Agenda - 2020 Innovation

• Taxation of buy-to-let businesses

• Own property in Ltd company now?

• Furnished Holiday Lettings

• CGT Principal private residence relief - 2020 changes

• New CGT payments on account

• IHT and the family home

• SDLT, particularly second homes

Agenda

Taxation of Buy to Let

Businesses

• Restriction phased in over 4 years from 2017/18:

• 2017/18 - the deduction from property income restricted

to 75% of finance costs, 25% available as BR reduction

• 2018/19 - 50% finance costs deduction and 50% as BR

tax reduction

• 2019/20 - 25% finance costs deduction and 75% as BR

tax reduction

• From 2020/21 - all financing costs given as BR tax

reduction

• Not if Furnished Holiday Lettings

Mortgage interest relief restriction

• Barry, a higher rate taxpayer, pays interest on his Buy

to Let Mortgage of £6,000 a year

• In 2019/20 he received gross rents £9,000 and incurred

£3,400 of allowable expenses.

• Only 25% of the interest is allowable = £4,500

• Net rental profit = £4,100

• 75% interest = £4,500

• Tax reducer = £820 (£4,100 x 20%)

• Tax payable = £820 (£4,100 x 40% - £820)

• Carry forward excess interest relief £400

Mortgage interest relief example

• Colin, a higher rate taxpayer pays interest on his Buy to

Let Mortgages of £40,000 a year = £16,000 tax relief

• 2017/18 - £30,000 allowed as deduction from rent,

£10,000 given as BR tax reduction = £14,000 tax relief





• 2020/21 onwards - no rental deduction £40,000 given

as BR tax reduction = £8,000 tax relief

Mortgage interest relief example 2

• Colin has gross rental income £60,000, Less:

• Agents commission of £6,000, repairs etc. £8,000

• Interest £40,000 = Net rental profits £6,000 (16/17)

• Other Income say £30,000, rents taxed @ 20%

• From 2020/21 if figures stay the same:

• Rental profit = £46,000

• Other income £30,000 = £76,000 total income

• Some of rent taxed @ 40%!

• Tax reducer = £8,000

Mortgage interest relief example 2

• HMRC guidance updated October 2016

• Sneaky change in policy?

• If you increase your mortgage loan on your buy-to-let

property you may be able to treat interest on the additional

loan as a revenue expense, as long as the additional loan

is wholly and exclusively for the purposes of the letting

business

• Interest on any additional borrowing above the capital value

of the property when it was brought into your letting

business isn’t tax deductible

Buy to let interest – Remortgages

• Flat in London worth £375,000

• Mortgage £80,000 = £295,000 starting capital

• Remortgage up to £205,000 = £125,000

• Rent out while abroad

• Use £125,000 to buy flat in Holland

• Interest on £205,000 allowed

Remortgage example – BIM 45700

• 10% Wear and tear allowance withdrawn 6 April 2016

• “Rent a room” relief increased to £7,500 6 April 2016

(proposal to restrict dropped)

• Renewals basis applies to replacement of furnishings in

dwelling houses from 6 April 2016

• But renewals basis for replacing or altering tools within

trading businesses withdrawn

Finance Act 2016 – Major property

tax changes

• Relief restricted if there is improvement

• Landlord replaces broken washing machine

• With new washer/dryer cost £600

• Equivalent washing machine costs £400

• Relief limited to £400

• New flat screen TV? – modern day equivalent?

Renewals basis back for property

rentals

• Most responses supported move to cash basis

• Landlords will pay tax on rent received rather than rent due

= When received by letting agent

• Same £150,000 turnover threshold – cash basis to be

default – must opt out to use accruals

• Joint owners – separate decisions about cash basis

• But H&W must use same basis

• Transition – ensure rent and expenses not double counted

Making Tax Digital: Simplifying tax

for property businesses

Tax Planning for Buy to Let

Landlords

• From 6 April 2017 buy to let interest restricted

• Companies will still receive interest relief against rental

and other profits

• Income and gains taxed at 19%

• Indexation available against gains (up to Dec 2017)

• Double taxation – taxed again when extract profit

• £5,000 dividend allowance – now £2,000

• Long term?

