10 Pitfalls When You’re claiming CGT PPR

Everyone is aware that one of the most generous reliefs available, at a time when the Government is constantly seeking ways to increase the tax take, is Capital Gains Tax Private Residence Relief (PRR).  All you need to do is live in a property.  You don’t even have to live in it for the whole period of your ownership, and when you come to sell it, subject to a number of conditions, you don’t have to pay capital gains tax on the increase in value from when you bought it.  And this normally applies whether the gain is £100 or £100 million.

Of course, it’s never that easy when dealing with legislation so here are ten pitfalls which we have come across where home owners have received unexpected tax bills

Too Much Land

The legislation gives you a generous half a hectare (1.235 acres) where HMRC will not question the usage of the garden, but if you exceed that, you may need to apportion the cost.  Of course if you live in a (say) 10 bedroom mansion, the legislation gives you some leeway so that they will allow relief for all of it if the land area is appropriate to the size and nature of the property.

Selling the Land After you’ve Sold the Property

A common issue relates to where you want to keep hold of part of a large garden after you’ve sold your home with a view to selling it to a property developer.  There’s no problem with that part, however, you may be in for a nasty shock when you tell your accountant because the land you retain no longer attracts PRR as, at the point you sold it, it was no longer your home.

Partitioning the Land

You’ve owned your home for a number of years and it has a large piece of land around it (the total area owned is three acres so more than the permitted area of 1.235 acres).  Five years ago, you partitioned 1.5 acres of it because you were contemplating selling it but the deal fell through and you’ve just let the land remain fallow with a 6’ fence partitioning it off from the rest of the garden.  A property developer has just offered you a significant sum for the fenced off land – the only problem is, it’s no longer part of your garden nor is it essential for the use and enjoyment of your property.  You may have to pay capital gains tax on the partitioned area sold.

You’re a Serial Property Developer

In recent years, HMRC has made use of some fairly strong case law when dealing with individuals who move into a property, spend 18 months renovating it, sell it then move into another property to do the same thing. Arguably, what they actually have is a trade and there would normally be no right to PRR on the properties sold.  From the case law, the test concerns “quality of occupation” i.e. have you moved in with your family – does your post go there, do you have furniture etc. HMRC’s problem is picking up these serial developers out of all of the people who might otherwise have fairly peripatetic jobs which entail them moving house on a regular basis.

You Moved Out Temporarily and Never Came Back

PRR reliefs are generous and extend to temporary absences from the property – perhaps for a job move overseas, or to go look after a chronically sick family member. If you eventually move back in, the legislation gives you a theoretical period of deemed occupation of up to 15 years.  However, if you fail to move back in, unless you remain in job related accommodation at the point you sell the property, the most you’ll get is three years additional relief.  However, if you’ve let out your property in your absence, there may be some further relief due.

You Own (and occupy) More than One Home

You can only claim relief for one property as your private residence during any particular period in time (married couples can only claim relief on the same property).  Accordingly, if you own two properties, you might want to consider making an election to HMRC to treat one of those properties as your private residence – usually the one where you are expecting to make the largest gains.  If you don’t, HMRC will look at the factual residence and choose one for you.

Divorce

If one spouse moves out and the other remains in the marital home, provided the outgoing spouse does not file a main residence election with HMRC, if the outgoing partner’s share in the property is eventually sold/gifted to the spouse who remained resident, (s)he can claim PRR for the whole period including the period during which (s)he was not in occupation.  However complex divorces can take many years to resolve and the need for both parties to move on to new lives can trump any potential tax consequences of holding on for a settlement.

You Didn’t Move Straight In

You live in rented accommodation but you’ve purchased a renovation project which will take 8 years of your weekends and evenings to complete and which you intend moving into once the Grand Designs Team have finished filming.  Sadly, none of that 8 years will qualify for PRR as the concession only gives you 12 months as of right and an additional 12 months for circumstances where you are prevented from moving in which are beyond your control. NB – this is an all or nothing concession so if you exceed the 24 months, essentially you get no relief for that 8 year period.

Most of The Property Is Used for your Business

You own a four level property, and two levels house your business where six employees attend each day during your period of ownership.  You can’t claim relief on the whole property even though you and your family live on the other two levels.  However, you may be able to claim rollover relief or possibly entrepreneurs relief on the business proportion dependent upon the circumstances.

