Separation, divorce, and private residence relief
Where a couple separate or divorce, one party may move out of the matrimonial home, with the other party buying them out. This could have capital gains tax implications.
While a couple are married and in a civil partnership and living together, they can transfer assets between them at a value that gives rise to neither a gain nor a loss. Furthermore, for private residence relief purposes, they can only have one main residence between them.
However, if the couple separate permanently, any transfers between them that take place after the end of the tax year in which they separate are at market value – the no gain/no loss rule ceases to apply. Further, they are no longer restricted to having only one main residence between them – each partner is entitled to private residence relief on their own main residence.
Beware the nine-month window
The final period exemption was reduced from 18 months to nine months from 6 April 2020. This reduction may impact on couples who separate or divorce.
Where as part of a financial settlement on separation or divorce or on the dissolution of a civil partnership, the spouse or civil partner who has ceased to occupy the marital home transfers an interest in that property to the other spouse or civil partner and the date on which the transfer takes place is more than nine months (for disposals after 6 April 2020) after the date on which they last occupied the property as their main residence, full private residence relief will not be due. The final period exemption now only shelters the last nine months of ownership.
However, help may be at hand in the form of a special relief.
The former matrimonial home can be treated as the main residence of the transferring spouse or civil partner from the date that his or her occupation ceased until the earlier of the date on transfer and the date on which the spouse or civil partner to whom the property is transferred ceases to use this as their main residence. The transferring spouse or civil partner must elect for this relief to apply.
Aside from the final nine month of ownership, relief for one property cannot be given at the same time as relief for another property. As a result, where the transferring spouse has acquired another residence, they may prefer that property to be their main residence. Consequently, this relief may not be beneficial in all cases.
Tax implications of student lets
As the new academic year begins, for student starting or returning to university, the 2020/21 academic year looks very different to normal. While many students may opt to stay at home and study online, those studying away will need somewhere to live – for many, this will be in private rental accommodation. The student market provides opportunities for landlords.
Letting an entire property
Landlords with a whole house to let can either let the house as a whole or can let individual rooms to unconnected tenants.
When letting to multiple households, landlords will need to be aware of the ‘house in multiple occupation’ (HMO) rules. A property is an HMO if there are at least three tenants forming more than one household and toilet, bathroom or kitchen facilities are shared. If at least five tenants live in the house forming more than one household and share toilet, bathroom or kitchen facilities, the property is a large HMO. The landlord will need to obtain a licence (and application for which can be made online on the Gov.uk website) and comply with the rules.
From a tax perspective, rental income from the let is taxed under the property income rules. All let properties which are owned by the same person or persons form a property rental business, with the taxable profits computed for the business as a whole rather than separately for each individual property. The landlord must declare the income to HMRC on the property pages of the self-assessment tax return unless it is less than £1,000 per year.
Letting a room in your main home
If you live near a university or college and have one or more spare rooms in your home, you may consider letting them to students to earn some extra cash. Where the rooms are let furnished, you can take advantage of the rent-a-room scheme. Under this scheme, as long as the rental income is less than £7,500 (or less than £3,750 where the rental income is shared with another person), you do not need to tell HMRC or pay tax on it.
If the rental income is more than £7,500 (or, £3,750, as appropriate), you can choose to pay tax on the excess or calculate the profit in accordance with usual rules. You will need to complete a tax return where this is the case.
Have you got your EORI number?
From 1 January 2021, you will need an Economic Operators Registration and Identification (EORI) number to move goods between Great Britain and the EU. Prior to 1 January 2021, you only needed an EORI number if you move goods between the UK and non-EU countries.
If you do not already have an EORI number, you will need to obtain one in order to move goods between Great Britain and the EU. You may also need one you move goods between Northern Ireland and non-EU countries.
Applying for an EORI number
From 1 January 2021, you will need an EORI number that starts with ‘GB’ to move goods between Great Britain and other countries.
If you do not already have an EORI number that starts with ‘GB’ and you have yet to apply for one, this should be done as soon as possible.
Applications for an EORI number can be made online.
To make an application, you will need:
• your VAT number and the effective date of your registration (which can be found on your VAT registration certificate);
• your National Insurance number (if you are applying as an individual);
• your Unique Taxpayer Reference (UTR);
• the date that your business started and its Standard Industrial Classification (SIC) code (which can be found on the Companies House register for a company); and
• your Government Gateway User ID and password.
Making an application using the online service should only take 5—10 minutes. You will receive your EORI number straight away unless HMRC need to make further checks, in which case it will take up to five working days.
Once an application has been made, the status of that application can be checked online.
Moving goods between Great Britain and Northern Ireland
The Northern Ireland Protocol comes into effect on 1 January 2021. Special rules apply to the movement of goods between Great Britain and Northern Ireland. From that date, an EORI number that starts with ‘XI’ will be needed to:
• move goods between Northern Ireland and other countries;
• make a declaration in Northern Ireland; or
• get a customs decision in Northern Ireland.
To obtain a EORI number that starts with ‘XI’ you will need to have one that starts with ‘GB’ – if you don’t, you will need to apply for one first. If you already have an EORI number that starts with ‘GB’ and HMRC have identified that you are likely to need one that starts with ‘XI’, then they should send you one automatically, Expect to receive this from mid-December 2020.
Trader Support Service
If you move goods between Great Britain and Northern Ireland, sign up to the Trader Support Service (see www.gov.uk/guidance/trader-support-service) for help and support on moving goods between Great Britain and Northern Ireland.
Extended off-payroll working rules
The delayed extension to the off-payroll working rules will come into effect from 6 April 2021. Under the extended rules, where services are supplied via an intermediary, such as a personal service company, to a medium or large private sector organisation, the private sector engager will be responsible for determining whether the off-payroll working rules apply. This will be the case where the worker would be an employee of the end client if they supplied their services directly, rather than through an intermediary. Where the rules apply, the private sector engager, or the fee payer if different, must deduct tax and National Insurance from payments made to the worker’s intermediary.
The impact of the changes on workers supplying their services through a personal service company will depend on the nature of both the end client and the arrangement under which the services are provided.
End client is a medium or large private sector company
Where services are supplied through a personal service company or other intermediary to an end client which is a medium or large private sector organisation, from 6 April 2020, the personal service company will no longer need to ascertain whether the IR35 rules apply and operate those rules.
Instead, the end client will need to determine whether the off-payroll working rules apply by deciding whether the arrangement between the parties is such that if the worker supplied their services to the end client directly, rather than through their personal service company, the worker would be an employee of the end client.
The worker will be given a copy of the determination reached as to their status by the end client. The worker should check they agree with the determination, and bring it to the end client’s attention if they do not.
If the off-payroll working rules apply, payments made to the personal service company will be made with tax and National Insurance deducted. The worker will receive a credit for the tax and National Insurance paid against the tax and National Insurance due on payments made by the personal service company to the worker.
If the off payroll working rules do not apply, the personal service company will be paid gross. Tax and National Insurance, as appropriate, will be due on payments made by the personal service company to the worker.
End client is a small private sector organisation - The extended off-payroll working rules do not apply to small private sector organisations. Where a worker supplies their service via a personal service company to a small private sector organisation, the personal service company must continue to assess whether the IR35 rules apply. Where they do (which will be the case if the worker would be an employee of the end client if they supplied their services directly), the personal service company must calculate the deemed payment on 5 April at the end of the tax year, and account for tax and National Insurance on that deemed payment.
The end client will continue to make payments to the worker’s intermediary gross.
End client is a public sector body - The off-payroll working rules have applied since 6 April 2017 where services are supplied to a public sector body through an intermediary. The extension of the rules from April 2021 do not change this (subject to small tweaks to ensure the rules work for end clients in the private sector). The public sector body remains responsible for deciding whether the rules apply, and for deducting tax and National Insurance from payments to the worker’s intermediary where they do. The personal service company does not need to decide whether the IR35 rules apply.
Tax implications of making loans to directors
Where a family company has cash in the bank but profits have been adversely affected by the pandemic, directors of a family company may wish to take a short term loan to enable them to meet personal bills, with a view to clearing the loan with a dividend payment when business picks up. This can be a tax-efficient strategy, although there are tax implications to be aware of if the loan balance exceeds £10,000, or if the loan is not repaid by the corporation tax due date.
A tax-free loan
It is possible to enjoy a loan of up to £10,000 tax-free for up to 21 months. To enjoy the maximum tax –free period, the loan must be taken out on the first day of the accounting period. Where the loan is taken out during the accounting period, as long as it is does not exceed £10,000, it can be enjoyed tax-free until nine months and one day after the end of the accounting period.
Provided the loan is for £10,000 or less, there is no benefit in kind tax to pay. But if the outstanding loan balance exceeds £10,000 at any point, the director is taxed on the benefit of the loan.
Section 455 charge
To avoid a section 455 charge, the loan must be repaid within nine months and one day of the end of the accounting period. This is the day by which corporation tax for the period must be due. A section 455 charge (named after the legislative provision imposing it) is a charge on the company set at 32.5% of the outstanding loan balance. The charge is aligned with the higher dividend tax rate.
