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:
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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:
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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:
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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 :
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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.