Entrepreneur’s relief – the basics
Entrepreneurs’ relief is intended to reduce the rate of capital gains tax to a flat rate of 10% on certain qualifying business disposals. Certain aspects of the relief have recently changed.
A qualifying business disposal must include a material disposal of business assets. For these purposes, a disposal of business assets is a disposal of:
a) the whole or part of a business;
b) of (or of interests in) one or more assets in use, at the time at which the business ceases to be carried on, for the purposes of the business; or
c) one or more assets consisting of (or of interests in) shares or securities of a company.
Formerly, to qualify for relief, the assets or shares had to be held by the individual for at least 12 months to the date of disposal. However, the length of ownership condition has recently been increased such that, for disposals made on and after 6 April 2019, the taxpayer will have to have held the assets or shares for at least 24 months for the relief to apply.
Shareholders - In order for a shareholder to claim on the disposal of shares, the following conditions generally need to be met:
a) the company in which those shares are held must be the individual’s personal company;
b) the shareholder must be an employee or officer, or of a company in the same group; and
c) the company must be a trading company or a holding company of a trading group.
All three of these conditions must be met for the whole of a 24-month period (for disposals from 6 April 2019) that ends with the disposal of the shares, cessation of the trade, or the company leaving the trading group and not becoming a member of another trading group.
Personal company - A company is the personal company of the individual at any time when all of the following conditions apply:
1. the individual holds at least 5% of the ordinary share capital of the company;
2. the individual can exercise at least 5% of the voting rights on the ordinary share capital;
3. the individual is entitled to at least 5% of the profits available for distribution; and
4. the individual would be entitled to at least 5% of the assets available on a winding up.
Conditions numbered 3, and 4 were added for disposals made on and after 29 October 2018. However, the way the law was drafted would have made it difficult for some taxpayers to determine whether those conditions had been met for the full qualifying period. Therefore, the original draft legislation was modified before enactment to include an alternative test to both those, namely that in the event of a disposal of the whole of the ordinary share capital of the company, the individual would be beneficially entitled to at least 5% of the proceeds.
Shareholding threshold - Where an individual’s shareholding has fallen below 5%, as a result of a fundraising event involving the issue of additional shares which takes place on or after 6 April 2019. The equity funding share issue must be made wholly for cash and be made for commercial reasons, and not as part of arrangements driven by tax avoidance.
In these circumstances the shareholder will be entitled to the relief which would otherwise be lost, by making one or both of the following elections:
• claim the relief on a deemed sale and reacquisition at market value at the point immediately before the additional shares are issued which removes the personal company qualification; or
• defer taxation of the gain made on this deemed sale until the actual disposal of the shares.
The second election will generally be required as the taxpayer will make a deemed sale with no sale proceeds with which to pay the CGT due.
Beware disposals to family members – the ‘market value’ rule
At first sight, the calculation of a capital gain or loss on the disposal of an asset is relatively straightforward – simply the difference between the amount received for the sale of that asset and the cost of acquiring (and, where relevant) enhancing it, allowing for the incidental costs of acquisition and disposal. However, as with all rules there are exceptions, and particular care needs to be taken when disposing of an asset to other family members.
Spouses and civil partners - The actual consideration, if any, is ignored for transfers of assets between spouses and civil partners. Instead, the consideration is deemed to be that which gives rise to neither a gain nor a loss. The effect of this rule, which is very useful for tax planning purposes, is that the transferee simply assumes the transferors base cost – and the transferor has no capital gain to worry about.
Other connected persons - While the no gain/no loss rules for transfers between spouses and civil partners is useful from a tax perspective, the same cannot be said to be true for market value rule that applies to transfers between connected persons. Where two persons are connected, the actual consideration, if any, is ignored and instead the market value of the asset at the time of the transfer is used to work out any capital gain or loss.
The market value of an asset is the value that asset might reasonably be expected to fetch on sale in the open market.
Who are connected persons? - A person is connected with an individual if that person is:
• the person’s spouse or civil partner;
• a relative of the individual;
• the spouse of civil partner of a relative of the individual;
• the relative of the individual’s spouse or civil partner;
• the spouse or civil partner of a relative of the individual’s spouse or civil partner.
For these purposes, a relative is a brother, sister or ancestor or lineal descendant. Fortunately, the term 'relative' in this context does not embrace all family relationships and excludes, for example, nephews, nieces, aunts, uncles and cousins (and thus the actual consideration is used in calculating any capital gain).
As noted above, the deemed market value rule does not apply to transfers between spouses and civil partners (to which the no gain/no loss rules applies), but it catches those to children, grandchildren, parents, grandparents, siblings – and also to their spouses and civil partners.
Example 1 - Barbara has had a flat for many years which she has let out, while living in the family home. Her granddaughter Sophie has recently graduated and started work and is struggling to get on the property ladder. To help Sophie, Barbara sells the flat to her for £150,000. At the time of the sale it is worth £200,000.