If the loan is cleared by the corporation tax date, there is no section 455 tax to pay. There are various ways in which the loan could be cleared, for example, by declaring a dividend (assuming that the company has sufficient retained profits) or by paying a bonus. However, there will be tax implications of these too. Unless the director can use funds from outside the company to clear the loan or will pay tax on the dividend or bonus being used to clear it at a rate which is less than 32.5%, it may be better to pay the section 455 charge instead.
The section 455 charge is a temporary charge which is repaid if the loan is repaid. The repayment is made nine months and one day from the end of the accounting period in which the loan was repaid, usually be setting it against the corporation tax liability for that period.
It should be noted that anti-avoidance provisions apply to prevent a director from clearing the loan shortly before the corporation tax due date and re-borrowing the funds shortly afterwards.
Benefit in kind charge
A tax charge will also arise on the director under the benefit in kind legislation if the loan balance exceeds £10,000 at any point in the tax year. The amount charged to tax is the difference between interest due on the loan at the official rate (set at 2.25% since 6 April 2020) and the interest, if any, paid by the director. The company must also pay Class 1A National Insurance (at 13.8%) on the taxable amount.
Renovating the holiday let during lockdown
The Covid-19 pandemic has hit the hospitality and leisure industry hard. Landlords with furnished holiday lettings have been unable to let their properties for considerable periods of time as a result of national and local lockdowns.
Properties need regular maintenance and refurbishment, and while being in lockdown is not ideal, it does provide a window in which to undertake repairs and generally refresh and improve the property. Where expenses are incurred during a period for which the property is unavailable for letting, are the associated expenses deductible in computing the profits or losses of the furnished holiday business?
Expenses are deductible in computing the profits and losses for a property business as long as they are revenue in nature and are incurred wholly and exclusively for the purposes of the business. If the accounts are prepared using the cash basis, capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.
Impact of property closure
It will generally be the case that repairs and refurbishments are undertaken while the property is not let – no one wants to rent a holiday home to find they are sharing it with builders.
Where the property is kept solely for letting as furnished holiday accommodation, but is in fact closed for part of the year because there are no customers or no business, HMRC allow a deduction for all associated expenses incurred in this period as long as there is no private use. Consequently, where the furnished holiday let is closed during lockdown, a deduction should be forthcoming for expenses incurred in this period.
However, a deduction is not permitted where the property is used privately. Consequently, if the landlord is living in the property during lockdown and undertaking the work at the same time, a deduction will be denied for expenses incurred during the period of private use. The landlord may need to balance the convenience of living in the property while doing the work against the loss of associated deductions for tax purposes.
Repairs v improvement
Where significant work is undertaken, it is important to understand the distinction between repairs, which essentially maintain the property, and improvements, which enhance it. A repair will include replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement. Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which cannot in computing profits.
Business rates update
The government is currently undertaking a fundamental review of the current business rates system, including ideas for possible change and a number of alternative taxes. Conclusions and any changes are likely to be forthcoming in Spring 2021.
Many businesses feel that the current system for calculating business rates is antiquated as it is based on estimated open market rental values from 1 April 2015.
Broadly, at revaluation, the Valuation Office Agency (VOA) adjusts the rateable value of business properties to reflect changes in the property market. This usually happens every five years. The most recent revaluation came into effect in England and Wales on 1 April 2017, based on rateable values from 1 April 2015. The rateable value is multiplied by the correct ‘multiplier’ (an amount set by central government) to give annual business rates payable.
The next revaluation will take effect in 2023 and the government has confirmed that this will be based on property values as of 1 April 2021 as this will help reflect the impact of Covid-19 more closely.
There are two business rates multipliers set by central government. The ‘small business multiplier’ applies to properties with RVs below £51,000, and the ‘standard multiplier’ applies to properties with RVs of £51,000 or more. Around 1.8 million properties, out of approximately 2 million rateable properties in England, use the small business rates multiplier.
In the recent Comprehensive Spending Review (25 November 2020), the Chancellor announced a freeze on the business rates multiplier in 2021/22 meaning that the multiplier in England for ‘small’ businesses will remain at 49.9p and for large businesses it will remain at 51.2p assuming no further changes to the small business supplement are made. The freeze is expected to cost the Exchequer £575m, which means a saving to retail of around £145m on what would have been paid if business rates were to be levied at 100%.
Small business rate relief
A business may be able to obtain a discount from its local council if it is eligible for small business rate relief. This generally applies where the property’s rateable value is less than £15,000. The business will not pay business rates on a property with a rateable value of £12,000 or less. For properties with a rateable value of £12,001 to £15,000, the rate of relief will go down gradually from 100% to 0%. For example, where property rateable value is £13,500, the business the discount is 50%, for a rateable value of £14,000, the discount is 33%.
As part of the government’s Coronavirus support package, in March 2020, the Chancellor announced a wide-ranging expansion to the business rate discount set out in the Spring Budget 2020. From 1 April 2020, all shops, pubs, theatres, music venues, restaurants and any other business in the retail, hospitality or leisure sectors, have been given a 100% holiday from paying business rates for twelve months. This measure applies to such businesses irrespective of their properties’ rateable value, ensuring that all businesses (as opposed to mostly SMEs) within these industries receive the same government support to manage and survive the pandemic.
It is not currently known whether the business rate relief holiday will be extended beyond March 2021.
The way forward
Whilst the 2021/22 freeze is welcome, it is a small step compared to the much bigger question of whether there will be any business rates relief for retail next year. In addition, the professional bodies are keen to see the government go further. The ICAEW for example, says that a reduction in the multiplier may be a simpler and relatively fairer way for the government to preserve the core revenue base, while giving time to properly consider further reform of business rates to reflect the changes in the way that business now operates, in particular with the move to online which has accelerated since the start of lockdown.
Business asset disposal relief - sale of the holiday let
Furnished holiday lets benefit from a number of tax advantages which are not available to landlords of residential lets. One of the main advantages is the opportunity to benefit from Business Asset Disposal relief (BADR) on the sale of the property, paying capital gains tax at only 10% above the annual exempt amount rather than at 18% or 28% (depending on whether the gains fall in the basic rate band or not) on the sale of the buy-to-let. Individuals can benefit from BADR on gains up to the lifetime limit of £1 million.
A let must meet certain conditions re availability and letting to qualify as a furnished holiday let for tax purposes.
Nature of the relief
Business Asset Disposal Relief was previously known as Entrepreneurs’ relief. It is available on the disposal of all or part of the business. The commercial letting of furnished holiday lettings, which for certain capital gains tax purposes, including BADR purposes, is treated as a trade, falls within the scope of the relief. Furnished holiday lets qualify for the relief if the let is in the UK or the EEA, but not elsewhere in the world.
The relief is available for a disposal of the whole or part of the business, and for a disposal of the assets used for the purposes of a business that has now ceased. Where the business is operated as a company, relief is available for the disposal of the shares.
In the case where an individual has one property that is let as a holiday let and decides to stop letting and sell the property, relief will be available where:
• the property was used as a FHL at the time that the FHL business ceased;
• the business was owned by the individual making the disposal for a period of two years immediately prior to the cessation of the business; and
• the disposal takes place within three years of the cessation.
The rules allow the landlord three years to sell the property once the FHL business ceases without losing the relief.
Billy has a cottage in Suffolk that he lets as a holiday let. The let meets the conditions for a furnished holiday let. The cottage was purchased as a holiday let in 2010. Billy ceases letting it in May 2020, putting it up for sale. The property is sold in November 2020, realising a gain of £120,000.
The conditions for BADR are met. Assuming Billy has his annual exemption available and has not used up his lifetime allowance of £1 million, he will pay capital gains tax £10,770 on the chargeable gain of £107,700 ((£120,000 - £12,300) @ 10%).
If the property had been a residential let and assuming Billy is a higher rate taxpayer, the capital gains tax bill would have been £30,156 (£107,700 @ 28%).
Problems may arise when the landlord has several properties in his or her furnished holiday letting business. The relief is only available for the sale of the whole or part of the business or assets used at cessation. Thus, where a landlord has multiple properties, but sells one of them while continuing to run the FHL business, that sale may not qualify for BADR and the lower rate of capital gains tax,
In some cases, there may be a part disposal of the business. This may be the case where the landlord has properties in different locations and sells those in one location, but continues to run the FHL business in other locations. It will depend on the facts in each case.
Recent issues for EMI schemes
When it was first introduced in 2000, the Enterprise Management Incentive (EMI) scheme had an initial life expectancy of around five years, but arrangements proved to be so popular with employers and employees alike that the scheme is still going strong some twenty years on.
In broad terms, the EMI is a tax-advantaged share option scheme designed for smaller companies who are looking to attract and retain key staff by rewarding them with equity participation in the business. The scheme is particularly popular with smaller, entrepreneurial companies that might not be able to match the salaries paid by larger firms.
A share option is a right to acquire shares in a company, on terms set out in an option agreement. This will specify how many shares an employee may acquire, how much he or she will have to pay for the shares, and when the shares can be acquired through exercise of the option. Option exercise may occur, for example, after a specified period of employment, on achieving prescribed performance targets, or the sale of the company.
EMI is open to companies with gross assets of £30m or less, and with fewer than 250 full time equivalent employees that carry on a qualifying trade. It enables them to offer share options worth up to £250,000 over a three-year period as an incentive. If the shares are bought at the market rate at the time the options were granted, employees pay no income tax or national insurance on the difference between what the shares are worth when acquired compared to the price paid. Capital gains tax will be payable on any gains made when the shares are subsequently disposed of.
