Property Taxation issues

The first thing to say is that property taxation is a complex area, and that you should always seek appropriate professional advice. We turned to Les Adey of Horder Adey, a firm of Chartered Accountants based in Putney, London, for an overview.

Please note this only gives an outline of the issues involved.

Value Added Tax (VAT)
Income Tax
Capital Gains Tax (CGT)

Value Added Tax (VAT)

Generally speaking the initial construction of a house is zero-rated. This means that the original developer can recover all the input tax he incurs in the construction process and charges vat to the first purchaser at 0%.

A subsequent purchaser of the house will have to pay standard rate vat on any works carried out on the property and cannot normally recover or pay a reduced rate of vat except in the following instances.
  1. Supplies incurred in the course of an approved alteration to a listed building can be zero rated
  2. Where a house has been empty for at least two years then the 5% rate of vat applies to the renovation.
  3. Converting a single residence into a number of flats or vice versa also attracts the 5% rate
  4. Converting a non residential property( eg a barn) into a dwelling also qualifies for the 5% rate
The construction of a 'granny flat' extension can also be zero-rated but remember the pitfalls-
  1. It must be self contained living accommodation-not simply an extension to an existing building.
  2. It must have no direct internal access to another dwelling apart from a fire door.
  3. It must have appropriate planning permission which permits separate use and disposal

Further information on VAT

Income tax

The letting of residential property is taxed as a business based on letting statements which must be drawn up to cover the financial year to 5 April. From the rental income can be deducted all expenses incurred wholly and exclusively for the business of the letting. This includes agents fees, interest paid, repairs and maintenance (but not capital expenditure which improves the value of the property) and insurance. Lessors of furnished residential property can claim one of two alternatives: Wear and tear allowance is basically 10% of gross rents received less a deduction for any council tax or water rate paid by the landlord. An alternative to the wear and tear allowance is the renewals basis where the landlord cannot claim a deduction for the initial amounts paid for carpets or furnishings but can claim an allowance when they are renewed or replaced. This is the only choice for the landlord of an unfurnished property. The wear and tear allowance is usually the best option for a landlord of furnished property.

The profits and losses of all UK properties are aggregated to give an overall profit or loss for the letting business. If the overall result is a loss then it can only be carried forward to set against future letting profits. It cannot be offset against the landlords other income for that year or carried back against earlier years letting profits.

If a landlord has properties outside the UK the profits or losses are calculated in the same way but any profits or losses cannot be offset against UK property profits or losses.

Further information on Income Tax

Capital Gains Tax (CGT)

If the house is your principal residence, there is no tax on any profit made from its renovation.
If it's not your principal residence, CGT will be charged on a percentage of profits after taking into account various reliefs including your annual exemptexemption (£10,600 in the 2012-13 tax year, £11,000 in 2014/15 and £11,100 in 2015/16. We do not yet know what it will be in 2016/17.).

Further information on CGT

Horder Adey: