Adrian Mooy & Co - Accountants Derby

What is the tax position should a company pay a director’s personal expenses?

Directors of small companies, especially those with prior experience of self-employment, often overlook the distinction between company funds and personal finances. It can be hard for some directors to resist the temptation to channel all expenses through the business bank account, whether those expenses are company related and tax-deductible or personal. However, such a practice has tax implications.

To obtain a tax deduction for an expense incurred by a director (or any employee), three conditions must be met:

 • The director-employee must be obliged to incur the expense.

 • The expense must have been incurred in the performance of the employment duties.

 • It must have been incurred ‘wholly, exclusively and necessarily’ in carrying out work on the company’s behalf.

The test of ‘necessity’ has been considered relatively recently in the tribunal case HMRC v Kunjar [2023] UKFTT 538, where it was confirmed that merely fulfilling a condition imposed by the employer (e.g., having to reside within a certain distance from the workplace and claiming the cost of travel) does not necessarily make the expenses allowable.

Any expense paid from the company bank account that does not meet these criteria or was not incurred directly to conduct company business will be taxed as a personal expense for the director. This will be treated similarly to a salary payment, attracting both income tax and National Insurance contributions (NICs).

Tax and NICs liability

How the tax is accounted for and whether it is solely the employee who is liable to NICs or both the employer and employee who are liable will depend on whose name the bill is made out to and who pays it. If the employee arranges for payment in their own name and the employer pays the bill, the employer has effectively discharged the employee’s debt. In this scenario, the director will be responsible for both income tax and NICs, while the employer will also incur employer’s NICs, just as if the employer had paid the employee directly in cash.

Conversely, if the employer pays the bill directly, this expense will be deductible for the company accounts. The director will then be charged to tax and NICs, which could be classified either as salary or as a benefit-in-kind. Whether the employer is liable for NICs depends on whether they can claim the employment allowance.

Type of expense

Although the payment may be taxable on the employee as a personal expense, whether a tax charge is actually levied will depend on the type of expense. For example, many companies pay for an employee’s professional subscription fees. In such cases, even if the invoice is issued in the employee’s name, the payment remains tax and NICs free for both employee and employer being also deductible from the company’s profits.

Director’s loan account

Many directors, particularly those of their own companies, have personal expenses paid for by the company, which are then charged to their director’s loan account (DLA). Where this occurs, the DLA may become overdrawn and then be cleared by crediting with salary, bonuses or dividends. HMRC has been known to argue that personal expenses regularly paid from the company account and then debited to the loan account should be treated as ‘an advance’ of salary, so PAYE, etc., should have been accounted for earlier, at the date of payment.

However, regular payments reimbursed through dividend payments cannot be regarded as ‘in advance of salary.’ Therefore, it is acceptable to declare a dividend credited to a DLA at the beginning of the accounting year and withdraw over subsequent months. Distributing dividends early in the accounting year can reduce the risk of the DLA becoming overdrawn, which may otherwise result in a beneficial loan interest tax charge on the director.

Practical tip

Many companies provide credit cards for business use, but it is important to remember that any personal expenses charged to these cards may also be subject to the tax rules outlined above.

Dividend waivers for inheritance tax purposes

It is not uncommon for shareholders in family and owner-managed companies to waive their rights to receive dividends. In broad terms, a waiver is where a shareholder forgoes (or ‘waives’) their right to be paid a dividend. Dividend waivers are often used as part of a tax planning exercise by spouses (or civil partners), such as where, in the absence of a waiver, a dividend would push one of the spouses into a higher income tax bracket.

However, the inheritance tax (IHT) implications of dividend waivers in income tax planning should not be overlooked.

Waivers and IHT

Dividend waivers can also play a significant role in IHT planning. For example, an elderly shareholder in a family company may prefer to waive their entitlement to a dividend so that their estate (and the IHT liability thereon) is not enhanced by the funds that would otherwise be received. This could also help to sustain the company’s funds for future business use. If a person (i.e., an individual or a company) waives a dividend within 12 months before they become entitled to it, the waiver does not of itself constitute a transfer of value for IHT purposes (IHTA 1984, s 15). The relief applies only to a waiver of dividends on shares; it does not extend to a waiver of (say) rent, or interest on loans to the company

Attention to detail

Of course, dividends must satisfy company law requirements to be valid. Furthermore, the 12-month timeframe for dividend waivers means that it is necessary to establish the timing of the shareholder’s entitlement to a dividend in terms of ensuring that the dividend is not waived too late. In particular, it is important to distinguish between ‘interim’ and ‘final’ dividends:

 • Interim dividends are due and payable when paid. A resolution to pay an interim dividend does not create a debt until the dividend is paid (see Potel v CIR (1970) 46 TC 658).

