Adrian Mooy & Co - Accountants Derby

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Although the National Insurance rates and thresholds for 2022/23 had already been set, at the time of the Spring Statement in March 2022, the Chancellor announced increases in the primary threshold which would align the starting point for National Insurance with the personal allowance from 6 July 2022. However, as the increase does not take effect until part way through the 2022/23 tax year, the two not fully aligned until 2023/24. The lower profit limit for Class 4 contributions was also increased.

Employees

Employees pay primary Class 1 National Insurance contributions on their earnings to the extent that these exceed the primary threshold. For 2022/23, contributions are payable at the main rate of 13.25% on earnings between the primary threshold and the upper earnings limit, and at the additional rate of 3.25% on earnings in excess of the upper earnings limit. Employees are treated as having paid contributions at a notional zero rate on earnings between the lower earnings limit and the primary threshold. This has the effect of ensuring that the year is a qualifying year for state pension purpose if the employee has earnings at least equal to 52 times the weekly lower earnings limit.

The lower earnings limit is £123 per week (£533 per month; £6,396 per year) and the upper earnings limit is set at £967 per week (£4,189 per month; £50,270 per year) for 2022/23.

The primary threshold was initially set at £190 per week (£823 per month; £9,880 per year). These thresholds now only apply from 6 April 2022 to 5 July 2022. From 6 July 2022, the primary threshold is aligned with the personal allowance, and from 6 July 2022 to 5 April 2023 is set at £242 per week (£1,048 per month; £12,570 per year). As the increase takes effect three months after the start of the 2022/23 tax year, the annual primary threshold for 2022/23 is £11,908. This will be of relevance to directors with an annual earnings period. The increase in the thresholds does not affect any liability for primary contributions for any tax week commencing before 6 July 2022.

As a result of the increase in the primary threshold, employees will pay less National Insurance from July onwards. There is no change to the secondary thresholds.

Case study

Imogen is paid £2,000 per month.

For April to June 2022 inclusive, she pays primary contributions of £155.95 per month (13.25% (£2,000 - £823)).

However, from July 2022, her monthly primary contributions fall to £126.14 (13.25% (£2,000 - £1,048)).

The increase in the primary threshold means that from July she is £29.81 better off each month.

Employment allowance

The employment allowance reduces the secondary contributions payable by the employer. The allowance is set at £5,000 for 2022/23, having been increased by £1,000 following the Spring Statement. Eligible employers should remember to claim the allowance.

The self-employed

The starting point for Class 4 contributions is aligned with the primary threshold for Class 1 purposes. To keep the alignment in light of the increase to the primary threshold from July 2022, the lower profits limit for 2022/23 has been increased from £9,880 to £11,908. The increase applies from 6 April 2022.

First-time buyer relief may reduce the stamp duty land tax (SDLT) that a first-time buyer pays when they buy their first home in England or Northern Ireland. A similar scheme applies in Scotland for Land and Buildings Transaction Tax (LBTT), but there is no first-time buyer relief from Land Transaction Tax in Wales. This articles focuses only on the SDLT relief.

Higher residential threshold

The SDLT relief for first-time buyers takes the form of a higher residential threshold. The normal residential threshold is £125,000. However, this is increased to £300,000 for first-time buyers buying their first home costing £500,000 or less.

Where the relief applies, no SDLT is charged on the first £300,000 of the purchase consideration, with the balance of the consideration (up to £500,000) liable to SDLT at 5%. Where the consideration is more than £500,000, the relief does not apply; first-time buyers pay SDLT as for other buyers to the extent that the consideration exceeds £125,000.

Example 1

Betty is a first-time buyer. She buys her first property, a 2-bed house, in June 2022 for £280,000, which she will live in as her main home. As the consideration is less than £500,000, first-time buyer relief applies. The consideration is below the SDLT first-time buyer threshold of £300,000, so Betty does not have to pay any SDLT.

Example 2

Libby also buys her first home in June 2022. The property costs £350,000. She too benefits from SDLT relief. No SDLT is payable on the first £300,000, but SDLT at 5% is payable on the remaining £50,000. She therefor pays SDLT of £2,500.

Example 3

Eliza buys her first home, a flat in London, in June 2022. The flat costs £700,000. As the consideration is more than £500,000, she is unable to benefit from first-time buyer relief. Consequently, she must pay SDLT of £25,000 ((£125,000 @ 0%) + (£125,000 @ 2%) = (£450,000 @ 5%)).

Buying an investment property

In areas such as London, where property prices are high, many would-be first-time buyers are unable to afford a property. Further, where the price is more than £500,000, first-time buyer relief is not available.

To overcome some of these difficulties and to get onto the first rung of the ladder, an option may be to buy an investment property in a cheaper area. However, for first-time buyers wishing to take advantage of first-time buyer relief to cut their SDLT bill, there is a sting in the tail – the relief is not available unless the first-time buyer intends to occupy the property as their only or main residence. Consequently, first-time buyers buying an investment property to enable them to get on the property ladder must pay SDLT at the usual rates where the consideration exceeds £125,000.

Sometimes a business may have ceased trading but then receives income or incurs expenses that have not been included in the final cessation accounts e.g. an insurance payment may be received or a debt that the business owner thought would never be paid is paid. Such receipts would have arisen due to the previous carrying on of the trade. Any such income is charged to tax separately from the profit of the trade (i.e. the previous cessation period is not reopened) but the receipt is still taxed as trading income. A business that has ceased trading may also find itself paying expenses after cessation. Examples include the costs relating to the collection of debts taken into account in computing earlier trade profits before the trade ceased and remedying what is found to be defective work carried out before cessation.

A deduction is allowed for a loss or expense which, if the trade had not ceased  would have been deducted in calculating the profits of the trade for corporation or income tax purposes, or would have been deducted from or set off against the profits of the trade. Such allowable expenses can be offset against any post cessation receipts. However, if the business does not have any post-cessation receipts, relief may still be available for post-cessation bad debts and certain specified expenses (broadly expenses incurred in remedying defective work or paying associated damages). Relief is given sideways against other income and capital gains of the same year and must be claimed by 31 January but one from the end of the tax year in which the payment was made e.g. if a qualifying payment is made in 2022/23, relief must be claimed by 31 January 2025. If an expense cannot be fully relieved using any of these methods then it is carried forward to be deducted from any post cessation receipts that may be received in the future, otherwise it is lost.

If the post-cessation receipts arise within six years of cessation, the person receiving the income can elect to carry back the receipts to the date of cessation

Restricted relief

If there are insufficient post-cessation receipts against which to offset the post-cessation expenses, (i.e. there is a loss), then there is a restriction on the amount of claimable expenses can be allowed against the other net income or capital gains for the tax year in which they are paid. The set off is subject to the £50,000 or 25% of adjusted total income cap. The relief is also restricted by the amount of any unpaid debts owed by the trader at the date of cessation. If an unpaid debt restricted the amount of relief in an earlier tax year, it is not allowed in a later year either. However, if the outstanding debt is repaid, the payment is a ‘qualifying payment’ and can be relieved.

From a tax perspective, all lets are not equal, and the rules that apply to furnished holiday lettings are different to those applying to traditional buy-to-lets.

Buy-to-let

Under a traditional buy-to-let, a landlord will let the property to the same tenant or tenants on a long-term basis. Lets are traditionally for a period of at least six months.

Where an individual landlord has rental income from one or more buy-to-lets, the rental profit is charged to income tax under the property income tax rules.

All buy-to-lets owned by the same person or persons form a single property income business and it is the overall profit from the business that is charged to tax. The landlord is charged on the rental profit (or his or her share of the rental profit) at his or her marginal rate of tax.

The cash basis is the default basis of accounts preparation where rental income is £150,000 a year or less. However, the landlord can elect for the accounts to be prepared under the accruals basis if preferred.

Where the landlord incurs interest or finance costs, these are not deducted in working out the rental profit. Instead, relief is given for 20% of the interest and finance costs as a tax reduction (capped at the tax due on the rental profit, with any unrelieved finance costs being carried forward).

Capital allowances are not available for furniture, fixtures and fittings, but relief by deduction is available for the replacement of domestic items.

As the profits or losses are computed for the property business as a whole, a loss on one property is automatically offset against the profit on another.. However, where the business as a whole makes a loss, the loss can only be carried forward and set against future profits from the same property income business.

Rental profits from buy-to-let investments do not count as earnings for pension purposes and are not liable to National Insurance.

Furnished holiday lets

By contrast, the furnished holiday lets are characterised by multiple short-terms lets to different guests. To qualify as a furnished holiday letting for tax purposes, the property must be let furnished,  be available for letting for at least 210 days in the tax year and actual let for 105 days in the tax year. Lets of more than 30 days are not counted, nor are stays by the landlord.

While regarded as an investment, furnished holiday lettings benefit from some business tax rules not available to buy-to-let landlords.

One of the main advantages is that landlords are allowed to deduct interest and finance costs in full in working out the profit for their furnished holiday lettings business, meaning that relief is given at their marginal rate of tax. Landlords of furnished holiday lets also benefit from capital gains tax reliefs, including business asset disposal relief and rollover relief, which are very valuable. The landlord is also able to claim capital allowances for furniture, equipment and fixtures if accounts are prepared on the accruals basis. Rental income also counts as earnings for pension purposes.

As with buy-to-lets, the profit or loss is calculated for the furnished holiday lettings business as a whole, rather than on a property-by-property basis. Where there is an overall loss, this can be carried forward for relief against future profits from the same business.

HMRC has finally set out its new timetable and criteria for joining its Making Tax Digital pilot. When will you be able to sign up and should you bother?

Overdue update

At the end of 2021 HMRC said that early in 2022 it would widen the availability of its Making Tax Digital for Income Tax Self Assessment ( MTD ITSA ) pilot for businesses. However, it’s taken it until half way through the year to do so and importantly well past the start of the 2022/23 tax year.

MTD ITSA becomes obligatory in April 2024 and will initially be for landlords, sole traders and self-employed individuals, not partnerships or companies. The latter need not concern themselves with the pilot.