As Barbara and Sophie are connected persons, the market value of £200,000 is used to work out Barbara’s capital gain rather than the actual consideration of £150,000. If she is unaware of this, the gain will be higher than expected (by £14,000 if Barbara basic rate band has been utilised), and Barbara may find that she is short of funds to pay the tax.
This problem may be exacerbated where the asset is gifted – the gain will be calculated by reference to market value, but there will be no actual consideration from which to pay the tax.
Annual tax on enveloped dwellings
The annual tax on enveloped dwellings (ATED) is a tax that applies, in the main, to companies owning residential property which is valued at more than £500,000.
The tax only applies on properties that are classed as ‘dwellings’. This is a property where all or part of it is used as a residence, for example a house or a flat. The ‘dwelling’ also includes the property's gardens or grounds. However, properties such as hotels, guest houses, boarding school accommodation and student halls of residence fall outside the definition of a ‘dwelling’, and thus outside the scope of the tax.
Valuing the property
The tax only applies to dwellings with a value of at least £500,000. The amount of the charge depends on the value of the dwelling. Therefore, it is necessary to know the value of any residential property owned wholly or partly by a company (or a partnership with at least one corporate partner). The key date is the valuation date. From 1 April 2018 the valuation date is 1 April 2017. If the property was acquired after 1 April 2017, the value is the date of acquisition.
The valuation is an open market valuation.
How much is the charge?
The charge is an annual charge payable for the period from 1 April to the following 31 March.
The chargeable amount for 1 April 2019 to 31 March 2020 is shown in the following table.
Property value Annual charge
More than £500,000 up to £1 million £3,650
More than £1 million up to £2 million £7,400
More than £2 million up to £5 million £24,800
More than £5 million up to £10 million £57,900
More than £10 million up to £20 million £116,100
More than £20 million £232,350
Payment and returns
An ATED return must be filed by 30 April each year. The return should be filed using HMRC’s ATED online service. An agent can be appointed to file the return on the company’s behalf.
The tax must also be paid by 30 April.
Partner note: FA 2013, Pt. 3 (ss. 94—174, Sch. 33 – 35).
Give from income to save inheritance tax
Within a family scenario, there are many situations in which one family member may make a gift to other family members. However, the way in which gifts are funded and made can make a significant difference to the way in which they are treated for inheritance tax purposes.
Not all gifts are equal - There is no inheritance tax to pay on gifts between spouses and civil partners. A person can make as many lifetime gifts to their spouse or civil partner as they wish (as long as they live in the UK permanently). There is no cap on the value of the gifts either.
Other gifts may escape inheritance tax if they are covered by an exemption. This may be the annual exemption (set at £3,000 per tax year), or a specific exemption such as that for gifts on the occasion of a marriage or civil partnership or the exemption for ‘gifts out of income’.
Gifts that are not covered by an exemption will counts towards the estate for inheritance tax purposes and, if the donor fails to survive for at least seven years from the date on which the gift was made, may suffer an inheritance tax bill if the nil rate band (currently £325,000) has been used up.
Gifts from income - The exemption for ‘normal expenditure out of income’ applies where the gift:
• formed part of the taxpayer’s normal expenditure;
• was made out of income; and
• left the transferor with enough income for them to maintain their normal standard of living.
All of the conditions must be met for the exemption to apply. Where it does, there is no requirement for the donor to survive seven years to take the gift out the IHT net.
What counts as ‘normal’ expenditure? - For the purposes of the exemption, HMRC interpret ‘normal’ as being normal for the transferor, rather than normal for the ‘average person’.
To meet this condition it is sensible to establish a regular pattern of giving –for example, by setting up a standing order to give a regular monthly sum to the recipient. It is also possible that a single gift may qualify for the exemption if the intention is for it to be the first of a series of gifts, and this can be demonstrated. Likewise, regular gifts may not qualify if they are not made from income.
In deciding whether a gift constitutes normal expenditure from income, HMRC will consider a number of factors, including:
• the frequency of the gift;
• the amount;
• the identity of the recipient; and
• the reason for the gift.
The amount of the gift is an important factor – to meet the test the gifts must be similar in amount, although they do not have to be identical. Where the gift is made by reference to a source of income that is variable the amount of the gift may vary without jeopardising the exemption.
Gifts will normally be in the form of money to the recipient, or a payment on the recipient’s behalf, such as school fees or a mortgage. The reason for making a gift may indicate whether it is made habitually – for example, a grandparent may makes a gift to a grandchild at the start of each university term to help with living costs. It is also important that having made the gift, the donor has sufficient income left to maintain his or her lifestyle.
When making gifts from income, check that they may meet the conditions to get the exemption.
When does the diesel supplement apply?
Employees with a company car are taxed – often quite heavily – for the privilege. The charge is on the benefit which the employee derives from being able to use their company car for private journeys.
The amount charged to tax is a percentage of the ‘list price’ of the car – known as the 'appropriate percentage'. The percentage depends on the level of the car’s CO2 emissions. A supplement applies to diesel cars. For 2019/20, as for 2018/19, the supplement is set at 4%. However, the application of the diesel supplement cannot take the percentage of the price charged to tax above the maximum charge of 37%. Consequently, the diesel supplement has no practical effect where emissions are 170g/km or above as the maximum charge already applies.
