Month: January 2015

Are there any tax advantages to HMOs?

Student house

The Official definition of an HMO is….

Your home is a House in Multiple Occupation (HMO) if both of the following apply:

  • at least 3 tenants live there, forming more than 1 household
  • you share toilet, bathroom or kitchen facilities with other tenants

Your home is a large HMO if all of the following apply:

  • it’s at least 3 storeys high
  • at least 5 tenants live there, forming more than 1 household
  • you share toilet, bathroom or kitchen facilities with other tenants

A household is either a single person or members of the same family who live together. A family includes people who are:

  • married or living together – including people in same-sex relationships
  • relatives or half-relatives, eg grandparents, aunts, uncles, siblings
  • step-parents and step-children

Typically your tenants are likely to be:

  • Students
  • Transient and foreign workers
  • LHA claimants (Local Housing Allowance)
  • Low paid workers

Here is really useful guide from The House Crowd (2014)

HMO’s are popular because they have higher yields than other Buy to Let Residential Properties.

Many investors believed they could claim Capital Allowances on HMO’s Plant & Machinery but that isn’t the case.

HMRC’s considered view published in its capital allowances manual is that:

“A dwelling house is a building, or a part of a building; its distinctive characteristic is its ability to afford to those who use it the facilities required for day-to-day private domestic existence.  In most cases there should be little difficulty in deciding whether or not particular premises comprise a dwelling house, but difficult cases may need to be decided on their particular facts. In such cases the question is essentially one of fact … cluster flats or houses in multiple occupation, that provide the facilities necessary for day-to-day private domestic existence (such as bedrooms with en-suite facilities and a shared or communal kitchen/diner and sitting room) are dwelling-houses. Such a flat or house would be a dwelling-house if occupied by a family, a group of friends or key workers, so the fact that it may be occupied by [say] students is, in a sense, incidental.  The common parts (for example the stairs and lifts) of a building which contains two or more dwelling houses will not, however, comprise a dwelling-house.” (CA11520)

So here is quick summary of ways to save tax on residential properties in general….

1. Claim allowable expenses

  • Mortgage or Loan Interest (but not capital)
  • Repairs and maintenance (but not improvements)
  • Decorating
  • Gardening
  • Cleaning
  • Travel costs to and from your properties for lettings or meetings
  • Advertising costs
  • Agents fees
  • Buildings and contents insurance
  • Ground Rent
  • Accountants Fees
  • Rent insurance (if you claim the income will need to be declared)
  • Legal fees relating to eviction

2. If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year

3. Claim for repair and advertising expenses incurred in getting the property ready for renting

4. Consider how the property is owned for example your partner may pay less tax or if you own it 50/50 you could use their capital gains tax exemption on sale of the property

5. Consider whether owning the property within a limited company might be better, Corporation Tax is 20% for small companies in the UK which can make dividends more tax efficient than personal income.

6. Make sure any borrowings you have are on the Buy to Let so that you can claim tax relief on the interest

7. Claim the Energy Saving allowance  for energy saving work and save £1,500

steve@bicknells.net

Will you pay Class 3A NI to top up your Pension?

This is exactly how I pictured the partners lounge

From 12 October 2015 to 5 April 2017 you’ll be able to make a ‘Class 3A voluntary contribution’ to top up your State Pension by up to £25 per week.

You can choose to top up your State Pension by between £1 and £25 per week. How much you’ll need to contribute depends on:

  • how much extra pension you want to get each week
  • how old you are when you make the contribution

Example You are 68 years old in October 2015. You decide that you want to get an extra £5 per week (£260 a year) on top of your pension.

The cost of an extra £1 per week for a 68 year old is £827, so you multiply £827 by 5.

You’ll make a lump sum payment of £4,135.

You can use this calculator to see how it works…

https://www.gov.uk/state-pension-topup

Here is a link to the legislation…

http://www.legislation.gov.uk/ukdsi/2014/9780111121689/contents

steve@bicknells.net

The VAT advantages of a development company

Group of construction workers. House renovation.

Property Development is a trade, where as Property Investment isn’t – renting out a residential property is a VAT exempt supply.

If you are planning significant building work, setting up a Development Company or using a building contractor might save VAT.

