Take advantage of the Annual Investment Allowance
The annual investment allowance (AIA) allows businesses to obtain an immediate deduction against profits for capital expenditure up to the limit of the allowance.
Where a business prepares accounts using the more traditional accruals basis, they are not allowed to deduct capital expenditure in computing profits; instead relief for capital expenditure is given under the capital allowances system, whether in the form of the AIA, a first-year allowance or a writing down allowance.
Where a business prepares accounts using the cash basis, different rules apply to capital expenditure. Under the cash basis, capital expenditure can be deducted in computing profits unless the expenditure is of a type where such as deduction is prohibited, for example, as is the case for land and cars. Capital allowances are not in point (except for cars), and the annual investment allowance is not available.
What expenditure qualified for the AIA? - The AIA is available on most items of plant and machinery, the main exception being cars. The AIA is likewise not available on items owned for another reason before they were used in the business or on items given to the proprietor or the business.
The AIA can only be claimed for the period in which the item of plant or machinery was purchased. If the payment is due within four months, the date of purchase is when the contract is signed. Where payment is due more than four months later, the date is that of when the payment is due.
The claim is made in the company or self-assessment tax return, as appropriate.
How much is the AIA? - The allowance is set at £200,000 for 12-month periods. The allowance is reduced proportionately for accounting periods of less than 12 months (so, if the accounting period is nine months, the AIA limit for that period is £150,000 (9/12 x £200,000)).
If qualifying expenditure in the period is less than the AIA for that period, the AIA can be claimed for the full amount of the expenditure. However, if qualifying capital expenditure in the period is more than the AIA for that period, the AIA can only be claimed up to the amount of the allowance, with relief for the balance of the expenditure being given by means of writing down allowances.
Example 1 - Harry buys three vans costing £20,000 each in the year to 30 September 2018. The total expenditure of £60,000 is less than the AIA available for the period, so he is able to claim the AIA for the full amount of the expenditure.
Example 2 - George buys new machinery costing £300,000 in the year to 31 October 2018. The expenditure exceeds the available AIA for the period of £200,000. He is able to claim the AIA on the first £200,000 of the expenditure. Relief for the remaining £100,000 is given by way of writing down allowances.
How is relief given? - Relief is given as a deduction in computing profits for the period. Thus, claiming the AIA provides immediate 100% relief for capital expenditure.
What happens when the item is sold? - If the item is sold, the proceeds are added to the relevant pool. This may trigger a balancing charge.
Do we have to claim the AIA? - No – a claim is not mandatory. It will not always be beneficial to claim the AIA, for example if profits are insufficient or the item is likely to be sold after a short period triggering a balancing charge; it may be preferable to claim writing down allowances instead. The claim can be tailored to the business’ circumstances.
Overdrawn director’s loan accounts
In a personal or family company, the lines between the directors as individuals and the company are often blurred – the director may lend money to the company when cashflow is tight and the company may lend money to the director or pay personal bills on the director’s behalf. Transactions between the director and the company are tracked via the director’s account.
If the director’s account is overdrawn at the end of the accounting period (such that the director owes the company money) and the company is close, there are tax consequences to consider. Broadly, a close company is one that is controlled by five or fewer shareholders (participators).
Potential tax charge - A tax charge arises on the company if the director’s loan account is overdrawn at the end of the accounting period and remains overdrawn nine months and one day after the end of that accounting period. This is the date on which corporation tax for the accounting period is due. The overdrawn amount constitutes a loan to the director from the company
The tax charge (known as the ‘section 455 charge’ after the section of the Corporation Tax Act 2010 which imposes the charge) is 32.5% of the amount of the loan. The rate of section 455 tax is the same as the higher dividend rate.
The tax is paid with, but is not the same as, the corporation tax for the period.
Example - Nigel is the director of his personal company N Ltd. Accounts are prepared to 31 March each year.
On 31 March 2018, Nigel’s director’s loan account is overdrawn by £20,000. The account remains overdrawn on 1 January 2019 (the date on which corporation tax for the period is due).
The company must pay section 455 tax of £6,500 (£20,000 @ 32.5%).
Avoiding the charge - Even if the loan account was overdrawn at the end of the accounting period, the section 455 charge can be avoided if the loan is cleared by the corporation tax due date of nine months and one day after the end of the period. This can be done in various ways:
• the director can pay funds into the company to clear the loan;
• the company can declare a dividend to clear the loan balance;
• the director’s salary can be credited to the account to clear the loan balance;
• the company can pay a bonus to clear the loan balance.
It should be noted that with the exception of the director introducing funds into the company, the other options will trigger their own tax bills.
Clearing the loan may not always be the best option – it may be preferable to pay the section 455 tax instead. This will be the case if the tax on the dividend or bonus credited to the account to clear the loan is more than the section 455 tax.
A temporary tax - Section 455 tax is a temporary tax in that it is repayable nine months and one day after the end of the tax year in which the loan is cleared.
Anti-avoidance provisions - It should be noted that anti-avoidance rules apply to prevent the director clearing the loan shortly before the section 455 trigger date, only to re-borrow the funds shortly thereafter.
Working from home – claim tax relief for your expenses
An increasing number of employees work from home some or all of the time. Where they do so, they may be able to claim tax relief for the costs that they incur from working at home, regardless of whether their employer meets those costs.
Nature of expenses
Where an employee works from home, they can claim tax relief for the extra costs that are incurred as a result of working from home. This may include the cost of phone calls from the landline, the costs of electricity and gas to heat and light the workspace, power the computer, and the cost of cleaning the workspace.
Wholly, exclusively and necessarily incurred
The rules on claiming tax relief for employment are strict; relief is only available for those expenses incurred wholly, exclusively and necessarily in the performance of the duties of the employment. This is difficult test to meet.
Mixed business and private use
Tax relief is not available for expenses that have both a work and a private element. This may prevent a deduction for, say, the cost of broadband which is used for both by the family for private use and also for work use. Likewise, no deduction for rent would be permitted unless a room was used exclusively for work, in which case a proportionate amount could be claimed.
Voluntarily working at home
To be allowed to claim tax relief for additional expenses incurred as a result of working from home, the employee must be required to work from home, rather than doing so voluntarily. Under the letter of the law, the employee should be working at home because the duties of the employment demand it, rather than as a matter of personal choice. However, from a practical perspective, if the employee’s contract requires that the employee works from home, either part time or on specified days or when required to do by the needs of the job, tax relief should be forthcoming.
Employer meets the expenses
Many employees will be able to reclaim the additional costs of working from home from their employer. If the expenses are such that the employee would be eligible for tax relief, the tax exemption for paid and reimbursed expenses comes into play and the employer and employee can both ignore the reimbursement for tax purposes – there is no tax to pay and nothing to report.
Keep it simple
To avoid the need to keep records and work out the additional costs of working from home, employers can pay a tax-free allowance of £4 per week (£18 per month) to employees who work from home. The amount is the same regardless of whether the employee works at home one day per week or five days a week. It may be possible to pay a higher amount if this is agreed with HMRC.
Payment on account of capital gains tax
From 6 April 2020 new rules apply to residential property gains liable to capital gains tax and from that date, UK residents will be required to make a return and a payment on account of the capital gains tax due within 30 days of the date of disposal of sale. Where the individual is a non-UK resident, the new rules will apply from 6 April 2019.
What disposals are within the new rules?
For UK residents, the new rules apply to a disposal on or after 6 April 2020 on which a ‘residential property gain’ arises. Certain disposals are excluded, including those on a no gain/no loss basis (such as between spouses and civil partners). Further, they do not apply if there is no capital gains tax to pay on the gain, for example, if the gain is sheltered by private residence relief or the annual exempt amount, of if there are sufficient allowable losses available to set against the gain,
However, where a chargeable gain arises on which capital gains tax is payable, a return and a payment on account will be required.
The return must be made within 30 days of the disposal where it takes place on or after 6 April 2020. So, if a landlord completes on the disposal of a buy-to-let property on 25 April 2020 realising a capital gain, the landlord must make a return to HMRC within 30 days, i.e. by 25 May 2020. This is much earlier than at present – under the current rules, the landlord would have until the following 31 January to notify of a disposal on 25 April.
In the event that there are two or more disposals of residential property which give rise to gain and which complete on the same day, they must be dealt with on the same return.
Payment on account
The second tranche of the rules is the need to make a payment on account of the capital gains tax due on the residential sale. The window for this is also 30 days. Under the current rules, the capital gains tax is due by 31 January after the end of the tax year in which the gain arose.
The payment on account is calculated as if the tax year ended on the date of the disposal. This means that the annual exempt amount and any allowable losses are taken into account. It should be remembered that higher rates of capital gains tax apply to residential property gains – 18% rather than 10% for basic rate taxpayers and 28% rather than 20% for additional rate taxpayer.
Kelly has several buy-to-let properties. She sold one on 30 June 2020, realising a gain of £42,000. On 1 May 2020, she sold a painting realising a loss of £10,000. It is assumed that the annual exempt amount for 2020/21 remains at £12,000. Kelly is a higher rate taxpayer.
