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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
Phone

01332 202660

Blog

Capital allowances - integral features

Adrian Mooy - Saturday, March 07, 2020
 
Since April 2008 some types of equipment or plant fitted to or in a building count as “integral features”. As such they qualify for capital allowances as “plant and machinery” to which the special rate (6% per annum from 1 April 2019) of writing down allowances applies.

 

The rules (Capital Allowances Act 2001) list the items which qualify as integral assets. They are:

 

a. electrical systems (including lighting systems);

 

b. cold water systems;
 
c. space or water heating systems;
 
d. powered systems of ventilation, air cooling or purification;
 
e. any floor or ceiling comprised in the systems described in c. or d.;
 
f. lifts, escalators or moving walkways; and
 
g. external solar shading.

 

However, where the primary purpose of an item is the insulation or enclosure of the interior of a building, or provide means of permanent internal divisions within a building, they will not qualify for plant and machinery allowances but if the expenditure on the item is incurred on or after 29 October 2018 they can qualify for the structures and buildings allowance.

 

Should I buy a rental property through a limited company?

Adrian Mooy - Saturday, March 07, 2020
 
Landlords hit by recent and forthcoming tax changes may wonder if it is better to buy a rental property through a limited company, rather than holding it personally.
 
Holding it personally

 

Where a property is held by an individual, the property income tax rules apply. The profits of the property rental business are charged to income tax at the individual’s marginal rate of tax. If a loss is made, this can only be carried forward and set against future profits of the same property rental business. The personal allowance is available if not used elsewhere.

 

Interest relief restrictions have been phased in progressively from 6 April 2017. For 2019/20, 25% of interest can be deducted in computing taxable profits (attracting relief at the landlord’s marginal rate), with relief for the remaining 75% given as a tax reduction at the basic rate. From 6 April 2020, relief for all interest and finance costs will be given in this way.

 

When purchasing the investment property, if it is a residential property and the landlord already owns at least one other residential property, the 3% Stamp Duty Land Tax (SDLT) supplement applies.

 

On sale, capital gains tax will be charged on any gain. The higher residential rates apply – 18% where total income and gains do not exceed the basic rate band and 28% thereafter. The individual can set his or her annual exempt amount – set at £12,000 for 2019/20 – against any chargeable gain where available.
 
Owning it through a company

 

Where a property is owned through a company, any profits are charged to corporation tax rather than income tax. There is no equivalent of the personal allowance – so profits are taxed from the first pound. However, at 19%, corporation tax rates are lower than income tax rates. The interest rate restrictions do not apply to companies, and interest is deductible in accordance with the corporation tax rules.

 

Companies pay corporation tax on chargeable gains and any gain on disposal of the property is subject to corporation tax. There is no annual exempt amount, and basic rate taxpayers pay capital gains tax at a lower rate than the corporation tax rate payable by companies; however, at 28%, the rate payable by higher rate taxpayers is more.

 

If the value of the property is more than £500,000, the company will also have to pay the annual tax on enveloped dwellings. The amount depends on the value of the property – ranging from £3,650 for a property in the £500,000 to £1 million band to £232,350 for properties valued at £20 million or more (2019/20 rates).
Where the property is brought by the company, SDLT will be payable, with the 3% supplement applying to the purchase of residential properties.
 
Buying through a company will also raise the issue of how best to extract the profits, and once personal and dividend allowances have been used, this will trigger personal tax liabilities in the hands of the recipient.

 

Do the sums
 
The best option will depend on personal circumstances, and there is no substitute for doing the sums. Remember to take account of the non-tax considerations, such as the additional costs associated with running a company and higher borrowing costs.

 

Putting a commercial property in a SIPP

Adrian Mooy - Friday, March 06, 2020
 
A SIPP is a self-invested personal pension plan, which is available to individuals. A SIPP can be an attractive option as individuals have the opportunity to choose where their pension funds are invested rather than this decision being made by the fund manager.

 

The range of investments that can be held within a SIPP is wide and includes commercial (but not residential) property. It can be tax efficient to invest in a SIPP, particularly if the individual has a need for business premises.

