Adrian Mooy & Co - Accountants Derby

The tax implications associated with gifting a property. There are various situations when one person may wish to gift a property to another. This process brings tax implications depending on the circumstances, and whether the property is a main residence or a second property.

Capital gains tax

The basic premise is that should a property be gifted or sold for less than market value, capital gains tax (CGT) will be payable by the donor if the recipient is a ‘connected person’ (i.e., a family member, family trust). This rule does not apply if the sale is at ‘arm’s length’ between two unconnected parties. Gifts to a spouse or civil partner are generally deemed to have been transferred at a value that does not create a gain or a loss. Transfers of assets between spouses or civil partners under a formal divorce or separation agreement or court order are also generally made at no gain or loss.

If the property has been the owner’s main residence for at least part of the ownership period, principal private residence (PPR) relief can be claimed, extending to the last nine months (or 36 months, if the owner has entered long-term care).

Children are deemed ‘connected’, so there is a disposal for CGT purposes of any property not covered by PPR relief; the disposal proceeds being market value at the date of the gift. The problem here is that as no money changes hands, the donor may incur a ‘dry’ CGT bill as a result of giving the property to the connected person (i.e., as there will be no disposal proceeds from which to pay the bill, the donor will need to find the money from elsewhere).

Inheritance tax

At the time the gift between individuals is made, no inheritance tax (IHT) will be payable. The gift is classified as a potentially exempt transfer and remains free from IHT if the donor lives for at least seven years from the date of the gift.

If the donor survives for more than three years the gift will form part of the donor’s estate although taper relief will be available to reduce the IHT tax payable. IHT will be payable on the gift if not covered by the nil-rate band.

Reservation of benefit

A key challenge in IHT planning involving a main residence is that the donor often wishes to continue living there.

Under the ‘gifts with reservation of benefit’ (GWR) anti-avoidance rules, any gift to a connected person risks being caught by this rule, rendering the arrangement ineffective for IHT purposes and the property being treated as remaining part of the estate upon the donor’s death.

The gift of an undivided share of an interest in land is not a GWR if either of the following conditions is satisfied:

 • The donor does not occupy the property, or occupies it to the exclusion (or virtual exclusion) of the donee for full consideration (e.g., full market rent).

 • The donor and donee both occupy the property, and the donor receives no (or negligible) benefit from the donee in connection with the gift.

While the IHT legislation does not provide a definition for ‘virtual exclusion’, HMRC’s Inheritance Tax Manual (at IHTM14333 ‘Gift with Reservation’) offers examples reflecting HMRC’s interpretation. For example, the GWR provisions will not come into play if the donor stays in the property (in the absence of the donee) for less than two weeks each year, or stays with the donee for less than one month each year. Temporary visits (e.g., whilst the donor recovers from treatment following medical treatment) and short-term domestic visits are also allowed.

Pay market rent

To mitigate the GWR charge, one strategy is for the donor to pay full market rent to continue residing in the property.

However, this comes with a disadvantage, because unless there is consistent income, any capital used to pay the rent may be depleted. The rent should be reviewed periodically to reflect market changes.

Joint occupation

In this situation, the donee can remain in the property so long as either the donor continues to meet all expenses, or the donee pays no more than their share. The occupants will basically need to strictly split all bills fairly. ... continued ...

Pre-owned asset charge

In an attempt to circumvent the GWR rules, a variety of complex schemes have been developed in the past, the most common being the ‘home loan’ or ‘double trust’ scheme. Over time, these schemes have been tested in the courts, leading to the introduction of the ‘pre-owned assets tax’ charge (POAT).

The POAT charge is a separate anti-avoidance measure that can apply even if the GWR rules do not. The POAT rules broadly state that if an asset is gifted or a contribution made towards the purchase of the property and the donor continues to receive some benefit, they are potentially liable to the POAT charge (e.g., money given to a child who buys a flat shortly afterwards and the parent lives in the flat).

This charge is distinct from IHT, functioning instead as an income tax charge based on the annual benefit assumed to be received by the donor from the property. To avoid the charge, a donor may elect for the property to come within the GWR rules instead, with the value of the occupation being measured by using annual rental values.

There exists a benefit threshold of up to £5,000 per annum that is disregarded; however, if the total benefit from the land (and any other items) exceeds this amount, income tax will be calculated on the entire value of the benefit (i.e., even the first £5,000 is not disregarded).