The chargeable gain on the sale of the property, after allowing for the annual exempt amount and the loss, is £30,000 (£42,000 - £12,000 - £10,000).
The payment on account is therefore £8,400 (£30,000 @ 28%). This must be paid by 30 July 2020.
The position for the year is determined at the end of the year once the self-assessment return has been submitted. Any balance due (for example if there have been non-residential property gains in the year) is due by 31 January after the end of the tax year. If the payment on account exceeds the final liability for the year, the excess will be refunded.
Paying mileage allowances tax-free
Employees are often required to make business journeys, either in their own or a company car. Most employers meet the cost of the fuel for business journeys, and it is possible to do this without triggering a tax liability.
Employees with a company car - Where an employee has a company car and meets the cost of fuel for private journeys, the employer can meet the cost tax-free as long as the payments made to the employee do not exceed the advisory fuel rates published by HMRC. These are updated quarterly.
Engine size Petrol . LPG
1400cc or less 12 pence per mile 8 pence per mile
1401 to 2000cc 15 pence per mile 10 pence per mile
Over 2000cc 22 pence per mile 15 pence per mile
Engine size Diesel
1600cc or less 10 pence per mile
1601cc to 2000cc 12 pence per mile
Over 2000cc 14 pence per mile
Although electricity is not regarded as a fuel for car fuel benefit purposes, an advisory electricity rate of 4 pence per mile was introduced from 1 September 2018.
If the employer pays more than the advisory rate the profits element is taxable and liable to Class 1 (employer and employee National Insurance contributions).
Example - In November 2018 Mark drives 260 business miles in his company car and claims a mileage allowance from his employer. Mark’s car is a petrol car with a 1600cc engine. As long as his employer does not pay more than 15 pence per mile, the payments are tax and NIC-free.
Employee’s own car - Where the employee uses their own car for business different, higher rates apply. These reflect the costs of insurance, servicing, depreciation, etc. which are borne by the employer when an employee has a company car.
Mileage payments are tax-free if the amount paid does not exceed the approved amount. This is simply the number of business miles for the year multiplied by appropriate approved mileage rate. The rates are shown in the table below.
Cars and vans 45p per mile for first 10,000 business miles in tax year
25p per miles for subsequent business mile
Motorbikes 24p per mile
Bicycles . 20p per mile
Example - Sarah drives 12,700 business miles in her own car in the tax year in question.
The approved amount is £5,175 ((10,000 miles @ 45p) + (2,700 miles @ 25p)).
As long the payments made to Sarah do not exceed £5,175, they are tax free.
For National Insurance purposes, the 45p rate for cars and vans is used for all business miles in the tax year, not just the first 10,000. In the above example, a mileage payment of up to £5,715 would be NIC-free (although anything over £5,175 would be taxable).
If the amount paid exceeds the approved amount, the excess must be reported to HMRC on the employee’s P11D or payrolled. If the employer pays less than the approved amount (or does not pay), the employee can claim tax relief for approved amount less anything paid by the employer.
The employer can also pay a tax-free passenger payment of 5p per mile for each passenger also making a business journey. This may encourage car-sharing.
As long as the payments do not exceed HMRC’s rates, they can be paid tax-free.
Spare time earnings may be tax-free
The new trading tax allowance for individuals of £1,000 applies for the 2017/18 tax year onwards. In broad terms, the allowance means that individuals with trading income below the annual threshold may not need to report it to HMRC and may not need to pay tax on it.
This allowance may be particularly useful to individuals with casual or small part time earnings from self-employment, for example, people working in the ‘gig economy’ (Deliveroo workers etc.), or small-scale self-employment such as online selling (maybe via eBay). It means that:
Practical implications of the allowance include:
Example – Income less than £1,000 - Graham enjoys picture-framing in his spare time, and he occasionally frames prints for family and friends for a small fee. During the 2018/19 tax year he received income of £700 from this source, and his expenditure on framing equipment amounted to £300. As Graham’s trading income is less than £1,000, he does not need to report it to HMRC and he does not need to pay tax or national insurance contributions (NICs) on it.
Example – Income exceeding £1,000 - Mary enjoys baking and makes celebration cakes to order in her spare time. In 2018/19, her income from cake sales is £1,500 and she incurred expenses of £300. As Mary’s expenditure is less than £1,000, she will be better off if she claims the trading allowance. Her taxable profit will be £500 (£1,500 less the trading allowance of £1,000).
More than one source of trading income
Although the trading allowance may work well for many small-scale traders, care must be taken where a person’s main source of income is from self-employment and their secondary income is from a completely separate small-scale business. HMRC will combine income from all trading and casual activities when considering the trading allowance. In this type of situation, where the allowance is claimed, the individual will not be able to claim for any expenditure, regardless of how many businesses they have and how much their total business expenses are.
Example – More than one income source - Mark is a self-employed car mechanic and has income of £30,000 in 2018/19. His business expenditure for the year is £10,000. In his spare time, Mark buys and sells old collectable car magazines via the internet. During 2018/19 he received net income of £1,000 from this source. If Mark claims the trading allowance against his part time income, he will be unable to claim expenses of £10,000 against his car mechanic income, and his taxable profit for the year will be £30,000. If he doesn’t claim the trading allowance, his taxable profit for the year will be just £21,000.
The CGT annual exemption – use it or lose it!
Capital gains tax (CGT) is normally paid when an item is either sold or given away. It is usually paid on profits made by selling various types of assets including properties (but generally not a main residence), stocks and shares, paintings, and other works of art, but it may also be payable in certain circumstances when a gift is made.
Some assets are exempt from CGT, including assets held in an Individual Savings Account (ISA), betting, lottery, or pools winnings, cash held in sterling, jewellery, antiques, and other personal effects that are individually worth £6,000 or less.
The most common method for minimising a liability to capital gains tax is to ensure that the annual exemption is fully utilised wherever possible. Whilst this is relatively straight-forward where only capital gains are in question, the computation can be slightly more complex where capital losses are also involved.
Most people are entitled to an annual CGT exemption, which means that no CGT is payable on gains up to that amount each year. For 2018/19, the limit is £11,700 and it will rise to £12,000 in 2019/20.
Eligible individuals each have their own exemption, so for jointly owned assets, there is scope for spouses and civil partners to exempt £23,400 worth of gains in 2018/19, rising to £24,000 in 2019/20.
However, the annual exemption is good only for the current tax year – you can’t carry it forwards or backwards - so if it isn’t used in a particular tax year, it will be lost. If you are planning to make a series of disposals, for example disposing of a portfolio of shares, you may want to consider the timing of sales between two or more tax years to use up as much and as many annual exemptions as possible.
Moving gains - Although inter-spouse/civil partner transfers are not technically exempt from CGT, the mechanics of computation are such that no CGT charge arises on such transfers. This treatment requires the spouses/civil partners to be married and living together. It should also be noted that if the spouse or partner later sells the asset, they may have to pay CGT at that time.
Example - Grace, a higher rate taxpayer, disposes of 500 shares in ABC plc in 2018/19 making a capital gain of £30,000. After deducting the annual exemption (£11,700), her chargeable gain is £18,300. As Grace is a higher rate taxpayer, she will pay CGT at the 20% rate, and £3,660 will be payable on the gain.
If prior to sale, Grace transferred half of the shares to her spouse Bob, a basic rate taxpayer, the capital gains tax situation would be significantly different. Both Grace and Bob will be able to use their annual CGT exemptions. They will each have a chargeable gain of £3,300 (after the annual exemption). Since Bob is a basic rate taxpayer, subject to his taxable income and chargeable gain being below the basic rate band, he will pay CGT at 10%.
Capital gains tax on the sale of the shares would be charged as follows:
Grace: Chargeable gain of £3,300 at 20% = £660
Bob: Chargeable gain of £3,300 at 10% = £330
Total CGT payable £990
Transferring half the shares to Bob potentially saves tax of £2,670.
Whilst it is permissible to organise your financial affairs in such a way as to minimise tax payable, strict anti-avoidance rules do exist.
Dividend income – How is it taxed in 2018/19?
The taxation of dividend income was reformed from 6 April 2016. Since that date, dividends are paid gross – there is no longer any associated tax credit – and all taxpayers receive a dividend allowance. Dividends not sheltered by the dividend allowance, or any available personal allowance, are taxed at the appropriate dividend rate of tax.
The ‘dividend allowance’ is available to all taxpayers, regardless of the rate at which they pay tax and unlike the savings allowance the amount of the dividend allowance is the same regardless of the tax bracket into which the recipient falls. Where the allowance is not otherwise utilised, it allows for tax-efficient extraction of profits from a family company.
Although termed an ‘allowance’ the dividend is really a zero-rate band, with dividends covered by the allowance being taxed at a rate of 0% (the ‘dividend nil rate’). Significantly, dividends covered by the allowance form part of band earnings.
