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Countdown to restriction of letting relief and final period exemption

Adrian Mooy - Sunday, February 09, 2020
No capital gains tax liability arises if a gain occurs on the sale of a property which has been the owner’s only or main residence throughout the period of ownership then the gain is fully sheltered by private residence relief. However, there are advantages to be had if the property has been the only or main residence for part of the period of ownership – not only is that period covered by private residence relief but the door is opened to benefit from the final period exemption and, where the property has been let, lettings relief.


However, time is running out to benefit from these reliefs in their current, more generous, form.


Final period exemption


The final period exemption extends private residence relief to the final period of ownership where the property has been the owner’s only or main residence at some point in the period of ownership. Until the end of the 2019/20 tax year, the final 18 months of ownership is exempt. However, from 6 April 2020, this is halved to nine months, although, as now, it will remain at 36 months where the owner is disabled or goes into care.
Where a sale is on the cards, completion before 6 April 2020 will keep the last 18 months of ownership tax-free as long as the property has been the only or main residence at some point.


Lettings relief


As it currently applies, letting relief can reduce the chargeable gain on a property that has been let and which has been the owner’s only or main residence at some point by up to £40,000. The relief reduces the chargeable gain by the lower of:


 • the gain attributable to letting (usually, the gain not sheltered by private residence relief)


 • the amount of private residence relief available


 • the gain attributable to letting


Lettings relief is being curtailed from 6 April 2020 and for properties disposed of after that date, it will only apply where the landlord is in shared occupancy with the tenant. So, if you own a property in which you live as a main home and subsequently move into a new home retaining the former home which you let out, you will not qualify for letting relief if you dispose of the property after 6 April 2020. Combined with the reduction in the final period exemption, the tax bill for post 6 April 2020 disposals may be significantly higher than that for disposals before 6 April 2020.


Consider selling before 6 April 2020


If a disposal is on the cards and you currently would benefit from lettings relief and/or the final period exemption, where possible aim to complete before 6 April 2020 to enjoy these reliefs in their current, more generous, form.


Child trust funds - new regulations

Adrian Mooy - Sunday, February 09, 2020
Maturing trust funds.


Following the results of a consultation, the government has set out new rules for when child trust funds (CTFs) mature. CTFs were introduced nearly 18 years ago to hold tax-free savings and investments, boosted by a government subsidy for children. A change in policy meant accounts couldn’t be opened for children born on or after 1 January 2011, though existing accounts were allowed to continue. The funds can’t usually be accessed, other than to transfer them to a junior ISA, until the child who will benefit from the account reaches 18. This will start to happen in August 2020.


Extended tax advantage.


Typically, the parent or guardian responsible for the CTF will authorise the bank etc. holding the account to release the funds when the beneficiary reaches 18. Under current rules the tax-free status is lost. However, the new regulations which will apply from 6 April 2020 allow investments in a CTF account to keep their tax-advantaged status after the account holder’s 18th birthday, which means there will be no rush for parents and their children to decide what to do with the money etc.


Steps to reduce CGT when selling your company

Adrian Mooy - Saturday, February 08, 2020
CGT rates


Since April 2016 the two main rates of capital gains tax (CGT) have been 10%, if your taxable income plus gains for the year fall within the basic rate band, and 20% if your income and gains are greater.


Where you sell your business, and meet the necessary conditions, a special 10% entrepreneurs’ relief (ER) rate applies regardless of how much your income and gains are. Before CGT starts to apply, every individual adult or child is entitled an exempt amount; for 2019/20 this is £12,000.


No gain, no loss


Special rules apply to transfers of assets between spouses. If one spouse gives assets to the other it’s treated as if they sold them to their spouse at the price equal to their cost, this is called a “no-gain, no-loss” transaction. If later the spouse who received the assets sells them for more than they cost the first spouse, they’ll make a capital gain, but they can use their annual exemption to lower or eliminate any CGT.


If you’re married or have a civil partner, you can use the no-gain, no-loss rule to save tax even where the rate of CGT you would pay is the lowest possible, i.e. where the ER rate applies.


Increasing the tax saving


The no-gain, no-loss rule doesn’t apply to gifts of assets to anyone other than your spouse or civil partner. Gifts of your company shares to children are treated as sales at their full value.


There is a legitimate way around this. You can claim CGT holdover relief. The effect of this is similar to giving shares to your wife. The gain is deferred (held over) until the children sell their shares. A holdover claim must be made jointly and usually anti-avoidance rules make it ineffective if the children are minors.


Before signing the sale contract, transfer shares to your spouse. This shifts part of the gain to them, against which they can use their annual exemption. You can achieve a similar result by transferring shares to family members, but this requires you to make a claim for “holdover relief”.


What to do if you need to change your tax return

Adrian Mooy - Saturday, February 08, 2020
You made it and filed your self-assessment return for 2018/19 by the 31 January 2020. However, having felt pleased with yourself, you realise to your horror that you have made a mistake and need to correct your return.


Can you do this and if so, how and by when?


Yes, you can


If you have made a mistake on your return, for example entered a number incorrectly or forgotten to include something, all is not lost. As long as you are within the time limit, the error can be corrected by filing an amended return.





If you are in time to file an amended return, the process that you need to follow will depend on whether you filed your return online or on paper.


Online returns


If you filed your return online, you simply amend your return online. To do this:


1.  Sign in to your personal tax account using your User ID and password.


2.  Once in your account, select ‘Self-Assessment Account’. If this does not appear as an option, simply skip this step.


3.  Select ‘More Self-Assessment details’.


4.  Choose ‘At a glance’ from the left-hand menu.


5.  Choose ‘Tax Return options’.


6.  Choose the tax year for the year you want to amend.


7.  Go into the tax return, make the changes you want to make, and file the return again.


Remember to check that it has been submitted and that you have received a submission receipt.


Check the revised tax calculation too in case you need to pay more tax as a result of the changes, but remember to take account of what you have already paid.


Paper return


If you opted to file your return on paper by 31 October 2019, to make a change you will need to download a new tax return. This can be done from the website. Fill in the pages that you wish to change and write ‘Amendment’ on each page. Make sure you include your name and unique taxpayer reference (UTR) on each page too. Send the corrected pages to the address to which you sent your original return.


Commercial software


If you used commercial software to file the return, contact your software provider to find out how to file an amended return. If your software does not allow for this, contact HMRC.




You have until 31 January 2021 to make changes to your 2018/19 tax return.
If you have missed the deadline, you will need to write to HMRC instead. This may be the case if you find a mistake in your 2017/18 return after 31 January 2020. In the letter, you will need to say which tax year you are amending, why you think you have paid too much or too little tax and by how much. You have four years from the end of the tax year to claim a refund if you have overpaid.


Changes to the tax bill


If amending the return changes the amount that you owe, you should pay any excess straight away. Interest will be charged on tax paid late. If your 2018/19 liability changes, your payments on account for 2019/20 may change too.
If as a result of the changes made to the return you have paid too much tax, you can request a repayment from your personal tax account.


Benefits in kind for shareholders

Adrian Mooy - Friday, February 07, 2020
Your spouse owns shares in your company. As well as paying dividends it provides her with a car. She has declared it as a shareholder’s benefit but HMRC has challenged this and says that the car is taxable on you. How should you respond?


Companies aren’t confined to providing benefits in kind to their directors and employees. Although not commonplace they can provide them to shareholders without breaching company law. For example, this could be a suitable arrangement for a company and with few shareholders where one or more of them is not a director, say a company owned by a married couple. However, the tax consequences need to be considered.


Close companies


There are special rules for taxing non-cash benefits provided by a close company to its shareholders. A close company is one controlled by five or fewer individuals, usually its shareholders. A shareholder receiving a benefit is taxed on an amount as if they had been paid a dividend. The taxable amount of this is worked out using the same methods as those for calculating taxable benefits for directors and employees. This can be tax efficient as the overall tax bill payable on distributions is usually less than that for benefits taxed as earnings because the tax rates are lower and there’s no NI liability to worry about. There is a catch.
Taxable under other rules


In the circumstances described, anti-avoidance rules prevent any tax advantage from the use of shareholder benefits. These mean that a benefit is only taxed if a dividend:


is not chargeable as earnings under a different rule, i.e. as earnings because they are a director or employee; or


is provided to a shareholder who is the spouse of a director or employee, but not either themselves. In this situation the benefit is taxable on the director/employee.


