Gifting property to the children
No one likes the idea of the taxman taking a chunk of their estate when they die, particularly if it will be necessary to sell a much-loved property to pay the inheritance (IHT) bill. The introduction of the residence nil rate band (RNRB -set at £175,000) means that a couple can now leave combined estates worth £1 million free of inheritance tax where this includes a residence valued at £350,000 or more, which is left to direct descendants. However, the RNRB is reduced where a person’s estate is worth more than £2 million and lost where the value of the estate exceeds £2.35 million.
If it looks likely that there may be IHT to pay, the idea of taking steps to reduce this is attractive. Where property is given away more than seven years before the donor’s death, it escapes IHT. Giving property to the children may, at first sight, be an attractive option, but there are traps to be aware of.
Giving away the main residence
If the main residence is given away, there will be no capital gains tax to pay as long as the main residence exemption applies in full. However, if the property is retained by the children as an investment property, the capital gains tax clock will start to run from the date that they acquire it. By contrast, if the property is gifted at death, there will be a capital gains tax uplift to the value at death, but there may be some inheritance tax to pay (potentially at 40%).
Problems can arise if the parents give the property to the children but continue to live in it. There are two sets of anti-avoidance rules that can apply – the gifts with reservation rules (GWR) and the pre-owned asset (POA) rules.
The GWR rules apply where a donor gives an asset away but continues to derive benefit from it. An example would be parents who transferred their home to their children but continued to live in it. The rules effectively ignore the transfer for inheritance tax purposes, such that it forms part of the death estate.
The POA impose an income tax charge on the previous owner if they give a property away but continue to live in it, based on a notional market rent of the property.
Seeking to take an investment property outside of the death estate can trigger a capital gains tax charge where a property is given to a child, even if no money changes hands. The child is a connected person and the property is deemed to be disposed at market value. This may trigger a capital gains tax bill of 18% or 28% of the gain (to the extent it exceeds the annual exemption), which must be paid within 30 days (but with no proceeds from which to pay the tax).
Giving away property in an attempt to save inheritance tax can be very complicated and it is easy to get it wrong; professional advice should be taken in advance.
EIS or VCT - which is right for you?
You’ve come into some money and want to invest in a tax-advantaged scheme, either an enterprise investment scheme (EIS) or a venture capital trust (VCT). The tax breaks for these are similar but with important differences. What are they?
Investing in companies always carries a risk and in enterprise investment scheme (EIS) companies or venture capital trusts (VCT) even more so. If you’re new to these types of investment or are unsure about putting money into higher risk schemes, we recommend that before you take the plunge you speak to a financial advisor. It’s worth comparing the different tax breaks for EISs and VCTs as they might help you decide where to put your money.
Income tax relief
Both EISs and VCTs offer the same rate of income tax relief which is given in the same way. The tax relief is equal to 30% of the amount you invest (this can be proportionately reduced if the company or fund you invest in uses some of the money for a non-qualifying purpose). The tax relief is given as a reduction of your tax bill. This means it doesn’t matter what rate of income tax you pay the amount of tax relief you’ll get is the same. For example, if you invest £20,000 in an EIS or VCT your tax bill is reduced by £6,000 (£20,000 x 30%).
The main differences in EIS and VCT income tax relief are:
you can carry back EIS tax relief from the year of investment to the previous one. Among other advantages this accelerates the tax saving
the tax relief is clawed back if you sell or transfer an EIS investment (unless it’s to your spouse or civil partner) within three years of making it. The claw-back period is five years for VCTs
dividends (distributions of income) from VCTs are tax exempt but those from EIS companies aren’t; they are taxable under the normal rules for dividends.
Capital gains tax deferral
If you have a capital gains tax (CGT) bill for the year of investment, or the year before, EIS investments offer an incentive VCTs don’t. You can claim deferral of the capital gain until you sell or transfer (to someone other than your spouse or civil partner) the investment. For example, if you made a taxable capital gain in 2020/21, you could defer when it’s taxed by investing in an EIS company on or before 5 April 2022 and using the carry-back rule we mentioned earlier to claim the tax relief for 2020/21.
