Adrian Mooy & Co - Accountants Derby

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

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

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

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

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

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

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

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

Tax and NICs liability

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

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

Type of expense

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

Director’s loan account

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

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

Practical tip

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

Dividend waivers for inheritance tax purposes

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

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

Waivers and IHT

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

Attention to detail

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

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

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

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

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

Practical tip

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

The way that many landlords will report details of their income and expenses to HMRC is changing from April 2026 onwards. This is when Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) comes into effect. Landlords who fall within the scope of MTD for ITSA will need to keep digital records, use MTD-compatible software and send quarterly updates to HMRC. This will impose new compliance obligations on them and change the way in which they interact with HMRC.

Start date 1: 6 April 2026

MTD for ITSA will apply to unincorporated landlords and sole traders with trading and/or property income of £50,000 or more from 6 April 2026. When determining a landlord’s MTD start date, it is important to take account of both rental income from unincorporated property businesses and also trading income from unincorporated businesses (such as those operated as a sole trader). However, any rental income from property companies can be ignored. The key figure is the total of both rental and trading income, so a landlord with rental income of £10,000 and trading income of £45,000 will be within MTD for ITSA from 6 April 2026 while a landlord with rental income of £49,000 who has no trading income will have a later start date. The relevant income will be that for 2024/25, as reported on the Self Assessment tax return which must be filed by 31 January 2026.

It is important that landlords with an April 2026 start date make sure that they know how MTD for ITSA will affect them, and that they are ready to comply from 6 April 2026 onwards.

Once within MTD for ITSA a landlord remains within it, even if their income falls to below the trigger threshold, unless it remains below the trigger threshold for three successive tax years.

Start date 2: 6 April 2027

Landlords running unincorporated property businesses will be brought within MTD for ITSA from 6 April 2027 if they have rental income and/or trading income from an unincorporated business of £30,000 or more.

Other landlords

The Government plan to bring unincorporated landlords and unincorporated businesses with rental and/or trading income of £20,000 or more into MTD for ITSA by the end of the current Parliament. As of yet, no date has been set for those whose income is below this level.

Obligations

Currently, where rental income is more than £1,000 (and the landlord is not within the rent-a-room scheme), they must report their taxable profits to HMRC on the property pages of their Self Assessment tax return by 31 January following the end of the tax year to which it relates. They must keep records of their income and expenses, but can do so in a way that suits them.

Under MTD for ITSA this all changes. The landlord will need to keep digital records and use software that is compatible with MTD for ITSA to report simple summaries of income and expenses to HMRC on a quarterly basis. The quarters run to 5 July, 5 October, 5 January and 5 April, although taxpayers can report to calendar quarters instead (30 June, 30 September, 31 December and 31 March). HMRC publish details of commercial software that fits the bill. They have also said that they will make free software available for those with the most straightforward affairs.

After the final quarterly update for the year has been submitted, the landlord will need to make a final declaration to finalise their income tax position for the tax year. This is like the current tax return and it is at this stage that the taxpayer will claim reliefs and allowances, and also reflect other income that they may have which is not within the MTD process, such as savings and investment income and income from employment. The landlord will also need to make a declaration that the information is complete and correct, as is currently the case on the Self Assessment tax return.

There is no change to the way in which tax is paid under MTD for ITSA, only the way in which income is reported.

As the 2024/25 tax year has now come to an end, individuals who need to file a Self Assessment tax return for that year can now do so. Although the return does not have to be filed online until 31 January 2026, there are benefits of filing early.

Get it out of the way

There is something very satisfying about ticking an item off a ‘to do’ list. Filing your 2024/25 tax return sooner rather than later will get it out of the way and mean that is no longer hanging over you. This will give you peace of mind.

Certainty as to your tax bill

Once you have filed your 2024/25 tax return you will know how much tax you need to pay. This will give you plenty of time to set funds aside to pay the January 2026 bill, and also to set up a Time to Pay arrangement if you will need to pay in instalments.

