During the pandemic, with the UK economy on the edge of collapse, the government moved swiftly to inject £80 billion into businesses through emergency loan schemes. Speed was critical, and verification checks were minimal, ensuring funds reached those in need quickly—but this urgency came at a cost.

As the dust settles, HMRC is uncovering staggering levels of fraud, with individuals and businesses exploiting loopholes, stolen identities, and shell companies to pocket millions. Now, a dedicated taskforce is racing against time to recover these misused funds and restore accountability to one of the most significant financial interventions in UK history.

Background on COVID loan schemes

It’s important to contextualise the pandemic, as the impact on individuals, companies, governments and countries goes beyond living memory. COVID was officially classed as a public health emergency of international concern by the World Health Organisation in March 2020. It was not until 5th May 2023 that the global emergency was officially brought to a close, although COVID still poses a degree of threat today.

During that time, several loan schemes were introduced with massive funding:-

• Bounce Back Loan Schemes: Provided £47 billion to more than 1.5 million businesses
• Coronavirus Business Interruption Loan Scheme: Provided £26 billion to 109,000 businesses
• Coronavirus Large Business Interruption Loan Scheme: Provided £5.5 billion to 753 businesses

Working together with the financial community, the UK government very quickly introduced financial support schemes, with the funds guaranteed by the government. This was the quickest way to fill a growing financial void, although preferring speed over checks at the time, bad debts and fraudulent activity are now a huge problem.

Before we investigate the level of fraud and misuse of COVID financial assistance, it’s essential to recognise the challenges and successes over this period, as well as fraudulent activity.

Rise of Covid loan fraud and misuse

As a consequence of misuse and fraud related to COVID loans, the government has made additional funding available to create a new HMRC taskforce. The taskforce has identified numerous methods of fraud, such as:-

• False claims – the use of dormant or dissolved companies and even non-existent employees.
• Fraudulent use of funds – many gained personally from the COVID loans, with some funds illegally transferred abroad to make them nearly impossible to recover.
• Identity theft – criminal gangs used stolen identities to apply for loans and grants.
• Collusion – many businesses colluded with their employees who were working while claiming furlough support.
• Multiple applications – individuals and businesses making multiple applications using different bank accounts.
• Misuse of Bounce Back Loan Scheme – the creation of shell companies to apply for loans, at which point the fraudsters disappeared
• Exploiting loopholes – urgency over depth of verification saw many individuals and businesses exploiting a lack of cross-referencing between agencies and banks.
• Fictitious business activities – some businesses with limited, if any, trading history were able to claim funds due to relaxed verification requirements.
• VAT and tax fraud – overstated losses and doctored records were used to evade tax while maximising pandemic relief funding.

As the government and businesses became more desperate, we saw the emergence of organised crime gangs. They were able to make fraudulent claims, in some cases involving millions of pounds. Alarmingly, while HMRC created a taskforce to investigate the misuse of COVID financial assistance, there is still uncertainty regarding the UK’s overall exposure and potential fraud.

National Audit Office

The National Audit Office estimates that approximately £21 billion was lost to fraud across government departments during the pandemic, with more than £7 billion linked to COVID support schemes. This equates to just over 2% of total COVID expenditure.

HMRC & COVID financial support

In 2022, HMRC estimated that £5.8 billion in public money had incorrectly been paid out as part of COVID financial support schemes. By 2023, initial expectations of recovering 25% of misappropriated funds were revised downwards to just 20%. Consequently, a staggering £4.3 billion was written off as irrecoverable.

Estimates vary as to total expenditure with regards to COVID, ranging from £310 billion million to £410 billion. However, in recent months, we have seen a significant increase in prosecutions through the HMRC taskforce.

The HMRC taskforce

In the spring of 2021, Rishi Sunak, the then-Chancellor of the Exchequer, announced the creation of a Taxpayer Protection Taskforce to combat fraudulent claims during the pandemic. The taskforce cost £100 million and consisted of 1200 HMRC staff. The target was to recover the £1.5 billion, pursuing legal action where there was a reasonable chance of a successful prosecution.

There are numerous forms of assistance and focused analysis, including:-

Cross-referencing and risk profiles

In an ideal world, in-depth cross-referencing would have allowed participating financial institutions to check the details of all COVID-related claims before the funds were made available. The taskforce finally introduced this, identifying duplicate claims and inconsistencies in financial filings. We also saw additional information from banks and other government departments integrated into this process to flag suspicious activity.

With literally millions of claims to process, businesses and individuals were categorised using cutting-edge technology so that the taskforce could prioritise high-risk applicants.

Whistleblower reports

As the electorate and businesses became more aware of the level of COVID fraudulent activity, we saw a significant increase in whistleblower reports. HMRC received 157,000 in the 2022/23 tax year, helping to identify fraudulent activity.

Targeted COVID support claim audits and investigations

Focused on some of the higher COVID support claims, HMRC was able to carry out in-depth audits of many businesses suspected of fraud. Using the latest technology, anomalies and discrepancies were identified, which very often opened the door to much deeper investigations.

As a consequence of the work of the taskforce, various legal tools were used to recover funds and prosecute fraudsters such as:-

• Freezing and seizing of assets
• Director disqualifications
• Prosecutions and publicity

While we await further updates, by May 2023, HMRC revealed that £1.1 billion had been recovered from fraudulent claims, but more work still needs to be done. In the 2023/24 tax year, 62% of director disqualifications (831/1222) related to misconduct and fraud involving COVID support schemes. A staggering 47% of the director bans were more than 10 years long, compared to just 6% before the pandemic.

Challenges in recovery

In theory, seeking redress should be relatively straightforward once the HMRC taskforce has identified fraudulent activity. In practice, this is never the case with an array of challenges to consider, such as:-

• Borrowers who have declared bankrupt
• Funds already spent or dispersed
• Tracing through often complex financial arrangements
• Jurisdictional challenges
• Sophisticated fraud schemes

Even though the UK government made £100 million available for the new taskforce, limited resources in certain areas restricted the ability to investigate potential fraudulent activity. Then there is the moral argument, enforcement vs supporting struggling businesses. Is this the right policy if claiming back fraudulent funds could lead to job losses?