Catching up

One of the main features of MTD ITSA is online quarterly reporting of business income and outgoings to HMRC. The trouble is that businesses able to join the pilot under the new criteria won’t be able to do so until July after the first quarterly reporting period has ended. If you join you’ll have little time (especially as the holiday season is upon us) to ensure that your records for the past quarter meet the MTD ITSA requirements in time to submit the first report due on 5 August 2022.

During the pilot period there are no penalties for submitting late quarterly reports. So, if you’re keen to join the pilot during 2022/23, while you must submit all four reports for the year you’ll be able to catch up for any quarter you’ve missed without the risk of being penalised.

Software trouble

Possibly a bigger stumbling block if you want to join the pilot is the very limited range of software available. MTD ITSA reports can only be made using compatible software. There are currently only three HMRC-approved providers. The big names such as Xero, Sage, Intuit Quickbooks and many others are still working on their products. If your provider is not on the short approved list for MTD ITSA software, we recommend waiting to join the pilot until it is rather than changing software at this stage.

The new criteria apply from July 2022. You can join the pilot if your bookkeeping software is compatible but currently there are only three such providers. You can join later but you’ll need to submit retrospective reports

If their profits are high enough, the self-employed pay two classes of National Insurance contribution – Class 2 and Class 4.

Class 2 contributions are flat rate contributions of £3.15 per week for 2022/23. It is the payment of Class 2 contributions that enables a self-employed earner to build up entitlement to the state pension and certain other contributory benefits. Class 4 contributions are payable on profits in excess of the lower profits limit, but do not garner any pension or benefit entitlement.

Lower profits limit for Class 4

The lower profits limit for Class 4 contributions is aligned with the primary threshold for Class 1 National Insurance contributions. This is set at £190 per week for the period from 6 April 2022 to 5 July 2022 (equivalent to £9,880 per year), rising to £242 per week (equivalent to £12,570 per year and aligned with the personal allowance) from 6 July 2022. The annualised primary threshold is £11,908. Consequently, the lower profits limit for Class 4 is set at £11,908 for 2022/23.

Class 4 contributions are payable at the main rate, which is 10.25% for 2022/23, on profits between the lower profits limit and the upper profits limit, which at £50,270 is aligned with the upper earnings limit for Class 1 contributions. Any profits in excess of the upper profits limit attract Class 4 contributions at the additional Class 4 rate, set at 3.25% for 2022/23.

Higher starting point for Class 2

Historically, a liability to Class 2 contributions has arisen where profits exceed the small profits threshold, which for 2022/23 is set at £6,725. However, the starting point for Class 2 contribution is to be increased with retrospective effect from 6 April 2022 to align it with the starting point for Class 4 contributions. For 2022/23, this is £11,908.

As Class 2 contributions earn entitlement to the state pension, self-employed earners who have profits between the small profits threshold, set at £6,725 for 2022/23, and the new starting limit of £11,908 will be treated as if they had paid a Class 2 contribution. This means they get the benefit of having paid a Class 2 contribution, but for zero contribution cost. This move brings the position of the self-employed with low profits broadly into line with that for employed earners with low earnings who are treated as having paid Class 1 contributions at a notional zero rate on earnings between the lower earnings limit (£6,396 for 2022/23) and the primary threshold (£11,908 for 2022/23).

Self-employed earners with profits below the small profits threshold can opt to pay Class 2 contributions voluntarily to maintain their contribution record. At £3.15 per week for 2022/23, this is a much cheaper option that paying voluntary Class 3 contributions, which are set at £15.85 for 2022/23.

Looking ahead

The Class 4 rates were increased by 1.25 percentage points for 2022/23 only pending the introduction of the Health and Social Care Levy. The rates are due to revert to 9% (main rate) and 2% (additional rate) from 2023/24. However, the self-employed will also have to pay the Health and Social Care Levy of 1.25% on profits in excess of the lower profits limit from 2023/24, so the total hit remains the same in 2023/24 as in 2022/23. However, unlike Class 4 contributions, liability to the Health and Social Care Levy remains beyond state pension age.

The usual method of incorporation is via Companies House WebFiling or Company Formation Agent (although paper submissions are still accepted). If incorporating via WebFiling there is the added benefit of HMRC automatically being notified by Companies House when a new company has been formed. HMRC will then usually issue a 'Notice to deliver a tax return' confirming the reporting date of the first accounts. In most cases, the notice period coincides with an accounting period of the company and a return is then submitted for a matching period.

The first accounting period usually covers more than 12 months because the starting date is the date that the company was incorporated ending on the ‘accounting reference date’, i.e. the last day of the month the company was set up. In the following years, the accounting reference date will normally cover the company’s financial year.

Example - If a company is incorporated on 11 May 2022, its accounting reference date will be 31 May 2023, so the first accounts cover 12 months and 3 weeks. The accounts will be from 1 June to 31 May in the following years.

Although Companies House sets the accounting period dates, the dates covering the first tax return will depend on whether or not the company started trading on the same day that it was incorporated. This because a company usually first comes within the charge to corporation tax when the company commences a trading activity. However, an accounting period will also be deemed to have commenced as soon as the company acquires a source of income (which could be the opening of an interest-bearing bank account).

