News Item
Tax issues and the sale of property
Alec Johnston a senior partner in Johnston Kennedy DFK who has been involved in advising on many property deals writes on some of the key factors to be considered when selling property: -
1. Is a property being sold or shares in a trading company?
Often properties are owned by investors in companies and as a result the vendor may prefer to sell shares in this company rather than the property itself. This is because a double tax charge may arise on the disposal of property by a company; with the company initially being chargeable to corporation tax on its profit and the company shareholder subsequently being subject to a second tax charge when extracting the net after tax proceeds out of the company. A sale of shares usually gives rise to a single tax charge under the capital gains tax rules.
A purchaser of property would usually prefer to buy the property, even after taking into account the potentially higher stamp duty land tax charges that may arise.
2. Who is the vendor?
If the vendor is an individual, then they will be entitled to reduce the gain arising on sale by taper relief. The rate of taper relief is dependant on whether the property qualifies as a 'Business Asset' or a 'Non-Business Asset'. In most instances commercial property is a business asset and residential property is a non-business asset, however, there are exceptions to this general rule.
The advantage of business taper relief is that the effective rate of Capital Gains Tax can be as low as 10% if the property has been owned for at least two years. Non-Business Asset Taper Relief is not so generous, and the effective tax rate can range between 24% up to 40% depending on length of ownership of the property.
If the property is being sold by a corporation entity then there are different tax consequences to be considered. Corporation tax will be charged on the net gain after taking off allowable costs, indexed for inflation. Corporation tax rates range between 19% for smaller companies and up to 30% for larger companies.
3. What was the purpose for which the property being sold was held?
Capital Gains Tax (potentially 10% after special tax relief's) only applies to selling investment properties.
If the property being sold is a trading asset or development property, income tax rules (potentially 40%) will apply.
Companies always pay tax at the prevailing corporation tax rates regardless of the type of property being sold.
4. Other tax considerations that may need to be taken into account
a) Safeguards may need to be put in place to avoid any potential claw-back of capital allowances on the sale of property. This can include such matters as the carving out of a leasehold interest in the property, joint elections with respect of plant and machinery on the sale of commercial property or the sale of shares in a single property company where the buyer inherits prior claims to capital allowances.
b) VAT implications arising on the sale of "opted" commercial property need to be taken into account, when buying or selling such a property.
c) Chargeable capital gains on the sale of an owner-occupied trading property can be deferred if the vendor buys a replacement owner-occupied trading property within specified timeframes.
d) The opportunities for tax arbitrage if investments assets are personally owned and trading assets are corporately owned should be carefully investigated.
e) The possibility to distribute assets out of companies should be carefully considered as this may be advantageous in certain circumstances.
f) The need to get professional valuations in support of properties held at 31 March 1982 or received by way of transfer on probate following the death of a spouse.
g) The residency status of the vendor is also important, as for Non-UK tax residents, it may be possible to avoid capital gains tax altogether.
h) Principal Private Residence exemptions and whether the appropriate elections have been made and / or whether the asset qualifies for relief.
i) Anti avoidance rules on intra group transfers and stamp duty considerations on the split of property transactions also need to be taken into account.
Conclusions
Gains arising on the sale of property can be complex as there are many different types of taxation to consider. Some of these may conflict and each property sale is subject to its own facts and circumstances.
This is an area where there are many opportunities for advisers to add value, and the above comments are no more than an aide-memoir. One of the most important considerations to check out at an early stage is the status of negotiations with the purchaser and whether there is still score to "change any deal" or whether Heads of Agreement have been signed. Successful tax planning could potentially eliminate or substantially reduce any liability whereas a poorly planned property sale may result in an overall effective tax liability of close to 60%. It is therefore crucial that advice is sought at an early stage.