 • Final dividends are legally due when declared by the company in general meeting (unless a later date for payment is specified, in which case they are due on that payment date).

For example, a person who waives a right to a final dividend would, in the absence of the IHT relief, dispose of a right, the value of which would generally be that of the dividend. The 12-month period for a waiver to be effective for IHT purposes should therefore be measured carefully.

The relief from IHT only applies ‘by reason of the waiver’. In other words, it does not necessarily apply if the waiver is part of a series of operations aimed at achieving a transfer of value for IHT purposes not related solely to the dividend waived (see HM Revenue and Customs’ Inheritance Tax Manual at IHTM04220). In addition, the waiver should be affected by deed, which cannot be backdated.

Practical tip

It is always better to ensure that a company’s shareholdings are properly structured in the first place, so that dividend waivers are unnecessary. However, where dividend waivers are unavoidable, they should be approached with caution, as anti-avoidance rules exist for other tax purposes in certain circumstances (e.g., the ‘settlements’ income tax provisions). HMRC may particularly seek to challenge waivers used on a regular or long-term basis, so consider other tax planning options instead (e.g., different classes of shares in the company). Professional advice should be sought, if necessary.

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.

The annual tax on enveloped dwellings (ATED) is a tax that is payable mostly by non-natural persons (mostly companies) owning UK residential property valued at more than £500,000. Unless one of the exemptions applies, the company will need to file an ATED return and pay the associated tax.

The return

Where a property within the charge is held on 1 April 2025, the ATED return for the period from 1 April 2025 to 31 March 2026 must be filed by 30 April 2025. The return will normally be filed online using HMRC’s ATED online service. Where the return cannot be filed online, a paper form can be used. However, this must be requested from HMRC. Taxpayers using a paper form should allow two weeks for HMRC to receive it.

Where a property within the charge is acquired after 1 April 2025, the deadline is 30 days from the date on which the property came into charge.

It is important that the return is filed on time as penalties are charged for returns filed late.

Valuation

The ATED only applies to non-exempt residential properties valued at more than £500,000 at the valuation date. For properties owned on or before 1 April 2022, the key date is 1 April 2022. Where the property was acquired after this, the key date is the date of acquisition.

The tax

The amount of tax payable depends on the value of the property. The rates applying for 2025/26 are shown in the table below.

Property value                                              Annual charge

More than £500,000 up to £1 million                £4,450

More than £1 million up to £2 million.              £9,150

More than £2 million up to £5 million.              £31,050

More than £5 million up to £10 million.            £72,700

More than £10 million up to £20 million           £145,950

More than £20 million                                       £292,350

The tax for 2025/26 must be paid by 30 April 2025 (or within 30 days of the property coming into charge where later). The charge may be reduced if the property is only owned for part of the year.

Exemptions

The first point to note is that the charge only applies to dwellings. This is a property that is, or could be used, as a residence, such as a house or flat. Certain properties do not count as dwellings for ATED purposes, including hotels and guest houses, boarding school accommodation, student halls of residence and care homes.

There are also a number of reliefs and exemptions which take certain properties outside the scope of ATED. For corporate landlords, the main exemption is that for properties that are let to a third party on a commercial basis and which are not, at any time, let to or occupied by anyone connected with the owner (such as a director shareholder of the property company). An exemption is also available for properties that are being developed by a property developer.

When starting a business, there are various decisions to make and tasks to perform. One of the first questions to address is whether to run the business as a sole trader, whether to set up a partnership with others or whether to form a company. The way in which a business is operated will determine the taxes that are payable and legal obligations that must be met.

A person operating as a sole trader is in business for themselves. This is arguably the simplest way to run a business.

Registering with HMRC

A person operating as a sole trader will need to register with HMRC for Self Assessment if they have trading income of £1,000 or more. This is the total from all unincorporated businesses, not per business.

If a person is already registered for Self Assessment, for example, because they have investment income or income from property to report to HMRC, they do not need to register again. Rather, they will simply need to complete the Self-Employment pages of the return to report details of their business income.

If a new trader is not registered for Self Assessment, they will need to do so by 5 October following the end of the tax year in which they first became liable to register. For example, if a person started a business in 2024/25 and their turnover was more than £1,000, they will need to register for Self Assessment no later than 5 October 2025. A person can register via the Gov.uk website (see www.gov.uk/register-for-self-assessment).

