Contributed By Hawkins Hatton Corporate Lawyers Ltd
Sale of real estate is exempt from VAT unless the seller has opted to tax the land and buildings. Most new-build commercial properties will attract standard-rated VAT at 20%.
If, however, a property is acquired with a sitting tenant, the 'transfer as a going concern' exception will apply provided both parties are VAT registered and hence no VAT will be payable on the purchase price. However, this exemption only applies where the buyer opts to tax the property before the transfer.
Business rates will be payable on the occupation of a business premises, examples of which include:
The domestic rates will be payable to the local council in March of each year in respect of the amount required in the following tax year.
The following reliefs from business rates are available:
Tax is payable on rental income from property as outlined below.
Property Owned by UK-resident individuals
An individual must pay tax on any profit made from renting out property. The amount paid depends on how much profit is made and an individual’s personal circumstances.
Property Owned by a UK Company
A company must pay corporation tax (at the current rate of 19%) on the profit it makes from renting out a property.
Allowable expenses are items which need to be spent in the day-to-day running of the property (eg, letting agents’ fees, council tax, etc).
Allowable expenses do not include ‘capital expenditure’. This includes buying a property or renovating it beyond repairs for wear and tear.
In addition, tax relief can be claimed on money spent on replacing domestic items (eg, beds, sofas, etc). Such items must have been bought for use by the tenants and the item replaced must no longer be used.
The Non-resident Landlord Scheme
A landlord who resides abroad for more than six months of the year must pay tax on any rental income received from a property in the UK. If the landlord is a company or trustee, the rules relating to their usual place of abode apply. The tax is collected using the Non-resident Landlord (NRL) Scheme. The tax can be paid by either the letting agent or tenant.
Capital Gains Tax
CGT is payable by an individual on the disposal of residential real estate in the UK (other than an individual's main residence) in respect of the gain (profit) made at a rate of 28% for a higher-rate tax payer, or a lower rate for a basic rate tax payer. A 20% CGT rate applies for commercial property.
A UK-based company will pay corporation tax at a rate of 19% on the investment gain (subject to any indexation allowance, which now only accrues up to 31 December 2017) on the disposal of a commercial or residential property.
Individuals pay 'non-resident' CGT (NRCGT) at 28% on any (post-April 2015) gains made on UK residential property if they are non-resident for tax purposes.
From 6 April 2019, NRCGT is extended to (post-April 2019) gains in respect of commercial property, albeit with certain exemptions.
The Tax Cuts and Jobs Bill was signed into law on 22 December 2017. This is intended to bolster real estate development and commercial real estate transactions.
Corporations will see a significant tax saving as the top rate of corporate tax has been reduced from 35% to a flat 21%.
Developers can deduct interest expenses for a variety of real estate activities.
Owners of property can make a large capital gain but defer any tax as long as they use the proceeds to buy some other property. Owners of commercial real estate could flip the properties without ever paying any capital gains tax.
Carried interest will allow for taxation at lower capital gains rates rather than ordinary income rates for assets held for at least three years (as opposed to one year).