Helpsheets ... continued 35 from homepage

The capital gains tax only or main residence exemption and the required ‘quality of occupation’.

The exemption from capital gains tax (CGT) for a dwelling that is the taxpayer’s ‘only or main residence’ is an important one for homeowners. The value of the exemption means that some may be tempted to claim it on properties that may not clearly fall within its parameters. We must therefore look at what is meant by an only or main residence.

In its online guidance headed ‘Work out tax relief when you sell your home’, under ‘What counts as your home?’ HMRC states: “You must have lived in your home as your only or main residence at some point while you owned it…”

Quality of occupation

As intimated by HMRC, the important factor to remember is that the exemption applies on the disposal of a dwelling-house or part of a dwellinghouse which is, or has at any time in their period of ownership been, the owner’s only or main residence.

Having a dwelling designated as the only or main residence throughout the period of ownership means that the gain accruing during that period of occupation will normally be exempt from CGT. It will also mean that certain periods (e.g., the last nine months) will be exempt even if the property is not then occupied.

Various court cases have determined that whether a property has been a residence depends on the quality of occupation. For example, in Moore v Thompson (1986) 61 TC 15 it was noted that “even occasional and short residence in a place can make that a residence; but the question [is] one of fact and degree”.

Court and tribunal cases

Someone who has been living in a property for only a short period before selling it may gain an insight from the following legal decisions:

 • Goodwin v Curtis (1998) 70 TC 478: The taxpayer lived in a farmhouse for 32 days and the court held this was only a temporary occupation, so the house was not his residence.

 • Harte v HMRC (TC01951): The short periods that the owner lived in a house did not qualify for main residence relief.

 • Moore v HMRC (TC02827): The court held that a house was not a long-term dwelling because it was occupied for only a few months between the owner separating from his wife and buying another house.

 • Iles v HMRC (TC03565): A flat occupied for only 25 days did not qualify.

The owners did not qualify for relief in the above cases, but in Dutton Forshaw v HMRC (TC04644), although a flat was occupied for only seven weeks, there was evidence that it would have been occupied for longer had he not had to live elsewhere, so relief was granted. The gain was also exempt in Bailey v HMRC (TC06085), where the owner had intended the property to be his main residence but had to move out after a short period because he could not get a mortgage and for health reasons.

More than just intention

We can see from these cases that, generally, for a property to be an only or main residence, there should be a degree of permanence or expectation of continuity. Mere intention to occupy a house for a longer period is unlikely to be sufficient without good evidence of other factors preventing this.

Further, the dwelling should be occupied as a residence. This will mean more than, say, simply sleeping at the property. The occupant should be able to cook and eat, bathe and spend leisure time there. If it is felt that a property’s status as a main residence might be questioned, evidence of this (e.g., bills and photographs of the property in use) may prove conclusive.

Practical tip

In its guidance, HMRC also states: “You don’t get tax relief if you bought it just to make a gain.” This is based on a less well-known part of the legislation (TCGA 1992, s 224(3)).

How will planning can help to reduce inheritance tax liabilities.

In April 2023, the National Will Register reported that 42% of adults in the UK had not made any provisions for their estate distribution in the event of death.

This leads to individuals having no control over how the estate is eventually distributed and increases the likelihood of a high inheritance tax (IHT) charge suffered by the beneficiaries.

To ensure that inheritance left behind is maximised with a minimum tax charge, a number of planning measures can be considered when a will is drawn up, including those outlined below.

Exempt beneficiaries

The primary advantage of a will is that the deceased’s estate is distributed according to the wishes of the individual. A popular measure is to leave the entire estate to the spouse or civil partner, as this could lead to the entire inheritance being exempt.

Charity organisations are generally also exempt beneficiaries. Not only is the asset donated to a charity treated as an exempt transfer on death, but if the transfer is more than equal to 10% of the estate’s baseline amount, the IHT charge goes down to 36% (from 40%).

The baseline amount is the estate’s value after adjusting for any exemptions and the nil-rate band (NRB) but before the charitable donation and residence nil-rate band (RNRB) are dealt with.

