Category Archives: property

HMRC targets property rentals

We are committed to helping our clients meet properly their tax compliance obligations to HMRC, while at the same time giving advice on the deductions and reliefs available so that no one pays more tax than they should out of ignorance.

We recognise that there are some who have not yet advised HMRC of their potential liability to tax in respect let property and sales of investment property. We are happy to help people to make those steps to join the tax system and to represent them in dealing with HMRC, and where necessary to discuss with HMRC on behalf of our clients any settlement of back taxes.

The following are extracts from an HMRC press release published on 31st May 2012

“A new taskforce to tackle tax evasion on property transactions was announced on today by HM Revenue & Customs (HMRC).

The taskforce covering East Anglia, London, Leeds, York, Leicester, Nottingham, Lincoln, Durham and Sunderland is expected to recover more than £17m from tax dodgers.

Taskforces are specialist teams that undertake intensive bursts of activity in specific high-risk trade sectors and locations in the UK. The teams will visit traders to examine their records and carry out other investigations.”

HMRC’s Mike Eland, Director General Enforcement and Compliance/or local taskforce lead, said:

“These new taskforces will bring together specialists from across HMRC to tackle tax dodgers. If you have paid all your taxes you have nothing to worry about. But deliberately evading tax can land you a heavy fine or even a criminal prosecution as well.

“This is not an empty threat – HMRC can and will track you down if you choose to break the rules.””

HMRC can level severe penalties on individuals whom they track down who have undeclared income. While we can of course help such people settle their obligations to HMRC, it is far better to make a voluntary disclosure of previously undeclared income and gains, and generally much less costly then being caught in the HMRC dragnet.

If you have a property tax issue like this, or indeed any tax issue re your investment property and buy-to-lets, why not call us on 0845 456 3583 (local rate) or 01702 205066, or email enquiries@jonstow.com?

Income tax issues with ownership of rental properties

The reality is that many married couples are liable to very different rates of income tax. It is not uncommon to have one who is a 40% payer while the other is liable only at 20% or has no liability at all. Therefore you might think that there would be some mileage in arranging property affairs to take advantage of this.

It is of course conceivable that the person with the higher level of income could be a 50% payer but most people in this position would and should already be arranging their tax affairs appropriately. Where one spouse is just into the 40% band, perhaps these issues would not have been addressed.

In a joint tenancy we said previously that the interests in the property are indivisible. Any profits from renting would be shared fifty-fifty which could be distinctly disadvantageous if there were a significant disparity between the highest marginal rates of the individual owners.

Married couples owning rental property as tenants in common will normally be assumed by HMRC as sharing their profits (or losses) fifty-fifty even if they actually own the property in different proportions. If the ownership percentages are in reality different, the split can be applied to the apportionment of income between the two, but that split must reflect each spouse’s share. A formal election form needs to be completed in these circumstances.

Without an election, if one spouse who wholly owns a property transfers a very small share of a per cent or so to the other, HMRC would make a fifty-fifty split automatically. This would save the couple jointly a significant amount by moving half the income from perhaps the donor spouse’s 40 or 50% tax band to the recipient’s 20 or even 0% tax band.

People who are not married or in a civil partnership may own property as joint tenants in any respective proportion such as seventy-five twenty-five, but may split the rental income in a different way they have agreed between them, preferably in writing, if they have a disparity in their particular tax rates. Of course they may do this without regard to income tax tax, but the point is that they have considerable flexibility. For capital gains tax purposes, gains will follow the underlying beneficial ownership as outlined.

You will see that it is possible to arrange your affairs in order to reduce the tax burden on a common sense way and without resorting to any scheme HMRC might not like. This does not mean that it is necessarily straightforward to do so as issues outlined here and in the previous article have to be considered carefully. You should seek professional advice before taking action.

Enhanced by Zemanta

Capital tax issues with ownership of rental properties

If you are buying a property with your spouse or civil partner or even just a business partner and you intend to let it out, make sure your solicitor or conveyancer knows this and arranges the most suitable ownership status. Generally for tax reasons this will be as tenants in common. As a tenant in common you will each own a specific share of the property, which may be half, or a different specified percentage.

The other sort of joint ownership is known as a joint tenancy. In that situation each person owns an indivisible share of the whole property and cannot pass a share to another person. In the event of the death of one of the owners of a property held as joint tenants, the ownership of the property passes to the survivor, and this cannot be changed by a gift by will.

A joint tenancy may not be a good idea from the point of view of the survivor in terms of inheritance tax planning as it may be liable to significant IHT on the death of the survivor. If gifted on by the survivor it would require that person to live seven years after the gift to avoid an inheritance tax charge on death. Whether or not a property is owned by a married couple, it is a very inflexible arrangement.

The terms and types of ownership in Scotland are different from those already mentioned, which apply to England and Wales, but the same situations as above are provided for.

