Business Rates
Business rates became due on most vacant business property from 1 April 2008 when previously such properties were exempt from rates. In last year’s Pre Budget report the Chancellor announced an exemption from business rates for empty properties which had a rateable value of less than £15,000, but only for the 2009/10 financial year.This exemption is now to be extended for the year to 31 March 2011, and boosted to include empty properties with a rateable value of less than £18,000.

Stamp Duty
A stamp duty ‘holiday’ was announced for residential property in September 2008, which effectively raised the lower threshold property values where SDLT is imposed at 1%, from £125,000 to £175,000. The lower threshold (£125,000) will apply once again from 1 January 2010. Where the residential property is located in a disadvantaged area the threshold from which the 1% rate of SDLT is imposed is £150,000.

SDLT is normally imposed at the completion date for the property sale, not the date on which contracts are exchanged. If the buyer takes possession of the property before the completion date, SDLT is charged on that earlier date. To take advantage of the zero rate of SDLT on a property costing no more than £175,000 you need to complete or take possession of the property before 1 January 2010.

CGT on Homes
There is a relaxation of the rules on principle private residence relief where part of the home is occupied exclusively by an adult in care, and the owner of the property is paid to care for that adult. In such cases the whole of the property will qualify for exemption from capital gains tax.

Furnished Holiday Letting

Tax concessions for the commercial letting of furnished holiday lets will be removed with effect from 6 April 2010 for unincorporated businesses and from 1 April 2010 for companies. Hoteliers and bed and breakfast proprietors are not affected by these changes.

the impact is:-
- Losses - future profits and losses from furnished holiday lettings will be treated as income from a property business, and thus relief for losses will be available only against the property lettings business. Any current losses from the furnished holiday lettings, which have not been used before April 2010, will be carried forward to be set against the future property lettings business.
- Pensionable income – from 6 April 2010 income from a furnished holiday lettings business will not count as pensionable income, which may reduce the amount of pension contributions available for tax relief in any tax year.
- CGT – the capital gains relief associated with disposing of a property used in a commercial furnished holiday letting business will cease to apply for disposals made after 5 April 2010. Consider a disposal to a trust or family member before this date.

- IHT - the business property relief exemption on property will cease to apply from 5 April 2010

Owners of FHL property are currently treated as traders and the income, losses and gains on sale are potentially available for a number of tax advantages compared to non-FHL property owners. These advantages include:

• Profits are deemed to be trading income and are taken into account for pension purposes
• Certain capital expenditure will qualify for the Annual Investment Allowance. (100% tax deduction)
• Losses are deemed to be trading losses and available to set off against any other income of the owner(s).
• Gains on sale may qualify for rollover relief and entrepreneurs’ relief.

For 2009-10 and certain earlier years, property owned in the EEA (European Economic Area) was included as FHL property as long as the usual qualifying conditions were met. This was announced in the 2009 Budget.

It is also worth mentioning that FHL is not treated as trading for all tax purposes. For example, there is no special treatment for business property relief for inheritance tax purposes. Generally speaking FHL will not qualify for business property relief unless part of an enterprise incorporating other facilities.

What to do?

If you are contemplating the sale of FHL property it may make sense to complete the transaction before the present capital gains tax concessions expire on the 5 April 2010. Potentially the gain on the sale may qualify for Entrepreneurs’ Relief. This could reduce your tax on any gain to just 10%, as long as the sale meets the required criteria.

If you are a long term investor and have no intention of selling, you could consider bringing forward any capital expenditure that may qualify as part of your Annual Investment Allowance. For 2009-10 you are allowed to claim a 100% deduction for expenditure up to £50,000. If this claim either created or enhanced an overall loss, you could set off the loss against your other earnings and reduce your liability for 2009-10. (You may also be able to carry losses back if this is more advantageous.)

Planning pointer.

If you own FHL property, now would be a good time to take a hard look at the tax planning advantages that are still in date. As soon as we cross the 5 April 2010 threshold all the present options are lost! Please call if you would like more information on this topic.

Every business with property should during October 2009 have received their new business rates valuation. This valuation will form the basis of business rates for the next five years.

