The Stamp Duty Land Tax (SDLT) holiday, announced on 8th July 2020, was welcome news to UK house buyers. This holiday extended the 0% rate of SDLT on house purchases, with completion dates before 31 March 2021, to properties with a value of up to £500,000. In the 2021 Budget, Rishi Sunak further extended the holiday to 30 June 2021.
Following this announcement, the UK has seen a buoyant property market, with house purchasers racing to complete property sales before this valuable holiday from SDLT ends. Nationwide Building Society reported that house prices rose to a six year high at the end of 2020. Between July and October 2020, house sales were up between 40% and 60% compared to the same period in 2019.
Such a buoyant property market has increased the competition to buy houses, so how could this have impacted those who have property development businesses?
If a property developer has been unable to compete in such a fast-moving market, they may have considered changing the nature of their business, moving away from buying and selling properties and, instead, renting out some or all of their current property portfolio in order to generate rental income.
If such a shift in business has taken place (and is not temporary), property developers should be aware that this could be at the expense of forfeiting valuable tax reliefs, such as relief from Inheritance Tax (IHT) and Capital Gains Tax (CGT).
Certain businesses receive 100% relief from IHT if, amongst other things, the business is mainly trading. This is a valuable relief, considering the rate of IHT is currently 40%. In general, property development would potentially be classed as a trading business and attract 100% relief on the business or share value. However, as the relief would not be available to businesses whose main function is to hold investment assets, such as rental properties, this relief could be lost if the decision is made to move away from a trading business to a rental business.
This shift towards an investment business could also impact the availability of the lower rate of CGT on the sale of a business or company shares. Again, if a trading business is sold at a capital gain, Business Asset Disposal Relief could reduce the rate of tax to 10% from 20% or 28%. The criteria for the lower rate of CGT are much stricter than the relief from Inheritance Tax Relief and the relief could be lost if more than 20% of the business is formed of investments, such as rental properties.
It is important to speak to a tax adviser if you are a property developer who has already made this change or if you are thinking about doing so. At Smith Cooper, we can analyse the assets held within your businesses in order to advise if relief would be available, or any steps that you may need to take. We can also advise on tax planning that can be done in order to utilise the reliefs available, in advance of the business moving towards having an investment function. Please do not hesitate to get in touch with our tax specialists.