Overview - AC3600



Some notes on the tax issues that may arise when a business acquires new premises (particularly where this happens in an examination question) includingVATBusiness RatesLegal expensesLease Premiums – income taxLease Premiums – capital gainsCapital allowances – fixtures and integral featuresStamp Duty Land Tax (SDLT)235728372695Health WarningThe notes in this booklet are designed to summarise some of the basic rules in respect of the taxes relevant to the sale and rental of business properties. They are largely condensed versions of HMRC guidance.They cover the material you need to understand for the purposes of an Undergraduate tax examination but, in real life the rules can be much more complex and the relevant facts harder to establish. Once you’ve finished the Module, don’t rely on what’s written here, go back to the original sources and take advice from an experienced colleague.00Health WarningThe notes in this booklet are designed to summarise some of the basic rules in respect of the taxes relevant to the sale and rental of business properties. They are largely condensed versions of HMRC guidance.They cover the material you need to understand for the purposes of an Undergraduate tax examination but, in real life the rules can be much more complex and the relevant facts harder to establish. Once you’ve finished the Module, don’t rely on what’s written here, go back to the original sources and take advice from an experienced colleague. VAT and propertyThis is an extract from Chapter 26 Property of Andrew Needham’s Value Added Tax 2011-12 (one of a series of Core Tax Manuals published by Bloomsbury Professional). “The VAT law applying to land and property is very complex and depending on the transaction it can be standard-rated, lower-rated, zero-rated or exempt….“To cover all the rules on property, in detail, would take an entire book in itself. The purpose of this chapter, therefore, is to demonstrate, by outlining the rules and explaining the more straightforward traps for the unwary, and why property transactions are the quickest way of losing a really large sum of VAT.“Property is an important minefield. It is important because every business occupies property either as owner or as tenant. It is a minefield because there is a wide range of possible transactions; there are several sets of rules in different parts of the law; and those rules are very complex.“If a business does not know VAT law on property thoroughly, it should get advice from a professional adviser. In order to get good advice, a business will need to give a detailed explanation of the facts of a proposed transaction properly. A business can’t do that if it does not have any idea of the rules which might apply, and, therefore, the facts which might be relevant. Thus, anyone with senior accounting responsibilities needs to have some idea of the key rules on property, so that they can spot situations on which they need advice.”There isn’t space in this Module to cover, in any detail, the finer points of VAT. Do please take heed of Andrew’s warnings here should you ever be responsible for advising on property transactions once you graduate.For the purposes of AC3600, the only aspects of VAT and property that you need to remember are:The general rule is that transfers of land and the grant of leases are exempt from VAT (Group 1 of Schedule 9, VATA1994)A landlord can elect to waive the exemption. This is commonly known as the “option to tax”.The option to tax converts an exempt sale or rent of property into a standard-rated output. The advantage of this is that related input tax is then recoverable.A property owner will usually only opt to tax if the tenants are VAT registered and can reclaim any VAT charged to them. Business RatesSee the Valuation Office Agency leaflet Business rates – an introductionAvailable at: site also gives the following short explanation of business rates:“Non-domestic rates are a means by which businesses and other occupiers of non-domestic property indirectly contribute towards the costs of the services provided by local authorities.This fact sheet provides an introduction to some of the issues that may affect you if you occupy non-domestic (business) premises. This includes properties occupied by organisations who do not operate in order to make a profit. The income from all non-domestic rates is paid into a national pool and redistributed between local authorities in proportion to their adult population. Domestic properties are subject to council tax.”Legal expensesThe costs associated with acquiring an interest in land are regarded as capital in nature (unless the person involved is actually trading in land). However, HMRC allow the expenses involved in the simple renewal of a lease to be treated as revenue expenditure.The first two extracts below explain HMRC’s view of what may be allowable from the tenant’s point of view (in the Business Income Manual) and the landlord’s (in the Property Income Manual). The final extracts are taken from the Capital Gains Manual and explain when you can allow legal expenses as a deduction in the CG calculationsEXTRACT 1From HMRC’s Business Income Manual BIM46420 - Specific deductions: professional fees: renewal of leasesPractical approachProfessional fees incurred on the renewal of a short lease with the owner's consent are capital but are likely to be small; in which event you may allow them on de minimis grounds. Circumstances where the amounts may be material and where you should contend, in appropriate cases, that the expenditure is of a capital nature include those where:the new lease is for a long term (say, a period which exceeds, or may at the lessee's option exceed, 50 years), orthere are provisions in the lease for the payment of a premium (or for equivalent capital outlay by the lessee). In practice the disallowance may be limited to