The dividend allowance is set at £2,000 for 2018/19; a reduction of £3,000 from the £5,000 dividend allowance that applied for the two previous tax years. Assuming dividends of at least £5,000 are paid in 2017/18 and 2018/19, the reduction in the dividend tax allowance will increase the tax payable by £225 for basic rate taxpayers, by £975 for higher rate taxpayers and by £1,143 for additional rate taxpayers.
Top slice of income
Dividend income is treated as the top slice of income. This determines which band it falls in, and the rate at which it is taxed.
Dividend tax rates
Dividend income has its own tax rates. Dividend income is taxed at 7.5% (the ‘dividend ordinary rate’) to the extent that it falls in the basic rate band, at 32.5% (the ‘dividend higher rate’) to the extent that it falls in the higher rate band, and at 38.1% (the ‘dividend additional rate’) to the extent that it falls in the additional rate band.
For 2018/19, the basic rate band covers the first £34,500 of taxable income. The additional rate band applies to taxable income in excess of £150,000. The bands are UK wide in their application to dividend income - the Scottish income tax bands apply only to non-savings, non-dividend income.
If the personal allowance has not been fully used elsewhere, bearing in mind dividend income has the last call, any unused portion of the allowance can be set against dividend income. The personal allowance is £11,850 for 2018/19, although it is reduced by £1 for every £2 by which income exceeds £100,000.
In 2018/19, Frances receives a salary of £25,000 and dividends of £30,000. Her personal allowance of £11,850 and the first £13,150 of her basic rate band is used by her salary, on which she pays tax of £2,630.
The first £2,000 of her dividends is covered by the dividend allowance and is tax-free. However, the allowance uses up £2,000 of her basic rate band, leaving £19,350 available (£34,500 - £13,150 - £2,000). The next £19,350 of dividends is taxed at the dividend ordinary rate of 7.5% and the remaining £8,650 (£30,000 - £2000 - £19,350) is taxed at the dividend higher rate of 32.5%.
The tax payable on her dividends is therefore £4,262.50 ((£2,000 @ 0%) + (£19,350 @ 7.5%) + (£8,650 @ 32.5%)).
Having an alphabet share structure in a family company allows dividends to be paid to family members to take advantage of their dividend allowance to extract profits tax-free.
Make the most of your allowances
The tax system contains a number of allowances which enable individuals to enjoy income and gains tax free. It makes sense to take advantage of available allowances. The following are a selection of some of the allowances on offer.
Personal allowance - Individuals are entitled to a personal allowance each year, set at £11,850 for 2018/19, rising to £12,500 for 2019/20. However, not everyone can benefit from the allowance – once income reaches £100,000 it is reduced by £1 for every £2 by which income exceeds more than £100,000 until it is fully abated. Reducing income below £100,000 will help preserve the allowance.
The personal allowance is lost if it is not used in the tax year – it cannot be carried forward (in certain circumstances it is possible to transfer 10% to a spouse). To prevent the allowance being wasted, various steps can be taken including:
• paying dividends to use up the dividend allowance & any unused personal allowance;
• transferring income earning assets from a spouse to utilise the unused allowance;
• paying a bonus from a family or personal company;
• accelerating income so that it is received before the end of the tax year.
Marriage allowance - The marriage allowance can be beneficial to couples on lower incomes, particularly if one spouse or civil partner does not work. The marriage allowance allows one spouse or civil partner to transfer 10% of their personal allowance (as rounded up to the nearest £10) to their spouse or civil partner, as long as the recipient is not a higher or additional rate taxpayer. The marriage allowance is set at £1190 for 2018/19 and £1250 for 2019/20, saving couples tax of, respectively, £238 and £250. The allowance must be claimed: see www.gov.uk/apply-marriage-allowance.
Trading allowances - Individuals are able to earn income from self-employment of up to £1,000 tax-free and without the need to declare it to HMRC. Where income exceeds £1,000, the allowance can be claimed as a deduction from income in working out the taxable profit, rather than deducting actual costs. Where allowable expenses are less than £1,000, claiming the treading allowance instead will be beneficial.
Property allowance - A similar allowance exists for property income, allowing individuals to receive property income of up to £1,000 tax-free without the need to tell HMRC. Where property income is more than £1,000, the individual can deduct this rather than actual costs when computing profits for the property rental business if this is more beneficial.
Rent-a-room - The rent-a-room scheme allows individuals to earn up to £7,500 tax-free from letting a furnished room in their own home.
Savings allowance - Basic rate taxpayers are entitled to a savings allowance of £1,000, while higher rate taxpayers benefit from a savings allowance of £500. Additional rate taxpayers do not get a savings allowance. ISAs provide the opportunity to earn further savings income tax free.
Dividend allowance - All taxpayers regardless of the rate at which they pay tax are entitled to a dividend allowance, set at £2000 for both 2018/19 and 2019/20. This can be useful in extracting profits from a family company in a tax-efficient manner.
Capital gains tax annual exempt amount - Individuals can also realise tax-free capital gains up to the exempt amount each year – set at £11,700 for 2018/19 and at £12,000 for 2019/20. Spouses and civil partners have their own annual exempt amount. Time sales of assets to make best use of the annual exemption.
The above is only a small selection of the allowances available.
Tax-free investments using Premium Bonds
Premium Bonds (PBs) are an investment product issued and maintained by National Savings and Investments (NS&I), which in turn, is backed by HM Treasury. With a return rate comparable with regular savings accounts (currently 1.40%), it is not difficult to see why PBs remain one of Britain’s favourite ways to save – around 21 million people currently have almost £72 billion invested in PBs.
The Autumn Budget on 29 October 2018 included a range of enhancements to PBs, aiming to encourage a stronger savings habit and boost the opportunity for young people to save. The changes should also help make PBs more accessible to everyone.
Currently the minimum amount of PBs that can be purchased is £100 (or £50 by standing order). This minimum investment limit will be cut to £25 by the end of March 2019. This will apply to both one-off purchases and regular savings and should help make this product more accessible for a wider range of people.
In addition, the rules on who can purchase PBs are being changed. Currently, only parents and grandparents can buy PBs for children under 16. Although the timescale is yet to be confirmed, it has been announced that in future it will be permissible for other adults to buy PBs on behalf of children. The person purchasing the bonds for children will have to be over 16 and must nominate one of the child's parents or guardians to look after the bonds until the child turns 16.
Once held for a full month, bonds are included in a monthly draw and the investor stands a chance of winning a cash prize. The larger monthly prizes currently include two £1 million prizes, five £100,000 prizes and eleven £50,000 prizes.
The maximum Premium Bond holding is £50,000 and there do not appear to be any current plans to increase this limit.
Weighing up the pros and cons - Before making or increasing an investment in PBs, it may be worthwhile taking time to consider a few pros and cons, including:
• All investments are effectively government-backed, so all money put into PBs is secure.
• A married couple or civil partners may invest a sizeable £100,000 between them.
• There is a small chance that the holder could receive a high return on an investment.
• Any prizes won are free from income and capital gains tax.
• No regular interest payments are made on investments in PBs.
• Most people earn only a small amount as a percentage of the money they contribute.
• Unless the investor wins a big prize, their return is unlikely to beat inflation.
Electronic investments - NS&I has confirmed that it will be launching a new PB app, which is designed 'to make saving easier'. Following the success of the NS&I Premium Bonds prize checker app, the new app will allow customers to buy and manage their PBs as well as most other NS&I accounts.
Summary - Although Premium Bonds are not strictly an ‘investment’, they can be encashed at any time with the full amount of invested capital being returned - and in the meantime, any returns by way of ‘winnings’ will be tax-free. The odds on winning a prize in any one month are currently 24,500 to one, and there is a negligible chance of winning a million. With the full facts in mind - investing in PBs stills presents a half-decent option for many.
Lettings relief – benefit from it while you can
Lettings relief is a potentially valuable relief that is available to those who let out a property which has at some point been their only or main residence. However, the opportunity to benefit from the relief in its current form may be time limited – the Chancellor announced at the time of the 2018 Budget that the relief is to be curtailed from April 2020. From that date, it will apply only where the owner of the property is in shared occupancy with the tenant. The Government are to consult on the details.
Nature of the relief
Under the rules as they currently apply, lettings relief is available where a gain arises on the disposal of a property which
• at some time has been the individual’s only or main residence;
• during the period of ownership, all or part of the property has been let as residential accommodation; and
• a chargeable gains arises as a result of the letting.
The amount of the relief is the lowest of the following three amounts:
1. the amount of private residence relief;
2. £40,000; and
3. the amount of the chargeable gain arising as a result of the letting.
Tom owned his flat for 5 years, realising a gain on sale of £200,000. He lived in it as his main residence for the first two years and let it out for the last three.
The first two years qualify for private residence relief, as does the last 18 months, which benefits from the final period exemption. Private residence relief is therefore £140,000 (3.5/5 x £200,000).
The remainder of the gain (£60,000) is attributable to the letting.
Lettings relief is the lower of:
1. £140,000 (the amount of private residence relief);
2. £40,000; and
3. £60,000 (the amount attributable to the letting).
Tom claims lettings relief of £40,000. As a result, only £20,000 of the gain is taxable (£140,000 being sheltered by private residence relief and £40,000 by lettings relief).
All that is known so far is that lettings relief is to be curtailed from 6 April 2020. From the same date, the final period exemption is to be halved to nine months; this will impact on the private residence relief available.
If a disposal of a property currently qualifying for lettings relief is on the cards, it may be beneficial to sell before 6 April 2020 rather than afterwards.
Year-end tax planning tips
As the end of the 2018/19 tax year approaches, it is worthwhile taking time for some last-minute tax planning. Here are some simple tips that may save you money.
1. Preserve your personal allowance: the personal allowance is reduced by £1 for every £2 by which income exceeds £100,000. For 2018/19, the personal tax allowance is £11,850, meaning that it is lost entirely once income exceeds £123,700. Where income falls between £100,000 and £123,700, the effect of the taper means that the marginal rate of tax is a whopping 60%. Where income is over £100,000, consider making pension contributions or charitable donations to reduce income and preserve the personal allowance. Where this is an option, consider also deferring income until after 6 April 2019 to reduce 2018/19 income.
2. Claim the marriage allowance: the marriage allowance can save a couple tax of £238 in 2018/19. Where an individual is unable to utilise their personal allowance, they can make use of the marriage allowance to transfer 10% of their personal allowance (rounded up to the nearest £10) to their spouse or civil partner, as long as neither pay tax at the higher or additional rate. The marriage allowance must be claimed.
3. Pay dividends to use up the dividend allowance: family and personal companies with sufficient retained profits should consider paying dividends to shareholders who have not yet used up their dividend allowance for 2018/19. The dividend allowance is set at £2,000 and is available to all individuals, regardless of the rate at which they pay tax. The use of an alphabet share structure enables individuals to tailor dividend payments according to the individual’s circumstances.
4. Make pension contributions: tax relieved pension contributions can be made up to 100% of earnings, capped at the level of the annual allowance. The annual allowance is set at £40,000 for 2018/19 (subject to the reduction for high earners). Where the annual allowance is not used up in year, it can be carried forward for up to three years.
5. Transfer income-earning assets to a spouse or civil partner: where one spouse or civil partner has unused personal allowances or has not fully utilised their basic rate band, considering transferring income earning assets into their name to reduce the combined tax liability (but non-tax considerations such as loss of ownership should be taken into account).
6. Put assets in joint name prior to sale: spouses and civil partners can transfer assets between them at a value that gives rise to neither a gain nor a loss. This can be useful prior to selling an asset which will realise a gain in order to take advantage of both partners’ annual exempt amount for capital gains tax purposes.
7. Make gifts for inheritance tax purposes: individuals have an annual exemption for inheritance tax of £3,000, allowing them to make gifts free of inheritance tax each year. Where the allowance is not used, it can be carried forward to the next year, but is then lost.
Using the cash basis – is it for you?
The cash basis is a simpler way of working out taxable profits compared to the traditional accruals method. The cash basis takes account only of money in and money out – income is recognised when received and expenses are recognised when paid. By contrast, the accruals basis matches income and expenditure to the period to which it relates. Consequently, where the cash basis is used there is no need to recognise debtors, creditors, prepayments and accruals, as is the case under the accruals basis.
Ben is a self-employed plumber. He prepares accounts to 31 March each year. On 28 March 2019 he fits a new shower, invoicing the customer £600 on 29 March 2019. The customer pays the bill on 7 April 2019.
He purchased the shower for £400 on 25 March 2019, receiving an invoice from his supplier dated the same date. He pays the bill on 8 April 2019 after he has been paid by the customer.
On the cash basis, the income of £600 and expenditure of £400 fall in the year to 31 March 2020 – they are recognised, respectively, when received and paid (in April 2019). By contrast, under the accruals basis, the income and expenditure falls into the year to 31 March 2019 as this is when the work was done and invoiced.
Who can use the cash basis?
The cash basis is available to small self-employed businesses (such as sole traders and partnerships) whose turnover computed on the cash basis is less than £150,000. Once a trader has elected to use the cash basis, they can continue to do so until their turnover exceeds £300,000. These limits are doubled for universal credit claimants.
Limited companies and limited liability partnerships cannot use the cash basis.
Advantages of the cash basis
The main advantage of the cash basis is its simplicity – there are no complicated accounting concepts to get to grips with. Because income is not recognised until it is received, it means that tax is not payable for a period on money that was not actually received in that period. This also provides automatic relief for bad debts without having to claim it.
Not for everyone
Despite the advantageous associated with its simplicity, the cash basis is not for everyone. The cash basis may not be the right basis for you if:
• you want to claim a deduction for bank interest or charges of more than £500 (a £500 cap applies under the cash basis);
• your business is more complex, for example, you hold high levels of stock;
• your need to obtain finance – banks and other institutions often ask for accounts prepared on the accruals basis;
• you want to claim sideways loss relief (i.e. set a trading loss against your other income) – this is not permitted under the cash basis.
Need to elect
If the cash basis is for you, you need to elect for it to apply by ticking the relevant box in your self-assessment return.
Importance of registering for child benefit
Parents affected by the High-Income Child Benefit charge (HICBC) can be forgiven for thinking that there is no point is registering for child benefit if they are only going to have to give back everything they receive in the form of the tax.
The HICBC applies where the parent claiming child benefit or their partner has income of more than £50,000 a year. The charge is set at 1% of the child benefit received for each £100 by which income exceeds £50,000. So, for example, if income is £57,000, the charge is equal to 70% of the child benefit received (((£57,000 - £50,000)/£100) x 1%). Once income reaches £60,000, the charge is equal to 100% of the child benefit received. The amount of child benefit received depends on the number of children – it is payable at a rate of £20.70 per week for the first child and £13.70 per week for each subsequent child. Where both partners have income in excess of £50,000, the charge is levied on the partner with the higher income; this is often not the person who received the benefit.
Child benefit also confers state pension rights. Parents registered for child benefit in respect of a child under 12 automatically receive Class 3 National Insurance credits. Class 3 credits have the effect of making a year a qualifying year for state pension (but not contributory benefit) purposes. Thus, each year that a parent is registered for child benefit for a child under 12 provides one qualifying year for state benefit purposes. A person needs 35 qualifying years for the full single-tier state pension and at least ten to receive a reduced state pension.
Failing to register for child benefit can mean missing out on an automatic entitlement to at least 12 qualifying years; this is particularly important if the claimant is a stay-at-home parent or works part time but does not pay sufficient Class 1 or 2 contributions to make the year a qualifying year.
If receiving the money and having to pay it back is a worry, it needn’t be. It is possible to register for child benefit and to elect not to receive it. This can be done online or by contacting HMRC’s child benefit office. Parents can restart the payment of child benefit if circumstances change and the full HICBC no longer applies (for example if income dips below £60,000). Where income is between £50,000 and £60,000 it is worth claiming the benefit as the HICBC will be less than the benefit received. Ring-fencing the amount needed to pay the charge in a separate account will remove some of the worry over having the funds available to pay the tax.
As claims for child benefit can only be backdated three months, parents affected by the HICBC who have opted not to claim child benefit should do so without delay. Registering for child benefit will also ensure that the child receives a National Insurance number on reaching age 16.
Directors' NICs - the correct way to pay
The non-cumulative nature for calculating National Insurance Contributions (NICs) makes it possible to manipulate earnings to reduce the overall amount payable by taking advantage of the lower rate of primary Class 1 contributions payable once the upper earnings limit has been reached. For example, an employee who is paid £3,000 each month of the year will pay considerably more in primary contributions than someone who is paid £600 for 11 months and £29,400 for one month, even though their total earnings for the year are the same.
Company directors often have greater scope to influence the time and amount of payments they receive as earnings, which potentially gives them the ability to avoid primary Class 1 contribution liability by astute use of the earnings period rules. For this reason, therefore, special rules exist which provide that a director’s earnings period is a tax year, even if he or she is paid, say, monthly or leaves the company during the year.
The only exception to the above rule is where a director is first appointed during the course of a tax year. Where this happens, the earnings period is the period from the date of appointment to the end of the tax year, measured in weeks. The calculation of the earnings period includes the tax week of appointment, plus all remaining complete weeks in the tax year (i.e. week 53 is ignored for this purpose). This is known as the pro rata earnings period.
Frank is appointed to the board of directors of Widgets Ltd in week 44 of the tax year. The primary threshold and upper earnings limit are calculated by multiplying the weekly values by 9, because the earnings period starts with the week of appointment. This means that in 2018–19, Frank will pay NIC at the main rate of 12% on his director’s earnings between £1,458 (9 × £162) (the primary threshold) and £8,028 (9 × £892) (the upper earnings limit) and at the additional 2% rate on all earnings above £8,028 paid up to 5 April 2019.
The significance of being a company director is that an annual earnings period must be applied for NIC purposes. It is therefore important to be clear as to who the directors of a company actually are. For example, there may be persons within the organisation who are called directors, but for whom that is just an honorary title.
