Tag Archives: Capital gains tax

Property Sales campaign

HMRC have posted on their website the following:

“The Property Sales campaign was an opportunity for you to bring your tax affairs up to date if you have sold a residential property, in the UK or abroad, that’s not your main home. If you made a profit on this type of property sale but have not told HM Revenue & Customs (HMRC), you might not have paid the right amount of tax.

To take advantage of the campaign you needed to send HMRC your disclosure and pay what you owed by 6 September 2013.

Now the deadline has passed, HMRC is using the information it holds to target those who should have made a disclosure and failed to do so.

If you think you should have made a disclosure under this campaign but have missed the deadline call the Campaigns Voluntary Disclosure Helpline now. It will still be beneficial to tell HMRC as the penalties you will pay may be lower than if HMRC approach you first.

If you would like us to help you approach HMRC to disclose the sale of a property which they should have been told about before, we will help you every step of the way and advise you in advance what tax and interest you will have to pay, as well as helping you in dealing with penalty issues.

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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.

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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.

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Property taxation for smaller investors and developers

Recently I have written posts on Furnished Holiday Lettings and on the new Capital Gains regime. Such is the enthusiasm for property investment and development even in these troubled times (and I share that interest myself) that I thought I should write a brief summary of the taxation implications of these interests and activities.

Property still offers the prospect of profits and long-term investment gains at a time when share markets are uncertain and yields on savings are generally poor. TV programmes such as Homes under the Hammer and Property Ladder are very popular and while there is no pretence that there is an easy way to make a fast buck it is clear that many people do make a reasonable profit by putting their money and often their labour into improving and refurbishing houses, flats and even commercial premises. What is rarely discussed on television is the taxation aspect of these activities.

UK taxation law looks at the nature of the property activity in order to determine the basis of taxation. Of course there are from time to time grey areas, but I will endeavour to explain the distinctions as clearly as I can.

In Homes under the Hammer we tend to have two types of approach in terms of those who buy their new property at auction, the investors and the developers.

Property investors

Many people buy with a view to refurbishing and letting their properties. Therefore there is clearly a view to long term investment. These people will expect to pay income tax at their appropriate rates on their lettings profits, which are the excess of their rents received over the running costs and expenses, which would include repairs and re-decoration, any utility expenses paid by the landlord, insurance, mortgage or finance interest and any other maintenance to be undertaken by the landlord.

The rates of income tax on profits could vary from the basic rate of 20% to 40% or even 50% for those on incomes over £150,000. As they are holding their properties to receive an income stream they are true investors. When they sell their properties after holding them for a period, their investment profit will be subject to capital gains tax at the rates of 18% or 28% as appropriate on gains realised after 22nd June 2010.

Property developers

Others are expecting to improve and sell on their properties as soon as they are ready. These people are carrying on a trade as property developers and will pay income tax on their profits from sale rather than capital gains tax. If they are not trading through a company then they will also be liable to Class 2 and Class 4 National Insurance, the latter being income related, and remember that “income” means their profits from buying, refurbishing or re-developing and selling on.

The difference in the basis of taxation from the investors who hold their properties is really one of intention. A habitual practice of property improvement and sale is likely to be seen as “an adventure in the nature of a trade” as the tax parlance has it. The intention is to make money usually over a relatively short term. Case law says that even one deal may amount to carrying on a trade if there is a clear intention towards profit from that deal. Many of the scenarios seen on the television programmes involve “amateur” property developers buying a flat or house, doing it up and / or converting it and selling it on. This will amount to trading. The profits will be subject to income tax and NIC rather than capital gains tax and consequently will be taxed more highly. Deductible expenses will include not only the cost of the refurbishments and other building works, but also any mortgage or finance payments. This should be contrasted with the investors who may claim finance costs only against letting income and not against their capital gains.

Because of the relatively high taxation rates which may apply to profits realised by developers subject to income tax they may decide to operate through a company. It is possible to cushion the effects of taxation a little using a corporate vehicle and it might be appropriate for even quite small scale developers, but I would always recommend seeking professional advice before taking this route. It is a complex area and now is not the time to explore it.

Grey areas

Now and again the differences between investment property management and property development may be blurred. Sometimes a would-be developer may decide to let the refurbished property while awaiting an improvement in the market and such a situation would look less like trading and more like investment. It could be that an intending investor repaints a garden flat, tidies up the garden and then before it is rented out gets a really good offer to purchase which is too good to turn down. To make a judgement over tax treatment will depend on the facts and in some cases a good argument.

Other complications

Unless operations are on a very large scale, generally our developer on the TV model will not have to worry about the onerous requirements of deducting tax paid to subcontractors under the Construction Industry Scheme, but before diving in it is always worth getting professional tax advice.