While many will use the moral argument, the reality is that if funds were obtained fraudulently, HMRC has a duty to recover them where possible.

Implications for businesses

In a similar vein to random HMRC audits for legitimate businesses, which can be costly, some businesses will inevitably face COVID-related audits even if they have acted in good faith. As companies are obliged to cover the cost of such investigations, this can be especially troublesome for small to medium-sized businesses. Then there is the knock-on effect, increased compliance and documentation requirements as companies attempt to avoid future expenses.

The advice for businesses looking to stay compliant is simple:-

• Retain records of how loans were used
• Cooperate fully with HMRC enquiries

On paper, this looks relatively straightforward. However, it can be challenging when HMRC asks questions about COVID loans applied for in the depths of a financial crisis. Even those businesses applying for legitimate financial assistance may not have been as focused on documentation as they were on saving their businesses.

Conclusion

The COVID pandemic tested the UK economy like never before, with rapid funding measures averting collapse but leaving the door open to fraud. Now, HMRC’s recovery efforts underscore the importance of accountability in public spending while putting business compliance under the spotlight. The lessons learned during this unprecedented time will shape future financial practices and scrutiny.

If you’re concerned about an HMRC investigation or need clarity on your COVID funding claims, our team is here to help you navigate the process and protect your business. Please feel free to contact us at your convenience, and we can examine your situation in more detail.

The Labour government may have announced the recent changes to the Furnished Holiday Let (FHL) tax regime, but this shift has been in motion since the previous government began pushing for reform. The goal is straightforward: to align FHL tax rules with the broader regulations governing rental property income. While these changes, set to take effect in April 2025, will bring significant adjustments for those invested in holiday lets, there’s still plenty of time to take advantage of the current system—and prepare for what’s next.

Overview of the FHL tax regime

Before we look at the changes, it’s important to recognise the current FHL tax regime and what it means to those operating such businesses.

Criteria for an FHL

The criteria are relatively simple: to qualify as an FHL, the property must be:-

• Furnished
• Based in the UK or the European Economic Area
• Available for at least 210 days of the year
• Let for at least 105 days of the year

In addition:-

• The property cannot have the same occupier for more than 31 days
• The homeowner must not be considered an “occupier.”

All FHLs in the UK and EEA states are considered businesses for tax purposes, even if the properties are held in the owner’s name.

Tax advantages of an FHL

The FHL tax regime has attracted controversy in the past, even though the sector is very different from traditional buy-to-let property. Before the changes, owners of FHLs were able to claim tax relief on:-

• Finance costs
• Energy and gas bills
• Insurances and repairs
• Personal travel to and from the property
• Accountancy fees

There was also the opportunity to:-

• Offset the purchase of furniture, equipment and fixtures against capital allowances
• Count income from an FHL towards your annual pension allowance
• Benefit from capital gains tax relief (entrepreneurs, business asset rollover and gift relief)

For example, an FHL owner upgrading their property with a £20,000 kitchen renovation could previously offset the cost against their taxable income. From April 2025, they will lose this advantage, making such investments less tax-efficient.

Tax disadvantages of an FHL

While the FHL regime offers attractive benefits, it’s not without its challenges. Let’s take a look at some potential drawbacks, which include:-

• The need to register for VAT on turnover of more than £90,000 (previously £85,000) per annum
• Excess wear and tear on the property due to a higher turnover of tenants
• Losses can only be offset against the same FHL, as each one is treated as a separate entity
• Additional and ongoing administrative work required to achieve the qualifying criteria

When it comes to the VAT threshold, it’s important to note that, for a self-employed individual, the combined turnover of their business and FHL interests counts towards their vatable income.

Under UK income tax regulations, profits from FHLs are treated as part of a property business, although there are significant tax benefits. From April 2025, the tax treatment of profits will be exactly the same as that of a typical property business.

Looking at the broader picture, it’s not difficult to see why FHLs have been popular with property investors, farmers, and second homeowners. How the forthcoming tax changes will impact this sector remains to be seen. Would a general increase in running costs suggest an increase in letting rates?

What are the main changes from April 2025?

While some of the changes from April 2025 onwards may seem minor, they could considerably impact the cost of running an FHL and personal finances. The traditional benefits of holding an income-producing asset within a business remain untouched, but for FHLs, there are significant changes to accommodate.

Removal of capital allowances

Currently, FHL owners can offset the cost of, for example, a new kitchen against a capital allowance, but this will not be allowed in the future. However, you will still be able to offset the cost of a replacement kitchen (on a like-for-like basis) and other costs, such as upgrading from single-glazed windows to double-glazed windows. This is because this type of expenditure is not seen as a capital cost, i.e. improvement to the property, but as a repair cost.

Restrictions on loan interest relief

Similar to personal mortgage interest relief, loan interest relief will only be available at the basic rate of income tax from April 2025.

End of business asset reliefs

While FHLs historically qualified for business asset disposal and rollover relief, this will not be the case under the new tax regime.

Changes to relevant earnings

Like income earned by a business, income from an FHL won’t qualify as relevant earnings for pension contributions under future regulations. This is more significant than some people might appreciate!

Succession planning changes

The removal of gift holdover relief will force many to review their future succession plans concerning FHLs. 

Transition rules and deadlines

Typically, there is a window of opportunity between the announcement of tax changes and their implementation. Regarding the FHL changes, the majority will not come in until April 2025. However, the government has introduced an anti-forestalling rule to prevent owners of FHLs from benefiting from early property sales. This rule became effective on 6 March 2024, the budget day, when future changes were confirmed.

There are still some helpful transition rules and deadlines, which include:-

• Maximising capital allowances for historic property expenditure
• Review succession plans
• Assess how this may impact your pension contributions

Whatever your situation, you should still seek professional advice to maximise the remaining benefits.

Don’t discount the FHL sector

There is no doubt that the loss of various capital allowances and reliefs, compared to traditional property businesses, is a blow to the FHL market. However, it’s important to maintain sight of the underlying attractions post-April 2025. These include:-

• Simplified tax reporting – this could reduce administration and professional costs
• Capital gains potential – supply issues could increase the capital value of remaining FHLs
• Stable rental income – the home holiday market is expected to remain strong 
• Flexibility – potential to switch between short, medium and long-term rentals

Those reading the recent press comment on FHL changes could be forgiven for assuming this is the beginning of the end for FHLs. This is not the case. 

