Myths about letting, Reclaiming overseas VAT and Simple Assessments

The summer is a popular time to move house, and in the current market property owners may decide to let rather than sell their former home. We explore some of the myths about letting property. We also have a reminder about the deadline for reclaiming overseas VAT, which is less than two months away. Finally, there is some news concerning Simple Assessments which are about to be issued by HMRC.

Below is just an extract from last week’s tax tips email. To receive the full email when it is published each Thursday, simply follow the link on the right (or below, if you’re reading this on a mobile device)

Myths about letting

HMRC has released some examples of common errors made by property owners when they let out their property. Many of these people do not consider themselves landlords as they did not set out to make a profit from their property. Your clients could fall into any one of these situations:

Posted abroad

People serving in the armed forces, or who work for multinational companies, may be required to relocate to another country for significant periods. Where their UK home is let out the rent should have tax deducted by the letting agent, or tenant, under the non-resident landlord scheme, unless the landlord has been granted gross payment status under that scheme. The landlord also needs to declare the rental income on their UK tax return.

Pub tenants

Pub landlords who live above their pub may let out their former home. Even if the rent income only covers the mortgage payments on the property, the whole amount of income and expenses must be declared on the owner’s tax return.

Student house

Parents may buy a property for their offspring to live in while at university. Where the property is also let to other students, who pay rent to the parents, that income must be declared on the parents’ tax returns. As the property is not the main home of the parents the rental income does not fall under the £7500pa rent-a-room relief exemption.

Care home

An individual partly funds the cost of their room in a residential care home by letting their former home. Although all the rental receipts are used to pay for the care home fees, the rent must be declared on the recipient’s tax return, and tax will be payable on the profits.


A property is inherited by siblings, and one of those individuals organises for it to be let out. The rent received belongs to all the siblings in proportion to their beneficial interests in the property, and should be reported on their tax returns as such. It is possible for the siblings to change the ratio in which the rental income is divided between them, if a declaration is made.

Under declarations

If the property owner has not declared their rental income correctly they can make a full disclosure using the let property campaign disclosure service. Where the under declaration applies only to the last tax return, that return can be amended within one year of the filing date. Our tax investigation experts can advise on the best course of action.

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.

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
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