Issue 42 - February 2014
www.taxinsider.co.uk
Property Deposits – What Is The Tax
Treatment?
James Bailey
Page 1
That’s a Relief! Business Rates And Special
Situations
Sarah Bradford
Page 2-3
Timing Can Be The Difference Between
Higher And Lower Property Taxes
Julie Butler
Page 4-5
Renewals Expenditure: Alive And Kicking?
Lee Sharpe
Page 6-7
TAX TIP
Tax Evasion v Tax Avoidance –
Understanding the Difference
Tax evasion is deliberately escaping from paying
tax that should be paid and usually entails
taxpayers deliberately misrepresenting or
concealing the true state of their affairs to the
tax authorities.
The Government has invested over £900 million
in putting procedures in place in order to
identify tax evasion. Such procedures include
the publishing of a ‘FBI-style’ list of ‘mugshots’
of people who are ‘tax criminals who have
absconded after being charged with a crime or
during trial’.
Tax avoidance is the exploitation of the tax rules
in order to reduce the tax that would otherwise
be paid. There are ‘targeted’ and ‘general’
anti-avoidance rules to counter schemes
and arrangements that are considered to be
abusive.
HMRC has developed the Disclosure of Tax
Avoidance Scheme (DOTAS) rules, under which
certain tax planning schemes must be notified
to HMRC shortly after they are marketed or
implemented. HMRC then consider the scheme
and decide whether the scheme is acceptable
tax planning or not. The intention is to assist
taxpayers by warning that certain schemes are
not valid and to make taxpayers aware of the
difference between ‘artificial avoidance schemes’
and ‘ordinary sensible tax planning’.
Example - Stamp duty land tax
A scheme titled ‘SDLT staged completion’ related
specifically to schemes whereby property sales
were undertaken in ways intended to avoid SDLT
by reducing the purchase price below the SDLT
band or threshold. Invariably an intermediate
sale, often on the same day, was introduced
into the arrangements with the sole intention of
removing the true purchase price from tax.
Questions & Answers
By Arthur Weller
Page 8
Property Deposits – What Is The Tax Treatment?
James Bailey explains when and if deposits received from tenants should be recognised as
income of a property letting business.
It is the usual practice to require a tenant to pay a deposit to the landlord when moving
into a property. At the end of the tenancy, the deposit is returned, subject to deductions for
‘dilapidations’.
Tenants are normally responsible for maintaining and repairing the interior of the property, and
if at the end of the tenancy they have failed to do so then the tenant and the landlord will
negotiate how the situation is to be dealt with.
Normally, the negotiation will take the form of agreeing how much of the deposit is to be returned
to the tenant, with the balance retained by the landlord to cover the cost of the dilapidations.
Deposit schemes
In the case of assured shorthold residential tenancies, with very few exceptions, the treatment
of the deposits paid by tenants is governed by statute. The landlord is required to protect
the tenant’s deposit by using one of two types of government approved ‘deposit protection
schemes’.
In a custodial scheme, the deposit is paid to the scheme, and at the end of the tenancy the
deposit is returned to the tenant – subject to some or all of it being paid to the landlord to cover
dilapidations.
In an insured scheme, the landlord retains the deposit, but pays insurance premiums to the
scheme to protect the tenant’s interests.
Tax treatment
The tax treatment of deposits for landlords follows the normal principles of accountancy. When
the tenant moves in and pays his deposit, the landlord has no right to the deposit money. He only
becomes entitled to some or all of it at the end of the tenancy, when he may be allowed to retain
part or all of the deposit to cover dilapidations.
Deposits received are income of the landlord’s property business, but this income should be
‘deferred’ until the end of the tenancy. The principle of ‘deferred’ income applies where the
recipient of the income has not done whatever is required to ‘earn’ that income. In the case of a
landlord, the deferral will continue until the landlord acquires (by agreement with the tenant or
in cases of dispute, by the intervention of the Deposit Protection Service) the right to retain some
or all of the deposit to cover dilapidations – or possibly, unpaid rent. At that point, the amount
of the deposit retained is brought in as income, and the cost of making good the dilapidations
is an expense.