Code out underpayments

If you are a PAYE taxpayer and you owe £3,000 or less, as long as you file your 2024/25 tax return by 30 December 2025, you can opt to have the tax that you owe collected through your 2026/27 tax code. This delays the payment date and effectively gives you an interest-free instalment plan.

Get a repayment sooner

If you have overpaid tax for 2024/25, the sooner you file your tax return, the sooner you will be able to receive a refund of the overpaid tax.

Review your payments on account

The final payment on account for the 2024/25 tax year is due by 31 July 2025. If you already know your 2024/25 liability, you can review your payments on account and reduce them to the correct level if they are too high, so you do not pay more than you need to in July.

Ascertain whether you are within MTD for ITSA from April 2026

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) applies from 6 April 2026 onwards to individuals running unincorporated trading and/or property businesses with trading and/or property income of £50,000 or more. The relevant income is that for 2024/25. Once the 2024/25 tax return has been filed, traders and landlords will be able to determine whether they must comply with MTD for ITSA from April 2026. The earlier they know, the longer they have to prepare.

Assess transitional profits

Self-employed earners with an accounting date other than one between 31 March and 5 April may have transition profits in 2023/24. These profits are normally spread over five years (2023/24 to 2027/28 inclusive) unless the trader elects for these to be assessed earlier. Once the 2024/25 return has been filed, you will know your profits and marginal rate of tax for this year and can assess whether it would be beneficial to bring forward some transition profits to 2024/25. This will be advantageous if they will be taxed at a lower rate in 2024/25 than in later years, or if the personal allowance has not been fully used.

Proof of income

Your tax return calculation provides you with proof of income which may be needed if you want to apply for a mortgage or a loan.

Assist with tax planning

Filing your 2024/25 tax return will provide you with information to enable you to review your tax affairs and take advantage of planning opportunities to save tax going forward.

Earn brownie points with your tax adviser

The run up to the 31 January deadline is a very busy time for accountants and tax advisers. They are likely to look favourably on clients who provide their tax return information early in the following tax year, allowing them to file the return ahead of the January rush.

Employers who provided taxable benefits and expenses to employees in the 2024/25 tax year need to meet compliance obligations in respect of those benefits. The obligations will vary depending on whether the benefits and expenses have been payrolled or not or included in a PAYE Settlement Agreement (PSA).

Payrolled benefits

Where an employer payrolled benefits in 2024/25, those benefits were taxed through the payroll and reported to HMRC under Real Time Information (RTI) on the Full Payment Submission (FPS). Consequently, they do not need to be reported to HMRC after the end of the tax year on the employee’s P11D. However, the employer will need to file a P11D(b) and include payrolled benefits when working out their Class 1A National Insurance liability for the year.

Employers must also provide employees with details of their 2024/25 payrolled benefits before 1 June 2025. This can be done on the employee’s payslip, by email or by letter.

P11D and P11D(b)

Taxable benefits and expenses which have not been payrolled or included in a PSA must be reported to HMRC on form P11D by 6 July 2025. The employer must also file a P11D(b) by the same date. This is the employer’s declaration that all required P11Ds have been filed. It is also the Class 1A National Insurance return.

Forms P11D and P11D(b) must be filed online – HMRC no longer accept paper forms. Employers can use either HMRC’s PAYE Online Service (employers with 500  or fewer P11Ds to file only) or a commercial software package. Penalties may be charged if the forms are filed later or are incorrect.

Employers must also provide employees with a copy of their P11D or details of the information contained therein by 6 July 2025.

PAYE Settlement Agreements

An employer can use a PSA to settle the tax due on a taxable benefit on an employee’s behalf. However, a PSA can only be used for items that are minor, which are provided irregularly or on which it is not practicable to operate PAYE.

Once made, a PSA is an enduring agreement and remains in place until cancelled by HMRC or by the employer. Where an employer already has a PSA, they should check that it is still valid. If they need to amend it or cancel it, this must be done no later than 5 July 2025. Employers who need to set up a new PSA for 2024/25 must do so by 5 July 2025.

Benefits included within the PSA do not need to be reported to HMRC on form P11D or included in the Class 1A calculation on the P11D(b).

