Top Landlord Tips for 2014 – Repairs and Services

As 2013 draws to a close, the year will be remembered for a number of reasons. For the tax adviser, the year was notable for two taxpayer victories over HMRC in relation to repairs being treated as revenue expenditure rather than capital.  The Hopegar case (Hopegar Properties Limited v HMRC [2013] UKFTT 331 (TC)) followed on from the Cairnsmill case (Cairnsmill Caravan Park v HMRC [2013] UKFTT 164 (TC)), where the replacement of a grass surface at a caravan park was held to be revenue in nature.  

In the Hopegar case, the company traded from premises on an industrial estate and claimed a deduction for expenditure incurred in diverting telecom cables, relaying and surfacing a carriageway, works repairing a car park and reinstating a footpath to the main office.  

Although this expenditure amounted to everyday landlord expenses, HMRC argued that the works constituted a scheme of alteration which should be looked at in the whole. The First-tier Tribunal, however, accepted the taxpayer’s confirmation that there was no scheme of alteration: the main carriageway required repair and that entailed additional expenditure on the replacement or renewal of some of the assets, which did not make it a capital outlay.

HMRC argued that the road could have been patch repaired, and that the fact this was not done made it capital expenditure. However, the Tribunal accepted that a quality repair could be carried out.  HMRC also tried to argue that the relevant entirety – the road network, cable network and Bankside House - was the asset being repaired.  There was a similar argument levelled in the Cairnsmill case, and a success prior to that in the Pratt case (G Pratt & Sons v HMRC [2011] UKFTT 416 (TC)).

A tax tip for 2014 for all landlords is therefore that there have been three Tribunal cases – Pratt, Cairnsmill and Hopegear, which all show that repairs to property can achieve tax relief and be classified as a revenue expense.  It is essential therefore, that adequate planning is undertaken and all property repair work is reviewed in light of these cases.  With the end of the current tax year in sight, there will be a tax advantage in ensuring that relevant matters can be addressed before 5 April 2014, and also making sure that the right planning and invoicing are in place.  Advisers should ensure that their landlord client understands the tax treatment, and that with careful planning the best tax protection can be achieved.  If landlords have any repairs that need to be carried out to the property, or moreover, alterations which should and can be treated as income tax allowable against the rental income received, then 2014 is the time to review this.  Landlords and tax advisers alike must focus on this point.

In the same way that 2013 was significant for the tribunal cases on achieving repairs to property as a revenue expense, there was also success in the capital taxes domain on services provided in connection with let property for the purposes of obtaining rollover relief.  A successful case was Ramsay (Elisabeth Moyne Ramsay v HMRC [2013] UKUT 226 (TCC)).

This was an Upper Tier Tribunal decision and therefore of significant importance in establishing that a let property provided with a large amount of inherent services relating to the active management of the property, was sufficient to constitute the carrying on of a business for the purpose of TCGA 1992, s 162 rollover relief on the incorporation of the business.  Essentially, this case established that where a property is very actively managed, it can count as a capital asset, and when sold, the capital gains tax liability can be mitigated by rollover relief.

It should be noted that in the Ramsay case, the owners had spent approximately 20 hours per week carrying out various activities linked to the property, which included meeting and assisting tenants and repairing and maintaining the communal areas.

The Upper tier Tribunal looked at the indicators of business.  They were looking for evidence of a serious undertaking, earnestly and actively pursued, with reasonable continuity and substance in turnover.  There is a need for this to be conducted in a regular manner on sound business principles, and to be the type of business which is commonly used by those who are seeking a profit from their activities. The Upper tier Tribunal was advised that the degree and scope of the activities far exceeded those usually provided by a normal passive investor, and went much further than the activities that most tenants would normally expect from their landlord.

It is against this background that landlords, or what are perceived to be landlords, have lost out in inheritance tax terms.  The reversal in the Upper tier Tribunal of the Pawson case (Nicolette Vivian Pawson (Deceased) v HMRC [2013] UKUT 050 (TC), and the refusal of any further leave to appeal, combined with the loss of the Zetland case (Trustees of David Zetland Settlement v HMRC [2013] UKFTT 284 (TC), meant that 2013 focused significantly on services provided for capital taxes.

A further tax tip for 2014 has to be to learn from the successes and failures of the high profile Tribunal cases, where inheritance tax reliefs are sought by a trading landlord. Any landlord who carries out a large amount of services for their tenants, and provides extra facilities, should review these to identify whether or not it is perhaps worth taking the services further still, in order to achieve capital gains tax rollover relief or inheritance tax business property relief. Is it worth reviewing the ‘badges of trade’ to make sure that these reliefs can be achieved? If a landlord has a property to sell and wants to roll that gain into the purchase of another business asset, then Ramsay gives us hope in 2014.  We can also learn a lot from the Ramsay, Pawson and Zetland cases, and it is important to ensure that landlords and their tax advisers use the information available to their advantage.

It is clear that HMRC are trying to classify genuine traders as landlords for inheritance tax purposes, and are then achieving a very large inheritance tax victory in relation to traders who have moved towards being a landlord.  Landlords need to ensure that the amount of let property does not overtake the trade; they must remember the cases of Balfour (Brander (representative of Fourth Earl of Balfour) v HMRC [2010] STC 2666 and Farmer (Executors of Farmer dec'd) v IRC [1999] STC (SCD) 321), and the good successes that were enjoyed there.  They must not let the whole business become one of investment holding, with reference to the inheritance tax legislation (in IHTA 1984, s 105(3)).

Where there is an investment line drawn, the taxpayer must make sure that they fall over the right side of that line, and that the majority of the business is actually derived from trading, as opposed to investment property income. The taxpayer must not run the risk of being regarded as a landlord by HMRC, when in actual fact they are a tradesperson.

Do not be made a landlord when you want to be a trader.  Check how the income is disclosed on the tax return and check considerations like Class 1 National Insurance contributions: has the income been treated as derived from trading as opposed to investment?  Many tax advisers might have suggested some short-term Class 4 National Insurance contributions advantages of treating income as property income, without giving proper regard to the capital taxes angle.  Review these aspects in 2014 and make sure that the capital gains tax and inheritance tax position has been properly reviewed.

A recent 2013 Tribunal case, Ridpath (Ridpath v HMRC [2013] TC/2012/07297), showed the need to record monies spent on property improvements.  A total of £40,000 had been spent on improvements, and although the First-tier Tribunal agreed it was very likely that these costs had been incurred, it was impossible to define precisely how much had been spent, and there was no proof or evidence of the expenditure. 

As a further tip for 2014, it is essential to record all those expenses incurred for property improvements, so that when properties are eventually sold, the minimum of capital gains tax, or indeed the correct amount of capital gains tax, is paid.  Re-examine the records in relation to landlord owned properties, and check that where improvements have been made, there are details and evidence of the expenditure to support the position.