This applies whether or not the landlord re-lets the property. Even if the landlord moves into it
himself or sells it untenanted, the deposit was income (albeit deferred income) when he received
it and it does not change its character as a result of him deciding not to re-let the property.
It should be noted that if the cost of the dilapidations is greater than the deposit, and if the
tenant pays the landlord compensation for them in addition to forfeiting all the deposit, the tax
treatment is different if the property is not re-let. In that case, the additional payment is likely
to be treated as a capital receipt (giving rise to a capital gain), because it is compensation for
the reduced value of the property as a result of the dilapidations. If the property is re-let, then
the additional sum paid is treated as income and the cost of making good the dilapidations is an
expense.
Practical Tip:
Make sure you do not include deposits as part of the income of your property business until the
end of the tenancy concerned, and then only to the extent that you do not return the deposit
to the tenant.
 That’s a Relief! Business Rates And Special Situations
Sarah Bradford looks at business rates and some of the with a rateable
premises withvalue of £5,000.
a rateable Heofqualifies
value £5,000.for
He100% small
qualifies
reliefs available. business
for 100% rates relief
small until 1rates
business March 2015,
relief untilmeaning
1 Marchhe pays
2015,
nomeaning
businessherates
paysuntil then. rates until then.
no business
Business rates are paid to the council on most non-
domestic premises, such as offices, shops, factories etc. Howevr, he he
However, must claim
must thethe
claim relief from
relief thethe
from council.
council.
The rates are determined by multiplying the rateable
value of the property by the rates multiplier set by central Small businesses with more than one property may still
government. Properties are valued by the Valuation Office qualify for relief if the rateable value of the other properties
Agency. is less than £2,600. The rateable values are added together
to determine the amount of relief, which is then applied to
Certain properties are eligible for business rates relief. There the main property.
are various different types of reliefs, including:
Businesses with a rateable value of less than £18,000 (or
• small business rate relief; £25,500 in Greater London) that do not qualify for relief are
• rural rate relief; still considered small and their business rates are calculated
• business rates deferral scheme; by reference to the lower small business multiplier.
• charitable rate relief; and
• enterprise zone relief. Small business rate relief must be claimed.

Special rules apply to certain types of business, including
pubs and self-catering and holiday let accommodation.
Business rates may also be payable in some circumstances
where a business is run from home.
This article looks at situations in which relief may be
available and the special rules that apply to certain types
of business.
Businesses in rural area
Businesses may be situated in a rural area with a population
of less than 3,000. Relief is available to a business that is
the only village shop or post office with a rateable value of
up to £8,500 or the only public house or petrol station with
a rateable value of up to £12,500. The relief is at a rate of
50%, although councils can top it up to 100%. Councils also
have the discretion to give relief of up to 100% to other rural
retail business with a rateable value of less than £16,500.

Small businesses Charities and community amateur sports clubs

Business rate help is available to small businesses. Small Where a property is used for charitable purposes, relief
business rate relief is available to businesses which use only of up to 80% may be available. Some councils provide a
one property and which has a rateable value of less than discretionary top up to take the relief up to 100%.
£12,000. Full relief is available until 1 March 2015 where
the rateable value is less than £6,000, meaning no business Businesses in enterprise zones
rates are payable. Where the rateable value of the property To encourage businesses to start up or relocate to an
is between £6,001 and £12,000, the relief gradually enterprise zone, businesses in enterprise zones are eligible
decreases from 100% to zero. for relief. The relief is valuable – up to 100% for five years
up to a maximum of £275,000. However, the business must
Example– –John
Example Johnpays
paysnonobusiness
businessrates
rates start up in or relocate to an enterprise zone by April 2015.