Example - David is given an EMI option to acquire a 3% shareholding in his employer’s company for its market value of £10,000. Four years later he exercises the option when the shares are worth £100,000, and eventually sells them for £150,000 when the company is taken over.
David will not pay any tax when the option is granted or when he exercises it. When the shares are sold, David will pay capital gains tax on his gain of £140,000 (£150,000 sale proceeds less £10,000 option exercise price). Ignoring any reliefs he may have available, capital gains tax will be charged at a rate of 10%, so tax of £14,000 will be payable.
Covid-19 and the working time requirement - One of the qualifying criteria for EMIs is that employees and directors need to be engaged to work at least 25 hours per week for their company or group or, if less, for at least 75% of their working time. So a part time employee can qualify by working say two days a week for the company, provided that work elsewhere does not amount to more than 25% of the whole.
Some participants in EMI schemes have been unable to meet the working time requirement because of reasons connected to the Coronavirus pandemic.
HMRC have confirmed that if an employee would otherwise have met the scheme requirements but did not do so for reasons connected to the Coronavirus pandemic, the time which they would have spent on the business of the company will count towards their working time.
HMRC accept the following as reasons for which an employee may have been unable to meet the working time requirements - furlough, working reduced hours, unpaid leave.
In all cases the reason must be attributable to the current Coronavirus pandemic and the period must have begun on or after 19 March 2020.
Employers and employees must keep evidence to show that there is a link to the Coronavirus pandemic.
EMI post-transition - HMRC have also recently confirmed that EMI schemes will continue to be available after the Brexit transition period ends on 31 December 2020. Previously, EMI schemes were approved under EU state aid rules and in February 2020 HMRC could only confirm that EMI would be recognised until the end of the transition period. However, HMRC have now stated that schemes will operate from 1 January 2021 under UK law.
Employees - expenses for working from home
The Covid-19 pandemic has meant that more employees worked from home than ever before. This trend looks set to continue following the Government’s latest advice to continue to work from home where you can do so. Further, many business plan to embrace flexible working beyond the end of the pandemic, allowing employees to work from home some or all of the time where their job allows this.
However, while working from home may save the cost of the commute, there are expenses associated with working from home. Is the employee able to claim tax relief where these are not met by the employer?
Additional household expenses
As a result of working from home, an employee will incur the cost of additional household expenses, such as additional electricity and gas costs, additional cleaning costs, and such like. During the Covid-19 pandemic, HMRC confirmed that employees are able to claim a deduction for additional household expenses attributable to working from home of £6 per week without supporting evidence. Where the actual additional costs are more than £6 per week, tax relief can be claimed for the full amount, as long as the employee can substantiate the claim. For example, this could be done by comparing bills prior to working from home with those during the working at home period.
Employees may have needed to buy office equipment, such as a computer and a printer, to enable them to work from home. Where these costs are not reimbursed by the employer, HMRC have confirmed that employee can claim a tax deduction for the actual expenditure incurred, as long as it was incurred ‘wholly, exclusively and necessarily’ in the performance of the duties of the employment.
To claim relief for other expenses employees will need to pass the general test that the expense was incurred ‘wholly, necessarily and exclusively’ in the performance of the duties of the employment. Care must be taken to distinguish between expenditure which puts the employee in the position to do their job as opposed to being incurred in the performance of it. Childcare, for example, would fall into the former category.
Relief is also denied for dual purpose expenditure, such as an office chair which enables the employee to be comfortable while working, as this fails the ‘exclusively’ part of the test.
Where the conditions for tax relief are met, a deduction can be claimed on form P87 (available on the Gov.uk website) or, where the employee completes a tax return, on the employment pages of the return.
Tax efficient remuneration using pension contributions
Despite on-going speculation that the government will intervene at some point, for now, making contributions into a pension scheme continues to be a particularly tax-efficient form of savings.
Nearly everyone is entitled to receive tax relief on pension contributions up to an annual maximum - regardless of whether they pay tax or not. The maximum amount on which a non-taxpayer can currently receive basic rate tax relief is £3,600. So an individual can pay in £2,880 a year, but £3,600 will be the amount actually invested by the pension provider.
Moreover, subject to certain conditions, tax relief is still currently available on pension contributions at the highest rate of income tax paid, meaning that basic rate taxpayers get relief on contributions at 20%, higher rate taxpayers at 40%, and additional rate taxpayers at 45%. In Scotland, income tax is banded differently, and pension tax relief is applied in a slightly different way.
The total amount of tax relief available on pension contributions is calculated with reference to ‘relevant UK earnings’. If you own a limited company and you take both salary and dividends, the dividends do not count as ‘relevant UK earnings’. This means that if you take a small salary and a large dividend from your company, your pension tax relief limit will be low - tax charges will apply if the limit is exceeded.
If you want to increase your tax-free contributions limit, you could consider either increasing the amount of salary you take from the company (to increase your 'relevant UK earnings'), or making the pension contribution directly from your company as an employer contribution. Making an employer contribution has additional advantages.
Employer contributions - Qualifying employer contributions count as allowable business expenses, so the company could currently save up to 19% in corporation tax. In order to qualify for a deduction, the pension contributions must be ‘wholly and exclusively’ for the purposes of business. HMRC will check for evidence that this is the case, for example whether other employees are receiving comparable remuneration packages.
Another advantage of making a company contribution is that employer National Insurance Contributions will not be payable on the contributions made, saving the company up to 13.8% on the contribution amount.
This means that the company can potentially save up to 32.8% by paying money directly into your pension rather than paying money in the form of a salary. Depending on your circumstances, this may or may not be more beneficial to you rather than paying personal pension contributions.
Employee benefits - An employer-provided pension can be a significant benefit. Employers can make contributions to occupational or personal pension plans without triggering a tax charge. This can significantly enhance an employee’s remuneration package and is a tax efficient way of rewarding employees. It is also worth noting that, subject to a couple of conditions, there is a tax exemption covering the first £500 worth of pension advice paid for by an employer. The exemption covers advice not only for pensions, but also on the general financial and tax issues relating to pensions.
Pension inequality - The government is currently reviewing feedback from a consultation on pensions tax relief administration, particularly in relation to an anomaly in the tax rules whereby people on low incomes may pay 25% more for their pension contributions due to the way their employers’ pension scheme operate. It is likely that there will be some modification to the rules to iron out this issue. Whether there will be wider-ranging changes or restrictions on pensions tax relief remains to be seen, but it is recommended that anyone considering topping up their pension pot should think about doing it sooner rather than later.
Making use of the transferable residence nil rate band
There are two nil rates bands for inheritance tax – the nil rate band of £325,000 and the Residence Nil Rate Band, set at £175,000 for 2020/21. Together, it is possible for spouses and civil partners to leave a joint estate worth £1 million (2020/21 figures) free of inheritance tax. However, this depends on the ability to fully utilise the RNRB.
Nature of the RNRB
The RNRB is available where the deceased’s interest in a residential property, which has been their main residence at some point, is passed to a direct descendant on their date. The value of the RNRB is the lower of:
the net value in the interest of the residence property (i.e. the value of the property, less any liabilities such as a mortgage); and
the RNRB at the year of death.
The RNRB is set at £175,000 for 2020/21. It will be increased annually in line with inflation.
The RNRB can only be used to shelter inheritance tax on one property. Where there is more than one residential property in the estate that has been a main residence at some point, the personal representatives can nominate which property passed on death will benefit from the RNRB.
The RNRB is also available where the deceased downsized on or after 8 July 2015, or ceased to own a residence after that date, as long equivalent assets are left to direct descendants.
A direct descendant is a child (including a step-child, an adopted child or a foster child) and their lineal descendants.
Reduced RNRB for estates in excess of £2 million
The RNRB is reduced by £1 for every £2 by which the deceased’s estate exceeds £2 million.
Transferable nature of the RNRB
As with the nil rate band, any portion of the RNRB unused on the death of the first spouse or civil partner can be used on the death of the surviving spouse or civil partner. However, the total available on the second death cannot exceed the value of the residence passed to direct descendants.
The ability to use the unused portion of a late spouse or civil partner’s RNRB is not automatic – a claim must be made by the executors or personal representative on the second death. A claim to transfer the unused portion of the RNRB should be made on form IHT436. A claim to use it on the estate of the surviving spouse must also be made – this is done of form IHT435.
There is a time limit of two years from the end of the month in which the second spouse or civil partner died for making the claim.
Betty died on 10 October 2018 leaving her entire estate worth £600,000 to her husband Stan, including her interest in the marital home. At the time of her death, the RNRB was £125,000.
Stan died in June 2020, leaving an estate valued at £1.3 million. The estate included his main residence, valued at £800,000, which was left equally to his three children.
As Betty had not used any of her RNRB, Stan’s personal representatives claim to transfer 100% of her RNRB and use it on Stan’s estate. The RNRB available to use against Stan’s estate is £350,000 (Stan’s own RNRB of £175,000 plus 100% of Betty’s nil rate band at the 2020/21 level of £175,000) as this is less than the value of the residence transferred on death to their direct descendants.
Reclaiming SSP for periods of self-isolation
The Coronavirus Statutory Sick Pay Rebate Scheme allows smaller employers to reclaim some or all of the Statutory Sick Pay (SSP) paid to employees who are absent from work due to a Coronavirus-related absence.
An employer is eligible to use the scheme if the employer had fewer than 250 employees across all their PAYE payroll schemes on 28 February 2020 and has paid sick pay to an employee who was absent from work as a result of a Coronavirus-related absence.
The ability to reclaim SSP is not limited to that payable to employees with Coronavirus symptoms; it also applies to SSP paid to employees who are required to shield or to self-isolate as a result of Covid-19.
Reclaiming SSP related to periods of self-isolation
An employee is eligible for SSP if:
they are self-isolating because someone that they live with has Coronavirus symptoms or has tested positive for Covid-19;
they have been told to isolate by the NHS or a public health body because they have been in contact with someone who has tested positive for Covid-19; or
they have been notified by the NHS to self-isolate before surgery for up to 14-days.
SSP payable from first day of sickness
The SSP rules have been relaxed in relation to Coronavirus absences and employees can receive SSP from the first day of a Coronavirus-related absence – the three waiting days do not need to be served before SSP is payable (as is the case for non-Covid absences).
As far as periods of self-isolation are concerned, SSP can be paid from the first day that the employee is off work because they are self-isolating where the period of self-isolation:
started on or after 13 March 2020 where someone they live with has Coronavirus symptoms or is self-isolating;
started on or after 28 May 2020 where the employee was notified by the NHS that have come into contact with someone who tested positive for Coronavirus; and
started on or after 26 August 2020 where the employee was notified by the NHS of the need to self-isolate prior to surgery.
Where an employee is required to self-isolate prior to surgery, only the days of self-isolation count as a Coronavirus-related absence. Any SSP paid for the day of the surgery and any recover days is not related to Coronavirus and cannot be reclaimed.
Eligible employers can reclaim up to two weeks’ SSP per employee where the employee has been absent from work due to Coronavirus, including where the employee is self-isolating or shielding. The claim can cover more than one period of absence, but where an employee has been absent from work for more than two weeks due to Coronavirus, the claim is capped at two weeks’ SSP – the employer must bear the cost of any further SSP paid.
Claims can be made online via the portal on the Gov.uk website.
Are you trading?
Lockdown restrictions have forced many businesses to close temporarily. Selling goods or clothes on sites such as eBay and Depop offers the opportunity to raise some much needed cash in these difficult times.
What are the associated tax implications and do you need to tell HMRC about it?
Badges of trade
There is a difference between occasionally selling an unwanted item and running an online business. When selling items online, it is necessary to consider whether you are actually trading. The courts have looked to the ‘badges of trade’ to answer this question. These are indicators that taken together provide an overall impression as to whether a trade exists.
The badges of trade are as follows:
profit-seeking motive -- an intention to make a profit indicates trading;
the number of transactions – systematic and repeated transactions indicate trading;
the nature of the asset – an asset that it can only be turned to an advantage by sale suggest trading;
existence of similar trading transactions or interests – transactions that are similar to those of an existing trade may themselves be trading;
changes to the asset –repairing, modifying or improving the asset to make it more easily saleable or saleable at a greater profit indicates trading;
the way the sale was carried out – selling the asset in a way typical of trading organisations suggests trading;
source of finance – selling the asset to repay funds borrowed to purchase it may indicate trading;
interval of time between purchase and sale – a short interval of time between purchase and sale may indicate trading;
method of acquisition – assets acquired by inheritance or as a gift are less likely to suggest trading.
There is no single overriding factor that provides conclusive proof that a person is trading; rather it is a question of forming an overall impression by considering the badges of trade.
Even if the sale of goods amounts to a trade, it not always necessary to tell HMRC about it, or pay tax on any profits.
The trading income allowance removes the need to tell HMRC about trading income where the gross annual income from one or more trades is £1,000 or less for the tax year. If you are self-employed and sell goods on eBay as a side line, it is not possible to use the trading allowance for the side line if income from your main trade is more than £1,000 – you must report both to HMRC.
What to tell HMRC
If your gross income from all trades that you carry out is more than £1,000, you must tell HMRC about your income and expenses on your self-assessment tax return (registering for self-assessment first if you are not already registered).
In working out your profit you can either deduct expenses wholly and exclusively incurred in connection with the trade or, if more beneficial, the £1,000 trading allowance. Deducting the allowance will generally be more beneficial if expenses are less than £1,000. However, as the deduction of the allowance cannot create a loss, if after deducting actual expenses there is a loss, it is better to deduct the actual expenses rather than the allowance so you can benefit from the associated loss relief.
If your profits are high enough, you may also need to pay Class 2 and Class 4 National Insurance contributions. For 2020/21, you will need to pay Class 2 National Insurance if you profits from self-employment are more than £6,475 and Class 4 if your profits are more than £9,500.
Selling your main residence with land
Most people do not expect to pay capital gains tax when they sell their only or main home, particularly if the property has been their only home for their entire time that they owned it. However, what is less well known is that the exemption places a limit on the amount of garden that falls within the main residence exemption. This may catch out those who sell their main residence and have large gardens or land.
What is allowed?
The legislation allows grounds up to the ‘permitted area’ to fall within the main residence exemption. This is set at 0.5 of a hectare (1.24 acres). However, a larger area may be allowed where, 'having regard to the size and character of the dwelling’ this is required for the reasonable enjoyment of the property.
The case of Phillips v HMRC UKFTT 381 TC concerned the sale of the Phillips’ main residence, which had a garden of 0.94 of a hectare. As it was their main residence, the Phillips did not declare the gain to HMRC. HMRC investigated the disposal while checking SDLT returns in March 2017, having discovered that at 0.94 of a hectare, the grounds exceeded the permitted area of 0.5 of a hectare allowed by the legislation.
In considering whether the larger grounds were needed for the reasonable enjoyment of the property, recourse was made to previous decisions. These included the case of Longston v Baker 73 TC415, in which the taxpayer contended that land in excess of 0.5 of a hectare was needed to house and graze his horses. However, the judge noted that it was ‘not objectively required, i.e. necessary, to keep horses at houses in order to enjoy them as a residence’.
In the Phillips’ case, the Tribunal found in their favour, ruling that the land was required for the reasonable enjoyment of the property, which is large and in a rural area. However, as previous decisions show, it is far from a given that the Tribunal will always rule in the taxpayer’s favour when it comes to deciding whether land sold with a house falls within the main residence exemption.
Some caution is required when selling a property that has substantial grounds, particularly if some of the land is used for equestrian purposes. The purchaser will pay SDLT, and where this is at mixed property rather than residential rates, a review of the SDLT returns may trigger an investigation.
Picking up on van benefits
An income tax charge will generally arise where an employee, or a family member, is able to use a work’s van for private use. This will nearly always include home-to-work travel.
From 6 April 2020, the flat-rate van benefit charge crept up once again and currently stands at £3,490 (rising from £3,430 in 2019/20), which equates to an additional £12 a year for a basic rate taxpayer. A lower cash equivalent applies for zero emissions vans.
If an employer also provides the employee with fuel for private use, then a tax charge on the provision of fuel will also arise based on an annual fixed rate. For 2020/21 the flat-rate van fuel benefit charge has been increased from £655 to £666.
The benefit charge applies regardless of the employee’s earnings rate but may be proportionately reduced if the van is only available for part of a tax year, and/or by any payments made by the employee for private use.
For 2020/21, a basic rate taxpayer will pay £698 for the use of a work’s van (£3,490 x 20%), which equates to around £13.40 a week. For a higher rate taxpayer, the cost will be £1,396.
If fuel is also provided for private use, for 2020/21, a basic rate taxpayer will pay additional tax of £133.20 (£666 x 20%), and a higher rate taxpayer will pay £266.40.
Tax is normally collected through a restriction to the employee’s Pay As You Earn (PAYE) tax code.
The trouble with pick-ups
Given their versatility and ‘outdoorsy’ nature, double-cabbed pick-ups are increasingly becoming a popular choice for a family vehicle. So, how does this work for the van benefit-in-kind (BIK) tax charge?
To qualify as a van for BIK purposes, a vehicle must be:
• a mechanically propelled road vehicle; and
• of a construction primarily suited for the conveyance of goods or burden of any description; and
• of a ‘design weight’ which does not exceed 3,500kg; but
• not a motorcycle as defined in the Road Traffic Act 1988, s. 185(1). Broadly, this means that it must have at least four wheels.
The design weight of a vehicle, also known as the ‘manufacturer's plated weight’, is normally shown on a plate attached to the vehicle. What it means is the maximum weight which the vehicle is designed or adapted not to exceed when in normal use and travelling on the road laden.
Human beings are not ‘goods or burden of any description’ so vehicles designed to carry people (such as minibuses) will not be a van for these purposes.
When it comes to double cab pick-ups, former contention has arisen as to whether they should be treated as cars or vans. HMRC now interpret the legislation that defines cars and vans for tax purposes in line with the definitions used for VAT purposes. This means that a double cab pick-up that has a payload of 1 tonne (1,000kg) or more will be accepted as a van for benefits purposes. Payload means gross vehicle weight (or design weight) less unoccupied kerb weight. The 1 tonne rule only applies to double cab pick-ups, not to any other vehicle.
