Some of our clients dream of being a landlord and building a property portfolio that will give them income and possibly become a valuable investment for the future. Some property clients, however, never intended to be a landlord but the need to move house forced them into renting their property.

Imagine this: you buy your house in October 1997 for £155,000 (including conveyancer’s fees, etc). You keep the house and let it due to needing to move to a new home in October 2015. Your current rental agreement is coming up for renewal and you would like to take the opportunity to sell the house and stop being a landlord, but if you do so before October 2020 there is an early redemption penalty on the mortgage of £5,000 to pay. What do you do? It raises a lot of questions. How will your Capital Gains Tax position be affected by the delay? Especially, if you pay income tax at a higher rate and the property’s current value of £450,000 is unlikely to change in the next couple of years. If you sell the property on or after 6th April 2020 – as opposed to now or before then you will have the following impacts, in this example October 2020 being the date when you sell:
  • Firstly, the final period exemption available, because you lived in the house before you rent it out, will fall from 18 months to 9 months which will result in £9,620 loss of relief.
  • Secondly, Letting relief which is currently available provided you have lived in the house will only apply if you share occupation of their house with a tenant. This will result in £40,000 loss of letting relief which is the maximum.
What does this mean to this Landlord?
  • Higher rate tax payer will pay £11,903 more after April 6th 2020, before the tax bill was £0 i.e. pre April 6th 2020.
    • Please note there are special rules which give 36 months relief to those with a disability, and those in or moving into care, which will not change.
  • Overall, what this means you are worse off £6,903 compared to now after you paid early redemption penalty on the mortgage of £5,000 for selling.
Getting the right advice can make a substantial difference to your pocket. Please note this is based on the plans by the government to implement the two changes as stated in the 2019 budget and assuming the annual exemption of £12,000 used in the comparison.

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Are you VAT registered and using the cash accounting scheme? Do you use a manual cashbook and are a little concerned that you can't continue to use your cashbook system with a spreadsheet and comply with Making Tax Digital Guidelines?

Bringing your business into line with the new Making Tax Digital guidelines can feel quite daunting. If you're not used to using an electronic accounting system on a day to day basis, then you may be concerned about switching to a digital system and whether you can also use those tried and trusted spreadsheets.

You can read about the guidelines and the implications direct here on the government site, and here's some more information to help make it a little clearer. Essentially the guideline states that for both supplies made and supplies received a digital record should be kept of:

  • the time of supply – the tax point;
  • the value of the supply – the net value excluding VAT, and
  • the rate of VAT charged for sales or the amount of input tax that you will claim for purchases.

To clarify, the time of supply, if you are cash accounting, is the date you receive payment or pay for the supply.

More importantly, what is not made entirely clear on the government notice is that the records don't just need to be digital, they also need to cross-reference to payments and receipts, which can indeed be done in the cashbook and effectively the cash book will become your digital record.

Businesses using the cash accounting system have always been required to cross-reference entries to their corresponding sales and purchase invoices so this isn't particularly new and MTD has not changed this. Simply recording a payment which covers several invoices, or part-pays a single invoice is not enough. The cross-referencing and date is important too.

You also need to be aware that statements from your suppliers that show multiple transactions cannot be posted as one entry. All invoices must be recorded individually and, as usual, retained for input tax deduction. There is one exception, which is described in the notice 700/22 and applies to HMRC’s definition of third-party agents: “where the information is received as a summary document you can treat this document as one invoice received by you for the purpose of creating your digital record”.

In most cases, Making Tax Digital should not change the type of records you need to keep but does require those records to be entered in digital format. The advantage of Making Tax Digital is that record keeping should be a little easier in the long run, especially as more of your suppliers will communicate with you digitally, hopefully keeping paper filing to a minimum.
Q. My client is a limited company, which also has a pension fund and both the company and the trustees of the pension fund are registered for VAT as separate entities.  Recently the company and the pension fund jointly have purchased a commercial property and the company has placed an option to tax on the property.  How do they deal with the VAT returns for each entity?

A. When a property is in joint ownership, the owners are treated by HMRC as a partnership for VAT purposes.  In your client’s case, each of the trustees of the pension fund and the limited company, as a corporate entity, are the ‘partners’ in a new VAT partnership and need to apply for VAT registration as that partnership entity. It is worth mentioning that where a partnership registration is required in this way for VAT, it does not necessarily follow that the partners in the VAT partnership will be viewed as a partnership for the Partnership Act 1890.

If the company and pension fund want the rentals of the property to be taxable supplies then the VAT partnership would need to make an option to tax for the property, irrespective of the limited company having its own option to tax in place.    The output tax on the rent would then be declared on the partnership’s VAT return.  Neither the company’s nor the pension fund’s, own VAT registration would deal with the VAT aspects of the jointly owned property.

If the company and the pension fund are not treating themselves as a partnership for accounting purposes in recording the income for the property, then care will need to be taken to ensure that rent transactions and any costs relating to the property can clearly be identified to enable the VAT return for the partnership to be completed.
Certax St Albans District are proud to announce the launch of our new website.

We have designed the website to be clear and easy to navigate, as well as providing information about the range of services we offer we have also included a number of resources including:

  • Tax Calculators
  • Companies House Forms
  • HMRC Forms
  • Check a Company Name
  • Useful Links

We also provide a very useful Business News feed which is regularly updated with News that is relevant to a wide range of organisations.

We can now also be found on facebook and twitter

Our Address

Certax Accounting (St Albans District) Ltd
85 Southdown Road

Phone Contacts

General: 01727 634444

Mobile: 07973 889086

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We will respond within one working day.