 

Permitted property

 

Properties that can be held through a SIPP include offices, shops, business units, hotels and care homes. The fact that the property has a residential element, such as a shop with a flat above it, does not necessarily preclude the property from being held in a SIPP. The property will count as commercial property as long as the flat is not occupied by a member of the SIPP.

 

If the SIPP does not have sufficient funds to buy the property outright, the SIPP can borrow to fund the purchase. Rental income can be used to meet the loan repayments and associated interest.

 

Renting it to the business

 

The commercial property can be rented to a business run by the SIPP member, as long as rent is paid at a commercial level. This can be an efficient way of building up pension savings – instead of the business renting a property from a third party and paying the rent to them, the rent is paid into the SIPP, building up the pension savings. The SIPP also benefits from any capital appreciation on the property.

 

Example

 

Harry runs a web design agency. He sets up a SIPP to save for his retirement and builds up some funds. He decides to invest in a unit on an industrial estate from which to run his business. The SIPP purchases the unit for £50,000, funded in part by a £20,000 loan.

 

The business rents the unit from the SIPP paying the market rent of £500 a month. The loan repayments and interest are paid from the rent and the balance of the rent builds up in the SIPP.

 

This is a win-win situation as Harry benefits from the rental income and any increase in value in the unit.

 

Stamp duty land tax on mixed-use properties

Adrian Mooy - Friday, March 06, 2020
 
Stamp duty land tax (SDLT) is payable on the purchase of land and buildings in England and Northern Ireland over a certain value. SDLT does not apply in Scotland and Wales; instead land and buildings transaction tax (LBTT) applies in Scotland and land transaction tax (LTT) applies in Wales.
As far as SDLT is concerned, there are different rates for residential and non-residential properties. The residential rates apply where the consideration for the property is more than £125,000, with different rates applying to different slices of the consideration. The rates range from 2% to 12%. For individuals, a 3% supplement applies to second and subsequent residential properties costing more than £40,000. Relief is available for first-time buyers. Where the property is purchased by a company, a 3% surcharge applies to the residential rates.

 

No residential rates are much lower and only apply where the consideration exceeds £150,000. The next £100,000 is charged at 2%; thereafter the rate is 5%.

 

Mixed use properties

 

A mixed-use property is one that incorporates both residential and non-residential use. The non-residential rates apply to mixed use properties. As these are considerably lower than the residential rates, the SDLT may be considerably less on a mixed-use property than on a residential property.

 

Identifying the type of property

 

It will not always be clear whether the property is a residential property (to which the residential property rates apply) or a mixed-use property (to which the lower non-residential rates apply).

 

A residential property is one which is used as a dwelling or which is suitable for use as a dwelling. The test is applied at the effective date of the transaction. The physical attributes of the dwelling are important in determining whether it is ‘suitable’ for use of a dwelling, irrespective of whether it is actually being used as a dwelling.

 

Where a building is used partly as a dwelling and partly for other purposes, it may not be straightforward to determine the SDLT rates that apply. A distinction is drawn between a property where certain rooms of a building that would otherwise be a dwelling are used for work (such as a spare room being used as a home office) and one where the building is divided into separate areas, with part used for residential accommodation and part adapted for business or commercial use (such as house part of which has been converted into a surgery).

 

In the ‘home office’ situation, the building remains a dwelling and the SDLT residential rates apply. However, the position is less clear cut where the property is converted or used without specific conversion. It is important to note that the actual use is not important – what is important is the degree of conversion required and the degree of separation from the residential areas. If the property is sold as a single building and it consists of or includes land that is not residential property, SDLT will be applied at the lower non-residential rates. Where the property meets the test for a residential property, the residential rates will apply.

 

Employer provided food in the workplace

Adrian Mooy - Friday, March 06, 2020
 
Apart from the exemption from the benefit in kind rules for free or subsidised food provided to employees in staff canteens meals or light refreshments provided in the workplace may also be exempt under s.317 Income tax (Employment and Pensions) Act 2003. For the exemption to apply the following conditions must be met:

 

 • The meals/food must be provided of a “reasonable scale”, HMRC manuals say that inspectors should not interpret the rules narrowly. For example, a glass of wine with a meal is accepted but not “the provision of an elaborate menu, fine wines and cigar”; and

 

 • all the employees working at that location must be entitled to either free or subsidised food.

