Joint tenants v tenants in common – Does it matter?
There are two different ways of owning property jointly – as joint tenants or as tenants in common. The way in which the property is owned determines exactly who owns what and also what happens when one of the joint owners dies and how any income is taxed.
Where two or more owners own a property as joint tenants, they jointly own the whole property rather than owning individual shares. Each owner has equal rights to the whole property. When one of the joint owners dies, the remaining joint owners own the whole property. The deceased is not able to pass his or her share on to someone else.
Helen and Harry are married and own their family home as joint tenants. The couple have three children. If, for example, Harry dies first, his share of the property automatically passes to Helen. Harry cannot leave his share of the property to his children.
Where a property that is owned as joint tenants is rented out, the income is treated as arising in equal shares as all owners have an equal stake in the property. For spouses and civil partners this is the default position; however, there is no possibility of making a Form 17 election (see below) as the property owned as joint tenants can only be owned equally.
Tenants in common
Tenants in common own individual shares in the property and have more flexibility than joint tenants as to what they do with their stake in the property. On death, their stake does not automatically go to the other joint owners; rather it will follow the provisions of the will (or, if there is no will, the intestacy provisions).
It will be beneficial to own property as tenants in common if you want to leave your share of the property to someone other than the other joint owner.
Jack and Jane are married. Each have children from previous relationships. They own a holiday cottage as tenants in common. In their wills, they have each made provision for their share to pass to their own children.
Where the property is let out, owing the property as tenants in common provides more flexibility as to how the income is allocated for tax purposes. Where the joint owners are spouses or civil partners, the income is treated as arising equally. However, where the actual beneficial ownership is unequal, they can elect (on Form 17) for the income to be taxed in accordance to their ownership shares where this is beneficial. If the tenants in common are not married or in a civil partnership, the income is taxed by reference to their actual stake in the property.
Changing ownership status
It is relatively easy to change the type of ownership, for example, if the property is owned as joint tenants it may be desirable to own it as tenants in common to enable each owner to leave their share to someone else. A property can also be changed from sole ownership to joint ownership – ether as tenants in common or joint tenants.
Making Tax Digital for VAT – what records must be kept digitally
Making Tax Digital (MTD) for VAT starts from 1 April 2019. VAT-registered businesses whose turnover is above the VAT registration threshold of £85,000 will be required to comply with MTD for VAT from the start of their first VAT accounting period to begin on or after 1 April 2019.
Digital record-keeping obligations
Under MTD for VAT, businesses will be required to keep digital records and to file their VAT returns using functional compatible software. The following records must be kept digitally.
Designatory data - Business name - Address of the principal place of business - VAT registration number - A record of any VAT schemes used (such as the flat rate scheme)
Supplies made - for each supply made: - Date of supply - Value of the supply - Rate of VAT charged
Outputs value for the VAT period split between standard rate, reduced rate, zero rate and outside the scope supplies must also be recorded.
Multiple supplies made at the same time do not need to be recorded separately – record the total value of supplies on each invoice that has the same time of supply and rate of VAT charged.
Supplies received - for each supply received: - The date of supply - The value of the supply, including any VAT that cannot be reclaimed - The amount of input VAT to be reclaimed.
If there is more than one supply on the invoice, it is sufficient just to record the invoice totals.
Digital VAT account
The VAT account links the business records and the VAT return. The VAT account must be maintained digitally, and the following information should be recorded digitally:
In addition, to show the link between the input tax recorded in the business' records and that reclaimed on the VAT return, the following must be recorded digitally:
The information held in the Digital VAT account is used to complete the VAT return using `functional compatible software’. This is software, or a set of compatible software programmes, capable of:
Functional compatible software is used to maintain the mandatory digital records, calculate the return and submit it to HMRC via an API.
Getting ready - The clock is ticking and MTD for VAT is now less than a year away.
Utilising the 2019/20 dividend allowance
The dividend allowance is quite unusual in that it is available to everyone and everyone has the same allowance. For 2019/20 the allowance is set at £2,000. In common with many allowances, it is a case of use it or lose it.
Nature of the allowance - Although termed the ‘dividend allowance’ its nature is really that of a nil rate band. Dividends which are sheltered by the allowance form part of band earnings, but the dividends that fall within that band are taxed at a zero rate.
Example - Harriet is a basic rate taxpayer. After taking account of her salary, she has £10,000 of her basic rate band remaining. She receives dividend income of £3,000.
The first £2,000 of her dividend income is covered by her dividend allowance and is tax-free. The remaining £1,000 is taxed at the dividend ordinary rate of 7.5%.
Harriet must therefore pay tax of £75 on her dividends.
The dividend income uses up £3,000 of her remaining basic rate band.
Family companies - In a family company scenario, it is possible to organise the shareholdings so as to spread the dividend income around the family to reduce the combined tax bill and to take advantage of each member’s dividend allowance. This is particularly useful where the family member has no other shares and the allowance would otherwise be lost.
As dividends must be declared in proportion to share holdings, the use of an alphabet share structure, whereby each person has their own class of share (e.g. A ordinary shares, B ordinary shares, etc.) preserves the flexibility to tailor dividend payments to shareholder’s circumstances.
Example - Andrew is the sole director of A Ltd. In 2019/20 the company has profits of £70,000 which Andrew wishes to withdraw as dividends. His wife Anne and his children Beth, Chris, Dawn and Emma all work outside the business. None has any other income from shares.
Andrew also pays himself a salary of £8,628.
To make use of each family member’s dividend allowance, an alphabet share structure is used, under which A ordinary shares are allocated to Anne, B ordinary shares are allocated to Beth, C ordinary shares are allocated to Chris, and so on.
Each family member receives a dividend of £2,000. As this is sheltered by their dividend allowances, this enables £10,000 of dividends to be paid tax-free. Had Andrew received the dividends paid to family members, they would have been taxed at the dividend higher rate of 32.5%.
Making use of the family’s dividend allowances reduces the overall tax bill by £3,250.
Other opportunities - Where one spouse or civil partner has substantial shareholdings and their partner does not hold any shares (with the result that their dividend allowance is unused) the shareholding partner could consider transferring shares to their spouse/civil partner (taking advantage of the ability to transfer the shares for capital gains tax purposes on a no gain/no loss basis). This will shift dividend income from one spouse/civil partner to the other and enable dividends that would otherwise be taxed to be received tax-free.
Taxpayers with unused dividend allowances could also discuss their investment strategy with their financial adviser with a view to exploring whether it would be beneficial to hold shares – but remember not to let the tax tail wag the dog.
Company purchase of own shares
Some shareholders may prefer proceeds from a company purchase of their shares to be treated as income rather than capital for tax purposes. Individual shareholders selling their shares back to the company normally prefer the proceeds from the share disposal to be treated as a capital receipt, where possible. This is because the capital gains tax (CGT) rate is 10% if entrepreneurs’ relief is available, or 20% in most other cases.
However, CGT treatment is subject to several conditions. The default position is that the proceeds from a company purchase of own shares is an income receipt and is liable at income tax rates. If the proceeds are treated as an income distribution (i.e. like a dividend), those tax rates are typically 32.5°/o and/or 38.1%. If the taxpayer carries on a trade of dealing in shares, any profits would be liable to income tax, at possible rates of 20%, 40%, and/or 45%. Trading treatment may be appealing if (say) the taxpayer has trading losses available to offset against a profit from the transaction. Trading receipts take precedence over income distributions for tax purposes.
Unfortunately, there is little guidance on the meaning of ‘trade’ in the tax legislation. This lack of statutory guidance has resulted in extensive case law over the years. The ‘badges of trade’ can sometimes be helpful. These were first established by the Royal Commission for the Taxation of Profits and Income in 1955, using previous case law about what constitutes a trade. Subsequently, in Marson v Morton, nine badges were identified. HM Revenue and Customs (HMRC) guidance lists these badges as follows:
The number of transactions
The nature of the asset
Existence of similar trading transactions or interests
Changes to the asset
The way the sale was carried out
The source of finance
Interval of time between purchase and sale
Method of acquisition
Taxpayers seeking trading treatment on a company purchase of own shares run the risk that the proceeds will be taxed as a distribution if their contention is unsuccessful.
