We will be pleased to help anyone who would like professional advice to help get their tax affairs in order and get advice on approaching HMRC. HMRC’s guidance is here. If after reading it you believe you need help, please call us on 01702 205066 or email firstname.lastname@example.org
Are you a landlord who has letting income to declare to HMRC which you should have reported before?
Here is an extract from an announcement made by HMRC on 19th September 2013 under the heading “Tax opportunity for landlords to put house in order”:
“Landlords who rent out residential property, and fail to tell HM Revenue and Customs (HMRC) about all the rental income, are being offered the chance to come forward and put their tax affairs straight – before HMRC comes to them.
HMRC estimates that up to 1.5 million landlords in this sector may be underpaying up to £500 million in UK tax every year.
Under HMRC’s new Let Property Campaign, landlords who may owe tax – whether through misunderstanding the rules or deliberate evasion – can come forward and tell HMRC about any unpaid tax on rents, and pay what they owe, including any penalties and interest due.
The campaign is open to all residential property landlords – from those that have multiple properties, to single rentals, and from specialist landlords such as student or workforce rentals, to holiday lettings. HMRC will be working with a variety of bodies over the next few months to develop tools and guidance to support landlords of all types and help them get their affairs up to date.”
The gist of this is that if you come forward to pay your tax and any back interest, HMRC will not “throw the book at you” with regard to penalties. You will not avoid them, but you should take advantage. If they catch you first you will end up paying more.
Why not ask us to help you “bite the bullet” and pay what you owe? We will make the initial approach to HMRC, act as a “buffer” between them and you, and make sure you get as good a deal as we can get for you.
Of course the ultimate responsibility is yours, but we would love to help you take the weight off your shoulders so that you do not have to worry.
Call us now on 01702 205066 or email email@example.com
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.
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 firstname.lastname@example.org?
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.
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.
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.
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.
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.
- 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.
- 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.
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.
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.
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.
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.
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
|Up to £125,000||Zero||Zero|
|Over £125,000 to £250,000||1%||Zero|
|Over £250,000 to £500,000||3%||3%|
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.
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
Making the tax system simpler is an admirable aspiration but it does not necessarily make it fair. The recent changes in the capital gains tax rules, or at least in calculating the charge to capital gains tax demonstrate this amply.
As expected and as heralded well in advance by the Coalition, the rates of capital gains tax were increased. Although effectively for basic rate taxpayers the main rate stayed at 18%, for the majority including the basic rate taxpayers deemed to go into the higher rate threshold by dint of their gains will find themselves taxed at 28%. There were a lot of howls about the anticipated increase before it happened. People were afraid that the rate would be increased to 40% or even 50% for the new super-taxpayers, but this has not happened, and was never likely to.
People have short memories of course, and prior to April 2008, the headline capital gains tax rate was usually 40% for investment gains as opposed to business gains. What we had then was taper relief, which could reduce the post 1998 gain charged by 40%, so in fact few people would have suffered a full 40% whack of tax after allowances unless their gains were very short term. Business taper relief reduced the gain by 75% after two years giving an effective rate of 10%.
After April 2008 and up to 22nd June 2010 the main capital gains tax rate was 18%. There was a lifetime “Entrepreneur’s Relief ” on business gains up to £1,000,000. This would be typically in respect of the sale of a business or an interest in a business and again gave an effective 10% tax rate though as mentioned, only on the first million.
Post June 2010 the position is
- Higher rate tax payers will pay 28% tax
- Those who do not breach the higher rate threshold will pay 18%
- The 10% rate for entrepreneurs will be extended to the first £5m of lifetime business gains
- The annual exempt amount for capital gains tax will remain at £10,100 for 2010-11
The main difference between what was the pre-April 2008 regime and the the two subsequent revisions is that there used to be some acknowledgment of the ravages of inflation. Taper relief in the period 1998 to 2008 took account of this if in a rather arbitrary fashion. On assets held prior to 1998 and post 1982 there was indexation allowance based on the retail price index.
The flat rate system Mr. Darling introduced a couple of years ago was wonderful for those who realised investments that they perhaps hadn’t held all that long. A rate of 18% was very acceptable. However, it was not very kind to those who had held assets longer since we must remember that the pound in your pocket in 1982 (if you were alive to have one) would have been worth about 38p by March 2008 and 35p now.
On a short-term gain the post June 2010 flat tax of 28% is still very acceptable. However, suppose one had an asset since 1982 which had cost £100,000 then and had only increased in value by an amount equivalent to the RPI.
In 1982 Mr. X buys a painting by a modern artist for £100,000. Although a lot of art has increased considerably in real value, this artist has rather gone out of fashion. In July 2010 Mr. X sold his painting for £282,000, which coincidentally is close to the increased value as per the RPI. In real terms, Mr. X hasn’t made a bean. Just the same, after deducting his generous £10,100 allowance he has to pay tax of over £48,000 just for keeping an important art work safe for the nation and not even taking into account twenty-eight years of insurance premiums and burglar alarm maintenance.
The Government has announced that it wishes to simplify the tax system, and I applaud that. However, simple doesn’t always mean fair. It is not fair to Mr. X.
Mr. Darling’s simple system was not fair to many employees who bought into share schemes with some expectation that they knew how much tax they would have to pay, but that’s another story.
© Jon Stow 2010