 

What’s new with company cars in 2020

Adrian Mooy - Thursday, March 05, 2020
 
If you have use of a company car for private travel you’ll have to pay tax for the privilege. Plus, there’s a further tax bill if the business pays for your fuel for private journeys. What’s changing with these tax charges in April 2020?

 

Cars and car fuel

 

Company cars are still popular despite sometimes being expensive in terms of tax. Conversely, employer-paid-for fuel has become less popular because of the reputation it gained for the high tax bills. However, because the environment is back in the headlines there are changes to the tax regime ahead which favour greener cars.

 

Back to zero

 

After a few years’ absence a zero tax charge makes a comeback in April 2020. It will apply to company cars registered:

 

 •  before or after 6 April 2020, powered wholly by electricity and therefore producing zero emissions

 

 •  on or after 6 April 2020 which have emissions up to 50g/km and can be driven solely on electrical power for 130 miles or more.

 

It was originally proposed that the rate for the latter group would be 2% of list price. That’s low, but the proposed 0% is better.

 

Almost zero

 

Also from 6 April 2020 there will be lower rates for cars with up to 50g/km emissions, but which don’t meet the 130 miles by electrical power only benchmark that’s needed to qualify for the 0% tax. Interestingly, there will be low but different rates for these hybrid cars depending on whether they were registered before or after 6 April 2020. For example, a hybrid car registered before the April date which can travel between 40 and 69 miles on electricity alone will result in a taxable charge of 8% of list price, while cars registered later will be chargeable at 6%

 

Levelling up

 

The disparity between pre and post 6 April registered cars continues throughout most of the new company car tax regime. Broadly, cars registered on or after 6 April will for 2020/21 be taxed on 2% less of list price than a comparable car registered earlier. For example, a driver of a company car registered pre 6 April 2020 which has emissions of between 100g/km and 104g/km will be taxed on 25% of its list price, whereas the rate for a driver of a later registered vehicle will be taxed on 23%. However, the difference will be eroded over the next two tax years as the lower rate will rise to match the higher.

 

On balance

 

Overall the new company car tax rates will be welcome news for anyone driving zero or very low emission cars. Further, because the decreased taxable amounts also mean lower Class 1A NI charges, employers which provide the cars should also be pleased.

 

The separate tax charge where an employer pays for fuel for private journeys made in a company car usually makes it tax inefficient and should be avoided. However, where the new lower or 0% rates apply to a car from April 2020 they will also cover the provision of fuel. This could make providing fuel a low tax perk worth considering.

 

The main change will be the reintroduction of a zero tax on wholly electric cars and hybrids which have a long electric only range. There will also be lower rates for some hybrid cars. The new rates also apply to car fuel benefit which could make it a more worthwhile perk for 2020/21 and later years.

 

Deferring your state pension

Adrian Mooy - Thursday, March 05, 2020
 
If your contributions record is sufficient, you will be entitled to the state pension on reaching state pension age. The age at which you reach state pension age depends on when you were born.

 

To qualify for a full single tier state pension (set at £168.60 per week for 2019/20, rising to £175.70 per week for 2020/21), a person needs 35 qualifying years. A reduced pension is payable to someone who has at least 10 qualifying years, but less than 35. The single tier state pension is payable those reaching state pension age on or after 6 April 2016.

 

When you reach state pension age, you do not need to take your state pension immediately. You can instead choose to defer it, receiving a higher pension in return. The rules on deferred state pensions differ depending on whether state pension age was reached before 6 April 2016 or on or after that date.

 

The state pension is taxable.

 

State pension age reached on or after 6 April 2016

 

If you reach state pension age on or after 6 April 2016 and opt to defer your state pension, the amount that you receive when you start taking your pension will be increased, as long as you defer your pension by at least nine weeks.

 

The state pension is increased by 1% for every nine weeks by which the pension is deferred. Deferring the state pension for 52 weeks will increase it by just under 5.8%.

 

At the 2019/20 rate of £168.60 per week, deferring the state pension for 52 weeks will increase it by £9.74 per week. This will increase as the state pension increases.

 

Any deferred state pension is paid with the regular state pension and is taxable in the same way.

 

It is not possible to take a deferred pension as a lump sum where state pension age is reached on or after 6 April 2016.

