Massive changes under discussion for the tax of Property Investors!!

woman in white shirt showing frustration

First we had the OTS Property Income Review dated 25th October 2022, since then the Policy Paper has been issued (1st November 2022) so it looks like we will see the adoption of at least some of the recommendations in Autumn Statement on 17th November 2022.

Key findings and priority recommendations

Furnished holiday lettings

Short-term rentals meeting the conditions fall into the furnished holiday lettings regime. This regime provides more favourable tax treatment than the main property income rules, with more tax relief for costs, including interest, and potentially a reduced Capital Gains Tax bill on disposal.
The OTS recommends that the government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.
If the furnished holiday lettings regime is abolished the OTS recommends that the government consider whether certain property letting activities subject to Income Tax should be treated as trading and whether it would be appropriate to introduce a statutory ‘brightline’ test to define when a property trading business is being carried on.
If the regime is retained, the introduction of a private use restriction may allow for relaxation of other requirements to enter the regime, making it simpler to understand and predict whether one is in scope.
Should the government conclude that the furnished holiday lettings regime be retained, the OTS recommends that the government then consider:
- removing the current distortion of allowing the regime for properties in the European Economic Area, either by permitting worldwide properties to qualify, or by limiting the regime to UK properties
- restricting the regime to properties used for commercial letting by removing the potential for personal occupation. This would permit a simpler approach to defining the regime

Repairs, replacements, and improvements

A long-standing area of complexity for taxation of property is whether costs are allowable straight away as repairs and replacements, or represent capital expenditure as improvements and should be disallowed for Income Tax.
The OTS recommends that HMRC should enhance the guidance in respect of the boundary between repairs and improvements to include clear examples of common situations, perhaps using flow-charts to lead towards case-by-case answers.
The OTS recommends that the government consider introducing a broader immediate Income Tax relief for all property costs – other than where work is part of the capital cost of the building, such as the initial fit-out of properties bought in a dilapidated state or structural work such as extensions to the property.

Jointly owned property

HMRC data indicates that almost half (1.5 million) of all taxpayers renting out property do so jointly, mainly with a spouse or civil partner, or with others.
Those not married nor in civil partnership will by default declare the split of income based on beneficial ownership, but can instead choose any other split they like without any form of election.
Conversely, spouses and civil partners, (providing they are living together) default to equal 50:50 shares for property other than furnished holiday lets, and respondents made very clear that the process to instead use a split based on beneficial ownership (using form 17) is complex and burdensome even for advisers, and taxpayers themselves are normally unaware of the need. This creates an unnecessary complexity and burden, and potentially accidental non-compliance.
The OTS recommends that the government should consider removing the anachronistic 50:50 rule for spouses and civil partners and aligning treatment to that of other joint owners and to the position for spouses under Capital Gains Tax and Inheritance Tax. To prevent abuse, the default beneficial ownership position should not be capable of being displaced.
The government may also wish to consider removing the ability for joint owners to decide on a split other than beneficial ownership.

Making Tax Digital for Income Tax

From April 2024, landlords in scope of Making Tax Digital (MTD) for Income Tax will need to keep digital records and file updates quarterly using compatible software. There was a very high level of concern common to all respondents about how the rules would apply to landlords.
The OTS recommends that HMRC should establish a system to deal with MTD for Income Tax for jointly owned properties, for example by making a jointly owned property the MTD filing entity.
Landlords may rely on multiple parties to provide information and potentially to support submitting reports.
HMRC needs to be able to authorise MTD for Income Tax filing agents alongside tax agents. This is needed because letting agents and bookkeepers will maintain digital records and may support quarterly submissions on behalf of some landlords. Specific professional standards and responsibilities will be needed for MTD for Income Tax filing agents.
The gross rental limit for being required to adopt MTD for Income Tax has been set at £10,000. The evidence suggests that a landlord with such low gross rentals will have a modest net profit, if any. The OTS acknowledges that, although there would be an Exchequer impact on raising the threshold, this could be outweighed by lower customer costs, higher levels of compliance and better taxpayer and agent engagement.
The OTS recommends that HMRC give consideration to increasing the minimum gross income threshold for MTD for Income Tax for landlords above £10,000, at least for the medium term.
As is clear from the points above there are unresolved complexities within MTD for Income Tax.
The OTS recommends that MTD for Income Tax should not apply to landlords until these major points have been dealt with by HMRC and by a range of software providers. Time will be needed to test new systems before adoption.

