Adrian Mooy & Co - Accountants Derby

There are many possible situations in which a person may make a loan to a family member, for example, a parent may lend money to an adult child to provide them with a deposit for a property. Where the parent has a personal or family company and there are unextracted profits in the company, it may seem sensible for the company to lend the money rather than for the parent to do so personally. However, this may have tax consequences which can be easily overlooked.

Loans to participators

Where the company is a close company (broadly one under the control of five or fewer people) as most personal and family companies are, the loans to participators rules need to be considered. Under these rules, a tax charge will arise on the company on any amount of the loan which remains outstanding nine months and one day after the end of the accounting period in which the loan was taken out.

The charge (known as the ‘section 455 charge’) is payable at the rate of 33.75% of the outstanding loan balance. This is the same rate as the upper dividend tax rate.

Associates

The reach of the loans to participators rules is wide. The recipient of the loan does not need to be a participator (broadly a shareholder) for the charge to apply – it also applies where the loan is made to an associate of the participator. This includes a relative of the participator, which for these purposes means a spouse or civil partner, a parent, grandparent or remoter forebear a child, grandchild or remoter issues or a sibling. It also applies where a loan is made to a partner of a participator.

Example

Louise is the director and sole shareholder of her personal company, L Ltd. The company makes a loan of £100,000 to Louise’s daughter Sophie to help her get on the property ladder. The loan is interest free. It is made on 1 January 2025.

The company prepares accounts to 31 March each year. If the loan remains outstanding on 1 January 2026 (as is the expectation), despite the fact that Sophie is not a participator in L Ltd, the company will need to pay section 455 tax of £33,750 on 1 January 2026.

The tax will become repayable nine months and one day after the end of the accounting period in which the loan is repaid, so in that way it is a temporary tax. However, it may be a significant cost to the company in the interim.

Benefit in kind charge

If the loan balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will also arise as the loan is made to a member of the director’s family or household. The charge will be based on the difference between the interest payable at the official rate and that actually paid, if any. The company will also pay Class 1A National Insurance on the taxable amount.

Planning issues

While it is possible to make a loan from a personal or family company of up to £10,000 for up to 21 months tax-free, tax consequences will arise where the loan is for a higher amount and/or is made for a longer period.

This does not mean it will never be beneficial to make a loan to a family member – it is a question of weighing up the cost of paying the section 455 tax and tying up the associated funds until after the loan has been repaid against the interest that the family member may pay if they were to borrow the money elsewhere. The section 455 tax will be repaid if the loan is repaid, while any interest paid on a third-party loan will not. The cost of the benefit in kind charge should also be factored in

A question often asked is: “Can I give all my assets to my children and avoid inheritance tax (IHT)?”.

The short answer is yes, but to avoid the tax, you need to live seven years from the gift and cannot benefit from the asset after the gift. If you continue to ‘enjoy’ the gifted assets, this is treated as a gift with reservation of benefit (GROB) and remains in your estate for IHT purposes.

Family home

Due to the GROB anti-avoidance rules, it is therefore not possible to simply transfer your home to your children and continue to live there.

Nor could you give a rental property to your children but continue to receive the rental income.

In either scenario, the property remains in your IHT estate.

All is not lost

There are, however, some relaxations to these rules relating to property, which can be useful if structured correctly:

(a) Paying rent - If you pay full market rent for the use of the property after you have given it to your children, this takes it outside of the GROB rules. Note that you will need to continually monitor the level of rent to make sure it is at a market rate, and your children will need to pay tax on their rental income.

If you stop paying the rent, then the house immediately becomes a GROB and is back in your estate, so you need to be prepared to continue paying rent until you die or move out of the house.

(b) Joint Occupation - The GROB rules do not apply if you give away a share of a property and occupy it jointly with the donee. So, you could give a share of the house to your child and cohabit with them. This is not a GROB, and after seven years, the value of the gift is outside of your estate.

However, you need to make sure you share the running costs of the house between you, proportionate to the share gifted. Again, the child would need to continue to live with you until your death to avoid it subsequently becoming a GROB.

(c) No Occupation - A further exemption exists for a gift of a share of a property which you do not occupy.

This could be useful if you wanted to gift a former home or a rental property to your children and you do not want or need to live in it in the future.

Have your cake and eat it too?

The final exemption (where you do not live in the property) has no restriction on receiving the ongoing rent. So, you could transfer (say) 50% of a rental property to your children but agree with them that you would continue to receive (say) 85% of the rent.

As this is a gift of a share of the property and you do not occupy the property after the gift, there is no GROB even though you receive more than your 50% share of the rent. You will, of course, need to pay income tax on the rent you receive (i.e., the 85%), with your children being taxable on the rent they receive.

Practical tip

If you have a holiday home or rental property and rely on the income to fund your expenditure, consider transferring part of the property to your children and retaining the bulk of the income. Assuming you survive seven years, you can get a substantial amount of value out of your estate without losing the benefit of the rental income. Remember that you may have to pay capital gains tax on the gift if the property has appreciated in value, and if there is a mortgage on the property you will have to deal with the bank and potentially stamp duty land tax (or equivalent taxes in Scotland or Wales, if applicable) on the transfer too.

The way that many landlords will report details of their income and expenses to HMRC is changing from April 2026 onwards. This is when Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) comes into effect. Landlords who fall within the scope of MTD for ITSA will need to keep digital records, use MTD-compatible software and send quarterly updates to HMRC. This will impose new compliance obligations on them and change the way in which they interact with HMRC.

Start date 1: 6 April 2026

MTD for ITSA will apply to unincorporated landlords and sole traders with trading and/or property income of £50,000 or more from 6 April 2026. When determining a landlord’s MTD start date, it is important to take account of both rental income from unincorporated property businesses and also trading income from unincorporated businesses (such as those operated as a sole trader). However, any rental income from property companies can be ignored. The key figure is the total of both rental and trading income, so a landlord with rental income of £10,000 and trading income of £45,000 will be within MTD for ITSA from 6 April 2026 while a landlord with rental income of £49,000 who has no trading income will have a later start date. The relevant income will be that for 2024/25, as reported on the Self Assessment tax return which must be filed by 31 January 2026.

It is important that landlords with an April 2026 start date make sure that they know how MTD for ITSA will affect them, and that they are ready to comply from 6 April 2026 onwards.

Once within MTD for ITSA a landlord remains within it, even if their income falls to below the trigger threshold, unless it remains below the trigger threshold for three successive tax years.

Start date 2: 6 April 2027

Landlords running unincorporated property businesses will be brought within MTD for ITSA from 6 April 2027 if they have rental income and/or trading income from an unincorporated business of £30,000 or more.

Other landlords

The Government plan to bring unincorporated landlords and unincorporated businesses with rental and/or trading income of £20,000 or more into MTD for ITSA by the end of the current Parliament. As of yet, no date has been set for those whose income is below this level.

Obligations

Currently, where rental income is more than £1,000 (and the landlord is not within the rent-a-room scheme), they must report their taxable profits to HMRC on the property pages of their Self Assessment tax return by 31 January following the end of the tax year to which it relates. They must keep records of their income and expenses, but can do so in a way that suits them.

Under MTD for ITSA this all changes. The landlord will need to keep digital records and use software that is compatible with MTD for ITSA to report simple summaries of income and expenses to HMRC on a quarterly basis. The quarters run to 5 July, 5 October, 5 January and 5 April, although taxpayers can report to calendar quarters instead (30 June, 30 September, 31 December and 31 March). HMRC publish details of commercial software that fits the bill. They have also said that they will make free software available for those with the most straightforward affairs.

After the final quarterly update for the year has been submitted, the landlord will need to make a final declaration to finalise their income tax position for the tax year. This is like the current tax return and it is at this stage that the taxpayer will claim reliefs and allowances, and also reflect other income that they may have which is not within the MTD process, such as savings and investment income and income from employment. The landlord will also need to make a declaration that the information is complete and correct, as is currently the case on the Self Assessment tax return.

There is no change to the way in which tax is paid under MTD for ITSA, only the way in which income is reported.

Currently, there is no limit on the amount of qualifying agricultural and business property that can benefit from the 100% rates of agricultural property relief (APR) and business property relief (BPR). However, this is set to change from 6 April 2026. From that date, the 100% rate of relief will be capped at the first £1 million of qualifying agricultural and business property. Where the qualifying agricultural and business property in the estate exceeds £1 million, relief will be given at the rate of 50%.

This change will impact farmers passing on farmhouses, farm buildings and other agricultural property, and they may wish to revisit their wills as a result.

£1 million allowance

Effect is given to the cap on 100% APR and BPR by means of a £1 million allowance. Each individual’s estate has an allowance. However, if this allowance is not used in full it is lost. Unlike the nil rate band and the residence nil rate band, the unused portion cannot be used by the surviving spouse or civil partner’s estate.

Planning ahead

Where a married couple or civil partners have combined qualifying business and agricultural property in excess of £1 million, leaving everything to each other is no longer tax efficient. While the inter-spouse exemption will apply on the first death, the surviving spouse or civil partner’s estate will only have one £1 million allowance to play with. Consequently, agricultural and business property in excess of £1 million not otherwise sheltered or exempt will only benefit from 50% relief.

If, instead, each provides for £1 million of qualifying agricultural and business property to be left other than to the spouse or civil partner, for example, to the children or grandchildren, the combined estates will be able to benefit from 100% APR and BPR on qualifying agricultural and business assets of £2 million.

Consideration could also be given to making lifetime transfers. A lifetime transfer is a potentially exempt transfer (PET) and oronly comes into charge if the transferor does not survive seven years. If the transferor dies before the seventh anniversary of the gift, IHT will apply, although taper relief will reduce the amount payable if the transferor survives for at least tthree years.

Transitional rules bite where a lifetime transfer is made on or after 30 October 2024 and the transferor  dies on or after 6 April 2026 and within seven years of making the gift. Where this is the case, the £1 million cap on 100% relief applies. As allowances and nil rate bands are applied in chronological order, where the PET comes into charge, this may mean that the full £1 million allowance is not available for gifts of qualifying agricultural and business property made on death.

Farmers are advised to take professional advice on what the changes will mean for them.

As the cost of living rises, you may consider letting a room in your home to bring in some much-needed additional income. This can be tax efficient as the Rent a Room scheme allows an individual to earn £7,500 a year from letting furnished accommodation in their own home (which can be owner-occupied or rented). Where more than one person benefits from the rental income, each can earn £3,750 a year tax-free, regardless of the number of people who benefit (so the total tax-free rental income can exceed £7,500 where three or more people share the rent).

To take advantage of the scheme, the room must be furnished.

If the rental income received is less than your tax-free threshold, you do not need to report the income to HMRC. However, if the rental income exceeds your tax-free threshold, you will need to complete a tax return.

Where the income exceeds the tax-free threshold, you can work out your taxable profit in one of two ways. If you want to take advantage of the scheme, you can deduct your tax-free allowance rather than your actual costs. This will often be beneficial. For example, if you receive rental income from letting furnished accommodation in your own home of £8,000 and incur costs of £700, under the Rent a Room scheme, your taxable profit will be £500 (£8,000 – £7,500) rather than £7,300 (£8,000 – £700). If you want to calculate your profit in this way, you will need to opt into the scheme in your tax return.

The scheme will not be beneficial if your actual costs are more than the tax-free limit. Here it is better not to use the scheme and deduct your actual costs rather than the threshold.

If your income is below the threshold but you have made a loss, it may be preferable to complete a tax return to preserve that loss rather than taking advantage of the scheme.

HM Treasury's recent 'Policy Costing Document' published to accompany  2024 Autumn Budget contained two sentences which appear to have gone d by many financial commentators, being that: ‘The government is providing funding for 1,800 HMRC debt management staff to enhance HMRC's capacity to collect outstanding tax debts. Funding is provided for 1,200 existing staff to extend their work with HMRC, and 600 additional staff.’ It is anticipated that this additional funding for new recruits, alongside the modernising of operations through advanced technology and credit agency data, will produce an additional £2 billion annually by 2029/30.

Collection process

The method of collecting unpaid tax varies depending on the type of tax owed. For instance, if the underpayment concerns PAYE tax and the taxpayer is not self-assessed, collection will typically occur through a reduction in the tax code, provided the liability is £2,999.99 or less. For amounts above this threshold, HMRC will request direct payment.

If payment is still not forthcoming, a simple assessment letter  will be issued, placing the taxpayer within self assessment. A late payer within the self assessment system will receive a series of paper reminders and telephone calls usually starting with a private debt collection agency. If payment remains outstanding, an officer from the Debt Management Department can contact the taxpayer to offer a 'Time to Pay' (TTP) arrangement, allowing for agreed monthly payments until the debt is settled. While interest will still be charged during this period, no penalties will apply unless the TTP arrangement is made more than 30 days after the due payment date.)

Since 2015, HMRC has had the power to collect payment of ‘significant debts’ (defined as those exceeding £1,000) directly from a taxpayer's bank current or savings accounts (including ISAs). After the debt has been recovered, £5,000 must remain across all accounts (including joint accounts) above normal calculated expenses.

Enforcement officers

If payment is still not forthcoming, HMRC may commence enforcement action. HMRC uses both internal enforcement officers and external debt collection agencies, depending on the type and size of the debt. Internal enforcement officers typically manage more complex or higher-value cases requiring careful legal oversight.

When an HMRC enforcement officer visits, the taxpayer will be asked to sign a ‘controlled goods agreement’ (CGA) giving the taxpayer a further seven days to pay. If payment is still not made, the enforcement officers will return to confiscate assets and auction them to settle the debt, charging a fee of £110, plus 7.5% of the amount of the debt over £1,500. Private debt collection agencies cannot deliver a CGA.

HMRC enforcement officers lack the power of eviction (unlike High Court enforcement officers who carry writs of possession) or arrest. However, they can pursue a charging order against a property, which secures the debt and permits forced sale through the courts if unpaid.

Chasing directors

Despite the protection companies receive under the 'veil of incorporation', HMRC can pursue a dissolved company for unpaid taxes. If the company cannot pay, HMRC may take legal action against the directors especially if they are found to have engaged in wrongful trading. HMRC typically targets directors first since shareholders generally have limited liability and are not personally responsible for company debts beyond their investment in shares. Nonetheless, exceptions exist for fraudulent behaviour or wrongful trading (e.g., if funds were misappropriated).

Practical point

The 'Measuring Tax Gaps 2025 report' published in June 2025 states that for the 2023/2024 tax year, HMRC collected approximately 94.7% of the total theoretical tax liabilities, amounting to £829.2 billion out of an expected £876 billion. This suggests that 5.3%, or £46.8 billion, went unpaid, representing the Chancellor’s current 'tax gap'.

There are no up-to-date details as to how many taxpayers are currently within the Direct Recovery of Debts process.

When is an adjustment is needed to the capital gains tax figure for 2024/25 calculated by HMRC’s self-assessment return software.

In her Autumn Budget on 30 October 2024, the Chancellor announced a number of changes to capital gains tax (CGT) rates, some of which took effect immediately. This complicates the CGT calculation for 2024/25, not least because HMRC’s self-assessment calculator does not take account of the in-year tax changes.

This means that if a taxpayer has made a chargeable gain in the period from 30 October 2024 to 5 April 2025, the self-assessment calculator will give the wrong answer.

Consequently, to ensure that they pay the correct amount of tax, taxpayers will need to work out an adjustment, which they will need to take into account when filing their tax return. Fortunately, HMRC has issued a calculator which can be used to calculate the adjustment.

The changes

Prior to 30 October 2024, the standard rate of CGT was 10% to the extent to which income and gains fell in the basic-rate band (which for 2024/25 is £37,700), and 20% once the basic rate band had been used up. Higher rates applied to residential property gains and carried interest, which were taxed at 19% where income and gains fell within the basic-rate band, and at 24% thereafter.

From 30 October 2024, the standard rates were brought into line with the rates applying to residential property gains, such that where gains are realised on or after that date, they are taxed at 18% where income and gains fall in the basic rate band, and at 24% once this has been used up. The Chancellor did not make any changes to the rates applying to residential property gains.

Business asset disposal relief (BADR) charges qualifying gains up to the lifetime limit of £1m and at a lower CGT rate. For 2024/25, gains qualifying for BADR are taxed at 10%. However, unlike the standard rates of CGT, the rate was not increased from 30 October 2024; instead, the Chancellor opted to delay the increase to 6 April 2025, increasing the rate applying for BADR purposes to 14% from that date. The rate is further increased to 18% from 6 April 2026, bringing it back into line with the lower standard rate.

The problem

Taxpayers using HMRC’s self-assessment tax return software receive a calculation of their tax liability once they have completed their return. However, the software for 2024/25 does not take account of the in-year changes to the standard rate of CGT and calculates gains (other than those in respect of residential property and carried interest) as if the lower standard rate was 10% and the upper standard rate was 20% for the whole of the 2024/25 tax year. Consequently, where chargeable gains were realised after 30 October 2024 and gains for the 2024/25 tax year were more than the annual exempt amount of £3,000, the liability is understated.

To address this and to ensure that the correct amount of CGT is paid, it is necessary to adjust the figure produced by HMRC’s return calculation software. HMRC has produced a calculator which can be used to work out the amount of the adjustment. The calculator can be found on the Gov.uk website (at www.gov.uk/guidance/workout-your-capital-gains-tax-adjustment-forthe-2024-to-2025-tax-year).