Therefore, the answer is that the benefits provided to your wife are taxable on you.


If a director delegates some duties to his wife she could be put on the payroll and the benefit could instead be treated as her income. If her pay isn’t disproportionately high relative to the work she does, the second anti-avoidance rule above won’t apply. As long as her tax rate is lower than his this would reduce their overall tax bill.


Unmarried shareholders


While providing benefits to a shareholder who’s not an employee or a director but is married to someone that is doesn’t save any tax because of the anti-avoidance rules, it can if there are slightly different circumstances.


If a director and their partner aren’t married or civil partners neither of the anti-avoidance rules will apply. This means the partner would be taxed on the benefit as a distribution and there would be a tax and NI saving.


You can’t avoid tax and NI by providing benefits to your non-working spouse if they are a shareholder. Anti-avoidance rules will mean the income is treated as that of the director. You can get around this by putting your spouse on the payroll. The arrangement works if the couple aren’t married or civil partners.


Incidental overnight expenses

Adrian Mooy - Friday, February 07, 2020
A tax exemption enables an employer to meet small personal expenses when an employee stays away from home for work, without the employee suffering a tax charge and without any need to report the expenses to HMRC.


What are incidental overnight expenses?


Incidental overnight expenses are personal (i.e. non-business) expenses incurred when an employee travels overnight for business. Examples include:


 • a newspaper
 • laundry
 • telephone calls home


How much is the exempt amount?


The exempt amount is £5 per night for trips in the UK and £10 per night for overseas trips. These limits have not been increased.


It should be noted that the exemption only applies if the expenses do not breach the limit. If amounts paid to the employee are more than the exempt amount, the full amount is taxable not just the excess over the exempt amount.


Per trip not per day


The exemption can be applied per trip rather than a day-by-day basis. This means that it will apply as long as the incidental overnight expenses paid for the trip do not exceed the allowance for the full trip – it does not matter if on a particular day the allowance is exceeded as long as on average within the exempt limit.
The application of the allowance is illustrated by the following example.




Rachel and Anna are colleagues and often travel on business.


In January 2020, Rachel spent five consecutive nights away from home on a business trip in the UK. During the trip she incurred incidental expenses of £21 which were reimbursed by her employer. On one day, her expenses (for laundry) were £8. On the remaining four days, they were less than £5 per day.
The exempt amount is £5 per day for overnight stays in the UK – equivalent to £25 for a five-night trip. As the expenses paid by her employer are less than £25, the exemption applies. It does not matter that on one day the actual expenses were more than the £5 daily limit.
Anna also took a business trip during January, spending three consecutive nights in Germany. She incurred incidental expenses of £31 which her employer reimburses. For trips abroad, the exempt amount is £10 per night – a total of £30 for a three-night trip. As the amount paid by Anna’s employer is more than £30, the full amount is taxable and liable to Class 1 National Insurance.


Making the most of pension tax allowances

Adrian Mooy - Thursday, February 06, 2020
Pension savings can be tax efficient as contributions to registered pension schemes, attracting tax relief up to certain limits.


Limit on tax relief


Tax relief is available on private pension contributions to the greater of 100% of earnings and £3,600. This is subject to the annual allowance cap.