These changes are huge, if implemented there will be widespread confusion about how to report property income, this is already a complex area of tax, most of these changes will probably mean property owners end up paying more tax!

steve@bicknells.net

Main and Special Rate Capital Allowances – how do you clear the pools down?

high rise building with green glass windows

When Capital Allowances are assessed on commercial property and holiday lets they will be split into 3 categories. We use specialists to make the assessments and they are able to maximise the claims. The categories are:

Annual Investment Allowance

You can only claim AIA in the period you bought the item.

The date you bought it is:

when you signed the contract, if payment is due within less than 4 months
when payment’s due, if it’s due more than 4 months later

If you buy something under a hire purchase contract you can claim for the payments you have not made yet when you start using the item. You cannot claim on the interest payments.

Since 2019 the AIA has been capped at £1m but that’s more than enough for most businesses.

AIA is not available for partnerships where one of the partners is a company or another partnership.

Main Rate and Special Rate Pools

The 3 types of pool are the:

main pool with a rate of 18%
special rate pool with a rate of 6%
single asset pools with a rate of 18% or 6% depending on the item

Special rate pool

You can claim a lower rate of 6% on:

parts of a building considered integral – known as ‘integral features’
items with a long life
thermal insulation of buildings

Integral features

Integral features are:

lifts, escalators and moving walkways
space and water heating systems
air-conditioning and air cooling systems
hot and cold water systems (but not toilet and kitchen facilities)
electrical systems, including lighting systems
external solar shading

What happens to the Pools if the Asset is disposed of?

The main and special rate pools will continue to qualify for WDAs until the business ceases, even though all the assets in the pool have been sold, transferred or scrapped. When the business ceases there will be a balancing adjustment. This will be either a balancing charge, i.e. taxable amount, if proceeds received for the assets (or their market value if they are not sold) exceed the value of the pool, or a balancing allowance, i.e. extra tax deduction, if the proceeds (or value) are less than the value of the pool. (Indicator FLM)

So you carry on taking 18% or 6% WDA until the business ceases.

If the property is being sold or has been sold and the company is to be wound up, then a balancing allowance of the CA pools can be received in the final accounting period. Usually, there will be a value attributed to capital allowances via the s198 election in the contract.

steve@bicknells.net

The Tax Issues of Hire Purchase (HP), PCP and Leases for assets – Capital Allowances

When businesses purchase assets they normally use finance, it makes sense to conserve your cash and spread the purchase cost over the life of the asset, but how will you choice impact on whether you can claim Capital Allowances, Annual Investment Allowance or Enhanced Capital Allowances.

You can claim capital allowances when you buy assets that you keep to use in your business, for example:

equipment
machinery
business vehicles, for example cars, vans or lorries

These are known as plant and machinery.

You can deduct some or all of the value of the item from your profits before you pay tax.

So clearly buying assets without finance or with a business loan is fine as you will definitely own the asset.

Hire Purchase

The normal assumption is that a vehicle bought under a HP agreement will become the property of the hirer once the final payment is made at the end of the lease period.

Section 67 Capital Allowances Act 2001 (CAA 2001) allows the capitalisation of the entire expenditure on the vehicle from delivery, providing the asset was in business use at the end of the chargeable period.

However, if a payment is not made and the vehicle is not acquired then it is treated as having been disposed of by s67(4).

