With summer here, a key area for income generation within landed estates and other rural businesses can be granting the public access to the house and grounds.
Opening the house and grounds (even if only for short periods) for weddings, tours/events, festivals and sporting events provides a valuable income stream to contribute towards upkeep, maintenance and repair.
Sally Appleton, partner, and a member of the firm’s Landed Estates and Rural Practice Group discusses the tax tips that may be helpful for landowners.
- Expenses incurred for the purposes of the trade may be deducted from the income received to calculate the profit (or loss) of the business for tax purposes. However, when a home is used in a business, the allocation of expenses may not be clear cut – for example the repairs and maintenance of a building may serve a dual purpose of preserving the family home, but also improve the appearance of a building for its use as a business. Great care must be taken in allocating expenses between public and private use and keeping evidence of all costs claimed as being ‘wholly and exclusively’ for the purposes of the trade.
- A further area of difficulty can be knowing the difference between what constitutes a repair expense and therefore eligible for immediate and full tax relief, and what is a capital improvement which attracts tax relief at a variety of different rates and sometimes none at all. This can be a complex area. For example, alterations to buildings can be considered to be capital improvements even if nothing is actually added.
- Where a business makes a loss, it may be possible to claim tax relief by offsetting the loss against other income in the year. This is known as ‘sideways loss relief’. There are restrictions on the quantity of losses that may be relieved in this way, but this is still valuable where the taxpayer has income from other sources. To claim such relief, certain conditions must be met: the loss-making activity must be a trade; the trade must be carried out commercially; and the trade must be carried out with reasonable expectation of a profit.
- Where losses have been claimed over a number of years, HM Revenue & Customs (HMRC) may enquire into the motive for running the business. In the situation of running a business in relation to a family house, garden, or other property, this could be seen as obtaining tax relief for expenditure (for repair and maintenance possibly) that would be incurred anyway. It is important to keep records showing that such costs are incurred wholly and exclusively for the purposes of the trade.
- Where a property or gardens are only open for a limited number of days, there must be clear distinction between private and commercial use for tax purposes. What defines ‘commercial’? Where a house or garden is only opened at arbitrary times for visits, tours, possibly ‘on request’ or ‘by appointment’, or is not open for a large part of the year – this might count against its trade being seen by HMRC as commercial. However, where properties are open for more frequent, advertised visits, where add-ons, such as lunches, are available, or where there is a website stating opening times and promotional leaflets, all these will support claims of ‘trading’. Such claims are also supported by a business plan showing that the venture is undertaken with a reasonable expectation of a profit.
- Where there is a holidays lettings business also in operation, possibly from farm or estate cottages or accommodation in the main house, care should be taken when allocating expenses between the different income streams, especially where some are profitable and others are not.
- When considering adding a new income stream to your business, you must always consider any VAT consequences. These can be complex and depend on the nature of the income and should be discussed with your professional advisor.
For any further information, please contact Sally Appleton.