Selling Rental Property

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1 a. Selling Rental Property Tax implications Presented by: Tony Cooney FCCA ACA CTA Partner Ashworth Treasure Ghartered Accountants u re.com

2 lntroduction Ashworth Treasure is a tax based firm of Chartered Accountants, operating from Lytham. We have 5 Chartered Tax Advisers and we act for a range of business owners and entrepreneurs, including landlords and other property based clients. Tony has been a partner at Ashworth Treasure for approximately 15 years and is a member of the Chartered lnstitute of Taxation. No reliance should be placed on the notes and specific professional advice should be sought in all circumstances.

3 Background At the last meeting we talked about obtaining tax relief for property repairs improvements. Some of the feedback mentioned that there were sometimes insufficient profits against which to offset certain expenditure and hence there was no benefit to such a claim. Or alternatively profits were needed in order to appease the bank! The following assumes personal ownership of property and not company ownership. lt also only relates to residential property How does tax work on selling property?. Tax is due on the selling proceeds less cost Individuals no longer entitled to 'taper relief or'indexation' Special rules for properties bought before March 1982 Cost includes original price, solicitors fees (both sale and purchase), estate agent fees, improvements not previously claimed against rentals, stamp duty land tax There is an annual allowance of t10,100 i.e. the first f 10k for each owner is tax free, but the allowance can't be carried forward The rate is 18% for a basic rate taxpayer and 28o/o for a higher rate taxpayer 2

4 The gain is added to annual income in order to determine whether you are a higher rate taxpayer so some may be at 18o/o and some at 28o/o The tax is due in one payment on 31 January following tax year of disposal. lf sold on 4 April2011, tax is due 31 January f sold on 6 April 2011 the tax is due on 31 January Obviously we should let the market dictate when to sell, but if close to 5 April then should be able to accommodate lf a loss is made, this can be carried forward indefinitely against future capital gains Problem areas lf you buy a property with a view to selling it at a profit then HMRC can tax it as income, not capital gains HMRC can deny relief for "maintenance" i.e. if you have rental losses there can be a temptation to put maintenance to cost of property. Rental income losses cannot be carried forward against future capital gains. Capital losses cannot be offset against rental income r Amounts owing on mortgages are irrelevant in capital gains tax calculations 3

5 There have been so many changes to capital gains tax over the years that some speculate whether more is to come e.g. increased rates or reduced annual exemption Opportunities Consider joint ownership on acquisition or a transfer to spouse before sale i.e. to take advantage of 2 x t10k annual exemptions As mentioned, watch the timing of the sale. lt is exchange of contracts that matters and not completion. Selling early in the tax year defers payment substantially. lf selling 2 properties (say) then could try to time it as to one selling in March and one in April (after sth) o There is no capital gains tax on the sale of your private residence. Also the last 3 years of ownership are deemed as occupied. So buy a property, move in, move out, rent out and sell for no tax. lf you have 2 properties an election can be made as to which is your private residence for tax. This is how the MPs 'flipped' their second homes - it was all perfectly legitimate. Complex area so seek advice. HMRC crackdown. HMRC have set up special tax evasion teams, who are going through Land Registry records and Stamp Office records in order to seek out buy-to-let landlords who have sold properties and not declared them on tax returns. They allegedly have also gathered information from letting agencies and benefits agency 4

6 Capital gains tax collections are up 23o/o as a result of the investigations with the average yield being f 10,800 per enquiry HMRC are looking at improvements and not allowing against cgt anything that is maintenance. Kitchens and bathrooms may be ok if improvement can be shown but decoration and generar repairs will not be allowed lnterest is due on any amounts undeclared from the date it was due and a penalty is charged The penalty for a deliberate and concealed mis-decraration is 100o/o of the tax due. The penalty can be mitigated by disclosure and assistance given. we have negotiated penalties of o/o in the past. There can be genuine error in not declaring i.e. you would not need to declare property rentals if you are making a loss. lf in doubt, seek advice. lf you have mis-declared then consider approaching HMRC before they approach you. Future Forums Could cover o Private residence o Rent of room in house. Tax relief on interest r Limited company ownership What do you want? Anything else? Let me know to n vcoo hwo rthtreas u re. co m 5

7 HM Revenue & Customs (HMRC) is targeting holiday homeowners and buyto-let landlords who have bought and sold properties but failed to disclose the disposals in their tax returns, an accountancy group has warned. UHY Hacker Young said that capital gains tax (CGT) inquiries focusing on residential properties have become more common as HMRC has begun trawling Land Registry data in a systematic manner. While a person's main residence is exempt from the tax, sales of second homes and buyto-let properties may be subject to CGT' "CGT inquiries focused on residential properties have become much more common recently and HMRC has clearly stated in inquiry correspondence that it has obtained information on taxpayers from the Land Registry, which is something we've not heard before," said Geoff Davies, partner at UHY Hacker Young. HMRC is also looking at taxpayers who have incorrectly offset costs spent improving properties against CGT. Taxpayers are allowed to deduct the cost of work on a property from their CGT bill but it must be considered "enhancement expenditure", and not maintenance. Taxpayers who have bought and sold properties over a relatively short period of time could also face extra tax bills, even if they have paid the correct amount of CGT. Davies warned that people who sold on properties without letting them could be considered property developers, making gains taxable as income - and hence a "massive increase" in their tax bill.

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