Property Sector Annual Update 2017

Property sector annual update
28 September 2017

Chairman’s welcome
John Endacott – Partner and Head of Tax

pkf-francisclark.co.uk
.
What’s hot in the property sector?!
• Housing crisis? Government or industry solution?
• Continuing taxation squeeze on landlords?
• Autumn budget – any good news likely?
• The elephant in the room…Brexit of course!

Programme
Structuring property development SPVs – Ian Pring
Accounting issues for property companies – Stephanie Henshaw
VAT update – Julie Towers
Capital allowances – Heather Britton
Property incorporation – Julian Smith

Structuring property development SPVs
Ian Pring – Tax Director

Structuring property development SPVs
• Some tax considerations for developers when determining land
ownership structure
• Individual or company?
• Structure used in the past
• New anti avoidance rules
• Possible future structure
• Stamp duty land tax on purchase and key reliefs available
• SDLT rates
• Mixed-use property
• Multiple Dwellings Relief
• Pre completion transactions

Individual or company ownership
structure – tax considerations
Take for example a business with profits of £100,000
Structure Type of tax Tax Total Net in hand
Individual Income tax (40%) £40,000
National insurance (2%) £2,000 £42,000 £58,000
Company Corporation tax (19%) £19,000
Plus dividend to shareholders (32.5%) £26,325 £45,325 £54,675
Or liquidation with Entrepreneurs’ Relief:
Plus capital gains tax (10%) £8,100 £27,100 £72,900
Or liquidation without ER
Plus capital gains tax (20%) £16,200 £35,200 £64,800

Individual or company ownership
structure – tax considerations
Company more tax efficient where:
• profit extraction by way of liquidation distribution or
• if profits to be retained for re-investment

Special purpose vehicles (SPVs)
In development and construction, SPVs are
• legal entities
• set up for a specific purpose to isolate risk
Commonly in the form of a company

Structure commonly used in the past
SPV 1 re
development 1
SPV 2 re
development 2
SPV 3,4, etc
Individual
shareholder(s)

Profit extraction
As each development completes in turn:
• Development sale proceeds received by SPV and corporation
tax paid
• SPV liquidated and liquidation distribution paid to individual
shareholders(s)
• Where Entrepreneurs’ Relief conditions satisfied – 5% share
ownership held and employee/director for at least 12 months
• Liquidation distribution taxed as capital gain at 10% up to
lifetime allowance, currently £10m

Targeted anti-avoidance rule (TAAR)
Aimed at phoenixing businesses:
• 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
• 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

TAAR conditions
• Condition A – The individual receiving the distribution held at least 5% of the
company being liquidated.
• Condition B – The company being wound up was a ‘close company’ at any time
within two years of the start of the liquidation process.
• Condition C – 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.
• Condition D – The main purpose, or one of the main purposes, of the winding
up is to secure a reduction in income tax.

Consequences of TAAR biting
Liquidation distribution subject to income tax at dividend tax
rates:
• 32.5% for higher rate taxpayers and/or 38.1% for additional rate
taxpayers
• Instead of capital gains tax at 10% with Entrepreneurs’ Relief
available or 20% otherwise

HMRC guidance
• HMRC guidance issued Summer 2017 - not very helpful!
• Of concern, guidance doesn’t cover off whether HMRC would
take the view that condition D is met in cases such as the
traditional SPV structure described
• 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
• Document commercial reasons for winding-up!