Working out the adjustment

An adjustment will need to be calculated for the 2024/25 tax year if:

 • a disposal of assets was made on or after 30 October 2024;

 • a self-assessment tax return was being completed for 2024/25; and

 • the net gains for 2024/25 (chargeable gains less allowable losses) are more than the annual exempt amount of £3,000.

The adjustment is not simply the rate increase multiplied by the gains realised on or after 30 October 2024, as it is necessary to take into account how the annual exempt amount has been used. The annual exempt amount is set against the gains taxed at the highest rate, so unless residential property gains have been realised prior to 30 October 2024, the best use of the annual exempt amount will be against net gains realised after that date. Similarly, losses are used so as to give the best result. ... continued ...

... continuation ... Residential property gains must be reported to HMRC within 60 days of completion and the best estimate of the tax due on the gain must be paid within the same time frame. Residential property gains are taken into account in calculating the liability for the year as a whole, and the amount of any adjustment. However, any tax already paid is deducted from the amount that is due to HMRC by 31 January 2026.

Before calculating the adjustment using HMRC’s adjustment calculator, the following information should be collated:

 • the dates on which the gains were realised;

 • the amount of each gain;

 • taxable income;

 • details of any capital losses; and

 • details of pension contributions and gift aid payments made net of basic rate tax.

The lower rates of CGT apply to income and gains falling within the basic rate band. To give effect to tax relief for pension payments and gift aid payments, the basic rate band is extended.

The calculator asks a series of questions, each of which must be answered to move on to the next question. The first questions concern whether the user is completing a self-assessment return, whether as an individual or as a trustee and whether capital gains were realised on or after 30 October 2024.

Having established that an adjustment is in fact needed, the user must enter details of gains other than those relating to residential interest or carried interest or which benefit from BADR or investors’ relief, both before and after 30 October 2024. Details of residential property gains and those on carried interest are entered separately, as are details of gains qualifying for BADR or investors’ relief.

Capital losses are entered as a single figure. Here, caution must be exercised as the adjustment calculator does not distinguish between those realised in 2024/25 and those brought forward from earlier years. Losses realised in 2024/25 must be set against gains realised in 2024/25 before applying the annual exempt amount. However, there is no requirement to use those from earlier years at the first opportunity, and it is only worthwhile using brought forward losses if they do not result in the annual exempt amount being wasted.

Before entering the losses figure in the adjustment calculator, where there are brought forward losses, it is important to establish how much, if any, of those losses are to be used in 2024/25. The figure entered in the capital losses box should be that for capital losses realised in 2024/25 plus any brought forward losses which are to be used in 2024/25 (which may be less than the total amount of brought forward losses).

Reporting the adjustment

The adjustment figure (not the revised liability for the year) should be entered in the box headed ‘adjustment to capital gains tax’ in the online return. If a paper return is completed, the adjustment is entered in Box 51 on Form SA108.

Example: Disposals before and after 30 October 2024

Marcus sold some shares in July 2024, realising a gain of £7,000. He sold some further shares in November 2024, realising a loss of £2,000. He also sold a beach hut in January 2025, realising a gain of £15,000. Marcus has income from employment of £75,000. He did not make any gift aid payments or pension contributions in 2024/25.

When completing his self-assessment return for 2024/25, HMRC’s software initially calculated his CGT liability at £3,400 (i.e., (20% (£7,000 - £2,000 + £15,000) - £3,000)).

The adjustment needed for the year, as per the adjustment calculator is £400. The post-30 October 2024 gain is reduced by the losses (£2,000) and the annual exempt amount (£3,000) and taxed at 24% rather than 20% as per the initial calculation.

The adjustment is therefore (24% - 20%) x (£15,000 - £2,000 - £3,000). The adjustment of £400 is added to the £3,400 initially calculated to arrive at the liability for the year of £3,800 (i.e., (20% x £7,000) + (24% x £10,000)).

Practical tip

Where capital gains were realised on or after 30 October 2024, use HMRC’s adjustment calculator to ensure that the correct amount of CGT is paid for 2024/25.

Landlords will be impacted by Making Tax Digital when it comes into effect in April 2026.

Making Tax Digital (MTD) is going to mean big changes for the majority of landlords who submit self assessments.

You’ll need to use software to keep track of your income and expenses and to make quarterly MTD submissions.

This applies to income from rental properties or self-employment is over £50,000 a year from April 2026 and over £30,000 from April 2027.

Instead of submitting a yearly Self Assessment you’ll need to update HMRC every quarter.

Will all landlords be affected by MTD?

MTD impacts all landlords with personally owned properties earning more than £50,000 a year from rental properties or self-employment from 2026, and those earning £30,000 or more from 2027.

Property income in scope for MTD includes:

• Residential buy to lets
• HMOs and student lets
• Furnished holiday lets (FHL)
• Commercial property
• Non-UK property, such as a holiday apartment abroad

This is £50,000 of rental income, so gross profit before deducting your expenses, rather than net profit.

I own rental property in a partnership. Will MTD affect me? - HMRC has said it will announce dates for other types of partnerships, including LLPs and those with corporate partners, at a later date.

I’m a landlord that’s registered as a limited company. Will MTD affect me? - lf You own your properties in a limited company, you don’t need to worry about MTD for Income Tax yet.

Does MTD mean you need to pay tax four times a year? - No, how you pay self-assessed income tax is not changing.

How does Making Tax Digital work for joint landlords? - If the rental income is from a jointly owned property, this is based on the share of ownership - i.e. 50% if both parties have equal shares in the property. If your share of the rental income is over £50,000, then you'll be in scope for MTD from April 2026.

To conclude - if you currently complete a Self Assessment for your property income, and you earn over £50,000 from property or self-employment, you’re going to need to switch to use software to make quarterly MTD submissions from April 2026.

Latest developments in making tax digital.

We are now little more than a year away from the phased introduction of making tax digital (MTD) for income tax self assessment (MTD ITSA), as follows:

Annual aggregate turnover (all sources) Implementation date

More than £50,000                       5 April 2026

More than £30,000 and up to £50,000     5 April 2027

More than £20,000 and up to £30,000     Before this Parliament ends (2029)

This last new, lowest band was announced as part of the Autumn Statement 2024 on 30 October 2024:

‘The government will expand the rollout of MTD to those with incomes over £20,000 by the end of this Parliament, and will set out the precise timing for this at a future fiscal event.’

Up to that point, many advisers were daring to hope that MTD might perhaps baulk at going lower than the initial £50,000 per annum threshold.

Key points It is perhaps worth emphasising:

 • The thresholds are measured across one’s annual gross income across all business sources (i.e., rents are broadly lumped in alongside all trading receipts – but see also below).

 • The measurement year for testing whether one is caught for April 2026 (being the start date for those individuals in the vanguard) will be 2024/25, the actual numbers for which may only just have been finalised and filed by 31 January 2026.

 • Thus, do the results for 2024/25 (now) dictate the MTD status for 2026/27?

 • Likewise, the measurement year for whether MTD for ITSA will apply for the lower £30,000 annual threshold from April 2027 (i.e., 2027/28) will be the actual results for 2025/26.

 • But each separate trade and property business* will still need its own set of quarterly returns ‘updates’.

 • Once a taxpayer is caught by MTD ITSA, that annual aggregated business turnover will need to fall below the threshold for three successive years in order to break free of its clutches.

*Generally, all property sources are rolled into a single property business; however, one might have separate UK and offshore rental businesses or lettings in different ‘capacities’, such as sole or joint tenancies, as against a full property partnership.

Given that the annual threshold is intended to have fallen to just £20,000 by 2029, one will presumably have to hope for another means of escape, such as business cessation (see also below).

Income boxes and joint property details

HMRC will monitor taxpayers’ incomes and corresponding MTD obligations by reference to specific boxes on their submitted tax returns – the gross trading income and rental receipts sections. This should be reasonably straightforward, but a quirk has arisen in relation to joint lettings.

Landlords holding only a proportion of joint property are, of course, reliant on whoever prepares that property’s accounts for their income and expenditure details. They are also allowed to choose to include only the net income figure from joint lettings in their current-format tax returns (whether as part of a larger portfolio or not).

In July/August 2024, HMRC confirmed that this easement would continue under MTD, despite the risk of the landlord understating their ‘true’ gross annual income by potentially including only the net amounts for co-owned property letting income.

Audit trail abandoned  When the quarterly ‘update’ regime was originally devised, it was intended that each return would report only that quarter’s results, and that any amendments to previous quarters in the tax year would have to be reported in the next available return but flagged separately so that HMRC could track any changes made.

HMRC has since walked back from this approach and announced in November 2023 that each quarterly return will now hold simply ‘year-so-far’ amounts without further analysis into separate quarters, etc.

Quarterly update deadlines On 22 February 2024, the latest regulations then published included that the quarterly updates’ filing deadlines would be extended by two days, to 7 August/November/February/May, thereby aligning with the usual VAT stagger group filing deadline for calendar quarters.

End of the ‘end of period statement’ Did anyone realise that, when the Chancellor announced ‘the end of the annual tax return’ back in July 2015, what he actually planned instead was a ‘final declaration’, plus four quarterly returns (‘updates’) for each separate business of theirs, plus an annual end of period statement for each business to cover all of the usual annual tax adjustments for disallowed expenses, capital allowances, etc?

But never mind because, ever keen to cut down on taxpayers’ administrative burdens, the government has magnanimously decided to remove the proposed end of period statement and just include all those tax adjustments in the final declaration, instead.

Presumably, the government is banking on nobody spotting that the updated final declaration will now function almost exactly like the tax return whose demise was promised almost a decade ago, just now with a load of extra form-filling obligations that nobody outside of HMRC ever asked for.

Exemptions and exclusions The list of specific exemptions from MTD ITSA has grown slightly:

 • Trustees;

 • Personal representatives of someone who has died;

 • Lloyd’s members;

 • Individuals without a National Insurance number (announced Autumn Statement 2023); and

 • Foster carers (announced Autumn Statement 2023).

However, just because someone is a Lloyd’s name or foster carer does not mean that they are entirely exempt from MTD; if they have ordinary non-exempt sources, they can be ‘caught’ for those. Likewise, the National Insurance Number exemption will, for most people, last only until they receive their notification – usually just before their 16th birthday.

A wider exemption may be accepted where the taxpayer can show that they are unable to comply with the requirements of MTD, such as by reason of:

 • old age or infirmity;

 • remoteness of location (poor Internet access); or

 • religion.

It seems that, so far, HMRC has resisted the temptation to hide the ‘digital exclusion’ application process behind an online application form.

Conclusion The greatest menace in MTD is not the digital filing and reporting, but the digital record-keeping; having to set up and maintain financial records in a manner tailored more to HMRC’s wants than your own business needs. This is the other, as-yet-unseen nine-tenths of the MTD iceberg.

But in promising to drop the entry threshold to as low as £20,000 per annum, the government has signalled to taxpayers (and to software companies) how firmly it has committed us to this project. For now, there are no precise dates on when MTD for ITSA will be extended to partnerships or to companies (‘avoiding’ MTD might soon be one of the few remaining tax-based incentives to incorporate) but, again, keep in mind that partners will not automatically be safe from MTD if they also have non-partnership business interests.

Overview

• Many possible changes were the subject of speculation leading up to the Budget: this list includes things that have been ruled out, as well as changes that the Chancellor announced
• These key points include measures that were announced previously but are about to come into force
• Measures which will not take effect until future dates are listed separately below

​​​​​​​​​​​​Implemented immediately

• Capital Gains Tax rates for disposals on or after 30 October 2024 rise from 10% to 18% (basic rate taxpayers) and 20% to 24% (higher rate taxpayers); the higher rate for residential property remains 24%
• Lifetime limit for gains qualifying for Investors’ Relief is reduced from £10 million to £1 million for disposals on or after 30 October 2024
• Stamp Duty Land Tax surcharge for purchase of additional dwellings increased from 3% to 5% for purchases from 31 October 2024
• Rules tightened for close company loans to participators, transfers of UK pension funds abroad, Employee Ownership Trusts, Employment Benefit Trusts and liquidation of Limited Liability Partnerships to close loopholes from 30 October 2024

From January 2025

• Confirmation that VAT will apply to private school fees from 1 January 2025

From April 2025

• Increase in rate of Employer National Insurance Contributions (ERNIC) from 13.8% to 15%, together with reduction of Secondary Threshold from £9,100 to £5,000
• Increase in Employment Allowance for small businesses’ ERNIC from £5,000 to £10,500 for 2025/26
• Certain ‘double cab pickup vans’ to be treated as cars for some tax purposes
• Extension until March 2026 of the 100% first year allowance for qualifying expenditure on zero-emission cars and charging points for electric vehicles
• Abolition of the remittance basis of taxation for foreign domiciled individuals, to be replaced by a ‘residence-based scheme’
• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 10% to 14%
• CGT rate on ‘carried interest’ increased to 32%
• IHT Agricultural Property Relief to be extended to land managed under an environmental agreement with government or other approved bodies
• 40% business rates relief for retail, hospitality and leisure businesses for 2025-26 on values up to £110,000
• Charitable business rates relief no longer available for private schools
• Fuel duty remains frozen, and the temporary 5p cut announced in March 2024 will be extended to 22 March 2026
• Rate of interest on late paid tax will increase by 1.5 percentage points
• Security for certain tax reclaims increased by introduction of a requirement for a digital signature
• Above inflation increases in National Living Wage and State pension
• As previously announced, the advantageous tax treatment of Furnished Holiday Lettings no longer applies in 2025/26

From April 2026

• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 14% to 18%
• ‘Carried interest’ moved to the income tax regime, with a discount for certain qualifying disposals
• IHT Agricultural Property Relief and Business Property Relief at 100% will only apply to the first £1 million of combined value; above that limit, the maximum relief will be 50%
• IHT Business Property Relief restricted to 50% for all ‘unlisted’ shares which are quoted on recognised stock exchanges such as the Alternative Investment Market
• Tightening of rules on charitable tax reliefs and closure of an avoidance scheme involving company cars from 6 April 2026
• Confirmation of the introduction of Making Tax Digital for Income Tax Self-Assessment from April 2026

No change, or later

• Unused pension funds and death benefits payable from a pension will be included in a person’s death estate for IHT purposes from 6 April 2027
• No changes to the ability to draw tax-free lump sums from pension funds, or reintroduction of a lifetime allowance
• The freezing of personal income tax allowances and rate bands will end with 2027/28: inflationary increases will be reintroduced for 2028/29
• Corporation tax rates appear to be fixed for the duration of the Parliament
• Inheritance tax nil rate bands will be frozen at their present levels until April 2030 (extended by two years from the previously announced date); no change to the availability of the additional Residence Nil Rate Band
• ISA and Junior ISA investment limits fixed at their current levels until April 2030
• Company car tax rates announced for 2028-29 and 2029-30, to provide long-term certainty; the incentives for purchasing electric vehicles will be maintained
• Previous Government’s proposal to base High Income Child Benefit Charge on combined household income will not be taken forward – HICBC still based only on the income of the higher earner of a couple

The importance of ‘period of ownership’ and ‘occupation’ in relation to a capital gains tax principal private residence relief claim.

Principal private residence (PPR) relief is one of the most important and familiar of reliefs against a capital gains tax (CGT) charge on the sale of a residence.

However, as is often the case with tax matters, this relief is not straightforward and comes with a set of conditions.

Lacking definitions

The relevant section of the Taxation of Chargeable Gains Act (TCGA) 1992 is s 222(1)(a), where PPR relief exempts a capital gain arising on a disposal of, or of an interest in:

‘(a) a dwelling house or part of a dwelling house which is, or has at any time in his period of ownership, been his only or main residence; or

(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.’

It is easy to overlook the phrase ‘period of ownership’ and focus instead on ‘at any time’ and ‘only or main residence,’ leading to the assumption that PPR relief automatically applies – but when do ‘ownership’ and ‘occupation’ begin?

Notably, the legislation refrains from providing definitions; therefore, we must refer to HMRC guidance and tax case law for clarity.

‘Period of ownership’

Generally speaking, the ‘period of ownership’ refers to the time during which the individual legally owns the property, starting from the date the property was initially acquired (usually the date of completion of the contract or 31 March 1982, if later), ending at the date of disposal.

The Upper Tribunal case HMRC v Lee [2023] UKUT 242 (TCC) illustrates this point. The case centred upon HMRC’s argument that a dwelling house cannot be owned separately from the ground upon which it stands, meaning that the period of ownership must include the entire duration of ownership of the land.

The facts in Lee were that the taxpayers had bought a property with land, demolished the house and spent two and a half years building a new one. They moved in and lived there for just over a year before selling, claiming full PPR relief on the gain made. The taxpayers argued that full PPR relief was available because the expression ‘period of ownership’ referred to the time they owned the new house. The critical period for them was the 15 months between the completion of the new house and the date of sale. Therefore, under the PPR relief rules at the time, this period would qualify for the final exemption of 18 months (this statutory period was subsequently reduced to nine months).

HMRC argued that the taxpayers had effectively owned the property for 43 months, from the date of acquisition of the land to the date of sale of the house, calculating that PRR would be available for 18/43rds of the gain due to the 18-month final period exemption.

