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If you are starting your own business, running it as a sole trader is the quickest and easiest way to do it. However, you will have unlimited liability which means you are personally responsible for business debts.
Another important aspect is that you are taxed on all the profits with little opportunity for tax planning. This is why most businesses will incorporate as profits increase.
We can assist in all aspects of self-employment, from choosing the best time to start the business, the best time for your year-end, support you through the initial business registration and provide advice on all aspects of tax.
We provide a range of compliance services for sole traders:
Partnerships are similar to sole trades, except that they are used when more than one person owns the business.
Each profit share is determined by the partners and best practice is to record this in a partnership agreement.
With partnerships each partner has joint and several liability for the debts of the partnership, so that if one partner cannot pay their share of any business debts, the debt will fall on the other partners.
Setting up a partnership agreement from the outset is essential.
Our compliance services include:
We are a member firm of the Association of Chartered Certified Accountants and our rigorous internal procedures mean that clients can be confident that their accounts have been prepared in line with the Association’s standards of and the Companies Act 2006.
Corporate tax planning can result in significant improvements in your bottom line. Our services will help to minimise your corporate tax exposure.
Self assessment tax returns are becoming increasingly complex and failing to submit your return on time, or correctly, can result in substantial penalties.
We use our expertise and the latest tax software to ensure that tax returns are completed efficiently, accurately and on-time. We have considerable experience in dealing with HMRC and are also experienced in representing our clients should they be subject to a tax enquiry or investigation.
We provide a comprehensive personal tax compliance service for individuals that includes:
Invoicing your contracting work through a limited company is highly tax efficient.
We are IR35 experts and will advise you on how to structure your next contract to minimise IR35 risk. We will ensure you claim all the tax deductible expenses that you are entitled to and work out if you can save money by joining the VAT Flat Rate Scheme. We will complete your accounts and tax returns ahead of deadlines and provide you with clarity over your future tax payments.
Free company incorporation and set up with HMRC if you are a new Contractor and sign up with us.
Included in this service:
VAT • Value added tax is one of the most complex and onerous tax regimes imposed on business. We provide an efficient cost effective VAT service which includes assistance with VAT registration and help with completing your VAT return.
Payroll • Administering your payroll can be time consuming and the task is made all the more difficult by the growing complexity of taxation and employment legislation. We provide a comprehensive payroll service.
Construction Industry Scheme • CIS returns & payments
Book-keeping • Maintenance of accounting records
Management Accounting • Provision of management accounts
If you wish to know more about these services please contact us on 01332 202660.
If your business does not require a statutory audit then our Assurance Service will provide reassurance that your accounts stand up to close scrutiny from your bank or other finance providers.
Work is tailored to your specific requirements and the level of confidence that you are looking to achieve and will provide credibility to your accounts by the issuing of an assurance review report.
Adrian Mooy & Co is a registered auditor with the Association of Chartered Certified Accountants.
We strive to provide an auditing service that adds more value than merely the statutory compliance requirement of an audit.
We tailor the audit to meet your circumstances and needs. Using the latest techniques and software we deliver a cost-effective audit that provides real value.
Before starting out you may need help with business planning, cash flow and profit & loss forecasts.
You may also want help identifying the best structure for your business. From sole trades and partnerships to limited companies and limited liability partnerships, we have the experience to advise on the best solution for you both operationally and from a tax point of view.
We also advise on accounting software selection, profit improvement, profit extraction & tax saving.
If you wish to know more about our Business Start-up service please contact us on 01332 202660.
We can work with you to:
Accountancy and taxation of property is a specialist area. We have the expertise and experience to work effectively with private landlords and property investors. We deal with self-assessment tax returns, accounts preparation and tax advice for all aspects of property portfolios.
Whether you are a first time buy to let landlord or a long established developer we will discuss and understand your situation in order to advise and recommend the most appropriate medium through which to carry out your property investments. We will guide you through the accounting and tax issues and help you to plan effectively to minimise your tax liabilities.
Services we offer include:
We take the time to explain your accounts to you so that you understand what is going on in your business.
Up to date, relevant and quickly produced management information for better control.
As part of our accounts service we prepare your annual accounts and complete yearly personal and business tax returns.
As your year-end approaches we will agree a timetable with you for completion of the accounts that minimises disruption to your business and leaves no late surprises when it comes to your tax liabilities.
We can also prepare management accounts to help you run your business and make effective business decisions. Management accounts are also very useful when approaching lending institutions when no year end accounts are available. We offer:
For a meeting to discuss your requirements please call us on 01332 202660.
We understand the issues facing owner-managed businesses.
We provide advice on personal tax & planning opportunities.
Running a small business places many demands on your time. We can help lift the load with our complete payroll service.
Designed to ease your administrative burden, our service removes what is often a time consuming task, leaving you free to concentrate on managing your business.
We can also prepare your benefits and expenses forms and advise you of any filing requirements and national insurance due. Benefits and expenses can be a complicated area and knowing what to report can be tricky.
We can file all your in-year and year end returns with HMRC and provide you with P60s to distribute to your employees at the year end.
We also offer a solution to meet your auto-enrolment obligations.
Businesses dealing with the requirements of VAT legislation will agree that this is often a complex area.
Our compliance services offer support for all stages of completing your VAT returns, whether you need advice on the treatment of specific transactions or have produced your records and would like verification that they are correct.
We can also advise on the pros and cons of voluntary registration, extracting maximum benefit from the rules on de-registration and the Flat rate VAT scheme.
Our consultancy service guides you through the intricacies of the legislation, pinpointing areas where you may be able to relieve or partly relieve the cost of VAT for your business, for example when purchasing new equipment or undertaking new projects such as property development.
For a free meeting to discuss VAT and obtain further advice please call us on 01332 202660.
We can conduct a full tax review of your business and determine the most efficient tax structure for you.
We give personal tax advice to a wide variety of individuals, including higher rate tax payers, company directors & sole traders.
We can assist with:
For a meeting to discuss your requirements please call us on 01332 202660.
Understand your needs
Firstly we listen and gain an understanding of your business and what you are aiming to achieve.
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.
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.
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.
We seek your opinions on the service we provide and respond to feedback in order to upgrade and improve what we do.
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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Residence Nil Rate Band
From April 2017, a new nil rate band – the residence nil rate band (RNRB) – is available for inheritance tax purposes. It increases the amount that can be left free of inheritance tax when the estate includes a residence (or a share in a residence) that is left to a direct descendant.
When is it available
The RNRB is available to an estate where:
How much is it worth
The RNRB is set at £100,000 in 2017/18, increasing to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21.
It is available in addition to the normal inheritance tax nil rate band of £325,000. This means that by 2020/21 a couple can leave £1 million free of inheritance tax where the estate includes a residence worth at least £350,000, which is left to direct descendants.
As with the normal nil rate, any portion of the RNRB unused on the death of the first spouse or civil partner can be used on the death of the second spouse or civil partner. This is the case even if the first spouse or civil partner dies before 6 April 2017, as long as the second death occurs on or after this date.
To qualify, the residence (or share in a residence) must be left to a direct descendant. This is a lineal descendant (children, grandchildren, great grandchildren, etc.) or the spouse or civil partner of a lineal descendant. Also qualifying, are step-children, adopted children and foster children of the deceased, and a child for whom the deceased was appointed a guardian or special guardian while they are under 18.
To qualify for the RNRB, the residence must be included in the deceased’s estate and must have been lived in by the residence at some point. However, it does not have to be the main home.
An estate can also benefit from the RNRB where the deceased downsized after 7 July 2015.
Estates worth more than £2 million
Where the estate is worth more than £2 million, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million. For £2017/18 it is lost completely where the estate exceeds £2.2 million.
Interest Relief for Lettings - Making The Most of The Old Rules
The mechanism by which landlords receive tax relief for interest and other finance costs is changing from April 2017 … and not for the better. The current rules are more generous than the new rules in that they enable the landlord to receive tax relief at his or her marginal rate of tax. By contrast, the new rules - which are being phased in - will, when fully implemented, provide relief only at the basic rate. Further, relief will be given as an income tax reduction rather than as a deduction from rental income when computing taxable profits.
Current rules - Under the existing rules, interest and other finance costs, such as fees for arranging a mortgage or loan, are deducted as an expense when working out taxable profits.
Example - John has two properties which he lets out. In 2016/17, he pays mortgage interest of £10,000 on mortgages taken out to buy the properties. He receives rental income of £18,000 in the year and incurs other allowable expenses of £2,000.
The properties are investment properties. John is employed as an IT consultant and in 2016/17 he receives a salary of £70,000. He is a higher rate taxpayer.
For 2016/17 he can deduct the mortgage interest, along with the other expenses, to arrive at a taxable profit of £6,000. Thus, he obtains relief for the mortgage interest at his marginal rate of tax of 40% - thereby reducing his tax bill by £4,000.
Looking ahead - Relief for finance costs is to be gradually restricted from 2017/18 onwards, although the restriction only applies in relation to residential properties. It does not affect commercial lets.
The restriction is to be phased in from April 2017 and will be fully in place from the 2020/21 tax year.
In the transitional period, some relief will be given as for the current rules as a deduction in computing profits and relief for the remainder will be given as a basic rate tax deduction.
Based on the facts in the above example, once the restriction is fully implemented, John will receive relief for his mortgage interest costs as a reduction in his tax bill of £2,000 (assuming a basic rate tax of 20%). The change in the rules will ultimately cost him £2,000 a year compared to the current position.
The current rules are more generous than the new rules, and where costs can be brought forward to 2016/17 rather than 2017/18, this can be potentially advantageous to higher and additional rate taxpayers.
Partner note: ITTOIA 2005, s. 272A, 272B, 274A (as inserted by F(No. 2)A 2015, s. 24).
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.
Private Residence Relief for Landlords - Part 1
With landlords facing capital gains tax (CGT) rates of 18% and/or 28% on the disposal of residential properties, this article considers the availability of private residence relief on disposals by landlords.
Private residence relief is available to shelter the gain on disposal of a person’s only or main residence. Ownership of a property alone is not sufficient to qualify for the relief; there must also have been occupation of the property as a residence.
If a let property does qualify for relief, this could add up to a valuable sum, as the following amounts potentially qualify:
Ensuring the property is the taxpayer’s residence - to qualify for relief, the property must be the person’s only or main residence, which carries with it an expectation of occupation with permanence.
Private Residence Relief for Landlords - Part 2
Example - Let property: How much relief?
Fred bought a house on 1 July 2002 for £12S,000. He occupied the property until 30 September 2005, when he decided to go travelling. He returned to the property on 1 l\/lay 2006 and occupied it until 31 March 2009, when he bought another house jointly with his girlfriend, which they occupied together. He decided to let out his house, and it was let until he disposed of it for £294,697 on 30 June 2016.
The periods qualifying for relief are as follows:
The property was owned for 14 years in total, with eight years and three months attracting private residence relief. The total gain was £169,697 and £100,000 of the gain (8.25/14 years x £169,697) qualifies for private residence relief.
The gain attributable to letting is for a period of five years and nine months and is £69,697 (5.75/14 years x £169,697). As this exceeds the maximum amount of relief of £40,000, the amount of relief for the letting period is restricted to £40,000.
This leaves Fred with a chargeable gain of £29,697.
Private Residence Relief for Landlords - Part 3
Which property is the only or main residence? Where a person has more than one residence (which is different to owning more than one residential property), determining which property is the main residence can either be decided on the facts, or an election can be made to nominate which is the main residence (TCGA 1992, s 222(5)).
Where an election is made, the property that is nominated does not have to factually be the 'main' residence, but it does have to be a dwelling house in use as the person’s residence (i.e. occupied on a permanent basis) for the election to be valid.
Time limits apply for making an election. An election can be made within two years of whenever there is a new combination of residences. This happens when a person starts occupying a dwelling as a residence, or ceases occupying a property as their residence (which may be different to when the property is acquired or disposed of).
An election can be varied at any time, and backdated for up to two years from the date that it was given. HMRC guidance states:
‘A variation will often be made when a disposal of a residence is in prospect or the disposal has already been made and the individual making the disposal wishes to secure the final period exemption.
For example, where an individual with two residences validly nominates house A, they may vary that nomination to house B at any time. The variation can then be varied back to house A within a short space of time. This will enable the individual to obtain the benefit of the final period exemption on house B with a loss of only a small proportion of relief of on house A.’
Ownership by husband and wife - for the purposes of private residence relief, a husband and wife may only have one residence. However, when it comes to letting relief, in the case of joint ownership by husband and wife each may have relief of up to £40,000.
Avoiding VAT Registration when the Threshold is Exceeded
Failing to register for VAT at the right time can be one of the most expensive mistakes a business can make. Compulsory registration is required where:
The problem is that businesses don’t always keep an accurate cumulative record of taxable supplies. If a taxable person goes over the VAT threshold, and doesn’t register on time, HMRC will register them from the date they ought to have been registered, collecting VAT on taxable income accordingly.
In many cases, the business will be unable to recover the VAT on sales. As a result, gross income is taken to be VAT inclusive, with 16.6% (or 20/120ths) of it being payable to HMRC.
Example. Joe runs a hairdressers. He brings in the 2015/16 records at the end of December 2016. These cover the year to go June 2016. Figures show taxable turnover to 30 June as £82,000; the registration threshold was passed on 31 July 2016, when the rolling cumulative twelve-month turnover came to £85,000. Joe should have registered the business from 1 September 2016. He has exposure to VAT on four months’ turnover - which could mean a cost of approximately £5,000. Joe says that there was an exceptionally busy quarter due to a local one-off event. This is unlikely to happen again.
There is a potential let out in the form of exception from registration. Schedule 1 (3) VATA 1994 says that a person does not become liable to registration if they can satisfy HMRC that the taxable turnover in the following twelve months (after the threshold is exceeded) will not exceed the deregistration threshold - £81,000 in 2016/17.
In order to look at using the exception, an estimate will need to be made of future activity. The estimate should be of future taxable turnover, this includes zero-rated supplies, but not exempt supplies or one-off sales of capital items.
The critical date is when the registration threshold is crossed. Neither the date the business would have been registered, nor the date of an application for exception matters. Only information which would have been available at the date of crossing the registration limit is relevant to the decision.
When considering making an application, only cite information that would have been available at the time the registration threshold was exceeded.
Claiming Back Tax on a Small Pension Lump Sum
Where a pension lump sum is taken, it is possible that too much tax may have been paid. Where this is the case, a refund can be claimed. However, the mechanism for claiming the refund will depend on the nature of the lump sum. Normally, you can take 25% of your pension pot as a tax-free lump sum, with any balance taxable at the taxpayer’s marginal rate.
Since 6 April 2015, it has been possible to flexibly access pension savings in defined contribution schemes on reaching age 55. Flexible access is not available in respect of defined benefit schemes.
Where the pension is worth not more than £10,000, it is usually possible to take the pension in one go as a `small pot’ lump sum. A person can take up to three small pots from different personal pensions and unlimited small pots from different workplace pensions. Where a small pension pot lump sum is taken, 25% is tax-fee.
Since April 2015, only defined benefit schemes have been able to make trivial commutation payments – a payment as a lump sum where the value of the pension pot is less than £30,000. Small pension pot lump sums can be taken separately from any trivial commutation payment.
Potential tax overpayment
While the first 25% of the pension lump sum is tax free, the remainder is taxable at the taxpayer’s marginal rate. Tax is deducted under PAYE on the pension payment, but often the code used is a basic rate (BR) code or an emergency code, and does not take account of the personal allowance or other income received. Consequently, the tax deducted may not match the amount actually due.
Claiming a refund
Where too much tax has been deducted, the refund mechanism depends on the circumstances:
Where the lump sum is from a defined contribution scheme, form P50Z should be used if the pension pot has been used up but the taxpayer has no other income in the tax year. However, if the pension has used the pension pot, but the taxpayer has other income in the tax year, form P53Z should be used.
If the lump sum has not used up the pension pot, regular payments are not being taken from the pension and the pension provider cannot refund the overpaid tax, a refund can be claimed on form P55.
Where the overpayment has arisen in respect of a trivial commutation lump sum, the refund can be claimed via the self-assessment tax return. If the taxpayer does not need to complete a tax return, form P53 can be used instead.
MTD - Extending the Cash Basis
The cash basis is an easier way for smaller businesses to work out their taxable profit. Under the cash basis it is only necessary to take account of money in and money out. By contrast, under the traditional accruals method, income and expenditure is recorded when invoiced or billed.
Prior to 6 April 2017, the cash basis was only available to unincorporated business and partnerships (as long as partners are individuals) whose turnover was less than the VAT threshold - £83,000 from 1 April 2016, increasing to £85,000 from 1 April 2017.
As part of the consultations on the Making Tax Digital reforms, the Government consulted on measures designed to simplify tax for unincorporated businesses. The measures included increasing the turnover threshold for the cash basis to make it accessible to more businesses. Following the consultation, it was announced that the threshold will be increased to £150,000 from 6 April 2017. Once in the cash basis, businesses can remain in it as long as their profits do not exceed the exit threshold. This is set at double the cash basis threshold and consequently increases to £300,000 from 6 April 2017.
Changes are also made to the cash basis rules, particularly in relation to the treatment of capital items. The general rule which prohibits a deduction for capital items in computing the profits of the business is replaced by a more limited disallowance for capital expenditure. Under the new rules, capital expenditure can be deducted in working out taxable profits unless the expenditure is incurred on or in relation to the acquisition of disposal of a business or in connection with the provision, alteration or disposal of:
• an asset that is not a depreciating asset (i.e. one with a useful life of more than 20 years);
• an asset that is not acquired or created for use on a continuing basis in the trade;
• a car;
• a non-qualifying intangible asset, including education and training; or
• a financial asset.
The new rules apply from 6 April 2017.
Extension to landlords
The availability of the cash basis is also extended to unincorporated property businesses from 6 April 2017 where the rental income of the property business (calculated according to cash basis rules) is not more than £150,000 a year. Where this is the case, the cash basis is the default basis and landlords within the cash basis threshold who want to use the accruals basis will now need to elect to do so.
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:
If he had instead put his properties into a company, the company would first have to pay corporation tax on its profits:
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.
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:
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:
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.
Replacement of Domestic Items Relief
The wear and tear allowance for fully furnished lettings was repealed with effect from 1 April 2016 for corporation tax and 6 April 2016 for income tax. It was replaced by a new relief for the replacement of domestic items.
Relief is not available for the initial expenditure on furnishings and domestic items. It is only available on their replacement. This is then complicated by the fact that relief is restricted if the replacement items are not 'the same or substantially the same' as the old item.
Guidance for taxpayers - HMRC updated its guidance ‘Income Tax when you rent out a property: working out your rental income' together with 'Income Tax when you rent out a property: case studies' on 28 October 2016. In the main guidance, it says: 'Where the new item is an improvement on the old item, for example replacing a sofa with a sofa bed, the allowable deduction is limited to the cost of purchasing an equivalent of the original item. So, if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference. When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or is not, the same or substantially the same as the old item.
If the replacement item is a reasonable modern equivalent, say a fridge with improved energy efficient rating compared to the old fridge, this is not considered to be an improvement and the full cost of the new item is eligible for relief.'
HMRC's case study:
'David has replaced a single, wooden framed bed in his rental property with a new double divan bed. The new double bed is an improvement on the old bed and David paid £500 for it, which is significantly more than the £150 it would have cost if he had replaced the old bed with a new equivalent wooden framed bed. Therefore, David cannot claim more than £150 of the purchase cost as a deduction.'
The new bed differs from the old bed in both size and style. The example does not elaborate what HMRC considers the improvement is. There is no mention of additional functionality (e.g. a storage divan). Many people would argue that a bed is a bed, regardless of its construction. Some people prefer the look of a wooden bed-frame. Even if a divan was more expensive, they would not consider it an improvement (quite the opposite). This highlights the subjectivity of establishing whether something is the same or improved.
If HMRC adopts a hard line, landlords will have little incentive to provide quality items in their let properties and arguably, it will further encourage a 'throw away’ society.
When it comes to preparing tax returns, whilst landlords may have invoices for items purchased as replacements, they may lack details concerning the item disposed of, particularly where records were not required because the wear and tear allowance was claimed.
Will common sense prevail? HMRC’s Property Income manual states in respect of the former non-statutory renewals basis:
'Sometimes it was impossible to find the current cost of replacing an old asset with something identical. Common sense had to be used to find the cost of a reasonable equivalent modern replacement.’
Personal Allowances and Tax Rates for 2017/18
The 2016 Autumn Statement confirmed that the personal allowance will be increased to £11,500 for 2017/18 (from its current level of £11,000 in 2016/17). It was also announced that the government intends to increase the allowance to £12,500 by the end of Parliament.
The basic rate limit is set to rise to £33,500 for 2017/18 (from £32,000 in 2016/17), which means that the 40% higher rate of tax will not kick in until an individual’s income reaches £45,000. The additional rate threshold, at which the 45% income tax rate is payable, will remain at £150,000 in 2017/18.
Transferring the personal allowance - Since April 2015 it has been possible for an individual, who is not liable to income tax or not liable above the basic rate for a tax year, to transfer part of their personal allowance to their spouse or civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate. The transferor's personal allowance will be reduced by the same amount.
For 2017/18, the amount that can be transferred will be £1,150, which means that the spouse or civil partner receiving the transferred allowance will be entitled to a reduced income tax liability of up to £230 for 2017/18.
One point to note here is that married couples or civil partnerships entitled to claim the married couple’s allowance are not entitled to make a transfer.
Married couple’s allowance - The married couple’s allowance may only be claimed if at least one of the parties to the marriage or civil partnership was born before 6 April 1935. The allowance is £8,355 for 2016/17 and will rise to £8,445 for 2017/18.
Blind person’s allowance - An allowance of £2,290 may be claimed in 2016/17 by a blind person, which is given in addition to the personal allowance, and reduces the taxpayer’s total income. The allowance is set to rise to £2,320 for 2017/18.
Note that a married blind person who cannot use all of the relief may transfer the unused part to the other spouse (or civil partner), whether the other spouse is blind or not. A married couple, or civil partners, both of whom qualify for relief, can each claim the allowance.
The allowance can only be claimed by someone who is registered as blind (but not partially sighted). A person may register as blind even if they are not totally without sight. HMRC will, by concession, allow the relief in the previous year if evidence of blindness had already been obtained by the end of it.
Savings income - The band of savings income that is subject to the 0% starting rate will remain at its current level of £5,000 for 2017/18.
The personal savings allowance (PSA), which took effect from 6 April 2016, allows basic rate taxpayers to receive up to £1,000, and higher rate taxpayers up to £500, of tax free savings savings income each year. The PSA is not available for additional rate taxpayers. The allowance is available in addition to the tax-advantages previously available to investors with individual savings accounts. The government has confirmed that the PSA will remain at its current level for 2017/18.
All individuals should try to fully utilise personal allowances and basic rate bands wherever possible. Unused allowances are not available to be carried forward, so it is important to ensure that they are used each tax year.
Savings income – do you need to claim back tax?
From 6 April 2016 onwards, bank and building society interest has been paid gross without the deduction of tax. However, previously basic rate tax was deducted at source unless you were a non-taxpayer who had registered to receive your interest gross.
If you had savings income in 2015/16, your taxable income was low, and if you hadn’t registered to receive your income gross, you may be due a repayment.
For 2015/16, the personal allowance was set at £10,600. To the extent that taxable non-savings income did not exceed the savings rate limit of £5,000, savings rate income was taxed at 0%. This meant that an individual could potentially receive up to £15,600 of savings income tax-free if they had no other income.
Case study 1
June is 74. In 2015/16, she receives a pension of £8,000 and bank and building society interest of £6,000 (gross) from which tax of £1,200 has been deducted.
Her total income for the year is £14,000.
Her pension of £8,000 is fully covered by her personal allowance of £10,600, leaving £2,600 of her personal allowance available to set against her savings income of £6,000.
The remaining £3,400 of her savings income is taxed at the savings starting rate of 0%. She has no taxable non savings income, so the full £5,000 nil rate savings rate band is available to her.
Therefore, no tax is due on June’s saving income of £6,000 and she is entitled to a repayment of the tax of £1,200 deducted at source.
Case study 2
Margaret is also 74. She receives a pension of £12,000 and building society interest of £6000 on which tax of £1,200 has been deducted.
Her personal allowance of £10,600 is set against her pension, leaving her with £1,400 of taxable pension income. The savings starting rate band of £5,000 is reduced by the amount of her taxable non-savings income, reducing the amount of savings income eligible for the zero rate to £3,600.
The first £3,600 of her savings income is tax-free. The remaining £2,400 is taxed at 20% - giving rise to a tax bill of £480. However, as £1,200 has been deducted at source, Margaret is entitled to a repayment of £720.
Claiming the repayment
The 2015/16 self-assessment tax return should have been filed by 31 January 2017. Where a tax return has been completed, the repayment can be claimed via the self-assessment system.
Where there is no requirement to file a tax return, a repayment of tax on savings income can be claimed on form R40.
Savings allowance from 6 April 2016
In most cases, the need to claim a repayment of tax deducted from savings income will disappear from 6 April 2016. From that date, bank and building society interest is paid gross and basic rate and higher rate taxpayers are allowed a savings allowance allowing them to receive savings income tax-free up to the level of the allowance, regardless of whether they have taxable non-savings income. The allowance is set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers for both 2016/17 and 2017/18. The savings rate limit and starting rate for savings remain, respectively, at 0% and at £5,000.
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?
Reduced pensions annual allowance for high earners
The pensions annual allowance places a cap on tax relieved contributions, which can be made to a registered pension scheme for the pension input period. From 2016/17, the pension input period is aligned with the tax year.
The pensions annual allowance is set at £40,000 for 2016/17. However, some higher earners are only entitled to a reduced annual allowance as the allowance is tapered where income exceeds certain thresholds.
The taper is only applied if the individual has both threshold income in excess of £110,000 for 2016/17 and adjusted net income in excess of £150,000.
Threshold income is basically taxable income after pension contributions made either by deduction from salary or to a personal pension plan where basic rate relief is given at source. Where a salary sacrifice arrangement was entered into after 8 July 2015 under which salary is given up in exchange for employer pension contributions, the salary given up needs to be added back. Any salary sacrifice arrangements before 9 July 2015 can be ignored.
If threshold income is less than £110,000 the reduction in the annual allowance does not apply.
Adjusted net income
Adjusted net income is basically taxable income before deducting pension contributions, plus any employer contributions.
If adjusted net income is less than £150,000 the reduction in the annual allowance does not apply.
The taper only applies where both threshold income is more than £110,000 and adjusted net income is more than £150,000. Where this is the case, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £150,000, subject to a maximum reduction. Thus, an individual who has threshold income of more than £110,000 and adjusted net income of more than £210,000 will only be entitled to the minimum pensions annual allowance of £10,000 for 2016/17. The maximum taper of £30,000 applies.
Hannah has a gross salary of £160,000 in 2016/17. She contributes £20,000 into a registered pension scheme. Her employer also makes a contribution of £20,000.
Her threshold income is £140,000 – her salary of £160,000 after her pension contribution of £20,000.
Her adjusted net income is her £180,000, being her salary before her pension contributions of £160,000 plus the pension contributions made by her employer of £20,000.
As her threshold income is above £110,000 and her adjusted net income is above £150,000, the taper applies.
Her annual allowance is reduced by 50% (£180,000 – £150,000) = £15,000.
Her annual allowance for 2016/17 is £25,000 (£40,000 - £15,000).
Don’t forget brought forward allowances
Even where the taper applies, it is possible to make tax-relieved contributions in excess of the reduced allowance if allowances have not been fully used in the previous three years. The taper did not apply before 2016/17 and unused allowances can be carried forward for up to three years.
MTD - Voluntary pay as you go
As well as the requirement to make a digital return and keep digital tax records, the Making Tax Digital (MTD) reforms introduce other changes to the way in which taxpayers interact with HMRC. One such change is the opportunity for taxpayers to make voluntary payments on account of their tax liabilities. Under the voluntary pay as you go (PAYG) proposals taxpayers will be able to, if they so choose, set aside money to pay their tax by making voluntary payments on account.
Some key points to note are:
• There will be no obligation to make PAYG payments.
• The payments will be flexible.
• HMRC claim the administration will be simple.
• Voluntary payments will be repayable.
• Payments and repayments will be made electronically.
Making payments – taxpayer chooses
It will be entirely up to the taxpayer to choose whether to make payments on account and if so when and how much to pay. There will be no deadlines, no requirements for voluntary payments to be made at a fixed time and no minimum payment.
Allocation of voluntary payments – HMRC choose
However, when it comes to deciding how voluntary payments are allocated, it is HMRC who decides rather than the taxpayer. The taxpayer pays into a pot and HMRC uses any money in the pot to pay liabilities as they become due. The argument for this is that HMRC can use the money in the way which best reduces any interest and penalties that a taxpayer may incur. However, this may not suit all taxpayers – some may wish to make payments on account towards their final self-assessment liability, but are happy to pay their VAT each quarter as it becomes due. Under the proposals as they currently stand this is not possible – payments can be made only against a taxpayer’s liabilities generally rather than set aside for a specific liability. Not everyone is happy with this.
Currently, there are no plans to pay interest on voluntary PAYG payments. Consequently, it may be better to open an interest-bearing account to save for future tax bills (particularly if giving an interest-free loan to the Exchequer does not appeal).
The plan is to roll-out voluntary PAYG with MTD, making it available to unincorporated businesses and landlords with a turnover above the VAT threshold from April 2018, when they are bought within MTD.
A good idea
The idea was well supported in principle and some taxpayers may like the idea of setting money aside to cover tax. There are alternatives, however, including the existing Budget Payment Plan.
Partner note: www.gov.uk/government/consultations/making-tax-digital-voluntary-pay-as-you-go.
IHT Estate returns
When someone dies, there are forms to fill in and send to HMRC. There are different forms and the correct forms depend on whether or not there is any inheritance tax to pay. Consequently, before the forms can be completed, it is necessary to value the estate for inheritance tax purposes and determine whether any tax is due.The inheritance tax forms should be sent with the application for the grant of representation. This is the legal right to deal with the estate.Form IHT205 – no IHT to payWhere there is no IHT to pay (for example if the whole estate has been transferred to a spouse or civil partner or the value is below the nil rate band, currently £325,000), short form IHT205 (2011) should be used. This form can also be used where the whole estate is left to a charity with a charity reference number. However, it cannot be used for estates worth more than £1 million, even if there is no IHT to pay.The form, together with notes on its completion is available on the Gov.uk website at: www.gov.uk/government/publications/inheritance-tax-return-of-estate-information-iht205-2011The information can also be completed online.There is no deadline for the submission of form IHT205.Form IHT217 – claim to transfer nil rate band for excepted estatesThe unused portion of the nil rate band on the death of the first spouse or civil partner can be transferred for use against the surviving spouse or civil partner’s estate on their death. Where there is no tax to pay and form IHT205 has been completed, a claim to transfer the unused nil rate band should be made on form IHT217 and filed with form IHT205. Form IHT217 is available on the Gov.uk website at:www.gov.uk/government/publications/inheritance-tax-claim-to-transfer-unused-nil-rate-band-for-excepted-estates-iht217Form IHT400 – IHT to payThe full form, IHT400, should be used where there is inheritance tax to pay, or where the short form cannot be used as the estate is worth more than £1 million.The form is available on the Gov.uk website, together with guidance notes on its completion, at: www.gov.uk/government/publications/inheritance-tax-inheritance-tax-account-iht400There is a deadline for submitting the form – a year from the end of the month in which the person died. Penalties may be charged if the form is submitted late.Form IHT402 – claim to transfer unused nil rate bandWhere there is IHT to pay and the inheritance tax threshold is increased by transferring the unused portion for a late spouse or civil partner, form IHT402 should be used to work out the percentage and claim the transfer. Form IHT402, which is available on the Gov.uk website atwww.gov.uk/government/publications/inheritance-tax-claim-to-transfer-unused-nil-rate-band-iht402, should be submitted with form IHT400.Form IHT207 – person who died lived abroadIf the person who died lived abroad permanently and had less than £150,000 in UK assets (cash, bank accounts or listed stocks and shares), form IHT207 should be used rather than form IHT205 if there is no tax to pay. It is available on the Gov.uk website at: www.gov.uk/government/publications/inheritance-tax-return-of-estate-information-iht207-2006
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