HMRC Post-transaction valuation checks (CG34) and why you need one

Post transactions checks are used in relation to capital gains, they can be used by individuals or companies.

Its a free service offered by HMRC.

HMRC state

If we agree your valuations we’ll not question your use of those valuations in your return, unless there are any important facts affecting the valuations that you’ve not told us about.

But HMRC say it could take at least 3 months to check the valuation.

You can only request a Post Transaction Valuation Check:

  • after disposals relevant to Capital Gains Tax
  • before the date you must file your Self Assessment tax return

Here is a link to the form

CG34 Post-transaction valuation checks for capital gains (publishing.service.gov.uk)

Why are they needed?

There are situation where transactions are not ‘arms length’ in other words they are between connected parties.

For example if you have a development company and sell property to related company.

You can use the CG34 for

  • Shares
  • Goodwill
  • Land
  • Other Assets

The CG34 is not mandatory, you don’t have to get a post valuation check, but if you do, you will gain protection against HMRC questioning your valuation (assuming they agree with you CG34 submission).

You will need to submit supporting documents for example a independent valuation report to justify the value.

For Land valuations you will also need

  • Copy leases
  • Tenancy Agreements
  • Plans of undeveloped land

Where do you send the form?

Taxpayers dealt with by HMRC’s High Net Worth Units, or Public Department 1 should send the completed CG34 to those offices.

Those dealt with by Specialist Trust Offices should send their forms to:

Specialist PT Trusts and Estates Trusts
SO842
Ferrers House
Castle Meadow
Nottingham
NG2 1BB

Other individuals, partnerships and personal representatives should send the completed form direct to:

PAYE and Self Assessment
HM Revenue and Customs
BX9 1AS

Companies should send to the office dealing with the company corporation tax affairs or if they do not have one, to:

Corporation Tax Services
HM Revenue and Customs
BX9 1AX

steve@bicknells.net

What is the Tax Treatment of Abortive Property Investment Costs?

Most investors, whether personal landlords or companies, will have suffered some abortive costs for deals that failed.

The nature of the costs will be capital for investors.

BIM35325 – Capital/revenue divide: general themes: abortive expenditure

Expenditure that would have been capital had it been successful does not change its character merely because in the event it is abortive. ECC Quarries Ltd v Watkis [1975] 51TC153 was concerned with costs incurred in an unsuccessful planning application.

If the application had succeeded the expenditure would have been capital. In the event the application failed; no asset was acquired or modified (and the company did not rid itself of any disadvantageous asset).

What this means is that property investors don’t get any tax relief for abortive fees.

This can be extremely bad news as the case of Hardy v Revenue & Customs [2015] UKFTT 250 (TC) a 10% deposit was paid and the outcome was that HMRC disallowed the claim for relief, the taxpayer appealed and the appeal was dismissed.

It seems unfair but the seller who receives the deposit treats it as a capital gain and pays tax on it.

If a property trader/developer had suffered the loss of the deposit and the costs was ‘wholly and exclusively’ for the purpose of the trade, the expenditure might be an allowable deduction from profits.

steve@bicknells.net

  

How do calculate property capital gains tax?

Assuming you own the property personally and its not your main residence (and benefiting from Principle Private Residence Relief), there are 2 rates of capital gains tax 18% for lower rate tax payers and 28% for higher rate tax payers.

You also have a CGT allowance which for 2018-19 is £11,700.

As a rough guide to assessing the tax

  1. Work out how much you have earned – Salary, Pension, Dividends etc
  2. Calculate your taxable gain  + Sale Price – Sale Costs – Purchase Price – Purchase Costs – Improvements
  3. You can then deduct the CGT allowance of £11,700 from the Gain (assuming you haven’t used against other gains)
  4. If the total of 1 to 3 comes to more than £46,350 you pay 28% tax on the capital gain, if the total is less than £46,350 you will pay 18% on the gain until you hit £46,350 then pay 28% once you exceed it

You can now pay CGT straight away using the HMRC online service but most people do via self assessment and pay by 31st January following the end of the tax year.

 

steve@bicknells.net

 

Working abroad? what about Principle Private Residence Relief?