As we have seen repeatedly, investment markets adapt to change in a way that maximises long-term income and capital appreciation. There is still potential for long-term capital gain, and the benefits of stable rental income should not be dismissed when it comes to FHs. Property and FHLs also provide an element of diversification for investment portfolios.

Conclusion

Historically, the generous tax benefits of holding FHLs in your own name, where they’re treated as business assets, led many investors to skip building formal business structures for their portfolios. However, with the upcoming changes, this landscape is set to shift. The new tax regime might prompt many FHL owners to rethink their strategy and consider transitioning to a more formal business structure.

Beyond addressing the immediate tax implications, it’s crucial for FHL owners to understand how the changes will affect their long-term income and tax liabilities. Now is the time to evaluate future strategies and make informed decisions about restructuring portfolios to minimise impact.

We’re here to guide you every step of the way – whether you need advice on navigating the upcoming changes or support in restructuring your assets for future success. Don’t wait until it’s too late – reach out today, and let’s work together to protect and grow your business in this evolving landscape.

Property tax exemptions and reliefs are a relatively straightforward topic on the surface, but they often have many moving parts. Over the last few years, there have been some significant changes in tax regulations for private property, personal property investment and investment via a company structure. While this has prompted some investors to reconsider their buy-to-let investments, it’s critical that you are aware of tax exemptions and reliefs for all of the scenarios. 

This article follows a recent one that covered less well-known tax exemptions but is focused solely on property. As with many investment tax reliefs and allowances, there may be time constraints or limitations that you may not be aware of.

Overview: Property tax exemptions and reliefs

When used correctly, property tax exemptions and reliefs are a means of either mitigating or eliminating tax liabilities, although they will very often require long-term planning. Property liabilities typically relate to capital gains, but, as we will see, there are scenarios where you may be liable for additional income tax. 

Whatever your scenario, it’s essential that you are aware of the most appropriate structure for your situation and that you react to changes in the future.

Tax exemptions and reliefs on private homes

Before we look at different ways of investing in property, several property tax exemptions and reliefs are available for private residences. These include:-

Private residence exemption

Under this tax break, which is also referred to as principal private residence relief, the sale of your primary residence is normally exempt from capital gains tax. For the vast majority of people, this will be a relatively simple scenario. However, where a secondary property was your primary residence for a period of time, you may be eligible for a partial exemption on a sale. This would be an issue to take up with your accountant and tax adviser.

Inheritance tax exemption

Regarding your share of a primary residence, anything you leave to your spouse or civil partner is exempt from inheritance tax. This is a valuable means of shielding your primary residence from tax on your death.

Residence nil rate band

In 2017, the government introduced a “residence nil rate band” of £175,000 to protect the family home from inheritance tax on death. This additional allowance can be used when leaving your main residence to your children or grandchildren. Together with the basic inheritance tax allowance, this provides potential protection on the first £500,000 of your estate.

Rent-a-room scheme

There is also a useful rent-a-room scheme that allows owner-occupiers or tenants who let out furnished accommodation in their home to earn up to £7500 a year tax-free. Where there is a joint letting arrangement, the allowance is split between the two individuals at £3750 each. If you provide additional services such as meals, this would be added to the rental income and count towards the allowance.

Investing in property as an individual

The 1980s saw a significant increase in homeownership across the UK, property investment, and the emergence of the buy-to-let sector. When investing in property, it’s important to know the property tax exemptions and reliefs and the most appropriate structure for your assets and income, whether in your name or as part of a company. We will now consider the consequences of investing in your name.

Buy-to-let rental income

If you acquire buy-to-let rental properties in your own name, the net rental income is added to any other income and charged at your relevant income tax rate. There are various charges which you can offset against gross rental income relating to the running and maintenance of the property. 

Mortgage interest relief

Historically, landlords could offset mortgage interest against their gross rental income to reduce their net taxable income. In April 2020, the government withdrew mortgage interest relief and replaced it with a basic 20% tax credit on rental income. This makes no difference to buy-to-let landlords in the 20% tax band, but for higher-rate taxpayers, it significantly reduces the amount of mortgage interest they can offset.

Capital gains tax

When holding an asset in your name, it is possible to offset all or part of any gain against your capital gains tax allowance. This allowance has fallen significantly recently, from £12,300 per annum to £6000 in the last tax year and £3000 in the 2024/25 tax year. 

Usually, any profit over and above your allowance would be added to your income and charged at the appropriate tax rate. However, there are separate rates for profits on residential property ranging from 18% for basic rate taxpayers up to 24% for higher rate taxpayers (recently reduced from 28% in the Spring Budget 2024).

Property allowance

Each individual also has a property allowance of £1000 a year, which can be used to offset gross rental income. It’s important to note that this allowance cannot be used against income as part of a rent-a-room scheme but could be used against another property or where perhaps you rent out a caravan or even a boat. As a condition of using your property allowance, you cannot offset any associated costs, so getting professional financial advice is essential.

Investing in property within a company

As your buy-to-let property portfolio increases, the subject of whether to switch from personal ownership to a company structure will likely arise. Before we look at tax exemptions and reliefs for company-based investments, it’s important to note the legal position. In the eyes of the law, a company is seen as an individual, a standalone legal entity that can take out loans, own property, sign agreements, etc. 

Tax on property income and profits

While there are specific rates and exemptions for income and profits for property held in your name, the situation for a company structure is relatively straightforward. Property gains and income within a company are subject to corporation tax instead of personal income or capital gains. For the 2024/25 tax year, the main rate of corporation tax is 25% although this is reduced to 19% for what is known as the “small profit rate”, companies with profits under £50,000.

Deduction of expenses

Putting aside the subject of personal and company mortgages, two very different sectors, there is one significant difference regarding the deduction of expenses. Any charges incurred in relation to finance, such as interest on a mortgage, can be deducted from gross income when calculating a company’s taxable income. This is in stark contrast to the changes to mortgage relief for individuals, as stated above.

