APC: Taxing times

Jen Lemen gets to grips with taxation for all APC candidates – not just those on related pathways. All APC candidates need to understand property taxation and factor this into their knowledge base at level 1, provision of services at level 2 and client advice at level 3. This is because taxation is an important source of revenue for government and a significant expense for both property owners and occupiers. APC competencies On the commercial real estate APC pathway, there are two tax-specific competencies: capital taxation and local taxation/assessment. Candidates are often confused by the requirements of each of these. Taxation is also relevant to the valuation competency, where valuations are undertaken for taxation purposes. Capital allowances is also a separate competency, but this is more likely to be pursued by candidates on the taxation allowances pathway. Capital taxation focuses on the following main taxes, which we will look at in turn later in this article: inheritance tax; capital gains tax; stamp duty land tax; annual tax on enveloped dwellings; and capital allowances. We will also look at the impact of VAT on property transactions. There are various other property taxes and reliefs, which are outside the scope of this article but may be relevant to individual candidates. Local taxation, on the other hand, primarily relates to non-domestic (business) rates. We will focus on this in a future APC series article, given the breadth and depth of the subject area. Inheritance tax IHT is a tax paid on the estate of a person who has died, including property, money and possessions. No IHT is typically payable if the estate is valued below £325,000. Above this threshold, unless certain circumstances apply, the standard IHT rate of 40% is charged. For example, if an estate is valued at £500,000, then IHT is charged at 40% on the sum over the threshold, ie on £175,000. There are several IHT reliefs available, including taper relief, business relief and agricultural relief. The basis of value for IHT purposes is defined in section 160 of the Inheritance Tax Act 1984. The valuation date is the date of death. The term “probate value” should be avoided. Despite clients often requesting a valuation for probate purposes, the valuation is required as part of the procedure for obtaining a grant of probate and must adhere to the statutory definition of market value. Capital gains tax CGT is the tax paid on the profit, ie the gain (not the sale price) when a chargeable asset, eg property, is disposed of. It does not apply to the sale of an individual’s main home. CGT rates depend on various factors, including whether the tax is to be paid by a business or an individual, and, if the latter, then whether the individual is a basic or higher rate taxpayer (for income tax purposes). For example, a property is purchased for £200,000 and sold for £250,000. This equates to a taxable gain of £50,000. The applicable CGT rate is then paid on the amount of gain above the annual exempt amount (tax-free allowance). The basis of value for CGT purposes is defined in section 272 of the Taxation of Chargeable Gains Act 1992. The valuation date depends on a number of factors, with assets owned before April 1982 being valued as at 31 March 1982. Sources of evidence for 1982 valuations include the VOA Property Report 1982, historic Nationwide house price data, ONS house market data tables, EGi 1982 property auction data and comparables sourced from other agents. Stamp duty land tax SDLT is paid when property or land is bought in England and Northern Ireland. In Wales and Scotland different taxes are payable; land transaction tax in the former and land and buildings transaction tax in the latter. SDLT is paid when a freehold or new or existing leasehold are purchased. It applies to both residential and non-residential properties. There is a threshold above which SDLT is payable. This differs for residential and non-residential properties and is set to change from 1 October 2021. Due to the impact of Covid-19, the threshold was amended until 30 June 2021, with transitional rates applying until 30 September 2021. SDLT rates and reliefs also differ for first-time buyers, additional properties, asset types (residential v non-residential), tenure types (freehold v leasehold) and non-UK residents. HMRC has a useful online calculator to help with assessing liabilities, as the calculation of SDLT can be complex, particularly for leasehold transactions. The basis of value for SDLT purposes is defined in section 118 of the Finance Act 2003. Annual tax on enveloped dwellings ATED is an annual tax paid by companies that own UK residential property valued at more than £500,000. HMRC set out annual charges based on the property value. The basis of value for ATED purposes is defined in section 98(8) of the Finance Act 2013. Capital allowances Capital allowances are a form of tax relief that can be claimed for assets used by a business, including some buildings, plant and machinery. This is instead of the business claiming a tax