Shortening the accounting period - The period covered by a tax return (the ‘accounting period’ for Corporation Tax) cannot be longer than 12 months. So to cover the first accounting period two tax returns may have to be filed (in the above example one for the year ended 10 May 2023 and another for the period 11 May 2023 to 31 May 2023); if so, there will also be two payment deadlines. Only one return will be required in the following years -- usually covering the same financial year as the accounts. The submission of two tax returns for just a few weeks (sometimes days) can be made more accessible by applying to shorten the accounting period to the end of the month before. Therefore, in the example above by applying to shorten so that the end date is the last day of the month before, only one set of accounts is required for the period 11 May 2023 to 30 April 2024 and also only one tax return and one tax payment.

Late submission of accounts to Companies House results in an automatic penalty of £150. Successful appeals against such penalties are rare. Of course the way to avoid a penalty is to submit the accounts on time. However, if you can see that you will not be able to make the deadline for whatever reason there is a way to avoid any penalty by shortening the accounting reference date, gaining an additional three months to submit.

When the accounting reference date is shortened the new deadline for filing accounts at Companies House becomes the longer of:

 nine months from the new accounting reference date; or

 three months from the date of receipt of the application form AA01 (change the accounting reference date).

Therefore if the accounting reference date is shortened by just one day that gains an additional three months in which to submit the accounts. In addition, the rules allow accounts to be made up to seven days on either side of the accounting reference date so these accounts can be submitted as prepared with no alterations required.

Importantly, the change to AA01 form must be received by Companies House before the date that the accounts are due initially and therefore, this method cannot be used if the filing deadline has passed.

Example - A company's year-end (Accounting Reference Date) is 31st March 2022.

The deadline for submission to Companies House is 31 December 2022.

However, the directors confirm that the accounts cannot be submitted by that date and wish to apply to shorten the accounting period.

An application is made to Companies House on Application form AA01 to shorten the accounting reference date by one day to 30 March 2022.

Accounts can be made up to seven days either side of the original accounting date and therefore the accounting reference date remains as 31 March 2022.

The revised submission deadline will be three months from the date that the AA01 is filed. Therefore, in this scenario, if form AA01 was submitted on 23 December 2022 the revised filing date will be 22 March 2023.

The next set of accounts to the year ended 31 March 2023 would need to be filed by 30 December 2023.

Private residence relief is a well-known relief but one which is often misunderstood. It applies to remove the liability to capital gains tax that would otherwise apply where a homeowner makes a gain on the disposal of their only or main residence.

Like all reliefs, it is dependent on the associated conditions being met. Further, the fact that a property is lived in as a home prior to disposal does not in itself mean the gain will be exempt in full.

Scope of the relief

Private residence relief applies to the gain accruing to an individual which is attributable to the sale of all or part of a ‘dwelling house’ which is or has been during the individual’s period of occupation his or her only or main residence and also any land which the individual has for their own occupation and enjoyment with that residence as it garden or grounds up to the permitted area.

What is a ‘dwelling house’

The term ‘dwelling house’ is simply the building in which the individual lives. This may be a house, a flat or a bungalow. Alternatively, it may comprise a caravan or a boat if this is where the individual resides.

Land and gardens

Private residence relief also extends to land and gardens that are enjoyed with the home. The legislation caps this at an area of 0.5 of an hectare (the ‘permitted area’). However, a larger area may fall within the exemption where this is considered reasonable with regard to the size and character of the property, although the exemption will not cover land in use for other purposes, such as agriculture or use in a trade. By contrast, land used as a paddock or an orchard may form part of the grounds if there is no significant business use.

The land must be sold with the property or before it – if the land is sold separately after the sale of the residence, the relief will not apply.

Only or main residence

The relief applies to the only or main residence. Where a person has more than one property, they can elect which one is their main residence for the purpose of the relief. However, only properties that are lived in as a residence can be a main residence. An election to specify a property as a main residence must be made within two years of the date on which the latest residence is acquired. In the absence of an election, it is a question of fact as to which is the main residence.

Married couples and civil partners

Married couples and civil partners only have one main residence for capital gains tax purposes between them.

Final period exemption

Where a property has at some time been an individual’s only or main residence, the last nine months of ownership are covered by the relief, regardless of whether the property is occupied as an individual’s main residence at that time. Where a person sells their home to go into care, the final period of exemption is 36 months.

Full relief

If a property has been occupied as an individual’s only or main residence for the full period for which the individual has owned the property, the relief applies to the full gain made on disposal, so no chargeable gain arises.

Partial relief

If the property has been an individual’s only or main residence for some but not all the time that they have owned it, partial relief is available. The gain is time apportioned and the relief applies to the period for which the property is occupied as an only or main residence, plus the last nine months. Any remaining gain is liable to capital gains tax to the extent not sheltered by losses or the annual exempt amount.

HMRC produce a number of toolkits which highlight common errors found in self-assessment tax returns. As the name suggests, the capital gains tax land and buildings toolkit highlights key errors commonly found by HMRC in relation to capital gains tax on land and buildings. The latest version of the toolkit relates to 2021/22 tax returns, to be submitted by 31 January 2023.

Key areas of risk

The toolkit highlights the following key areas of risk.

