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First Grant of a Major Interest in Residential Property – Attribution of Input Tax and the Capital Goods Scheme

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First Grant of a Major Interest in Residential Property – Attribution of Input Tax and the Capital Goods Scheme
Clarification of policy from HMRC on the treatment of input tax incurred on the construction of residential property where the developer sells a long leasehold interest separately from the freehold interest. 

HMRC begin by explaining how the ‘first grant of a major interest’ (i.e. freehold grant or leasehold grant over 21 years) in a residential property is zero-rated.  All subsequent grants are then exempt.  

When a residential property is constructed or created by the conversion of a non-residential property, all input tax is recoverable against the first grant of a major interest.  However, if a residential property is constructed and the first grant of a major interest is a long lease, the developer is using the building for a business purpose other than solely for the purpose of selling the building. As such, the developer will have to treat the building as a capital item under the provisions of the Capital Goods Scheme (‘CGS’).  The construction input tax recovered against the zero-rated long lease will have to be adjusted through the CGS should any subsequent exempt grant be made of the building. 

If a developer constructs a residential property, and the first grant of a major interest is a freehold sale, the developer is using the building for the purpose of selling it, and does not have to treat it as a capital item under the CGS. 

HMRC give three examples of how the above provisions would work as follows: 

(a) All flats sold followed by the freehold - The sale of each individual flat will be a zero-rated first grant of a major interest. HMRC say that although the developer will hold a capital item, when the freehold is sold, they consider that it will only be exempt to the extent that it relates to those areas of the building that were previously the subject of the zero-rated grants of individual flats. Most of the sale of the freehold title will be zero-rated because it relates to the common parts that have not been subject to any previous supply.

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Business Tax Tip - Don’t be a Scrooge – office parties are tax free provided all employees who work in the office are invited, and the cost per head is less than £150 per year!


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Dividends for couples - Married couples and civil partnerships who own businesses need to make sure both their tax allowances and lower rate bands for income tax are being used – it’s bad tax planning for one to be paying higher rate tax while the other has income of less than £37,295 for 2005/06.


Make use of the 10% wear and tear allowance - The 10% wear and tear allowance is particularly suited to ‘fully furnished’ property that has been furnished immediately after acquiring it. This is because you can start to make the 10% claim immediately from the first year of letting.


Child Trust Fund Account - If you have a child born after 1 September 2002, up to £1,200 per year can be added to their tax-free Child Trust Fund account – this sum can be made up of gifts from anyone, including the parents.


Fancy a Tax-Free Gift? - Have you been running your company for 20 years or more? Why not reward yourself with a tax-free gift? Section 323 ITEPA 2003 exempts “long service awards” to employees (including directors) with over 20 years’ service. The award must not be in cash, but with an upper limit of £50 per year of service (so 20 years = £1,000), you could buy yourself a really nice gold watch!


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General Tax Tip - What are you up to?
When the money laundering rules came in in 2003, one of my accountant friends told me he had simply reported all his clients on the first day, on the basis that “everyone’s up to something where tax is concerned”!




Business Tax Tip - Staff entertainment.
One of the “grey areas” of staff entertainment is entertaining people who work for you but are not your employees – for example, I had a long argument with a tax inspector who wanted to disallow the cost of drinks given by a pub landlord to the draymen who delivered his beer, on the grounds that they were not his employees, but the brewery’s.




Personal Tax Tip - Lower rates of SDLT
As you can see from the table, rates of SDLT are lower in “disadvantaged areas”, and there is a facility to look these up on HMRC’s website, using the postcode of the property concerned, but beware – a solicitor told me that this is not 100% accurate, and if it says the relief is not due, it is worth double checking – the “disadvantaged areas” are defined by electoral wards, and sometimes these may have changed.

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