Tag Archives: CGT

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.


Ready Made Property Tweets Latest Articles, Property Investment Strategies, UK Property Forum for Buy to Let Landlords

If like me you are a big fan of Twitter you will no doubt enjoy sharing information with your fellow landlords.

I have just completed the mammoth task of completely updating my buy to let property investment strategy and I will be tweeting about it over the next few days.

Below are some of the tweets I’ve already sent. By all means use them to link through to any articles that might interest you and/or click the re-tweet button Ready Made Property Tweetsat the bottom right of each tweet.

 

 

 

 


The practicalities of a deeds of trust and using a Ltd company in England Latest Articles, UK Property Forum for Buy to Let Landlords

I am a higher rate tax payer and I want to expand my property portfolio further. I want to shelter the rental income from my income tax bracket as I wish to re-invest the money into buying more property. I do not need to draw money from the business. The practicalities of a deeds of trust and using a Ltd company in England

I have read extensively and considering my long term goals, using a Ltd company seems to be the best fit. However, in the current climate, lenders seem to have very low LTV products e.g. deposits required equal 35-45%, which is counter productive to growing a portfolio.

I have read that you can buy the properties as personal BTL mortgages with deposits of 25% and then create a deed of trust to the Ltd Company and benefit from corporate rates on income. However, it’s very hard to be sure this is in reality a workable option as I have many questions where the answers are not very forthcoming.

If anybody actually has any real life experience with this approach, I would really appreciate your help on these questions below:

  • Do you have to tell the mortgage company you are going to put the property into deed of trust to a Ltd company when applying for the mortgage?
  • Do mortgage companies accept this method to managing your portfolio?
  • If you do the deed of trust at the same time as you purchase the property, does this avoid any CGT issues since there would be no gain from when you personally bought the property (no change in Market Value price)
  • Does the deposit you put into the property become a ‘directors loan’ too?
  • How easy is it to re-mortgage the property when you need to re-finance the property?
  • Is there anything specifically that needs to be included in the deed of trust to ensure the income is regarded as that of the business?

Any other comments?

I really would like the advice of somebody who has actually done it or is doing it now as I don’t think everybody really understands the value of a limited company to some investors, especially when they are exposed to super high tax rates above the 40% bracket.

Many thanks

Terry


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


First Timer – Let to Buy Latest Articles, UK Property Forum for Buy to Let Landlords

First Timer - Let to BuyI bought a one bed flat in North London a few years ago to live in with my partner. Recently we purchased our first flat together and have moved into it. I was able to secure the new mortgage partly based on the projected income from the old property – I believe this is known as “Let to Buy” and is becoming quite commonplace.

To avoid becoming a dreaded “accidental landlord” I’ve done a fair bit of research in the run up to moving out to ensure I know what I’m doing. Continue reading First Timer – Let to Buy


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


Oven Cleaning is one of the biggest issues in a rented property Landlord News, Latest Articles, Property News

ovenOven cleaning is one of the biggest issues and this article is to help Landlords present this particular item in their property in its best condition for an inventory inspection and help tenants bring an oven back to its initial clean state when leaving the accommodation.

Let’s put it into perspective, the cleanliness of a property makes up 51% of tenancy deposit disputes and some of which can be attributed to people forgetting or missing an item to be cleaned, another is that differing people have differing ideas of what is clean. Let me give you an idea how we all think the same but differently.

Picture a cat in your head,
How big is it?
What is it doing?
What colour is it?

While we have all just seen a cat in our minds eye, some cats will be small, medium, large. It might be sleeping, sitting, jumping around and any colour you want. Nevertheless, it is still a cat. The same is true for cleaning, someone might have actually worked very hard to clean a property but yet it is not you to your high standard. Maybe they just don’t know how to do the task correctly and yes some are just simply too lazy to do it. It is a rare situation that we know which of these statements is true for a given household and it might be a combination of all of these factors.

There is a continuum for the level of cleanliness form: never been cleaned, attempted but still dirty, cleaned to an average household standard up to what we call in the inventory profession “cleaned to a high domestic standard” and “cleaned to a professional standard” the best of course being a professional clean.

Here is a list of key phrases I use when describing the cleanliness of an oven from best to worst:
1. As New
2. Cleaned to a professional standard
3. Cleaned to a high domestic standard
4. Clean to a domestic standard
5. Partly cleaned
6. Needs finished clean
7. Not clean.

I must add that fortunately, most inspection I do I only have to decide if the cooker/oven has been cleaned to a domestic or professional standard.

If you look at the picture below, this is an oven an oven cleaned to a high standard but its condition is excluded from our discussion on cleaning. This is a worn oven and unless you have prior information, to this picture, it is not possible to say if this is through damage or due to age and fair wear and tear.

 

This oven is clean but through age and use, it is marked and even rusted at the sides.

Then we have the oven that is clean to a high domestic standard that is to say it is grease free but there are still baked on marks.

 

You should also watch out for chemical residue, many of the excellent oven cleaning products on the market leave residue marks on surfaces if you don’t wash off the product fully, which technically means the oven is still partially dirty, need a finish clean.

There are several very good cleaning products on the market. But there is one that I prefer to use it gets the job done and is fairly easy to use and normally takes a clean to domestic standard to a professional clean level. It is a strong chemical so you have to be careful and follow the manufactures instructions it is “Oven Pride”. Please note that I don’t have shares in the company and I am not getting any benefit for mentioning this product my motivation for mentioning it is to   help anyone who reads this article in particular Landlords and Tenants.

About the author of this Post

Sydney Lewis A+ Inventories

Syd Lewis has been a private landlord for over 20 years, he is an accredited member of the National Landlords Association (NLA), Residential Landlords Association (RLA), Sponsor of the Good Landlords Campaign, a full member of the Association of Professional Inventory Providers (APIP) and a Certified Electrical Portable Appliance Tester (NIPIT). He is passionate about what he does which is providing residential inventory services, PAT testing and marketing floor plans for Agents, Landlords and Tenants. Inventories start from £56.00 to find out more see:-


Landlords CGT Question Landlord News, Latest Articles, Property News, Tax & Accountancy, Tax and Accountancy

Landlords CGT QuestionLaniora Lay has raised the following Landlords CGT Question:-

“I have been renting out my former family home for the last three and a half years. Meanwhile I myself have been living in rented accommodation.  

I now wish to move back in to my former home and would like to know how long I need to live there before I can sell it and avoid having to pay CGT.  Continue reading Landlords CGT Question


How to create incentives for the PRS to grow Landlord News, Latest Articles, Property News

How to create incentives for the PRS to growMark Garner, a regular reader of Property118 has very kindly written in to share these thoughts on simple changes the government could make to incentivise the necessary growth of the UK’s Private Rented Sector.  

What do you think?

To increase the size of the UK PRS the Government need to change their current policy on:-

Pensions – Allow SIPP’s to purchase residential property. Isn’t it crazy that we can invest our retirement funds into high risk Caribbean resports but not into providing much needed housing in the UK?  Continue reading How to create incentives for the PRS to grow


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