Blog

Beware the capital gains tax connected person rules

Adrian Mooy - Friday, March 05, 2021
 
Although it is possible to transfer assets between spouses at a value that gives rise to neither a gain nor a loss, giving a property to children or other family members may trigger an unwelcome capital gains tax bill, even if nothing was received it return.

 

The market value rule

 

Where assets are disposed of to a connected person, the transfer is deemed to take place at market value, regardless of whether any consideration is actually received and the amount of that consideration.
The list of connected persons includes:

 

  1.  - spouses and civil partners;
  2.  - relatives (siblings, ancestors or lineal descendants);
  3.  - spouse or civil partners of relatives;
  4.  - relatives or spouses or of civil partners; and
  5.  - spouses or civil partners of those relatives.
 

 

However, as noted above, the no gain/no loss rule applies to transfer between spouses and civil partner rather than the market value rules.
The following case study illustrates the potential cost of being caught out by the market value rule.

 

Case study

 

Adrian has a buy to let property. To help his daughter to get on the property ladder, he decides to make a gift of the property to her. He receives nothing in exchange for the property.

 

At the time that he gifted the property to his daughter, the house was valued at £300,000.

 

Adrian purchased the property ten years earlier for £200,000. Costs of acquisition and disposal are £5,000.

 

As his daughter is a connected person, Adrian is deemed to have disposed of the property for £300,000, giving rise to a chargeable gain of £95,000 (£300,000 – (£200,000 + £5,000)).

 

Assuming Adrian is a higher rate taxpayer and has used his annual exempt amount already, this will give rise to a capital gains tax bill of £26,600 (£95,000 @ 28%). This must be reported to HMRC within 30 days and capital gains tax paid within the same time frame.

 

Despite not receiving a penny for the property, Adrian must find £26,600 to pay in capital gains tax.

 

The gift will also be a potentially exempt transfer for IHT purposes.

 

Selling your main residence with land – Will the SDLT return trip you up?

Adrian Mooy - Monday, March 01, 2021
 
Most people do not expect to pay capital gains tax when they sell their only or main home, particularly if the property has been their only home for their entire time that they owned it. However, what is less well known is that the exemption places a limit on the amount of garden that falls within the main residence exemption. This may catch out those who sell their main residence and have large gardens or land.

 

What is allowed?

 

The legislation allows grounds up to the ‘permitted area’ to fall within the main residence exemption. This is set at 0.5 of a hectare (1.24 acres). However, a larger area may be allowed where, 'having regard to the size and character of the dwelling’ this is required for the reasonable enjoyment of the property.

 

Case law

 

The case of Phillips v HMRC UKFTT 381 TC concerned the sale of the Phillips’ main residence, which had a garden of 0.94 of a hectare. As it was their main residence, the Phillips did not declare the gain to HMRC. HMRC investigated the disposal while checking SDLT returns in March 2017, having discovered that at 0.94 of a hectare, the grounds exceeded the permitted area of 0.5 of a hectare allowed by the legislation.

 

In considering whether the larger grounds were needed for the reasonable enjoyment of the property, recourse was made to previous decisions. These included the case of Longston v Baker 73 TC415, in which the taxpayer contended that land in excess of 0.5 of a hectare was needed to house and graze his horses. However, the judge noted that it was ‘not objectively required, i.e. necessary, to keep horses at houses in order to enjoy them as a residence’.

 

In the Phillips’ case, the Tribunal found in their favour, ruling that the land was required for the reasonable enjoyment of the property, which is large and in a rural area. However, as previous decisions show, it is far from a given that the Tribunal will always rule in the taxpayer’s favour when it comes to deciding whether land sold with a house falls within the main residence exemption.

 

Caution required

 

Some caution is required when selling a property that has substantial grounds, particularly if some of the land is used for equestrian purposes. The purchaser will pay SDLT, and where this is at mixed property rather than residential rates, a review of the SDLT returns may trigger an investigation.

 

Recent issues for EMI schemes

Adrian Mooy - Friday, February 26, 2021
 
When it was first introduced in 2000, the Enterprise Management Incentive (EMI) scheme had an initial life expectancy of around five years, but arrangements proved to be so popular with employers and employees alike that the scheme is still going strong some twenty years on.

 

In broad terms, the EMI is a tax-advantaged share option scheme designed for smaller companies who are looking to attract and retain key staff by rewarding them with equity participation in the business. The scheme is particularly popular with smaller, entrepreneurial companies that might not be able to match the salaries paid by larger firms.

