Welcome to the Property - Glossary of Terms page. To find the term you are looking for, please select from the A-Z list by clicking on the letter, or by scrolling down the page.
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Accruals basis
Under accruals basis accounting, income is recognised in the accounting period in which it is earned and expenses are recognised as they are incurred. This contrasts with the cash basis, under which income is recognised when it is received and expenses are recognised when they are paid.
Business Assets Taper Relief (BATR)
This is a relief (not available to companies) that reduces a chargeable gain by 75% if an asset has been held for at least two years, and has been a qualifying asset throughout that period. The effective rate of tax is reduced to a maximum of 10%.
Business Property for BATR
This includes assets used in a qualifying business or shares in a qualifying business. Property let to a trading company will qualify unless the tenant is a quoted company, an investment company or not trading (eg a charity).
Business Property Relief
Where certain conditions are satisfied, relief from inheritance tax is available on the transfer of 'relevant business property'. The relief is a percentage reduction in the value transferred and applies to transfers in life and on death. The reductions may be 50% or 100% depending on the category of the asset.
Buy-to-let
The practice of purchasing a property for investment purposes. The investment is intended to provide a combination of income, in the form of rent received from a tenant, and capital growth, in the form of an increase in the property’s market value.
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Capital allowances
Capital allowances are tax allowances that the owner of an asset can offset against taxable income or profits. They provide a deduction for tax purposes in lieu of the depreciation charged in accounts.
There are various types of capital allowances. The most common and widely available are plant and machinery allowances. The definition of plant and machinery takes in a wide ranging group of fixed assets, from air-conditioning through to elevators. Other types of capital allowances include industrial building allowances (see industrial buildings allowances) and those specific to hotels and commercial buildings in Enterprise zones (see Enterprise Zone).
Capital Gains Tax
Capital Gains Tax (CGT) is a tax charged to individuals on gains made from selling or disposing of assets. Limited companies are charged Corporation Tax on these gains. As far as individuals are concerned, CGT is calculated for each tax year and is charged on the total of that individual’s taxable gains after taking into account certain selling costs and reliefs that can reduce or defer gains, allowable losses they made on assets to which CGT normally applies and the annual exemption (£8,500 for every individual in 2005-6 tax year).
Commercial Property
Land and buildings which are either zoned, designed or intended for use by businesses such as retailers and office workers. Property other than that used for residential purposes (see residential property).
Completion
The point in a property transaction at which the legal transfer of a property from the seller to the buyer is finalised (contracts will have previously been exchanged – see exchange). The buyer can take possession of the property from the completion date.
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Development
Property development refers to either the construction of new buildings or refurbishment of existing buildings in the pursuit of gains.
Dilapidations
A state of disrepair in a property where there is a legal liability for the condition of disrepair. Three components are required for the issue of dilapidations to arise – a property or part of an estate, a lease and a state of disrepair for which one party has accepted legal liability and for which the other party has suffered or will suffer financial loss. Dilapidations provisions appear in the vast majority of lease agreements and usually place the burden on the tenant to cover the cost of making good any disrepairs that have taken place over the period of their lease.
Dividends
Dividends are distributions made out of a company’s profits to its shareholders in proportion to the number of shares they hold. The owners of preference shares typically receive a set amount each year whilst dividends paid to the holders of ordinary shares tend to fluctuate according to the company’s level of profits. A company can only make dividend payments out of its distributable reserves.
Domicile
Under UK law, every individual must have a country of domicile. This is generally defined as the country which a person regards as their permanent home.
There are three different types of domicile and these are detailed below:-
Domicile of Origin – this is quite simply the domicile that is acquired at birth. A child born of married parents will acquire the domicile of the father. If the parents are unmarried then it is the mother’s domicile that is acquired.
Domicile of Dependency – a child’s domicile will follow that of the person on whom they are legally dependent, typically a parent. If that parent’s domicile changes then the child’s domicile would also change accordingly.
Domicile of Choice – a child will retain his domicile of origin or dependency until at least age 16 for England and Wales or, for Scotland, age 14 (males) or 12 (females). From that point they may be able to acquire a domicile of choice.