For example, in Khan v Revenue and Customs , the proceeds of a company purchase of own shares (i.e. 98 out of 99 shares) from its sole shareholder almost immediately after his acquisition of the company’s entire share capital from its previous owners was held to be a distribution for income tax purposes, not a trading transaction representing the disposal of trading stock as the taxpayer argued.
Had the taxpayer been successful, he would have made a very small profit on proceeds of £1.95 million Unfortunately, he was instead faced with a large tax bill on a distribution based on that amount.
Gains from off-plan homes
If you bought your home brand new and 'off-plan' you may realise a significant capital gain when you sell that property.
This is not a problem if you occupied the property as your main home for your entire period of ownership. In that case principal private residence relief should cover the whole of the capital gain and there will be no tax to pay on the disposal. However, an issue arises if there was a delay between the date you acquired the property and the date you moved in.
For newly built properties there can be a considerable delay between exchanging contracts to purchase (generally regarded as the acquisition date for any property) and the completion date when you move in. As HMRC have insisted that any gain is apportioned equally to every day of ownership, even when the property is not finished, the taxable gain attributed to the period when the building was incomplete can be considerable.
Fortunately, this problem has been resolved by the Court of Appeal which has ruled that the ownership period starts when the purchaser acquires full legal rights to occupy the property. This means the period from signing a contract to buy (the contract exchange date) to the date the owner is given the keys is not subject to tax.
If you have already paid capital gains tax as HMRC argued the gain on your half-built new home was taxable, you may be able to claim a refund of that tax.
HMRC’s Private And Personal Expenditure Toolkit
HMRC’s personal and private expenditure toolkit highlights the errors that HMRC commonly find in relation to private and personal expenditure.
Personal bills are an area of risk, particularly where the proprietor’s or partners’ finances and those of the business are closely linked. The toolkit states:
‘To ensure that all relevant business expenditure is properly charged in the accounts, it is important to review the expenses claimed and consider whether all deductions are wholly and exclusively for the purpose of the business.’
Other areas of particular risk include:- travel and subsistence; entertaining, gifts, subscriptions and sponsorship; and drawings and the capital account.
The toolkit contains a checklist, which highlights potential areas of risk and how that risk can be mitigated. The checklist contains the following:
- Have expense headings which could include private or personal expenditure been reviewed to identify any non-business elements?
- Have any personal expenses been paid by credit card allocated to drawings?
- Have all business expenses paid by credit card been analysed correctly?
- If there has been interest charged on credit cards, has this been restricted?
- Has any interest paid on a loan or other finance for a mixed purpose been restricted?
- Have any household bills been analysed and allocated appropriately?
- Have the profits been adjusted for the cost of any personal clothing?
- If a business vehicle has been used for non-business travel, including home to work, has only the business travel been claimed?
- If a private vehicle has been used for travel, have the appropriate costs been claimed?
- Are all expenses claimed for business trips wholly and exclusively for business purposes?
- If a family member accompanied the proprietor or partner on a business trip, have any associated non-business costs been disallowed?
- Have all business expenses paid by credit card been correctly analysed?
- Have profits been adjusted appropriately for any entertaining expenses paid?
- Have profits been adjusted appropriately for gifts made?
- Have all gifts, donations or subscriptions to charity been reviewed?
- Have any sponsorship payments made been reviewed?
- If the sponsorship includes hospitality or other benefits, have these been dealt with?
- If the proprietor’s or partners’ drawings have been described as wages or salaries, have these been properly allocated to drawings
- If there have been wages or salaries pay to relatives or connected parties, are the amounts paid commensurate with their duties?
- If the capital or current account is overdrawn and the loan is funding the proprietor’s or partners’ drawings, has the interest been restricted appropriately?
- Have the drawings been adjusted for any trading stock taken for personal use?
- Has an adjustment been made for services provided to the proprietor by the business?
- Are all of the payments made to a registered pension scheme allowable?
- Have the profits been adjusted for any fees paid by the business for personal tax matters?
Are workers employees?
It is important to know whether a worker is employed or self-employed as there are many differences in the way in which they will be taxed. Broadly, employees are taxed under the PAYE system with income tax and Class 1 national insurance contributions (NICs) being deducted from payments made to them. Class 1 NICs are also payable by employers. In contrast, the self-employed pay income tax and Class 4 NICs direct to HMRC, and are also currently liable to Class 2 NICs.
Some important differences are that:
• currently, self-employed people have a lower liability to NICs than employees (especially when taking into account the employer’s liability)
• self-employed people benefit from a cash-flow advantage in the timing of tax payments under self-assessment, compared with employees taxed under the PAYE system
• the rules allowing tax relief for expenses are generally more relaxed for the self-employed
• in some circumstances, an employer who incorrectly treats an employee as self-employed is liable for the income tax and NICs that they should have deducted under PAYE. HMRC may treat as a net amount the figure that was intended to be paid gross.
The term ‘employment’ is broad in scope but is not exhaustively defined. The legislation lists three types of arrangement which indicate the central meaning of the term:
• Any employment under a contract of service
• Any employment under a contract of apprenticeship
• Any employment in the service of the Crown
For tax purposes, though, the concept of ‘employment’ is normally extended to encompass also the holding of an office. The distinction between ‘office’ and ‘employment’ is only of limited interest for tax purposes. Employees are said to operate under a ‘contract of service’.
Firstly, the terms and conditions of the engagement need to be established – normally established from the contract between the worker and client/employer, whether written, oral or implied or a mixture of all three. Then any surrounding facts that may be relevant need to be considered – for example, whether the worker has other clients and a business organisation.
Factors indicating employment include:
• Substitution – does the individual have to carry out the work personally, or can they send a substitute to do the work for them?
• Control – is the individual told what to do, when and how to do the work?
• Pay structure – is the individual paid by the hour, week or month, and are they eligible for overtime pay?
• Hours – is the individual required to work set hours, or a given number of hours per week or month?
• Location – does the individual work at the other party’s premises, or at a location of the other party’s choice?
• Integration – is the individual part and parcel of the organisation?
• Dismissal – what provisions are there for terminating the engagement?
• Mutuality of obligations - does the nature of the contract mean that there is an obligation for the engager to provide work on the one hand, and for the individual to carry out that work on the other?
• Benefits – is the person in receipt of benefits eg. holiday & sick pay, medical insurance or a company car?
• Continuous work – are there long periods where the individual works only for one party?
Workers’ rights - If a worker is classed as an employee, there will automatically be entitled to certain employment rights, including the National Minimum Wage, statutory minimum levels of rest breaks and paid holiday, and protection against unlawful discrimination
Employment status is not determined by any one single factor. In more complicated circumstances it will be necessary to build up a picture, taking into factors such as substitution, mutuality of obligation, control, pay structure and benefits, and the wording of any contracts in place.
Allowable finance costs
Although the way in which landlords obtain relief for finance costs on residential properties is changing, there is no change to the type finance costs that are eligible for relief.
What qualifies for relief
The basic rule is that relief is available for expenses that are incurred wholly or exclusively for the purposes of the property rental business, and this rule applies equally to finance costs. Relief is available for eligible finance costs where they meet this test.
The definition of finance costs includes mortgage interest and interest on loans to buy furnishing and suchlike. Relief is also available for the incidental costs of obtaining finance, as long as the interest on the loan is allowable. Incidental costs of loan finance include items such as arrangement fees, and fees incurred when taking out or repaying loans or mortgages.
Limit on eligible borrowings
A landlord can obtain relief for the costs of borrowings on a loan or mortgage up to the value of the property when it was first let. Buy-to-let mortgages are often more expensive than residential mortgages with interest charged at a higher rate. The loan does not have to be secured on the let property. Where a landlord wishes to buy a rental property and has sufficient equity in their own home, it may make commercial sense to release capital from the home by borrowing against it and using the money to purchase the rental property. Interest on the loan is eligible for relief, despite the fact the loan is not secured on the rental property.
No relief for capital repayments
Capital repayments, such as the capital element of a repayment mortgage or loan repayments, are not eligible for relief. Where the borrowings are in the form of a repayment mortgage, it will be necessary to split the payment between the interest and capital when working out the relief. The lender should provide this information on the statement.
