Tag: tax

Residential Property Capital Gains Overpayment Madness

By now I am sure you are familiar with the rules

From 27 October 2021, you must report and pay within 60 days of completion of conveyance.

For example, if you complete the disposal on 1 November you must report and pay your Capital Gains Tax by 31 December.

If the completion date was between 6 April 2020 and 26 October 2021 you must report and pay within 30 days of completion of conveyance.

You may have to pay interest and a penalty if you do not report and pay on time.

Tell HMRC about Capital Gains Tax on UK property or land if you’re not a UK resident – GOV.UK (www.gov.uk)

You report the gains using this link Report and pay your Capital Gains Tax: If you have other capital gains to report – GOV.UK (www.gov.uk)

If you need a tax agent to help you you have to start the process get and X reference, give that to you tax agent/accountant, they then sent the client a link to become their agent.

You also have to report the information again on your self assessment return.

What happens if you over pay the CGT?

You would think that doing the self assessment would generate a refund, but thats not the case, very frustrating!

The only way to recover or offset the overpaid CGT is to follow a new workaround shared by HMRC at the end of June.

The workaround suggests either:

(a) amending the UK Property Return before submitting the self-assessment return for the year to recover the overpayment that way; or

(b) submitting the self-assessment return and then calling HMRC to ask for a manual transfer to be made of the payments showing on the property account against the self-assessment account so it can then be offset against the total self-assessment bill.

Offsetting overpaid CGT against income tax | ICAEW

CGT Overpayment – Refund request – Community Forum – GOV.UK (hmrc.gov.uk)

CG10450 – Overpayment relief – HMRC internal manual – GOV.UK (www.gov.uk)

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

Don’t buy a holiday let in a company if you want stay in it!

interior of contemporary house on lake on cloudy day

Generally companies are great because corporation tax rates are lower than income tax rates, however, for Holiday Lets company ownership can be a problem if you have personal use for the following reasons (of course if you don’t want to stay there these don’t apply):

ATED

ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.

You’ll need to complete an ATED return if your property:

  • is a dwelling — find out the meaning of ‘dwelling’ in the next section
  • is in the UK
  • was valued at more than:
    • £2 million (for returns from 2013 to 2014 onwards)
    • £1 million (for returns from 2015 to 2016 onwards)
    • £500,000 (for returns from 2016 to 2017 onwards)
  • is owned completely or partly by a:
    • company
    • partnership where any of the partners is a company
    • ­collective investment scheme — for example a unit trust or an open ended investment vehicle

Chargeable amounts for 1 April 2022 to 31 March 2023

Property valueAnnual charge
More than £500,000 up to £1 million£3,800
More than £1 million up to £2 million£7,700
More than £2 million up to £5 million£26,050
More than £5 million up to £10 million£60,900
More than £10 million up to £20 million£122,250
More than £20 million£244,750

Benefit in Kind

Here is an example from HMRC

A UK company purchases a flat in a French ski resort for £200,000. It is agreed that a market rental for the property would be £500 per week during the 6 month skiing season and £100 per week during the rest of the year. A husband and wife who are both directors of the company use the flat for holidays with their children for 3 weeks during the ski season and one week in the rest of the year. Their children are neither employees nor directors of the company. The employer advises that the sole reason the property was bought was as a holiday home for the husband and wife. It has only been used by them as a holiday home.

We would argue in this case that provided is equivalent to available for use. Assuming that the flat was habitable for the whole of the year we would seek a benefit under Part 3 Chapter 5 measured on availability for the whole of the year. The employer may argue that the husband and wife work full time and that this prevents them using the flat for more than the 4 weeks in the year of actual use and so they are effectively only provided with it for 4 weeks. We do not accept that argument.