a proportion of the expenses of renewal appropriate to the premium etc.As regards the cost to the lessor of granting a lease, see PIM2205 [see below] Fees in connection with proceedings under the Landlord and Tenant Act 1954 may include:the costs of resisting ejection from the premises,obtaining a new lease in face of opposition by the landlord, orsecuring compensation under the Act.Such expenses stem from the landlord's refusal to renew the lease and you should not regard them as an admissible deduction.EXTRACT 2From HMRC’s Property Income Manual PIM2205 - Deductions: specific items: legal & professional costsOverviewExpenditure on professional fees of a revenue nature is deductible if they are incurred for the purposes of the rental business. Professional fees are not allowable if they are capital or they are not incurred wholly and exclusively for the purposes of the rental business. Generally, the fees are capital if they relate to a capital matter, such as the purchase of property.The expenses incurred in connection with the first letting or subletting of a property for more than one year are capital expenditure and therefore not allowable. The expenses include, for example, legal expenses (such as the cost of drawing up the lease), agent’s and surveyor’s fees and commission. Expenses for a let of a year or less can be deducted.The normal legal and professional fees incurred on the renewal of a lease are also allowable if the lease is for less than 50 years. But any proportion of the legal etc costs that relate to the payment of a premium on the renewal of a lease are not deductible.Where a replacement lease follows closely on a previous one, and is in broadly similar terms, a change of tenant will not normally make the associated legal and professional costs disallowable. Any proportion of the legal or other costs that relate to the payment of a premium on the renewal of a lease will, of course, remain disallowable.If, however, the property concerned is put to some substantial use other than letting, such as occupation by the owner between lets, or where, say, a long lease replaces a short lease, the legal and other costs will be capital expenditure. In such circumstances, the expenditure is analogous to a physical alteration or improvement to the landlord's capital asset.Other examples of allowable legal and professional costs that may be incurred include:costs of obtaining a valuation for insurance purposes,the normal accountancy expenses incurred in preparing rental business accounts and agreeing taxation liabilities (see below),subscriptions to associations representing the interests of landlords,the cost of arbitration to determine the rent of a holding,the cost of evicting an unsatisfactory tenant in order to relet the property.Other examples of non-allowable legal and professional expenses include:legal costs incurred in acquiring, or adding to, a property,costs in connection with negotiations under the Town and Country Planning Acts,fees pursuing debts of a capital nature, for example the proceeds due on the sale of the property.Capital expenses may be allowable in computing any capital gain or loss on the disposal of the property. See the CG manual. [Emphasis added – see below]Cost of taxation accounts and negotiationsFees incurred on preparing accounts for commercial reasons and on many other accountancy services will meet the ‘wholly and exclusively’ test. Hence the cost can be deducted in computing rental business profits.Strictly, any additional fees incurred for computing and agreeing the tax liability on rental business profits are not deductible. But, under a long-standing practice, normal recurring legal and accountancy fees incurred in preparing accounts or agreeing the rental business tax liability can be deducted.This practice does not extend to other personal fees; for example, fees incurred on preparing a tax return or working out CGT due.Further guidanceFor detailed guidance on the deduction of professional fees see BIM46400 onwards.EXTRACTS 3 and 4From HMRC’s Capital Gains Manual and CG15160 - Expenditure: categories of allowable expenditureTCGA92/S38 (1)Except where there is specific provision to the contrary, allowable expenditure is restricted to the amount or value of the consideration in money or money's worth given by the taxpayer wholly and exclusively for acquiring the assetcreating the assetenhancing its valueestablishing, preserving or defending title to or rights over the assetincidental costs of acquisition and disposalCG15251 - Expenditure: incidental costs of acquisition and disposalAllowable incidental costs are limited to fees, commission or remuneration paid for the professional services of anysurveyor, valuer or auctioneeraccountant or agentlegal advisercosts of transfer or conveyance (including Stamp Duty)costs of advertising to find a buyer or sellercosts reasonably incurred in making any valuation or apportionment required for the purposes of the Capital Gains Tax computation.Premiums: what is a premium and why do we tax them?Tax on premiumsLump sums received upfront for the grant of a lease of 50 years or less are liable to tax on a special basis. Such receipts are generally called ‘premiums’, (ITTOIA05/S277 and CTA09/S217).Difference between a premium and rentA distinction is made between:a premium paid for the grant of a lease, andrent due under the lease.What is a premium?A lease is sometimes granted on terms that require the payment of both:a premium - a lump sum, andrent - regular payments.In other instances, the lease may require only the payment of rent.A premium is a sum paid on the creation of an interest in property. As such it is capital on normal principles. This led to landlords seeking premiums instead of rent to avoid IT. To counter this, the anti-avoidance legislation (now ITTOIA05, Part 3, Chapter 4 for IT payers and CTA09, Part4, Chapter 