The UK authorities require strong evidence that an individual has actually settled in another country and that they have the intention of living there permanently or indefinitely. The onus is very much on the individual to prove that he has ceased to be domiciled in the UK. The act of living in a country for a long time is not, in itself, sufficient to acquire domicile of that country. In fact, it is often an extremely arduous task to acquire a domicile of choice.
There are no hard and fast rules as to what the actual requirements are, to acquire a domicile of choice. The following factors would support an individual’s claim for domicile in a particular country:
- establishing a permanent home in that country
- gaining citizenship, nationality or ‘permanent residence rights’ there
- working there
- having their children educated there
- living there with their spouse/partner
- have bank accounts and investments there
- the exercise of local voting rights
- making local funeral arrangements
- disposing of assets in the country they have previously been domiciled in.
Although domicile is a function of physical presence and intent, it is often only after death that it falls to be established, so that intent has to be inferred from the actions taken by a deceased during their lifetime.
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Enterprise Zone
An area with economic problems that has been given financial help by the government to encourage the growth of new businesses. The government grants automatic planning permission for such development or class of development subject to conditions and limitations, as may be specified in a scheme. Enterprise Zones are designated by the Secretary of State.
Exchange
The point at which contracts are exchanged between the buyer and seller. This event creates a binding contract on both the buyer and seller and it is not possible to back out once contracts have been exchanged without risking serious financial penalties.
Equity release
A mechanism by which a house-owner can turn the cash value of their house into a stream of income and capital payments, whist retaining the use of the house until their death.
Freehold
An owner’s interest in land where both the property and the land on which it stands belong to their owner indefinitely. i.e. the outright ownership of a property.
Furnished/Unfurnished
These terms apply to properties that are let out to tenants. A furnished property should be fully equipped with furniture and amenities. There is however no legal definition of what furniture must be provided or its condition if a property is let as furnished. An unfurnished property will typically be rented out as an “empty” building having no moveable furniture.
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Gearing
For a company, this term is used to describe the relationship between debt and equity and is calculated by dividing the company’s debt by its equity shareholders’ funds. A highly geared company is one that carries a lot of debt in relation to its equity capital. In the property sector, the term is often used to describe the ratio of debt to the value of an individual property. Gearing is sometimes also referred to as “leverage”.
Home Reversion
Under a home reversion plan, home owners sell their property to a plan provider for a lump sum. They are designed for older home owners who wish to release the maximum amount of equity from their property. The home owners become a lifetime tenant in their home and usually, whilst they are not charged any rent, they are responsible for any repairs and maintenance. By selling their home to a plan provider, the owners are releasing the capital tied up in their home whilst the plan provider takes over the risk of the future value of the property.
Industrial Buildings Allowances
Industrial buildings allowances (IBAs) are a type of capital allowance that can be claimed when capital expenditure has been incurred on a building that is used for a qualifying purpose. The allowances are provided at the rate of 4% per annum on a straight line basis over 25 years from the date that the building is first brought into use.
The following are qualifying trades:-
- Agricultural contracting
- Fishing
- Manufacturing
- Mineral extraction
- Processing
- Storage (only certain categories)
- Working foreign plantations.
The following undertakings are also qualifying trades:-
- Bridges
- Docks
- Electricity
- Highway undertakings
- Hydraulic power
- Inland navigation
- Sewage
- Transport
- Tunnels
- Water
Insulation
Any material that offers resistance to heat transmission. When insulation is placed in walls, floors or ceilings it reduces the loss (or gain) of heat. Insulation materials include fibreglass, rock wool, urethane foam and polystyrene and comes in different forms such as blanket, batt, rigid, fill and reflective.
Interest
The finance cost charged by a provider on the finance provided to an individual, partnership or company. Banks and other financial intermediares will charge interest on loans made to finance the purchase of a property typically at a rate of x% above the base rate.