It is very important to check the detail of the new valuation to make sure that the rateable value applied to your property is correct. The rateable value is determined by a number of factors primarily the open market rental value on the valuation date. The valuation date for the 2010 changes is 1 April 2008. We are aware of cases where business rates have been reduced, following appeals on the basis that rental values have fallen.

Appeals against the new valuations should be submitted before the 30 November 2009. If you want to appeal your business rates, please feel free to phone for advice.

Business clients should also be aware that there are a number of specific reliefs that you may be able to claim to reduce your business rates – these include small business rate relief (England and Wales) and transitional relief. This isnt given automatically, so you must complete the form and claim it.

If you would like our assistance checking the valuation please call. The Valuation Office Agency (VOA) website can be accessed at www.2010.voa.gov.uk/rli/en/basic and has a number of useful FAQ sections.

We all know the property market has been through terrible times lately. Some businesses, set up in the good times to invest in let property for the long term, have been forced to sell some property to generate  funds to cover ongoing costs.

Where a property investment business starts to develop properties for sale, rather than keeping them for long term letting, the business has started a trade of property development.

So a property, previously held as an investment, is transferred to “stock” , meaning it is now stock being made ready to be sold, then that property must be treated as if it had been sold at its open market value at that point.

This can create a capital gains tax charge, or a capital loss, before the property has actually been sold.

To avoid this problem the business owners can make an election to treat the value of the property when it enters stock, as the value when it was acquired by the business. Any gain or loss will then only arise when the property is eventually sold by the business. This election must be sent to the tax office within two years of the end of the accounts year for a company, or by the first anniversary of 31 January following the tax year end for an unincorporated business.

Besides the timing issue, the advantage of making this election is that the loss, if one arises, becomes a trading loss made on the sale of stock by the business rather than a capital loss. Generally a trading loss can be set-off against a wider range of income than a capital loss. However, to use this trading loss the Taxman will have to be convinced that the property business has actually started a trade of property development, and is not simply selling off its surplus investments.

This can be a very difficult area and full advice is essential so please contact us for advice in your own circumstances.

We have all seen and heard comments in  the  media  about  MPs “flipping” their properties in order to avoid capital gains tax on selling their  second  homes.

You might be wondering what does this mean? And is this a game  anyone  with  more  than  one “residence”  can  play? …read on

The hysteria has surrounded the facts that

• MP’s have been able to purchase a second property with a mortgage of up to £300,000 funded by the taxpayer, then ‘flip’ to avoid or minimise the capital gains tax payable.
• Some MP’s have nominated one property as their second home for House of Commons expenses purposes, and a different home as the second home for CGT purposes.

Lets start with some basic rules

• You are exempt from CGT on a gain from selling your  ”main  residence”,  and you  can  only  have  one  main  residence  at  the same time.

• If you are married or in a civil partnership, you can only have one main residencebetween the two of you.

• The one  exception  to  this  rule  is when a property has been your main residence at any time during your ownership of it, in which case exemption extends to the last 36 months before you sell it, even if in fact you have another main residence during that period.

The purpose of this exception is to make some allowance for the fact that you may need to buy a new home before you manage to sell the old one. Certainly a consideration in todays marketplace.

When you have more than one “residence”, the law allows you to nominate which one is to be treated as your “main residence” for tax purposes and so enjoy the exemption from CGT. You must do this within two years of having a choice, ie more than one residence.

Once you have made this nomination, by writing to the tax office that deals with your tax affairs, you can subsequently vary that nomination at any time in the future, and the variation can be backdated by up to two years. In the case of a married couple or civil partnership, both must sign the nomination and any subsequent variation.

For example:

Ian buys a holiday home in North Wales in December 2006. In January 2007  he writes to his tax office to make an election that his home in Stockport should be his ‘main residence’. In July 2009 he decides to sell the holiday home.

He writes to the tax office in July 2009 ‘varying’ the election making the North Wales property his main residence. Two months later, he writes again making the property in Stockport again the main residence. Because   the   North Wales property was   properly   nominated   as   his  “main residence” for a period (July and August 2009), the last 36 months of the gain are exempt from CGT.

