Investment Capital Gains

Have you bought any mutual funds this year or late last year while the market was doing its skyrocket thing? Last year it was hard to lose money. This year it has been easy.

You should be calling your mutual fund (they all have 800 numbers) to find out if and when they plan to pay their capital gains and dividends. You might say to yourself, they won't be paying anything this year because the fund is selling for less now than it did at the beginning of the year. Think again. It is very probable that the mutual fund manager took profits on many high flyers that he bought cheap last year. According to the way funds are set up those profits are taxable to holders of the mutual fund and not to the fund itself.

It is possible you bought a fund at $40 per share that is now selling at $30 per share and be hit with a 25% capital gains distribution of $10. On paper you now have a $10 per share loss and a tax bill based on the $10 per share distribution. That is adding injury to insult.

With this as a possible scenario it might be prudent to sell your fund for less than you paid for it. You should work the numbers with your accountant to see if this might reduce your tax bill. But you have to do it now. You can't wait until after the mutual fund declares its capital gains distribution. This is especially true if you have purchased any high tech or international funds during the past year. You can carry losses forward to next year to offset against profits and distributions next year.

The greatest numbers of mutual funds declare these distributions near the end of the year, usually starting in November with most of them in December. The rumors I hear are that the distributions will be early this year because of the poor performance of the majority of funds.

This applies to everyone who does not have a tax shelter of some kind such as a 401k, IRA, SEP or other similar investment vehicle.

One piece of advice I want you to heed. Don't buy any mutual funds now because they are "cheap". Wait until after they declare their capital gains and dividend distributions. You could be whacked with a big tax bill.

How To Avoid Capital Gains Tax By Moving Overseas

If you want to avoid UK capital gains tax by moving overseas it's usually necessary to remain non-resident for five complete tax years. Any gains on assets disposed of after you leave the UK will then escape UK capital gains tax completely.

The other side of the coin though is that you'll want to avoid or at least minimise any tax charges overseas. There's no point saving UK tax at say 20% but then incurring tax overseas at 30%!

This is particularly the case when there are reliefs that will apply to reduce any gain for UK tax purposes. The main reliefs that I'm thinking of here could include:

· A disposal of your home. The UK provides for a full tax exemption on the disposal of your main residence (assuming it's been your main residence throughout your period of ownership). Other countries aren't as generous and could only provide for a deferral (eg Spain which provides for a form of rollover relief to defer the gain when you buy another main residence).

· Business assets. Examples here are properties that have been let to a trader. These could qualify for taper relief of 75%. This means that a higher rate taxpayer would have a CGT charge of 10% - which is very low even by international standards

· Gambling winnings - tax free in the UK but not so elsewhere

· Most debts are tax free in the UK - not so elsewhere

· Assets held long term. Any assets held for at least ten years will in any case qualify for maximum non business asset taper relief. This will reduce the effective CGT charge for a higher rate taxpayer to 24% and not 40%

Therefore this makes it very important to ensure that any overseas jurisdiction you choose offer a CGT free or low CGT environment.

Low CGT jurisdictions

Italy 20%

Ireland 20%

Japan 20%

Croatia 25%

China 20%

Spain 18%

However when looking at these you need to bear in mind the opportunities above for low UK CGT rates.

CGT free jurisdictions

If you want to avoid CGT in full there are plenty of these to choose from. Some of the most famous countries with no CGT or can offer a CGT free environment for expats with correct planning include:

Gibraltar

Malta

Andorra

Monaco

Isle of Man

Channel Islands

Cyprus

If you're thinking about moving overseas to avoid CGT you should ensure that you take detailed advice. If you're interested in more articles on moving overseas and avoiding UK CGT visit http://www.wealthprotectionreport.co.uk for further details of offshore tax planning opportunities.

How Does Capital Gains Tax Work?

In Australia, a comprehensive capital gains tax regime generally applies to events that happen to capital gains tax assets acquired by taxpayer after 19 September 1985. The provisions of the law which implements this change in the way in the tax operates in Australia found in the income tax assessment legislation. Parts 3.1 and 3.3 of this legislation other major rules for this type of tax. The provisions of the law are what are called catchall provisions. They apply to all gains that arise as a result of the event happening whether or not the gains of the capital nature, subject to certain exemptions and exceptions, and a territorial and temporal limitations. However, where a gain arises from an event and an amount is also assessable under some other Parisian, double taxation is avoided by reducing or eliminating the amount of the gain.