Mervyn wishes to invest in a buy to let property. As he only has a small mortgage on his home, he remortgages to release £150,000 of equity.
Following the remortgage, he has a mortgage of £200,000 on his own home. Using the released equity, he buys a property to let for £150,000. He spends some time renovating the property in his spare time before letting it out. When the property is first let, it has a value of £160,000.
During the 2019/20 tax year, Mervyn pays mortgage interest of 10,000and makes capital repayments of £10,800. The property is let throughout.
Mervyn can claim relief for 80% of the interest costs – this is attributable to the borrowings of £160,000 (80% of the loan of £200,000), being the value of the let property when first let. The interest eligible for relief is therefore £8,000 (80% of £10,000). For 2019/20, 25% (£2,000) is relieved by deduction with the balance giving rise to a deduction from the tax due of £1,200 (75% x £8,000 x 20%).
No relief is available for the capital repayments.
Company year-end tax planning
As a director shareholder of your company you can arrange your income for maximum tax efficiency.
Whatever arrangements you put in place to maximise tax efficiency for your income, February is a good time to review them before the end of the tax year.
Checking that you’ve used your lower tax rate bands
Draw enough income from your company so that together with that from other sources the total is at least equal to the basic rate threshold. For 2019/20 that’s £50,000 (£12,500 tax-free personal allowance plus the normal basic rate band of £37,500). It’s possible to increase your income further but be taxed at the basic rate using tax reliefs, such as for pension contributions.
Essentially, there are two types of tax reliefs, those which:
• are tax deductible and increase your basic rate threshold; and
• those which only increase your basic rate band.
The first type includes tax allowances (apart from the personal allowance and blind person’s allowance) and tax-deductible costs, e.g. business expenses for which you aren’t reimbursed, and interest on tax-allowable loans, such as those to fund working capital for your business.
The second type includes tax allowances related to marriage, pension contributions and gift aid payments.
Example. In February 2020 Dan projects that his income for 2019/20 will be £56,000. He’s entitled to tax relief for expenses of £2,000 which he incurred in his job and for which he has not claimed reimbursement from his company. His taxable income is therefore £54,000 which exceeds the basic rate threshold meaning he’ll pay higher rate taxes on £4,000 (£54,000 - £50,000)
If on or before 5 April 2020 Dan pays an extra pension contribution of £4,000 his basic rate threshold will increase by that amount and he won’t have to pay any higher rate tax. This would save Dan tax of £800.
Suggestion - Between now and 5 April 2020 pay pension contributions. The effect will be to reduce your tax bill by up to 40p in the pound. The same applies for gift aid payments. But if overall you don’t want to spend more on pensions or gift aid you can instead bring forward such payments you intend to make after 5 April.
Suggestion - If your income has already passed the basic rate tax band and you don’t want to make further pension or gift aid payments you can limit the higher rate tax damage by simply deferring any further salary or dividends until after 5 April 2020. Instead, if you need the income to survive, borrow it from your company and repay it when you take the deferred salary.
Purchase of own shares
The co-director and shareholder of your company wants to leave and sell their shares. You can’t raise the cash to buy them out. They have suggested a company share buy-back. Is this something worth considering?
A company purchase of own shares, also known as a buy-back, is a useful tool for shareholders to exit their company if they can’t sell their shares. Typically it’s used by small and medium-sized private companies because usually there’s no market for the shares and the other company owners don’t want or can’t find outsiders to come in. While there are tax factors to consider and HMRC requires notification of a share buy-back, the conditions and requirements are set out in company law.
Basic requirements - While the buy-back requires relatively little paperwork, the conditions under which a buy-back can be made are very strict. The first factors you should consider are how will the company pay for the shares and whether the company have sufficient reserves, i.e. accumulated profits, which it hasn’t already paid to the shareholders.
First factor - financing the deal
Firstly, the company must have sufficient cash to pay the shareholder for their shares in full. The rules don’t allow it to pay for shares in instalments.
If the company doesn’t have the cash or can’t sell assets to raise it, the rules permit a phased buy-back. That is, buying parcels of shares from the shareholder. This isn’t the same as buying all the shares and paying in instalments and the distinction is key to it being allowed under company law. However, if it’s important that the shareholder ceases to own a share in the company sooner rather than later, say because they are in conflict with the directors, there is an alternative to the phased buy-back.
If the company has sufficient reserves it can borrow money to finance the buy-back without breaching the conditions.
Second factor - company reserves
Earlier it was mentioned that the company must have reserves sufficient to cover the price it pays for the shares it’s buying back. However, there’s an exception to this condition.
A company can, subject to more conditions, buy back shares without sufficient reserves. The extra conditions are relaxed if the buy-back is part of an employee share scheme and the total cost of the shares is no more than the lower of £15,000 and 5% of the company’s paid up share capital at the start of the financial year in which the transaction will take place.
Practicalities - The starting point for a share buy-back is checking the company’s reserves on the most recent balance sheet. You’ll need to consider if subsequently this is likely to have changed to the extent that the buy-back condition won’t be met. Approval by shareholders’ resolution is required; a simple majority is sufficient. You’ll of course want a contract with the departing shareholder and it’s advisable to have professional help drafting this. It’s then just a case of doing the deal and filling in some forms for Companies House.
A share buy-back is useful for shareholders to exit their company if they can’t sell their shares elsewhere. The company must usually have accumulated profits at least equal to the amount it intends to pay for the shares.
Trivial benefit traps – Contractual obligations
The trivial benefits exemption allows employers to provide employees with low cost benefits free of tax and National Insurance and any reporting obligations. For the purposes of the exemption, a benefit is trivial if the cost per head is not more than £50. Where trivial benefits are provided to an officer of a close company or a member of their family or household, an annual cap of £300 per tax year also applies.
For the exemption to be available, the benefit must not be provided in return for services provided and the employee must not be contractually entitled to receive the benefit.
Contractual entitlement is wider than simply inclusion in the contract of employment. Consequently, the fact that the contract makes no reference to the provision of trivial benefits is not enough to satisfy the conditions for the exemption.
In the December 2019 issue of their Employer Bulletin, HMRC highlighted a number of ways in which a contractual obligation may arise, including:
• a letter to the main contract document
• a staff handbook
• a redundancy agreement
• an employer union agreement
If any of these provide for the employee to receive the trivial benefit, the exemption will not apply.
Beware of creating a ‘legitimate obligation’
Employers seeking to make use of the trivial benefits exemption should also be wary of falling into the ‘legitimate expectation’ trap; a contractual obligation may also arise is the employee has a legitimate expectation to receive the benefit.
In the December 2019 issue of Employer Bulletin, HMRC illustrate this with an example of an employer who provides employees with a cream cake each Friday. While there is no contractual obligation for the employer to provide the employees with a cream cake on a Friday, the fact that the employer does so every Friday creates a legitimate expectation, taking the provision of the cakes outside the trivial benefits exemption.
Frequency seems to be a problem here – HMRC seemingly do not apply the legitimate expectation argument where a benefit is provided annually, even if it is provided each year. HMRC’s Employment Income Manual at EIM21867, states:
“Just because a gift is provided each year, or is provided to all staff members, does not mean that the employee has a contractual entitlement to it.”
The guidance instructs HMRC officers that they “should not normally challenge modest gifts that are provided infrequently to employees, just because they are given to employees each year – for example, a Christmas or birthday gift”.
To avoid falling into the legitimate expectation trap, vary both the nature and timing of trivial benefits provided to employees.
Is it better to build a property portfolio in a limited company?
The introduction of ‘Section 24’ - the restriction of interest and finance costs as a tax-deductible expense - has seen a huge change in the way that many landlords operate their rental activities. Prior to those changes, operating your rental business through a company was rare, and was utilised by landlords with much larger portfolios. There was simply no need for most landlords to incorporate their rental businesses. Also prior to the changes, mortgages available for property companies - often called SPVs (special purpose vehicles) - were scarce and not very competitive.
Landlords and incorporation
The strategy of incorporation is not for every landlord. It is more useful for higher and additional rate taxpayers and those who were previously basic-rate taxpayers who have become higher-rate due to these changes. Getting the ownership structure right can, however, in the right circumstances, make a huge difference to the amount of tax paid over a taxpayer’s lifetime from rental income. What then are the potential advantages and disadvantages of holding property in a limited company?