Q&A: hire purchase contract and capital allowances | Accountancy Daily

PCP – Contract Purchase

Under any other finance arrangement it will depend on whether the vehicle is owned or not, usually the documentation will confirm the position but a PCP is considered to be an HP arrangement with a balloon payment. If the end payment is not paid and the option to purchase not taken then that is a disposal and thus a clawback of the allowances claimed.

Contract Hire and Leases

Contract Hire will not pass ownership to hirer so they are not eligible for Capital Allowances.

But the hire costs will normally be tax deductible and generally 50% of car hire VAT can be reclaimed.

steve@bicknells.net

Commercial Property Capital Allowances Sideways Relief

IT rental business losses can be set against general income only to the extent that they are attributable to:

certain capital allowances,
certain agricultural expenses (see PIM4224).

Until the 2010-11 tax year, relief against general income could be claimed to the extent the loss was due to furnished holiday lettings. This is not available for tax years 2011-12 onwards, see PIM4130. Losses of a furnished holiday lettings business may now only be carried forward to use against future profits of that same furnished holiday lettings business.

Where a customer claims loss relief against general income, they must take the full amount of the loss available up to the amount of their general income. They can’t opt to take a smaller amount, either they claim for the full loss or they claim for none (ITA07/S121).

PIM4220 – Property Income Manual – HMRC internal manual – GOV.UK (www.gov.uk)

The largest capital allowances are likely to be from Annual Investment Allowance claims.

Any taxpayer seeking to obtain in excess of £50,000 of otherwise unlimited income tax reliefs in any one year will find their deductions ‘capped’ (ITA 2007, s 24A). The ‘cap’ is the greater of:

25% of their total income; or
£50,000.

steve@bicknells.net

HMO’s denied Capital Allowances

HMRC have recently confirmed their view that common areas in Houses of Multiple Occupation (HMO) are parts of a “dwelling house” and ineligible for capital allowance claims.

Claims relating to Houses in Multiple Occupancy:

We are aware that some taxpayers have submitted claims for plant and machinery allowances in respect of shared parts of houses in multiple occupation (such as hallways, stairs, landings, attics and basements within the houses). They contend that these shared areas are not part of the dwelling-house and that allowances are therefore available. We disagree with this position. If you come across such a claim, please notify the Capital Allowances single point of contact for your area.
CA11520 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk)

The capital allowance legislation specifically denies tax relief for plant and machinery installed in a dwelling house. However, plant and machinery installed in the common areas such as hallways, stairs and lift shafts, in blocks of flats would qualify as the flats themselves are the dwellings, not the building as a whole.

Expenditure incurred on the provision of plant or machinery ‘for use in’ a dwelling-house is not qualifying expenditure for an ordinary property business, an overseas property business or the special leasing of plant or machinery.
CA23060 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk)

This would seem inconsistent with the HMRC view on HMOs and there may be a test case on the interpretation, particularly as there is no definition of “dwelling house” in the tax legislation. There is also a lack of clarity concerning the status of University Halls of residence where there is often substantial expenditure on plant and machinery in common areas.

Furnished Holiday Lets although a holiday home is a ‘dwelling house’, providing the conditions are met to meet the Furnished Holiday Let (“FHL”) legislation, capital allowances can be claimed CA20025 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk). FHL are deemed as ‘trading’ for tax purposes. The restriction for claiming capital allowances on dwellings (CAA2001 35) is therefore NOT applicable to FHL’s.

steve@bicknells.net

A Summary of Tax, Savings and Benefits of Electric Cars

What is the plug-in grant?

The plug-in grant has been around for several years as an incentive to purchase electric vehicles to curb climate change. The grant has been modified many times, but it currently offers £2,500 off of eligible low-emission cars and up to £16,000 for larger vehicles.

You do not need to apply for the grant. The car dealer will include the grant in the vehicle’s price if it is eligible.

