A question of intent

November 1, 2018

HMRC continues to take a very keen interest in the profits of property businesses. Tim Mallon, managing director of Leathers the Accountants, explains the importance of intention in determining tax treatment

Purchasing property can undoubtedly be a lucrative business – whether you buy with a view to selling and making a profit, or rental income is the goal, property is certainly a sector that continues to offer rewards. But not just to the investors…

It is widely known that the numbers employed by Her Majesty’s Revenue & Customs (HMRC) are much reduced when compared to those 15 years ago. Despite this reduction in workforce, the pressures on HMRC to maintain and increase the tax yield have never been greater and this has led to its resources being focused on those sectors where the increase in tax resulting from an ‘intervention’ should be significant. Property is one such sector.

In 2016, we saw the introduction of new rules dealing with the taxation of UK land owned in some way by a non-UK resident company or individual. This has led to the creation of the Offshore Property Development Task Force, a team of 50 HMRC professionals focused on the implementation of these new rules.

The new rules seek to tax property development (as opposed to investment) activities carried on by non-UK residents as income; potentially subject to tax at rates up to 45 per cent. A significantly higher potential rate when compared to tax rates on capital which can be as low as 20 per cent for commercial property owned by an individual. For both UK and overseas investors in property, obtaining capital treatment can be vital to the overall profitability of the project.

When faced with any form of challenge from HMRC, evidence is crucial. None more so than when that evidence demonstrates the original intentions of the parties.

In 2015, developer Terrace Hill (Berkeley) Limited won a Tax Tribunal case which demonstrated this very point. The company made
a property acquisition in 2000 and completed the renovation of it in 2003. Two years on, in May 2005, it let the property, but then sold it only four months later.

HMRC sought to tax the profit on the sale as income. Terrace Hill successfully argued against HMRC that the intention had always been to keep the property as an investment to provide rental income but as this was proving to be less than anticipated, they decided to sell when they received an offer that was too good to turn down.

In Terrace Hill’s successful appeal against the HMRC judgement, the tribunal pointed to detailed minutes from its board meeting, which supported its claim it intended to keep the property. The minutes also set out the expected rentals at the outset which meant that the company could demonstrate that actual rentals were disappointingly low. Furthermore, the company accounts had always treated the property as an investment asset, consistent with the stated intentions in the board minutes.

The documents created at the outset of this venture were key in determining the eventual outcome. Proper preparation is key and that includes consulting a specialist in property tax before you take any decisions for yourself – only when you fully understand your tax position can you make an informed choice in what to do about it.

Leathers the Accountants
The team at Leathers the Accountants are leading property tax advisors and have advised investors and property businesses on the most complex of matters for almost 30 years. Contact Tim Mallon on: 0191 224 6760

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