Advantages of using a company to invest in property
1. Lower tax rates
The main reason why landlords use a company to invest in property is to take advantage of corporation tax rates and dividend tax rates, which are lower than income tax. If you are a higher rate taxpayer, you pay 40% on your rental profits; additional rate taxpayers even more. For a limited company, however, the corporation tax rate is currently 19%. If you own and rent a property held outside a limited company, you are taxed on all your rental profit, no matter how you withdraw it. On the other hand, a limited company can choose to distribute its profit in the form of dividends to shareholders. As a company director, you determine the income you receive in a particular year; some years you may take a sizeable dividend when other income is low. Other years, when the opposite is true, you may not. Although dividends are still taxable, there is currently a £2,000 tax-free allowance per individual. Or you can simply leave the profits, essentially reinvesting them within the company to buy the next property.
2. Tax treatment of mortgage interest
From 6 April 2020, mortgage interest will no longer be an allowable expense for individual property investors. Instead, they will claim a basic rate allowance. For higher rate taxpayers, effectively 50% of the interest amount will no longer be deductible against tax. This change began to be phased in gradually over four years from April 2017.
Landlords with rental property within a limited company are unaffected by these changes. Instead, limited company landlords can subtract mortgage interest costs in full from their rental income before calculating their corporation tax. This means limited company borrowers will have a significantly reduced tax bill.
3. Transferring ownership to avoid inheritance tax
Outside of a company structure, if you wish to gift a property to your child, this will incur a capital gains tax (CGT) liability. However, if you hold the property inside a company, gifts of shares to family members will be potentially exempt transfers (assuming they are bona fide) and, therefore, could reduce your taxable estate for inheritance tax (IHT) purposes. If it is done correctly, the ownership can pass to your children tax-free, as the value of the transfer can be held over for CGT purposes.
A property investment company can also be used as a means of providing an income to other family members, in addition to providing an IHT planning structure. Family members can be encouraged to take an active part in the running of the company and control can gradually be passed down.
4. Limited liability The word ‘limited’ refers to the ‘limited liability’ of the company’s shareholders. If the company goes bust, the worst that can happen is that the company ceases trading as it is insolvent. However, for an individual or a partner in a partnership, you could be forced to sell your own possessions - including your home - to meet any outstanding debt.
Disadvantages of using a company to invest in property
1. Mortgage availability
Rates and fees are likely to be higher than for a personal buy-to-let mortgage since the number of mortgage products on offer for limited companies is still much lower than for individuals. However, this situation is changing as ever more property investors hold properties in a company structure. You will still need to give a personal guarantee and your own finances will be scrutinised, so think of the company more as a ‘tax wrapper’.
2. Personal tax issues
If you intend leaving your rental profits within the company to re-invest, there is no issue. The company pays corporation tax on your rental profits, and the post-tax income is left to roll up to buy more properties, or maybe invest in a pension. However, there may be an occasion where you need to take out a large one-off sum from the company. Removing large amounts of profits from a company as a dividend can incur personal tax charges of up to 38.1%.
3. Additional costs of compliance
Companies have additional running costs, as they require accounts to be filed with both Companies House and HMRC, and directors must approve annual confirmation statements. This creates an added layer of responsibility for landlords choosing the limited company route. This can be handled by your accountant, but it will naturally come at some additional cost.
4. Loss of some tax reliefs
If you ever need to sell a property held in a limited company, you should be aware that companies do not pay CGT on the profit like an individual would. As such, there is no annual exempt tax-free amount (currently £12,000). Instead, companies pay corporation tax on the profit. Of course, for higher rate taxpayers, this compares favourably to the 28% CGT rate after the annual exemption. If you are ever planning to occupy a rental property as a main residence, using a company structure would not be beneficial. The company would not be able to claim PPR (principal private residence) relief on a future disposal. It is worth pointing out that there can also be quite negative tax consequences if a director lives in a property owned by their own limited company.
Is a limited company right for you?
Every landlord has differing circumstances. The decision as to whether a company should be used to hold new investment property will essentially depend on your future intentions. Ask yourself the following key questions:
Do I have a lower-earning spouse in whose name the property income could be put? If not, for higher rate taxpayers, the lure of paying the much lower rate of corporation tax is very strong.
Do I need property profits to cover my living costs? If not, leaving profits rolling up in the company - for future purchases, or just until your non-property income falls - will leave you better off than if you need to take it out to spend.
Do I need mortgages to grow my property portfolio? The ability to claim the entire cost of your mortgage interest as a deduction against corporation tax is a major argument in favour of using a company for higher-rate taxpayers.
Ultimately who am I buying property for?
In the early days, this will be you, but you should consider your exit strategy - do you plan to sell off your property portfolio to pay for your retirement, or is it important that you pass on your portfolio to your children or grandchildren? If passing on your properties is important to you, holding them within a limited company (if structured correctly) could result in large IHT savings.
Every landlord’s circumstances differ. By building a portfolio via a limited company, it is possible to make substantial tax savings; but it may not work for every landlord. Weigh up the ‘pros’ and ‘cons’ and check first that there isn’t a simpler option that suits your circumstances better.
Child trust funds - new regulations
Maturing trust funds.
Following the results of a consultation, the government has set out new rules for when child trust funds (CTFs) mature. CTFs were introduced nearly 18 years ago to hold tax-free savings and investments, boosted by a government subsidy for children. A change in policy meant accounts couldn’t be opened for children born on or after 1 January 2011, though existing accounts were allowed to continue. The funds can’t usually be accessed, other than to transfer them to a junior ISA, until the child who will benefit from the account reaches 18. This will start to happen in August 2020.
Extended tax advantage.
Typically, the parent or guardian responsible for the CTF will authorise the bank etc. holding the account to release the funds when the beneficiary reaches 18. Under current rules the tax-free status is lost. However, the new regulations which will apply from 6 April 2020 allow investments in a CTF account to keep their tax-advantaged status after the account holder’s 18th birthday, which means there will be no rush for parents and their children to decide what to do with the money etc.
Capital gains tax annual exemption
The capital gains tax (CGT) annual exemption is useful tax break for many taxpayers. It is generally available to individuals (£12,000 for 2019/20), personal representatives (for the tax year of death and the two following years) and trustees.
The CGT annual exemption is a use it or lose it allowance. Any unused exemption for one tax year cannot be carried forward.
Tax planning involving the CGT annual exemption is often aimed at ensuring that multiple exemptions are used in respect of the same asset.
There are two main methods:
1. Disposing of the asset in stages over two or more tax years, so that the gains falling into each tax year are reduced by the annual exemption for that year. This may happen where an interest in the investment property is transferred from (say) parent to adult child in one tax year, and a further interest in the property is transferred in the following tax year.
2. Gifting parts of an asset (commonly a business asset on which gift holdover relief can be claimed) to (say) other family members such as spouses (or civil partners) and children prior to disposal of the asset, so that each individual can use their annual exemptions to reduce the overall CGT liability. Gains on investment properties cannot be ‘held over’ in this way (unless they are qualifying furnished holiday lettings).
HMRC is alert to the use of the annual exemption as an ‘avoidance device’. HMRC’s guidance accepts that not every ‘fragmented’ disposal is for tax avoidance purposes, and that a gift may be genuine even though there is an overall tax benefit. However, HMRC may challenge artificial arrangements by opening an enquiry into the tax return of the person(s) making the disposal. For example, HMRC might look at the disposal of an asset where it suspects that an unconditional contract for its sale took place before an interest in the asset was gifted. Alternatively, HMRC may seek to contend that a gift was a ‘sham’. Information and documentation to support transactions (e.g. correspondence, contracts) should be retained for possible inspection.
HMRC’s guidance on the exploitation of the annual exemption concludes: ‘When considering any challenge to any arrangements you should also give consideration to the amount of tax at risk.’ The potential tax savings vary. For individuals, the normal CGT rates (for 2019/20) are 10% (basic rate taxpayer) and/or 20% (higher rate taxpayer). However, those rates are increased to 18% and 28% in respect of residential property and carried interest. The possible tax savings (for 2019/20) therefore range from £1,200 to £3,360.
Restriction of letting relief and final period exemption
No capital gains tax liability arises if a gain occurs on the sale of a property which has been the owner’s only or main residence throughout the period of ownership then the gain is fully sheltered by private residence relief. However, there are advantages to be had if the property has been the only or main residence for part of the period of ownership – not only is that period covered by private residence relief but the door is opened to benefit from the final period exemption and, where the property has been let, lettings relief.
However, time is running out to benefit from these reliefs in their current, more generous, form.
Final period exemption
The final period exemption extends private residence relief to the final period of ownership where the property has been the owner’s only or main residence at some point in the period of ownership. Until the end of the 2019/20 tax year, the final 18 months of ownership is exempt. However, from 6 April 2020, this is halved to nine months, although, as now, it will remain at 36 months where the owner is disabled or goes into care.
Where a sale is on the cards, completion before 6 April 2020 will keep the last 18 months of ownership tax-free as long as the property has been the only or main residence at some point.
As it currently applies, letting relief can reduce the chargeable gain on a property that has been let and which has been the owner’s only or main residence at some point by up to £40,000. The relief reduces the chargeable gain by the lower of:
• the gain attributable to letting (usually, the gain not sheltered by private residence relief)
• the amount of private residence relief available
• the gain attributable to letting
Lettings relief is being curtailed from 6 April 2020 and for properties disposed of after that date, it will only apply where the landlord is in shared occupancy with the tenant. So, if you own a property in which you live as a main home and subsequently move into a new home retaining the former home which you let out, you will not qualify for letting relief if you dispose of the property after 6 April 2020. Combined with the reduction in the final period exemption, the tax bill for post 6 April 2020 disposals may be significantly higher than that for disposals before 6 April 2020.
Consider selling before 6 April 2020
If a disposal is on the cards and you currently would benefit from lettings relief and/or the final period exemption, where possible aim to complete before 6 April 2020 to enjoy these reliefs in their current, more generous, form.
Dealing with finance costs correctly
The self-assessment deadline is looming. Self-assessment tax returns for the year to 5 April 2019 must be filed online by 31 January 2020 if a late filing penalty is to be avoided.
Landlords will need to complete the property income pages. Particular care should be taken where the landlord has a loan or a mortgage as the way in which relief is given for financing costs is changing and the position for 2018/19 is different to that for 2017/18.
The way in which relief for finance costs is given is moving from relief by deducting the finance costs when computing profits to giving relief in the form of a basic rate tax reduction. The 2018/19 tax year is a transitional year.
What costs are eligible for relief?
Interest payable on loans to buy land or property which is used in the rental business is eligible for relief, as is interest on loans to fund improvements or repairs. It should be noted that it is not necessary for the loan to be secured on the let property – the rule is that interest is allowable on borrowings up to the value of the property when first let. Thus, if a landlord borrowed against their main home to fund a buy-to-let investment property, the interest on that loan would be allowable on the loan up to the value when the property was first let. If the mortgage on the residential property is more, the allowable interest is proportionately reduced.
Relief is also available for the costs of getting a loan.
It should be noted that it is only the interest and other finance costs which qualifies for relief – no relief is available for any capital repayments which may be made.
The position for 2018/19
For 2018/19, relief for 50% of eligible finance costs is given as a deduction in computing the profits of the property rental business and relief for the remaining 50% is given as a basic rate tax reduction. This makes completing the property pages of the tax return slightly tricky as the information must go in two places.
The first box which needs to be completed is Box 26. This is where allowable loan interest and other financial costs need to be entered. Amounts entered in this box are deducted in computing rental profits. Therefore, as only 50% of the allowable finance costs for 2018/19 are relieved in this way, only 50% of the costs for that year should be entered in this box.
The remaining 50% is entered in Box 44, helpfully titled ‘Residential finance costs not included in box 26’. The amount entered in this box is used to calculate a reduction in the landlord’s tax bill. The reduction is equal to 20% (the basic rate of income tax) of the amount entered in Box 44.
If you have any unrelieved finance costs from earlier years, these should be entered in Box 45. Any balance of residential finance costs which is unrelieved may be carried forward to future years for relief by the same property business.
Using your car in your property rental business
Landlords will often use their car for the purposes of their property rental business. Where they do so, they are able to claim a deduction for the costs that they incur.
Using mileage rates
Where a landlord uses their car for business purposes, the easiest way to work out the amount that can be deducted is to make use of the simplified expenses system and use the relevant mileage rates to claim a deduction based on the business mileage undertaken.
For cars (and also vans) the rate 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 mileage.
Karen is an unincorporated landlord and has three properties that she lets out. During the tax year, she undertakes 712 business miles in her own car in respect of her property business.
She claims a deduction of 45p per mile, a total deduction for the year of £320.40.
Deduction based on actual costs
The use of simplified expenses, while generally easier from an administration perspective, is not compulsory. The landlord can instead claim a deduction based on the actual costs. However, in practice this will be time consuming. Further, where the car is used for both business and private travel, a deduction is only permitted for the business element. Separating actual costs between business and private travel can be very time consuming and will only be worthwhile where it gives rise to a significantly higher deduction than that obtained by using the mileage rates.
Capital allowances cannot be claimed where mileage allowances are claimed. Where a deduction is based on actual costs, capital allowances can be claimed in respect of the car. However, the claim must be adjusted to reflect any private use. So, for example, if a car is used for the purposes of the property business 20% of the time and for private use 80% of the claim, any capital allowance claim must be restricted to 20%.
The costs of travel on public transport or by taxi can be deducted in computing the profits of the property rental business to the extent that it constitutes business travel for the purposes of that business.
Legal and professional fees – Capital or revenue?
At some point, a landlord is likely to incur legal and professional fees in connection with the running of their property rental business. It is easy to fall into the trap of assuming that these costs can be computed in calculating taxable profits if they are incurred wholly and exclusively for the purposes of the business; however this is only part of the story. The landlord must also determine whether the costs are revenue or capital in nature. The rules also differ depending upon whether the accounts are prepared on the cash basis or using traditional accounting under the accruals basis.
The rule - The nature of the legal fees follow that of the matter to which they relate – so if the fees are incurred in relation to an item which is itself revenue in nature, the legal and professional fees are also revenue in nature. Likewise, legal fees that are incurred in connection with a matter that is capital in nature are also capital in nature.
Legal fees that are revenue in nature would include, for example, fees incurred to recover unpaid rent, while legal fees that are capital in nature would include fees incurred in connection with the purchase of a property.
Cash or accruals basis - Revenue items are deductible in computing profits regardless of whether they are prepared under the cash or accruals basis, although the time at which the relief is given will differ. Under the cash basis, the deduction is given for the period to which the expenditure relates, for the cash basis the deduction is given for the period for which the expenditure is incurred.
For capital expenditure different rules apply. No deduction is allowed for capital expenditure under the accrual basis, whereas under the cash basis, the treatment depends on the nature of the item – capital expenditure is deductible under the cash basis unless the expenditure is of a type for which a deduction is expressly forbidden. Items of the forbidden list include expenditure in or in connection with lease premiums and the provision, alteration or disposal of land (which includes property).
Example of allowable revenue items
A deduction for legal and professional fees will normally be allowed where they relate to:
• costs of obtaining a valuation
• normal accountancy costs incurred in preparing accounts of the rental business and agreeing the tax liabilities
• costs of arbitration to determine the rent
• the costs of evicting an unsatisfactory tenant to re-let the property
Example of capital expenses
The following are examples of legal and professional fees which are capital in nature:
• legal costs incurred in acquiring or adding to a property
• costs in connection with negotiations under the Town and Country Planning Act
• fees incurred in pursuing debts of a capital nature, such as the proceeds due on sale
Leases - Leases can be tricky. The expenses incurred in connection with the first letting or subletting for more than one year are deemed to be capital and therefore not deductible – this would include the legal fees incurred in drawing up the lease, surveyors’ fees and commission. However, if the lease is for less than one year, the associated expenses can be deducted. Normal legal and professional fees on the renewal of a lease are also deductible if the lease is for less than 50 years; although any proportion of the fees that relate to the payment of a premium are not deductible.