There are special rules if you work overseas (and rules for working away in the UK)
This blog focuses on working overseas. The important thing to make sure you keep good records and tell your accountant!
Office/employment outside UK
TCGA92/S223 (3) (b)
You may allow relief for a period of absence of any length throughout which an individual worked in an employment or office all the duties of which were performed outside the United Kingdom, or a period of absence throughout which the individual lived with a spouse or civil partner who worked in such an employment or office if the conditions set out in CG65046 are fulfilled.
All of the duties of the employment must be performed outside the United Kingdom. You can ignore any return to the United Kingdom for holidays, but you should not ignore any duties which are in practice performed in the United Kingdom even if they are only incidental to the main duties performed outside the United Kingdom.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65040

Condition A
Before the period of absence there must be a time during which the dwelling house was the individual’s only or main residence.
Condition B

After the period of absence there must be a time during which the dwelling house is the individual’s only or main residence (if within S223 (3) (a), (b), (c) or (d))

Use of residence during period of absence
It does not matter how the residence is used during a qualifying period of absence. For example, it may be let without any loss of relief.

 https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65050

steve@bicknells.net

Can a Property Flipper or Developer use Entrepreneurs Relief?

City Developer

Property Flipping and Development are Trades (not investments), so YES, they could qualify for Entrepreneurs Relief.

You may be able to pay less Capital Gains Tax when you sell (or ‘dispose of’) all or part of your business.

Entrepreneurs’ Relief means you’ll pay tax at 10% on all gains on qualifying assets.

Work out if you qualify

You’ll qualify if you dispose of any of the following:

  • all or part of your business as a sole trader or business partner – including the business’s assets after it closed
  • shares or securities in a company where you have at least 5% of shares and voting rights (known as a ‘personal company’)

https://www.gov.uk/entrepreneurs-relief/eligibility

5 Pitfalls to avoid with Entrepreneurs Tax Relief

How does Entrepreneurs Relief help?

Let’s take an example using a Company

Flipping or Development Profit £100,000

Corporation 20% £20,000

Profit after Tax £80,000

If close the business and you apply Entrepreneurs Relief the you will pay 10% tax = £8,000

You will also get your CGT allowance of £11k deducted first.

Without Entrepreneurs Relief the tax would 20% or even more if the distribution was via dividends or salary. For unincorporated businesses the tax could be 20%, 40% or 45%!

What are the rules for ending a business?

  • The business has ceased.
  • The assets were in use at the time of cessation.
  • The business was owned for 1 year by the individual prior to cessation.
  • The assets were disposed of within 3 years of cessation.
  • The assets are not held as investments.

However, if you do the same thing within 2 years HMRC may consider that you are only doing this to gain a tax advantage and it could then be treated as income.

steve@bicknells.net

 

When do you pay Capital Gains Tax on a Property Sale?

One family house for sale

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

So it doesn’t apply to Property Developers, their profits are trading income not investment income.

Disposing of an asset includes:

If you sell a property that your have lived in you will probably qualify for Principle Private Residence Relief

How does Principle Private Residence Relief work?

Even it it wasn’t your Principle Private Residence but you did own it personally you will still get an allowance of £11,100 tax free.

Companies get an indexation allowance

Capital Gains Tax for Companies

Residential properties don’t qualify for business asset rollover relief.

Once you have worked out your gain, the choices for individuals are:

Report your gain and pay straight away

You can use the Report Capital Gains Tax online service for the 2016 to 2017 tax year (6 April 2016 to 5 April 2017) if you’re a UK resident.

You’ll need a Government Gateway account – you can set one up from the sign-in page.

You don’t need to wait for the end of the tax year – you can use this service as soon as you’ve calculated your gains and the tax you owe.

Report in a Self Assessment tax return

Use Self Assessment to report your gain in the tax year after you disposed of assets.

If you don’t usually send a tax return, register for Self Assessment by 5 October following the tax year you disposed of your chargeable assets.

If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October.

You must send your return by 31 January (31 October if you send paper forms).

