Inheritance tax relief (IHT) finally refused for furnished holiday lets (FHL)
The final hope for the executors of the Pawson estate was recently quashed when they were denied leave to appeal against the Upper Tribunal ruling which refused Business Property Relief (BPR) for a holiday let in Suffolk.
This means that FHLs will not generally qualify for BPR unless a wide range of services are also provided.
The Pawson case has been ongoing for some time and concerned a holiday bungalow in Suffolk which was regularly rented out on short term holiday lets. The deceased managed the letting, organising bookings, cleaning and maintenance. The Upper Tribunal concluded that the principal activity of deriving income from land is an investment activity and so BPR could not apply. This decision is somewhat at odds with other businesses which derive income from land such as hotels or farmers who still enjoy BPR. HMRC’s current practice is to routinely refuse a claim whatever the facts and the recent ruling will presumably only strengthen their resolve
However, where a significant level of services are provided to the holidaymaker, we consider that there may still be scope to claim BPR. Advice should be taken by any holiday let owner now to ensure that they have the best chance of qualifying for the potentially valuable relief. Please contact Elaine Skelton if you would like to discuss how your holiday let may be affected.
Reducing IHT for investment property owners
Investment properties attract no relief from IHT regardless of whether they are owned by the individual personally, or through an investment company. Individuals who are concerned about the level of IHT payable by their beneficiaries may wish to consider reviewing their finance arrangements to see if their IHT position can be improved.
Investment properties attract no relief from IHT regardless of whether they are owned by the individual personally, or through an investment company. Individuals who are concerned about the level of IHT payable by their beneficiaries may wish to consider reviewing their finance arrangements to see if their IHT position can be improved.
Individuals who hold investment properties with significant equity value (either personally or through an investment company) are likely to leave behind large IHT liabilities on their death. Additionally, individuals who make gifts of shares in investment companies during their lifetime may trigger immediate Capital Gains Tax (CGT) charges, and may not even reduce the IHT bill if the gift is not survived by at least 7 years.
Individuals caught by these rules may be able to benefit from a review of their property investment financing arrangements. Recent case law has shown that if financing is structured in a particular way the individual concerned may be able to benefit from BPR which provides 100% relief from IHT.
If you are concerned about your potential IHT liabilities we are happy to offer a one hour no obligation consultation to discuss your affairs and how we may be able to help you. Please contact Elaine Skelton, Head of our Private Client Team, for more information.
Incorporation of property rental business
Careful consideration should always be given when deciding what structure to use to own property investments. Companies typically pay less tax than an individual, but there can be double taxation if the individual needs to extract cash from the company. Incorporating an existing property business can also potentially trigger CGT. However, if you incorporate a property business in the right way, the base cost of the properties for tax purposes can benefit from a market value uplift, deferring and potentially saving tax on a future disposal. Recent Tax Tribunal cases have provided further guidance on when relief may be available.
The Upper Tier Tax Tribunal (UTT) has published its decision for the case of Elisabeth Moyne Ramsey v HMRC. Overturning the decision of the First Tier Tax Tribunal (FTT), the UTT held that Mrs Ramsey’s activities were sufficient to be regarded as a business for the purposes of CGT incorporation relief. This meant that the property could be transferred to a company in exchange for shares without giving rise to an immediate CGT charge. Mrs Ramsey owned a single property, a house which had been converted into 10 flats, and she was able to demonstrate that she and her husband spent approximately 20 hours a week carrying out various activities such as collecting rents and maintaining the property.
The case was a defeat for HMRC, which generally argues that property rental activities carried on by an individual or partnership represents an investment activity rather than a business, and therefore does not qualify for incorporation relief.
From a taxation viewpoint, there are arguments for and against holding rental property via a company. On the plus side, company ownership may enable retained profits to be taxed at the relatively low corporation tax rates rather than income tax rates, and may allow future savings in stamp duty land tax as ownership can be transferred via a sale of shares rather than a sale of the property itself. Potential disadvantages of company ownership are that stamp duty land tax liabilities may arise on the transfer into the company (unless relief is available under the partnership rules) and that there is the potential for double tax charges if the property is sold on by the company (a tax charge on the gain within the company and a second charge on extraction of the profits). Investors should also be aware of the new tax charges for high value residential properties held within companies, although these charges should generally not apply where the property is let to third parties on a commercial basis.
If you wish to find out more about the advantages and disadvantages of incorporating your property rental business, please contact Zoe Roberts, Tax Partner, or your usual BHP contact to discuss.
