Capital gains tax and inheritance tax are generally agreed to be two of the most likely areas to come under review in October’s Budget, and any changes – almost certain to be in the Treasury’s favour – will have a particular impact on live-in B&Bs, which is where people run a bed and breakfast business from what is also their home.
The current situation is that any capital taxes levied when such a property is sold are levied on those parts of the property which are used exclusively for business; so if you have a five bedroom house and three of those bedrooms for the B&B business, then no capital gains tax (CGT) would be payable on the parts of the property which are the owner’s principal residence, but CGT would be due on the fraction of the property taken up by those three bedrooms.
The principle here is ‘reasonable apportionment’, and it is not simple. For example, if you use the kitchen both for your own use and to prepare guests’ breakfasts, then it counts as part of your home; but if you have a lounge which is solely for the use of your B&B guests, then this room would be assessed for CGT purposes alongside those bedrooms.
With the new Government hinting that it would like to see CGT rates raised to similar levels of income tax, then live-in B&B owners could be facing a much increased bill should they sell their property.
Then there is the question of Business Asset Disposal Relief, previously called ‘Entrepreneurs’ Relief’. Under this scheme, business owners selling certain business assets pay just 10% tax on the first £1 million. However, to qualify the asset must be used for trading, rather than be viewed as an investment asset (i.e. just rented out).
Whilst hotels would ordinarily qualify, live-in B&Bs fall into a grey area, and whether they are regarded as a trading or an investment asset depends very much on the level of actual service provided to guests – something for which HMRC would require evidence.
The same is true when it comes to inheritance tax (IHT), another area thought to be in the Chancellor’s crosshairs. Trading businesses normally qualify for Business Property Relief, which currently provides a 100% relief against this tax on business assets. A taxpayer’s main residence would then be able to utilise the nil rate band of £325,000 each plus, potentially, the additional residence nil rate band.
Should IHT rates be increased or tax-free allowances be decreased in the Budget, then the ability to provide evidence that the B&B is ‘trading’ and hence qualifies for Business Property Relief will be even more important.
Because of the grey areas, this is an even more complicated area of taxation than normal, which is why live-in B&B owners definitely need specialist advice - particularly if, as expected, the October Budget does see significant changes in the way capital is taxed.