Class 1A National Insurance

Employers must pay their Class 1A National Insurance bill by 22 July if they make the payment electronically. Where payment is made by cheque, it must reach HMRC by Friday 18 July 2025. Interest is charged on payments made late.

Significant IHT savings are possible simply by making regular use of available reliefs and exemptions, such as the annual exemption, the IHT nil-rate band, and potentially exempt transfers (PETs).

1. Annual exemption

Transfers of value (e.g., gifts) are generally exempt from IHT, up to a maximum of £3,000 per tax year. Any unused annual exemption can be carried forward to the following tax year (but not beyond).

2. Nil-rate band

Every individual is entitled to an IHT threshold (or ‘nil-rate band’). Where chargeable lifetime gifts (and the individual’s death estate) do not exceed the available nil-rate band (£325,000 for 2025/26), there is no IHT liability.

3. PETs

Most types of lifetime gifts (e.g., from one individual to another) are PETs. A PET made more than seven years before death becomes an exempt transfer for IHT purposes. Conversely, a PET becomes a chargeable transfer if made within seven years of death. Chargeable transfers within the seven-year period ending with the latest chargeable transfer are cumulated, for the purpose of determining the IHT position (although if the individual made a PET just within seven years before death which therefore becomes chargeable, it may be necessary to take into account chargeable transfers within the seven years before that, making up to 14 years in total).

Doubling up the savings

The IHT savings may be doubled if married couples (or civil partners) make use of these elements, and substantial combined IHT savings can be achieved over a relatively short period of time.

Example: £1,354,000 given away – IHT-free

Husband and wife make the following cash gifts to their adult children:

(a)Husband - £677,000

 • Year 1 – Gifted £325,000 nil-rate band plus £3,000 annual exemption for current tax year and previous year brought forward – Total £331,000

• Year 2-7 – Gifted annual exemption £3,000 x 6 years – Total £18,000

• Year 8 – Gifted nil-rate band £325,000 plus annual exemption £3,000 – Total £328,000

(b)Wife (As above) - £677,000

Thus, in a little over seven years, husband and wife will have managed to reduce their estates by a total of £1,354,000, resulting in a potential IHT saving of £541,600 (i.e., £1,354,000 x 40%).

This planning strategy might seem obvious, and rather ‘vanilla’ compared to some IHT saving techniques; yet in practice, it is often overlooked.

Is it affordable?

It must be borne in mind that if gifts are made, the donor will lose the income (if any) generated by the gifted assets, as well as the underlying assets. If the asset is gifted but income generated by the asset is retained, the ‘gifts with reservation’ anti-avoidance rules will need to be considered. If ‘caught’ by those rules, the IHT savings may be wholly or partly lost.

Practical tip

Other IHT reliefs (e.g., business property relief) and exemptions (e.g., normal expenditure out of income) could also be considered, if appropriate. Where assets are being given away instead of cash, other taxes (e.g., capital gains tax) may need to be addressed. Above all, IHT (and other tax) mitigation should never take precedence over personal circumstances and financial needs.

Making Tax Digital for Income Tax Self Assessment (MTD for ITSA) is introduced progressively from 6 April 2026. It will require unincorporated traders and landlords whose income is over the trigger threshold to keep digital records and make quarterly returns and a final declaration to HMRC using MTD-compatible software.

The start dates for traders and landlords with trading and/or property income in excess of £30,000 have been known for some time (albeit they are now later than originally announced). At the time of the Autumn 2024 Budget, the Government stated that MTD for ITSA would be extended to apply to traders and landlord with trading and/or property income of £20,000 or more before the end of the current Parliament. At the time of the 2025 Spring Statement, it was announced that it will apply to them from 6 April 2028.

Start dates

The first start date is 6 April 2026. This is for individuals with income from an unincorporated trading and/or property business of at least £50,000.

The second start date is 6 April 2027. This is for individuals not already within MTD for ITSA with income from an unincorporated trading and/or property business of at least £30,000.

The final start date is 6 April 2028. This is for individuals not already within MTD for ITSA with income from an unincorporated trading and/or property business of at least £20,000.