Annual tax on enveloped dwellings

As a side note, there is an additional tax known as the annual tax on enveloped dwellings, which relates to property held within a company. Property assets need to be revalued every five years, and the total value will attract an annual charge ranging from:-

• £4400 per year for property assets valued between £500,000 and £1 million
• £287,500 per year for property portfolios valued in excess of £20 million

While those using companies to manage their property assets are unlikely to reach the higher echelons, this is still a charge that needs to be considered.

Property Tax Summary

The tax system, particularly property tax exemptions, varies significantly for personal and investment property held in your name and those managed via a corporate structure. There are also additional running expenses and charges for drawing income from a company, whether via dividends or salary, which will impact your net return. 

If you are considering property investment and are uncertain about holding assets in your own name or via a company, it’s critical that you take financial advice from a specialist.  

We would welcome the opportunity to discuss your situation and plans in more detail and consider the options available.

While the Labour Party’s deputy leader, Angela Rayner, continues to be headline news, there is also a growing focus on the complicated UK tax system. The purpose of this article is not to add fuel to the fire of a political argument but to dissect the current regulations, loopholes and the often absurd complexity of taxation in the UK.

The Angela Rayner story

Angela Rayner, the MP for Stockport, bought her council house in 2007 under the right-to-buy scheme. She received a 25% discount on the property’s asking price, a saving of £26,000, buying the property for £79,000. Fast forward to 2015, and the property was sold for £127,500, which equates to a profit of £48,500. As the property was deemed her main residence, there was no capital gains tax to pay.

However, between the purchase and sale of the property, Angela Rayner married Mark Rayner in 2010. There is confusion as to whether Ms Rayner’s main residence was her own or her husband’s property, where she spent time and is said to have used on official documentation for their children.

As always, when it comes to taxation, the devil is very often in the details. While not directly addressing the above scenario, it does prompt a number of questions. There is also an additional subject regarding electoral rules and the fact that voters are legally obliged to register at their permanent address (main residence).

Taxation, marital assets and your main residence

There are specific tax rules for assets transferred between spouses and civil partners and the sale of a main residence. Under normal circumstances, the sale of an individual’s main residence is exempt from capital gains tax, as are asset/investment transfers between spouses or civil partners. So, it seems fairly straightforward, but then we have the term “living together.”

Spouses “living together” can only have one main residence, on which a sale would be free of capital gains tax. However, what if we have a scenario where a couple lives separately and has separate houses and, therefore, doesn’t “live together” in the traditional manner? Would each have a capital gains tax exemption for their main residence in this scenario?

HMRC legislation is confusing

One of the headlines regarding this situation suggests, under HMRC regulations, that spouses can only have one main residence between them. This closes the potential tax loophole where spouses can nominate a different property as their main residence and avoid any capital gains tax on a sale. However, there are situations where spouses or civil partners can be legally separated for capital gains tax purposes:-

• Under a court order
• By a formal deed of separation
• In circumstances where the separation is likely to be permanent

To make a confusing situation even worse, did you know there is no specific legal definition of the term living together? HMRC legislation points to various non-legal definitions, leading many to believe these are legally tested.

However, there is no such confusion over the term main residence, defined as:-

• A property where you spend a substantial amount of time during the period of ownership
• Personal belongings and continuity of occupation provide evidence of your permanent address
• An official residence when it comes to public records such as the electoral roll

When we say no confusion, we mean no confusion to the general public, but there is from a legal standpoint. It is possible to pursue alternative legal declarations regarding your main residence and taxation. However, as you can see above, there are a clearly defined number of conditions when identifying your main residence.

Capital gains and your main residence

As discussed above, the story of Angela Rayner, now being investigated by Greater Manchester police, seems to relate to electoral law. If it was found that Ms Rayner’s main residence was her spouse’s property, she may have broken the law, but the time limit for prosecution has already expired. That said, if there were discrepancies with the definition of her main residence, HMRC could potentially pursue her for capital gains tax on the £48,500 profit made on the sale of her property. 

In many ways, this argument has become a point of principle. If deemed a second home, the capital gains tax rate for a sitting MP in 2015, on £74,000 a year, would be 28%. This equates to a £13,580 taxable profit, which, assuming Ms Rayner had not utilised her then £11,100 capital gains tax allowance, equates to a potential tax bill of £2480. When the cost of any repairs on the property is taken into account, the potential tax bill could be reduced to zero. 

Until HMRC is able to define a legal term for “living together,” we may see a number of similar instances going forward.

Capital gains tax implications and divorce

After a recommendation from the Office of Tax Simplification in 2021, the UK government agreed to relax the capital gains tax rules on divorce. New legislation was brought in for disposals on or after 6 April 2023, marking a significant change.

Rules before 6 April 2023

As normal, prior to 6 April 2023, couples either married or in a civil partnership could use the nil gain/nil loss basis transfer of assets. While the partner acquiring the assets would inherit the base cost of the partner disposing of the assets, there was no tax liability on the transfer. However, if the relationship broke down and they separated the nil gain/nil loss rule would only apply until the end of the tax year in which they parted ways.

This was deemed unfair because a couple parting at the start of the tax year would have more time to organise their assets more tax-efficiently. Someone separating on 4 April would have literally one day to use the transfer between spouses, after which any transfers would be treated as a disposal – and potentially subject to CGT.

Rules from 6 April 2023

In what many view as a much fairer system of separation, HMRC introduce four new rules from 6 April 2023 onwards:-

• Parting couples now have up to 3 tax years from the tax year they separate to transfer assets under the nil gain/nil loss basis. This period could be cut short on a formal divorce if the partnership is dissolved or annulled or if they parted as part of a formal separation order.
• Where a formal divorce/separation agreement is in place, the three years can be extended as part of the arrangement.
• The nil gain/nil loss basis relief has been extended to include situations where an interest in the marital home is retained and then sold – not transferred to the other partner.
• In situations where one partner transfers their share of the marital home to the other but retains an interest in future profits, relief would again be extended and applicable, when sold, in a similar manner to that applied to the original transfer.

These changes have been welcomed in what can be very challenging situations where the immediate focus is naturally on the wider family rather than finances. Levelling the playing field also gives separating couples more time to negotiate a balanced financial settlement.

