Tag: Property

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

Can you get the company to buy your solar panels?

aerial view of two houses with roof tiles

At the moment the UK like other countries is in the depth of an energy crisis, mainly caused by the price of gas and lack of gas supplies.

Energy prices are higher than they have ever been, even with potential government intervention the costs will still be high. On top of that we have climate change, if we are to avoid climate disasters, we need to use renewable energy, such as Solar.

There has never been a better time to make your home more energy efficient.

Solar Panels and Batteries could mean you could become close to self-sufficient for energy, harnessing sunlight in the daytime, storing it in batteries and using it at night.

What if your company purchased a solar system for your home as benefit in kind, what would the tax be?

VAT

From 1 April 2022 until 31 March 2027 a zero rate applies to the installation of certain specified energy-saving materials in, or in the curtilage, of residential accommodation in Great Britain 

Energy-saving materials and heating equipment (VAT Notice 708/6) – GOV.UK (www.gov.uk)

It makes no difference whether your company purchases the system or whether an individual purchases it.

Solar panels include all systems that are installed in, or on the site of, a building and that are:

  • solar collectors such as evacuated tube or flat plate systems, together with associated pipework and equipment, such as circulation systems, pump, storage cylinder, control panel and heat exchanger
  • photovoltaic (PV) panels with cabling, control panel and AC/DC inverter

Capital Allowances

Expenditure on solar panels is special rate expenditure on the basis they are integral features of buildings or structures.

Integral features expenditure can also qualify for AIA, they do not unfortunately qualify for the super deduction (must also be a company to qualify for the super deduction).

Click to access Super_deduction_factsheet.pdf

https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca22335

To qualify for the allowance the conditions at S33A (1) and (2) etc must be met, please see the link below

EXPENDITURE ON INTEGRAL FEATURES (s. 33A) | Croner-i Tax and Accounting (croneri.co.uk)

Ownership of the property is not a requirement to qualify however the person that incurs the expenditure must own the P&M because of incurring it.

Benefit In Kind

As an employee, with the use of a company assets comes a chargeable BIK. The basic calculation is 20% of market value when first available less any unavailability and any contribution. 

Example – Solar Panel System Cost = £16,000 x 20% BIK = £3,200 BIK on which the tax is 20% = £640 per year or 40% = £1,280 per year in addition to the tax there is also Class 1A NI at 13.8% (£441.60), but the overall costs is still below the energy cap of £3,500 and even below the Governments suggested cap of £2,500.

In our particular case we have electric cars and work from home and use significantly more than the average levels.

The benefit in kind is reported in section L (assets placed at the disposal of the employee) of the P11D.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21873

steve@bicknells.net

When does the Corporate Bodies 15% SDLT Rate Apply?

modern building against sky

Most people aren’t aware of the 15% which can apply to corporate property purchases over £500k and expect to pay the rates below (these are the rates with the extra 3%)

Property or lease premium or transfer valueSDLT rate
Up to £125,0003%
The next £125,000 (the portion from £125,001 to £250,000)5%
The next £675,000 (the portion from £250,001 to £925,000)8%
The next £575,000 (the portion from £925,001 to £1.5 million)13%
The remaining amount (the portion above £1.5 million)15%

Stamp Duty Land Tax (SDLT) is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies or ‘non-natural persons’. These include:

  • companies
  • partnerships including companies
  • collective investment schemes

These bodies may also need to pay Annual Tax on Enveloped Dwellings.

Relief from the 15% higher rate charge

The 15% rate does not apply to property bought by a company that is acting as a trustee of a settlement or bought by a company to be used for:

  • a property rental business
  • property developers and traders

FA03/S55/SCH4A: property rental businesses FA03/SCH4A/PARA5

Where the acquisition of a chargeable interest is exclusively for the purpose of exploitation as a source of rents or other receipts in the course of a qualifying property rental business, the 15% higher rate charge will not apply to the transaction. Instead, SDLT will be charged at the higher rates (the ones with the extra 3% in the table above) – see SDLTM09835 for more information on companies and the higher rates.