Inadequate Proof that a Property has been Rented Out

It is possible to get PRR if you leave a property for whatever reason and rent it out.  The relief is limited but, under average circumstances can still be valuable.  However, it remains incumbent on the owner to actually prove that they rented a property out during the period of ownership and, if the period of rental was (say) a decade ago, such proof may be hard to find.  Accordingly, it is important to retain records such as rental agreements to demonstrate that the criteria for the additional relief have been met.

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REPLACEMENTS BASIS FOR RENTAL BUSINESSES

We have various clients who receive rental income from residential lettings.  We have been asked to remind them of the change to the relief for “wear and tear” allowance and the renewals basis for expenditure within their properties, and particularly how these differ for corporate landlords?

With the exception of furnished holiday lettings, capital allowances are not available for the cost of capital items used within a dwelling let out residentially (s.35 CAA 2001).  Prior to 6 April 2016 (1 April 2016 for companies) such taxpayers could only claim relief based on the “wear and tear” allowance at a rate of 10% of gross rents to give a measure of notional relief for the provision and replacement of such expenditure.

From 6 April 2016 the wear and tear relief is replaced by a standard “Replacement Domestic Items relief” (s.311A ITTOIA 2005 for noncorporate taxpayers, with mirror provisions for companies under s.250A CTA 2009). The key points of the new rules are summarised below:

  • Relief is only available on the replacement of an existing item, and not therefore on the initial purchase or the purchase of existing white goods, furnishings etc with a building
  • If there is a sale or part-exchange of an old item, the consideration or discount received is netted-off against the allowable cost of the new item
  • The legislation contains a rule that restricts expenditure on the new item, if not “substantially the same” as the old item being replaced, which would limit the relief to the cost of an equivalent “old” item. This would apply, for example, on replacement of a refrigerator for a significantly larger model needed to cope with an increased number of tenants within a building.

Relief under these rules is not available for furnished holiday lettings, where capital allowances would generally be available (s.311A(7) ITTOIA 2005,   s.250A(7) CTA 2009).

The new rules apply to expenditure incurred on or after 1 April 2016/6 April 2016 for companies and non-company taxpayers respectively, with the “wear and tear” allowance ceasing to be available on that date accordingly.

For companies with an accounting period that straddles 31 March 2016, the period is split into two separate notional periods with profits being split accordingly between the pre and post 31 March periods. This is done by default on a time apportionment basis although a different apportionment may be claimed on a just and reasonable basis. Relief under the new rules then applies to the pre 31 March profits under the old rules, with “wear and tear” available if applicable, and post 31 March replacements basis available for qualifying expenditure incurred after that date –

Example

“Proper T Ltd” has the following results for its furnished residential property business for the year ended 31 December 2016: £
Rental profits (before “wear and tear” or “replacement items” relief) 75,000
Expenditure incurred on qualifying “replacements”:  pre-1 April 2016 £8,000, post 31 March 2016 £12,000
Profit relating to period 1/08/15 – 31/03/16 (243 days) 49,931
Less – Wear and tear relief (10%)  (4,993)
Net taxable profit to 31/03/16 44,938
   
Post 31 March 2016 profits (122 days) 25,069
Less – relief under new “replacements” basis       (12,000)
Net profit from 01/04/16   13,069

Private Residence Relief – Quality of Occupation

Is there a required minimum period of residence in a property so that it may be regarded as the main residence for the purposes of private residence relief?

Firstly we must consider the legislation at Section 222 Taxation of Chargeable Gains Act 1992. The requirement here is that the dwelling-house must have been the only or main residence at some point in the period of ownership. There is no legislative requirement for a minimum period of residence.

The question was tested in the case of Goodwin v Curtis where it was decided that it is the quality of residence and not the period of occupation that would enable a property to qualify. The major dictum arising from this case was that there must be “some assumption of permanence, continuity and some expectation of continuity”

This has been tested further in a recent First Tier Tribunal Case. That of Stephen Bailey (TC 06085) on 31st August 2017.

The property in question had been bought from the appellant’s company in May 2008. He moved in on his own in May 2010 with a view to renovate it and make it a family home (He lived elsewhere with his children and his partner lived partly in this other property and partly in her own.)

Because of personal reasons (the death of a friend who had previously occupied the property) he was unable to cope and sold the property in August 2010. In the course of the case it transpired that there had been two short periods of occupation by Mr Bailey each around two or three months. An earlier period of occupation in 2008 having been terminated due to the financial crash.