 

State pension age reached before 6 April 2016

 

Different rules applied where state pension age was reached before 6 April 2016. Under the rules that applied at that time, the extra state pension could be used to increase the weekly pension payments or taken as a lump sum. Those reaching state pension age before 6 April 2016 receive, depending if the eligibility conditions are met, the basic state pension. This may be supplemented by the earnings-related second state pension.

 

The deferral rate was better under these rules too – the state pension was increased by 1% for every five weeks by which it was deferred. This is equivalent to an increase of 10.4% for every 52 weeks that the pension was deferred.

 

For 2019/20 the basic state pension was £129.20 per week. It will increase to £134.25 per week for 2020/21. At the 2019/20 rate, deferring the pension for 52 weeks increases it by £13.44 per week.

 

Under the pre-April 2016 rules applying to those who reached state pension age before 6 April 2016, it is possible to take the deferred pension as a lump sum if it has been deferred for at least 12 months in a row. Interest is also paid at 2% above the Bank of England base rate. This can be taken in the year in which the state pension is claimed or the following year.

 

A deferred pension lump sum is taxed at the taxpayer’s highest marginal rate on their other income when the lump sum is taken. So, if the taxpayer’s other income in that year is covered by the personal allowance, the deferred pension sum will be tax-free, but if the taxpayer has other income and is taxable at the basic rate, they deferred pension lump sum will be taxed at the basic rate, even if this takes the taxpayer’s total income into the higher rate band. It is taxed in the year in which it is taken

 

Deferring the state pension can be a useful way to increase your weekly pension if you do not need it immediately on reaching state pension age.

 

Giving money to charity to save inheritance tax

Adrian Mooy - Thursday, March 05, 2020
 
One way to reduce the amount that the taxman takes from an estate in inheritance tax is to make a donation to charity. This is can be particularly tax effective. The donation is taken off your estate before inheritance tax is calculated, and if the donation is large enough – at least 10% of your net estate – the rate at which inheritance tax is levied on the remainder of the estate is reduced.

 

Making smaller donations

 

Even if the donation is less than 10% of the estate, it will be effective in reducing the amount of inheritance tax paid. This is because the donation is deducted from the net estate before working out the inheritance tax payable.

 

Example 1

 

An individual dies leaving a net estate (after allowing for the nil rate band and residence nil rate band) of £400,000. The estate is left to his children. Inheritance tax of 40% of the net estate is payable – an inheritance tax bill of £160,000. After inheritance tax, the children receive £240,000 in total.

 

Assume instead that the individual had left £20,000 to charity and the remaining £380,000 to his children. The inheritance tax bill will now be 40% of (£400,000 - £20,000), i.e. £152,000.

 

Leaving £20,000 to charity saves £8,000 in inheritance tax. After inheritance tax, the children receive £228,000 and the charity £20,000 – a total of £248,000. The £20,000 gift to charity effectively costs the children £12,000.

 

Donations of at least 10% of the net estate

 

To encourage charitable giving on death, the rate of inheritance tax is reduced by 10% -- from 40% to 36% -- where at least 10% of the net estate is left to charity. The effect of this can be illustrated by the following example.

 

Example 2

 

An individual dies leaving a net estate of £1 million, split equally between his four children. Inheritance tax payable on the estate is £400,000 (40% of £1 million), leaving £600,000 after tax (£150,000 per child).

 

If instead the individual had left 10% of his estate to charity – equal to £100,000, the amount on which inheritance tax is payable is reduced to £900,000 and the rate of inheritance tax is reduced to 36%. The inheritance tax payable on the estate is now £324,000 – a reduction of £76,000. The children receive £576,000 (£144,000 each) and the charity receives £100,000 – a total of £676,000.

 

The gift of £100,000 to the charity effectively costs the children £24,000 as a result of the inheritance tax savings.

 

Is it worth it?

 

It depends on your outlook. If the aim is to reduce the amount that the taxman gets or make a tax-efficient gift to charity, the answer is yes. However, if the beneficiaries want to maximise the amount that they get from the estate, the answer is no. In each case, they are worse off by making the charitable donation than by taking the inheritance tax hit. While it may be preferable for money to go to charity rather than to HMRC, some of the charitable gift is coming out of their pocket.

