Introduction. Dealing or investment. Definitions. The main tests

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1 Introduction The taxation of property companies is affected by a large number of rules. The reasons for this are the variety of uses to which property can be put and the different ways in which income and profits can arise from property. Substantial profits can be made on single transactions, making tax planning important. The large volume of tax legislation affecting property means that the precise way in which a transaction is structured can significantly affect the tax payable. The inter-relationship between different taxes is often very important. In particular, value added tax (VAT) needs to be considered with care and stamp duty land tax (SDLT) is a major factor. This section considers the taxation of both companies that invest in property and companies that deal in property. Property transactions carried out by individuals and partnerships are not covered. Even so, in a section like this it is only possible to touch briefly on the many aspects of this huge subject. In any specific case in which a property transaction is being contemplated, it is important to take detailed advice. In this section, the term property means land with or without buildings on it. Dealing or investment The distinction between property dealing, which is trading, and investment in property is of the utmost importance. The taxation of trading income differs in several ways from the taxation of property investment income and different tax reliefs are available. Companies can both deal and invest in property but this can result in a tax disadvantage for their shareholders. Definitions The main way of deciding whether a property transaction is trading or investment is the motive for the purchase. Trading If a property is bought in order to sell it at a profit, whether or not work is carried out on it, this indicates that the transaction is a trading venture. Investment A property is bought as an investment if it is acquired in order to generate rental income. Unfortunately, the distinction is rarely clear cut. Any buyer hopes that an investment will increase in value and most property is bought with a view to reselling it at a profit. A company that develops a property with the intention of selling it to produce a dealing profit might well let it before sale. This could be to obtain a better price by selling it as a let building, or because it is unable to sell the property immediately at a favourable price. The eventual sale would still generally be taxed as a trading transaction. The main tests Determining the motive for a purchase can be difficult. The motive that determines the tax treatment is not necessarily what the company says it is, if the objective facts suggest a different motive. HM Revenue & Customs (HMRC) considers several factors. The available evidence Directors minutes are important evidence and a decision to buy a property should always be minuted. A business plan or projections showing income yield for investment, or profit on sale, if dealing, would also be relevant. The company s objects An investment company will find it easier to contend that a property purchase is an investment than will a company that has no powers to invest. A property All Rights Reserved Page 1 of 14

2 transaction by a building company is more likely to be taxed as dealing than as investment. Companies registered from 1 October 2009 are not required by law to have a statement of objects specifically setting out their powers, but such a statement may be useful in the case of a company undertaking property transactions. Accounting treatment Whether the property is shown as trading stock or an investment in the company s accounts is an increasingly important factor in establishing the tax liability. Letting the property Actual letting at a profit is evidence in support of investment, though it is not conclusive evidence. Length of time the property is held Holding the property for a long time indicates investment. A quick purchase and sale suggests dealing, although external factors might affect the length of time a property is held. Development of the property Development of the property followed by sale is normally treated as trading. Borrowing Short-term borrowing to finance the purchase suggests that the motive is a quick sale, i.e. trading. Nevertheless, the buyer might intend to replace short-term finance with long-term borrowings later. Many cases have been heard by the courts. The decisions generally depend on the particular facts of the case, but it can be helpful to examine decided cases for guidance in borderline situations. Development Property development is not a separate category from dealing and investment for tax purposes. Tax is concerned with income and gains, and development does not by itself produce either of these. What is important is how the developed property is turned to profit. A property could be constructed or refurbished for letting, in which case the company is taxed as an investment company. Alternatively, a property could be developed for resale, in which case the transaction is trading. Property dealing The profits made by a property dealing company on buying and selling properties are taxed in the same way as the profits of any other trading company. Deductible expenditure The profits of property dealing are calculated in accordance with commercial accounting principles, as modified by tax legislation. Expenditure on acquiring and developing properties for resale is deductible as a trading expense for tax purposes only if: It is wholly and exclusively expended for the purposes of the trade; It is not of a capital nature; and It is not specifically disallowed under tax legislation. All Rights Reserved Page 2 of 14

