How is a property sale taxed under the flat rate scheme?
I have a client who uses the flat rate scheme (FRS) and she is considering the sale of her trading premises for £200,000. She has never opted to tax the building and was not charged VAT when she purchased it five years ago for £160,000.
My thinking is that if she opted to tax the property and charged 20% VAT on the sale, she would make a VAT profit of £11,200 because she would charge £40,000 VAT but only declare £240,000 x 12% on her VAT return with the scheme, ie based on her relevant flat rate percentage. Is my thinking correct?
If she does not opt to tax, which will create an extra charge of stamp duty land tax (SDLT) to the buyer, should she withdraw from the scheme because, as I understand it, an exempt sale of £200,000 will also be subject to 12% FRS tax? She might also be able to claim input tax on her estate agent and legal fees with the partial exemption de minimis limits if she reverts to normal VAT accounting. Is this a reasonable summary of the situation?
Query 20,799 – Flattened.
More than just a repair?
My client owns a number of high-end properties that are let out for rental on a long-term basis. He is undertaking significant maintenance work. A couple of the properties have large bathrooms with old-fashioned plastering that needs replacing. Rather than simply replastering, he is contemplating having the bathrooms retiled, with the existing shower area becoming a wet room. There are no structural alterations needed.
Do readers consider that there is an argument that the expenditure can be treated as a repair – on the basis that this is simply replacing the old with the new?
Query 20,800 – Hopeful.
For better or worse
I would appreciate readers’ views on an issue regarding the interaction of tax and marriage. My client Jane has owned her own house for some years (like all properties mentioned in this question, it is in England). She has lived there since she purchased it and owns no other property. Her fiancé John also owns only one property. He lived there on his own for several years, but last year moved in with Jane and let out his property to tenants. He didn’t take an ownership stake in Jane’s property.
They are now intending to buy a property together to live in. Jane will sell her house, but John will retain the rental property. As I understand it, if they buy their new house before they get married, they will (both) have to pay the additional dwelling rate on that house purchase, but if they get married first the additional rate will not apply (see HMRC’s Stamp Duty Land Tax Manual at SDLTM09820). Is that right? If they do buy the new property before getting married, would they be able to get a refund of the extra stamp duty land tax when they get married or if John were to sell his rental property?
Query 20,801 – Marriage Broker.
Wise after the event
My client is the holding company of a trading group. Three years ago, it sold one of its trading subsidiaries and claimed substantial shareholdings exemption (SSE) on the disposal. A year after the sale it discovered a significant fault with a large item of plant that the company owned and there has been a long dispute over the warranty claim. As a result, my client has had to refund a substantial sum (exceeding £500,000) of the amount received on the sale of the shares. My client accepts that as the disposal was covered by SSE there is tax relief for this payment, but has asked about the costs of the dispute. This involved litigation, expert evidence and considerable legal costs. I think that the SSE claim similarly means that there is no possibility of tax relief for these costs.
Am I right to be pessimistic or can my client obtain some relief?
Query 20,802 – Pessimist.
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