Dear members of this forum,
May I request your help in getting some valuable advice. We were living in our home in Scotland till July 2014;but due to certain job reasons relocated to Australia and currently am in Australia. We were not sure whether this relocation would work and so didn't want to sell our house in Scotland. So we have been advertising our property through cottages4you. We have had some guests; but overall the business is nothing great to write about.
But now its tax time and was wondering about the tax implications.
Did go through some online sites incl HMRC and I have come to the conclusion that our property cannot be classed as FHL as per the tax office guidance as it would not qualify in one respect - we have not had 105 days of actual occupation of the property by guests(its less than that in the period from Sept 2014 to April 2015. So I have some doubts
- so what happens to the houses in the first year of their letting if they don't attract the stipulated 105 days of real occupancy? Is there any way we can still classify it as an FHL? From the rules it seems that in the first year we cannot make an election.so are we really stuck?
- If there is no option that I can classify our house as FHL, what category will it fall into? Will it be classed as a rental property? If so can I claim for the expenses like cleaner/caretaker expenses; the initial expenditure which I had incurred in furnishing the house to a holiday let status; the running costs such as gas/electricity/insurance etc.
-We still have mortgage on this house; so if this house can be classed only as a rental property can I offset for the mortgage interest(reduce the interest amount of my mortgage against the total income)
- Me and my wife jointly own the house and the mortgage is paid from a joint account. The holiday let business is run by my wife and the whole contract with cottages4you is in my wife's name. Also the whole day-to-day business is looked after by my wife(who is with me in Australia). The payment from cottages4you comes into the same joint account. But I am in a higher tax bracket than my wife and so was wondering the whole income or at least the 80% income(actually I think its a loss in the first year) could be written off in my wife's name? Was listening to John Endacott's lecture on this topic (https://audioboom.com/boos/640860-tax-g ... ngs-part-2) and he has mentioned that its not stipulated that the division should be 50 -50 even if its a joint ownership. What are your thoughts on this?
I am pretty sure that I need to get advice from a qualified accountant on these complex issues; but if anyone of you have any ideas, may I request your help.
Thanks in advance for taking trouble in reading through my query and in offering advice. Please do reply.
Thanks
Paul
Request for some info
-
Guest
Re: Request for some info
Last edited by Guest on Thu Jul 16, 2015 11:27 pm, edited 1 time in total.
The reply from 7Aspire is as always, very comprehensive and exactly what you needed. No one could put it better.
Just a minor footnote. If you do apply for business rates, you will either have to pay your council extra for your rubbish and recycling to be removed, or outsource to a private company. Even so, you should end up better off than paying full council tax.
Just a minor footnote. If you do apply for business rates, you will either have to pay your council extra for your rubbish and recycling to be removed, or outsource to a private company. Even so, you should end up better off than paying full council tax.
Dear 7Aspire,
Thank you very much in taking the effort and answering almost all of my queries. Had read through some of your earlier postings and its really commendable that some of the forum members including yourself put in so much effort to answer all these mundane queries raised by (?probable passers-by) totally ignorant folks like myself. Thanks once again.
Now coming to your reply, most of it is pretty clear, but certain sections were not clear to me. Let me try to expand on those.
In our personal case we will not qualify for FHL for the period from Sept 2014 to Sept 2015. So the plan is to go ahead and submit a tax return for the period from Sept 2014 to April 2015 as non-FHL property. Will wait and see if we can manage to qualify for FHL during the present tax year (April 2015 to March 2016). You did mention that we could claim " normal business expenses (cleaning, maintenance, utilities, consumables, travel, own home use, advertising, letting agents fees, mortgage interest, bank charges, etc" but cannot claim capital expenses. But at the same time claim -? 10% of gross rental income as wear and tear (W&T).
My doubt -
1) is this (W&T) in addition to the above mentioned normal business expenses. Can I claim both?
2)If I claim that 10% as (W&T) for year 2014-15(as non FHL property), does it impede me in claiming the capital expenses(which I made in July 2014-(prior to getting the house on cottages4you) at a later date - for eg for tax year 2015-16, if I managed to get FHL status or is it that once I claimed 10% as W&T for one year means that I cannot claim any capital expenses in the future also even if it becomes FHL at another time point?
3) You did mention "If you do qualify as FHL and your bank charges/mortgage interest will be less than £500pa, you can treat your CA purchases as expenses, using a system knowing as 'cash basis' accounting."