Alternative future ownership structure
Shareholder(s)
Holding
company
SPV 2SPV 1 SPV 3, 4, etc

Group structure
• Commercial requirements – segregation of risk – still met
• Liquidation distribution on winding up SPV is exempt from tax in the
hands of holding company
• Beneficial if post tax proceeds to be re-invested in new
developments
• 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

Stamp Duty Land Tax (‘SDLT’)
rates of charge – 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
£150,000
0%
So much as exceeds £150,000, but
does not exceed £250,000
2%
The remainder (if any) 5%

Surcharge SDLT – residential properties
Threshold New additional property SDLT rate
£0 - £125,000 3%
£125,000 - £250,000 5%
£250,000 - £925,000 8%
£925,000 – £1.5m 13%
Over £1.5m 15%

What is residential property?
• 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
• Non residential property is anything which is not entirely residential
• Any single transaction involving the acquisition of six or more
residential properties is deemed a non-residential transaction
• A residential property transaction which includes land that is not
residential property is “mixed use” and therefore non-residential

Residential or non residential?
`

What is mixed use property?
Legislation: “Land which includes land that is not residential
property”
Helpful factors:
 Recent evidence of commercial use
 Different title numbers
 Use restriction

Wholly residential?

“development site with PP for 4 new homes plus existing 5
bedroom house set in 0.6 of an acre”

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 – residential rates: £47,600
Filing position taken:
SDLT – commercial rates: £25,500
£22,100 SDLT saving to client

Multiple dwellings relief
• Transactions the main subject matter of which includes
interests in a least two dwellings
• 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

• Purchase of building for £2m, comprising 24 flats
• Each flat qualified as a self-contained dwelling
• Default non-residential SDLT treatment = £89,500 SDLT
• MDR claim = £60,000 SDLT
• 2,000,000/24 = 83,333
• 83,333 x 3% = 2,500
• 2,500 x 24 = 60,000
• £29,500 SDLT saving with MDR claim (via SDLT return)

• Purchase of hotel by developer
• Sold with vacant possession, with detailed planning to convert
to 14 apartments
• Intended as purchase of residential units, negotiated surveyor
access pre-completion, ground works undertaken
• Hotel is non-residential but process of adaption to residential
use clearly underway at completion combined with marketing
and planning
• If non-residential rates applied, SDLT of £79,500
• Filing position taken that MDR applied resulting in SDLT of
£55,000 = £24,500 SDLT saving

Pre completion transaction
(sub-sale/transfer of rights)
• Onward sale of whole
A sells to B sells on to C
• Onward sale of part
A sells to B sells part on to C
Can eliminate/reduce SDLT payable by B if properly structured

SDLT amendment & overpayment claims
• Purchaser may amend a land transaction return within 12
months of its filing date
• Overpayment relief claim (re ‘error or mistake’) can be made
within 4 years

Accounting issues for property companies
Stephanie Henshaw - Corporate Partner

Programme
• Valuations – how has FRS 102 changed the
landscape?
• Deferred tax and property
• New rules for below market rate loans
• Leases under FRS 102
• Treatment of incentives
• When to provide for potential costs

Accounting – one size does not fit all!
Micro
(choice)
Non Micro
(default)

Valuations: how has FRS 102 changed the landscape?
• What is “investment
property”?
Definition
• Requirements
• Impact on accountsValuation

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 – landlord
holding property
under operating
lease, subject to
conditions,
property by
property basis
What is “investment property” for accounting purposes?

Property under construction?
Fixed assets:
Where intended
for use in the
business
Work in progress:
Where intended
for sale

How is investment property valued?
• Purchase or construction
price
• Legal fees, taxesInitially
• Fair value at reporting date
• Unless undue cost or effort
to obtain reliable valueSubsequently

Assessing fair value
• Broadly, fair value = open market value
• No specific accounting requirements as to who should value
• Must disclose in notes to accounts if valuer is not independent
• Valuation for bank purposes may not be appropriate
• No specified frequency for revaluation
• Provided valuation in accounts is materially correct
• Covenant implications – net worth or LTV (valuation for
bank)

Reporting valuations – how the rules have changed
Old rules FRS 102
Profit and loss £000s Profit and loss £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

Changes in value of investment property
• Reported directly within profit and loss account, not via
revaluation reserve
• Impacts reported profit for year (whether gain or loss)
• Communication with users of accounts
• Ongoing profit from rental activities v valuation gains/ losses
• Impact on profit-related bank covenants
• Impact on value-sharing agreements – JVs/SPVs,
shareholder agreements