The nature of the diesel supplement was reformed from 6 April 2018. From that date it applies to cars propelled solely by diesel (not hybrids) which do not meet the Real Driving Emissions 2 (RDE2) standard. The supplement is levied both on diesel cars which are registered on or after 1 January 1998 which do not have a registered Nitrogen Oxide (NOx) emissions value, and also on diesel cars registered on or after that date which have a NOx level that exceeds that permitted by the RDE2 standard.
Checking whether the supplement applies
So, how can employers tell whether the diesel supplement applies?
Diesel cars which meet the level of NOx emissions permitted by Euro standard 6d meet the RDE2 standard. Consequently, they are exempt from the entire diesel supplement. For cars that are manufactured after September 2018, employers can use the Vehicle Enquiry Service (see https://vehicleenquiry.service.gov.uk/) to identify whether a particular car meets the Euro 6d standard – the employer simply needs to enter the registration number of the car into the tool to find information on the vehicle, including its Euro status. Cars that are shown as meeting Euro status 6AJ, 6AL, 6AM, 6AN, 6AO, 6AP, 6AQ or 6AR meet Euro standard 6d and are therefore exempt from the diesel supplement. Where the car was registered on or after 1 September 2018, this information is also shown on the vehicle registration document, V5C.
From 6 April 2019 onwards, employers should use fuel type F (rather than A as previously) when reporting the allocation of a diesel car meeting the Euro 6d standard to HMRC on Form P46(Car) or when payrolling the benefit.
Cars that do not meet the Euro 6d standard are subject to the diesel supplement. HMRC advise that very few, if any, diesel cars were exempt from the diesel supplement in 2018/19.
Alan is allocated a company car registered in 2015. The car has CO2 emissions of 120g/km. It does not meet the Euro 6d standard. The diesel supplement applies and the appropriate percentage is increased by 4% from 28% (the percentage applying for 2019/20 to petrol cars with CO2 emissions of 120g/km) to 32%.
Louise is allocated a new diesel company car on 6 April 2019. The V5C shows that the car has CO2 emissions of 120g/km and that it meets Euro Status 6d. The diesel supplement does not apply and the tax charge for 2019/20 is based on the appropriate percentage of 28% for cars with CO2 emissions of 120g/km.
Tax aspects of using a work’s van
If an employee is able to use a work’s van for private use, which generally includes home-to-work travel, there will be a taxable benefit and a subsequent tax charge.
From 6 April 2019, the flat-rate van benefit charge has risen from £3,350 to £3,430, representing a small increase in real terms to a basic rate taxpayer of £16 a year.
If an employer also provides the employee with fuel for private use, then a tax charge on the provision of fuel will also arise based on an annual fixed rate. For 2019/20 the flat-rate van fuel benefit charge has been increased from £633 to £655, so there is an increase in real terms to a basic rate taxpayer of just £4.40.
What is a van? - to qualify as a van, a vehicle must be:
• a mechanically propelled road vehicle; and
• of a construction primarily suited for the conveyance of goods or burden of any description; and
• of a ‘design weight’ which does not exceed 3,500kg; but
• not a motorcycle. Broadly, this means that it must have at least four wheels.
The design weight of a vehicle, also known as the ‘manufacturer's plated weight’, is normally shown on a plate attached to the vehicle. What it means is the maximum weight which the vehicle is designed or adapted not to exceed when in normal use and travelling on the road laden.
Human beings are not ‘goods or burden of any description’ so a vehicle designed to carry people (such as a minibus) will not be a van for these purposes.
Private use - A charge to income tax will generally arise if a company van is made available, by reason of the employment, to an employee or to a member of his or her family or household for private non-business-related use. It must be made available without a transfer of ownership from the employer to the employee.
There are three types of journeys that are classed as non-taxable business use:
• business journeys - journeys carried out as part of employment
• ordinary commuting - travel to and from home to a place of work
• insignificant private use beyond ordinary commuting
Pool vans - Broadly, vans used as pool vans that meet the following criteria will not attract a charge:
• the van is used by more than one employee
• the van is not ordinarily used by one employee to the exclusion of others
• the van is not normally kept at or near employees' homes
• it is used only for business journeys (some incidental private use is allowed eg. commuting home with the van to allow an early start to a business journey the next morning)
HMRC apply these rules strictly.
Tax charge - The benefit charge may be proportionately reduced if the van is only available for part of a tax year, and/or by any payments made by the employee for private use.
For 2019/20, a basic rate taxpayer will pay £686 for the use of a work’s van (£3,430 x 20%). For a higher rate taxpayer, the cost will be £1,372.
If fuel is also provided for private use, for 2019/20, a basic rate taxpayer will additional tax of £131 (£655 x 20%), and a higher rate taxpayer will pay £262.
Tax is normally collected through the employee’s Pay As You Earn (PAYE) tax code.
Penalties for late self-assessment returns
The normal due date for a self-assessment return where filed online is 31 January after the end of the tax year to which it relates. This means that self-assessment tax returns for 2017/18 should have been filed online by midnight on 31 January 2019, and self-assessment returns for 2018/19 must be filed online by midnight on 31 January 2020.
Returns do not have to be filed online – paper returns can be submitted. However, an earlier deadline of 31 October after the end of the tax year applies, so 31 October 2018 for 2017/18 paper self-assessment returns and 31 October 2019 for 2018/19 paper self-assessment returns.
A later deadline may apply if the notice to file the return was issued after 31 October following the end of the tax year. In this scenario, the deadline is three months from the date of issue of the notice to file, which will fall after the normal 31 January deadline. For example, if notice is given on 2 December, the filing deadline is the following 2 March. Where the notice to file is issued after 31 July but on or before 31 October, the deadline for filing a paper return is three months from the date of the notice (which will be after the usual 31 October deadline); however, the deadline for filing an online return will remain at 31 January, as this will be at least three months from the notice date.
Penalties are charged where tax returns are filed late (unless, the taxpayer can demonstrate that they have a reasonable excuse for filing late which is acceptable to HMRC). The penalties can soon mount up.
A penalty will apply where a paper return is not filed by 31 October after the end of the tax year (or such later deadline as applies where the notice to file was issued after 31 July) or where an online return is not filed by 31 January after the end of the tax year (or by such later deadline as applies where the notice to file was issued after 31 October). If the paper filing deadline is missed, a penalty can be avoided by filing a return online by the online filing deadline.
An initial penalty of £100 is charged if the filing deadline is missed. The penalty applies even if there is no tax to pay.
If the return remains outstanding three months after the filing deadline, further penalties start to apply. For online returns, the key date here is 1 May, from which a daily penalty of £10 per day is charged for a maximum of 90 days (a maximum of £900). At this point, it is advisable to file the return as soon as possible – each day’s delay costs a further £10 in penalties.
Further penalties are due if the return remains outstanding after another three months have elapsed (i.e. at 1 August where an online return was not filed by 31 January). In this case, the penalty is £300 or, if greater, 5% of the tax outstanding.
A further penalty of the greater of £300 or 5% of the tax outstanding is charged if the return has not been filed 12 months after the deadline (i.e. before the following 1 February).
The penalties can soon mount up, and can reach £1,600 or more where the return is 12 months late. Outstanding returns should be filed as a matter of urgency. Penalties are also charged for any tax paid late.
Furnished holiday lettings – is it worth qualifying?
When it comes to taxing rental income, not all properties are equal. Different rules apply to properties which meet the definition of ‘furnished holiday lettings’ (FHLs). While the rules now are not as generous as they once were, they still offer a number of tax advantages over other types of let.
Advantages - Properties that count as FHLs benefit from:
• capital gains tax reliefs for traders (business asset rollover relief, entrepreneurs’ relief, relief for business assets and relief for loans for traders); and
• plant and machinery capital allowances on items such as furniture, fixtures and fittings.
In addition, the profits count as earnings for pension purposes.
What counts as FHLs? - For a property to count as a FHL it must meet several tests. It must be in the UK or the European Economic Area (EEA), it must be furnished and it must be let commercially (i.e. with the intention of making a profit).
The property must also pass three occupancy conditions. The tests are applied on a tax year basis for an ongoing let, the first 12 months for a new let and the last 12 months when the let ceases.
The pattern of occupancy condition - The total of all lettings that exceed 31 continuous days in the year cannot exceed 155 days. If continuous lets of more than 31 days total more than 155 days in the tax year, the property is not a FHL.
The availability condition - The property must be let as furnished holiday accommodation for at least 210 days in the tax year. Periods where the taxpayer stays in the property are ignored as during these times the property is not available for letting.
The letting condition - The property must be commercially let as furnished holiday accommodation for at least 105 days in the year. Periods where the property is let to family or friends at reduced rate or free of charge are ignored as they do not count as commercial lets. Lets of longer than 31 days are also ignored, unless the let only exceeds 31 days as a result of unforeseen circumstances, such as the holidaymaker being unable to leave on time as a result of a delayed flight.
Second bite at the cherry - If seeking to secure FHL status, but the property does not meet the letting condition, all is not lost. Where the landlord has more than one property let as a FHL and the average rate of occupancy across the properties achieves the required 105 let days in the year, the condition can be met by making an averaging election.
A property may also be able to qualify if there was a genuine intention to meet the letting condition and the other occupancy conditions are met by making a period of grace election.
Further details on making averaging and period of grace elections can be found in HMRC helpsheet HS253 (see www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet).
Is it worth it? - While FHLs do enjoy favourable tax treatment, these are only available if the associated conditions are met. While FHLs, particularly in prime tourist locations, may be able to command high rental values in high season, the properties may lay empty for several weeks in the off season. By contrast, a longer term let will offer an element of security that multiple short lets may not provide.
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Jointly-owned property – who pays the tax?
Where property is jointly-owned, the way in which the rental income can be split between the joint owners for tax purposes depends on whether the joint owners are married or in a civil partnership or not.
Married couples and civil partners
Where a property is jointly owned by a married couple or civil partners, the basic rule is that the rental income is split equally, regardless of the actual underlying ownership.
Tom and Richard are married. They jointly own a flat in which Tom has a 70% stake and Richard has a 30% stake. The flat is let out. The rental profit is £8,000 a year.
Despite owning the property in unequal shares, Tom and Richard are both taxed on 50% of the rental income (£4,000).
However, where the beneficial ownership is unequal, the couple can elect (on Form 17) for the income to be assessed for tax purposes in accordance with their actual beneficial shares. In the above example, were Tom and Richard to make a Form 17 election, Tom would be taxed on rental profits of £5,600 (70%) and Richard would be taxed on £2,400 (30%).
For married couples and civil partners, the only permissible allocations are 50:50 (the default position) and, on the making of a Form 17 election, in accordance with actual ownership where the property is owned in unequal shares.
Joint owners who are not married or in a civil partnership
Where a property is owned jointly by individuals who are not married or in a civil partnership, it is usual for the rental income to be allocated in accordance with the ownership share. However, the joint owners can agree to a different division of profits and losses – the allocation for tax purposes does not have to mirror the actual ownership of the property. However, where a different allocation is agreed, the split for tax purposes must match the actual allocation of rental profits.
Jake and his girlfriend Jade jointly own a flat which they let out. Jake owns 20% of the property and Jade owns 80% of the property. The rental profit is £10,000 a year.
Jade has £3,000 of her basic rate band available, whereas Jake has £9,000 of his basic rate band available. Therefore, to minimise the tax payable on the rental income, they agree that it will be shared so that Jade receives 30% (£3,000) and Jake receives 70% (£7,000).
Where joint owners are not married or in a civil partnership it is possible to agree an actual allocation that minimises tax. However, depending on the relationship between the owners, the tax considerations may be secondary as each owner may be keen to receive a share of rental profits proportionate to their actual stake in the property.
Airbnb-type lets – is rent-a-room relief available?
Many homeowners have taken advantage of sites such as Airbnb to let out a spare room on a temporary basis or their whole property while they are away. In most cases, as long as the associated conditions are met, hosts can enjoy rental income of up to £7,500 tax-free under the rent-a-room scheme. This continues to be the case as planned legislation to restrict the availability of the relief has not been introduced.
Rent-a-room relief is a relief that allows individuals to earn up to £7,500 per year tax-free from letting out furnished accommodation in their own home. This limit is halved where more than one person benefits from the income such that each person can enjoy rental income of up to £3,750 per year tax free.
The relief is available to owner occupiers and tenants. To qualify, the rental income must relate to the let of furnished accommodation in the individual’s only or main home. While the relief was introduced to boost the supply of cheap residential accommodation, there is no minimum period of let and applies equally to very short lets. Further, the individual can let out as much of their home as they want.
The relief can be used where a room is let furnished to a lodger. It can also be used where the letting amounts to a trade, for example, where the individual runs a guest house or a bed-and-breakfast or provides services such as meals and cleaning.
Where gross rental income is less than £7,500 (or £3,750 where the income is shared), the relief is automatic – there is no need to tell HMRC.
Where the gross rental income exceeds the rent-a-room limit, the individual has a choice of deducting the rent-a-room limit and paying tax on the excess or calculating the profits in the normal way by deducting the actual expenses. Claiming rent-a-room relief will be beneficial if there is a profit and actual expenses are less than the rent-a-room limit. This is done on the tax return.
It is not possible to create a loss by deducting the rent-a-room limit if, for example, rental income is less than the limit – the income is simply treated as being nil. Where deducting actual expenses from rental income produces a loss, it is better not to claim rent-a-room relief to preserve the loss.
Rent-a-room relief cannot be claimed where the accommodation is not in the individual’s main home, where accommodation is provided unfurnished or where a UK home is let out while the owner is working abroad.
Rent-a-room relief is available for Airbnb-type accommodation as long as the conditions are met. The issue is not whether the income is from an Airbnb-type let; rather, whether the conditions for rent-a-room relief are met. This is likely to be the case if the nature of the Airbnb let is such that it comprises the let of a furnished spare room in the taxpayer’s home, or the whole home for a short period, such as a weekend or a couple of weeks when the homeowner is on holiday.
However, where the individual uses Airbnb or similar to let accommodation in a property which is not his or her main home, for example a holiday cottage, rent-a-room relief is not available and the normal property rental rules apply. The individual may, however, benefit from the property income allowance of £1,000.
Stamp duty land tax on non-residential properties
Stamp duty land tax (SDLT) is payable in England and Northern Ireland on the purchase of property over a certain price. It applies equally to residential and non-residential properties, although the rates are different. Stamp duty land tax is devolved with land and buildings transaction tax (LBTT) applying in Scotland and land transaction tax (LTT) applying in Wales.
