As we head into 2022, Tim Walford-Fitzgerald, Partner at UK accountancy firm HW Fisher shares his expectations for the property market and the 6 major tax considerations you need to be aware of.
6 property taxes to be aware of:
1: HMRC is cracking down on landlords and capital gains tax payments
HMRC may get more aggressive with landlords who have missed some of the changes in rules in recent years. Now that the residential mortgage relief restriction is in full force, we expect less tolerance for misreporting, especially in light of the losses that some landlords may have from recent defaults.
Capital gains tax for residential property transactions can now be paid within 60 days, following calls for the 30-day payment period to be doubled due to unsuspected homebuyers being hit with fines. We expect the recent extension of the disposal reporting deadline to result in greater enforcement against those who have failed to meet their reporting obligations.
2: Reminder for property developers, new taxes will come into effect from April
From 1 April 2022, will be 4%, charged on profits from residential-property development activities in excess of £25m derived in accounting periods ending after 31 March 2022.
3: Watch out for the proposed changes to Stamp Duty Land Tax (SDLT)
At the moment if you buy the classic high street property of a ground floor shop with a flat above, you only pay commercial rates of SDLT. HMRC is proposing that the cost should be apportioned so only the shop benefits from commercial rates, with the flat suffering the higher residential rates. HMRC are currently consulting on these proposed changes together with considering changes to reduce the increasing number of incorrect multiple dwelling relief (MDR) claims. The review is due to close on 22 February 2022.
4: Reduced VAT rates have now ended on holiday lets
Don’t forget that the temporary reduced rate of VAT for supplies of holiday accommodation increased from 5% to 12.5% on 1 October 2021. Even if a holiday is taken after 1 October the 5% can still be applied if a tax point is created beforehand.
5: VAT conversion of commercial to residential – Understand where the 5% rate on dwellings applies
There have been changes around VAT conversion of commercial to residential, and it is important to understand clearly where the 5% rate on dwellings applies. The reduced rate applies to:
- Conversion of a non-residential building into dwellings;
- Conversions involving a change in the number of dwellings within the building, for example, the conversion of a house that creates additional dwellings or the conversion of multiple occupancy dwellings into one house
- The renovation of residential property which has been unoccupied for more than 2 years
However, there are conditions that include, for example, a planning condition that prevents the separate disposal of a dwelling. Such a condition would prevent the 5% applying.
The 5% rate applies to costs such as:
- Work to the fabric of the buildings including walls, roofs, floors, stairs, windows, doors, wiring and plumbing;
- The provision of facilities such as water, power, heat and drainage and the installation of fitted kitchen units, sanitary ware, central heating and light fittings.
- In addition, if the builder undertakes the work and purchases materials on the owner’s behalf, the 5% also applies to materials.
The 5% rate does not apply to professional fees such as architects/surveyors etc.
6: Avoid the VAT and tax traps of developing student accommodation
There are VAT reliefs available for student accommodation where classed as dwellings or relevant residential. The former is preferred as it avoids the need to monitor the use of the property over the 10 years post-completion. If constructed as dwellings (single studio units or cluster flats), the VAT relief (zero-rate) extends not just to the main contractors but to services provided by sub-contractors.
Careful structuring using an SPV1/SPV2 structure can result in VAT being recovered on professional services where VAT is charged at 20%. Any planning conditions that prevent the separate disposal of a studio/cluster flat within the development could significantly alter the above analysis and result in a VAT cost against development profit.
Tim concludes: “Last year was been one of the busiest for the housing market in more than a decade. According to Zoopla, estimates show that there were 1.5 million sales in 2021, with the total value of homes changing hands at £473bn, some £95bn higher than in 2020. As a result, we expect to see HMRC become more proactive on reclaiming owed property tax. As property transactions tend to involve high values, if there is an issue with VAT it usually involves a significant sum. It is therefore very important that landlords, developers and home renovators are up to speed with the latest changes.”