Johnis aispicture
John a picture framer
framer and his
and runs runs his business
business out of
out of premises

2. www.taxinsider.co.uk - February 2014

 Exempted properties
Certain properties are exempt from business rates, in
particular, exemptions are available for agricultural land
and buildings (including fish farms), buildings used for
the training or welfare of disabled people and buildings
registered for public religious worship and church halls.
Empty properties
Properties that are empty escape business rates for a period
of three months, after which full business rates are usually
payable. However, certain types of property are able to
enjoy empty property relief for a longer period. Industrial
premises, such as warehouses, are exempt from business
rates for a further three months (i.e. six months in total)
when empty. Empty listed buildings and buildings with a
rateable value of less than £2,600 do not pay business rates
until such time as they are reoccupied.
Extended business rate relief is also available for charities
as long as the next use of the building is predominantly
charitable, and for community amateur sports clubs as long
as the next use is mostly as a sports club.
Pubs
Different rules apply to set the rateable value of pubs
and buildings used in the licensed trade for business rate
purposes. The rateable value is based on the annual level
of trade that the pub is expected to achieve if it operates
in a reasonably efficient manner. This is known as `fair
maintainable trade’ and is based on the type of pub or
licensed premises, the area in which it is situated, and the
services that if offers. In working out the `fair maintainable
trade’ the Valuation Office Agency also looks at rents and
turnovers. A percentage, as agreed with the British Beer
and Pub Association, is applied to the fair maintainable
trade to arrive at the rateable value. Business rates are paid
by reference to the rateable value determined in this way.
Self-catering and holiday let accommodation
Properties that are situated in England and available to let
for 140 days or more in a year are treated as self-catering
accommodation and are therefore liable for business rates.
Different rules apply in Wales; to be liable for business rates
the property must be both available to let for 140 days a
3.
year and actually let for 70 days or more. In England there
is no requirement that the property is actually let, such
that business rates apply as long as the property remains
available for letting for 140 days or more.
Where business rates are in point, the rateable value is
found by applying a price per bed space on each property,
which reflects its type, size and location. The bed space
measure reflects how many people can sleep in the
property.
Working from home
Many people work from home. Depending on the nature
and type of business and the extent to which the home is
used for business purposes, business rates may be payable
instead of council tax on that part of the home used for
business purposes. The remainder of the home remains
liable to council tax. In deciding whether business rates
apply, various factors are considered, such as the extent and
frequency of the business use of the room or rooms used
for business and any modifications made to those rooms to
accommodate the business use. Where business rates are
in point, a rateable value is assigned to the non-domestic
part. The business rates are based on the rateable value.
When setting up a business from home, do not overlook
the possibility that business rates may be due, particularly
if changes are made to the property to enable the business
to operate from home. Planning permission for change of
use may also be needed. Advice should be sought.
However, basing a business from home will not
automatically mean that business rates are due, particularly
if the business is run from a room also used for domestic
purposes (for example a person who works on the dining
room table during the day and uses the room for family
meals in the evening). Where business rates do apply to a
business that is run from home, the rateable value is likely
to be low and small business rate relief may be in point.
Practical Tip:
Remember to claim small business rate relief if due.
www.taxinsider.co.uk - February 2014
 Timing Can Be The Difference Between Higher And Lower Property Taxes
Julie Butler outlines the importance of timing property
transactions in order to maximise tax savings and explains
the need to plan in advance for all areas.
It has been said that ‘timing is everything’. Most property
taxpayers want to pay a fair and reasonable amount of tax.
However no taxpayer wants to pay ‘silly tax’ (i.e. tax created
through bad timings or inefficient structures). Examples
would be to pay a higher rate tax one year and then pay
no tax the next year due to (say) tax losses. The essential
ingredients to all-efficient tax savings is the combination
of good housekeeping and planning in advance. The
problem with this philosophy is that most taxpayers fail to
organise their property affairs in this way!
Timing of the sale of the property
With each individual taxpayer having an annual exemption
for capital gains tax (CGT) purposes (£10,900 for 2013/14)
there is effective tax planning that can be put in place
to ensure that CGT savings are maximised by spreading
property disposals across the tax years.