Assuming you employ a builder…

The VAT Rules are in VAT Notice 708 Buildings & Construction

Your builder may be able to charge you VAT at the reduced rate of 5 per cent if you are converting premises into:

  • a ‘single household dwelling’
  • a different number of ‘single household dwellings’
  • a ‘multiple occupancy dwelling’, such as bed-sits, or
  • premises intended for use solely for a ‘relevant residential purpose’

As your builder will be VAT registered, they reclaim the VAT they are charged and then charge you VAT at 5%.

If your business is property rental and you do the work yourself, you can’t take advantage of the 5% rate.

If your Development Company is VAT registered you can reclaim all the VAT.

Get your existing business or your property development company to convert the property and then sell it to another company that you own (may be an SPV)  will be a  VAT 5% Rated transaction. The other company then carries on the rental business.

steve@bicknells.net

Is Striking Off a company the best solution?

 

Closing down stamp

Companies House guidance states…
A company may apply to the registrar to be struck off the register and dissolved. The company can do this if it is no longer needed. For example, the directors may wish to retire and there is no one to take over from them; or
it is a subsidiary whose name is no longer needed; or it was set up to exploit an idea that turned out not to be feasible. Some companies who are dormant or non trading choose to apply for strike off. If you have
decided that you no longer want to retain your company and wish to have it struck off, the registrar will not normally pursue any outstanding late filing penalties unless you restore the company to the register at a later stage.
Form DS01 is used to apply for striking off and guidance GP4
An alternative, if the business has assets is to use an Members Voluntary Liquidation (MVL).
  1. The Insolvency Practitioner will ask your Accountant to confirm that the clients tax affairs are inorder and that appropriate advice has been given
  2. Final Accounts will need to be prepared and creditors paid
  3. A Declaration of Insolvency will be signed – The declaration of insolvency demonstrates that the company will be able to settle or secure liabilities and the costs of liquidation within 12 months
  4. A meeting of Shareholders will appoint the Insolvency Practitioner
  5. Notices will be posted at Companies House and in the London Gazzette
  6. Then the MVL can be a carried out and funds distributed
  7. Arrangements can be put in place to allow the directors access to funds during the process

Here are my top 5 reasons why an MVL might be a good choice:

  1. The change in 2012 capped capital distributions on striking off at £25,000 but this cap does not apply to liquidations
  2. You want to retire and close your business and extract the net worth
  3. You created a Special Purpose Vehicle (SPV) for a specific project and the company is no longer needed
  4. Companies that are stuck off can be re-instated but that’s not the case with liquidated companies
  5. Entrepreneurs Tax Relief may be applicable meaning the capital distribution is taxed at 10%
You may also consider disincorporation.
steve@bicknells.net

 

Is Commonhold better than Leasehold for Flats?

Mosaïque de logements

Most residential flats are owned on Long Leasholds but this creates tax issues –  Stamp Duty, Capital Gains, Income Tax/Corporation Tax.

Take a look at HMRC Helpsheet 292 and CG70700 to get an idea of Capital Gains Tax issues!

Fortunately ESC/D39 can be applied to Lease Extentions

In practice, the surrender of an existing lease and the grant of a new lease should not be treated as a disposal for Capital Gains Tax purposes if the taxpayer so wishes and all of the following conditions are satisfied:

  • the transaction, whether made between connected or unconnected parties, is made on terms equivalent to those that would have been made between unconnected parties bargaining at arms length;
  • the transaction is not part of or connected with a larger scheme or series of transactions;
  • a capital sum is not received by the tenant;
  • the extent of the property under the new lease is the same as that under the old lease;
  • the terms of the new lease (other than its duration and the amount of rent payable) do not differ from those of the old lease. Trivial differences should be ignored.

CG71240

The terms of a particular lease may provide for its extension if the tenant so requests. If such a request is made, the extension of the lease does not have any immediate Capital Gains Tax consequences.

In 2002, Commonhold was introduced in the Commonhold and Leasehold Reform Act 2002 (CLRA 2002). Commonhold can be applied to both Commercial and Residential buildings.

The advantage of commonhold is that it gets rid of the concept of the declining asset – sellers and purchasers of commonhold properties will no longer have to worry about how many years are left on the lease.

