Category: Tax

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Business tips Tax

The benefits of Business Asset Disposal Relief for entrepreneurs 

The benefits of Business Asset Disposal Relief for entrepreneurs

When you dispose of a business, you want to do this in a way that maximises your return and keeps you as tax-efficient as possible. But what’s the best way to achieve this? 

The answer may well be to make use of the new Business Assets Disposal Relief (BADR). This was previously known as Entrepreneurs’ Relief, but was renamed and reworked as BADR in Finance Act 2020. If the gain you make when disposing of a business qualifies for BADR, the first £1M of your lifetime gains can be taxed at 10% instead of 20%. 

That’s a substantial tax benefit if your capital gain happens to be eligible. However, some of the rules are open to interpretation and good guidance will be needed to ensure your eligibility. 

Understanding the BADR rules 

If you can reduce the capital gains tax (CGT) due on your disposal down from 20% to 10%, that ends up saving you a considerable amount in lost cash. 

But understanding and adhering to the BADR rules can be tricky, especially if you don’t have the assistance of an experienced tax adviser to guide you. 

Key elements to factor in include: 

  • BADR applies to disposal of the assets of a business you own as a sole trader or partnership, but NOT on disposal of goodwill to a close company where you own 5% or more of the shares. 

  • The relief is NOT available on goodwill arising on incorporation of an unincorporated business. And it’s also NOT available on any investments held by the business. 

  • The relief can also be used in relation to assets that you own personally but that are used in the business or your personal company – and which are sold within three years of the business ceasing – or in association with the disposal of your interest in the business or sale of shares in your personal company. For example, you might personally own a workshop that’s used by the company for business purposes. 

  • When talking about shares in your ‘personal trading company’, the following is the definition of a personal company: it’s a company in which you own 5% or more of the ordinary shares, where you’re entitled to 5% or more of the profits available for distribution and of distributable assets in the event of a winding up. You must also be either an employee or officer of the company. 

  • There are no requirements in the BADR rules about hours or salary, but you must have some demonstrable evidence that you work in the company. 

  • A trading company is one which doesn’t have ‘substantial’ non-trading activities. Although not defined in legislation, HMRC considers ‘substantial’ to be 20% or more. This applies to asset values, sales, profits and management time. An overall view taking all factors into account needs to be established. 

  • As an example, if your company has surplus cash equal to over 20% of total assets, that may be considered to be a non-trading asset. HMRC’s default view is likely to be that it should have been extracted and taxed as dividends, which would taint the company’s trading status. It may however be possible to argue that the company needs to carry large cash balances for trading purposes. 

  • In the event of a company being wound up, BADR will be denied if the shareholder operates in a similar trade within the following two years. This is to prevent the owners taking advantage of the relief with no intention of permanently exiting the trade. 

Talk to us about your eligibility for BADR 

If you currently own shares in a company and are thinking of disposing of the business (whether by sale or winding up), we can guide you through the process and help you avoid the pitfalls. 

If your situation is complex – for example, you have multiple share classes and significant non-trading aspects to the business – there’s real value in getting expert advice. The rules in this area change and getting it wrong can be an expensive mistake! 

Get in touch to discuss your BADR eligibility. 

 

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Categories
Cash Tax

Extended carry back of losses – don’t miss the claim deadlines

Extended Carry Back Of Losses - Don't Miss the Claims Deadline

To help businesses that suffered losses during the Covid-19 pandemic, temporary measures were introduced to increase the period for which certain losses could be carried back. This is helpful as it enables businesses
to obtain relief for those losses earlier, generating a useful tax repayment at times when the business may be suffering from cash flow difficulties.

Relief is available to both unincorporated business and companies, although the mechanics of the relief is different. To take advantage of the extended carry back period, the relief must be claimed by the relevant deadline.

Unincorporated businesses

The extended carry-back rules apply to losses for the 2020/21 and 2021/22 tax years. Under the rules, unrelieved losses can be carried back and set against profits from the same trade for the three years before the tax year of the loss. The extended rules apply where a claim has been made to relieve the loss against the general income of the year of the loss and/or the previous tax year, and the loss has not been fully relieved by that claim. Losses carried back under the extended rules are set against the trading profits of a later tax year before that of an earlier tax year. Losses carried back under the extended rules are capped at £2 million for each loss-making tax year within the scope of the relief.