In our case that is less than £500, but is there something that I should do now to prepare for this thing called 'cash basis' accounting'?(hoping that in a year we could become a FHL)
4)In the next statement you have mentioned "my view is put all your CAs into the first year you qualify as FHL, and carry the potential loss forward to offset future tax liability."
I do apologise for my ignorance, but in layman's terms what does that mean?
5) From your reply - "If for tax reasons it suits you and your wife to have the property income assigned to one or other of you, or otherwise in different proportion to your respective ownership share, you must make a declaration to HMRC. Clearly, if you continue to be classified as domiciled in the UK such that your worldwide earnings mean you are in the higher tax threshold, then it probably makes sense to have all the property income assigned to your wife. "
I have been doing some online reading on this topic after that advice and came across a few relevant points - the below mentioned is copied from this webpage - (http://www.pglaw.co.uk/form-17-declarin ... -property/)
- Couples and their advisors should be aware of guidance published by HMRC on the taxation of income from property. Most significantly, whilst HMRC have previously only asked for evidence of beneficial ownership in the case of bank and building society interest, this requirement will also apply in respect of all types of property. For example, in the case of a husband and wife, it is not uncommon for the legal title to ‘buy to let’ property to be held either in the sole name of the husband (especially if they are the higher earner and a mortgage was required), or in joint names, but rental income to then be declared as belonging to the wife, so as to make use of her personal allowance and marginal tax rates.
As well as completing HMRC’s updated Form 17 (Declaration of beneficial interests in joint property and income), in future couples will need to submit that form to HMRC with evidence of their beneficial interests before they will be taxed otherwise than equally. Evidence is provided by way of a formal deed, called a Declaration of Trust, signed by the couple, setting out their respective beneficial interests in the property.
A Declaration of Trust is a simple form of trust, which essentially states that although the legal title is owned by one or both parties, the beneficial interests (i.e. the right to receive income) is held by the party wishing to declare it on their tax return. Therefore, whilst HM Land Registry might show the legal title to the property as being in joint names, the Declaration of Trust would sit behind the legal title, providing evidence of the way in which the actual benefit is apportioned and rental income paid between the couple.
-------
Form 17 is in this HMRC webpage - https://www.gov.uk/government/publicati ... -income-17)
But after going through that form its evident that we need this thing called "Declaration of Trust"
Was wondering anyone has done a similar thing or come across anything like that? Do we need to register it with land registry or some other agency or is it that the husband and wife fill in a form with witness signatures and send it to HMRC?
Regarding the business rates/council tax, we were very fortunate -the council gave us 100% off the council tax- if not by this time we would have sold the property!!! Thanks for raising that important point.
Once again let me thank you for the reply and for members like yourself who provide lot of valuable information to ignorant newbies like myself.. Let me hope that you could reply to my queries, in your spare time.
Thanks
Paul
Thank you very much in taking the effort and answering almost all of my queries. Had read through some of your earlier postings and its really commendable that some of the forum members including yourself put in so much effort to answer all these mundane queries raised by (?probable passers-by) totally ignorant folks like myself. Thanks once again.
Now coming to your reply, most of it is pretty clear, but certain sections were not clear to me. Let me try to expand on those.
In our personal case we will not qualify for FHL for the period from Sept 2014 to Sept 2015. So the plan is to go ahead and submit a tax return for the period from Sept 2014 to April 2015 as non-FHL property. Will wait and see if we can manage to qualify for FHL during the present tax year (April 2015 to March 2016). You did mention that we could claim " normal business expenses (cleaning, maintenance, utilities, consumables, travel, own home use, advertising, letting agents fees, mortgage interest, bank charges, etc" but cannot claim capital expenses. But at the same time claim -? 10% of gross rental income as wear and tear (W&T).
My doubt -
1) is this (W&T) in addition to the above mentioned normal business expenses. Can I claim both?
2)If I claim that 10% as (W&T) for year 2014-15(as non FHL property), does it impede me in claiming the capital expenses(which I made in July 2014-(prior to getting the house on cottages4you) at a later date - for eg for tax year 2015-16, if I managed to get FHL status or is it that once I claimed 10% as W&T for one year means that I cannot claim any capital expenses in the future also even if it becomes FHL at another time point?
3) You did mention "If you do qualify as FHL and your bank charges/mortgage interest will be less than £500pa, you can treat your CA purchases as expenses, using a system knowing as 'cash basis' accounting."