Variations of these loan schemes have been attempted by taxpayers, with HMRC challenging them before the tax tribunals. One such example (but where the taxpayer won) is the recent case Executors of Mrs LV Elborne v HMRC [2025] UKUT 59 TCC. Following this decision, HMRC is likely to expedite amendments to IHTA 1984 to counteract similar future schemes.

In 2003, Mrs Elborne sold her home to trustees of a life interest trust, in exchange for an unsecured, zero‑interest loan broadly equal in value to the home at the time when the home loan scheme was implemented. She retained a life tenancy, living rent‑free (but paying all expenses) until her death. The loan note was then gifted to the trustees of a second life interest ‘family’ trust from which Mrs Elborne was excluded from benefit, which satisfied the PET conditions by her surviving for seven years.

The executors agreed that the value of the property in the life interest trust was chargeable in the estate due to her qualifying life interest (this being a pre-2006 settlement) but claimed a reduction in value by the amount of the outstanding debt (the loan note). Furthermore, as the loan note had been gifted more than seven years before death, it could not be chargeable in her estate, unless there was a GWR. HMRC disagreed and disallowed the loan note deduction.

The Upper Tribunal ruled that no benefit had been reserved, stating that it was irrelevant to the holder of the loan note (i.e., the trustees of the family settlement) where Mrs Elborne lived.

Stamp duty land tax/ Land and Buildings Transaction Tax/ Land Transaction Tax

On making a gift, normally, no stamp duty land tax (SDLT), is due by the recipient if no money changes hands.

However, when a property is transferred with a mortgage and that mortgage is taken on by the recipient, SDLT is due on the value of the debt transferred.

The same rules exist under the Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.

Practical tip

In July 2025, the government published draft legislation proposing that from 6 April 2027, unused pension funds are generally included in a deceased’s estate for IHT purposes. Should the legislation be enacted in its current form, many estates that previously fell below the IHT threshold could now be caught, potentially triggering a 40% tax charge. Some financial advisers are considering equity release to mitigate this additional IHT exposure, particularly where property constitutes a significant portion of their clients’ estate. By unlocking tax-free cash, money could be gifted during the donor’s lifetime (noting the sevenyear PET rule), thereby reducing the value of their taxable estate for IHT purposes.

Three main changes to Employer’s National Insurance contributions (NICs) were announced in last October’s Autumn Statement, all of which came into effect from 6 April 2025:

 • The rate of Employer’s NICs increased from 13.8% to 15%.

 • The threshold at which Employer’s NICs start to be due reduced from £9,100 to £5,000 per employee.

 • The employment allowance (EA) went up from £5,000 to £10,500, with a removal of the £100,000 test which previously prohibited larger employers from claiming it.

Winners and losers

The interaction of these changes will result in winners and losers, particularly in relation to the EA, which was significantly increased. The EA is an allowance for businesses (which meet certain criteria) to reduce their Employer’s NICs liability.

When she delivered the Autumn Statement 2024, Rachel Reeves said: “This will allow a small business to employ the equivalent of four full-time workers on the national living wage without paying any National Insurance on their wages.”

Let’s break that down. The national living wage (NLW) is the minimum hourly rate which must be paid to employees and workers over 21. Lower amounts apply to those under 21 or those in their first year of an apprenticeship. It’s worth noting that company directors, although treated as employees for tax purposes, are not required to be paid the NLW unless they have a separate employment relationship with the company.

For 2025/26, the NLW is £12.21 per hour, so for a full-time employee working 35 hours per week, that comes to £427.35 per week, or £22,222 per year. Employer’s NICs is calculated as 15% above the £5,000 threshold, so the tax due would be (£22,222 - £5,000) x 15% = £2,583.30. With four employees, the total NICs comes to £10,333.20 which would be covered by the £10,500 EA - meaning no employers’ NIC is due on their wages.

Of course, this is a simplification and does not take into account factors like overtime, benefits-inkind or paying annual or performance bonuses. It also assumes a 35-hour working week rather than, for example, a 37.5-hour or 40-hour week, which some people work. But it makes good rhetoric at the despatch box.