 

Charitable giving can reduce the inheritance tax payable, but at a cost.

 

Changing a will after death

Adrian Mooy - Thursday, March 05, 2020
 
As long as certain conditions are met, it is possible to change a will after death. This is known as a post-death variation, and it can be a useful tax planning tool.
A post-death variation can be made to:

 

 • reduce the amount of tax payable
 • to change who benefits under the will
 • place the assets of the deceased into trust
 • to provide for someone who was left out of the will

 

Conditions that must be met
In order to vary a will after the deceased has died, the following conditions must be met:

 

 • it must be made within two years of the deceased’s death
 • all beneficiaries adversely affected by the variation must agree to it and be party to it
 • it must be made in writing
 • it must contain a statement of intent for tax purposes, specifying that the beneficiary/beneficiaries elect for the relevant statutory provisions to apply
 • if the amount of tax payable as a result of the variation increases, the personal representative must be party to it and agree to it
 • it must not be made in consideration for money or money’s worth

 

Although there is no requirement for new beneficiaries to sign the deed of variation, this is often done as good practice.

 

Effect

 

Where a deed of variation is made, the will is treated as if applied, as so varied, at the date of the deceased’s death.

 

Two-year window

 

There is a two-year window in which a deed of variation must be made. It is possible that in the period between the date of death and the making of the deed of variation, changes have occurred. For example, the asset that is subject to the variation may have been sold. In this situation, the proceeds, rather than the actual asset, would be redirected as a result of the deed of variation.

 

Once made cannot be undone

 

Once a deed of variation has been made, it cannot be undone. It is therefore advisable to take advice prior to varying a will.

 

Example

 

Bill dies in October 2019 leaving an estate of £1.5 million split equally between his wife, Barbara, and his sons Simon and Philip.
The family agree to vary the will so as to leave everything to Barbara to benefit from the inter-spouse exemption. Bill’s unused nil rate band will be available on Barbara’s death. Her will provides for everything to be left equally between her sons.
Simon and Philip must be agree to be party to the deed of variation as they are adversely affected by the redirection.
The deed of variation is made in February 2020. The changes are deemed to be effective from the date of Bill’s death as if they represented his will at that time.

 

Winding up your personal service company

Adrian Mooy - Wednesday, March 04, 2020
 
Come April, many workers who have been providing their services through an intermediary, such as a personal service company, may find that their company is no longer needed. This may be because they fall within the off-payroll working rules, with the result that because tax and National Insurance is deducted from payments made to the intermediary, the tax advantages associated with operating through a personal service company are lost. Alternatively, it may be because their end client does not want the hassle of operating the off-payroll working rules and has decided only to use ‘on-payroll’ workers, putting workers previously using personal service companies on the payroll.

 

Where the personal service company is not needed, the question arises as how best to wind it up and extract any remaining cash.

 

Striking off

 

Striking off can be an attractive option where the personal service company can pay its debts and has less than £25,000 left in the company to extract.

 

The advantage of this route is that sums paid out in anticipation of the striking off are treated as capital rather than as a dividend, with the result that the capital gains tax annual exempt amount, if available, can be used to reduce the taxable amount. Where entrepreneurs’ relief is available, any taxable gain is taxed at only 10%. To qualify for this treatment, the company must be struck off within two years of making the last distribution.

 

If the amount left to extract is less than £25,000, but it would be preferable for it to be taxed as a dividend, for example, because the dividend allowance and/or the personal allowance are available or the distribution would be taxed at the lower dividend rate of 7.5%, striking off can still be used. However, to prevent the capital treatment applying, it would be necessary to breach one of the conditions so that the dividend treatment applies instead. This can be achieved by waiting more than two years from the date of the last distribution before striking off.

 

Members’ voluntary liquidation (MVL)

 

Where the funds left to extract are more than £25,000 and it would be beneficial for them to be taxed as capital – for example, to benefit from entrepreneurs’ relief or to utilise an unused annual exempt amount, the members’ voluntary liquidation (MVL) procedure can be used.
 
An MVL is a formal procedure; the director(s) must provide a sworn affidavit that creditors will be paid in full and a liquidator must be appointed.

 


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