Is tax due on a buyout fee for surrendering my regulated tenancy?

MacSue

[Deleted User] said:

MacSue said:

Update - I just spent a long time on the phone to HMRC and ended up with a Capital Gains Tax person. She says that it wouldn't be liable to CGT (it would if I was a business but not as an individual). She says it would be taxable as a compensation payment.  As I already get more pension than the personal allowance I would pay 20% and if I push it much higher as some have suggested here then it could get closer to the higher tax bracket!
Just thought it could help to add this in case anyone in similar circumstance finds themself here! Thanks for your thoughts.

My view (as someone who would not know one end of a regulated tenancy from another):

1. You have a regulated tenancy.
2. A regulated tenancy is a lease for tax purposes (see para 10 Sch 8 TCGA)
3. A lease is a chargeable asset.
4. You would be disposing of your lease via a surrender to the freeholder (although it won't make a difference if an assignment is involved).
5. You are getting consideration for that surrender (or assignment).
6. That gives you a chargeable gain (you might have some costs of disposal - e.g. legal fees)
7. Normally that means capital gains tax is due but...
8. Does this amount to a dwelling house?  No idea but it sound like it. In that case it would feel like PPR is due (bit I have no idea if it is) so there is no CGT due.  I say "feel" because what you live in is a dwelling house but the terms is not defined in legislation and there might be some wacky case out there that decided differently. So you'd need proper advice if you ever to get to surrendering.

So that suggests that your HMRC mate might be right that no CGT is due.  I have no idea what their thought process was based on your note or whether it ties in with what I've said above.

If all that I've said is rubbish and that your surrender has absolutely nothing to do with CGT, then what's the source of the income?  None.  I can't see any head of tax. The most likely one when you say that sort of thing is "miscellaneous income" but this does not feel like miscellaneous income to me.

So unless the CGT person gave some detailed reasons for saying that income tax is due, I'd have to say that they are likely to be wrong (although I may be). 

The HMRC advisor was referencing https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg72300
that I had found - this she said only applied to business not an individual. She also looked elsewhere in the manual and said it definitely didn't count for CGT but would be a personal compensation payment and I should fill out a self assessment tax return and put it in additional information box 5 page 1! 

gelato_cat

MacSue said:

Update - I just spent a long time on the phone to HMRC and ended up with a Capital Gains Tax person. She says that it wouldn't be liable to CGT (it would if I was a business but not as an individual). She says it would be taxable as a compensation payment.  As I already get more pension than the personal allowance I would pay 20% and if I push it much higher as some have suggested here then it could get closer to the higher tax bracket!
Just thought it could help to add this in case anyone in similar circumstance finds themself here! Thanks for your thoughts.

I wonder if it's worth now speaking to an Income Tax person at HMRC to find out how these compensation payments are taxed.  For example, the first £30k of a redundancy payment is tax-free regardless of your tax bracket so I wonder if there are different categories.

Also, I tend to think if you're paying a lot of tax, it means you have a high income, so I personally wouldn't let the income tax put me off seeking the proper compensation in this situation.

Bookworm105

MacSue said:

Bookworm105 said:

CG13030 - Compensation: personal compensation or damages - HMRC internal manual - GOV.UK (www.gov.uk)

So you are saying that this confirms what she said that CG tax does not apply? It's not quite the same situation - this is compensation for injury or damage and I would be voluntarily surrendering a tenancy. HMRC said no CGT but would be taxed in regular income tax

CGT manual deals with leases, but not in the overt context of residential property, but as we have all discussed, residential property brings PRR into play, which would negate any CGT payable as it is your main residence. So i think no CGT is a reasonable conclusion.

But, there is a general principle that if something can be taxed under income tax then that takes precedence over CGT. But again we return to the specific problem: can anyone evidence if a "bung" for surrendering (leaving) a residential regulated tenancy (a "long lease") early is income, or is it capital, in the context of an individual receiving it from their landlord.

If we look at it from the LL perspective, is it:
- a capital value for his property (so reduction for his own CGT) 
or
- a forgoing of future rent receipts (so income tax)

Personally I favour the capital treatment as it is closest to the general scenario:

• Where the landlord and tenant agree that the tenancy should end in return for compensation being paid to the tenant.

So £30k + totally tax free.... perhaps it's time for @Jeremy535897 to wade in here 

mybestattempt

Unfortunately, I think the HMRC person was wrong. In my view its a capital gain which attracts PPR.

(It's definitely not personal compensation and isn't chargeable to income tax.)

I believe the following links provide the correct guidance but need to be read carefully to identify the parts relevant in this case:


https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg72300

In this case the tenant and landlord have agreed to end the tenancy (lease) and the landlord is paying the tenant compensation. 

There is a asset in this case as the tenancy gives the tenant a right to stay in the property, which is a legal and equitable interest in the property which has a capital value.

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg64600

As the tenancy creates a legal and equitable interest in the property and it's the tenants main residence PPR is available.

MacSue

gelato_cat said:

MacSue said:

Update - I just spent a long time on the phone to HMRC and ended up with a Capital Gains Tax person. She says that it wouldn't be liable to CGT (it would if I was a business but not as an individual). She says it would be taxable as a compensation payment.  As I already get more pension than the personal allowance I would pay 20% and if I push it much higher as some have suggested here then it could get closer to the higher tax bracket!
Just thought it could help to add this in case anyone in similar circumstance finds themself here! Thanks for your thoughts.

I wonder if it's worth now speaking to an Income Tax person at HMRC to find out how these compensation payments are taxed.  For example, the first £30k of a redundancy payment is tax-free regardless of your tax bracket so I wonder if there are different categories.

