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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.

The tax transparent nature of a REIT can often be seen as an appealing reason for a property investment business to convert, with clear tax advantages provided for under the governing REIT legislation.  In this article, we set out the tax consequences of converting to a REIT and consider what that will mean for its investor profile.

REIT conversion status can carry substantial tax benefits, the REIT is a vehicle that holds and manages a portfolio of real estate from which its shareholders earn a profit.  The tax neutral status of the REIT itself means that it pays no UK corporation tax on its profits from its property rental business and nor does it pay any capital gain tax on any disposals, providing the property held meets certain qualifying criteria (for details see article titled “The REIT Option for You?”).

Instead, for each accounting period, the REIT is required to distribute 90% of its profits to its investors by way of a dividend.  Those distributions are then generally subject to basic rate withholding tax at 20%, except for example, where paid to a pension scheme, UK resident company or some sovereign wealth funds.  These entities are able to apply for a tax exemption status and would then receive their dividends gross.  Likewise, REIT shares can be held under an ISA wrapper and the fund manager will also receive gross distributions, making the investment highly tax efficient.

When the REIT legislation was first introduced back in 2001, there was some confusion as to the extent to which the REIT would be required to satisfy the UK corporate tax regime, given its exempt tax status. After a number of consultations and HMRC guidance, it was clear that the REIT was still required to operate under effectively a shadow tax regime, in order to replicate the tax treatment of a direct investment in property.

This, for example, includes the mandatory requirement to claim Capital Allowances where it has the entitlement to do so, an area which we explore further in our next article, Veritas Advisory’s Capital Allowances REIT Service.

The REIT status effectively removes the double layer of taxation where tax is actually paid out on profits at both the property company and shareholder levels.  Instead, tax is typically only paid at the investor level, which gives rise to improved returns.

The current default for a property investor is to hold property offshore, often within a special purpose vehicle (SPV) and there were clear advantages for doing so, particularly with the capital gains exemption, however, this is to be removed from April 2019.  Furthermore, from 1 April 2020, HMRC have now confirmed that corporate investors will be subject to UK corporation tax rules on rental income and not taxed under non-resident landlord rules for income tax.

Offshore investors will therefore have to abide by the corporate tax rules which will include the restrictions on deductions for interest payments and greater restrictions on the ability to use carried forward losses; the reasons for opting for the default offshore structure are narrowing and the REIT regime for some will be a considered alternative.

It however must be said that the REIT status will not suit all, with a lengthy list of conditions which must be considered and met.  These include, that where a property is to be redeveloped and the development costs represent more than 30% of the market value of the property and any disposal is made within three years of practical completion of the development, then it is deemed to fall outside of the tax-exempt business.

Whilst the tax advantages are significant, a far wider consideration of the REIT conversion needs to be made before embarking on the journey.