A person who has previously been registered for Self Assessment, but did not file a return for the last tax year, will need to register again to reactivate their account.

Tax and National Insurance

A sole trader must pay income tax on their profits. Their profits form part of their total taxable income, which will be liable to income tax to the extent that it exceeds their personal allowance for the tax year. For 2024/25 and 2025/26, the personal allowance is £12,570. Income tax is charged at 20% on the first £37,700 of taxable income. Taxable income in excess of £37,700 up to £125,140 is taxed at 40%, and anything over £125,140 is taxed at 45%. Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of income in excess of £100,000, such that anyone with adjusted net income in excess of £125,140 does not receive a personal allowance.

Self-employed individuals must pay Class 4 National Insurance if their profits exceed £12,570. This is payable at a rate of 6% on profits between £12,570 and £50,270 and at 2% on any profits in excess of £50,270. Where profits exceed the small profits threshold (set at £6,725 for 2024/25 and increasing to £6,845 for 2025/26), no Class 4 National Insurance contributions are payable. However, the trader will earn a National Insurance credit which will provide them with a qualifying year for state pension purposes. Sole traders with profits which are below the small profits threshold can opt to pay voluntary Class 2 contributions to build up their state pension entitlement. At £3.45 per week for 2024/25 (increasing to £3.50per week for 2025/26), this is a much cheaper option than paying voluntary Class 3 contributions, and may be beneficial if the sole trader would not otherwise secure a qualifying year.

Tax and Class 4 National Insurance contributions must be paid by 31 January following the end of the tax year. Once the tax and Class 4 liability reaches £1,000, payments on account must be made for future tax years.

VAT

A sole trader will need to register for VAT if their VATable turnover exceeds the VAT registration threshold of £90,000 in the previous 12 months, or is expected to do so in the next 30 days.

Records

The sole trader will need to keep records of their business income and expenses to enable them to work out their taxable profits. It is a good idea to have separate personal and business bank accounts to avoid personal and business expenses getting mixed up. The trader should also keep invoices, receipts, etc.

The favourable tax regime that applies to landlords letting furnished holiday accommodation comes to an end on 5 April 2025. For 2025/26 and later tax years, furnished holiday lets will be treated in the same way as other residential lettings. While this will absolve the landlord from the need to hit letting and availability targets (other than the less onerous ones needed for business rates purposes), the ability to benefit from valuable capital gains tax reliefs will also be lost. However, there remains a very limited window in which to access these reliefs.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) is a valuable relief that reduces the rate of capital gains tax payable on the disposal of a qualifying asset on gains up to the lifetime limit of £1 million.

Under the tax regime for furnished holiday lets that applies until the end of the 2024/25 tax year, an unincorporated landlord is able to benefit from BADR as long as the associated conditions are met. The rules allow BADR to be claimed on disposals of business assets made within three years of the date on which the business ceased.

Under the transitional rules that apply to furnished holiday lettings, as long as the landlord met the conditions for BADR in relation to a FHL business that ceased prior to 6 April 2025, the landlord has three years in which to dispose of the business assets and claim the relief.

This is a good deal. As long as the landlord ceases their FHL business on or before 5 April 2025, and sells their properties within three years of the cessation date, they will benefit from the reduced rate of capital gains tax applying to gains eligible for BADR. However, it is important to note that the business must cease; the relief does not apply if a landlord has a number of furnished holiday lets and sells some but not all of them. In this scenario the business would be ongoing, albeit with less properties.

Ceasing the business prior to 6 April 2025 and securing BADR on the disposal of the properties may be particularly attractive where the properties are pregnant with gains, as the ability to benefit from BADR can deliver significant savings. The exact amount of the savings depends on the date of disposal. Where the disposal takes place in 2024/25, the capital gains tax rate is 10% where BADR applies (offering potential savings of up to £140,000). The rate increases to 14% for qualifying disposals in 2025/26 (and the potential savings fall to £100,000). The rate is further increased to 18% from 6 April 2026, reducing the potential value of the relief to £60,000.

Gift holdover relief

Gift holdover relief allows the gain that would arise on the gift of business assets to be held over, reducing the recipient’s base cost. Where the disposal is to a connected person, the gain would be computed by reference to the market value of the property. Holdover relief is very useful here, as where the property is gifted, there are no proceeds from which to pay the tax. The relief must be jointly claimed by both parties. The gift of the furnished holiday let must be made before 6 April 2025 to benefit from this relief. Making use of the relief can be a good way to pass on a holiday let to the next generation.

The October 2024 Autumn Budget confirms consigning forms P11D and P11D(b) to the legacy dustbin – Almost.

On 16 January 2024, there was a HMRC ‘simplification update’ announcing the mandation of payrolling benefits-in-kind (BIKs) from tax year 2026/27.

Example: Payrolling of medical benefit

The payroll department is advised that Roger has a medical benefit of £3,000 per year. He is paid monthly, so to account for the income tax and Class 1A National Insurance contributions (NICs), £250 is processed as a notional payment each month. HMRC held meetings with representative bodies; silence and a general election followed and there was no confirmation this would be pursued, until…

The October 2024 Autumn Budget

This contained the following statement:

‘The government confirms that the use of payroll software to report and pay tax on benefits in kind will become mandatory, in phases, from April 2026. This will apply to income tax and Class 1A National Insurance contributions (NICs).’

Until this, the announcement in January 2024 issued by the previous government was meaningless. Most would have predicted that payrolling would be a disaster if pursued in a ‘big bang’ way, so I was encouraged to read that the move to mandation was to be done in a phased way. I imagined, perhaps, medical benefit being mandated in 2026, followed by cars and vans in 2027 or something similar to the way we became used to auto-enrolment with staging dates.

The phasing reality

Then I read HMRC’s accompanying policy paper, ‘Confirming plans to mandate the reporting of benefits in kind via payroll software from April 2026’ and November 2024’s Agent Update, which detailed phasing in a way I never imagined. From April 2026, taxable values of all BIKs must be processed via the payroll with the exception of employment-related loans and accommodation, to be mandated later. Although, these can be processed on a voluntary basis if the employer is comfortable, they can calculate and process the taxable value each time the payroll is run. This is not a phased mandation. This is a mandation of the current voluntary system.

HMRC concessions

HMRC has introduced two concessions as a result of stakeholder engagement following the January 2024 announcement:

1. In recognition that employers will need time to adjust in tax year 2026/27, HMRC will ‘monitor the penalty position’ in the first year of mandatory payrolling.

2. Although HMRC expects correct taxable values to be payrolled, an ‘end of year’ process will be introduced to amend any errors in the tax year – whilst details are unknown, given the P11D will be for loans and accommodation only, this sounds like a ‘P11D by payroll’ process to me.

The reality in practice

As a payrolling advocate, having implemented it and been on the receiving end as an employee, I do not want to be negative about a proposal I broadly support. However, from experience, it is time to be realistic about this, always considering full details are not known at the time of writing.

Things to be aware of include the following:

 • It’s not only benefits (and taxable expenses) that will be processed in real-time but also the calculation of Class 1A NICs, payable with the monthly PAYE remittance.

 • Forms P11Ds and the P11D(b) may be consigned to HMRC’s legacy pile of forms; however, this does not change the requirement for taxable benefits knowledge.

 • To enable HMRC to report benefits provided by employers UK-wide, they will expect a granular breakdown of benefit information per employee, per pay period; however, this only matches our desire to provide detailed payslips, all facilitated by payroll software.

 • BIKs that are ‘made good’ by the employee and those that will send the employee over the 50% allowable tax deduction are issues to be overcome.

 • Communication with employees about the issues involved.

Practical tip - Vitally, aside from the above considerations, accurate payrolling in real time depends on the real-time provision of information. Gone are the days when providers could give taxable values after the end of the year. From April 2026, we need this information when the payroll is processed (and by the cut-off).

Some key issues to address when considering the disincorporation of a business.

It may now be fiscally attractive for some owner-managed businesses to disincorporate. Here are some further considerations.

No ‘disincorporation relief’

Unlike with an incorporation (where, for example, TCGA 1992, s 162 allows gains on qualifying business assets to be rolled over into the cost of the shares being issued), there are no special tax reliefs available on a disincorporation.

George Osborne did introduce such a relief in April 2013, which allowed land and buildings and goodwill to be transferred to the shareholders at the company’s capital gains base cost, thus avoiding a corporation tax charge on any gain made by the company. However, the relief was limited in scope (the total market value of the qualifying assets could not be more than £100,000), got little takeup, and was abolished in March 2018.

Getting rid of the company

The easiest and cheapest way of doing this will be a striking-off if the company can satisfy all the relevant conditions (e.g., it has not traded for three months). Once approved by the directors, form DS01 (striking-off application by a company) must be completed and submitted to Companies House, along with a fee of £33 for an online application.