The tribunal disagreed with HMRC’s view, upholding the First-tier Tribunal’s decision that the section of TCGA 1992 referred to a ‘dwelling house’ and therefore the start date for PPR relief was the date that the construction work on the property was completed. Although the house existed for a quarter of the time the land had been owned, the ‘period of ownership’ test related to the house only.

Planning opportunities

This ruling seemingly presents a valuable tax planning opportunity. It implies that a taxpayer could strategically purchase a plot of land with the intention of obtaining planning permission to build a larger house, or they could opt to acquire a smaller residence with the plan of demolishing and constructing a more substantial dwelling. Although obtaining planning permission can take years, once granted, the value of the land or property would undoubtedly increase. This case indicates that even if land remains vacant for an extended period prior to the construction of a house, once it becomes occupied as the PPR, the seller may be eligible for full PPR relief, even if the structure was present for a short period before the sale.

Another planning opportunity could arise where an owner lives in their main residence while ... continued ...

... continuation ... constructing a new property within the garden. Any gain on the sale of the original house would qualify for full PPR relief as the main residence, and any gain on the future sale of the new property could also be fully exempted if it was occupied for the full period of ownership (starting on the contract completion date or date of occupation, not when the original land was acquired).

Furthermore, the Court of Appeal has confirmed that the date of acquisition of an off-plan property for PPR relief purposes is the date of completion and not at exchange of contracts (Higgins v HMRC [2019] EWCA Civ 1860).

‘Occupation’

To qualify for PPR relief, the owner must have occupied the property as their main home during the period owned. ‘Occupation’ refers to actual physical residence (i.e., the period during which the owner genuinely lived in the property as their main home). Those periods of occupation will be covered automatically under a PPR relief claim. However, there are some periods when actual presence in the residence is not possible but which can still qualify if certain conditions are met (e.g., working away or a delay in moving in due to refurbishment).

Additionally, the period of non-occupation between buying the property and moving in can also be treated as a period of occupation, limited to a 24-month period on the condition that no other person uses the property as their residence during that time. Problems can arise when there is a delay in taking up residence or when the taxpayer already owns the land on which a house is to be built or buys a plot specifically to do so. A typical situation can arise when properties are being developed, not least because sometimes the development takes longer than 24 months through no fault of the owner. Therefore, the date of ‘occupation’ needs to be considered carefully.

The case White & Anor v HMRC [2019] UKFTT 659 (TC) centred around the 24-month rule (as an extra-statutory concession), highlighting the difficulty in determining when ownership starts and, therefore, from when the clock starts ticking. In that case, HMRC considered the date of acquisition of a property acquired in stages commenced from the time of entering into an unconditional contract for the first part of the property acquired.

The taxpayers bought four adjacent properties to convert into one residence. The first property was purchased in June 2001 and the final one in April 2002. There was a dispute around the date of taking up residence – somewhere between September and November 2003. On the eventual sale, HMRC challenged the PPR relief claim, going for the date of exchange of contracts of the first property as the start date. Depending on when occupation was held to begin, the delay was 27 or 29 months. This meant the existing concession for delayed occupation could not apply and more than two years of the ownership period was chargeable.

The importance of records

HMRC is known to look carefully at developments for residential property undertaken by builders who then claim PPR on sale.

A typical example is Ives v HMRC (2023) UKFTT 968 (TC), where in a period of five years, the taxpayer (a plasterer) bought and sold three properties at a substantial gain following work undertaken to each property. HMRC argued he was trading as a property developer, but the First-tier Tribunal disagreed, allowing a PPR relief claim to succeed. Reading the judgement, it is clear the courts require a great deal of background information when making their decisions. In this case, the court looked at whether contents insurance had been taken out in each case (it had not), although it was confirmed that furniture had been moved. Witness statements were presented from 20 family and friends asserting that they visited the properties for parties (which would not have been possible in a non-habitable property), water and electric bills were produced, evidence taken from estate agents, pictures printed from Zoom, whether addresses had been changed for such items as a driving licence, car insurance, the doctor and milkman.

Ultimately, the court determined that ‘on the balance of probabilities’ the taxpayer intended each property to be his main residence, despite relatively short-term occupancy due to changing family circumstances.

Practical tip

Mr Ives could be seen as fortunate in winning his case, possibly because HMRC’s presentation of the case had flaws. However, the case does indicate HMRC’s area of interest and the importance of keeping documents to support any PPR relief claim.

The possible ways in which principal private residence relief claims might sometimes be incorrect.

For most individuals selling their main home, the expectation is that any capital gains will be largely or fully tax-exempt because of principal private residence (PPR) relief.

However, tax cases have demonstrated the potential for costly mistakes, with incorrect claims leading to substantial capital gains tax (CGT) bills.

To qualify for a PPR relief claim, two conditions need to be fulfilled:

 1. The property must not have been purchased solely for the purpose of making a profit.

 2. It must be the individual’s only or main residence throughout the period of ownership.

Periods of absence from the property may be permitted, depending on the circumstances.

Making a (trade) profit?

A common strategy for tax-free property portfolio sales is to nominate each property as a PPR in turn, prior to the sale. However, whilst HMRC may initially accept PPR relief claims for the first couple of sales, their ‘Connect’ system may flag these transactions when checking Land Registry records. This could lead to a challenge of the PPR relief claims on the basis that the reason for nominating the properties was to avoid paying tax, which may indicate a trading activity.

HMRC may also pursue taxpayers who frequently buy and sell properties within a relatively short period, arguing that those engaged in such activities are operating as a business and are therefore liable for tax and National Insurance contributions. Similar observations apply to property developers who purchase properties for development, move in after completion, and then resell them shortly afterwards for a profit.

What is ‘permanence’?

Although many tax cases have affirmed the need for a degree of permanence or continuity in residence, the quality of occupation and the expectations regarding residency are more critical factors than the length of time spent living there. Generally, a property should serve as the permanent residence for at least 12 months to strengthen a PPR relief claim, although claims have been successful for shorter periods in some cases.

