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Tax issues facing those investing in residential property

Posted on 13 August 2015 by Jonathan Legg

I recently spoke to an audience of property professionals at the annual Residential Funding Conference at the Cavendish Conference Centre in central London, run by LD events.  I discussed the key tax issues facing those currently investing in residential property, whether as landlords or developers.

One of the main problems I outlined is that the raft of anti-avoidance rules for residential property (intended to stop owner occupiers owning their homes though companies) still impacts on commercial landlords and developers.  So, whilst these types of owners will not generally have to pay the penal rate of Stamp Duty Land Tax (SDLT) or the Annual Tax on Enveloped Dwellings (ATED), there are major compliance issues – for example, relief from both the 15% SDLT and ATED must be claimed in online tax returns and failure to do so will incur penalties.

I also focused on the increasingly important distinction between what is “residential” property and what is “non-residential or mixed” property for SDLT purposes.  Given that the top rates are 12% as opposed to 4% (residential versus non-residential and mixed) this has now become a major point.  The definition of dwelling is a building which is “suitable for use as a dwelling…or in the process of being constructed or adapted for such use” and in most cases the distinction will be obvious, but there are many surprising or borderline cases.  For example, a residential block with retail units on the ground floor will be mixed  – so a top rate of 4% SDLT, despite the significant amount of residential property on the upper floors.  What about offices with planning permission to convert to residential use?  It is likely that this is non-residential, provided that no physical works have started (given that you normally must look at use at the time of acquisition).  However HMRC’s guidance states that selling and marketing such a building with planning for residential means that the property has become residential.  There are a number of examples like these so, as always, proper legal advice should be taken in each case.