4 for CT payers) was introduced.Premiums are more common in some parts of the country than others and you may meet them more often in respect of large commercial and industrial properties.In Scotland, any provision relating to a premium also includes a grassum.Why special rules for premiums are neededA premium paid for a very long lease is clearly a capital sum. If it is paid for a shorter lease it has a character more like rent paid in a lump sum rather than periodically. It is more akin to income, and the shorter the lease, the more like income it is.The Taxes Acts charge a proportion of a premium to tax as income. The proportion to be charged as income depends on the length of the lease. The shorter the lease, the greater the proportion to be charged. If the lease is for more than 50 years then none of the premium is treated as income. As well as charging IT on the recipient of leases, the Act gives relief in some circumstances to the payer. There may be CGT consequences on both the assignment of a lease and the grant of a sub-lease.Premiums: how the charge is calculatedTaxation of premiums received - detailsPremiums and similar receipts related to the grant of a lease are taxable wholly or partly as income where the taxpayer gets them for granting a lease of fifty years or less. The part of the premium taxable as income is treated as a receipt of the rental business for the year of assessment in which the lease is granted. If the taxpayer receives a lump sum for selling their existing lease these special rules don’t apply.The amount, which is a receipt of the rental business, is calculated on a sliding scale that depends on the length of the lease for which the taxpayer got the payment. The longer the lease, the smaller the amount charged as property income but the larger the amount potentially chargeable as trading income (in a property dealing trade) or, if there is no trade, as capital gains, (ITTOIA05/S277 and CTA09/S217).The rule is that the amount taxable as income of the rental business is reduced by 2% of the premium for each complete year of the lease after the first. Thus:the full amount of a premium is taxable as income where the lease is for less than two years,98% of the premium is taxable as income if the lease is for two years or more but less than three years,96% of the premium is taxable as income if the lease is for three years or more but less than four years,and so on until the lease is for 49 years or more but less than 50 years; here 4% of the premium is taxable as income; the deduction from the taxable premium is 49 complete years less one year = 48 years x 2% = 96%, thus, for example, 4% is taxable if the lease is for 49 years and one month or 49 years and 11 months,when the lease is for exactly 50 years 2% of the premium is taxable as income; the deduction is 50 complete years less one year = 49 years x 2% = 98%,none of the premium is taxable as income when the lease is for over 50 years; for example, where the lease is for 50 years and one day.The legislation expresses this is a more formal way. The method of calculation is prescribed in ITTOIA05/S277 (4) and CTA2009/S217(4). The amount taxable as income is given by the formulaP × (50-Y)50Where:-P = the premium, andY = the number of complete years in the term of the lease apart from the first. Example illustrating basic premium casePaul grants a 25-year lease to Peter on 5 June 2004. The lease agreement requires Peter to pay Paul a premium of ?30,000 on 30 June 2004 in addition to rent of ?400 a month. Paul must include in his rental business accounts for 2004-05 both the rent due for the period from 5 June 2004 (when the lease started) to 5 April 2005 and the taxable amount of the premium. That is, the premium is taxed in the year in which the lease is granted. The amount which Paul is treated as receiving as part of his rental business is calculated as follows:Premium receivable?30,000Less: (2% of ?30,000) x 24 years?14,400??15,600Plus: rent for period 5/6/04 - 5/4/05*? 4,000Amount to include in rental business?19,600*This is ten months at ?400 a month.?Premiums: how the relief is calculatedIf the payer of a premium uses the property for the purposes of a trade, profession or vocation or sublets it as part of their own rental business, then they may be able to treat part of the premium as an allowable revenue expense. Relief is given by spreading the chargeable amount over the period of the lease and treating it as if it were rent due (in addition to any actual rent). There are two stages to working out how much relief is due.1) Work out the chargeable amount of the premiumThe chargeable amount of the premium must be calculated - that is the amount of the premium on which the recipient of the premium is taxed (or would be if he were chargeable). You need to know the amount of the premium and the length of the lease. (See the example above.)2) Spread the chargeable amount over the period of the leaseThe chargeable amount is treated as if it were rent for the property (in addition to any actual rent) which becomes due from day to day throughout the period of the lease. This will be a deduction in computing the taxable profits.If, in the example above, Peter uses the property wholly for his trade, he will be able to claim an annual deduction of ?5,424 calculated as follows:? 4,800 rent (?400 x 12 months)? 624taxable premium (?15,600 ÷ 25 years)? 