Buy-To-Let Property: Too Costly to Sell?
Many landlords are weighing up their options in light of the new regime to restrict tax relief for interest costs.
The new regime for restricting income tax relief on the finance costs of buy-to-let (BTL) properties threatens to punish many residential property businesses, to the extent that some landlords will almost certainly conclude that they are better off either fully or partly selling up and exiting the BTL sector. Unfortunately, the costs of exit may prove prohibitive.
The new regime applies only for income tax purposes, so companies are largely unaffected. While it is potentially possible to incorporate a property business relatively tax- efficiently, some portfolios will not be suitable, and in other cases landlords may wish to shed certain properties before incorporating the remainder.
Risks vs Rewards - Rationalising a rental property business may allow the landlord to pay down some or all of the debt that generates the finance costs at the heart of the problem. This must, however, be weighed up against the costs incurred on the property disposal:
Whilst one factor may be manageable on its own, it will probably be a combination of factors that will see the worst outcomes.
Negative equity and a depressed market - While many areas in the UK have more than ‘bounced back' from the depths of the recession in 2008/09, it has been reported in the press that house prices in 53% of towns and cities were still below their peak 2007 values, with a particular concentration in the North of England. The average house price in Liverpool at the beginning of 2016, for example, was 23% down on the 2007 figure.
Given the current economic uncertainty over Brexit, it seems unlikely that house prices will have fared significantly better by the end of this year. lf, as some fear, a large proportion of landlords are forced to sell properties as the new regime starts to bite, BTL property values may be harder hit as availability rises and appetite wanes.
Finance cancellation costs - A further potential problem is the cost of cancelling mortgage deals early, within a discount or similar period. One of the key saving graces of the recent recession has been that interest costs have been low and stable, allowing some landlords to tread water over the last few years in spite of negative equity. Some deals, however, have long clawback periods that trigger financial penalties if the mortgage is settled too soon.
Capital gains tax - lt seems that Mr Osborne was determined to milk landlords for every penny that he could: aside from the new interest restriction regime, he arranged for capital gains tax (CGT) on dwellings to remain at 28% while practically everything else was reduced to 20%. Most homeowners will be able to avoid CGT thanks to 'only or main residence relief’. The 28% CGT charge will most likely fall most often on BTL landlords.
Conclusion - Some landlords are still struggling with negative or substantially reduced equity, together with high gearing and early redemption penalties which will lead to some difficult decisions having to be made.
Are Your Company's Dividends Valid?
Many family or owner-managed businesses will pay dividends several times a year. It is important to get the process correct, lest they be challenged by HMRC later on.
A dividend may be challenged where it is found to have been made otherwise than in accordance with the Companies Act 2006 or the company's own legal constitution.
Who authorises dividends? - It is generally the company's own Articles of Association that determine who may authorise dividends.
For these purposes, there are two types of dividend:
Dividends may only be paid when the company has the funds to do so. The Companies Act 2006 specifies that a dividend may be paid only out of profits available for that purpose.
Relevant accounts - In order to check what profits are available for distribution in the period, the directors/shareholders must refer to the relevant accounts. These are usually the latest annual accounts laid before the company in a general meeting.
Getting the paperwork right - It is essential that the paperwork be drawn up correctly to support the dividend. For final dividends, general meetings are no longer necessary provided a majority of shareholders approve the proposed dividend by ordinary resolution. The documentation should evidence that the relevant accounts have been considered, and the distribution approved.
An interim dividend may be varied at any time before it is actually paid, and as such is deemed to be paid only when the funds are placed unreservedly at the disposal of the shareholder. This is straightforward when dealing with a money transfer, but if effected by journal entry in the company's books of account - typically by way of a credit to a director's loan account or similar - then an interim dividend will be deemed to have been paid only when the relevant entries have been made.
Dividends should be paid in proportion to respective shareholdings. Dividend vouchers are still required, despite there no longer being a 'tax credit' in the new dividend regime.
Summary - Dividends are still a key tool for tax efficient income planning. But getting the procedure and paperwork right is essential, including:
Correcting mistakes in your tax return
Mistakes happen and where a mistake has been made in your tax return it is possible to file an amended return to correct the mistake.
The amended return must be filed within 12 months of the original deadline.
The normal deadline for filing a self-assessment tax return online is 31 January after the end of the tax year. The self-assessment return for 2015/16 should have been filed by 31 January 2017. The filing deadline is extended where the notice to file was issued within three months of the filing deadline. Where this is the case, a later deadline of three months from the issue of the notice to file applies (so if the notice to file a 2015/16 tax return was given on 15 November 2016, the return must be filed by 15 February 2017). Paper returns must be filed by 31 October after the end of the tax year – so a deadline of 31 October 2016 for 2015/16 paper return.
Thus, where the normal online filing deadline applies, amended returns for 2015/16 must be filed by 31 January 2018. Where a paper return is submitted, an amended paper return for 2015/16 must be sent to HMRC to arrive by 31 October 2017.
Amendment process – online returns
Where the original return was filed online, it is a relatively straightforward process to amend it online. The process is as follows:
Amendment process – paper returns
Where a paper return was filed, a mistake in the return can be corrected by downloading a new tax return and sending the corrected pages to HMRC. Write `Amendment’ on each page and make sure the taxpayer’s name and UTR is included.
Write to HMRC
Alternatively, you can write to HMRC with details of the corrections. If the window for filing an amended return has passed, you will need to write to HMRC to tell them of any corrections. A refund can be claimed up to four years from the end of the tax year to which it relates.
Changes to your tax bill
Correcting a mistake in your tax return may also change the amount of tax that you owe for that tax year. Where an amended return is filed online, the calculation is also updated. Within three days of filing an amended return, the tax account will also be updated. If you owe more tax, this, plus the associated interest, should be paid without delay. If you have paid too much, you can request a repayment online. However, HMRC warn that you should allow up to four weeks to receive it.
Jointly owned property – how rental income is taxed
The situation where a married couple or civil partners jointly own an investment property that they let out is a familiar one, but when it comes to the rental income, special rules apply.
Default position - Where a property is owned jointly by a husband and wife, the default position for income tax is that each spouse is treated as receiving 50% of the income, regardless of who actually receives what. This may not be the most efficient allocation from a tax perspective.
Example - David and Charlotte are a married couple. They jointly own three properties as joint tenants, which they let out. The rental profit is £20,000 a year. David works in the City and is an additional rate taxpayer. Charlotte works part-time as a florist earning £12,000 a year and is a basic rate taxpayer.
The rental income is split 50:50 and each spouse is treated as receiving rental income of £10,000. Tax of £4,500 (£10,000 @ 45%) is payable on David’s share of the rental income, whereas tax of £2,000 (£10,000 @ 20%) is payable on Charlotte’s share of the income.
Tax-wise, this is not the best result. If Charlotte were to be taxed on the whole £20,000 of rental income, the tax payable would be £4,000 (£20,000 @ 20%), rather than the £6,500 currently payable by the couple – a saving of £2,500.
Unequal ownership - It is possible to override the default position if the property is not owned in equal shares and elect to be taxed in relation to the actual ownership and income split by completing form 17, Declaration of beneficial interest in joint property and income. It is worth noting that from a capital gains tax perspective, assets can be transferred between spouses and civil partners on a no gain no loss basis if it is deemed worthwhile to alter the underlying ownership and consequently the actual income split.
A form 17 declaration can be made by married couples and civil partners who hold property jointly, who actually own the property in unequal shares and are entitled to the income arising in relation to shares, and who want to be taxed on that basis.
Example - Greg and Jack are in a civil partnership and own a flat as tenants in common, which they let out. The rental income is £16,000 a year. Greg owns a 75% share of the property and Jack owns the remaining 25% share. Greg pays tax at basic rate & Jack at additional rate.
Under the default position, each would be taxed on 50% of the rental income - £8,000 each. As a basic rate taxpayer, Greg would face a tax bill of £1,600 (£8,000 @ 20%) and Jack would face a tax bill of £3,200 (£8,000 @ 40%) – a combined bill of £4,800.
In this instance, it would be beneficial for Greg and Jack to be taxed on an actual basis and to make a form 17 declaration. Taking this route would mean that Greg would be taxed on £12,000 of the rental income (75% of £16,000), on which he would pay tax of £2,400 (£12,000 @ 20%), and Jack would be taxed on the remaining £4,000, on which he would pay tax of £1,600 (£4,000 @ 40%). Their combined tax bill would fall to £4,000, a saving of £800.
