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Adrian Mooy & Co

Welcome to our home page. We are a small firm of Chartered Certified Accountants and tax advisors in Derby. We help businesses like yours grow and be more profitable.  For a friendly service covering audit, tax, accounts, self assessment, VAT & payroll please contact us.

 

How can we help you?

We offer a traditional personal service and welcome new clients.

We specialise in cloud-based accounting solutions. With the power of cloud accounting in your hands, you can access accurate real-time data on the go, accept instant payments and even automate repetitive tasks like invoicing. Fast, easy, touch-of-a-button accounting is the future.

From start-up to exit and everything in-between - whether you’re struggling with company formation, bookkeeping, or annual accounts and taxation, you can count on us at every step of your business’s journey.

If you are looking for a Derby accountant then please contact us.

  • Quality checked firm - awarded the prestigious ACCA Quality Checked mark
  • Cloud-based accounting solutions
  • Tax solutions to help you keep more of your income
  • Transparent affordable pricing
  • Free initial interview
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Tax Planning for individuals

Tax Planning for Individuals

Successful individual tax planning requires careful attention across a wide range of areas and time frames.

Tax Planning for small business

Tax Planning for Small Business

Effective tax-saving strategies for small businesses operating in a tough economic climate.

Planning your financial future

Planning your Financial Future

In today's complex financial and business world everyone needs reliable and professional help in managing their finances.

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Services

Web-based accounting

Xero is a web-based accounting system designed with the needs of small business owners in mind.

 

It can automatically connect to your bank and download your bank statements. From there it’s simple to tell Xero what transactions relate to and once told it remembers and looks out for similar transactions. This saves time and makes keeping your accounts up to date easier.

 

xero accounting softwareLog in from any web browser. As your accountant we are also able to log in and provide help and advice when needed.

Group Xero presentation

Xero makes keeping your accounts up to date easier.

Our process for delivering tax accounting vat self assessment and payroll services

Confirm your expectations

Our aim is  to help you maximise your business potential and we tailor our service to meet your requirements and agree a timetable for delivering them.

 

Our Process

Understand your needs

Firstly we listen and gain an understanding of your business and what you are aiming to achieve.

Actively communicate

Communication is important to the success of any commercial venture. It is therefore a vital part of our work with you, sharing the knowledge and ideas that help you to realise your ambitions.

Build a relationship

Success in business is based around relationships and trust. Our objective is to develop and build strong relationships with our clients, based on two way trust and respect.

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Continuous improvement

We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.

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Get in touch for a free initial interview.

Testimonials

First class! Super accountant! We have been with Adrian Mooy & Co since 1994. They provide a prompt, accurate & reliable service. There is always someone at the end of the phone to help and advise us. They have always delivered and we are more than happy to recommend them.    Ian Cannon - Link a Bord Ltd

Straightforward and easy to deal with Adrian Mooy & Co provide an efficient, friendly and professional service - payroll, tax returns, annual accounts and VAT returns are always done on time.    Eddie Morris

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Helpsheets

 

Business expenses

Being savvy with your expenses is a large part of running a successful business, regardless of its size. Claiming expenses is a simple way to keep your business tax efficient – it reduces your profit, which in turn reduces your tax payments. By claiming every allowable expense you’re making sure you don’t pay a penny more in tax than you have to.

 

For more information about exactly what expenses you can claim, see our helpsheets.

Accountant preparing tax return
  • Income Tax When You Rent Out A Property

    HMRC have recently published a series of case studies which aim to help landlords avoid common mistakes when working out and reporting income and profit from renting out property. Some of the situations covered by the case studies are explored below. The case studies are taken from HMRC’s guidance.

    Remortgaging - If you increase the mortgage on a buy-to-let property, the interest on the additional loan is deductible as a revenue expense, but only on total borrowings up to the capital value of the property when it was brought into the letting business. Interest on borrowings in excess of the value of the property when brought into the letting business is not deductible.

    The loan does not have to be secured on the rented property for relief to be available.

    The way in which relief for interest is given is changing from 6 April 2017, gradually moving from a tax deduction to a basic rate income tax reduction.

    Wholly and exclusively rule - Expenses can be deducted from rental income if they are incurred 'wholly and exclusively’ for the property rental business. If an expense was not incurred for the purposes of the property rental business in any way, it cannot be set against the rental income.

    Claiming part expenses - Sometimes a cost may be incurred which is not `wholly and exclusively’ for the purposes of the property rental business, although part of the cost is. Where a definite part or proportion of an expenses is incurred wholly and exclusively for the purposes of the property business, a deduction can be claimed for that part or proportion.

    Typical maintenance and repair costs - There are typical maintenance and repair costs that a landlord is likely to incur, and these can be claimed against rental income. The list includes:

    • repairing water or gas leaks and burst pipes;
    • repairing electrical faults;
    • replacing broken windows, doors, gutters and roof slates and tiles;
    • repairing internal or external walls, roofs and doors;
    • repainting and decorating (but not improving the property) to restore it to its original condition;
    • treating damp or rot;
    • repointing and stone cleaning;
    • hiring equipment to carry out necessary repair work; and
    • replacing existing fixtures and fittings, such as radiators, boilers, water tanks, bathroom suites and kitchens (but not electrical appliances).

    Don’t forget to deduct the cost of repairs to the property when working out the rental profit.

    Replacing domestic items - A deduction is available where domestic items are replaced. The amount of the deduction is the cost of the replacement item (on a like-for-like basis) plus any cost of disposing of the old item, less any proceeds received from the sale of the old item.

    More than one property - Where a landlord rents out more than one property, the income and expenditure from all of the properties are combined to determine the overall profit or loss.  Losses can be carried forward and set against future profits from the same property rental business.

    Uncommercial lets - Where a property is let on terms that are not commercial, for example at a reduced rent to a friend, expenses can only be deducted up to the value of the rent.

    Landlords should take a look at HMRC’s guidance at www.gov.uk/guidance/income-tax-when-you-rent-out-a-property-case-studies

  • Rental Losses and the New Restriction on Finance Costs

    From 6 April 2017 the tax relief for loan interest and other finance expenses relating to let residential property will be restricted. How will this affect current and future losses from your buy-to-let property?

    Controversial new rules

    Since the new rules which will limit tax relief on interest and finance costs for landlords of residential properties were announced in 2015, they’ve been a source of controversy, largely because they are tricky to understand. One point which seems to cause a lot of confusion is how property rental losses will be affected.