Non-residential property - As the name suggests, non-residential property is property other than that which is used as a residence. This includes commercial property, such as shops and office, agricultural land and forests. The non-residential rates of SDLT also apply where six or more residential properties are brought in a single transaction.
Mixed use properties - The non-residential rates of SDLT also apply to mixed use properties. These are properties which have both residential and non-residential elements. An example of a mixed use property would be a shop with a flat above it.
Rates - SDLT is charged at the appropriate rate on each ‘slice’ of the consideration. No SDLT is payable where the consideration is less than £150,000, or on the first £150,000 of the consideration where it exceeds this amount.
The rates of SDLT applying to non-residential properties are shown in the table below. They also apply to the lease premium where the property is leasehold rather than freehold.
Consideration SDLT rate
Up to £150,000 Zero
The next £100,000 (i.e. the ‘slice’ from £150,001 to £250,000) 2%
Excess over £250,000 5%
ABC Ltd buys a commercial property for £320,000. SDLT of £5,500 is payable, calculated as follows.
On first £150,000 @ 0% £0
On next £100,000 @ 2% £2,000
On remaining £70,000 @ 5% £3,500
Total SDLT payable £5,500
New leasehold sales and transfers - The purchase of a new non-residential or mixed use leasehold property triggers a SDLT liability on the purchase price (the lease premium) and also on the annual rent payable under the lease (the net present value). The two elements are calculated separately and added together.
The lease premium element is calculated using the rates above, while the rent element is payable at the rates in the table below. No SDLT is payable on the rent if the net present value is less than £150,000.
Net present value of the rent SDLT rates
£0 to £150,000 Zero
£150,001 to £5,000,000 1%
Excess over £5,000,000 2%
Existing leases - SDLT is only payable on the lease price where an existing lease is assigned.
SDLT calculator - HMRC have published a handy calculator on the Gov.uk website which can be used to work out the SDLT payable on a commercial transaction. It can be found at www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro.
Scotland and Wales - The rates of LBTT payable on the purchase of non-residential properties in Scotland can be found at www.revenue.scot/land-buildings-transaction-tax/guidance/calculating-tax-rates-and-bands and the rates of LTT payable on the purchase of non-residential properties in Wales can be found at https://gov.wales/land-transaction-tax-rates-and-bands.
Claiming a deduction for pre-letting expenses
For tax purposes, a property rental business begins when the first property is let. However, it is likely that the landlord will have incurred some expenses prior to that date in getting the property ready to let and in finding a tenant and agreeing the let.
Once the letting has commenced, expenses incurred in relation to that let will be deductible in computing the taxable rental profits, as long as the conditions for deductibility are met. It is therefore necessary to distinguish between expenses incurred as part of the letting business and preparatory expenses incurred before the property rental business began.
While no relief is available for preparatory expenses at the time that they are incurred, relief may be available under the special rules for pre-letting expenses once the business has commenced.
Relief for pre-letting expenses - For relief to be available in respect of expenses incurred before the start of the property rental business, the expenditure must meet all of the following conditions:
• the expenditure is incurred within a period of seven years before the date on which the rental business started
• the expenditure is not otherwise allowable as a deduction for tax purposes
• the expenditure would have been allowed as a deduction had it been incurred after the rental business had started
Consequently, to be allowed under the pre-letting expenditure rules, the expenditure must be incurred wholly and exclusively for the purposes of the business and (otherwise than in accordance with the cash basis rules permitting a deduction for capital expenditure) must be revenue in nature.
The type of expenditure which might qualify for relief under the pre-letting expenses rules would include the costs of advertising, cleaning, tidying up the garden, and suchlike.
Where expenditure qualifies for deduction under the pre-letting expenses rules, the expenditure is treated as if it were incurred on the day on which the property rental business began. In this way, it is deducted from the rental income of the first accounting period of the property rental business.
Example - Teresa buys a house to let out. The property costs £250,000, and the associated costs of the purchase are £4,000. The purchase completes on 28 February 2019.
Teresa arranges for some work to be undertaken on the property prior to letting it out. This comprises painting the property (£2,000) and some minor repairs (£400). She also buys carpets and curtains (£3,000) and arranges for the cleaning (£200) and the garden tidying (£150).
She incurs costs of £400 on advertising for a tenant.
A tenant is found, and the property is let from 1 May 2019.
The property rental business starts on 1 May 2019. Relief is available under the pre-letting rules for the following expenses: repairs and maintenance (decorating and minor repairs): £2,400; cleaning: £200; gardening: £150; and advertising: £400.
These costs are treated as if they were incurred on 1 May 2019 and are deducted from the rental income if the first period of letting.
The cost of property and associated expenses are not allowable (relief will be given on the eventual sale under the capital gains tax rules). Likewise, no relief is available for the initial purchase of the carpets and curtains, although relief will be available if at some future point they are replaced in accordance with the relief for the replacement of domestic items.
