Business Income Manual 45820 Full Text
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Business Income Manual 45820 Full Text
You can change your cookie settings at any time. A borrower who wishes to repay early will have to pay the lender a charge (called break charges in this guidance). If such charges amount to a premium, they are expressly disallowed. We might, therefore, expect the Courts to look to other sources - other legal contexts, dictionary definitions, common usage and so on - for assistance. In the context of loans, this would mean some excess over the amount advanced. It is sometimes argued that break payments are interest because they may be calculated by reference to interest that the lender might have received had the loan continued. Break payments are made to terminate the loan; they are not for using the money over time. The way the agreement describes the sum is irrelevant. The issue is the reality of the transaction, not the labels the parties attach to it. Whether the payment in question is considered specifically within the loan agreement or provided for elsewhere is not determinative. In such circumstances the break payment will not amount to a premium and will therefore attract relief as incidental costs of raising loan finance. Most High Street lenders commonly require such break payments as a condition of advancing finance. However there is no intention at the outset for a premium to be paid, that more capital is repaid than originally advanced. Instead any break fee received is compensatory. In Kato an indemnity payment was provided for within the loan agreement. HMRC contended under the terms of the loan agreement that a larger sum had to be repaid than the original sum borrowed, therefore the difference was a premium within (c) above. However the Commissioner’s judgment reproduced in part below took a different view. The following characteristics may be indicative, but are likely to be confined to schemes contrived for the purposes of avoidance, with substantial sums being present: We’ll send you a link to a feedback form.
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It will take only 2 minutes to fill in. Don’t worry we won’t send you spam or share your email address with anyone. You can change your cookie settings at any time. The rules apply only to Income Tax. For details see CFM30000 onwards. We’ll send you a link to a feedback form. It will take only 2 minutes to fill in. Don’t worry we won’t send you spam or share your email address with anyone. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our privacy notice. You will receive a link to reset your password.To continue using Tax Insider please log in again.These payments are often called “redemption penalties” or “break payments”. The deductions for the cost of borrowing by Limited companies are enshrined in the rules for “loan relationships” in the 1996 Finance Act, and generally speaking these allow all the costs of taking out or redeeming a loan, provided that it was for a business purpose. These prevented a deduction for the following costs: Essentially, this required an additional payment if the Agreement was terminated early, and it was this which HMRC argued was a “premium” and as such not an allowable expense. In such circumstances the break payment will not amount to a premium and will therefore attract relief as “incidental costs of raising loan finance”. Most High Street lenders commonly require such break payments as a condition of advancing finance. However there is no intention at the outset for a premium to be paid, that more capital is repaid than originally advanced. Instead any break fee received is compensatory”. These payments are often called “redemption penalties” or “break payments”. The deductions for the cost of borrowing by Limited companies are enshrined in the rules for “loan relationships” in the 1996 Finance Act, and generally speaking these allow all the costs of taking out or redeeming a loan, provided that it was for a business purpose.
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Call 0808 169 9916 to learn more. The rental income from these properties will remain taxable in the UK, even if the individual is non-resident for tax purposes, as it is from a UK source. As such, it will need to be declared on an individual’s self-assessment tax return on SA105, the UK Property pages. With regards to exemption or relief from UK tax under a double tax treaty most treaties do not allow this; however, it is still important that the appropriate treaty is referred to in case some form of relief is available. If rental income has not been declared by an individual, then he or she should be making a voluntary disclosure to HMRC as soon as the error is discovered. This applies equally to non-resident taxpayers as well as resident ones, so overseas landlords who have not declared their UK rental income now have the opportunity to declare this via this campaign. For husband and wives who have undeclared income from one property they jointly own, each of them must make a separate declaration. The campaign cannot be used for declaring income for the current or previous tax year; this must be done via a self-assessment tax return, so individuals not yet registered for self-assessment must do so. If an individual is registered for self-assessment and has been issued with notices to file tax returns, then if a self-assessment tax return is outstanding and is within the four-year rule for being able to file tax returns (see 2.8.1 ), then the individual must declare the income via his outstanding tax return. The effect of this is that the individual will be subject to the normal self-assessment penalties rather than the potentially less severe penalties under the let property campaign. If some tax, however, has deliberately been underpaid, then tax due for up to 20 years will have to be paid. They are both non-resident and so applied for their rental income to be paid gross and received HMRC’s agreement to this (see 3.1.4 below).