The standard rate of CGT is 28% but this is reduced to 18% on
capital gains up to the unused amount of the basic income
tax band, if any. There is therefore an additional benefit to
selling the property when taxpayers are lower earners.
Principal private residence relief (PPR)
Obviously property disposals should be protected by PPR
where possible. The timing of the disposal of the main
residence must also be looked at for tax advantages. There
was a blow for property owners in the Chancellor’s autumn
statement in December 2013 with the announcement of
a reduction in the ‘tax free’ time allowed to sell the main
residence after ceasing to live there. Each individual had a
period of three years after moving out of the main residence
to sell the property and still achieve PPR. The Finance Act
2014 is to reduce this time allowed to 18 months, effective
from 6 April 2014. Previously the property owner could
4.
play with this three-year allowance and reasonably enjoy
extra tax-free allowances.
Care has to be taken to maximise the use of PPR and
above all the timing of the disposal of the main residence.
Advantage can be taken of ‘flipping’.
What is ‘flipping’?
‘Flipping’ broadly involves a taxpayer electing for a second
home to be his or her main residence for CGT purposes
(TCGA 1992, s 222(5)), then changing that election in favour
of the first home a short time later. The ’short’ period
should ideally not be ‘ridiculously short’ and there should
be a degree of permanence, with which to substantiate the
‘quality’ of occupation.
By this procedure, the first home loses the main residence
exemption for (say) a few weeks, and the second home
achieves at least three years’ worth of exempt gain. As
mentioned, this period is reduced to 18 months from
6 April 2014. However, to be effective, both properties
must be factually occupied as the taxpayer’s home, and
the deadlines for making and changing the election must
be achieved. It is essential that there is evidence of actual
occupation.
Timing of property expenses
It is generally only farmers who are allowed to ‘average’
their profits. Landlords can, however, prepare budgets
and predictions of future expenses to even out the tax
disadvantages of unpleasant fluctuations. A five-year plan
of expenditure for both repair and improvements should
be carried out. In the current tax regime property owners
don’t just have the worries of the ‘higher rate threshold’, but
also the 45% additional tax rate. For 2013/14, this higher
rate threshold is £41,450. This is the level of income after
which taxpayers begin to pay the 40% higher rate of tax
above the personal allowance (PA) i.e. it is the sum of the
PA (£9,440 for 2013/14) and the basic rate limit (£32,010
www.taxinsider.co.uk - February 2014
 for 2013/14).
There is the further disadvantage of a 45% tax rate for
earnings above £150,000. Clearly the tax planning has
to be tailored towards what level of income the property
owner enjoys. There must be consideration for other
variable income sources (e.g. dividends drawn from owner
managed businesses). Timing the point at which property
expenses are incurred can help keep total income below
these problem levels. It is not just repair expenses that
can be controlled by strategy month on month and year on
year.
The £100,000 income problem and the loss of personal
allowances
Where an individual’s net income exceeds £100,000, the
personal allowance (PA) will be reduced by £1 for every £2
of income above £100,000, i.e. there is an ‘abatement’ of
the personal allowance. Where total income for a tax year
is predicted to rise above £100,000, tax planning can be
brought into play by increasing property repair expenditure
to keep below the £100,000 limit. There are many taxpayers
unaware of this ‘tax nasty’ and many fail to realise how
painful the ‘tax hit’ is with income just above the £100,000
limit. Tax planning suggestions are the obvious pension
contributions and gift aid, as well as the timing of property
expenditure.
As mentioned, for 2013/14 the PA is £9,440. It is easy to
see how punishing the abatement of the PA can be and how
helpful the correct timing of expenditure is.
Repair or improvement to property
There have been three recent tax tribunal cases that have
helped the case for claiming expense incurred on property
maintenance as repairs as opposed to improvements, thus
accelerating the absolute tax relief, not just the timing of
the tax relief (see Property Tax Insider December 2013).
