REPAIRS TO NEWLY ACQUIRED LET PROPERTY

A client has acquired a buy-to-let property and will be carrying out some repairs before taking on tenants. Will the repair costs qualify for a tax deduction?

This is a fairly common question which is often fraught with difficulty. The answer very much depends upon the facts. The discussion which follows relates to genuine repair and maintenance costs and not to works which result in a significant improvement over the asset’s original condition. The cost of such works will invariably be treated as capital.

It is generally accepted that the cost of routine repairs and maintenance, for example redecorating, carried out after a property acquisition is a revenue cost. Similarly, work to repair or reinstate a worn or dilapidated asset is usually deductible as a revenue expense and HMRC accept that carrying out repairs shortly after acquisition does not necessarily point to a capital expense. However, they also point out that if buying a property in good condition is capital then the combined cost of buying a dilapidated property and putting it into good condition must also be capital. So, in their view, the cost of repairs carried out after buying a property which was not in a fit state to let until the repairs had been carried out is a capital cost and even more so if the price paid for the property clearly reflected its dilapidated state.

This can perhaps be contrasted with the situation where the property is capable of being used in its current state but the new owner wishes to carry out some repair and maintenance work to appeal to a particular class of tenant, in which case the expenditure is, arguably, revenue in nature and deductible.

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A reminder about ‘TRIVIAL BENEFITS’

I have read that it is now possible to pay staff tax-free using small value benefits in kind. Is this correct?

The “Trivial Benefits” rules have been introduced for the tax year 2016-17 and onwards. In general terms, no income tax charge arises on a benefit provided to an employee (or member of an employee’s family or household) if four conditions are met:

  • The benefit is not cash or a cash voucher
  • The cost of providing the benefit does not exceed £50
  • The benefit is not provided as a result of a salary sacrifice arrangement
  • The benefit is not provided in recognition of services provided by the employee or in anticipation of such services.

There is an additional rule for directors and their families which imposes a £300 annual limit. This £300 limit might lead one to suppose that non-directors will be able to enjoy tax-free a series of small benefits totaling at least £300 in a tax year and possibly even more. This is a situation where the fourth of the conditions listed above needs careful consideration. HMRC have in the past in certain circumstances taken the view that where some form of non-contractual award is made to employees so regularly that employees develop an expectation of receiving such rewards then the rewards become, in effect, contractual payments for services rendered and are therefore taxable. It will be interesting to see how this particular area of tax law develops.

Employers may also wish to consider potential employment law implications.

VARIATION OF A SURVIVOR’S JOINT INTEREST

Following a deed of variation entered into by the beneficiaries of a will or intestacy the resultant dispositions of assets are deemed to be those of the deceased, but what happens if a surviving joint tenant joins in the variation and gives up his or her share in the relevant asset?

The relevant legislation refers to “dispositions whether effected by will, under the law relating to intestacy or otherwise”. HM Revenue & Customs take the view that the words “or otherwise” have the effect of including in the variation rules the automatic inheritance of a deceased owner’s interest in a jointly held asset. It therefore follows that a variation by the surviving joint owner is not a transfer of value for inheritance tax purposes. Similar rules apply for capital gains tax purposes.

 

MARGINAL RATES OF TAX

At a recent discussion at a pub, my friend told me they are paying 60% tax.  I didn’t believe him and decided to look it up. None of the tax tables refer to a 60% rate. Can you please explain?

The 60% rate is an effective rate rather than an actual rate. Let us suppose you are a company director considering the possibility of taking a bonus. Assuming they have no other income, if his total pay is currently £100,000 he has taxable income of £88,500 after deducting the personal allowance of £11,500. The personal allowance is reduced by £1 for every £2 of income above the income limit of £100,000.  So if he takes a bonus of £23,000 the personal allowance is reduced to zero and his taxable income is £123,000.

PLANNING WITH JOINTLY HELD PROPERTY

A client owns an investment property and pays higher rate tax on the rental income but her husband has some unused personal allowance and fully available basic rate band. It would make sense for him to have some of the income but she wants to leave the property on her death to her children from her first marriage. Is there anything she can do?

With some exceptions, there is a general presumption that spouses and civil partners who jointly own property own it, and the income which flows from it, on a 50:50 basis. This is why couples who wish to share and be taxed on income otherwise than on a 50:50 basis have to effect a change to the beneficial ownership of the asset and then make a declaration to HMRC using Form 17.

This 50:50 rule can work to the client’s advantage. If she transfers the investment property into joint ownership with her husband so that she retains beneficial ownership of 99% of the property and her husband has 1% then, in the absence of a Form 17 declaration, they will be taxed on the income on a 50:50 basis but she is still in a position to pass on 99% of the value of the property to her children.

HIGHER RATES FOR SDLT ADDITIONAL PROPERTIES

My girlfriend and I are about to buy our first home together and I am concerned that we may have to pay the higher rates for stamp duty. My girlfriend will sell her flat but I’ll keep my buy to let which I will continue to let. Will we have to pay the higher rates on the half that I am purchasing or on the whole property?

The higher rates will apply to the total price paid for the property. The reason for this is that you will own an interest in an additional residential property and there are special rules for joint purchasers.

For joint purchasers, the higher rates will apply if either purchaser already owns another residential property and they are not replacing their main residence. In the case of joint owners, we look at each joint buyer separately and ask whether the 3% surcharge would apply to a purchase by that person. If the 3% would apply to either party, then the 3% surcharge applies to the whole of the transaction.

Qualifying loan interest

A client took out finance to buy into a partnership. The interest on this loan is qualifying loan interest and therefore tax deductible. The partnership has now been incorporated into a Limited company. How does this effect the loan interest?

Tax relief is available for interest on loans where the borrowed money is used for reasons including acquiring an interest in a trading or professional partnership, including a Limited Liability Partnership and to buy ordinary shares in a close company in which you own any part of the share capital. Meaning both situations separately fall under qualifying loan interest. But how about the original finance when the partnership incorporates?

ITA07/S410 ensures continuity of relief where a partnership is incorporated into a close company, an employee-controlled company or co-operative. Under ITA07/S410 the original loan is treated as if it were made at the time of the succession or reorganisation. This rule ensures the original loan continues to be qualifying loan interest and tax deductible now the partnership has been incorporated into a Limited company.