The definition of ‘director’ is wide and extends beyond someone registered as a director with Companies House. For these purposes a director means:
• in relation to a company whose affairs are managed by a board of directors or similar body, a member of that board or similar body;
• in relation to a company whose affairs are managed by a single director or similar person, that director or person; and
• any person in accordance with whose directions or instructions the company’s directors (as defined above) are accustomed to act.
However, a person giving advice in a professional capacity is not treated as a director.
Companies can save time and money by calculating directors’ NIC in a similar way to other employees. Instead of paying very high levels of NIC on a short-term basis, directors who are paid regularly (e.g. directors who have contracts of service with their companies) can spread their contributions evenly throughout the tax year. The earnings period remains an annual earnings period, but contributions are made on account throughout the tax year. A recalculation on an annual basis is performed when the last payment is made and any outstanding National Insurance due is paid at that time.
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Tax efficient remuneration using pension contributions
In the lead-up to the 2018 Autumn Budget there was plenty of speculation that the Chancellor would take the opportunity to cut tax relief on pension contributions, which currently costs the Government around £38 billion a year. In the event, this was not to be the case, and the generous tax relief provisions continue to apply in their current form for the foreseeable future.
Subject to certain conditions, tax relief is currently available on pension contributions at the highest rate of income tax paid, meaning that basic rate taxpayers get relief on contributions at 20%, higher rate taxpayers at 40%, and additional rate taxpayers at 45%. In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.
Pensions are a particularly tax-efficient form of savings since nearly everyone is entitled to receive relief on contributions up to an annual maximum regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider.
The total amount of tax relief available on pension contributions is calculated with reference to ‘relevant UK earnings’. If you own a limited company and you take both salary and dividends, the dividends do not count as ‘relevant UK earnings’. This means that if you take a small salary and a large dividend from your company, your pension tax relief limit will be low - tax charges will apply if the limit is exceeded.
If you want to increase your tax-free contributions limit, you could consider either increasing the amount of salary you take from the company (to increase your relevant UK earnings), or making the pension contribution directly from your company as an employer contribution. Making an employer contribution has additional advantages.
Qualifying employer contributions count as allowable business expenses, so the company could currently save up to 19% in corporation tax. In order to qualify for a deduction, the pension contributions should be ‘wholly and exclusively’ for the purposes of business. HMRC will check for evidence that this is the case, for example whether other employees are receiving comparable remuneration packages.
Another advantage of making a company contribution is that employer National Insurance Contributions will not be payable, saving the company up to 13.8% on the contribution amount.
This means that the company can potentially save up to 32.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you than paying personal pension contributions.
Benefits for employees - An employer-provided pension can be a significant benefit. Employers can make contributions to occupational or personal pension plans without triggering a tax charge. This can significantly enhance an employee’s remuneration package and is a tax efficient way of rewarding employees. It is also worth noting that, subject to a couple of conditions, a relatively new tax exemption may cover the first £500 worth of pension advice paid for by an employer. The exemption covers advice not only for pensions, but also on the general financial and tax issues relating to pensions.
Conclusion - Of course we do not know at present whether there will be any changes further down the line affecting tax relief on pension contributions. It is therefore strongly recommended that anyone considering topping up their pension pot should think about doing it sooner rather than later.
Private residence relief and the final period exemption
Private residence relief (also called main residence relief) is well known. It prevents a liability from capital gains tax arising on any gain on the disposal of a property which has been the taxpayer’s only or main residence throughout the period of ownership.
Where a property has not been the only or main residence throughout, the amount of private residence relief is reduced. It is available both for the period during which the property was the taxpayer’s only or main residence and, currently, the final 18 months of ownership (the ‘final period exemption’). Where the property has been let, the chargeable gain may be further reduced by lettings relief (but note this is to be curtailed).
The final period exemption is a useful exemption. It shelters the gain in the final period of ownership as long as the property has at some point during the period of ownership been the taxpayer’s only or main residence. It prevents a gain from arising if, for example, the taxpayer moves into a new home before the sale of the former home has completed. It also reduces the chargeable gain in respect of a let property that at some time has been the only or main residence. It is also a useful planning tool where a taxpayer has more than one residence.
The final period exemption
The final period exemption currently applies to the last 18 months of ownership. This is increased to 36 months where the taxpayer moves into care or is disabled.
However, at the time of the 2018 Budget it was announced that the final period exemption would be halved from 6 April 2020. Where residence is disposed of on or after that date, only the last nine months of ownership qualifies for the final period exemption. However, it is to remain at 36 months when the taxpayer moves into care or is disabled. The government are to consult on the change.
As the change does not come into effect until 6 April 2020, there is time to plan ahead. If a disposal is on the cards and the property has been the only or main residence at some point, but not throughout, the period of ownership, disposing of the property before that date shelters the last 18 months of ownership. Assuming that the legislation follows the same format as for the reduction in the final period exemption from 36 months to 18 months with effect from 6 April 2014, the critical date will be the date on which contracts are exchanged, which must be before 6 April 2020.
Jack purchased a house on 1 November 2014. Until 31 October 2018 he lived in it as his main residence. On 1 November 2018 he completed on the purchase of a flat, which he lived in during the week. As he was planning to sell the house, he elected for the flat to be his only or main residence from 1 November 2018.
If contracts on the sale of the house are exchanged before 6 April 2020, the last 18 months will be exempt, so the whole gain will qualify for PRR. However, if exchange occurs after 6 April 2020, only the final nine months will qualify for relief bringing some of the gain into charge.
Faster tax relief for capital expenditure
From January 2019, businesses considering investing more than £200,000 in plant and machinery may benefit from a change to the capital allowances rules, which should allow them to obtain tax relief at a much earlier time.
Broadly, business profits, after any adjustments for tax purposes (for example depreciation of fixed assets), are reduced by capital allowances to arrive at taxable profit. Since capital allowances are treated as a trading expense of a particular accounting period, they can potentially increase a loss, or turn a profit into a loss for tax purposes. This in turn, will have an impact on the amount of tax payable by a business - so where a business is considering expenditure on qualifying items, it may be beneficial to undertake some upfront planning.
The annual investment allowance (AIA) for capital allowances purposes is a 100% allowance for qualifying expenditure on machinery and plant. Put simply, this means that a business buying a piece of equipment that qualifies for the AIA can deduct 100% of the cost of that asset from the business’s profit before calculating how much tax is due on that profit.
VAT-registered businesses claim the AIA on the total cost of the asset less any VAT that can be reclaimed on that asset. Non-VAT-registered businesses can claim the AIA on the total cost of the asset.
The AIA was set at its current level of £200,000 from 1 January 2016, but it was announced in the 2018 Autumn Budget that, subject to enactment, the limit will be increased to £1,000,000 from January 2019. This measure is designed to stimulate business investment in the economy by providing an increased incentive for businesses to invest in plant or machinery. However, the increase will only be available for a limited time. Under current proposals, the AIA limit will revert to its current level from 1 January 2021. Businesses considering making significant investments in, say, the next five years, may wish to consider bringing their purchase forward, so as to benefit from the increased AIA limit and obtain immediate tax relief on their investment.
Where a business spends more than the annual AIA limit, any additional qualifying expenditure will still attract relief under the normal capital allowances regime, but this will result in relief being spread over several years, rather than in one go.
It is worth remembering that connected companies are only entitled to one AIA between them.
The legislation includes a series of transitional rules, which can be complex. It is worth seeking guidance where expenditure on qualifying AIA items is being considered and the business has a chargeable period that spans either of:
a. the operative date of the increase to £1,000,000 on 1 January 2019, or
b. the operative date of the reversion to £200,000 on 1 January 2021.
Subject to enactment, the temporary increase of the AIA should provide a welcome tax break. It will help boost the cash-flow of SME businesses seeking to invest in qualifying plant and machinery, by reducing liability to income (or corporation) tax directly in proportion to capital investment for the financial year in which the expenditure was made.
Give to charity to reduce your inheritance tax bill
Making gifts to charity can be an effective way to reduce the amount of inheritance tax (IHT) payable on your estate. Charitable gifts can work to reduce the IHT payable in two ways:
Lifetime gifts and bequests on death made to qualifying charities and registered housing associations are exempt from inheritance tax, provided that the gift was made outright.
Qualifying charities - A qualifying charity is one that meets the following conditions:
HMRC assumes that people appointed by charities are fit and proper persons unless they hold information to show otherwise.
Reducing the net estate - Where a gift is made to charity, the net estate is reduced by the amount of the gift. This can be effective in reducing the amount of inheritance tax payable where the value of the estate exceeds the nil rate band (currently £325,000), plus the residence nil rate band, where available.
The gift to charity reduces the net value of the estate.
Example - Elsie died on 1 December 2018 leaving an estate worth £475,000. She had never married and had no children. In her will she left £5,000 to a qualifying charity, and the balance of her estate to her niece Susan.
Her total estate of £475,000 is reduced by the charitable gift to £470,000. After deducting her nil rate band of £325,000, her taxable estate is £145,000 (on which IHT of £58,000 (£145,000 @ 40%) is payable. The charitable gift reduced the IHT payable on her estate by £2,000 (£5,000 @ 40%).