• No CGT or IHT relief on shares

Run Rental Business through a

company?

• Factors to consider:

• Attitude of bank – loan to value, interest rate?

• CGT – transfer at MV = capital gains

• Holdover gains under s162 TCGA 1992?

• All of assets transferred in exchange for shares

• Must be a business

• SDLT – based on value of consideration

• Relief if partnership/LLP to Ltd Company?

• If mirror % ownership

Incorporating a Rental Business

• EM Ramsey v HMRC UKUTT

• S162 TCGA holdover applies on transfer of a business

• Gains held over into base cost of new shares issued

• Property rental business transferred – 10 flats

• FTT agreed with HMRC that not operated as a

business!

• 20 hours a week arranging maintenance, collecting

rent, cleaning between lets

• Wrong decision? – Overturned at UTT

• Now accepted by HMRC CG65715

s162 incorporation relief – is it a business?

• S260 TCGA – hold over gain where there is IHT charge

e.g. transfer into and out of trust

• Simple planning technique

• Dad wants to give daughter £300K investment property.

Base cost £60K

• CG = major deterrent

• Gain = £240,000 x 28% CGT = £67,200

Passing on a Buy to Let using a trust


• Dad transfers property into trust = if immediately

chargeable = CG holdover (s260 TCGA)

• IHT charge? – likely to be within nil rate band (£325K)

• Property into trust for daughter without tax charge

• No CGT, no IHT

Passing on a Buy to Let property


• Property in trust

• If trust is felt to be inappropriate…

• Wait at least 3 months…

• …. Or if property looks like going over NRB if trust suits

for longer

• Appoint out property to daughter

• Holdover under s260 TCGA on way out – No CGT

• If gifted directly no holdover = CGT for Dad

Passing on a Buy to Let Property

1.11.19 1.11.20 1.11.23

BUY EIS SHARES

SELL ASSET

Deferral using EIS – 4 year window

36M12M

DEFER GAIN

• Mr and Mrs McIlroy sell property in November 2020 for

£300,000 making a capital gain of £50,000 each

• Reinvest their £50,000 gains in EIS shares Jan 2021.

• The £50,000 gain would be deferred until the EIS

shares are sold and the £14,000 CGT not payable

• If unconnected deduct £15,000 (30%) from IT liability

• Sell £12,000 worth of EIS shares February 2024, 25….

• The gains on the EIS shares exempt from CGT

• The £12,000 deferred gain comes back into charge –

within CGT annual exemption – to continue?

Property investor – defer/eliminate gains?

Airbnb notify HMRC of rentals

• Airbnb will share data with HMRC about the earnings of

hosts (those who let out property) on its UK platform in

the years 2017/18 and 2018/19.

• HMRC likely to open enquiries into those that have not

reported

• Discovery assessments re earlier years?

• Many will be covered by Rent a Room relief £7,500

• Not if second property

Rent a Room - £7,500 p.a. tax free

• Room(s) let must be part of main residence of the

taxpayer

• Must be residential use, furnished, not an office

• Not available if living abroad

• Proposal to limit to situations where taxpayer not

present when let out dropped => CGT letting relief

• So house rented out for Wimbledon fortnight still OK

Correcting Earlier Years

• 2018/19 – amend return by 31 January 2021

• Let Property Campaign

tell HMRC that you want to use the Let Property Campaign

(Notify)

tell HMRC about all income, gains, tax and duties not previously

told them about (Disclose) – in addition to rental income

make a formal offer

pay what you owe

help HMRC if they ask you for more information

• Overseas property => Worldwide Disclosure Facility

Furnished Holiday Lettings

• Much stricter conditions

• Available 210 days (30 weeks) from 2012

• Actually let 105 days (15 weeks) from 2012

• Day averaging elections to apply separately for UK and

EEA businesses

• May elect for FHL treatment to continue for 2 years after

fail to qualify

• Sideways loss relief ended 5 April 2011

Furnished Holiday Lettings changes

• If lose FHL treatment then lose tax breaks:

• Capital allowances on furniture

• CGT reliefs – ER in particular

• Earnings for pension purposes

• New mortgage interest relief restriction doesn’t apply

• Special treatment continues for 2 further years if

elect

Furnished Holiday Lettings

• Consider selling if unlikely to meet FHL conditions?

