3 key tips on Tax planning around property

 In Tax

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Tax planning around property - recording improvements and repairsTax planning around property

In the Chancellor’s Budget speech in March 2014 he announced a major overhaul of pensions once again.  The plan is to allow pensioners to draw down their pension savings and spend it as they like rather than have to buy an annuity.  Some may choose to purchase property with a view to letting it out.  Here are some tips on tax planning around property.

Recording Improvements

A recent 2013 Tribunal case, (Ridpath TC02785), showed the need to record monies spent on property improvements.  A total of £40,000 had been spent on such improvements, and although the First-tier Tribunal agreed it was very likely that these costs had been incurred, it was impossible to define precisely how much had been spent, and there was no proof or evidence of the expenditure.

It is essential to record all expenses incurred on property improvements, so that when the buildings are eventually sold only the correct amount of capital gains tax is paid.  Practitioners should  re-examine  the records in relation to landlord owned properties and check that where improvements have been made, there are details and evidence of the expenditure to support the position.  It is also best to review all property repairs.

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Tax Relief on Property Repairs

There have been three recent Tribunal cases – Pratt, Cairnsmill and Hopegear, which all show that repairs to property can achieve tax relief and be classified as a revenue expense.  It is essential therefore, that adequate planning is undertaken and all property repair work is fully assessed in light of these cases.  When the end of the current tax year is in sight, there will be a tax advantage in ensuring that relevant matters can be addressed before 5 April, to make  sure that the right planning and invoicing are in place.

Actively Managed Property and Rollover Relief

Ramsay was an Upper Tier Tribunal (UTT) decision and therefore of significant importance in establishing that a let property provided with a large amount of inherent services relating to active management, was sufficient to constitute the carrying on of a business for the purpose of section 62 TCGA 1992 CGT rollover relief.

Essentially, this case established that where a property is highly actively managed, it can count as a capital asset, and when sold, the capital gains tax liability can be mitigated by rollover relief.

It should be noted, that in the Ramsay case, the owners had spent approximately 20 hours per week carrying out various activities linked to the property, which included meeting and assisting tenants and repairing and maintaining the communal areas.

There is a need to demonstrate a positive trading environment. The UTT looked at the trade requirements – they were looking for evidence of a serious undertaking, earnestly and actively pursued, with reasonable continuity and substance in turnover. 

There is a need for the trading activity to be conducted in a regular manner on sound business principles, and to be the type of trade which is commonly used by those who are seeking a profit from their activities.

The UTT was advised that the degree and scope of the activities in the Ramsay case far exceeded those usually provided by a normal passive investor, and went much further than the activities that most tenants would normally expect from their landlord.

Tax Tip

There are many tax planning opportunities for property in 2014 if the client has correctly recorded improvements, actively managed the assets and examined the opportunities to claim tax relief on repairs.

Julie Butler F.C.A. is the author of Tax Planning for Farm and Land Diversification (Bloomsbury Professional), Equine Tax Planning ISBN: 0406966540, and Stanley: Taxation of Farmers and Landowners (LexisNexis). 

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