5,424Premiums: difference between granting and assigning a leaseA distinction is made between:a premium paid for the grant of a lease, anda capital sum paid on the sale of a lease.A sale (or assignment) is a CGT matter (unless the taxpayer is carrying on a property dealing trade).The difference between granting and assigning a leaseA person holding property freehold (a landlord) may grant a lease under which another person (the tenant) occupies the property for a certain time. When the lease expires, the property reverts to the landlord. The tenant might in turn grant a sub-lease under which he allows another person (a sub-tenant) to occupy the property for part of the term of the lease. At the end of the sub-lease the property reverts to the intermediate landlord (the head tenant) until the original lease (the head lease) expires. If the sub-tenant pays a lump sum to the intermediate landlord, that is a lease premium.Alternatively, the head tenant might find someone to take over the head lease in his place. If he does, he does not grant a sub-lease, he assigns his lease. If he receives a lump sum payment for the assignment, that is not a lease premium.It may not always be clear whether a lease has been assigned or whether a sub-lease has been granted. It is only an assignment of the lease if all the lessee's interest in the lease for the whole of the rest of the term is transferred. Where a sub-lease is granted it is usual for it to expire not later than one day before the head lease comes to an end. Where a transfer purports to be an assignment, but is for a period of less than the remainder of the term, even if only one day less, it is not an assignment but a sub-lease.Be careful when clients refer to 'selling' a lease or leasehold property as this word may be used loosely. You should check the written contract to see whether the lease has been assigned for the remainder of its term or whether a sub-lease has been granted.Example distinguishing a premium from sale proceedsJeremy pays a premium of ?10,000 to his landlord to obtain the grant of a lease of 21 years at a rent of ?5,000 a year. The ?10,000 is within the premium rules. Ten years later Jeremy sells the remaining eleven years of his lease to Robert for ?8,000. That ?8,000 is not a premium for the grant of a lease but the sale price of the lease and any gain or loss is dealt with under the CGT rules (unless Jeremy is a property dealer).Capital gains: assigning a short leaseA lease is an asset for CG purposes. The disposal of a lease may give rise to a chargeable gain or an allowable loss.Where a short lease is assigned the amount originally paid for it must be restricted.A short lease of land is a wasting asset, but its value does not waste uniformly over its term.At first, the rate of decline in value is relatively slow but it becomes very rapid during the last few years of the term of the lease. Hence, the straight-line method of wasting expenditure contained is not appropriate and is disapplied. Instead, the allowable expenditure is wasted in accordance with the table in TCGA92/SCH8/PARA1 and the formulae in paragraph 1(4). These rules state the following adjustments must be made to the actual expenditure:Exclude from the acquisition expenditure a fraction equal to P1-P(3)P(1) , whereP(1) = percentage for the duration of lease at beginning of ownershipP(3) = percentage for the duration of lease at the time of disposalExclude from any enhancement expenditure a fraction equal to P2-P(3)P(2) , whereP(2) = percentage for the duration of lease at time of any allowable enhancement expenditureP(3) = percentage for the duration of lease at the time of disposalYearsPercentageYears PercentageYearsPercentage50 or more1003390.2801664.1164999.6573289.3541561.6174899.2893188.3711458.9714798.9023087.3301356.1674698.4902986.2261253.1914598.0592885.0531150.0384497.5952783.8161046.6954397.1072682.496943.1544296.5932581.100839.3994196.0412479.622735.4144095.4572378.055631.1953994.8422276.399526.7223894.1892174.635421.9833793.4972072.770316.9593692.7611970.791211.6293591.9811868.6971 5.9833491.1561766.4700 0If the duration of the lease is not an exact number of years the percentage to be derived from the Table above shall be the percentage for the whole number of years plus one-twelfth of the difference between that percentage and the percentage for the next higher number of years for each odd month counting an odd 14 days or more as one month. Examples – assignment of a short leaseOn 30 June 2004, Mr B paid a premium of ?50,000 to acquire a 25 year lease over a property. On 30 June 2012, he disposed of that lease by assignment.At the date of disposal, the lease had 17 years to run and therefore the rules in TCGA92/SCH8/PARA1 apply.Mr B's allowable acquisition expenditure is calculated as follows.Actual expenditure? 50,000Amount to be excludedP(1) - P(3) x ? 50,000 =81.100 - 66.470X ?50,000 =? 9,019 P(1) 81.100Expenditure allowable ?50,000 - ?9,019= ?40,981This example assumes that no income tax relief was due to Mr B (which he might have been able to claim if he had used the property in his business) Where this is the case, the allowable expenditure is reduced by the amount of the relief actually given to Mr B. This reduction is made before the reduction required by TCGA92/SCH8/PARA1 (4).How this rule works in practice is illustrated by the following example.Mr W acquired a 31 year lease of a property on 31 January 2006. He paid a premium of ?20,000. On 31 January 2012, he disposed of the lease for ?25,000. Between January 2006 and January 2012, he used the property for the purposes of his trade of motor mechanic. He was given relief under ICTA88/S87 of ?1,550.Mr W's gain on the disposal of the lease is calculated as follows.Allowable expenditure:Cost of lease: ?20,000Less: relief given against trading profits: ? 1,550?18,450Less: amount to be excluded, TCGA92/SCH8/PARA1 (4):P(1) - P(3)x?18,450=88.371 - 81,100x?18,450=? 1,518 P(1) 88.371 ?16,932Computation of gain:Disposal proceeds? 25,000Allowable expenditure:? 