As this is not a formal winding-up, any amounts received are treated as an income distribution unless the total amounts distributed are up to £25,000, in which case it can generally be treated as a capital distribution. Companies with larger distributable reserves will probably want to incur the much more substantial fees of a member’s voluntary liquidation, as this will automatically be treated as a capital distribution (potentially with business asset disposal relief available), unless caught by anti-avoidance.

‘Anti-phoenixing’ rules

Four key conditions must be met for ‘antiphoenixing’ tax rules to apply:

a. The individual (S) has at least a 5% interest in the company.

b. The company is a close company.

c. Within two years of that distribution, S (or their connected persons) continues to be, or becomes, involved in a similar trade or activity. Crucially, for a disincorporation, this can include as a sole trader.

d. It is reasonable to assume, having regard to all the circumstances, that the main purpose (or one of the main purposes) of the windingup is the avoidance or reduction of a charge to income tax.

Where the conditions are met, amounts received in the liquidation will be treated as income distributions. Unfortunately, HMRC will not give clearance on this anti-avoidance legislation.

On a disincorporation, the main reason for the liquidation is to change business structure to a simpler form. However, HMRC may seek to argue, where there are significant distributable reserves, that condition D is met (i.e., one of the main purposes of the winding-up is a reduction in income tax that would otherwise be paid on distributions).

In its guidance published on 25 July 2018, HMRC states that:

 1. ‘A decision not to make an income distribution prior to the company’s winding up does not, of itself, mean that Condition D has been met.’

 2. ‘If the recipient of the distribution believes that Condition D was not met, they should self-assess on that basis. HMRC can only displace this where the individual’s decision was not a reasonable one.’

Transfer of VAT registration

Many businesses seem to have incurred long delays in transferring a VAT registration recently, so it may be simpler to just de-register your company and seek a new VAT registration as a sole trader.

Practical tip

Seek clearance under the transactions in securities rules (ITA 2007, s 701) before winding up the company. If given, this should give some comfort that the TAAR is unlikely to apply.

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

When and how it is necessary to report a gain on the disposal of a residential property and pay the associated tax.

Not all residential property is equal when it comes to the tax treatment of capital gains.

Setting the scene

Where a property is sold or otherwise disposed of (e.g., given to a family member other than a spouse or civil partner) and a gain arises, there will be no capital gains tax (CGT) to pay if the property has been the owner’s only or main residence throughout the full period of ownership (or for all but the last nine months). If this is the case, the private residence exemption will shelter the gain from CGT.

However, for properties such as investment properties and second homes which have not been occupied throughout as a main home, there may well be CGT to pay if a gain arises on the disposal of the property.

The end of the favourable tax rules for furnished holiday lettings and the increase in tenants’ rights in the Renters Reform Bill, together with the fear that the freeze in the higher residential rate of CGT at 24% may be a limited time offer, may lead many landlords to the decision that it is time to exit the market. Those looking to sell second homes may also opt to do this sooner rather than later to ensure that any gain is taxed at 24%, in case the rate is increased.

Residential property gains have their own rules when it comes to CGT, with a limited window in which to report the gain to HMRC and pay the associated tax. Taxpayers who fail to comply with the rules will face interest and penalties, with ignorance of the rules offering no defence.

Reporting the gain

When a chargeable gain arises on the disposal of a residential property, that gain must be reported to HMRC within 60 days of the completion date. HMRC has a dedicated online service for doing this, and taxpayers will need to set up a ‘Capital Gains Tax on UK Property’ account to report their gain online. Guidance on how to do this can be found on the Gov.uk website at: www.gov.uk/taxsell-property.

To report the gain, the following information is required, and it is sensible to ensure that it is all to hand before starting the reporting process:

 • address and postcode of the property;

 • the date that the property was acquired;

 • the date of exchange of contracts on the sale of the property;

 • the completion date of the sale;

 • the amount paid for the property or, where relevant (e.g., if a gift from a connected person or if the property was inherited) its market value or probate value;

 • the sale proceeds (or, where relevant, the market value at the date of disposal);

 • the cost of any capital improvements;

 • the costs associated with buying the property, such as stamp duty land tax (or equivalent), legal fees, etc.);

 • the costs of selling the property (such as estate agents’ fees and legal fees); and

 • details of any available reliefs and exemptions (e.g., private residence relief for periods occupied as a main home).