Exempt transfers

If the individual has children who are minors, they can set up a bare trust in their will. This results in the assets transferred to the trust being managed by the trustees until such time as the beneficiary comes of legal age, whereupon the rights to all the capital and any income from the asset pass to the beneficiary.

Not only is this an effective way of protecting the interests of the dependents, but transfers to a trust result in the asset being excluded from the death estate calculation, leading to a reduced IHT charge.

Life policies

Another option is setting up a life insurance policy in trust. This will exclude the policy payout from the death estate calculation, but the payout can still be made to the beneficiaries specified in the instructions to the trustees.

Any risk of lifetime IHT on the premiums paid can be reduced or avoided by using the annual exemption of £3,000, or by ensuring that the premiums satisfy the conditions to fall within the ‘normal expenditure out of income’ exemption (see IHTA 1984, 21(2)).

Reduction in tax charge

In the context of families, an effective double IHT charge can be avoided if the individual ‘skips’ a generation when specifying the beneficiaries in the will. Assets left to the children will lead to an initial tax charge that will repeat when these assets are then transferred to the next generation.

The family as a whole can potentially save tax if the initial inheritance is bequeathed directly to the grandchildren, leading to a single tax charge on the assets transferred.

Naming direct descendants (children or grandchildren) as the beneficiaries of the residence possessed by the individual will lead to the deduction of £175,000 RNRB in the taxable estate calculation. This will lead to a direct tax reduction of £70,000 (i.e., £175,000 x 40%) and may be doubled if the unused RNRB of a deceased spouse or civil partner is available.

Investing in unquoted or quoted shares and securities of trading companies controlled by the individual can lead business property relief, provided assets have been owned for at least two years. Depending upon the type of investment, the relief can reduce the value of the investments by 50% or 100%, thereby possibly eliminating or reducing the tax charge.

As long as the individual is of sound mind and not under any undue pressure, the document written, signed, dated and witnessed by two independent witnesses will be legally valid.

Practical tip

A will can easily be replaced by a new one; or a codicil could be drawn up to amend the current one.

The strict application of the rule for allowable expenses would require all expense payments to employees to be treated as employment income, leaving the employee to claim relief for the allowable part separately. In addition, an employer is required to notify HMRC of all expenses paid to an employee, even if the employee incurs the expense on the employer’s behalf.

However, invariably, those expenses will not be taxable on the employee, as being incurred ‘in the performance of the duties’ of the employment and ‘wholly, exclusively and necessarily incurred’.

Dispensations and payrolling

Pre-2016, if it was clear that a particular type of expense would not give rise to any tax liability on the employee (being allowable for tax purposes), the employer applied to HMRC for a ‘dispensation’.

Post-2016, a statutory exemption for reimbursed expenses was enacted such that those expenses were no longer taxable. This saved time applying for a dispensation and reporting those particular expenses on form P11D. Other taxable expenses still required submission of form P11D to HMRC and the tax thereon collected from the employee directly under self-assessment or, more usually, via the next year’s PAYE notice of coding.

Since 2016 and with HMRC’s agreement, employers have been able to choose to ‘informally’ payroll other non-reimbursed expenses and benefits-inkind (BIKs). Once registered, the employer adds the correct cash equivalent value of the payrolled expenses or BIK to the employee’s taxable pay, so that the tax and National Insurance contributions (NICs) for the employee are calculated, collected and paid in real-time spread throughout the tax year. HMRC should then exclude the value from the employee’s tax code. Not all benefits have to be payrolled; the employer can choose. Therefore, form P11Ds will only need to be submitted to declare benefits that cannot be ‘payrolled’ (e.g., accommodation and loans subject to interest at less than the official rate). Employers may still have a Class 1A NICs liability and therefore will still need to submit a form P11D(b).

Since 6 April 2023, HMRC no longer agrees to such ‘informal’ arrangements; instead, new employers or employers wanting to payroll expenses and BIKs for the first time must formalise arrangements. Registration is via HMRC’s online service, and is required by 6 April 2024 for the tax year 2024/25.

As a measure towards simplifying and modernising the tax system as of March 2023, HMRC no longer accepts paper P11D filings; all submissions must be made online. Further, the government has decided to mandate payrolling expenses or BIKs for all employers from April 2026.

