With Andy Waddell and Sharron Carle, Winslows Tax
Property Lawyers…if you’re not already signed up for Winslows’ bi-monthly Property Tax Talks Q&A Webinars, please request the joining link at wanda@winslows.co.uk.
Attendees can submit questions in advance for Winslows Tax experts to discuss. Below are three examples of questions and answers from the latest session.
Q1: Compensation Payments
My client is selling a property but the buyer is having problems securing finance to complete the transaction.
They have already made two payments totalling £100,000 to extend the completion date
and my client was paid £50,000 in compensation under the standard conditions of the sale. However, it is looking like this transaction is not going to complete as we are near the new completion deadline and my client does not want to extend again.
Can you please explain the tax implications for our client on these payments if the sale does not complete?
A:
- The Compensation Payment of £50,000 in respect of the delayed completion will, be subject to Income tax under Section 369 of the Income Tax (Trading and Other Income) Act 2005. This is because standard condition 7.2 contract rate is treated as akin to interest
- The Extension Fee Payments of £100,000 will be treated as capital sums derived from the Property and subject to Capital Gains Tax under Section 22(1) TCGA 1992. To the extent that any relief (such as PPR) or exemption is available in respect of the sale of the Property, that relief should apply to the Extension Fee Payments, whether or not the actual sale of the Property completes.
- In the event that the sale of the property is abandoned, and the deposit is retained the amount of the deposit will be treated as consideration for the disposal of a separate asset and not a disposal of the Property itself. Capital Gains Tax is chargeable under section 144(7) TCGA 1992. There is no base cost for this asset, so it is fully chargeable to tax
It should be noted that relief on the sale of a main residence does not apply to forfeited deposit receipts.
Q2: Leasehold Enfranchisement
I am acting on the acquisition of a freehold building for clients who are exercising their right of collective enfranchisement under Leasehold Reform Housing and Urban Development Act 1993.
The purchase price is £1 million. There are 4 flats in the building, all of the tenants are participating and are qualifying tenants.
The unexpired term of the leases is 44 years. Two of the tenants live in their property as their main residence. One lives in New York but uses the flat when he is in London and the last flat is owned by a company which lets the property as an investment.
What are the SDLT implications? Will they qualify for Collective Enfranchisement (CE) relief?
A: Probably worth a quick recap on CE relief.
- CE can be claimed where on the acquisition of a FH in a building pursuant to either:
- rights under the leasehold reform, Housing and Urban Development Act 1993 by qualifying tenants; or
- rights of first refusal under the Landlord and tenant act 1987.
- Usually these tenants set up a company to acquire the Freehold as their nominee – immediately granting themselves long leases in the process and the relief cannot be claimed if the average purchase price is greater than £500k and the 15% rate applies to the transaction. This is to ensure no SDLT payable by the company itself and no tax in grant of longer leases.
- CE works a little like MDR in that relief is claimed by dividing the purchase price by the number of flats involved and applying SDLT rates to the average price per flat.
- As there is a corporate tenant, we would usually need to consider the 15% of SDLT but in this case the 15% will not apply as (a) the average dwelling price is £250k and (b) the company lets the property which allows for an exemption.
- Accordingly CE relief can be claimed. The 3% rate will not apply as the leases have greater than 21 year terms remaining.
- However, the 2% rate will apply due to the New York resident owner.
Q3: Non Resident Transaction, with a Rent Apportionment issue.
My client is a non-resident acquiring a Commercial property in the UK The Seller has opted to Tax.
The property is currently tenanted. The rent has been paid in advance (there will be an apportionment of rents due to him at completion), what are the tax implications for my client on the purchase of the property?
A:
- SDLT usual non-residential rates.
- Sale of property rental business, so likely TOGC. If the seller has opted, buyer must be registered or liable to be registered for VAT, they would do this through the Non Established Persons Unit. They must have opted before date/time of supply.
- Practical issues – ensure these conditions have been satisfied before completion, get evidence. HMRC can pick these up later.
- Where rent is paid to a non-resident landlord, there is an obligation for the tenant or the managing agent to withhold and account for income tax on the rent unless the landlord is registered under the Non Resident landlord scheme to receive payment gross.
- There are conditions to registration and the buyer must get these and the registration for gross payment agreed with HMRC as soon as possible.
- If the amounts regarding the apportionment of rent in connection with the purchase contract are paid via your law firm, the NRLS will not have to be operated on the apportioned sums and they can be paid without deduction of Tax.
- However, they are still rental income so they will need to be included in the buyer’s annual tax return.