Adrian Mooy & Co - Accountants Derby

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

Loans to participators

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

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

Associates

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

Example

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

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

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

Benefit in kind charge

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

Planning issues

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

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

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 benefits or otherwise of voluntary VAT registration

Many businesses strive to keep their turnover under the VAT registration limit (currently £90,000) because not only are they wary of the additional administrative costs but also because they believe that adding VAT to the invoice will make their business uncompetitive. However, even if a business has not reached the limit, voluntary VAT registration can offer significant benefits, not least including creating a more professional image and enhancing credibility, signalling to customers and potential business partners that the business has reached the VAT threshold, a significant milestone in the growth of any business.

Claiming pre-registration VAT

One of the main benefits of voluntary VAT registration is the financial benefit that can be gained. Input VAT paid on goods or services before registration can be reclaimed, subject to certain conditions. This can result in a much-needed cash lump sum during challenging initial phases for a start-up. VAT on goods (e.g. stock and equipment) can be reclaimed if purchased within four years of registration. The goods must be in stock on the registration date or used to make taxable supplies after registration and not fully used. However, the company must have been in operation for those four years in order to be eligible to make this claim. Additionally, VAT invoices and records must be available from that time.

VAT on services can also be reclaimed but in a shorter window of up to six months before registration (e.g. a typical cost being for website design paid for five months before registration). The services must have been used to establish the business and the VAT must not have been passed on to customers. Valid VAT invoices are required to support any input claim.

Improved cash flow

Reclaiming input VAT on purchases can improve cash flow, especially if the business needs to purchase a lot of stock, equipment or services from VAT-registered suppliers. The business can use the reclaimed VAT to invest in other areas of the business, rather than tying up cash in VAT payments.

Improved business opportunities

Many other VAT-registered businesses prefer to work with other VAT-registered suppliers since they can reclaim VAT on purchases.

Ensure registration is on time

Registering the business from the start can help avoid fines or penalties for late registration if the business accidentally exceeds the threshold. This proactive approach ensures that the business is compliant and prepared for any potential growth that might push it over the threshold.

Downsides of voluntary registration

The most evident downside to becoming VAT registered is the requirement of the business to charge customers VAT and thereby increasing prices (unless the business makes zero-rated supplies). If customers are VAT-registered businesses themselves, the fact that there is additional VAT to pay will not be an issue for them as they will be able to reclaim on their own VAT return. However, if the customers are the general public, they will not be able to reclaim, and the higher price may mean they look elsewhere for their purchase (possibly a non-VAT-registered business) – it will depend on what is being sold. Of course, just because a business is VAT registered does not mean the full 20% uplift needs to be passed on to the customer.

Another downside to being VAT registered is the additional administration required, including compliance with Making Tax Digital for VAT.

Practical point

HMRC allows businesses to register as ‘intending traders’. An intending trader is an individual or entity that, on the date of the registration request, is engaged in business activities, has not yet begun making taxable supplies, but intends to do so in the future. Registration is therefore possible even if the business is still in the planning stage. This allows businesses to reclaim VAT on costs incurred during this time, preventing some claims, especially for services, from falling outside the pre-registration time limits.

If you are running a business, regardless of whether you operate as a sole trader, in partnership or the business is run as a limited company, you will need to register for VAT if your total taxable turnover in the previous 12 months exceeds the VAT registration threshold of £90,000 or if you expect your taxable turnover to be more than £90,000 in the next 30 days.

If both you and your business are based outside the UK and you supply goods or services to the UK (or expect to do so in the next 30 days), you must register for VAT regardless of your taxable turnover.

Taxable turnover

The trigger for registration for a UK-based business is its taxable turnover. For VAT purposes, this is everything that is not exempt from VAT or outside the scope of VAT. It includes zero-rated goods; reduced rate goods and goods charged at the standard rate. In working out your taxable turnover, you must also take into account:

• goods hired or loaned to customers;
• business goods used for personal reasons;
• goods received in barter or part-exchange or as gifts;
• services from other countries that are subject to the reverse charge;
• goods and services subject to the domestic reverse charge; and
• building work over £100,000 that the business did itself.

