Tag Archives: capital allowances

Spring Budget 2021

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As expected much of Rishi Sunak’s Spring Budget was focused on continuing support for businesses as we move towards the easing of the Covid lockdown measures. It was welcome news that help will continue beyond the dates currently set for business to re-open, with the furlough scheme, business rates holiday, reduced SDLT rate and VAT reductions all due to continue. House builders in particular will benefit from the introduction of the mortgage guarantee scheme.

An increase in corporation tax to 25% was widely anticipated albeit delayed until 2023, but the super deduction of 130% for capital expenditure and an extension of tax relief on business losses incurred during the lockdown came as a pleasant surprise.

There was plenty of bad news with government borrowing expected to reach £600bn over the two-year period to March 2022 and job losses at 700,000 since the start of the pandemic but measures to help balance the books were in short supply. Freezing tax allowances and rate bands was one way for the Chancellor to increase the overall tax take without any headline grabbing rate increases, but I think we can be sure that there will be more tax rises to come.

Goodman Jones Budget Summary 2021

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A recent history of property taxation – 2016

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CGT
Compared to today, property investment taxation before 2013 was relatively straightforward with one of the more complex discussions being convincing non-residents that they really could realise profits on investment sites without UK Capital Gains Tax.  Changes were made in 2013 which proved to be the start of a wholesale reform to various aspects of property taxation.

Introduction of Annual Tax on Enveloped Dwellings (ATED)

2013 heralded the introduction of the ATED (Annual Tax on Enveloped Dwellings) legislation which applied to high value UK residential property “enveloped” in certain structures.  The tax implications were an annual ATED charge, a 15% rate of Stamp Duty Land Tax and Capital Gains Tax at 28% on increases in value from April 2013.  When ATED was first introduced the definition of high value was property worth more than £2m.  Since then the definition has fallen to property worth more than £500,000 with subtle differences between ATED, CGT and SDLT thresholds.

There are exemptions against the ATED regulations but these exemptions need to be claimed and therefore many ATED Returns are submitted to HMRC which do not result in tax liabilities.  Based on our client base we submit far greater numbers of “relief” returns than “charging” returns.

Capital Allowances

One year after the introduction of ATED there was a change in the regulations governing capital allowances.  In order for the purchaser of a commercial property to claim capital allowances on the site’s fixtures and fittings the vendor must have already claimed allowances on those assets.  This has led to commercial discussions about purchasers paying professionals to determine the claims which the vendor makes for pre-completion periods or reductions in purchase price to reflect the tax relief that the purchaser will not be able to claim as the vendor has not maximised their claims.

Stamp Duty Land Tax

Later in 2014 the SDLT rates for residential properties moved from a slab system to a progressive rate.  This was to help avoid artificial ceilings on prices caused by purchasers not being willing to pay £1 more for a property as that £1 would result in greater SDLT.  The slab system still operates for properties charged under the commercial property rules.

ATED brought certain non-residents into the Capital Gains Tax net.  From April 2015 that net was widened with the introduction of Capital Gains Tax on non-residents who dispose of UK residential property.  The chargeable gain only applies to value generated from April 2015.  For properties owned prior to April 2015 the chargeable gain can be determined by either a time apportionment of the gain or determining the actual increase in value from April 2015.  If the latter is adopted then an April 2015 valuation would be necessary to determine the post 2015 gain.  A connected change was the requirement for non-residents to report the gain within 30 days of conveyance.  Unless the non-resident had an existing relationship with HMRC then the Capital Gains Tax may also have to be paid within the 30 day period.

Although UK Capital Gains Tax rates fell on 6 April 2016 the reduction did not apply to gains from residential property.  A further change on 6 April 2016 impacted residential landlords.  Traditionally these landlords claimed a 10% wear and tear allowance against furnished rental income to reflect the cost of repair and replacement of furnishings and white goods within a property.  Although this was an optional treatment it was the method widely used by landlords.  From 6 April wear and tear allowance has been abolished and landlords should claim tax relief on the actual cost of replacing these assets.

New rules for purchases of second homes or buy-to-lets

April 2016 was also the month in which new rules were introduced which resulted in higher SDLT rates on purchases of second homes or residential buy to lets.  For effected properties SDLT is 3% higher than the rate of SDLT which would otherwise apply, but there are exemptions for lower value properties, caravans, mobile homes and boat houses.  There is a specific relief for individuals who move home and buy their new home before selling their previous home.  These individuals will need to pay the higher rate of SDLT on the purchase of a second home and then recover the excess SDLT on sale of the first home.  There is a time limit to sell the former home and a time limit to claim a refund.

Offshore property developers

Offshore property developers of UK sites have been able to structure their affairs so that part of the development profit is charged to UK tax.  This does not allow for a level playing field between the domestic developer, who is fully charged to UK tax, and the offshore developer.  Legislation was introduced on 5 July 2016 to level this playing field.

Rental income

Individuals who receive income from renting out rooms in their home could receive up to £4,250 per year without tax.  From April 2016 this has been increased to receipt up to £7,500 per year. The Government accept that some people can generate small amounts of income from rentals of, for example, their homes whilst on holiday.  From April 2017 there will be a new £1,000 allowance for property income with individuals not needing to declare, or pay tax, on sums less than the allowance.

Mortgage Interest

From April 2017 mortgage interest on loans to acquire buy to let properties will only be tax deductible as if the landlord is a basic rate taxpayer.  This tax relief restriction is being phased in over 4 years with the full restriction applying from April 2020.  The mechanism to generate the relief is a credit against tax liabilities and not a deduction from rental profits.  This can result in taxpayers falling into higher rates of tax and therefore being unexpectedly subject to the restriction. As the changes only apply to those paying income tax this has led to questions about the benefit of holding these properties in a company.  Such a change in structure needs to be carefully thought through as it leads to other considerations.

From 6 April 2017 it is anticipated that there will be changes to the non-domicile legislation which will bring more individuals into the UK Inheritance Tax net and could result in properties which they own through offshore structures being subject to UK Inheritance Tax for the first time ever.

The ATED legislation was introduced in 2013 and was a major shift in the UK property tax base.  Who would have believed that it would be the start of a number of changes?  Further changes are expected in 2017.

 

A Trip to Ikea? The withdrawal of the renewals basis and merits of furnishing a let property

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One of the most controversial and far reaching changes to tax practice introduced by HMRC in the past two years is the withdrawal of ESC B47 with effect from 6 April 2013, which permitted a deduction for the renewal of various household items in respect of a furnished or unfurnished property let. It also enabled landlords to claim a 10% deduction of the gross rental income (less any expenses incurred by the landlord on items usually borne by a tenant), to cover the replacement of carpets, furniture and the provision of smaller items such as cutlery.

Following HMRC’s comprehensive review of the Extra Statutory concessions, many have been removed or enshrined in legislation, including ESC B47- well part of it anyway. Whilst the part of the concession permitting a deduction for wear and tear is now legislated, the ability to claim a deduction for the renewal of capital items such as free-standing white goods and other items of household furniture is no longer possible. This is simply due to existing legislation denying capital allowances on the provision of plant and machinery for use in a normal residential property business, which ESC B47 countered. Despite many of the rules pertaining to a residential let being similar to those of a trade, letting income is for tax purposes still treated as investment income.

As a tax practitioner, I deal with a significant number of clients who have property lets, as do my colleagues so the topic of whether something is allowable or not allowable, revenue or capital, often generates a healthy debate in the office. If you drill down hard enough, read enough articles and study the legislation/HMRC guidance, it is usually possible to come up with some vaguely sensible decision as to how to proceed in so far as expenses are concerned. However, having spent many years explaining to clients that any expenditure incurred ‘wholly and exclusively’ for the purposes of a letting business (as is the case with a trade) should be allowable, to then have to explain that there is no possibility of claiming a deduction for a new carpet in an unfurnished property (or furnished if the wear and tear allowance is not claimed), seems to fly in the face of common sense.

According to HMRC, the impact of these changes ‘was not a significant consideration’ in terms of tax yield, which, in my humble opinion, makes it all the more bewildering as to why they chose to take this course of action in the first place. It has clearly confused and in some cases, antagonised landlords and tax advisers alike. The Revenue suggest that by incorporating the renewals basis previously found within ESC B47 within legislation, a deluge of cases involving tax avoidance could appear. Maybe I am missing a trick but I cannot envisage a scenario whereby an avoidance scheme centres around the replacement of fridges in a residential let!

So, we are now left in a situation whereby if the replacement is of an item such as a cooker in a fully integrated kitchen, a deduction may be claimed but if the replacement cooker is freestanding, a deduction is not allowable. If wear and tear is already claimed due to the property being furnished, the replacement of the freestanding cooker would be covered by the 10% deduction. The Revenue state that replacing items such as hobs in an integrated kitchen are simply repairs owing to the fact that you are not replacing an ‘entirety’, being the whole fitted kitchen and instead, are merely repairing it. However, if you replace a fridge that is free-standing, you are replacing an entirety and due to the withdrawal of ESC B47, no deduction from gross rents can be made.

To ensure that as much expenditure is covered by a deduction from gross rents, it may be that some landlords feel it beneficial to convert an unfurnished property to a furnished one by adding a bed and a sofa. The Revenue allow a deduction for wear and tear where the property is let with sufficient furniture and furnishings for normal residential use. A second hand bed and a sofa would near enough achieve that goal.

All in all, these much publicised changes have not exactly endeared HMRC to the tax profession and the many landlords out there. They have stated that they will ‘monitor’ the position but in the meantime, if you are a landlord, you may wish to carefully consider whether you afford your tenant the luxury of a Bosch for £1,000 or a Zanussi for £200!’

Furnished Residential Lettings v Furnished Holiday Lets

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Is there really that much of a difference between the two? Both are furnished, both are lettings but in the weird and wonderful world of taxation, they are poles apart.

Whilst cost is an obvious consideration when choosing a property to purchase, one cannot overlook the tax advantages and potential rental yield attributable to a furnished holiday let.

Imagine that the beautiful character cottage you have been holidaying at in Cornwall for many years comes onto the market for what you consider to be an affordable asking price. You realise that due to work commitments, holidays at the property will be at a premium but the opportunity to purchase it with a view to moving there on retirement is too much to resist. What are your options if you do take the plunge?

Firstly, you could let the property out as a normal furnished or unfurnished residential let, given that it is located in small town with all the basic amenities that a tenant would require on the doorstep. Of course, this would guarantee a regular income but not necessarily recoup your outlay at a particularly expeditious rate.

A more appealing option may be to enter the furnished holiday let market, which given that you have been paying up to £1,500 for a week in the cottage, could be a particularly lucrative option especially in the summer season.

The tax advantages of owning and letting a furnished holiday let are numerous, in particular the myriad of Capital Gains tax reliefs. Firstly, you need to be aware of the basic qualifying rules whereby the property must be let for 105 days and be available for 210 days in any given tax year. HMRC also stipulate that the property cannot be in ‘longer term occupation’ for more than 155 days during a tax year. The definition of ‘longer term occupation is over 31 days consecutively. When I plug the numbers into my calculator (I’m a Tax Adviser not an Accountant!), this means that there are potentially 155 days for you or the family to spend at the property. There are even periods of grace available where the conditions regarding days let are not met in a particular tax year.

As if that is not good enough, providing that the property has qualified as a furnished holiday let during the final twelve months of ownership, the chargeable gain will be eligible for a 10% tax rate by virtue of qualification for Entrepreneur’s Relief.

If you decide that you want to dispose of the existing property and acquire a larger, more luxurious one at any time, another Capital Gains tax relief often overlooked is Rollover Relief. If you make a considerable gain on disposal of the initial property, that gain can be rolled into the purchase of the new property, meaning that in many situations no tax is paid until the new property is ultimately sold. As death is not a chargeable occasion for rolled over gains, there will be no tax to pay whatsoever if the second property is retained for life with the eventual recipient inheriting it at probate value.

Other tax advantages are capital gains tax gift relief, the ability to count the profit as net relevant earnings for pension contribution purposes and capital allowances on furnishings and appliances.

Consideration should be given to the cost of replacing household furnishings and employing an agent to manage the property but on balance furnished holiday lettings do continue to offer some great tax breaks.

An investment property that could qualify as a long term residential let as well as a furnished holiday let would be tax utopia but to find an area to appeal equally to prospective residential tenants as well as holidaymakers is difficult.

Whether you are deliberating over buying that dream cottage in the UK or villa in the sun (the furnished holiday let rules also apply to properties located in the EEA), to help you have peace of mind where potential tax exposure is concerned, you are welcome to contact one of our experienced tax team for some advice.

Capital Allowance Claims for Fixtures in Second Hand Properties

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April 2012 and April 2014 changes to tax law have considerable impact on property transactions which, if ignored, can lead to wasted tax relief.

Since 1996 the extent that a purchaser of commercial property can claim capital allowances on assets within a property has been limited to the disposal value brought into the tax computation by the vendor, or by a previous owner. Purchasers have therefore had to make enquiries into the property’s capital allowance history.

The above led to the introduction of a joint election between the purchaser and seller that state the amount of the sales price that is apportioned to fixtures. The amount specified in the election cannot be greater than the vendor’s costs of the fixtures. Typically purchasers would wish the sum to be high and vendors wish it to be low. The election is often one of the more emotional aspects of purchase negotiations.

The election only covers assets subject to claims from 1996 onwards. This does not prevent purchasers of older buildings identifying assets on which a claim has never been made and making a “late” claim on those assets installed within the building before 1996.

The Finance Act 2012 changes the administrative processes and scope for tax planning.

At present, the joint election is good practice. From April 2012 it is mandatory for the value of fixtures being transferred to be identified. If a joint election is not used then the only alternative is that the Tax Tribunal process determines it for the parties. From April 2012 it has been important that there is certainty as to the transfer value as, unless the value of fixtures is determined, the purchaser (nor any future purchaser) is prevented from making a capital allowances claim on those fixtures.

From April 2014 capital allowance claims will only be possible to the extent that assets have been subject to an earlier claim. This will lead to owners having increased documentation requirements to substantiate claims and purchasers seeking sight of that evidence during the commercial negotiations. A further impact is that it will prevent late claims for pre-1996 expenditure. Taxpayers therefore have until March 2014 to make the first ever claim on pre-1996 property expenditure.

Capital Allowances on Purchase and Sale of Commercial Property

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Do you understand your pooling obligations?

I expect the answer to that question for most people is no. However, failing to comply with new legislation introduced in the Finance Act 2012 will prevent the purchaser of a commercial building claiming capital allowances on any fixtures and fittings acquired with the purchase.

The legislation is simple in its concept but as is often the case, will cause significant practical difficulties. The new rules have been introduced because HMRC are convinced that there has been a large scale double counting of capital allowances caused by the purchasers of commercial buildings making a late claim to pool capital expenditure on their original purchase of the property some years after the date of purchase. Such claims generally assume that the seller has not previously made a claim for capital allowances on these fixtures and fittings and, due to the lapse of time between sale and pooling of expenditure, HMRC has not been able to check the records of the seller to make sure this is correct.

In HMRC’s consultation last year the Revenue recognised the fact that there was a natural tension between the purchaser and seller in connection with capital allowances on fixtures and fittings. The seller is likely to seek a low value on capital assets to enable them to claim higher balancing allowances on sale, whereas the purchaser is likely to want to a high value on fixtures and fittings to enable them to claim a larger capital allowance portion of the sale price. The intention of the new legislation is to ensure agreement between the seller and the buyer as to the amount of capital allowance expenditure available.

The practical problem that seems so far to have been overlooked by HMRC is that the seller of the building is under the obligation to identify and pool the relevant capital expenditure but is likely to have less interest in doing so than the purchaser. Essentially the legislation forces the buyer into ensuring that he agrees a section 198 election with the seller to determine the value of the allowable capital expenditure. If the seller refuses to play ball then the purchasers only option is to apply to tax tribunal to agree the capital allowance pool.

It is still early days, however, what has already become clear is that capital allowances will now form a significant part of the negotiations in the purchase and sale of commercial buildings and accordingly you should keep your accountants advised at the earliest stage when considering a disposal or purchase.

Flat Conversion Allowances – Get ‘em while they’re hot!

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In May 2012, HM Treasury released its consultation paper relating to the “enveloping” of high value residential property.

Much has been written about it already, so I won’t bore with another summary – but it made me want to revisit what had resulted from a previous consultation issued in May 2011. If you missed that one, it was entitled “Consultation on the removal of 36 tax reliefs” – I can’t deny that the title is snappy and to the point.

Using the Government’s words, that consultation was issued so as “to simplify the tax system through the removal of reliefs”.

So let’s pick one of the 36 at random – Flat Conversion Allowances – and see what happened to that relief?

Well, no prizes for guessing that in December 2011, Flat Conversion Allowances (sometimes called Flats Above Shops relief) were repealed and they will be withdrawn for expenditure incurred after March 2013.

It strikes me as odd, that when there is a shortage of affordable property in parts of the UK, and when the smaller end of the construction industry is on its knees, the relief is repealed. Or, perhaps there is greater wisdom involved in that by giving advance notice of the repeal, it will accelerate property owners’ decisions to convert and give a much needed boost to the construction sector (I’ll leave the funding issues as a matter for another day!)

All I know is that anyone thinking about converting under-used space above commercial premises may want to revisit this relief and reconsider the timing of their plans if they want to claim the currently available 100% capital allowances.