Evidence is key – there needs to be “some evidence of permanence, some degree of continuity or expectation of continuity” for the claim to be valid even if, in the end, the claimant does not live in the property for as long as originally intended. HMRC will apply this standard at the outset of any HMRC enquiry challenging a PPR relief claim.

It is a matter of fact whether a property is the individual’s PPR or not, but to demonstrate the fact, suggestions include ensuring that utility bills are in the owner’s name at the property address. Other documentary evidence could include receipts for home insurance, telephone bills and DVLA records showing the address as the main residence during the PPR relief claim period. Information considered in evidence by HMRC in the past has included fuel bills indicating that a property was unoccupied for part of a winter when the taxpayer claimed it was being used as their PPR.

Excessive PPR relief claims may arise if the property is not occupied as the individual’s main or only residence throughout their ownership period. While there is no minimum occupancy requirement for a PPR relief claim, many fail because the property needs to be occupied both before and after any period of absence (unless the absence is due to work away from home, in which case returning is not required). If the reason for the absence is work abroad, then any period of absence, no matter how long, is allowable. ... continued ..

Absences can be cumulative so long as one or more of certain conditions apply:

 • Absences of up to three years (or two or more periods of absence which together do not exceed three years) may be treated as a period of residence.

 • Absences of up to four years can be allowed if the distance from the place of work prevents residence at home or the employer requires the taxpayer to work away from home.

Unfortunately, it is often the case that for unavoidable reasons, the individual is unable to move back into the property after an absence. In such cases, even if the previous conditions have been met, the absence will not count, resulting in a potentially substantial portion of a gain being taxable. It does not matter whether the property remains empty or is rented during the absence.

Some relief is available, as the first year and the last nine months of ownership are always treated as periods of occupation, regardless of whether actual occupation occurs. This exemption can be valuable in situations where it takes a long time to sell the property and find alternative accommodation.

Getting ‘flipping’ right An often overlooked tax relief opportunity is the ability to ‘flip’ ownership, which broadly allows PPR relief to be retained even when the owner is not residing in the property. The tax law permits the owner of more than one property to elect which is their main residence. The owner must have lived in the property at some point, but there is no specific duration for these purposes.

Having made the initial election, it can then be varied (flipped) as many times as required by giving a further notice to HMRC. There is no prescribed form or wording for the election, but the rules state that it must be made within two years of acquiring a second (or subsequent) residence unless there is a delay in occupation, in which case the date of moving into the residence is the trigger event.

If no election is made, HMRC will make its own determination on sale. Should the two-year time limit be missed altogether, there needs to be a ‘trigger’ event which will change what is termed the ‘combination of residences’ and reset the election date.

Examples of ‘events’ include:

 • getting married;

 • renting out one of the properties for a short period; when that let period ends, the owner can take up residence as the ‘combination of residences’ will have changed; or

 • selling half the house to a joint owner, such that the seller is no longer in full ownership but is still in residence.

Every owner of two or more properties should elect which residence is to be treated as their PPR. An election should ideally be made as soon as possible following the purchase of the second property. Then, having made the election, the situation can be reviewed at any time up to the two-year anniversary date, thereby keeping all options open. Having made an initial election, there is no statutory limit to the number of times that the address of the property declared on the election can be changed.

Impact of renting a room

Letting a room or rooms in a main residence can be beneficial from an income tax perspective under the rent-a-room relief rules. However, the letting can have CGT implications as letting part of the property removes that part of the property from the cover of PPR relief while it is so let. This may or may not be problematic, depending on whether lettings relief is available to shelter any gain attributable to the let period and, where the gain is not fully sheltered, whether the CGT annual exempt amount is sufficient to cover any chargeable gain remaining.

Lettings relief shelters any gain not covered by PPR relief, such that the gain is only chargeable to CGT to the extent that it exceeds the lower of:

 • the amount of the gain sheltered by PPR relief; and

 • £40,000.

Practical tip

Spouses and civil partners can take advantage of the no gain, no loss provisions and transfer the property into joint names before any property sale where this is beneficial (e.g., to benefit from a second CGT annual exempt amount).

Employers have a duty to enrol eligible staff in a pension scheme. Staff are eligible if they are aged between 22 and state pension age and earn more than £192 per week (£833 per month).

Where an employer takes on seasonal or temporary staff, they must still assess them. However, the assessment will need to take into account that the worker may only work for the employer for short periods of time, they may join and leave in the middle of pay periods and their earnings and hours may vary. The employer can use postponement to delay the assessment.

Staff working for less than three months

Where staff are taken on for less than three months, the employer can either assess them each time they are paid and enrol them in a qualifying pension scheme if they meet the eligibility criteria or make use of postponement. Under postponement, the employer can delay working out who to enrol for up to three months. An employer can only use postponement if they are within six weeks of the date on which the worker met the age and earnings criteria for automatic enrolment.

Employers who opt to use postponement must write to the workers to let them know that they are using postponement. This must be done within six weeks of the start of the postponement period. If the worker leaves before the three-month period is up, the employer is spared the need to assess them and enrol them in a pension scheme. However, eligible staff can request that the employer enrols them during the postponement period.

Staff working for more than three months

Where temporary or seasonal staff are employed and the expectation is that they will work for the employer for more than three months, the employer can either assess the staff each time they are paid and enrol them in a qualifying pension scheme if they are an eligible employee or they can use postponement. However, where they work for more than three months, postponement delays the enrolment of eligible staff rather than removing the enrolment obligation.

Postponement can run from the date that the employee started work or, if later, the date on which the employee met the age and earnings criteria for automatic enrolment.

At the end of the three-month period, the employer must assess those staff to see if they are eligible employees, and if they are, enrol them in a qualifying pension scheme straight away. Where a worker is not an eligible employee, the employer can again use postponement to delay assessing them for a further three months.

Workers who meet the eligibility criteria can request that the employer enrols them in a qualifying pension scheme during the postponement period.