Having a property owned by people as tenants in common gives more flexibility. Firstly, the property doesn’t have to be owned on a fifty-fifty basis. It can be owned in whatever percentages may be agreed, such as 75:25 or 95:5. Actually several people could have a distinct share of a property. A person’s share could be willed to someone other than a joint owner if desired, or if one married person or civil partner wanted to leave the share to the other, then a will would take care of it with no difficulty. The point is that there would be room to plan who should inherit and at the same time take account of inheritance tax considerations.

A share of a property owned as tenants in common can be sold or transferred to another party. A gift to a spouse / civil partner would not attract capital gains tax, though a sale to a non-spouse would (if there were a gain) and a gift to a non-spouse / civil partner would be valued at the market rate for capital gains purposes.

You will see that the distinctions between joint tenancies and tenancies in common are important for tax purposes. A joint tenancy arrangement has much less flexibility. If you need to understand more about the nature of these distinctions you should take legal advice. In the next article we will be discussing the income tax issues relevant to the two types of ownership.

Enhanced by Zemanta

Urgent – Important changes to tax treatment of Furnished Holiday Lettings losses

If you have Furnished Holiday Lettings (FHL) business losses in the current tax year ending on 5th April 2011 this is the last year (2010-11) in which you will be have the ability to set them off against other general income.    i.  e. earnings, investment income and non-FHL lettings profits etc.

If you already have losses or if you would have losses if you brought forward the timing of necessary expenditure such as repairs to properties to spend before 5th April, you should consider doing so as in future losses post 5th April 2011 will only be offset against other FHL income.

There is a summary of the changes to the tax treatment of FHL here.

Furnished Holiday Lettings – the latest news

Following the Coalition’s decision not to abolish the Furnished Holiday Lettings (FHL) tax category with all its advantages over the letting of investment property, we now know what the Government does intend for the future.

Donegal cottage

The regime for FHL is not going to be quite as generous as it was in the past, but we should be thankful that it is not going to be axed altogether. The previous qualifications for a letting to be an FHL were:

  • the property should be available for holiday letting on a commercial basis for at least 140 days in the tax year;
  • it should be let for at least 70 days;
  • individual lets should not exceed 31 days
  • the holiday property should not be let to the same person for more than 31 days in the year in the holiday letting period of at least 140 days.
  • outside the holiday letting period longer term occupation by one tenant should not exceed 155 days in a tax year.

From 2012-13

  • the property should be available for holiday letting on a commercial basis for at least 210 days in the tax year;
  • it should be let for at least 105 days;
  • individual lets should not exceed 31 days
  • the holiday property should not be let to the same person for more than 31 days in the year in the holiday letting period of at least 210 days.
  • where the FHL business comprises multiple properties the qualifying days rules will be averaged between the properties so that all will fall within (or without) the FHL category. There will be clarity rather than confusion.
  • a “period of grace” will be introduced to allow businesses that do not continue to meet the “actually let” requirement for one or two years to elect to continue to qualify throughout
  • that period.

From 2011-12

  • losses made in a qualifying UK or European Economic Area (EEA) furnished holiday lettings business may only be set  against income from the same UK or EEA furnished holiday lettings business

The change to the loss relief position is significant. Previously as FHL losses were treated as trading losses they could be set against and individual’s other income of the same year or carried back to be set against the taxpayer’s income of the previous year. If taxpayers will have other income in 2010-11 and anticipate some expenditure in the near future relevant to their FHL businesses they might consider spending the money earlier if it would enable them to claim loss relief against other income in 2010-11.

It is worth repeating the unchanged advantages from my earlier post:

  • any capital gains made on FHL-qualifying properties will be liable to capital gains tax at the business rate of 10% and would qualify for the new Entrepreneurial 10% lifetime band which is now to be £5 million, more than enough for most FHL owners one would think.
  • a capital gain on one property may be rolled over into another replacement property subject to certain conditions being met. Therefore the gain would only be taxed on the final sale of the replacement assuming that was not also replaced.
  • you can claim Capital Allowances in respect of equipment such as white goods purchased for your properties, and can write down the costs against current income. For non FHL furnished rentals normally you are only allowed a deduction of 10% of the rent.

Undoubtedly there will be some property owners who will find that their lettings no longer qualify as Furnished Holiday Lettings and therefore they will ultimately pay more tax. Others whose businesses continue to qualify will not be able to set off their losses and again will pay more tax on other income.

Unless the expenditure on equipment is very high one would expect the ordinary furnished lettings “wear and tear” allowance of 10% of the rent to afford the replacement of lost capital allowances.

The new regime is not quite so friendly as the previous one, but as the last Government was minded to abolish FHL altogether we should be thankful for small mercies and some quite big ones in terms of capital taxes.

It is not possible to cover every detail or quirk of an issue in an article such as this. As always, please take paid-for professional advice before making any changes to your business or personal tax status.

Enhanced by Zemanta