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. The cut is likely to have a significant impact on employees and directors of small businesses who receive both salary and dividend payments.
Many family-owned companies allocate dividends towards the end of their financial year and/or the tax year, so it was not until March/April 2019 that the impact of the reduction first started to hit home. Unfortunately, many other taxpayers may not become aware of the change until they complete their 2018/19 tax return, which in most cases, will be due for submission to HMRC by 31 January 2020.
How much tax is paid on dividend income is determined by the amount of overall income the taxpayer 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.
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.
For a basic rate taxpayer, the reduction in the allowance means an increase in tax paid on dividends of £225. For a higher rate taxpayer, the reduction increases the annual tax bill on dividends by £975, and for additional rate taxpayers, the increase is £1,143. Note that if dividend income falls between multiple tax bands, these figures will be different.
Dividend income is taxed at the taxpayer’s highest rate. This can often work in the taxpayers favour, particularly where a mixture of salary and dividends is received. For example, if a director receives a salary of £40,000 and a dividend of £12,000, their tax liability for 2019/20 will be as follows:
Amount taxed Tax due
On salary of £40,000
Personal allowance £12,500 £0
Basic 20% rate £27,500 £5,500
On dividend of £12,000
Dividend allowance £2,000 £0
Basic rate 7.5% £8,000 £600
Higher rate 32.5% £2,000 £650
Total tax due for year £6,750
In this example, personal allowances are deducted first against the salary, leaving £27,500 of other income falling within the basic rate tax band (£37,500 for 2019/20). Dividend income falling within the basic rate band is £10,000 (£37,500 minus £27,500 used), with the remaining £2,000 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 band, leaving £8,000 within the basic rate band and taxable at the lower 7.5% rate. The remaining £2,000 of dividend income is taxable at the dividend upper rate of 32.5%.
Individuals who are not registered for self-assessment generally do not need to inform HMRC where they receive dividend income of up to £2,000. Those with income between £2,000 and £10,000 will need to report it to HMRC. The tax can usually be paid via a restriction to the PAYE tax code number, so that it is deducted from salary or pension. Alternatively, the taxpayer can complete a self-assessment tax return and the tax can be paid in the usual way (generally 31 January following the end of the tax year in which the income was received). Those receiving more than £10,000 in dividends will need to complete a tax return.
The allocation of various rate bands and tax rates can be complicated, even in situations where straight-forward dividend payments are 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 is such cases.
Tax relief for charitable donations
Individuals who donate to charity can do so tax-free. There are various ways of making tax-relieved gifts to charity – the way in which the relief works depends on whether the donation is made via Gift Aid, as a deduction from wages or a pension via the Payroll Giving Scheme, in a will or whether it is a gift of land or property.
A donation through Gift Aid is treated as having been made net of the basic rate of tax, allowing the charity to reclaim the tax element from HMRC. Thus, the amount given equates to 80% of the donation and the charity benefits from the remaining 20%. This results in every £1 given through Gift Aid being worth £1.25 to the charity.
To enable the charity to reclaim the tax, the donor must complete a Gift Aid declaration, in which the donor must confirm that they are a UK taxpayer. This is important – the tax that is paid to the charity comes from the tax paid by the individual, and if the individual has not paid sufficient tax to cover tax claimed by the charity on the donation, HMRC may ask the donor to pay the equivalent amount in tax. Taxpayers who make regular donations and who have a Gift Aid declaration in place should check that they have paid enough tax. This may be important for pensioners who, following an increase in the personal allowance, find that they are no longer taxpayers.
Donors who pay tax at the higher or additional rate of tax are able to claim relief of the difference between the higher or additional rate and the basic rate through their self-assessment returns. It is important that this is not overlooked and that records of donations are kept so the additional relief can be claimed.
Payroll giving schemes enable employees to make donations to charity as a deduction from their pay and to receive tax relief at source for those donations. Employers wishing to operate a scheme must appoint a payroll giving agency. A list of approved payroll giving agencies is available on the Gov.uk website. The employer deducts the donation from the employee’s gross pay for PAYE purposes and pays it over to the payroll giving agency. The payroll giving agency passes the donation on to the employee’s chosen charity.
As the deduction is made from gross pay, no tax is paid on it. However, the employee will still pay National Insurance on the amount donated (as will the employer).
Gifts in a will
Where a donation to charity is made in a will, the donation will either reduce the value of the estate before inheritance tax is calculated, or, if 10% or more of the estate is left to charity, reduce the rate of inheritance tax by 10% from 40% to 36%.
Giving land, property or shares to charity
Income tax or capital gains tax relief may be available for donations of land, property or shares to charity. Income tax relief is given by deducting the value of the donation from total taxable income for the tax year in which the gift was made to the charity. Relief is claimed in the self-assessment return.
Where land, property or shares are sold to a charity for more than the cost, but less than their market value, no capital gains tax is payable.