 

A share option is a right to acquire shares in a company, on terms set out in an option agreement. This will specify how many shares an employee may acquire, how much he or she will have to pay for the shares, and when the shares can be acquired through exercise of the option. Option exercise may occur, for example, after a specified period of employment, on achieving prescribed performance targets, or the sale of the company.

 

EMI is open to companies with gross assets of £30m or less, and with fewer than 250 full time equivalent employees that carry on a qualifying trade. It enables them to offer share options worth up to £250,000 over a three-year period as an incentive. If the shares are bought at the market rate at the time the options were granted, employees pay no income tax or national insurance on the difference between what the shares are worth when acquired compared to the price paid. Capital gains tax will be payable on any gains made when the shares are subsequently disposed of.

 

Example

 

David is given an EMI option to acquire a 3% shareholding in his employer’s company for its market value of £10,000. Four years later he exercises the option when the shares are worth £100,000, and eventually sells them for £150,000 when the company is taken over.

 

David will not pay any tax when the option is granted or when he exercises it. When the shares are sold, David will pay capital gains tax on his gain of £140,000 (£150,000 sale proceeds less £10,000 option exercise price). Ignoring any reliefs he may have available, capital gains tax will be charged at a rate of 10%, so tax of £14,000 will be payable.

 

Covid-19 and the working time requirement

 

One of the qualifying criteria for EMIs is that employees and directors need to be engaged to work at least 25 hours per week for their company or group or, if less, for at least 75% of their working time. So a part time employee can qualify by working say two days a week for the company, provided that work elsewhere does not amount to more than 25% of the whole.

 

Some participants in EMI schemes have been unable to meet the working time requirement because of reasons connected to the Coronavirus pandemic.
HMRC have confirmed that if an employee would otherwise have met the scheme requirements but did not do so for reasons connected to the Coronavirus pandemic, the time which they would have spent on the business of the company will count towards their working time.

 

HMRC accept the following as reasons for which an employee may have been unable to meet the working time requirements:

 

 • furlough
 
 • working reduced hours
 
 • unpaid leave
 
In all cases the reason must be attributable to the current Coronavirus pandemic and the period must have begun on or after 19 March 2020.

 

Employers and employees must keep evidence to show that there is a link to the Coronavirus pandemic.

 

EMI post-transition

 

HMRC have also recently confirmed that EMI schemes will continue to be available after the Brexit transition period ends on 31 December 2020. Previously, EMI schemes were approved under EU state aid rules and in February 2020 HMRC could only confirm that EMI would be recognised until the end of the transition period. However, HMRC have now stated that schemes will operate from 1 January 2021 under UK law.

 

Business rates update

Adrian Mooy - Monday, February 22, 2021
 
The government is currently undertaking a fundamental review of the current business rates system, including ideas for possible change and a number of alternative taxes. Conclusions and any changes are likely to be forthcoming in Spring 2021.

 

Many businesses feel that the current system for calculating business rates is antiquated as it is based on estimated open market rental values from 1 April 2015.

 

Broadly, at revaluation, the Valuation Office Agency (VOA) adjusts the rateable value of business properties to reflect changes in the property market. This usually happens every five years. The most recent revaluation came into effect in England and Wales on 1 April 2017, based on rateable values from 1 April 2015. The rateable value is multiplied by the correct ‘multiplier’ (an amount set by central government) to give annual business rates payable.

 

The next revaluation will take effect in 2023 and the government has confirmed that this will be based on property values as of 1 April 2021 as this will help reflect the impact of Covid-19 more closely.

 

Covid-19 support

 

There are two business rates multipliers set by central government. The ‘small business multiplier’ applies to properties with RVs below £51,000, and the ‘standard multiplier’ applies to properties with RVs of £51,000 or more. Around 1.8 million properties, out of approximately 2 million rateable properties in England, use the small business rates multiplier.

 

In the recent Comprehensive Spending Review (25 November 2020), the Chancellor announced a freeze on the business rates multiplier in 2021/22 meaning that the multiplier in England for ‘small’ businesses will remain at 49.9p and for large businesses it will remain at 51.2p assuming no further changes to the small business supplement are made. The freeze is expected to cost the Exchequer £575m, which means a saving to retail of around £145m on what would have been paid if business rates were to be levied at 100%.

 

Small business rate relief

 

A business may be able to obtain a discount from its local council if it is eligible for small business rate relief. This generally applies where the property’s rateable value is less than £15,000. The business will not pay business rates on a property with a rateable value of £12,000 or less. For properties with a rateable value of £12,001 to £15,000, the rate of relief will go down gradually from 100% to 0%. For example, where property rateable value is £13,500, the business the discount is 50%, for a rateable value of £14,000, the discount is 33%.

