property investment and tax

[ASB]

Thank you ASB, you have been most helpful.

One more little thing. From this year the nil rate band and the NCDR have been abolished. So profit this year is taxed at a flat 19% and there is no supplement.

So if you are mistaken in the fact that you paid the divi last year and it was voted this year you'll save yourself the 427.50. [At least I think that is the position]

[Harrysp]

FFS what is going on here, we are actually going to answer some ones question in a meaningful fashion, this would never have happened in the golden days

[JMorley]

ASB / sjd

I have been reading through the Capital Allowances Act and constructed the following argument. I bought the property while working away on a contract which I used for accomodation, I did not mention this point before. Anyway my argument is as follows:

Section 1 paragraph 1 of the Capital Allowances Act 2001 (The Act) provides for allowances in respect of capital expenditure during a chargeable period. Section 1 paragraph 2b includes allowances for Industrial Buildings as detailed in Part 3 of The Act. By virtue of Section 275, in Part 3, (Buildings used for welfare of workers) the capital expenditure on the building in question is allowable as it was provided for the welfare (overnight accommodation) of the worker while carrying out the business of the Company.

As per Section 2 paragraph 1b, allowances and charges are to be given effect for corporation tax purposes, in calculating profits for a chargeable period. Section 2 paragraph 3 notes that this effect is to be read in conjunction with the provisions of Section 352.

Section 352 paragraph 1 describes an allowance or charge to which a person (Company) is entitled or liable under this Part (3) is to be given effect in calculating the profits of that person's (Company’s) trade, by treating:
(a) the allowance as an expense of the trade, and
(b) the charge as a receipt of the trade.

Section 352 paragraph 2, notes that, in the case of a person who
(a) is entitled to an allowance or liable to a charge in respect of a commercial building, and
(b) occupies the building in the course of a profession or vocation,
the references in subsection (1) to a trade are to be read as references to the profession or vocation.

While the nature of the Company’s business does not fall directly within any of the definitions of Qualifying Trades. It would however, under the definitions given on HMRC website (Notice 701/5 March 2002) be classified as a profession (Engineering).

Thus, reading profession for trade in Part 3 of The Act, the Company is entitled to an allowance for the capital expenditure on a building provided for the welfare of its workers. This allowance should be given effect by treating it as an expense when calculating profits for the purpose of Corporation Tax.

[ASB]

Dunno gov you'd need an accountant for that

Your argument may have some validity - but I would not be surprised if residental property is excluded.

You have the foollowing basic possibilities:-

- Assume you are right. CT is self assessment so enter it on the relevant bit of the form and hope you are right.

- Write to your CT inspeector. Set out your argument and ask him for an opinion. Note that this is only an opinion, so you don't have to go with it (and ulitmately it doesn't have to be right either!).

I believe the rate is 4% for most buildings so this will help your CT by approx 1% of the building value. There is a but of course....

Since the value of the asset is written down this is likely to increase the nominal profit when the asset is sold. Thus you will pay CT on it.

Example:

100k property, sold in n years for 200k. There is CT to pay on 100k.

100k property, written down to 96k. This saves you CT on 4k now. When you sell it for 200k you have CT to pay on 104k. Thus the capital allowance only effectively enable you to defer tax.

It's also worth remembering that if the gain is large enough and your profit goes above 300k then you will pay CT @ 32.75% on that.

Of course since it is owned by yourco there is no CGT element - or allowances.

[simondolan]

Iba

Nice argument but falls down I'm afraid because overnight accommodation isn't welfare.

[JMorley]

Welfare

Do you know the definition of welfare in this context. The Act did not give one.

I noticed that reference is made to buildings provided by hotels for workers (whether at the same or different site to the actual hotel) were allowable. From this I concluded (rightly or wrongly) that a building provided for hotel worker welfare had to be for overnight accomodation.

Many thanks

[simondolan]

Welfare

I'm not aware of a definition of "welfare" in the Act. It is designed to cover things like sports halls provided for employees.

I can tell you from experience that residential accommodation provided for the sole director of a one man Company will not qualify as an Industrial Building though, and therefore no Capital Allowances will be due.

[JMorley]

Thanks Simon

I would have thought that Sports Halls would be covered by the clauses for Sports Pavillions in The Act.

I am sure your experience will be borne out, however, I may as well put it to the taxman and ask for an opinion - you don't get if you don't ask.

Ultimately, if I have to pay CT on the monies, it does at least qualify for marginal relief. The real plus for me doing it this way will be that the £20k I spent on renovations (repairs) can be put down against CT. Obviously when I sell I pay CT as they will show as gains on the purchase price. However, had I bought the property personally, I would have paid CT on the dividends to get the money to spend and then, as this is not my main residence, the gains would be taxable too.

Regards

[simondolan]

Repairs

Up to you of course.

The £20k you spent in renovations will likely not be allowed either though - the renovation costs form part of the capital costs of the property for tax purposes and are thus only available for offset once the property is sold.

Massive amount of case law on what constitutes an allowable repair and what constitutes part of the capital cost, so you'll no doubt have fun researching that particular area!

[JMorley]

My understanding of repairs is anything which is like for like, or accounting for modern standards like for like, is classed as repair rather than a capital cost. The work undertaken was replastering, rewire, replacement kitchen etc. I just had to repair most of the property in one way or another.