A reduced rate of IHT - Where the charitable gift is at least 10% of the net estate, the rate of inheritance tax is reduced from 40% to 36%. The net estate is the value of the estate after deducting any debts, liabilities, reliefs and exemptions and the nil rate band and residence nil rate band, as appropriate.
Example - Alfred died on 20 October 2018. He left an estate of £700,000. He had never married and had no children. In his will he left £40,000 to a qualifying charity, with the balance of his estate split equally between his three nephews.
The value of the estate in excess of the nil rate band is £375,000 (£700,000 - £325,000). This is the baseline amount. The qualifying donation to charity of £40,000 is more than 10% of this amount. Thus, the rate of inheritance tax on the taxable estate is reduced from 40% to 36%.
Consequently, the inheritance tax payable on Alfred’s estate is £120,600 (£335,000 @ 36%).
Complications - Where the residue of the estate is partially exempt, for example if it left to a surviving spouse or to a charity, and the Will contains other legacies are left free of tax, it is necessary to gross up such legacies when testing whether the 10% test is met. HMRC produce a calculator which can be used to check whether the test is met. It is available on the Gov.uk website at www.gov.uk/inheritance-tax-reduced-rate-calculator.
Has the dividend allowance cut hit home?
The dividend allowance, which was originally introduced from 6 April 2016, was cut from £5,000 a year to £2,000 from 6 April 2018. Fortunately, the tax rates on dividend income, above the allowance, remain at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers; and dividends received on shares held in an Individual Savings Account (ISA) continue to be tax free.
Many family-owned companies will allocate dividends towards the end of their financial year and/or the tax year, so for many people, it will be around March/April 2019 when the impact of the reduction hits home.
How much tax is paid on dividend income is determined by the amount of overall income an individual receives. This includes earnings, savings, dividend and non-dividend income. The dividend tax will primarily depend on which tax band the first £2,000 falls in.
For a basic rate tax payer – in 2018-19 this generally means someone with income less than £46,350 – the reduction in the dividend allowance from £5,000 to £2000 could lead to an increase in dividend tax of £225. Higher rate and additional rate tax payers may be worse off by £975 and £1,143 respectively.
It is worth noting that if dividend income falls between multiple tax bands, the figures specified above will be different.
Examples - Dividend income only - An individual who receives dividend income only of less than £2,000 in 2018/19 will have no tax to pay on their dividend income as it falls within the dividend nil rate band.
Basic rate taxpayer - An individual who has, say, dividend income of £10,000 and other taxable income of £8,000 in 2018/19, will pay tax as follows:
Total income £18,000
Less personal tax allowance (£11,850)
Taxable income £6,150
Dividend income taxable at nil rate (£2,000 x 0%) £0
Dividend income taxable at ordinary rate (£4,150 x 7.5%) £311.25
Total tax liability £311.25
Higher rate taxpayer - An individual who has, say, dividend income of £10,000 and non-dividend income of £40,000 in 2018/19 will pay tax as follows:
Total income £50,000
Less personal allowance (£11,850)
Taxable income £38,150
Non-dividend income at basic rate (£28,150 at 20%) £5,630
Dividend income taxable at dividend nil rate (£2,000 at 0%) £0
Dividend income at dividend ordinary rate (£4,350 at 7.5%) £365.25
Dividend income at dividend upper rate (£3,650 at 32.5%) £1,186.25
Total tax liability £7,181.50
In this example, personal allowances are deducted first against other income, leaving £28,150 of other income falling within the basic rate tax band (£34,500 for 2018/19). Dividend income falling within the basic rate tax band is £6,350 (£34,500 minus £28,150 used), with the remaining £3,650 falling above the basic rate limit. The dividend nil rate is allocated to the first £2,000 of dividend income, falling wholly within the basic rate limit, leaving £4,350 within the basic rate limit. The remaining £3,650 of dividend income is taxable at the dividend upper rate of 32.5%.
These examples show how complicated the allocation of various rate bands and tax rates can be, even in situations where a straight-forward dividend payment is made. Family business structures may be particularly vulnerable to the impact of the reduction in the dividend allowance, especially where multiple family members take dividends from the family company. A pre-dividend review may be beneficial, as family members could find themselves far worse off than first thought.
Employment allowance – have you claimed it?
The employment allowance is a National Insurance allowance which is available to qualifying employers. The allowance reduces employers’ (secondary) Class 1 National Insurance by up to the £3,000.
The allowance is set at £3,000 or, if lower, the employers’ secondary Class 1 bill for the tax year.
Who can claim?
Most employers, whether a company or an unincorporated business, are able to claim the employment allowance if they are paying employers’ Class 1 National Insurance contributions. However, if there is more than one PAYE scheme, a claim can only be made for one of them.
Who can’t claim?
The main exclusion is for companies, such as personal companies, where the sole employee is also a director. However, the allowance can be preserved if the sole employee is not also a director, or if the business has more than one employee.
Remember to claim
The employment allowance is not given automatically and must be claimed. This is done via the payroll software through RTI. Although, ideally, the claim should be made at the start of the tax year, it can be made at any time in the year.
Using the allowance
The allowance is set against the employers’ Class 1 National Insurance liability for the tax year until it is used up, reducing the amount that the employer needs to pay over to HMRC.
If the employers’ NIC bill for the year is less than £3,000, the unused amount cannot be carried forward or set against other liabilities. The allowance is capped at the employers’ Class 1 NIC bill for the year. It cannot be set against Class 1A or Class 1B liabilities, or against employees’ NIC.
Making good use of the £1000 property allowance
A new property allowance of £1,000 was introduced from 6 April 2017. The allowance means that individuals with income from property of less than £1,000 do not need to pay tax on that income. Further, they do not need to tell HMRC about it. The allowance is available in addition to the personal allowance.
Consequently, when filling in the 2017/18 self-assessment tax return, any income from property of less than £1,000 can be ignored – there is no need to complete the property pages.
If property income is more than £1000 the taxpayer has a choice as to how profits are worked out.
Option 1 - If and individual has income from property, the profits for the property business can be worked out by deducting the £1,000 allowance from the rental income, rather than deducting the actual expenses. This will be beneficial where actual expenses are less than £1,000. It can also reduce the need to keep a record of expenses.
Example - Tony lets out a flat for which he receives rental income of £600 per month. The flat is let throughout 2017/18 and Tony receives rental income for the year of £7,200.
His actual expenses for the year are £650.
Tony works out his profit for the year by deducting the £1,000 allowance from the rental income of £7,200 – leaving him with a taxable rental profit of £6,200.
This is a better result for Tony than deducting actual expenses as this would have resulted in a higher profit of £6,550.
Option 2 - Deducting the allowance will not always be the best option. If actual expenses are more than £1,000, deducting accrual expenses rather than the £1,000 allowance will result in a lower profits.
Example - Guy receives rental income of £500 a month from letting out a studio in 2017/18. His total rental income for the year is £6,000. His expenses for the year are £2,000. Deducting the actual expenses leaves a taxable profits of £4,000, whereas if he had instead claimed the allowance of £1,000, his taxable profit would have been £5,000.
Rent-a-room - It is not possible to claim both the £1000 property allowance and rent-a-room relief for the same income. Where rent-a-room relief is available, this will trump the property allowance.
However, if the individual also has another source of income which does not qualify for rent-a-room relief, the allowance can be claimed in respect of that.
Example - Mary lets out her spare room to a lodger as furnished accommodation, receiving rental income of £3,600 in 2017/18.
She also lives near a concert venue and rents out her drive for parking, receiving income of £810 in 2017/18.
She claims rent-a-room relief in respect of the let of her spare room and the property allowance in respect of the income received from letting out her drive.
Losses - Where a property business makes a loss, the loss can be carried forward and set against future profits from the same property business. If rental income is less than £1,000 but expenses exceed income (so that there is a loss), aside from the admin involved, it is better to claim the loss rather than take advantage of the allowance, as this may save tax in the future. However, if the amounts involved are very small, it may not be worth the hassle.
Budget changes to main residence relief
In his Budget on 29 October 2018, the Chancellor outlined a number of changes to main residence relief. The changes affect the final period exemption and the availability of lettings relief, which applies where a property which has at some time been an only or main residence, is let out.
Main residence exemption
No capital gains tax is payable on a gain arising on a property which throughout the period of the taxpayer’s ownership has been his or her only or main residence.
If the property has been an only or main residence at some point, the taxable gain is reduced. There are advantages of having occupied a property as a main residence at some point, even if it is not occupied as such for the whole period of ownership.
Final period exemption
Where a property has been occupied as the taxpayer’s only or main residence at some point, the final period of ownership is exempt from capital gains tax. The final period is currently 18 months (or 36 months where the taxpayer moves into care or is disabled). However, the Chancellor announced in the Budget that this is to be reduced to nine months from 6 April 2020 (but will remain at 36 months for disabled taxpayers and those moving into care).
Lettings relief is a valuable relief which reduces the chargeable gain when a property which has at some point been the taxpayer’s only or main residence is let out. Lettings relief is the lower of:
It isn’t clear yet what the curtailment is to look like – the Government is to consult on the detail in 2019. However, the Chancellor did reveal that post April 2020, it will only be available for ‘properties where the owner is in shared occupancy with the tenant’.
Impact on landlords
Occupying a property which is let as an only or main residence for a time is a valuable tax planning tool, opening up the possibility of the final period exemption and lettings relief to shelter the gain. The curtailment of these reliefs will affect landlords who wish to dispose of properties which have been let and which have also been lived in as an only or main residence.
However, the reliefs will remain available in their current form until April 2020, and this allows an element of planning. Disposing of the property before that date will preserve the reliefs in their existing, more generous, form. If a disposal of a let property is on the cards and it has not been an only or main residence, living in it as such prior to sale will help reduce the chargeable gain. There is no minimum period of occupation – the test is one of quality rather than quantity.
Does the marriage allowance apply to you?
The marriage allowance can be beneficial to married couples and civil partners on lower incomes. Claiming the marriage allowance is worth up to £238 in 2018/19 and £250 in 2019/20.
Nature of the allowance - The marriage allowance allows one spouse of civil partner to transfer 10% of their personal allowance (rounded up to the nearest £10) to their partner if they are unable to utilise the full allowance. However, it is only available where the recipient pays tax at the basic rate – couples where one party has no income and the other party is a higher or additional rate taxpayer cannot benefit from the allowance.
A personal can transfer 10% of their personal allowance to their spouse or civil partner if:
• they are married or in a civil partnership;
• they have not used up all of their personal allowance (set at £11,850 for 2018/19 and at £12,500 for 2019/20);
• and their partner pays tax at the basic rate.
For Scottish taxpayers, the marriage allowance is available if the recipient pays tax at the Scottish starter, basic or intermediate rates.
For 2018/19 the personal allowance is £11,850 and the marriage allowance is £1,190. For 2019/20, the personal allowance is £12,500 and the marriage allowance is £1,250.
Impact of the marriage allowance - Where the marriage allowance is claimed, the transferor’s personal allowance for the year is reduced by the amount of the allowance and the transferees personal allowance is increased by the amount of the allowance. Instead of that portion of the personal allowance being wasted, it is set against the transferee’s income, saving tax at the basic (or relevant Scottish) rate.
Example - Lauren is a stay-at-home mum. She has no income in either 2018/19 or 2019/20.
Her husband Joe works as an electrician earning £20,000 a year.
They claim the marriage allowance for both 2018/19 and 2019/20.
For 2018/19, the allowance is £1,190. By claiming the allowance, Lauren’s personal allowance is reduced to £10,660 (£11,850 - £1,190) and Joe’s personal allowance is increased to £13,040 (£11,850 + £1,190). Their combined personal allowances remain at £23,700, but utilising the marriage allowance to increase Joe’s allowance while reducing Lauren’s saves them £238 (£1,190 @ 20%) in tax.
If they claim the marriage allowance of £1,250 for 2019/20, Lauren’s personal allowance will fall to £11,250 (£12,500 - £1,250), while Joe’s personal allowance will increase to £13,750. Claiming the allowance will save them tax of £250 (£1,250 @ 20%) for 2019/20.
The allowance will still be effective where the partner with the lower income does not fully utilise the allowance, even if as a result, they have some tax to pay as a result of making the claim.
Example - In 2018/19, Max has income of £11,000 and his wife Amy has income of £17,000. Claiming the marriage allowance will reduce Max’s personal allowance to £10,660, meaning he will pay tax of £68 ((£11,000 - £10,660) @ 20%). However, Amy’s personal allowance will increase to £13,040, saving her tax of £238. As a couple they are £170 better off (£238 - £68).
How to claim - The marriage allowance can be claimed online: see www.gov.uk/apply-marriage-allowance. Once a claim is made it will apply automatically for subsequent tax years, unless cancelled or circumstances claim. A claim can be backdated to include any tax year since 5 April 2015 for which the qualifying conditions are met.
The allowance can also be claimed for the year in which one partner dies.
Impact on tax codes - Where the marriage allowance is claimed, both the transferor’s and transferee’s tax code are amended as a result. A code with a ‘M’ suffix denotes that the individual has received the marriage allowance, whereas a ‘N’ suffix denotes that the individual has transferred 10% of their personal allowance to their spouse or civil partner.
In the above example, Lauren would have a tax code of 1066N for 2018/19, while Joe’s tax code would be 1,304M. For 2019/20, Lauren’s tax code would be 1125N, while Joe’s tax code would be 1375M.
Letting a property as a furnished holiday let – is it worthwhile?
Where a property is located in a holiday region, consideration will be given as to whether to let as a holiday let or on a long term basis. There are tax differences to consider.
Furnished holiday lets - Special rules apply to furnished holiday lets, which provide a number of advantages compared to the tax regime applying to other rental businesses. They:
To benefit from these advantages, any furnished holiday lettings are treated separately from other lets and the profits must be worked out separately for each furnished holiday lettings business.
What counts as a furnished holiday let - The property must be in the UK or the EEA and must be let furnished; the furniture provided must be sufficient for normal occupation and visitors must be able to use the furniture. The property must also be commercially let.
UK and EEA lets are treated as different furnished holiday lettings businesses.
The furnished holiday letting must also pass various tests.
The occupancy tests - There are three occupancy tests and all must be met for the property to be treated as a furnished holiday letting for tax purposes.
The pattern of occupation condition - A let will not count as a furnished holiday letting if the total of all lettings that exceed 31 days is more than 155 days in the tax year.
The availability condition - The property must be available for letting as a furnished holiday accommodation for at least 210 days in the tax year.
The letting condition - The property must be commercially let as furnished holiday accommodation for at least 105 days in the tax year. Longer lets of more than 31 days are excluded, unless the let extends beyond 31 days due to unforeseen circumstances.
If the property fails the letting condition and is not let for 105 days in the tax year, there are two concessionary routes by which the property may still qualify – by making an averaging election or a period of grace election. The elections can be used together.
Averaging election - Where a landlord has more than one property which is let as furnished holiday accommodation, the condition is treated as met where an averaging election is made as long as on average each property is let for at least 105 days in the tax year. So, for example, if a landlord has 4 properties which in total were let on lets of less than 31 days for at least 420 days, the letting conditions is met under an averaging election, even if any individual property is let for less than 105 days. An averaging election must be made by the anniversary of 31 January following the end of the tax year, i.e. by 31 January 2021 for 2018/19.
Period of grace election - The second way in which the condition can be treated as met is by making a period of grace election where it can be shown that there was a genuine intention to let the property, but this did not happen due to unforeseen circumstances. The letting condition must have been met in the year before that for which the first period of grace election is made. A second period of grace election is permitted, but if a property does not meet the letting threshold in the fourth year after two consecutive period of grace elections, it will no longer qualify as a furnished holiday letting.
Losses can now only be carried forward and set against profits from the same furnished holiday lets business.
If the property does not qualify as an FHL, the normal tax rules for rental businesses apply.
Rent-a-room: Can you benefit?
Rent-a-room relief was introduced to encourage people to let spare rooms in their own home in order to increase the supply of low-cost rental accommodation. In return, the recipient is able to earn up to £7,500 a year tax-free.
Plans to restrict the relief so that it was only available where the occupation by the tenant overlapped with that of the landlord for at least one night have been abandoned – meaning that it is still possible to benefit from the relief for Airbnb-type lets where the property may be rented out for a short time in the landlord’s absence. It can also be used by those running a bed-and-breakfast.
To qualify the accommodation must be let furnished in the landlord’s home – it does not matter whether the home is owned or rented (but where rented, check that sub-letting is permitted). Where more than one person benefits from the income, the tax-free limit is halved, regardless of how many people share the income.
Rental income up to the rent-a-room limit is tax-free and does not need to be reported to HMRC. Where the rental income is more, the landlord has a choice:
• work out rental profit in the usual way by deducting expenses from the rental income;
• deduct the rent-a-room limit from the rental income and pay tax on the difference.
Using the rent-a-room limit will be beneficial where this is more than actual expenses. Where this route is taken, the relief should be claimed on the self-assessment tax return by ticking the appropriate box.
Case study 1
John is single and has a two-bedroom house. He lets out his spare room for £400 a month. He qualifies for rent-a-room relief. As his rental income of £4,800 is less than the rent-a-room limit, he does not need to declare it to HMRC.
Case study 2
Rob and Fiona are keen hikers and go away each weekend in the summer. They let out their Brighton flat via Airbnb while they are away. In 2018/19 they earned rental income £6,000, which they shared equally.
Rob and Fiona share the income and each have a rent-a-room limit of £3,750. As the rental income from letting out the flat (£3,000 each) is less than their rent-a-room limit, they are eligible for rent-a-room relief and do not need to report the income to HMRC.
Case study 3
Julie runs a B and B in Cheltenham. In 2018/19, she receives rental income of £12,000. Her expenses are £3,000.