 

As part of the government’s Coronavirus support package, in March 2020, the Chancellor announced a wide-ranging expansion to the business rate discount set out in the Spring Budget 2020. From 1 April 2020, all shops, pubs, theatres, music venues, restaurants and any other business in the retail, hospitality or leisure sectors, have been given a 100% holiday from paying business rates for twelve months. This measure applies to such businesses irrespective of their properties’ rateable value, ensuring that all businesses (as opposed to mostly SMEs) within these industries receive the same government support to manage and survive the pandemic.

 

It is not currently known whether the business rate relief holiday will be extended beyond March 2021.

 

The way forward

 

Whilst the 2021/22 freeze is welcome, it is a small step compared to the much bigger question of whether there will be any business rates relief for retail next year. In addition, the professional bodies are keen to see the government go further. The ICAEW for example, says that a reduction in the multiplier may be a simpler and relatively fairer way for the government to preserve the core revenue base, while giving time to properly consider further reform of business rates to reflect the changes in the way that business now operates, in particular with the move to online which has accelerated since the start of lockdown.

 

Student loan repayments: Increased thresholds from April 2021

Adrian Mooy - Thursday, February 18, 2021
 
Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HMRC. Employers have an obligation to deduct student loan repayments in certain circumstances and to account for such payments ‘in like manner as income tax payable under the Taxes Acts’.

 

There are two plan types for student loan repayments, which have different repayment thresholds. From April 2021, the thresholds are as follows:

 

• plan 1 with a 2021-22 threshold of £19,895 (£1,658 a month or £382 per week) rising from £19,390 in 2020-21); and

 

• plan 2 with a 2021-22 threshold of £27,295 (£2,275 a month or £525 per week) rising from £26,575 in 2020-21).

 

Plan 1 loans are pre-September 2012 Income Contingent Student Loans and repayments will start when the £19,895 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £27,295 is reached. Previously plan 2 loans have been repaid outside of the payroll directly to the SLC, but from April 2016 they are to be calculated and repaid via deduction from an employer’s payroll. This means that employers and payroll software must be capable of coping with both types of plans.

 

From 6 April 2021 HMRC are introducing a new plan type for Scottish Student Loans (SSL) known as Plan 4. The Plan 4 threshold will be £25,000. Student Loan deductions will continue to be calculated at 9% on earnings above the Plan 1, Plan 2 or Plan 4 threshold.

 

Post-graduate loans - Repayment of postgraduate loans (PGL) via PAYE commenced from April 2019. Broadly, if an individual has a PGL, HMRC will send their employer a Postgraduate start notice (PGL1) to ask them to start taking PGL deductions. Individuals may also be liable to repay a Student Loan Plan Type 1 or 2 concurrently with PGL. HMRC will let their employer know this by continuing to send the normal Student Loan start (SL1) and Student Loan stop (SL2) notices as well as PGL1s and PGL2s.

 

The Postgraduate Loan threshold will remain at its current level of £21,000 for 2021-22. Earnings above £21,000 will continue to be calculated at 6%.

 

Repayment - Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:

 

 •  a new employee’s P45 shows deductions should continue – the employer will need to ascertain which plan type the employee has;

 

 •  a new employee confirms they are repaying a student loan – again, the employer will need to confirm the plan type;

 

 •  a new employee completes a starter checklist showing they have a student loan - the checklist will tell the employer which plan type to use; or

 

 •  HMRC issues form SL1 (Start Notice), which will tell the employer which plan type to use.

 

Employers are not responsible for handling employees’ student loan queries – the employee must contact SLC for this (https://www.gov.uk/government/organisations/student-loans-company).

 

While the amount you pay is calculated based on your pre-tax income above £26,575 (£27,295 from April 2021), the money is taken after you've paid tax.

 

Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.

 

If an employee has two jobs, the employer does not need to be concerned with the employee’s other income, but should calculate the deduction based only on amounts paid by him. However, if the employee has two employments with the same employer, these should be aggregated for student loan purposes if they are aggregated for NIC purposes.

 

Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee’s pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above).

 

Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.

 

Taxpayers who make repayments through PAYE can swap to repaying by direct debit in the last 23 months of their loan if they so wish. SLC will normally contact individuals shortly before this time to offer this option. This payment method enables account holders to choose a suitable monthly repayment date and ensures that they do not repay too much.