Tax relief may be given automatically where your employer deducts the contributions from your gross pay (a ‘net pay scheme’). Alternatively, if you pay into a personal pension yourself or your employer pays contributions into the scheme after deducting tax, the pension scheme will claim basic rate relief (‘relief at source’). Thus if you pay £2,880 into a pension scheme, your scheme provider will claim basic rate relief of £720, meaning your gross contribution is £3,600. If you are a higher or additional rate taxpayer, the difference between the basic rate tax and your marginal rate can be reclaimed from HMRC via your self-assessment return.
Annual allowance


The pension annual allowance caps tax-relieved pension savings – contributions can be made to a registered pension scheme in excess of the available annual allowance, but they will not attract tax relief. The annual allowance is set at £40,000 for 2019/20; although this may be reduced if you have high earnings. The annual allowance taper applies where both your threshold income is more than £110,000 (broadly income excluding pension contributions) and your adjusted net income (broadly income including pension contributions) is more than £150,000. Where the taper applies, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £150,000 until the annual allowance reaches £10,000. This is the minimum amount of the annual allowance. Only the minimum allowance is available where adjusted net income is £210,000 or more and threshold income is more than £110,000.
The annual allowance can be carried forward for up to three tax years if it is not used, after which it is lost. The current year’s allowance must be used first, then brought forward allowances from an earlier year before a later year.




Harry has income of £100,000 in 2019/20. He has received an inheritance and wishes to make pension contributions of £60,000. In the previous three years he has used £10,000 of his annual allowance, leaving £30,000 to be carried forward for up to three years.
To make a contribution of £60,000 for 2019/20, Harry will use his annual allowance of £40,000 for 2019/20 and £20,000 of the £30,000 carried forward from 2016/17. The £10,000 remaining of the 2016/17 allowance will be lost as cannot be carried forward beyond 2019/20. The unused allowances of £30,000 for 2017/18 and 2018/19 can be carried forward to 2020/21.
Reduced money purchase annual allowance


A lower annual allowance of £4,000 (money purchase annual allowance (MPAA)) applies to those who have flexibly accessed pension contributions on reaching age 55. This is to prevent recycling of contributions to secure additional tax relief.


Lifetime allowance


The lifetime allowance places a ceiling on your pension pot. For 2019/20 it is set at £1,055,000. A tax charge will apply if you exceed the lifetime allowance.



Missed the filing deadline?

Adrian Mooy - Thursday, February 06, 2020
If you missed the 31 January deadline for self-assessment HMRC will fine you £100 and more if you continue to delay. It will cancel the penalty if you have a reasonable excuse.


Must you file a tax return?


It’s a common misunderstanding that if you owe tax you’re required to submit a tax return. The correct position is that you only need to file a self-assessment return if you’re asked to do so by HMRC. It does this by issuing a “notice to file”. However, to prevent you and any individual from evading tax simply by not declaring income, you’re required to notify HMRC within a time limit if you believe you owe tax but haven’t received a notice to file - it’s then up to HMRC to issue one. If it doesn’t do so you won’t be penalised for not submitting a tax return by the normal deadline.


Notice to file received


Once issued, there is no appeal procedure against a notice to file even if you have no income, gains or other tax liability to declare.
If you receive a notice to file but don’t submit a return within the time limit the initial penalty is £100. However, even if you don’t owe any tax this can rise to £1,600.


Appealing a penalty


You can appeal against a penalty but HMRC will only cancel it if you have a reasonable excuse such as you or a close member of your family being seriously ill and this was a significant factor in you missing the deadline.


HMRC has the power to withdraw a notice to file. If it does so any penalties for late filing will be withdrawn. This option is only open to HMRC if you haven’t yet submitted the tax return in question and is entirely at HMRC’s discretion.


Discretionary conditions


HMRC will usually agree to withdraw a notice to file a tax return if for a year you don’t meet its criteria for being within self-assessment. There are circumstances in which HMRC insists on self-assessment. For example, if you have income from self-employment or you or your partner receive child benefit and one of you has annual income exceeding £50,000.


If you don’t meet criteria for self-assessment for a year and haven’t yet submitted the corresponding tax return you can ask HMRC to withdraw the requirement to submit one. It has the discretion to refuse your request but if it agrees it will also cancel the late filing penalties. Use HMRC’s online tool to check if self-assessment applies.


Trivial benefit traps

Adrian Mooy - Thursday, February 06, 2020
The trivial benefits exemption allows employers to provide employees with low cost benefits free of tax and National Insurance and any reporting obligations. For the purposes of the exemption, a benefit is trivial if the cost per head is not more than £50. Where trivial benefits are provided to an officer of a close company or a member of their family or household, an annual cap of £300 per tax year also applies.