International Financial Reporting Standards (IFRS)
Often known by the older name of International Accounting Standards (IAS), are a set of accounting standards issued by the International Accounting Standards Board (IASB). The consolidated accounts of companies listed on the UK Stock Exchange were required by an EU regulation to comply with adopted International Financial Reporting Standards for accounting periods starting after 1 January 2005. IFRSs are mandatory for companies listed on the Alternative Investment Market (AIM) for accounting periods commencing on or after 1 January 2007. The Accounting Standards Board (ASB) is currently introducing new UK Financial Reporting Standards (FRSs) to bring UK accounting standards into line with proposed IFRSs.
Investing
The act of laying out money or capital in an enterprise with the expectation of profit. Typically, individuals, partnerships and companies invest their own cash, together with money borrowed from third parties such as banks, in properties in order to benefit from the long-term capital growth derived from the increasing market value of those properties.
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Joint Tenancy
When two or more people buy a property together, they will hold the property in one of two ways, either as “joint tenants” or as “tenants in common” (see tenants in common).
In a Joint Tenancy, each person shares equal rights in and control of the property. When one joint tenant dies, their interest disappears immediately before their death. Since the survivor already owns all the property, nothing passes or is transferred under any will, and little more needs to be done, other than to record the death. Joint tenancies can become inappropriate where the property owners need to plan to reduce Inheritance Tax liabilities.
Land Registry
Land Registry is a government department responsible to the Lord Chancellor. It is responsible for keeping and maintaining the Land Register of England and Wales. The department registers title to land in England and Wales and records dealings, such as sales and mortgages, with registered land. Searches will be requested from the Land Registry by conveyancers as part of any property transaction.
Leasehold
The right to occupy a portion of a building for a given length of time. Leaseholds generally occurs in buildings that comprise more than one unit.
Leases
Leases can appropriately be classified into finance leases and operating leases. The distinction between a finance lease and an operating lease will usually be evident from the terms of the contract between the lessor and the lessee.
An operating lease involves the lessee paying a rental for the hire of an asset for a period of time which is normally substantially less than its useful economic life. The lessor retains most of the risks and rewards of ownership of an asset in the case of an operating lease and this category would apply to most property rental situations. (see Rent).
A finance lease usually involves payment by a lessee to a lessor of the full cost of the asset together with a return on the finance provided by the lessor. The lessee has substantially all the risks and rewards associated with the ownership of the asset, other than the legal title.
Life Time Mortgage
A lump sum borrowed against the security of a Principal Private Residence to release funds. Normally offered by insurance companies to those over the age of 55 and interest is rolled up.
Limited Company
A legally constituted body with separate identity and liability of shareholders is limited to the shares they own. Shareholders can vary in number and rights. A common and well understood vehicle often used in property transaction either for the purpose of holding an asset or executing transactions.
Limited Liability Partnership (LLP)
An LLP is an alternative corporate business vehicle (introduced April 6th 2001) that gives the benefits of limited liability but allows its members the flexibility of organising their internal structure as a traditional partnership. It is “tax transparent”.
Any new or existing firm of two or more persons will be able to incorporate as an LLP. It is not possible for a company to become a LLP or vice versa.
LLP’s are similar to companies in the respect that they will be required to provide financial information equivalent to that of companies, including the filing of annual accounts.
However it is possible for a trade or business carried on by a LLP to be transferred on a tax efficient basis to a Limited company, and for a Limited company to contribute its assets, trade or business to a LLP tax efficiently.
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Non UK Resident Company
A non Resident Company is one which is incorporated outside the UK and not managed or controlled within the United Kingdom and are used, mainly, by non UK domiciled investors.
A non UK resident company will be liable to UK corporation tax on UK trading profits on UK situated property developments arising through a branch or agency in the UK.
A non UK resident company will pay income tax at the basic rate (currently 22%) on the rental profits. Under the Non Resident Landlord scheme lessee must deduct this sum before paying rents overseas. However, Non Resident Landlords may apply to the Inland Revenue for permission to receive rents gross. This process requires a UK agent to make the return of rental income and expenditure on behalf of the non resident landlord.
A non UK resident company is exempt from UK tax on gains arising on rental property held as an investment property.