    Interest - old rules v new rules

    Under the rules which apply until 6 April 2017 interest etc. counts as a deductible expense in the same way as any other. If your total expenses exceed your rental income it creates a loss, which is carried forward and used to reduce taxable rental profit (or increase a loss) for later years. From 6 April 2017 25% of interest etc. won’t count as an expense and so can’t be taken into account when working out a loss, but it can be carried forward and used in a different way. Note. The portion of interest not allowed for 2018/19 increases to 50%, for 2019/20 to 75%, and for 2020/21 and later years, it’s 100%.

    Example 1. In 2017/18 Amy receives £9,600 rent from a flat she bought in April 2017. Her expenses are £4,000, plus mortgage interest of £8,000. To arrive at her taxable profit she can deduct the £4,000 and 75% of the mortgage interest (£6,000). The result is a loss of £400 which can be carried forward. The disallowed interest of £2,000 can also be carried forward, but not as a loss; it is instead added to the interest paid in the next year.

    Example 2. ln 2018/19 Amy received rent of £10,000. Her expenses are £3,800, plus mortgage interest of £7,800. In 2018/19 the proportion of interest which can’t be claimed as an expense is 50%. This means Amy’s rental income profit is £1,900, i.e. income £10,000 less: expenses of £3,800, mortgage interest of £3,900 (being 50% of £7 ,800) and the loss brought forward of £400. She also has brought forward interest of £2,000 This is added to the disallowed interest for 2018/19 of £3,900. It’s here that things start to get tricky.

    Tax credit for interest etc. payments

    Amy’s disallowed interest of £5,900 (which is the total of the amounts brought forward from 2017/18 and the amount disallowed for 2018/19) is used to create a tax credit, which is knocked off her general tax liability. The maximum credit is the basic tax rate (20%) multiplied by the interest, i.e. £1,180 (£5,900 X 20%), but further restrictions can apply. These limit the tax credit to the lower of 20% of the:

    • disallowed finance costs, in Amy’s case that’s 20% of £5,900
    • property profits, i.e. for Amy that’s 20% of £1,900; and
    • adjusted total income.

    Any part of the disallowed interest that isn’t used to create a credit can be carried forward and used the next year.

    Tip. While you should already be keeping a record of losses carried forward because they must be declared on your tax return, for 2017/18 and later years you’ll also need to report the amount of carried forward interest (if any), so it’s important to understand how the new rules work.

  • Dividends

    Dividends have lost some of their appeal thanks to the changes announced in the 2015 Summer Budget, and implemented from 6 April 2016. Basically, the effective income tax rate on dividends has increased by 7.5% across the bands, significantly narrowing the efficiency margin. However, where the alternative is a bonus subject to employees' and employers' National Insurance contributions (NICs), they are still relatively tax-efficient, and are likely to remain the preferred method of extracting profits (broadly above the personal allowance) for many family-owned companies.

     

    Beware of insufficient company reserves - The company may pay out as dividends only what it can afford to, when measured against its distributable profits - basically all the after-tax profits it has ever made since incorporation, after all previous dividends it has paid out.  It does not necessarily matter if a company is making losses, or has just made losses in the latest accounting period; what matters is whether there remains an overall distributable surplus.

     

    Get the balance right - Taxpayers often assume that they can vote dividends in the amounts they see fit, for various family shareholders. By default, dividends must be voted in proportion to shareholdings. This is arguably subject to the company’s Articles of Association, but it would be most unusual for the Articles to deviate from this standard.

     

    Dividend waivers - One of the ways to get around this is to 'waive' one’s entitlement to a proposed dividend by means of a dividend waiver, in respect of some or all of one’s shares. The waiver can be in respect of a future dividend, or several future dividends, or apply for a given period.

     

    Pitfalls with waivers - A waiver is a formal document: it is a legal deed of waiver so must be drawn up correctly, and must be signed and witnessed accordingly.  Waivers cannot be implemented retrospectively; they must be in place before entitlement to the dividend arises. They should not last for more than twelve months.

     

    Alphabet shares instead? - If waivers are likely to be a regular feature, then it may be better to issue a separate class of shares to the affected shareholder, that may well rank on an equal footing with the original class of shares, but effectively circumventing the presumption that all shares of a particular designation are equally entitled to a dividend. It is generally recommended that such shares rank on an equal footing so that they are demonstrably and significantly more than just a right to income.

     

    Pitfalls in relation to timing of dividends - A common pitfall with otherwise valid dividends is that the dividend paperwork must also be in order - and timeous.

     

    ln particular, interim dividends may be varied at any time up until they are actually paid, and if payment is effected by journal entry rather than with a money transfer (cheque, bank credit, etc.) HMRC’s position is that it is not effected until it is written up in the company’s books and accounting records. ln HMRC’s company taxation manual (at CTM15205), HMRC is quite clear that if the journals are written up later on, the dividend will be treated as paid on that later date - even if in a later income tax year.

     

    Conclusion: Despite the government’s best efforts, dividends remain a very important component of the profit extraction/remuneration strategy of most family companies. There are, however, numerous opportunities to go wrong, and it is important to work with your accountant to develop (and stick to) a compliant regime that works for your business.

     

  • HMRC Offers Simpler Tax Method For Buy-To-Let Landlords

    One of the potential implications for buy-to-let landlords of ‘making tax digital' is to make income tax payers send in quarterly returns rather than annual returns.

    This will  multiply paperwork and aggravation for individuals and businesses, without actually making the process of tax collection any more eflicient. On 15 August 2016, HMRC published a consultation document called 'simplified cash basis for unincorporated property businesses’. This cash basis of working out your tax is something which has already been proposed for unincorporated trading businesses, and so what we are talking about here is extending the availability of the cash basis to buy~to-let landlords as well.

    MTD s still in consultation and not becoming fully operational until 2020. There will be a requirement to provide information every quarter to HMRC instead of doing an annual tax return. In conjunction with this there will be a requirement for everyone to keep their records on computer.

    Is there any advantage for landlords? One advantage is that, as a buy-to-let landlord, you don’t have to take into account rent receipts until you actually receive them.

    More interestingly, there is a proposal to give immediate 100% relief for capital expenditure. The example which HMRC give is of a tenant who requires expensive specialist furniture to be installed, costing £15,000. A little while later, that tenant moves out and the specialist furniture is sold for £6,000. Under cash accounting as proposed, the £15,000 would be an immediate deduction against the rents, when it was paid. On the flipside, the £6,000 you would get for selling the furniture is then a taxable receipt. The example HMRC give here is of a commercial letting, and that’s significant. Landlords of residential property are likely to be covered by the new 'replacement' rules which are replacing the wear and tear allowance (10% of rents) from this year.