Beware, however, it will not always be better to be taxed by reference to actual ownership – sometimes the default 50:50 split will give a better result.
Example - Frank and his wife Julie own a property as tenants in common. The property is let out and generates rental income of £10,000 a year. Frank owns 80% of the property and Julie the remaining 20%. Frank is a higher rate taxpayer while Julie does not work and has no other income. Under the default position their combined tax bill is £2,000 – Frank will pay tax at 40% on his 50% share of the income (£5,000), whereas Julie’s share of the rental income will be covered by her personal allowance. By contrast, electing to tax the income by reference to their actual shares would increase the tax bill to £3,200 as Frank would then pay tax at 40% on £8,000 (80%) of the rental income.
Overpaid PAYE and how to get it back
There are various reasons why a PAYE overpayment may arise. This can happen simply because an error was made when paying PAYE and too much was paid or a payment was made twice. An overpayment may also arise where an employer has recovered a statutory payment or where the employer forgot to deduct the employment allowance to which they were entitled when making the payment to HMRC.
Where the PAYE account appears to be in credit, the first step to getting a refund is to establish why the overpayment has arisen and to check that it is not simply due to an error in the FPS or the EPS. Where the FPS or EPS is wrong, the error should be corrected by submitting an amended FPS or EPS, as appropriate.
Overpayment in current tax year
Where the overpayment relates to the current tax year, getting a refund is straightforward in that the amount by which the PAYE account is in credit can simply be deducted from subsequent payments to HMRC in the same tax year, until everything is square again.
Overpayment relates to a previous tax year
Things become somewhat more complicated where the PAYE overpayment relates to a previous tax year, not least because HMRC are reluctant to accept an overpayment is genuine. Where the overpayment is more than £500, HMRC require an acceptable explanation as to why it arose before they will consider repaying or reallocating it. It is therefore vital to identify why the overpayment arose and provide evidence to support the explanation.
Claiming a refund
Employers seeking a refund for a PAYE overpayment in a previous tax year need to make a claim, either by calling the Employer Helpline on 0300 300 3200 or writing to HMRC at the following address:
National Insurance Contributions and Employers Office
HM Revenue and Customs
The following information should be provided:
• business name and address;
• PAYE reference;
• contact telephone number;
• amount overpaid for each tax year for which a claim is made;
• tax month in which the overpayment arose (if possible);
• for each year for which a claim is made, why you overpaid; and
• whether this overpayment has been claimed before.
However, it should be noted that HMRC will allocate the overpayment against any PAYE owing for the current or other earlier years before making a refund. They will also set it against any other tax that may be owing, such as any outstanding corporation tax, before making a repayment.
Once they are satisfied that the repayment is due, it will be made directly to the employer’s bank account if an EPS containing bank details has been submitted.
IHT Estate returns
When someone dies, there are forms to fill in and send to HMRC. There are different forms and the correct forms depend on whether or not there is any inheritance tax to pay. Consequently, before the forms can be completed, it is necessary to value the estate for inheritance tax purposes and determine whether any tax is due.
The inheritance tax forms should be sent with the application for the grant of representation. This is the legal right to deal with the estate.
Form IHT205 – no IHT to pay
Where there is no IHT to pay (for example if the whole estate has been transferred to a spouse or civil partner or the value is below the nil rate band, currently £325,000), short form IHT205 (2011) should be used. This form can also be used where the whole estate is left to a charity with a charity reference number. However, it cannot be used for estates worth more than £1 million, even if there is no IHT to pay.
The form, together with notes on its completion is available on the Gov.uk website at: www.gov.uk/government/publications/inheritance-tax-return-of-estate-information-iht205-2011
The information can also be completed online.
There is no deadline for the submission of form IHT205.
Form IHT217 – claim to transfer nil rate band for excepted estates
The unused portion of the nil rate band on the death of the first spouse or civil partner can be transferred for use against the surviving spouse or civil partner’s estate on their death. Where there is no tax to pay and form IHT205 has been completed, a claim to transfer the unused nil rate band should be made on form IHT217 and filed with form IHT205. Form IHT217 is available on the Gov.uk website at:
Form IHT400 – IHT to pay
The full form, IHT400, should be used where there is inheritance tax to pay, or where the short form cannot be used as the estate is worth more than £1 million.
The form is available on the Gov.uk website, together with guidance notes on its completion, at: www.gov.uk/government/publications/inheritance-tax-inheritance-tax-account-iht400
There is a deadline for submitting the form – a year from the end of the month in which the person died. Penalties may be charged if the form is submitted late.
Form IHT402 – claim to transfer unused nil rate band
Where there is IHT to pay and the inheritance tax threshold is increased by transferring the unused portion for a late spouse or civil partner, form IHT402 should be used to work out the percentage and claim the transfer. Form IHT402, which is available on the Gov.uk website at
www.gov.uk/government/publications/inheritance-tax-claim-to-transfer-unused-nil-rate-band-iht402, should be submitted with form IHT400.
Form IHT207 – person who died lived abroad
If the person who died lived abroad permanently and had less than £150,000 in UK assets (cash, bank accounts or listed stocks and shares), form IHT207 should be used rather than form IHT205 if there is no tax to pay. It is available on the Gov.uk website at: www.gov.uk/government/publications/inheritance-tax-return-of-estate-information-iht207-2006
Savings income – do you need to claim back tax?
From 6 April 2016 onwards, bank and building society interest has been paid gross without the deduction of tax. However, previously basic rate tax was deducted at source unless you were a non-taxpayer who had registered to receive your interest gross.
If you had savings income in 2015/16, your taxable income was low, and if you hadn’t registered to receive your income gross, you may be due a repayment.
For 2015/16, the personal allowance was set at £10,600. To the extent that taxable non-savings income did not exceed the savings rate limit of £5,000, savings rate income was taxed at 0%. This meant that an individual could potentially receive up to £15,600 of savings income tax-free if they had no other income.
Case study 1
June is 74. In 2015/16, she receives a pension of £8,000 and bank and building society interest of £6,000 (gross) from which tax of £1,200 has been deducted.
Her total income for the year is £14,000.
Her pension of £8,000 is fully covered by her personal allowance of £10,600, leaving £2,600 of her personal allowance available to set against her savings income of £6,000.
The remaining £3,400 of her savings income is taxed at the savings starting rate of 0%. She has no taxable non savings income, so the full £5,000 nil rate savings rate band is available to her.
Therefore, no tax is due on June’s saving income of £6,000 and she is entitled to a repayment of the tax of £1,200 deducted at source.
Case study 2
Margaret is also 74. She receives a pension of £12,000 and building society interest of £6000 on which tax of £1,200 has been deducted.
Her personal allowance of £10,600 is set against her pension, leaving her with £1,400 of taxable pension income. The savings starting rate band of £5,000 is reduced by the amount of her taxable non-savings income, reducing the amount of savings income eligible for the zero rate to £3,600.
The first £3,600 of her savings income is tax-free. The remaining £2,400 is taxed at 20% - giving rise to a tax bill of £480. However, as £1,200 has been deducted at source, Margaret is entitled to a repayment of £720.
Claiming the repayment
The 2015/16 self-assessment tax return should have been filed by 31 January 2017. Where a tax return has been completed, the repayment can be claimed via the self-assessment system.
Where there is no requirement to file a tax return, a repayment of tax on savings income can be claimed on form R40.
Savings allowance from 6 April 2016
In most cases, the need to claim a repayment of tax deducted from savings income will disappear from 6 April 2016. From that date, bank and building society interest is paid gross and basic rate and higher rate taxpayers are allowed a savings allowance allowing them to receive savings income tax-free up to the level of the allowance, regardless of whether they have taxable non-savings income. The allowance is set at £1,000 for basic rate taxpayers and £500 for higher rate taxpayers for both 2016/17 and 2017/18. The savings rate limit and starting rate for savings remain, respectively, at 0% and at £5,000.
Buying a Property
Tax issues to consider:
1. Are you financing the purchase in a tax-efficient way? If the money is coming from a company that you own, for example, have you considered buying the property in the company, rather than taking income out of the company (possibly heavily taxed) to fund the purchase? ls it worth considering buying the property in an LLP in which your company is a member?
2. ls the buy-to-let loan interest relief restriction a problem? In many cases those affected by the restriction of loan interest relief to the basic rate (which is being phased in over four years starting in April 2017) is going to mean that they are paying an effective rate of tax of more than 50%, or even, in some cases, more than 100%.
Loan interest relief restriction doesn’t apply to limited companies. So, should you be considering buying the property in a company rather than individual names, if this is a practical option?
