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Most residential flats are owned on Long Leasholds but this creates tax issues – Stamp Duty, Capital Gains, Income Tax/Corporation Tax.
Fortunately ESC/D39 can be applied to Lease Extentions
In practice, the surrender of an existing lease and the grant of a new lease should not be treated as a disposal for Capital Gains Tax purposes if the taxpayer so wishes and all of the following conditions are satisfied:
- the transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arms length;
- the transaction is not part of or connected with a larger scheme or series of transactions;
- a capital sum is not received by the tenant;
- the extent of the property under the new lease is the same as that under the old lease;
- the terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences should be ignored.
The terms of a particular lease may provide for its extension if the tenant so requests. If such a request is made, the extension of the lease does not have any immediate Capital Gains Tax consequences.
In 2002, Commonhold was introduced in the Commonhold and Leasehold Reform Act 2002 (CLRA 2002). Commonhold can be applied to both Commercial and Residential buildings.
The advantage of commonhold is that it gets rid of the concept of the declining asset – sellers and purchasers of commonhold properties will no longer have to worry about how many years are left on the lease.
Under the commonhold system, all flat owners will automatically be members of a company – the Commonhold Association – that owns the freehold and thus the block.
This means that it should be easier to run the building for the benefit of the flat owners.
However, blocks of flats will still need to be managed.
And as a form of community ownership, commonhold brings with it various tensions.
To alleviate any possible problems, members will have to sign up to a “Commonhold Community Statement”.
This statement will set out all the rules and regulations you normally find in a lease, for example rules about subletting, pets, noise and use of gardens.
Which is better?
Most residential properties (dwellings) are owned directly by individuals. But in some cases a dwelling may be owned by a company, a partnership with a corporate member or other collective investment vehicle. In these circumstances the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.
ATED is a tax payable by companies on high value residential property (a dwelling). It came into effect from 1 April 2013 and is payable each year.
Budget 2014 announced a reduction in the threshold from £2 million to £500,000 to be introduced over 2 years. From 1 April 2015 a new band will come into effect for properties with a value greater than £1 million but not more than £2 million with an annual charge of £7,000. From 1 April 2016 a further new band will come into effect for properties with a value greater than £500,000 but not more than £1 million with an annual charge of £3,500.
Chargeable amounts for chargeable period 1 April 2014 to 31 March 2015
|Property value||Annual chargeable amount 2014 to 15|
|More than £2 million but not more than £5 million||£15,400|
|More than £5 million but not more than £10 million||£35,900|
|More than £10 million but not more than £20 million||£71,850|
|More than £20 million||£143,750|
There are reliefs that might lead to you not having to pay any ATED. You can only claim these by completing and sending an ATED return.
A dwelling might get relief from ATED if it is:
- let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
- open to the public for at least 28 days per annum, if part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will apply to the whole property
- part of a property trading business and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
- part of a property developers trade where the dwelling is acquired as part of a property development business the property was purchased with the intention to re-develop and sell it on and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
- for the use of employees of the company, for the company’s commercial business and where the employee does not have an interest (directly or indirectly) in the company of more than 10%, the employee’s duties must not include services for any present or future occupation of the property by someone connected with the company, the relief is also available where a partner in a partnership does not have an interest of more than 10% in the partnership
- a farmhouse, if it is occupied by a qualifying farm worker who farms the associated farmland, a former long-serving farm worker or their surviving spouse or civil partner
- a dwelling acquired by a financial institution in the course of lending
- owned by a provider of social housing
Alternatively in some cases it might be better to own the property as an individual or jointly with other individuals.
As joint tenants (sometimes called ‘beneficial joint tenants’):
- you have equal rights to the whole property
- the property automatically goes to the other owners if you die
- you can’t pass on your ownership of the property in your will
- you can only sell or remortgage the property with the other owners’ agreement
Tenants in common
As tenants in common:
- you can own different shares of the property
- you can pass on your share of the property in your will
- you can stop one owner from selling or remortgaging the property without the other owners’ agreement
The main source for this blog was HMRC
In the Autumn Statement 2013 it was announced that a CGT charge will be introduced from April 2015 on ‘future’ capital gains made by non-UK residents disposing of UK residential property. George Osborne said…
“Britain is an open country that welcomes investment from all over the world, including investment in our residential property”
“But it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not. That is unfair.”
UK Residents typically pay capital gains tax at 28% on any profit from selling property that is not considered their primary residence.
Reuters reported in Dec 2013…
Property lawyers and estate agents said foreign owners would be relieved the tax will not apply to historic gains before 2015. But they cautioned that the overall impact could be marginal as many foreign investors see London property as a safe and profitable place to park capital.
“Tax is not the primary driver for the majority of international buyers of residential property in London,” Knight Frank’s head of global research, Liam Bailey, said.
“It is important to note that the change to CGT rules brings the UK in line with other key investor markets, such as New York and Paris, where equivalent taxes can approach 35-50 percent depending on the owner’s residency status.”
It was not immediately clear how the tax would be collected and how it would apply if foreign owners used a domestic company to purchase property.
When a company disposes of an asset and makes a capital gain, as the main rate of corporation tax in 2014 is 21% (20% small profits rate) there could be a future tax saving opportunity for overseas investors to transfer property to limited companies.
There are other tax implications for example ATED (Annual Tax on Enveloped Dwellings) and SDLT (Stamp Duty Land Tax) but now could be a good time to consider your options.