Reporting valuations – balance sheet impact
Old rules FRS 102
£000s £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

• Distributions = dividends, share buybacks
• Must be supported by “realised” (cash) profit
• Property valuation is “unrealised” profit
• Extent of “realised” profit may not be evident from
accounts under FRS 102 – no requirement for disclosure
• Directors need to know to avoid potential illegal
distribution (and personal liability)
• Options?
Practical implications - distributions

Narrative note explains
unrealised element of
retained profit
Transfer unrealised
profit annually to
separate “other”
reserve
Options for tracking unrealised profit

Presenting an “other” reserve
Original FRS
102
After reserve
transfer
£000s £000s
Investment
property
14,500 Investment
property
14,500
Other net
assets
1,810 Other net
assets
1,810
16,310 16,310
Investment
property
reserve
11,500
Profit and loss
account
16,300 Profit and loss
account
4,800
16,310 16,310

Accessing unrealised profit
Squeezed Limited wants to redeem some shares for £1m. It
has £14m of retained profit of which £13.8m relates to
unrealised property valuation gains.
£000s
Net assets 15,000
Share
capital
1,000
P&L 14,000
15,000 Realised
profit
£0.2m
Unrealised
profit
£13.8m
<£1m
buyback
price
Potential solution:
1. Capitalise £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
£1m of realised profit to
support buyback

• Deferred Tax = accounting device to recognise tax effect
of timing differences between accounting and taxable
profit
• Property examples:
• Capital allowances (tax) v depreciation (accounts)
• Property valuation movements recognised in P&L, not
taxable
• Historically, disclosure only for deferred tax on valuations
• Post FRS 102, provide for tax in full
Deferred tax and property

Deferred tax on valuations – balance sheet impact
Old rules FRS 102
£000s £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

• Increase in liabilities, although no cash impact
• Potential mitigation via indexation of original cost
• Impact of reduced net worth on bank covenant
compliance?
• Additional tax charge element, reducing profit for year
• Deferred tax on investment property valuation gains is
unrealised so no impact on distributions
• Impact on bank covenant compliance?
Practical implications

FRS 102 and interest free loans
Old rules
£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

• Particularly relevant to non-small companies (turnover
>£10.2m, total assets > £5.1m)
• Exemption for small companies with loans from director
shareholders
• Non-market rate loans (interest free or below market rate)
• Not repayable on demand
• Discount over life of loan
• Using estimated market rate of interest for loan of size and
duration
• Discount element is initially treated as capital contribution
• Discount “unwinds” over life loan as P&L expense
FRS 102: non-market rate loan treatment

FRS 102 and interest free loans
(borrower)
Old rules FRS 102
£000s £000s
Interest free loan (6,000) Interest free loan (discounted) (4,700)
16,310 17,610
Revaluation reserve 11,500 Capital contribution (not
distributable)
1,300
16,310 17,610

Overall impact of FRS 102 changes
Old rules FRS 102
£000s £000s
Interest free loan (6,000) Interest free loan (discounted) (4,700)
Deferred tax on property valuations (1,955)
16,310 15,655
Revaluation reserve 11,500 Investment property reserve (not
distributable)
9,545
Capital contribution (not distributable) 1,300
16,310 15,655

• Rent free periods, reverse premiums, contribution to fit out
• Spread on a straight line basis in accounts, not as cash
received/ paid
Impact:
• Longer period of spread
• Mismatch of profit impact v cash
• 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

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?

