Tax returns for 2016/17, Tax avoidance schemes, Off-plan purchases

We have some shocking news about tax computations for the 2016/17 personal SA tax returns. We also pass on warnings from HMRC about two tax avoidance schemes which are circulating. Finally, we present some timely tips for advising clients who have bought properties off-plan.

Below is just an extract from last week’s tax tips email. You can register to receive future copies by following the link on the right (or below, if you’re reading this on a mobile device)

Off-plan purchases

When a taxpayer purchases a newly constructed property, he may put down a deposit to reserve the property before it is finished, or even started. This is referred to as buying “off-plan”.

The contract to purchase the property is normally not completed until the property is finished, and at that time the balance of the purchase price must be paid. If the taxpayer can’t pay the balance when requested, he loses the right to complete the contract and acquire the property.

This is what happened to Mr Hardy, who paid a deposit of £72,000 for an apartment in central London, but due to cash-flow problems could not raise the balance of the purchase price when required. He claimed that his lost deposit was a capital loss.

The First-Tier and the Upper-Tier tax tribunals disagreed. Hardy did not acquire an asset when he paid his deposit, and neither did he acquire a contractual right as the contract did not permit him to assign his right to buy the property. His real loss was thus a tax nothing.

However, HMRC do have their cake and eat it on this issue when the taxpayer is a non-resident buying a residential property. In that case, if the taxpayer does dispose of his right to buy the property off-plan, that disposal is subject to non-resident CGT. Also, the start date for any apportionment of a residential period starts from the acquisition of the off-plan right, not from the completion of the property.

Our CGT experts can help with this tricky area.


CGT horror, VAT on overseas expenses, Contracts for difference

To coincide with Halloween, when frightening and spooky things abound, we have three tales of tax horror to shock you. First: bad advice given by a solicitor on the gift of a house. Second: the lack of advice given by a large firm of accountants on reclaiming VAT on overseas expenses. Finally a warning about letters from HMRC concerning schemes involving contracts for difference. There is something to learn from each of these situations.

This is an
extract from our topical tax tips newsletter dated 29 October 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

CGT horror 
Imagine this: your client tells you he has given his daughter a let property to reduce the value of his estate for IHT purposes, and to provide his daughter with a source of income. The solicitor who handled the conveyance said as no money changed hands there was no capital gains tax to pay. 
  
The solicitor’s advice is wrong on two fundamental points. The gift between the father and daughter is taxable, as it doesn’t fall into one of specific exemptions provided by the legislation – such as a transfer between spouses/civil partners (TCGA 1992, s 58). 
  
Where a transaction – including a gift – occurs between connected parties, the transaction is deemed to occur at the open market value of the asset transferred (TCGA 1992, s 17). The father and daughter are connected persons as they are relatives (TCGA 1992, s 286(2)). It makes no difference that the daughter is an adult, she remains connected to her father for the whole of her life. The fact that no money changed hands doesn’t change the deemed consideration for the transaction. 
  
If the property has increased in value while your client has owned it there may well be CGT to pay. The taxable gain is calculated as if he had sold the property to his daughter at its market value. 
  
There are two possible ways to mitigate this gain:…..

The
full newsletter contained the remainder of this piece plus links to related source material for this
story and the
other two topical, timely and commercial tax tips. We’ve been
publishing this newsletter weekly since 2007; it’s clearly written
and focused on precisely what accountants in general practice need to
know about each week.


Buy to let property, ATED returns, CGT on the garden

Land and buildings are a good source of tax revenue as they don’t move and their ownership is usually easy to determine. This week we examine the forthcoming changes to tax deductions for expenses relating to residential properties, a new filing regime for properties subject to the ATED, and a CGT trap when selling part of the garden.

Buy to let property 
Landlords holding residential property are beginning to wake-up to the increased tax charges they will have to pay when the changes to tax deductions, announced in the Summer Budget, come into effect. 
  
The first change is the removal of the wear and tear allowance from April 2016. This will apply to both individual and corporate landlords, and will increase the taxable profits from furnished properties by 10% at a stroke. 
  
Instead of the flat 10% of rents deduction, landlords of all residential properties (furnished and unfurnished) will be permitted to deduct the actual cost of replacing furnishings, free-standing appliances, carpets, curtains and other loose items provided in the property. This will align the tax rules between furnished and unfurnished properties. Note the initial cost of providing the furniture etc, won’t be deductible. 
  
The second major change is the removal of the interest and other finance costs as a tax deductible expense. This will only affect individual landlords, not companies. From 6 April 2017 the amount of interest deductible for tax purposes will be restricted to 75% of the amount paid. This restriction will increase to 50% in 2018/19, and 75% in 2019/20, and from 6 April 2020 100% of the interest will be denied as a deduction.    
  
In place of the interest deduction the landlord will receive tax credit equivalent to 20% of the restricted amount of interest. The following is a simplified example (ignoring other deductible expenses) of how the effect on a landlord who pays tax at 40% in 2016/17 compared to 2020/21.

Table 
  
The effect on individual landlords will vary according to the level of debt the lettings business holds. Your landlord clients will need tailored advice as to the likely impact on their business, and how vulnerable they are to rises in interest rates, which are also on the horizon. 
  
This is an
extract from our tax tips newsletter dated 3 September 2015
(5 days before we publish an extract on this blog). You can obtain future issues by registering here>>>

Last week’s newsletter contained links to related source material for this story and the
other two topical, timely and commercial tax tips. Published weekly since 2007, every week it’s clearly written
and focused on precisely what accountants in general practice need to know about that week.


Small companies, Residential property, Incorporation

The Summer Budget turned out to be a disruptive storm that blew holes through the tax affairs of small companies and individual landlords. In last week’s newsletter we outlined what you need to discuss with clients who own small companies or residential property. We also looked at some issues concerning incorporation. In future newsletters we will study the implications of the Budget for employers, home-owners and non-domiciled individuals.

Residential property

For many years HMRC has viewed the operation of a property letting business just like any other business – where expenses are wholly and exclusively incurred for the business they are deductible – including all finance costs. That approach will change from 6 April 2017.      
As landlords can deduct all the interest they pay from the rental income, thosewho pay income tax at 40% or 45% effectively get tax relief at those rates for their loan interest. The Budget changes are designed to ensure that landlords will only get tax relief for interest paid at 20%.
The change is introduced over four years, such that the percentage of loan interest disallowed in the tax computation will be:
·     2017/18:25%
·     2018/19:50%
·     2019/20:75%
·     2020/21 and subsequent years: 100%    
Up to 20% of the disallowed interest will be deducted from the tax due on the rental income. Where 20% of the interest exceeds the tax charge for the year, the excess will be carried forward to be relieved in a future year, so has the same effect as if 20% of the interest had created a loss for the letting business.      
These changes won’t affect corporate landlords, owners of non-residential property or of properties that qualify as furnished holiday lettings.
A knee-jerk reaction would be to incorporate the lettings business, but that is not straight-forward, as we discuss below. However, individual landlords should review how sustainable their current level of borrowings are. 
The Budget also announced the 10% wear and tear allowance for fully furnished properties will be abolished from 6 April 2016. In its place all landlords will be able to deduct the actual costs of replacing furnishings in the property. This is good news for landlords who let partly-furnished properties, as they will be able to get atax deduction for the cost of replacing carpets, curtains and free-standing white goods.

This is an
extract from our tax tips newsletter dated 16 July 2015. The newsletter
itself contained links to related source material for this story and the
other two topical, timely and commercial tax tips. It’s clearly written
and extremely good value for accountants in general practice. Try it
for free by registering here>>>