    Who will be able to use this 'simpler' method of tax accounting? Basically, individuals and partnerships consisting only of individuals will be eligible. As the proposals are drafted, there’s no upper limit, although the consultation paper does ask the question as to whether  there should be an upper limit, for example based on rental turnover.

    There are possible complications with applying the cash basis ln its simplest and most rigorous form. For example, what do you do about tenant deposits which are paid at the outset and held by the landlord under very stringent rules, which basically prevent him spending the deposit on anything? If you take cash accounting in its simplest form, this deposit would be taxable when received, and you would only get tax relief in the period including the end of the tenancy, when the deposit was paid back. Does it make a difference whether this deposit has to be handed over to a government approved agency to hold, or whether the landlord, in the case of a particular tenancy, is enabled to hang on to the deposit? All of these and more are issues which taxpayers and landlords may need to address in the future. Hl\/lRC's consultation closed on 7 November 2016, and its outcome is awaited.

  • Lettings relief

    Lettings relief

    Lettings relief increases the amount of the gain that is sheltered from capital gains tax when you sell a property which has at some time been your only or main residence, and in respect of which some private residence relief is due.

    Private residence relief (PPR) is available on the disposal of a property that has been used as the owner’s only or main residence at some point during the period of ownership. If the property has been the only or main residence throughout the whole period of ownership, there is no capital gains tax to pay – the full amount of the gain is eligible for the relief. However, if the property has been used for business or let out for some of the period of ownership, part of the gain will be taxable. However, if some PRR is due, the gain relating to the last 18 months of ownership is exempt.

    Nature of lettings relief

    Lettings relief provides an element of additional relief where part of the gain on the disposal of a residential property is taxable because the property has been let out during the period of ownership. The relief is only available if the property has at some point been the only or main residence and private residence relief is available in respect of part of the gain.

    The amount of lettings relief is the lowest of:

    • the amount of private residence relief;

    • £40,000; and

    • the amount of the gain that is chargeable by reason of the letting.

    Example

    David bought a flat on 1 September 2006 for £200,000. He lives in it as his main home for three years. He then moved in with his girlfriend, letting out the flat for seven years until he sold it on 31 August 2016 for £305,000. Costs of acquisition and sale were £5,000.

    Before taking account of any available reliefs, David realises a gain of £100,000 (£305,000 – (£200,000 + £5,000)).

    The property was David’s only or main residence for 3 years and qualifies for private residence relief for this period. Further, the last 18 months of ownership are also exempt, bringing the total period qualifying for private residence relief to four and half years.

    The gain eligible for PPR is therefore £45,000 (£100,000 x 4.5/10).

    The remaining gain of £55,000 is attributable to the letting and does not qualify for private residence relief.

    However, lettings relief is available. The amount of the relief is the lowest of:

    • the gain qualifying for private residence relief, i.e. £45,000;

    • £40,000; and

    • the gain attributable to the letting, i.e. £55,000.

    Letting relief is therefore £40,000.

    Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.

    Double the relief

    Although married couples and civil partners can only have one main residence between them for PPR purposes, each individual is entitled to lettings relief in respect of their share of the gain – doubling the potential letting relief available for spouses or civil partners to £80,000.

    Although the property was let for seven years, the availability of lettings relief reduces the chargeable gain to £15,000.

  • VAT Flat rate scheme

    The VAT flat rate scheme is an optional simplified accounting scheme for small businesses. The scheme is available to businesses that are eligible to be registered for VAT and whose taxable turnover (excluding VAT) in the next year will be £150,000 or less. Once in the scheme, a business can remain in it as long as its taxable turnover for the current year is not more than £230,000.

    The flat rate scheme is designed to simplify the recording of sales and purchases. Under the scheme, a business works out the VAT that it is required to pay over to HMRC by applying a flat rate percentage to its gross (VAT-inclusive) turnover. The flat rate percentage depends on the type of business. The percentages for each business sector can be found on the gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay. The percentages are all less than the standard rate of VAT of 20%, reflecting the VAT that would be recovered on purchases.

    Example

    Jack is registered for the flat rate scheme. In a particular accounting period his turnover is £12,000. The flat rate percentage for his sector is 14%. Jack must pay VAT of £1,680 (14% of £12,000) over to HMRC. He does not need to work out the VAT on purchases.

    Advantages

    The main advantage is that it reduces the record keeping burden, as it is not necessary to keep records of the VAT incurred on purchases. As the VAT percentages are averages it is possible that the business may pay less VAT than accounting for VAT under the traditional rules, particularly if purchases are low. However, the business may also pay more if purchases are higher than average – you may need to do the maths to see if it is for you.

    Businesses also enjoy a discount of 1% from their flat rate percentage during their first year in the scheme.

    Limited cost businesses

    From 1 April 2017, a new flat rate percentage of 16.5% applies to a `limited cost business’. This is one whose VAT inclusive expenditure on goods is either less than 2% of their VAT inclusive expenditure in a prescribed accounting period or greater than 2% but less than £1,000 if their prescribed accounting period is one year. The figure of £1,000 is adjusted accordingly for periods that are not one year. In determining whether this test is met, capital expenditure, food and drink for consumption by the flat rate business or its employees, and vehicle, vehicle parts and fuel (except where the business is one that carries out transport services) are excluded from the calculation.

    However, a business with a VAT inclusive turnover of £20,000 in an accounting period would only need to incur expenditure of £400 or more to fall outside the definition of a limited cost business – for most businesses this will be doable, even taking account of the exclusions.

  • New Tax Allowances For Property and Trading Income

    New tax allowances for property and trading income - £1,000 each coming into effect for 2017/18 onwards.

    At Budget 2016, the government announced two new allowances of £1,000 each for property and trading income, to take effect from 6 April 2017. The details were expanded in the Autumn Statement 2016, confirming that the trading allowance will also apply to certain miscellaneous income from providing assets or services.

    How will the allowances work? - Broadly, where the allowances cover all of an individual’s relevant income (before expenses), they will no longer have to declare or pay tax on this income. Those with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses. The trading allowance will also apply for Class 4 National Insurance contribution purposes.

    There are two important exceptions worth noting:

    • the allowances will not apply to partnership income from carrying on a trade, profession or property business in partnership; and
    • the allowances will not apply in addition to relief given under the current rent-a-room relief scheme.

    When do the allowances take effect? - For those individuals who choose for simplicity to report their income and expenses of a trade according to the tax year, the trading allowance will take effect for trading income in the period 6 April 2017 to 5 April 2018. Otherwise, it will take effect for periods ending on either an accounting date or on such other date, on or after 6 April 2017, which forms the basis period for the 2017/18 tax year.

