Tag Archives: Capital Gains Tax

Accidental landlords advised to consider selling BEFORE April 2014 Advice, Buy to Let News, Landlord News, Latest Articles, Tax & Accountancy, Tax and Accountancy, Tax News

Accidental landlords looking to sell and take advantage of tax breaks on former main residences are being advised of the importance of doing so before April 2014.

The Chancellor George Osborne confirmed in his Autumn Statement that Capital Gains Tax relief on former homes will be halved from 36 to 18 months when the new tax year begins on 6th April 2014.

If at some point a property has been your Principal Private Residence you are entitled to claim PPR relief available on the sale of a property. The last three years (18 months as of April 2014) of ownership are exempt in calculating Capital Gains Tax (CGT), whether the individual is living there at the time of selling or not.

It is important to note that PPR relief claims are often investigated by HMRC. It is, therefore, imperative to be able to prove beyond any shadow of doubt that the property was indeed your Principal Private Residence. Examples of how this can be achieved are Council Tax records, bank statements, voters roll, utility bills, doctors and dentists records etc. The more evidence the better of course.

Let’s look at two examples of selling a property claiming PPR relief before and after April 2014:

1. Property is purchased 10 years ago for £100,000 and was at some point your principle private residence. It is then sold for £200,000 10 years later making a taxable gain of £100,000

  • PPR relief at 36 months would mean the gain is now reduced by the ratio of time owned minus 3 years. Therefore taxable gain now equals 84/120 x £100,00 = £70,000 (effectively PPR relief = £30,000)
  • On top of this you can claim “letting relief” which is the lesser of the PPR relief or a maximum of £40,000. Therefore in this example Letting relief equals the PPR figure of £30,000
  • Therefore Total taxable gain in this example equals £70,000 – £30,000 (Letting relief) = £40,000
  • However it gets better if the property is jointly owned as each owner is able to claim the same Letting relief of £30,000. Therefore taxable gain now equals £70,000 – £30,000 – £30,000 = £10,000

2. Same example, but PPR relief is now only 18 months post April 2014

  • PPR relief would now mean taxable gain equals 102/120 x £100,00 = £85,000 (PPR relief = £15,000)
  • Letting relief is now the lesser of the PPR figure or £40,000. Therefore Letting relief now equals £15,000
  • Therefore Total taxable gain in this example equals £85,000 – £15,000 (Letting relief) = £70,000
  • However if the property is jointly owned as each owner is able to claim the same Letting relief of £15,000. Therefore taxable gain now equals £85,000 – £15,000 – £15,000 = £55,000

In Summary:

  • Pre April 2014 taxable gain for a sole owner of the above example = £40,000 or for joint owners £10,000
  • Post April 2014 taxable gain for sole owner = £70,000 or for joint owners £55,000
  • When the length of time the property has been owned is shorter than 120 months the percentage difference between the two examples will be greater.

Don’t forget that each owner get’s a CGT annual exemption which can also be used. As of August 2013 that figure is £10,600 per person, which can be taken off the total taxable gain if it has not already been used elsewhere that year. This is a VERY good reason to take professional advice. The cost of the advice could well represent only a fraction of the tax savings.

If instead of being an Accidental landlord you have moved into a BTL property at some point prior to sale to take advantage of the above reliefs it can be more difficult to prove residence.

Neil Barlow, an accountant for Pacific Limited, has therefore provided example cases below where landlords failed to prove entitlement to PPR relief:

“It is well known that the test as to whether a property has been used as a residence for the purposes of the valuable CGT private residence relief is based on quality of occupation rather than quantity.

An interesting case on the time aspect was Paul Flavell v HMRC TC00642. The taxpayer lost his claim for PPR relief because the Tribunal decided that there was no evidence to show that the taxpayer had ever lived in the property. They said “if evidence had been provided to support the claim of living at the property for 5 months, they would have found that to be sufficient for the claim”.

“It is also clear that for any chance of success proper evidence is required to establish use as a residence.

P Moore v HMRC TC02827 is the latest case on the issue and is cause for concern.

1. The taxpayer bought a property and let it for four years. The tenant moved out in November 2006, and the taxpayer moved in because his marriage was in difficulties.

2. He sold the house at the end of August 2007, having put it on the market in April. He claimed PPR on the gain on the basis that he had lived at the property for 8 months, having not put it on the market until he had lived there for 3 to 5 months.

3. HMRC argued that the taxpayer’s occupation did not have a sufficient degree of permanence, and no relief was due.

4. The First-tier Tribunal decided the taxpayer did not have the intention of staying in the house for a considerable period as evidenced by the fact that he had not arranged to have correspondence sent to the address while living there, choosing instead to have it forwarded to his new partner’s home.

5. His latest relationship was the crucial factor. Whilst the taxpayer may have been prepared to stay in his property for some time, the tribunal found it hard to accept he had “no serious hope or expectation” of setting up home with his partner (later to become his wife) before March 2007, given the fact that the couple put in an offer shortly after that date to purchase a new house.

6. In addition the taxpayer did not fully change his postal address and he told HMRC in writing that his occupation was temporary.

7. Finally, the Tribunal wanted to see if his new wife would collaborate the story but she did not attend the hearing.”

If you want advice

This article should not be construed as advice. The firm we use for accountancy and tax advice specialise in advising on the affairs of property based entrepreneurs. They are a boutique firm based in Norwich but they act for clients throughout the UK. One major advantage of using a smaller boutique firm in the provinces is price. Having said that I don’t believe you will ever find better advice from a big six firm in the capital regardless of how much you pay. If you would like an introduction please complete the form below.Accidental landlords

Accountants Introduction Request


Tax Treatment of Equity Loans for Buy to Let Landlords Advice, Buy to Let News, Commercial Finance, Financial Advice, Landlord News, Latest Articles, Legal, Mortgage News, Property Investment Strategies, Tax and Accountancy, Tax News, UK Property Forum for Buy to Let Landlords

I have been posting on numerous forums about the introduction of equity loans into the UK buy to let mortgage market, a common question is the tax treatment.

Equity loans do not attract interest in the normal way, there are no regular monthly payments. One UK lender, funded by USA equity house JC Flower & Co. (a leading financial services investment company with funds in excess of £5billion) has entered the UK market and others may follow. Their return on investment is earned when the loan term expires or or sale or refinance of the property, whichever is sooner. Their return is capital plus a share in capital appreciation equal to double their investment. For example, if they provide top up finance of 10% of a property value their return with be 20% of the increased capital value plus their investment when the funding is redeemed.

As you may know, I was previously a former commercial finance broker. When I was practising I was renowned for digging into complex funding, tax and legal structures to explore opportunities and threats which others may never have considered.

Note to all – I no longer provide advice and this post must not be treated as advice.

The tax treatment of the redemption of BTL equity loans will be very interesting.

Let’s use this example. Equity loans can sit over and above traditional interest bearing mortgages but for the sake of simplicity I have based the following example on equity funding only.

Property value at outset £100,000
Equity loan at outset £20,000

Property value at sale £200,000
Capital gain £100,000 (or is it and if so how is it shared? – see below)
Equity loan capital repaid £20,000
Profit on Equity loan to lender £40,000

Now does the £40,000 profit on the equity loan to the lender reduce the owners capital gain to £60,000 or is the owners gain still treated as £100,000?

The lender operating the first of these schemes has already stated they will bill their return as interest at the point of loan redemption. However, that’s not to say HMRC will see it that way, only time will tell. Therefore, my suggestion to all landlords considering this type of finance is to plan for the worst and hope for the best in terms of tax treatment. As has been proven many times, the law says you can call something pretty much whatever you like but case law or legislation will determine what it really is. Case in point, advance rent or deposit? – see Johnson vs Old

So will profits made by equity lenders need to be used to offset rental profits? If so there could be a substantial paper loss created in the year of redemption. Unused losses may be rolled forward, assuming losses are made, but such losses are only offsettable against future rental profits. No problem, in fact potentially very advantageous, IF you continue to make rental profits going forward. However, if this was your only property you may be stuffed by having to pay CGT on the full £100,000 of gain and not being able to utilise the carry forward losses. Note that rental losses can not be used to reduce other taxable income.