• NB – ER applies for disposals < 3 years of cessation of

FHL business

• Claim Capital allowances on furniture while you still can

• AIA £1 million – reverts to £200,000 1.1.2021?

• If fail FHL conditions continue to get WDA on balance in

pool => 18%

• From 6 April 2016 renewals basis applies if fail FHL

conditions

Furnished Holiday Lettings – Planning

• Company with £500,000 cash on deposit

• Very few other assets

• ? Is it a trading company for CGT ER now BADR?

• Possible solution:

• Buy furnished holiday lets and trade for 24 months

• Does this work?

Furnished Holiday Lettings –

Planning

IHT BPR for holiday cottage business?

• Depends what services are provided

• HMRC guidance is that the provision of the following

does not constitute trading:

• Arranging new tenancies, advertising, taking bookings

• Rent collection

• The provision of hot water and heating

• Cleaning of stairs and passages in multi-unit premises

• Arranging for repairs to the property

• But normal if running a property business

Furnished Holiday Lettings –

Is it a trade?

• Executors of Mrs Marjorie Ross

• R owned 2/3 of holiday letting business worth £1.5m

• Cottages in Cornwall used by visitors and staff at Port

Gaverne hotel (formerly also owned)

• Also house in Weymouth

• Extensive services provided in addition to hire of

cottages

• Furnished holiday lets for IT and CGT

• But not BPR for IHT = business mainly of making or

holding of investments

No BPR for holiday cottage business

• Services included:

• Laundry facilities on site

• Free wi-fi

• Handyman on site

• Children's sand pit, surf boards, fishing nets, croquet

• OS maps of local area

• Newspapers/milk delivered

• Change of bed linen during stay


• PRs of Mrs Graham (deceased) v HMRC

• Mrs G owned country house hotel and 4 holiday

cottages in Scilly islands

• Visitors to Cottages provided with extensive services in

addition to hire of cottages

• Furnished holiday lets for IT and CGT

• BPR for IHT ? not if business mainly of making or

holding of investments

• OTS have suggested BPR should be available


Services included:

• a swimming pool and sauna,

• games room, barbecue area,

• bike shed with bicycles available for hire.

• separate guest lounge for arriving and departing guests

• on arrival guests were offered hot drinks and snacks

• helped to their accommodation and given a welcome

pack, which included a weekly itinerary of activities on

the island.

BPR for holiday cottage business?

Services included:

• Each flat was supplied with flowers, home-made

marmalade, bread and sometimes wine, and also milk,

tea and coffee etc.

• Guests were allowed to take herbs and seasonal

produce from the garden such as tomatoes from the

greenhouse,

• Groceries ordered by guests were unpacked by the

staff.

BPR for holiday cottage business?

CGT Principal Private

Residence Relief

• Taxpayer’s main residence exempt

• Includes grounds of 0.5ha

• Or “required for reasonable enjoyment having regard to

size and character”

• Includes servants quarters

• And buildings in “curtilage”

Private Residences

• 3 years for any reason*

• Any periods whilst working abroad*

• Up to 4 years working elsewhere in UK*

• * Actual occupation at some time before and after

• Last 18 months owned (was 36m) => 9 months

• NB - Letting relief ??? lower of:

• £40,000

• Gain attributable to let period

• Gain exempted due to PPR

Private Residences – Deemed occupation

• If 2 or more residences

• May elect which is principal residence

• Only one at time

• Switch back and forth

• Last 18 months owned then exempt (was 36m)

• Acceptable tax avoidance per GAAR guidance

Private Residence Planning

• Moore v HMRC – FTT decision

• Property initially a “Buy to Let”

• Marriage break up – “moved in” to property 12.11.06

• Council tax records support this

• Property sold 22.7.2007 = 8 months later

• Put property on market with Estate Agent – 22.4.2007

• Date moved in with new girlfriend? – unclear

• Post delivered to girlfriend’s address (2nd wife)

Not a Residence for CGT PPR

• HMRC’s view - Mr Moore’s occupation did not have

the degree of permanence, continuity or expectation

of continuity necessary for the property to qualify as

his only or main residence for the purposes of sections

222 and 223 TCGA.