 

If an employee makes additional student loan repayments direct to SLC, they will have no effect on the size of the repayments made through the payroll – the employer will continue to deduct 9% of earnings above the threshold. The employee will, of course, pay off the loan more quickly.

 

Tax efficient remuneration using pension contributions

Adrian Mooy - Monday, February 15, 2021
 
Despite on-going speculation that the government will intervene at some point, for now, making contributions into a pension scheme continues to be a particularly tax-efficient form of savings.

 

Nearly everyone is entitled to receive tax relief on pension contributions up to an annual maximum - regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider.

 

Moreover, subject to certain conditions, tax relief is still currently available on pension contributions at the highest rate of income tax paid, meaning that basic rate taxpayers get relief on contributions at 20%, higher rate taxpayers at 40%, and additional rate taxpayers at 45%. In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.

 

The total amount of tax relief available on pension contributions is calculated with reference to ‘relevant UK earnings’. If you own a limited company and you take both salary and dividends, the dividends do not count as ‘relevant UK earnings’. This means that if you take a small salary and a large dividend from your company, your pension tax relief limit will be low - tax charges will apply if the limit is exceeded.

 

If you want to increase your tax-free contributions limit, you could consider either increasing the amount of salary you take from the company (to increase your 'relevant UK earnings'), or making the pension contribution directly from your company as an employer contribution. Making an employer contribution has additional advantages.

 

Employer contributions

 

Qualifying employer contributions count as allowable business expenses, so the company could currently save up to 19% in corporation tax. In order to qualify for a deduction, the pension contributions must be ‘wholly and exclusively’ for the purposes of business. HMRC will check for evidence that this is the case, for example whether other employees are receiving comparable remuneration packages.

 

Another advantage of making a company contribution is that employer National Insurance Contributions will not be payable on the contributions made, saving the company up to 13.8% on the contribution amount.

 

This means that the company can potentially save up to 32.8% by paying money directly into your pension rather than paying money in the form of a salary.
 
Depending on your circumstances, this may or may not be more beneficial to you rather than paying personal pension contributions.

 

Employee benefits

 

An employer-provided pension can be a significant benefit. Employers can make contributions to occupational or personal pension plans without triggering a tax charge. This can significantly enhance an employee’s remuneration package and is a tax efficient way of rewarding employees. It is also worth noting that, subject to a couple of conditions, there is a tax exemption covering the first £500 worth of pension advice paid for by an employer. The exemption covers advice not only for pensions, but also on the general financial and tax issues relating to pensions.

 

Pension inequality

 

The government is currently reviewing feedback from a consultation on pensions tax relief administration, particularly in relation to an anomaly in the tax rules whereby people on low incomes may pay 25% more for their pension contributions due to the way their employers’ pension scheme operate. It is likely that there will be some modification to the rules to iron out this issue. Whether there will be wider-ranging changes or restrictions on pensions tax relief remains to be seen, but it is recommended that anyone considering topping up their pension pot should think about doing it sooner rather than later.

 

Tax relief on business loans

Adrian Mooy - Saturday, February 13, 2021
 
Interest paid on loans used for qualifying businesses purposes should be eligible tax relief and can save up to 45% of the cost of the interest.

 

The repayment of the capital element of a loan is never deductible for income tax relief purposes. However, interest paid on loans to a business will be a deductible revenue expense, provided that the loan was made ‘wholly and exclusively’ for business purposes. For example, interest paid on a loan taken out to acquire plant and machinery (a capital asset) is a revenue expense and will therefore be allowable for income tax and corporation tax.

 

The incidental costs of obtaining loan finance are deductible. Given that business owners often borrow funds personally, and then introduce the capital to the business by way of a loan, it is essential that tax relief is not only secured at the outset of the loan, but also maintained throughout the borrowing period. It is often the case that qualifying loans become non-qualifying loans so care is needed.

 

Broadly, the loan will become non-qualifying if either the capital ceases to be used for a qualifying purpose or is deemed to be repaid.

 

For example, Bob borrows £100,000, secured on his house, and lends this to his business. The loan is a qualifying loan, so he can initially claim tax relief on the interest payments. Unfortunately, the rules relating to the repayment of qualifying capital mean that each time a capital credit is made to the account it is deemed to be the repayment of qualifying loan. Since the capital value of the loan is reduced every time a payment is made, credits totalling £50,000 per year will mean that all tax relief is lost within just two years. Re-borrowing shortly after making a repayment is not a qualifying purpose so future relief is also lost.