Cars: CO2 emissions of less than 50g/km and can travel at least 112km with zero emissions. The car must cost less than £35,000 and be on the list of government approved vehicles. The grant will pay for 35% of the car price up to £2,500.

Grants for vehicle charging points

In addition to the plug-in grant, you can also receive up to £350 towards the cost of a vehicle charging point. The Electric Vehicle Homecharge Scheme (EVHS) provides up to 75% of the installation cost on domestic properties in the UK.

There is also the Workplace Charging Scheme (WCS) which is a voucher based scheme that provides support to businesses who install vehicle charging points.

Both grants need to be applied for from the government’s website.

HMRC Advisory Fuel Rate

The advisory electricity rate for fully electric cars is 4p per mile.

So you can claim 4p per mile for business miles in an electric car.

Advisory fuel rates – GOV.UK (www.gov.uk)

100% Capital Allowances

Businesses of all sizes can claim 100% FYAs on capital expenditure on a car (CA23153) provided that:

the car is ‘unused and not second hand’, and is first registered on or after 17 April 2002;
it is an electric car or a car with qualifying CO2 emissions of not more than a specified amount;
the expenditure is incurred between 17 April 2002 and 31 March 2025; and
the expenditure is not excluded by the general FYA exclusions, see CA23110.

Second Hand zero emission cars are added to the main rate pool and written down at 18%

Benefit in Kind

Cars first registered from 6 April 2020 (WLTP)

CO₂ emissions figure	Electric range figure	2020–21	2021-22
0	N/A	0%	1%
1–50	130 or more	0%	1%
1–50	70–129	3%	4%
1–50	40–69	6%	7%
1–50	30–39	10%	11%
1–50	Less than 30	12%	13%

steve@bicknells.net

Working at Home – How can claim tax relief?

Working from Home Tax Relief

Tax Savings for Employees and business covering VAT, Home Costs and Equipment

Further information on the items discussed in the video

VAT Notice 700 – 32. Apportionment of tax between business and non-business activities

This section explains how to treat tax incurred on goods or services that are used only partly for business purposes

https://www.gov.uk/guidance/vat-guide-notice-700#apportionment-of-tax-between-business-and-non-business-activities

Claim tax relief for your job expenses

From 6 April 2020 your employer can pay you up to £6 a week (£26 a month) to cover your additional costs if you have to work from home. For previous tax years the rate is £4 a week (£18 a month).

You will not need to keep any records.

If you work at home voluntarily

If you’ve agreed with your employer to work at home voluntarily, or you choose to work at home, you cannot claim tax relief on the bills you have to pay.

https://www.gov.uk/tax-relief-for-employees/working-at-home

Simplified expenses if you’re self-employed

You can only use simplified expenses if you work for 25 hours or more a month from home.

Hours of business use per month	Flat rate per month
25 to 50	£10
51 to 100	£18
101 and more	£26

Example

You worked 40 hours from home for 10 months, but worked 60 hours during 2 particular months:

10 months x £10 = £100
2 months x £18 = £36

Total you can claim = £136

https://www.gov.uk/simpler-income-tax-simplified-expenses/working-from-home

Specific deductions: use of home: apportioning the expenditure

The factors to be taken into account when apportioning an expense include:

Area: what proportion in terms of area of the home is used for trade purposes?
Usage: how much is consumed? This is appropriate where there is a metered or measurable supply such as electricity, gas or water.
Time: how long is it used for trade purposes, as compared to any other use?

The method of apportioning an expense depends on the relative importance of each of these factors. There are examples at BIM47825.

https://www.gov.uk/hmrc-internal-manuals/business-income-manual/bim47815

Claim capital allowances

You can claim capital allowances when you buy assets that you keep to use in your business, for example:

equipment
machinery

https://www.gov.uk/capital-allowances

Other Points to Consider

Capital Gains Tax
Planning Consent
Insurance
Business Rates
Benefit in Kind

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Are my costs Capital or Revenue expenditure?