As of yet, no date has been announced from which individuals with combined trading and property income of less than £20,000 will be brought within MTD for ITSA.

The income is the combined trading and property income from all sources before the deduction of expenses. An individual will be within MTD for ITSA if their total trading and property income exceeds the trigger threshold even if the income from each individual business is below it. The relevant income for assessing whether an individual is within the scope of MTD for ITSA from 6 April 2026 is that for 2024/25.

Once within MTD for ITSA, an individual must remain within it unless their income is below the prevailing threshold for three consecutive tax years.

Case studies

Abigail is a sole trader with trading income of £45,000 in 2024/25. She also receives rental income from a buy-to-let of £12,000. Although individually neither her trading nor her property income is more than £50,000, as her combined trading and property income at £57,000 is more than the threshold, she will be within MTD for ITSA from April 2026.

Billy has trading income of £35,000. As long as he remains at this level, he will be within MTD for ITSA from April 2027

Caitlin runs two small sole trader businesses. Her income from one is £15,000 a year and her income from the other is £7,000 a year. If her income remains at this level, she will be within MTD for ITSA from 6 April 2028.

It is important that traders and landlords are aware of their start date and plan ahead so that they are ready to comply from that date.

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

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

No ‘disincorporation relief’

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

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

Getting rid of the company

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

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

‘Anti-phoenixing’ rules

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

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

b. The company is a close company.

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

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

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

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

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

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

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

Transfer of VAT registration

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

Practical tip

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

Landlords will be impacted by Making Tax Digital when it comes into effect in April 2026.

Making Tax Digital (MTD) is going to mean big changes for the majority of landlords who submit self assessments.

You’ll need to use software to keep track of your income and expenses and to make quarterly MTD submissions.

This applies to income from rental properties or self-employment is over £50,000 a year from April 2026 and over £30,000 from April 2027.

Instead of submitting a yearly Self Assessment you’ll need to update HMRC every quarter.

Will all landlords be affected by MTD?

MTD impacts all landlords with personally owned properties earning more than £50,000 a year from rental properties or self-employment from 2026, and those earning £30,000 or more from 2027.

Property income in scope for MTD includes:

• Residential buy to lets
• HMOs and student lets
• Furnished holiday lets (FHL)
• Commercial property
• Non-UK property, such as a holiday apartment abroad

This is £50,000 of rental income, so gross profit before deducting your expenses, rather than net profit.

I own rental property in a partnership. Will MTD affect me? - HMRC has said it will announce dates for other types of partnerships, including LLPs and those with corporate partners, at a later date.

I’m a landlord that’s registered as a limited company. Will MTD affect me? - lf You own your properties in a limited company, you don’t need to worry about MTD for Income Tax yet.

Does MTD mean you need to pay tax four times a year? - No, how you pay self-assessed income tax is not changing.

How does Making Tax Digital work for joint landlords? - If the rental income is from a jointly owned property, this is based on the share of ownership - i.e. 50% if both parties have equal shares in the property. If your share of the rental income is over £50,000, then you'll be in scope for MTD from April 2026.

To conclude - if you currently complete a Self Assessment for your property income, and you earn over £50,000 from property or self-employment, you’re going to need to switch to use software to make quarterly MTD submissions from April 2026.

Latest developments in making tax digital.

We are now little more than a year away from the phased introduction of making tax digital (MTD) for income tax self assessment (MTD ITSA), as follows:

Annual aggregate turnover (all sources) Implementation date

More than £50,000                       5 April 2026

More than £30,000 and up to £50,000     5 April 2027

More than £20,000 and up to £30,000     Before this Parliament ends (2029)

This last new, lowest band was announced as part of the Autumn Statement 2024 on 30 October 2024:

‘The government will expand the rollout of MTD to those with incomes over £20,000 by the end of this Parliament, and will set out the precise timing for this at a future fiscal event.’

Up to that point, many advisers were daring to hope that MTD might perhaps baulk at going lower than the initial £50,000 per annum threshold.

Key points It is perhaps worth emphasising:

 • The thresholds are measured across one’s annual gross income across all business sources (i.e., rents are broadly lumped in alongside all trading receipts – but see also below).

 • The measurement year for testing whether one is caught for April 2026 (being the start date for those individuals in the vanguard) will be 2024/25, the actual numbers for which may only just have been finalised and filed by 31 January 2026.

 • Thus, do the results for 2024/25 (now) dictate the MTD status for 2026/27?

 • Likewise, the measurement year for whether MTD for ITSA will apply for the lower £30,000 annual threshold from April 2027 (i.e., 2027/28) will be the actual results for 2025/26.

 • But each separate trade and property business* will still need its own set of quarterly returns ‘updates’.

 • Once a taxpayer is caught by MTD ITSA, that annual aggregated business turnover will need to fall below the threshold for three successive years in order to break free of its clutches.

*Generally, all property sources are rolled into a single property business; however, one might have separate UK and offshore rental businesses or lettings in different ‘capacities’, such as sole or joint tenancies, as against a full property partnership.

Given that the annual threshold is intended to have fallen to just £20,000 by 2029, one will presumably have to hope for another means of escape, such as business cessation (see also below).

Income boxes and joint property details

HMRC will monitor taxpayers’ incomes and corresponding MTD obligations by reference to specific boxes on their submitted tax returns – the gross trading income and rental receipts sections. This should be reasonably straightforward, but a quirk has arisen in relation to joint lettings.

Landlords holding only a proportion of joint property are, of course, reliant on whoever prepares that property’s accounts for their income and expenditure details. They are also allowed to choose to include only the net income figure from joint lettings in their current-format tax returns (whether as part of a larger portfolio or not).

In July/August 2024, HMRC confirmed that this easement would continue under MTD, despite the risk of the landlord understating their ‘true’ gross annual income by potentially including only the net amounts for co-owned property letting income.

Audit trail abandoned  When the quarterly ‘update’ regime was originally devised, it was intended that each return would report only that quarter’s results, and that any amendments to previous quarters in the tax year would have to be reported in the next available return but flagged separately so that HMRC could track any changes made.

HMRC has since walked back from this approach and announced in November 2023 that each quarterly return will now hold simply ‘year-so-far’ amounts without further analysis into separate quarters, etc.

Quarterly update deadlines On 22 February 2024, the latest regulations then published included that the quarterly updates’ filing deadlines would be extended by two days, to 7 August/November/February/May, thereby aligning with the usual VAT stagger group filing deadline for calendar quarters.

End of the ‘end of period statement’ Did anyone realise that, when the Chancellor announced ‘the end of the annual tax return’ back in July 2015, what he actually planned instead was a ‘final declaration’, plus four quarterly returns (‘updates’) for each separate business of theirs, plus an annual end of period statement for each business to cover all of the usual annual tax adjustments for disallowed expenses, capital allowances, etc?

But never mind because, ever keen to cut down on taxpayers’ administrative burdens, the government has magnanimously decided to remove the proposed end of period statement and just include all those tax adjustments in the final declaration, instead.

Presumably, the government is banking on nobody spotting that the updated final declaration will now function almost exactly like the tax return whose demise was promised almost a decade ago, just now with a load of extra form-filling obligations that nobody outside of HMRC ever asked for.

Exemptions and exclusions The list of specific exemptions from MTD ITSA has grown slightly:

 • Trustees;

 • Personal representatives of someone who has died;

 • Lloyd’s members;

 • Individuals without a National Insurance number (announced Autumn Statement 2023); and

 • Foster carers (announced Autumn Statement 2023).

However, just because someone is a Lloyd’s name or foster carer does not mean that they are entirely exempt from MTD; if they have ordinary non-exempt sources, they can be ‘caught’ for those. Likewise, the National Insurance Number exemption will, for most people, last only until they receive their notification – usually just before their 16th birthday.

A wider exemption may be accepted where the taxpayer can show that they are unable to comply with the requirements of MTD, such as by reason of:

 • old age or infirmity;

 • remoteness of location (poor Internet access); or

 • religion.