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In the following tax years Hilary was issued with notices to file self-assessment tax returns, whereas Donald was not, despite his taxable income being above his personal allowance and so tax being due in the UK for most tax years. Because of this lack of notices to file tax returns, Donald mistakenly thought that HMRC’s agreement for his share of the rental income to be paid gross meant they were agreeing to this income being exempt from UK tax (despite HMRC’s standard letter saying otherwise!). He therefore did not inform HMRC that he owed tax and should be filing tax returns. It is a way for individuals to bring their tax affairs up to date on a voluntary basis and provides more favourable terms than would otherwise be the case. An individual does not have to use the let property campaign to make a voluntary disclosure, but will in that case not benefit from the more favourable terms given under the campaign. The campaign can only be used by individuals for declaring rental income from residential property (not commercial property) and cannot be used by companies or trusts or individuals who are already under enquiry or a compliance check by HMRC or who have been notified of this by them. There is a let property questionnaire on HMRC’s website which shows whether or not an individual is eligible to use the campaign. A key element of being able to benefit from lower penalties is how much the individual co-operates with HMRC and the accuracy of the information he provides to HMRC. HMRC regard someone as falling under the scheme if the individual is absent from the UK for six months or more, so someone who is a tax resident in the UK can still fall under this scheme. They have two children who attend boarding school in the UK. June lives in Dubai with Terry, but visits the UK each year between June and September to avoid the Middle Eastern summer and to be with their children over the school summer holidays.
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Technically, anyone who pays rent to or collects rent for a non-resident landlord is obliged to deduct basic rate tax from the rental income.However, the reality is that many letting agents do not do this and just calculate the tax due on the gross rental income before allowable expenses. This will often result in too much tax being deducted, which the landlord can claim either: They should give this certificate to the landlord by 5 July following the year ended 31 March. In this situation, HMRC will seek to recover the tax that should have been deducted and accounted for from the letting agent or tenant and not from the landlord. If the letting agent or tenant can show that the landlord has paid the tax due, say via his or her self-assessment tax return, or that there is no tax due, then HMRC may agree to collect only penalties and interest, and not tax, from the letting agent or tenant. If agreed by HMRC, it should be remembered that if a further property is purchased and let out, another application should be made for that particular property, otherwise basic rate tax (at the time of writing 20) should be deducted until agreement is received from HMRC. Individuals apply on form NRL1, companies on form NRL2 and trustees on form NRL3. This is now done online in one of two ways, either via a Government Gateway account (see 2.3.7 ) or via an online form that is then sent to HMRC in the post. HMRC will no longer accept any earlier versions of the forms. If the tax deducted is not due then it can be claimed back by the individual on his self-assessment tax return. HMRC will not consider applications made more than three months before the landlord leaves the UK. However, in practice it is quite common for HMRC to agree that no returns are required if they are happy that no tax is due, e.g. if the gross rental income before deductions is well below the personal allowance and the individual has no other taxable income.
It is still liable to UK tax and so needs to be declared on the individual’s self-assessment tax return and any tax due must be paid by the normal due date under self-assessment of 31 January. This is stated in HMRC’s standard letter to landlords confirming their agreement to rental income being paid gross. HMRC will then contact the new agent to confirm that no tax needs to be deducted. Prior to this the new agent will need to deduct tax from the non-resident landlord’s rental income. In this situation, the individual needs to see if relief is available under a double tax treaty between the UK and that country. If not, then it is likely that the country in which the landlord is living and resident for tax purposes, will give relief for any double tax. It is best to carry out due diligence on the prospective letting agent as follows: He has approached two letting agents who have stated they will be pleased to handle the lettings for him whilst he is abroad. Big Letters Ltd is a large national chain (12 fees) and Stavely Lets (8 fees) which is a six man team based locally. He undertakes a due diligence research on both and notices: This is a legal requirement so why not. This is time consuming, in the eventuality of a dispute. This fits in with the number that can be managed without standards of management and care dropping. There are important distinctions between the two as shown in the Table below. The advantage of the assured shorthold tenancy agreement is that the landlord can give notice to repossess the property on the last day of the fixed term or (more usually) two months before the term ends. Housing Act 1988, Chapter 1 Housing Act 1988, Chapter 2 It is this right under s. 21 of the Housing Act 1988 for the landlord to recover possession of the property after the end of the fixed term. The landlord must follow the correct procedure, i.e. service of the section 21 notice and then via the courts.