If a business wishes to use the extended carry-back rules in respect of a 2020/21 loss, it must claim by 31 January 2023. The deadline to claim relief for a 2021/22 loss under the extended carry back rules is 31 January 2024. Claims are normally made in a tax return, but a stand-alone claim can be made where the claim affects more than one tax year.

Example

A sole trader makes a loss in 2020/21. He has no other income in that year. He makes a claim for sideways relief to carry back the loss against his general income for 2019/20. If he wishes to take advantage of the extended carry-back rules to carry back any unrelieved loss against trading profits of 2018/19 and, where loss is not fully relieved, against trading profits of 2017/18, he must claim by 31 January 2023.

It should be noted that the claim cannot be tailored to prevent personal allowances from being wasted. Where this will occur, consideration should be given to whether it would be preferable to carry the loss forward instead and set it against future trading profits.

Companies

Under normal rules, a company can carry back a loss for an accounting period back one year against the profits of the previous accounting period. Under the extended carry-back rules, losses for accounting periods ending between 1 April 2020 and 31 March 2022 can be carried back up to three years. Losses must be set against the profits of a more recent accounting period before those of an earlier accounting period. A cap of £2 million applies to losses for accounting periods ending between 1 April 202 and 31 March 2022 which can benefit from the extended carry-back. A separate £2 million cap applies to losses for the accounting period ending between 1 April 2021 and 31 March 2022.

Claims must be made within two years of the end of the accounting period in which the loss arose.

Example

A company prepares accounts to 31 March each year. It made a loss in the year to 31 March 2021. Under normal rules, the loss can be carried back against profits for the year to 31 March 2020. If the loss is
unrelieved, a claim can be made under the extended carry back rules to set the loss first against the profits of the year to 3 March 2019 and, if still not fully relieved, against the profits of the year to 31 March 2018.

The claim must be made by 31 March 2023

What are my options? 

Your immediate thoughts are probably ‘great, sign me up!’. However, depending on your business circumstances you need to consider the different options to ensure you maximise this opportunity for your business.  

There are three main options: 

 

  • Make a current Year Claim to reduce your tax bill 

  • Carry Back your losses to receive a Tax Refund 

  • Carry Forward your losses to reduce your future tax bill 

For businesses with large losses a combination of all three should be considered. 

Corporation Tax

The Corporation Tax rate is changing from April 2023, so this must also be considered when deciding if to carry back losses or carry forward. There will be a decision which needs to be reviewed alongside the need for cash now and the want to reduce taxes.

If your business has made a trading loss since April 2020, book a call and let’s discuss the best route to get a tax relief cash bonus back into your business. 

Categories
Business tips Gym Tax

Tackling the cost-of-living crisis with Tax Advice & Reliefs

Tackling The Cost of Living Crisis with Tax Advice & Reliefs

As the cost-of-living continues to rise, small businesses are feeling the impact deeply, hitting both their personal and business budgets, as well as their employees.

 

With soaring energy prices, rising inflation, good shortages and supply chain issues businesses have been hit hard. And all this is coupled with the very real concern that trade could drop off if people are forced to cut back their spending.

Hunt's First Autumn Budget

Hunt’s first Autumn Budget

Over the last
few months, we have seen many tax changes announced and mostly all of them
repealed under the new PM’s leadership.

In the Autumn
Statement on 17th November 2022, we saw the government announce several
tax changes. Here’s a roundup of the latest changes:

Changes affecting business owner and employees:

·       Freezing of income tax and national insurance rates/ thresholds until April 2028.

·       Reducing the threshold for when you pay 45% tax (from £150,000 to £125,140) from April 2023.

·       Reduction in the tax-free dividend allowance from April 2023 (£2,000 to £1,000).

·       Reduction in NIC paid by 1.25% from 6th November 2022 – saving money on salary and
benefits.

·       Increase in SDLT thresholds for buyers and first-time buyers from 23rd September
2022. These rates will continue until 31st March 2025.

 

Changes affecting the business:

·        Reduction in tax relief for SME’s claiming for qualifying R&D projects – from 130% to 86% and reducing the loss surrenderable tax credit from 14.5% to 10%.

·        Reduction in staff costs by 1.25% (NIC) from 6 November 2022 – saving money on employing staff.

·        Increase in corporation tax from 19% to 25% in April 2023. Companies with profits between £50-250k will pay 19-25%, whist companies with profits over £250k will pay 25%.

·        Freeze on employer NIC rates and the employment allowance.