I can’t see HMRC allowing landlords to choose how they apply the lenders return to suit their individual circumstances, i.e. as either interest or a share of capital gain,  but we can live in hope, not that that’s a good strategy of course! If HMRC do allow a choice to be made that would be utopia from a tax planners perspective 🙂

What I would suggest to all considering equity loans is that they should plan for the worst case tax scenario and hope for the best case tax scenario. In other words, make decisions based on the worst case tax scenario and if that works then fine. Obviously there are many other aspects of the deal to consider too which is why I am an advocate of taking professional advice as opposed to taking a short sighted approach and simply jumping into deals unadvised just to save initial fees.

If you are a portfolio landlord who makes good rental profits then treating the lenders return as interest could be extremely tax advantageous if the tax regime remains as it is today. This is because income tax rates are greater than capital gains tax rates for higher rate tax payers.

Therefore, for landlords who will continue to make rental profits, post redemption of their equity loans, this is particularly attractive in my opinion. At worst, if HMRC decide to treat the lenders returns as capital gains, landlords will pay a lower CGT bill and not be able to offset interest. For a landlords with no ongoing rental profits post redemption of an equity loan, having the lenders return treated an interest charge is highly unlikely to be attractive whereas having the returns treated as capital gains will be far better for them.

If, of course, your equity loan is secured against your private home then no CGT is payable on sale anyway.

Tax Treatment of Equity Loans for Buy to Let Landlords

Tax is not the only consideration.

I have listed 11 good reasons for considering the product and 9 downsides in my main post about equity loans. That’s not to say that everybody should think equity loans are the best thing since sliced bread just because my list of pro’s and cons is 11 vs 9, it doesn’t work that way. The reasons for NOT doing something can be very different to reasons FOR doing something, they are not necessarily like for like considerations. For example, I also prefer a strategy of high gearing combined with high liquidity over a low gearing strategy because that’s what suits me and my attitude to risk. It does not mean that people who prefer a different strategy are either wrong or right, it just proves we are all different, hence we have other preferences such as careers, holidays, cars, films, food and where we live.

For further information and discussion about equity loans please CLICK HERE.


Charging for your own labour Latest Articles, Tax & Accountancy, Tax and Accountancy, UK Property Forum for Buy to Let Landlords

I have been renovating my buy to lets without making a charge for my time and effort. I told the accountant I want to start charging £10 an hour for my labour as this will give a more accurate figure as to the total costs of the properties and also limit the capital gains tax when I come to sell.  The accountant says I’ll need to set up a limited company, sort out payroll, national insurance and in short don’t do it. Sounds like using a sledgehammer to crack a walnut, any advice would be very gratefully received.

Andrew Jones Charging for your own labour


Minimising Capital Gains Tax – Readers Question Latest Articles, Tax & Accountancy, Tax and Accountancy

Minimising Capital Gains TaxMy wife and I own a semi-commercial property where the ground floor commercial unit is occupied by a mini cab firm and the 2 x upper floors provide for a separate self contained residential unit. I have a commercial loan on the property as a whole, which recently, after five years of being on an interest only mortgage basis, has changed to capital and interest repayments with a 20 year remaining term, with no early repayment penalties.  Continue reading Minimising Capital Gains Tax – Readers Question


HMRC Property Sales Campaign Landlord News, Latest Articles, Property News, Tax and Accountancy

Landlords CGT QuestionThe HMRC property sales campaign has recently been launched to encourage taxpayers who have not already done so to tell them about the sale of, or disposal of, properties that are not their main homes either in the UK or abroad, and have failed to declare any profits on which Capital Gains Tax should be paid.

Taxpayers have until the 9th August 2013 to tell HMRC they may have unpaid tax and until the 6th September to calculate their liability and pay what they owe. After the 6th September, as quoted on their own website “HMRC will use the information it holds to target those who should have made a disclosure under this campaign and failed to do so.”

HMRC have said that by coming forward voluntarily taxpayers are likely to receive better terms than if HMRC comes to them first.

You are eligible for this campaign if :

  • You’ve sold, or disposed of, second or additional residential properties either in the UK or abroad. These could include a holiday home or a property that you rented out.
  • You have sold your main home. This would normally qualify for Private Residence Relief but in some circumstances the relief is restricted. Where the entitlement to this relief is restricted Capital Gains Tax may be due if you are liable to UK taxes.
  • Even if you didn’t originally purchase the property you may still be liable to pay tax on the gain if you acquired the property another way. For example you may have inherited it or it may have been a gift.