Preparing for mandated payrolling of benefits

It is understandable why HMRC wishes to do away with form P11D, especially those still being submitted on paper; however, note that currently employers who payroll on a voluntary (informal) basis can exclude certain benefits or employees. Under mandation, payrolling of all benefits is required.

Although the proposed change is two years away, affected employers may wish to start considering how they will move to payrolling, the steps needed to get there by 2026 and any impact on their employees’ wages. For example, some employees may experience cashflow issues for 2026/27, where payrolling and PAYE code adjustments for prior years overlap, or where the taxable benefits have uncertain values. Explanation of the upcoming changes to all employees will be important.

Practical tip

It is yet to be determined how loans and accommodation benefits will be processed under payrolling. In addition, employers will need to consider how last-minute benefit changes for leavers will be processed before payroll cut-off. This is particularly important for benefits which usually carry a relatively high BIKs implication such as company cars.

The income tax charge for an employee on the benefit-in-kind of a car provided by the employer (referred to here as a ‘company’ car for convenience) can be potentially expensive. The benefit-inkind calculation is beyond the scope of this article but is broadly based on the car’s list price and carbon dioxide emissions.

What does ‘available’ mean?

The car benefit legislation applies if the car is made available to an employee (or member of the employee’s family or household), is made available by reason of the employment, and is available for the employee’s (or member’s) private use (ITEPA 2003, s 114(1)). Note that a key condition for a company car benefit-in-kind charge is that the car is available for the private use of the employee (or a member of the employee’s family or household). But what does ‘available’ mean? It is not defined in the legislation. HM Revenue and Customs (HMRC) guidance (in its Employment Income MI at EIM23300) states that the “ordinary dictionary meaning” is applied, being “at one’s disposal or capable of being used”. Furthermore, car benefit can only apply when the car is ‘made available’. HMRC considers (at EIM23200) this requires:

 • a decision by someone (normally the employer) having control of the car; and

 • that decision is conveyed to the employee.

Unavailable?

Circumstances where HMRC accepts that a car is unavailable to an employee include:

 • the car is physically incapable of being used (e.g., it has broken down and has not been repaired or is in the garage undergoing repairs); and

 • the employee is unable to gain access to the car because they do not have the car keys, or power or authority to direct the person who has the keys to hand them over or direct the person who has the keys to drive the employee to a location of the employee’s choice.

If the car was available both before and after the period in question, it must last at least 30 consecutive days to count as a period of unavailability (ITEPA 2003, s 143(2)). A car does not count as unavailable simply because (say) the employee was banned from driving or the car does not meet normal legal requirements. For example, in Norton & Anor v Revenue and Customs [2023] UKUT 48 (TCC), the appellant car dealership bought an expensive and rare Maserati and a rare high-performance Ford GT40. In 2016, HMRC considered that those cars had been made available to the first appellant (TN) as a benefit-in-kind. On appeal, the Upper Tribunal (UT) noted the company’s handbook provided that a company vehicle may not be used without the express permission of management and that any vehicle used must have road tax (or trade plates). The UT held that this prohibition was conditional; as with the legal obstacle to driving an untaxed car, it was not an effective restraint upon use where TN could comply with the company’s handbook by arranging for prior payment of road tax. The appellants’ appeals were dismissed (apart from one discovery assessment).

Practical tip

HMRC guidance (at EIM25175) confirms that a car does not count as unavailable simply because there is no road tax (or MOT certificate, or insurance); the car must be withdrawn so that the employee cannot access it.

A look at the workings of the self-billing system and how it can be helpful for businesses.

Usually, it’s the supplier who issues a VAT invoice; but in some circumstances, the customer prepares the invoice instead and gives the supplier a copy. This system is called ‘self-billing’. Any business can use this procedure, so long as certain conditions are met.

Self-billing is an agreement between businesses, which is most commonly found in the building and haulage industries where large businesses often have many smaller sub-contractors.

How do I start using self-billing?

There is no requirement to obtain HMRC’s prior approval before starting to operate self-billing. Any business can use self-billing provided the arrangements meet the legal conditions laid down in SI 1995/2518, reg 13(3) and in VAT Notice 700/62 (September 2014): Self Billing.

