Land and property is one of the more complicated subjects for tax planning because it is an area that encompasses the entire spectrum of taxes and has its own set of rules and allowances within each one. There is often a complex interaction between the various taxes affecting land and property that must be considered at the outset if you want to make sure you take the right decisions and minimise your tax burden as much as possible.
Having decided that it makes financial sense to invest in a particular property, the first important decision you need to make for both commercial and tax purposes is whether to register it in your own name or through a limited company. Much will depend on how long you intend to keep it and whether you plan to invest in further properties. Companies are still able to claim indexation against capital gains but have no annual CGT allowance, so the longer you keep the property the more likely it is that the benefits of indexation will outweigh the loss of the annual allowance. A company will also pay less tax on profits than a higher rate taxpayer, so if you use the company as a tax shelter by maintaining a high level of retained profits, there will be more funds available to buy further properties later.
Entrepreneurs relief is also an important factor. This is only allowable to individuals, not companies, so it may be wise to keep the property in your own name if you intend to use it as your own business premises for trading purposes. However, letting does not count as a qualifying trade, so no entrepreneurs relief would be allowable. Therefore, if you intend to let the property out, it may be better to put it in the company name, although you should bear in mind that companies pay corporation tax on chargeable gains and you may then suffer further tax when you extract the sale proceeds from the company, either as dividends or as a capital distribution on winding-up.
The other big tax decision you will have to make is whether or not to waive the VAT exemption. This should be decided even before you buy the property as an option to tax cannot be backdated unless you have previously informed the Revenue of your intention to do this. If the property has already been opted in you will pay VAT on the purchase price anyway, and this may make it beneficial for you to opt to tax the property yourself so that you can recover the VAT. However, this means that you will be at a commercial disadvantage if you let the property to non-VAT registered businesses or individuals as they will not be able to recover the input tax and will seek a reduction in the rent to compensate. You will also be unable to reverse this decision for 20 years so if you sell the property within that time you will be obliged to charge VAT on the sale price.
There are many different factors that will affect these decisions ranging from intended use of the property, expected profits, investment potential, tax rates and allowances, loan finance, interest rates, retirement plans, exit strategy and your own financial position. At Acumen, we can help you weigh up all these factors and advise you on the tax implications. Come and speak to us if you need any assistance with any of this.
Please read the following Information Sheets and Tax Tips for further details: