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By Kevin McDaid, Nov 6 2018 11:56AM

Gary & Tina, a married couple from Bradford, purchase a BTL in 2016 for £130,000.


Gary is a higher rate taxpayer via his employment whilst Tina pays no tax in respect of her part time employment. They have 3 young children.


The BTL produces an annual rental profit of £3,000 per annum. If the property was jointly owned the default position would be that the rental profits would be split 50/50 creating a £600 income tax liability for Gary, whilst Tina would pay no tax. As they have 3 children, child benefit will be jeopardised if Gary’s total taxable income exceeds £50,000.


It certainly makes sense to consider transferring the beneficial ownership of the BTL solely or partly into Tina’s name. Let us assume that Tina can receive the full £3,000 rental income without being liable to pay any tax. This will save the couple £600 in tax each year until they come to dispose of the property in 2020 (total saving after 4 years £2,400).


In 2020 the property will sell for £155,000. It was purchased for £130,000. The gain would be as follows:


Property Purchase 2016 130,000


Disposal 2020 155,000

Gain 25,000

Anticipated CGT annual exemption in 2020 12,500

CGT (property investor rate)* 18% 12,500 2,250

*Assumes BR tax taxpayer

The obvious suggestion would be transfer the property back into joint ownership prior to the sale in order to benefit from a second annual CGT exemption of £12,500. This would result in there being nil CGT payable. Remember CGT is NOT payable on interspouse transfers.


However, if the property had a £80,000 mortgage on it, the transfer from Tina to 50/50 joint ownership would create a transfer of consideration of 50% of £80,000, i.e. £40,000 liable to SDLT at 3% = £1,200.


Until 01/04/16 SDLT would not have been an issue had the ‘deemed consideration’ been below £125,000. Now, with legal costs of transferring the property in addition to the SDLT, the tax savings to be made from the transfer become relatively small. Indeed, was it even worth transferring the property into Tina’s sole name in the first instance?


A potential solution would be to transfer over just under £40,000 of the mortgage from Tina to Gary in order to avoid the SDLT charge. This would mean that Gary would not quite own 50% of the property and so the gain may be split, say 51/49 in favour of Tina. As a result Tina would be liable to CGT on £250 at 18% = £45. Gary would not pay any CGT.


As a couple, they pay no income tax on the rental income, no SDLT on the transfer back into joint ownership, and save over £2,200 in CGT by following this course of action.


Conclusion


What had been standard practice up until 04/2016 (automatically transferring property from the individual lower tax paying spouse back into joint ownership in order to benefit from a second annual CGT exemption) is no longer, necessarily, the ‘no brainer’ that it once was. More number crunching required I am afraid.


Kevin McDaid, For & on behalf of Tax Facts Ltd


04/04/2016


UPDATE – On 22/11/17

The Government announced that married couples (such as Gary & Tina) would be allowed to transfer property between them where the consideration is < £125,000 WITHOUT TRIGGERING AN SDLT LIABILITY. The couple simply have to be living together at the date of the transfer. Once the £125,000 threshold is exceeded, standard SDLT rates will apply as opposed to the 3% surcharge. Thus, had Tina been transferring a 50% share in a property to Gary with an outstanding mortgage of £260,000, Gary would be deemed to be taking over £130,000 of the mortgage, creating an SDLT liability of £50 (1%). Had this ‘minor amendment’ (as it was called) not taken place a £130,000 consideration would have created an SDLT liability for Gary of £3,950 (i.e. £125,000 at 3% and £5,000 at 4%) – saving of £3,900 for G & T.

I am aware that many solicitors and conveyancers appear to be unaware of this change, as at the date of writing (06/11/18). As it is almost a year since its introduction, I would hope that this will become more widely known as an increased liability of £3,900 for G & T in the above example is not something that they should have to stand just because ‘professionals’ are failing to keep up to date with changes in legislation.



By Kevin McDaid, Nov 6 2018 11:49AM

It will come as little surprise to property owners that the latest Budget has seen them hit with further tax restrictions coming into effect from 06/04/2020 that could see them pay significantly more capital gains tax (CGT) when selling a property which has, at any time, been your main residence (aka principle private residence).


This measure will impact not only those with buy-to-let properties but anyone who owns a property and moves out more than nine months before the property is sold. For example, separating couples where one party moves out before the sale of the family home.

What are the tax reliefs available on selling a former home?


What is changing?


Principal private residence (PPR) relief


Principal private residence (PPR) relief protects taxpayers from being liable to capital gains tax (CGT) during the period a property has been occupied as their main home. PPR relief covers not only periods of actual occupation but also periods of ‘deemed occupation’.


These include:


• up to 12 months on initial purchase if refurbishing the property before moving in,

• time spent working away from home (subject to certain restrictions),

• the final 18 months of ownership, regardless of occupation (aimed at protecting those who have a cross-over period when replacing their main home).


For sales after 5 April 2020 the final 18 month ‘deemed occupation’ is reducing to just nine months.


Until 05/04/2014 the final 36 months of ownership counted as ‘deemed occupation.’


This final 36 month exemption will continue to apply for those who have had to move out of their homes and into residential care.


Lettings relief


From April 2020, lettings relief will be scrapped for those not occupying the property at the same time as their tenants.


At present, it is available in addition to PPR relief where a property is let out that has, at some point during the period of ownership, been occupied as your home. The maximum relief available is £40,000 per individual. Thus, lettings relief can provide £80,000 tax relief for a couple selling their former residence. This equates to a tax saving of £22,400 for higher rate taxpayers.


Throw in x 2 annual CGT exemptions (£11,700 in the current 18/19 tax year) and gains of just over £100K can be avoided.


At present, I feel that these CGT reliefs dove tail nicely with the ability to reclaim the 3% SDLT surcharge within 3 years of replacing your PPR. For instance, after moving out the clock starts ticking for the 3-year SDLT surcharge reclaim. But the initial 18 months of non- occupation are covered by CGT PPR ‘deemed occupation’ relief whilst lettings relief and annual exemptions should take care of the vast majority of gains (£102,400 maximum per couple) inside the next 18 months. By this time, the ex PPR must be sold in order to reclaim the 3% SDLT surcharge.


How do the current rules work? (up until 5 April 2020)


Sam purchases a flat for £250,000 and occupies it immediately as her main home for five years until she moves into a house with her partner. She chooses to rent out her old flat for the next four and half years, after which time it is put up for sale, selling 6 months later (in June 2018) for £450,000.


Sam owned the PPR for 10 years (120 months).


There was actual occupation for 4.5 years (54 months) and deemed occupation in the final 18 months. Total occupation 72 months qualifying for PPR relief (72/120 = 60%).


Proceeds 450,000

Less: acquisition costs/enhancement expenditure (250,000)

Capital gain 200,000

Less: PPR relief: - 60% (120,000)

Less: Lettings relief equal to the lower of: - (40,000)


£40,000 40,000

PPR relief 120,000

Chargeable gain during let period 80,000

Chargeable gain 40,000

Less: annual exemption (11,700)

Taxable gain 28,300

Tax thereon (assuming 28%) £7,924


Although Sam only occupied the property for less than half of her ownership period, less than 15% of the gain is chargeable after PPR, Lettings relief and the annual exemption are utilised.


After changes implemented (from 6 April 2020 onwards)


If a sale took place after 5 April 2020, but all other conditions were the same as outlined above, Sam’s PPR relief would be down to 61 months (50.83%) and she would receive no letting relief.


tax liability would increase by £15,316 (even after taking into account the higher annual exemption).


Proceeds 450,000

Less: acquisition costs/enhancement expenditure (250,000)


200,000

Less: PPR relief: - (50.83%) (101,667)

Chargeable gain 98.333

Less: annual exemption (using 2019/20 level) (12,000)

Taxable gain 86,333

Tax thereon at 28% £24,173


An increase of £16,249, i.e. over twice her tax liability under the old rules.


What would happen if Sam kept the property for another 10 years?


If Sam decided to keep the property a further 10 years, her entitlement to PPR relief over the total period of ownership would be significantly diluted (& no letting relief). Consequently, CGT would be considerably increased.


It, therefore, follows on that we can probably expect to see a glut of properties coming on to the market from Spring 2019, with some bargains to be had the closer we get to April 2020 as vendors have to balance lower sale proceeds against higher tax liabilities.


As one would assume that many residential landlords will be considering their property portfolios in light of loan interest relief restrictions reaching 75% from 04/2019 (100% from 04/2020), it surely can be no coincidence that these CGT restrictions are occurring at the same time as the income tax restrictions. An attempt to kick start the housing market?


Also, don’t forget that from 06/04/2020, CGT will be payable within 30 days of the sale compared to 31 January following the year of transaction, under the current regime. This can produce a bizarre situation whereby a sale occurring on 06/04/19 would see any tax owing payable by 31/01/2021 but a sale exactly a year later (06/04/2020) would require the tax to be settled by 06/05/2020.


How long do you need to live in a property before it becomes your PPR?


The question of how long one needs to reside in a property for it to qualify as the main home for PPR purposes is one which is frequently raised, but, as is so often the case with tax, the answer is not clear cut. In practice it is the quality of occupation not length of occupation that matters.


A taxpayer must have intended to occupy the property with a degree of permanence. Consequently, where there are only short periods of occupation, the difficulty can be evidencing this permanence to HMRC.


Evidencing intention has proved the defining factor in many recent cases, such as Susan Bradley v HMRC [2013] TC02560. When Mrs Bradley separated from her husband, she moved into their second property and immediately placed the property on the market. This was taken to be evidence that the property was not intended to be occupied as a home with any degree of permanence and PPR relief was denied.


Conversely, if a property is acquired to be lived in long-term but subsequent factors make this impossible, such as a relationship breakdown, then a short-term occupation can be sufficient to provide entitlement to PPR relief.


How do you know which property is your PPR?


A married couple can only have one PPR between them, so if a couple have multiple properties which meet the conditions of a home, an election can be submitted to HMRC indicating which property is to be treated as the main residence for PPR purposes. It does not necessarily have to be the one that is occupied the most. Once an election has been submitted, it is possible to vary the lection at any point in the future.


An election can be made whenever there is a change in circumstances such as the acquisition of a new property, marriage or divorce. Such an election should be made in writing (jointly for spouses) within two years of the change in circumstance.


Sometimes which property should be chosen as the PPR is an obvious choice, for example, a home which will not be sold during lifetime will not benefit from CGT relief. Contrast this this to the MP with a London apartment (family home elsewhere) who is unsuccessful in defending his/her seat in the next election and returns to regular work in the constituency in which the family home is.


In such a case, judicious use of an election could see the London apartment entirely covered by PPR relief (including the final 18 months of deemed occupation under the current regime). This period could then qualify as actual occupation for the family home, probably ensuring that no more than a couple of years PPR relief would be lost on the family home, if ever that is sold.


Otherwise, the suggestion would be that it is the property that is most likely to go up in value quickly that should be nominated as the PPR.


If no elections have been made then which property is an individual’s PPR will be determined on the facts of each case. In some cases which property has been occupied as the main home will be obvious, but if the position is fluid this can help with keeping options for relief open.


The onus is on the taxpayer to provide the evidence of occupation, but with HMRC’s ever increasing ability to access information through its powerful Connect database the number of HMRC enquiries is rising where contradictory information is provided.


HMRC has been known to compare the utility bills of each property and request details of an owner’s diary to enable them to determine the ‘real’ PPR. It is therefore important that taxpayers who may wish to claim PPR relief are able to prove their occupation such as by diarising time spent at each property, ensuring utilities and other household bills are registered in their name, and generally evidencing their occupation.


These changes will no doubt trigger individuals to review the benefits of selling property before the reliefs are withdrawn, especially given the large gains which usually accompany residential property sales.


Consideration should also be given as to how any sale proceeds will be reinvested, especially if the desire is to remain in the UK property market in which case the stamp duty land tax (SDLT) cost will need to be taken into account.


If you have more than one UK property which qualifies as a home, it is worth contacting me to consider the tax implications, even if there is no immediate intention to sell up.



By Kevin McDaid, Mar 7 2017 01:09PM

In a real life case study ‘John’ http://www.propertytaxadvisers.co.uk/case-studies/4591698202, I highlighted how a full time landlord with a reasonably significant residential property portfolio of BTLs, would see his net income (after tax) fall from £91,668 in the 2014/15 tax year to just £19,261 by 2020/21 even though his income and expenditure would remain the same. This equates to a drop in income of almost £72,500.

Imagine how bad things could get if interest rates rise from the historically low levels they are currently at!


The reason for the huge drop in income is because of changes in the taxation of BTLs held by non corporate bodies (i.e. individuals, partnerships, LLPs).


05/04/2016 saw the end of the 10% wear and tear allowance and 06/04/17 will see the phased introduction of the restriction of loan interest relief. This will be complete by 06/04/2020, at which point non corporate landlords will not receive any tax relief for loan interest on residential lets. Instead, they will obtain a 20% tax credit.


For a 40% taxpayer this means that tax relief on mortgage interest will halve by 2020. But the new rules can also turn taxpayers who are currently only liable to 20% income tax into 40% taxpayers with adverse knock on implications for tax credits, child benefit &/or student loans. The first case study ‘Michelle’ at http://www.propertytaxadvisers.co.uk/case-studies/4591698202 looks at this.


No wonder then that most landlords will have recently considered changing their operating status to that of a limited company.


You should note that incorporation is NOT right for everybody. There may be far easier solutions that will be appropriate for you. In some cases, doing nothing might even be the best thing to do.

But whatever route is chosen you can be sure of the same sense of satisfaction that JC from Leeds felt following my advice leading to his incorporation in March 2016. His testimonial at the side of this blog indicates ‘I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business’.


By the time the loan interest relief restrictions are fully implemented in 2020, John will be over £54,000 per annum better off as a result of my advice.


However, to achieve such significant savings requires a thorough understanding of the relevant legislation, case law and HMRC guidance.


• Will you qualify as a business?

• Should you operate as an LLP?

• Could a deed of trust help me to avoid refinancing costs?


With substantial amounts of Stamp Duty Land Tax (SDLT) and Capital Gains Tax (CGT), mortgage refinancing costs and additional accountancy fees likely to arise as a result of incorporation, it is a decision that should not be taken without access to the full implications.


In certain circumstances SDLT, CGT and the refinancing costs can be taken out of the equation.

Sorry, I don’t think there is anything that can be done about the increased accountancy costs. To be fair, operating via the medium of a company has far more compliance obligations than an unincorporated business – hence, the higher fees.


With the new rules just around the corner, now is the time to be contacting us for your own bespoke plan. One thing is for sure: You will be in the minority if you are a landlord who does nothing and ends up not paying more tax than they have to.


By Kevin McDaid, Mar 7 2017 01:05PM

Did you know that from 06/04/2017, the way that landlords are to calculate their rental profits is to change?


No, well it is hardly a surprise seeing as HMRC only announced it on 31/01/17 – see https://www.gov.uk/government/publications/calculation-of-profits-of-property-businesses.


I was asked by the Chartered Institute of Taxation [CIOT] Property Taxes Sub-Committee if I would like to comment upon it. Whilst I welcome the changes, on the whole, (as does the CIOT and other bodies such as the RLA) I did highlight a situation where a landlord could find himself paying £1,000 additional tax under the new default basis of accounting where income and expenditure were exactly the same over a 2 year period, compared to if the old default method of accounting had continued to operate.


Now, I know that times are hard in the Exchequer but, I am sure, this is not a deliberate ploy!


The extra tax payable is down to how tax relief will be given for loan interest from April 2017.


Such discrepancies should not happen.


The logic behind replacing the old accruals basis of accounting as the default method for landlords and replacing it with the cash basis means that landlords will only pay tax as and when they receive the rental income and only claim a deduction at the time an expense is incurred. Unsurprisingly, landlords (just like any other taxpayer) find this much easier to understand than the accruals basis.


In simple terms, if you were to pay an annual insurance premium of £600 at the beginning of March 2017, you would claim the full cost in the 2016/17 tax year under the new default cash basis of accounting. Under the outgoing default accruals basis of accounting, as only one month of the premium would relate to 2016/17, only £50 would be claimed as an expense in 2016/17 and the balance (£550) would be claimed in 2017/18 because 11/12th of the premium actually applies to the 2017/18 tax year.


Ultimately, both methods result in a claim for £600 worth of an expense. And assuming income and expenditure remains similar over both years, the amount of tax payable should be very similar. That is, of course, until the loan interest restriction totally distorts the position.


We will have to see how HMRC propose to fix this little anomaly now that it has been brought to their attention.


The change to cash accounting is the forerunner to ‘Making Tax Digital’ (MTD) which will see, all but the smallest of landlords be required to report their rental income and expenditure to HMRC on a quarterly basis from 06/04/2018.


If you would like further details of MTD, please contact us for a fact sheet.


By Kevin McDaid, Oct 17 2016 02:08PM

She was the great hope for tens of thousands of individual landlords to stave off a planned government tax increase on buy-to-let properties being phased in over 4 years from April 2017. But Cherie Blair QC, herself a landlord of multiple properties with her husband, the former PM Tony Blair, and their three children, has failed in her attempt to obtain a judicial review on the grounds that the new rules would be an unfair tax on tenants because they would drive up costs for buy-to-let investors.


Currently loan interest is treated as an allowable expense in exactly the same way that repairs or buildings insurance are. However, from April 2017, a 20% tax deduction will be allowed instead. For a 40% taxpayer, with BTL loan interest of £4,000, he/she would currently receive £1,600 tax relief. This will drop to £1,400 from April 2017 and at the rate of £200 per annum until 2020 when the rules will be fully phased in and only £800 tax relief will be available.


There could also be knock on effects with the loss of child benefit for those with taxable income exceeding £50,000.


But it would be wrong to think that these new rules will only impact upon 40% taxpayers. In the case studies at http://www.propertytaxadvisers.co.uk/case-studies/4591698202 I highlight how individuals currently well below the 40% tax threshold (£43,000 in 2016/17) will be thrust into the 40% tax bracket by these changes and, subsequently, be detrimentally affected.


It is my understanding that the new rules will have an impact on the calculation of taxable income for tax credit purposes. If this does, indeed, prove to be the case, landlords who are not even liable to tax at present could find themselves to be worse off in that tax credits will reduce and tax may become payable.


As these new rules only apply to individuals, operating via a company may be an option. But as CGT and SDLT would, most likely, be payable on transferring over an existing portfolio into company ownership, tax planning advice should be sought. It is not simply a case of saving income tax by operating via a company but how do you then get the profits out of the company.


As an experienced tax professional, I never really thought that the legal challenge headed up by Cherie Blair QC stood much of a chance. It appears that an appeal is unlikely.


With less than 6 months to go until the 1st phase of the rules become operational, it is time for those landlords who had been pinning their hopes on a Cherie Blair inspired government U-turn, to start planning for the future.


Unfortunately, it is likely that most landlords will find themselves worse off than in years gone by regardless of any tax planning undertaken. However, understanding how the changes will impact on you personally and keeping the taxes as low as possible (as many landlords who I have already advised throughout the country will testify) should now be the goal requiring your earliest attention.


By Kevin McDaid, Oct 11 2016 10:07AM

In the previous blog ‘Capital gains on BTL to be taxed as income – don’t worry it is not going to happen’ I drew attention to the concerns of no less a body than The Law Society that an unconsulted upon piece of legislation had been ‘sneaked’ into the Finance Bill 2016 that could result in landlords being liable to Income Tax (IT) rather than Capital Gains Tax (CGT) on the ultimate disposal of their buy to lets at a gain/profit.


Eventually, it was determined that it was not the Government’s intention to tax landlords in such a manner. However, there are instances where the sale of property will be subject to income tax rather than CGT. And I am not just talking about obvious property developers.


Even where a property can, on the face of it, qualify as a Principle Private Residence (PPR) which would normally mean that the gain would be entirely exempt from CGT (never mind being subject to income tax) this relief can be denied and the seller of their own home become liable to pay income tax (and, potentially, NIC). Imagine the sensational headlines this could create.


The relevant legislation has been around for donkeys’ years. (Where do such phrases come from?) This is why it surprises me when I see programmes such as ‘Homes under the hammer’; I do wonder whether some of the purchasers have taken tax advice before appearing on the programme.


This is because the tax treatment of the sale will be determined by the intention of the outset at the project. So if the purchaser clearly intends to refurbish and sell, this would be subject to income tax under the Income Tax Act 2007 s.756 where ANY of the conditions in subsection 3 are met:


a) The land is acquired with the sole or main object of realising a gain from disposing of all or part of the land.

b) Any property deriving its value from the land is acquired with the sole or main object of realising a gain from disposing of all or part of the land.

c) The land is held as trading stock

d) The land is developed with the sole or main object of realising a gain from disposing of all or part of the land when developed.


Consequently, if you purchase a property for, say £200,000 as a married couple (in a civil partnership) and you are 40% taxpayers, and spend £30,000 renovating, then sell for £252,000, there would be a gain of £22,000 (ignoring SDLT and professional fees). If both spouses had their annual CGT exemptions in place for 2016/17 of £11,100, there would be no CGT to pay and they would be better off to the tune of £22,000. Whoopee!


Unfortunately, if their intention at the outset was to renovate and sell, they would fall foul of the above legislation and find themselves subject to income tax. As 40% taxpayers they would pay £8,800 in tax between them, leaving them with only £13,200 proceeds (NIC has been ignored but would be chargeable if it was deemed that the activity amounted to a trade. This would be chargeable at 9% or 2% depending upon the other income of the individuals).


Clearly, CGT treatment is preferable.


Is there anything that can be done to sway the tax treatment away from Income towards capital?


If the above property had been let out for a period of time prior to sale, this could be treated as a gain because the conditions in the legislation could be refuted in that it was not the sole or main intention to dispose of the property at a gain. Instead, the intention was to let the property out and make taxable profits that way. If circumstances change that precipitate the sale of the property then any gain/profit should be treated as being liable to CGT.

The HMRC manuals on the subject of the availability of Principle Private Residence Relief (PPRR) to exempt a gain from CGT on the disposal of a property that has, at some point during ownership, been regarded as your home, begins at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65200. ‘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’.

Consequently, if a property is purchased with the sole or main intention of selling at a profit, PPRR, will be denied on any gain arising on disposal. This does not mean that you cannot purchase a rundown property knowing that you will need to spend £50,000 renovating but in so doing you increase its value by £90,000. You may have continued living in your existing home whilst the bulk or all of the renovation was taking place. When the renovation is completed you sell your existing home, move in to the new place but find that you don’t get on with the neighbours and decide to move on in a matter of a few weeks/months, disappointed that it has turned out not to be your ‘forever home’ but content in the knowledge that you are £40,000 better off.


There is no doubt that HMRC should look closely at any such transaction if they felt that the main reason for purchasing the property in the first instance was to create a gain. The fact that you lived there as your home for a short period of time (with no other PPR) would be irrelevant. Of course, if you could show that it was your main intention to live in the property as your home, then PPRR should be available. Consequently, it is usually only when a recurring theme occurs that HMRC may seek to invoke the relevant piece of legislation, Taxation of Capital Gains Act (TCGA) 1992 s.224(3) to deny relief. They may even apply to seek Income Tax treatment via Income Tax Act (ITA) 2007 s.756.

The case of Hartland v Revenue & Customs [2014] UKFTT 1099 (TC) is a very good example of where HMRC would seek to deny PPRR on gains on the sale of dwellings that the owner thought would be CGT free because they were his home. Not only did the case consider TCGA 1992 s.224(3) and the denial of CGT PPRR, HMRC also sought to subject the gains to income tax under ITA 2007 s.756.


The facts of the case are as follows:


• Mr Hartland worked in the building trade.

• Between 1996 and 2005 Mr Hartland purchased 4 properties that he lived in, refurbished then sold at a profit. The length of time he lived in each property diminished with each purchase/sale, i.e. he sold property 1 after 4 years ownership whilst property 4 was put up for sale after about 9 months of ownership.

• HMRC sought to charge income tax on the profits/gains of all the disposals as though Mr Hartland was a property trader.

• Unsurprisingly, Mr Hartland claimed that no tax (income or capital gains) should be payable because his intention when purchasing each property was to live in them as his home.

• The tax tribunal considered various case law concerning the badges of trade. It concluded that Mr Hartland had purchased the earlier properties as a home and therefore the gains on these were exempt from CGT because of PPRR. However, for the last property the Tribunal concluded that the acquisition, demolition, rebuilding and sale were undertaken in the course of a property development trade. The evidence showed that he sold it almost as soon as the works were completed, and there was no evidence that he ever lived in it. The profit on disposal was, therefore, subject to Income Tax.


It would be wrong to conclude that HMRC would only ever seek to apply ITA 2007 s.756.where the taxpayer worked in the building trade. However, such an individual is likely to be able to purchase, refurbish and sell a property and make a greater gain than the average person because of their ability to complete much of the work personally. The greater the gain/profit, the more tax is likely to be at stake and the greater the interest HMRC will show in a case. Where transactions are occurring frequently and the period of occupation as a home is non-existent or minimal, HMRC are much more likely to cast an interested glance.


Whilst income tax is the outcome for an individual trading with a view to a realisation of profits, capital gains tax treatment will be applied but with PPRR denied/restricted if HMRC can show a desire to make a profit was a significant driver behind any purchase/sale.

The second arm of TCGA 1992 s.224(3) seeks to restrict PPRR in cases where a dwelling has clearly been a home but a profit motive prior to sale has emerged. The legislation reads as follows:


• where there is subsequent expenditure on the dwelling house wholly or partly for the purpose of realising a gain from its disposal.

• Where the second part of the subsection applies no relief is due on any part of the gain attributable to the expenditure.

One of the examples HMRC give for the above is for a large house acquired as a home, subsequently concerted into two flats.


The disposal of a plot of land for building that was once part of the home’s garden could trigger TCGA 1992 s.224(3) or even ITA 2007 s.756 if the sale is not structured tax efficiently. At https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg65243 HMRC indicate that the cost of obtaining planning permission is to be ignored in triggering a restriction to PPRR. Any costs incurred thereafter, for instance clearing the land for sale, would be denied PPRR. If you actually build the new property yourself or in a joint venture with the builder, income tax will, ultimately, be charged on any profit made on the sale.


The case studies at http://www.propertytaxadvisers.co.uk/case-studies/4591698202 consider some of the issues raised in this blog in greater detail.


By Kevin McDaid, Oct 11 2016 09:59AM

I recently read a very interesting article on https://www.property118.com/capital-gains-on-btl-to-be-taxed-as-income/89928/comment-page-13/#comments regarding Sections 75-78 of the Finance Bill 2016 ‘Taxation of profits from trading and investing in UK land’ which make profits made on the sale of buy-to-let property become taxable, at income tax rates. This effectively would mean that income tax would be paid at 20% instead of the equivalent 18% CGT rate applicable for individuals paying tax below the 40% higher rate. For income tax payers at 40% (>£43K taxable income in 2016/17) or 45% (> £150K taxable income) they would be even worse off as their CGT rate is just 28%. Also, bear in mind that that the annual personal CGT exemption stands at £11,100 meaning that, for a married couple/civil partnership, there would be no tax to pay on any joint gain of just over £22K.


The article was prompted by the concerns of no less a body than The Law Society.

Apparently, there were 26.000 reads of the article and 13 pages of responses to it. Some of the initial comments clearly showed how desperate some landlords felt about it:


• ‘Well, that is me pretty much done and certainly facing bankruptcy’.

• ‘Might as well order my coffin now whilst I can still afford it’.


In time, the responses became a little less emotional and offered links to other commentators on the legislation which corresponded with my initial thoughts on the matter that the legislation was not intended to impact on property investors at all. (This is not me trying to be smug by the way; I initially glanced at the article on Friday but did not get chance to return to it until Monday. I had a few doubts about its substance over the weekend.)


A couple of weeks after the initial article, this was published https://www.property118.com/landlords-will-not-be-taxed-on-capital-gains-as-income/90259/ confirming that ‘HM Treasury have now provided assurances in the form of written correspondence to at least two landlords associations that the ambiguous wording was not intentional and that capital gains made by BTL landlords will NOT be taxed as income’.

It turns out that the aim of the legislation is to ensure that non resident developers will be subject to UK tax in respect of UK property developments just in the same way as UK resident businesses are.


‘A scare story with no substance’ is how one commentator described it. I think this is incorrect. Certainly, if the initial source of the concern is The Law Society, I think it was absolutely right that the concerns were aired and HMRC requested to clarify the position.


I have, in the past, been involved in a couple of instances where legislation and the accompanying HMRC guidance has been ambiguous (in relation to the wear and tear allowance – see http://www.taxadvisermagazine.com/article/wear-%E2%80%98n%E2%80%99-tear) and, in the ability to claim capital allowances in respect of fixtures and furnishings in residential let property. As a result of representations made to HMRC by the Property Taxes sub-committee of the Chartered Institute of Taxation (CIOT), of which I am a virtual member, HMRC’s stance on both issues was, ultimately, obtained so that landlords knew where they stood. Or did they?


Sticking with the wear and tear allowance issue, this article by the CIOT: - http://www.taxadvisermagazine.com/article/update-renewals-basis-let-property, indicated that over 75% of landlords (in a survey of 628) were unaware of the legislative changes. This is why 3 years after the legislation was enacted in April 2013, it was totally turned on its head in April 2016.


Conclusion


The UK tax system is extremely complicated even for the professionals working in and around it.


The Government is constantly bringing in new legislation to counter what they perceive to be tax avoidance. In this instance, it was solely aimed at non UK resident property developers. HMRC guidance is there to help to clarify how they, as the enforcers of tax legislation, see the legislation applying.

Where the government perceive that there may be some tax avoidance against which they feel they may need to act immediately they sometimes legislate without initial consultations with organisations such as The Law Society and the CIOT. Such consultations often highlight the types of anomaly that arose here and would allow the legislators and HMRC (in their guidance) to show specifically what their intentions were.

It would be misleading of me to indicate that such consultations always clear ambiguities. However, they are a good starting point. Clarity is more often achieved where two parties discuss rather than one party simply seeking to impose their will.


Finally, I noted on Google the other day that they celebrated their 18th birthday. I suspect there is no 18 year old on the planet today as well known as Google (hang in there, there is a link). It is very easy to come up with masses of information on a topic these days by the press of a button. As this story showed me, it can be dangerous to look in isolation at one part of a topic without having an understanding of the fuller picture. In tax, where multiple issues can arise from what appears to be even the simplest of situations, it takes years of experience and keeping up to date with the many changes in the legislation and guidance, to appreciate the impact and intentions of the Government’s tax strategy.


By Kevin McDaid, Aug 3 2016 03:14PM

Since April 2013, the Statutory Residence Test (SRT) has provided a comprehensive method of assessing whether an individual is regarded as resident (or not) in the UK for tax purposes.



The test applies three stages as follows:



• Meet the criteria in stage 1 and you are NON RESIDENT. No need to look at later stages.

• Meet the criteria in stage 2 and you are RESIDENT. No need to look at stage 3.

• Only if it has not been possible to determine whether non resident under stage 1 or resident under stage 2, will stage 3 need to be considered. Residence will then be determined by UK ties and visits.



As the HMRC guidance https://www.gov.uk/government/publications/rdr3-statutory-residence-test-srt runs to 105 pages, it is not possible to comment on every aspect of the guidance. Instead, based on a recent job I undertook, I am going to limit myself to considering the UK resident individual who goes to work abroad full time. This may be employment or self-employment. In this instance, I am looking at a worker who is employed.



Let us first of all consider what being resident or non resident means: -



• Resident – you are liable to UK tax on your worldwide income regardless of where it is earned.

• Non resident – you are only liable to UK tax on the income earned in the UK.



There is a third category – being resident but not domiciled. This allows the individual to avoid being subject to UK tax on income earned abroad so long as it is not remitted to the UK.



Just because you are resident in the UK does not mean that you will not also be resident in another tax jurisdiction. In fact, this is quite common. This is where double taxation agreements https://www.gov.uk/government/collections/tax-treaties come into play to determine which country gets ‘the 1st bite of the cherry’. In the case of my client, Dave, he lived in the UK and was resident here for tax purposes but he was also resident in Australia, where he worked. The double taxation agreement between the UK and Australia determines that an individual with dual residency would pay tax on his/her earnings in Australia first (because that is where the money is being earned) but because he/she is liable to UK tax on his/her worldwide income, would receive a credit in the UK for the tax already suffered in Oz.



The only way that a UK resident will cease to be UK resident (and, thus, avoid paying tax on income earned elsewhere in the world) is if:



• Visits to the UK are less than 16 days per annum for the first 3 tax years and 46 days P/A thereafter.

• They work full time abroad without any ‘significant breaks’, spend fewer than 91 days in the UK and work < 31 days in the UK for > 3 hours per day. This is the 3rd automatic overseas test.



For many people going abroad, they will have ties in the UK that will mean that their visits to the UK will be greater than 16 days per annum for the first 3 tax years. Consequently, the only way that they will become non resident will be if they meet the 3rd automatic overseas test.



So what does ‘working abroad full time’ mean?



You have to work an average of 35 hours or more per week over the course of the year. This does not necessarily have to be for the same employer, so chopping and changing jobs will not necessarily jeopardise non residence.



1. Calculate the total number of hours actually worked (not hours specified in the contract).


2. Disregard any days that you worked in the UK for > 3 hours.


3. Calculate the reference period which is 365 days (366 for a leap year) less the disregarded days (mentioned at 2 above) less days that were ‘allowable’ gaps between employments and less ‘other days’ (annual/sick leave etc).



Let us break this down by way of an example:



Dave lives in the UK and has been UK resident here all his life. He obtains employment in Australia which is on a 6 month contract where he will work 5 x 12 hour days (60 hours) then have 3 days off. He has 30 days annual leave (so he receives 15 days for 6 months) and he is off sick for 3 days. He does not return home to the UK at all in this contract.



Once this contract ceases he returns to the UK to visit family. He does not work in the UK and after 30 days he returns to Australia and immediately starts a new contract of employment which mirrors the first contract. He has 2 days sick and does not return to the UK until this contract ceases after 6 months.



Over a 365 day period Dave would have to work just over 1,820 hours to qualify as working an average of 35 hours per week. His annual leave and days off sick are disregarded so that his ‘reference period’ reduces to 330 days. Dave is then required to work 1,660 hours to average 35 hours p/w. Dave actually does 2,700 hours in his 2 contracts that span just over a year (because, remember, Dave had 30 days back in the UK when he was between jobs). We can conclude that Dave has met the 35 hour per week condition.



He has also been in the UK for < 91 days. Therefore, the only hurdle that he has to overcome to ensure that he loses his UK residency and, therefore, does not pay UK tax on his Australian income is, to ensure that he has not had ‘any significant breaks during the tax year from the overseas employment’



On page 40 (3.20) of the guidance there is an explanation of what is meant by a significant break:



‘You will have a significant break from overseas work if at least 31 days go by and not 1 of those days is a day on which you:

 work for more than 3 hours overseas, or

 would have worked for more than 3 hours overseas but you do not do so because you are on annual leave, sick leave or parenting leave.

If you have a significant break from overseas work you will not qualify for full-time work overseas’.



When Dave returned to the UK between his contracts he had 30 days here, therefore, and immediately started his new contract on his return to Australia. This does not constitute a significant break. Had he spent just one more day away from work this would, potentially, have made him continue to hold UK residence for tax purposes. That said, he could have taken longer off work by storing up his leave from the first employment. For instance, he could have been away from work for 40 days if he had 10 of them covered by annual leave.



On page 11 (1.1) of the guidance there are further details of how to treat gaps between employments. Ultimately, any such gap will be allowed up to 15 days when calculating the ‘reference period’ (a maximum of 30 days reduction over a year) which means that less hours need to be worked to meet the 35 hour per week average.



However, the big stumbling block, particularly when you are considering employment as far away as somewhere like Australia, is that if you want to take time off work (potentially to return to the UK) you must be extremely careful not to trigger the ‘significant break’ clause by taking off more than 31 days where the excess is not covered by annual leave, such as when you are between contracts.



Very briefly, the other issue that may jeopardise becoming non UK resident when working abroad is the 91 day rule back in the UK. Can this be avoided by spouse and family coming to visit you in the country where you are working or at a half way point?



As ever, knowing the tax rules allows you to plan in advance how you want the cards to fall so that you can obtain the most favourable tax treatment.


By Kevin McDaid, Aug 3 2016 03:09PM

You may be aware that from April 2015 new rules were put in place to allow pension providers to pay out pension plans to certain customers. These rules cover defined contribution pensions, more commonly known as money purchase schemes, but not defined benefit schemes, often known as final salary pensions. If you are unsure which type of pension you are paying into or want to know what you will be allowed to do, ask your scheme provider.


Previously, most people saved in a pension scheme and then used the funds to buy an annuity which provided them with a guaranteed income in the form of a pension. This is still an option, but it is no longer the only option. It is now up to the individual to decide how much and when they wish to withdraw from their pension plans. In theory, and whilst the money lasts, they will be able to take out as much as they like, whenever they like, from as early as age 55 years.



The three main choices available are:


➢ to withdraw all of the money in one go

➢ leave it in the scheme and take a regular or ad hoc income

➢ buy an annuity or enter into a drawdown arrangement


Or


➢ A combination of all three.


Freedom for the way ‘Tax Free’ cash can be taken



Most people can already take up to 25% of their pension as a tax free cash lump sum. This remains the same, but from April 2015, how you choose to do this changed too. The options now are;




➢ Take 25% tax free in one go, meaning any subsequent withdrawals will be taxed as income.


Or


➢ Take 25% of every cash withdrawal tax free, with the remaining 75% taxable as income.




So how will your lump sum be taxed?



The amount of tax you pay depends on your ‘other’ taxable income in the year you take your pension. As your pension provider will not know how much your other income is, they will be instructed by HMRC to operate an emergency tax code, 1100L for this, the 2016/17 tax year. This will result in tax being deducted as follows:



• the first £916.67 is not taxed

• the next £2,667.67 is taxed at 20%

• the next £8,916.67 is taxed at 40%

• and the remainder is taxed at 45%



Over the course of a tax year, these monthly rates translate as follows:



• the first £11,000 is not taxed

• the next £32,000 is taxed at 20%

• the next £107,000 is taxed at 40%

• Anything above £150,000 is taxed at 45%

• Between £100,000 and £122,000 the £11,000 tax free allowances are withdrawn resulting in an effective 60% tax rate. However, this is ignored for the purposes of this article.



The effect of this is best illustrated by way of an example:



Sally is due to reach 55 on 30/09/2016 at which point she decides she is going to retire and take the whole of one of her pensions, £40,000, in a lump sum. £10,000 of this will be tax free, leaving £30,000 taxable in the month of receipt. This will result in tax of:



• the first £916.67 is not taxed

• the next £2,667.67 is taxed at 20% = £533.53

• the next £8,916.67 is taxed at 40% = £3,566.67

• £17,499 taxed at 45% = £7,874.54

• Total tax deducted = £11,974.74

• Net receipt = £28,025.26 (including £10,000 tax free element)



If Sally’s only other income during the tax year was her salary at the rate of £3,000 per month until the end of September 2016 (£18,000), we can see that her total taxable income for the year is £48,000 which is way short of the £150,000 tax threshold at which 45% tax becomes payable. As Sally has paid almost £8,000 in tax at 45% she is clearly due a refund:




So how do you get a refund?



You may be able to reclaim it immediately using form:-



• P53z if you have taken all of your pension and have other income

• P50z if you have taken all your pension and have no other income or

• P55 if you have only taken part of your pension



These forms and additional information can be found at https://www.gov.uk/claim-tax-refund/you-get-a-pension or by calling 0300 200 3310. If you would rather not fill in one of these forms and are happy to wait, then HMRC should notice the incorrect tax deduction at the end of the tax year when they reconcile their records.



If the pension was being accessed say in February or March it may not be worth your time completing the relevant form because HMRC may do the annual review quicker than they deal with your repayment claim. Once the tax year has ended, if you believe you are due a refund but have not heard anything by the end of April, contact HMRC to bring it to their attention.



Unfortunately, HMRC will not release a refund of tax if an individual is required to complete an annual Self-Assessment tax return. Consequently, in the situation involving Sally, if instead of being employed she had been self-employed or was receiving rental income she would have had to wait until April 2017 at the earliest to complete her tax return and claim the refund.


By Kevin McDaid, Jun 28 2016 02:56PM

5 April 2016 saw the end of the 10% wear and tear regime for landlords with fully furnished residential property. It also saw the end of the ‘renewals’ regime applicable for landlords of unfurnished or part furnished residential property.


Landlords of fully furnished property could opt to use the renewals regime rather than 10% wear and tear if favourable to them.


10% wear and tear meant that a landlord could deduct a flat 10% from rents received (less any costs paid by the landlord on behalf of the tenant such as for a TV/broadband package) but they could not then claim for the actual cost of renewing furniture.


Example:



If the above property did not qualify as fully furnished the landlord in the above example would have had to claim renewals for replacing the TV, meaning that that he/she would have had taxable profits of £4,250, i.e. £250 more than under 10% wear & tear. Note that the landlord would not have been able to claim any relief if the TV was not a replacement.


This is how renewals operated until April 2013. Then HMRC severely limited what could be claimed. In the notes relevant to the property pages for the 205/16 tax return HMRC state:



‘You can claim the cost of renewing small items such as cutlery, but you can’t claim the original

cost of the item or the cost of any improvement. The renewals allowance for the cost of replacing

furniture or furnishings is no longer available’.



Thus, the TV in the above example would not have been allowable. Had it been a kettle costing £20 or so, it would have been allowed.


Consequently, the new the new replacement furniture relief, applying from 6 April 2016, is actually very beneficial to landlords previously unable to claim the 10% wear and tear allowance. For the 10% wear & tear landlords the new regime is unlikely to be heralded as favourable.


A deduction can now be claimed for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house, such as:


 movable furniture or furnishings, such as beds or suites,

 televisions,

 fridges and freezers,

 carpets and floor-coverings,

 curtains,

 linen,

 crockery or cutlery,

 beds and other furniture


Fixtures integral to the building that are not normally removed by the owner if the property was sold would not be included because the replacement cost of these would, as now, be a deductible expense as a repair to the property itself. Fixtures include items such as:


 baths,

 washbasins,

 toilets,

 boilers,

 fitted kitchen units


Landlords will no longer need to be concerned with whether the item being replaced is a fixture (and therefore a repair to the property) or not. In either case, the cost can be deducted from their rental income to arrive at the profits of their property rental business.


Landlords of furnished holiday lets are unaffected by these new rules. They will continue to operate the capital allowances regime for the types of expenditure shown above.



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What our clients said about us:

I have a portfolio of over 50 residential properties throughout the North of England.

I first came across Kevin in 2010 when he was performing capital allowances valuations in respect of houses of multiple occupation (HMO). At that point, not many accountants that I spoke to, had much of a clue about the ability to claim the allowances whilst many of those organisations who were in the know, were keen to do the valuations for a hefty fee but then really did not instil me with any confidence about the tax implications.

Kevin was different; we had an initial chat over the phone, there was no big sell and no hefty fee. Because he has a tax and surveying background, not only was he able to undertake the valuations he was able to liaise with my accountant to fully explain the tax implications and talk him through the reporting procedure.

There is no question that the tax savings I made hugely outweighed his fees.

Fast forward 5 years and there is no surprise that, once again, he seems to have a far greater understanding of the latest tax changes than the accountants of other landlords that I regularly speak with.

He has kept me fully updated on the tax implications of the loss of wear and tear and the changes in the allowability of loan interest. He has provided me with an in depth report showing how much post tax income I would have from the present day right through until 20/21 when the restriction is fully in force. It did not paint a pretty picture. In fact, I would go so far as to say, that I would almost certainly no longer be able to continue to operate as a property investor by 20/21 in a sole trader capacity. Consequently, as of 01/04/16, I am now operating as a limited company, Kevin guiding me and my accountant through the tricky incorporation maze and explaining the best profit extraction method going forward.

I would point out that we had been discussing the SDLT implications of incorporation on the run up to the Budget on 16/03/16. With over 50 properties this was going to be a hefty charge for me. We had anticipated there would be a relief for the transfer of more than 15 properties into company ownership. When it was announced in the Budget that this would not apply, Kevin contacted me on Budget day whilst I was in South America to break the news and to push for the transfer to take place by 31/03/16 in order to save an extra 3% SDLT, which I duly did.

Once again, big tax savings for reasonable costs but, most importantly to me, I know exactly where my business is going, how much money I can personally extract from the company & how much should be left in to help pay off existing mortgages or to expand the business.

It really is a no brainer to work with Kevin whether you are a large or small property investor.

 

JC, Leeds

 

We first used the tax services of Kevin almost 10 years ago when he was working for a local firm of chartered accountants. Having received an excellent service from him for a number of years (including expanding from a partnership to a limited company) we were delighted to hear that Kevin had set up on his own and had no hesitation in signing up as a client in 2012. He continues to offer a very personable and cost effective service. We would absolutely recommend him to any other small company like ours.  

In addition to our company, we have a small residential property portfolio and were contemplating disposing of one of the properties in 2014/15. Had we not consulted with Kevin prior to the sale, we would have been facing an unwelcome Capital Gains Tax Liability. However, by transferring the property from sole into joint ownership we were able to benefit from a second CGT exemption which saved us almost £2,000’.  

 

Mrs S (Company Director, Bingley)

I first met with Kevin in July 2015 because I was worried that I had been receiving rental income for 3 years but had not declared anything to the tax man. The reason I had not done so was because I had spent quite a bit doing it up when I first purchased it and, by my calculations, I had only just started to make a profit in the tax year ended 05/04/2015.

Kevin explained that not all the expenses would be allowable because some counted as improvements. He provided a fact sheet on ‘Revenue versus  Capital’ indicating that those costs that counted as improvements would, ultimately, be available to set against any gains on disposal of the BTL. He also clarified the other expenses I was entitled to claim.

He calculated the net profit from letting. Even though no tax was payable he advised that the income still needed to be reported to HMRC which he duly did via a letter as, he said, the amounts involved were below the level for which a tax return was required. Apparently, this saved me penalties for failing to submit tax returns by the due date.

A tax return will be required for 2015/16 and I will be using Kevin to prepare this as, last year, he took away my concerns in sorting out my tax in a professional manner. He is not expensive and I feel comfortable dealing with him.

I would be happy to recommend him based on my experience.

 

RT, Bradford.

BLOG INDEX - PLEASE SCROLL DOWN TO VIEW INDIVIDUAL ENTRIES.

How SDLT could change how rented property is owned by couples/civil partners.

CGT Reliefs on homes to be significantly restricted from 04/2020

Mortgage Interest Relief Restrictions - Are you ready?

Making Tax Digital (MTD) & the cash basis for landlords

Landlords lose legal challenge over BTL tax changes

When the sale of a property will be liable to Income Tax rather than CGT

CGT on BTL to be taxed as income - Don't worry, it is not going to happen

The Statutory Residence Test - Working full-time abroad

Replacement Furniture Relief.

How flexible are your pensions savings?

Nov-18

Nov-18

Mar-17

Mar-17

Oct-16

Oct-16

Oct-16

Aug-16

Jun-16

Jun-16