HMRC recommend that a self-billing agreement should be reviewed every 12 months. At the end of that period, the business will need to review the agreement so that it can provide HMRC with evidence to show that its supplier has agreed to accept the invoices raised on its behalf and remains VAT-registered.

However, if there is a business contract with the supplier that includes the self-billing agreement in its terms, it may not need to make a separate selfbilling agreement. In these circumstances, the selfbilling agreement would last until the end date of the contract, and it would not need to review the selfbilling agreement until the contract had expired.

Why use self-billing?

The advantages of self-billing are:

• accounting staff will be working with uniform purchase documentation; and
• it may make invoicing easier if the customer (rather than the supplier) determines the value of purchases after the goods have been delivered or the services supplied.

Before a business begins self-billing, it should consider the following points:

• It can only recover the VAT shown on selfbilled invoices if it meets the conditions explained in Notice 700/62.
• It may find it difficult to set up self billing arrangements with its suppliers, or burdensome to maintain them.
• It will be responsible for ensuring that the self-billed invoices it raises carry the correct VAT liability for the goods or services supplied to it.
• If it is raising electronic self-billed invoices to large numbers of suppliers, it will need to ensure that its accounting system is robust and accurate enough to handle the demands that will be placed on it.

How does it work?

If a business self-bills, it must:

• raise self-billed invoices for all transactions with the supplier named on the document for a period of up to 12 months or if it has a contract with its supplier, for the duration of that contract;
• complete self-billed documents showing the supplier’s name, address and VAT registration number, together with all the other details that make up a full VAT invoice;
• set up a new agreement if its supplier transfers its business as a going concern;
• keep the names, addresses and VAT registration numbers of the suppliers who have agreed to be self-billed, and be able to produce them for inspection by HMRC if required. HMRC recommends that a business reviews these details regularly so that it can be sure that it is only claiming VAT on invoices it has issued to suppliers who have valid VAT registration numbers.

A business must not issue self-billed VAT invoices:

• on behalf of suppliers who are not registered for VAT or who have deregistered; or
• to a supplier which changes its VAT registration number, until a new self-billing agreement is drawn up.

Practical tip

Self-billing can make administration easier and reduce disputes with suppliers over the value of supplies received.

Unincorporated trading businesses are going through their biggest tax change for a generation, with the switch to a tax year basis of assessment replacing the ‘basis period’ system for 2024/25. The tax year 2023/24 is a transition year with special rules. Further change is now on the way.

‘Cash basis’ to become the norm

Since 2013/14, smaller unincorporated trading businesses have had the option of preparing their tax computations on a cash basis (i.e., looking at when money is received or paid) rather than the normal accruals basis of accounting.

The cash basis has been expanded for such taxpayers (by FA 2024, Sch 10), including those in partnerships, from the tax year 2024/25. The changes will not apply to property businesses or those entities already excluded from the current cash basis regime (such as farmers and creative artists making a profits averaging election).

The cash basis will become the default method of calculating profits, with businesses able to opt to use the accruals basis instead if they wish. This reverses the current position for those eligible to use the cash basis. The accruals basis election (under new ITTOIA 2005, s 25C) has effect for the tax year for which it is made and every subsequent tax year until an election is made to move back into the cash basis.

Trading businesses can currently elect to use the cash basis if their turnover is below £150,000 p.a. and must leave the cash basis when their turnover exceeds £300,000. These restrictions are being removed completely.

Deductions for interest

Where the cash basis is used, there is currently a limit of £500 on the amount of interest that the business can deduct against the profits for the year.

This limit is being abolished, allowing tax relief for full interest costs if they are ‘wholly and exclusively’ for the purposes of the trade.

Trading losses

The current restrictions on the utilisation of losses under the cash basis, which only allow for the carry forward of losses against the first available profits of the same trade, will be removed. As under the accruals basis, losses will be available to be:

 • set against total income or gains of the same or previous year (ITA 2007, s 64); or

 • (for losses arising in the first four tax years of trade) carried back three years against total income (ITA 2007, s 72).

