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Sam
Sam, Accountant
Category: Tax
Satisfied Customers: 13658
Experience:  26 HMRC expertise, PAYE, Self Assessment ,Residency, Rental Income, Capital Gains, CIS ask for Sam Tax
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Hello...can you help us?
Submitted: 1 year ago.
Category: Tax
Expert:  Sam replied 1 year ago.
Hi
Thanks for your post, can you advise what your question is, and advise all relevant information
Thanks
Sam
Customer: replied 1 year ago.

Thank you. We bought a building in 2001 and improved it substantially to use as an FHL accommodation business. We sold at auction in April, 2013 at a loss. Over the years we claimed Capital Allowances on £34,000 which had been invested in improvements. Total cost of building plus improvements £122,000. Net Sale Proceeds: £80,000. Our question is 'What do we do about balancing charges on that £34,000?

Expert:  Sam replied 1 year ago.
Hi
Thanks for your question
The improvements should not have been claimed over the years but left until the property was sold, to reduce (and in this case create a greater loss) against the considered gain,
May I ask why you were claiming these over the years as the only eligible deductions would be the day to day to day expenses (such as insurance, heating, lighting etc) and then a 10% wear and tear for the furnishings.
However - lets see how big an issue this is, what did you claim between 2001 to 05/04/2013 - against this original spend of £34,000
What exactly was the £34000 spent on (so I can see whether some could have claimed against the rental position)
Clarify that this property met the conditions of a furnished holiday let for the whole period of ownership (as there are strict rules with availability which I have listed here
•The property must be situated in the European Economic Area
•The property must be furnished
•It must be let out on a commercial basis with a view to making profits
•It must be available for commercial letting to the public generally for at least 210 days in a 12-month period
•It must be so let for at least 105 such days
•The property must not normally be in the same occupation for more than 31 consecutive days at any time during a period of at least seven months out of the same 12-month period as that referred to in (iv) above
And what capital improvements then have you claimed that bring the total spend up to £122,000 - so how much was the building purchase and what capital improvements with listed details and amounts did you spend out for, and how do these differ from this £34,000 invested improvements
I can then fully unthread what has occurred, as to what should have occurred, and also determine the correct taxation position should there not in fact be a loss at all.
Thanks
Sam
Customer: replied 1 year ago.

We need a little while to answer your questions. Can you put the above reply in an email to us so that we can compile our response inmail?

Expert:  Sam replied 1 year ago.
Hi
I am afraid we cannot communicate directly with customer (Just Answer policy) it all has to be done via the Q & A thread, or we do have additional services which allow communication via a phone call (this does involve an additional charge so let me know if you wish to take his up)
But you can take the time you need to compile your answer, I am in and out today with clients as we are getting close to 31st Jan deadline, but will respond in between meetings, if you have had time to gather the information and respond by then.
Thanks
Sam
Customer: replied 1 year ago.

Ok...we'll see what we can do . Can we get back to you if we use a different computer? If so, how....can you give us a link?

Expert:  Sam replied 1 year ago.

Hi John

You just log onto the website www.JustAnswer (.co.uk or .com) and log in using your user name and password ***** then you on top left will be My Questions and you can gain access to this question thread. But you would need all this information to file the last rental income position with HMRC and the capital gain position for 2013/2014 (or 2014/2015 if the property sold after 06/04/2014) Thanks Sam

Customer: replied 1 year ago.

Thank you . We've discovered the email link.

Expert:  Sam replied 1 year ago.
Hi John
That's wonderful
I shall await your response with the information requested
Thanks
Sam
Customer: replied 1 year ago.

Hi Sam,

Many thanks for your questions, I hope this gives a start to providing answers.

We bought the building £72000 (incl. expenses of purchase) Nov 2001 from a private residence. We intended to use it for groups of friends, but soon realised that we would need to go commercial to support the cost of necessary improvements. By Jan 2005 we had plans accepted for substantially new layout inside the building to provide fire escape routes (claimed as expenses in that tax year '05/06), and paid for new internal walls, renovated kitchen and shower room, new central heating, new studio flat for FHL - living/ kitchen area, bathroom, stairs, additional rooflight, rewiring and re-plumbing and carpet and a new mains line from the road to allow separate metering. And all in a grade II listed building with thick stone walls. Professional costs were £41000 in total, materials for our own work another £10000, grand total £122000 (all figures rounded for clarity).

