The tax legislation landlords and developers need to be aware of

“There are six property taxes you need to be wary about in the coming year, from VAT to capital gains tax.”

That’s according to Tim Walford-Fitzgerald, partner at UK accountancy firm HW Fisher, who has outlined the main pitfalls to avoid in 2022.

HMRC in crackdown mode on capital gains tax

Walford-Fitzgerald warned the HMRC may get more aggressive with landlords who have missed some of the changes in rules in recent years.

He said: “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.”

Property developer tax

Developers are being charged a 4% tax on profits from residential-property development activities in excess of £25m from April.

The £25m limit will derive from accounting periods ending after 31 March 2022.

The property developer tax was introduced by Chancellor Rishi Sunak in the October Budget. It was last 10 years, and is expected to raise £2bn to pay for the removal of unsafe cladding on high-rise buildings.

Proposed changes to Stamp Duty Land Tax (SDLT)

You need to keep an eye out for changes to stamp duty that could make buying mixed-use property more expensive.

Walford-Fitzgerald said: “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 are 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.

The end of reduced VAT rates on holiday lets

The temporarily reduced rate of VAT increased from 5% to 12.5% on 1 October 2021.

However, as highlighted by Walford-Fitzgerald, even if a holiday is taken after 1 October the 5% can still be applied if a tax point is created beforehand.

VAT conversion of commercial to residential

The tax expert also wrote about what happens with VAT when dwellings are converted from commercial to residential.

The 5% rate applies to conversions of non-residential building into dwellings, the conversion of a house to create additional dwellings, and the conversion of multiple occupancy dwellings into one house.

It can also apply to the renovation of residential property which has been unoccupied for more than two years.

Though Walford-Fitzgerald added: “There are conditions which 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.

However, it doesn’t apply to professional fees such as architects/surveyors etc.

Avoid the VAT and tax traps of developing student accommodation

Developers can get VAT relief for student accommodation where it’s classed as dwellings or relevant residential, however, there are pitfalls.

Walford-Fitzgerald said: “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 a 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.”

To discuss anything more, get in touch with your local team of experts here.