Investment gains and losses
If you sell an EIS or VCT investment for more than you paid for it the gain is tax exempt. For EIS, you must own the investment for at least three years before the exemption applies. If you make a loss from the sale of an EIS investment you can use it to reduce the taxable gains made from other sales or transfers of the same or later years, e.g. from selling an investment property. Conversely, you cannot claim tax relief for losses made from the sale or transfer of a VCT investment.
As a rule of thumb, EIS investments tend to be riskier than those in VCTs but successful EIS investments usually produce greater income or gains. However, there’s no certainty of success.
Take your pick . EIS investments have the added incentive of CGT deferral relief. However, if you’re looking for a tax-free income stream VCTs provide it whereas EISs don’t.
While the rate of income tax relief is the same, EIS relief can also be used to reduce your tax bill for the year of investment or the previous year. EIS investments also allow you to indefinitely defer capital gains tax liabilities. All income and capital gains from VCT investments are tax exempt whereas income from EIS investments is taxable.
Making use of a spouse’s allowable losses
Spouses and civil partners benefit from special rules for capital gains tax purposes which allow them to transfer assets between them at a value that gives rise to neither a gain nor a loss. The transferee spouse/civil partner effectively takes on the transferor’s base cost. This can be very useful from a tax planning perspective to maximise available annual exempt amounts and capital losses.
Capital losses are automatically set against gains of the same tax year before taking account of the annual exempt amount. To the extent that they are not set against capital gains in this way, they are carried forward for relief against future gains.
While it is not possible to transfer capital losses to a spouse or civil partner to enable them to make use of those losses, it is possible to utilise the no gain/no loss rule to transfer an asset, or share of an asset, to a spouse or civil partner with losses prior to disposal, so that they can dispose of the asset (or a share in the asset) to a third party, making use of their unrelieved capital losses in the process.
This is illustrated by the following simple example.
Dorothy and David have been married for a number of years.
In June 2020, Dorothy sold some shares, realising a capital loss of £40,000. She had no other disposals in 2020/21.
David is planning to sell a property, which is in sole name. He purchased the property for £200,000 and has received an offer for £285,000. Costs of sale are £4,250, meaning the sale will realise a net gain of £80,750 (£285,000 - £200,000 – 4,250). It is expected that the sale will complete in December 2021.
Both Dorothy and David are higher rate taxpayers.
Although Dorothy cannot transfer her losses to David, David can transfer a share in the property to Dorothy prior to sale.
David decides to transfer 76% of the property to Dorothy. Her base cost for her 76% share is £152,000.
On the subsequent sale, Dorothy will realise a gain of £61,370 and David will realise a gain of £19,380.
Dorothy can set her capital losses of £40,000 and her annual exempt amount of £12,300 against her share of the gain, leaving her with a chargeable gain of £9,070 (£61,370 - £40,000 - £12,300) on which tax of £2,539.60 is payable.
David can set his annual exempt amount of £12,300 against his share of the gain, leaving a chargeable gain of £7,080 on which tax of £1,928.40 is payable.
By making the transfer and accessing Dorothy’s allowable losses and annual exempt amount, the capital gains tax paid in total is £4,522, rather than the £19,166 ((£80,750 - £12,300) @ 28%) that would have been payable had David simply sold the property while in his sole ownership.
Extracting profits from a property company
Running a property business through a limited company rather than as an unincorporated business may be an attractive proposition; at 19% the rate of corporation tax is lower than the basic rate of income tax and interest and financing costs are fully deductible in computing taxable profits. However, the tax bill on the company is not the end of the story – if profits are required outside the company, they will need to be extracted, and this may come at a further tax cost.
Take a salary
If your personal allowance has not been utilised elsewhere, it can be tax efficient to take a small salary. As long as the salary is at least equal to the lower earnings limit (set at £6,240 for 2021/22), paying a salary will ensure that the year is a qualifying year for state pension and contributory benefits purposes.
The optimal salary will depend on whether the employment allowance is available to shelter employer’s National Insurance contributions. Where the allowance is not available, as will be the case if the company has one only one employee who is also a director, the optimal salary is equal to the primary threshold of £9,568. If the employment allowance is available, it is tax efficient to pay a higher salary equal to the personal allowance of £12,570.
Once a salary at the optimal level has been paid, it is more tax efficient to take further profits as dividends, than to pay a higher salary. The dividends will be tax-free to the extent that they are covered by any unused personal allowance and the dividend allowance, which is set at £2,000 for 2021/22. Once the allowances have been used up, dividends are taxed at 7.5%, 32.5% and 38.1% where they fall, respectively, in the basic rate, higher rate and additional rate bands.
There are some rules which govern the payment of dividends. They can only be paid out of retained profits (on which corporation tax has already been paid) and must be paid in accordance with shareholdings (although the use of an alphabet share structure allows for flexibility).
Other options for extracting profits from the property company include the provision of benefits in kind, which can be tax efficient where the benefit is exempt from tax and National Insurance, the payment of rent if the business is run from home and making pension contributions on the director’s behalf.
Amend your PSA for Covid-19 related benefits
A PAYE Settlement Agreement (PSA) enables an employer to meet the tax on certain benefits and expenses on the employee’s behalf. This can be useful to preserve the goodwill nature of a benefit.
Not all benefits are suitable for inclusion within a PSA. To qualify a benefit must fall into one of the following categories:
the benefit is minor;
the benefit is provided irregularly; or
the benefit is provided in circumstances where it is impractical to apply PAYE or to apportion the value of a shared benefit.
A PSA can be used, for example, to meet the tax liability on the provision of an annual party that falls outside the associated tax exemption. Benefits that are exempt from tax do not need to be included.
The tax and National Insurance payable on items included within a PSA for 2020/21 must be paid by 22 October 2021 where payment is made electronically, and by 19 October 2021 otherwise.
An enduring agreement - Once as PSA has been set up, it remains in place until cancelled or amended by the employer or by HMRC. Existing PSAs should be reviewed each year to ensure that they remain valid.
Amending the PSA
If a PSA needs to be altered, this must be done by 6 July following the end of the tax year to which it relates.
The Covid-19 pandemic changed the way in which employees worked and may have changed the mix of benefits that were provided. Where a PSA needs to be amended in light to take account of Coronavirus-related benefits provided in the 2020/21 tax year, this must be done by 6 July 2021.
Normally, HMRC would issue a new P626 (the PSA) when a PSA is amended. However, where amendments to the PSA relate solely to Covid-19 changes, rather than issuing a new P626, they will instead issue an appendix to the existing PSA.
Covid-19 exemptions - To remove the tax charge that would otherwise arise, a number of limited-time exemptions have been introduced in respect of Coronavirus-related benefits. These include an exemption for the provision of Coronavirus antigen tests, and also any reimbursement of the cost of the test where this is initially met by the employee.
Where employees have worked at home during the Covid-19 pandemic and have bought equipment to enable them to do so, any reimbursement by the employer is also tax-free, as long as the provision would fall within the exemption for accommodation, services and supplies if provided directly by the employer.
Coronavirus-related benefits that fall within the time-limited exemptions do not need to be included within a PSA. However, consideration may be given to adding any non-exempt benefits made available to employees during the pandemic to the PSA (for example, antibody tests), as long as they meet the qualifying conditions for inclusion.
A new PSA - If a PSA is not already in place, should an employer wish to set one up to deal with taxable benefits provided as a result of the Covid-19 pandemic, if the PSA is to have effect for 2020/21, it must be agreed with HMRC by 6 July 2021.
End of the AIA transitional limit – Beware of the traps
The annual investment allowance (AIA) allows you to claim an immediate deduction against your profits for qualifying capital expenditure up to the available limit. The AIA limit was temporarily increased from £200,000 to £1 million from 1 January 2019 to 31 December 2021. It will return to its permanent level of £200,000 from 1 January 2022. This means that time is running short to take advantage of the higher limit. But, be warned, there are traps to be avoided.