The house in Stockport has a period of two months when it was not the ‘main residence’ and the eventual gain on the sale of this property will need to be time apportioned and the two month period will not be exempt. However, the chances are that the gain for such a short period would be covered by the annual exemption from capital gains tax, which most people rarely use.

It is important to make the election in the first instance, when two homes are available. If the election is not made, then there is no opportunity to vary it. If you have failed to make the election within the time limit, please do speak to us about the situation,  we can advise on the options available.

The EU seems to have caused a problem for the Chancellor. As a direct result of EU rulings the UK has been compelled to extend the various tax advantages of ‘Furnished Holiday Lettings’ status to properties located within the European Economic Area (EEA) – as long as they meet the required qualifying criteria.

Clearly the UK Treasury were very unhappy with this, and in his April 2009 budget the Chancellor announced that the entire Furnished Holiday Lettings tax legislation is to be repealed and withdrawn with effect from 6 April 2010.

What difference will this make?

Obviously if you presently rent out accommodation as a qualifying holiday let in the UK it will make a big difference.

From the 6 April 2010 FHL property income will revert to being taxed as non-FHL property income. In a nut shell the downside tax effects after 5 April 2010 are:

• you can no longer set of FHL losses against other income

• you can no longer claim capital allowances for the purchases of furniture and equipment, and

• you will lose significant capital gains tax reliefs including roll-over and entrepreneurs’ relief if you dispose of FHL properties after 5 April 2010.

• you will lose the ‘Business Property Relief’ on FHL property, which means the property value will become chargeable to inheritance tax.
  

What are the opportunities?

As always change can have positive effects. We have listed a two below:

• if you own a let property in the EEA, that would have qualified as a FHL property under the present rules, it may be possible to back date changes to your tax returns for 2007 and 2008. This would include set off of surplus FHL losses against other income.

• if you have sold a property in the EEA that would have qualified for more favourable capital gains tax treatment, computations can be revised for the years ending 5 April 2007 and 5 April 2008.

What’s next?

If you feel that you may be affected by these changes we should meet and discuss as soon as possible. The most immediate deadline is to apply for a late change to your 2007 self assessment tax return if it needs to be changed; this has to be done by 31 July 2009. (If you have operated your FHL trade through a company, amendments to tax computations for accounting periods ending after 31 December 2006 have to be submitted by the same date, 31 July 2009.)

Sterling has depreciated considerably against the Euro in the last year. Whilst this is of great interest to other Euro zone residents, who can buy property in the UK at much lower Euro cost, the opposite applies to UK residents who have purchased property elsewhere in the Euro zone.

For instance a property in Spain costing 1.5m Euros purchased early 2007 would have required an investment of £1m sterling.

A similar property may currently be worth 1.1m Euros. This is a loss on your investment of 400,000 Euros. Common sense might argue that if you disposed of the property now, you would merely multiply the loss by the exchange rate prevailing when the sale completed? Unfortunately this is not the case!

Capital gains tax legislation dictates that you compare the sterling value of the purchase at the date of purchase, with the sterling value of the disposal at the date of disposal. In our example a property disposal today of 1.1m Euros converts to say £1.1m sterling.

Despite the property dropping dramatically in price – you have made a taxable gain of almost £100,000.

Fine you may say but what if you want to reinvest the proceeds in another property in the Euro zone? The sterling gain of £100,000 will cost you possibly £18,000 in UK taxes; that’s £18,000 less to invest!

So be wary. A loss on sale in a local currency can produce unwelcome tax liabilities when converted to sterling.

There is no tax relief on purchasing your own home. Where possible, business owners should try to structure their affairs so that the business has borrowings and minimise the mortgage for the home.

The mortgage is a major outgoing for most people, and both interest and capital repayments have to be funded out of our taxed income.

For example, you would need a salary of over £1,000 per month as a 20% tax payer, or more than £1,300 per month as a higher rate tax payer, to pay £800 per month of mortgage interest.

With recession starting to bite and taking into account the difficult property market, one solution might be letting either part or all of our homes. This article sets out a number of the tax considerations

Rent-a-room relief

Rent a room relief can be claimed if you let out a room in your home. The following rules should be considered.

1. If you don’t make such an election you will be taxed on the difference between the rents you charge and directly attributable costs (such as a proportion of gas, electricity, water and general rates, repairs and of course mortgage interest).

