a trading name of Francis Clark LLP. Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered
number OC349116. The registered office is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for
inspection and at www.pkf-francisclark.co.uk. The term āPartnerā is used to refer to a member of Francis Clark LLP or to an employee. Registered to carry on
audit work in the UK and Ireland, regulated for a range of investment business activities and licensed to carry out reserved legal activity of non-contentious
probate in England and Wales by the Institute of Chartered Accountants in England and Wales. Partners acting as insolvency practitioners are licensed in the
UK by the Institute of Chartered Accountants in England and Wales. A partner appointed as Administrator or Administrative Receiver acts only as agent of the
insolvent entity and without personal liability. Francis Clark LLP is a member firm of the PKF International Limited network of legally independent firms and
does not accept responsibility or liability for the actions or inactions on the part of any other individual member firm or firms.
Disclaimer & copyright
pkf-francisclark.co.uk
Editor's Notes
SDLT on Ā£1m = Ā£39,500
SDLT on Ā£1m = Ā£73,750 = Ā£34,250 higher than non-res
Welcome
As indicated in the introduction our overarching theme today is complexity so have chosen three areas which have (or might) represent new areas of complexity
Start with a look at some recent developments in relation to rules governing distributions, including new challenges following implementation of FRS 102, and the updated guidance on what constitutes distributable profit
Spotlight on intangible assets and practical issues to consider
Finally a new area but one which seems to have mushroomed in a relatively short space of time ā web-based reporting of business information which, while not directly financial is likely to land in the FDs lap
Stress ā this is accounting definition ā does not mean applies in the same way for tax or VAT
Use in business = offices, materials yards, equipment sheds
Choice ā this is for back to back leases ā i.e. lease in and lease on
Reference to construction price = for assets still under construction that are intended from the outset to be investment property
Subsequently = e.g. at end of financial reporting period in which acquired or built
- carry at fair value
Property under construction āshould be adjusted to fair value, but may depend on whether can asses far value of an incomplete building
Undue cost and effort ā usually relevant where cost of obtaining valuation is onerous relative to benefit of information.
- too few transactions to give sense of market value
- Not possible to use alternative basis of assessing value e.g. by using rental values and rental yield data
So, given that FRS 102 has created additional complexity around what constitutes distributable profit one issue is how we manage that complexity and how we keep track of what we can distribute
- first bullet point ā just read it out
BUT
Second bullet point ā directors make the recommendations to shareholders, pay interim dividends, decide whether prefs can be redeemed etc so they need to know how much distributable profit they have available ā could do that by memo account in nominal ledger or by keeping separate record ā eg excel
Third bullet point ā still question of how to manage shareholdersā expectations if they donāt understand what can and canāt be distributed ā so some information in the accounts isnāt a bad idea
Builders merchants is a fully taxable business
VAT incurred Ā£60K
For CGS building built on land have to be considered as one CGS asset therefore the Ā£250K is breached
Years 2 ā 10 review recovery of Ā£6K VAT
Usual position of a licence to occupy would be exempt unless an option to tax had been made.
VAT on sale Ā£70K
Sale by X is automatically standard rated as the property is less than 3 years old and freehold interest being sold
Check SDLT on sale
Should pension fund make an option to Tax ? Advantages and disadvantages