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Tax Insider Hot Property Tips

Just like the business hot tips, we bring you topical items.  Again we prefer not to expand on them and hope you will find them of use.

Practice Marketing April 2019 – Property Articles

 

Three property tax articles:

  • SDLT and first-time buyers
  • Keeping records of rental income and expenses
  • Main residence relief – beware when buying off-plan

 

SDLT and first-time buyers

Stamp duty land tax (SDLT) is payable where you buy a property in England or Northern Ireland and the amount paid is more than a certain amount. SDLT does not apply in Scotland, where Land and Buildings Transaction Tax (LBTT) applies instead, nor in Wales, where Land Transaction Tax (LTT) is payable.

As far as residential property is concerned, the rates depend on whether a person is a first-time buyer or not and whether the property is a second or subsequent property. The current residential threshold is £125,000. However, a 3% supplement applies to second and subsequent homes where the purchase price is more than £40,000. Relief is available for first time buyers.

First time buyer rates

Since 22 November 2017, first time buyers buying a residential property do not pay any SDLT if the purchase price is less than £300,000. Where the purchase price is between £300,000 and £500,000, first-time buyers pays SDLT at the rate of 5% on the excess over £300,000. First-time buyers buying a property for more than £500,000 do not get any relief – instead they pay the normal residential rates.

Case study 1

Kieran buys his first flat for £200,000. As the consideration is less than £300,000 and he is a first-time buyer, no SDLT is payable.

Without the relief he would have paid SDLT of £1,500.

Case study 2

Orla is a first-time buyer. She buys a two-bedroom cottage costing £420,000. She benefits from first-time buyer relief, paying SDLT at 5% on the excess over £300,000. She must therefore pay SDLT of £6,000 (5% (£420,000 – £300,000)).

Without the relief, she would pay SDLT of £11,000. She saves £5,000 as a result of the relief for first-time buyers.

Case study 3

Connor and Daniel are first time buyers. They buy a flat in London for £700,000.

As the purchase price is more than £500,000, they do not benefit from first-time buyer relief. Consequently, SDLT is calculated at the normal residential rates as follows:

On first £125,000 @ 0% £0
On next £125,000 @ 2% £2,500
On next £450,000 @ 5% £22,500
SDLT payable £25,000

 

Shared ownership schemes

Changes announced in the 2018 Budget with retrospective effect extended the availability of first-time buyer relief to first-time buyers buying a property through a qualifying shared ownership scheme. Relief is available to the first share purchased as long as the market value of the shared ownership property is less than £500,000. No SDLT is payable where the first-time buyer pays less than £300,000 for their share, with SDLT being payable at the rate of 5% on the excess over £300,000 where their share costs between £300,000 and £500,000.

First-time buyers who purchased a property through a shared ownership scheme between 22 November 2017 and 29 October 2018 who did not benefit from the relief can claim a refund. Where the transaction was completed before 29 October 2018, those affected have until 28 October 2019 to file an amended SDLT return.

Partner note: FA 2003, s. 57B and Sch. 6ZA.

 

 

Keeping records of rental income and expenses

Unless rental income is less than £1,000, landlords must declare it to HMRC and pay tax on any profit made by the property rental business.

The profit can be calculated by deducting allowable expenses from rental and other income of the property business. However, where it is beneficial to do so, the landlord can claim the property allowance of £1,000 and deduct this instead of actual expenses. This will work in the landlord’s favour where actual expenses are less than £1,000 (unless there is a loss to preserve).

To calculate profits (or losses) accurately, the landlord must keep records.

Rental income

For all properties in the property rental business, a record should be kept of:

  • the dates on which the property was let;
  • rental income received;
  • any income from services provided to tenants (for example if the landlord undertakes maintenance or repairs and bills the tenants for this); and
  • any other income, for example from the sale of domestic goods for which replacement relief is claimed.

The landlord should also keep supporting documentation, such as rent books, invoices and bank statements.