16,932Chargeable gain? 8,068 Capital gains: granting a long lease out of a freehold The grant of a long lease, that is a lease with a term of over 50 years, out of a freehold or long lease is the simplest scenario involving the grant of a lease. The normal rules apply to the computation of the gain. The whole of any premium received is brought into account as consideration for the grant of the lease and the part disposal formula in TCGA92/S42. However, in these circumstances, when applying the part disposal formula A/A+B:A is the premium received;B is the value of the remaining interest (that is the interest in the land retained by the landlord) plus the value of the right to receive the rent due under the lease.ExampleOn 30 June 2008, Mr J bought the freehold of a property for ?150,000.On 30 June 2011, he granted a 75 year lease of the property to Mr L. A premium of ?100,000 was paid by Mr L and rent of ?5,000 per year was due under the lease. Mr J incurred legal fees of ?3,000 on the grant of the lease.A professional valuer has reported that, at 30 June 2011, the value of the freehold reversion was ?30,000 and the value of the right to receive the rent was ?70,000.i) Mr J's allowable acquisition expenditure is calculated as follows:?150,000 (cost of property) x A / (A+B) ?150,000 x 100,000 = ?75,000100,000 + (30,000 + 70,000)ii) The gain accruing to Mr J is then calculated as follows.??Premium received100,000lessApportioned cost (as above)75,000Legal fees 3,000 78,000Chargeable gain22,000Capital gains: granting a long lease out of a freehold Where a short lease, that is a lease with a term not exceeding 50 years, is granted out of a freehold or long lease, there are two particular rules which must be applied. Part of any premium paid will be chargeable as property income, and this part must be deducted in arriving at the consideration to be brought into the Capital Gains computation.In the A/A+B formula used for determining the allowable expenditure, the A in the numerator is not the same as the A in the denominator. As with the grant of any lease, the grant of a short lease out of a freehold or long lease is a part disposal. However, in applying the A/A+B part disposal formula in TCGA92/S42, a special rule must be observed: The A in the numerator (the top part of the fraction) is the amount of the premium not chargeable as property incomeThe A in the denominator (the bottom part of the fraction) is the full amount of the premium.The amount chargeable to Schedule A is not deducted in arriving at the A factor in the denominator since the denominator must represent the value of the whole interest held by the landlord before the grant of the lease.The following example illustrates these two rules.On 6 April 2005, Miss S bought a freehold property for ?45,000 including expenses of purchase. On 6 April 2012 she granted a 46 year lease for a premium of ?35,000 and a rent of ?2,000 per year. The value of the reversionary interest in the property was ?30,000 and the value of the right to receive the rent over the term of the lease was ?20,000.The computation of the gain is as follows.i) Amount chargeable as property income Premium received35,000 Less amount chargeable as property income:35,000 X (50 - 45) = 3,500 50Consideration for CGT purposes 31,500ii) Allowable expenditureApplying the part disposal formula:45,000 x 31,500 =16,67735k + (30k + 20k)Note: The A factor in the numerator is the consideration for CGT purposes; the A factor in the denominator is the entire premium.iii) Chargeable gainDisposal proceeds31,500less Allowable expenditure 16,677Chargeable Gain 14,823FixturesFrom HMRC Capital Allowances manual (CA26025)A fixture is an asset that is installed or otherwise fixed in or to a building or land so as to become part of that building or land in law. This means that fixture has the same meaning in the fixtures legislation as in property law. Any boiler or water filled radiator installed in a building as part of a space or water heating system is also a fixture for the purposes of the fixtures legislation.Property law distinguishes between chattels and fixtures. A chattel is an asset, which is tangible and moveable. A chattel may become a fixture if it is fixed to a building or land. For example, before it is installed in a building as part of a central heating system, a central heating radiator is a chattel. Once installed, it becomes a fixture.The courts have developed two tests for determining whether an asset is a fixture or a chattel:the method and degree of annexation,the object and purpose of annexation.The first test is not conclusive. Some degree of physical affixation is required before a chattel becomes a fixture. If the asset cannot be removed without serious damage to, or destruction of, the building or land, that is strong evidence that it is a fixture. But it is neither a necessary nor a sufficient condition.The second test is now accorded greater significance by the courts than the first. The courts look at the purpose and intention of the asset and its affixation. If, when viewed objectively, it is intended to be permanent and effect a lasting improvement to the property, the asset is a fixture. If the attachment is temporary and is no more than is necessary for the asset to be used and enjoyed, the asset remains a chattel.Where a property is leased, property law distinguishes between tenant's fixtures and landlord's fixtures. A tenant's fixture is one installed by the tenant that may be removed by the tenant during or at the end of the lease. For example shop fittings are frequently installed on this basis. This distinction is not relevant for the fixtures legislation. The rules on fixtures apply to both tenant's and landlord's fixtures.Normally a person has to satisfy an ownership condition in order to be able to claim Plant & Machinery allowances (PMAs) on an asset. In law, a fixture belongs to the freeholder of the land. This means that only the freeholder can satisfy the ownership condition and claim PMAs. For example, a leaseholder who incurs capital expenditure on a fixture is not the owner of the fixture and so cannot claim PMAs. The case of Stokes v Costain Property