Accounting period falls wholly within period from 1 January 2019 to 31 December 2021
If your accounting period falls wholly within the period for which the higher £1 million limit applies, for example, if you prepare your accounts to 31 December 2021, the position is quite straightforward. If your accounting period is 12 months, the available AIA limit is £1 million; if you accounting period is less than 12 months, the limit is proportionately reduced.
If you are planning capital expenditure of more than £200,000, and you have a 31 December year end, it would be advisable to incur the expenditure before 31 December to benefit from £1 million limit. The limit will revert to £200,000 for the year to 31 December 2022.
Accounting period spans 31 December 2021
The position is more complicated if your accounting period spans 31 December 2021. Not only do you need to calculate the limit for your accounting period, you also need to calculate the cap that applies to expenditure that is incurred after 31 December 2021.
The AIA limit for periods spanning 31 December 2021 is found by applying the formula:
(x/12 x £1,000,000) + (y/12 x £200,000) where x is the number of months in the period before 31 December 2021 and y is the number of months in the period on or after 1 January 2022.
However, this is not the end of the story as a further cap applies to limit the AIA that is available for expenditure incurred in the period but on or after 1 January 2022. The cap is equal to:
y/12 x £200,000
where y is the number of months in the period falling on or after 1 January 2022.
Example - David is a sole trader. He prepares accounts to 31 March each year. He is planning in investing in new equipment in the year to 31 March 2022 which will cost £300,000.
His AIA limit for the year to 31 March 2022 is £800,000 ((9/12 x £1,000,000) + (3/12 x £200,000)).
However, a further cap of £50,000 (3/12 x £200,000) applies to expenditure incurred in the period from 1 January 2022 to 31 March 2022.
If David buys his equipment before 31 December 2021, he can claim the AIA for the full amount, achieving an immediate deduction in calculating profits for the year to 31 March 2022. However, if he buys the equipment on or after 1 January 2022 but before 31 March 2022, he can only claim the AIA on £50,000 of the expenditure (despite the limit for the period being £800,000). He will be able to claim writing down allowances on the difference. In this case, he may wish to delay the expenditure until on or after 1 April 2022, so that it falls in the year to 31 March 2023, for which the AIA will be available for £200,000 of the expenditure.
Companies - Companies incurring qualifying expenditure in the period 1 April 2021 to 31 March 2023 may be better claiming the super-deduction than the AIA. The super-deduction is not available to unincorporated businesses.
Hidden benefit of the new extended loss relief
The new extended tax loss relief seems straightforward but a closer look reveals an opportunity for sole traders and business partners to save more tax than first appeared. Is this something you can take advantage of?
Tax relief for trading losses - Trading losses can be used to reduce tax payable on income of the current year, the previous year or both. The trouble is this can mean losing at least some or all of your personal tax-free allowance.
Example 1 - existing rules. In 2020/21 you made a loss of £30,000 and had other taxable income, a salary of £20,000 on which the tax payable is £1,500 ((£20,000-£12,500 personal allowances) x 20% £1,500). The rules say that losses are deducted from your income before personal allowances. Therefore, to get the £1,500 tax refunded you must use £20,000 of the loss relief. This means the £12,500 personal allowance is wasted.
New extended loss relief - The new loss relief rules are different in that you can’t use them to reduce tax payable on your other income. Instead, the loss relief can only be used against profits from the same trade. Ironically it’s this limitation that produces an opportunity for extra tax savings. The following example illustrates this. Bear in mind that to access the new loss relief you must either have no taxable income in the same and previous year as the loss, or have reduced it to nil for at least one of them by making a claim for relief under the existing rules.
Example 2 - existing rules. Jimmy’s sole-trader business shows the following results:
Year 2020/21 2019/20 2018/19
Trading profit/(loss) (£45,000) £26,000 £20,000
Other income £5,000 £12,000 £10,000
If he claims loss relief (under the existing rules)against his other income for both 2020/21 and 2019/20 he’ll have no taxable income in either year. He will have used all the loss but wasted his personal allowance for both years.