3. Might you be caught by the new 3% stamp duty land tax surcharge? This 3% surcharge applies to all company purchasers, and individual purchasers who have another property, and are not buying the property in question as their main residence. Is there scope, though (e.g. if there are other individuals such as family members around), for the property to be bought in the name of someone who doesn’t own any other residential property, and therefore won’t be caught by the 3% surcharge even if the property isn’t their main residence?
4. Does the property need work done on it? This question is relevant if you’re buying a property that you’re planning to let out or occupy for the purpose of some business. In this situation, budgeting to carry out the work gradually over a period, laying out small amounts at any one time, is both easier on your cash flow and more tax-efficient, because it’s less likely to be disallowed by HMRC as 'capital' improvement works.
5. Can you 'spread' the future capital gain?
6. Does anyone have capital losses such that an element of the gain can be tax-free when the property is ultimately sold.
7. Does anyone have rental losses? lf someone with these losses brought forward can be brought into ownership, and the property counts as part of the same property 'business' as the one where they’ve made the losses, you could be enjoying an income tax 'holiday' on the rents from the new property.
8. Can you structure the purchase to get rollover relief?
9. Can you structure the purchase to maximise inheritance tax business property relief?
10. Could you be moving the value of the property out of your inheritance taxable estate?
11. Are you buying the property for someone else to live in? If you are, consider whether you can extend the availability of main residence CGT relief by putting the property in a trust for that person.
12. Should you be making a main residence election?
MTD - Voluntary pay as you go
As well as the requirement to make a digital return and keep digital tax records, the Making Tax Digital (MTD) reforms introduce other changes to the way in which taxpayers interact with HMRC. One such change is the opportunity for taxpayers to make voluntary payments on account of their tax liabilities. Under the voluntary pay as you go (PAYG) proposals taxpayers will be able to, if they so choose, set aside money to pay their tax by making voluntary payments on account.
Some key points to note are:
• There will be no obligation to make PAYG payments.
• The payments will be flexible.
• HMRC claim the administration will be simple.
• Voluntary payments will be repayable.
• Payments and repayments will be made electronically.
Making payments – taxpayer chooses
It will be entirely up to the taxpayer to choose whether to make payments on account and if so when and how much to pay. There will be no deadlines, no requirements for voluntary payments to be made at a fixed time and no minimum payment.
Allocation of voluntary payments – HMRC choose
However, when it comes to deciding how voluntary payments are allocated, it is HMRC who decides rather than the taxpayer. The taxpayer pays into a pot and HMRC uses any money in the pot to pay liabilities as they become due. The argument for this is that HMRC can use the money in the way which best reduces any interest and penalties that a taxpayer may incur. However, this may not suit all taxpayers – some may wish to make payments on account towards their final self-assessment liability, but are happy to pay their VAT each quarter as it becomes due. Under the proposals as they currently stand this is not possible – payments can be made only against a taxpayer’s liabilities generally rather than set aside for a specific liability. Not everyone is happy with this.
Currently, there are no plans to pay interest on voluntary PAYG payments. Consequently, it may be better to open an interest-bearing account to save for future tax bills (particularly if giving an interest-free loan to the Exchequer does not appeal).
The plan is to roll-out voluntary PAYG with MTD, making it available to unincorporated businesses and landlords with a turnover above the VAT threshold from April 2018, when they are bought within MTD.
A good idea
The idea was well supported in principle and some taxpayers may like the idea of setting money aside to cover tax. There are alternatives, however, including the existing Budget Payment Plan.
Partner note: www.gov.uk/government/consultations/making-tax-digital-voluntary-pay-as-you-go.
Company cars in 2017/18
Company cars are a popular benefit and are often something of a status symbol. But, they have also been an easy target for the taxman.
Where a company car is available for private use, the employee is taxed on the associated benefit that this provides. The amount that is charged to tax – the cash equivalent value – depends on the list price of the car and the appropriate percentage.
The list price is essentially the manufacturer’s price when new. This remains the reference point by which the tax charge is calculated – it does not matter how much was actually paid for the car, whether it was bought second-hand or that cars tend to depreciate rapidly.
The appropriate percentage – the percentage of the list price charged to tax – depends on the car’s CO2 emissions.
Adjustments are made when calculating the cash equivalent to reflect the periods when the car was unavailable, capital contributions and contributions to private use.
Appropriate percentage - Linking the appropriate percentage to the CO2 emissions has the effect of rewarding those who choose lower emission cars. However, it also provides the Government with an easy mechanism for increasing the tax charge year on year by making the emissions criteria stricter.
The appropriate percentage is set for a year for the relevant threshold (95g/km). For 2017/18, the appropriate percentage for a car with CO2 emissions of 95g/km is 18% - For 2017/18, it was 16%.
Thereafter, the appropriate percentage is increased by 1% for every 5g/km by which the CO2 emissions exceed the relevant threshold, to a maximum of 37%. Diesel cars attract a 3% supplement on top of what the relevant percentage is; however, the over percentage is capped at 37%.
Increasing the appropriate percentage each year means that a company car driver will pay more tax in 2017/18 than in 2016/17 on the same car, despite the fact it is a year older, has higher mileage and will have generally depreciated.
Example - Max has a company car. It has CO2 emissions of 120g/km. The car cost £30,000 when new. Max is a higher rate taxpayer.
In 2016/17, the appropriate percentage was 21% and in 2017/18 it was 23%. This means that the cash equivalent value of the benefit has increased from £6,300 for 2016/17 to £6,900 for 2017/18 and the associated tax bill has increased from £2,520 to £2,760 – an increase of £240.
Fuel - A separate charge applies where fuel is provided for private motoring in a company car. The amount taxed is the appropriate percentage as determined for the purposes of the tax charge on the car multiplied by the multiplier for the year, set at £22,600 for 2017/18. In the above example, if Max were to receive fuel for private journeys, he would be taxed on a benefit of £5,198 – a further tax bill of £2,079.20.
Unless private mileage is very high, employer-provided fuel is rarely an efficient benefit.
Practical tip – Choosing a cheaper low emission company car will minimise the associated tax charge.
Avoiding VAT Registration when the Threshold is Exceeded
Failing to register for VAT at the right time can be one of the most expensive mistakes a business can make. Compulsory registration is required where:
The problem is that businesses don’t always keep an accurate cumulative record of taxable supplies. If a taxable person goes over the VAT threshold, and doesn’t register on time, HMRC will register them from the date they ought to have been registered, collecting VAT on taxable income accordingly.
In many cases, the business will be unable to recover the VAT on sales. As a result, gross income is taken to be VAT inclusive, with 16.6% (or 20/120ths) of it being payable to HMRC.
Example. Joe runs a hairdressers. He brings in the 2015/16 records at the end of December 2016. These cover the year to go June 2016. Figures show taxable turnover to 30 June as £82,000; the registration threshold was passed on 31 July 2016, when the rolling cumulative twelve-month turnover came to £85,000. Joe should have registered the business from 1 September 2016. He has exposure to VAT on four months’ turnover - which could mean a cost of approximately £5,000. Joe says that there was an exceptionally busy quarter due to a local one-off event. This is unlikely to happen again.
There is a potential let out in the form of exception from registration. Schedule 1 (3) VATA 1994 says that a person does not become liable to registration if they can satisfy HMRC that the taxable turnover in the following twelve months (after the threshold is exceeded) will not exceed the deregistration threshold - £81,000 in 2016/17.
In order to look at using the exception, an estimate will need to be made of future activity. The estimate should be of future taxable turnover, this includes zero-rated supplies, but not exempt supplies or one-off sales of capital items.
The critical date is when the registration threshold is crossed. Neither the date the business would have been registered, nor the date of an application for exception matters. Only information which would have been available at the date of crossing the registration limit is relevant to the decision.
When considering making an application, only cite information that would have been available at the time the registration threshold was exceeded.
Employment allowance – can you benefit?
The National Insurance employment allowance can reduce an employer’s National Insurance bill by up to £3,000 – but not all businesses can benefit.
Nature of the allowance
Where available, the allowance is set against the employer’s secondary Class 1 National Insurance bill. The allowance, set at £3,000, reduces the National Insurance payable by the employer until it is used up or, if sooner, the tax year ends. Qualifying employers whose secondary National Insurance liability for a tax year is £3,000 or less will not pay any employer’s National Insurance. Employers whose secondary National Insurance liability is more than £3,000 will benefit in a £3,000 reduction in their National Insurance bill.
The way the allowance works means that employers will pay less or even nothing at the start of the tax year and the full month’s liability once the allowance has been used up.
Not for everyone
Not all businesses are able to benefit from the employment allowance. Since 6 April 2016, it has not been available to one-man companies where the sole employee is also the director. However, in a family company scenario, having a set up where there is more than one paid employee or the only employee is not also a director will preserve the allowance. This can be beneficial in formulating a profit extraction strategy and setting an optimal salary level.
The employment allowance is also not available where someone is employed for personal, household, or domestic work, such as a nanny or a gardener (although the allowance is available where the personal employee is a care or support worker). Service companies operating under IR35 where the only income is the earnings of the intermediary and public bodies and those doing more than 50 per cent of their work in the public sector are similarly denied the allowance.
The allowance must be claimed through the employer’s real time information software package. To the extent that the allowance is not used up during the tax year, it is lost – any unused balance cannot be carried forward to the following year.
A quick overview of capital gains tax
Capital gains tax is payable on net gains to the extent that they exceed the annual exempt amount.
Capital gains tax is a tax on the profit that is made on the disposal of an asset. Normally, this will apply when an asset is sold, but a taxable gain may also arise when an asset is given away as a gift or exchanged for something else. A tax charge may also arise if compensation, such as an insurance payout, is received when the asset is destroyed. Exemptions and reliefs may be available.
Chargeable assets - Capital gains tax is only payable if the asset in question is a chargeable asset. Chargeable assets include personal possessions which are worth more than £6,000, any property which is not your main home, shares (other than those held in a tax-free scheme or investment), and business assets.
Allowable costs - In working out the chargeable gain, you deduct any allowable costs. These include not only the cost of buying the asset in the first place but also any incidental costs of buying and selling, such as advertising, commission, etc., and anything spent on the asset to enhance its value.
Losses - Losses are worked out in the same way as gains. Losses and gains arising in the same tax year are set against each other to arrive at the net gain for the year. Where there is a net loss, this can be carried forward and set against future gains.
Annual exempt amount - All individuals are entitled to an annual exempt amount. For 2017/18, this is set at £11,300 for 2017/18. For 2016/17, the figure was £11,100.
The annual exempt amount is set against net gains for the year (gains less losses). Any brought forward losses can be used to shelter any gain remaining once the annual exemption has been applied.
If the annual exempt amount is not used in the tax year in question, it is lost – unused amounts cannot be carried forward.
Rates - For 2017/18, capital gains tax is payable at the rate of 10% to the extent that total taxable income and gains do not exceed the basic rate band of £33,500, and at 18% where the income and gains exceed this limit. Higher rates of, respectively, 18% and 28%, apply to gains on property (where not exempt) and to carried interest.
Spouses - Transfers between spouses and civil partners are deemed to be at a value that gives rise to neither gain nor a loss. This means it is possible to transfer assets between spouses and civil partners tax-free prior to a disposal to a third party, to take advantage of an unutilised annual exempt amount.
The capital gains tax rules can be complex. It is advisable that professional advice is sought, ideally before making the disposal.
Residence nil rate band and downsizing
The residence nil rate band (RNRB) is an additional nil rate band, which is available where a death occurs on or after 6 April 2017 (or, in the case of married couples and civil partners, the death of the second spouse/civil partner occurs after that date) and the property is left to direct descendants.
The RNRB is set at £100,000 for 2017/18, £125,000 for 2018/19, £175,000 for 2019/20, and £175,000 for 2021/21.
The allowance is reduced by £1 for every £2 by which the value of the estate exceeds £2 million.
As with the normal nil rate band, any unused portion is transferred to a spouse or civil partner on his or her death.
Downsizing - Availability of the RNRB may be preserved where a person downsizes on or after 8 July 2015. If at the date of death the estate does not qualify for the full RNRB, a downsizing addition may be available if the following conditions are met:
The amount of the downsizing addition will generally be equal to the amount of the RNRB that is lost because the residence no longer forms part of the estate. Assets at least equal to the RNRB plus downsizing addition must be left to direct descendants.
Calculating the downsizing addition - Work out the RNRB that would have been available when the disposal of the former home took place (set at £100,000 where this is between 8 July 2015 and 5 April 2017) plus any transferred RNRB available at the date of death.
Case study - Jack and Eva sold their family home in September 2016 for £500,000 and bought a retirement flat. Eva died in April 2017, leaving all her estate to Jack. Jack died in August 2020, leaving his estate, valued at £900,000 equally to the couple’s two daughters. The retirement flat is valued at £280,000.
The downsizing addition is calculated as follows:
If Jack and Eva had not purchased a new home, the downsizing addition would be equal to the RNRB available at death.
Cash basis threshold increased
Cash basis threshold increased
The cash basis is a simpler way for smaller businesses to work out their taxable profit. Under the cash basis, profit is calculated by reference to cash in and cash out, rather than by reference to income earned in the period and expenditure incurred, as is the case under the traditional accruals basis.
Prior to 6 April 2017, the cash basis was only open to sole traders and unincorporated businesses with a turnover below the VAT registration threshold (which was set at £83,000 from 1 April 2016 and increased to £85,000 from 1 April 2017).
However, in preparation for the introduction of Making Tax Digital, under which businesses will be required to maintain records digitally and to provide digital updates to HMRC quarterly, the cash basis threshold has been increased. Availability of the cash basis is also extended to unincorporated landlords from 2017/18 onwards.
New look cash basis
From 6 April 2017, the entry threshold for the cash basis is increased to £150,000. Once using the cash basis, businesses can remain in it until their turnover exceeds the exit threshold, set at double the entry threshold. Thus, the exit threshold is £300,000 from 6 April 2017.
From 6 April 2017, the cash basis also becomes the default accounting basis for unincorporated businesses with rental income of £150,000 or less. Such businesses can still use the accrual basis if they prefer – but will need to elect to do so.
Simplified rules for treating capital expenditure under the cash basis are also introduced from 6 April 2017. Instead of the general prohibition on capital expenditure that applied prior to that date, the new rules only prohibit the deduction of certain items, namely:
• capital items incurred in connection with the acquisition or disposal of a business or part of a business;
• any asset not acquired or created for use on a continuing basis in the trade;
• a car;
• certain intangible assets, including education or training; and
• financial assets.
Capital expenditure that does not fall into the above categories can be deducted as for revenue expenditure.
Is it for me?
The cash basis will suit many small businesses, but it is not for all businesses. This may be the case if the business has high stock levels or has losses that would be beneficial to offset against other businesses. On the plus side, tax is only payable on money that has actually been received by the year end.
Getting the Formalities Right - Share Issues
The formalities of operating and administering a company can easily be overlooked. However, aside from any adverse company law implications, this can have unfortunate tax consequences.
For example, if a small owner-managed trading company proves to be unsuccessful, the value of its shares may become negligible. The company's individual shareholders may be able to claim income tax relief for an allowable loss in value of the shares against their net income if certain conditions are satisfied.
One condition for share loss relief in such circumstances is that the individual must have subscribed for the shares. This condition might appear straightforward to prove. However, two recent cases suggest otherwise.
Were shares issued? - In Alberq v Revenue and Customs , the appellant entered into a trading venture with a business partner and paid £250,000 into a company in February 2008. The venture proved unsuccessful. The company went into administration in February 2009, and was dissolved in September 2011. HM Revenue and Customs (HMRC) refused the appellant's share loss relief claim (under s 131) for 2008/09 of £250,000. The key question was whether the company issued shares to the appellant in consideration of the £250,000 he put into the company.
Unfortunately for the appellant, he was unable to demonstrate the issuance of additional shares. The First-tier Tribunal noted that important forms of evidence of his shareholding in the company were not produced (e.g. the company's register of members, or share certificates for the appellant's shares). A draft shareholder’s agreement had been prepared by solicitors in February 2008, indicating a further allotment of shares to the appellant. However, the tribunal concluded that the shareholder’s agreement was never finalised and executed, and additional shares were never issued.
Share subscription - By contrast, in Murray-Hessian v Revenue and Customs  a company (GT Ltd) was incorporated in May 2011 by its initial shareholder (AG). Subsequently, the company's annual return to 13 May 2012 filed at Companies House included a list of shareholders showing that the appellant held 225 ordinary shares (22.5%). However, a further annual return to 14 May 2012 (i.e. one day after the date shown on the previous return) was filed showing AG as owning 100% of the ordinary shares, and the appellant holding none. Subsequently, the company entered administration. HMRC refused the appellant's claim for share loss relief against his other income. HMRC argued (among other things) that the appellant lent £272,372 to GT Ltd, and that the 225 shares had not been subscribed for.