1. Record keeping -- good record keeping is essential as poor records may mean that the information provided on the tax return is not accurate, and this may result in incorrect deductions for expenditure, with amounts over or under-stated. In addition, poor record keeping may mean that allowable expenses are overlooked and reliefs are not claimed. The nature of capital gains tax means that past events (such as the incidental costs of acquisition) are relevant and records need to be kept until the property is disposed of so that any gain can be computed correctly.

2. Disposals – disposal are not limited to the sale of the land or building and a disposal will occur for capital gains tax purposes where a property or land is given away or exchanged, and this may trigger a capital gains tax liability. There may also be a disposal for capital gains tax purposes if an asset is lost or destroyed or if a capital sum is received in respect of the asset. All disposals should be taken into account in the return, and care should be taken to include the disposal in the correct tax year.

3. Valuations – the valuation of land and buildings comprises the largest single area of risk and accounts for a large part of HMRC compliance work. Problems are more likely to arise where the valuation is not performed by a qualified independent valuer. In valuing land or buildings, errors may arise where the potential for development, the existence of tenancies, the inclusion of intangibles or other assets or the existence of restrictive covenants over the land are overlooked. HMRC are less likely to challenge a valuation where they are happy that it has been undertake by a qualified independent valuer.

4. Expenditure – certain expenditure is allowed as a deduction in computing the chargeable gain, including acquisition costs, enhancement expenditure and the incidental costs of disposal. Expenditure is only allowed as a deduction if it is capital in nature and has not been deducted elsewhere (for example in calculating rental profit). Care must be taken that expenditure that is deducted in computing the gain meets these tests.

5. Reliefs – various reliefs are available for capital gains tax purposes (such as private residence relief). However, reliefs are only available if the associated conditions are met. Some reliefs require documentary evidence. Care should be taken to ensure that the conditions are met where reliefs are claimed.

Checklist

The toolkit also contains a useful checklist. This can be used as an aide-memoir and it is advisable that it is completed when completing the tax return to ensure nothing is overlooked. This may prove to be time well spent.

There is usually a capital gains tax (CGT) charge when a chargeable asset is sold at a gain (subject to the individual personal allowance for an individual). However deferment of the gain may be possible should 'rollover relief' be available.

'Rollover' relief can be claimed where trading assets are sold and new assets purchased within a set timeframe using the proceeds (or the equivalent amount of proceeds if the asset is given away). The relief can be claimed by both individuals and companies and allows CGT to be deferred on the sale of a business asset when replacing it with another business asset within a period commencing one year before and ending three years after disposal.

Under this relief the allowable cost of acquisition and any other expenditure of the new asset is reduced by the amount of gain on the old asset. Therefore when the new asset is eventually sold two sets of capital gains will come into charge.

Relief can be claimed where the business is:

• trading, which includes carrying on a business of Furnished Holiday Let;

• occupying and managing commercial woodlands to make a profit;

• carrying on a profession, vocation, office or employment;

• making a personally owned asset available to a personal company; and

• disposing of land by a compulsory purchase.

The assets do not have to be of the same type but must be used, and only used, for the trade.

There is no requirement to invest the actual sale proceeds into the asset purchased so long as an amount equal to the disposal proceeds is used. However, if only part of the sale proceeds is used, the unused part is chargeable immediately (although Business Asset Disposal Relief may be available subject to the relevant conditions).

Provisional claims - HMRC may allow provisional relief where the original asset has been sold and the trader plans to reinvest the proceeds in a new asset but has not yet done so. When the reinvestment finally takes place the actual claim replaces the provisional claim. However, should the reinvestment not take place within three years from 31 January following the tax year of disposal the provisional relief will be cancelled (i.e. provisional relief will automatically cease after 31 January 2027 for a disposal in 2022/23).

Asset not used in business - If the asset is acquired but not taken into the business within the timescale, a claim may still be possible providing:

• the expenditure is incurred for the purpose to enhance the asset's value

• any work arising from such expenditure begins as soon as possible after acquisition and is completed within a reasonable time.

• on completion of the work the asset is taken into use in the trade and no other purpose

• the asset is not let or used for any non-trading purpose in the period between acquisition and the time it is taken into the trade

Should the original asset only be used in the business for part of the time of ownership the acquisition and proceeds are apportioned into business and non-business use on a timeline basis. Therefore only the part relating to the time used in the business can qualify for relief. For these purposes the period of ownership excludes any period pre 31 March 1982.

Time scale - The time limit for a claim is four years from the end of the accounting period to which the claim is related for companies and from the end of the tax year for individuals.

'Rollover' relief is not available where replacement assets are acquired to make a profit on sale. A similar relief, known as 'holdover relief', is available where the replacement asset is a depreciating asset.

There are various ways to enjoy savings income tax-free. However, not all routes are open to all taxpayers – the options depend on the nature of the savings and the saver’s other earnings and marginal rate of tax.

Savings Allowance

Basic and higher rate taxpayers are entitled to a savings allowance. The allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. The allowance is available in addition to the personal allowance and also the dividend allowance. Taxpayers who pay tax at the additional rate (which applies to taxable income in excess of £150,000) do not benefit from a personal savings allowance and must pay tax on any savings income unless it is otherwise exempt.