To qualify as a qualifying property rental business, the business must meet two conditions:-

  • it must be a property rental business as defined in Chapter 2 of Part 4, CTA 2009 (excluding the condition that the profits are chargeable to corporation tax – see PIM1020 onwards for more information), and
  • it must be carried on a commercial basis and with a view to a profit.

https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09555

This relief may be withdrawn in certain circumstances:-

https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09660

So thankfully most companies won’t have to pay 15% but this has been a source of confusion for some clients.

steve@bicknells.net

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

Are you missing out on Qualifying Interest Relief?

If you pay interest on a personal loan then you used to lend money to your limited company then you can probably claim tax relief on the interest that you pay on your personal loan.

Here are the rules from HS340 – You may be able to claim relief for interest paid or for alternative finance payments where the loan or alternative finance arrangement is used to:

  • buy ordinary shares in, or lend money to, a close company in which you own more than 5% of the ordinary share capital on your own or with associates
  • buy ordinary shares in, or lend money to, a close company in which you own any part of the share capital and work for the greater part of your time in the management and conduct of the company’s business, or that of an associated company
  • acquire ordinary share capital in an employee controlled company if you are a full-time employee – we regard you as a full-time employee if you work for the greater part of your time as a director or employee of the company or of a subsidiary in which the company has an interest of 51% or more
  • acquire a share or shares in, or to lend money to, a co-operative which is used wholly and exclusively for the purposes of its business
  • acquire an interest in a trading or professional partnership (including a limited liability partnership constituted under the Limited Liability Partnership Act 2000, other than an investment limited liability partnership)
  • to provide a partnership, including an limited liability partnership, with funds by way of capital or premium or in advancing money, where the money contributed or advanced is used wholly for the partnership’s business – if the partnership is a property letting partnership, read information about the residential property finance costs restriction
  • buy equipment or machinery for use in your work for your employer, or by a partnership (unless you’ve already deducted the interest as a business expense) – relief is only available if you, or the partnership, were entitled to claim capital allowances on the item(s) in question – if the equipment or machinery was used only partly for your employment, or only partly for the partnership business, only the business proportion of the loan interest or alternative finance payments qualifies for relief)

You cannot claim relief for interest on overdrafts or credit cards.

The limit on Income Tax reliefs restricts the total amount of qualifying loan interest relief and certain other reliefs in each year to the greater of £50,000 and 25% of ‘adjusted total income’.

To claim the tax relief you enter the amount of interest paid on your self assessment return under Additional Information SA101 ‘Qualifying Loan Interest Paid in the Year’.

This could be useful for Property Investors who invest via a limited company. Here is an example

Fred Smith owns his own home worth £500k without a mortgage

He borrows 75% £375k against his home and lends it to his limited company, the interest rate from his broker is 2% cheaper than borrowing in his limited company.

So he could save £7,500 a year interest

He also gets tax relief on the interest that he has paid.

steve@bicknells.net

If you don’t charge a market property rent what expenses can you claim?

There may be times when a property owner decides not to charge a market rent or lets the property rent free. This will mean you will be restricted on the amount of expenses you can claim.

PIM2130 Properties not let at a commercial rent

Expenses incurred by a customer on a property occupied rent free by, for example, a relative are likely to be incurred for personal or philanthropic purposes – to provide that person with a home. The same applies where the property is let at less than a commercial rate or isn’t let on commercial terms.

Unless the landlord charges a full market rent for a property (and imposes normal market lease conditions) it is unlikely that the expenses of the property are incurred wholly and exclusively for business purposes (PIM2010). So, strictly, they can’t be deducted in arriving at rental business profits. However, if the customer lets a property below the market rate (as opposed to providing it rent-free), they can deduct the expenses of that property up to the rent they get from it. This means that the uncommercially let property produces neither a profit nor a loss, but the excess expenses cannot be carried forward to be used in a later year.

A relative or friend may ‘house sit’ between normal lettings on commercial terms. Provided the property is genuinely available for commercial letting and the landlord is actively seeking tenants they can deduct the expenditure incurred on that property in the normal way. 