Partnership
Two or more people coming together in business to share profits. A partnership is normally governed by a partnership agreement otherwise the relationship is governed by General Law and the Partnership Act. The liability of partners to third parties is unlimited.
Prelet
Property developments that have been let to tenants (on long or short leases) whilst the schemes are being planned or are under construction.
Private Residence Relief
This relief is available if an individual has lived in a property that has been classed as a main residence for a period of time.
This relief is not available to property dealers who purchase a property with the sole intention of making a dealing profit, i.e., it was not a main residence. (see Trading).
The technical name for a person’s main residence is principle private residence (PPR).
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Real Estate Investment Trusts (REITs)
REITs are common to many economies with a developed property market. Generally they are close ended companies or trusts that hold, manage and maintain real estate for investment purposes which is leased to tenants. A key feature is that the tax treatment of property investment held indirectly through a REIT is broadly comparable to that of property held directly. This ensures that investors may make commercial decisions without taxation factors having a disproportionate influence. The Structure and Tax status of REITs is currently being debated in the UK.
Rent
An agreed charge for the use of a capital asset, typically property (see Lease).
Residential Property
Property usually occupied for private or domestic purposes. Yields and returns often vary from other types of property investments, and often a different type of investor or financier is involved. (See also Principal Private Residence and Commercial Property).
Second Homes
A generic term for a holiday home owned by an individual in addition to their Principal Private Residence. It is predicted that by 2015 the number of people buying a second home in the UK will rise by 24% to 405,000 while 334,000 second homes will be owned abroad. They are considered a good investment for the future but reasons for purchase are wide and varied.
Self Invested Pension Plan (SIPP)
A pension plan wrapper that enables investment in stocks, shares, investment funds and commercial and residential property. There is a lifetime limit of £1.5 million from April 2006, increasing annually. A SIPP provides the tax advantages and legal framework for investments for retirement.
Special Purpose Vehicle (SPV)
An SPV is any entity established for the purpose of undertaking a single property transaction. There are many types of SPVs and each has its own tax status.
Stamp Duty
Stamp duty applies to land transfers prior to 1st December 2003. After that date it applies only to transfers of stock and marketable securities and certain transfers of interests in partnerships. The rate of duty is normally ½% with a minimum of £5.
Normally the purchase of shares in a UK property company attracts stamp duty at 0.5%.
Stamp Duty Land Tax (SDLT)
SDLT on land transactions is chargeable at rates between 1% and 4% on the VAT inclusive price. The rate of 4% applies for amounts in excess of £500,000.
Stamp duty land tax applies to conveyances and land transfers after 1st December 2003. The rate of duty ranges from nil (less then £120,000) to 4% (over £500,000). SDLT is also payable on rents under leases and premiums payable on leases.
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Tenants in Common
A legal term indicating that a property is owned in shares, typically half and half. Splitting of property ownership is a simple matter that involves a notification to the Land Registry. Ownership through tenancy in common is often part of Inheritance Tax Planning (See Joint Tenancy; Land Registry).
Trading
It is important to distinguish, for fiscal purposes the difference between investing and trading, particularly when applied to property transactions. Trading is often associated with a regularity of transactions that are commercially organised. Every case will stand on an interpretation of individual facts, but the consequences will be that investing is treated subject to capital taxation rates and trading to income taxation rates. There are advantages and disadvantages of either.
Trusts
A trust is where assets are settled by a settlor for the benefit of certain persons or class of persons. The assets are held by trustees on trust. There are various types of trust, amongst which are the following:-
- Bare trusts
- Discretionary trusts
- Accumulation and maintenance trusts
- Interest in possession trusts
Value Added Tax (VAT)
VAT is a tax on the final consumption of certain goods and services. The normal rate is 17 ½% but the current rates of VAT on building work are:-
- 0% for new dwellings or non-business charitable purposes.
- 5% on the cost of renovating buildings that have been empty for three years.
- 17 ½% on repairs of buildings, extensions and the construction of commercial buildings.
There is also a special 5% rate applicable on the installation of certain Energy Saving Materials.
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