Example 3 - new rules. To access the new loss relief Jimmy must make a claim to use the loss in 2020/21 or 2019/20 under the existing rules. While the obvious choice is the year with the highest income, i.e. 2019/20, this would result in only £5,000 of the loss remaining to carry back to 2018/19 under the new extended loss relief rule. A better result is achieved if Jimmy instead claims loss relief against other income for the year of the loss (2020/21).
This seems counter intuitive because Jimmy’s income for 2020/21 is only £5,000 meaning that the claim results in no tax saving for 2020/21 as his income is already covered by his personal allowances. However, by claiming the loss relief for 2020/21 Jimmy uses just £5,000 of it. This leaves £40,000 (£45,000 - £5,000) which can be carried back under the new rules, first against 2019/20 and then 2018/19. The relief can only be used against trade profits and so will cover those for 2019/20, but will leave his personal allowance intact to cover his other income for that year.
Another angle. The “limitation to trade profits” rule can be used to increase loss relief carried forward. Say you made a loss in 2020/21 of £20,000 and had £1,000 other income. In 2019/20 your profits were £10,000 and you had other income of £10,000. Using the existing rules you could carry the £20,000 loss relief and so reduce your taxable income to nil. But if instead you claimed relief against the current year’s income, apparently wasting £1,000, you will limit the loss carried back under the new rules to £10,000 leaving £9,000 of it to carry forward.
Because the new extended loss relief is only set against trading income it can, unlike the existing loss relief, avoid wasting all or part of your tax-free personal allowance. This is done by claiming relief under the existing rules for the tax year in which your other income is lowest.
Capital allowances - optimum tax efficiency
Tax relief for buying equipment used in your business is given as capital allowances. You or your company can claim the capital allowances depending on who buys and owns the equipment. But which is the most tax efficient option?
Capital allowances basics
A tax deduction for the cost of equipment used in a business isn’t calculated in the same way as day-to-day expenses. Because equipment tends to last for more than a year the tax deduction, capital allowance (CA), is spread over a number of years.
For some purchases CAs aren’t spread but given in full for the financial period in which the purchase is made, i.e. like day-to-day expenses. However, this article focuses on tax efficiency ignoring the timing issue. Specifically, whether it’s more tax efficient for you or your company to purchase equipment and claim the CAs .
Equipment used by business in general
The CAs rules for equipment are complex but broadly apply in the same way to purchases made by a director who uses it to do their job or the company.
A director isn’t entitled to CAs for equipment that’s not used directly for doing their job. For example, if a director bought an item of equipment that’s only used by other employees in the company’s business, the director can’t legitimately claim CAs for its cost.
In the circumstances described above, the company should purchase the equipment so it can claim the CAs. If it can’t afford to, but the director can, they should lend or give the money to the company to buy the equipment.
Equipment used by director
Where equipment is used by a director in the course of doing their job, there are two ways to obtain CAs. Assuming the company has the funds to buy the equipment:
it could buy and own the equipment itself and let the director use it; or
the director can buy and own it using money supplied by the company.
Generally, the CAs available to a company and a director will be the same. However, be aware that there are exclusions for some types of equipment, e.g. cars and vans. A director isn’t entitled to CAs for these.
Tax efficiency ratings
Assuming that the company funds the purchase of equipment, the tax advantage for a company purchase compared to one made by the director varies considerably depending on how the company provides the funds to the director. It could pay a dividend (if they are a shareholder), extra salary or make a gift of the equipment (which would count as a taxable benefit in kind). We’ve crunched the numbers to test the tax efficiency of each of these methods.
Our calculations show that as a rule it’s always more tax efficient for a company to purchase and own the equipment. For example, on a purchase of £1,000 the saving could be up to £373. The tax efficiency is greater if the company can reclaim the VAT paid (if any) on the purchase.
The degree of tax efficiency varies widely but as a rule it’s greatest if your company purchases and owns the equipment, and claims the capital allowances. If your company doesn’t have the funds to make the purchase, you should lend it the money rather than make the purchase yourself.
Working out the capital gain on the sale of an investment property
If you sell a property that has not been your main residence throughout the period that you have owned it, you may need to pay capital gains tax if a gain arises on the disposal of the property. This may be the case if you have an investment property, such as a buy-to-let or holiday let, or a second home.