Investments, 57TC688, confirmed this. Costain had a 99- year lease over a property and incurred expenditure installing lifts and central heating that were landlord's fixtures. The Courts held that Costain had no entitlement to capital allowances because the word belonging (now ownership) in the plant and machinery legislation meant absolute ownership and Costain did not own the lifts.Special legislation for fixtures was introduced in 1985. It is in Chapter 14 Part 2 CAA01. Broadly, it lets allowances go to a person who incurs expenditure on the provision of a fixture, either on installation or by acquiring an interest in the building or land to which the fixture is attached, provided that allowances do not go to more than one person at the same time. It treats a person who incurs capital expenditure on a fixture as the owner (the "virtual" owner) of the fixture. It prevents anybody else, even the real owner, being treated as the owner of the fixture for PMA purposes. Actual ownership is irrelevant. A freeholder can only claim PMAs on a fixture if the fixtures legislation treats that person as the owner of the fixture.Fixtures: Apportioning expenditure on a building, etc (CA26250)Where a person acquires for a capital sum an existing interest in land (for example, freehold or leasehold), which includes a fixture, the person is treated as owning the fixture as a result of incurring the part of the sum that relates to the fixture.The part of the capital sum that relates to the fixture is found by apportioning the capital sum between the fixture and the rest of the land.The apportionment is made under CAA01/S562 (this requires the apportionment to be made on a just and reasonable apportionment of the total sum paid and the help of a building surveyor or other professional valuer may be needed.) Alternatively the purchaser and vendor make a joint election under CAA01/S198 to determine the amount apportioned to the fixture (Within certain limits, the two parties can agree to adopt whatever value they wish for tax purposes.)Fixtures: Restriction where previous PMA claim (CA26400)CAA01/S185Broadly this legislation limits the allowances given overall on a fixture to original cost. When a person (the current owner) is treated as owning a fixture that another person (the past owner) has previously been treated as owning the expenditure of the current owner that qualifies for PMA is restricted to the past owner's disposal value. NoteYou will recall the basic rule that when you bring in a disposal value for capital allowance purposes it is limited to the cost of the asset included in the pool. Integral Features (adapted from CA22310 onwards)OutlineFA2008 introduced a new classification of integral features of a building or structure, expenditure on the provision or replacement of which qualifies for WDAs at the 10% special rate. The new classification applies to qualifying expenditure incurred on or after 1 April 2008 (CT) or 6 April 2008 (IT).BackgroundThe introduction of this new classification was part of the wider ‘Business Tax Reform’ package, introduced by FA2008.It included changes intended to simplify and reduce the distortive impact of capital allowances, including the introduction of a simplified structure with two general P&M pools, one with the rate of WDAs set at the main 20% rate, and the other with the rate set at the ‘special rate’ of 10%.Against this background, the new classification of ‘integral features’ was intended to re-draw the boundary between buildings, including their main features, and other equipment, so that the main features that are normally integral to a modern building (such as electrical, cold and hot water systems etc.) would attract WDAs at the lower 10% rate. This rate was considered to be more appropriate, given the longer average economic life of the defined assets, compared with the generality of other P&M. Following a period of public consultation, a simple list approach was taken to defining the new classification (rather than, for example, an approach that might have tried to import some sort of “purposive” or “trade specific” element into the definition). The simple list approach was preferred because this was considered likely to provide a more certain, consistent and fairer set of rules when applied to expenditure by all businesses. DefinitionThe new rules on integral features apply where a person carrying on a qualifying activity incurs expenditure on the provision or replacement of an integral feature for the purposes of that qualifying activity. Each of the following is an integral feature of a building or structure - an electrical system (including a lighting system), a cold water system, a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system, a lift, an escalator or a moving walkway, external solar shading Only assets that are on the list are integral features for PMA purposes; if an asset is not one of those included in the list, the integral features rules are not in point. The rules also specifically clarify that the new definition does not extend to any asset whose principal purpose is to insulate or enclose the interior of a building, or to provide interior walls, floors or ceilings which are intended to remain permanently in place. So if, for example, a business installs a new, permanent false ceiling in its premises, in order to conceal new wiring and service pipes, expenditure on that ceiling would not qualify for PMAs.On the other hand, if a business installs in its premises a plenum floor or plenum ceiling, the principal purpose of which is to function as an integral part of the heating or air conditioning system (for example, the plenum floor or plenum ceiling may form the fourth side of a duct or channel through which stale air is extracted and treated air is discharged), that expenditure would qualify for PMAs as part of an ‘integral feature’ of