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This is necessary if a landlord wants to be able to rely on this reason (i.e. ground 1 of schedule 2 to the Housing Act 1988) to get possession of the property at the end of the fixed term and is also relevant if the property is mortgaged.’ However, if they can evict them within six months of the end of the contractual fixed term, that is a different matter. Taking action through the courts can be time consuming and expensive as in this example: She gets many applicants for her central London flat, one of which is a high ranking diplomat with a foreign embassy in London. He seems very nice and well spoken and shows her his recent salary notice which adequately covers the rent. A shorthold tenancy agreement is signed and Irina goes abroad. The shorthold tenancy agreement has now expired and she gives notice for the tenant to leave.So perhaps Irina can bring a claim for possession of the property against the diplomat on the grounds that he has not paid his rent, but this is unlikely to be successful. However, when things go wrong there is no easy recourse and costs can mount up as Irina’s case illustrates. Insurance is a must in these situations and a lack of it can prove very costly. In this situation the cash basis needs to be applied consistently and overall it must give a reasonable result that does not differ substantially from the accruals basis. However, an individual can elect for generally accepted accounting principles (GAAP) to apply instead to his property business if he so wishes. It has a more long term benefit than revenue expenditure. Depreciation of assets cannot be deducted from the rental income, unlike in some countries (e.g. Australia) where this is possible. However, capital allowances for plant and machinery may be an allowable deduction, but generally only for: Student accommodation may also cause complications with regards to qualifying expenditure for allowable capital allowances.
This may include documents, such as invoices and agreements etc., and a record of the purpose of incurring the expense should also be kept. The sole purpose of the expense should be for the rental property business; however, if it can be shown there is a clear distinction between an element that relates solely to the rental property, and an element that relates to some other purpose, then it may be possible to apportion the expense between the two elements on a reasonable basis. For example, a non-resident may visit his rental property and rent a car while visiting the UK. If he can show the mileage for travelling to the property to inspect it or carry out some other task purely for the rental property business, then he may be able to claim a deduction for this travelling cost. On the other hand, if a refurbishment or alteration to a property results in substantially the whole of the property being altered, then this cost may be regarded as capital expenditure. The invoices for capital expenditure incurred should be kept, as these items may be treated as enhancement of capital expenditure when claiming capital gains tax (CGT) relief later. A key question, therefore, when looking at whether repair or renewal expenditure is an allowable deduction, is whether or not it improves the item concerned. If it merely replaces the item with a modern day equivalent, using modern technologies and materials for essentially the same item, with no other improvement or upgrade, then the cost should be regarded as a repair and so allowable. If there is another improvement or upgrade, then it is unlikely this will be treated as an allowable repair expense. The wear and tear allowance was calculated as 10 of the net rent from the property (i.e. rent received less council tax, water rates, gas, electricity and any other usual tenant liabilities born by the landlord). The renewals basis was the replacement of items on a like-for-like basis.
Once the choice was made, the landlord had to continue using the same method each year and so could not swap between the two alternatives. It did not cover fixtures, so a landlord who was claiming the wear and tear allowance could also claim deductions for other repairs and replacements to fixtures not covered by the allowance (such as wash basins, sinks, toilets, fitted kitchens and bathrooms). He could not, however, claim the actual renewal of furniture and furnishings which were covered by the wear and tear allowance. This newer relief applies to all landlords, not just to those of fully furnished rental properties. It should also be noted that the relief applies to freestanding items only, and not to fixed items such as integrated appliances like an oven in a fitted kitchen, fitted or walk-in wardrobes and so on. In their view, changing the functionally (from a sofa to a sofa bed in the above example) means the replacement is not substantially the same as the old item. In addition, they take the view that changing the material or quality of the item also means that the replacement is not substantially the same as the old item. HMRC give the example of upgrading from synthetic fabric carpets to woollen carpets, where they consider the replacement is not substantially the same as the old item and so there has been an improvement. These are: However, as the property as a whole is regarded as the asset, the replacement of such items should be regarded as repairs (subject to the above improvement rule) and so relief should be available. This will not apply to commercial properties where capital allowances will be available instead. HMRC therefore took the view that it did not apply to items such as carpets, which were of much higher value, or to freestanding white goods unless they were an integral part of a fitted kitchen and so part of the property.
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This HMRC view (which much of the profession disagreed with) largely affected landlords of unfurnished or partly furnished residential properties, who were unable to claim the wear and tear allowance that was available to landlords of fully furnished properties. PIM 2030 sets out circumstances in which HMRC would regard such costs as capital rather than revenue. Similarly, any grants received towards repairs must be taken into account. In this situation, the amounts paid by the tenant need to be brought in as income and taxed accordingly. Similarly, if the tenant makes a contribution towards maintenance or repair costs then this contribution needs to be included with income rather than against the cost deduction. The following applies to landlords who are subject to income tax. This will include loans for the purchase of the property and for any other items for the rental property business, such as repairs, alterations and improvements. BIM 45815 details the kind of expenses that are usually allowable and BIM 45820 details those that are excluded from tax relief. Typical allowable costs would include: The source of the borrowing and the security of the loan, together with the residence of the lender, are not normally relevant when deciding whether or not tax relief is available. Example 2 at BIM 45700 shows how a landlord can withdraw funds from the property business, and use those for some reason other than in respect of the rental business, including for private purposes, but still receive tax relief for the interest. The key point is that the individual’s capital account does not become overdrawn and, to be able to show this, a balance sheet will need to be prepared. This new regime only applies to rental property businesses subject to income tax, so covers individuals (including those in partnership), trusts and estates, but not companies and also not furnished holiday lets (FHL) in the UK, though property located overseas will be covered by the new restriction.
The restriction relates to finance costs, and not just loan interest, and therefore includes costs associated with obtaining a loan. Where the amount borrowed is only partly used for the above purpose, for example a dwelling house and some other letting like a residential flat above a shop, it should then be apportioned on a just and reasonable basis. He has a number of rental properties in the UK and these provide his only source of UK income.This is likely to be the case for a number of British expats living overseas, with (say) one or two rental properties in the UK and no other UK sourced income. He also receives some deferred bonuses which related to his UK work before leaving, and some restricted share units vest which were awarded to him while he was still working in the UK, resulting in some of these becoming taxable in the UK (see 8.2 on share options). As a result, he becomes a higher rate taxpayer and so the new rules will start having a negative impact on his tax liability.Without this deduction he may end up having a tax liability because his personal allowance no longer covers all of his taxable rental income or it could push him into the higher tax rate bracket. Similarly, if a non-resident has been in a loss situation because of the deduction of interest, then again this may reduce the losses available or the individual may find himself in a profit situation which is not fully covered by the personal allowance. Where not all the relievable amount is used in a tax year, the amount unrelieved can be carried forward indefinitely or until the rental property business ceases, even if the loan to which the finance costs relate to is repaid. This is calculated as total income excluding savings and dividends income less losses, reliefs, personal allowances and (where appropriate) blind persons’ allowances.
However, care needs to be taken when considering whether or not a landlord should incorporate his rental property business and both wider tax issues and non-tax issues should be considered. For example, a landlord may obtain private residence relief, if it has been his main residence at some stage during his ownership of the property, and so (in turn) letting relief. These reliefs will be lost if the property is transferred to a limited company, which may not be in the landlord’s interests if he moves back into the property to live in it, as his only or main residence, after a period of living and working overseas, which is regarded as a deemed period of occupation under s. 223(3) of TCGA 1992 (see 3.2.6 ). However, care needs to be taken when dealing with overseas lenders to ensure that there is no obligation on the individual to withhold tax at basic rate from the interest payments he makes to an overseas lender and to account for these to HMRC. HMRC confirm (in their Savings and Investment Manual ) that there is a presumption that if a loan is for less than a year, then the interest on this is regarded as being short and there will be no withholding obligation. They then go on to say that if, at the outset, the loan is for more than a year, then the interest paid on this loan is likely to be regarded as being yearly interest and so there is potentially a withholding obligation, although the facts of the case need to be considered to establish if this is the case or not, as the situation may not be so clear cut. The intentions of the parties involved will be an important factor in determining if the interest is short or yearly. Residence for this purpose is not the same as for tax, but is the individual’s residence for jurisdiction purposes, i.e. under which jurisdiction the lender would take action against the payer, e.g. for payment of interest or the repayment of the loan.