Reclaiming VAT on solar panels
The ECJ has recently ruled that the use of solar panels to generate surplus electricity which is then sold back to the network represents an economic activity. This gives the possibility for householders to register for VAT and to reclaim VAT incurred on the costs of installing the panels.
Mr Fuchs, an Austrian resident, had solar panels fitted to the roof of his house. He sold all of the electricity generated to the electricity supplier, and then bought back what he needed for his own use. Overruling the Austrian tax authorities, the ECJ ruled that the sale of electricity to the supplier was an economic activity carried on by Mr Fuchs, and he was therefore entitled to register for VAT and to reclaim the VAT on the cost of the solar panels. This would be the case even if the economic activity resulted in losses, ie if the amount of electricity sold to the supplier was less than the amount of electricity used by the householder.
The case suggests that it should be also be possible for UK householders to register for VAT and to reclaim the input VAT payable (normally at 5%) on solar panels. There are a number of issues to consider here though, such as accounting for private use restrictions (unlike the Austrian system, under the UK Feed in Tariff rules only the surplus electricity generated gives rise to a taxable supply) and the administration involved in registering for VAT and filing regular returns. We anticipate that HMRC will resist applications to register. Please contact Simon Buchan, Head of VAT Services, if you wish to discuss whether or not it may be worthwhile seeking to register and reclaim the VAT.
Withdrawal of renewals basis
Following the review of Extra Statutory Concession B47, from April 2013 it is no longer possible to make a claim in rental accounts for replacement assets on the renewals basis. This will specifically affect landlords who let part furnished property as they cannot claim for say, the cost of replacement white goods in any other way. Taking action now may preserve your relief for such costs.
Previously, landlords of furnished residential properties were able to claim for the replacement of furnishings (eg furniture, cookers, washing machines, dishwashers, linen, cutlery etc) using either:
- The Renewals basis (ESC B47) OR
- The Wear and Tear allowance (10% of rents, less certain costs)
However, from April 2013 the concession has been withdrawn and the renewals allowance ceased to be available (except for the strict statutory allowance for ‘trade tools’ which is unlikely to be of much relevance for landlords).
This means that the only option available for residential landlords will be the Wear and Tear allowance, which can only be claimed on fully furnished properties. ‘Fully furnished properties’ are being defined as those with ‘sufficient furniture, furnishings and equipment for normal residential use’. In other words, a tenant must be able to move in and have assets sufficient for living comfortably and not need to provide for anything except clothing and food.
For landlords who rent unfurnished or partially furnished residential accommodation, the only way relief will now be available for any replacement of fixtures is on the standard “repairs and renewals” basis (eg some bathroom and kitchen fittings). There will be no relief for the replacement of other furnishings. If goods are integrated into the fabric of the property, replacements may be able to be claimed under the repairs basis. Landlords may also like to consider whether it is worth increasing the level of furnishings within part furnished properties to qualify for the wear and tear allowance.
Please speak to Mark Sleight or your usual BHP contact if you would like to discuss.
Capital or repair?
Two recent Tribunal cases have demonstrated that the definition of “repairs” (qualifying for 100% tax relief) as opposed to “capital” (which may not attract relief until the property is sold) is perhaps broader than one might at first imagine. We recommend that you should always discuss any potential significant costs before incurring them to ensure that you understand the possible tax reliefs available.
In the Cairnsmill Caravan Park case, a partnership resurfaced part of the grass covered caravan site with a tarmac coating. HMRC argued that this was an improvement to the site and therefore attempted to disallow the expenditure for tax purposes.
Rejecting HMRC’s arguments, the Tribunal accepted the partners’ contention that the site had not been improved (customers stated that they preferred the old grass surface) and that the expenditure should be regarded as an allowable repair cost.
The Hopegear Properties case related to the repairs and widening of the main entrance road to an industrial estate, repairs to footpaths and relaying of fibre optic cables. There were related landscaping costs, changes to an existing car park and the construction of a temporary access road for the duration of the repairs. HMRC argued that the whole of the expenditure was capital in nature, being one overall scheme of alteration to the industrial estate.
The Tribunal formed the view that there was no overall scheme of alteration and that the character of the assets concerned had not changed when the overall effect of the work was examined. The cost of work was therefore generally allowable as a repair. However, It was accepted by the Tribunal that the widening work on the road represented capital expenditure and that expenditure directly relating to that widening would also be regarded as capital.
If you are planning to incur significant expenditure on repairs or alterations, please let us know in advance so that we can help to ensure that tax relief is maximised.
Recent VAT Tribunal decisions
Two recent VAT Tribunal decisions have emphasised the importance of obtaining advice regarding the VAT implications of property transactions.