PIM2010 – Property Income Manual – HMRC internal manual – GOV.UK (www.gov.uk) states

Wholly and exclusively rule                        

Most of the trading expenses rules are applied to property income (see PIM1100 onwards). This includes the ‘wholly and exclusively’ rule which says that expenses cannot be deducted unless they are incurred wholly and exclusively for business purposes.

Dual purpose expenditure

Strictly, if an expense is not wholly and exclusively for the purposes of the property business, it may not be deducted. In practice, though, some dual purpose expenses include an obvious part which is for the purposes of the business. We usually allow the deduction of a proportion of expenses like that. 

In summary – rent free or less than market value

  • Its unlikely that the expenses will be incurred wholly and exclusively for business purposes
  • Expenses not incurred for business expenses are excluded or restricted
  • Where a property is let below market rate, you can only deduct expenses up to the value of the rent received
  • You can not use rent free or less market rent to produce a loss for tax purposes. Any excess losses can not be offset against other rental profits or carried forward.

What about Covid?

  • Tenants should continue to pay rent and abide by all other terms of their tenancy agreement to the best of their ability. The government has made a strong package of financial support available to tenants, and where they can pay the rent as normal, they should do. Tenants who are unable to do so should speak to their landlord at the earliest opportunity.
  • In many, if not most cases, the COVID-19 outbreak will not affect tenants’ ability to pay rent. If a tenant’s ability to pay will be affected, it’s important that they have an early conversation with their landlord. Rent levels agreed in the tenancy agreement remain legally due and tenants should discuss with their landlord if they are in difficulty.

Guidance for landlords and tenants – GOV.UK (www.gov.uk)

steve@bicknells.net

How do you tell HMRC your business is active? or dormant?

When you form a new limited company HMRC will send you a letter, the letter will tell you the company UTR and it also says ‘you must tell HMRC within 3 months of starting or restarting any business activity’.

Personally I think it would much better if this was covered within the formation process, most people form a companies because they want to start business activity immediately so it would make sense that business are automatically registered or at least able to choose a date on which they will start activity, for example the start of a month, this would avoid HMRC creating multiple returns for the same year, as Corporation Tax returns can only be for 12 month period and companies are rarely formed on the 1st day of a month.

I have seen may situations where businesses forget to tell HMRC that they have started, but do submit accounts and the corporation tax return and HMRC so far HMRC have been ok with this, but that’s no guarantee that they will always be sympathetic.

What does ‘Active’ mean

Generally your company or organisation is considered to be active for Corporation Tax purposes when it is, for example:

  • carrying on a business activity such as a trade or professional activity
  • buying and selling goods with a view to making a profit or surplus
  • providing services
  • earning interest
  • managing investments
  • receiving any other income

What’s interesting is that the definition is slightly different for

  • Other Taxes
  • Company Law
  • Accounting Standards

What does ‘Dormant’ mean

Your company is called dormant by Companies House if it’s had no ‘significant’ transactions in the financial year.

Significant transactions don’t include:

  • filing fees paid to Companies House
  • penalties for late filing of accounts
  • money paid for shares when the company was incorporated

You do not need to tell Companies House if you restart trading. The next set of non-dormant accounts that you file will show that your company is no longer dormant.

Your company will be considered dormant for corporation tax purposes in any of the following circumstances:

  • It is not trading and does not receive any other income. This includes investment income.
  • It is a new limited company that hasn’t started trading yet.
  • It is a flat management company.
  • It is an unincorporated association or charity that owes less than £100 corporation tax.

A dormant company can be, for example:

  • a new company that’s not yet trading
  • an ‘off-the-shelf’ or ‘shell’ company held by a company formation agent intending to sell it on
  • a company that will never be trading because it has been formed to own an asset such as land or intellectual property
  • an existing company that has been – but is not currently – trading
  • a company that’s no longer trading and destined to be removed from the Companies Register

To remain dormant – don’t make payments

  1. If the company pays an invoice for example from the accountant that would make the business active
  2. If the company pays its formation cost then it won’t be dormant
  3. If you have employees you will be active
  4. If you pay dividends you will be active

To stay dormant pay any costs personally and not via the company.

