by Alan Shenton
Several regions of the country which had experienced a continual boom in demand for residential property are now experiencing a cooling off, or even a downturn, in the market. Many builders are facing problems in selling their houses at the budgeted price. They are turning their attention to all manner of fixtures and fittings to make the house look more attractive and a better bargain. Yet the main obstacle to any house sale is widely recognised as being the chain of buyers and sellers involved. Break this chain and you can sell your own house more quickly.
Breaking the chain
The simplest route for a builder to sell on his house to a buyer is to accept the buyer’s old house in part exchange. It sounds simple, and it is simple to achieve, but there are tax costs which should be considered, principally VAT and stamp duty.
This article considers ways of effecting a part exchange while minimising the total costs of VAT and stamp duty.
Builders will be well aware of how VAT affects them on sales of residential housing. Briefly, the sale of a residential house which they have constructed is zero rated for VAT purposes. This means they do not charge VAT on the sale price. However, “zero rate” is still a tax rate for VAT purposes: they can accordingly register for VAT and recover VAT input costs.
Turning to stamp duty, anybody who purchases a house and pays over £30,000 will have to pay stamp duty of 1% on the consideration. This sometimes appears inequitable, as exceeding the threshold will trigger a charge on all the sale proceeds, rather than the excess over £30,000.
In dealing with a part-exchange transaction, the trick is to avoid VAT and stamp duty costs being incurred unnecessarily.
There are three alternative routes to consider.
Simple part exchange
The first route involves the building company selling the house to the buyer and accepting the buyer’s old house in part exchange. The builder will then sell on the part-exchange house in due course to another buyer.
The builder’s sale of the new house is zero rated for VAT purposes. However, his onward sale of the part-exchange house he accepted, because he did not construct it himself, is an exempt supply. This could raise a partial exemption problem for the builder, and would be particularly grave if the builder’s company were part of a group of companies which had a group registration for VAT purposes. A proportion of all input VAT would not be recoverable.
The simple way of trying to minimise the problem is to have part-exchange transactions dealt with by one solicitor. The VAT on the transaction costs can then be easily identified and it can be claimed that only this input VAT should be disallowed to the builder.
This method of treating the VAT is known as the “direct attribution” or “builder’s method”. If set up correctly and well run, it can mean recovery of most of the builder’s input VAT.
For stamp duty purposes, the part-exchange purchaser will pay 1% duty on all cash shortfall between the new and old properties (known as equality money) if this payment exceeds £30,000. The onward sale of the old house by the builder will also attract stamp duty at the full price, but this will be paid by the second purchaser, not by the builder.
Part-exchange broker
The second route involves using the services of a part-exchange broker, for which a charge will be made. Further, some control will be surrendered by the builder and he will have to place reliance on the broker, all factors which will determine whether this method is worth pursuing.
Part-exchange company
The third route involves setting up a part-exchange company. This may be more appropriate if there are a large number of transactions or it is intended to hold the part-exchange property for a period — and finance is needed to do so — before its onward sale. The problem here is getting the part-exchange property into the ownership of the part-exchange company.
There would be a VAT problem if the building company accepted an old house in part exchange, and then transferred it to the part-exchange company for onward sale. The transfer would be an exempt supply for VAT purposes by the building company.
However, the use of the part-exchange company is improved where the transactions are undertaken as set out in the illustration below, which shows the steps involved through transactions (a), (b) to (c).
The arrangement has the merit of isolating the exempt supplies into an identifiable cost centre. Furthermore, there may be an opportunity to streamline the stamp duty paperwork if one can agree a streamlined procedure with the Stamp Office.
The practicalities of this route must be addressed. Transferring the new house from the building company into the part-exchange company is an extra transfer of title. This means further professional costs and VAT on them, which would be irrecoverable in the part-exchange company. Also, the NHBC guarantee would be with the building company whereas the buyer would require that cover in purchasing from the part-exchange company. Provided these issues were addressed and the costs found to be acceptable then it may be worth pursuing this route.
Gaining a competitive edge
In a more competitive market, any way of distinguishing the product must be to the seller’s advantage. For a builder, to be able to accept a buyer’s house in part exchange is an enormous advantage. However, this is only worth undertaking if the advantage of the sale of the new house is not outweighed by the costs of dealing with the old house. Of those costs, stamp duty and VAT are major considerations.
I have explained above the possible ways of mitigating the VAT and stamp duty costs while operating a part-exchange scheme. The exact route to follow would depend on the circumstances of the builder. The geographical spread of sites, the need to distinguish different qualities of houses through sales by different companies, and whether or not a broker was available in that part of the country would all help shape the decision as to how to effect part-exchange transactions.
Whichever route were chosen in outline, the matter should be researched in detail and advice taken. Stamp duty and VAT may be a significant cost on one transaction. Multiplied by numerous transactions over the year they could be a significant part of the margin the company would otherwise make on the sale of its new houses.
The opportunities are available to enhance the sales of houses, even in a depressed market. It only remains for you to consider and take advice to obtain the competitive advantage.
