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Capital v Revenue – Understand The Risks v Benefit

As we are fast approaching the self assessment filing deadline for individuals and the amendment window for corporate entities with a year end of March, understanding the importance of what constitutes capital or revenue expenditure, and the risks and benefits associated with it, is extremely important.

24 Jan 2024

Written by:

First Year Allowances for Corporate Members of Partnerships

In a positive move HMRC have updated their capital allowances guidance for partnerships stating that partnerships with underlying corporate partners can claim first year allowances

19 Jan 2024

Written by: Abu Choudhury

Substantial Unclaimed Capital Allowances On Existing Assets

Capital Allowances provide an opportunity to save substantial amounts of money in a lean market yet many property owners and occupiers are already sitting on vast savings without even knowing it.

23 Oct 2023

Written by: David Gibson

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Latest News

Capital v Revenue – Understand The Risks v Benefit

24 Jan 2024

As we are fast approaching the self assessment filing deadline for individuals and the amendment window for corporate entities with a year end of March, understanding the importance of what constitutes capital or revenue expenditure, and the risks and benefits associated with it, is extremely important.

First Year Allowances for Corporate Members of Partnerships

19 Jan 2024

In a positive move HMRC have updated their capital allowances guidance for partnerships stating that partnerships with underlying corporate partners can claim first year allowances

Substantial Unclaimed Capital Allowances On Existing Assets

23 Oct 2023

Capital Allowances provide an opportunity to save substantial amounts of money in a lean market yet many property owners and occupiers are already sitting on vast savings without even knowing it.

The Risk to Lawyers of Not Correctly Addressing Capital Allowances

23 Oct 2023

Solicitors acting for clients on a purchase or disposal of a commercial property must ensure they correctly address capital allowances; failure to do so may give rise to reputational and / or financial risk.

Maximising Capital Allowances and Avoiding Pitfalls Through Timing

23 Oct 2023

The rules surrounding the transition between Super Deduction and Full Expensing can be complex and the importance of fully analysing and understanding any contract for construction or purchase is significant.

Use Capital Allowances to Help Pay for Higher Spec Offices

23 Oct 2023

On a typical £1m CAT B fit out the landlord or occupier, whoever is incurring the expenditure, could recover up to £250k by claiming Capital Allowances.

HMRC Capital Allowances Enquiries Focusing On Certain Sectors

26 Sep 2023

An increasing number of claims being submitted to HMRC are not fully compliant with the legislation, and in some cases are double what they should be, particularly in certain industry sectors.

Unearthing Hidden Treasures – LGT Wealth Article

01 Sep 2023

Veritas Director David Gibson was recently interviewed by Nicholas Duffy of LGT Wealth Management for thoughts on how family offices and property owners can identify Capital Allowances to help leverage other investments. Click here to read in full

Offset ESG Costs With Capital Allowances

09 Aug 2023

The impact of both ESG and MEES on the property sector is resulting in significant capital investments. To incentivise and reduce the net cost of capital investment, tax relief is available by way of capital allowances.

When setting up a UK property investment business, the default position is to do so via an overseas special purpose vehicle (SPV). However, this is now being challenged on a number of fronts, including tax, fund administration, increased liquidity and public perception.  In this article, we look further into these drivers and provide a reminder of the key conditions that need to be considered before converting to a REIT.

A UK REIT is a closed-ended publicly traded company that provides it’s investors with access to investment into property assets within a tax efficient wrapper.  When initially launched in 2001 the take up was limited to mainly existing large listed property companies, such as Landsec and British Land, which having built up large property gains, the ability to convert to a REIT enabled them to eliminate any latent capital gains and in return for increased liquidity.

The governing REIT legislation sets out the requirements which must be satisfied in order for a UK property business to be granted UK REIT status.  Here we note some of those “compliance” features, but not limited to:

  • Be solely resident in the UK for tax purposes;
  • Have a listing on a recognised stock exchange, including AIM;
  • Not be an open-ended investment company;

A UK REIT must have a property rental business which forms its tax-exempt business.  Whilst it can have other taxable businesses, the property rental business must:

  • Consist of at least 3 single properties, with no one property representing more than 40% of the total value of properties in its rental business;
  • For each accounting period, distribute at least 90% of its property rental business profits by way of a dividend (known as a property income dividend or PID);
  • At the beginning of each tax accounting period, at least 75% of the REIT’s gross assets must relate to the property rental business or be cash and cash equivalents;

There are clear tax benefits to converting into a REIT, with no UK corporation tax payable on profits or capital gains on the disposal of assets.  It should, however, not be overlooked that REITs are still required to prepare tax returns under a shadow tax regime and as part of this requirement, there is a mandatory requirement to claim Capital Allowances, which in turn provides a benefit by retaining cash in the business which would otherwise form part of the PID.

Instead the dividends from REITs are treated as property income to an investor, subject to withholding tax at the basic rate of income tax.  For some, mainly institutional investors, they are able to gain an exception to such a charge, by registering to receive the dividend gross rather than net and this includes charities, UK companies and pension funds.

Then there is the ability to increase liquidity which the REIT regime allows investors to tap into and at the same time the REIT can benefit by diversifying its investor base, with an internationally recognised investment wrapper and providing the opportunity for future fund raising.

From a fund management point of view, operating it from the UK can have perceived benefits, removing the need for overseas fund administration.

The REIT regime will however not fit every property model, for example, for properties to be part of the tax-exempt business any redevelopment activity whose cost exceeds 30% of the fair value of the property and a disposal is made within three years of practical completion of the development, then it is deemed to fall outside of the tax-exempt business.

With the move by HMRC to bring non-resident landlords under the UK corporate tax regime from 1 April 2020, it can be argued that it further strengthens the pull to bring investments back onshore.

Since the relaxation of the entry rules, including the abolition of the entry charge, there has been an increasing appeal to converting property businesses into a UK REIT, with a greater focus on sector specialists, such as in student accommodation, logistic warehouses, healthcare and the private rented sector.  It therefore seems on reflection, that with income hungry investors, that the REIT option is one that will increasingly be considered, and that the number of listed REITs will only continue to grow.