However, the First-tier Tribunal found: the appellant had an agreement with AG that he would invest £272,000 in GT Ltd by way of subscription for shares; consequently, AG was from the outset holding a percentage of the shares as nominee, agent, etc., on behalf of the appellant until the shares could be registered in the appellant's name; and that AG subsequently transferred the legal title to the appellant. The tribunal concluded that the appellant had subscribed for 225 shares in GT Ltd for share loss relief purposes.
Tip: The First-tier Tribunal in Alberg considered that the issuance of shares required the appellant to be written up in the register of members of the company as the owner of the shares (following National Westminster Bank Plc v Inland Revenue Commissioners .
However, in Murray-Hession, the tribunal considered that Hl\/lRC’s reliance on the NatWest case was misplaced for various reasons, including that it concerned the offering of shares to the public and the more rigorous requirements applicable to a plc. Furthermore, company law had changed since NatWest. Even if the shares had been allotted to the appellant in Murray-Hessian without being registered, the tribunal was not sure that NatWest would have affected the issue for other reasons.
Salary Sacrifice: The New Rules
The advantages associated with salary sacrifice schemes are considerably reduced once new rules come into effect from 6 April 2017.
What is a salary sacrifice arrangement? Under a salary sacrifice arrangement, the employee gives up an amount of cash salary in return for a benefit-in-kind. Where the benefit-in-kind is exempt from tax and National Insurance contributions (NICs), under the current rules salary sacrifice arrangements are beneficial for both the employee and the employer. There is no tax or NICs to pay on the benefit-in-kind. The employee saves tax and primary Class 1 NICs on the salary given up in exchange for the benefit, and the employer saves secondary Class 1 NICs.
Salary sacrifice arrangements are often used to take advantage of the tax and NICs exemptions available for childcare vouchers and mobile telephones.
Salary sacrifice arrangements can still be beneficial for the employee if the benefit is not exempt, as taking a benefit-in-kind rather than cash salary will generally move the NIC liability from Class 1 to Class 1A, saving the employee contributions at 12% or 2%.
New rules The new rules apply from 6 April 2017 for arrangements entered into on or after that date. Where an arrangement is already in existence on 5 April 2017, the start date is delayed, either until 6 April 2018 or 6 April 2021, depending on the nature of the benefit.
Under the new rules, the benefit of any associated exemption is lost where a benefit is provided under a salary sacrifice arrangement or flexible benefit arrangement, unless the benefit is one of a limited range of protected benefits. Instead, the employee is taxed by reference to the higher of the cash foregone and the cash equivalent value of the benefit calculated under normal rules. Thus, where a benefit would otherwise be exempt (so the cash equivalent value is nil) under the new rules, if it is provided under a salary sacrifice arrangement, the employee would instead be taxed by reference to the cash given up.
Protected benefits - Certain benefits are protected from the operation of the new rules, and remain able to benefit from the associated tax exemptions when made available under a salary sacrifice or flexible benefits arrangement. The protected benefits are:
Consequently, salary sacrifice arrangements continue to be potentially beneficial where the benefit taken in exchange is on the above list.
Existing arrangements - Where an arrangement is in place on 5 April 2017, there is a period of grace before the new rules bite.
For existing contracts, the start date is the earlier of the date on which the contract ends, is modified or renewed, and 6 April 2021 where the benefit taken in exchange is a car (other than an ultra-low emissions car), living accommodation, or school fees, and 6 April 2018 in all other cases.
To preserve the advantages associated with salary sacrifice arrangements for as long as possible, enter into an arrangement before 6 April 2017.
Travelling Expenses for the Self Employed: Recent Cases
The tricky area of the deductibility of travel expenditure by the self-employed.
Basic tests - For an expense to be deductible in computing a self- employed individual's taxable profits the expense must have been 'wholly and exclusively’ incurred for business purposes; must not constitute a 'capital' expense; and must not be 'specifically prohibited' as a deduction by statute.
Splitting travel costs - Although, strictly, an expense needs to be wholly and exclusively incurred for business purposes, in practice it is often feasible to dissect a particular expense into a private and a business element, enabling the latter to rank as tax deductible. Often HMRC will challenge the taxpayer’s split.
In the recent case of Dr AS Jolaoso, a gynaecologist, the travelling expenses in point were motoring costs, and whilst Dr Jolaoso sought to claim 50% of these costs as incurred for business purposes, HMRC allowed only 10%.
Key differentiation: ‘in’ versus ’to’ - The Courts have decided that travelling expenses incurred in the course of the business are deductible whereas such expenses incurred in travelling to the place of business are not. This principle was decided as far back as 1971 (Horton v Young ) and the case was a victory for the taxpayer, a Mr Horton.
In that case, Mr Horton, a sub-contractor, argued that his home was his business base, and thus when he travelled around picking up his bricklayers to then take them to building sites such expenses were tax deductible, i.e. the expenses were incurred in the course of carrying on his business. The court agreed. A similar favourable result also arose for the taxpayers in two cases in 2011 (Reed v R & CC ; Kenyon v R & CC , concerning a scaffolder and a pipe fitter respectively.
On the other hand seven years earlier in 2004 (Powell v Jackman ) Mr Powell, a milkman, was denied a deduction with reference to his travel expenses incurred in travelling from his home to the milk dairy to pick up his milk for delivery to customers. And, six years later in 2010 (Manders v R & CC ), a similar result arose where a market trader was denied a deduction for expenses incurred in travelling from his home to the location of his market stall. And as recently as 2014 (White v R & CC ) a flying instructor, was denied a deduction for his travel expenses incurred in travelling from his home to airports where he provided flying lessons.
Two recent taxpayer failures and very similar cases occurred in 2014 (Dr S Samadian v R & CC ) and 2015 (Dr Sharat Jain v R & CC ). Both cases involved hospital consultants and the expenses related to travel between home and a number of private hospitals, and between the private hospitals and various NHS hospitals.
What becomes very clear when looking at these cases is that they are each heavily fact dependent.
The home: a business office - The cases illustrate that the major problem area is where the taxpayer seeks to deduct travel expenses incurred in travelling from (and to) his/her home where an alleged office subsists. The office must be of some substance; just a desk and filing cabinet, and making the odd business call, will not suffice. In addition, HMRC must not be able to argue that in fact the 'real' office is located elsewhere and it is from that office that the real the business is conducted.
Thus, for example, in Manders v R & CC the court took the view that it was his market stall that was Mr Manders’ main place of business and so travel costs from home to the stall were disallowed. Similarly, in White v R & CC, the court held that despite having an office at his home, the flying instructor conducted his business at the airports on a regular and predictable basis, and hence travel costs to and from were disallowed.
Tip - To enhance success, try and identify a decided case (or cases) where another taxpayer succeeded in the courts and where the facts are very similar to your own circumstances.
Individual Savings Accounts (ISAs) offer an opportunity to build up tax-free savings income, subject to certain limits. For those looking to put money away in an ISA in 2017/18, there are new limits and various different ISAs on offer.
The simplest ISA is a cash ISA. Cash ISAs can be held with a bank or a building society and National Savings and Investments offer some cash ISA products. Interest paid on savings held within a cash ISA is tax-free.
Stock and shares ISA
Within a stocks and shares ISA, it is possible to hold shares in companies, unit trusts and investment funds, corporate bonds and Government bonds. However, it is not possible to transfer shares held outside an ISA into a stocks and shares ISA unless they come from an employee share scheme.
Income from, and capital gains on, investments held within a stocks and shares ISA are tax-free.
Innovative finance ISA
An innovative finance ISA can include peer-to-peer loans, although it is not possible to transfer peer-to-peer loans made outside an innovative finance ISA into such an ISA. Interest on loans within an innovative finance ISA is tax-free.
A single ISA limit applies to savings across cash, stocks and shares and innovative finance ISAs. The limit is set at £20,000 for 2017/18, increased from £15,240 for 2016/17. Savers can invest in one type of ISA up to the limit or split the limit across the different types of account.
Junior ISAs are tax-free savings accounts for children available to those under the age of 18 and living in the UK. There are two types of Junior ISA – a cash Junior ISA and a stocks and shares Junior ISA. Interest, dividends and capital gains are tax-free. The investment limit is £4,128 for 2017/18, increased slightly from £4,080 for 2016/17.
