Tax help for affordable home ownership

You might be surprised to get help from the tax man, but that is exactly what has happened. On 14 May HMRC, the Charity Commission and the Homes and Communities Agency published revised guidance on the tax treatment of low cost home ownership. This offers a significant relaxation of the previous rules but also sets a trap for the unwary.

The issue

First tranche shared ownership sales are generally accepted as being a trading activity and are accounted for as such under SORP 2008.  This is logical given that the properties are built with the intention of selling at least an initial part.  The original guidance confirmed that provided such sales are to genuine charitable beneficiaries they are exempt from tax. Shared ownership sales to non beneficiaries and open market sales are taxable.  However, the credit crunch and slump in the housing market means that many potential beneficiaries have been unable to obtain a mortgage.  Charitable housing associations have, therefore, been unable to sell their shared ownership schemes as originally planned. 

How is the taxman helping?

The revised guidance allows these homes to be sold on the open market without a tax charge arising.  However, this is only if you can show that there has been a major change in circumstances. You will need clear evidence from, for example, minutes of meetings, marketing activity or independent advice that:

• The development was properly planned as an effective way of enabling the charity to further its charitable purposes;
• The difficulties in finding beneficiaries have caused a major change in circumstance arising after the decision to proceed with the development was taken; and
• In the circumstances the proposed use of the property or proceeds of sale is the most effective way of furthering the purposes of the charity.

Selling the properties is, of course, only one option.  Associations may instead choose to use the properties for social or intermediate rent.  If this is a permanent change so that the properties are appropriated to fixed assets the property is treated for tax purposes as sold at market value.  However, the guidance states that this will normally be regarded as tax exempt so a deemed profit will not be taxed nor, more likely given the current market, will a loss be allowed. The rental income will also be exempt.

Is there a problem?

If the rental option is intended to be temporary the properties stay in trading stock, although accounting opinion is divided on this.  Here in lies the tax trap.  Rental income on properties held as trading stock will only be tax exempt if they are let to genuine charitable beneficiaries.

So what should you do?

• Robust procedures for confirming that potential shared ownership purchasers are genuine beneficiaries were essential under the original guidance and remain so for ongoing schemes.  The assessment needs to be by the charity; you cannot rely on a HomeBuy agent who referred the purchaser.
• If changing to open market sale is the solution make sure you have clear evidence to show a major change in circumstances.
• If opting for rental watch the accounting treatment and if you leave the properties in stock only rent to genuine charitable beneficiaries.

Clearly in these troubled times cash is king and you must do what is best for the organisation even if this means paying a little tax.