Category: Tax articles

by Sarah Ashcroft

One of the most controversial subjects in recent months has been the new Labour-dubbed ‘bedroom tax’ the government is introducing. Whatever your thoughts and feelings on the issue, perhaps the most sensible course of action now is to work out exactly how the change will affect you and your family.

The bedroom tax is part of the welfare reform promised by the coalition government and will see the amount of housing benefit dished out to certain people slashed. Individuals, couples or families who are deemed to be living in a property that is too big for them will have their allowance reduced so that it’s more in keeping with the amount somebody in their circumstances should be receiving.

Effectively, it’s bad news for those who live in a property that includes spare bedrooms, as these will be seen as going to waste and subsequently trigger a reduction in housing benefit. So if you live in a council property or housing association home, now is the time to consider how a change in benefits could affect you, as the measure is due to be implemented from next month.

When it comes to determining how many bedrooms a home contains, certain factors will be taken into consideration. For instance, all children under the age of 16 of the same gender will be expected to share a bedroom, while all under-tens – regardless of whether they are male or female – will also be deemed to be in one room.

All the spare rooms will then be added up and households will learn whether they will still receive the same benefits or face a reduction. Those who no longer qualify for the full amount will find that they lose 14 per cent of their housing benefit if they have one extra bedroom, while the total will go down by 25 per cent if they have two or more spare places to sleep.

It’s estimated that about 660,000 working-age social tenants will be impacted by the welfare reform, potentially resulting in many having to move to a smaller property in order to once again meet the rules for the full amount.

Parents who have separated but both have access to their children face one of the most important criteria of the scheme. Under the new rules, one parent will have to make themselves the ‘main carer’, meaning only they can claim benefits for an extra bedroom.

Other people who will be affected by the bedroom tax include foster carers, parents who have children visit but don’t live with them and families with disabled children. There are plenty of people around the UK who must consider the impact of a reduction in housing benefit.

It will be left up to landlords to determine what constitutes a bedroom and what doesn’t. This has already led to many tenants seeking to prove that certain rooms are not suited for sleeping.

Those who haven’t yet made arrangements to deal with a shortfall in funding will have to act quickly if they are to cope with the changes when they are introduced next month.

External links

• National Housing Federation: Bedroom tax
• Shelter: The bedroom tax

Published on: March 27, 2013

by Jennifer Adams of www.taxinsider.co.uk

There is a great deal of truth to be found in the statement that “Timing is everything” – the difference between a good joke and a bad one, for example, is a person’s sense of timing.

Timing and the recognition of timing also creates advantages and disadvantages in the field of taxation.

The date of purchase and subsequent sale of a property will make the difference between whether you make money/profit (and therefore possibly pay capital gains tax (CGT)), or lose money creating a capital loss (which can either be offset against the gain made from the sale of any other property during the same fiscal year or be carried forward to be used in future tax years).

Despite the reduction in value and sale prices of property currently prevalent as a result of the credit crunch, there are still some properties that stand at a capital profit which, if that profit is translated into a chargeable profit in excess of £10,600 per person per annum, can produce a CGT bill of either 18 per cent or 28 per cent of the gain made (depending upon the seller’s personal income tax rate).

As a 28 per cent CGT bill is more acceptable than a 50 per cent income tax bill (if the seller is an additional rate taxpayer), it’s always preferable for the gain for such taxpayers to be recognised as a capital rather than an income tax gain, if that can be achieved (best, of course, would be a NIL tax charge!).

CGT issues

‘Timing’ is thus all important, but practically what is most beneficial is not always easy to achieve.

With most assets, including property, the date of disposal for CGT purposes is the actual date of signature of contract even though the monies may not be debited from the purchasers’ bank account and the asset not conveyed, delivered or physically transferred until a later date.

If the contract includes any conditions or perhaps is subject to the exercise of an option, then the disposal will not occur until those conditions have been met.

Probably the worst feature of CGT is the many and varied rules for special cases – no other tax has quite so many complex reliefs for individual situations nor, indeed, so long a list of partial or complete exemptions as are found with CGT.

Despite this, tax planning is possible should a property be found to stand at a profit.

With any form of CGT planning, the principle of law determined in the tax case Furniss v Dawson ([1984] 1 All ER 530) should be at the back of the mind.

The principle is, broadly, that where a scheme is put into place comprising a number of steps, one or more of which has no purpose other than to avoid tax, then those steps are to be ignored for tax purposes.

So with this in mind, what comprises a tax planning exercise?

In order to save tax, it’s first necessary to identify when a tax charge actually arises. The basic rule is that before a transaction can give rise to a chargeable gain all of the following must be present:

• A chargeable person; and
• A chargeable asset; and
• A chargeable disposal.

Generally, a ‘chargeable person’ is someone who is resident or ordinarily resident in the UK for at least part of the tax year (TCGA 1992, s 2(1)); a ‘chargeable asset’ includes all forms of property such as land, chattels and legal rights (unless specifically exempt). A ‘chargeable disposal’ occurs when ownership changes or part or the entire asset ceases to exist.

Having considered the above and thus identified that a charge does exist, it should then be possible to either bring forward or possibly delay the date of transaction to be taxed in whichever year is more tax beneficial.

If it’s planned to sell a property which will produce a gain but the property needs some work done on it, usually this is reflected in the price.

However, if the work is more improvement than repair in nature, it may be worthwhile undertaking just the improvement work to reduce the profit on sale thereby reducing the tax bill; possibly even calculating a spend that reduces the profit to just below the CGT annual exempt amount.

You would particularly want to do this if a loss is being incurred on the lettings received, as more repair costs will only increase the income tax loss to be carried forward which may then never achieve tax relief!

Repair or improvement?

The main consideration in this plan is the difference between what is deemed ‘repair work’ (a revenue item and thus allowable as a cost against rental income) and ‘capital improvements’ (a capital item not allowable against rental income but rather an expense for which tax relief is only possible when the property is finally sold).

The definition of a repair is not one that has a statutory footing — rather it takes the normal dictionary definition, although this is supplemented by case law on the distinction between repairs and capital improvements.

A ‘repair’ is really a restoration or a replacement of a particular part of a building, rather than of the whole building at one time.

A ‘capital improvement’ goes beyond a repair, i.e. more than just replacing like with like. If a roof is subject to storm damage, replacing tiles to take the roof back up to its original standard would be a repair; for example, however, taking off the roof and building another storey would be a capital improvement.

HMRC accepts that items such as mending broken windows, etc. would all normally be regarded as repair works.

However, the refurbishment or repair to a property purchased in a derelict state would be regarded as capital expenditure (the assumption being that buying a property in such a state would reduce the price of that property, hence the logic for the repairs to that property being regarded as capital in nature).

A problem area is when work is undertaken to a property that is intended to be repair work but includes an element of improvement. This often happens where building materials improve, making it impractical to replace like with like.

HMRC is generally realistic in accepting that the expenditure should be regarded as a repair rather than as a capital improvement.

This is provided that the improvement element arises only due to the upgrading of materials available, and any improvement to performance or capacity is small. Likewise, incidental improvements may often be treated as repairs.

Practical tip:

CGT planning should be an ongoing procedure for the whole of your property portfolio. Even if you are not intending to sell, the CGT gains or losses made on the portfolio need to be reviewed on an annual basis, and recalculated using current property sale values.

This will enable you to plan for any improvements that can be deemed as capital in nature which, when undertaken, will reduce any capital gain that might be due when a sale is finally made.

Related articles

• Using capital losses and the annual CGT exemption
• More than one home; which one is your main residence?

Published on: September 1, 2012