Mixed use buildings are increasingly common, particularly in our city centres. In many respects, mixed use properties are treated as a commercial investment. Before putting an offer in on a mixed use property, buyers should consult with their legal adviser. This article looks at the tax implications of mixed use properties. Considering the tax implications at the outset of a transaction will make buyers better equipped to make an appropriate offer on a property and avoid any unexpected costs down the line. What is a Mixed Use Property? Generally speaking, 'mixed use' is a global term used for a property with a combination of commercial and residential uses in one building, estate or development. The distinction may be easy enough to spot in investment properties with residential leases already in place. This could include long leases at a premium, assured shorthold tenancies or secured tenancies. However, there are many grey arears which will be considered on a case by case basis including:
- Garden/garage licences - which on the face of it are residential but may allow for business/agricultural use; and
- Individuals operating business from home.
VAT payable on purchase One question that should be asked of the seller before placing an offer on any commercial property is whether the seller has opted to tax the property (in other words, whether the seller has waived the VAT exemption in respect of the Property). This is a standard enquiry your legal adviser will raise as a result of CPSE's of the seller, where a copy of the election and acknowledgement from HMRC will be obtained. The complication with mixed use properties is that any election in respect of the residential part of the mixed use property will be disapplied and take effect over the commercial part only. The purchase price on a mixed use property in which the Seller has opted to tax will therefore need apportioning between the commercial and residential elements in order to calculate the tax due to HMRC and the ultimate purchase price. There is no exact science when it comes to apportioning the purchase price and HMRC guidance simply states that "where part of the land being transferred is residential property, the consideration must be apportioned on a 'just and reasonable basis' ". The 'just and reasonable' test is subjective and each case is considered on its own merits. Apportionment is generally on the basis of floor area of the respective uses. The key is to retain evidence to show how that apportionment was carried out. SDLT payable on purchase SDLT (or Stamp Duty Land Tax) is a greater concern for buyers. Unlike VAT, which is generally a cashflow issue, SDLT cannot be claimed back. SDLT is therefore a real cost to a Buyer and is very much dependant on the total, VAT inclusive, purchase price. However unfair this may seem you are therefore paying SDLT on the VAT element (so tax on tax). This means that any apportionment for VAT purposes will directly affect your SDLT liability. The commercial rates for SDLT apply to the whole of mixed use premises. Click here for a link to the HMRC website as a reminder of those current rates https://www.gov.uk/government/publications/rates-and-allowances-stamp-duty-land-tax/stamp-duty-land-tax-rates As a Buyer, it is therefore important to speak to your legal adviser as early in the buying process as possible as any VAT/SDLT liability may affect the purchase price you are willing to pay, particularly where a VAT liability will take you over the next SDLT threshold. For more information on Mixed Use Properties, please contact Lisa Davison on 0114 224 2029 or email [email protected]