·        Confirmation that the Annual Investment Allowance for Capital Allowances will continue to remain at £1m post April 2023 when the 130% super deduction ends.

·        Increase in SEIS investor funding limits from April 2023 from £100k to £200k – allowing eligible businesses to raise more cash which gives investors favourable tax relief.

 

·        Increase in limit on Company Share Option Plans from £30k to £60k from April 2023.

 

 Only a small number of these measures guarantee lower tax costs for businesses compared what we originally expected when we had the Mini Budget in September.

But what else can businesses do?

Tax advice and tax reliefs is an area often overlooked when businesses are experiencing financial hardship. But tax is a very real cost to businesses and any opportunities to save it should be explored. Not to mention the many ways businesses can look to support employees’ tax efficiently without resorting to increasing wages.

There are many tax efficient ways business owners can look to get more cash back into their business and ease the cost-of-living burden personally and for their employees.

 

 

Innovation tax reliefs

 

Claim back up to £33 (up to £21.50 after April 2023) for every £100 spent via R&D Tax Relief / claim back up to £90 for every £100 spent via Creative Tax       Relief / save 10% in corporation tax on patent box relief claim.

Funding

 

Up to £50k back on SEIS funding for investors / up to £300k back on EIS funding for investors / receive up to £1k in interest on business owner loan without        paying income tax.

VAT

 

VAT registration – save 20% in VAT on purchases or VAT deregistration – save    your customers 20% on VAT on their purchases.

Investments

 

Receive an extra 30% for investments that are eligible under the capital           allowances super deduction until 31st March 2023.

Losses

 

Limited companies that have made trading losses­ can carry them back over the last three years and get a refund for 19% (or up to 25% for profits over £250k from April 2023) corporation tax already paid.

Pensions

 

Pension contributions are tax-deductible so result in a 19% (or up to 25% for profits over £250k from April 2023) corporation tax saving. Pay up to £40k per year into pension saving c.£16.8k for a 40% taxpayer.

Employee incentives & expenses

 

There are numerous tax efficient benefits and business expenses personally paid for to explore to help boost personal funds from trivial benefits to points          reward cards.

Employee loan

 

If a business has available cashflow, it can be a good way to incentivise the   business owner and employees by offering up to £10k loans, interest free.

If you are a business owner, valuable tax savings could help with the steep increase in costs your business is experiencing right now, along with many tax reliefs and incentives that could ease the cost-of-living burden for you and your employees.

Don’t ignore the opportunity
Work with us, or your Accountants and Advisers, but don’t ignore this opportunity. Take a good look at the visual to see if anything feels relevant to you.

 

If there is even the smallest chance something might be relevant, get in touch and let’s talk through how we could help.

Categories
Business tips Tax

Should you deduct tax from interest payments? 

Should you deduct tax from interest payments?

 

In the course of funding and growing your business, it’s likely that you’ll take out some form of loan – and will end up paying interest on loans from directors or other third-parties. However, many businesses fail to consider the taxation requirements on these interest payments. 

There are three different categories of lender to consider: 

  1. Interest paid to an individual – usually a director or shareholder 

  1. Interest paid to a UK limited company 

  1. Interest paid to a non-resident company 

Each of the categories has differing rules regarding how to deduct tax from interest payments. As such, it’s important to think about who you’re paying the interest to and how you should account for the requisite tax on these payments. 

How to account for tax on loan payments 

So, how do you account for the tax on these loan payments? And how do the rules change depending on which category of lender you’re making the payments to? 

Let’s look at how this works for the three categories we’ve outlined: 

  • Payments to an individual – if the lender is an individual (e.g. a director or shareholder,) you should deduct tax from any interest paid at the basic income tax rate of 20%. This then needs to be remitted to HMRC on a quarterly basis, together with form CT61 – the corporation tax form re the return of income tax on company payments. Many companies are unaware of this requirement and are open to penalties and other compulsory payments. 

  • Payments to a UK limited company – interest paid to a UK limited company can be made without any deduction of tax, unless the company is a nominee for a person beneficially entitled to the interest. 

  • Payments to a non-resident company – interest paid to non-resident companies should by default have tax deducted at the same 20% rate. In many cases there may be a double-taxation agreement (DTA) in place which removes the need to deduct tax at source. If you rely on a DTA, an appropriate claim should be made – it’s not automatic. (Exception: If the non-resident company has a Double Taxation Treaty Passport then interest can be paid without deduction of tax.) 