Do the sums

Interestingly, the £5,000 threshold creates an incentive to employ more people for fewer hours. For example, if the business employed part-time workers for 20 hours per week, their pay at the NLW rate would be 20 x £12.21 = £244.20 per week or £12,698 per year, resulting in NICs of £1,155 per employee. They could employ nine part-time employees and still have the NICs covered by the £10,500 allowance. Employing part-time workers gives them 9 x 20 = 180 working hours per week rather than 4 x 35 = 140 hours per week with fulltime employees.

A similar principle applies for employees. If I have one job earning £36,000 a year, I would pay NICs of £1,874.40, but if I have three jobs each paying £12,000, I pay no NICs (unless certain ‘aggregation’ rules apply) because each job pays below the £12,570 primary Class 1 NICs threshold.

Points to note

A couple of things to bear in mind relating to the EA:

 • The EA has to be claimed each year via payroll software.

 • It is available to most employers (including self-employed, partnerships, LLPs, companies, etc.).

 • Single-director companies with no other employees cannot claim. You must have at least one other employee paid above the £5,000 threshold to qualify.

 • You cannot claim for personal, household, or domestic staff.

 • The allowance may have to be split between ‘connected companies’ depending on the circumstances. Practical tip

With the EA now worth £10,500 per year, make sure you are claiming it if you are eligible. You can also claim for previous years if you’ve missed an eligible claim in the past

Unincorporated landlords who had combined property and trading income in 2024/25 of £50,000 or more must comply with Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) from 6 April 2026. This requires them to keep digital records and make quarterly returns and a final declaration to HMRC using MTD-compatible software.

Where landlords jointly own a property, there are some points to note.

Working out qualifying income

A landlord is only within MTD from 6 April 2026 if their combined property and trading income (before the deduction of expenses) is £50,000 or more in 2024/25

Where a landlord receives income from a jointly owned property, they only need take account of their share of the income from that property in working out their qualifying income. For example, if two brothers jointly owned a house in respect of which rental income of £20,000 was received in 2025/26 which was shared equally, each brother will need to take into account income of £10,000 in working out their qualifying income.

Digital records

Under MTD for ITSA a landlord must keep digital records of their income and expenses. Where a landlord receives income from a jointly owned property, they only need to keep digital records for their share of the income and expenses.

Landlords with income from jointly owned property can choose to simplify their record-keeping by creating less detailed digital records for the jointly let properties. This means creating a single digital record for each category of property income received in an update period and creating a single digital record for each category of property expenses incurred in a tax year. For example, where the landlord receives rent of £1,000, they can either create a digital record for each monthly rent payment or a single digital record of £3,000 for the rent received in the quarterly update period.

Reporting easement

MTD for ITSA requires landlords within its scope to make quarterly returns on property income and expenses using MTD-compatible software.

However, to simplify matters, where a landlord receives income from a jointly owned property, an easement applies under which the landlord can opt not to include expenses that relate to a jointly let property in their quarterly update. Instead, this information is finalised at the end of the tax year.

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.

Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) will apply from 6 April 2026 to sole traders and unincorporated landlords with combined trading and property income in 2024/25 of at least £50,000.

Under MTD for ITSA, traders and landlords must keep digital records and make digital returns to HMRC using MTD-compatible software.

A digital record is a record of income and expenses that is created and stored in software that works with MTD for ITSA. Under MTD for ITSA, a trader must keep digital records of their trading income and expenses, and an unincorporated landlord must keep digital records of their property income and expenses. If a trader or landlord has other income, there is no need for them to keep records of that income digitally.

Software

Traders and landlords within MTD for ITSA will need to use software that either creates digital records and submits information to HMRC or software which connects to the trader or landlord’s own record-keeping software, such as a spreadsheet. This type of software is known as bridging software.

Taxpayers can choose a single product that meets all their needs or a number of products that work together. Where more than one product is used, they must link digitally. For example, it is acceptable to keep records in a spreadsheet which is linked digitally to software to submit information to HMRC. However, it is not acceptable to manually enter or cut and paste data from a spreadsheet into a software package.

Records that must be kept digitally

The following records must be kept digitally:

• self-employment income, such as sales, takings and fees;
• self-employment expenses, such as the cost of goods, travel costs, office costs, rent, etc.;
• property income, such as rent, lease premiums, reverse premiums and inducements; and
• property expenses, such as repairs, maintenance, travel, etc.

The amount, the date the income was received or payment made and the nature of the income or expense should be recorded. The income and expenditure categories for MTD for ITSA are the same as for the Self-Assessment tax return.

If a trader has more than one business, they will need to keep the details for each business separately and make separate quarterly returns for each business. Landlords should keep separate records for their UK and foreign property businesses.

Jointly let properties

Where a landlord has income from a jointly let property, they only need to keep digital records relating to their share of the income and expenses. Landlords with income from jointly let properties can opt to keep less detailed records or to exclude income from jointly let properties in their quarterly updates; the income is instead included when the position for the tax year is finalised.

Turnover below the VAT threshold

If a trader’s turnover from a single self-employment is £90,000 or less, they only need to record whether a transaction is income or an expense. More detail is not required.

Landlords with income from residential letting need to record whether a transaction is an income or an expense and, where it is an expense, whether it is a restricted finance cost.

Once income reaches £90,000, transactions must be fully categorised.

Retailers

Retailers can create a digital record of gross daily takings rather than having to record each individual sale.

Storing digital records

Digital records must be kept for at least five years from the 31 January submission date for the tax year in question, i.e. for 2026/27, until 31 January 2033.

A new 40% first-year allowance (FYA) is to be introduced from April 2026. It will apply to main rate expenditure on new assets, excluding cars. Both companies and unincorporated business will be able to benefit. The new allowance will be available from 1 January2026 for corporation tax and from 6 January 2026 for income tax.

From 1 April 2026 for corporation tax and 6 April 2026 for income tax the main rate of writing down allowance (WDA) is reduced from 18% to 14%. A hybrid rate will apply where the chargeable period spans the date of the rate change.

Utilising the new allowance

Companies have a range of options for relieving main rate expenditure in the year in which it is incurred. The annual investment allowance (AIA) provides immediate relief for qualifying expenditure on new and used assets and applies to both qualifying main rate and special rate expenditure. However, it is subject to an annual limit of £1 million.

Companies can also take advantage of full expensing to deduct qualifying expenditure on new main rate assets. Full expensing is available without limit.

Like full expensing, the new 40% FYA applies to qualifying expenditure on new main rate assets. As full expensing can be used without limit, the 40% FYA will only be of use to a company where the expenditure is outside full expensing. This will be the case, for example, for assets used for leasing.

The new 40% FYA is also available to unincorporated businesses.

The cash basis is the default basis of accounts preparation for traders. It allows capital expenditure to be deducted when computing profits unless the expenditure is of a type for which such a deduction is specifically prohibited. Cars fall into this category. Where a deduction is not allowed, capital allowances can be claimed (unless simplified expenses have been used to claim relief for mileage costs).

Capital allowances are of more relevance where the trader uses the accruals basis. Unincorporated businesses can access the AIA, but do not benefit from full expensing. The new 40% FYA will be useful to them where the AIA has been used up, and also where expenditure qualifies for the new 40% FYA but not the AIA.

Where the 40% FYA is claimed, the balance of the expenditure is relieved by main rate WDAs.

Reduction in the WDA

The rate of WDA on main rate expenditure drops from 18% to 14% from 1 or 6 April 2026. This will lengthen the period over which relief is given for expenditure on main rate assets. It will have an impact where the business opted not to claim the AIA or full expensing on qualifying main rate expenditure or, from January2026, where the new 40% FYA is claimed.

Cars, other than new zero emission cars, are not eligible for any of the FYAs. Low emission cars are allocated to the main pool. The reduction in the main rate WDA will mean that it will take businesses longer to fully relieve the cost of main rate cars than is currently the case.

Where the chargeable period spans the date on which the rate changes, a hybrid rate will apply. This will reflect the number of days in the chargeable period before the rate change and the number of days on or after the rate change. For example, where a company prepares accounts to 30 June, the hybrid rate for the period to 30 June 2026 is 17%.

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.

One of the key requirements under Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is the need to keep digital records of income and expenses. A digital record is a record of income or an expense that is created and stored using software that is compatible with MTD for ITSA.

There are different software options available. A landlord within MTD for ITSA can either choose a single software package that does everything or different software products that work together. For example, a landlord could record income and expenses in a spreadsheet that is linked by software (bridging software) to another package for submitting returns to HMRC. It is important to note that where more than one product is used, they are linked digitally. It is not permissible to enter figures manually or to cut and paste from one program to another.

Information that must be recorded

A landlord within MTD for ITSA will need to keep records of property income, such as rent, premiums for the grant of a lease, reverse premiums and inducements, and property expenses, such as repairs, maintenance and cleaning, digitally.