The three cases are Pratt (G Pratt and Sons v HMRC [2011]
UKFTT 416 (TC)), Hopegar (Hopegar Properties Ltd v HMRC
5.
[2013] UKFTT 331 (TC)) and Cairnsmill Caravans (Cairnsmill
Caravan Park v HMRC [2013] UKFTT 164 (TC)) and there are
tax advantages of understanding the principals of these
cases. The preparation of a five-year projected property
repair and improvement schedule should include reference
to these cases. Evidence to support the claim for repairs
must be made.
Good preparation to save higher rates of tax
A projection of every tax return must be prepared in advance
so it can be seen which higher tax rates the taxpayer/property
owner needs to be saved from. This must obviously be tied
into projected repair and improvement schedules. Each tax
return must be prepared as soon after the end of the tax
year as possible, but by then we are dealing with historic
information.
Assigning property income to spouse
It is possible to assign property income between spouses
(see Property Tax Insider February 2013). Thus if one spouse
is a higher earner it is possible to assign the property income
to the lower earner. Such activity must be undertaken as
part of the overall tax planning review.
Income tax losses
Income tax trading losses can be offset ’sideways’ against
total income and also against capital gains in order to
achieve tax relief, within certain limits. There are therefore
judgement calls to be made about how and when the
trading losses should be offset. Trading tax losses can
become a useful planning tool to keep below the higher rate
threshold. There can also be planning around the trading
loss with regard to the timing of trading expenditure (e.g.
when a higher tax loss is needed there has to be planning
of the expenditure).
Practical Tip:
Tax planning around property taxes is not simple, it is not
one dimensional, and it cannot be undertaken historically
or lightly.
www.taxinsider.co.uk - February 2014
 Renewals Expenditure: Alive And Kicking?

Lee Sharpe considers whether the cost of replacing

freestanding items such as fridges or washing machines, Part-furnished properties are ineligible for wear and tear
which used to be claimed as a ‘renewal’, is still allowable. allowance. The cost of maintaining or repairing an asset is
pretty much always allowable. But the cost of replacing an
Health warning! asset outright is a capital expense and not generally given
The following article comes with a health warning: it is as a deduction from rental profits, except under certain
precisely at odds with HMRC guidance. Regular readers circumstances.
will know that we have previously distinguished between
HMRC’s guidance, and what the law actually says. They Renew, replace
are not always the same thing. Sometimes it is helpful to The renewals basis allowed the landlord to deduct the cost
the taxpayer simply to go along with the guidance, when of replacing an asset on a ‘like for like’ basis. The cost of
it suits. Then again, there are times when you just have to acquiring the first washing machine was not deductible,
put your foot down. but the cost of replacing it was. If you bought a much
better washing machine, then the improvement was not
’Renewals basis’ – where all else fails deductible – until you replaced the asset again, to that
It is a very old tax treatment that has largely fallen into disuse higher standard.
since the advent of capital allowances, and in particular the
generous first year or annual investment allowances for So, for landlords of only part-furnished residential properties
eligible fixed assets, except perhaps in one specific area, that couldn’t claim wear and tear allowance, the renewals
namely part furnished residential properties. basis was very useful. I say was…

No capital allowances Party poopers!

The legislation forbids a capital allowances claim on fixed In December 2011, HMRC published a consultation on
assets used in a dwelling. In a commercial building, desks, withdrawing several tax concessions – helpful tax treatments
tables, central heating and many other items are generally operated informally by HMRC to benefit taxpayers but that
eligible for tax relief through capital allowances, but not had no legislative force – from 2013/14. They had been
so in a dwelling (ignoring the special regime for furnished around for years but in one of those glorious tax cases that
holiday lettings). suited just one taxpayer but cost everybody else, they were
held to be unlawful. HMRC could ignore the issue no longer;
However, HMRC recognises that there is nevertheless they had to go (although some might disagree that they had
significant expenditure in residential properties on assets no choice).
such as furniture, kitchen equipment and the like.