Where the property in question is jointly owned, each co-owner should report their share of the gain.

Once set up, taxpayers can log into their Capital Gains Tax on UK Property account to view and, where necessary, amend previous returns.

Taxpayers who are unable to report a property gain online can do so using a paper form. However, the taxpayer will need to contact HMRC to request a copy of the form.

Reporting the gain online does not remove the need to complete the CGT pages of the self-assessment tax return. These still need to be completed to enable the taxpayer’s CGT position for the year to be finalised. Once the taxpayer has submitted their self-assessment return for the tax year, they will no longer be able to amend returns made through their Capital Gains Tax on UK property account.

If an investment property or second home is sold at a loss, the loss does not need to be reported to HMRC online within 60 days. However, it should be reported on the taxpayer’s self-assessment return to preserve the loss for set-off against future capital gains.

Working out the tax on the gain

The CGT on residential property gains must be paid within 60 days of the completion date. This will be the best estimate of the tax due at that time.

However, the amount paid at this time may not be the final figure. The taxpayer’s CGT position for the year is finalised after the end of the tax year when their self-assessment return is filed. There may be additional tax to pay after the year end (e.g., if the taxpayer expected to be a basic-rate taxpayer and was actually a higher-rate taxpayer or if they realised non-residential gains on which CGT is due by the usual date of 31 January after the end of the tax year).

Alternatively, the taxpayer may be due a refund if losses were realised later in the tax year after the sale of the residential property completed, or if tax was actually due at a lower rate than used when calculating the payment on account.

The gain on the property is computed in the usual way, taking into consideration the acquisition cost, any enhancement expenditure, the sale proceeds and the costs of buying and selling the property.

Any reliefs to which the taxpayer is entitled should also be taken into account. If the property had been the taxpayer’s main residence at some point, private residence relief may be due for the periods it was occupied as such, any qualifying periods of absence and the final nine months of ownership. Likewise, if the taxpayer shared property with a lodger, lettings relief may be in point.

Taxpayers are entitled to an annual exempt amount for CGT, which for 2024/25 is set at £3,000 and is to remain at this level for 2025/26. If this has not already been used, it can be taken into consideration in calculating the tax due on the chargeable residential property gain. Capital losses brought forward, and any losses realised earlier in the tax year, can also be taken into account in working out the CGT bill.

However, losses realised after the completion date cannot be taken into account, even if they are realised within the 60-day reporting and payment window before the tax is paid. Instead, these will be taken into account when finalising the taxpayer’s CGT position for the year once they have filed their self-assessment tax return.

The tax due on the gain is calculated at the CGT rates for residential property gains. This is 18% where income and gains do not exceed the basic rate band and 24% once the basic rate band has been used up. Despite speculation before the Autumn Budget on 30 October 2024 that these rates would increase, the Chancellor opted instead to raise standard CGT rates, leaving the residential rates unchanged. They are to remain at 18% and 24% for 2025/26.

The tax due on the residential property gain can be paid online through the online account using a debit or corporate credit card or by approving a payment through an online account. Payments can also be made by bank transfer or by cheque. The 14-character CGT payment reference should be quoted.

Any further tax due when the taxpayer’s CGT position for the year is finalised should be paid through the self-assessment system by 31 January after the end of the tax year. If the taxpayer is due a refund (e.g., as a result of losses realised after the completion of the residential property gain, this can be claimed once the position for the year has been finalised).

Practical tip

When selling an investment property or second home, remember to report any chargeable gain to HMRC within 60 days of the completion date and pay the CGT due on the gain in the same timeframe.

A look at some tax planning opportunities for companies, with the end of the current financial year looming for corporation tax purposes.

This article briefly highlights some tax planning opportunities available to limited companies ahead of their year end to reduce tax liabilities and maximise profit extraction by the effective use of allowances and reliefs.

Capital allowances - When a company incurs capital expenditure for their business, capital allowances can be claimed, which will reduce the company’s taxable profits. Capital allowances are available at various rates depending on the type of expenditure incurred. To ensure the most tax-efficient use of allowances, businesses will need to analyse the costs between the various categories.

The main categories of allowances are:

 • Annual investment allowance (AIA) – maximum of £1m of qualifying expenditure*;

 • 100% first-year allowance (FYA) on brand new main pool expenditure and electric cars;

 • 50% FYA on brand new special rate pool expenditure;

 • 18% writing down allowance (WDA) on the general pool*;

 • 6% WDA on the special pool*;

 • 3% straight line allowance on qualifying structures and buildings*;

 • Small pool write-off where the balance is less than £1,000*.