• Goodwin v Curtis – “A person’s ‘home’ was to be

distinguished from a property which the person

temporarily occupied”

• FTT rejected taxpayers appeal – NOT PPR

Not a Residence for CGT PPR

• Trustees get PPR if beneficiary lives in house

• Martyn’s daughter Hannah – buy flat in Manchester? 3

options:

1. Martyn buys – not PPR

2. Hannah buys, Martyn as guarantor (her PPR)

3. Buy via trust – PPR available to trustees

• (With 3, Martyn should not lend funds to trust – could

invoke the settlements rule – he should guarantee the

Trust borrowing or settle funds absolutely)

Child at University? Extra PPR

• From 6 April 2020 Ancillary reliefs limited:

• Deemed occupation for last period of ownership further

restricted to 9 months (was 18m, previously 36m)

• Letting relief restricted to periods when tenant lives

with taxpayer (i.e. lodgers only)

Private Residence Relief changes

• Derick purchased a house for £200,000 on 1 January

2001. He sold it for £500,000 on 31 December 2020.

During Derick’s 20 year (240 months) ownership he:

• Lived in the house as his only residence for 17 years

(204 months)

• Let the entire property for 3 years (36 months) before

selling it.

• The net gain is £300,000 and PRR will be available for

the period Derick occupied the house as his main home

which is 204/240 months.

Private Residences from 6 April 2020 example

• The gain £255,000 is eligible for relief.

• Leaves a potential gain liable to CGT of £45,000.

• Derick also qualifies for 9 months of final period

exemption which is £11,250

• This reduces the potential taxable gain to £33,750

(£45,000 - £11,250).

• As Eric was not in shared occupancy with his

tenants, lettings relief no longer applies

Private Residences from 6 April 2020

• Where spouses/ civil partners transfer interests in residential

properties between them the transferee spouse/civil partner

inherits the transferor partner’s ownership history and

entitlement to PPR.

• ESC D49 legislated - where an individual acquires land on which

they build a dwelling and they then occupy as a main residence, or

purchases an existing dwelling and delays occupation until

alterations completed, or until they complete the disposal of their

previous residence the period of non-occupation between

acquisition and the occupation of the dwelling to be treated as

a period of occupation of the house as the individual’s main

residence, provided that the period does not exceed two years

and no other person has used the property as a residence during

that time.

Private Residence changes in FA 2020

Non-Resident Landlords

• Strictly agent/tenant must deduct 20% at source from rent

• Apply - Form NRL1 to receive rent gross

• UK tax affairs are up to date, or

• they have not had any UK tax obligations before they applied, or

• they do not expect to be liable to UK income tax for the year in which they apply, or

• they are not liable to pay UK tax because they are Sovereign Immunes.

Non-Resident Landlord Scheme

• Agent/tenant required to pay over tax deducted and make

annual return to HMRC by 5 July after end of tax year

• 5 July 2020 for 2019/20

• And give annual certificate to landlord

• From April 2015 HMRC will no longer send out annual

return forms

• Forms online at gov.uk/personal-tax/non-resident-landlord-

scheme

Non-Resident Landlord Scheme

• New charge from 6 April 2015 on disposal of UK

residential properties (dwellings)

• Applies to NR individuals, trustees and close companies

• Rebase at 6 April 2015

• Or time apportion gain based on cost

• What about PPR relief?

• Report disposal and pay CGT within 30 days

CGT payable by non-residents

• Frau Merkel lives in Germany bought a holiday cottage

in England April 2005 for £500,000, uses 2 weeks/ year.

• Sells the cottage in April 2020 for £650,000. Market

value of the cottage on 6 April 2015 was £550,000.

• Gain computed with ref to 6 April 2015 value £100,000.

• Time apportioned gain on cost £150,000 x 5/15 =

£50,000

• Elect to use the time apportionment basis

CGT payable by non-residents

• PPR will still be available to non-residents disposing of

main residence

• Consultation considered 2 options:

1. Remove election - HMRC may seek evidence that de-

facto main residence – mail delivery, electoral roll.