3 Interest The high cost of acquiring and developing property means that property dealing companies often have to finance their activities with borrowings. The tax treatment of interest payable is governed by what are known as the loan relationship rules. Interest on money borrowed to finance the acquisition or development of property for resale is deductible as a trading expense. The interest for an accounting period must be calculated on an accruals basis. The tax treatment generally follows the accounting treatment. The loan relationship rules also cover exchange gains and losses where a borrowing is in a foreign currency. Date of purchase and sale Property is generally sold under a contract. Under the rules for taxing chargeable gains, the date of sale of a property is the contract date rather than the completion date when ownership of the property is transferred. This rule does not apply to the calculation of trading income and either date can be used, provided the policy is applied consistently. Some companies take the date of the purchase contract as the acquisition date and the date of completion of a sale as the disposal date. Such a policy is arguably in accordance with the basic accounting concepts of prudence and not anticipating profits. Stock and work in progress Properties owned by a dealing company at the end of its accounting year represent its stock in trade and work in progress. If the company is developing its sites, the building costs form part of trading stock if the buildings are completed, or part of work in progress if buildings are still in the course of construction. Any fixtures and fittings in the property also form part of trading stock or work in progress and no capital allowances can be claimed. If a property company grants a long lease at a premium, rather than selling the freehold, the interest in the property kept by the company continues to form part of its trading stock. Where a property is sold subject to the creation of a ground rent, the value of the right to receive future ground rents must be brought in as trading income. Appropriation from trading stock A property acquired as trading stock and developed might in the end not be sold but kept for letting. If the company makes a positive decision to keep the property, there will be an appropriation (transfer) of the property from trading stock to fixed assets. At that point, tax becomes chargeable on trading income as if the property had been sold at its market value as trading stock and reacquired as a fixed asset at the same price. If this occurrence is expected, it might be advisable to limit the taxable profit by taking the property out of trading stock early in the course of development. Ideally, a property that will be kept should be transferred to a separate investment company (see the separate topic Property letting ). All Rights Reserved Page 3 of 14

4 Losses A property dealing company can claim relief for a trading loss in the same way as any other trading company: By carry-forward against the future profits of the trade. By set-off against any profits of the accounting period in which the loss arose. By set-off against any profits of the previous 12 months. By surrender as group relief against the profits of the same period of other group companies, if the company is a member of a 75% group. Shareholders Some tax advantages normally accorded to shareholders in trading companies are not available in respect of property dealing companies. Property dealing is an excluded trade under the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS) which was introduced from 6 April Individuals who invest in property dealing companies are not eligible for income tax relief under the scheme, nor can they defer capital gains tax (CGT) by claiming reinvestment relief. Likewise, property dealing companies are not qualifying holdings for venture capital trusts (VCTs). Property dealing is an excluded activity under the corporate venturing scheme. This provides relief for corporate investors in a similar way as the EIS does for individuals. Property dealing companies cannot grant tax-advantaged share options to employees under the enterprise management incentive scheme. Capital gains tax An individual can claim entrepreneurs relief on certain chargeable gains arising from business disposals. The relief, which reduces the CGT rate on qualifying disposals to 10%, can be claimed on more than one occasion up to a lifetime total of 10 million. Gains in excess of 10 million will be charged at the normal CGT rates, currently 18% or 28% depending upon the individual s marginal income tax rate. Qualifying disposals for the purpose of the relief include disposals of shares in (and securities of) a trading company (or holding company of a trading group), provided that the individual: Is an officer or employee of the company, or of a company in the same group of companies; and Owns at least 5% of the ordinary share capital of the company; and That holding enables the individual to exercise at least 5% of the voting rights in the company. The above conditions must be satisfied throughout the 12 months ending: On the date of the disposal of the shares, if the business continues to trade; or If the company ceases to trade, on the date the trade ceases. In this case, the disposal of the shares must take place within three years after the trade ceases. A property dealing company would normally be a trading company, but this will not be the case (and therefore entrepreneurs relief will not be available) if, broadly, more than 20% of All Rights Reserved Page 4 of 14