There are other taxes involved in residential property, notably Stamp Duty Land Tax (SDLT) on purchase of any real estate and if you are selling you might consider the advantages of looking for first time buyers who currently have advantages in terms of having higher thresholds before paying SDLT.

Purchase price SDLT rate SDLT rate for
first-time buyers
Up to £125,000 Zero Zero
Over £125,000 to £250,000 1% Zero
Over £250,000 to £500,000 3% 3%
Over £500,000 4% 4%

From 6th April 2011, the rate of SDLT on properties valued at over £1M is 5%, but that will not concern most smaller-time property investors.

Summary

The property market is still “hot property” with promise of real rewards. The tax implications are quite complicated, but not too difficult to pick through with proper professional advice. Why not give us a call?

© Jon Stow 2010, 2011

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Taxation of Furnished Holiday Lettings

Rather than bore you with another “Emergency” Budget Summary, and many of us including me have been inundated with very similar emails and documents containing the “key” facts, I am going to be picking out and expanding on a few items of interest. I think Furnished Holiday Lettings are a good place to start because they are an area of entrepreneurial potential and should be of interest to many.

In the 2009 Budget Chancellor Darling announced that the special arrangements distinguishing Furnished Holiday Lettings (FHL) from other types of letting would be abolished from April 2010. Briefly, profits from lettings of residential and commercial property have been generally treated as investment income. FHL income has in recent years been treated as business income. The reason Mr. Darling proposed doing away with the special advantages of FHL was that the European Union considered the rules to be discriminatory in that they only applied to lettings within the UK and did not extend to lettings by UK taxpayers in other countries in the European Economic Area.

To give UK FHL owners time to prepare for the new regime, Mr. Darling extended the special reliefs to UK taxpayers owning FHLs in other EEA countries for 2009-10 only.

Because of the General Election the FHL abolition clauses in his 2010 Finance Bill were lost in the truncated Parliamentary timetable. The Coalition has now said that the current FHL arrangements will not be abolished for 2010-11 onwards but that there will be consultations on the best arrangements going forward to make sure that the general rules are compliant with European requirements while at the same time preserving the advantageous rules for holiday property owners. These are seen to encourage tourism and therefore help with prosperity and employment in holiday areas.

In the meantime we have an area of enterprise in respect of which there are considerable tax advantages. What are these advantages?

  • If you make a loss on your holiday letting you can set it against other income under Self Assessment thus reducing your tax liability on other income of the same year or the previous tax year. This means effectively that the profits and losses are treated as arising from a trade.
  • 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.
  • 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.

What are the special conditions which distinguish an FHL?

  • the property must be available for holiday letting on a commercial basis for at least 140 days in the tax year;
  • it must be let for at least 70 days;
  • individual lets should not exceed 31 days
  • the holiday property must 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 must not exceed 155 days in a tax year.

We will have to wait for the consultation to end but we do now know that the Coalition appears committed to allowing the current advantages for FHL to continue.

As you will have gathered, the tax rules for Furnished Holiday Lettings are quite complicated and if you are thinking of investing in that way you should seek professional advice. The tax advantages are considerable, though, with a properly managed FHL providing a high income during the season, though of course there is much higher requirement for management and provisions of services as one would expect for an enterprise to be treated as a trade.

© Jon Stow 2010

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Capital gains and wild exaggerations

We now know that the “Emergency Budget” will be on 22nd June. In the interim we will have further flapping about the headline rate of capital gains tax going up to the highest marginal income rate (40 or 50%), as opposed to the 18% flat rate we currently have for non-business assets and an effective 10% rate for business assets.

Well hang on, isn’t that what we had up to April 2008, only two years ago? The rate then was effectively 10% for business assets held for two years. The maximum rate was 40%. There was taper relief to allow for assets held rather longer, and the main downside of Mr. Darling’s flat-rate bombshell was that actually tax payers who had held assets for a long time, perhaps 20 years were worse off for the loss of indexation relief built in to 1998 with effect from the change after April 2008.

I suspect that it would be quite easy to re-introduce a taper relief of some sort to avoid taxing inflation too much, and perhaps some new form of short term gains tax could be introduced to punish the City people who were able to say that the rewards for their services were capital gains rather than remuneration subject to higher rate tax and National Insurance.

I do not expect the very long term investors are going to be able to avoid being taxed on inflation altogether, but prudent investors should be rewarded with a lower effective rate with some sort of relief.

When will the new capital gains regime start? April 2011, April 2010 or 22nd June 2010? I have no idea of course and this is more idle speculation but given that the tax take from CGT is small, there is a degree of political window-dressing, so I am hopeful there will be some suitable reliefs in place under the new rules.

© Jon Stow 2010

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