This campaign is not for you if you:

  • Buy and sell property as a business. These sales are subject to Income Tax rather than Capital Gains Tax.
  • Need to disclose a gain made by a trust, company or partnership.

If you take part in this campaign and tell HMRC about any gain that you haven’t previously disclosed you can assess the correct level of penalty to reflect why you have not paid the right amount of tax in the past. Under certain circumstances you may be able to pay what you owe by installments.

 

If you think this may apply to you, and you would like help to regularise your tax affairs with HMRC, please Click Here


LCP analysis of official Land Registry data just released Landlord News, Latest Articles, Property Investment News, Property News

 LCP London Central Portfolio  
  • Prices in England and Wales rise marginally by 2.27% across the year, bringing the average price to £238,293
  • Prices in Prime London Central (PLC) rose 14.1% to finish 2012 at £1,359,739
  • The number of sales of London’s super prime properties (£10m+) increased 10 fold
  • The number of sales in England and Wales between £2m and £5m increased a staggering 71%
  • The most expensive sale in PLC in Q4 was a house in Farm Street, Mayfair at £28,134,500
  • High value sales in Q4 were also registered in London Central’s most prestigious developments -One Hyde Park, 199 Knightsbridge and The Lancasters

Naomi Heaton, CEO of London Central Portfolio comments:- Continue reading LCP analysis of official Land Registry data just released


Exit plan – move in before selling up to avoid CGT Landlord News, Latest Articles, Property Investment Strategies, Property News, Tax & Accountancy, Tax and Accountancy

This weekend I received an email from Cissie asking “If I move into a buy to let property which has been let for several years, and sell it after 6 months or a year, can I avoid CGT ? “

It’s a very interesting question, one which is close to my own heart as my parents investigated that strategy before jumping in head first. There isn’t a black and white Yes or No answer to this one, as my accountant often says to me “it depends”Continue reading Exit plan – move in before selling up to avoid CGT


Tax Treatment of Property Development vs Property Investment Financial Advice, Landlord News, Landlords Stories, Latest Articles, Property Investment Strategies, Property News, Tax & Accountancy, Tax and Accountancy, Tax News

Tax Treatment of Property Development vs Property InvestmentWith so many buy to let  property investors now considering buy/refurb/sell deals I feel the time is right to explain the tax treatment of property development vs property investment.

For example, did you knowthat buy/refurb/sell deals are taxed as a trade (property development) and CGT annual exemptions can not be claimed on disposal?

Continue reading Tax Treatment of Property Development vs Property Investment


Taxation strategies for capital raising on a BuyToLet basis for retirement Buy to Let News, Commercial Finance, Landlord News, Latest Articles, Property Investment News, Property Investment Strategies, Property News, Tax & Accountancy, Tax and Accountancy, Tax News

It is quite rare for me to share taxation strategies here in full on my blog, especially taxation strategies for capital raising purposes which I’ve not used personally yet (but intend to). However, following an email from a reader called Mike today I will make an exception on this occasion. I love to share my strategies bit by bit but I often miss out some key elements, either to encourage further conversation or to provide enough intrigue for my readers to want/need to contact me personally. I explain why I do that here.

Mike wrote to me as he is currently going through a tax investigation and from his email it is quite aparent that he has a decent understanding of landlord taxation. Mike’s email raised questions regarding an article I recently published about “Partial Exit Strategies for landlords“, and in particular the taxation strategies for capital raising as referred to in that particular article. Continue reading Taxation strategies for capital raising on a BuyToLet basis for retirement


Weekly News round up for the week ending 3rd of August 2012 Commercial Finance, Landlord News, Latest Articles, Property News, UK Property Forum for Buy to Let Landlords

This weekend we are celebrating the launch our Discussions Forum.

You will find it on the main Navigation Bar of our website. We introduced this new feature based on feedback from readers who would like to be able to see at a quick glance the articles which are the most recently published or commented upon. The Discussions page also shows when the articles were first published, how many times each article has been read, how many comments have been left and who by. You can link to the main article or just the latest comment.

We have also added Exit Strategies and Succession Planning to the dropdown in the Navigation Bar headed “Landlords Log”. This groups together the best read articles on those subjects and each page links to related articles in the appropriate series. Continue reading Weekly News round up for the week ending 3rd of August 2012


Property Forum and News website where UK landlords and letting agents share best practice