Tax on property transactions is one of the more complex areas of the tax system. Unlike with most businesses, effective tax planning needs to be carried out on a transaction by transaction basis. There are often a number of different taxes involved, e.g. corporation tax, SDLT and VAT, or income tax, SDLT, ATED and VAT. A structure that reduces SDLT, but at the cost of increasing corporation tax, is unlikely to be attractive to the taxpayer. Successful planning needs to take account of all relevant taxes.
The next difficulty is that there is not a separate system of charging profits from property transactions to income or corporation tax. Different rules apply to income profits and capital profits. With most businesses, it is easy to distinguish the two and apply the appropriate tax rules. Not so with property. A property transaction can produce either an income profit (called property dealing or property trading) or a capital profit (called property investment) and the dividing line between the two is by no means clear-cut.
The theoretical difference is clear: if a property is bought for resale, it is trading and if it is bought to generate rents, it is investment. The difficulty is that the motive at the time of acquisition of a property or site is often unclear. A developer may buy a site in the hope of getting planning permission for say, offices, and by the time he gets it may find that a different development, say a hotel, is more attractive for the site. A developer may erect a building, let it, and then sell it because a let building can sometimes command a higher price than one with vacant possession. Determining whether the transaction is dealing or investment – or even partly dealing and partly investment – in each of these circumstances is very difficult. Yet getting the decision wrong can significantly increase the tax due.
Robert Maas FCA, FTII, FIIT, TEP is a tax consultant at CBW Tax www.cbw.co.uk. One of the UK's leading experts on property taxes, he is an experienced tax writer and speaker and was awarded the Lifetime Achievement award at the Taxation Awards 2013.
Join us and the CBW tax team on 3 March for the launch of Property Taxes 2014/15 and a Property Tax Technical Briefing by Robert at the CBW London office. For more information see http://www.cbw.co.uk/pdf/CBW-property-tax-book-launch-Mar-15.pdf