Summary

While it will be interesting to see how Angela Rayner’s story develops, the main focus of this article is on the often complex UK taxation system and confusion regarding the term “living together”. Even though HMR legislation may portray a seemingly legal definition, this is not the case, and until this is challenged in the courts, the situation is unlikely to change.

As you can see, what many may deem straightforward situations can very quickly become complex and potentially expensive. If you would like to discuss your circumstances in more detail, please feel free to call one of our team today.

What is an NNP?

Before we look at changes to ATED in more detail, it is essential to recognise the definition of an NNP. This description covers numerous bodies, such as:-

• A company
• A partnership (with a corporate partner)
• A collective investment scheme
• Trusts

Anybody holding property in their own right will not be liable for ATED.

What is the purpose of ATED?

Introduced on 1 April 2012, ATED is an annual tax targeting UK residential properties owned by NNPs. All properties valued up to £500,000 are exempt from the tax with a sliding scale on those valued upwards of £500,000. Initially, when the scheme was introduced, properties valued at up to £2 million were exempt from the tax. However, in 2015 the exemption was reduced to £1 million and then down to £500,000 in 2016.

While income tax bands tend to increase in line with inflation, this has not been the case for the ATED thresholds. Since inception, they have remained unchanged at:-

As you might have guessed, while the ATED tax bands have remained rigid, annual tax charges have increased year of year in line with inflation. The following table gives you an idea of the long-term impact:-

Some of the early tax charges have increased significantly over time!

Changes to ATED going forward

Those properties acquired by an NNP before the introduction of ATED in April 2012 would have been revalued as of 1 April 2012. Since its inception, the idea was to revalue all NNP-held properties every five years.

The 2012 valuation would dictate ATED liabilities for the subsequent five tax periods, 2013/14 up to 2017/18. On 1 April 2017, all NNP-held properties were again revalued, with the new figure used to calculate tax payments for the five years from 2018/19. Any potential ATED liability on properties acquired between valuation dates would be based on the purchase price, prior to the next wholesale revaluation.

Currently, ATED charges cover the period from 1 April to 31 March and are paid in advance by the end of April. In the last budget, the Chancellor confirmed the new valuation point for properties held by NNPs and increased tax charges in line with (high) inflation. As a result, all properties will now be revalued as of 1 April 2022, with this figure used as a base to calculate any ATED for the five periods starting in 2023/24. On a side note, if part of an ATED qualifying dwelling is sold for more than £40,000, this will trigger a revaluation for ATED purposes.

What is classified as a dwelling?

Dwellings are best described as properties where all or parts are/could be used for residents. This will take in houses and flats, and the valuation will also include gardens, grounds and additional buildings. It is important to note that the valuation is not just based on the residential building itself when part of a more extensive development.

Specific residential properties are exempt, undeveloped land is only subject to ATED in certain circumstances, but residential properties under construction, or those adapted as residences, will be subject to the ATED criteria.

Are there any exemptions from ATED?

While technically, they are built to house people; several properties are not considered dwellings for ATED purposes. These include:-

• Prisons
• Care homes
• Halls of residence
• Military accommodation
• Hotels
• Boarding schools
• Hospitals
• Guesthouses

It is vital to take advice if unsure whether an NNP held property should be classed as a dwelling. In some situations, relief may be available to reduce your ATED or bring it down to nil.

Submitting your ATED return and taxes

All ATED submissions are made using the HMRC online service, with many people using their accountants to calculate potential ATED liabilities. Your return (and any taxes due) should be submitted before the end of April during the taxable period. Late or inaccurate submissions will likely attract penalties. This is where the value of your accountant comes in!

Statistics about ATED

The UK government has compiled a list of interesting statistics about ATED, which may surprise many people. For example:-

• ATED receipts have fallen each year during the period 2015/16 up to 2020/21
• 2020/21 receipts came in at £111 million (a fall of 13% on the previous year)
• ATED income decreased in all bands except for the £500,000 – £1 million range
• 85% of total ATED receipts in 2020/21 came from London, dominated by the boroughs of Westminster and Kensington and Chelsea

Yet again, London dominates the UK property market!

Summary

Property price movements before, during and in the aftermath of Covid have been mixed in different areas of the country. The heavy dependence on London dwellings, and challenging market conditions, may explain the short-term fall in ATED receipts. However, in the long term, the value of dwellings tends to rise; therefore, the rigid ATED tax bands will draw more properties into the tax threshold each year.

Conversely, as mentioned above, individual tax band charges increase in line with inflation, with a significant rise this year. As a consequence of the revaluation and an across-the-board increase in tax rates, ATED income will likely rise in the short term. Yet again, the Chancellor has done no favours for NNPs holding dwellings which fall under the ATED criteria.

You might also like to read our article, Why Is the Moyne Ramsay Ruling So Important?. This intriguing case centred on a property divided into ten separate flats for letting, raising the critical question: was this considered a business or an investment? The article explores the implications of the ruling and its significance for property owners and investors alike.

The Trust Registration Service (TRS) was created in 2017 as part of an EU Anti-Money-Laundering Directive (the 4th Money-Laundering Directive). Even though the UK has withdrawn from the European Union, as part of the Brexit withdrawal agreement, it was agreed that the TRS would be maintained. The idea is simple, to help combat money laundering, serious crime and the financing of terrorism. Consequently, all UK express trusts liable to pay tax in the UK were legally obliged to register.

New rules introduced on 6 October 2020

On 6 October 2020, as a consequence of the 5th Money-Laundering Directive, the rules dictating registration with the TRS were updated. The legal obligation for registration is now extended to cover the following:-

• All UK express trusts
• Non-UK express trusts
• Bare trusts
• Some complex estates

Before we look at the impact on property ownership and the TRS, it is essential to note there are still some trusts excluded from registration. These include:-

• Trusts imposed by statute
• Trusts created by court order
• UK registered pension trusts
• Trusts used to hold life, retirement or health policies
• Trusts used to hold insurance policy benefits
• Charitable trusts
• Pilot trusts holding no more than £100
• Will trusts
• Property co-ownership trusts, where the trustees and beneficiaries are the same
• Financial/commercial trusts set up in the course of professional services/business transactions
• Child bank accounts held in trust, holding cash but no investments
• Trusts holding funds for vulnerable people/bereaved minors
• Personal injury trusts

At first glance, the list of exemptions may seem complex but it is relatively straightforward. By removing relatively simple trusts in the equation, this allows the authorities to focus on larger more complex trust. As a result of the changes, non-exempt trusts in existence on or after 6 October 2020 are obliged to register with the TRS by the later of:-

• 1 September 2022
• 90 days from when registration is triggered

Now that we have established which trusts are covered and which are exempt, we will now take a look at the information required by the TRS.