5 the company s assets, income or activities are non-trading. For this reason, it may be advisable for property dealing activities and property investment activities to be carried on in separate companies. In addition, CGT holdover relief on gifts or transfers of shares at under value by individuals or trustees is available only if the company qualifies as a trading company, unless the gift/transfer is a chargeable transfer of value for inheritance tax (IHT) purposes. Property investment A property investment company s main source of income is normally rents. It might also receive interest and other forms of income, as well as capital gains on property disposals. The taxable income from each source is calculated in accordance with the rules that apply to that type of income. The various amounts and any chargeable gains are aggregated to form total profits, from which the company s management expenses are deducted. Rental income Rents from all of a company s properties in the UK are taxed together and separately from other income. Letting profits Letting income includes all rents, ground annuals, feu duties and any other receipts in respect of a licence to occupy or otherwise use land or in respect of the exercise of any other right over land. All such income from all properties (including those let furnished) owned by a company form the income of a single property letting business. The profits of a property letting business are calculated in the same way as the profits of a trade. Expenses are allowable if they are revenue expenses incurred wholly and exclusively for the purposes of the letting, and are not specifically excluded under tax legislation. Allowable expenses in respect of all properties are set against total rental income. Expenditure on legal and professional fees on the first letting or subletting of a property is capital expenditure, and therefore not deductible from letting income, unless the lease is for one year or less. Such expenses of renewing a lease are revenue items, and therefore deductible from income, if the lease is for less than 50 years, although any part relating to a premium on the renewal is a capital item. Property letting losses Provided the letting is on a commercial basis with a view to the realisation of profits, a loss on property letting is relieved in the following ways: By set-off against other income or gains of the same accounting period. By carry-forward against property letting income in future periods. By surrender as group relief against profits of the same period in other group companies, if the company is a member of a 75% group. If the company stops letting property but continues carrying on other commercial investment business, any unrelieved property letting loss is carried forward as a management expense of the company. Relief is lost if the company stops carrying on commercial investment business. All Rights Reserved Page 5 of 14

6 An anti-avoidance rule restricts the use of losses generated by the annual investment allowance (AIA) through the use of tax avoidance arrangements. Overseas lettings Income from letting overseas property is taxable separately from UK property income. The profit is generally calculated in the same way as the profit from UK properties. Losses can only be carried forward and relieved against future profits from overseas letting. Relief is available only if the letting was on a commercial basis with a view to the realisation of profits. Interest Interest payable is not treated as an expense of letting property but is deductible under the loan relationships rules. Interest payable (on an accruals basis) by an investment company, whether on a loan or an overdraft, is a debit on a non-trading loan relationship. Interest receivable is a credit on a non-trading loan relationship. Debits and credits on non-trading loan relationships are netted off. If the result is a credit, it is taxed as a separate income source. If the result is a debit, a claim can be made to treat the whole or any part of it in the following ways: It can be set against overall profits of the company for the same accounting period. If the company is a member of a group, it can be surrendered as group relief against profits of the same period in other 75% group companies. It can be carried back and set against credits on non-trading loan relationships for the previous 12 months. It can be carried forward against non-trading profits, including capital gains. Management expenses A company that carries on investment business can deduct from its total profits all expenses of management. The company does not have to be UK resident nor does it have to qualify as an investment company. Relief for management expenses is available even if investment is not the company s main activity. Management expenses are not defined, except that any expenses deductible in calculating income from a particular source, for example, rental income or trading income, must be deducted from that income and cannot be deducted as management expenses. Management expenses are normally the expenses of running the company and managing its investments. Interest payable is not an expense of management but a debit on loan relationships. Directors remuneration It can be difficult for an investment company to obtain a deduction for directors remuneration in excess of the amount that the company might have paid a third party for the same services on a commercial basis. Remuneration paid to directors for managing the company s properties should be deducted in calculating letting profits and only the balance claimed as management expenses. Remuneration for services relating to the acquisition or development of properties can be disallowed as part of the capital cost of buying fixed assets. Whether a pension contribution for a director is an allowable deduction for tax purposes is determined in the same way as for directors remuneration. All Rights Reserved Page 6 of 14

7 Surplus management expenses Management expenses that cannot be relieved against profits of the same accounting period are surplus management expenses. Surplus management expenses can be carried forward and treated as if they were management expenses of the next period. They cannot be carried back. These surplus management expenses can be carried forward until the company stops carrying on commercial investment business of any type. They are then lost permanently. Surplus management expenses can be surrendered as group relief, if the company is a member of a 75% group. Capital allowances Allowances are available for several types of capital expenditure, the most common ones being plant and machinery. Industrial buildings allowances (IBAs) are no longer available. Plant and machinery Much of the expenditure on a modern building includes items that constitute plant or machinery eligible for capital allowances. A company buying an existing building or building a new one should isolate such expenditure and claim the appropriate capital allowances. The capital allowances rules make it essential to classify correctly all expenditure on construction, refurbishment and repair of buildings. Most expenditure on plant and machinery is allocated to either the general pool or the special rate pool. Expenditure on integral features of a building is allocated to the special rate pool. This classification comprises electrical and lighting systems, water, heating, ventilation and air conditioning systems. It includes the floors and ceilings comprised in these systems, as well as lifts, escalators, external solar shading and active façades. Certain revenue expenditure (broadly in respect of major refurbishments) on integral features is treated as capital expenditure. The taxpayer is required, over a rolling 12-month period, to identify revenue expenditure where the cost exceeds 50% of the cost of replacing the asset. Integral features qualify for the AIA which gives 100% tax relief for the first 25,000 a year ( 100,000 before April 2012) of expenditure on all equipment. For smaller businesses, planning the timing of expenditure to minimise the excess over the AIA limit in any year will accelerate tax relief. Any expenditure on integral features in excess of the AIA will attract an 8% writing down allowance (10% before April 2012). The 8% allowance allowance will also be available for thermal insulation of a building, but not where it is used for a residential property business. Expenditure above the AIA limit on plant and machinery in buildings that does not fall into the integral features category (such as toilet and kitchen facilities) qualifies for the 18% (20% before April 2012) rate of writing down allowances on general plant. Capital allowances at the 18% rate are also available on plant and machinery used by an investment company in the course of managing its business. This would include computers and other office equipment. All Rights Reserved Page 7 of 14

