CG67900 – Capital Gains Manual: Businesses: Appropriations to and from stock in trade
Appropriation treated as a disposal – TCGA92/S161 (1)
Where an asset (which was acquired by a person otherwise than as trading stock) is later appropriated for use as stock in that person’s trade, the transfer is dealt with for trading profits as if there were a sale and purchase at market value, see BIM33630. For capital gains purposes, TCGA92/S161 (1) deems the asset to have been sold for its open market value at the date of transfer.
Election to defer CG charge – TCGA92/S161 (3)
Collection difficulties might arise because tax on chargeable gains may become due and payable before there has been a factual disposal of the asset. To relieve this problem, the trader may make an election under TCGA92/S161 (3). If an election is made, there will be no chargeable gain on the appropriation of the asset to trading stock. Instead, in the computation of trading profits, the market value of the asset will be reduced by the amount of the chargeable gain. The effect of an election is that the trading profits or losses will include the whole of the income profit and the capital gain accruing on the asset over the whole period of ownership.
So what happens if you have a develop a property and then decide to keep it as an investment rather than sell it?
This known as reclassification and there would be an immediate deemed disposal under ITTOIA 2005 s 172B and CTA 2009 s 157 as a result a taxable trading profit would calculated based on the market value.
The tax would be payable even though the property had not been sold and a profit had not been realised. No elections are available.
Just focusing on income tax, HMRC assume that when you buy a property/investment property its owned 50/50 between husband and wife or civil partners living together, this set out in the Income tax Act s 836. However, this rule will not apply in any of the following instances:
the income is from furnished holiday lettings;
there is actually a partnership in which case the income is divided according to the terms of the partnership agreement;
both husband and wife, or both civil partners, have signed a declaration stating their beneficial interests in both the property and the income arising from it.
When you make a declaration it must apply equally to ownership and income and a couple must be married or civil partners, you can’t be separated or divorced or joint tenants.
You can use this form to declare a beneficial interest if you hold property jointly and:
• you actually own the property in unequal shares, and
• you are entitled to the income arising in proportion to those shares, and
• you want to be taxed on that basis.
Form 17 must be submitted with in 60 days of completion, in addition a Declaration of Trust is likely to be required.
If there is a change, even a minor change, after submitting the Form 17 it will be invalid and revert to 50/50.
If the property is held in a single name it may be possible to use a declaration of trust to confirm joint beneficial interest.
Income Tax and Capital Gains Tax will be be based on the beneficial interest in the property, so if one spouse is a higher rate tax payer and the other a lower rate tax payer changing the proportion of ownership could have a significant tax advantage.
There is no default ownership for unmarried property owners.
Property owners may also need to agree the split with their mortgage lender.
FRS102 has led to many changes in the way we account for things and investment property is a prime example.
The fair value of investment properties changes over time, generally, it goes up in value.
The reporting of gains and losses under old and new UK GAAP differs fundamentally.
Under FRS 102, annual changes in the fair value of Investment Properties are taken to profit or loss, whereas under SSAP 19, equivalent gains and losses were taken in most cases to the Statement of Recognised Gains and Losses. This may have a significant impact on reported performance. The resultant earnings volatility may need to be explained to lenders and other users of the accounts.
FRS 102 removes some of FRS 19’s exemptions from recognising deferred tax. As a result, in contrast to current UK GAAP (that is, FRS 19), companies will often need to recognise significant deferred tax liabilities on revaluation gains.
The tax won’t be payable until the gain is realised.
Many property investors are likely to switch to Micro-entity accounting because its much simpler and doesn’t require property revaluations and deferred tax.