Information required when registering a trust

To fulfil their legal obligations, trustees must provide the following information to the TRS:-

• Lead-trustee
• Co-trustees
• Settlor
• Beneficiaries

Initially, where a beneficiary is not named individually, perhaps part of a class group, their details will not be required. However, when they receive financial/non-financial benefits from the trust, and they are identifiable at this point, their identity will need to be revealed to the TRS.

How does the TRS impact property trusts?

In recent times, trust laws have been used to mask the underlying ownership of property and land. This was a prevalent method for overseas investors looking to acquire property in the London property market. The update to TRS rules will now force many trusts holding property to register with the TRS. However, it is crucial to recognise the distinction between the legal owner and the beneficial owner.

Legal owner

The legal owner is named on the title deeds at the land register and can make decisions regarding the asset.

Beneficial owner

The beneficial owner is the person(s) entitled to income from the property or proceeds from the sale.

While the legal owner(s) have the power to sell the property, a valid deed (signed by all parties) needs to be registered with the land registry. This is done using an accompanying Form B which adds a restriction over the title deeds. Consequently, the non-legal owner will be made aware if the property is being sold.

Practical examples involving property

Now that we have set the groundwork, we will look at some common scenarios involving trusts and property and whether they need to register with the TRS.

Property held for children under the age of 18

Schedule 1(2) of the Trusts of Land and Appointment of Trustees Act 1996 covers legal protection of property held by two or more persons where at least one is under the age of 18. In this scenario, the property must be kept in trust by those over 18 for the benefit of themselves and those under 18. As this is a trust imposed by legislation, it would be exempt from TRS registration.

Joint ownership of property

Where property is held in joint ownership between two or more people over 18, as a bare trust, it would typically need to be registered. However, if the trustees (the legal owners) and the beneficiaries are the same, this would fit the conditions for exclusion. Consequently, there is no obligation to register with the TRS.

Land Registry

There is a specific condition for exclusion where there are more than four joint owners and more than four beneficiaries. Under existing legislation, the Land Registry legal title for a property can only define up to 4 parties. So, if we assume there are five beneficial owners, but only four are mentioned on the legal title, this trust would be excluded from registration.

However, if only three of the five owners were mentioned on the legal title, this trust would need to be registered. This is because one of the beneficial owners is not mentioned on the legal title; therefore, there is no official note of their beneficial interest.

Keeping a record of beneficial ownership

The ongoing tightening of TRS regulations is a means by which the authorities hope to record the beneficial ownership of property and other assets. Initially, only those bare trusts with a tax obligation were legally required to register details with the TRS. However, the circumstances have now been extended to include an array of situations where there is no immediate tax liability. This will allow the authorities to monitor properties and assets where legal owners differ from beneficial ones.

Summary

There will no doubt be further additions to the TRS regulations to combat potential money laundering and the non-payment of taxes. Since its inception, the regulations have been tweaked and adjusted numerous times to exempt an array of traditional activities involving trusts. At the same time, they are recognising and bringing more complex trust arrangements within the remit of the TRS. By shining a light on the use of trust deeds to manage assets and tax liabilities, the authorities hope to reduce potential abuses of the system.

Sources:-

• https://townends.com/blog/trust-registration-service-co-ownership-of-land-and-property/
• https://www.lodders.co.uk/all-you-need-to-know-about-the-trust-registration-service/
• https://gateleyplc.com/insight/quick-reads/the-trust-registration-service-trs-an-overview-of-the-new-legislation-and-how-it-affects-property-transactions/
• https://townends.com/blog/trust-registration-service-co-ownership-of-land-and-property/
• https://albertgoodman.co.uk/insights/extension-to-the-requirement-to-register-a-trust-under-the-trust-registration-service

Annual Tax on Enveloped Dwellings

All companies (whether UK or not) holding UK residential property valued at over £500,000 are subject to the Annual Tax on Enveloped Dwellings (ATED).

The ATED year runs from 1 April to 31 March and companies must file an ATED return by 30 April for each ATED year during which they hold a UK residential property. If any reliefs are available then an ATED relief return must be submitted in order to claim them, if a relief does not apply then the company will be liable to pay an annual chargeable amount based on the value of the property at the most recent valuation date.

The ATED rules require a revaluation of existing property every five years.    The last revaluation date was 1 April 2017 or date of acquisition whichever is later.  Therefore, from 1 April 2023 the valuation date will change to 1 April 2022 or date of acquisition if later.

For the ATED return due for 2023/24 which is due for filing by 30 April 2023, all existing properties will be required to be revalued at 1 April 2022.  This could mean more properties are likely to breech the £500,000 limit and fall into the ATED regime for the first time.  There is the possibility that some properties have fallen in value and will therefore fall out of ATED regime, although this is likely to be rare.

Please note that any failure to file an ATED return, even if an ATED relief is claimed, penalties will be applied.

Annual Tax on Enveloped Dwellings –What do you need to do

1. Any residential properties within entities already claiming ATED reliefs (such as property developers or residential landlords) will not need to revalue the properties at 1 April 2022 provided the reliefs continue to apply.
2. Other entities with residential properties should review their portfolios and the individual values of any residential properties at 1 April 2022 to ensure that any ATED compliance matters are known well in advance and complied with.  Whilst the revaluation date does not kick in until 2023 it is advisable to obtain the valuation now.

While governments often wax lyrical about simplifying the UK taxation system, it only seems to get more complicated. Take the potential tax charge on selling a property and any resulting capital gains. You could understand different rates for personal and business transactions; surely that must be about it?

How many different rates of tax are there?

As you will see, the rate of tax charged on the sale of property ranges from 0% to 45%! To simplify a relatively complex subject, we will look at personal and business transactions separately.

Personal transactions

There are many different issues to consider concerning personal investment in residential and non-residential property. A further split between residents and non-residents of the UK makes the situation a little more complex.