VAT Update
Julie Towers - VAT Partner

Agenda
• VAT and commercial property
• Common issues with transfer of going concern
• Hot topics with HMRC

.
VAT and commercial property
Builders Merchants purchased land
for £100k plus VAT in 2015
Engaged contractor to build new
commercial building £200K plus VAT
Building completed in May 2016 and
used by the builders merchants

BUILDERS
MERCHANT
Can recover
VAT on land
and build costs?
Initial use for
fully taxable
business
purpose
As expenditure
> £250K (plus
VAT) falls within
Capital Goods
Scheme

During 2017 licence granted to a
third party to use part of the
building for storage
• Storage automatically standard rated
• No clawback under the Capital Goods
Scheme

2018 the third
party is no longer
a tenant
Builders
merchant sells
the freehold to a
pension fund for
£350K plus VAT.
Pension fund
grants a lease to
builders
merchant on part
of the building
Can the pension fund
recover the VAT?

2019 pension fund grants new
lease to café
6 month rent free period
• No benefit to pension fund
• Benefit to pension fund
In return café carries out works

Buyer must
purchase a
business/part
Buyer should run
‘same kind of
business’
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)

Common issues with TOGC
Example1
• Vendor operates car park, option to tax
made
• Issue – vendor does not actually run the
car park, subsidiary does
• Vendor has no business to sell therefore
no TOGC
• VAT will be charged unless vendor can
revoke his option to tax

Example2
• Vendor operates pub
• Property held in property company, option to
tax made
• Buyer will run pub
• Issue – property company runs property rental
business, buyer will run pub, not the same kind
of business
• VAT will be charged on sale of property unless
vendor can revoke his option to tax

Example3
• Vendor owns freehold interest and has tenant
with 25 year lease. Option to tax made
• Vendor to grant new 999 year lease
• Vendor says VAT must be charged as per
HMRC’s Notice 700/9
• Incorrect following Robinson Family case
• Can be TOGC as long as Buyer makes option
to tax and tenant remains in situ

• Issue – transfers from A>B>C. B
does not trade. A has opted to
tax. Neither transfer can be
TOGC
• Possible solutions
• Could A and B or B and C form
a VAT group?
• Could B trade for a period?
• Could A revoke its option to
tax
• Where B is nominee for C
adopt statement of practice
Immediately
consecutive
transfers
Example4

Issue – Vendor and buyer are
connected. HMRC challenged
whether buyer had made
notification to landlord to
confirm the anti-avoidance
provisions did not apply
Solutions
• Include as warranty in SPA
• Ensure notification otherwise
made in writing
• Verbal notification
Common issues with TOGCExample5

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

Definition of dwelling – 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

Definition of dwelling – 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

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 – Advocate
General’s opinion contrary to
HMRC’s view on similar facts
What will happen when we leave
the EU?
S106 agreements

Capital allowances and commercial property
Heather Britton – Tax Director

.
Focus areas
• What are fixtures and who should be interested?
• Practical points on sale & purchase
• Commercial negotiations & elections
• Review of existing property portfolio
• Reduce risk & maximize reliefs

What are capital allowances?
• Tax relief for spend on qualifying capital items
• Depreciation in accounts = not tax deductible
• Annual Investment Allowance = 100% tax relief
• Maximum £200,000
• Writing Down Allowance
• 18% plant and machinery & 8% for integral features
• First Year Allowances (100%) for energy or water efficient
technology
• If no capital allowances then no tax relief until building sold

Who should be interested?
Property investors
Owner-occupiers
Property developers
Furnished holiday
lets

Typical values of fixtures in buildings
Building type Qualifying for capital allowances
Offices – air conditioned 25% - 35%
Retail – shopping centres 10% - 30%
Hotels 25% - 40%
Industrial units – landlord’s shell 10% - 15%
Nursing homes 25% - 40%
Bars, pubs, restaurants 20% - 40%

.
Fixtures
• Fixtures = plant and machinery installed/fixed to building or land
• New rules from 2014
• 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

• s198 election (Capital Allowances Act 2001)
• Sets price of fixtures within building
• Binds both parties
What is it?
• Submit to HMRC < 2 years of completion
• Methods to keep transactions movingWhen?
• Tax clawback for seller
• Loss of tax relief for buyer
• Alternative = first-tier tax tribunal (unlikely)
• Doing nothing is expensive for both parties
If no
election?
Election to ‘fix’ fixtures

