Cathryn Pernstich looks at the three taxes that can apply to and influence the terms of a property transaction.
Tax is no-one’s favourite subject and is something that raises its ugly head frequently. It should be met head on and dealt with in a transaction sooner rather than later.
What taxes affect land?
There are three taxes that can affect a land transaction:
• VAT
• Stamp Duty Land Tax
• Capital Allowances
Each can affect cash flow and in the case of VAT and Stamp Duty Land Tax, can make the acquisition of land (be that leasehold or freehold) expensive.
VAT
If a newly constructed building is being sold freehold then VAT must be charged on the price if sold within three years of construction. Unless a transfer of a going concern can be shown to exist or unless the buyer is registered for VAT, the extra twenty per cent on the purchase price could be a painful surprise.
If the seller has elected to waive the option to tax then VAT will be payable on the purchase price or on the rent under any lease taken. Again, if the transaction can be structured as a transfer of a going concern or if the buyer/tenant is VAT registered then the additional twenty per cent may not be payable.
Stamp Duty Land Tax
Stamp Duty Land Tax affects commercial and residential properties alike. The amount payable will depend on the type of property, how many properties are owned (in certain circumstances) and the amount of the purchase price or rent payable.
It is worth mentioning that if VAT is payable on the purchase price or rent, then that additional twenty per cent will be included in the Stamp Duty Land Tax calculation – tax becomes payable on tax!
It can be worth taking specialist advice to try and mitigate Stamp Duty Land Tax liabilities.
Capital Allowances
An often forgotten area, capital allowances are applicable to both a seller and a buyer. If capital expenditure has been undertaken then either or both parties, working in agreement, could claim an allowance back from HMRC.
Too often tax implications in property transactions are left until just before exchange of contracts or even completion. At those points it is very hard to re-negotiate or re-structure the price or the terms of a deal. With a bit of time spent early on in the transaction, a buyer’s tax liability might be able to be reduced.
If you have any questions or would like to discuss any of the issues raised in this blog, please feel free to contact Cathryn Pernstich, Senior Associate within our Commercial Property team. Cathryn is contactable by telephone on 01737 854 521 or by email on [email protected]