A word of warning though - under an agreement between HMRC and the Society of Motor Manufacturers and Traders (SMMT), a hard top consisting of metal, fibre glass or similar material, with or without windows, is accorded a generic weight of 45kg. Therefore, the addition of a hard top to a double cab pick-up with an ex-works payload of 1,010 kg will convert the vehicle into a car because the net payload is reduced to 965 kg. This in turn, will have the potential knock-on effect of throwing up a much higher BIK tax charge.
Selling a property at below the probate value
The property market is often volatile but throw a Coronavirus pandemic and a stamp duty holiday into the mix and it is easy to see how property prices can vary dramatically, even in a relatively short period.
Where a deceased’s estate includes land, inheritance tax is computed by reference to the probate value. However, this may be substantially different to the amount that is realised by the executors when the land is finally sold. If the sale proceeds are less than the probate value, the estate may have paid inheritance tax on a value that was never realised.
However, the tax legislation provides for a specific inheritance tax relief where there is a loss on the sale of the land.
The relief applies where the appropriate person – usually the executor – sells an interest in land included in the deceased estate within four years of death for a value different to its value at the date of death. Where this is the case, the executor can make a claim for the sale value to be substituted for the value on death.
Harold died in September 2019. His estate included his home which was valued for probate purposes at £800,000. It was subsequently sold for £750,000 in June 2020.
His executor claimed to have the sale price substituted for the probate value, reducing the inheritance tax payable on his estate.
The sting in the tail
A problem can arise if the deceased’s estate includes more than one property. Where relief is claimed, the sale price must be substituted for the probate value for all properties sold within the four-year period. The executors cannot choose the value which gives the best result – the same approach must be applied consistently.
Bill died leaving his family home and three investment properties. The investment properties were valued for probate purposes at, respectively, £200,000, £300,000 and £500,000. All three properties were sold within four years of Bill’s death realising, respectively, £250,000, £290,000 and £540,000.
Despite the fact that the second property sold for less than its probate value, it is not worthwhile making a claim to substitute the sale price for the probate value as this would also apply to properties 1 and 3, increasing the value of the three properties for inheritance tax purposes from £1 million to £1,040,000 – an increase of £40,000.
Annual investment allowance
The annual investment allowance (AIA) was increased from its usual level of £200,000 to £1 million for the two-year period from 1 January 2019 to 31 December 2020. As this period draws to a close, it may be prudent to review planned capital expenditure, particularly where this has been put on hold due to the Covid-19 pandemic. The AIA will revert to £200,000 from 6 April 2021.
What is the AIA?
The AIA is a capital allowance which provides for 100% relief for qualifying expenditure up to the available AIA in the period in which the expenditure was incurred. However, the allowance does not have to be claimed – writing down allowances can be claimed instead for some or all of the expenditure. Once the AIA has been used, relief for any further expenditure is given in the form of writing down allowances.
Incur expenditure in 2020 rather than 2021
The AIA for an accounting period depends on when the period falls. If the period falls wholly within the two-year period from 1 January 2019 to 31 December 2021, the allowance is £1 million. This is proportionately reduced where the accounting period is less than 12 months.
So, where a company prepares accounts to 31 December each year, it will have an AIA of £1 million for the year to 31 December 2020 and an AIA of £200,000 for the year 31 December 2021.
Consequently, if the company is planning to incur qualifying capital expenditure of more than £200,000, it would be beneficial from a tax perspective to incur the expenditure in 2020 rather than 2021 to maximise the immediate relief against profits.
Periods spanning 31 December 2020
Where the accounting period spans 31 December 2020, transitional rules apply to work out the AIA for the period. This is found by applying the formula:
(x/12 x £1,000,000) + (y/12 x £200,000)
• x is the number of months in the accounting period prior to 1 January 2021; and
• y is the number of months in the accounting period after 31 December 2020.
Therefore, if a company prepares its accounts for the year to 31 March 2021, the AIA for that year is £800,000 ((9/12 x £1,000,000) + (3/12 x £200,000)).
However, the transitional rules have a sting in the tail – a cap applies to expenditure incurred in that part of the accounting period falling on or after 1 January 2021.
The cap is found by applying the formula:
y/12 x £200,000
• y is the number of months in the accounting period after 31 December 2020.
This means that where the accounting period is the year to 31 March 2021, the cap is £50,000 (3/12 x £200,000). The cap operates to limit the AIA for expenditure incurred in the period 1 January 2021 to 31 March 2021 to £50,000, even if the expenditure for the year is with the AIA of £800,000.
Thus, to prevent the cap biting and to obtain maximum benefit from the AIA for the year, the bulk of the expenditure should be incurred in 2020 rather than 2021. This can catch the unwary.
Statutory redundancy pay and furloughed employees
Employers may face the difficult decision to make some employees redundant. Legislation was introduced at the end of July to protect furloughed employees.
An employee is entitled to statutory redundancy pay if they have at least two years’ continuous employment when they are made redundant. Where an employee has been furloughed during the Coronavirus pandemic, the time that they are on furlough counts as part of their continuous employment.
The amount of statutory redundancy pay to which an employee is entitled depends on:
• how many complete years they have been employed at the date that they are made redundant;
• their age at the date of redundancy; and
• how much they are paid.
It is paid at the rate of:
• one and a half week’s pay for each full year the employee was aged 41 or older;
• one week’s pay for each full year the employee was 22 or older but younger than 41; and
• half a week’s pay for each full year that the employee was younger than 22.
The number of years’ service that is taken into account in calculating statutory redundancy pay is capped at 20 and is counted back from the date of the redundancy. This works in the employee’s favour as the rate at which statutory redundancy is paid increases with age.
Pay is also capped. For 2020/21, the cap is set at £538 per week, meaning that the maximum statutory redundancy pay that is payable for 2020/21 is £16,140 (£538 x 1.5 x 20).
Pay and furloughed employees
Where an employee has been furloughed and a grant claimed under the Coronavirus Job Retention Scheme, the employee may only be receiving minimum furlough pay of 80% of their pay to a maximum of £2,500 per month, rather than their usual pay.
However, when working out an employee’s statutory redundancy pay, the employee’s pre-furlough pay is used rather than their furlough pay where this is lower. This applies where the calculation date for statutory redundancy pay is on or before 31 October 2020 (the date on which the furlough scheme comes to an end).
Where the employee’s pay varies, statutory redundancy pay is based on average pay over the previous 12 weeks. Where that period includes at least one week where the employee was furloughed, the averaging calculation must be performed over 12 weeks of full pay.
Exploiting the staycation trend – Buying a holiday let
Those looking to buy an investment property may wish to consider a holiday let. Not only do the second and subsequent homes benefit from SDLT savings as a result of the temporary increase in the SDLT threshold, they can also benefit from the favourable tax regime for furnished holiday lettings.
There are special tax rules for properties that qualify as furnished holiday lettings:
• plant and machinery capital allowances can be claimed for furniture, equipment and fixtures;
• capital gains tax reliefs for traders – business asset disposal relief, business asset rollover relief, relief for gifts of business assets --- are available;
• profits count as earnings for pension purposes.
However, to qualify, the let must meet the conditions to qualify as an FHL.
The property must be in the UK or in the EEA, it must be let commercially and it must be let furnished. In addition, it must meet three occupancy conditions:
1. pattern of occupancy condition -- the total of all lettings that exceed 31 days is not more than 155 days in the year;
2. the availability condition -- the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property); and
3. the letting condition –the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year (ignoring lets of more than 31 days unless the let exceeds 31 days as a result of unforeseen circumstances and lets to family or friends).
If the let does not meet the letting condition (which may be the case, for example, if there are further lockdowns) all is not lost. Where the landlord has more than one property let as a FHL, the letting condition is treated as met if the average rate of occupancy for all properties is at least 105 days in the year. To take advantage of this, the landlord must make an averaging election no later than one year from 31 January following the end of the tax year (i.e. by 31 January 2023 in respect of an election for 2020/21).
The second way of qualifying as a FHL in a year where the letting condition has not been met is to make a period of grace election. This route can be taken where there was a genuine intention to meet the condition but this did not happen due to unforeseen circumstances (such as letting cancelled due to lockdowns). To be eligible to make an election, the pattern of occupation and the availability conditions must have been met and, for the first year for which a period of grace election is made, the lettings condition was met in the previous tax year. Where a period of grace election is made, the lettings condition is treated as met. A further period of grace election can be made for the following year if the lettings condition is not met that year. However, if after two successive period of grace elections the letting condition is not met, the property will cease to qualify as a FHL.
Separate FHL business
Lettings that are FHLs are taxed as a separate FHL property business.
The residential SDLT threshold is increased to £500,000 where completion takes place between 8 July 2020 and 31 March 2020. This also benefits those purchasing second and subsequent residential properties as the 3% supplement is added to the residential rates, as reduced. However, the clock is running and completion must take place by 31 March 2021 to benefit from the savings.
Tax relief on business loans
Interest paid on loans used for qualifying businesses purposes should be eligible tax relief and can save up to 45% of the cost of the interest.