As her rental income is more than £7,500 she must report it to HMRC. However, she can still benefit from rent-a-room relief by opting to work out her profit by deducting the rent-a-room limit of £7,500 rather than actual costs of £3,000. Thus, her taxable profit is only £4,500, rather than £9,000 (which would be the profit in the absence of rent-a-room relief). By claiming the relief, she will save tax of £900 if she is a basic rate taxpayer and tax of £1,800 if she is a higher rate taxpayer.
The importance of keeping good business records
To ensure that you pay the correct amount of tax and file correct tax returns with HMRC, it is vital that you keep complete and accurate records. This applies regardless of whether you are running a business as a sole trader or in partnership or operating a limited company.
Business records for the self-employed - The self-employed need to complete records of their business income and expenses. Where the business is operated in partnership, the responsibility of keeping records falls on the nominated partner.
It is important to keep records of:
• all sales and income
• all business expenses
• VAT records if the business is VAT registered
• PAYE if the business has employees
Records are essential to enable the business to work out its profit or less. They may also be needed to support the figures included on the tax return should HMRC ask questions.
Keeping records of expenses ensures that nothing is overlooked and tax relief can be claimed as appropriate. It is, however, important to retain proof of expenses, for example:
• bank statements
• sales invoices
• purchase invoices
• till rolls
• paying-in slips
Limited companies - Where the business is operated as a limited company, records of income and expenses must be kept as for a sole trader. It is important to record income, expenses, debts owed by and to the company, details of goods brought and sold, details of stock and records of stock takes, etc.
Records must also be kept about the company itself, including details:
• directors and shareholders
• minutes of votes and resolutions
• details of any charges on the company’s assets, debentures, indemnities
The company must also keep a register of persons with significant control. Broadly, anyone who has more than 25% of the voting rights, can appoint or remove a majority of directors or can influence or control the company.
How to keep records - While records can be kept manually, for many businesses it will soon become mandatory to keep digital records. Most businesses who are VAT registered and whose turnover is above the VAT registration threshold of £85,000 will need comply with the requirements of Making Tax Digital for VAT from the first VAT accounting period beginning on or after 1 April 2019. This will necessitate keeping certain VAT records digitally. Once MTD is introduced for income tax and corporation tax, it will be mandatory to keep digital business records for these purposes too.
Where there is no mandatory digital record keeping requirement to meet, records can be kept on paper, using software packages or on spreadsheets.
How long to keep records - Where a self-assessment tax return is filed before the deadline of 31 January after the end of the tax year to which it relates, records should be kept for at least 22 months of the end of the tax year (12 months from the filing deadline). Where the return is sent late, records should be retained for at least 15 months from the date the return was submitted.
Beware penalties - HMRC can charge penalties for the failure to keep accurate records. A company director can be fined £3,000 or disqualified for the failure to keep proper accounting records.
Simplified deductions where your business is based at home
Many small businesses are run from home. Where a business is run from home, household costs will be incurred which are attributable to the business. These may include additional costs of gas and electricity to provide heat and light to the home office or workshop and to power the computer or equipment, the costs of additional cleaning, and suchlike.
Expenses which are wholly and exclusively incurred for the purposes of the business can be deducted in working out the profits of the business. This will inevitably involve a certain amount of record keeping in order to identify what those expenses are. As far as household bills are concerned, it is permissible to deduct a proportion of the total household expenses in computing the business profits, with the apportionment being made on a ‘just and reasonable’ basis.
Claim simplified expenses instead
Businesses can save themselves the hassle of working out the proportion of household costs that relate to the business by instead using HMRC’s simplified expenses to claim a deduction for the costs of working from home. The deduction is a set amount per month, depending on the number of hours worked at home on the business each month. The hours include not only hours worked by the proprietor, but also hours worked in the home by any staff.
The monthly deduction is shown in the table below.
Hours of business use per month Monthly flat rate deduction
25 to 50 £10
51 to 100 £18
101 or more £26
The simplified expenses do not cover telephone and internet costs, in respect of which a separate deduction can be claimed.
Luke is self-employed as a graphic designer. He runs his business from his house.
He normally works at home for 120 hours a month, except in August when he works 20 hours and December when he works 60 hours. He is able to claim a deduction for the year of £288 (being 10 months @ £26, one month @ £10 and one month @ £18).
Actual or simplified?
While claiming a deduction based on simplified expenses is a lot less hassle, it may not necessarily give the greatest deduction. Where the trader thinks the time spent working out a deduction based on actual costs is worthwhile, only they can decide.
What makes a property a residence?
Capital gains tax private residence relief is available where a property is occupied as the taxpayer’s only or main residence. The question of what constitutes ‘occupation as a residence’ was considered recently by the Tribunal, with perhaps surprising results.
Quality not quantity
There is no minimum period of residence that is needed for private residence relief to be in point; rather it is necessary to look at the quality of the occupation. The term ‘residence’ is not defined in the legislation is relation to private residence relief, and thus takes its ordinary everyday meaning, i.e. the place where a person lives – their home.
Need to cook, eat, sleep and do laundry
In Hezi Yechiel TC06829 the Tribunal considered whether the taxpayer occupied the property in question as his main home. He had purchased it 2007 intending to make it a home for himself and his then fiancée. The property required a significant amount of work and planning permission was sought to extend the property. The taxpayer got married in 2008, but the couple separated in early 2011 having never lived in the property. Mr Yechiel moved into the property in April 2011. It was advertised for rent or sale in October 2011 and sold in August 2012. Mr Yechiel moved in with his parents, who lived 15 minutes away, in December 2011.
A builder who had been engaged by Mr Yechiel to work on the property had ‘kitted up’ a bedroom and kitchen. Mr Yechiel slept in the property every night from April 2011 to July 2011 and was present at the property every morning during that period. He brought a bed and a side table for the property. While he used the kitchen for basics, he did not cook there – he mainly ate at his parents, having a takeaway if he ate at the property. His mother did his laundry.
While the Tribunal accepted that Mr Yechiel occupied the property, they found that his occupation lacked the sufficient quality to constitute residence – it did not have the necessary degree of permanence. Mr Yechiels intentions were of importance, and he had no clear plan – he moved into the property as he needed somewhere to live, with the intention of living there for a period of time.
The Tribunal considered not only his intention, but also what he did and did not do in the property. He slept there, but spent a considerable part of the day at his parents’ home. He did not cook at the property and his laundry was done by his mother.
The Tribunal considered ‘that to have a quality of residence, the occupation of the house should constitute not only sleeping, but also periods of ‘’living’’, being cooking, eating a meal sitting down, and generally spending some periods of leisure there’. They found that Mr Yechiel’s occupation lacked sufficient quality to be considered a period of residence, and as such he was not entitled to private residence relief and lettings relief.
The moral of the story
Merely sleeping at a property is not enough to qualify it as a ‘residence’ – you must also do your laundry and cook there to satisfy the Tribunal.
Amending your tax return
The deadline for filing the 2017/18 self-assessment tax return of 31 January 2019 has now passed. You filed your return on time and paid the tax that you thought was due, but you know realise that you have made a mistake. Is it too late to correct it, and if not, how do you go about it?
A tax return can be amended once it is filed – but you only have 12 months from the filing deadline in which to file an amended return. This means that you have until 31 January 2020 to file an amended 2016/17 return where it was filed online. However, if you have found a mistake in your return for 2017/18 or an earlier year, it is no longer possible to file an amended return. Instead, you will need to write to HMRC telling them about the error and advising them of the correct figures.
Correcting the return
If you are in still in time to file an amended return (for example, you want to amend your 2017/18 tax return), the mechanism for amending the return depends on whether you filed online or whether you filed a paper return.
If you filed your return online, you can amend your return online too. To do this, you need to log into your HMRC online account and select the self-assessment from the home ‘at a glance’ page. Under the heading of ‘returns’ it will tell you that you have completed your self-assessment return for the 2017/18 tax year, and provide a number of options, including an option to ‘Amend Self-Assessment return for year 2017 to 2018’. Selecting this option, provides a number of options for amending the already-submitted return, asking the taxpayer if they would like to:
• add a new section to your submitted return;
• amend figures already submitted;
• delete a section from your submitted return;
• add/delete a section and/or amend a figure; or
• return to tax return options.
From there it is simply a case of selecting the appropriate option, amending the return to show the correct figures and filing the amended return.
If the return was filed using a commercial software package, check whether is facilitates the filing of amended returns. If this is not possible, contact HMRC.
Where a paper return has been filed, the 12-month amendment window runs to 31 October after the filing deadline (as an earlier deadline applies to paper returns). To amend a paper return, download a new return, complete it correctly, and send it to HMRC.
Pay more tax or claim a refund
Amending your tax return will also change the amount of tax you owe. If it is more, you will need to pay this, plus interest (which runs from the due date of 31 January after the end of the tax year). If your tax bill goes down as a result of the amendment, you can claim a refund – but remember you only have four years from the end of the tax year to which it relates in which to do so.