FHL was started in '05/06 and continued until the building was sold in mid-April 2013. FHL conditions were met in that period.

FHL allowed me to claim capital allowances OR choose a 10% wear & tear regime.
I chose the first, as capital costs were necessary for plant and equipment to set up the business, and the 10% seemed too fixed a number to reflect possibly wildly changing circumstances.
We claimed capital allowances for rewiring and re-plumbing, new furniture and kitchen appliances, blackout blinds for rooflights, new rooflight, costs of converting a plumber's pipe store to a good bicycle store for guests. We included things to make the courtyard garden attractive - garden furniture, long-lived climbing plants, trellis to support them up the high walls. We uncovered a magnificent old fireplace, so claimed for timber flooring and tiles to front that.
Total capital claimed on was £34000, beginning '05/06. We were allowed WDA on that sum as follows:
'05/06 25% => 8500, leaving 25500
'06/07 25% => 6375, leaving 19125
'07/08 25% => 4781, leaving 14344
'08/09 25% => 3586, leaving 10758
'09/10 20% => 2151, leaving 8607
'10/11 20% => 1721, leaving 6886
'11/12 20% => 1377, leaving 5509
'12/13 20% => 1101, leaving 4408
----------
total allowed £29,592.

We sold the building for personal reasons at a bad time. It went to auction as a private house, yielding £80,000 net - a very substantial loss on £122,000 invested. However we see that IR has allowed us a lot.

Please ask for more detail as necessary.

Thanks

John

Expert:  Sam replied 1 year ago.
Hi John
Thanks for your response
AS a FHL you are treated as running a trade, however a few fundamental issues are as follows
Capital improvements should not have been claimed as expenses against the rents received - such as fire escape routes new internal walls, renovated kitchen and shower room, new central heating, new studio flat for FHL, rewiring, replumbing converting plumbers bike store to bicycle store.
Then for furnishing you have either the wear and tear or renewals allowance as you have chosen the renewals you cannot have the initial purchase of said items just the replacement value as and when this arose,so I am afraid you need to revisit ALL your figures of rental income declared with expenses since 20005/2006.
The trellis and courtyard clean up and plants would be day to day expenses
You seem to have got confused with capital costs and the capital allowances regime (which are two separate matters) and also what is permitted under the renewals basis for furnishing, which means you have possibly under declared the net rental income for each year AND also please note that there are NO capital allowances/balancing charges arising as these were never due as you have misinterpreted the capital costs and capital; allowance position.
So on that basis - you have a purchase price (and costs of £72,000
Capital/conversion costs £50,000, less disposal costs = £122,000 (plus rewiring and re plumbing and conversion of pipe store)
Maybe a further £5000 - so total spend of £127,000
Then you sold at action for only £80,000 - and HMRC would need to be sure that this did in fact represent the true market value - if this was the market value you could have got on open market then you have (with possibly some more figure tweaking for the capital costs) a loss of £47,000
But the rental income position will need looking at -
let me know if you have any follow up questions, I appreciate the answer I have provided means revisiting back year - something I am sure you could do without the hassle of, but you do not wish to make a bad situation worse through the capital gain/loss situation, by having claimed the wrong costs against the wrong tax position, or claiming for items that were never due relief on, and as we are talking a substantial amount of money that falls into the wrong claimed aspects of income/gains, should HMRC look into this, this would prove even more costly.
Thanks
Sam
Customer: replied 1 year ago.

Thank you. We've looked at your response in a very busy day, but will get on to this forthwith!

We'll get back to you as soon as we can.

Expert:  Sam replied 1 year ago.
Hi
Thanks for your response and you take what time you need, and if you have any follow up questions I will be more than happy to help.
If you would rate the level of service I have provided, in the meantime it would be appreciated, as I then get credit for the work undertaken so far, but this still will allow you to continue to discus this topic further if needed.
Thanks
Sam
Customer: replied 1 year ago.