It is important that you understand how to calculate the gain. Overlooking deductible expenses may prove costly.
Need to act promptly
Working out whether there is a gain on the disposal is something that needs to be done promptly – residential property gains must be reported to HMRC within 60 days of completion and the tax paid, if any, within the same time frame. Interest and penalties may be charged for failure to report the gain and pay the tax within this time frame.
The starting point of the calculation is the consideration for the disposal. This will normally be the amount that the purchaser paid for it. However in certain situations, the market value is used instead of the amount paid, for example where the property is sold or gifted to a ‘connected person’ such as a child or a sibling.
Costs of disposal
When working out the gain, you can deduct the costs of disposal from the sale proceeds (or market value where relevant). This will give you the net disposal proceeds. Relevant costs here are estate agents fees, legal fees and suchlike.
However, if you have a mortgage on the property, any amount paid to clear the mortgage cannot be deducted.
In working out the gain, you will also need to deduct the purchase cost of the property, and the cost of any improvements that you have undertaken since you acquired the property, for example, any costs incurred in extending the property. However, normal decorating and maintenance costs should be ignored in calculating the gain.
Cost of acquisition
You can also deduct any incidental costs of acquisition, such as legal fees, survey fees and stamp duty land tax.
Once you have worked out the gain, you will need to take account of any available reliefs. For example, if the property has been your main residence at some point, you will be entitled to main residence relief for the period for which you lived in it as your main residence, and also the last none months of ownership.
If a property is jointly-owned, each owner is only liable for their share of the gain, and it is this rather than the total gain that they must report to HMRC. The gain is reportable and payable per chargeable individual rather than per property.
Working out the tax
A payment on account of the tax due on a residential property gain must be paid within 30 days. This is the best estimate of the tax due at the date of sale. Losses realised previously in the tax year or brought forward can be taken into account, as can the annual exempt amount, if this has not been used already.
As the end of the year there may be some adjustment after the tax return is filed, and it is possible that a repayment may arise if losses are realised on later disposals in the tax year.
Using 'bounce bank loan' to pay dividends
Open until 31 March 2021, the Governments' Bounce Back Loan Scheme (BBLS) helped support businesses during the coronavirus pandemic, permitting firms to apply a minimum of £2,000, up to a maximum of £50,000, or 25% of business turnover whichever is the lower amount, repayable over either six or ten years, with the government paying the interest for the first 12 months to the lender.
Some directors would have withdrawn the money to survive personally and pay personal bills, but this was not the purpose of the loan. The conditions of the BBLS were that the loan was not to be used ‘for personal purposes’ which included director’s loans/withdrawals. Should the lender bank become aware that this has occurred and believe that the loan has been used fraudulently, then it has a legal duty to report its suspicions to the National Crime Agency (NCA) under the anti-money laundering rules. Other people may also be obliged to report the activity including the company accountant and any business regulated as a ‘High Value Dealer’ (i.e. one that receives the equivalent of 10,000 euros or more in cash for the sale of goods). Indeed, the NCA has already made arrests for fraudulent claims using the BBLS.
Usually, drawings by a director will be either a salary/bonus or a dividend. Payment of a salary will be allowed under the BBLS, being deemed 'working capital' under tax law. However, many directors take only the 'optimum amount' for NIC purposes (i.e. £9,500 for 2021/22 or £12,570 where the Employment Allowance is available) and they will more than likely have already withdrawn that amount before taking out the loan. Therefore, any additional payment will be in the form of a dividend. However, a company can only make a distribution (e.g. dividend) out of profits available for the purpose i.e. its accumulated, realised profits. It is possible to pay a dividend in a loss-making period provided that there were sufficient 'distributable'/retained profits or reserves over previous years available to do so but if there were no such profits then the dividend will be deemed 'illegal' under the Companies Act 2006.
Personal use of the loan could also mean a large tax bill for the company should the monies not be repaid into the company's bank account within nine months and one day after the company's year-end. If the loan monies have been withdrawn making a directors' loan account overdrawn, then if a dividend cannot be made (because the amount of reserves is not available), then the loan must be repaid within the nine months and one day otherwise the company will be charged a tax bill of 32.5%. Repaying the loan at a later date (either in cash or cleared by funds being credited to the director’s loan account, such as the credit of a salary or dividend payment or written off) will result in the tax being repaid.