Stress business woman

It makes a big difference to your tax whether you can offset costs as revenue expenditure or remove costs because they are capital expenditure

HMRC published a guide on this in September 2016 and have circulated in in their Agent Alert Self Assessment Special January 2016.

https://www.gov.uk/government/publications/hmrc-capital-vs-revenue-expenditure-toolkit

The Toolkit is really useful and covers lots of problem areas:

Acquisition, improvement and alterations to assets – highly relevant to property investors
Legal and Professional – including how to handle unsuccessful property purchases – which are a capital cost – and Business Owner Training Costs
Finance Costs
IT Costs – including websites
Intangible assets – such as Goodwill

steve@bicknells.net

Should you lease or buy a van – which is better?

Commercial Vehicles are tax efficient which ever option you choose and provided your employees agree to minimal private use they won’t have to pay any benefit in kind tax on using the vehicle.

But its important to make sure the vehicle you choose is actually a van and not classed as a car. For example double cab pick ups are extremely popular and it makes a big difference whether a double cab pick up is treated as Car or a Van for tax purposes, in summary:

Benefit in Kind on Cars is linked to CO2 where as on a Van its Flat Rate (and could be zero if your private use is insignificant)
Vans qualify for the Annual Investment Allowance, Cars have restricted Capital Allowances
You can reclaim VAT on Vans but its much harder to reclaim VAT on cars

HMRC have some guidance in EIM23150….

Under this measure, a double cab pick-up that has a payload of 1 tonne (1,000kg) or more is accepted as a van for benefits purposes. Payload means gross vehicle weight (or design weight) less unoccupied kerb weight (care is needed when looking at manufacturers’ brochures as they sometimes define payload differently).

Under a separate agreement between Customs and the Society of Motor Manufacturers and Traders (SMMT), a hard top consisting of metal, fibre glass or similar material, with or without windows, is accorded a generic weight of 45kg. Therefore the addition of a hard top to a double cab pick-up with an ex-works payload of 1,010 kg will convert the vehicle into a car (net payload reduced to 965 kg). Under this agreement, the weight of all other optional accessories is disregarded. HMRC has also adopted this treatment.

http://www.hmrc.gov.uk/manuals/eimanual/eim23150.htm

A double cab with a payload in excess of 1000kg can still be classified as a car if the taxman dealing with the case decides it is a car. You may have to justify a genuine business need for the vehicle.

Annual Investment Allowance

Since January 2016 the Annual Investment Allowance has been permanently set at £200,000, which means the first £200,000 you spend on assets, including Commercial Vehicles (vans), will be offset against your tax bill immediately. This applies to both the self employed and companies.

So if the buy your van, even if you get with a loan or on hire purchase, you should be able to make a big tax saving in the first year.

However, just remember that when you sell the vehicle there will be a balancing charge for tax, basically this means that the total tax offset will be the purchase price less residual value.

If you have already used up your AIA you will still be able to claim Capital Allowances.

If you lease the vehicle you can not claim AIA or Capital Allowances as you don’t own the vehicle.

VAT

If you buy the vehicle you will be entitled to full VAT refund, if you lease it you can reclaim the VAT on each Lease Payment (which slows down the recovery of VAT).

If you buy the Van when you later sell it you must charge VAT on the sale price.

Deposits

Cash flow might be a reason to choose a lease as its likely the deposit will be less than if you get a loan or HP.

Flexibility

If you need different vehicles for different staff at different times, leasing might be a good flexible option.

steve@bicknells.net

The Tax Advantages of Commercial Fit Out

When you carryout out a refurbishment or Fit Out of your business premises you will be entitled to Capital Allowances.

Here is quick summary of the main types of allowance.

Business Premises Renovation Allowances

BPRA gives incentives to bring back into business use derelict or business properties that have been unused for at least one year. It gives an allowance of 100% for certain expenditure you incur when converting or renovating unused business premises in a disadvantaged area.