The Lifetime ISA is the latest addition to the ISA stable and is available from 6 April 2017. A Lifetime ISA can be opened by anyone under the age of 40. Once open, a person can save up to £4,000 a year up to age 50 and receive a Government bonus of 25% of the amount saved – up to £1,000 a year. However, a Lifetime ISA can only be used to save for a first home or for retirement, in which case the funds cannot be accessed until the saver turns 60. If the funds are withdrawn for any other purpose, the Government bonus is lost and charges are applied. Interest on savings within a Lifetime ISA are tax-free.
Help to Buy ISA
The Help-to-Buy ISA was launched to help first-time buyers save a deposit for their first home. Provided they save at least £1,600, they will receive a Government bonus of 25% of the amount saved. The maximum bonus is £3000, payable on savings of £12,000.
A person who has a Help-to-Buy ISA can from 6 April 2017 transfer their savings into the Lifetime ISA (to a max of £4,000 a year), or continue to save into the Help to Buy ISA, or have both. However, it is only possible to use the bonus from one to buy a first home.
Reduced pensions annual allowance for high earners
The pensions annual allowance places a cap on tax relieved contributions, which can be made to a registered pension scheme for the pension input period. From 2016/17, the pension input period is aligned with the tax year.
The pensions annual allowance is set at £40,000 for 2016/17. However, some higher earners are only entitled to a reduced annual allowance as the allowance is tapered where income exceeds certain thresholds.
The taper is only applied if the individual has both threshold income in excess of £110,000 for 2016/17 and adjusted net income in excess of £150,000.
Threshold income is basically taxable income after pension contributions made either by deduction from salary or to a personal pension plan where basic rate relief is given at source. Where a salary sacrifice arrangement was entered into after 8 July 2015 under which salary is given up in exchange for employer pension contributions, the salary given up needs to be added back. Any salary sacrifice arrangements before 9 July 2015 can be ignored.
If threshold income is less than £110,000 the reduction in the annual allowance does not apply.
Adjusted net income
Adjusted net income is basically taxable income before deducting pension contributions, plus any employer contributions.
If adjusted net income is less than £150,000 the reduction in the annual allowance does not apply.
The taper only applies where both threshold income is more than £110,000 and adjusted net income is more than £150,000. Where this is the case, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £150,000, subject to a maximum reduction. Thus, an individual who has threshold income of more than £110,000 and adjusted net income of more than £210,000 will only be entitled to the minimum pensions annual allowance of £10,000 for 2016/17. The maximum taper of £30,000 applies.
Hannah has a gross salary of £160,000 in 2016/17. She contributes £20,000 into a registered pension scheme. Her employer also makes a contribution of £20,000.
Her threshold income is £140,000 – her salary of £160,000 after her pension contribution of £20,000.
Her adjusted net income is her £180,000, being her salary before her pension contributions of £160,000 plus the pension contributions made by her employer of £20,000.
As her threshold income is above £110,000 and her adjusted net income is above £150,000, the taper applies.
Her annual allowance is reduced by 50% (£180,000 – £150,000) = £15,000.
Her annual allowance for 2016/17 is £25,000 (£40,000 - £15,000).
Don’t forget brought forward allowances
Even where the taper applies, it is possible to make tax-relieved contributions in excess of the reduced allowance if allowances have not been fully used in the previous three years. The taper did not apply before 2016/17 and unused allowances can be carried forward for up to three years.
Replacement of Domestic Items Relief
The wear and tear allowance for fully furnished lettings was repealed with effect from 1 April 2016 for corporation tax and 6 April 2016 for income tax. It was replaced by a new relief for the replacement of domestic items.
Relief is not available for the initial expenditure on furnishings and domestic items. It is only available on their replacement. This is then complicated by the fact that relief is restricted if the replacement items are not 'the same or substantially the same' as the old item.
Guidance for taxpayers - HMRC updated its guidance ‘Income Tax when you rent out a property: working out your rental income' together with 'Income Tax when you rent out a property: case studies' on 28 October 2016. In the main guidance, it says: 'Where the new item is an improvement on the old item, for example replacing a sofa with a sofa bed, the allowable deduction is limited to the cost of purchasing an equivalent of the original item. So, if a new sofa would have cost you £400 but a sofa bed cost you £550, you could only claim the £400 as a deduction and no relief is available for the £150 difference. When considering if the new item is an improvement on the old asset, the test is whether the replacement item is or is not, the same or substantially the same as the old item.
If the replacement item is a reasonable modern equivalent, say a fridge with improved energy efficient rating compared to the old fridge, this is not considered to be an improvement and the full cost of the new item is eligible for relief.'
HMRC's case study:
'David has replaced a single, wooden framed bed in his rental property with a new double divan bed. The new double bed is an improvement on the old bed and David paid £500 for it, which is significantly more than the £150 it would have cost if he had replaced the old bed with a new equivalent wooden framed bed. Therefore, David cannot claim more than £150 of the purchase cost as a deduction.'
The new bed differs from the old bed in both size and style. The example does not elaborate what HMRC considers the improvement is. There is no mention of additional functionality (e.g. a storage divan). Many people would argue that a bed is a bed, regardless of its construction. Some people prefer the look of a wooden bed-frame. Even if a divan was more expensive, they would not consider it an improvement (quite the opposite). This highlights the subjectivity of establishing whether something is the same or improved.
If HMRC adopts a hard line, landlords will have little incentive to provide quality items in their let properties and arguably, it will further encourage a 'throw away’ society.
When it comes to preparing tax returns, whilst landlords may have invoices for items purchased as replacements, they may lack details concerning the item disposed of, particularly where records were not required because the wear and tear allowance was claimed.
Will common sense prevail? HMRC’s Property Income manual states in respect of the former non-statutory renewals basis:
'Sometimes it was impossible to find the current cost of replacing an old asset with something identical. Common sense had to be used to find the cost of a reasonable equivalent modern replacement.’
Claiming Back Tax on a Small Pension Lump Sum
Where a pension lump sum is taken, it is possible that too much tax may have been paid. Where this is the case, a refund can be claimed. However, the mechanism for claiming the refund will depend on the nature of the lump sum. Normally, you can take 25% of your pension pot as a tax-free lump sum, with any balance taxable at the taxpayer’s marginal rate.
Since 6 April 2015, it has been possible to flexibly access pension savings in defined contribution schemes on reaching age 55. Flexible access is not available in respect of defined benefit schemes.
Where the pension is worth not more than £10,000, it is usually possible to take the pension in one go as a `small pot’ lump sum. A person can take up to three small pots from different personal pensions and unlimited small pots from different workplace pensions. Where a small pension pot lump sum is taken, 25% is tax-fee.
Since April 2015, only defined benefit schemes have been able to make trivial commutation payments – a payment as a lump sum where the value of the pension pot is less than £30,000. Small pension pot lump sums can be taken separately from any trivial commutation payment.
Potential tax overpayment
While the first 25% of the pension lump sum is tax free, the remainder is taxable at the taxpayer’s marginal rate. Tax is deducted under PAYE on the pension payment, but often the code used is a basic rate (BR) code or an emergency code, and does not take account of the personal allowance or other income received. Consequently, the tax deducted may not match the amount actually due.
Claiming a refund
Where too much tax has been deducted, the refund mechanism depends on the circumstances:
Where the lump sum is from a defined contribution scheme, form P50Z should be used if the pension pot has been used up but the taxpayer has no other income in the tax year. However, if the pension has used the pension pot, but the taxpayer has other income in the tax year, form P53Z should be used.
If the lump sum has not used up the pension pot, regular payments are not being taken from the pension and the pension provider cannot refund the overpaid tax, a refund can be claimed on form P55.
Where the overpayment has arisen in respect of a trivial commutation lump sum, the refund can be claimed via the self-assessment tax return. If the taxpayer does not need to complete a tax return, form P53 can be used instead.
Residence Nil Rate Band
From April 2017, a new nil rate band – the residence nil rate band (RNRB) – is available for inheritance tax purposes. It increases the amount that can be left free of inheritance tax when the estate includes a residence (or a share in a residence) that is left to a direct descendant.
When is it available
The RNRB is available to an estate where:
How much is it worth
The RNRB is set at £100,000 in 2017/18, increasing to £125,000 for 2018/19, £150,000 for 2019/20 and £175,000 for 2020/21.
It is available in addition to the normal inheritance tax nil rate band of £325,000. This means that by 2020/21 a couple can leave £1 million free of inheritance tax where the estate includes a residence worth at least £350,000, which is left to direct descendants.
As with the normal nil rate, any portion of the RNRB unused on the death of the first spouse or civil partner can be used on the death of the second spouse or civil partner. This is the case even if the first spouse or civil partner dies before 6 April 2017, as long as the second death occurs on or after this date.