the building or structure Special 10% rate of WDAs FA08 introduced a new Chapter 10A to CAA01, which contains the rules governing ‘special rate expenditure’, which must be allocated to the ‘special rate pool’ and in respect of which the person incurring the expenditure may be entitled to WDAs at the ‘special rate’ of 10% p.a. Expenditure on the provision or replacement of integral features is one type of special rate expenditure. Other types are expenditure on thermal insulation and expenditure on long-life assets.Annual Investment Allowance (AIA)A person may claim AIA on special rate expenditure including on his or her expenditure on integral features. In general, businesses are free to allocate their AIA to AIA qualifying expenditure in any way they see fit. They are therefore free to set their AIA against expenditure qualifying for the lower 10%, special rate of WDA, before using any balance against their main rate, 20% P&M expenditure. In this way, the AIA may act as a sort of de minimis provision, allowing modest amounts of annual expenditure on integral features to be completely covered by the new 100% allowance. This is likely to be of particular assistance to smaller businesses and may relieve some businesses from the need to make annual special rate pool calculations.Replacement of integral featuresIf the expenditure on the repairing an integral feature represents the whole, or more than 50% of the cost of replacing an integral feature, either all at once, or within any period of 12 months, such expenditure is to be treated as capital expenditure on the replacement of an integral feature for capital allowances purposes. And the person incurring the expenditure is to be deemed to own the P&M as a result of incurring the expenditure. No double deduction If the expenditure is so deemed to be capital expenditure, the same expenditure may not also be deducted as a revenue expense in calculating the income from the qualifying activity. Policy aim: a simple, pragmatic approach The broad policy purpose underlying these rules is to ensure that both new and replacement expenditure on an ‘integral feature’ is afforded the same tax treatment.“Replacement” expenditure is defined and brought within these new capital allowances rules to prevent some businesses from seeking to claim that they have really incurred a revenue expense on a repair to a larger asset such as the building itself, in other words, that they have not incurred capital expenditure. The test of “replacement”, by reference to expenditure on replacing more than 50% of the integral feature within 12 months, is intended to discourage any attempts to avoid the application of the replacement rules by businesses, say, splitting replacement expenditure over two or more chargeable periods. In most cases, however, it is expected that businesses will simply replace a particular integral feature and so will know that the new rules apply. Even where the business does not replace the feature all at once, it will know whether or not a specific integral feature has worn out, and whether or not it plans to replace the whole, or the bulk of it, within the next year. Likewise, it is expected that in most cases, it should be apparent to HMRC whether it is reasonable to accept the taxpayer’s advice that expenditure on an integral feature does, or does not, constitute “replacement” expenditure. So it is not anticipated that, for example, detailed running totals of expenditure will routinely be required, or that the replacement rules will give rise to any need for special or attempted “precise” valuations. Although the usual principles of reasonable care apply, it should be remembered that there is no statutory obligation on the taxpayer to, for example, obtain more than one quote or estimate. In the main, the policy intention is to adopt a “light touch” approach, so that any additional administrative burdens are kept to a minimum.Example 1Jack decides to replace the electrical system in his factory. The cost of replacing the whole system is around ?100,000. Jack’s business’s chargeable period ends on 31 December each year. He pays ?40,000 towards the new system on 31/12/08 and pays the balance of ?60,000 on 30/6/09, after the work is satisfactorily completed. Although Jack’s initial expenditure in his 2008 chargeable period, on beginning to replace this integral feature represented only 40% of the replacement cost, that initial expenditure plus the further expenditure incurred within 12 months (that is, plus the balance incurred in his 2009 chargeable period) represented more than 50% of the replacement cost, and so the total expenditure is deemed to be capital expenditure, to be allocated to the special rate pool, where it will attract WDAs at 10%.Example 2 Phoebe would like to replace the electrical system in her seaside boutique. She obtains an estimate from Seaside Electrics Ltd, who quote a total figure of ?100,000 for the whole job. She decides that she cannot afford this, so requests a separate estimate for replacing the wiring and sockets on the ground floor alone, because this is the floor she is most worried about, following some recent flood damage. Seaside Electrics Ltd quote a figure of ?48,000 for this floor alone. Although it might have been possible for Phoebe to have obtained a cheaper estimate for replacing the whole system, for a total of say ?90,000, (when ?48,000 would have represented more than 50% of that total) this is not relevant. The ?100,000 estimate from the same established electrician was a bona fide arm’s length estimate and there is no need to enquire further. The partial replacement cost represents less than 50% of the total replacement cost and so the integral features provisions do not apply.Stamp Duty Land TaxThe following information has been extracted from a 2007 document produced by HMRC Introduction to leases. The full