Capital Gains Tax for B&B Owners You’ve had enough of serving breakfasts and servicing bedrooms and want to sell up; how much tax will you pay? The purpose of this article is to give you an idea of the factors which will impact on your Capital Gains Tax position on the sale of a B&B, it is most certainly not a “work it out yourself” guide. To keep things simple we are concentrating on B&Bs which are also family homes and which are not part of a larger enterprise such as a farm. We are going to discuss the four key reliefs and exemptions which help reduce (or eliminate) Capital Gains Tax: Principal Private Residence Relief Letting Relief Annual exemption Entrepreneurs’ Relief Relief if your B&B is your home If your B&B is also your family home (or as been your family home at some time during your period of ownership) you will be entitled to exemption from Capital Gains Tax for any gain arising from the disposal of your home (Principal Private Residence Relief), the exemption does not extend to any part of the gain relating to part of the property used exclusively for a business. The exclusivity test works very much in your favour, any part of the property which is used for business and domestic purposes (for example, a kitchen) attracts the relief but occasional and very minor domestic use such as storing personal effects in a dining room exclusively used by the guests is disregarded by HMRC. The law is not specific about the division between domestic (exempt) gain and business gain, it merely says that it must be made in a “just and reasonable manner”. This gives some scope for weighting value towards the domestic side but HMRC are instructed to refer any case where “the tax at stake is material or the apportionment appears to have been unduly weighted in favour of the residential accommodation” to the Valuation Office Agency – such a referral can give rise to professional fees eating away any tax saving. Each case does have to be dealt with on its merits, for a smaller business with (say) two guest bedrooms and two family bedrooms a simple apportionment based on the number of bedrooms may be appropriate but if there is a significant difference in the size of the rooms of the facilities available a more complex basis of division may be needed. The division need not necessarily be the same as that used for costs set against the business income because some of the costs may relate to the business use of parts of the property which are not exclusively used for the business. When looking at the division of the gain the length of time rooms have been used for specific purposes is as important as how they have been used. If we take a simple case of a 50:50 split based on bedrooms for a property which has been used as a B&B all of the time between purchase and sale the gain will be divided equally between the domestic and business gains. If all of the property has been used as your home at some time (either before or after use as a guesthouse) you can take into account the time the guest bedrooms were used as family rooms. For example, again taking our simple 2 guest rooms, 2 family rooms case, if the time split is also 50:50 the business use is reduced from 50% to 25%. More relief if your B&B is your home Even if there is a business gain all is not lost! Provided the guesthouse is also your home you will be entitled to “Letting Relief” which gives additional relief of the lowest of: The gain which is treated as an exempt domestic gain; The gain which is treated as a business gain; and £40,000 (per owner, so a married couple or civil partners owning the property jointly are entitled to up to £80,000 of relief). Using our simple case above, assuming a total gain of £100,000 and joint ownership by husband and wife, Letting relief would be the lowest of: The exempt domestic gain - £75,000 The business gain - £25,000 Maximum relief £80,000 so relief of £25,000 would be given eliminating all of the taxable gain. It is important to note that Letting relief is only available if you live on the premises and only extends to property let as residential accommodation (for example, if you let out a garage as a workshop the gain arising on the garage would not qualify for Letting relief). Relief everybody gets Every person is entitled to a CGT exemption of £10,100 a year so a married couple/civil partnership can have tax free gains (after deducting the reliefs above) of £20,200 a year. Relief for business owners Provided the proposals in the Finance Bill are enacted any taxable gains arising from the disposal of an asset : Used in a business; Owned for at least a year; and Disposed of within three years of ceasing the business will be taxed at the preferential rate of 10% (“Entrepreneurs’ Relief”). There is a complication (it is tax we are dealing with!), Entrepreneurs’ Relief will only apply to the “business proportion” of the taxable gain (in the example above, 25%). Putting it all together By now you are probably totally confused! The following examples may help to clarify things, (the figures are based on a property co-owned by a married couple): Business proportion of gain Total gain 25% 75% 30% 70% 50% 60% 100,000 100,000 200,000 200,000 300,000 300,000 Gain taxable at 10% - 30,000 - 56,000 35,000 60,000 Gain taxable at 18%/28% - - - 4,000 15,000 20,000 The rate of tax applicable (18% or 28%) will depend upon your taxable income in the year of the gain. Where to go from here If you have any concerns about the way in which the matters dealt with in this article relate to your own particular circumstances you should discuss things with your own accountant. This article has been prepared by AIMS Accountants for Business who have recently partnered with the Bed and Breakfast Association to offer discounts to its members. AIMS is the largest independent association of professionally qualified accountants in the UK specialising in helping small and independent businesses. To find your nearest AIMS Accountant and receive a free consultation with no obligation, visit www.aims.co.uk or call 020 7616 6632. More about AIMS Accountant for Business With over 250 AIMS Accountants around the UK, clients benefit from a cost effective, quality and personal service on a local level, with the support of a nationwide structure and access to considerable resources without being charged inflated prices. AIMS Accountants understand how to run a business in today’s economic climate. Working with fixed fees, agreed in advance and not charging by the hour; their unique charging structure allows genuine client relationships to be established. AIMS Accountants get to know their clients and their business, providing essential support without the concern of a large bill at the end of the year. Disclaimer (our lawyers insist that we have one!) While every care has been taken over the preparation of this article nether AIMS Accountants for Business nor The Bed & Breakfast Association can accept any responsibility or liability to any person, whether a member of The Bed & Breakfast Association or not, in respect of anything done or omitted to be done by any such person in reliance, whether sole or partial, upon the whole or any part of the contents of this article. This article is based upon the law at the time of writing (July 2010) and the proposals in the Finance Bill published following the Emergency Budget, the provisions of the final Finance Act could be different from those proposals.