In our case that is less than £500, but is there something that I should do now to prepare for this thing called 'cash basis' accounting'?(hoping that in a year we could become a FHL)
4)In the next statement you have mentioned "my view is put all your CAs into the first year you qualify as FHL, and carry the potential loss forward to offset future tax liability."
I do apologise for my ignorance, but in layman's terms what does that mean?
5) From your reply - "If for tax reasons it suits you and your wife to have the property income assigned to one or other of you, or otherwise in different proportion to your respective ownership share, you must make a declaration to HMRC. Clearly, if you continue to be classified as domiciled in the UK such that your worldwide earnings mean you are in the higher tax threshold, then it probably makes sense to have all the property income assigned to your wife. "
I have been doing some online reading on this topic after that advice and came across a few relevant points - the below mentioned is copied from this webpage - (http://www.pglaw.co.uk/form-17-declarin ... -property/)
- Couples and their advisors should be aware of guidance published by HMRC on the taxation of income from property. Most significantly, whilst HMRC have previously only asked for evidence of beneficial ownership in the case of bank and building society interest, this requirement will also apply in respect of all types of property. For example, in the case of a husband and wife, it is not uncommon for the legal title to ‘buy to let’ property to be held either in the sole name of the husband (especially if they are the higher earner and a mortgage was required), or in joint names, but rental income to then be declared as belonging to the wife, so as to make use of her personal allowance and marginal tax rates.
As well as completing HMRC’s updated Form 17 (Declaration of beneficial interests in joint property and income), in future couples will need to submit that form to HMRC with evidence of their beneficial interests before they will be taxed otherwise than equally. Evidence is provided by way of a formal deed, called a Declaration of Trust, signed by the couple, setting out their respective beneficial interests in the property.
A Declaration of Trust is a simple form of trust, which essentially states that although the legal title is owned by one or both parties, the beneficial interests (i.e. the right to receive income) is held by the party wishing to declare it on their tax return. Therefore, whilst HM Land Registry might show the legal title to the property as being in joint names, the Declaration of Trust would sit behind the legal title, providing evidence of the way in which the actual benefit is apportioned and rental income paid between the couple.
-------
Form 17 is in this HMRC webpage - https://www.gov.uk/government/publicati ... -income-17)
But after going through that form its evident that we need this thing called "Declaration of Trust"
Was wondering anyone has done a similar thing or come across anything like that? Do we need to register it with land registry or some other agency or is it that the husband and wife fill in a form with witness signatures and send it to HMRC?
Regarding the business rates/council tax, we were very fortunate -the council gave us 100% off the council tax- if not by this time we would have sold the property!!! Thanks for raising that important point.
Once again let me thank you for the reply and for members like yourself who provide lot of valuable information to ignorant newbies like myself.. Let me hope that you could reply to my queries, in your spare time.
Thanks
Paul
Hi 7Aspire,
Thanks for that great reply. You have been extremely helpful and have dealt with all my doubts. Am sure there will be many like myself who would be thanking you for your constant support/advice. Thanks
Re -division of income among husband and wife-it seems its a very tricky point and probably will email HMRC about it.
Also thanks for pointing that £500 cap; it was a big oversight from my side; actually I took it as £500 per month; definitely its more than £500 in a year; actually near to £3000.
I have another query. If a guest stays in the property from tomorrow i.e 10/07/15 and vacates the property by 10:00 am on next Friday 17/07/15(actually he has stayed for seven nights only) will it be counted as eight days of occupancy for HMRC's FHL eligibility purposes or is it that it will be counted as only seven days of occupancy. It might sound stupid, but am not sure about it.
Please do reply.
Once again thanks for all the replies.
Paul
Thanks for that great reply. You have been extremely helpful and have dealt with all my doubts. Am sure there will be many like myself who would be thanking you for your constant support/advice. Thanks
Re -division of income among husband and wife-it seems its a very tricky point and probably will email HMRC about it.
Also thanks for pointing that £500 cap; it was a big oversight from my side; actually I took it as £500 per month; definitely its more than £500 in a year; actually near to £3000.
I have another query. If a guest stays in the property from tomorrow i.e 10/07/15 and vacates the property by 10:00 am on next Friday 17/07/15(actually he has stayed for seven nights only) will it be counted as eight days of occupancy for HMRC's FHL eligibility purposes or is it that it will be counted as only seven days of occupancy. It might sound stupid, but am not sure about it.
Please do reply.
Once again thanks for all the replies.
Paul