The rules that govern this tax affected taxpayers income tax liability because assessable income includes a net capital gain for the income year. In a capital gain is the total of the taxpayer's capital gains from income year, reduced by certain capital losses made by the taxpayer. A capital loss cannot be deducted from taxpayers sensible income, but it can reduce gains in the current income year or in later in the next year. The amount of a game made on or after 21 September 1999 may be discounted by 50% from individual trust or by one third to certain superannuation funds and life insurance companies from capital gains tax assets that a virtual assets. No discount is allowed to capital gains made by company generally or buy life insurance company from its nonvirtual assets. A company can only offset a net capital loss against the game if it passes either the continuity of ownership test or the same business test in relation to both the capital loss year, the capital gain in and in the intervening years. Further, if it fails both the continuity of ownership test and the same business test in income year, the company must work out their gains and losses in a special way. It is very important to understand how this type of tax can work because you could sell a large assets thinking that you'll recoup a large amount of money from it and not realise that you will actually be incurring a large tax bill.

Residential Capital Gains Strategy For 2009 - Impact of New Law

If you have turned your primary residence into a rental, a second home or a vacation home and are planning to sell it, you should be aware of a new law that changes how capital gains are calculated beginning January 1, 2009. You may want to change your strategy while there is still time.

The Current Law.

Currently, the law excludes up to $250,000 ($500,000 if married filing a joint return) of gain realized on the sale or exchange of a primary residence. The sale of a home qualifies for this exclusion if the home was the primary residence of the tax payer for at least two of the five years ending on the date of sale or exchange. The exclusion applies even if the home was originally purchased as a second home.

The New Law.

Rethink your strategy because on January 1, 2009, the rules will change. President Bush signed The Housing and Economic Recovery Act of 2008 (H.R. 3221) on July 30, 2008. The tax law name of this same law is The Housing Assistance Tax Act of 2008. This law will generate tax revenue by reducing the home sale exclusion, but it also provides a friendly transition for taxpayers.

The law does not allow a taxpayer to claim exclusion for any period of time after December 31, 2008, in which the home is not the main home of the taxpayer. The available exclusion is apportioned in the ratio that the period the home was the primary residence (qualifying use) bears to the period of ownership after December 31, 2008. Any nonqualifying use that occurred prior to January 1, 2009 is ignored. The maximum excludable amount remains at $250,000 or $500,000, depending on your marital status.

An Example.

If a homeowner purchased a house in 2009 for their main home, turned it into a rental property in 2012 and sold it 2014, the property would not have been used as a primary residence for 2 years of the five years it was owned (or 40% unqualified use). Under these circumstances, 40% of the gain realized from the sale would be subject to capital gains tax. The remaining 60% of the gain would be excluded up to the maximum amount allowed.

Temporary Absences.

Being absent from the property for temporary periods of time that are not greater than two years will not threaten the status of a home as a primary residence. A home can still be the primary residence of the taxpayer when he/she is absent because of a change in employment, health conditions or other unforeseeable circumstances.

Time Remains To Do Tax Planning.

Because the new law uses a test period of January 1, 2009 to the date of sale, the highest tax advantage is gained by using the home entirely as a primary residence during this period of time. Taxpayers who are planning to sell a vacation home, a second home or a rental home, may want to discuss with their tax advisors whether to move into the home on or before January 1, 2009, to accumulate as much qualifying use as possible before the home is sold. There is still time to do some planning to gain a tax benefit from this change.
This article is intended to be a general discussion of the topic area and is not to be considered as legal or tax advice for your specific circumstance. Always seek and rely upon the advice of a reputable accountant, tax advisor or tax attorney before taking any action about your personal situation.

This article is intended to be a general discussion of the topic area and is not to be considered as legal or tax advice for your specific circumstance. Always seek and rely upon the advice of a reputable accountant, tax advisor or tax attorney before taking any action about your personal situation.

Income Tax - UK Landlords

Introduction

It's only a small word but it looms very large in the thoughts and the nightmares of many of us. It was Disraeli who said that there are only two things in life that are certain...., "death and taxes". The good news is that you don't have to be quite so fatalistic. Like anything in life, you can be a victim, or you can make circumstances work for you. It always helps if you have a good accountant to guide you.

I confess it is only belatedly that I've become acquainted with the intricacies of the taxation system. For years I managed without making a return. Not out of any deliberate plan to defraud. But just because I knew I wasn't making any money. My mortgage payments were barely covered by the rental income and having not sold any property, there were no capital gains. So why trouble the poor overworked civil servants I thought!

Then house prices went through the roof! I sold a few properties and realised some capital gains, investing most of it back into property. It was only when talking to a tennis friend, who turned out to be an accountant that I started to think I might need to explore the matter a bit more carefully. A holiday to Australia in which I took along a copy of the Zurich Tax Handbook as a bit of 'light reading' convinced me that there might be a problem. I think it was the bit on 'tax evasion' being a criminal offence punishable by imprisonment that focused my thoughts. I resolved on my return to come clean. To my amazement, the tax system was not as penal or as complicated as I had feared. Now let's look briefly at what the main taxes that affect a property investor are.