8 Site assembly Assembling a site ready for development can give rise to particular tax problems. A company might have to buy property that it does not want to develop, to obtain the site it requires. There is a risk that a disposal of such property could be taxed as a trading transaction. There is only limited tax relief on payments to tenants to obtain vacant possession. Abortive costs of obtaining planning permission are not normally allowable in calculating a chargeable gain. Chargeable gains The properties held by an investment company form part of its fixed assets. The costs of purchase and development of properties are capital expenditure and are only allowable in calculating the chargeable gain on an eventual sale. A property dealing company will only have a chargeable gain on assets that it has used for its own business, such as its office premises. Profits on properties it develops are trading profits. Tax on chargeable gains Companies are charged corporation tax on chargeable gains. The way in which gains are calculated is broadly the same as for CGT for individuals, although there are several differences. Such gains are charged at the normal corporation tax rates. A company treats its chargeable gains as an additional source of profits, against which it can offset trading losses, management expenses, debits on loan relationships and charges on income. Disposals The date of acquisition and disposal of an asset for capital gains purposes is the contract date, not the date the property is conveyed. If the contract is conditional, in particular if it is conditional on the exercise of an option, the date of acquisition or disposal is the date that the condition is satisfied. Where property is disposed of because of the exercise of an option, either by the seller or the buyer, the date of disposal of the property is normally the date the option is exercised. In effect, an option is a type of conditional contract and the exercise of the option is the event that makes the contract unconditional. Part disposals The grant of a lease at a premium is a part disposal of the property and the normal capital gains part disposal rules apply to it. It is often difficult to determine whether a holding of property is a single asset or several separate assets. Where two buildings are bought under a single contract, the tax liability on a subsequent sale of one of the buildings can differ depending on whether the sale is treated as a part disposal of the two or a complete disposal of one. If the consideration for the transfer or other disposal of part of a holding of land is not more than 20% of the market value of the entire holding, the seller can elect to deduct the disposal proceeds from the base cost of the holding instead of calculating a gain on the disposal. The company cannot adopt this treatment if the consideration on the transfer is more than 20,000 or if the consideration for all disposals of land in the year is more than 20,000. All Rights Reserved Page 8 of 14

9 Reliefs Companies chargeable gains benefit from indexation allowance. This adjusts the amount of a gain which is taxable for the effect of inflation between the month of purchase, or March 1982 if later, and the month of sale. This is often advantageous for property transactions because of the generally high acquisition cost. Capital expenditure on improvements to a property is indexed from the date it was incurred. Indexation cannot increase a loss or turn a gain into a loss. Rollover relief Rollover relief, which allows for the deferral of gains on the replacement of business assets, is not available in respect of let properties. In some limited circumstances, rollover relief can be claimed where properties are acquired on a compulsory basis, including some instances where tenants have exercised rights to acquire property. Losses Capital losses can only be set against chargeable gains of the same year, with any excess being carried forward against future chargeable gains. Capital losses cannot be set against other profits of the company. Value added tax VAT on property is probably the most complex part of VAT law. It is only possible here to give a very brief outline of the main areas that are of particular concern to property companies. Property transactions and property income can be zero rated, standard rated, exempt or taxed at a reduced rate, depending on the circumstances. It is the nature of the supply that determines the VAT treatment, rather than whether the company is engaged in property dealing or investment. Zero rating Zero rating is the most beneficial treatment because the company can reclaim input tax on its own costs. It applies to the following main transactions or supplies: The first grant of a major interest (the freehold or a lease of more than 21 years) in all or part of a new residential building, or a building destined for charitable use, by the company constructing that building. The grant of a major interest in all or part of a residential building by the company converting it from a non-residential into a residential building. The sale of renovated houses that have been empty for more than ten years. The supply of services related to the construction of a residential building, or a building destined for charitable use, other than the services of an architect, surveyor or someone acting as a consultant or in a supervisory capacity. The supply of building materials in conjunction with the supply of services that qualify for zero rating. Some fixtures are not included. All Rights Reserved Page 9 of 14