2. A fixed rule to identify the main residence based on

number of days spent there

New legislation requires occupation for at least 90 days

in the tax year concerned to qualify for PPR

Private Residence Relief and non-

residents

• Non UK residents to pay CGT on disposal of all UK land

and buildings from 6 April 2019

• (Applied to UK residential property from 6 April 2015)

• From 6 April 2020 UK residents to report disposals of UK

residential property within 30 days of completion

• Also pay CGT on account within 30 days

• Does not apply if gain covered by PPR or losses b/f

• Gain will also need to be reported on SA return

Returns and Tax on UK Property Disposals

• Disposals of UK property from 6 April 2020

• Report and pay CGT on account within 30 days of

completion

• Not required if no CGT to pay – e.g. private residence

• Agents able to deal with on client’s behalf if authorised

• Disposals 6 April to 30 June can be reported by 31 July

without penalty

Reporting of CGT on UK property disposals

• address and postcode of property

• date they acquired the property and purchase price/value

• date they exchanged contracts when selling or disposing of the

property

• completion date

• value of property when they disposed of it

• costs of buying, selling or making improvements to the property

• details of any tax reliefs, allowances or exemptions they’re entitled to

claim

• property type, if they’re a non-resident

• property value on 31 March 1982 if owned at that date

• For non-residents – MV at 5 April 2019

CGT on UK property disposals – info. needed

IHT and the Family Home

• Additional £175,000 IHT relief for family home

• No IHT on transfer of family home <£1,000,000 =

(£325,000 + £175,000) x 2

• Also available if downsize

• Like NRB transferred to surviving spouse if unused

• Taper relief by £1 for £2 over £2,000,000 before IHT

reliefs – e.g. BPR, APR

• May need to review client’s Will’s and estate

planning

Additional Main Residence Nil Rate Band

• Additional IHT relief for family home, phased in:

• £100,000 – 2017/18

• £125,000 – 2018/19

• £150,000 – 2019/20

• £175,000 – 2020/21

• Then increased with CPI

IHT Family Home Allowance

• Taper relief by £1 for £2 over £2,000,000 before IHT

reliefs – e.g. BPR, APR

• Family home £900,000, business worth £5m would

mean no RNRB!

• Couple with £2m home plus £1m savings owned jointly

= £1,500,000

• Leave half share to spouse on first death

• On second death, estate = £3m, no relief

IHT Family Home Allowance -

tapering

• Additional NRB available if downsize:

1. to a less valuable residence and that residence,

together with assets of an equivalent value to the

‘lost’ RNRB, has been left to direct descendants, or

2. sold their only residence, and the sale proceeds, or

assets of an equivalent value, have been left to direct

descendants, or

3. has otherwise ceased to own their only residence,

and other assets of an equivalent value have been left

to direct descendants

Residence Nil Rate Band - Downsizing

• Individual dies on or after 6 April 2017

• The property disposed of must have been owned by

the individual and it would have qualified for the

RNRB had the individual retained it

• Less valuable property, or other assets of an

equivalent value if the property has been disposed of,

are in the deceased’s estate

• Less valuable property, and any other assets of an

equivalent value, are inherited by the individual’s

direct descendants on that person’s death

RNRB – Downsizing Conditions

• Downsizing or the disposal occurs after 8 July 2015

• No time limit on the period in which the downsizing or

the disposals took place before death

• Any number of downsizing moves between 8 July

2015 and the date of death of the individual

• Would also include disposing of part of a property

(including land occupied and used as a garden or

grounds) or a share in it

• Where a property is given away, assets of an

equivalent value to the value of the property when

the gift was made must be left to direct descendants

RNRB – Downsizing – Further

Conditions

• Widow sells a home worth £400,000 in August 2020

and moves to a home worth £210,000.

• At the time of the sale the available RNRB is £350,000

• By downsizing, she has potentially lost the chance to

use £140,000 or 40% of the available RNRB

• When the widow later dies in October 2020, the home is

worth £225,000 and is left to her children together with

£500,000 of other assets.

RNRB – Downsizing – Example 1

• The estate can use an RNRB of £225,000. However,

the widow was eligible for an RNRB of £350,000 had

she not downsized. The estate can therefore claim an

additional RNRB of 40% of the available RNRB (40% x

£350,000) or £140,000.