The landlord will need to record the following in their digital records:

• the amount;
• the date on which it was received or incurred; and
• the category into which it falls.

The income and expenditure categories used for MTD for ITSA are the same as for the Self-Assessment tax return.

Different property businesses

If a landlord has both a UK property business and an overseas property business, they will need to keep separate digital records for each business.

Jointly let properties

A landlord with income from jointly let properties only need include their share of the income and the expenses. There is an easement which allows landlords with income from jointly owned properties to keep less detailed digital records.

Turnover of under £90,000

If the landlord’s total property turnover is less than £90,000, they can choose to categorise their digital records in less detail. If a landlord has income from residential lettings, they can record only whether a transaction is an income or an expense, and for expenses, whether the expense is a restricted finance cost.

Property income allowance

Landlords claiming the property income allowance do not need to record this in their digital records. Instead, it is claimed at the end of the tax year when the position for the year is finalised.

Some important tax issues when considering incorporation.

The question as to whether a business should operate through a limited company is often dictated by the tax implications, though not always – insulation of the individual from commercial risks is often reason enough.

The term ‘incorporation’ can also include transferring a business (usually a partnership) into a limited liability partnership (LLP) as they, like limited companies, are bodies corporate with a separate legal identity.

However, LLPs are treated exactly the same as ordinary partnerships for tax purposes, i.e., they are transparent with the partners (or ‘members’ as LLP partners are known) taxed on their profit or capital shares. When a partnership becomes an LLP, it is essentially a non-event for tax purposes, even though a new legal entity is operating the trade; however, becoming a limited company is very much an event for tax purposes.

Capital gains tax

The main issue is that when a sole trader, or partnership, transfers business assets into a limited company, it is treated as a disposal for capital gains tax (CGT) purposes on the owner, even though they own the recipient company and the business is one of a going concern.

The default position, assuming all assets have gone across to the company, is that the notional capital gain will be rolled over into the value of the shares, which the owner will receive in consideration. However, this default relief – ‘incorporation relief’ (under TCGA 1992, s 162) – can be disapplied and the CGT paid instead.

Incorporation relief is quite an unusual relief. First, it is automatic (unless disapplied); second, it applies to ‘businesses’ and not just trades as required by the other CGT reliefs. This is useful for those businesses which might resemble more of an investment than trade, such as a rental property portfolio; whilst renting land will never be a trade, it might be a business if it is operating as such when sufficient hours and activity are provided by the owner.

The main criterion for TCGA 1992, s 162 relief is that all assets (except cash) go into the company; if that is not the case, section 162 relief is not available and CGT will be chargeable. However, one reason why business owners might disapply the relief is because they do not want a latent gain with the shares; they may prefer to ‘have it over with’, pay the tax at the current rate and, more importantly, claim business asset disposal relief if they can.

If TCGA 1992, s 162 is not activated and the disposal remains chargeable, the consideration received by the business owner will be mainly in the form of a directors’ loan account; this can then be drawn down, tax-free, whenever the company has the funds to make repayments. It is therefore important to value the business assets properly, as an overvalued sale may lead to a greater loan account, with corresponding ‘excess’ drawdowns being taxable as dividends.

Stamp duty land tax, etc.

The tax which may be of most concern is stamp duty land tax (SDLT) in England and Northern Ireland (or its devolved equivalents); under FA 2003, s 53, the transfer of land or buildings to a connected company attracts a deemed charge based on market value consideration; SDLT must be paid within 14 days of completion, so it is a major strain on cashflow.

Incorporating a family partnership, all of whose partners are related or are the same people as the subsequent shareholders, can potentially avoid the charge via provisions in FA 2003, Sch 15; however, there are anti-avoidance provisions within FA 2003, Sch 15, para 17A acting as an effective exit charge within the first three years; also, the antiavoidance rule in FA 2003, s 75A is a much wider provision striking down any arrangement made to avoid SDLT. A legitimate business partnership looking to incorporate for genuine commercial reasons should have nothing to fear, but SDLT is a complicated area, and an expensive one if you get it wrong.

Practical tip

When considering incorporation, factor in the CGT or SDLT cost of doing so, as well as the company and individual’s tax position going forward. If faced with a high upfront cost for those taxes, the potential long-term savings of incorporation may still make it a worthwhile cost.