The consultation is at www.hmrc.gov.uk/budget-updates/
No wear and tear 06dec11/withdraw-tech-note.pdf‎. When ‘consulting’ on the
For fully furnished properties (broadly those where a tenant withdrawal of the renewals basis concession, the document
does not have to supply his own furniture in order to live said:
comfortably in the property), the wear and tear allowance “The Income Tax (Trading and Other Income) Act (ITTOIA)
provides a useful alternative. It is 10% of the rental income 2005 section 68… gives a renewals allowance for the
– after deducting any costs that are normally borne by the replacement of trade tools…If the taxpayer’s qualifying
tenant. It is fairly generous and simple to operate, and activity is an ordinary property business or an overseas
quite popular. It is meant to cover the cost of mending or property business CAA 2001 s 35(2) denies capital allowances
replacing furniture, white goods and similar. for qualifying expenditure incurred in providing plant or

6. www.taxinsider.co.uk - February 2014

 machinery for use in a dwelling-house. In such cases, relief
will be available either under ITTOIA 2005 s 68… or, for
furnished lettings, under the wear and tear allowance at
Sections 308A to 308C ITTOIA 2005” (emphasis added).
I actually rang the HMRC officer named in the guidance, to
check that s 68 had sufficient scope to cover white goods, a
chaise longue, etc., and was told that if it were not, it would
be changed. Fair enough, I thought. If only…
Renewals lost
However, many colleagues were concerned that the
renewals basis would not apply. To rub salt into the wound,
HMRC also published new draft guidance in its Business
Income manual on repairs, and the example “Refitting a
Kitchen” at the draft new BIM46911 (www.hmrc.gov.uk/
briefs/income-tax/draft-guidance.pdf) caused me concern,
since I expected the guidance to say, “…but don’t worry,
because Sophia can always claim the renewals basis for her
free-standing fridge”. Alas, no.
Just checking
So I contacted HMRC again, just to be sure. At which point I
was advised by a brace of officers that s 68 would not cover
renewing washing machines or furniture, and wasn’t really
up to covering much more than small, frequently-replaced
items such as the odd piece of cutlery or perhaps a teapot.
This was not good. When I pointed out that I had previously
been assured that the effect of the abolition of the
concession would be negligible, they replied that they’d
had no idea there were so many part-furnished properties,
and interested parties had not identified a significant risk.
To which ‘interested parties’ had they been speaking, I
wondered?
What does the legislation actually say?
ITTOIA 2005 s 68, as originally set out (abridged):
Replacement and alteration of trade tools
1. This section applies if—
a. expenses are incurred on replacing or altering any
tool used for the purposes of a trade...
2. In calculating the profits of the trade, a deduction is
allowed for the expenses…
3. In this section “tool” means any implement, utensil or
article…(emphasis added)
7.
Section 272 confirms that this applies equally to property
businesses. So if I can replace the word “trade” with the
words “property business”, then why is a washing machine
not a “tool” – or at least an article – used in a property
business? Where does it say that the tools must be small,
frequently replaced or of low cost? The section might be
headed “tools” but the definition seems much wider (in
fact, the title is a throwback to much older legislation, and
it has been used to claim for far more than “tools” in the
normal sense).
What about the consultation?
If we review the advice in the 2011 consultation, it said
quite clearly:
“..for… expenditure incurred in providing plant or machinery
for use in a dwelling-house… relief will be available either
under ITTOIA 2005 s 68 or, for furnished lettings, under the
wear and tear allowance”
Now, we might not be sure that a washing machine is a
tool, or an article, but it’s clearly a machine: the clue’s in
the name.
Interestingly, when HMRC updated its Business Income
manual for real in December last year, “Refitting a Kitchen”
did not make an appearance.
Practical Tip:
I think that the renewals basis is alive and kicking, and that
it never actually went away for residential properties (or
anywhere else).
The idea that a landlord of a part-furnished dwelling can
claim for repairing a fridge, but not for replacing it, seems
quite ridiculous. I believe that the legislation still allows
renewals claims to be made.