deduction for the expenditure. Generally, the cost of the assets can be written off over several years against a businesses’ taxable income. Capital allowances are a specialist area so unless a candidate is pursuing the capital allowances competency, it is unlikely that in-depth knowledge or advice will be required. VAT VAT is paid on the supply of goods or services in the course of furtherance of any business. It is paid at a standard 20% rate on most goods and services. Some goods and services are exempt from VAT, while others attract reduced 5% or zero rates. The sale or letting of a commercial property is generally exempt from VAT. But there are exceptions to this, eg, VAT is charged at 20% on the freehold sale of a new commercial property or a commercial property that is less than three years old. Commercial property owners can also elect to charge VAT at 20% when selling or letting a property. This means that all supplies made relating to the property incur VAT at 20% and VAT can be recovered at 20% on all costs relating to the property. A VAT election lasts for 20 years and is generally irrevocable. If the property is sold, then the VAT election falls away and the new owner can decide whether to elect to charge VAT or not. Effectively, electing to charge VAT passes the VAT liability to the tenant. This can be problematic if the potential occupier cannot recover VAT, eg they make exempt supplies such as a bank, health sector business or charity, or a small business below the VAT registration threshold. This would make the VAT element irrecoverable and an extra cost for the occupier. If the occupier is VAT registered then they can recover the VAT, although the election may still have an adverse impact on their cashflow. The election will allow the owner to recover VAT incurred on repairs and redevelopment, so the decision should be carefully considered and subject to specialist legal and taxation advice. The VAT election status should, therefore, be carefully considered when advising on the leasing and letting or purchase and sale competencies. Valuation It is essential for candidates to understand how to transparently and consistently apply the RICS Valuation – Global Standards (Red Book Global 2020) and RICS UK VPGA 15 of the UK National Supplement. UK VPGA 15 sets out the statutory definitions of market value under the various pieces of tax legislation, which are not the same as the RICS VPS 4 definition of market value. Market value within each piece of legislation is broadly defined in similar terms: “the price which the property might reasonably be expected to fetch if sold in the open market at that time, but that price must not be assumed to be reduced on the grounds that the whole property is to be placed on the market at one and the same.” When assessing market value for tax purposes, relevant caselaw (eg Duke of Buccleuch v IRC [1967] 1 AC 506 and Lynall v Inland Revenue Commissioners [1972] 3 WLR 759) has established the following assumptions to be adopted by the valuer: The sale is a hypothetical sale; The vendor is a hypothetical, prudent and willing party to the transaction; The purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a special purchaser); For the purposes of the hypothetical sale, the vendor would divide the property, ie asset to be valued, into whatever natural lots would achieve the best overall price; All preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date; The property is offered for sale on the open market by whichever method of sale will achieve the best price; There is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers; The valuation should reflect the bid of any special purchaser in the market (provided that the purchaser is willing and able to purchase). Awareness is key Taxation is an important issue for candidates to be aware of, and to advise on, if relevant to their competency choices. This includes a wide range of taxes and an appreciation of the Red Book. A lack of understanding will lead to a gap in candidates’ service provision and reasoned advice, potentially risking a negligence claim and failure to succeed in their APC final assessment interview. The quick quiz 1. When will the SDLT holiday end? a) 30 September 2021 b) 31 October 2021 c) 1 January 2022 2. What is the IHT rate on lifetime transfers to and from certain trusts? a) 40% b) 20% c) 0% 3. What is the CGT rate applied to entrepreneurs’ relief? a) 10% b) 20% c) 35% Scroll down for the answers. Professional guidance alert RICS Guidance Note – Asbestos: legal requirements and best practice for property professionals and clients (4th edition, May 2021) RICS Guidance Note – Land measurement for planning and development purposes (Global, 1st edition, May 2021) RICS Regulation – Use of social media: guidance for RICS members (Version 1, June 2021) Further reading Aviva Tax table 2021/2022  UK VPGA 15 of the UK National Supplement  HMRC manuals  SDLT calculator Jen Lemen BSc (Hons) FRICS is a partner at Property Elite Image from Pixabay Quick quiz answers: 1. 30 September 2021; 2. 20%; 3. 10%