Tag: Property Tax Specialist

Inspired by Grand Designs? You are entitled for a VAT refund if you build your own home.

VAT refunds for DIY builders

If you build your own house or convert an existing property into a home, you may be eligible to apply for a VAT refund on building materials and services. You do not need to be VAT registered to claim a refund.

What qualifies?

Refunds can be claimed in respect of building materials that are incorporated into the building and which cannot be removed without tools or without damaging the building. Refunds are available for materials used to build both new homes and for certain conversions.

A new home will qualify if it is separate and self-contained and you build it for you and your family to live in. The property must not be used for business purposes, although you are permitted to use one room as a home office.

Conversions will qualify if the property was previously used for non-residential purposes and is converted for residential use. Conversions of residential building will only qualify if they have not been lived in for at least 10 years.

Where you use a builder, the builder’s services will normally be zero-rated where they work on a new home. However, you can claim a refund for VAT charged by a builder working on a conversion.

What does not qualify?

Refunds are not available in respect of:

  • materials or services on which no VAT is payable because they are zero-rated or exempt;
  • professional fees, such as architects’ fees or surveyors’ fees;
  • costs of hiring machinery or equipment;
  • building materials which are not permanently attached to or part of the building;
  • fitted furniture, some gas and electrical appliances, carpets and garden ornaments.

A refund is also denied if the building is not capable of being sold separately, for example, as a result of planning restrictions.

How to claim

The claim is made on form 431NB where it relates to a new build and on form 431 where it relates to a conversion. The forms are available on the Gov.uk website. The claim must be made within three months of the date on which the building work was completed.

You must include all the relevant supporting documentation with your claim, such as valid VAT invoices to support the amount claimed. The refund will normally be issued within 30 days of making the claim.

Partner note: www.gov.uk/vat-building-new-home/eligibility.

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Today’s blog covers the serious curtailment to letting relief for landlords coming April 2020 – read more here.

Curtailment of letting relief

Landlords have been hit with a number of tax hikes in recent years, and this trend shows no signs of abating. From 6 April 2020, lettings relief – a valuable capital gains tax relief which is available where a property which has at some point been the owner’s only or main residence is let out – is seriously curtailed.

Now

Under the current rules letting relief applies to shelter part of the gain arising on the sale of a property which has been let out as residential accommodation and which at some time was the owner’s only or main residence. The amount of the letting relief is the lowest of the following three amounts:

  • the amount of private residence relief available on the disposal;
  • £40,000; and
  • the gain attributable to the letting.

Under the current rules, periods of residential letting count regardless of whether or not the landlord also lives in the property.

From 6 April 2020

From 6 April 2020, letting relief will only be available where the owner of the property shares occupancy with a tenant. From that date, lettings relief is available where at some point the owner of the property lets out part of their main residence as residential accommodation and shares occupation of that residence with an individual who has no interest in the residence.

To the extent that a gain that would otherwise be chargeable to capital gains tax because it relates to the part of the main residence which is let out as residential accommodation, the availability of lettings relief means that it is only chargeable to capital gains tax to the extent that it exceeds the lower of:

  • the amount of the gain sheltered by private residence relief; and
  • £40,000.

Example 1

Tom owns a property which he lives in as his main residence. He lived in it for a year on his own, then to help pay the bills he let out 40% as residential accommodation.

In June 2020 he sells the property realising a gain of £189,000. He had owned the property for five years and three months (63 months).

The final nine months of ownership are covered by the final period exemption – this equates to £27,000.

For the remaining 54 months, private residence relief is available for the first 12 months and 40% of the remaining 48 months – a total of 31.2 months (12 + (40% x 48)). This is worth £93,600. (31.2/63 x £189,000).

Private residence relief in total is worth £120,600 (£27,000 + £93,600).

The gain attributable to the letting is £68,400 (£189,000 – £120,600). This is taxable to the extent that is exceeds £40,000 (being the lower of £40,000 and £120,600).

Thus the letting relief is worth £40,000 and the chargeable gain is £28,400.

Example 2

Lucy buys a flat for £300,000 which she lives in for one year as her main residence. She then buys a new home which she lives in as her main residence and lets the flat out for three years, before selling it and realising a gain of £96,000.

If she sells it before 6 April 2020, she will be entitled to private residence relief of £60,000 (30/48 x £96,000). The final 18 months are exempt as she lived in the flat for 12 months as her main residence. The gain attributable to letting is £36,000, all of which is sheltered by lettings relief (as less than both private residence relief and £40,000).