But HMRC has not publicly backtracked on its earlier
guidance, so any renewals claims made after the beginning
of the 2013/14 tax year should be made carefully, with
full and accurate disclosure, so HMRC cannot attack the
treatment years down the line. However, this is a course
of action which taxpayers and advisers must appreciate
carries risk.
www.taxinsider.co.uk - February 2014
 Property Tax Insider Gurus – Answer Your Questions
By Arthur Weller
Q.1 What would be my tax payment?
I live overseas and want to buy some land in Scotland. The
property in question has a house and about 1,500 acres of
land of which 600 are currently used for crops, 400 are used
in timberland and 500 are forest/wildlife. Assuming all taxes
have been paid by the moment of purchase, what would be
the approximate yearly tax if it is my place of residence?
The current owners are asking £4.5 million.
Arthur Weller replies:
ATED (Annual Tax on Enveloped Dwellings) only applies to
£2 million (or higher value) properties owned by a company
or collective investment, so if you are buying this property
in your own name, there is no annual tax to pay. If you are
planning to buy through a company, then ATED for a £4.5
million property is currently £15,000 per year. But ATED
only applies to residential properties (dwellings).
If a dwelling is part of a larger, mixed-use property that
has parts not used for residential purposes, then only the
residential part would have ATED payable on it.
Q.2 Are these modernisations capital or revenue
costs?
I have recently bought a property that has needed full
modernisation –double-glazed windows, carpets, bathroom,
kitchen, painting, boiler replacement, etc. Is this all treated
as a capital cost as it is pre-tenancy or can it be treated as
a revenue expense? Tenants will move in the day after the
work is completed.
Arthur Weller is just one of the tax advisers available through our Tax Insider
consultancy service. He is a Chartered Tax Advisor (CTA) who operates his own
tax consultancy, a member of the Chartered Institute of Taxation and also a
qualified Certified Accountant.
Our Tax Insider telephone consultancy service provides advice on all areas of UK
and international taxation for accountants and tax payers alike.
Sign up for a consultation with Arthur today and get 10% discount by quoting
AW10DISC
For full details about our Tax Insider consultancy service, please go here:
www.taxinsider.co.uk/tax_advice_help.html
Disclaimer: This ‘Tax Insider’ guide is produced for general guidance only, and professional advice should be sought before any decision is made. Individual circumstances can vary and therefore no responsibility
can be accepted by the contributors or the publisher Tax Insider Ltd, for any action taken, or any decision made to refrain from action, by any readers of this guide. All rights reserved. No part of this guide may be
reproduced or transmitted in any form or by any means. To the fullest extent permitted by law, the contributors and Tax Insider Ltd do not accept liability for any direct, indirect, special, consequential or other losses
or damages of whatsoever kind arising from using this guide.
Arthur Weller replies:
Look at www.hmrc.gov.uk/manuals/pimmanual/PIM2020.
htm where you can see that the crucial questions to ask
are: a) was the property not in a fit state for rental use
before the refurbishment was carried out? or b) was the
price paid for the property substantially reduced because
of its dilapidated state? If yes, then the refurbishment costs
are capital expenditure.
Q.3 Inheritance tax planning - which is the best way?
Whilst reading your December 2013 edition of the
Property Tax Insider magazine, there is mention relating
to inheritance tax planning and the fact that there are
differences between whether a rental business generates
investment property income or trading income. Can you
please elaborate to what benefits each has and what can
be done in the accounts to show that you are a majority of
one and not the other?
Arthur Weller replies:
If a rental business is classified as trading it should be eligible
for business property relief from inheritance tax. It should
also be eligible for rollover relief from capital gains tax for
replacement of business assets. However, Class 2 and 4
National Insurance contributions must be paid on trading
income. More important than what is shown in the accounts
is the level of services provided with the accommodation.
Letting furnished accommodation with extra services
provided is investment income, whereas running a hotel is
trading income. The distinction can sometimes be a narrow
one.
www.taxinsider.co.uk - February 2014