Organisations who sell affordable homes could be taxed as traders
HMRC has issued guidance for charity trustees of housing associations who may be considering backing affordable home schemes. Traditionally charitable housing associations and registered social landlords (RSLs) have provided rented housing. However in the current property climate affordable housing schemes, where only a part of the property’s equity is sold and the buyer pays rent on the rest while living in the property, are increasingly popular.
There are, however, possibly tax implications for charitable organisations who go down this road, chiefly the risk that the scheme may give rise to ordinary taxable trading activity. Trustees are asked to be aware of the differences between, on the one hand, trading that promotes their charitable purposes (primary purpose trading), and trading which does not further a charitable purpose and creates a tax liability (non-primary purpose trading). Thus providing low cost homes for the charity’s targeted beneficiaries is primary purpose trading, but any arrangement which involves selling homes on the open market may not be.
Some bigger and more complex schemes may well be somewhere between the two. In that case, the trustees have a duty to identify the non-primary purpose trading, apportion income and expenses to it as appropriate, and made a self-assessment tax return on the profits to HMRC. To cater for these few more complex schemes, HMRC have issued a form, CAR1, which organisations can submit in order to get clarity and reassurance about their future tax position before they undertake any housing development. Like other clearance processes, the advice provided as a result can be relied on when compiling the self-assessment tax return, provided that the application form set out all the relevant facts and drew attention to all the relevant issues.
Full guidance for organisations on the issue can be found on the Charity Commission website.