News
18 August 2008
Assured Shorthold Tenancies – Pros and cons in a difficult market
Fears over the so called ‘credit crunch’ and a shortage of buyers may be leaving developers with properties that they are unable to sell. Cash flow issues mean that simply holding on to surplus housing stock is not always attractive.
Similarly many smaller local developers simply don’t have the ability to offer large discounts or incentives.
Whilst the sale market may be slowing, the rental market is booming. Many first time buyers are deciding either through choice or necessity to rent until the market bottoms out or mortgages become more easily available.
One option for developers is to rent their surplus stock under assured shorthold tenancies (AST) for the minimum six months allowed until the market improves.
There has been comment in the press recently indicating that a number of developers are considering funded Joint Ventures to hold and let excess stock, possibly with a view to the stock being transferred into residential REITs at some point. Whilst superficially attractive, in giving rise to immediate cash-flow unless done properly these schemes can result in some nasty surprises.
A developer will have recovered the VAT it paid when acquiring the land and on its building and professional costs (where applicable). The eventual sale of the freehold or the granting of a long lease is treated as a zero rated supply of the individual properties.
If the developer instead grants ASTs, it is treated as an exempt supply. This leads to the HM Revenue and Customs (“HMRC”) being able to claim payment of the input tax recovered. Subsequently when the developer does sell the freehold or grant a long lease then it should be able to again recover a proportion of the input VAT but this still leads to an unexpected and potentially significant liability which can easily negate the advantages of letting the properties in the first place and can serious affect cash-flow.
To negate the VAT claw back issue, the developer can set up a separate subsidiary company (“Tenantco”). The developer can transfer the freehold or grant the long leases to Tenantco.
The key point is to not group Tenantco with the developer for VAT purposes. The result is that for the developer the transfer to the Tenantco is treated as zero rated therefore there is no clawback of VAT. Tenantco can then freely grant the ASTs which are exempt supplies. Tenantco cannot recover its input tax in relation to the grant of the ASTs but this will primarily be VAT on professional costs.
Once conditions have improved and when the ASTs have come to an end, Tenantco can sell the properties which will be an exempt supply.
There are other potential tax liabilities which also require consideration, looking at corporation tax, the ‘sale’ of the properties is likely to be deemed to take place at market value and so a corporation tax liability will be due on the disposal by the developer. But depending upon individual developers corporation tax profile it may be that by the time the tax is due, the property has been sold on and therefore there are funds available to pay the tax.
The final potential tax liability to consider is Stamp Duty Land Tax (“SDLT”). Provided certain criteria are met, group relief from the payment of SDLT will be available. Key points are that Tenantco must not leave the group for at least three years from the acquisition of the properties and funding for the acquisition must not be provided by third parties. The effect is that no SDLT will be due on the transfer.
There are a number of other options that can be explored depending upon each developers’ circumstances, which can mitigate the problems of surplus stock being on the books. With careful thought it may be possible to maximise returns in a poor economic climate along with the improved atmosphere and impression of a site which almost fully occupied as opposed to a site almost fully on the open market for sale.
The information contained in this article is not intended to be a comprehensive study, nor to provide legal advice, and should not be relied upon or treated as a substitute for specific advice concerning individual situations.
If you require any further information regarding property matters please contact Rebecca Howle on 01782 205 000 or email rebecca.howle@beswicks.com
Uploaded: August 2008
The information contained in this article is not intended to be a comprehensive study, nor to provide legal advice, and should not be relied upon or treated as a substitute for specific advice concerning individual situations.
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