There is no need for a separate savings allowance for savers who total income is less than their personal allowance as the personal allowance will shelter any savings income.

Savings starting rate

Savings income which falls within the savings starting rate band is taxed at the savings starting rate of 0%. Depending on the individual’s personal circumstances, they may be able to enjoy up to £5,000 of savings income tax-free.

The savings starting rate band is set at £5,000, but is reduced by any taxable non-savings income. This is other taxable income in excess of the personal allowance (but excluding any dividends which are treated as the top slice of income). Consequently, the full £5,000 savings starting rate band is available where other taxable income is less than the individual’s personal allowance. The standard personal allowance is £12,570 for 2022/23. The savings starting rate is eroded once taxable income in excess of the personal allowance reaches £5,000.

The savings starting rate is applied before the personal savings allowance.

Tax-free savings

If savings are held within a tax-free wrapper such as an Individual Savings Account, the associated savings income is tax-free.

Case study

Marion has a state pension of £11,000 a year. She has considerable savings which generate interest of £9,000 a year. She also receives interest of £200 a year from savings held in an ISA.

As her total income of £11,000 is less than her personal allowance of £12,570, the remainder of her personal allowance is available to shelter the first £1,570 of her savings allowance.

Her pension (her only other taxable income) does not exceed her personal allowance; consequently, she is entitled to the full £5,000 savings starting rate band. Savings falling within this band are tax-free (attracting the savings starting rate of 0%).

She is also able to benefit from the personal savings allowance, which is £1,000 because she is a basic rate taxpayer. The remaining interest (other than that from her ISA) of £1,430 (£9,000 - £1,570 - £5,000 - £1,000) is taxed at the basic rate of 20%. The interest of £200 from her ISA is tax-free.

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

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

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

• advertising costs;
• accountancy costs;
• cleaning costs;
• letting agency fees;
• gardening costs;
• repairs and maintenance;
• cost of utilities where met by the landlord;
• council tax where met by the landlord;
• legal fees;
• travel costs.

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

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

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

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

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

These rules do not apply to furnished holiday lettings.

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

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

Keep records - It is important to keep good records of expenses so nothing is overlooked.

Property that is jointly-owned may be let out. As people are taxed individually, the income must be allocated in order to work out the tax that each joint owner is liable to pay. The ways in which income from jointly-owned property is taxed depends on the relationship between the owners.

Joint owners are not married or in a civil partnership - Assuming there is no property partnership, where property is jointly-owned by persons who are not married or in a civil partnership, the income arising from the property will normally be allocated in accordance with each person’s share in the property. Each person is taxed on the income that they receive.

Example - Andrew, Alison and Anthony are siblings who own a property together which is let out. Andrew owns 50% of the property, Alison owns 30% and Anthony owns the remaining 20%.

The property generates rental income of £10,000. The income is allocated as follows in accordance with the ownership shares:

• Andrew: £5,000;
• Alison: £3,000; and
• Anthony: £2,000.

Each is taxed on the share that they receive.

The joint owners do not have to share profits in accordance with their ownership shares – they can agree a different split. If they do, they are taxed on what they actually receive.

Spouses and civil partners - Where property is owned jointly by spouses and civil partners, the default position is that the income is treated as being allocated 50:50 for tax purposes, regardless of the amounts that they actually receive. This can be useful from a tax planning perspective where spouses or civil partners have different marginal rates of tax. The no gain/no loss capital gains tax rules can be used to transfer a small share in a property to a spouse or civil partner paying tax at a lower rate, transferring 50% of the income for tax purposes in the process.

Example - Frank is a higher rate taxpayer. He owns a property generating rental income of £20,000 a year. He transfers a 5% stake in the property to his wife Felicity, whose only income is a salary of £15,000. Frank and Felicity are each taxed on £10,000 of the rental income. Felicity pays tax at 20% on her share. Had the property remained in Frank’s sole name, he would have paid tax at 40% on the full amount of the rental income. Taking advantage of the rules saves them tax of £2,000 a year.

This rule does not apply to income from furnished holiday lettings.

Form 17 - Where spouses or civil partners own a property jointly in unequal shares, they can elect for the income to be taxed by reference to their underlying ownership shares. However, this is only possible where they own the property as tenants in common (and each own their own share); where the property is owned as joint tenants (and as such the owners have equal rights over the whole property), the income split remains 50:50.

The election is made on Form 17. It must be made by both spouses/civil partners jointly and they must declare that they own the property in the shares stated on the form. The income split takes effect from the date of the latest signature, and to be effective must reach HMRC within 60 days of the signature.

The ability to elect for income to be taxed in accordance with ownership shares opens up tax planning opportunities, particularly as use can be made of the capital gains tax no gain/no loss rules for transfers between spouses and civil partners to change the ownership slip without triggering a chargeable gain.

Directors and shareholders in close companies are often able to influence the payments that are made to them. Broadly, a close company is one that is controlled by five or fewer shareholders. Personal companies and most family companies are close.

In a close company, there are often numerous transactions between the director and the company – the company may, for example, make payments to the director, loan money to the director and may also make payments on the director’s behalf. On the other side of the coin, the director may loan money to the company, repay loans or make payments on the company’s behalf. The director’s loan account provides the means for keeping track of the transactions between the director and the company. However, tax consequences arise if the director’s loan account is overdrawn at the end of the accounting period or if a loan has been made which has not been repaid.