If a new lease closely follows the previous lease, a change of tenant will not render the associated fees non-deductible. However, if the property is put to other use between lets, or a long lease, say, replaces a short lease, the associated costs will be capital and non-deductible.
Does the high-income child benefit charge apply?
The high-income child benefit charge (HICBC) applies to claw back child benefit from either the claimant or his or her partner where at least one of them has income of £50,000 or more. The charge is perhaps one of the more unfair tax charges in that the person who suffers the liability may not be – and often isn’t – the person who received the child benefit.
Nature of the charge - The charge may apply to an individual with income over £50,000 where either they or their partner has received child benefit in the tax year. It may also bite where someone else gets child benefit for a child who lives with you and they contributed an equal amount to the child’s upkeep. It does not matter whether the child living with the individual is theirs or not.
It is important to note here that ‘partner’ does not have to be a spouse or civil partner – the charge also applies to unmarried couples living together as spouses or civil partners.
The measure of income for the purposes of the charge is ‘adjusted net income’. Broadly, this is income after taking account of Gift Aid donations and pension contributions and, for the self-employed, trading losses.
Where both partners each have income in excess of £50,000, the charge is levied on the higher earner; if their income is the same, it is the person who receives the child benefit who pays the charge.
How the charge is calculated - The charge claws back 1% of child benefit for every £100 by which adjusted net income exceeds £50,000. Where adjusted net income is £60,000 or more, the charge is 100% of the child benefit received in the tax year.
Example 1 - Suki claims child benefit for her two children. This is set at £20.70 per week for the eldest child and at £13.70 for her youngest child – equal to £1,788.80 for 2019/20.
Suki earns £30,000 from her job as a teacher and her husband Yuto earns £55,000 (after pension contributions) from his job in IT.
As Yuto’s adjusted net income is more than £50,000, the HICBC bites. It is equal to 50% ((£55,000 - £50,000)/100 x 1%) of the child benefit received by Suki in the year, i.e. £894.40.
Example 2 - Matthew and Maria have two children in respect of which Maria claims child benefit, equal to £1,788.80 for 2019/20. Matthew has adjusted net income of £58,000 and Maria has adjusted net income of £72,000.
As the higher earner, Maria is liable for the HICBC. As her adjusted net income is more than £60,000, the charge is equal to the child benefit paid in the year, i.e. £1,788.80
Paying the charge - Where a person is liable for the HICBC, they must declare it on their self-assessment tax return. The tax can be paid via self-assessment. Alternatively, if the tax return was filed by 30 December 2019 and the underpayment for the year in total is less than £3,000 it can be collected through PAYE via an adjustment to the tax code.
Worth stopping the claim? - Where the charge is equal to the full amount of the child benefit, it may seem easier not to claim it, rather than claiming it only to have to pay it back. However, child benefit paid for a child under 12 comes with National Insurance credits, helping to build up entitlement to the state pension. If the claimant does not otherwise pay sufficient National Insurance for the year to be a qualifying year, failing to claim may adversely affect their state pension. The solution is to claim but elect not to receive the benefit.
Relief for trading losses
In the event that a loss arises in a trade or profession, consideration should be given as how best to obtain relief for that loss. As with many things, there is no ‘one size fits all’ and the best option will depend on the trader’s particular circumstances.
Option 1 – Relief against general income
If the trader has other income, one of the easiest (and quickest) ways to obtain relief for the loss is to set against general income. However, this option is only available where accounts are prepared using the traditional accruals basis; traders using the cash basis cannot relieve a trading loss in this way.
A claim can be made to relieve the loss against:
• Income of the same tax year;
• Income of the previous tax year;
• Income of both the current and the previous tax years.
If the trader wishes to relieve the loss against the income of the current and the previous tax year, they must choose which year has priority. The income of the priority year must be completely extinguished before the balance of the loss can be set against the other year; it is not possible to make a partial the claim and tailor the relief, for example, to preserve personal allowances.
If the individual does not have sufficient income in the current or previous tax year, but has a capital gain, the relief can be set extended to capital gains (net of capital losses but before the annual exempt amount).
When choosing whether to relieve the loss in this way, consideration should be given to preserving personal allowances. If other income in the year is sheltered by personal allowances, there is little benefit in making a claim against general income.
Option 2 – Against later profits of the same trade
A loss arising in a trade or profession can be carried forward and set against future profits of the same trade. However, the loss must be set against the first tax year in which a profit arises – again it is not possible to tailor claims to preserve personal allowances. If the loss is not fully utilised against the first year in which a profit arises, the unused balance must be set against the next tax year in which a profit arises.
Option 3 – Relieving an early year loss
If the trade is relatively new, the trader may be able to benefit from a special relief that applies to losses made in the early years of the trade. Under this relief, a loss that is made in the year that the trader starts to trade or any of the three subsequent years (i.e. the first four years of the trade) can be carried back and set against total income of the three years before the tax year in which the loss was made, with earlier years taken in priority to later years.
This option is not available where accounts are prepared using the cash basis.
Option 4 – Terminal loss relief
In the event that a loss is made in the final 12 months of trading, relief can be claimed under the terminal loss relief provisions against the profits from the same trade taxed in the four years to cessation.
The best option will depend on the trader’s personal circumstances. Consideration should, however, be given to preserving personal allowances, obtaining relief at the highest possible rate and obtaining relief as early as possible.
From 6 April 2020, there is a change to the off-payroll (IR35) rules.
The new rules will affect you if you work via your own personal service company. Clients are likely to investigate the profile of the contractor workforce more closely than before.
Contracts caught by the rules - The change could impact you if you supply personal services to large and medium organisations in the private and voluntary sector. If the client is a ‘small’ business, the rules are unchanged. A ‘small’ company meets two of these criteria: its annual turnover is not more than £10.2 million: it has not more than £5.1 million on its balance sheet: it has 50 or fewer employees.
Who decides? - Under the new rules, responsibility for making the decision as to whether IR35 rules apply passes to the business you contract for. The key question is whether, if your services were provided directly to that business, you would then be regarded as an employee. If you or your client use CEST, HMRC’s online check employment status for tax tool, HMRC undertakes to stand by the results if information provided is accurate, and given in good faith. In future, your client will have to provide you with the reasons for its status decision in a ‘Status Determination Statement’.
Implications - Significant tax implications arise. If IR35 applies, the business or agency paying you will calculate a ‘deemed payment’ based on the fees charged by your PSC. Broadly, this means you are taxed like an employee, receiving payment after deduction of PAYE and employee National Insurance Contributions. If you operate via a PSC, the PSC will receive the net amount, which you can then receive without further payment of PAYE or NICs.
Review your position - are clients likely to query your employment status? Should you consider restructured work arrangements, or renegotiating fees? If working via a PSC, is it still the best business model?
Getting ready for off-payroll working changes
From 6 April 2020 the off-payroll working rules that have applied since 6 April 2017 where the end client is a public sector body are to be extended to large and medium private sector organisations who engage workers providing their services through an intermediary, such as a personal service company.
There are tax and National Insurance advantages to working ‘off-payroll’ for both the engager and the worker. The typical off-payroll scenario is the worker providing his or her services through an intermediary, such as a personal service company. Providing services via an intermediary is only a problem where the worker would be an employee of the end client if the services were provided directly to that end client. In this situation, the IR35 off-payroll anti-avoidance rules apply and the intermediary (typically a personal service company) should work out the deemed payment arising under the IR35 rules and pay the associated tax and National Insurance over to HMRC.
Compliance with IR35 has always been a problem and it is difficult for HMRC to police. In an attempt to address this, responsibility for deciding whether the rules apply was moved up to the end client where this is a public sector body with effect from 6 April 2017. Where the relationship is such that the worker would be an employee if the services were supplied direct to the public sector body, the fee payer (either the public sector end client or a third party, such as an agency) must deduct tax and National Insurance from payments made to the intermediary.
These rules are to be extended from 6 April 2020 to apply where the end client is a large or medium-sized private sector organisation. This will apply if at least two of the following apply:
Where the end client is ‘small’, the IR35 rules apply as now, with the intermediary remaining responsible for determining whether they apply and working out the deemed payment if they do.
Getting ready for the changes
To prepare for the changes, HMRC recommend that medium and large private sector companies should:
Workers affected by the changes should also consider whether it is worth remaining ‘off-payroll’; providing their services as an employee may be less hassle all round.
Using company vans for tax-free home to work travel
As a general rule, travel between home and work is regarded as private travel and if the employer meets the cost of that travel, a benefit-in-kind tax charge will be triggered. However, it is possible for employees with a company van to use that van to travel between home and work, and for the employer to meet the cost of fuel for such journeys, without a tax charge arising. However, as with most tax exemptions, there are stringent conditions to be met.
Tax charge on company vans
Where an employee has the use of a company van and private use of that van is unrestricted, a tax charge arises. The amount charged to tax is £3,420 for 2019/20. This gives rise to a tax bill of £684 for a basic rate taxpayer, £1,368 for a higher rate taxpayer and £1,539 for an additional rate taxpayer. Where fuel is also provided, a separate fuel charge applies; the taxable amount is set at £655 for 2019/20.
No charge arises if the van is used only for business journeys or in respect of vans that meet the conditions to be regarded as a pool van.
Restricted private use
It is also possible to escape a tax charge but to be able to use the van for home to work travel if a condition – known as the ‘restricted private use condition’ – is met. This comprises two parts:
• the commuter use requirement
• the business travel requirement
The commuter use requirement is met if:
• the terms on which the van is made available to the employee prohibit private use other than for the purposes of travel between home and work (‘ordinary commuting’) or travel between two places where the journey is essentially the same as the home to work journey
• neither the employee or the members of the employee’s family or household make private use of the van other than those purposes
It should be noted that insignificant private use, such as occasionally using the van to take something to the tip, is disregarded.
The second requirement is the business travel requirement. This is met if the van is available to the employee mainly for use for the purposes of the employee’s business travel. That is to say, the main reason that the employee has the van is because they need it for their job. The business travel requirement must be met at all times when the van is available to the employee.
If the provision of the van is exempt, no fuel benefit arises, even if the employer meets the cost of home to work travel.
Tony is a delivery driver. He is provided with a van by his employer for use in his work. He is allowed to take the van home at night and use it to drive to and from work. However, all other private use is prohibited. His employer pays for all fuel, including that for his journey between home and work.
As the restricted private use condition is met, there is no tax to pay on either the provision of the van or the fuel.
Advisory and approved fuel rate
The subject of allowable mileage rates for tax purposes often causes confusion as different rules apply depending on whether a car is employee or company owned.
Broadly, employees can only claim mileage allowance tax relief where their own vehicle is used for business purposes. If the employee is provided with a company car, a mileage claim can be made for business travel to cover the cost of fuel where this is paid for by the employee. There are different rules if the company pays for the fuel.
Approved mileage allowance payments (AMAPs)
An employee using their own car for work can claim a mileage allowance from their employer, which is designed to cover the costs of fuel and wear and tear for business trips. The mileage allowance will be tax-free if it does not exceed HMRC’s Approved Mileage Allowance Payment (AMAP) rates, which are currently as follows:
• Cars and vans: first 10,000 business miles per year – 45p per mile; over 10,000 miles – 25p per mile
• Motorcycles: first 10,000 business miles per year – 24p per mile; over 10,000 miles – 24p per mile
• Bicycles: first 10,000 business miles per year – 20p per mile; over 10,000 miles – 20p per mile
For NIC, the 45p per mile rate is used for all business miles in the tax year, not just the first 10,000 miles.
Actual costs of business journeys made in the employee’s private car cannot be claimed as a deduction by the employee as the legislation specifically prevents this where mileage allowance payments are made to that employee.
AMAPs are designed to cover any general or mileage-related expenses in relation to the car itself (such as fuel, servicing, tyres, road fund licence, insurance and depreciation), plus interest on any loan to buy the vehicle. The employee cannot claim any additional relief for expenses of that type.
AMAPs do not cover other expenses specific to the particular journey (such as parking charges, road tolls or accommodation) and the normal rules for deductions apply to expenses of this type.
Reporting - Unless the employer reimburses employees at a higher rate than the AMAP rate, the payments do not need to be reported on annual forms P11D as a benefit-in-kind.
If an employer pays less than the approved rates, the employee can claim income tax relief from HMRC for the shortfall. This can be done via a self-assessment tax return or by completing form P87.
Company vehicles - The AMAP scheme does not apply for company cars. However, employees can still claim fuel expenses for all business mileage where they pay for the fuel. The rates are lower than the AMAP rates and are updated quarterly. Current and previous rates can be found on the Gov.uk website at https://www.gov.uk/government/publications/advisory-fuel-rates.
Amounts paid in excess of HMRC’s advisory rates will be taxable.
If the company pays for all fuel (business and private), the fuel benefit will be charged, which is based on the cash equivalent of the benefit each tax year. The fuel benefit is fixed each year (for 2019/20 it is £24,100). This figure is multiplied by the CO2 percentage figure applicable to the company car.
Claims - It is the employee’s responsibility to claim tax relief due on mileage allowances. Form P87 can be used where an employee is not within self-assessment but has allowable employment expenses of less than £2,500 for a tax year. Current year claims are usually made via the employee’s PAYE tax code. However, employees have four years from the end of the tax year to make a claim for earlier years.
Incidental overnight expenses
A tax exemption enables an employer to meet small personal expenses when an employee stays away from home for work, without the employee suffering a tax charge and without any need to report the expenses to HMRC.
What are incidental overnight expenses?
Incidental overnight expenses are personal (i.e. non-business) expenses incurred when an employee travels overnight for business. Examples include:
• a newspaper
• telephone calls home
How much is the exempt amount?
The exempt amount is £5 per night for trips in the UK and £10 per night for overseas trips. These limits have not been increased.
It should be noted that the exemption only applies if the expenses do not breach the limit. If amounts paid to the employee are more than the exempt amount, the full amount is taxable not just the excess over the exempt amount.
Per trip not per day
The exemption can be applied per trip rather than a day-by-day basis. This means that it will apply as long as the incidental overnight expenses paid for the trip do not exceed the allowance for the full trip – it does not matter if on a particular day the allowance is exceeded as long as on average within the exempt limit.
The application of the allowance is illustrated by the following example.
Rachel and Anna are colleagues and often travel on business.
In January 2020, Rachel spent five consecutive nights away from home on a business trip in the UK. During the trip she incurred incidental expenses of £21 which were reimbursed by her employer. On one day, her expenses (for laundry) were £8. On the remaining four days, they were less than £5 per day.
The exempt amount is £5 per day for overnight stays in the UK – equivalent to £25 for a five-night trip. As the expenses paid by her employer are less than £25, the exemption applies. It does not matter that on one day the actual expenses were more than the £5 daily limit.
Anna also took a business trip during January, spending three consecutive nights in Germany. She incurred incidental expenses of £31 which her employer reimburses. For trips abroad, the exempt amount is £10 per night – a total of £30 for a three-night trip. As the amount paid by Anna’s employer is more than £30, the full amount is taxable and liable to Class 1 National Insurance.
Is HMRC holding on to your PAYE refund?
HMRC’s guide to the loan charge
Following the government’s report on the review of the loan charge HMRC has given new guidance.
Contact details for HMRC re.loan charge
• General questions regarding the loan charge, 03000 599110.
• Individuals who have settled the amount due from their use of disguised remuneration and have paid in full or are paying it by instalments and have questions for HMRC can call 03000 534226 or send an email to email@example.com.
• Individuals who are waiting to finalise a settlement with HMRC and have questions should call 03000 599110.
• Employers who have paid the loan charge and have questions should call 03000 599110.
What counts as notifying
Disclosing a source of income which might result in tax liabilities to HMRC requires more than just mentioning it in a tax return or other document. In context of the loan charge HMRC has set out what it considers disclosure. It says:
“For the purposes of the loan charge, HMRC will consider a loan scheme as disclosed if you provided sufficient information in your return or accompanying documents to enable HMRC to identify the loan scheme and specifically the person to whom the loan was made and the loan arrangement. For example, if the avoidance scheme promoter had provided the scheme user with a disclosure of tax avoidance scheme (DOTAS) number, it is reasonable for you to have enclosed this number on your return. Alternatively, where the loan scheme was not disclosed to HMRC (and there was no DOTAS number) it would be reasonable for you to refer to your loan arrangement elsewhere on your return.