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 ‘pre-commencement
integral features’?
Summary of rules on disposal of property

.
Example – no previous claim
• Client bought a dilapidated building from a college for £1m
• Fixtures all very old so not much thought given by buyer in
purchase process
• Fact find
• No-one could have claimed allowances
• Capital allowances available to buyer based on replacement costs

.
Example – no previous claim (cont’d)
• Surveyor appointed to value:
• Bare value of land
• Replacement cost of plant and machinery
• Replacement cost of building
• Result for client
• £50k plant and machinery
• £120k integral features

Conflicting aims?
Seller
Minimise
balancing
charge
Purchaser
Maximise capital
allowances

Practical considerations when selling
Seller’s
aims
Establish
allowance history
Include in sales
particulars
Maximise
chattels element
CPSE Q32 –
address early
Aim = low fixtures
value
Any tenant’s
fixtures?
Minimise tax clawback
Maximise sale price

Transaction hold-up - example
• Furnished holiday let being sold for £800k
• No capital allowance responses originally provided
• Seller had not claimed allowances on fixtures
• Unaware they were able
• Little/no tax paid on FHL profits – jointly owned

Transaction hold-up – example (2)
• Seller could have claimed
• Need to ‘force’ to pool to access any allowances
• Then elect
• Sales contract can deal with this
• Survey can take place shortly after purchase
• Buyer paid for survey but retained all of the allowances
• Nearly £200k of purchase price eligible
• Election signed shortly afterwards to secure relief

• Commercial Property Standard Enquiries
• Information provided by seller to buyerWhat is it?
• Capital allowances on fixtures
• Last question – ensure not left until lastQuestion 32
• Ensure responses appropriate
• Ensure any previous elections identified
• History of property required
Practical
points
CPSE

CPSE responses
‘Not applicable’ 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 allowances….
on fixtures…?
Only N/A if trading stock
If not, provide information

Practical considerations when buying
Buyer’s
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

Existing portfolio review
Review of
portfolio
• Beneficial to review existing properties in
portfolio / used in the trade
• If tax-paying, beneficial to review now
• Even if loss-making consider claim, for
example if refurbishing
• May be forced to make claims CAs on sale

2017 landscape
• Capital allowance and VAT on transactions need
early consideration
• Early negotiation is key
• Missed opportunities for making claims – 2 year
window is vital
• Lost tax relief & litigious environment
• Office of Tax Simplification review

Property incorporation
Julian Smith - Tax Partner

• Separate legal entity – debt
• Changes to loan interest relief
• Lower rates of tax on profit
• Planning opportunities
Why incorporate?

.
Personal v corporate
Issues
• Tax liabilities
• Maximising reliefs
• Loan interest relief
• Loss relief
• Costs of incorporation
• Company formation and administration
• Transfer of property

.
Personal v corporate
Issues
• Profit extraction
• Maximising allowances
• Passing on property
• Inheritance tax
• Estate planning

.
Tax liabilities
• Income tax
• Personal Allowance and rates of income tax –
20%/40%/45%
• Capital gains tax
• Annual exemption and 4 rates of tax on property
disposal – max 28%
• Corporation tax
• 19% and indexation allowance on gains

.
Tax liabilities
Stamp Duty Land Tax - residential
• 3% surcharge
• 15% rate of SDLT - more than £500,000 by non-natural
persons
Consideration (£) 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

Stamp Duty Land Tax – non-residential
• 6 or more dwellings
• Mixed use property
Tax liabilities
Consideration (£) SDLT rate (%)
0-150,000 0
150,001-250,000 2
250,001 + 5

.
Loan interest relief
Example:
Higher rate tax payer
Rental income £50,000
General expenses £10,000
Finance interest £20,000
Tax year 2016/17 2020/21
Gross rental income £50,000 £50,000
General expenses -£10,000 -£10,000
Allowable interest -£20,000 -
Rental profit £20,000 £40,000
Tax at 40% £8,000 £16,000
Less tax reducer - -£4,000
Tax liability on rental
income
£8,000 £12,000