Loan repaid by corporation tax due date - The corporation tax for an accounting period is due for payment nine months and one day after the end of the accounting period. If the loan is repaid in this period (or the overdrawn balance cleared), there are no further tax consequences. However, the loan must be reported on the company’s corporation tax return. Depending on the amount of the loan, there may also be a benefit in kind tax charge for the director, and a Class 1A National Insurance liability on the company. This will be the case if the amount owed by the director to the company exceeds £10,000 at any point in the tax year.

An overdrawn account can be cleared in various ways, for example, by paying money into the company from personal resources, crediting a bonus or salary payment to the account or by declaring a dividend. It should be borne in mind that there will be tax and National Insurance contributions to pay on a salary or bonus payment and tax to pay on a dividend.

Loan remains outstanding - If the loan has not been repaid and the director’s account remains overdrawn at the corporation tax due date, the company must pay tax on the overdrawn balance. This rate of this tax (Section 455 tax) is linked to the dividend upper rate. Consequently, it was increased to 33.75% from 6 April 2022 in line with the increase in the dividend upper rate applicable from the same date. The increase in the rate means that it is now more expensive for a company to loan money to a director. The rate of Section 455 tax was 32.5% prior to 6 April 2022 (and 25% prior to 6 April 2016).

Where a Section 455 tax charge arises it must be paid with the corporation tax for the accounting period, nine months and one day after the end of the accounting period. Crucially, it is not corporation tax, and also unlike corporation tax it is a temporary tax that is repaid if the loan balance is cleared. The tax becomes repayable nine months and one day after the end of the accounting period in which the loan is repaid. It is usually set against the corporation tax for the period, or repaid to the company if there is no corporation tax to pay. The repayment of the section 455 tax must be claimed – it is not made automatically.

Planning considerations - Personal and family companies will need to budget for the higher Section 455 charge when making loans to directors (or to other participators) that will not be repaid by the corporation tax due date.

When deciding whether to clear the loan, the whole picture needs to be considered. It is only worth paying a dividend or bonus to clear the loan if the tax consequences of doing so are less than paying the section 455 tax, for example, if a dividend would be sheltered by the dividend allowance or taxable at the dividend lower rate. Otherwise, it is better to leave the loan outstanding and pay the tax. If the director has several loans made over different period, it makes sense to clear those made on or after 6 April 2022 first.

Companies cease for various reasons, some closing for the personal reasons of their directors or shareholders, rather than being forced to close by creditors.  Many companies will have accumulated monies or assets that need to be distributed to shareholders on cessation (after all creditors' liabilities have been settled). The method of distribution needs careful planning to ensure that the minimum amount of tax is paid.

When a company ceases trading it can either:

• apply to be ‘struck off’ from the Register of Companies; or
•  be wound-up under liquidation; or
•  become dormant.

Whichever route is taken, dividends may already have been made to the fullest extent possible from accumulated profits but there may still be capital to distribute. ‘Striking off’ is not a formal winding up procedure, and as such any distribution of surplus assets (including the repayment of its share capital represented by those assets) is legally an income distribution. However, treatment of a distribution can be as capital where the company's total assets are less than £25,000. Such a distribution is subject to CGT, taxed at either 10% or 20% depending upon the shareholder's total income but after deducting the shareholder's annual allowance and offset of any capital losses.

If a company has applied to be ‘struck off’ but within two years of making a distribution the company has still not been dissolved, or has failed to collect all its debts or pay all of its creditors, then the distribution is automatically treated as a dividend.

If the £25,000 limit is exceeded, the whole distribution is treated as a dividend with no reliefs being available, making the extraction of the final shareholders’ funds expensive, depending on the shareholders' tax situation. In addition, where the distribution is of assets other than cash, the valuation of those assets could assume significance in determining whether the £25,000 threshold is breached.

Any company needing to make a distribution above £25,000 or where the shareholders would prefer the CGT to income tax treatment, will effectively be forced down the formal liquidation route with the additional costs that will be incurred (usually approximately £1,500 - £2,000 for a small company in straightforward circumstances). Apart from the more beneficial CGT rates, Business Asset Disposal Relief may be available if the relevant conditions apply. BATR reduces the rate of CGT to 10% rather than 20% where the shareholder is taxed at higher rates.

Once a liquidator is appointed, all distributions made during the winding up process are normally treated as capital subject to CGT which could produce a tax planning situation. For example, if the company has a mixture of cash and goods, the liquidator could be asked to release the cash first. If this could be planned to be at the end of the tax year then the annual exemption for that year can be used. The annual exemption for the next year can be used against any gain when the assets are sold.

Should the shareholder be a basic rate taxpayer, consideration may be given to extracting the excess over £25,000 as a dividend chargeable to income tax before cessation, leaving an amount equal to £25,000 to be extracted as capital. However, should the company then apply for dissolution, HMRC could argue that the intention was always to apply to strike off the company for tax reasons, and tax the whole amount as income. Intent is likely to be inferred should the company dispose of any remaining assets, leaving only cash before the application.