The disclosure must have contained sufficient information so that it was apparent that a tax liability may have arisen as a result of the loan arrangement. Where the nature of the loan arrangement was such that only by considering its implications over more than one year could it have become apparent that a tax liability arose, the disclosure will be considered reasonable if sufficient information was provided when considering all relevant returns together.
If you are not sure if you disclosed the scheme you should check your copy of your return.”
On the loan charge
HMRC announces changes to the loan charge Review outcome. Following its review the government has set out its revised plans regarding the loan charge. This can apply if you’ve been given a loan instead of an outright payment for services you’ve provided to a customer.
Revised charge. The big news is that the loan charge will now only apply to loan arrangements made on or after 9 December 2010. Originally HMRC intended to pursue the charge back to 1999. It also won’t apply to loan schemes used between 9 December 2010 and 5 April 2016 if you have fully disclosed details of a loan arrangement on your tax return and HMRC has taken no action to demand tax or start an enquiry. If the charge applies and you haven’t declared it, you’ll have more time (until September 2020) in which to declare and pay the tax, which can be spread over three tax years. HMRC will publish detailed guidance ahead of the September deadline (see The next step). Tip. If you’ve already paid the loan charge for years which are now outside the charging period, ask HMRC for a refund.
The changes are good news if you are liable to the loan charge, whether or not you’ve declared it. The charge will now be limited to 2010 onwards and there will be more time to pay.
HMRC's new guidance - https://www.gov.uk/guidance/find-out-how-the-changes-to-the-loan-charge-affect-you
After considerable campaigning the government caved in to pressure and ordered a review of the controversial loan charge. The outcome, published in its report in December 2019, was a partial but significant success for those affected by the charge.
HMRC published its guidance on the changes to the loan charge on 21 January 2020. This sets out the steps required because of the review. These vary depending on whether you have reported the loan charge to HMRC and, if so, what stage of the settlement process has been reached.
If you’re an individual and haven’t notified HMRC of a loan arrangement you should include details on a self-assessment tax return for 2018/19. If you’ve submitted your return you should amend it. You have until 30 September 2020 to do this. Employers who used schemes for their employees should contact HMRC by that date.
If you’re an individual and have told HMRC about a loan arrangement on a tax return and it hasn’t taken any action, e.g. started an enquiry, the loan charge won’t apply for 2015/16 or earlier years and you’re now not required to notify HMRC. If for any year you told HMRC about a loan scheme and it has responded, you don’t need to amend the information even if your loan charge liability has changed. HMRC will contact you about the revised loan charge. If you’re an employer who used loan schemes for your employees you don’t need to take any action, HMRC will contact you. Tip. If you haven’t heard from HMRC by 31 August 2020 you should contact it.
You must report a loan arrangement by 20 September 2020. If you have notified HMRC it should contact you with revised details of the loan charge, but if you haven’t heard by 31 August you should make contact.
What to do if you need to change your tax return
You made it and filed your self-assessment return for 2018/19 by the 31 January 2020. However, having felt pleased with yourself, you realise to your horror that you have made a mistake and need to correct your return.
Can you do this and if so, how and by when?
Yes, you can - If you have made a mistake on your return, for example entered a number incorrectly or forgotten to include something, all is not lost. As long as you are within the time limit, the error can be corrected by filing an amended return.
How? - If you are in time to file an amended return, the process that you need to follow will depend on whether you filed your return online or on paper.
Online returns - If you filed your return online, you simply amend your return online:
1. Sign in to your personal tax account using your User ID and password.
2. Once in your account, select ‘Self-Assessment Account’. If this does not appear as an option, simply skip this step.
3. Select ‘More Self-Assessment details’.
4. Choose ‘At a glance’ from the left-hand menu.
5. Choose ‘Tax Return options’.
6. Choose the tax year for the year you want to amend.
7. Go into the tax return, make the changes you want to make, and file the return again.
Remember to check that it has been submitted and that you have received a submission receipt.
Check the revised tax calculation too in case you need to pay more tax as a result of the changes, but remember to take account of what you have already paid.
Paper return - If you opted to file your return on paper by 31 October 2019, to make a change you will need to download a new tax return. This can be done from the Gov.uk website. Fill in the pages that you wish to change and write ‘Amendment’ on each page. Make sure you include your name and unique taxpayer reference (UTR) on each page too. Send the corrected pages to the address to which you sent your original return.
Commercial software - If you used commercial software to file the return, contact your software provider to find out how to file an amended return. If your software does not allow for this, contact HMRC.
When - You have until 31 January 2021 to make changes to your 2018/19 tax return.
If you have missed the deadline, you will need to write to HMRC instead. This may be the case if you find a mistake in your 2017/18 return after 31 January 2020. In the letter, you will need to say which tax year you are amending, why you think you have paid too much or too little tax and by how much. You have four years from the end of the tax year to claim a refund if you have overpaid.
Changes to the tax bill - If amending the return changes the amount that you owe, you should pay any excess straight away. Interest will be charged on tax paid late. If your 2018/19 liability changes, your payments on account for 2019/20 may change too.
If as a result of the changes made to the return you have paid too much tax, you can request a repayment from your personal tax account.
Year-end checking of directors' NICs
To prevent manipulation of the NIC earnings period rules to reduce contributions, directors liable to Class 1 contributions will have an annual earnings period, however often they are paid.
The non-cumulative nature for calculating employee Class 1 NICs makes it possible to manipulate earnings to reduce the overall amount payable by taking advantage of the lower rate of primary Class 1 contributions payable once the upper earnings limit has been reached. For example, an employee who is paid £3,000 for each month of the tax year will pay considerably more in primary contributions than someone who is paid £600 for 11 months and £29,400 for one month, even though their total earnings for the year are the same.
Since company directors often have greater scope to influence the time and amount of payments they receive as earnings, special rules exist which provide that a director’s earnings period is a tax year. As the end of the tax year approaches, it is worthwhile checking to make sure that all company director NICs have been calculated correctly.
There is an exception to the above rule where a director is first appointed during the course of a tax year. Where this happens, the earnings period will be the period from the date of appointment to the end of the tax year, measured in weeks. The calculation of the earnings period includes the tax week of appointment, plus all remaining complete weeks in the tax year (i.e. week 53 is ignored for this purpose). This is known as the pro rata earnings period.
Example - Mr Green is appointed to the board of directors of A Ltd in week 44 of the tax year. The primary threshold and upper earnings limit are calculated by multiplying the weekly values by 9, because the earnings period starts with the week of appointment. This means that in 2019–20, Mr Green will pay NIC at the main rate of 12% on his director’s earnings between £1,494 (9 × £166) (the primary threshold) and £8,658 (9 × £962) (the upper earnings limit) and at the additional 2% rate on all earnings above £8,658 paid up to 5 April 2020.
Leaving the company - It is also worth checking as to whether any directors have left during the year. Again, to prevent manipulation of the rules, directors ceasing mid-year retain an annual earnings period for the remainder of that year and the next year in relation to earnings from the same employer.
Who does the annual earnings basis affect? - Towards the end of the tax year, a check should be made to ensure that the annual earnings basis is being used for the correct people. There may be people within the organisation who are called directors, but for whom that is just an honorary title.
The definition of ‘director’ is wide and extends beyond someone registered as a director with Companies House. For these purposes a director means:
• in relation to a company whose affairs are managed by a board of directors or similar body, they are a member of that board or similar body
• in relation to a company whose affairs are managed by a single director or similar person, that director or person
• any person in accordance with whose directions or instructions the company’s directors (as defined above) are accustomed to act
However, a person giving advice in a professional capacity is not treated as a director.
Companies often find it easier to calculate directors’ NIC in a similar way to other employees, spreading contributions throughout the year. A recalculation on an annual basis should be performed when the last payment of the year is made and any outstanding National Insurance due can be paid at that time.
Benefits in kind for shareholders