If the cost of the accommodation exceeds £75,000, then the amount of the cash equivalent would be calculated in accordance with Section 106 ITEPA 2003 (see EIM11472). As the annual value is based on the open market rental, under ESC A91 the cash equivalent of the benefit is restricted to step 1 of Section 106. This would mean that the cash equivalent for the tax year would be £15,600 (£500 x 26 + £100 x 26). Under Section 108 that would be split between the husband and wife in whatever way was just and reasonable, presumably half each in this case (see EIM11472).

The amount of the benefit under section 106 is:

•Step 1 – the cash equivalent as if section 105 ITEPA 2003 applied (see EIM11431)

•Step 2 – ORI × (C – £75,000) (this amount is called the additional yearly rent), where:

•C is the cost of providing the living accommodation (see point three above) and

•ORI is the official rate of interest

•Step 3 – calculate the rent that would have been payable if the property had been let for the taxable period at that additional yearly rent (see EIM11428 for taxable period)

•Step 4 – add together the amounts calculated under step 1 and step 3. From this total subtract any excess rent paid by the employee. The answer is the amount of the benefit.

FLM Indicator have a calculator to work this out if you need it.

What would be the tax if its personally owned?

If the property is owned personally then a SA105 Box 10 Private Use Adjustment is made, this excludes a % of the property costs for the period of private use. If you only stay there for a short period its going to be a much lower cost.

steve@bicknells.net

How do you create a Group using Share Exchange/Swap? Why is it done?

photo of man holding pen

Share for Share exchange is often used when you are re-organising or creating a group and benefits from tax relief.

Basically if you don’t do a share exchange you would need to sell the shares at market value creating both Capital Gains and Stamp Duty costs.

In order to do a Share exchange you must have bona fide commercial reasons for doing it and it can’t be just to avoid tax. So for example you might want to create a group in order to separate trading and investment activities and enable an investment company to obtain mortgage finance (most lenders probably would not lend to a single company doing both trading and investment in the same company as it puts the investment at risk).

Why?

Here is a common scenario, a developer buys a commercial property to develop into residential and sell, but when the project completes the market conditions have changed they want to keep the residential properties and rent them out.

During the development they will have reclaimed VAT and the first grant of residential is Zero Rated, so they get full recovery. An investor would not get this.

So to avoid partial exemption for VAT its best to move to a new company and there are bona fide Commercial Reasons too as previously noted.

Although the reclassification to investment will create a profit and tax charge a group structure will provide Group SDLT relief. See these blogs for details.

What if you move a Property from Fixed Asset Investment to Trading Stock or Vice Versa? Appropriations and Reclassifaction – Steve J Bicknell Tel 01202 025252

Do you pay SDLT on Properties Transfers within a Group? – Steve J Bicknell Tel 01202 025252

How?

The process basically has 4 stages.

Stage 1 – Form the new companies

Assuming you are now creating a new Holding Company with a New Investment Company, these need to be formed first.

Stage 2 – HMRC Clearance

Its not mandatory but it is best practice How to apply for clearance or approval of a transaction from HMRC – GOV.UK (www.gov.uk)

To get clearance you need to write a letter to HMRC setting out all the facts, the group structure and the commercial reasons, typically the letter is 6 to 10 pages long.

You can request advance clearances by sending an email to reconstructions@hmrc.gov.uk. You do not need to send a paper copy.

Attachments should be no larger than 2MB. Do not send self-extracting zip files as HMRC software will block them.

If possible we would like to reply by email, but we need your permission to do so by including the following statement:

‘I confirm that our client understands and accepts the risks associated with email and that they are happy for you to send information concerning their business or personal details to us by email. I also confirm that HMRC can send emails to the following address (or addresses)….’

If you’re making the application on behalf of yourself or your company adapt this wording as necessary.

Stage 3 – The Contract

This is normally done by a solicitor.

The contract deals with the acquiring company and the shareholders of the target company under which the shares are to be acquired with the consideration being shares in the acquiring company.