For the exemption to be available, the benefit must not be provided in return for services provided and the employee must not be contractually entitled to receive the benefit.


Contractual entitlement


Contractual entitlement is wider than simply inclusion in the contract of employment. Consequently, the fact that the contract makes no reference to the provision of trivial benefits is not enough to satisfy the conditions for the exemption.


In the December 2019 issue of their Employer Bulletin, HMRC highlighted a number of ways in which a contractual obligation may arise, including:


 • a letter to the main contract document
 • a staff handbook
 • a redundancy agreement
 • an employer union agreement


If any of these provide for the employee to receive the trivial benefit, the exemption will not apply.


Beware of creating a ‘legitimate obligation’


Employers seeking to make use of the trivial benefits exemption should also be wary of falling into the ‘legitimate expectation’ trap; a contractual obligation may also arise is the employee has a legitimate expectation to receive the benefit.


In the December 2019 issue of Employer Bulletin, HMRC illustrate this with an example of an employer who provides employees with a cream cake each Friday. While there is no contractual obligation for the employer to provide the employees with a cream cake on a Friday, the fact that the employer does so every Friday creates a legitimate expectation, taking the provision of the cakes outside the trivial benefits exemption.


Frequency seems to be a problem here – HMRC seemingly do not apply the legitimate expectation argument where a benefit is provided annually, even if it is provided each year. HMRC’s Employment Income Manual at EIM21867, states:


“Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it.”


The guidance instructs HMRC officers that they “should not normally challenge modest gifts that are provided infrequently to employees, just because they are given to employees each year – for example, a Christmas or birthday gift”.


Good practice


To avoid falling into the legitimate expectation trap, vary both the nature and timing of trivial benefits provided to employees.


Is advice about personal tax a business expense?

Adrian Mooy - Wednesday, February 05, 2020
The First-tier Tribunal recently ruled on whether a company was entitled to reclaim VAT on fees it paid for advice about a scheme to reduce income tax bills for its directors.


Taylor Pearson (Construction) Ltd (TPC) reclaimed VAT of just under £10,000 that it had paid for advice involving complex scheme to remunerate its directors tax efficiently. HMRC argued that the scheme benefited the directors by saving them income tax and as this was a personal and not a business objective the company wasn’t entitled to reclaim the VAT on the fees. TPC’s counter argument was that the scheme had tax and NI advantages for it as well, and therefore it had a business purpose.


In case its main argument failed HMRC had a back up which was that there was no “direct and immediate link” between the VAT reclaimed with taxable supplies, i.e. supplies on which TPC would charge VAT. HMRC uses this argument if it objects to VAT being reclaimed but has no other solid legal grounds to refuse it. The “direct and immediate” argument derives from a Supreme Court judgment and so carries significant weight.
The judgment also states that VAT on purchases can be reclaimed if there is “...a direct and immediate link between those acquired goods and services and the whole of the taxable person’s economic activity because their cost forms part of that business’s overheads and thus a component part of the price of its products” . In other words, VAT paid on a genuine overhead of a business is deductible (unless specifically prohibited as is the case for business entertainment).


The First-tier Tribunal’s decision therefore turned on whether the cost of the advice it received was an overhead of TPC’s business or for the personal benefit of the directors. While there was no doubt that the latter was significant, the judge noted that the advice only related to tax and NI matters linked to remuneration from the company and not to the directors’ other income. It was therefore an overhead of the business and TPC was entitled to reclaim the VAT it had paid.
A company isn’t entitled to reclaim VAT paid on fees for advice given in respect of a director’s personal tax or other financial affairs.
The judge showed his displeasure with HMRC’s suggestion that incentivising employees by reducing their tax and NI bills on company income had no direct and immediate link with the purposes of its business. He said, “I do not consider that this argument has any merit whatsoever and do not understand why HMRC put it forward” . Especially as it had relatively recently lost a very similar case which it didn’t appeal against.
VAT paid on fees incurred by a company to minimise tax and NI liabilities on remunerating its directors or employees is a legitimate overhead of the business and can therefore be reclaimed.