To qualify, the residence (or share in a residence) must be left to a direct descendant. This is a lineal descendant (children, grandchildren, great grandchildren, etc.) or the spouse or civil partner of a lineal descendant. Also qualifying, are step-children, adopted children and foster children of the deceased, and a child for whom the deceased was appointed a guardian or special guardian while they are under 18.
To qualify for the RNRB, the residence must be included in the deceased’s estate and must have been lived in by the residence at some point. However, it does not have to be the main home.
An estate can also benefit from the RNRB where the deceased downsized after 7 July 2015.
Estates worth more than £2 million
Where the estate is worth more than £2 million, the RNRB is reduced by £1 for every £2 by which the value of the estate exceeds £2 million. For £2017/18 it is lost completely where the estate exceeds £2.2 million.
Personal Allowances and Tax Rates for 2017/18
The 2016 Autumn Statement confirmed that the personal allowance will be increased to £11,500 for 2017/18 (from its current level of £11,000 in 2016/17). It was also announced that the government intends to increase the allowance to £12,500 by the end of Parliament.
The basic rate limit is set to rise to £33,500 for 2017/18 (from £32,000 in 2016/17), which means that the 40% higher rate of tax will not kick in until an individual’s income reaches £45,000. The additional rate threshold, at which the 45% income tax rate is payable, will remain at £150,000 in 2017/18.
Transferring the personal allowance - Since April 2015 it has been possible for an individual, who is not liable to income tax or not liable above the basic rate for a tax year, to transfer part of their personal allowance to their spouse or civil partner, provided that the recipient of the transfer is not liable to income tax above the basic rate. The transferor's personal allowance will be reduced by the same amount.
For 2017/18, the amount that can be transferred will be £1,150, which means that the spouse or civil partner receiving the transferred allowance will be entitled to a reduced income tax liability of up to £230 for 2017/18.
One point to note here is that married couples or civil partnerships entitled to claim the married couple’s allowance are not entitled to make a transfer.
Married couple’s allowance - The married couple’s allowance may only be claimed if at least one of the parties to the marriage or civil partnership was born before 6 April 1935. The allowance is £8,355 for 2016/17 and will rise to £8,445 for 2017/18.
Blind person’s allowance - An allowance of £2,290 may be claimed in 2016/17 by a blind person, which is given in addition to the personal allowance, and reduces the taxpayer’s total income. The allowance is set to rise to £2,320 for 2017/18.
Note that a married blind person who cannot use all of the relief may transfer the unused part to the other spouse (or civil partner), whether the other spouse is blind or not. A married couple, or civil partners, both of whom qualify for relief, can each claim the allowance.
The allowance can only be claimed by someone who is registered as blind (but not partially sighted). A person may register as blind even if they are not totally without sight. HMRC will, by concession, allow the relief in the previous year if evidence of blindness had already been obtained by the end of it.
Savings income - The band of savings income that is subject to the 0% starting rate will remain at its current level of £5,000 for 2017/18.
The personal savings allowance (PSA), which took effect from 6 April 2016, allows basic rate taxpayers to receive up to £1,000, and higher rate taxpayers up to £500, of tax free savings savings income each year. The PSA is not available for additional rate taxpayers. The allowance is available in addition to the tax-advantages previously available to investors with individual savings accounts. The government has confirmed that the PSA will remain at its current level for 2017/18.
All individuals should try to fully utilise personal allowances and basic rate bands wherever possible. Unused allowances are not available to be carried forward, so it is important to ensure that they are used each tax year.
MTD - Extending the Cash Basis
The cash basis is an easier way for smaller businesses to work out their taxable profit. Under the cash basis it is only necessary to take account of money in and money out. By contrast, under the traditional accruals method, income and expenditure is recorded when invoiced or billed.
Prior to 6 April 2017, the cash basis was only available to unincorporated business and partnerships (as long as partners are individuals) whose turnover was less than the VAT threshold - £83,000 from 1 April 2016, increasing to £85,000 from 1 April 2017.
As part of the consultations on the Making Tax Digital reforms, the Government consulted on measures designed to simplify tax for unincorporated businesses. The measures included increasing the turnover threshold for the cash basis to make it accessible to more businesses. Following the consultation, it was announced that the threshold will be increased to £150,000 from 6 April 2017. Once in the cash basis, businesses can remain in it as long as their profits do not exceed the exit threshold. This is set at double the cash basis threshold and consequently increases to £300,000 from 6 April 2017.
Changes are also made to the cash basis rules, particularly in relation to the treatment of capital items. The general rule which prohibits a deduction for capital items in computing the profits of the business is replaced by a more limited disallowance for capital expenditure. Under the new rules, capital expenditure can be deducted in working out taxable profits unless the expenditure is incurred on or in relation to the acquisition of disposal of a business or in connection with the provision, alteration or disposal of:
• an asset that is not a depreciating asset (i.e. one with a useful life of more than 20 years);
• an asset that is not acquired or created for use on a continuing basis in the trade;
• a car;
• a non-qualifying intangible asset, including education and training; or
• a financial asset.
The new rules apply from 6 April 2017.
Extension to landlords
The availability of the cash basis is also extended to unincorporated property businesses from 6 April 2017 where the rental income of the property business (calculated according to cash basis rules) is not more than £150,000 a year. Where this is the case, the cash basis is the default basis and landlords within the cash basis threshold who want to use the accruals basis will now need to elect to do so.
Making money from your spare room
Under the rent-a-room scheme, it is possible to earn tax-free income from letting out a furnished room in your own home to a lodger. You can even use the scheme if you run a bed-and-breakfast or a guest house.
Rent-a-room is not available if the room is unfurnished, or if you let accommodation in a UK home while living abroad. The Government also intends to amend the rules so the scheme is not available to those who let accommodation via Airbnb and similar sites.
Automatic exemption - No tax is payable if the gross receipts from letting are less than the rent-a-room threshold, set at £7,500 a year from 6 April 2016. The exemption is automatic and does not need to be claimed. Even better, there is no need to tell HMRC about the income.
Gross receipts include rental income before expenses, any amounts received in respect of the provision of services, such as cleaning, meals or laundry, and any balancing charges.
Gross receipts exceed £7,500 - If your gross receipts from letting a furnished room in your home exceed the rent-a-room threshold of £7,500, you can still benefit from the scheme. However, whether it is beneficial to do so will depend on the level of the associated expenses.
Where receipts exceed £7,500, you have a choice as to how to work out the rental profit on which you pay tax. Under method A, you simply deduct the associated expenses and any capital allowances and pay tax on the actual profit. Under method B, you deduct the rent-a-room threshold and pay tax on the difference.
So, if expenses are less than the rent-a-room threshold, method B is beneficial, whereas if they exceed the threshold, method A is better.
Example - In 2016/17, Greg lets out two furnished rooms in his own home to lodgers. He receives rental income of £8,000. His associated expenses are £1,000. Under method A, he would pay tax on the actual profit of £7,000 (£8,000 - £1,000). Under method B, he would only pay tax on £500 (£8,000 - £7,500).
The rent-a-room scheme is beneficial. Greg opts into the scheme on his tax return and claims the allowance.
Losses - Rent-a-room will not be beneficial if you make a loss, even if your rental receipts are below the rent-a-room threshold. Under the rent-a-room scheme, you cannot create a loss. Losses can be carried forward and set against future rental income.
More than one landlord - If a house is owned jointly by two or more people, the rent-a-room limit is halved so each person has a tax-free allowance of £3,750. This is the case regardless of the number of people receiving rental income from letting rooms in the property – so tax-free rental income per property cannot exceed £7,500.
Opt in and out - You can choose each year whether it is beneficial to use the scheme and opt in and out on your tax return by the normal filing date of 31 January after the end of the tax year.
Annual investment allowance
The annual investment allowance (AIA) is a capital allowance that enables a business to write off the cost of most items of plant and machinery in full against profits in the year in which the expenditure is incurred.
The AIA is available for most items of plant and machinery. This includes capital items used in the business, such as equipment, machines, computers and vans. Also included are integral features, some fixtures, such as fitted kitchens, and also alterations to install plant and machinery and any costs of demolishing plant and machinery.
And what doesn’t?
The main exclusion is cars. However, 100% first year allowances are available for new and unused cars with CO2 emissions of 75g/km or less. Where first year allowances are not available, writing down allowances are given at the rate of 18% where the car is new and the CO2 emissions are between 75g/km and 130g/km, or where the car is second-hand and the CO2 emissions are below 130g/m. For cars (new and second-hand) where the CO2 emissions are 130g/km or more, writing down allowances are given at the special rate of 8%.