Expenses

The landlord will also need to keep a record of expenses. Expenses can be claimed to the extent that they relate wholly and exclusively to the letting out of the property. Examples of expenses which typically may be incurred by a landlord include:

  • agents’ fees
  • advertising costs
  • wages of staff
  • repairs and maintenance
  • cleaning
  • gardening
  • replacing domestic items
  • landlords’ insurance

The landlord should keep a record of all expenses incurred, and also supporting documentation, such as invoices, agents’ statements, bank statements, receipts, etc.

Where the property allowance is claimed instead, the landlord does not need to keep records of actual expenses. However, it is useful to do so in order to check whether claiming the allowance is beneficial, and also from a business perspective.

Method of keeping records

At the moment, the landlord can keep their records in the way that best suits them. They may prefer to use a software package designed for this purpose, a general accounting package or spreadsheets. Alternatively, they may prefer to keep manual records. What matters at this point is that adequate records are kept and will stand up to HMRC scrutiny if need be.

Looking ahead to Making Tax Digital

When Making Tax Digital for income tax purposes is rolled out to landlords, they will need to keep digital records and upload information up to HMRC quarterly via a digital account. The start date has yet to be announced, but at the time of the 2019 Spring Statement the Chancellor confirmed that it would not be introduced from 2020.

Partner note: www.gov.uk/keeping-your-pay-tax-records/rental-income.

 

 

Main residence relief – beware when buying off-plan

Private residence relief exempts any gain arising on the sale of the only or main residence from capital gains tax. Where the property has been occupied as the main residence throughout the period of ownership, the whole gain is exempt; if the property has only been occupied as a main residence for part of the period of occupation, the gain eligible for relief is reduced accordingly.

A recent tribunal case highlighted the loss of relief that may potentially arise when a property is purchased off-plan.

The taxpayer, Mr Higgins paid a deposit to reserve an apartment in what was previously St Pancras station. Contracts were exchanged on 1 October 2006, but the purchase did not complete until 5 January 2010 as a result of delays in the construction of the apartment. Mr Higgins signed a contract to sell the flat on 15 December 2011; the sale completing on 5 January 2012. He lived in the property for two years, from 5 January 2010 until 5 January 2012. He claimed main residence relief in respect of the gain arising on sale.

HMRC sought to deny part of the relief relating to the period from which contracts were exchange – 1 October 2006 – to the date on which Mr Higgins occupied the property – 5 January 2010. For capital gains tax purposes, the period of ownership runs from the date of exchange of contracts, rather than from completion. However, main residence relief can only start from the date the property was first occupied. It did not matter that it was not physically possible to occupy the property in October 2006 as it did not exist at that point; and indeed Mr Higgins had no right to occupy the property until the sale had completed.

The Tribunal agreed with HMRC and accordingly the proportion of the gain relating to the 39 months from 1 October 2006 to 5 January 2010 was liable to capital gains tax as during that period the apartment was not occupied as a main residence.

Although extra-statutory concession D49 can provide relief where there is a delay of up to two years in taking up residence, the tribunal found the concession not to be relevant in this case.

Delay between exchange of contracts and completion

This decision is not only relevant where a property is purchased off plan. The start date for ownership for main residence relief purposes is the date contracts are exchanged, not the completion date (regardless of the fact the purchaser has no right to occupy the property until completion). Unless exchange of contracts and completion occur on the same day (which is not usually the case) there will be a window where, technically, main residence relief is not in point. In practice, where the delay is only a few weeks, HMRC usually ignore it and grant main residence relief.

The decision is this case is somewhat worrying – and something to be aware of when buying a new home. Extra-statutory concession D49 may help to bridge the gap where the delay in taking up occupation is beyond the taxpayer’s control.

Partner note: Higgins v HMRC [2017] TC 05724, TCGA 1992, s. 222, Extra-statutory concession D49.