HMRC will also look at the following factors when establishing if the payment of interest is from a UK source: Under these EU rules, legal action will take place in the state where the person’s domicile is (as defined by the States concerned: see SAIM 9090 for the UK definition of this). However, in this scenario it is the lender, not the borrower, who has to apply to HMRC and who will be required to deduct and account for tax until they are told otherwise by HMRC. If the interest is paid gross, without deduction of tax, and without HMRC’s authorisation, then the tax that should have been deducted will still have to be paid to HMRC. The cost of travelling to a rental property will be allowable if the sole purpose of the journey is in respect of the rental business. Costs such as flights to the UK are unlikely to be allowable, as there is very likely to be a dual purpose of the journey, i.e. if an individual is visiting the UK for another reason as well, such as seeing relatives, friends, to perform work in the UK (a business meeting and so on). It will then be difficult to distinguish an element that relates solely to the rental business, from other reasons such as visiting family and friends. In rare cases where, say, a non-resident owning UK property has no agent and travels to the UK to oversee renovations, repairs, tenant eviction or signing leases, there may be a case for claiming a standard economy airfare as travel expenses. Other running costs can be included as well as fuel. Since 6 April 2017, landlords (individuals and partnerships, but not companies) can claim the fixed rate mileage rates of 45p per mile for business mileage up to 10,000 miles per year (and then 25p per mile above this), rather than claiming the actual costs. The recipient could be taxed on the amounts received. Landlords cannot claim a deduction for their time spent on their rental business.
Revenue expenses include accountancy fees for the preparation of the rental business accounts, agreeing tax liabilities (consideration should be taken of overseas accountancy fees as well as UK fees) and fees in respect of the renewal of leases (if for less than 50 years) or the first lease if for less than a year, but not the fees in respect of the initial lease if for more than one year, as this would be regarded as a capital expense. Fees in respect of a replacement lease with a different tenant should be allowable if the replacement lease is similar to the previous lease in place. If there is a substantial change, such as changing to a long lease from a short lease, then the fees may not be allowable. Therefore a breakdown of the charge will be needed to establish which costs are allowable and which are not. As mentioned above, capital allowances may be available in respect of capital expenditure incurred in common areas. If the costs are incurred only partly in respect of the rental business, then an apportionment should be made on a reasonable basis to establish the allowable element. If there are, then they can be deducted against these. If not, then certain expenses, such as the cost of collecting bad debts, can be relieved sideways and against other taxable income and gains in the same tax year. In this respect the claim for relief needs to be made by 31 January following the relevant tax year. However, HMRC permit the deduction of allowable expenses, but not to the extent that a loss arises, and any excess expenses not deducted cannot be carried forward for use in the future. Once he or she returns to the UK and becomes tax resident, and so taxable on his worldwide income, the rental income from this overseas property will be taxable in the UK. It will be treated as a separate overseas rental business to any rental income from UK properties he may have.
The income will need to be declared on the foreign pages (SA106) of the self-assessment tax return and the taxable income will be calculated in the same way as with UK rental income. Relief will be available for any foreign tax paid, which may be either in the form of a tax credit against the UK tax due on the income or a deduction against the rental income. This latter method may be more appropriate if a loss is being made on the rental property and the foreign tax credit method is then lost, as there is no UK tax against which to offset it. It is first set off against any other taxable profits that have arisen in the same tax year from the UK rental business and any excess is then carried forward to set against future profits from the UK rental business. No claim is needed for this loss relief as it applies automatically and the losses can be carried forward indefinitely. This will not be relevant when an individual is not resident in the UK as the profits from overseas properties are not then taxable in the UK, but if he were to return to the UK and become resident again, this may need to be considered. In the case of the latter, the weakness of the pound since Brexit has meant that more holiday makers are spending their holidays in the UK now and the demand for holiday lets is rising. There will also be the need to consider income tax, VAT and in some countries an occupancy tax. VAT in the UK is to be considered but thankfully occupancy tax is not currently applicable to UK hosts, but the government may perceive Airbnb hosts as an area of tax loss and choose to alter this in the future. Note that VAT would also be charged on the commission deductions in the examples below (see 2.5 VAT and GST ). Separate records are required for each of these because the losses from one FHL business cannot be used against profits of the other.It would be expected that summer lets would be at a more commercial figure of weekly rent than winter lets.
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