BPRA started on 11 April 2007 and ends on:

• 31 March 2017 for Corporation Tax
• 5 April 2017 for Income Tax

To qualify for BPRA, you must incur qualifying expenditure.

Qualifying expenditure is capital expenditure you incurred when you:

• convert a qualifying building into qualifying business premises
• renovate a qualifying building that is, or will be, a qualifying business premises
• repair qualifying business premises

Capital Allowances

Integral features

Integral features are:

• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

Fixtures

You can claim for fixtures, eg:

• fitted kitchens
• bathroom suites
• fire alarm and CCTV systems

You can claim if you rent or own the building, but only the person who bought the item can claim.

Annual Investment Allowance

The Allowance is set at up to £200,000 from January 2016

You can only claim AIA in the period you bought the item.

The date you bought it is:

• when you signed the contract, if payment is due within less than 4 months
• when payment’s due, if it’s due more than 4 months later

If you buy something under a hire purchase contract you can claim for the payments you haven’t made yet when you start using the item. You can’t claim on the interest payments.

If you don’t want to claim the full cost, eg you have low profits, you can claim part of the cost as AIA and part using writing down allowances. You can do this at any time as long as you still own the item.

If your business closes, you can’t claim AIA for items bought in the final accounting period.

Enhanced Capital Allowance

100% capital allowances can be obtained for expenditure on environmentally beneficial technology. This enables businesses to write off the whole capital cost against their profits in the year in which the expenditure is incurred and therefore to obtain valuable tax relief which can improve cashflow.

What doesn’t count as plant and machinery

You can’t claim capital allowances on:

• things you lease – you must own them
• buildings, including doors, gates, shutters, mains water and gas systems
• land and structures, eg bridges, roads, docks
• items used only for business entertainment, eg a yacht or karaoke machine

New Tenant – Lease Incentives

New Tenants may get incentives such as rent free periods or reverse premiums. The new accounting rules (FRS102) mean that these incentives are spread over the life of the lease not taken over the period to the first rent review. Spreading these savings out will mean that tenants get a tax advantage as the gain will be less at the beginning of their lease.

Fit Out Finance

Generally funding fit outs is an issue due to the nature of the security.

However there are lender who can provide funding, for example http://www.fitoutfinance.uk/

As the name suggests, Fit-Out Finance is dedicated to funding fit-outs of business premises, including:

• Head Office.
• Warehousing.
• Fast food outlets.
• Restaurants/retail premises.
• Showrooms.

Using a blend of hire purchase, lease, unsecured loan and other facilities where appropriate, we are able to fund not just the tangibles, but all manner of tertiary work, from survey through to painting and plumbing.

As previously noted HP and Loans are suitable for tax relief through Capital Allowances.

Here are a couple of examples of how funding can work.

Start Up Fast Food Outlet

Well researched & professional, our client was buying into a well-respected fast food franchise.

Their bank had supported the franchise purchase, but there was a further £75,000 required to fit the premises to franchisor specification.
With the customer’s background and a solid franchise, arranging leasing on equipment was fairly straight forward.

That left a £30,000 shortfall on less tangible works – as there were 2 owners in the business, we were able to secure Start-Up loans to fund the shortfall

A Warehouse

The client was a well established, profitable hirer of electrical equipment. Despite being profitable, the business was highly seasonal and therefore cashflow fluctuated wildly.
Most of their funding was done under their roof, being shared between the bank, and the bank’s own finance company, who handled their hire stock.
However, when they approached the finance company, they were confidently informed that racking and mezzanine floors couldn’t be financed; hence they ploughed on, pouring valuable cash into fixed assets.

They had spent over £100,000 on racking etc and were struggling with cashflow to complete the project.

The Funder was able to:
• Release the full value of the assets they had paid for.
• Provide ongoing further funding for a mixed bundle of assets, ranging from a mezzanine floor to bikes used to move around the facility efficiently.
• Provide a £35K term loan to cover intangible costs.

steve@bicknells.net