In the Sunnyside Property Company case, a company (SN) operated a nursing home. Nursing home fees are VAT exempt and therefore SN was unable to reclaim input VAT. In 2003 the ownership of the premises was transferred to a newly-incorporated associated company (SC), which leased them back to SN. SC reclaimed input tax on the refurbishment of the premises.
HMRC then rejected the claim on the basis that the input tax all related to the exempt supply of the lease of the premises. SC appealed, arguing that it was making separate standard-rated supplies of facilities in addition to its exempt supplies of a lease of the premises. The Tribunal agreed with HMRC’s view that SC was making a single composite exempt supply of property and services, and that none of the input tax related to taxable supplies.
In the Alexandra Countryside Investments case, a company (Alexandra) converted a former public house, which included a manager’s flat, into two houses. Each of the two houses contained part of the manager’s flat. The question for the Tribunal was whether Alexandra’s onward sale of the houses was zero-rated, as the first time sale of two new dwellings, or exempt, as the sale of two dwellings created from an existing building. If the sale was zero rated then Alexandra would be entitled to reclaim the VAT in connection with the conversion work. HMRC argued that, because the manager’s flat was incorporated into both houses, the sale of the houses was not the first time sale of two new dwellings and was therefore exempt.
However, the relevant legislation states that the conversion of a non-residential part of a building which already contains a residential part is zero-rated if the result of that conversion is to create an additional dwelling or dwellings. The Tribunal therefore allowed the appeal, as before the conversion there was only one dwelling and after the conversion there were two dwellings. Please contact Simon Buchan, Head of VAT Services, if you wish to discuss the VAT treatment of any transactions involving property.
When is interest not deductible?
The current financial climate means that financing is a major issue and the means of financing is key to ensuring interest paid is eligible for tax relief. It is vital to take advice before changing any financing arrangements to ensure that you do not lose valuable tax reliefs.
We have recently become aware of a situation where an individual, who was required to refinance by his funders, converted his loan accountant to an overdraft account whilst he secured new financing. This resulted in a loss of income tax relief. The individual in question operated his property business through a limited company which he had invested in using a loan. As an investment in a qualifying company, the individual was eligible for income tax relief for the interest paid on the loan.
For various reasons, the lender decided to withdraw the individual’s loan facility and requested that he re-finance. However, until such time as the individual was able to secure a new loan, the existing loan was converted to an overdraft. The interest on the overdraft, payable at a much higher rate, was not eligible for the same tax relief as the original loan.
Unfortunately, it took over twelve months to secure new financing meaning the bank’s original decision came at a significantly increased cost to the taxpayer.
If you are claiming interest relief or are paying interest on loans to fund your investments and you have any questions or concerns, please contact Rachelle Rowbottom or your usual BHP contact for more information.
The future of flood insurance
The Association of British Insurers (ABI) and the Government have been working together over recent months to formulate a plan which is designed to ensure that flood insurance will remain as widely affordable and available as possible. In June 2013, the two bodies agreed a Memorandum of Understanding (MoU) to develop a new scheme.
According to the Met Office the summer of 2012 was the wettest summer in 100 years which, compounded by recent flooding through the UK, means that the risk of flooding is a key concern for any property owner.
Following the floods of 2007, the Government agreed a ‘Statement of Principles’ with the ABI which obliged insurers to offer flood insurance to all residential and small business customers provided that:
- the property was built before 1 January 2009; and
- the property is not at significant risk (i.e. flooding occurs less than once in 75 years) or, if the property is at risk, where flood defences are planned which would reduce that risk within 5 years.
The Statement was intended to ensure that adequate insurance was widely available at a reasonable cost.
The Statement of Principles was due to come to an end on 30 June 2013, but following the MoU, this will now be extended until 2015.
Under the new MoU, the ABI and the Government have agreed in principle to develop a not-for-profit flood fund – known as Flood Re – which will enable cover to be provided for homes in high flood risk areas. The idea is that home insurers will be subject to an annual levy (working out at an average of £10.50 per year on all home insurance policies) which will be used to build up a fund to cover claims for high risk areas. The insurance companies will then be able to put high risk properties into the fund, with the flood risk element of the premium being capped at a range between £210 and £540, depending on the Council Tax banding of the property.
Flood Re is only intended to cover residential properties and will exclude the most expensive properties (Council Tax band H) and those built after 1 January 2009.
The advice to property owners is to check the terms of any existing or proposed insurance policies to ensure the flood damage cover is provided. A failure to do so could not only mean a very expensive repair bill but might also amount to a breach of any mortgage covenants to ensure the property is adequately insured.