Hi Sam,

Thank you for your guidance.

1. The work to satisfy Fire Regulations was allowed by HMRC Preston Office (our personal visit - a rare pleasure these days) as a day-to-day expense for the year '05/06. That included, and I quote, "work to satisfy Fire Regs is 'Expenses' and includes fire escape, hole in wall, moving [some of] the walls around, consequential ceiling work, new staircase, refinishing, redecorating, and any necessary rejigging of electrical and plumbing stuff".
The rest of our capital expenditure seemed to be tacitly allowed as pool for Cap.Allowances. Hence, I believe, arises some of the confusion you point out. This has not yet been thoroughly resolved in our minds but we will proceed as you suggest.

2. Recalculating the work for capital improvements we get £23,000 to add to the building cost £72,000 = £95,000.
FHL expenses for '05/06 are now £40,000 including rates, marketing, power, etc., including work for Fire Regs (£31,000).
Furnishings are now separated in case we change to 10% wear & tear in revisits.
No previous years' expenses are now included - maybe we need to look at Property pages again for those years.

We will gradually revisit all years Returns from '05/06.

3. We expected that an auction was surely a publicly advertised marketplace: various bidders were interested, and the process went on until all but one had dropped out. Do you think that referencing the auction house would satisfy HMRC ?

Thank you again.

John

Expert:  Sam replied 1 year ago.
Hi John
Thanks for your response
That's fine about the fire regulation work and those other associated costs to put things back to restorative order for the fire regs to be met, if you have HMRC approval
And yes do revisit the appropriate expenses claimed each year v capital costs that should have been claimed against the gain position once the property was sold.
Plus looking at a 10% wear and tear claim OR renewals on the replacement furnishings
If that leaves you at this stage with the £95,000 as the purchase and capital costs, and you sold for £80,000 (and this is the most you could have gone as market value - which you would need to demonstrate, do the auction house offer an amount they feel a property is worth when listed for auction perhaps?) then you have a loss of £15,000 -
Its known that auctions can often see property sell for less then they could fetch on a normal open market place - whether or not you considered selling through the usual means and had valuations to that effect prior to making the decision to take the property to auction, would be useful too - its about HMRC being satisfied that you actually got the true market value for this property, that's all.
Let me know if I can be of any further assistance - and it may well be there are very few alterations to be made -
If I could trouble you to rate the level of service I have provided it would be appreciated.
Thanks
Sam
Customer: replied 1 year ago.

Hi Sam,

Thank you for alerting me to problems with our use of capital allowances. This has been essential in the framing of our Capital Gains Return for the year just past, and will be in our restating of Property income for previous years.

" . . . Then for furnishing you have either the wear and tear or renewals allowance . . ."

I have been talking to the HMRC SA help phone line (when they eventually rang me back) and find that my suppositions about the availability of allowances in respect of capital used in the 'trade' of FHL are in fact partly justified. We can indeed use those allowances for capital other than capital used to improve the building, fixtures and suchlike, eventually saleable as part of the building. Our mistake was to include fixtures in the list.
The proposed 10% wear and tear allowance is available for furnished lettings generally but is excluded for furnished holiday lettings. See PIM 4105 paragraph Capital Allowances.
There have been no changes to the rules on allowances for capital used in FHL during the period of interest '05/06 to '13/14.
Of course we have now to work over the Returns from '05/06 pruning, and then write the results in a letter to a special Tax Office.
" . . . Its known that auctions can often see property sell for less then they could fetch on a normal open market place . . . its about HMRC being satisfied that you actually got the true market value for this property . . . "
We need to consider this with an estate agent. Thank you for raising it.

Best regards,

John Morton

Expert:  Sam replied 1 year ago.

Hi John

You are very welcome and I am glad that you found that HMRC supported some of yoru thought process and that you alos found Just Answer a useful tool.

Let me know if I can assist with anything else, but a rating would be much appreciated so I am credited for the time.

Thanks

Sam

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