It seems that, so far, HMRC has resisted the temptation to hide the ‘digital exclusion’ application process behind an online application form.

Conclusion The greatest menace in MTD is not the digital filing and reporting, but the digital record-keeping; having to set up and maintain financial records in a manner tailored more to HMRC’s wants than your own business needs. This is the other, as-yet-unseen nine-tenths of the MTD iceberg.

But in promising to drop the entry threshold to as low as £20,000 per annum, the government has signalled to taxpayers (and to software companies) how firmly it has committed us to this project. For now, there are no precise dates on when MTD for ITSA will be extended to partnerships or to companies (‘avoiding’ MTD might soon be one of the few remaining tax-based incentives to incorporate) but, again, keep in mind that partners will not automatically be safe from MTD if they also have non-partnership business interests.

Overview

• Many possible changes were the subject of speculation leading up to the Budget: this list includes things that have been ruled out, as well as changes that the Chancellor announced
• These key points include measures that were announced previously but are about to come into force
• Measures which will not take effect until future dates are listed separately below

​​​​​​​​​​​​Implemented immediately

• Capital Gains Tax rates for disposals on or after 30 October 2024 rise from 10% to 18% (basic rate taxpayers) and 20% to 24% (higher rate taxpayers); the higher rate for residential property remains 24%
• Lifetime limit for gains qualifying for Investors’ Relief is reduced from £10 million to £1 million for disposals on or after 30 October 2024
• Stamp Duty Land Tax surcharge for purchase of additional dwellings increased from 3% to 5% for purchases from 31 October 2024
• Rules tightened for close company loans to participators, transfers of UK pension funds abroad, Employee Ownership Trusts, Employment Benefit Trusts and liquidation of Limited Liability Partnerships to close loopholes from 30 October 2024

From January 2025

• Confirmation that VAT will apply to private school fees from 1 January 2025

From April 2025

• Increase in rate of Employer National Insurance Contributions (ERNIC) from 13.8% to 15%, together with reduction of Secondary Threshold from £9,100 to £5,000
• Increase in Employment Allowance for small businesses’ ERNIC from £5,000 to £10,500 for 2025/26
• Certain ‘double cab pickup vans’ to be treated as cars for some tax purposes
• Extension until March 2026 of the 100% first year allowance for qualifying expenditure on zero-emission cars and charging points for electric vehicles
• Abolition of the remittance basis of taxation for foreign domiciled individuals, to be replaced by a ‘residence-based scheme’
• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 10% to 14%
• CGT rate on ‘carried interest’ increased to 32%
• IHT Agricultural Property Relief to be extended to land managed under an environmental agreement with government or other approved bodies
• 40% business rates relief for retail, hospitality and leisure businesses for 2025-26 on values up to £110,000
• Charitable business rates relief no longer available for private schools
• Fuel duty remains frozen, and the temporary 5p cut announced in March 2024 will be extended to 22 March 2026
• Rate of interest on late paid tax will increase by 1.5 percentage points
• Security for certain tax reclaims increased by introduction of a requirement for a digital signature
• Above inflation increases in National Living Wage and State pension
• As previously announced, the advantageous tax treatment of Furnished Holiday Lettings no longer applies in 2025/26

From April 2026

• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 14% to 18%
• ‘Carried interest’ moved to the income tax regime, with a discount for certain qualifying disposals
• IHT Agricultural Property Relief and Business Property Relief at 100% will only apply to the first £1 million of combined value; above that limit, the maximum relief will be 50%
• IHT Business Property Relief restricted to 50% for all ‘unlisted’ shares which are quoted on recognised stock exchanges such as the Alternative Investment Market
• Tightening of rules on charitable tax reliefs and closure of an avoidance scheme involving company cars from 6 April 2026
• Confirmation of the introduction of Making Tax Digital for Income Tax Self-Assessment from April 2026