HMRC contended that the property was never his main residence and that no relief should be due on the disposal.

The Tribunal differed in that view and ruled that relief was due in relation to the whole of the gain.

It is interesting to note that there was little evidence to support the case and the decision was based on Mr Bailey’s oral evidence as he was found to be “a straightforward witness and his evidence reliable”

Whilst an FTT case cannot be totally relied upon to support a claim, it can be persuasive when considering periods of occupation.

What is important to consider is the quality of the occupation rather than the quantity

VAT – Inadvertently Deregistering with Property on Hand

A frequent question asked on VAT often relates to property. 
Although VAT in relation to property can be complex, the situation can be far worse when a change in circumstances or a transaction has already taken place and the client hasn’t taken advice at the right time or realised the implications.
In this series of short articles, we aim to draw attention to some of the common areas of risk so that hopefully it won’t be you or your client having to deal with the fallout in the future.

 

Sometimes a business will transfer its trade as a going concern and transfer the VAT registration number to the new entity thinking it will keep things simple, but this can be a mistake if the old entity wishes to retain land or property.

Take for example the case of a sole trader who bought a property four years ago for £300,000+VAT and claimed the input tax as it occupied the property in its fully taxable business. The building falls within the capital goods scheme (CGS) as the threshold for the scheme is £250,000+VAT.  Under the CGS the use of the building needs to be monitored over a ten-year term.  If the business incorporates and the new company takes on the VAT number the sole trader is left deregistered with a CGS asset on hand.  As the sole trader has not opted to tax the building, there is an exempt deemed supply of the asset on deregistration and a single CGS adjustment would be required to reflect the deemed exempt use over the remainder of the ten year CGS term. In simple terms, this means repaying a proportion of the VAT figure initially recovered.

To avoid this problem, we would advise that the company takes a new VAT number when it registers and that the sole trader remains registered under the existing number, opts to tax the property, and charges rent + VAT to the company.

Or consider a trading company that bought investment properties to let out. One property was acquired with tenants in situ from a seller who had opted to tax, so the company has also opted to tax to meet the TOGC conditions.  Another property it bought freehold when it was two years old, so opted to tax to recover the VAT chargeable on the building because it was ‘new’.

The company then sells its trade but decides to keep the properties; the rent is below the VAT threshold so it deregisters.

Here we have an opted building on which input tax was claimed on the purchase, and an opted building acquired as a TOGC.  In both cases, output tax is due on the value of the properties at the time of deregistration.

This would be avoided by remaining VAT registered; the administration involved in continuing to charge VAT and submit VAT returns would be a small price to pay to avoid having to account for output tax on the value of the buildings

NEW COMPANY LOSS RULES TO GO AHEAD

The Finance Bill due to be debated in early September will finally include the new rules for the set off of company losses that were originally announced in March 2016.

As a result of the first Finance Act being rushed through due to the snap General Election the legislation to introduce the new company loss relief rules were dropped. This led to considerable uncertainty as to the start date of the new rules but it has now been confirmed that the new rules will apply from 1 April 2017 after all.

So if your company diversifies into a new business activity the losses of one activity incurred after 1 April 2017 can be carried forward and set off against future profits of the new business. Previously such losses would have been ring fenced against future profits of the activity that incurred the losses.

There are new restrictions for companies and groups with profits in excess of £5 million and also changes to the set off of losses within a group.

We can of course assist you in ensuring that relief for losses is obtained in the most beneficial way.

REPORTING EXPENSES AND BENEFITS PROVIDED TO EMPLOYEES

HMRC have recently updated their toolkit dealing with the reporting of expenses and benefits provided to employees and directors in the light of significant recent changes in this area.

HMRC toolkits are designed to help minimise the risk of errors in returns and computations and their use, although voluntary, will be taken into consideration in determining whether or not reasonable care has been taken in the completion of a return such as a form P11d reporting expenses and benefits.

Reminder: It is no longer necessary to obtain a reporting dispensation from HMRC for certain reimbursed expenses such as travelling and subsistence. But it is still important for the employer to keep records to demonstrate that such expenses have been reviewed to ensure that they have been incurred wholly, exclusively and necessarily in the performance of the employee’s duties. The toolkit reminds us to keep a record of the date and details of the expenses and benefits provided with associated documentation and also a record of any contributions made by a director or employee towards the cost of expenses and benefits provided to them. This recording also includes the new exemption for the provision of trivial benefits to employees.