10 Supplies taxed at a reduced rate VAT is charged at the reduced rate of 5% on: The supply of building materials and services for the conversion of non-residential property into residential property. The conversion of a single residential property into multiple dwellings (e.g. bedsits). The renovation of residential property that has been empty for three years or more. Converting a non-residential property into a care home, certain other communal forms of accommodation or a multiple occupancy dwelling and certain other conversions between these categories. Renovations and alterations of care homes, etc that have not been lived in for three years. Constructing, renovating or converting a building into a garage as part of the renovation of a property that qualifies for the reduced rate. Exempt and standard rated supplies Transactions and supplies of property that neither qualify for zero rating nor are chargeable at the reduced rate are in general exempt from VAT. This means that the company cannot reclaim input tax on its costs, including development and refurbishment costs. There are three main exceptions from exemption: The disposal of a commercial or industrial building within three years of its construction, or of an uncompleted non-residential building. These are taxable at the standard rate. The supply of some mainly leisure-related activities, which is taxed at the standard rate. This covers the provision of camping facilities, parking charges, fishing and hunting licences, and hotel and holiday accommodation. A disposal where the option to bring exempt disposals of land and buildings into the charge to tax has been exercised. The option to tax Waiving the VAT exemption enables a property investment company to reclaim input tax on the purchase of the property, where VAT has been charged, and on any development or refurbishment costs. The option once exercised is normally irrevocable at least for 20 years. However, there is a cooling-off period of six months under which, subject to a number of specified conditions, an election to tax may be revoked. The option to tax should be exercised before any rent is charged, otherwise not all the input tax will be recoverable. The option to tax cannot be exercised in respect of residential property. A company that refurbishes residential property, whether for sale or letting, cannot recover VAT on its costs. An option to tax must cover the whole of any building, but need not extend to all of a company s properties. HMRC Notice 742A gives full details of the option to tax rules and the consequences of exercising an option. All Rights Reserved Page 10 of 14

11 Other taxes Property companies are likely to be liable to other taxes, the main one being stamp duty land tax (SDLT). Stamp duty land tax SDLT is payable on transactions in property whether or not there is a conveyance and whether the deal is concluded in the UK or elsewhere. SDLT is a percentage of the consideration, the percentage being dependent on the total consideration. SDLT can be a significant cost, especially in larger transactions. For non-residential property, the rates are: Up to 150,000 0% More than 150,000 and up to 250,000 1% More than 250,000 and up to 500,000 3% More than 500,000 4% For residential property, the rates are: Up to 125,000 0% More than 125,000 and up to 250,000 1% More than 250,000 and up to 500,000 3% More than 500,000 and up to 1 million 4% More than 1 million and up to 2 million 5% More than 2 million (purchased by individuals) 7% More than 2 million (purchased by non-natural persons) 15% The 7% rate applies to transactions with an effective date after 21 March The 15% rate apples to transactions with an effective date after 20 March Non-natural persons include companies and collective investment schemes. Bulk purchasers of residential property can claim a new relief under which the rate of SDLT is determined by using the mean consideration per dwelling instead of the aggregate consideration. The relief is available for transactions on or after 19 July Residential property transfers up to 150,000 in disadvantaged areas are exempt from SDLT. The list of almost 2,000 disadvantaged areas that benefit from the exemption is available on the Stamp Office website (www.hmrc.gov.uk/so). It is based on the index of deprivation and covers the most disadvantaged 15% of wards in England and of postcode areas in Scotland. In Wales and Northern Ireland, the exemption applies to the most disadvantaged 42% of wards. Sales of freeholds, lease assignments and lease premiums are all eligible for the exemption. Disadvantaged areas relief will not be available for transactions with an effective date after 5 April All Rights Reserved Page 11 of 14

