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  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  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.
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.
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.
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.
3 (1) Where a dwelling is acquired by a property trader from the personal representatives of a deceased individual, the acquisition is exempt from charge if the following conditions are met. (2) The conditions are— (a) that the acquisition is made in the course of a business that consists of or includes acquiring dwellings from personal representatives of deceased individuals, (b) that the deceased individual occupied the dwelling as his only or main residence at some time in the period of two years ending with the date of his death, (c) that the property trader does not intend— (i) to spend more than the permitted amount on refurbishment of the dwelling, or (ii) to grant a lease or licence of the dwelling, or (iii) to permit any of its principals or employees (or any person connected with any of its principals or employees) to occupy the dwelling, and (d) that the area of land acquired does not exceed the permitted area
Meaning of “property trader” 8 (1) A “property trader” means— (a) a company, (b) a limited liability partnership, or (c) a partnership whose members are all either companies or limited liability partnerships
Meaning of “refurbishment” and “the permitted amount” 9 (1) “Refurbishment”of a dwelling means the carrying out of works that enhance or are intended to enhance the value of the dwelling, but does not include— (a) cleaning the dwelling, or (b) works required solely for the purpose of ensuring that the dwelling meets minimum safety standards. (2) The “permitted amount”, in relation to the refurbishment of a dwelling, is— (a) 10,000, or (b) 5% of the consideration for the acquisition of the dwelling, whichever is the greater, but subject to a maximum of £20,000.
This could be could be useful in the following circumstances
Property Flipping is done when you buy a property do a small amount of work to it and then sell it for a profit.
Using this SDLT relief could significantly increase your profit.
Buy Refurbish Refinance Rent (BRRR)
This relief can only be used by a trading company, residential letting doesn’t count as trading. However, you could have a group of companies, one is a development company and one a residential investment company.
The development company buys the Probate Property and gets the relief.
Once its been refurbished the development company could sell the property or transfer it to the investment company.
The Government love making changes to property tax, often in order to increase tax.
Legislation will be introduced in Finance Bill 2019-20 amending sections 222 to 224 TCGA. These changes will:
reduce the final period exemption from 18 months to 9 months (there are no changes to the 36 months that are available to disabled persons or those in a care home)
reform lettings relief so that it only applies in circumstances where the owner of the property is in shared-occupancy with a tenant
make some revisions to job related accommodation relief by extending it to serving members of the armed forces, who are required to live away from home and, instead of being provided with job-related accommodation, receive payments from the MOD under its Future Accommodation Model and uses those funds to pay for accommodation
legislate 2 ESC – D21 Late claims in dual residence cases and D49 Short delay in owner occupiers taking up residence
clarify the rules concerning the transfer of residential properties between spouses or civil partners – those rules will make clear that where an individual transfers all or part of an interest in a residential property that they own to their spouse or civil partner, the receiving spouse or civil partner will inherit the transferring spouse’s or civil partner’s previous history of use of that property, resulting in a fairer outcome
Finance Bill 2017 introduces a new corporation tax deduction for contributions to grassroots sports.
From 1 April 2017 Companies will be able to make deductions for all contributions to grassroots sports through recognised sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions to grassroots sports. Sport governing bodies will be able to make deductions for all their contributions to grassroots sports.
Qualifying expenditure will be drawn quite widely and will, for example, include payments to coaches and officials. However, no payments to participators will be eligible, other than to cover the cost of travelling to competitions.
The legislation will contain similar protections to the charity and CASC legislation to ensure that payments are made for the intended purposes and to prevent payments being made for personal benefit. gov.uk
Currently, the following provisions provide a relief for CT on payments to sports clubs or in connection with sporting events:
Under section 189 of the Corporation Tax Act 2010, sporting bodies registered as charities can receive payments that can be deducted against the donating company’s CT liability.
Under section 202 of the Corporation Tax Act 2010, payments made to Community Amateur Sports Clubs (CASC) can be deducted for CT in the same way as payments to a charitable body.
Otherwise, section 54 (1) (a) of the Corporation Tax Act 2009 is likely to prevent payments being deductible for CT because they do not meet the test of being ‘wholly and exclusively for the purposes of the trade’.
Landlords have been used to claim 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.
As the old rules apply until the 5th April 2016 it would be worth postponing any renewal purchase until after 6th April 2016, so you can claim a tax deduction in 2016/17.
It also worth noting that the old rules only applied to fully furnished property where as the new rules can be applied by any landlord who includes any items of furniture or equipment in their property.
The cost of the renewal is reduced by any sale proceeds for the item it replaces.
David Gauke, the Financial Secretary to the Treasury, said a review of pension taxation would keep savers in mind.
“We need to ensure it is effective in terms of encouraging saving, and it is going in the right place,” he said.
Basically there are 2 changes under review..
The ISA idea
Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.
I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment
Flat Rate Tax Relief
The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.
The BBC explained how this might work
At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.
It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.
Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.
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.
There are many reasons why residential property investors are now rushing to incorporate, the biggest reason being the Restriction of Mortgage Interest Tax Relief.
Clause 24 of the Finance Bill sets out plans is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows
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 its 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.
When you sell or give a residential property to your Company you will incur Capital Gains Tax if you make a gain, its for this reason many investors and their advisers believe that they are ‘automatically’ entitled to claim Incorporation Tax Relief, but in many cases Incorporation Tax Relief will NOT be available!
In summary Incorporation Tax Relief allows Sole Traders to postpone/hold over a gain by transferring all their business assets into a limited company in return for Shares.
The key problem area is the Property Investment is generally not considered to be a Trade.