Amount of the AIA
For 12 month periods beginning on or after 1 January 2016, the AIA is set at £200,000. The allowance is adjusted proportionately for accounting periods of more or less than 12 months.
Once the allowance has been fully used up, any further capital expenditure on plant and machinery will attract writing down allowances only (unless it is of a type that qualifies for a first-year allowance).
The AIA must be claimed on the tax return.
Tailoring the claim
It may not always be beneficial to claim the AIA in full. It is not an all or nothing claim and the allowance can be claimed in respect of some but not all of the expenditure. Also, there is no requirement to claim it – it may be preferable to claim writing down allowances instead or not to make a claim for a particular year. Whether and to what extent a claim is beneficial will depend on the circumstances and there is no substitute for crunching the numbers.
Stuart prepares accounts to 31 March each year. In the year to December 2016, he spends £220,000 on new machinery. He also needs to buy four new vans, which will cost him £100,000. He was planning to buy the vans in March 2017, but on the advice of his accountant, he delays the purchase until April 2017.
For the year to 31 March 2017, Stuart claims the annual allowance of £200,000 and writing down allowance of £3,600 on the remaining £20,000 of expenditure on the machinery.
In the year to 31 March 2018, he claims the AIA on the vans (plus the writing down allowance on the pool value).
By delaying the expenditure on the vans until April 2017, he is able to obtain immediate relief in full for the expenditure.
Let property campaign
The Let Property Campaign is an initiative by HMRC to encourage those with undeclared rental income to come forward and to bring their tax affairs up to date. In return, HMRC will charge lower penalties than those levied on landlords who wait to be found out.
Who may benefit? - There are many reasons why a landlord may not have paid the correct amount of tax and in many cases the error will be an innocent one, arising because the landlord has not understood the rules. The campaign is available to individual landlords, including those who rent out one or more properties, undertake specialist lettings such as student lets, rent a room in their main home for more than the rent-a-room threshold of £7,500 a year, live abroad and rent out a property in the UK or live in the UK and rent out a property abroad, or who rent out a holiday home.
Taking part - Landlords who owe tax to HMRC and who wish to take part in the Let Property Campaign need to:
Notification - To notify, you only need to let HMRC know that you will be making a disclosure – at this stage, you do not have to provide details of omitted income and gains. That comes later. Notifications can be made by completing the DDS form (see www.gov.uk/government/publications/hm-revenue-and-customs-disclosure-service). HMRC will then issue a unique disclosure reference number (DRN) and payment reference number (PRN).
Disclosure and payment - Details of undeclared income and gains are provided at the disclosure stage – which can be made once a DRN has been received and must be made (together with payment of tax, interest, and penalties) within 90 days of the date on the notification acknowledgement letter.
Payment must be made at the same time as making the disclosure – this is a condition of the campaign (although in rare cases it may be possible to negotiate with HMRC to make the payment in instalments). Guidance on preparing the disclosure is available on the Gov.uk website. HMRC also produce a calculator which can be used to work out the tax, interest, and penalties due. The disclosure contains a declaration that the disclosure is correct and complete. The declaration should only be made if this is the case, as the consequences of making a false declaration may be severe – and could include a criminal prosecution.
Acceptance or rejection - Once a disclosure has been made, HMRC will acknowledge receipt. If everything is in order after checks have been made, it will be accepted. If HMRC are unable to accept the disclosure, they will write to the landlord to let them know. Disclosures are unlikely to be accepted if checks find them to be materially inaccurate or if, prior to notifying, HMRC have informed the landlord of their intention to open an enquiry or compliance check.
Disclosing in itself will not guarantee immunity from prosecution, particularly if serious tax problems are revealed. However, choosing to disclose will work in the landlord’s favour.
PAYE Settlement Agreements
PAYE Settlement Agreements
A PAYE settlement agreement (PSA) can be a useful tool. It enables an employer to agree with HMRC to meet the tax and associated National Insurance on the employee’s behalf on certain pre-agreed benefits and expenses.
What can be included?
A PSA is not suitable for all expenses and benefits and an item can only be included within a PSA if it qualifies on one of the following grounds:
the item is minor, for example, a small gift;
the item is provided irregularly, for example, taxable relocation expenses and benefits in excess of the tax-free limit; or
it is impracticable to work out the amount on which the employee should be taxed, for example, if the benefit is shared.
Some items cannot be included, even if they would qualify on grounds of irregularity or impracticality. The list of excluded items includes cash payments and high-value items, such as company cars.
The introduction of the exemption for trivial benefits means that most minor benefits will now be tax-fee, removing the need to include them in a PSA.
Impact of a PSA
Including an item in a PSA means that the employer does not need to tell HMRC about it on the employee’s P11D (or payroll it). The employee essentially receives the item tax and NIC-free – this can generate goodwill, particularly where the impact of the benefit, such as a gift, would be somewhat lessened by an associated tax bill. However, this all comes at a cost to the employer, as tax is paid at the employee’s marginal rate on the grossed up value of the benefit. The employer must also pay Class 1B NIC (at 13.8%), both on the taxable value of the benefits included in the PSA and on the tax paid on those benefits. The Class 1B charge is payable in place of any Class 1 or Class 1A liability that would otherwise arise.
ABC Ltd has a Summer Dinner for its ten employees at a cost of £300 per head. All the employees pay tax at 40%.
The tax payable by the company is £2,000 (40% (£300 x 100/60) x 10)).
The Class 1B NIC is £690 (13.8% ((10 x £300) + £2,000)).
The total amount that the employer must, therefore, pay to settle the PSA is £2,690.
Setting one up
Currently, the PSA must be agreed with HMRC before 6 July following the end of the tax year to which it relates (so by 6 July 2017 for 2016/17). This is the P11D deadline. However, the rules are to be simplified from 6 April 2018, removing the need to agree the PSA in advance.
The tax and NIC due under the PSA must be paid by 22 October after the end of the tax year where payment is made electronically, and by 19 October otherwise.
Tax on investments: opportunities
Some people are now able to have up to £17,000 of savings income tax-free. If they also receive dividends, up to £22,000 of their income could be tax free as a result of the £5,000 dividend allowance.
There are essentially three main categories of income, savings income: which includes interest on deposits in banks and building societies; dividends; and other income such as earnings, pensions and rent. Tax rates are applied to different types of income in a defined order and that order can make a difference to the amount of income tax payable. The order for taxing income is earning and other non-savings first, then savings income and finally dividends.
0% rate band
The 0% starting rate of tax operates in a very specific way but it can be valuable. The maximum 0% starting rate band is £5,000 and is given on your savings income if non-savings income is no more than the personal allowance of £11,000. However, as non-savings income is taxed first, it will not be available at all if your non-savings income exceeds the personal allowance plus the £5,000 starting rate band – that is a total of £16,000. So if you have earnings/pension income of up to £11,000, you could receive £5,000 of savings income free of income tax.
Dividend income does not affect your entitlement to the savings income starting rate band because it sits on top of the savings income and is taxed last under the rules set out above. So you might have £11,000 of earnings, £5,000 of savings income and thousands of pounds of dividend income, but you would still qualify for the nil starting rate band and that would mean your £5,000 of savings income would continue to be taxed at nil.
There is also the new savings allowance. For basic rate taxpayers, it means that £1,000 of savings income will be tax free. Basic rate taxpayers could therefore potentially receive tax-free savings income of £17,000 (i.e. £11,000 personal allowance plus £5,000 taxed at 0% starting rate plus £1,000 savings income allowance). For higher rate taxpayers the savings allowance is reduced to £500, so the value of the tax relief given by the allowance is the same whether you are a 20% taxpayer or a 40% taxpayer. But if you have enough income to push you into the 45% tax bracket – even by just a pound – you lose the allowance altogether.
Spread the income
Basic rate tax is no longer deducted at source from interest on bank and building society accounts, etc. In addition, from April this year, the first £5,000 of a person’s dividend income is tax free. So it makes sense to ensure that dividend income is spread around a family – where possible – to maximise the benefits. If a couple find that one of them has a relatively low level of earnings/pensions, the lower income partner should consider holding the assets that generate the savings income and dividends to qualify for the extra tax-free cashflow.
Children under 18 – and sometimes even older – generally have relatively low earnings or other non-savings income. Any tax-free savings or dividend income they receive could be really tax-efficient. But don’t forget, income that arises from a parental gift will be taxable on the parent if it comes to over £100 in a tax year.