• Backdated to 1 April 2017
• £2m de-minimis for interest deductions
• Restricted interest deductibility where above £2m de-
minimis
• Excess interest carried forward
Corporate interest relief

• Pre & post 1 April 2017
• Different methods of calculation for deductible
interest
• Exemptions available – elections must be made
• Applies before loss relief rules
Corporate interest relief

• New flexible corporation tax loss regime
• New rules are backdated to 1 April 2017
• More flexibility - carry forward of losses and group
relief
• Trading now set against total profits or group relieved
Corporate loss relief

• Property and management expenses available for group
relief
• Non trade loan relationship deficits available against total
profits and group relief
• Restrictions:
• Trade small or negligible
• Investment business becomes small or negligible
• Groups where profits >£5m
Corporate loss relief

• Refinancing
• Existing finance arrangements
• Liaising with existing lenders
• Cost of commercial debt
Incorporation – pitfalls

.
• Capital Gains Tax
• Connected parties – deemed MV
• S.162 incorporation relief?
• Ramsay v Revenue and Customs [2012]
• What constitutes a “business”?
• 20 hours per week
• Shares v loan account

• Stamp Duty Land Tax
• Market value – s.53
• Linked transactions
• Multiple Dwellings Relief
• Non-residential rates
• Partnership incorporation
• Beware of anti avoidance legislation – s.75A

• Profit extraction
• Dividends
• £5,000 dividend allowance (reducing to £2,000)
• Salary
• Income Tax and NIC
• Pension contributions
• Loan repayment

.
• Historically, investment companies subject to higher
rates of corporation tax
• No longer applies
• Subject to future changes in legislation
• Proven track record - investment companies work!
• Alternative to traditional trust structure
• Flexibility, control and asset protection
• Estate planning benefits
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 – 45%
Corporation tax on gains (19%),
Indexation allowance
Capital gains tax on gains –
(20%/28%), annual exemption
(£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

Family Investment
company
Lenders
(e.g. parents)
Shareholders
(e.g. parents, children and
grandchildren)
Transfer of property in
return for loan of £1m
Loan repayment of £1m
From post tax profits
Shares
Dividends

• Share structure
• Different share classes
• Voting v Non-voting
• Golden share
• Company constitution
• Restrictions
• Pre-emption rights
• Directors
• Day to day control

• Loan arrangement
• Debenture - protect initial investment
• Interest v non-interest repayment terms
• Is the loan a “chargeable lifetime transfer”?
• If yes, immediate IHT charge – 20%
• Seek professional advice
• Accounting under FRS 102
• Small entities

• Inheritance Tax
• Gift of shares from outset
• No IHT consequence – no value
• Loan account
• Frozen asset value
• Spend it!
• Gift of loan account
• Potentially exempt transfer
• 7 year clock

• Growth in asset value
• Outside estate for IHT purposes
• No BPR on shares – investment v trade
• BUT do nothing = 40% IHT on value of personally
owned properties

• Planning re profit extraction
• Adult family members
• Utilise personal allowances and dividend allowances
• Retain profits in the company

EXAMPLE
• In 2017, Dad incorporates 3 rental properties –
• Property A - £200k MV
• Property B - £450k MV
• Property C - £350k MV
• Sets up company:
• 2 adult children as shareholders – 50 ord. shares each
• Children and Dad as directors
• Loan account of £1m to Dad

EXAMPLE (cont)
• Annual post tax profits £40,000
• Annual loan repayment to Dad of £40,000 and residue
retained in company
• 10 years later, properties are worth £1.4m and Dad
owed £600k
• Net company value £800k
• Outside of Dad’s estate
• IHT saving on £800k x £40% = 320k

Any questions?
John Endacott – Partner and Head of Tax

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Property Sector Annual Update 2017

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