Capital allowances

Under the cash basis, most capital expenditure on plant and machinery is treated as an allowable expense. On transition to the cash basis, any pool that contains only items of capital that can be deducted in full in the year of expenditure under the cash basis will come to an end; a full deduction for the remaining pool balance is taken in the year of transition. Note that, due to the availability of the annual investment allowance, many businesses will not have such a balance on their pools.

However, if there are also items that had been purchased that are not cash-deductible (e.g., cars), they must remain in the pool on a just and reasonable basis.

Private use adjustments

The cash basis requires complex adjustments for capital assets used for both business and private purposes.

For example, a reduction in business use is treated as the sale of part of the asset at market value. Accounting for private use of capital assets is therefore more straightforward under the accruals basis.

Practical tip

This change will be significant for all unincorporated trading businesses, particularly as regards whether to elect to stay with accruals accounting in 2024/25. The transition between accruals and cash accounting avoids double counting (and omission) of income and expenses, so be careful when analysing the profits you want to be taxed on in 2024/25.

A look at which vehicle an investor should use.

When considering making an investment, two of the main issues are a good return and an exit strategy. As well as the performance of the investment itself, how to hold it is another matter. Personal income tax rates and those on subsequent capital gains tax (CGT) on disposal, and potentially inheritance tax (IHT), may make holding something personally an unattractive option.

So, what about trusts and companies?

What do they have in common?

By placing an asset into either vehicle, you are technically giving the asset away. A limited company is a separate legal entity from the individual investor; whilst that investor may own all the shares (and thus indirectly the asset), the income and returns belong to the company in the first instance.

By placing an asset into trust, you are giving it away – the beneficial ownership (which is the only type of ownership that matters in reality) has left the original owner. People who create trusts (‘settlors’) can benefit from their own trust, but for tax purposes they will generally be deemed to own the asset still. Trusts are created to give one’s descendants (usually) the use of the asset, whilst the legal ownership is held by trustees (which can consist of the settlor in their lifetime).

Limited companies

A limited company is a separate legal person that can hold assets for the owner, even though the owner technically gave them away, though the shares are still in the owner’s estate for IHT purposes. Unless the asset is cash or used in a trade, capital gains tax (CGT) will be payable when the asset goes into the company, possibly stamp duty land tax (SDLT) too (in England or Northern Ireland), if land or buildings are placed therein.

Once in the company, the corporation tax on any income or capital gain rate will never be more than 25% – and possibly only 19% if below £50,000 in a year. The owner will only suffer personal taxation if they withdraw that income – which they can control carefully by declaring dividends or taking a salary or officer’s fee. Income can therefore accumulate within the company with no personal tax if nothing is withdrawn.

Another useful aspect of being a separate entity is that the risk, inherent with investment, is limited (hence the name!). The owner would only ever lose what they invested; there would be no personal liability beyond that. Also, companies can last in perpetuity, so the company’s shares can be gifted and passed onto other family members ad infinitum.

Trusts

By placing an asset into trust, a settlor is giving away the legal ownership to a trustee to hold for someone else, or a group of people, to enjoy the beneficial ownership. The settlor can declare themselves trustees too, but they no longer hold the asset for themselves.

Depending on the type of trust, income tax rates range from a blanket basic rate (interest in possession trusts – where the beneficiary has a right to the asset’s income with tax paid by trustees as a credit) or a blanket additional rate for discretionary trusts from April 2024 (where the trustees have complete discretion over the capital and income and beneficiaries can reclaim a 45% tax credit on income distributions). Trustees are charged the higher rate of CGT (for 2023/24) (i.e., 18% on disposals, or 28% for residential properties and with only half the annual exemption of an individual). Depending on the circumstances, income tax and CGT burdens may render trusts prohibitive.

However, their great advantage over companies is that after seven years, the asset is out of the settlor’s personal estate for IHT purposes, but they still retain some control over the capital via the trustees. Trusts have their own nil-rate band for IHT purposes (currently £325,000), and will suffer no IHT consequences on values below that. There is no CGT on assets going into trust, nor SDLT if land or buildings are settled.

Practical tip

Whether a company or trust is used will depend upon the investor, their circumstances, their priorities, and for whom the investment is held. If IHT is an important factor, with long-term succession in mind, a trust might be better, but to manage a purely personal investment, the tax benefits of a company might be more attractive.