 *Pro-rated for chargeable accounting periods of less than twelve months.

The maximum AIA allowance is restricted to £1m per year, which is split between a company and any associated companies. Companies are associated with each other where one company controls another, or both are under the control of the same person or persons. Where applicable, the AIA can be allocated between associated companies in any way, as long as the overall maximum is not exceeded.

Where the maximum AIA is exceeded and expenditure has been incurred on both general and special rate pool assets, in most cases, the AIA should be allocated to special rate pool expenditure in priority to the general pool. There is no restriction on FYA claims, which should be considered in addition to the AIA, particularly where the AIA allowance has been exceeded, in order to maximise claims.

For allowances to be claimed, expenditure must have been incurred before the end of the accounting period. The date on which expenditure is incurred is the date the obligation to pay becomes unconditional, which in most cases is on delivery. Where the requirement to pay falls more than four months after the date the obligation to pay becomes unconditional, capital allowances cannot be claimed until the year in which payment is made. For assets financed by hire purchases, this rule does not apply, but the asset must have been brought into use by the end of the period in order to claim allowances.

Pension contributions - When a company makes a pension contribution on behalf of its employees, subject to it satisfying the ‘wholly and exclusively’ conditions, it will be tax deductible. As an added benefit, company pension contributions are a tax-exempt benefitin-kind for the recipient. As HMRC generally accepts that remuneration paid to a controlling director will satisfy the ‘wholly and exclusively’ tests, pension contributions are an efficient way to extract remuneration from a company whilst simultaneously lowering corporation tax liabilities.

Corporation tax relief for pension contributions are generally available in the accounting period in which the payment is made (although larger pension contributions may be subject to spreading over more than one accounting period in certain circumstances, which are beyond the scope of this article). Therefore, companies must ensure that contributions have physically been made and payment has left the company bank account prior to the period end. An accounting provision for the expenditure would not be sufficient to satisfy this requirement.

Whilst theoretically a company can make contributions and receive tax relief without restriction, individuals do not receive corresponding treatment and are subject to an annual maximum pension input allowance. The annual maximum for individuals is based on a tax year, which may not be the same as the company’s year end, so the timing of contributions will be important. From 6 April 2023, the annual maximum pension allowance for individuals is £60,000.

In addition to this, any unused allowances from the previous three tax years can be utilised as long as the individual was a member of a pension scheme during this period. In addition to any gross personal contributions and defined benefit scheme growth a recipient may have, company contributions count towards the annual limit. Where the annual allowance is exceeded, an income tax charge will arise on the recipient at their marginal rate of tax. Companies planning large pension contributions ahead of their period end will need to consider this in order to avoid creating additional tax liabilities.

Trivial benefits - Trivial benefits are a tax-efficient way for companies to reward their employees and for owners to extract value from the company. Trivial benefits are taxdeductible for the company and tax-exempt for the employee.

The conditions to be satisfied to meet the exemption are:

 • the benefit is not cash or a cash voucher;

 • the cost of the benefit does not exceed a VAT inclusive value of £50;

 • the employee is not entitled to the benefit as part of any contractual obligation; and

 • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.

An employee can receive an unlimited number of trivial benefits each year. Examples that can be given include vouchers, hampers and birthday gifts. Where the company providing the benefit is a close company, whilst directors and members of their family or household can receive tax-exempt trivial benefits, the maximum amount that can be received is £300 over the tax year, subject to the usual conditions being satisfied. Where a member of the director’s family or household is also an employee of the company, they are each entitled to their own £300 allowance.

Bonuses - A company may consider paying its directors and employees a bonus based on its year end results. Where the necessary conditions are met, a company can include a tax-deductible provision for the bonus payments in its accounts (under CTA 2009, s 1288). Where a bonus is properly evidenced and documented, this allows a company to accelerate the corporation tax relief it receives on the bonuses ahead of when they are paid for PAYE purposes. In normal circumstances, corporation tax relief would be given in the period that the remuneration is paid.

For this treatment to be available, the company must have a constructive obligation to pay the bonus at its year end. This can be evidenced by a board minute prior to the year end, which is then ratified at the AGM, or if a company has a history of paying bonuses, by past practice. In addition to having a constructive obligation, the company must also actually pay the bonus within nine months of the period end, or if earlier, the date of filing of the corporation tax return. At the time the bonus is paid, PAYE will need to be operated, with the associated tax and National Insurance contributions liabilities paid.

