After you’ve established your budget, found a potential property, and researched the legals, it’s just as important to consider the tax position before bidding at auction. Once the auctioneer’s gavel has struck, you’ll be stuck with a legally binding contract with limited opportunity to change the tax consequences.
Intention and structure
“What was the intention when you bought it?” is the question we ask the most in connection with property transactions, because your intention as a trade or investment purchase defines its tax treatment and its acquisition vehicle/strategy.
So before you sign on the dotted line, make sure you’re clear which legal entity is buying the property and why, or if you need a bit more flexibility, ask your legal team to organise the paperwork so you can clarify the legal purchaser after auction but before completion. Changing your mind can result in additional SDLT / VAT being paid on the transaction, so it’s important to get it right.
Understand the SDLT position
Once the hammer falls on that lot, you’ll be contractually obliged to pick up all the extra fees and costs that go on top of the auction price – one of those is SDLT (stamp duty land tax). With different rates for different uses and users, it’s important to check you’ll get the rate you’re expecting, and that any plans you have to benefit from SDLT reliefs (e.g. subsale relief) work out as you’d expect.
Do your VAT homework on commercial lots
The VAT position of a commercial property can be complex – it depends on whether the property was ‘VATable’ under the vendor, and what your intention is for the property after acquisition.
To be certain of VAT recovery, you may need to register your acquiring vehicle for VAT and opt the property to tax before the auction date, even if you don’t know if yours will be the winning bid.
We’d suggest some pre-auction checks of the legal pack/selling conditions:
- Check whether the vendor has registered the property for VAT (opted to tax). If so, is the vendor intending to sell with VAT, or without as a TOGC (transfer of a business as a going concern)?
- As a rule of thumb, if the seller has registered the property for VAT and you want to recover the VAT, you’ll have to VAT register and opt the property to tax (the option is not transferrable from the vendor). Whether you need to register before the auction depends on:
- How the deposit is paid – if it’s passed direct to the vendor you must apply for VAT and opt to tax before the auction. It is rare for a deposit to be paid direct to the vendor, but it is important to be aware.
- How long you have between auction date and completion – you will need HMRC to approve your VAT/option papers before completion, but they can take up to 6 weeks. Delays in receiving confirmation from HMRC can result in financial issues at completion.
- If the vendor is planning a TOGC sale, check in advance whether you also meet the complex TOGC conditions. Flipped sales and leasebacks are examples of areas where your plans for the property may mean you fail the TOGC tests, even if the vendor qualifies. The benefits of a TOGC transaction are that you’ll save on SDLT (SDLT is charged on the VAT inclusive price), and you’ll avoid having to finance the refundable VAT.
- For a mixed use property – check the agreement is clear that VAT is only charged on the commercial parts, and on what basis the auction price will be split between commercial and residential elements. If the auctioneer mistakenly charges VAT on the residential part, it is irrecoverable, so check before you sign. There may be tax benefits from careful apportionment of value between commercial and residential – if there is an opportunity to negotiate the split, talk to us before you sign.
- Your intention for the property can also affect the VAT status – a conversion of commercial to residential can result in a clawback of VAT if you don’t meet certain conditions.
Of course, if you don’t win the auction, you’ll need to rescind any VAT notifications you make over the property, but this is relatively straightforward. So if you’re really keen on the property, and the VAT numbers are significant, consider a speculative registration prior to attending the auction.
For residential property, unless you are planning new build or certain conversion projects, you’re unlikely to recover any VAT you pay – so build this into your pre-auction viability review. If you are looking at any sort of conversion or build projects, a quick chat with us could confirm whether there’s any scope of reducing the VAT rate, or recovering any of the VAT. Similarly for any mixed use developments.
Capital allowances – a valuable tax saving, if you know what you’re looking for!
This valuable allowance can give buyers of investment property a double tax deduction on certain assets within the fabric of a commercial/mixed use building (or substantial common parts of residential blocks) classified as “plant” by HMRC’s guidance.
A surprising number of property owners (and their advisors) don’t fully understand the benefits, or how to maximise these allowances. This can be for as much as 40% of the purchase price of an office space – a tax saving of £160k on a £2m building.
The rules are complex, but you might be prepared to bid differently on a property, if you thought you could negotiate additional tax benefits together with the sale.
There are two pots of allowances potentially available:
- Allowances that the vendor would have been entitled to claim.
These can only be passed on by mutual agreement between you and the vendor (s198 agreement), and many vendors choose to retain such allowances. But for an administration/LPA receivership sale, the additional tax losses may not be useful to the vendor, so they may sign the valuable capital allowances over to you, if you negotiate with them directly. They’re unlikely to agree anything in advance of the auction, but it could be worth approaching them beforehand to understand their position.
- Allowances that the seller was not entitled to claim.
The rules classifying which assets are eligible for capital allowances were expanded in 2014. This means there may well be further assets that the vendor was not entitled to claim, but you would be, as a new buyer of those assets. Claiming for this does not require vendor permission, but the assets need identifying by the buyer, so again, it could be worth a conversation with the owner in advance of the auction.
Implications for funding
At the point you win your auction bid, the deposit is immediately payable, with completion scheduled for shortly afterwards. It’s unlikely that a bank will have enough time to turn around its mortgage paperwork between auction date and completion – so you’ll need plans in place to fund the timing gap.
Bridging or short term finance can cover the gap, but make sure you’ve also considered your tax cash requirements (e.g. any VAT requiring upfront payment or additional SDLT), and built those into the plan as well.
As you’d expect – the above are headline issues over some pretty complex rules – if you’re considering a transaction where the above issues are relevant, chat things through with your usual contact here at BKL to make sure you’re on track, or get in touch with our specialist property team via our enquiry form.