Principal Private Residence

As the vast majority of homeowners in the UK only own one property, their principal residence, they will likely qualify for private residence relief. This means they will pay 0% tax on capital gains when selling their home. Aside from the primary residency condition, to qualify for the relief, there are other conditions:-

• No part of the property has been used exclusively for business purposes during the period of ownership
• The property, including gardens and grounds, is not greater than the permitted maximum area
• You have not been absent from the property, aside from allowed periods of absence, during the period of ownership

If a property were your principal residence for part of the ownership period, then any relief on capital gains tax would be prorated. After considering your capital gains tax allowance, any remaining gains are added to your taxable income. If you remain within the basic income tax band, you would be charged 18% on the taxable gain or 28% if you exceeded the basic income tax band.

Non-residential property

Non-residential property tends to cover assets such as plots of land, shops, factories and offices, i.e. properties where you would not normally reside. If the sale was carried out in a personal capacity, you could offset gains against your capital gains tax allowance. Any gain which exceeds this amount would be added to your taxable income. If this were within the basic income tax band, you would pay a flat 10% on the taxable gain, rising to 20% for those above the basic income tax band.

Non-resident, sale of UK residential property

The subject of non-residents and capital gains tax has prompted many controversial headlines over the years. Under the current tax system, non-residents won’t pay capital gains tax on most of their UK assets, such as shares. However, they are required to pay capital gains tax on property and land gains in the UK. If the property/land was held before 6 April 2015, the individual has the option to rebase the value to 5 April 2015.

Typically, a non-resident would be eligible for the standard capital gains tax allowance. Chargeable gains over the annual allowance are added to the individual’s taxable income. Combined income exceeding the basic income tax band would see the gains charged at 28%; those below the limit are charged at 18%. Any disposal must be reported to HMRC within 60 days of completion, regardless of any gain/loss, via the capital gains tax on UK property service.

Non-resident, UK non-residential property sales post-April 2019

In April 2019, the UK government extended the scope of capital gains tax to include all UK real estate and land, not just residential. We also saw new regulations covering what were deemed indirect property sales. This covers the sale of shares in property-rich companies which derive at least 75% of their value from UK land/ property (not trading assets). This subject is covered in more detail in the corporate section below.

Simplified tax rates for UK residents

As a UK resident, if you have a chargeable gain on a residential property, this would be added to your taxable income (less your capital gains tax allowance). If your combined taxable income does not exceed the basic rate tax band, you will be charged 18% on the gain. If the combined taxable income takes you above the basic rate tax band, you would be charged 28%. The rate for commercial property gains is less, at 10% and 20% respectively for the individual tax bands.

Corporate transactions

The situation regarding property tax is different again when transactions are carried out by corporate bodies. While less complex than taxation on personal property investment, it is vital to be aware of your obligations.

Limited company sale of residential property

Many investors have used limited companies to hold their buy to let assets in the private rental sector. In this situation, where the trading of properties is supplementary to the main business, gains on a property sale would be subject to corporation tax. This rate is currently 19% but is subject to change.

Company shares held by a non-resident taxpayer

In the past, some non-resident taxpayers in the UK have used corporate entities such as limited companies to shield property gains from capital gains tax. However, as we covered above, this has changed due to new legislation introduced in 2019. As a result, if a non-resident taxpayer owned at least 25% of shares in a property-rich company, deriving at least 75% of its value from non-trading UK property and land, any disposal would be considered an indirect property sale. While normally share sales for non-residents are free of capital gains tax, in this scenario any gains would be charged at a flat rate of 28%.

Property trader/developer

Usually, chargeable gains on property disposals would be added to your income, with rates of 18% for those who do not exceed the basic rate tax band and 28% for those who go above. However, the situation is different if an individual is deemed a property trader/developer. Unable to use the standard capital gains tax allowance, profits on property sales are classed as trading income. Consequently, for an additional rate taxpayer, this would mean a charge of 45%, a 17% increase on the usual capital gains tax rate!

Conclusion

As individuals and companies become more innovative in the structure of property investments, HMRC has introduced an array of new regulations. This has resulted in a range of capital gains tax rates on property, ranging from 0% to 45%. Recently, there has been much focus on non-resident investors and, in particular, treatment of both direct and indirect property gains. It is safe to say this is a fluid situation!

When you mention tax and the property market, people automatically assume you are talking about SDLT (stamp duty land tax). However, many people are unaware that value-added tax (VAT) is a factor in many property transactions. Introduced back in 1973, when the UK joined the European Union, VAT is the UK government’s third-largest source of revenue after income tax and national insurance. However, what should have been a relatively simple system has become highly complicated. So how does VAT relate to the property market?

Before we look at the various scenarios regarding property and VAT, it is essential to note that a VAT exemption will likely mean you have to reclaim the VAT from HMRC. Consequently, you may pay the VAT initially and then need to reclaim it, potentially impacting cash flow.

Residential and commercial property

There are two distinct areas to consider when looking at VAT in the property market, residential property and commercial property. The rules relating to VAT are very different, and you must be aware of potential liabilities. As we are talking about a possible 20% increase in your budget if VAT is charged, it is crucial to know the situation before you start.

Residential property

When considering the impact of VAT on residential property activities, it can become relatively complicated. We will now look at some of the more frequently asked questions when it comes to residential property and potential exposure to VAT.

Buying and selling residential property

This is one of the more straightforward scenarios. VAT is not charged when buying and selling residential property. Depending on the scenario, the buyer may be liable to SDLT, but there is no exposure to VAT. However, if you use the services of an estate agent or other service provider, their fees will attract VAT.

Demolition and/or rebuild of residential property

When demolishing an entire residential property to ground level, the costs incurred are exempt from VAT as is the rebuild budget. However, when only demolishing a part of the property, it may be open to interpretation regarding the retention of a facade. This relates to whether the subsequent rebuild is classed as an alteration, enlargement or extension to the remaining structure. If so, there would be no exemption, and VAT would be charged on services and materials.

On a similar tack, the cost of materials and labour is also VAT exempt on new build properties, as is a subsequent sale.

