The property owner
Crystallising a loss: sale to a third party
Where an owner is sitting on a property standing at a loss, crystallising that loss through a sale can be beneficial – especially if the owner has other properties standing at gains, which is often the case. Crystallising can be used to offset capital gains tax (CGT) on profitable investments, reducing overall tax liability.
The easiest way to crystallise a loss is to sell the loss property to a third party. This is not likely to raise concerns from HMRC. However, the loss rules can be quite restrictive and generally losses can only be offset against profits in the same year or future years. So timing is key.
Use of losses can also be quite restrictive. Capital losses are normally only offsetable against other capital gains, and the rules for individuals are more restrictive than for companies.
Writing down the property’s value
If timing of sale cannot be organised to allow offset, more thinking is required. For the owner who holds property as trading stock, a write-down of the value in the accounts is normally deductible. While there are sometimes psychological hurdles to overcome here, the ability to offset the loss should not be overlooked.
Sale to a connected person
For the person holding their property as an investment, write-down does not create a tax loss. Consideration can be given to crystallising the loss through a sale to a connected person. Connected persons for this purpose include spouses, civil partners and certain relatives.
Problems to be aware of:
- The loss can only be used against gains made on sales to the same connected person. This is not fatal but means that sales of gain assets must be routed through the same connected person. That person can’t be the spouse, as no gain or loss arises on an inter-spouse transfer.
- Transfer of the property can give rise to a stamp duty land tax (SDLT) charge that needs to be considered.
Losses on investments and loans
Where the property is held in a company, as well as the loss on the property itself, the owner may also be able to claim tax relief for their loss on the investment in the company, or on loans to the company. Although losses on shares are normally capital losses, in some cases it is possible to convert these into income tax losses.
Alternatives to selling: gifting a property
Not all owners nursing a loss need to sell. Many can afford to sit on the property and await better times.
Here there can be opportunities for a little estate planning where a parent wants to give away property to their children. A gift of a property is treated for capital gains purposes as a sale of the property at market value, even though the donor receives no cash. A downturn can offer an opportunity to make those gifts with little or no tax arising.
Letting on a temporary basis
Another common situation for property developers originally intending to sell their completed residential units is to let them for a period until the market picks up.
A problem arises if the developer has recovered VAT on the basis that they were going to sell. If they decide to let, that is exempt for VAT purposes and the VAT recovered may have to be paid back to HMRC.
An HMRC practice relating to developers letting on a temporary basis can help here. Or failing that, another possibility is to engineer a sale to a connected person which might enable VAT recovery to be maintained.
The direct tax and SDLT issues arising here can be complex and need to be considered alongside VAT.
Property incorporation
Some personal landlords, because of the unfavourable rules on tax deductibility of interest, are faced with negative cashflows after tax even though they are positive pre-tax. This is prompting many landlords to sell up.
An alternative approach is to incorporate the portfolio i.e. to transfer personally owned property to a company. There are plusses and minuses of incorporating and the process is not completely straightforward. There’s more information in our article on the potential tax pitfalls of property incorporation.
The opportunist property buyer
Buying debt
In some cases, consideration can be given to acquiring the debt funding the property rather than the property itself, especially where the amount of the loan has become more than the value of the property. Buying the debt will not normally give rise to SDLT, and so can be a considerable saving if the debt gives the buyer the control they need over the property.
In some cases, buying debt at a discount can give rise to a deemed taxable release of the debt, so this needs to be considered carefully. Happily, there are exemptions from this where the borrower is insolvent.
Buying the company
Another option is to buy the company that owns the property. A key benefit of buying the company is that stamp duty on shares is 0.5% compared to the much higher SDLT rates on buying the property.
Buying a company can be problematic if the property is standing at a gain, as it can lead to double tax when the buyer comes to sell. But where the property is standing at a loss, this issue goes away and could even lead to doubling up of losses!
The buyer may also be able to benefit from the high original cost base when they come to sell. This could significantly reduce or avoid tax on the eventual resale. There are anti-avoidance provisions which can prevent the use of a loss existing at the time of acquisition of a company, so this needs to be managed carefully. However, it won’t always apply where the loss is used to shelter the gain on the property owned by the company when the company was acquired.