    The allowance for property income and certain miscellaneous income takes effect for such income arising from 6 April 2017 onwards.

    Trading allowance - The legislation provides for full relief to be given where the receipts that would otherwise have been brought into account in calculating the profits of the trade for the tax year are up to £1,000. The effect of the relief will be that the profits from the trade are treated as nil.

    There will be an equivalent rule for certain miscellaneous income, and this will apply to the extent that the £1,000 trading allowance is not otherwise used against trading income.

    There will be an optional alternative method for calculating profits where the receipts from a trade or miscellaneous income are more than £1,000. This will take the form of an election, which will apply to the calculation of the profits of all trades for a particular tax year. For trading income, the effect of the alternative method will be to calculate the profits on the receipts that would otherwise have been brought in to account in calculating the profits of the trade for the tax year, less the deduction of the £1,000 trading allowance. In calculating the profits, no deduction will be allowed for expenses generally or any other matter. There will be a rule to ensure that the total amount of the trading allowance cannot exceed £1,000 where the individual has both sources of income.

    Property allowance - As with the trading allowance, new legislation will provide for full relief where property income arising in the tax year is up to £1,000. The effect of the relief will be that the income and expenses are not brought into account when calculating profits of a property business.

    There will be an optional alternative method for calculating profits where the relievable receipts of a property business are more than £1,000. This will take the form of an election, which will apply to the calculation of the profits from property businesses for a particular tax year. The effect of the alternative method will be that the income receipts are brought into account only in calculating the profits for the tax year. Any expenses associated with the income receipts will not be brought into account. In calculating the profit, a deduction is allowed for the £1,000 property allowance.

  • Travelling Expenses for the Self Employed: Recent Cases

    The tricky area of the deductibility of travel expenditure by the self-employed.

    Basic tests - For an expense to be deductible in computing a self- employed individual's taxable profits the expense must have been 'wholly and exclusively’ incurred for business purposes; must not constitute a 'capital' expense; and must not be 'specifically prohibited' as a deduction by statute.

    Splitting travel costs - Although, strictly, an expense needs to be wholly and exclusively incurred for business purposes, in practice it is often feasible to dissect a particular expense into a private and a business element, enabling the latter to rank as tax deductible. Often HMRC will challenge the taxpayer’s split.

    In the recent case of Dr AS Jolaoso, a gynaecologist, the travelling expenses in point were motoring costs, and whilst Dr Jolaoso sought to claim 50% of these costs as incurred for business purposes, HMRC allowed only 10%.

    Key differentiation: ‘in’ versus ’to’ - The Courts have decided that travelling expenses incurred in the course of the business are deductible whereas such expenses incurred in travelling to the place of business are not. This principle was decided as far back as 1971 (Horton v Young [1971]) and the case was a victory for the taxpayer, a Mr Horton.

    In that case, Mr Horton, a sub-contractor, argued that his home was his business base, and thus when he travelled around picking up his bricklayers to then take them to building sites such expenses were tax deductible, i.e. the expenses were incurred in the course of carrying on his business. The court agreed. A similar favourable result also arose for the taxpayers in two cases in 2011 (Reed v R & CC [2011]; Kenyon v R & CC [2011], concerning a scaffolder and a pipe fitter respectively.

    On the other hand seven years earlier in 2004 (Powell v Jackman [2004]) Mr Powell, a milkman, was denied a deduction with reference to his travel expenses incurred in travelling from his home to the milk dairy to pick up his milk for delivery to customers. And, six years later in 2010 (Manders v R & CC [2010]), a similar result arose where a market trader was denied a deduction for expenses incurred in travelling from his home to the location of his market stall. And as recently as 2014 (White v R & CC [2014]) a flying instructor, was denied a deduction for his travel expenses incurred in travelling from his home to airports where he provided flying lessons.

    Two recent taxpayer failures and very similar cases occurred in 2014 (Dr S Samadian v R & CC [2013]) and 2015 (Dr Sharat Jain v R & CC [2015]). Both cases involved hospital consultants and the expenses related to travel between home and a number of private hospitals, and between the private hospitals and various NHS hospitals.

    What becomes very clear when looking at these cases is that they are each heavily fact dependent.

    The home: a business office - The cases illustrate that the major problem area is where the taxpayer seeks to deduct travel expenses incurred in travelling from (and to) his/her home where an alleged office subsists. The office must be of some substance; just a desk and filing cabinet, and making the odd business call, will not suffice. In addition, HMRC must not be able to argue that in fact the 'real' office is located elsewhere and it is from that office that the real the business is conducted.

    Thus, for example, in Manders v R & CC the court took the view that it was his market stall that was Mr Manders’ main place of business and so travel costs from home to the stall were disallowed. Similarly, in White v R & CC, the court held that despite having an office at his home, the flying instructor conducted his business at the airports on a regular and predictable basis, and hence travel costs to and from were disallowed.

    Tip - To enhance success, try and identify a decided case (or cases) where another taxpayer succeeded in the courts and where the facts are very similar to your own circumstances.

  • Are Your Company's Dividends Valid?

    Many family or owner-managed businesses will pay dividends several times a year. It is important to get the process correct, lest they be challenged by HMRC later on.

    A dividend may be challenged where it is found to have been made otherwise than in accordance with the Companies Act 2006 or the company's own legal constitution.

    Who authorises dividends? - It is generally the company's own Articles of Association that determine who may authorise dividends.

    For these purposes, there are two types of dividend:

    • final - normally recommended by the directors and then approved in a general meeting of the shareholders; or
    • interim - paid between general meetings and authorised by the directors - the shareholders must ultimately approve the accounts against which the interim dividends are paid.

    Dividends may only be paid when the company has the funds to do so. The Companies Act 2006 specifies that a dividend may be paid only out of profits available for that purpose.

    Relevant accounts - In order to check what profits are available for distribution in the period, the directors/shareholders must refer to the relevant accounts. These are usually the latest annual accounts laid before the company in a general meeting.

    However:

    • if the distributable profits per those latest accounts are not enough to cover the desired level of dividends, interim accounts may be drawn up to demonstrate that there are, now, sufficient reserves; and
    • if the company has just started and there have been no accounts yet laid before the company in a general meeting, initial accounts may be drawn up to 'prove' there are sufficient profits.

    Getting the paperwork right - It is essential that the paperwork be drawn up correctly to support the dividend. For final dividends, general meetings are no longer necessary provided a majority of shareholders approve the proposed dividend by ordinary resolution. The documentation should evidence that the relevant accounts have been considered, and the distribution approved.

    An interim dividend may be varied at any time before it is actually paid, and as such is deemed to be paid only when the funds are placed unreservedly at the disposal of the shareholder. This is straightforward when dealing with a money transfer, but if effected by journal entry in the company's books of account - typically by way of a credit to a director's loan account or similar - then an interim dividend will be deemed to have been paid only when the relevant entries have been made.

    Dividends should be paid in proportion to respective shareholdings. Dividend vouchers are still required, despite there no longer being a 'tax credit' in the new dividend regime.

    Summary - Dividends are still a key tool for tax efficient income planning. But getting the procedure and paperwork right is essential, including:

    • checking there are sufficient distributable profits (reserves) in place to support the dividend and evidencing it;
    • shareholder meeting or resolution to demonstrate that shareholders approve a final dividend as recommended by the directors; or
    • confirmation that the directors have authorised an interim dividend - and either 'physical' payment or contemporaneous entries in the company’s books if effected by journal entry;
    • dividend waivers must be effected before the right to the dividend arises; and
    • dividend vouchers to confirm that the dividend has been paid to the shareholder.

     

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  • Should Landlords Incorporate? - Part 1

    Issues to bear in mind for buy-to-let landlords thinking about incorporating of their property business.

    A BTL investor should only incorporate his or her business if there is good reason to do so. Before the new rules restricting tax relief for finance costs on residential property, many landlords would not have been better off by incorporating. Since April 2016 a new, more punitive regime for taxing dividend income means that incorporation is even less beneficial.

    Example: Sole proprietor vs company - Joe owns several properties, but has no other sources of income. His net property profits are £40,000. In 2016/17, his personal tax position will be:

    2016 / 2017
    £
    £
    Rental Income
    40,000
    40,000
    Less: P Allce
    11,000
    40,000
    29,000
    £
    Taxed at:
    20%
    £
    Tax
    (5,800)
    Net Income
    34,200

    If he had instead put his properties into a company, the company would first have to pay corporation tax on its profits:

    2016/2017
    £
    £
    Rental Income
    40,000
    40,000
    Less: Salary
    (8,000)
    (8,000)
    32,000
    Taxed at:
    20%
    £
    Tax
    (6,400)
    Net Income
    25,600
    Continued in Part 2 ...
  • Should Landlords Incorporate? - Part 2

    But this is only half the story; although it is Joe's company, he has so far drawn out only £8,000 salary and the rest of the company’s profits are locked up in the company’s bank account - those funds are not yet his. He therefore pays a dividend out of the company to put the funds at his personal disposal.

    2016 / 2017
    £
    £
    Company Funds
    payable as dividends:
    25,600
    25,600
    Balance of Personal Allce
    3,000
    Taxable
    22,600
    Taxed at:
    New Dividend
    5,000
    -
    "Allowance" 0%
    Ordinary
    17,600
    1,320
    Div Rate 7.5 %
    22,600
    Total Income Tax on dividends:
    1,320
    24,280
    Dividend income after tax:
    Add: salary already taken (as above)
    8,000
    Net income
    32,280
    Net income without company (above):
    34,200
    Lost by running portfolio through company
    1,920

    The real problem is that, by 2020/21, Joe will be getting only 20% tax relief on his mortgage lnterest if he continues to hold the property personally, while the corporate alternative would not be caught. Suppose that Joe's net rental income of £40,000 is after having paid £32,000 in mortgage interest, and move forwards to 2020/21, where all of his mortgage interest will be subject to the new tax relief restriction:

    2020 / 2021
    £
    £
    Rental Income
    40,000
    40,000
    Disallow: Interest
    (32,000)
    72,000
    Less: P Allce
    (12,500)
    Deemed taxable:
    59,500
    Basic Rate 20%
    37,500
    7,500
    Higher Rate 40%
    22,000
    8,800
    59,500
    Mortgage Interest adjustment
    (6,400)
    (9,900)
    Net income
    30,100
    Continued in Part 3 ...
  • Should Landlords Incorporate? - Part 3

    Joe stands to lose £4,100 by 2020/21 if he continues to run his business personally, even though personal tax-free bands and allowances have risen significantly by then (the government has committed to increase the personal allowance to £12,500 and the higher rate threshold to £50,000).

    We already have a rough idea of how Joe would fare with a corporate property portfolio, because companies will not be affected by the new BTL finance restrictions. On the basis that companies remain static, then Joe would still be £1,920 worse off in a company in 2020/21 than with a personal portfolio now in 2016/17, but that would nevertheless be £2,180 better than sticking with personal ownership all the way through to 2020/21.

    Companies will be more tax-efficient by 2020/21 because the main rate of corporation tax is set to fall to 17%, increasing Joe's saving to more than £3,100.

    Many career landlords are dealing with much larger numbers, and the savings will be much more substantial. The key consideration is how much the artificial tax cost of disallowing interest, etc., exceeds the compensating 20% tax relief. If we look instead at an alternative where Joe's mortgage interest is only £12,000, the results are quite different:

    2020 / 2021
    £
    £
    Rental Income
    40,000
    40,000
    Disallow: Interest
    (12,000)
    52,000
    Less: P Allce
    (12,500)
    Deemed taxable:
    39,500
    Basic Rate 20%
    37,500
    7,500
    Higher Rate 40%
    2,000
    800
    39,500
    Mortgage Interest adjustment
    (2,400)
    (5,900)
    Net income
    34,100

    In this scenario, the new mortgage interest regime will end up costing Joe only a very small amount annually, even when fully implemented in 2020/21. He would be much better off sticking with direct ownership, rather than incorporating his business.

    Other things to consider are the possible effects on student loans, child benefit and the forfeiture of personal allowance for those with larger portfolios.

  • Travel Expenses - Intermediaries: The New Rules

    The Finance Bill 2016 introduces new rules which restrict the ability of workers providing their services through an intermediary to claim a deduction for the cost of travelling between home and work.

    Employees are not allowed a deduction for home to work travel costs (ordinary commuting) and the new rules deny relief in certain situations to workers working through an intermediary for travel. However it should be noted that the rules do not affect all workers providing their services through an intermediary - a deduction for home-to-work travel is only denied if certain conditions are met.

    Who is affected? - The new rules apply where a worker:

    • personally provides services to another person;
    • is employed through an employment intermediary; and
    • is under the supervision, direction or control of any person in the manner in which they undertake their work.

    Employment intermediary - The rules apply where the worker does not provide his or her services direct to the client, but those services are provided through an intermediary. Thus, the intermediary provides an additional layer between the worker and the client. The intermediary may be a psc, an umbrella company, an employment agency or similar.

    Supervision, direction and control -  The 'supervision direction and control' test is critical in determining whether a worker who provides services through an intermediary is able to claim a deduction for the cost of travel between home and work. The new rules only bite where the worker is subject to, or is subject to the right of 'supervision, direction and control' of any person as to the manner in which the worker provides his or her services.

    The 'supervision, direction and control' test is met if there is a right to supervise, direct or control, even if there is no actual supervision, direction or control. The supervision, direction or control can be provided by 'any person'. It does not have to be provided by the client - the test is met if it is provided by an agency, a project manager, a consultant, a manager, etc.

    The worker only needs to meet one part of the test for it to apply.

    Supervision - The 'supervision' element of the test is met if someone watches or oversees how the worker provides his or her services or checks the work that the worker is doing to make sure that it is done correctly or to the right standard.

    Direction - Direction over the manner in which a worker provides his or her services means providing a worker with instructions, guidance or advice so that they do their work in a particular way.

    Control - A person is subject to control as to how they do their work if another person tells or instructs them how to do the work. It is the right of a person to say to the worker 'don’t do it like that' or 'do it like this'.

    A worker who provides personal services through an intermediary is still able to claim a deduction for home to work travel if they are not subject to supervision, direction & control.

  • Cars and Benefits-in-Kind

    Cars and leasing arrangements

    The rules for car benefits have been problematic for employers. The days when a company car was a 'perk' are long gone for most employees except for the most fuel-efficient cars the benefit-in-kind charge is based on an amount far higher than the real benefit that the employee gets from it. It has become more common for employees to buy their own cars and claim back a mileage allowance from the employer. But employees then miss out on the buying power and freedom from hassle given by employer fleet management, and employers fear that the employees will not buy cars that project the right image when they visit clients.

    So an alternative approach has been for the employer to be responsible for a fleet of cars that are leased to the employees. The employee has a commercially calculated, all-inclusive, lease payment to include servicing, repairs, etc., deducted directly from net pay, and pays for fuel. The employer reimburses the employee at the HMRC approved rates for the business mileage the employee reports. The net result will normally be much less expensive for the employee than having a company car and the accompanying benefit-in-kind charge.

    Unfortunately, HMRC did not like this approach, and challenged it in a case, Apollo Fuels v HMRC [2016]. The history of this case is unusual, in that the taxpayer won all the way through the courts, but for different reasons at each stage. HMRC’s argument was that the benefit-in-kind legislation only required the employer to have provided the car by reason of the employment without a transfer of the property in it for the company car rules to bite. The First-tier Tribunal held that the lease gave the employee some ownership rights, so there was a transfer of the property in the car, and hence no benefit-in-kind charge. The Upper Tribunal disagreed, but said the company car rules were displaced by a

    charge under s 62 on zero. The Court of Appeal, which is where the case has recently been decided, held that the arrangements were commercial and did not, on a purposive construction, give rise to a benefit-in-kind at all.

    While the taxpayer has therefore succeeded three times, the victory won't hold in the longer term. Finance Bill 2016 includes provisions to prevent such arguments from succeeding in 2016/17 and subsequent years.

    The legislation affects living accommodation, company cars or vans, and loans. In all three areas wording about 'fair bargain’ is introduced in similar terms. For cars and vans it says: 'In determining for the purposes of this Chapter whether this Chapter applies by virtue of subsection (1) to a car or van made available to an individual it is immaterial whether or not the terms on which the car or van is made available constitute a fair bargain’.  For cars and vans there is an additional provision to deal with any argument that the vehicle is provided for reasons other than employment. This provision deems any car or van that an employer provides to an employee (or member of their family) to have been made available by reason of the employment except in two situations. The first is where the employer is an individual and the vehicle is provided in the normal course of domestic, personal or family relationships, and the second is where the employer runs a vehicle hire business and the vehicle is provided to the employee as a normal member of the public.

    So any future Apollo Fuels type of scheme will be caught because the employer is 'providing' the car, and cannot argue that this is not because of the employment relationship. The first of the only two exceptions will be when, for example, a father employs his daughter in the business, and separately lets her have a car that she can use because she is his daughter. If the daughter is in a job where all the employees get cars, the exception will not apply. The other exception will require the employer to be running a car hire business, but it will not be possible to argue that the company fleet of lease cars is such a business. In order to meet the rules for the exception, not only would the vehicles have to be made available to the public for hire, they would also have to be hired by the employee acting as an ordinary member of the public. In other words, an employee of a genuine car hire company does not have to go to a competitor to hire a car when he needs one for a few months for fear of triggering a benefit-in-kind charge if he hires one from his employer, but a car hire company cannot use the exception to set up an Apollo Fuels type scheme for its employees.

  • Company Owners Beware of unpaid PAYE & NI Liabilities

    Imagine a situation where an owner-managed company owed HM Revenue and Customs (HMRC) substantial amounts of PAYE income tax and National Insurance contributions (NIC) when it ceased trading and was liquidated. Those company liabilities may relate to remuneration paid to its owners. HMRC can pursue the individuals for the unpaid tax, broadly if there has been a failure to deduct PAYE, and HMRC considers that the company wilfully failed to make the deductions from relevant payments to them. A similar provision applies for NIC purposes in respect of the individual's primary contributions, if there is a wilful failure to pay by the company.

    Whether the company owner(s) are liable for the unpaid PAYE and NIC of the business under the above rules will depend on the particular facts and circumstances, as two contrasting tribunal cases illustrate.

    Personally liable: In Marsh & Anor v Revenue and Customs [2016] , two individuals were directors and equal shareholders of a trading company. The company eventually experienced cashflow problems. Historically, the individuals received small amounts by way of salary from the company. Most of their income was received in dividends. However, for the tax year 2010/11, the director shareholders increased their salaries. The company had outstanding income tax and NIC, most of which related to the director shareholders. In April 2011, the company went into administration. HMRC sought to transfer the liabilities to the individuals.

    The First-tier Tribunal noted that the individuals drew substantial salaries when the company’s profits could not support them. It was clear to the tribunal that the company was already in financial difficulties when the director shareholders decided to take salaries instead of dividends. The failure to make deductions from their salaries was held to be wilful, and the tribunal concluded that the director shareholders were personally liable to pay the relevant tax and NIC.

    Not Iiable: By contrast, in West v Revenue and Customs [2016], the appellant was the sole director and shareholder of a trading company. For a number of years, the appellant drew money from the company as director’s loans. However, the director’s loans remained outstanding and increased over a number of years. Following advice from an insolvency practitioner, the appellant's accountant was instructed to prepare accounts showing an amount of director’s remuneration which, after deducting PAYE and NIC, would be sufficient to offset the drawings on the director’s loan account. Subsequently, a resolution was passed for the winding up of the company. PAYE and NIC liabilities were still outstanding. HMRC sought to formally transfer the liabilities from the company to the appellant, on the basis that he received payments from the company knowing that it had wilfully failed to deduct sufficient tax.

    The tribunal judge noted that the PAYE obligations fell on the employer, and this basic rule was set aside only in limited circumstances: (1) The employer did not deduct PAYE; (2) The failure was wilful and deliberate; and (3) The employee received the remuneration knowing that the employer had wilfully failed to deduct the tax. HMRC had to show that all three circumstances were present. On the first condition, the tribunal judge found that tax was deducted from the remuneration provided by the company to the appellant; the total amount of PAYE and NIC liabilities was shown in the company's records. Thus the first condition was not satisfied. As all three conditions must be fulfilled, there was no basis for transferring the company's PAYE liability to the appellant. Furthermore, the tribunal judge found, on the facts and evidence, that the company's failure to pay the NIC liability was not wilful or deliberate. The appellant's appeal was allowed.

    The decision in West begs the question whether it leaves the door open for company owners to pay themselves large amounts of remuneration, and allow the company to be liquidated owing substantial PAYE and NIC liabilities. In West, the tribunal panel reached different decisions (but the tribunal judge had the casting vote). The other tribunal member expressed concerns on this point. The tribunal judge commented: 'Although I have concerns as to the consequences of allowing Mr West’s appeal, I do not consider that the legislation in its current state is sufficient to deal with the problems to which [the disagreeing tribunal member] refers.’ A change in the law therefore seems a possibility.

  • Buying a Property

    Tax issues to consider:

    1. Are you financing the purchase in a tax-efficient way? If the money is coming from a company that you own, for example, have you considered buying the property in the company, rather than taking income out of the company (possibly heavily taxed) to fund the purchase? ls it worth considering buying the property in an LLP in which your company is a member?

    2. ls the buy-to-let loan interest relief restriction a problem? In many cases those affected by the restriction of loan interest relief to the basic rate (which is being phased in over four years starting in April 2017) is going to mean that they are paying an effective rate of tax of more than 50%, or even, in some cases, more than 100%.

    Loan interest relief restriction doesn’t apply to limited companies. So, should you be considering buying the property in a company rather than individual names, if this is a practical option?

    3. Might you be caught by the new 3% stamp duty land tax surcharge? This 3% surcharge applies to all company purchasers, and individual purchasers who have another property, and are not buying the property in question as their main residence. Is there scope, though (e.g. if there are other individuals such as family members around), for the property to be bought in the name of someone who doesn’t own any other residential property, and therefore won’t be caught by the 3% surcharge even if the property isn’t their main residence?

    4. Does the property need work done on it? This question is relevant if you’re buying a property that you’re planning to let out or occupy for the purpose of some business. In this situation, budgeting to carry out the work gradually over a period, laying out small amounts at any one time, is both easier on your cash flow and more tax-efficient, because it’s less likely to be disallowed by HMRC as 'capital' improvement works.

    5. Can you 'spread' the future capital gain?

    6. Does anyone have capital losses such that an element of the gain can be tax-free when the property is ultimately sold.

    7. Does anyone have rental losses? lf someone with these losses brought forward can be brought into ownership, and the property counts as part of the same property 'business' as the one where they’ve made the losses, you could be enjoying an income tax 'holiday' on the rents from the new property.

    8. Can you structure the purchase to get rollover relief?

    9. Can you structure the purchase to maximise inheritance tax business property relief?

    10. Could you be moving the value of the property out of your inheritance taxable estate?

    11. Are you buying the property for someone else to live in? If you are, consider whether you can extend the availability of main residence CGT relief by putting the property in a trust for that person.

    12. Should you be making a main residence election?

  • Getting the Formalities Right - Share Issues

    The formalities of operating and administering a company can easily be overlooked. However, aside from any adverse company law implications, this can have unfortunate tax consequences.

    For example, if a small owner-managed trading company proves to be unsuccessful, the value of its shares may become negligible. The company's individual shareholders may be able to claim income tax relief for an allowable loss in value of the shares against their net income if certain conditions are satisfied.

    One condition for share loss relief in such circumstances is that the individual must have subscribed for the shares. This condition might appear straightforward to prove. However, two recent cases suggest otherwise.

    Were shares issued? - In Alberq v Revenue and Customs [2016], the appellant entered into a trading venture with a business partner and paid £250,000 into a company in February 2008. The venture proved unsuccessful. The company went into administration in February 2009, and was dissolved in September 2011. HM Revenue and Customs (HMRC) refused the appellant's share loss relief claim (under s 131) for 2008/09 of £250,000. The key question was whether the company issued shares to the appellant in consideration of the £250,000 he put into the company.

    Unfortunately for the appellant, he was unable to demonstrate the issuance of additional shares. The First-tier Tribunal noted that important forms of evidence of his shareholding in the company were not produced (e.g. the company's register of members, or share certificates for the appellant's shares). A draft shareholder’s agreement had been prepared by solicitors in February 2008, indicating a further allotment of shares to the appellant. However, the tribunal concluded that the shareholder’s agreement was never finalised and executed, and additional shares were never issued.

    Share subscription - By contrast, in Murray-Hessian v Revenue and Customs [2016] a company (GT Ltd) was incorporated in May 2011 by its initial shareholder (AG). Subsequently, the company's annual return to 13 May 2012 filed at Companies House included a list of shareholders showing that the appellant held 225 ordinary shares (22.5%). However, a further annual return to 14 May 2012 (i.e. one day after the date shown on the previous return) was filed showing AG as owning 100% of the ordinary shares, and the appellant holding none. Subsequently, the company entered administration. HMRC refused the appellant's claim for share loss relief against his other income. HMRC argued (among other things) that the appellant lent £272,372 to GT Ltd, and that the 225 shares had not been subscribed for.

    However, the First-tier Tribunal found: the appellant had an agreement with AG that he would invest £272,000 in GT Ltd by way of subscription for shares; consequently, AG was from the outset holding a percentage of the shares as nominee, agent, etc., on behalf of the appellant until the shares could be registered in the appellant's name; and that AG subsequently transferred the legal title to the appellant. The tribunal concluded that the appellant had subscribed for 225 shares in GT Ltd for share loss relief purposes.

    Tip: The First-tier Tribunal in Alberg considered that the issuance of shares required the appellant to be written up in the register of members of the company as the owner of the shares (following National Westminster Bank Plc v Inland Revenue Commissioners [1994].

    However, in Murray-Hession, the tribunal considered that Hl\/lRC’s reliance on the NatWest case was misplaced for various reasons, including that it concerned the offering of shares to the public and the more rigorous requirements applicable to a plc. Furthermore, company law had changed since NatWest. Even if the shares had been allotted to the appellant in Murray-Hessian without being registered, the tribunal was not sure that NatWest would have affected the issue for other reasons.

  • Do You Need to Make Payments on Account?

    The 2015/16 self-assessment tax return must have been filed online by 31 January 2017 to avoid a late filing penalty. This is also the deadline for paying any outstanding tax and self-employed National Insurance contributions for 2015/16, and also the date by which the first payment on account for the 2016/17 tax year must be made. A payment on account is simply a payment towards the final liability for the tax year to which the payments relate.

    Who needs to pay on account? - Not everyone who files a self-assessment tax return will need to make a payment on account. Payments on account are not required if your self-assessment bill for the previous tax year was less than £1,000, or if more that 80% of your income was deducted at source (e.g. under PAYE). If the 80% test is met, payments on account are not required, even if your self-assessment bill is more than £1,000.

    How much must be paid and when? - Each payment on account is 50% of the previous year’s liability. So, for 2016/17 each payment on account is 50% of the 2015/16 liability.

    A person who is required to make payments on account must make one payment by 31 January in the tax year and another by 31 July following the end of the tax year. If the total amount paid on account for the year is less than the final liability for the year, any outstanding balance must be paid not later than 31 January after the end of the tax year. If the amount paid on account is more than the final tax liability, the excess if refunded Or, where applicable, set against the payments on account due for the following year.

    This means that for 2016/17, an individual who is liable to make payments on account must make the first payment no later than 31 January 2017 and the second payment no later than 31 July 2017. Each payment is 50% of the self-assessment bill for 2015/16. Any balance owing for 2016/17 not covered by the payments on account must be paid no later than 31 January 2018.

    When working out how much you need to pay and whether a 'sweep up’ payment is due, remember to deduct payments on account made for the year from the account shown on the tax calculation - the tax return calculation does not reflect any payments made. You can check what has been paid during the year by logging into your personal tax account and selecting `View statements’. This will show the payments on account that have already been made and the amount that needs to be paid.

    Reducing payments on account - If you have a self-assessment liability of £1,000 or more for 2015/16, you will need to make a payment on account for 2016/17 unless at least 80% of your tax has been deducted at source, for example under PAYE. It may be that you know that your income will be less in the following year or that the source in respect of which the liability arose has ceased.

    Where this is the case, it is not necessary to make the payments during the year and wait to claim a refund once the tax return for the year has been submitted. Instead, you can ask HMRC to reduce your payments on account to reflect the amount that you expect to be due. This can either be done online via your self- assessment return (select ‘Reduce payments on account’), or by completing form SA303 and sending it to your tax office.

    Trap: Beware of reducing your payments on account below the correct amount of the payment, as interest will be charged where payments on account should have been made and were paid late.

    Example: Payments on account - In 2015/16 George, a self-employed decorator, makes a profit of £38,000. He has no other income. His tax liability for the year is £5,480 (20% (£38,000 - £10,600)). He must also pay Class 4 National Insurance contributions of £2,694.60 (9% (£38,000 - £8,060)) and Class 2 contributions £145.60 (payable at a rate of £2.80 per week).

    His total tax and Class 4 NIC liability is £8,174.60 This is the figure which determines whether payments on account are due. Payments on account are not made in respect of the Class 2 liability.

    As this figure exceeds £1,000, he must make payments on account of £4,087.30 by midnight on 31 January 2017 and 31 July 2017. Any remaining tax/Class 4 National Insurance contributions for 2016/17, together with his Class 2 National Insurance contributions, must be paid by midnight on 31 January 2018.

  • Buy-To-Let Property: Too Costly to Sell?

    Many landlords will be weighing up their options in light of the new regime to restrict tax relief for interest costs.

    The new regime for restricting income tax relief on the finance costs of buy-to-let (BTL) properties is now only a few months away. lt threatens to punish many residential property businesses, to the extent that some landlords will almost certainly conclude that they are better off either fully or partly selling up and exiting the BTL sector. Unfortunately, the costs of exit may prove prohibitive.

    The new regime applies only for income tax purposes, so companies are largely unaffected. While it is potentially possible to incorporate a property business relatively tax- efficiently, some portfolios will not be suitable, and in other cases landlords may wish to shed certain properties before incorporating the remainder.

    Risks vs Rewards - Rationalising a rental property business may allow the landlord to pay down some or all of the debt that generates the finance costs at the heart of the problem. This must, however, be weighed up against the costs incurred on the property disposal:

    • negative equity and a depressed market;
    • finance cancellation costs; and
    • capital gains tax.

    Whilst one factor may be manageable on its own, it will probably be a combination of factors that will see the worst outcomes.

    Negative equity and a depressed market - While many areas in the UK have more than ‘bounced back' from the depths of the recession in 2008/09, it has been reported in the press that house prices in 53% of towns and cities were still below their peak 2007 values, with a particular concentration in the North of England. The average house price in Liverpool at the beginning of 2016, for example, was 23% down on the 2007 figure.

    Given the current economic uncertainty over Brexit, it seems unlikely that house prices will have fared significantly better by the end of this year. lf, as some fear, a large proportion of landlords are forced to sell properties as the new regime starts to bite, BTL property values may be harder hit as availability rises and appetite wanes.

    Finance cancellation costs - A further potential problem is the cost of cancelling mortgage deals early, within a discount or similar period. One of the key saving graces of the recent recession has been that interest costs have been low and stable, allowing some landlords to tread water over the last few years in spite of negative equity. Some deals, however, have long clawback periods that trigger financial penalties if the mortgage is settled too soon.

    Capital gains tax - lt seems that Mr Osborne was determined to milk landlords for every penny that he could: aside from the new interest restriction regime, he arranged for capital gains tax (CGT) on dwellings to remain at 28% while practically everything else was reduced to 20%. Most homeowners will be able to avoid CGT thanks to 'only or main residence relief’. The 28% CGT charge will most likely fall most often on BTL landlords.

    Conclusion - Some landlords are still struggling with negative or substantially reduced equity, together with high gearing and early redemption penalties which will lead to some difficult decisions having to be made.

  •  

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Phone: 01332 202660

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