My Tax Liabilities

Tax liabilities for rental properties are assessed on the basis of income and capital gains. Firstly, let's examine how liabilities derived from income are calculated.
All income from land and property in the UK is taxed under Schedule A; that includes residential investments whether they are furnished or not. Income and expenses for tax purposes are assessed as a single letting business. So effectively if you have one or one hundred properties, Her Majesty's Revenue & Customs (HMRC) take the total figure rather than looking at individual properties. Income is assessed by tax years ending on the 5th April. Schedule A income is treated as investment income. As such any losses can only be carried forward and offset against Schedule A income and not personal income such as a salary.

Taxable profit is the income that remains after all allowable expenses have been deducted. It's always helpful to have a quick flick through the 'revenues' booklet IR150 in Taxation of Rents for detailed guidance. Like everything these days a copy is available to download from their website http://www.hmrc.co.uk

In essence, your taxable profit is calculated by taking your annual rent and then deducting expenses. For convenience HMRC separate expenses into 5 categories. These are:

Legal & professional- Legal services for a remortgage, valuation fees, mortgage broker fees, landlord safety certificate costs, tenancy agreement costs, letting agent fees, admin cost to close a mortgage, membership fees to a professional body

Repair, maintenance & renewals-redecoration costs, appliance repair charges, plumbing, electrical repairs, etc

Rent, rates, insurance, ground rents, etc -insurance, council tax charges, grounds rent

Cost of services provided, including wages - cleaning, meals

Other expenses -Telecom charges, utility bill costs, computer software, advertising costs, computer purchase (if used exclusively for the business - could be accounted as a capital allowance (see section on capital allowances below)

What are my allowable expenses?

Repair and renewals
Where a property is furnished or part furnished; rather than to claim as each renewal arises it is possible to make a single claim of 10% of rent as a 'wear and tear' allowance. This is accepted by the Revenue as broadly equivalent to the cost of normal renewals of furniture. Beyond the fittings, such as furniture there will be renewals and repair to the building e.g. repair to the roof, bathroom and windows, etc. This raises a real taxation hornet's nest. When does a renewal become an improvement? The latter is not an allowable expense against income (although it can be offset against capital gains - see later under Capital Gains Tax( CGT)).

There is, as with many tax issues, a grey area of when a renewal becomes an improvement. It is largely a question of fact and degree in each case whether expenditure on a property leads to an improvement and therefore become a capital expense. UPVC windows were considered for many years to be an improvement and therefore the expenditure counted as capital. However, in recent years HMRC have relented and accepted that UPVC is for most people the modern equivalent of wood and therefore is considered a renewal.

Another example of the way the HMRC approach the subject is their approach to the refurbishment of a fitted kitchen. For example, they consider that where a kitchen is refurbished, including work such as stripping out and replacement of base units, wall units, sinks, etc, retiling, work top replacements, repair to floor coverings and associated re-plastering and re-wiring. Provided that the kitchen is replaced with a similar standard kitchen then this is a repair and the expenditure can be off set against income. If at the same time additional cabinets are fitted that increase the storage space, or extra equipment is installed; then this element is a capital addition and not allowable and the additional expense should be apportioned as a capital cost. If the standard units are replaced by expensive customised items using high quality materials, the whole expenditure is then judged to be capital.

Loans and Interest

Most people will have borrowed money to finance their investment. When accounting for these costs it is interest payments alone that are an allowable expense. This means where a loan is a repayment mortgage; only the interest element of the loan can be offset against rental income. It is also possible to offset other loans that have been taken out for the business. For instance, when one has been raised to finance a new kitchen or extension of the rental property. It should be quite clear in these cases that the loan is specifically for the business and where possible documentary evidence should be available (just in case the revenue raises an enquiry on the matter). Therefore, if a loan is arranged, try to separate it off from your personal finances. This could be done by using it to set up a separate business account.

Non - standard lettings

So far I have referred to the tax treatment of a 'standard' buy-to-let property rented on an Assured Shorthold Tenancy. There are two categories of residential rentals that are treated slightly differently by the Revenue. These are where somebody rents a room in their house and a furnished holiday let.

Rent a room

Under this system a person is allowed to rent out a room in their own home without having to pay tax providing the rent is no more than £4250 pa. If it is more than this, the taxpayer has the option to have the excess income (i.e. above £4250) taxed as a Schedule A rental profit. Otherwise the entire rent will be taxed in the usual way on the profit from the gross receipts minus allowable expenses.

Furnished holiday lettings

These are treated slightly differently to the Revenue from a standard residential let. This is because of the amount of management time involved and the relatively short rental periods. They are therefore are therefore classified as a business rather than an investment. Consequently a different tax treatment applies.

To qualify as a holiday let the following criteria must be met. The property must be:

* Available for holiday let at least 140 days a year

* Actually let for 70 days a year

* Not occupied by the same person for over 31 days in 7 months

The main advantage to landlords with a holiday let is that the activity is regarded as a trade and is assessed under Schedule D. Therefore, any losses can be offset against an individual's personal income, which includes their salary.