12 There is no SDLT on property transfers within a 75% group of companies. Part exchanges of residential property, under which only one property is chargeable to SDLT at the full rate, are restricted to sales by house-builders. Otherwise, where property is exchanged, SDLT is charged on the full value of the consideration for each property. There are reliefs for subsales, buying property from personal representatives, chain-breaking companies and sale and leaseback transactions. The reliefs prevent a double charge to SDLT in certain circumstances. Under stamp duty, a double charge was prevented by avoiding a conveyance, but this technique does not avoid SDLT. The SDLT on the grant of a lease is 1% of the discounted net present value of the rent payable over the term of the lease, to the extent that this value exceeds 125,000 for residential property or 150,000 for non-residential property. The net present value is the rent payable over the whole term of the lease discounted at a rate of 3.5% a year. There are a number of special rules for particular circumstances. A lease premium relating to residential properties is chargeable at the full SDLT rates that apply to property purchases. However, where the rent for a non-residential property is more than 1,000 a year, the premium cannot be charged at 0% the lowest rate is 1%. The stamp duty on shares is only 0.5%. A buyer could save a considerable amount of tax by buying the shares in a property company rather than the property itself, provided the company holds only the property in which the buyer is interested. Council tax The acquisition of a company poses a greater risk for the buyer than the acquisition of assets. Commercial and other tax considerations must also be taken into account. There is anti-avoidance legislation to limit exploitation of this difference. The 15% SDLT rate for transactions after 20 March 2012 is intended to discourage the ownership of high value residential property in a company which can subsequently be sold without liability to SDLT. The Government is consulting on the introduction of an annual charge from April 2013 on residential properties valued over 2 million already owned by non-natural persons. Liability to council tax on domestic buildings is normally the responsibility of the residents, but the owner is liable if the building is empty. The owner might also be liable to council tax on buildings used as residential care homes, nursing homes or hostels and buildings in multiple occupation. Real estate investment trusts (REITs) Companies and groups of companies can become REITs and benefit from tax exemption on income and gains from property, provided certain conditions are satisfied. The tax consequences of a company becoming a UK REIT are: Qualifying rental income and gains from disposals of investment property are exempt from corporation tax. Other income and gains are taxable in the usual way. Distributions (dividends) to shareholders out of exempt profits are paid with 20% income tax deducted, and are taxed as property income of the recipient. All Rights Reserved Page 12 of 14

13 Individual shareholders liable to higher rate tax have an additional 20% tax to pay on the gross distribution. 30% tax is payable by individual shareholders who are liable to income tax at the additional rate. For corporate investors, the gross distribution is included in profits liable to corporation tax and the 20% tax credit is set against the tax payable. Distributions out of non-exempt profits are treated as normal dividends for tax purposes. REITs are eligible investments for individual savings accounts (ISAs) and child trust funds (CTFs). The main conditions for becoming a UK REIT are: The company must be UK resident. However, its properties do not have to be in the UK. The company s shares must be listed on a recognised stock exchange. It must not be a close company (controlled by five or fewer people) or an open-ended investment company (OEIC). At least 75% of the company s assets must be investment property and at least 75% of its income must come from investment property. The company must have at least three properties and no single property can represent more than 40% by value of the rental portfolio. The ratio of taxable rental profits before interest and capital allowances to interest on loans to fund the tax-exempt business must be more than 1.25:1. The company must distribute at least 90% of its rental profits. It is possible, however, for this test to be met by way of the offer of an optional stock dividend. A company or group that elects to become a UK REIT has to pay an entry charge of 2% of the market value of their investment properties on the date it joins the regime. It can choose to spread the charge over four years in instalments of 0.5%, 0.53%, 0.56% and 0.6%. The Government is considering abolishing this charge. Tax planning key points Corporate vehicles offer a number of tax advantages: It is easier to determine the nature of the activities: trading, investment etc. Corporation tax rates are, generally, lower than personal taxes. Finance costs are within the loan relationships rules and tax relief should be more readily available. Capital gains are reduced by an indexation allowance. It may be possible to sell the company rather than the property and to mitigate the SDLT charge on the purchaser. However: The tax rate on capital gains is the same as that for income taxable on the company. No CGT annual exemption is available. All Rights Reserved Page 13 of 14

14 Share transactions are subject to a range of anti-avoidance rules. Losses can be trapped within the corporate vehicle. This guide is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking action on the basis of the contents of this publication. The guide represents our understanding of the law and HM Revenue & Customs practice as at September 2012, which are subject to change. All Rights Reserved Page 14 of 14

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