Report Company Capital Gains in a Corporation Tax Return

Report your gains to HM Revenue and Customs (HMRC) when you file your Company Tax Return. How much tax you pay depends on any allowances and reliefs you claim.

steve@bicknells.net

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

Why would you create a Family Investment LLP for property?

immobilier

With all the recent changes in Property Investment Tax rules some investors have sought to move their property investments into LLP’s

Limited Liability Partnerships have largely been ignored by HMRC and untested with case law (so there is a risk that HMRC will start to pay more attention to them if they grow in popularity).

LLPs could have some benefits, especially for Inheritance, let’s look at the advantages:

  • If you had a property portfolio with potentially large capital gain you could move the property to the LLP as equity capital introduced (be careful on how the LLP agreement is written) and in theory this wouldn’t create a capital gain (CGT)
  • The LLP will show the full value in their accounts including the gain
  • Then you can add other family members

LLP’s are also being used as a stepping stone to incorporation.

S162 Incorporation Tax Relief would probably be available once the LLP has been trading for a while

Can a Residential Property Investor use Incorporation Tax Relief?

SDLT will probably not apply

Where the transferor is a partnership, this normal rule is overridden by the prescriptive rules in FA 2003 Sch 15. The impact of these provisions can be that to the extent the company is connected with the partners making the transfer, no SDLT may arise. https://www.taxjournal.com/articles/incorporation-buy-let-business-10062015

There are specialists offering solutions such as Property 118 – but the fees may out way the benefits for many investors

LLP structure reduces landlords tax bill by 85% – CASE STUDY

Holding property in companies is definitely the future for residential property investment

5 reasons why you need a Property Investment Company!

I would recommend a company for each property as this should make it easier for lenders to take a charge and creates the opportunity to sell the company rather than the property within it.

You can then have a holding company.

steve@bicknells.net

What are the tax changes for Residential Investors?

 

Boot

But to Let Stamp Duty

Prop Value Std Rate B2L Rate
< £125,000 0% 3%
£125k to £250k 2% 5%
£250k to £925k 5% 8%
£925k to £1.5m 10% 13%
Over £1.5m 12% 15%

A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.

This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.

But, commercial property investors, with more than 15 properties, will be exempt from the new charges.

Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!

Mortgage Interest

Mortgage Interest offset against property income will be restricted

2017/18

75% of the interest can be claimed in full and 25% will get relief at 20%

2018/19

50% of the interest can be claimed in full and 50% will get relief at 20%

2019/20

25% of the interest can be claimed in full and 75% will get relief at 20%

2020/21

100% will get only 20% relief

For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax

These rules will not apply to Companies, Companies will continue to claim full relief.

Capital Gains

From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.

There will be an additional 8% surcharge to be paid on residential property.

Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).

Wear & Tear

Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

What could a Property Investor do to reduce the impact of these changes?

  1. Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
  2. Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
  3. Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
  4. Increasing the Rent – Could you charge more to cover the extra taxes?
  5. Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
  6. Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc

steve@bicknells.net

 

 

 

How developing your home could mean you lose Principle Private Residence Relief

Group of construction workers. House renovation.

We all try to improve our properties, but are we doing it with a profit motive?

TCGA92/S224 (3)

The purpose of private residence relief is to relieve gains arising on the disposal of an individual’s residence so that the whole of the disposal proceeds are available to be used to buy a new residence of a similar standard. It is not intended to relieve speculative gains or gains arising from development.

The exclusion of speculative or development gains is achieved by TCGA92/S224 (3). It is important to understand the scope and limitations of this subsection so that you can apply it in suitable cases.

The subsection applies

  • where a dwelling house is acquired wholly or partly for the purpose of realising a gain from its disposal, or
  • where there is subsequent expenditure on the dwelling house wholly or partly for the purpose of realising a gain from its disposal.

Where the first part of the subsection applies no relief is due on any gain accruing from the disposal of the dwelling house. Where the second part of the subsection applies no relief is due on any part of the gain attributable to the expenditure.

If you plan to develop your property prior to sale  it could be worth transferring it to company before any work is carried out, this could help to ensure that any gain to the date of transfer will be exempt from tax.

There is a further potential risk that HMRC may view the property development as a trading activity.

steve@bicknells.net

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