If she sells the property after 6 April 2020, the final period exemption only covers the last nine months, reducing the private residence relief to £42,000 (21/48 x £96,000). The remainder of the gain of £54,000, which is attributable to the letting, is chargeable to capital gains tax as letting relief is no longer available as Lucy does not share her home with the tenant.

Consider realising a gain on a let property which has also been a main residence prior to 6 April 2020 to take advantage of the letting relief available prior to that date where a landlord does not share the accommodation with the tenant.

Partner note: TCGA 1992, s. 224; Draft legislation for inclusion in Finance Bill 2019—20 (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816196/Changes_to_ancillary_reliefs_in_Capital_Gains_Tax_Private_Residence_Relief_-_Draft_legislation.pdf).

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Do you have a second home? You might want to sell up before April 2020!

Private residence relief and the final period exemption

From a capital gains tax perspective, there are significant tax savings to be had if a property has been the owner’s only or main residence. The main gains are where the property has been the only or main residence throughout the whole period of ownership as private residence relief applies in full to shelter any gain arising on the disposal of the property from capital gains tax.

However, there are also advantages if a property enjoys only or main residence status for part of the ownership period; not only are any gains relating to that period sheltered from capital gains tax, but those covered by the final period exemption are also tax-free.

The final period exemption works to shelter any gain arising in the final period of ownership from capital gains tax if the property has at any time, however briefly, been the owner’s only or main residence. This can be particularly useful if the property is, say, lived in as a main home and then let out prior to being sold, or where a person has two or more residences.

Prior to 6 April 2020, the final period exemption applies generally to the last 18 months of ownership. Where the person making the disposal is a disabled person or a long-term resident in a care home, the final period exemption applies to the last 36 months of ownership.

From 6 April 2020, the final period exemption is reduced to nine months, although it will remain at 36 months for care home residents and disabled persons.

Planning ahead

Where a property which has been occupied as a main residence at some point, it could be very advantageous to dispose of it prior to 6 April 2020 rather than after that date to benefit from the longer final period exemption.

Example

Frankie has a cottage on the coast that he brought on 1 January 2010 for £200,000. He lived in it as his main residence for two years until 31 December 2011, when he purchased a city flat which has been his main residence since that date. He continues to use the cottage as a holiday home.

He plans to sell the cottage and expects to get £320,000.

Scenario 1 – sale on 31 March 2020

If Frankie sells the cottage on 31 March 2020, he will have owned the cottage for a total of 10 years and three months (123 months). Of that period, he lived in it for 24 months as his only or main residence. As the sale takes place prior to 6 April 2020, he will benefit from the final period exemption for the last 18 months.

The gain on sale is £120,000 (£320,000 – £200,000)

He qualifies for 42 months’ private residence relief, which is worth £40,976 (42/123 x £120,000).

The chargeable gain is therefore £79,024 (£120,000 – £40,976).

Scenario 2 – sale on 30 April 2020

If Frankie does not sell the property until 30 April 2020, he will only benefit from a nine-month final period exemption. If he sells on this date, he will have owned the property for 124 months. Assuming the sale price remains at £320,000 and the gain at £120,000, the gain which is sheltered by private residence relief is £31,935 (33/124 x £120,000), and the chargeable gain is increased to £88,065 (£120,000 – £31,935).

If planning to dispose of a property which has been an only or main residence for some but not all of the period of ownership, selling prior to 6 April 2020 will enable the owner to shelter the gain pertaining to the last 18 months of ownership.

Partner note: TCGA 1992, s. 223; Draft legislation for inclusion in Finance Bill 2019—20 (see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/816196/Changes_to_ancillary_reliefs_in_Capital_Gains_Tax_Private_Residence_Relief_-_Draft_legislation.pdf).

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A quick guide to what should be included when calculating the profit or loss for a property rental business.

Property income receipts – what should be included?

When calculating the profit or loss for a property rental business, it is important that nothing is overlooked. The receipts which need to be taken into account may include more than simply the rent received from letting out the property.

Rent and other receipts

Income from a property rental business includes all gross rents received before any deductions, for example, for property management fees or for letting agents’ fees. Other receipts, such as ground rents, should be taken into account.

Deposits

The treatment of deposits can be complex. A deposit may be taken to cover the cost of any damage incurred by the tenant. Where a property is let on an assured shorthold tenancy, the tenants’ deposit must be placed in a tenancy deposit scheme.

