We get a lot of questions at Tax Insider about “cashbacks”. These inducements to purchasers are becoming more and more common in today’s property market, and this article looks at some of the possible tax pitfalls they bring with them.
Types of Cashback
There are three main ways in which cashbacks are offered:
Mortgage lender’s cashback – where the bank or building society providing your finance pays you a sum of money on completion of your mortgage
Vendor’s cashback – where the vendor of the property (typically a property developer) pays you a sum of money when you complete the purchase of the property
“Gifted deposits” – where the vendor (or sometimes an agent) gives you the cash for the deposit on the property being sold
Property trading v Property Investment
The treatment of all the above inducements will depend on how your business works. If you are a property developer or trader, buying properties in order to sell them again in the short term, then all the above cashbacks will form part of the profits of your trade. This is because as a trader, you must include all receipts that come to you in the course of your trade. When you buy a property, you are buying an item of trading stock, and any receipts associated with that are taxable.
The position is more complicated if you are a property investor, buying the property in order to let it out.
There are also some possible complications associated with Stamp Duty Land Tax, which apply to both traders and investors.
Cashbacks for the property investor
This is the oldest of the cashbacks, having been around for more than ten years. The lender pays a cash sum to the borrower when the mortgage completes. Originally, these were seen as an inducement to first time buyers – the advertising copy played on the idea that you could spend the cash on furnishing your new home – but they are quite common on all types of mortgage now.
Because these have been around for some time, their treatment for tax purposes seems well settled – they are not taxable, provided they are a single lump sum rather than a series of annual payments, and they do not affect the cost of the property for CGT purposes. If you buy a property for £150,000, and get a £5,000 cashback from the mortgage lender, the cost of the property to you is still £150,000 when you come to sell it – it is not reduced by the cashback, because the cashback came from the mortgage provider and it did not affect the price you paid for the property.
If the vendor of your buy to let property offers you a cashback, the position is more complicated. One thing seems certain – it is going to be taxable in one way or another!
The two most likely ways in which it could attract tax are:
Reduction of the CGT base cost – if you buy a property for £150,000, but the vendor gives you £10,000 back, then at the very least, HMRC could argue that the property only cost you £140,000, so that would be the deduction you could claim when you sold it. There is, however, another possibility:
The cashback could be a “capital sum derived from an asset”. The CGT legislation states that if you “derive” a capital sum from an asset, even if you do not sell the asset in the process, you are treated as if you had made a disposal for CGT purposes. The legislation is commonly used in the case of sums paid in compensation for damage to an asset, but the way it is drafted, it could catch cashbacks. Under this legislation, you would make an immediate capital gain when you received the cashback. There are good arguments for saying that the legislation does not apply to this situation, but (as we tax advisers are fond of saying) the position is by no means certain.
The first thing to be said is that the word “gifted” is misleading. In no sense is the vendor making a “gift” to you. Instead, he is paying you an inducement to buy his property. The same applies if the “gift” comes from an agent acting as a middleman in the transaction.
The same tax considerations apply to these “gifts” as to vendor cashbacks, so they could either reduce the base cost, or, possibly, be a disposal giving rise to an immediate capital gain. I could even put up an argument that they are chargeable to income tax – after all, you are being paid to act in a certain way (to buy the property), and how is that different from being paid to do some work?
Stamp Duty Land Tax
SDLT is payable on the “chargeable consideration” paid for a property, so the question is, if you receive a cashback, is the “chargeable consideration” the amount you paid less the cashback or not? This could be particularly significant if the difference meant crossing one of the SDLT thresholds:
Joe buys a buy to let property for £255,000. This is in the 3% band of SDLT (consideration over £250,000). But if Joe receives a £10,000 cashback, or a gifted deposit of the same amount, can he claim that the real price of the property was only £245,000, which would put him in the 1% band for SDLT? The difference is significant - £7,650 of SDLT against £2,450.
The answer is that no-one is certain. I wrote to HMRC a month ago, asking their views on this, and so far they have not replied.
HMRC and Cashbacks
The buy to let market has grown enormously in the last few years, and in a way HMRC seem to be caught up in a game of “catch-up”. There is an old Statement of Practice that deals with cashbacks from such things as credit cards and on retail purchases, but it is silent on the matter of cashbacks on property purchases. It could be argued that the same principles apply (which would be good news, because in general the Statement says cashbacks are not taxable), but the Statement is full of caveats that each case must be judged on its particular facts, and HMRC would have little difficulty in arguing that it did not apply to property cashbacks.
In addition to the uncertainty surrounding the tax treatment of cashbacks, you need to consider two other important issues:
Commercial Reasons for Cashbacks
There is, famously, no such thing as a free lunch, so why is the vendor (or the agent) offering you a cashback or a gifted deposit? Is it because the property has been overvalued, and the cashback is offered to dissuade you from looking too critically at the market value of the property itself?
Does the mortgage lender know you are getting a cashback or a gifted deposit? If not, would the lender still have offered you the mortgage if they did? This is a very tricky and potentially dangerous area – when applying for a mortgage, you are entering into a contract with the lender, and if you are not disclosing the full facts, you could find yourself in serious trouble!
I am afraid this article offers no clear answers on the tax treatment of cashbacks for buy to let investors. The tax treatment is uncertain, and so if you get a cashback offer (and decide to accept it, having considered the commercial aspects) the best advice I can offer you is to make sure you disclose the matter fully on your tax return – a tax adviser will be able to suggest an appropriate way to do this for the particular type of cashback you have received.
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