Build to Rent refers to purpose-built housing designed for rent rather than sale.

Schemes generally offer longer tenancy agreements and are often professionally managed by the owner or operator.

With a lack of affordable housing, UK house prices soaring, and the general cost of living crisis, Build to Rent developments are an attractive option for investors seeking long-term returns. Research shows that by 2032, 8% of homes in UK for rent will be purpose-built – up from 1.5% today.

The analysis predicts a continued evolution in the market, with single-family homes making up 18% of BTR stock in ten years’ time compared to 12% today.

Developments are often concentrated among the world’s leading cities, where years of rising house prices have put home ownership beyond the reach of many young people.

Private Rented Sector (PRS)

PRS is a classification of housing in the UK where property is owned by a private landlord and leased to a tenant.

Any property that is privately owned and rented out is considered private rental housing and Build to Rent sits within this classification.

The difference can be seen in that where some PRS schemes are owned by a ‘buy-to-let’ landlord with a handful of properties, Build to Rent developments are owned by institutional investors and property companies.

These schemes are generally professionally managed and appeal to residents for their higher security and quality.

Tax implications of Build to Rent

There are multiple hurdles for both investors and developers embarking on their Build to Rent journey. Particularly from a tax perspective.

For instance, BTR assets are residential, which results in investments in BTR assets being caught within tax rules primarily designed to tax other types of residential property investment.

In practice, this results in increased tax and adviser costs and the need to manage tax risk.

Value Added Tax (VAT)

Building homes to sell can be carried out on a VAT efficient basis through the availability of zero-rating on both the construction costs and onward sale.

The construction rules apply equally to BTR developments, but the exempt end-use creates more complexity around the recoverability of VAT on professional and land costs.

There are a number of commercially motivated structures used for the development of BTR assets which also may also mitigate VAT.  For instance, disposing of land at so called “golden brick” stage of construction, this being the point at which construction of the dwelling reaches above foundation level, creates an invaluable zero-rated supply.

Despite this, even if development structures are VAT efficient, the operational side will usually create a VAT cost.

In the commercial property context, the VAT cost normally sits with the end-consumer.

In some cases, the impact on the rent may be negligible depending on the chain of under-lettings.

However, in BTR arrangements, the VAT cost stays with the landlord because it makes the last supply in the chain as an exempt letting to tenants.

This irrecoverable VAT must be factored into decisions about rent setting and acceptable level of returns.

Furthermore, determining whether residential units are dwellings for VAT purposes requires analysis of the nature of the dwelling, but also of restrictions in planning and other documents.

Investors must determine if ancillary facilities, such as gyms or common areas etc. are part of the dwellings.

On this matter, the guidance is limited. Currently, official guidance confirms that construction of a residents’-only gym in a single residential block should benefit from zero-rating, but what about a residents’-only gym in a separate building, for use by multiple residential blocks?

Moreover, how are services categorised? When does the property start to become a hotel for instance? Can services be offered separately to rent?

Naturally, these issues present a minefield and will certainly encourage great debate amongst those who will be impacted.

Direct taxes

If the BTR asset is, or is planned to be, held within a non-resident holding structure, you must consider the impact of the direct tax rules designed to discourage non-residents from investing in high-end UK residential property.

There are exemptions in the rules, but they need to be worked through to know what does or does not apply. Letting property should remove a BTR landlord from the Annual Tax on Enveloped Dwellings and associated capital gains tax charge due to falling into one of the exemptions.

However, the non-resident capital gains tax charge on UK residential property has no such exemption.

Furthermore, it is essential to consider the new transaction in land rules and the current consultation to bring non-residential companies with UK income from real property into the UK corporation tax regime.

The following analysis and risk management then starts to become an expensive and time-consuming part of the investment process.

Stamp Duty Land Tax (SDLT)

The 3% SDLT surcharge for second homes that is added to any claim for multiple dwellings relief is a further implication.

You would never pay more than you would for commercial property, however, it is a surcharge aimed at second homers and not BTR investors.

As a result of this, many investors have argued for exemptions to apply. This has so far been ignored.

Council Tax implications

BTR landlords will generally be liable for council tax when their units are empty.

Ideally, the rules would exempt BTR landlords in relation to unoccupied properties which are being marketed for rent.

However, the councils who benefit from the tax, may be less inclined to support this measure.

Why Williamson & Croft?

As with any and all business investments, tax is and always will be an important consideration for BTR. Investors must be aware of the tax costs to ensure they are factored into developmental costs and operational returns.

At Williamson & Croft, we provide specialist tax advice to support clients through specific transactions, projects, or events in their business or personal affairs.

Our goal is for the client to have the necessary advice to ensure they make an informed decision on their tax affairs, ensuring that they are as tax efficient as possible while remaining fully compliant.

We provide clear, concise advice and manage the entire process of the tax event to remove the stress and risks of not implementing our tax advice fully.

If you are considering in embarking on investing in a BTR scheme or already involved in one and have queries, it is essential that you seek expert advice.

Contact us today to discuss how we can help you.