Market Masterclass: Single Family Rental - Tax

Matt Poole: So what are the key tax issues I am seeing in single family rental? I think the main tax issues are VAT, SDLT and corporation tax and it is really important to think about those early on because tax can be quite a major cost if you get the structuring wrong but if you think about it early enough in the process, it is quite easy to mitigate most of the tax charges.

In respect of VAT, not being able to recover VAT is a potential 20%25 real cost for the company so it is very important to get that right. With proper structuring it is possible to usually recover the whole of the VAT other than things like white goods are the exception to that.

For SDLT it is important to think about if the commercial rates or residential rates for SDLT apply and whether any release such as multi-dwellings relief are available. It could also be advantageous to acquire the shares in a property-only vehicle if that is possible.

In respect of corporation tax, businesses obviously expect to pay tax on their profits but it is important to make sure those tax charges only arise once the income is actually coming into the company and that you do not suffer a dry tax charge.

There are three different main categories of VAT that could apply. Supplies can be standard-rated i.e. subject to VAT at 20%25; they can be zero rated, which means there is VAT at zero percent or they can be exempt, which means there is no VAT but it has an impact on recovery.

Businesses are able to recover VAT they incur in respect of standard-rated or zero-rated supplies but they cannot recover VAT they incur in relation to exempt supplies, so exempt supplies are generally a bad thing for a business to be making; so when we are looking at the VAT position of the structure we are trying to minimise any VAT leakage on exempt supplies.

The first step is to minimise any VAT incurred in the first place. This involves thinking about the VAT treatment of the acquisition of the land and the construction of the property.

The first thing to think about is the VAT treatment of the acquisition of the land and the construction works. So the acquisition of the land could be VAT-able – standard-rated if the seller has opted to tax the land and its commercial or bare land; or it could be zero-rated if the residential development started and you have got beyond what's called the golden brick stage.

Golden brick is simply the layer of bricks above the foundation level. At that stage a sale can be zero-rated such that the developer does not incur any VAT on the purchase.

To the extent a developer does incur VAT in respect of the development, to recover that VAT they need to be making a zero-rated supply of the property, and the way we deal with that is generally granting a lease for more than 21 years to a group company, which tends to be called a VAT lease.

The benefit of that is that it allows you to zero-rate that supply and recover the VAT incurred in respect of the development. So, for that reason, it is important that the developers do not make supplies of less than 21 years or other exempt supplies of the property before making that zero-rated grant.

In terms of the building works, they are generally zero-rated in respect of residential property; architects' fees and certain professional fees might be standard-rated and VAT-able but this is a point that should be covered off in the building contract to make sure there are no misunderstandings between the parties.

So another way of minimising the VAT on acquisition of the land is to structure the transaction as a TOGC. That stands for a transfer of a going concern. It applies where there is a transfer of a business from one party to another and the result of that is that the transaction falls outside the scope of VAT so there is no VAT chargeable, so that is a good thing for the purchaser.

TOGC treatment applies where there is a transfer of business. Business is a very broad concept and can include a property rental business or it could be a development business which is quite often looked at in this context.

Obviously with an election on the horizon there is increased prospect of change in the tax system and the Government is clearly going to be looking to raise further revenues from tax payers. The corporation tax rate obviously increased to 25%25 recently.

Probably unlikely that that will come down any time soon. A simplification of the SDLT rules would be really welcome given it has become very complex recently and also it would be worth looking at the thresholds for the various bands of SDLT given that house prices have gone up over the past few years. That unfortunately seems unlikely. SDLT is a bit of a political hot potato.

Frequently there are discussions about whether it should be a buyer's or a seller's tax and the impact it has on the market, housing market. Also recently there has been a lot of discussion about a land value tax which would negatively impact developer's returns – so we'll just watch this space in terms of to see what comes next.