What are the Rules for Clubs

HMRC may treat your club or unincorporated organisation as dormant for Corporation Tax purposes if it’s active but both the following conditions apply:

  • your organisation’s annual Corporation Tax liability must not be expected to exceed £100
  • you run your club or organisation exclusively for the benefit of its members

For each year of dormancy your organisation must not have any:

  • allowable trading losses for which it may want to claim relief
  • assets it’s likely to dispose of, which would give rise to a chargeable gain
  • interest or annual payments to pay out from which tax is deductible and payable to HMRC

When you think your company is dormant

If your company has stopped trading and has no other income, you can tell HMRC that it’s dormant for Corporation Tax.

If you’ve never had a ‘notice to deliver a Company Tax Return’

You can tell HMRC your company’s dormant over the phone or by post.

If you’ve filed a Company Tax Return or had a ‘notice to deliver a Company Tax Return’

You’ll still need to file a Company Tax Return online – this will show HMRC that your company is dormant for this period.

Confirmation Statements

Dormant companies still need to file the annual confirmation statement and the dormant accounts.

How do tell HMRC you are active?

Within 3 months of becoming active you need to tell HMRC, you can do this via the Government Gateway but I think its easier to write to HMRC.

Your letter must include:

  • the company’s name and registration number
  • the date the company’s accounting period started
  • the date to which the company intends to prepare accounts
  • the company’s principal place of business
  • the nature of the business being carried out by the company
  • the name and home address of each director of the company
  • if the company has taken over another business, the name and address of the former business and also the name and address of the person from whom the business was acquired
  • if the company is a member of a group of companies, the name and registered office address of the parent company
  • if the company has been obliged to comply with the Income Tax (Pay as You Earn) Regulations 2003, the date on which that obligation first arose

The letter must be:

  • signed by a company director or company secretary
  • include a declaration that the information is correct and complete to the best of their knowledge

Send your letter to:

Corporation Tax Services
HM Revenue and Customs
BX9 1AX
United Kingdom

What about the self employed and Landlords?

If you earn over £1,000, then you will need to register.

For the self employed use form LC Forms (hmrc.gov.uk)

For Landlords use this form LC Forms (hmrc.gov.uk)

There are other forms for Partnerships

From April 2023 the Self Employed and Landlords earning over £10,000 a year will need file quarterly under Making Tax Digital rules.

steve@bicknells.net

When do you pay Capital Gains Tax on Property Sales?

Currently when you sell a residential investment property you pay CGT via self assessment, so if you sell now, that’s in the tax year to 5th April 2020, due for payment by 31st January 2021, but that’s changing very soon.

From 6 April 2020, when a UK resident disposes of UK land, a CGT return will need to be submitted to HMRC within 30 days of the completion of the disposal, and the full liability will be payable within that same 30 day window.

That’s a big change in time scales!

In order to file potentially complex returns within that time scale, investors will need to

  1. Keep full up to date records
  2. An estimate of the UK Taxpayer full income will be needed to assess the rate of CGT to be applied
  3. Details of the tax payers unused CGT annual exemption
  4. Details of any CGT losses unused

These rules will also apply to Trusts

The rules will apply to UK Properties first and its planned to include overseas property a year later.

steve@bicknells.net

 

Property Tax Webinars for Accountants

Following the success of my Making Tax Digital Seminars and I am making 3 filmed webinars for MBL on Property Tax

Furnished Holiday Lets & Serviced Accommodation – Tax Matters

http://www.mblseminars.com/Outline/Furnished-Holiday-Lets-_-Serviced-Accommodation—Tax-Matters—Webinar/9685

Using a Company Vehicle for Property Investment – A Guide for Accountants

http://www.mblseminars.com/Outline/Using-a-Company-Vehicle-for-Property-Investment—A-Guide-for-Accountants—Webinar/9690

Option to Tax on Commercial Property Conversions – A Guide for Accountants & Tax Advisors

www.mblseminars.com/Outline/Option-to-Tax-on-Commercial-Property-Conversions—A-Guide-for-Accountants-_-Tax-Advisors—Webinar/9684

These are a useful guide to current tax and accounting rules and include tips on how to avoid problems.

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