Registration deadline

Where taxable turnover in the previous 12 months exceeded £90,000, the business must register for VAT within 30 days of the end of the month in which the threshold was exceeded. The registration is effective from the first day of the second month after which the threshold is exceeded.

Example

Bella is a sole trader. On 7 July 2025 her VAT taxable turnover in the previous 12 months exceeded £90,000 for the first time. Bella must register for VAT by 30 August 2025. Her registration is effective from 1 September 2025.

Where taxable turnover will exceed the VAT registration threshold in the next 30 days, the business must register for VAT by the end of that 30-day period. The registration is effective from the date that the business realised that the threshold would be exceeded.

Example

Cameron signs a contract to deliver goods worth £102,000 on 17 July 2025. He must register for VAT by 16 August 2025. His registration is effective from 17 July. He must therefore charge VAT on those goods.

Where a business registers late, it must pay VAT on taxable goods and services supplied after the date by which it should have registered. A late registration penalty may also be charged.

Businesses which exceed the threshold temporarily can apply for a registration exception.

Registration process

A business can register for VAT online (see www.gov.uk/register-for-vat/how-register-for-vat). The information required will depend on whether the business is run by an individual or as a partnership, or by a company.

To register as an individual or partnership, you will need your National Insurance Number, an identity document (such as a passport), bank account details, your unique taxpayer reference (UTR), details of your annual turnover and an estimate of your taxable turnover for the next 12 months. For a company registration, the company registration number, bank account details, UTR, annual turnover and estimated turnover for the next 12 months will be required.

In certain circumstances it is not possible to register online and registration must be done by post, such as if you are applying to join the agricultural flat rate scheme.

Voluntary registration

A business whose taxable turnover is below the VAT registration threshold can register for VAT voluntarily. If you do this, you will need to charge VAT on taxable supplies that you make, but you can claim back VAT on things that you buy for your business. Voluntary registration is worthwhile if you make zero-rated supplies but incur VAT on items that you buy.

Simple Assessment is used by HMRC to collect tax underpayments from taxpayers with straightforward tax affairs. It removes the need for the taxpayer to complete a Self Assessment tax return.

HMRC will issue a Simple Assessment where there is an underpayment of tax which cannot be collected through PAYE. Each year HMRC undertake a PAYE reconciliation process and issue a P800 calculation. Where this shows that tax is owing which cannot be recovered through PAYE, they may issue a Simple Assessment. A Simple Assessment letter will be sent by post or issued to the taxpayer’s personal tax account if they have one. The letter will show the taxpayer’s taxable income, tax that has been paid and the amount that is owed.

Check if it is correct

It is important to check that the figures in the Simple Assessment are correct – HMRC can, and do, make mistakes. You should check the amounts shown in the Simple Assessment against your P60, bank statements, letters from the Department for Work and Pensions, and similar. If you do not understand the figures, it is prudent to take advice.

If you think the calculation is wrong, you should tell HMRC, either by writing to them or by calling them. You must do this within 60 days of the date on the letter. You should tell HMRC which figures you think are wrong and what you think they should be. If HMRC agree with you, they will send you a new Simple Assessment with the revised figures. If they think their figures are correct, they will send you a decision letter explaining why. If you still do not agree with them, you can appeal. This must be done within 30 days of the date on which the decision letter was issued.

Payment must still be made on time while the appeal is dealt with unless HMRC instruct otherwise.

Paying your Simple Assessment

Tax owed under Simple Assessment can be paid online, by bank transfer or by cheque. The date by which payment must be made depends on the date on which the Simple Assessment letter was received. Where the letter for the 2024/25 tax year is received before 31 October 2025, payment must be made by 31 January 2026. Where the letter for 2024/25 is not received until after 31 October 2025, payment must be made no later than three months from the date on the Simple Assessment letter.

Interest will be charged on payments made late.

The mechanism by which landlords letting furnished residential property can secure relief for the cost of domestic items.

Landlords letting residential property cannot claim capital allowances for the fixtures and fittings that they provide. Since 6 April 2025, this applies equally to landlords letting furnished holiday accommodation; prior to this date, capital allowances were available under the former regime for furnished holiday lettings. However, it is not available where a landlord lets one or more furnished rooms in their own home and claims rent-a-room relief.