Tax-free mobile phone
Mobile phones are ubiquitous – they are also subject to a tax exemption which enables employees to enjoy a mobile phone provided by their employer without suffering a benefit in kind tax charge. However, as with all exemptions there are conditions to be met for the exemption to apply.
Nature of the exemption
The exemption applies where an employer provides an employee with a mobile phone for his or her use. However, ownership of the phone must not be transferred to the employee. The exemption covers the use of the phone and the cost of all calls, including private calls. It also applies to the provision of a SIM card for use in the employee’s own phone.
The exemption is limited to one phone or SIM card per employee. Phones or SIM cards provided to members of the employee’s family or household by virtue of the employee’s employment are treated as if they were provided to the employee.
If the employee is provided with more than one mobile phone or SIM card, second and subsequent phones or SIM cards are taxed as a benefit in kind (as an asset made available for the employee’s use).
If the exemption does not apply, the employer can meet the cost of business calls without triggering a tax charge.
Contract between employer and supplier
While the end result may seem to be the same if the employer contracts with the phone supplier or if the employee takes out the contract and the employer either pays the bill or reimburses the employee, from a tax perspective the outcome is very different.
The mobile phone exemption only applies if the contract is between the employer and the phone supplier. If the contract is between the employee and the phone supplier and the employer meets the cost, the employer is meeting a personal bill of the employee rather than providing the employee with a mobile phone. This is an important distinction and can mean the difference between the exemption being available and the employee suffering a tax hit.
The exemption applies to smartphones. To count as a phone, the device must be capable of making and receiving voice calls. Tablets, such as iPads, do not qualify (even if calls can be made via What’s App or similar services). The fact that a device has telephone functionality does not in itself qualify it as a mobile phone. As a general rules, devices that use Voice Over Internet Protocol (VOIP) systems will not qualify.
Beware the OpRA rules
The exemption is lost if the mobile phone is made available to the employee under a salary sacrifice or other optional remuneration arrangement (OpRA). Where this is the case, the alternative valuation rules apply and the benefit is valued by reference to the salary foregone instead.
Family companies – optimal salary for 2019/20
For personal and family companies it can be beneficial to extract some profits in the form of a salary. Where the individual does not have the 35 qualifying years necessary to qualify for the full single-tier state pension, paying a salary which is equal to or above the lower earnings limit for National Insurance purposes will ensure that the year is a qualifying year.
New tax rates and allowances came into effect from 6 April 2019, applying for the 2019/20 tax year. These have an impact on the optimal salary calculation for family and personal companies. As in previous years, the optimal salary level will depend on whether or not the National Insurance employment allowance is available.
It should be remembered that directors have an annual earnings period for NI purposes.
Employment allowance unavailable - Companies in which the sole employee is also a director are not able to benefit from the employment allowance. This means that most personal companies are not eligible for the allowance. Where the allowance is not available or has been utilised elsewhere, the optimal salary for 2019/20 is equal to the primary and secondary threshold set at £8,632 (equivalent to £719 per month and £166 per week).
At this level, assuming that the director’s personal allowance (set at £12,500) is available, there is no tax or employer’s or employee’s National Insurance to pay. However, as the salary is above the lower earnings limit of £6,136 (£512 per month, £118 per week), it will provide a qualifying year for state pension and contributory benefit purposes.
The salary is deductible in computing the company’s taxable profits for corporation tax purposes, saving corporation tax of 19%.
Employment allowance is available - It is beneficial to pay a salary equal to the personal allowance (assuming that this is not used elsewhere) where the employment allowance (set at £3,000 for 2019/20) is available to shelter the employer’s National Insurance that would otherwise arise to the extent that the salary exceeds £8,632.
Although employee’s National Insurance is payable to the extent that the salary exceeds the primary threshold of £8,632, this is more than offset by the corporation tax deduction on the higher salary.
For 2019/20, a salary equal to the personal allowance of £12,500 exceeds the primary threshold by £3,868. Therefore, employee’s National Insurance of £464.16 (£3,868 @ 12%) is payable on a salary of £12,500. However, as salary payments are deductible for corporation tax purposes, the additional salary of £3,868 saves corporation tax of £734.92 (£3,868 @ 19%). This exceeds the employee’s National Insurance payable by £270.46.
So paying a salary equal to the personal allowance of £12,500 allows more profits to be retained (to the tune of £270.46) than paying a salary equal to the primary threshold of £8,632.
If the director has a higher personal allowance, for example, where he or she receives the marriage allowance, the optimal salary is one equal to that higher personal allowance.
Director is under 21 - Where the director is under the age of 21, the optimal salary is one equal to the personal allowance of £12,500 regardless of whether the employment allowance is available. No employer National Insurance is payable on the earnings of employees or directors under the age of 21 until their earnings exceeds the upper secondary threshold for under 21's set at £50,000 for 2019/20. Employee contributions are, however, payable as normal
Any benefit in paying a salary above the personal allowance? - Once the personal allowance is reached it is not worthwhile paying a higher salary as further salary payments will be taxed and the combined tax and National Insurance hit will outweigh the corporation tax savings.