Other considerations re interest on loan payments 

If you stick to the rules we’ve outlined for the three categories of loan, you can be confident that you’re applying the right tax to these payments. However, there are other considerations to think about re the tax and interest implications. 

  • Reclaiming deducted tax – any tax you’ve deducted from individuals can be reclaimed by the lender as part of their normal self-assessment tax return filing. If their total interest income is within the tax-free personal savings allowance, the company can claim the interest costs against its own profits, while the lender, in effect, receives it tax free. 

  • Annual interest – interest in this case refers to ‘annual interest’. In practice, this simply means that the loan was either expected to last for at least a year in whole or in part, or is capable of lasting for at least a year – for example, an ‘on demand’ loan with no fixed payment date. Interest on, say, a fixed-term six-months loan doesn’t fall under this. It’s also worth noting that where there are successive short-term loans, they could be considered as one continuous loan. 

  • Tax on interest paid – tax is deducted on interest paid. If the interest is added to the principal outstanding, and only payable at the end with the capital, then tax would only be deducted at the end, on the interest element. If the credit is to something like a director’s loan account (which could be withdrawn in whole or in part at any time), even if in practice it isn’t withdrawn, that still counts as ‘paid’ as it’s made available to the director. 

Talk to us about help with your CT61 forms 

If you’re unsure whether you’re accounting for tax on interest payments in the right way, please do come and talk to us. 

Where you’re paying interest on loan payments to a UK limited company, we can help you by preparing the CT61 forms on your behalf. 

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Categories
Tax

Should I change my accounting date for making tax digital?

Should I change my accounting date, for making tax digital?

In preparation of the introduction of MTD for income tax, which comes into effect from 6 April 2024 for unincorporated businesses and landlords with trading and property income of more than £10,000 the basis period rules are being reformed.

At present, once an unincorporated business is established, it is taxed on the current year basis. This means that the profits which are taxed for a particular tax year are those for the accounting period that ends in that tax year. For example, if an established business prepares it accounts to 30 June each year, for 2022/23 it will be taxed on the profits for the year to 30 June 2022, as this is the year that ends in the 2022/23 tax year.

However, from 2024/25 a business will be taxed on its profits for the tax year, i.e. the profits from 6 April and the start of the tax year to 5 April at the end of the tax year. Where accounts are prepared to 31 March (or to a date between 1 and 4 April), the accounting period is deemed to correspond to the tax year. If the accounts are prepared to a different date, it will be necessary to apportion the profits from two accounting periods to arrive at the profits for the tax year. For example, if accounts are prepared to 30 June each year, the profit for 2024/25 will comprise 3/12th of the profits for the year to 30 June 2024 and 9/12th of the profit for the year to 30 June 2025. This will mean that the business will need the accounts for the year to 30 June 2025 in order to finalise their tax liability for 2024/25. Under the current year basis they only need the accounts to 30 June 2024.

To move from the current year basis to the tax year basis, the tax year 2023/24 is a transitional year. In this year, the profits for the year ending in 2023/24 are taxed, together with any profits for the period from the end of that period to 5 April 2024. If there are any overlap profits to be relieved, these will be deducted. This may result in more than 12 months’ profits being taxed in 2023/24. However, spreading relief will tax the additional profits over a five year period, unless the business elects otherwise.

Move to a 31 March year end?

Going forward, life will be simpler if the business prepares accounts to 31 March (or to 5 April). Where the accounting date is other than 31 March, it may be beneficial to change to a 31 March accounting date ahead of the move to the tax year basis. This could be done in 2022/23 or in the 2023/24 transitional year.

Where the move is made in 2022/23, the normal rules on change of accounting date apply. The first accounts to the new date must not be for a period longer than 18 months and the change must be made for commercial reasons. Notice of the change of accounting date must be given in the self-assessment tax return. Depending on how the dates work, any unrelieved overlap profit may be relieved or overlap profits may arise. Any overlap profits created on a change of accounting date will be relieved in the 2023/24 transitional year.

Alternatively, the move to a 31 March accounting date could be made in the transitional year (2023/24). Making the change in this year would avoid the creation of overlap profits and provide access to spreading relief.

 

If a change of accounting date is not made prior to 2024/25, it is possible to change the accounting date once the tax year basis is up and running. This will have minimal consequences and remove the need to apportion profits from two periods to arrive at the profits for the tax year.

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Categories
Tax

Plan your business spending to benefit from time-limited reliefs

Plan business spending to benefit from time-limited reliefs

Unincorporated businesses and companies planning capital expenditure projects need to be aware of some time-limited reliefs. Timing capital expenditure to benefit from these reliefs can be financially beneficial.

Annual investment allowance

The annual investment allowance (AIA) is available to both unincorporated business and to companies. It provides immediate 100% relief against profits for qualifying capital expenditure on plant and machinery in the accounting period in which the expenditure is incurred up to the available AIA limit. The limit remains at its temporary limit of £1 million until 31 March 2023, reverting to its permanent level of £200,000 from 1 April 2023.

Most items of plant and machinery qualify for the AIA; the main exception being expenditure on cars.

Where the accounting period is 12 months in length and falls wholly within the period from 1 January 2019 to 31 March 2023, the AIA limit for the period is £1 million.

Where the period spans 31 March 2023, the AIA limit for the period is:

 x/12 x £1 million + y/12 x £200,000,

where x is the number of months in the period prior to 1 April 2023 and y is the number of months in that period on or after that date.

Consequently, the AIA limit for the year to 30 September 2023 is £600,000 (6/12 x £1 million + 6/12 x £200,000).

However, not all expenditure in a period spanning 31 March 2023 is equal. Where the expenditure is incurred before 1 April 2023, qualifying expenditure up to the limit for the period will be eligible for the AIA. However, a further cap applies if the expenditure is incurred in the period but after 31 March 2023. This is y/12 x £200,000. Only expenditure up to this cap qualifies for the AIA. Relief for expenditure in excess of that qualifying for the AIA is given as writing down allowances.

So, if a business prepares accounts for the year to 30 September 2023, its AIA limit for the year is £600,000. It can claim the AIA for expenditure of up to £600,000 if the expenditure is incurred before 1 April 2023. However, if it incurs the expenditure after 1 April 2023, only £100,000 qualifies for the AIA, whereas, if the business accelerates the expenditure to incur it on or before 30 September 2022 (so that it falls within the year to 30 September 2022), it can benefit from the AIA for expenditure of up to £1 million.

Where significant capital projects are planned, undertaking them sooner rather than later will mean maximum advantage can be taken of the temporary AIA limit.

Super deduction for companies

Companies can also benefit from a super-deduction of 130% of the expenditure when calculating profits. This is available in respect of qualifying expenditure on plant and machinery which would otherwise be eligible for main rate writing down allowance, subject to certain exceptions, the main one being expenditure on cars.

To qualify, the expenditure must be incurred in the period from 1 April 2021 to 31 March 2023.

The super-deduction is only available to companies; unincorporated businesses do not qualify. Where available, the deduction rate trumps that under the AIA. However, the expenditure must be incurred by 31 March 2023 to qualify.

50% first-year allowance

Companies can also benefit from a 50% first-year allowance for qualifying expenditure (excluding cars) that would otherwise benefit from special rate writing down allowances.

 

This allowance can be useful if the AIA limit has been used up. Again, the expenditure must be incurred by 31 March 2023.

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Categories
Tax

High Income Child Benefit Charge – not just for higher rate taxpayers

High Income Child Benefit Charge - not just for higher rate taxpayers

The High Income Child Benefit Charge (HICBC) is a tax charge that claws back payments of child benefit where the recipient or the recipient’s partner has income of at least £50,000 per year. Where both the recipient and their partner have income of this level, the charge is levied on the one with the higher income. The scope of the charge may mean that it falls on someone who did not receive the benefit and who is not a biological or adoptive parent of the child/children in respect of which the benefit was paid.

For 2022/23, child benefit is payable at the rate of £21.20 for the eldest child and at the rate of £14.45 per week for subsequent children.

The HICBC applies where the recipient of the benefit or their partner has ‘adjusted net income’ of at least £50,000 a year. This is taxable income before personal allowances, but after gift aid and pension payments.

The HICB charge claws back 1% of the child benefit paid for every £100 by which adjusted net income exceeds £50,000. Where adjusted net income is £60,000 or above, the HICBC is equal to the child benefit paid for the tax year.

Basic rate taxpayers and HICBC

Despite its name, a person can be a basic rate taxpayer and still fall within the scope of the HICBC.

For 2022/23, a person in receipt of the standard personal allowance of £12,570 with no adjustments will not pay higher rate tax until their income exceeds £50,270. However, the HICBC bites where income exceeds £50,000. A person with income of £50,270 in receipt of child benefit will face a HICBC of 2.7% of their child benefit, despite being a basic rate taxpayer.

Pay the charge

Where the charge applies, the person liable for the charge must complete a self-assessment tax return and pay the charge, with any other tax and National Insurance due under self-assessment, by 31 January after the end of the tax year to which the charge relates.

Stop the benefit

Where income is at least equal to £60,000, the HICBC claws back all the child benefit received in the tax year. Consequently, there is no net benefit to receiving the child benefit, and there is the added hassle of completing the relevant section of the self-assessment tax return and paying the tax. As a result, it may be preferable not to receive the child benefit in the first place.

The recipient can elect to stop receiving child benefit by completing the online form or contacting the Child Benefit Office by phone or by post.

 

However, child benefit paid for a child under the age of 12 earns National Insurance credits that allow the year to be treated as a qualifying year for state benefit purposes. Consequently, anyone entitled to child benefit should still register for the benefit, even if they elect not to receive it, in order to benefit from the associated National Insurance credits. This is particularly important where the recipient does not pay sufficient National Insurance for the year to be a qualifying year but their partner would be liable for the charge if the child benefit is paid. 

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Categories
Tax

Relief for homeworking expenses post Covid-19

Relief for homeworking expenses and post Covid-19

The Covid-19 pandemic forced large numbers of employees to work from home for the first time. Having made the transition to home working, post pandemic, many employees have continued to work from home some or all of the time.

Household expenses

Employees who work from home may incur costs as a result, such as increased household bills. The tax legislation allows employers to make a tax-free payment of £6 per week (£26 per month) to employees who work from home at least some of the time to help them meet the costs. The payment can be made tax-free regardless of whether the employee works from home through choice.

If the employer does not contribute towards the costs of additional household expenses, the employee may be able to claim tax relief. During the Covid-19 pandemic, the conditions were relaxed and employees who were required to work from home during the pandemic were able to make a claim of £6 per week for 2020/21 and 2021/22 for the full tax year (even if they returned to the office for some of the year). However, the easement came to an end on 5 April 2022, and for 2022/23 onwards relief is only available where the employee is required to work from home (either by the employer or the nature of the work), but not where the employee has the option to work at home or at the employer’s premises but chooses to work from home.

Hybrid working arrangements are attractive because of the flexibility that they offer. However, the choice element will limit to ability to claim a deduction for household expenses. Requiring the employee to work from home on, say, one specified day of the week will open the door to a claim.

Homeworking equipment

Where an employee works from home, depending on the nature of their job, they may need equipment to enable them to do so. Where the employer provides homeworking equipment, no tax liability arises in respect of that equipment.

During the Covid-19 pandemic, the rules were relaxed so that where an employee purchased homeworking equipment, the cost of which was later reimbursed by the employer, the reimbursement was not taxed. If the employer did not reimburse the cost, the employee could claim a tax deduction.

However, this easement ended on 5 April 2022. The strict statutory rules now apply, and as employees are not able to claim a deduction for capital expenditure (such as the cost of a computer), where this cost is reimbursed by the employer, the reimbursement will be taxable.

 

However, a deduction is allowed for revenue expenses wholly, necessarily and exclusively incurred in undertaking the employment duties, and any reimbursement of those costs can be made tax-free.

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Categories
Tax

Tax relief for the expenses of running a property business

full trolley

Tax relief for the expenses of running a property business

In common with other types of business, expenses are unavoidable when running a property business. However, subject to certain conditions, it is possible to obtain tax relief for the expenses of running a property business.

Allowable expenses

The general rule is that a landlord can deduct revenue expenses which are incurred wholly and exclusively for the purposes of renting out the property.

Examples of typical expenses incurred by a landlord running a property business for which a deduction may be available include:

·       advertising costs;

·       accountancy costs;

·       cleaning costs;

·       letting agency fees;

·       gardening costs;

·       repairs and maintenance;

·       cost of utilities where met by the landlord;

·       council tax where met by the landlord;

·       legal fees;

·       travel costs.

No relief is available for costs met by the tenant. Typically, a tenant in a buy-to-let would pay the utility bills and the council tax. However, where a landlord lets furnished holiday accommodation, the utility bills and any business rates may be paid by the landlord. These can be deducted.