The lack of capital allowances does not mean that landlords are not entitled to any tax relief for the cost of domestic items provided to tenants. While they are not able to deduct the cost of the original item, a dedicated relief is available for the cost of replacement domestic items. The relief applies equally to individual and corporate landlords.

Meaning of ‘domestic items’

A domestic item is defined in the legislation as ‘an item for domestic use (such as furniture, furnishings, household appliances and kitchenware)’. However, fixtures are expressly excluded from the definition. A ‘fixture’ is an item of plant and machinery that is installed so as to become part of the property. This includes boilers and radiators installed as part of a heating system.

Domestic items that commonly fall within the scope of the relief include movable furniture (e.g., sofas, beds, tables and chairs), furnishings (e.g., curtains, carpets and rugs), household appliances (e.g., fridges, freezers and washing machines) and kitchenware (e.g., crockery and utensils).

However, the relief does not apply to items such as baths, toilets, washbasins and fitted furniture, such as a fitted kitchen. These count as fixtures.

When does the relief apply?

The availability of the relief is contingent on four conditions being met.

The first condition is that the individual or company looking to claim the relief is carrying on a property business that includes the letting of one or more dwelling houses. This now includes landlords letting furnished holiday accommodation.

The second condition is that an old domestic item that has been provided for use in the dwelling house is replaced with the purchase of a new domestic item. Further, the old item must no longer be available for use by the tenants and the new item must be available for their exclusive use.

The third condition is that the expenditure on the new item must be incurred wholly and exclusively for the purposes of the property business. Further, the landlord must not otherwise be able to claim a deduction for the capital expenditure.

Landlords preparing their accounts using the accruals basis are not able to deduct capital expenditure in calculating their profits. However, landlords who use the cash basis (which is the default basis of accounts preparation where annual rental income is £150,000 or less) can deduct capital expenditure unless it is of a type for which such a deduction is not permitted. Landlords within the cash basis can only claim relief for replacement domestic items if the expenditure is not deductible in the computation of profits under the cash basis expenditure rule. As the cost of most domestic items can be deducted by landlords using the cash basis to prepare their accounts, the relief for replacement domestic items is predominantly of relevance to landlords using the accruals basis.

The final condition is that capital allowances must not have been claimed on the new domestic item. Prior to 6 April 2025, landlords letting furnished holiday lettings were able to claim capital allowances.

Nature of the relief

Relief for expenditure on replacement domestic items is given as a deduction in computing the profits of the property rental business. However, the deduction is capped at the cost of a like-forlike item, plus any costs of acquisition and disposal.

HMRC will accept that an item is a like-for-like replacement if it is of broadly the same quality and standard as the old item. The fact that the item is new does not in itself make it an improvement over the old item. For example, if a mid-range washing machine is replaced with a similar midrange washing machine for broadly the same price allowing for inflation, the replacement will count as a like-for-like replacement.

However, where the replacement item is not of the same quality and standard as the original, the deduction is capped at the lesser of the cost of the new item and the cost that would have been incurred had the new item been a like-for-like replacement of the old item. A deduction is denied for any enhancement element.

Example 1: Partial deduction on upgrade Ali is a landlord letting furnished residential flats. One of the flats needs a new washing machine. The old washing machine was a budget model. Ali replaces it with a washer-dryer costing £550. Had he chosen an equivalent budget model, the cost would have been £210.

Although Ali spent £550 on the new washer-dryer, he is only able to deduct £210 in respect of the replacement item in calculating his taxable rental profits.

Where a landlord upgrades a domestic item, a deduction for the enhancement element is not available at the time of the upgrade. However, when the upgraded item is replaced, the landlord will be able to deduct the cost of an equivalent item. So, in Example 1, while Ali is unable to deduct £340 of the cost of the washer-dryer when he purchases it, if in a few years’ time he replaces the washer-dryer with an equivalent model, which due to inflation costs £600 at that time, he will be able to deduct the full £600 when calculating his taxable rental profits.

If the replacement item is inferior to the original item, the full cost can be deducted.

Incidental expenditure

It is likely that when replacing a domestic item, the landlord will incur related costs, such as the cost of the delivery and installation and the cost of disposing of the old item. These costs can also be deducted in addition to the cost of the replacement like-for-like item.

Example 2: Relief for delivery, installation and disposal costs Bella lets out her holiday home as furnished holiday accommodation. She replaces the oven with a like-for-like replacement costing £700. She also pays £50 for delivery and £100 for the oven to be installed. She pays a further £75 for the disposal of the old oven.

Bella is able to claim a deduction for the cost of the replacement oven, and also for the cost of delivery, installation and disposal – a total deduction of £925.

Part exchange

The old item may be given in part-exchange for the new item, reducing the amount that the landlord pays for the new item. Here, the deduction is the amount that the landlord pays on top of the tradein value (assuming the replacement is equivalent to the old item).

For example, if a landlord trades in an old fridge for an equivalent new model costing £300 and receives £30 for the old fridge, the landlord would be able to deduct £270.

If the replacement is superior to the original item, the deduction is capped at the cost of a like-forlike replacement less the trade-in allowance.

Sale proceeds from the old item

The landlord may be able to sell the old item. Where this is the case, any proceeds are deducted from the cost of the new items in working out the amount of the relief.

For example, if a landlord buys a replacement washing machine for £400 and sells the old one for £50, assuming the replacement is a like-for-likereplacement, the landlord will be able to deduct £350 (i.e., the cost of the replacement less the proceeds from the sale of the old washing machine). If the replacement is superior to the original item, the deduction is capped at the cost of a like-forlike replacement less the sale proceeds.

Practical tip

When replacing domestic items in a residential or holiday let, remember to claim relief for the cost of a like-for-like replacement where a deduction is not otherwise available for the cost of the item.

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.

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

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

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

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

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

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

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

Making a (trade) profit?

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

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

What is ‘permanence’?

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

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

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

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

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

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

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

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

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

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

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

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

Examples of ‘events’ include:

 • getting married;

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

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

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

Impact of renting a room

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

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

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

 • £40,000.

Practical tip

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

Cars are a special case when it comes to capital allowances. While capital allowances may be claimed on cars used in a business, partners and sole traders have the option of using the simplified expenses system instead.

Where the cash basis is used, it is not possible to deduct the full cost of the car in the year of purchase – such a deduction is prohibited under the cash basis capital expenditure rules.

No annual investment allowance

The annual investment allowance (AIA) allows immediate write-off for the full purchase cost in the year of acquisition, as long as enough of the £1 million AIA allowance for the year remains available. Unlike vans, cars do not qualify for the AIA, and unless the car is eligible for a first-year allowance, it is not possible to obtain 100% relief immediately.

Full expensing and 50% first-year allowance not available

Similarly, companies are unable to benefit from full expensing or the 50% first-year allowance for new cars that are not eligible for the 100% first-year allowance.

100% first-year allowance for electric cars

While the AIA and full expensing are unavailable, a 100% first-year allowance is available for expenditure on new electric cars. This provides immediate relief for the full cost of a new electric car in the year of purchase. The 100% first-year allowance is only available in respect of expenditure on a new electric car; it is not available on the purchase of a second-hand electric car. Writing down allowances are available instead.

Writing down allowances

If the first-year allowance is not available and simplified expenses have not been claimed, relief for expenditure on a car used for business purposes is given by means of writing down allowances. The rate of the allowance depends on the car’s CO2 emissions.

Main rate writing down allowances at the rate of 18% are available for new and second-hand cars whose CO2 emissions are 50g/km or less (including second-hand electric cars). New or second-hand cars with CO2 emissions of more than 50g/km qualify for special rate capital allowances at the rate of 6%.

Private use adjustment

If a car is used for both personal and business use, capital allowances are only available in respect of the business use. For example, if a sole trader uses their car for both business and private use and estimates that business use accounts for 60% of the total use, an adjustment would be needed to account for the private use. To do this, the writing down allowance would be reduced by 40%.

Consider simplified expenses instead

Sole traders and partnerships can take advantage of the simplified expenses system and deduct an amount based on the business mileage in the tax year when calculating their taxable profit. The deduction is given at a rate of 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any further business mileage. Where simplified expenses are used, capital allowances cannot be claimed as well. Likewise, if capital allowances have been claimed, the simplified expenses system cannot then be used.

Companies are not able to claim simplified expenses and instead obtain relief for expenditure on cars in the form of capital allowances.