 

It is also worth noting that a business cannot claim a deduction for notional interest that might have been obtained if money had been invested rather than spent on (for example) repairs.

 

Double counting is not permitted, so if interest receives relief under the qualifying loan rules, it cannot also be deducted against profits so as to give double tax relief.

 

Restrictions under cash basis

 

Tax relief on loan interest is restricted where the ‘cash basis’ is used by a business to calculate taxable profits. Broadly, businesses using the cash basis are taxed on the basis of the cash that passes through their books, rather than being asked to undertake complex and time-consuming accruals calculations.
Under the cash basis, bank and loan interest costs and financing costs, which include bank loan arrangement fees, are allowed up to an annual amount of £500. If a business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated. Businesses should review annual business interest costs - if it is anticipated that these costs will be more than £500, it may be more appropriate for the business to opt out of the cash basis and obtain tax relief for all the business-related financing costs.

 

Private use of assets

 

Where a loan is used to buy an asset that is partly used for business and partly for private purposes, only the business proportion of the interest is generally tax deductible. Commonly cars and other vehicles used in a business fall into this category. Note however, that a deduction for finance costs is not allowable where a fixed rate mileage deduction is claimed.

 

Example

 

Bob takes out a loan to buy a car and calculates that he uses it in the business for 40% of the time. The interest on the loan he took out to buy the car is £500 during 2020/21. He can therefore deduct £200 (£500 x 40%) for loan interest in calculating his trading profits.
Finally, interest paid on loans used to fund the business owner’s overdrawn current or capital account is generally not deductible for tax purposes.

 

Rent-a-room relief

Adrian Mooy - Friday, February 12, 2021
 
The rent-a-room scheme allows those with a spare room in their home to let it out furnished and to receive rental income of £7,500 tax-free each year without the need to declare it to HMRC. Where more than one person receives the income, each can receive £3,750 tax-free. The limits are not reduced if the accommodation is let for less than 12 months.

 

Eligibility

 

The rent-a-room scheme can be used by anyone who lets a furnished room in their own to a lodger. They do no need to own their own home – it can also apply if they rent (but they should check with their landlord whether their lease allows this). The rent-a-room scheme can also be used by those running a guest-house or a bed-and-breakfast establishment and provide services, such as meals and cleaning, as well as accommodation.
The scheme is not available in relation to accommodation which is not in the individual’s main home or which is let unfurnished.

 

Automatic exemption

 

Where the rental receipts are £7,500 or less (or £3,750 or less where more than one person benefits from the rental income), the exemption is automatic. There is no need to tell HMRC about the rental income. Rental receipts are the rental income before deducting expenses, plus any charges made for services such as cleaning or meals.

 

Using the scheme where rental income exceeds the threshold

 

The rent-a-room scheme can also be used where the rental receipts exceeds the rent-a-room threshold (£7,500 or £3,750 as appropriate). Where this is a case, the taxable amount is simply the amount by which the rental receipts exceed the rent-a-room threshold. This approach will be beneficial if the rent-a-room threshold is more than actual expenses. However, where using actual figures will produce a loss, it is not beneficial to claim rent-a-room relief as this cannot create a loss and the benefit of the loss will be lost.
Where rental receipts are more than the rent-a-room threshold, a tax return must be completed. If the relief is to be claimed, this can be done by ticking the relevant box in the return.
The election can be made each year, depending on whether it is beneficial to do so.

 

Example 1

 

Mary lets out her spare room to a lodger for £100 a week, earning her £5,200 a year.
As the receipts are less than £7,500, she takes advantage of the automatic exemption for rent-a-room relief. She does not have to declare the income to HMRC.

 

Example 2

 

Polly lets out a room in her home for £10,000 a year. She incurs expenses of £1,000 a year.
If she does not claim rent-a-room relief, she will pay tax on her profit of £9,000. However, by claiming rent-a-room relief, she is only taxed to the extent that her rental income exceeds £7,500. She is therefore able to reduce her taxable profit from £9,000 to £2,500 by claiming the relief.

 

Doing up properties – Are you trading?

Adrian Mooy - Thursday, February 11, 2021
 
There can be money to be made buying a property in a dilapidated state, renovating it, and selling it for a profit. However, when it comes to tax, it is important to know whether the ‘profit’ element is a capital gain or a trading profit. This will determine how it is taxed and at what rate.

 

Trading or investment

 

The tax consequences will depend on whether the property is an investment or whether there is a trade. The question is whether you are a property developer or a property investor.