The repayment of the capital element of a loan is never deductible for income tax relief purposes. However, interest paid on loans to a business will be a deductible revenue expense, provided that the loan was made ‘wholly and exclusively’ for business purposes. For example, interest paid on a loan taken out to acquire plant and machinery (a capital asset) is a revenue expense and will therefore be allowable for income tax and corporation tax.
The incidental costs of obtaining loan finance are deductible. Given that business owners often borrow funds personally, and then introduce the capital to the business by way of a loan, it is essential that tax relief is not only secured at the outset of the loan, but also maintained throughout the borrowing period. It is often the case that qualifying loans become non-qualifying loans so care is needed.
Broadly, the loan will become non-qualifying if either the capital ceases to be used for a qualifying purpose or is deemed to be repaid.
For example, Bob borrows £100,000, secured on his house, and lends this to his business. The loan is a qualifying loan, so he can initially claim tax relief on the interest payments. Unfortunately, the rules relating to the repayment of qualifying capital mean that each time a capital credit is made to the account it is deemed to be the repayment of qualifying loan. Since the capital value of the loan is reduced every time a payment is made, credits totalling £50,000 per year will mean that all tax relief is lost within just two years. Re-borrowing shortly after making a repayment is not a qualifying purpose so future relief is also lost.
It is also worth noting that a business cannot claim a deduction for notional interest that might have been obtained if money had been invested rather than spent on (for example) repairs.
Double counting is not permitted, so if interest receives relief under the qualifying loan rules, it cannot also be deducted against profits so as to give double tax relief.
Restrictions under cash basis - Tax relief on loan interest is restricted where the ‘cash basis’ is used by a business to calculate taxable profits. Broadly, businesses using the cash basis are taxed on the basis of the cash that passes through their books, rather than being asked to undertake complex and time-consuming accruals calculations.
Under the cash basis, bank and loan interest costs and financing costs, which include bank loan arrangement fees, are allowed up to an annual amount of £500. If a business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated. Businesses should review annual business interest costs - if it is anticipated that these costs will be more than £500, it may be more appropriate for the business to opt out of the cash basis and obtain tax relief for all the business-related financing costs.
Private use of assets - Where a loan is used to buy an asset that is partly used for business and partly for private purposes, only the business proportion of the interest is generally tax deductible. Commonly cars and other vehicles used in a business fall into this category. Note however, that a deduction for finance costs is not allowable where a fixed rate mileage deduction is claimed.
Example - Bob takes out a loan to buy a car and calculates that he uses it in the business for 40% of the time. The interest on the loan he took out to buy the car is £500 during 2020/21. He can therefore deduct £200 (£500 x 40%) for loan interest in calculating his trading profits.
Finally, interest paid on loans used to fund the business owner’s overdrawn current or capital account is generally not deductible for tax purposes.
The rent-a-room scheme allows those with a spare room in their home to let it out furnished and to receive rental income of £7,500 tax-free each year without the need to declare it to HMRC. Where more than one person receives the income, each can receive £3,750 tax-free. The limits are not reduced if the accommodation is let for less than 12 months.
The rent-a-room scheme can be used by anyone who lets a furnished room in their own to a lodger. They do no need to own their own home – it can also apply if they rent (but they should check with their landlord whether their lease allows this). The rent-a-room scheme can also be used by those running a guest-house or a bed-and-breakfast establishment and provide services, such as meals and cleaning, as well as accommodation.
The scheme is not available in relation to accommodation which is not in the individual’s main home or which is let unfurnished.
Where the rental receipts are £7,500 or less (or £3,750 or less where more than one person benefits from the rental income), the exemption is automatic. There is no need to tell HMRC about the rental income. Rental receipts are the rental income before deducting expenses, plus any charges made for services such as cleaning or meals.
Using the scheme where rental income exceeds the threshold
The rent-a-room scheme can also be used where the rental receipts exceeds the rent-a-room threshold (£7,500 or £3,750 as appropriate). Where this is a case, the taxable amount is simply the amount by which the rental receipts exceed the rent-a-room threshold. This approach will be beneficial if the rent-a-room threshold is more than actual expenses. However, where using actual figures will produce a loss, it is not beneficial to claim rent-a-room relief as this cannot create a loss and the benefit of the loss will be lost.
Where rental receipts are more than the rent-a-room threshold, a tax return must be completed. If the relief is to be claimed, this can be done by ticking the relevant box in the return.
The election can be made each year, depending on whether it is beneficial to do so.
Mary lets out her spare room to a lodger for £100 a week, earning her £5,200 a year.
As the receipts are less than £7,500, she takes advantage of the automatic exemption for rent-a-room relief. She does not have to declare the income to HMRC.
Polly lets out a room in her home for £10,000 a year. She incurs expenses of £1,000 a year.
If she does not claim rent-a-room relief, she will pay tax on her profit of £9,000. However, by claiming rent-a-room relief, she is only taxed to the extent that her rental income exceeds £7,500. She is therefore able to reduce her taxable profit from £9,000 to £2,500 by claiming the relief.
Winding up a business
The decision of how and when to cease a business is usually prompted by a combination of three main factors - market conditions, market forces, and life changes. Unfortunately, many businesses will have been adversely affected by the coronavirus outbreak and some will now be facing closure.
Under the self-assessment regime, the final tax year in which a business is taxed is the tax year in which it actually ceases to trade, so if the business stops trading on 30 September 2020, the final year of assessment will be 2020/21. The tax bill for the year before that is based on the accounting year that ended in the tax year before trading stopped (so if accounts are made up to 30 June each year, the tax bill for 2019/20 is based on profits for the year that ended on 30 June 2019). Profits (if there are any) from the accounting date in the previous tax year (30 June 2019 in this example) to the date on which the business finally stops (30 September 2020), are then charged to tax for the tax year in which the cessation occurs (2020/21). Therefore, that final period may be more or less than 12 months long (15 months in this example – 1 July 2019 to 30 September 2020).
Example - Jack has been trading for many years and makes his accounts up to 30 September each year. He narrows his options to stop trading to one of two dates:
• 30 June 2020
• 31 December 2020
Jack’s annual tax bill is calculated as normal up to and including the 2019/20 tax year (based on accounts for the year ending on 30 September 2019). His final tax bill is for 2020/21 as this is the year he ceases to trade. So, depending on the date he chooses to stop trading, his final tax bill is based on profits for:
• 9 months from 1 October 2019 to 30 June 2020, or
* 15 months from 1 October 2019 to 31 December 2020
If Jack had ‘overlap profits’ when he started his business, and he hasn’t used them during the lifetime of his business (for example, on a change of accounting date), he can claim relief for them against his final year’s tax bill.
Terminal loss relief - A loss in the last 12 months of trading can usually be offset against trading income of the tax year in which the business permanently ceases and the three previous years. Terminal loss relief is given as far as possible against the profits of later years before earlier years, even if the result is that personal tax allowances are wasted. So, if there is a terminal loss in 2020/21, it is set first against income from any other sources in 2020/21 (for example, against employment income). If any loss is left over after it has been set against other income, the balance is set against any income in 2019/20, then 2018/19, and finally against 2017/18. HMRC will issue a refund of tax overpaid or set the refund against any outstanding tax bills.
The time limit for making a claim for terminal loss relief is four years from the end of the tax year in which the loss arises.
Deregistering for taxes - HMRC must be notified when a business ceases. This may include deregistering for Class 2 NICs and VAT.
For VAT-registered businesses, deregistration must be undertaken within 30 days of ‘ceasing to make supplies’ by submitting form VAT 7 (included in the HMRC VAT Notice 700/11: Cancelling your registration) to HMRC. Once HMRC are satisfied that registration should be cancelled, they will confirm the effective date and issue a final VAT return. The business will need to account for VAT on stock and certain assets on hand at the close of business on the day the registration is cancelled.
Make the most of your spare time
In the current economic climate, many people are looking for ways to increase household income. The trading allowance may be particularly useful to employees who also have small part time earnings from self-employment as it enables them to receive tax-free income of up to £1,000 with no requirement to report it to HMRC.
The allowance has already proved very popular with individuals with casual or small part time earnings from self-employment, for example, people working in the ‘gig economy’ (Deliveroo workers and such like), or small scale self-employment such as online selling (maybe via eBay or similar). In broad terms, it means that:
• individuals with trading income of £1,000 or less in a tax year will not need to declare or pay tax on that income; and
• individuals with trading income of more than £1,000 can elect to calculate their profits by deducting the allowance from their income, instead of the actual allowable expenses.
There are a few practical implications of the allowance to note. For example, where actual expenses are less than £1,000, deducting the trading allowance will be beneficial, whereas if actual expenses are more than £1,000, deducting these expenses will give a lower profit figure, and ultimately a lower tax bill. In addition, where income is less than £1,000, but the individual makes a loss, an election for the allowance not to apply may be made. In this case, the loss in is dealt with in the usual way with the loss being carried forward against future property profit. The details will need to be declared on the tax return. This in turn, means that loss relief is not wasted.
Example – Income less than £1,000
Peter enjoys cycling and does all his own bike repairs. In his spare time he services bikes for friends and neighbours for a small fee. During the year 2019/20 he received income of £600 from this source, and his expenditure on bike parts was £150. As Peter’s trading income is less than £1,000, he does not need to report it to HMRC nor does he need to pay tax or national insurance contributions (NICs) on it.