Where an employee uses their own vehicle for business journeys, their employer can  cover the associated costs by paying a mileage allowance. As long as the allowance does not exceed that payable at the approved rate, payment of the allowance is tax-free. Employers can instead reimburse the employee’s actual costs associated with using their own vehicle for business. However, as this is difficult and time consuming, paying approved allowances should be an easy win, were it not for rising fuel prices.

The approved mileage rates have not been increased since April 2012, yet fuel prices are now considerably higher than they were 10 years ago. Given the current climate of rapidly rising fuel prices, is paying mileage allowances at the approved rates still a good idea?

Approved mileage allowance payments - Under the approved mileage allowance payments system (AMAPs), employers can pay mileage allowances to employees tax-free as long as the amount paid does not exceed the ‘approved amount’.

The approved amount is simply the number of business miles in the tax year multiplied by the approved rate. For cars and vans, this is set at 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any subsequent business miles. For motor bikes, the rate is 24p per mile.

As long as the amount paid is not more than the approved amount, it can be paid tax-free. However, if it exceeds the approved amount, the excess is taxable. If instead the amount paid is less than the approved amount, the employee can claim tax relief for the shortfall.

A similar system applies for National Insurance. However, as National Insurance is not worked out cumulatively, the 45p per mile rates applies to all business mileage undertaken in the employee’s own car or van.

Impact of fuel prices increases - The approved mileage rates have not increased since April 2012, when petrol was around £1.42 per litre. At the time of writing (in June 2022), it was around £1.85 and rising. In the 10 years since the last increase in the approved rates, fuel prices have increased by more than 30%.

The approved rates are supposed to cover all costs associated with using a personal car for business, including running costs, insurance and depreciation. In a climate of rising costs, it is now doubtful whether they do.

The employer can instead make payments based on the actual costs tax-free. However, the associated record keeping is likely to prove prohibitive. Alternatively, they can agree higher bespoke rates based on actual costs with HMRC, but again the level of work involved is unlikely to make this a popular option.

Employers who wish to make a more accurate reimbursement of employee’s costs can pay above the approved mileage rates, but this will trigger a tax liability for the employer. Where the amount also exceeds the approved amount for National Insurance, Class 1 National Insurance contributions are payable by the employer and employee, and must be processed through the payroll.

The employee can claim a deduction for any difference between the amount paid and the actual costs incurred; however, as these are tricky and time consuming to work out, most employees will simply not bother and take the hit.

The solution is really for HMRC to increase the approved rates to reflect current prices so that they do what the system is supposed to do.

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

Household expenses

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

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

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

Homeworking equipment

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

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

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

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

The First-tier Tribunal (FTT) recently considered whether money from property sales was trading income or capital gains, and if private residence relief was due. The FTT ruling provides useful guidance on both issues

Serial property sales - Mr Campbell (C) bought and sold four properties in little over five years. He made a substantial profit from the transactions which he declared as capital gains. He claimed private residence relief (PRR) against each gain, meaning that in his view there was no tax to pay. HMRC disputed that the profits were capital gains, arguing instead that C was trading as a property developer and so any profits were liable to income tax to which, of course, PRR cannot apply. HMRC also argued that even if the profits were capital gains PRR wasn’t due as C hadn’t lived in the properties.

Trading or not? - For HMRC to succeed at the First-tier Tribunal (FTT) it had to show that one or more of the generally accepted tests established by case law, known as the “badges of trade”, applied to C’s buying and selling of properties. While some of these applied, e.g. there were multiple transactions and C had spent money improving the properties to varying degrees, the FTT decided that on balance the money made by C wasn’t trading income.

Mitigating factors - In arriving at this decision it took account of the fact that C was employed full time in work not related to property development and had not been engaged in such activities elsewhere. We’re not so sure the FTT’s decision was right. However, it is a reminder that where there’s doubt tribunals will usually come down in favour of the taxpayer.

While the existence of one badge of trade can be enough to confirm an activity as trading it doesn’t automatically do so despite HMRC’s assertion. As in this case it’s possible for more than one badge of trade to apply without an activity counting as trading.

Private residence relief - Having dodged the “trading” bullet C’s claim for PRR was now in the line of fire. Here his luck ran out. C had argued that although he had not lived in the properties PRR applied because it was his intention to but he was prevented because he lived in job-related accommodation. This is one of the exceptions that allows PRR for periods of absence from your home but the FTT decided the alleged job-related accommodation was actually C’s home. Several factors indicated this, not least was that in his evidence C referred to the accommodation as his home. The property was his parents’ home and C lived there not because of his work but to look after his father with dementia.

It’s worth noting that had C’s claim for PRR not failed for the reasons we’ve explained, HMRC had a further argument in reserve. Legislation specifically precludes PRR for gains made from properties specifically purchased for the purpose of making a gain. If this argument had been needed we think it would have had a better than 50/50 chance of succeeding.

HMRC failed to show that buying, improving and selling properties for a profit was trading. The FTT said the tests for trading activity were not met. However, HMRC won its argument that private residence relief didn’t apply. The taxpayer’s argument that he didn’t live in the properties as he was in job-related accommodation wasn’t believable.