2. If you do make such an election you will be taxed on the difference between the total rents you receive and £4,250. Expenses are ignored.

Where the property is jointly owned the £4,250 will be shared between the partners, as will the rents.

In most cases it will be necessary to work out the tax charge using both methods to see which is more beneficial.

Where the rents received from letting a room are less than £4,250 per annum (£354.17 per month) the income is entirely tax free!

Letting your home.

If you decide to move from your home and let the whole property the following points should be considered.

- You will be taxed on the rents received less attributable costs. Costs will include mortgage interest paid.

- As the property has been your principal private residence any gain that you make on subsequently selling the property will be tax free until you move out plus the last three years of ownership. Consequently if you do not let for more than three years there will be no capital gains tax to pay.

- If you let for more than three years you can also make a claim for lettings relief which is currently worth £40,000. Also, the relief is available to both owners if property is jointly owned including married couples or civil partners.

You should also be mindful in both these situations that letting or part letting of the property may be prohibited by your mortgage lender.

Restriction of PPR

If part of your home is let it will not affect your exemption from capital gains tax, providing the ‘rent a room’ scheme applies.

HMRC publication IR87 page 9 states:

“The private residence relief is not affected if you have a lodger who is treated as a member of your family, sharing the living rooms and eating with you, even if he or she has a separate bedroom.”

Leaflet IR87 was withdrawn on 23/92005, but has been included in HMRC’s Capital Gains Manual at #64702.

http://www.hmrc.gov.uk/manuals/cg4manual/cg64702.htm

HMRC consider the number of lodgers (at any one time) to be a critical factor, they consider there should be only one lodger. However this view is debateable.

If the rent a room scheme does not apply, it is important to measure the area of the let rooms and any other space for the exclusive use of lodgers (eg do they have there own bathroom?) and compare this to the rest of the house including any shared areas. All private areas and common areas are not in the rented area.

Many entrepreneurs have purchased commercial property that has been fully or partly occupied at various times by their business, and rent may have been charged for the use of the property; either the property owner has been paid rent by his business, or by other third parties.

The way in which the new capital gains tax rules apply to the disposal of these properties changed on 6 April 2008.

Under the new rules, all taxable capital gains are now subject to a flat 18% tax chargem with one important exception. If a disposal qualifies as the sale of a business asset you may be able to claim entrepreneurs’ relief. In which case, the first £1m of qualifying lifetime disposals are subject to tax at the reduced rate of 10%. Generally speaking the disposal of a business property should qualify for entrepreneurs’ relief as long as it is sold in conjunction with the sale or cessation of the business, or within 3 years of that date.

Obviously, if you have purchased a property for the purposes of running your business you may feel that this relief will be available to you when you sell the property. Unfortunately the position of certain property owners, particularly those who have charged rent to their business, may not be so straightforward.

The issues that affect the availability of entrepreneurs’ relief when commercial property has been rented to a business, are complex and if you have commercial property please feel free to speak to us for more details. However, we have highlighted below the fundamental difference between a disposal by a sole trader and a disposal by a partner or company shareholder.

1. Sole traders are treated differently to partners and owners of limited companies.

If you are a sole trader there would be no commercial or tax purpose in charging your business rent for the use of your property – both property and business are in your name. There could be circumstances where part of the property has been let to a third party. However as long as part of the property is in use by the owner’s business when the property is sold, a claim to entrepreneurs’ relief should be effective; at least to some extent.
2. Partnerships and limited companies.

If a partner or shareholder has purchased a property and made this available to the business for a rental payment, the CGT position on disposal is more complex. If rent has been charged by the owner to the partnership or company, a claim for entrepreneurs’ relief on sale may be precluded.

A final point. Relevant legislation has not yet completed its passage through Parliament. The Treasury are aware that a sale of a business property prior to 6 April 2008, that would have qualified for taper relief, may not now qualify for entrepreneurs’ relief; purely due to the rental payments issue. There is therefore a possibility that there may be some relaxation of the rules in any amended legislation.

If you are contemplating a sale of this type of property please contact us before completing the sale in order that we can help you organise contracts in the most tax efficient way.