It is important to be cautious that discussions and provision of bonus payments prior to the period end do not trigger an immediate PAYE liability (under ITEPA 2003, s 18). These rules determine when remuneration is treated as paid and when PAYE should be applied. These rules are stricter for directors than employees. If a bonus is determined before the end of a period of account, this becomes the trigger date for PAYE to be operated. However, this can be avoided if the bonuses are allocated to a ‘pool’ for a later distribution by shareholders at the AGM, but this is an area where caution should be exercised.

Don’t forget…

 • Working from home allowance – Where directors and employees are required to work from home, they can be paid a tax-free flat rate expense of £6 per week which is tax deductible for the company.

 • Dividend allowance – For the 2024/25 tax year, individuals can receive total tax-free dividends of £500 per year. Dividends can only be paid to shareholders and only if the company has sufficient distributable reserves.

 • Check time limits – Ensure that any claims for reliefs are submitted in time. For example, for companies making a rollover relief claim, the time limit is four years from the end of the accounting period to which the claim relates.

 • Check director salaries – Where directors take a low salary, ensure that the amount declared through the payroll is at least equivalent to the lower earnings level to receive a qualifying year’s credit for state pension entitlement. For 2024/25, the lower earnings limit is £6,396 per year.

Practical tip - Do not wait until after the year end and when the corporation tax payment date is almost due to start considering tax planning. Business owners need to be proactive to ensure their business is as tax-efficient as possible and all available expenses and reliefs have been claimed.

From 6 April 2025 onwards, furnished holiday lettings are treated for tax purposes in the same way as other residential lets, and residential lets and furnished holiday lets owned by the same person (or same persons) form part of the same property rental business.

Prior to 6 April 2025, furnished holiday lettings had their own regime. Under these rules, losses from furnished holiday lettings could only be carried forward and set against future profits from furnished holiday lets – they could not be set against profits from residential lets. Likewise, losses on residential lets could not be offset against profits from furnished holiday lets. However, within each stream, losses on one property are automatically offset against profits from another property in calculating the overall rental profit or loss for that stream.

All this changes for 2025/26 and beyond as furnished holiday lets and residential lets are now all in the same pot and the profit or loss is calculated on a global basis for all residential properties regardless of whether they are let on longer lets or as holiday accommodation. The profit or loss for the property rental business is simply found by deducting total expenses from total rental income; there is no need to compute the profits or loss on a property-by-property basis. This means that, for example, if a loss is made on a furnished holiday let in a tax year, it is automatically relieved against profits made in respect of other properties in the portfolio.

Example 1

Leo has two properties that he lets as long-term residential lets and a third property which he lets as a holiday cottage. In 2025/26, rental income and expenses in respect of each property are as shown below. He also incurs general expenses of £2,700 in running his property rental business.

Property.           Rental income  Expenses   Profit (Loss)

Residential let.    £20,000.       £3,200.    £16,800

Residential let.    £24,000.       £2,700.    £21,300

Holiday let.        £6,000.        £7,400     (£1,400)

Total.              £50,000.       £13,300    £36,700

Leo’s overall profit for his property rental business is £34,000 (rental income of £50,000, less property-specific expenses of £13,300 and general expenses of £2,700). The loss on the holiday let is automatically relieved against the profit on the residential lets in the calculation of the overall profit – relief does not have to be claimed.

Brought forward losses

Where a landlord had unrelieved losses on their furnished holiday lets as at 6 April 2025, the losses can be carried forward and set against profits from the merged property business comprising residential and holiday lets. As furnished holiday lets are no longer treated differently to other residential lets, relief for losses is not restricted to profits let as holiday lets. This may mean that where a landlord letting holiday lets also has residential lets, relief may now be available for losses which could not be relieved previously due to insufficient profit on the holiday lets.

Example 2

In 2024/25, Mary makes a profit of £12,000 from residential lets. She also makes a loss of £3,000 on her holiday let. She has previous unrelieved losses of £7,000 on her holiday let. In 2024/25, different rules apply to residential lets and holiday lets. This means Mary must pay tax on the profit of her residential lets of £12,000. She cannot set the loss from the holiday let against this. Instead, the losses from her holiday let of  £10,000 are carried forward.

For 2025/26, the holiday let is treated as a residential let, and her profit for the year is £13,000. She is able to set off the brought forward losses of £10,000 from her holiday let, reducing her taxable profit in 2025/26 to £3,000.