Commercial Property Tax: Everything You Need to Know
You really don’t want to get into commercial property unless you’re very familiar with the UK’s commercial property tax scene. The last thing you need is to fall foul of a set of complex tax rules, leaving yourself vulnerable to huge unexpected bills, potential fines, a bad record with HMRC, or even a repossession. This article reveals everything you need to know about the ins and outs of property tax on commercial buildings, including commercial property capital gains tax and commercial stamp duty. Read on to stay clear of problems with the tax man!
Commercial Property Tax Complexity
Commercial property tax vs residential? They’re very different. At the same time the UK’s sale of commercial property tax system is notoriously complex, tricky for anyone but experts to decode. Commercial property taxation is steeped in complexities of its own, not least because it has gone through so many changes over the years.
2013 saw non-resident companies selling high value UK residential property came under the Capital Gains Tax umbrella, with a rate of 28%. In 2015 Non-Resident Capital Gains Tax was brought in for non-UK residents when they made a profit on selling UK residential property.
In 2017 the Autumn Budget extended the non-resident capital gains tax regime to commercial property disposals from April 2019. Before then, non-UK residents in the shape of individuals, companies and trusts didn’t pay UK tax on the financial gains they made when selling UK property.
Because every commercial property tax rate rule your business falls under will probably change again at some stage, you will always benefit from professional guidance.
Stamp Duty Land Tax
What is SDLT? It means Stamp Duty Land Tax, also simply known as ‘Stamp Duty’, payable when you complete the purchase of a property. From 1st October 2021 onwards the stamp duty on commercial property rates are:
- For a property worth £0 to £125,000 – 0%
- £125,001 to£250,000 – 2%
- £250,001 to £925,000 – 5%
- £925,000 to £1,500,000 – 10%
- £1,500,000 or more – 12%
It’s also important to know Land & Buildings Transaction Tax, also called LBTT, applies if the commercial property you own is in Scotland. It’s also important to know that, 1st April 2018, SDLT in Wales was replaced by a devolved tax called Land Transaction Tax or LTT.
Value Added Tax
VAT or Value Added Tax also applies to commercial property. Ideally you’ll clearly establish the VAT position of a commercial property before signing on the dotted line. You need to be clear about whether VAT will be payable on the property’s acquisition, or whether you can transfer it as exempt from VAT, falling under the ‘transfer of a going concern’ (TOGC) rule. This depends on whether the seller has ‘opted to tax’ for VAT purposes.
As a seller or landlord you can decide to Opt to Tax, which means a commercial let or sale that would otherwise be exempt is liable to pay VAT at the standard rate of 20%. This means you must charge VAT on top of the rent, and also means you can claim back the VAT you paid on any costs related to the property. If you choose to do this, you have to tell HMRC within 30 days of your decision. And once it’s made, you can’t reverse the decision for 20 years – another great reason to seek expert tax advice.
Rental profits are subject to income tax, but as you’d expect you can make deductions for expenses. The income tax rate can be as high as 45% so it makes a lot of sense to know the ropes. Allowable expenses involve all the costs around the day-to-day running of the property, and include a wide variety of work, goods, and services:
- Your letting agent and accountant fees
- Your legal fees for lets of a year or less
- Your legal fees for renewing a lease for less than 50 years
- Buildings and contents insurance
- Maintenance and repairs (not improvements)
- Utility bills
- Rent and ground rent
- Service charges
- Council Tax
- Cleaning, gardening and the like
- Phone calls, stationery, advertising, marketing and more
UK companies must pay Corporation Tax on their rental profits. The current Corporation Tax rate is 19% and the calculations are similar to income tax assessment. You pay Corporation Tax on profits from doing business as a limited company, or as an overseas company with a UK branch, and there’s no bill as such. You need to calculate and report it yourself.
Taxable profits for Corporation Tax include the money you make from doing business, called trading profits, plus any investments, and any assets you sell for more than you paid for them, something called chargeable gains. Bear in mind if your business is UK based you’ll pay Corporation Tax on all the profits you make here and abroad.
Capital Gains Tax
How about capital gains on commercial property? The commercial property Capital Gains Tax rate for individuals dropped to 20% in April 2016. Companies pay corporation tax on property sales, but there’s Entrepreneurs Relief to take into account, available to individuals and also to some trustees.
Entrepreneurs’ Relief reduces the amount of Capital Gains Tax you pay on a property sale or after 6 April 2008, having met the qualifying conditions via a two year qualifying period running either up to the date of disposal or the date the business ceased trading. There’s a lifetime limit on capital gains for every individual person, for disposals of property on or after these dates:
- 6 April 2008 to 5 April 2010, £1 million
- 6 April 2010 to 22 June 2010, £2 million
- 23 June 2010 to 5 April 2011, £5 million
- 6 April 2011 to 10 March 2020, £10 million
- 11 March 2020, £1 million
As we mentioned, Land & Buildings Transaction Tax (LBTT) applies if you’re in Scotland. 1st April 2018 saw SDLT replaced in Wales by a devolved Land Transaction Tax (LTT). Both of these are similar to Stamp Duty Land tax or SDLT, but not exactly the same. Make sure, if this applies to you, that you understand which tax relates to your business and how much you’ll need to pay.
Understanding commercial property tax
Now you can see which commercial property tax you’ll be liable for. But as you can also see, it remains complex. This is a task for an expert – a good accountant will make certain you know what taxes you face, how much they’re likely to be, and when they come due. As a prospective property investor or developer, knowing your tax can make all the difference between a thriving property business and one that ends up dead in the water.
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