Example – Income exceeding £1,000
Jane enjoys baking and makes celebration cakes to order in her spare time. In 2019/20, her income from cake sales was £1,600 and she incurred expenses of £400. As Jane’s expenditure is less than £1,000, she will be better off claiming the trading allowance. Her taxable profit will be £600 (£1,600 less the trading allowance of £1,000).
The trading allowance is available even if the individual has only traded for part of the tax year. For example, if trade started in February 2021, the individual would still be able to claim the full amount of the trading allowance of £1,000 as if they had been trading for the entire 2020/21 tax year.
Although the trading allowance may work well for many small scale traders, care must be taken where an individual’s main source of income is from self-employment and their secondary income is from a completely separate small scale business. HMRC will combine income from all trading and casual activities when considering whether the trading allowance applies. In this type of situation, where the allowance is claimed, the individual will not be able to claim for any expenditure, regardless of how many businesses they have and how much are the total business expenses.
Student loan repayments
A final point worth noting is that where an individual is claiming the trading allowance and they are also repaying a student loan, then the income used to calculate their student loan repayments will be the amount after the trading allowance has been deducted.
Reasonable excuse – does coronavirus count?
HMRC may allow an appeal against a penalty if the taxpayer has a ‘reasonable excuse’ for why, say, they filed a return late or paid their tax late.
A ‘reasonable excuse’ is something that prevented a taxpayer from meeting a tax obligation despite the fact that they took reasonable care. HMRC take a hard line as regards what they constitute as a ‘reasonable excuse’; providing the following examples of ‘acceptable’ reasonable excuses:
• the taxpayer’s partner or another close relative died shortly before the tax return or payment deadline;
• an unexpected stay in hospital that prevented the taxpayer from dealing with their tax affairs;
• a life threatening illness;
• the failure of a computer or software just before or while the taxpayer was preparing their tax return;
• service issues with HMRC;
• a fire, flood or theft which prevented the completion of a tax return;
• postal delays which could not have been predicted; or
• delays relating to a disability.
By contrast, HMRC cite the following example of excuses that they will not accept as a valid reason for failing to meet a tax obligation:
• relying on someone else to send the return and they failed to send it;
• a cheque or payment bounced due to insufficient funds;
• the taxpayer found HMRC’s online system too complicated;
• the taxpayer did not receive a reminder from HMRC; or
• the taxpayer made a mistake on their return.
Impact of coronavirus
HMRC have confirmed that they will consider coronavirus as a reasonable excuse. Where claiming this, the taxpayer should explain in their appeal how they were affected by coronavirus. As a rule of thumb, HMRC are more likely to accept it as a reasonable excuse where the virus led to one of the circumstances listed above as ‘acceptable reasonable excuses’. Thus the contention that the taxpayer had a reasonable excuse for failing to meet a tax obligation would be strong if a partner or close relative (such as a parent) died of Coronavirus around the tax deadline, the taxpayer was seriously ill with the virus or was in hospital unexpectedly.
Where the taxpayer appeals on the grounds that they had a reasonable excuse for failing to file a return or pay a tax bill, they should file the return or pay the bill as soon as they are able after the reason for the reasonable excuse has been resolved.
Student loan repayments: Increased thresholds from April 2021
Repayment of student loans is a shared responsibility between the Student Loans Company (SLC) and HMRC. Employers have an obligation to deduct student loan repayments in certain circumstances and to account for such payments ‘in like manner as income tax payable under the Taxes Acts’.
There are two plan types for student loan repayments, which have different repayment thresholds. From April 2021, the thresholds are as follows:
• plan 1 with a 2021-22 threshold of £19,895 (£1,658 a month or £382 per week) rising from £19,390 in 2020-21); and
• plan 2 with a 2021-22 threshold of £27,295 (£2,275 a month or £525 per week) rising from £26,575 in 2020-21).
Plan 1 loans are pre-September 2012 Income Contingent Student Loans and repayments will start when the £19,895 threshold is reached. Loans taken out post-September 2012 in England and Wales become eligible for repayment when the higher threshold of £27,295 is reached. Previously plan 2 loans have been repaid outside of the payroll directly to the SLC, but from April 2016 they are to be calculated and repaid via deduction from an employer’s payroll. This means that employers and payroll software must be capable of coping with both types of plans.
From 6 April 2021 HMRC are introducing a new plan type for Scottish Student Loans (SSL) known as Plan 4. The Plan 4 threshold will be £25,000. Student Loan deductions will continue to be calculated at 9% on earnings above the Plan 1, Plan 2 or Plan 4 threshold.
Post-graduate loans - Repayment of postgraduate loans (PGL) via PAYE commenced from April 2019. Broadly, if an individual has a PGL, HMRC will send their employer a Postgraduate start notice (PGL1) to ask them to start taking PGL deductions. Individuals may also be liable to repay a Student Loan Plan Type 1 or 2 concurrently with PGL. HMRC will let their employer know this by continuing to send the normal Student Loan start (SL1) and Student Loan stop (SL2) notices as well as PGL1s and PGL2s.
The Postgraduate Loan threshold will remain at its current level of £21,000 for 2021-22. Earnings above £21,000 will continue to be calculated at 6%.
Repayment - Broadly, an employer must start making student loan deductions from the next available payday using the correct plan type if any of the following apply:
• a new employee’s P45 shows deductions should continue – the employer will need to ascertain which plan type the employee has;
• a new employee confirms they are repaying a student loan – again, the employer will need to confirm the plan type;
• a new employee completes a starter checklist showing they have a student loan - the checklist will tell the employer which plan type to use; or
• HMRC issues form SL1 (Start Notice), which will tell the employer which plan type to use.
Employers are not responsible for handling employees’ student loan queries – the employee must contact SLC for this (https://www.gov.uk/government/organisations/student-loans-company).
While the amount you pay is calculated based on your pre-tax income above £26,575 (£27,295 from April 2021), the money is taken after you've paid tax.
Deductions are rounded down to the nearest pound. Deductions are non-cumulative, and so employers can ignore the question of amounts already deducted by a former employer. HMRC provide tables to assist employers in calculating the deduction each pay day, which (because of rounding) may not be exactly 1/52 of the annual amount.
If an employee has two jobs, the employer does not need to be concerned with the employee’s other income, but should calculate the deduction based only on amounts paid by him. However, if the employee has two employments with the same employer, these should be aggregated for student loan purposes if they are aggregated for NIC purposes.
Employers are required to collect student loan repayments through the PAYE system by making deductions of 9% from an employee’s pay to the extent that earnings exceed the relevant threshold for each plan type, each year (see above).
Each pay day is looked at separately, and so repayments may vary according to how much the employee has been paid in that week or month. If income falls below the starting limit for that week/month, the employer should not make a deduction.
Taxpayers who make repayments through PAYE can swap to repaying by direct debit in the last 23 months of their loan if they so wish. SLC will normally contact individuals shortly before this time to offer this option. This payment method enables account holders to choose a suitable monthly repayment date and ensures that they do not repay too much.
If an employee makes additional student loan repayments direct to SLC, they will have no effect on the size of the repayments made through the payroll – the employer will continue to deduct 9% of earnings above the threshold. The employee will, of course, pay off the loan more quickly.
An informal company wind-up
Capital or income
Usually, when a company distributes its profits to its shareholders they are liable to income tax on the payments they receive. However, a special rule means that distributions made in the course of winding up a company are taxed as capital instead. This provides tax-saving opportunities.
Example. Owen and Jane are equal shareholders of Acom Ltd. Both are higher rate taxpayers. They decide to close the business and appoint a liquidator to wind up the company. All distributions of profit left in Acom from this point are capital meaning that Owen and Jane can deduct any unused part of their capital gains tax (CGT) annual exemption (£12,000 for 2019/20) and pay tax on the balance at a maximum of 20%. Assuming Acom has £98,000 to distribute in total, Owen and Jane would each be liable to CGT on £49,000. If their CGT exemptions are available in full they would each have to pay tax of up to £7,400 (£49,000 - £12,000) x 20%) but it would be less if they were entitled to entrepreneurs’ relief (ER).
By comparison, if Acom distributed its profits before starting the winding up process, Owen and Jane would each be liable to income tax of at least £15,925 (£49,000 x 32.5%). By comparison the CGT bill is less than half that, but there’s still room for further tax saving.
Winding up costs
Usually, the tax advantage of capital distributions is only available when you appoint a liquidator to wind up your company. The trouble is a liquidator’s fees can be high and, depending on the value of your company, might significantly eat into or even outweigh the tax saving achieved.
Rather than paying a liquidator to wind up your company you could do it yourself informally by notifying Companies House of your intention. However, CGT treatment will only apply if the amounts available to distribute are no more than £25,000 - any more than that and the whole of any distribution is taxed as income.
Reduce the distributable amount
If your company’s net value is more than £25,000 you’ll need to reduce it before you can use the informal winding up tax break. That will require you to make distributions from your company on which you’ll have to pay income tax. Despite this you can still save on tax and costs. You’ll need to crunch the numbers to see if it’s worthwhile.