Stage 4 – Stamp Duty Relief

As the acquiring company is paying consideration for the shares (the issue of its own shares), then the transaction is subject to Stamp Duty. However, relief can be claimed under s77 FA 1986 if the conditions are met and the anti-avoidance rule of s77A FA 1986 does not apply. HMRC guidance is at STSM042000 starting at STSM042410. After the conditions have been checked and a claim prepared, see “How to Claim Relief” on GOV.UK. The claim needs to be made within 30 days of the contract date and, as HMRC outline, various information will need to be attached to the e-mail claim including the stock transfer form.

steve@bicknells.net

How are HMRC attacking the use of TOMS for serviced accommodation?

The Tour Operators Margin Scheme (TOMS) was created for holiday companies.

Accommodation that is bought in and sold without material alteration, falls within TOMS. However, where there is material alteration the accommodation becomes an in-house supply and TOMS can not be used.

Further details are in Notice 709/5

7.6 How an in-house supply of accommodation is made

If you own a hotel and supply accommodation within it, you are making an in-house supply of accommodation.

If you hire, lease or rent accommodation under an agreement whereby you take responsibility for the upkeep of the property and you are required to undertake any maintenance to the fabric of the building (that is, not just cleaning and changing towels or bed linen and so on), you are making an in-house supply of accommodation.

Also, if you buy in accommodation and provide catering staff from separate sources, for example a ski chalet with a chalet-maid, you are making an in-house supply, commonly referred to as ‘catered accommodation’.

HMRC are attacking the use of TOMS for Rent to SA

  • Rent to SA is not a tour operator and the services being supplied are not designated travel services – tour operators organise travel in their own name and entrust others with the supply
  • The supply made by the landlord is not a ‘designated travel service’ – taking a lease of residential premises, whether furnished or unfurnished for a term of years is not a relevant service for TOMS
  • The landlord is not supplying hotel accommodation or short-let accommodation
  • If the SA operator furnishes the property that is a material alteration which means TOMS can’t be used
  • If the contract requires the SA operator to replace broken glass or deal with condensation or do maintenance that would go beyond routine cleaning and minor repairs
  • If the SA operator is responsible for utilities and Council Tax these constitute a material alteration to supply

What about the Landlord?

The landlord is not supplying a Furnished Holiday Let unless they meet the Occupancy Conditions set out in HS253 this will not be the case in Rent to SA as they are not doing short lets they are simply renting out residential property on a long let. They will not be able to claim capital allowances and the they will not avoid section 24 interest restrictions.

steve@bicknells.net

Spring Statement 2022

A summary of the Spring Statement 2022 is now available – click here

We have produced this newsletter to cover the main issues that are most likely to be of interest to you. You will also find useful commentaries to help you understand how the proposed changes may affect you personally. In addition, we have included a detailed calendar of the most important dates for 2022/23 that will help you with tax planning ahead of time. If you have any questions concerning the issues covered in this summary, or would like advice on the best possible course of action in a particular area, please contact us – click here

Have you remortgaged? will that restrict the recovery of interest beyond the Section 24 rules?

Many Buy To Let properties were purchased in individual names, that was norm before, then from 2017/18 we saw the introduction of clause 24 (section 24).

Essentially Section 24 removes Interest from the property expenses and gives you tax relief (finance allowance) at 20% (basic rate). So Higher rate tax payers will pay more tax.

Historically, its been common for BTL owners to regularly remortgage and with draw capital, basically cashing in on house price rises.

But what many owners seem to have overlooked is that if the mortgage exceeds the original property value (including SDLT and related costs) plus any improvement costs, then the mortgage interest is further restricted.

Increasing a mortgage

If you increase your mortgage loan on your buy-to-let property you may be able to treat interest on the additional loan as a revenue expense, as long as the additional loan is wholly and exclusively for the purposes of the letting business.

Interest on any additional borrowing above the capital value of the property when it was brought into your letting business is not tax deductible.

If the mortgage is for a residential property then the restrictions on interest from April 2017 will apply.

Examples of how to work out Income Tax when you rent out a property – GOV.UK (www.gov.uk)

steve@bicknells.net