No change, or later

• Unused pension funds and death benefits payable from a pension will be included in a person’s death estate for IHT purposes from 6 April 2027
• No changes to the ability to draw tax-free lump sums from pension funds, or reintroduction of a lifetime allowance
• The freezing of personal income tax allowances and rate bands will end with 2027/28: inflationary increases will be reintroduced for 2028/29
• Corporation tax rates appear to be fixed for the duration of the Parliament
• Inheritance tax nil rate bands will be frozen at their present levels until April 2030 (extended by two years from the previously announced date); no change to the availability of the additional Residence Nil Rate Band
• ISA and Junior ISA investment limits fixed at their current levels until April 2030
• Company car tax rates announced for 2028-29 and 2029-30, to provide long-term certainty; the incentives for purchasing electric vehicles will be maintained
• Previous Government’s proposal to base High Income Child Benefit Charge on combined household income will not be taken forward – HICBC still based only on the income of the higher earner of a couple

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

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

Setting the scene

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

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

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

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

Reporting the gain

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

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

 • address and postcode of the property;

 • the date that the property was acquired;

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

 • the completion date of the sale;

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

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

 • the cost of any capital improvements;

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

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

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

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

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

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

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

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

Working out the tax on the gain

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

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

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

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

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

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

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

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

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

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

Practical tip

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

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

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

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

The main categories of allowances are:

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

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

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

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

 • 6% WDA on the special pool*;

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

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

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

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

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

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

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

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

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

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

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

The conditions to be satisfied to meet the exemption are:

 • the benefit is not cash or a cash voucher;

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

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

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

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

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

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

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

Don’t forget…

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

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

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

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

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

Most lifetime gifts of a residential property (e.g., from a parent to adult offspring, where the parent is going into a nursing home) are straightforward ‘potentially exempt transfers’ (PETs) for inheritance tax (IHT) purposes, which become exempt gifts if the parent (in this example) survives at least seven years thereafter.

Trapped in the IHT net?

However, what if the parent returned to live in the gifted property within seven years? Anti-avoidance rules (‘gifts with reservation’ (GWR)) are broadly designed to prevent ‘cake and eat it’ situations whereby individuals seek to reduce exposure to IHT on their estates by making lifetime gifts of assets (which they hope to survive by at least seven years) whilst continuing to have the use or enjoyment of those assets. If the donor is ‘caught’ by the GWR rules, the gifted (or possibly substitute) property is treated as remaining part of their estate for IHT purposes. In the above example, does this mean that the parent cannot later reoccupy the property, or occasionally stay with their offspring in the property, after giving it away? As with most tax questions, the answer is: ‘It depends’.

Welcome back…for now!

HM Revenue and Customs guidance (Revenue Interpretation 55) indicates that a property donor will not be ‘unreasonably prevented from having limited access to property they have given away’. This includes circumstances where a house becomes the donee’s residence but where the donor subsequently stays with the donee for less than one month each year, or in the donor’s absence for not more than two weeks each year. Temporary stays for a short-term purpose may also be allowed (e.g., while the donor looks after the donee convalescing after medical treatment).

Another GWR let-out potentially applies where the donor continues living in the property after it has been given away, but they pay the donee a market rent for their continued occupation. The donor’s occupation or use of the land is disregarded for GWR purposes if full consideration is paid for it in money or money’s worth. However, the donee will generally be liable to income tax on the rent received.

A further possible escape from an IHT charge on death under the GWR rules applies if the following conditions are all satisfied:

 • The occupation results from an unforeseen change in the donor’s circumstances.

 • The donor is unable to maintain themself through old age, infirmity or otherwise.

 • The occupation represents reasonable provision by the donee for the donor’s care and maintenance.

 • The donee is a relative of the donor or the donor’s spouse (or civil partner).

However, in each case, care is needed to ensure that the donor’s stays in their former residence do not escalate beyond permissible levels into more significant ones (e.g., where the donor increases their overnight visits to stay with the donee at the residence from one month to three months a year). Such longer stays may be caught by the GWR rules.

Practical tip

Consider the potential implications of gifting the family home for taxes other than IHT (e.g., capital gains tax), as well as non-tax legal implications (e.g., security of tenure), in advance of making any such gifts.