Interest and finance costs

Landlords running a property business cannot deduct interest and finance costs, such as mortgage interest, when calculating their taxable profit. Instead, they can deduct 20% of those costs from the tax that they owe. The deduction is capped at the amount of tax – it cannot generate a repayment. However, any unrelieved interest and finance costs can be carried forward.

These rules do not apply to furnished holiday lettings, in respect of which interest and finance costs can be deducted in full in calculating profits.

Private and business expenses

Relief is only available for business expenses, and where an expense is incurred for both private and business purposes, relief is only available if the business element can be separately identified. If a car is, for example, used both privately and for the business, relief is available for business mileage costs, but not private journeys. Approved mileage rates can be used.

Domestic items

Separate rules also apply to domestic items, such as furniture, furnishings and white goods, in a residential let. No relief is available for the initial cost of the item, but where the item is replaced, the cost of a like-for-like replacement can be deducted in calculating profits.

These rules do not apply to furnished holiday lettings.

Capital expenditure

The treatment of capital expenditure depends on the way in which the accounts are prepared. The cash basis is the default basis where rental receipts do not exceed £150,000. Where this is used, capital expenditure can be deducted in calculating profits unless such as deduction is expressly prohibited. The main exclusions are land and buildings and cars.

 

Under the accruals basis, relief is available either in the form of capital allowances (which are limited in a residential let) or when computing the gain on the eventual sale.

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Categories
Tax

Capital Gains Tax or Inheritance tax

Capital Gains or Inheritance Tax

Sometimes there is a choice of which tax to pay and where a person owns an investment property, they may be able to exercise a degree of choice whether they take a capital gains tax hit or their beneficiaries pay inheritance tax. However, there is something of a gamble here – while capital gains tax is chargeable at a lower rate than inheritance tax, if the donor fails to live for at least seven years from the date of the gift, IHT may also be payable.

CGT and gifts

The capital gains tax rules on gifts depend on the relationship between the donor and the recipient. Where an asset is given to a spouse or civil partner, no capital gains tax is payable as the transfer is deemed to be at a value that gives rise to neither a gain nor a loss.

However, if the gift is to a connected person, such as a child, the transfer is deemed to be at market value (regardless of whether any consideration changes hands). A gift to someone else other than at arms’ length is also deemed to be at market value. This may trigger a capital gains tax liability on the donor.

However, if an asset is left to a person on death, there is no capital gains tax to pay. The property is included in the deceased’s estate at market value. While there may be IHT to pay, there is a tax-free uplift for capital gains tax purposes as the beneficiary’s base cost for CGT is the market value at death.

Gifts and inheritance tax

Lifetime gifts (other than to spouses and civil partners) are potentially exempt transfers for inheritance tax at the time that they are made. There is no inheritance tax to pay at the time of the gift. However, if the donor does not survive seven years from the date of the gift, the gift is taken into account when working out inheritance tax on death. Depending on the value of the estate and whether the nil rate band has already been utilised, inheritance tax may be payable, even if capital gains tax was paid by the donor. While taper relief is available where the donor survives at least three years, there is no relief for any capital gains tax paid on the gift.

There is no inheritance tax on gifts to spouses and civil partners, whether made during the donor’s lifetime or on death.

Case study

Albert has a holiday cottage valued at £500,000. The cottage cost £200,000. He wonders whether it would be worthwhile giving the cottage to his daughter while he is alive to save tax. He is a higher rate taxpayer.

If he gives her the cottage when its value is £500,000, he will pay capital gains tax of £84,000 ((£500,000 – £200,000) @ 28%). Costs of acquisition and sale are ignored for simplicity.

If he dies while the cottage is worth £500,000, it is included in his death estate and if not covered by the nil rate band, then his estate will pay inheritance tax of £200,0000 (£500,000 @ 40%).

He gives the cottage to his daughter and pays £84,000 in CGT.

He lives another 10 years. At the time of his death, the cottage is worth £900,000. There is no inheritance tax to pay on the cottage, but if his daughter sells the cottage, she will pay capital gains tax to the extent the consideration exceeds £500,000. Had he held on to the cottage, inheritance tax of £360,000 (£900,000 @ 40%) would have been payable by his estate.

 

However, if he dies a year after making the gift, assuming his nil rate band has been used up by earlier gifts, the estate will pay inheritance at 40% on the gift (£200,000) in addition to the £84,000 capital gains tax Albert has already paid.

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