Renovating a residential property

As a general rule, all products and services are charged at 20% VAT unless specifically exempt. Consequently, an individual carrying out renovation work on their own home would be eligible for full VAT on materials and services. There may be scenarios where VAT is reduced, which include:-

• Installation of energy-saving material
• Installation of grant-funded security/heating systems
• Installation of mobility aids for the elderly
• Renovation of a property which had been empty for two years

If a residential property has been empty for at least two years, you would be eligible for a VAT reduction from 20% to 5%. This would cover the cost of labour and materials, although not everyday items such as televisions, carpets, etc. The government introduced this VAT reduction to encourage the renovation of previously empty residential properties.

Converting non-residential property into dwellings

On the subject of renovations, there are VAT exemptions for those looking to convert non-residential property into dwellings. However, there are conditions attached:-

• The building has never been used as a residential dwelling

OR

• The building has not been used for residential purposes in the previous 10 years

In this scenario, the developer can claim back all VAT when the property is sold. Alternatively, if the homeowner retains this as a private residence, they can claim VAT under the DIY Builders Refund Scheme.

Commercial property

As you might expect, the VAT landscape is very different for commercial property, and there are several issues you need to be aware of. We will now look at some of the more common scenarios regarding commercial property and potential VAT liability. However, before we look at different scenarios in detail, there is one issue to consider, opting to tax a property.

Opting to tax

Except for new commercial properties less than three years old, normally, VAT is not part of the sale price. Therefore, in a typical scenario, the property is seen as an exempt supply when it comes to VAT. This prompts the question, why would you opt to make a property a taxable supply?

The answer is simple; you are converting an exempt supply into a taxable supply to recover VAT related costs. Opting to tax is especially useful if you rent out commercial property. While you will need to charge VAT on rents to the tenant, you would be able to reclaim VAT on the purchase, ongoing expenses and related professional charges.

You can only revoke the option to tax on a building in limited circumstances such as:-

• 20 years after the option to tax was exercised
• Within a six month cooling-off period, assuming no input tax has been claimed or output tax charged
• The buyer has no interest in the property after six years, e.g. you opted to tax the property before purchase, only for the deal to fall through

If you own several properties, the option to tax is not a blanket condition and can be carried out on individual buildings. However, there are pros and cons concerning this option, and it is vital to take advice from your accountant.

Purchase of a commercial property

The purchase of commercial property and the exposure to VAT can get a little complicated. We will therefore attempt to simplify this by reviewing various scenarios.

Purchase of new commercial building
The purchase of commercial premises deemed “new”, i.e. less than three years old will incur a 20% VAT charge on the sale price.

Purchase of established commercial building
Where you buy established commercial premises, i.e. at least three years old, usually there is no VAT to pay on the purchase price. However, where the property has been “opted to tax”, VAT will be charged at the standard 20% rate.

Purchase of opted to tax commercial building
Under normal circumstances, where a commercial building has been opted to tax, VAT will be charged on top of the sale price. However, the situation is different where the property is part of assets sold with a going concern business. The asset sale is deemed neither a supply of goods nor a supply of services – consequently falling outside the scope of VAT. In this scenario, VAT would not be applied to the property sale price.

Sale of a commercial property

If a commercial property has not been opted to tax and is not less than three years old, there won’t be any VAT to pay. Where the buyer of a commercial property has opted to tax, they would usually be forced to charge VAT on any future sale. However, there are some scenarios where a buyer can disapply the seller’s option to tax.

In this scenario, the property would become exempt for VAT purposes but only in the following circumstances, where the property is to be:-

• Adapted for use as a dwelling
• Converted into another residential building, e.g. care home or student accommodation
• Used for charitable purposes
• Sold to a housing association
• Used as a caravan pitch
• Used as a houseboat mooring

It is not difficult to see the potential benefits for the buyer, i.e. a reduced purchase price. However, the seller could have significant financial consequences, as they would not be able to reclaim VAT incurred in relation to the transaction. In addition, they may have to pay back an element of VAT they have claimed in the past.

Implications for SDLT

There may be a potential knock-on effect to the SDLT charge depending on whether a building is opted for tax or not. As SDLT is charged on the gross sale price, whether or not VAT is applied can significantly affect the SDLT charge.

Understanding property VAT

We have touched on several scenarios where VAT may be charged and the potential knock-on effects on various parties. There are obvious pros and cons, but you must take professional advice before either opting for tax or buying a property already opted for tax. Failure to do so could prove very expensive!

Sources:-

https://www.stephensons.co.uk/site/businesses/srvrealestate/property-guides/vat_property_transactions/

https://druces.com/reduced-vat-rate-residential-property/

https://www.diydoctor.org.uk/projects/renovation-conversion-vat.htm

https://renovateme.co.uk/blog/reduced-vat-for-renovation/

https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708 – reduced-rating-the-renovation-or-alteration-of-empty-residential-premises

https://www.thecpa.co.uk/news/vat-free-home-improvements/

https://www.self-build.co.uk/question/reclaiming-vat/

https://www.gov.uk/guidance/buildings-and-construction-vat-notice-708

https://www.gov.uk/guidance/construction-services-and-zero-rated-relief-vat-information-sheet-0717

https://www.no-use-empty.org.uk/advice-and-guidance/property-tax-and-vat/reduced-vat-schemes/

https://www.taxinsider.co.uk/vat-what-is-the-option-to-tax-and-why-would-you-do-it

https://www.taxinsider.co.uk/revoking-the-option-to-tax-after-years-ta

https://www.etctax.co.uk/knowledge_centre/disapplication-of-an-option-to-tax-seller-beware/

https://pkffpm.com/trending-topics/revoking-option-to-tax/

https://www.gov.uk/government/publications/vat-revoking-an-option-to-tax-after-20-years-vat1614j

In his Spring Statement, the Chancellor announced a cut in fuel duty for petrol and diesel as he sought to ease the impact of rising prices for households and businesses.

The Chancellor will lift the starting thresholds for National Insurance contributions (NICs). He also pledged a cut to income tax in 2024. However, the Health and Social Care Levy will still be implemented in April 2022.

For businesses, there is an increase to the Employment Allowance, as well as relief from business rates on a range of green technologies and help with training and the adoption of digital technology.

You should contact us before taking any action as a result of the contents of this summary.