Example. Shaun is a higher rate taxpayer and the only shareholder of Bcom Ltd. It has distributable reserves of £35,000. Shaun could formally liquidate Bcom so that what he receives, after paying the liquidator’s fees of, say, £3,000, is liable to CGT. This would leave him with £28,000 after tax. If instead he paid a dividend of £10,000 and then applied to Companies House to dissolve the company, he would net £29,150. Not a massive tax saving but Shaun also avoids the time and red tape that goes with a formal liquidation.
Reduce the value of your company to £25,000 by making distributions to shareholders and informally winding up the company. This will save the cost of a liquidator’s fees. Plus, each shareholder can use their annual capital gains tax exemption to reduce the amount on which they pay tax on their share of the final £25,000 distributed from the company.
Unused residential finance costs
Since 2017/18, the amount of income tax relief that landlords with residential properties have been able to claim on residential property finance costs (e.g. mortgage interest) has gradually been restricted such that for the year 2020/21 the restriction is now given as a tax reducer at the basic rate of tax (i.e. 20%). Loans that are wholly for commercial properties, land and property dealing or development businesses or properties used for a furnished holiday letting business are not affected.
Landlords affected by this restriction may have noticed a box on the 2020 tax return as being Box 45 - Unused residential finance costs brought forward.
Completion of this box records the amount of interest that has not been utilised in one year to be carried forward and to the finance costs figure of the following year. The tax reduction for that following year is then calculated using both the amount brought forward and the current year's finance costs. The tax reduction applies to each property business separately such that any ‘excess’ tax reduction on an overseas property business cannot be used against a UK property business or share of partnership property business or vice versa. If the property has made a loss then no tax deduction will be given either and the unused finance cost amount for that year will be carried forward and utilised in the following year's calculations. The tax reduction cannot be used to create a tax refund.
Calculating the amount of restriction to be applied can be complicated in some circumstances. The amount to claim is the lower of the finance costs incurred, the profits of the property business (less losses brought forward) and the taxpayer’s total taxable income (after deduction of the personal allowance but ignoring savings and dividend income). This restriction may result in an amount being disallowed, therefore the amount not used is carried forward to be utilised in any following year and recorded in box 45.
Tax year 2019 - 2020
Employment before tax = £40,000
Rental income = £21,000
Other expenses = £(8,000)
Property profits = £13,000
Finance costs = £14,000 (£3,500 allowable against rental income - 25%)
Taxable income = £49,500 (£40,000 + £13,000 - £3,500)
Income Tax calculation:
£49,500 less personal allowance (£12,500) = £37,000
Tax due: (£37,000 x 20%) £7,400
Finance cost tax reduction calculated
on property profits (£9,500 x 20%) £ (900)
Final Income Tax = £5,500
The tax reduction is calculated as 20% of the lower of:
- finance costs = £14,000
- property profits = £9,500
- adjusted total income (exceeding personal allowance) = £49,500
The lowest figure is property profits, so £9,500 x 20% = £900 tax reduction. £1,000 finance costs (£10,500 – £9,500) that have not been used are shown in box 45 and carried forward being added to the finance costs for that year and then the total amount restricted accordingly.
If a landlord has brought forward amounts of restricted finance costs from earlier years and has receipts from their property business of £1,000 or less then they have the choice of either claiming expenses and using the reducer calculation in the normal way or claiming the Property Income Allowance (PIM) tax exemption. If they choose the PIM route then the restricted finance costs figure is carried forward to be used in any future years’ income tax liability calculation. Individuals can decide on a year by year basis which approach to take.
The ability to carry forward unused finance costs will be beneficial to those landlords with a temporary reduction in property income possibly because a property is vacant for a period or a short-term increase in costs (e.g. due to refurbishment).
Make the most of the dividend allowance
The 2020/21 tax year comes to an end on 5 April 2021. The last few months of the year are a good time to undertake a review and to ensure that allowance for the year is not wasted.
Nature of the dividend allowance
One allowance that is available to all taxpayers, regardless of the rate at which they pay tax, is the dividend allowance. The allowance is set £2,000 for 2020/21.
Although called an ‘allowance’, the dividend allowance is more of a nil rate band. Dividends sheltered by the allowance are taxed at a zero rate of tax. However, the dividends covered by the allowance count towards band earnings.
Once the dividend allowance and any remaining personal allowance have been used up, any further dividend income (treated as the top slice of income) is taxed at the relevant dividend tax rate:
7.5 for dividends falling within the basic rate band;
32.5% for dividends falling within the higher rate band; and
38.1% for dividends falling within the additional rate band.
Personal and family companies
If you have a personal company and have sufficient retained profits, consider paying a dividend if you have not already done so to mop up your dividend allowance and any unused personal allowance. Although dividends are paid from profits which have already suffered corporation tax, the availability of the dividend allowance allows retained profits to be extracted without incurring any additional tax. A further benefit is that there is no National Insurance to pay on dividends.
In a family company scenario, making family members shareholders provides scope for family members to utilise their dividend allowances, allowing profits to be extracted in a tax-efficient manner.
There are some points to watch. Dividends can only be paid from retained profits and must be paid in proportion to shareholdings. However, the use of an alphabet share structure whereby each family member has a different class of shares (e.g. A shares for one person, B shares for another, and so on) provides the flexibility to declare different dividends for each person, depending on their available allowances and their marginal rate of tax.
Mr Wilson is a director of W Ltd. His wife and two adult daughters, Emily and Evie, are both shareholders. The shareholdings are as follows
Mr Wilson – 100 A Ordinary shares;
Mrs Wilson – 100 B Ordinary shares;
Emily Wilson – 100 C Ordinary shares
Evie Wilson – 100 D Ordinary shares.
Mr Wilson is a higher rate taxpayer. None of the family has used their dividend allowance for 2020/21.
Mr Wilson wishes to declare a dividend of £8,000 for 2020/21.
If he declares a dividend £80 per share for A ordinary shares only, he will receive a dividend of £8,000, of which the first £2,000 will be covered by the dividend allowance of £2,000. The remaining £6,000 will be taxed at the higher dividend rate of 32.5%, giving rise to a tax bill of £1,950.
However, if instead, he declares a dividend of £20 per share for A, B C and D Ordinary Shares, each member of the family will receive a dividend of £2,000, which will be sheltered by their dividend allowance and received tax-free. By taking this route, the family’s tax bill is reduced by £1,950.
Getting ready for off-payroll working
Over the past ten years, various steps have been taken to improve the effectiveness of the off-payroll (IR35) rules, with limited success. In April 2017 the Government reformed the way in which the rules operate in the public sector by shifting responsibility for determining employment status from an individual contractor to the organisation engaging them. These rules are being extended to medium and large organisations in all sectors of the economy from 6 April 2021 and businesses need to prepare ahead of this date to ensure they are able to meet compliance obligations.
Many organisations will have already started to prepare. However, given the difficulties being faced due to the coronavirus, many businesses will have had to prioritise other matters. With this in mind, HMRC have recently re-launched their package of customer education and support on this subject, hoping that it will help motivate businesses to start preparing.
Businesses that may be affected by the reforms are:
• medium or large sized non-public sector organisations which engage contractors who work through their own intermediary
• employment agencies which supplies contractors who work through their own intermediary
• contractors who provide services through their own limited company or other intermediary.
Preparation work may include the following:
• Looking at the current workforce (including those engaged through agencies and other intermediaries) to identify those individuals who are supplying their services through personal service companies
• Determining if the off-payroll rules apply for any contracts that will extend beyond April 2021. The CEST tool can be used to do this (see below).
• Communicating with contractors about whether the off-payroll rules apply to their role.
• Implement processes to determine if the off-payroll rules apply to future engagements. These might include who in an organisation should make a determination and how payments will be made to contractors within the off-payroll rules.
HMRC are running a series of overview webinars, which also include an opportunity to ask questions using an online chat tool. The following webinars are currently available:
• Overview of the off-payroll working rules –an end-to-end overview of the reform
• Overview of the off-payroll working rules for contractors – providing contractors with an overview of the reform and an outline of what they need to do to prepare for April 2021, including the practical accounting requirements for them and their limited company or other intermediary
• Making the determination, disagreements and record keeping – covering HMRC’s view on requirements to make a determination and what constitutes a disagreement. Some aspects of this webinar may be relevant to contractors.
Full details of the webinars, including links to the registration pages, can be found at https://www.gov.uk/guidance/help-and-support-for-off-payroll-working.
HMRC will also be running some topic-based webinars for those who already have an understanding of the basics of the off-payroll working rules. Further information on these webinars can be found at https://www.gov.uk/guidance/help-and-support-for-off-payrollworking
HMRC say they will also be running workshops and education calls for small groups of customers that will be delivered virtually, providing a comprehensive overview of what the changes mean.
The HMRC Employment Status Manual (ESM) has been updated for the new rules and contains detailed guidance and clear explanations of how the rules should be applied. Some pages may be relevant for contractors.
The Check Employment Status for Tax tool (CEST) is already available for organisations and contractors to consider the appropriate employment status for tax for contracts running beyond 6 April 2021.
HMRC have confirmed that they will stand by the results given by the CEST tool, provided it is used in accordance with their guidance and the information entered is accurate, and remains accurate. This is regardless of when the tool is used ahead of April 2021, and means employers can already use the tool for engagements that start in April 2021 onwards.