Also, I tend to think if you're paying a lot of tax, it means you have a high income, so I personally wouldn't let the income tax put me off seeking the proper compensation in this situation.

Thanks. I did ask about this and pointed out a comparison to redundancy and she said this isn't redundancy and it's needs to be declared as part of income tax. 

I don't have a high income, I have a higher pension because I didn't take it for 10 years which means it's higher than the personal allowance so I have to pay tax but far from a high income hence me needing to move. I will still consider taking the landlord's 'bribe' but I need to factor in the tax and so need them to offer more for it to make sense for me and make a significant difference to moving.

mybestattempt

MacSue said:

gelato_cat said:

MacSue said:

Update - I just spent a long time on the phone to HMRC and ended up with a Capital Gains Tax person. She says that it wouldn't be liable to CGT (it would if I was a business but not as an individual). She says it would be taxable as a compensation payment.  As I already get more pension than the personal allowance I would pay 20% and if I push it much higher as some have suggested here then it could get closer to the higher tax bracket!
Just thought it could help to add this in case anyone in similar circumstance finds themself here! Thanks for your thoughts.

I wonder if it's worth now speaking to an Income Tax person at HMRC to find out how these compensation payments are taxed.  For example, the first £30k of a redundancy payment is tax-free regardless of your tax bracket so I wonder if there are different categories.

Also, I tend to think if you're paying a lot of tax, it means you have a high income, so I personally wouldn't let the income tax put me off seeking the proper compensation in this situation.

Thanks. I did ask about this and pointed out a comparison to redundancy and she said this isn't redundancy and it's needs to be declared as part of income tax. 

I don't have a high income, I have a higher pension because I didn't take it for 10 years which means it's higher than the personal allowance so I have to pay tax but far from a high income hence me needing to move. I will still consider taking the landlord's 'bribe' but I need to factor in the tax and so need them to offer more for it to make sense for me and make a significant difference to moving.

It could be a costly mistake to take the word of the person at HMRC that this is taxable as income, I would definitely question the advice given.

For compensation to be taxable as income it needs to be related to and replace a source of income; loss of earnings, loss of profits, loss of pension, loss of rents etc.

In this case there is no source of income here which the compensation relates to or replaces. You are not being compensated for loss of income.

The compensation relates to the right the you have from the tenancy/lease to stay in the property which has value (hence the need for a valuation) and that right is an asset, it is not a source of income.

Giving up that right/asset in exchange for a capital sum gives rise to a capital gain which attracts PPR so no tax to pay. 

The original advice from the accountant was correct and should be followed.

I would suggest going back to the original accountant and obtaining detailed written advice. It may come at a cost but far less than accepting there is tax to pay.

MacSue

mybestattempt said:

It could be a costly mistake to take the word of the person at HMRC that this is taxable as income, I would definitely question the advice given.

For compensation to be taxable as income it needs to be related to and replace a source of income; loss of earnings, loss of profits, loss of pension, loss of rents etc.

In this case there is no source of income here which the compensation relates to or replaces. You are not being compensated for loss of income.

The compensation relates to the right the you have from the tenancy/lease to stay in the property which has value (hence the need for a valuation) and that right is an asset, it is not a source of income.

Giving up that right/asset in exchange for a capital sum gives rise to a capital gain which attracts PPR so no tax to pay. 

The original advice from the accountant was correct and should be followed.

I would suggest going back to the original accountant and obtaining detailed written advice. It may come at a cost but far less than accepting there is tax to pay.

Thanks for taking the time to write this. I'm quite flummoxed I have to say. My instinct was not to believe the HMRC woman because it didn't tie up but then I had gone there to get a definitive answer to the question. I was trying to avoid paying to find out this info that seemed like a straightforward question to me but now it seems so complicated. I'm so glad I'm not a tax advisor! Some of the answers here that have referred me to the Capital Gains Tax Manual have been too hard to follow especially with lots of acronyms! 
I guess it's time to pay an accountant for their opinion! 

Can you tell me what PPR is please

Bookworm105

MacSue said:

Can you tell me what PPR is please

Private Residence Relief
when selling a property you are liable for CGT (Capital Gains Tax)
however, if the property has been your only/main home, then you get PRR which completely covers the tax liability for the time it was your main home 

lots of posts on here explain main home and how PRR works, or read the instructions: 
Private Residence Relief (Self Assessment helpsheet HS283) - GOV.UK (www.gov.uk)

MacSue

I want to thank those that took time to advise me on this question. Because of your persistence, I persisted with HMRC and after lots of waiting in queues on the phone and passing from one to another I managed to speak to a 'technical inspector' who understood the question far better than everyone else and referred me to CG64420P and specifically CG64470. He talked of interest in a dwelling house is not only when bought but also where there is a longterm right. So, as several said CGT is liable by PPR or PRR applies and so no tax is due. He advised writing to the tax office when it has all gone ahead and quoting the relevant sections of the CGT manual. So thanks to all! 

Now all I have to do is get the LL to up their offer! And find somewhere I actually want to live within my budget! 
Any advice?!!! 

MacSue

[Deleted User] said:

MacSue said:

Now all I have to do is get the LL to up their offer! And find somewhere I actually want to live within my budget! 
Any advice?!!! 

Well done on getting the easy bit sorted...

Thanks! I just emailed the LL with various reasons why I needed more and it almost bounced back with "our final offer is £30,000". My negotiating skills are somewhat lacking, want to reply without being rude but suggesting that they consider it further... Any thoughts?