Deposits not returned at the end of the tenancy or amounts claimed against bonds should normally be included as income. However, any balance of a deposit that is not used to cover services or repairs and is returned to the tenant should be excluded from income.

Jointly-owned property

Where a property is owned by two or more people, it is important that the profit or loss is allocated between the joint owners correctly. Where the joint owners are married or in a civil partnership, profits and losses will be allocated equally, even if the property is owned in unequal shares, unless a form 17 election has been made for profits and losses to be allocated in accordance with actual ownerships shares where these are unequal.

Where the joint owners are not spouses or civil partners, profits and losses are normally divided in accordance with actual ownership shares, unless a different split has been agreed.

Overseas rental properties

Where a person has both UK and overseas rental properties, it is important that they are dealt with separately. The person will have two property rental business – one for UK properties and one for overseas properties. Losses arising on an overseas let cannot be offset against profits of a UK let and vice versa. Proper records should be kept so that the income and expenses can be allocated to the correct property rental business.

Furnished holiday lettings

Different tax rules apply to the commercial letting of furnished holiday lettings and where a let qualifies as a furnished holiday let it must be kept separate from UK lets that are not furnished holiday lettings. Likewise, furnished lets in the EEA must be dealt with separately from UK furnished holiday lets.

Getting it right

Good record keeping is essential to ensure that not only that all sources of income are taken into account, but also that any income received is allocated to the correct property rental business.

Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).

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If you use the property rental toolkit, do you think it’s useful?

Using the property rental toolkit to avoid common errors in returns

HMRC’s property rental toolkit highlights errors commonly found in tax returns in relation to property income. The toolkit can be used to help avoid those errors, some of which are discussed briefly below.

Computation

For unincorporated property businesses, the default basis is the cash basis where the qualifying conditions are met and the landlord does not elect to use the accruals basis. Where the business has moved into or out of the cash basis, transitional adjustments may be needed.

In some circumstances, a trade of providing services may be carried on in addition to the let of the property; and in some cases, the letting may amount to a trade.

It is important the correct computational rules are used.

Record keeping

Poorly-kept records may mean that things are overlooked – income may not be taken into account and allowable expenses not claimed. Property disposals may also be missed.

Property income receipts

All income which arises from an interest in land should be included as receipts of the property rental business. Receipts can include payments in kind (maybe work done on the property in lieu of rent). It should be noted that casual or one-off letting income is still treated as income from a property rental business.

Profits and losses from overseas lets, from furnished lettings and from properties let rent-free or below market rent should be dealt with separately. For other UK lets owned by the same person or persons, income and expenses are combined to work out the overall profit or loss for the property rental business.

Deductions and expenses

Expenses incurred wholly and exclusively for the purposes of the property rental business can be deducted in the computation of profits. Problems may arise where an expense has both a business element and a private element (for example, a car or phone used both privately and for the business). A deduction can be claimed only for the business part where this can be identified and meets the wholly and exclusively test.

The way in which relief for finance costs is being given is shifting from relief by deduction to relief as a basic rate tax reduction. Ensure that the split is correct for the tax year in question and relief given in the right way.

Allowances and reliefs

There are various reliefs that may be available to those receiving rental income.

Rent-a-room relief is available where a room is let furnished in the taxpayer’s own home, enabling receipts of £7,500 a year to be enjoyed free of tax.

The property income allowance of £1,000 means that rental income below this level does not need to be returned to HMRC. Where income exceeds this level, the allowance can be deducted instead of actual expenses where this is beneficial.

Capital allowances can be claimed in certain circumstances. They are available on certain items that belong to the landlord and which are used in the business, for example, tools, ladders, vehicles, etc. However, they are not available for domestic items in a residential property for which a replacement relief is available instead. Capital allowances are similarly not available for plant and machinery in a residential property unless it is a furnished holiday let.

Losses

Property rental losses must be treated correctly. They can only be carried forward and set against future property profits of the same property rental business.

Checklist

The checklist within the toolkit can be used to ensure that everything has been taken into account and that nothing has been overlooked.

Partner note: HMRC’s property rental toolkit (see www.gov.uk/government/publications/hmrc-property-rental-toolkit).

To find out more please follow us on Facebook , Twitter or LinkedIn. Feel free to contact us on 0333 006 4847 or request a call back by texting to 075 6464 7474