• This would give a total RNRB of £365,000 (£225,000 +

£140,000).

• But this is more than the maximum available RNRB

(£350,000) so the additional RNRB is restricted to

£125,000

• Plus ex husband’s unused NRB

RNRB – Downsizing – Example 1

SDLT - additional 3% charge

on second homes

Purchase priceSDLT rate

Buy to Let and

second homes

Up to £125,000 NIL 3%

£125,001 - £250,000 2% 5%

£250,001 - £925,000 5% 8%

£925,001 - £1,500,000 10% 13%

£1,500,001 and over 12% 15%

SDLT rates 1 April 2016 – 7 July 2020

Purchase priceSDLT rate Second homes

Up to £500,000 NIL 3%

£500,001 - £925,000 5% 8%

£925,001 - £1,500,000 10% 13%

£1,500,001 and over 12% 15%

SDLT rates - 8/7/20 to 31/3/21

• Additional SDLT – 3% extra from April 2016

• £175,000 purchase price:

• = 3% up to £125,000 = £3,750, plus

• 5% on next £50,000 = £2,500 = £6,250

• Now 3% = £5,250

SDLT charges on second homes

• Higher SDLT rates will not apply if at the end of the day the individual owns only one residential property, irrespective of the intended use of the property

• Example:

• Kevin, who lives in rented accommodation, sells the

only residential property he owns, a buy-to-let, and

purchases another buy-to-let.

• At the end of the day of the transaction he owns one

property, so he will not pay the higher rates of SDLT.

Additional 3% SDLT on second

homes

• Where individual replaces a main residence the higher

rates of SDLT will not apply – if within 36 months

• Example:

• Anne owns both a main residence and a second home.

She sells her main residence and purchases a new

house which will be her main residence. Although she

has two properties at the end of the day of the

transaction, she has replaced her main residence so the

higher rates will not apply.

SDLT – 36 month rule

• Married couples/ CPs who own one property at the end

of the day will not pay the higher rates of SDLT.

• However, if either of them owns more than one

residential property they may pay the higher rates when

purchasing another property.

• Example:

• Mr A marries Mr B. They each own a property

(purchased before they were married). Mr Brown then

sells former main home and purchases buy to let

• > 1 at the end of the day => extra 3% applies

SDLT – Married couples, civil

partners

• Rate of SDLT depends on the structure of the transaction, and who owns the property

• Example: Ian owns one residential property. He buys

another property jointly with his daughter. The property

will be his daughter’s first property. At the end of the

day Ian owns more than one residential property and

has not replaced his main residence, = > extra 3%

• Example: Tania gives her son Sam money towards a

deposit and acts as a guarantor on the mortgage, but

will not jointly own the property. At the end of the day

Sam will own one property, so extra 3%will not apply.

SDLT – Buying property for children

• Unlike CGT individuals will not be able to elect which of their residences is their main residence

• Thus the treatment of a main residence for SDLT may differ from the treatment for CGT

• Key factors:

• Where the individual and family spend their time

• Where their children go to school

• Where registered to vote

• Where the individual works

• The location and degree of furnishing, etc

SDLT – No main residence election

• New main residence must be bought within 36 months of sale of old main residence

• What if new residence bought before old one sold?

• Extra 3% applies as own 2 properties at end of day

• Excess SDLT refunded if sold within 36 months

• Example:

• Mr and Mrs Kelly own one property as their main

residence. They purchase another property, which they

will use as their main residence before selling the first

residence. At the end of the day they own two

properties and not replaced main residence = extra 3%

SDLT – 36 month “grace” period

• P N Bewley Ltd v HMRC (2019)

• PNB acquired land with “derelict” bungalow £200,000

• Planning permission had been granted for the

Demolition of the existing dwelling and erection of

replacement building

• Paid £1,500 SDLT, HMRC assessed £7,500

• High asbestos content in the building and not suitable

for use as a dwelling

• 3% supplement did not apply, Non-residential rate

No 3% SDLT supplement as not habitable

Purchase price SDLT rate Cumulative

Up to £150,000 NIL NIL

£150,001 - £250,000 2% £2,000

£250,001 and over 5%

SDLT – Non-residential rates

Documents

Agenda - 2020 Innovation