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61 Friar Gate  Derby  DE1 1DJ

 

Registered to carry out audit work Association of Chartered Certified Accountants.

www.auditregister.org.uk under number 8011438

Member of the Association of Chartered Certified Accountants
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01332 202660

Blog

Landlords warned over potential tax rise

Adrian Mooy - Friday, January 24, 2020
 
Landlords are being warned by the Association of Taxation Technicians (ATT) that if they have previously lived in a property that they let, then potential changes to the Finance Bill this year could increase their capital gains tax (CGT) bill significantly.

 

The ATT is urging for changes to avoid this ‘cliff-edge’, as changes to the Finance Bill could lead to an increase in landlord’s CGT bills of up to £11,200.

 

Letting relief is currently available to those who have lived in a property at one time during their period of ownership, but that have since moved out and let the property. This relief can cover up to a maximum of £40,000 in gains arising during this period but is only available until 5 April 2020.

 

If the proposed changes are implemented on 6 April 2020, then letting relief will only be available in situations where the landlord and tenant are living in the property at the same time.

 

The draft legislation states that the requirement for ‘shared occupation’ will apply to future lettings as well as any let periods prior to April 2020.

 

Michael Steed, Co-Chair of the ATT’s Technical Steering Group, said: “Someone who was entitled to the maximum letting relief under the old rules but sells on 6 April 2020, could be up to £11,200 worse off than if they had sold a day earlier on 5 April 2020.

 

“At the same time, they will also be subject to new rules – which have already been legislated – requiring them to pay that tax much earlier than they would have previously.”

 

 

Properties not let at a commercial rent

Adrian Mooy - Thursday, January 23, 2020
 
There may be a number of reasons why a property is occupied rent-free or let out at rent that is less than the commercial rate. This may often occur where the property is occupied by a family member in order to provide that person with a cheap home. For example, a parent may purchase a house in the town where their student son attends university and let it to the student, and maybe even his housemates, at a low rent to help them out. While the parents’ motives are doubtless philanthropic, their generosity may cost them dearly when it comes to obtaining relief for the associated expenses.

 

Wholly and exclusively rule

 

Expenses can only be deducted in computing taxable rental profits if they are incurred wholly and exclusively for the purposes of the property rental business. Unfortunately, HMRC take the view that unless the property is let at full market rent and the lease imposes normal conditions, it is unlikely that the expenses are incurred wholly and exclusively for business purposes. So, where the property is occupied rent-free, there is no tax-relief for expenses.
If the property is let at a rent that is below the market rent, a deduction is permitted, but this is capped at the level of the rent received from the let. This means that where a property is let at below market rent, it is not possible for a rental loss to arise, or for expenses in excess of the rent to be offset against the rent received from other properties in the same property rental business.

 

Periods between lets

 

Where there are brief periods where the property is occupied rent-free or let out cheaply, it may be possible to obtain full relief for expenses. For example, if the landlord is actively seeking a tenant and a relative house sits while it is empty, relief will not be restricted as long as the property remains genuinely available for letting. In their guidance HMRC state, that ‘ordinary house sitting by a relative for, say, a month in a period of three years or more will not normally lead to loss of relief’. However, if a relative takes a month’s holiday in a country cottage, relief for expenses incurred in that period will be lost.

 

Commercial and uncommercial lets

 

Where a property is let commercially some of the time and uncommercially at other times, expenses should be apportioned on a just and reasonable basis between the commercial and non-commercial lets. Any excess of expenses over rents in the period when commercially let can be deducted in the computing the profit for the rental business as a whole. However, an excess of expenses over rent when the property is let uncommercially are not eligible for relief.
 
Timing must also be considered – expenses relating to uncommercial lets cannot be deducted simply because they are incurred when the property is let commercially.

 

Allowable finance costs

Adrian Mooy - Wednesday, January 22, 2020
 
Although the way in which landlords obtain relief for finance costs on residential properties is changing, there is no change to the type finance costs that are eligible for relief.

 

What qualifies for relief

 

The basic rule is that relief is available for expenses that are incurred wholly or exclusively for the purposes of the property rental business, and this rule applies equally to finance costs. Relief is available for eligible finance costs where they meet this test.

 

The definition of finance costs includes mortgage interest and interest on loans to buy furnishing and suchlike. Relief is also available for the incidental costs of obtaining finance, as long as the interest on the loan is allowable. Incidental costs of loan finance include items such as arrangement fees, and fees incurred when taking out or repaying loans or mortgages.

 

Limit on eligible borrowings

 

A landlord can obtain relief for the costs of borrowings on a loan or mortgage up to the value of the property when it was first let. Buy-to-let mortgages are often more expensive than residential mortgages with interest charged at a higher rate. The loan does not have to be secured on the let property. Where a landlord wishes to buy a rental property and has sufficient equity in their own home, it may make commercial sense to release capital from the home by borrowing against it and using the money to purchase the rental property. Interest on the loan is eligible for relief, despite the fact the loan is not secured on the rental property.

 

No relief for capital repayments

 

Capital repayments, such as the capital element of a repayment mortgage or loan repayments, are not eligible for relief. Where the borrowings are in the form of a repayment mortgage, it will be necessary to split the payment between the interest and capital when working out the relief. The lender should provide this information on the statement.

 

Example

 

Mervyn wishes to invest in a buy to let property. As he only has a small mortgage on his home, he remortgages to release £150,000 of equity.

 

Following the remortgage, he has a mortgage of £200,000 on his own home. Using the released equity, he buys a property to let for £150,000. He spends some time renovating the property in his spare time before letting it out. When the property is first let, it has a value of £160,000.

 

During the 2019/20 tax year, Mervyn pays mortgage interest of £10,000 and makes capital repayments of £10,800. The property is let throughout.

 

Mervyn can claim relief for 80% of the interest costs – this is attributable to the borrowings of £160,000 (80% of the loan of £200,000), being the value of the let property when first let. The interest eligible for relief is therefore £8,000 (80% of £10,000). For 2019/20, 25% (£2,000) is relieved by deduction with the balance giving rise to a deduction from the tax due of £1,200 (75% x £8,000 x 20%).
 
No relief is available for the capital repayments.

 

Legal and professional fees – Capital or revenue?

Adrian Mooy - Tuesday, January 21, 2020
 
At some point, a landlord is likely to incur legal and professional fees in connection with the running of their property rental business. It is easy to fall into the trap of assuming that these costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story. The landlord must also determine whether the costs are revenue or capital in nature. The rules also differ depending upon whether the accounts are prepared on the cash basis or using traditional accounting under the accruals basis.

 

The rule

 

The nature of the legal fees follow that of the matter to which they relate – so if the fees are incurred in relation to an item which is itself revenue in nature, the legal and professional fees are also revenue in nature. Likewise, legal fees that are incurred in connection with a matter that is capital in nature are also capital in nature.

 

Legal fees that are revenue in nature would include, for example, fees incurred to recover unpaid rent, while legal fees that are capital in nature would include fees incurred in connection with the purchase of a property.

 

Cash or accruals basis

 

Revenue items are deductible in computing profits regardless of whether they are prepared under the cash or accruals basis, although the time at which the relief is given will differ. Under the cash basis, the deduction is given for the period to which the expenditure relates, for the cash basis the deduction is given for the period for which the expenditure is incurred.

 

For capital expenditure different rules apply. No deduction is allowed for capital expenditure under the accrual basis, whereas under the cash basis, the treatment depends on the nature of the item – capital expenditure is deductible under the cash basis unless the expenditure is of a type for which a deduction is expressly forbidden. Items of the forbidden list include expenditure in or in connection with lease premiums and the provision, alteration or disposal of land (which includes property).

 

Example of allowable revenue items

 

A deduction for legal and professional fees will normally be allowed where they relate to:

 

 • costs of obtaining a valuation

 

 • normal accountancy costs incurred in preparing accounts of the rental business and agreeing the tax liabilities

 

 • costs of arbitration to determine the rent

 

 • the costs of evicting an unsatisfactory tenant to re-let the property

 

Example of capital expenses

 

The following are examples of legal and professional fees which are capital in nature:

 

 • legal costs incurred in acquiring or adding to a property

 

 • costs in connection with negotiations under the Town and Country Planning Act

 

 • fees incurred in pursuing debts of a capital nature, such as the proceeds due on sale

 

Leases

 

Leases can be tricky. The expenses incurred in connection with the first letting or subletting for more than one year are deemed to be capital and therefore not deductible – this would include the legal fees incurred in drawing up the lease, surveyors’ fees and commission. However, if the lease is for less than one year, the associated expenses can be deducted. Normal legal and professional fees on the renewal of a lease are also deductible if the lease is for less than 50 years; although any proportion of the fees that relate to the payment of a premium are not deductible.
If a new lease closely follows the previous lease, a change of tenant will not render the associated fees non-deductible. However, if the property is put to other use between lets, or a long lease, say, replaces a short lease, the associated costs will be capital and non-deductible.

 

Does the high-income child benefit charge apply?

Adrian Mooy - Monday, January 20, 2020
 
The high-income child benefit charge (HICBC) applies to claw back child benefit from either the claimant or his or her partner where at least one of them has income of £50,000 or more. The charge is perhaps one of the more unfair tax charges in that the person who suffers the liability may not be – and often isn’t – the person who received the child benefit.

 

Nature of the charge

 

The charge may apply to an individual with income over £50,000 where either they or their partner has received child benefit in the tax year. It may also bite where someone else gets child benefit for a child who lives with you and they contributed an equal amount to the child’s upkeep. It does not matter whether the child living with the individual is theirs or not.

 

It is important to note here that ‘partner’ does not have to be a spouse or civil partner – the charge also applies to unmarried couples living together as spouses or civil partners.

 

The measure of income for the purposes of the charge is ‘adjusted net income’. Broadly, this is income after taking account of Gift Aid donations and pension contributions and, for the self-employed, trading losses.

 

Where both partners each have income in excess of £50,000, the charge is levied on the higher earner; if their income is the same, it is the person who receives the child benefit who pays the charge.

 

How the charge is calculated

 

The charge claws back 1% of child benefit for every £100 by which adjusted net income exceeds £50,000. Where adjusted net income is £60,000 or more, the charge is 100% of the child benefit received in the tax year.

 

Example 1

 

Suki claims child benefit for her two children. This is set at £20.70 per week for the eldest child and at £13.70 for her youngest child – equal to £1,788.80 for 2019/20.

 

Suki earns £30,000 from her job as a teacher and her husband Yuto earns £55,000 (after pension contributions) from his job in IT.

 

As Yuto’s adjusted net income is more than £50,000, the HICBC bites. It is equal to 50% ((£55,000 - £50,000)/100 x 1%) of the child benefit received by Suki in the year, i.e. £894.40.

 

Example 2

 

Matthew and Maria have two children in respect of which Maria claims child benefit, equal to £1,788.80 for 2019/20. Matthew has adjusted net income of £58,000 and Maria has adjusted net income of £72,000.

 

As the higher earner, Maria is liable for the HICBC. As her adjusted net income is more than £60,000, the charge is equal to the child benefit paid in the year, i.e. £1,788.80

 

Paying the charge

 

Where a person is liable for the HICBC, they must declare it on their self-assessment tax return. The tax can be paid via self-assessment. Alternatively, if the tax return was filed by 30 December 2019 and the underpayment for the year in total is less than £3,000 it can be collected through PAYE via an adjustment to the tax code.

 

Worth stopping the claim?

 

Where the charge is equal to the full amount of the child benefit, it may seem easier not to claim it, rather than claiming it only to have to pay it back. However, child benefit paid for a child under 12 comes with National Insurance credits, helping to build up entitlement to the state pension. If the claimant does not otherwise pay sufficient National Insurance for the year to be a qualifying year, failing to claim may adversely affect their state pension. The solution is to claim but elect not to receive the benefit.

 

Make use of the CGT inter-spouse exemption

Adrian Mooy - Thursday, January 16, 2020
 
There are a number of tax concessions available to married couples and civil partners which recognise that their financial affairs may be interlinked. One of these concessions relates the transfer of assets between spouse and civil partner for capital gains tax purposes. The disposal is deemed to take place at a value which gives rise to neither a gain nor a loss. This means that the spouse or civil partner making the disposal does not end up with a capital gains tax bill; the spouse or civil partner acquiring the asset simply takes over his or her partner’s base cost. This rule can be very useful from a tax planning perspective as the following case studies show.

 

Case study 1

 

Jane and John have been married for a number of years. Jane has built up a portfolio of shares, which she wishes to now sell so that the couple can take a mid-life gap year. The sale of the shares will realise a gain of £30,000. Jane is a higher rate taxpayer and John is a basic rate taxpayer. Neither has used their 2019/20 annual exemption and the intention is to sell the shares before the end of the 2019/20 tax year.
 
The annual exemption for 2019/20 is set at £12,000.

 

If Jane simply goes ahead and sells the shares, she will realise a chargeable gain of £18,000 after deducting the annual exempt amount. As a higher rate taxpayer, the gain will be taxed at 20%, giving rise to a capital gains tax bill of £3,600.
 
However, if Jane and John make use of the inter-spouse exemption to transfer shares which would otherwise give rise of a gain of £18,000 to John, the position is very different. Jane is left with a gain of £12,000 which is covered by her annual exempt amount, leaving nothing in charge. John, however, is left with a chargeable gain of £6,000 (£18,000 - £6,000) after deducting his annual exempt amount. As the gain falls within his basic rate band, it is taxed at 10%, resulting is a capital gains tax liability of £600.
 
By making use of the inter-spouse exemption, the couple’s combined capital gains tax bill is reduced by £3,000.
 
Case study 2

 

Karamo owns an investment property jointly with his civil partner Robert. The property is let and the couple receive rental income of £20,000 a year. Karamo is a higher rate taxpayer, whereas Robert is in the process of setting up a photography business and earning around £14,000 a year.
 
Each civil partner is deemed to have received rental income of £10,000 a year. Karamo pays tax of £4,000 (£10,000 @ 40%) on his share, while Robert pays tax of £2,000 (£10,000 @ 20%) on his share. The total tax paid on the rental income is therefore £6,000.
 
By making use of the inter-spouse exemption, Karamo transfers his share of the property to Robert. As a result, Robert receives all the rental income, which is now all taxed at 20%, reducing the tax bill to £4,000, saving the couple £2,000 a year.

 

Correcting an overpayment of wages

Adrian Mooy - Wednesday, January 15, 2020
 
Mistakes happen, and it can be very easy inadvertently to pay an employee too much when doing the wages. Perhaps a number was keyed in incorrectly or figures were transposed, or maybe commission was overstated or an employee was paid for more overtime hours than they actually worked.
 
From an employment law perspective, an employer has the right to recover overpayments of wages from the employee. But what needs to be done to correct the mistake for tax and National Insurance purposes?
 
Adjustments during the tax year
 
It is relatively straightforward to correct an overpayment of wages where the mistake is discovered in the same tax year and the employee continues to be employed.

 

You will need to agree with the employee how the money is to be recovered. You may simply deduct it from future pay, or alternatively the employee may refund the overpayment to you. Where the overpayment is deducted from future pay, the correct approach is to deduct the net overpayment from net pay (i.e. after tax and National Insurance have been deducted).

 

The mistake should be corrected in the next Full Payment Submission (FPS) sent to HMRC – this should show the correct payments to date and the correct net tax to date. The effect of this is that the PAYE deducted from the overpayment can be set off by reducing the next monthly remittance sent to HMRC. The employer should keep a note of both the reason for the adjustment and the method used to recover the net pay from the employer.
 
Mistakes discovered after the end of the tax year
 
If the mistake is not discovered until after the end of the tax year, it will be necessary to submit an FPS showing the correct year to date figures as at 5 April at the end of the tax year in which the mistake occurred. For 2018/19 and earlier tax years, mistakes discovered after the end of the year can also be corrected using an Earlier Year Update (EYU); however, HMRC will not accepts EYUs for correcting 2019/20 mistakes post year-end.

 

The employee should also be informed of the mistake and given a replacement P60, clearly marked ‘replacement’. The employer will also need to agree with the employee how the overpayment is to be recovered.

 

Using company vans for tax-free home to work travel

Adrian Mooy - Monday, January 13, 2020

 

As a general rule, travel between home and work is regarded as private travel and if the employer meets the cost of that travel, a benefit-in-kind tax charge will be triggered. However, it is possible for employees with a company van to use that van to travel between home and work, and for the employer to meet the cost of fuel for such journeys, without a tax charge arising. However, as with most tax exemptions, there are stringent conditions to be met.

 

Tax charge on company vans

 

Where an employee has the use of a company van and private use of that van is unrestricted, a tax charge arises. The amount charged to tax is £3,420 for 2019/20. This gives rise to a tax bill of £684 for a basic rate taxpayer, £1,368 for a higher rate taxpayer and £1,539 for an additional rate taxpayer. Where fuel is also provided, a separate fuel charge applies; the taxable amount is set at £655 for 2019/20.

 

No charge arises if the van is used only for business journeys or in respect of vans that meet the conditions to be regarded as a pool van.

 

Restricted private use

 

It is also possible to escape a tax charge but to be able to use the van for home to work travel if a condition – known as the ‘restricted private use condition’ – is met. This comprises two parts:

 

 • the commuter use requirement

 

 • the business travel requirement

 

The commuter use requirement is met if:

 

 • the terms on which the van is made available to the employee prohibit private use other than for the purposes of travel between home and work (‘ordinary commuting’) or travel between two places where the journey is essentially the same as the home to work journey

 

 • neither the employee or the members of the employee’s family or household make private use of the van other than those purposes

 

It should be noted that insignificant private use, such as occasionally using the van to take something to the tip, is disregarded.

 

The second requirement is the business travel requirement. This is met if the van is available to the employee mainly for use for the purposes of the employee’s business travel. That is to say, the main reason that the employee has the van is because they need it for their job. The business travel requirement must be met at all times when the van is available to the employee.

 

If the provision of the van is exempt, no fuel benefit arises, even if the employer meets the cost of home to work travel.

 

Example

 

Tony is a delivery driver. He is provided with a van by his employer for use in his work. He is allowed to take the van home at night and use it to drive to and from work. However, all other private use is prohibited. His employer pays for all fuel, including that for his journey between home and work. As the restricted private use condition is met, there is no tax to pay on either the provision of the van or the fuel.

Utilising the 2019/20 dividend allowance

Adrian Mooy - Saturday, January 11, 2020
 
The dividend allowance is quite unusual in that it is available to everyone and everyone has the same allowance. For 2019/20 the allowance is set at £2,000. In common with many allowances, it is a case of use it or lose it.
 
As the end of the 2019/20 tax year draws closer, what can be done to ensure that the allowance is not wasted?

 

Nature of the allowance

 

Although termed the ‘dividend allowance’ its nature is really that of a nil rate band. Dividends which are sheltered by the allowance form part of band earnings, but the dividends that fall within that band are taxed at a zero rate.

 

Example

 

Harriet is a basic rate taxpayer. After taking account of her salary, she has £10,000 of her basic rate band remaining. She receives dividend income of £3,000.
 
The first £2,000 of her dividend income is covered by her dividend allowance and is tax-free. The remaining £1,000 is taxed at the dividend ordinary rate of 7.5%.

 

Harriet must therefore pay tax of £75 on her dividends.

 

The dividend income uses up £3,000 of her remaining basic rate band.

 

Family companies

 

In a family company scenario, it is possible to organise the shareholdings so as to spread the dividend income around the family to reduce the combined tax bill and to take advantage of each member’s dividend allowance. This is particularly useful where the family member has no other shares and the allowance would otherwise be lost.

 

As dividends must be declared in proportion to share holdings, the use of an alphabet share structure, whereby each person has their own class of share (e.g. A ordinary shares, B ordinary shares, etc.) preserves the flexibility to tailor dividend payments to shareholder’s circumstances.

 

Example

 

Andrew is the sole director of A Ltd. In 2019/20 the company has profits of £70,000 which Andrew wishes to withdraw as dividends. His wife Anne and his children Beth, Chris, Dawn and Emma all work outside the business. None has any other income from shares.
 
Andrew also pays himself a salary of £8,628.

 

To make use of each family member’s dividend allowance, an alphabet share structure is used, under which A ordinary shares are allocated to Anne, B ordinary shares are allocated to Beth, C ordinary shares are allocated to Chris, and so on.
 
Each family member receives a dividend of £2,000. As this is sheltered by their dividend allowances, this enables £10,000 of dividends to be paid tax-free. Had Andrew received the dividends paid to family members, they would have been taxed at the dividend higher rate of 32.5%.
Making use of the family’s dividend allowances reduces the overall tax bill by £3,250.
 
Other opportunities

 

Where one spouse or civil partner has substantial shareholdings and their partner does not hold any shares (with the result that their dividend allowance is unused) the shareholding partner could consider transferring shares to their spouse/civil partner (taking advantage of the ability to transfer the shares for capital gains tax purposes on a no gain/no loss basis). This will shift dividend income from one spouse/civil partner to the other and enable dividends that would otherwise be taxed to be received tax-free.

 

Taxpayers with unused dividend allowances could also discuss their investment strategy with their financial adviser with a view to exploring whether it would be beneficial to hold shares – but remember not to let the tax tail wag the dog.

 

Recording directors’ expenses correctly

Adrian Mooy - Friday, January 10, 2020
 
It is only permissible for a company to deduct expenditure in computing its taxable profits if incurred wholly and exclusively for the purposes of the trade. Since a company is a separate legal entity that stands apart from its directors and shareholders, it will not incur personal expenses. However, many companies, particularly 'close' companies (broadly a company under the control of 5 or fewer participants) pay for personal expenses of the directors. It is important to note that where payments, either made to or incurred on behalf of a director, do not form part of their remuneration package, these amounts may not be an allowable company expense. In such circumstances it may be appropriate for these items to be set against the director's loan account. Establishing whether a payment forms part of a director's remuneration package can be complex and good record keeping is essential to back up such claims.
 
Accounting disclosure requirements for directors’ remuneration include sums paid by way of expense allowance and estimated money value of other benefits received other than in cash. The money value is not the same as the taxable amount, although this is often used in practice. This means the onus is on the director to justify why amounts not disclosed in accounts should be accepted as part of the remuneration package rather than debited to his or her loan account.
 
Where the expenditure forms part of the remuneration package it will be an allowable expense of the company and the appropriate employment taxes (PAYE income tax and NICs) should be paid, where relevant.  Where the expenditure does not form part of the remuneration package the relevant amount should normally be debited to the director's loan account.
 
Cash transactions between the company and a director may have tax consequences. Broadly, at the end of an accounting period, if the director owes the company money, a tax charge may arise. Subject to certain conditions, a charge may arise where a director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. The tax charge (known as the ‘s 455 charge’) is the liability of the company and is calculated as 32.5% of the amount of the loan. The tax charge can potentially be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the accounting period.

 

Good record keeping of all cash and non-cash transactions between a company and its directors is essential. Poorly kept records can mean that information provided is not accurate, which in turn may result in non-business expenditure incurred by the directors being incorrectly recorded or misposted in the business records and claimed in error as an allowable expense. Conversely, justifiable business expenditure incurred by the directors may not be claimed or claimed inaccurately. Consequently, directors' loan account balances may be incorrect resulting in the company being liable for a s 455 charge if the loan account is overdrawn, or corporation tax relief not being claimed on allowable expenses by the company at the appropriate time.

 

A review of particular accounts headings may identify directors' personal expenditure that has not yet been allocated appropriately. Transactions should normally be recorded as they occur and a detailed transaction history maintained, so that it is possible to identify the director's loan account balance on any given date.

 


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