 

Much of it comes down to your intention when you bought the property. If the aim was to buy the property, do it up and then let it out, the property will count as an investment property. However, if the intention is to buy, renovate and sell at a profit, HMRC may regard you as trading. However, an intention to sell at a profit at some point in the future does not automatically mean you are trading. Also plans change, and a property purchased as a long-term investment might be sold after a relatively short period of time as a result of a change in personal circumstances.

 

Badges of trade

 

The concept of the ‘badges of trade’ has been developed from case law and provides something of a checklist which can be used to determine whether an activity is a trade or an investment. The six badges of trade are as follows:

 

1. The subject matter of the transaction.

 

2. The length of the period of ownership.

 

3. The frequency or number of similar transactions.

 

4. Reasons for the sale.

 

5. Motive when acquiring the asset.

 

Where there is a trade, the property will only be held for as long as it takes to do up and sell. A property developer is likely to develop more than one property, either simultaneously or in succession. Where there is a trade, the property will be sold to realise a profit; for an investment property, the sale may be triggered by other factors.

 

Case study 1

 

Paul inherits some money and invests in a property, which he plans to do up and rent out. He completes the renovations and rents out the property for six years before selling it to enable him to buy a larger family home.

 

The property was purchased as an investment and would be regarded as an investment property. The gain on sale would be liable to capital gains tax.
 
Case study 2

 

Mark sees a run-down property on the market and spots the opportunity to make a profit. He buys the property, spends six months renovating it, selling once complete, making a profit of £40,000. He invests the proceeds in another property to renovate and sell.

 

Mark would be treated as trading. His aim is to sell the properties at a profit. Consequently, he would be liable to income tax rather than capital gains tax on the profit.

 

Make the most of your spare time

Adrian Mooy - Wednesday, February 10, 2021
 
In the current economic climate, many people are looking for ways to increase household income. The trading allowance may be particularly useful to employees who also have small part time earnings from self-employment as it enables them to receive tax-free income of up to £1,000 with no requirement to report it to HMRC.

 

The allowance has already proved very popular with individuals with casual or small part time earnings from self-employment, for example, people working in the ‘gig economy’ (Deliveroo workers and such like), or small scale self-employment such as online selling (maybe via eBay or similar). In broad terms, it means that:

 

 • individuals with trading income of £1,000 or less in a tax year will not need to declare or pay tax on that income; and

 

 • individuals with trading income of more than £1,000 can elect to calculate their profits by deducting the allowance from their income, instead of the actual allowable expenses.

 

There are a few practical implications of the allowance to note. For example, where actual expenses are less than £1,000, deducting the trading allowance will be beneficial, whereas if actual expenses are more than £1,000, deducting these expenses will give a lower profit figure, and ultimately a lower tax bill. In addition, where income is less than £1,000, but the individual makes a loss, an election for the allowance not to apply may be made. In this case, the loss in is dealt with in the usual way with the loss being carried forward against future property profit. The details will need to be declared on the tax return. This in turn, means that loss relief is not wasted.

 

Example – Income less than £1,000

 

Peter enjoys cycling and does all his own bike repairs. In his spare time he services bikes for friends and neighbours for a small fee. During the year 2019/20 he received income of £600 from this source, and his expenditure on bike parts was £150. As Peter’s trading income is less than £1,000, he does not need to report it to HMRC nor does he need to pay tax or national insurance contributions (NICs) on it.

 

Example – Income exceeding £1,000

 

Jane enjoys baking and makes celebration cakes to order in her spare time. In 2019/20, her income from cake sales was £1,600 and she incurred expenses of £400. As Jane’s expenditure is less than £1,000, she will be better off claiming the trading allowance. Her taxable profit will be £600 (£1,600 less the trading allowance of £1,000).

 

The trading allowance is available even if the individual has only traded for part of the tax year. For example, if trade started in February 2021, the individual would still be able to claim the full amount of the trading allowance of £1,000 as if they had been trading for the entire 2020/21 tax year.

 

Although the trading allowance may work well for many small scale traders, care must be taken where an individual’s main source of income is from self-employment and their secondary income is from a completely separate small scale business. HMRC will combine income from all trading and casual activities when considering whether the trading allowance applies. In this type of situation, where the allowance is claimed, the individual will not be able to claim for any expenditure, regardless of how many businesses they have and how much are the total business expenses.

 

Student loan repayments

 

A final point worth noting is that where an individual is claiming the trading allowance and they are also repaying a student loan, then the income used to calculate their student loan repayments will be the amount after the trading allowance has been deducted.