More Pain for Property Developers

It remains to be seen what impact Covid-19 and the lockdown procedures will have on the housing market going forward but certainly many property developers, particularly at the smaller end of the market will be feeling the pinch.

It may be that, at least in the shorter term, they will find new properties harder to sell and may even be forced to change their trading model such that properties are let out rather than being sold.  Whilst this may be intended as only a temporary measure until the market picks back up and will certainly provide a welcome source of income in the intervening period, it can have important ramifications from a tax perspective.

VAT Recovery

VAT on inputs on the construction of new residential properties can be recovered in full based on the developer’s intended use for the property.  If the first grant of a major interest in the property is intended to be a zero-rated disposal (as a sale of the freehold or grant of a long leasehold would be) the input VAT can be fully recovered.

If, instead of a sale, the developer decides to hold the property for letting, this is an exempt supply and a partial exemption calculation would be needed.  This could lead to a clawback of some of the VAT already recovered.

There are ways to avoid this issue, for example, by a sale of the property to an associated company but care is needed before taking such a step.

Annual Tax on Enveloped Dwellings (ATED)

To add to the pain, high value rental properties owned within companies are potentially subject to the ATED regime.

The regime currently catches properties which are worth more than £500,000 (based on value as at 1 April 2017 or purchase price if later) and, if caught, the annual charge ranges from £3,700 up to £236,250 (across six bands).

For the year ended 31 March 2021 both the ATED return and any tax due must be dealt with by 30 April 2020 otherwise penalties will be imposed.

There are a number of exemptions from the charge which can benefit both property developers and those operating letting businesses. Whilst this is good news, the exemption has to be claimed via submission of a “nil return”.

With effect from April 2018, ATED returns must be submitted online and this involves a registration process which can be time consuming.

ATED values are soon to be rebased to 1 April 2022 values and it will be interesting to see the impact of both Brexit and Covid-19 in this regard.

If you require assistance with either property related VAT recovery or ATED then please get in touch.