document is available at The rates of SDLT have been updated to reflect changes made in 2011.Introduction Stamp Duty Land Tax (SDLT) was introduced on 1 December 2003. This leaflet is a quick guide to leases. It does not replace either the guidance notes to completing the land transaction return or the SDLT manual. When is SDLT due on a lease? SDLT applies to the grant of a lease where the chargeable amount of the transaction includes rents. In Scotland, this includes exchanges of missives of let, which are not to be followed by the grant of a formal lease. Working out SDLT How do I work out the amount of SDLT? You must look separately at the rent and any consideration other than rent, for example, a premium. How do I work out SDLT on the rental element of leases? We charge SDLT on the ‘net present value’ of the total rent payable over the term of the lease. You must work out the net present value of the rent due for each year of the lease, and then add them all together. How do I work out the net present value? You should work out the net present value by applying the formula shown in the Appendix A, and using the example to help you. You can also use the tool available on our website at .uk/so to help you work out the net present value. What happens after that? When you’ve worked out the net present value, you can then calculate the SDLT due on the lease. Is there a difference between residential and non-residential leases? There are different thresholds for the net present value of the rental payments. For residential leases, the nil rate band is ?125,000 and for non-residential leases, the nil rate band is ?150,000. What are the rates of SDLT? The tables below show the rates of SDLT that apply, depending on whether the lease is for residential or non-residential property. SDLT is then due at 1 per cent on the excess over these present value of the rental payments Rate of SDLTResidential lease ?125,000 or less 0% ?125,001 or more 1% on the excess over ?125,000 Net present value of non-residential or mixed lease payments ?150,000 or less 0% ?150,001 or more 1% on the excess over ?150,000 What if the property is furnished? When you’re working out the amount of SDLT due, it doesn’t make any difference if the property is furnished or not. What if VAT is due on the rent under the lease? For the purposes of working out the SDLT on the rent, if VAT is due, it is included in the rent. What if there is a provision for a rent review? For the purposes of working out the net present value, we ignore all rent changes which take place after five years. The rent value used for later periods is the same as the highest rent paid in any 12-month period in the first five years of the lease. What happens if a lease is varied to increase the rent? If there is no provision for a rent review and a lease is varied to increase the rent, we treat the variation as if it were the grant of a lease for the additional rent chargeable. This transaction will be a linked transaction. What if the transaction involves considerations other than rent? If other considerations are involved, for example, a premium, check the tables in Appendix B to see which rate you should use to work out the amount of SDLT due. If the rent covers water, gas or electricity, does this affect the calculation? For the purposes of SDLT, if the rent is expressed as a single sum - payable for rent and any other matters, but is not apportioned, it is all treated as rent. If separate sums are expressed, we only take the rental element into account. However, the apportionment must be on a just and reasonable basis. Appendix AThe formula for calculating the net present value is NPV= i=1nri1+TiNPV is the net present value.ri is the rent payable in the year.i is the first, second, third etc. year of the term. n is the term of the lease.T is the ‘temporal discount’ rate. The Treasury sets the temporal discount rate and is currently 3.5 per cent. The addition you should use in the net present value formula is 0.035. Example Net present value of rent payable over the term of a lease.A lease has a fixed term of five years and the rent payable in each year is as follows:Year 1?4,000Year 2?5,000Year 3?6,000Year 4?7,000Year 5?8,000We calculate the net present value of the rent over this period as follows.Year 1?4,000/ (1+0.035)?3,864.73Year 2?5,000/[(1+0.035) x (1+0.035)]?4,667.55Year 3?6,000/[(1+0.035) x (1+0.035) x (1+0.035)]?5,411.65 Year 4?7,000/[(1+0.035) x (1+0.035) x (1+0.035) x (1+0.035)]?6,100.09 Year 5?8,000/[(1+0.035) x (1+0.035) x (1+0.035) x (1+0.035) x (1+0.035)]?6,735.76The net present value is the sum of the calculated values, that is ?26,779, rather than the ?30,000 actually due.Appendix B(Tables taken from HMRC website Non-residential land or property rates and thresholdsPurchase price/lease premium or transfer value (non-residential or mixed use)SDLT rate(includes first time buyers)Up to ?150,000 - annual rent is under ?1,000ZeroUp to ?150,000 - annual rent is ?1,000 or more1%Over ?150,000 to ?250,0001%Over ?250,000 to ?500,0003%Over ?500,0004%Note that for the above purpose the annual rent is the highest annual rent known to be payable in any year of the lease, not the net present value used to determine any tax payable on the rent .SDLT on residential land or propertyPurchase price/lease premium or transfer value SDLT rateSDLT rate for first-time buyersUp to ?125,000ZeroZeroOver ?125,000 to ?250,0001%ZeroOver ?250,000 to ?500,0003%3%Over ?500,000 to ?1 million4%4%Over ?1 million5%5% First time buyersThe first time buyer's ?250,000 threshold applies from 25 March 2010 up to 24 March 2012 inclusive.Properties bought in a disadvantaged areaIf the property is in an area designated by the government as 'disadvantaged' a higher threshold of ?150,000 applies for residential properties. ................
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