Under the commonhold system, all flat owners will automatically be members of a company – the Commonhold Association – that owns the freehold and thus the block.

This means that it should be easier to run the building for the benefit of the flat owners.

However, blocks of flats will still need to be managed.

And as a form of community ownership, commonhold brings with it various tensions.

To alleviate any possible problems, members will have to sign up to a “Commonhold Community Statement”.

This statement will set out all the rules and regulations you normally find in a lease, for example rules about subletting, pets, noise and use of gardens.

Which is better?

steve@bicknells.net

 

How do you account for Construction Retentions?

Home Office

It’s a very common question, the client pays you and keeps a retention of 5% reducing to 2.5% on completion  to be released after the end of the defects period.

You do the same with your sub-contractors.

The retentions need to be held in balance sheet accounts as they can’t be invoiced to client and aren’t due to the sub-contractors. But they should be included within sales and sub-contract costs.

HMRC’s guidance is in BIM51520

In the construction industry it is a common feature of construction contracts for the customer to retain part of the contract fee over a maintenance period pending the satisfactory completion of any remedial work required by the contractor. Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.

In their accounts, builders will generally deal with retentions in one of the following ways:

  • include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment (see BIM42700 onwards), or
  • defer recognition of retentions until their receipt becomes virtually certain.

Each of the above accords with generally accepted accounting practice and should be followed for tax purposes unless an unrealistically conservative view has been taken.

In recent years, construction industry customers have become increasingly reluctant to pay retention monies, irrespective of whether there are defects to be made good. It is now common for such monies never to get paid. Consequently, it will often be the case that, whichever of the above approaches is adopted, there will be little or no difference in the figure of net profit.

A challenge will only be appropriate in worthwhile cases. For example, where retentions are only recognised on receipt but, in practice, a large proportion is in fact consistently paid over to the builder and there is a significant tax effect (compared with the alternative provisions method).

There is guidance on VAT in VATTOS5170

……the tax point for retentions is delayed until either a VAT invoice is issued or payment of the retention is received, whichever is the earlier. It must be stressed that this only applies to the retained element of the contract price. The rest of the supply is subject to the normal tax point rules.

steve@bicknells.net

 

Taxman reveals top 10 terrible tax excuses

the dog ate my homework

Last years excuses used in unsuccessful appeals against HMRC penalties for late filing and payment. Here’s the full list:

  • My pet dog ate my tax return…and all the reminders.
  • I was up a mountain in Wales, and couldn’t find a postbox or get an internet signal.
  • I fell in with the wrong crowd.
  • I’ve been travelling the world, trying to escape from a foreign intelligence agency.
  • Barack Obama is in charge of my finances.
  • I’ve been busy looking after a flock of escaped parrots and some fox cubs.
  • A work colleague borrowed my tax return, to photocopy it, and didn’t give it back.
  • I live in a camper van in a supermarket car park.
  • My girlfriend’s pregnant.
  • I was in Australia.

https://www.gov.uk/government/news/taxman-reveals-top-10-terrible-tax-excuses

The previous year, the following bizarre, exotic and flimsy excuses have all been used by tardy taxpayers:

  1. My pet goldfish died (self-employed builder)
  2. I had a run-in with a cow (Midlands farmer)
  3. After seeing a volcanic eruption on the news, I couldn’t concentrate on anything else (London woman)
  4. My wife won’t give me my mail (self-employed trader)
  5. My husband told me the deadline was 31 March, and I believed him (Leicester hairdresser)
  6. I’ve been far too busy touring the country with my one-man play (Coventry writer)
  7. My bad back means I can’t go upstairs. That’s where my tax return is (a working taxi driver)
  8. I’ve been cruising round the world in my yacht, and only picking up post when I’m on dry land (South East man)
  9. Our business doesn’t really do anything (Kent financial services firm)
  10. I’ve been too busy submitting my clients’ tax returns (London accountant)

All of these people and businesses received a £100 penalty from HM Revenue and Customs (HMRC) for filing late. They appealed against the decision using these excuses, but were unsuccessful.

https://www.gov.uk/government/news/revenue-reveals-top-10-oddest-excuses-for-late-tax-returns

Don’t be late get your return done!

steve@bicknells.net