The person borrowing the money could also be liable under the beneficial loan provisions where the balance outstanding on the director’s account is at least £10,000 at some point in the tax year (unless the loan is otherwise exempt). However, this charge can be avoided if payment of interest on the loan is made at the 2% official rate.
Where problems relating to the incorrect use of the loan and the non-repayment of the loan are may arise is where the company subsequently goes into liquidation. Insolvency practitioners will be obliged to investigate the use of the loan especially if it was taken and then dividends drawn shortly afterwards. In their eyes such a use of the money means that there were no unreleased profits in the company from which dividends could be drawn and therefore the withdrawal would have been 'illegal'.
Distributions on cessation of a company
When a company closes down, it may have accumulated monies or assets that need to be distributed to shareholders. If the asset is in the form of cash then any distributions would typically be as dividends (or possibly additional contributions to a pension scheme). A dividend will be the route to take should the amounts be small, particularly given the £2,000 'Dividend Allowance' (DA) limit and if the total income is less than the 'basic rate' (£50,270 for 2021/22). However, dividends can only be paid out of 'accumulated, realised profits' and therefore the company needs to have set aside sufficient profits to cover the amount withdrawn as dividend as at the date of payment. Having a credit balance in the bank account is not enough - profits must have been earned but not withdrawn. If the cessation has been planned and sufficient accumulated profits are available, the monies could be taken over a period before cessation at the shareholders’ marginal tax rates to efficiently spread any tax liability efficiently over two or more tax years.
Even after dividends have been paid to the amount of accumulated profits, there may still be capital assets to distribute (cash or otherwise). Such distributions are treated as capital should certain conditions apply. The two conditions are first that the company has collected, or intends to collect, its debts and has paid off or intends to pay of its creditors at the date when the distribution is made. Second, there is a statutory withdrawal limit of £25,000 whether taken as a single distribution or in separate amounts. Any distribution exceeding this amount is taxed as income, unless the company goes down the route of a formal liquidation. If Business Assets Disposal Relief (BADR) is available the percentage tax levied for capital gains tax purposes (CGT) is 10 per cent rather than the usual 20 per cent for higher rate taxpayers. Where the distribution is of assets other than cash, the valuation of those assets could assume significance in determining whether the £25,000 threshold is breached.
Therefore, depending upon the amount of accumulated profits, it will be preferable for the capital treatment to be used if the tax rate is lower which is will be should BADR be available and the withdrawal as dividends would by taxed at higher rates.
BADR not available
Where BADR is not available it may be preferable for at least some of the withdrawals to be taxed as dividends. For example, should the shareholder be a 'basic rate' taxpayer, and the withdrawal amounts be greater than the £25,000 limit, the amount will be taxed as a dividend chargeable to income tax at 7.5% (the 'DA' may also be available). The £25,000 will be treated as capital (with the annual exemption deducted if not otherwise used), taxed at 10 per cent. However, should the company then apply for dissolution, HMRC could argue that the intention was always to make an application to close the company and deem the whole amount withdrawn to be income. Furthermore, there may be penalties due if it is considered that reasonable care has not been taken.
Any company needing to make a distribution greater than £25,000 or which cannot fulfil the two conditions above or where shareholders prefer a CGT to income tax treatment must enter into formal liquidation. Once a liquidator is appointed, all distributions made during the winding up process are generally treated as capital subject to CGT. Tax planning in such a situation could be the timing of distribution payments on either side of a tax year so as to attract the individual’s CGT annual exemption for more than one tax year. A BADR claim may also be possible to reduce any CGT payable.
When a company is struck off
If a company has applied to be ‘struck off’ but after two years of making a distribution the company has still not been dissolved, or the company has either failed to collect all its debts or pay all its creditors, then the distribution is automatically treated as an income dividend.
Get ready for the next steps of Making Tax Digital
Making Tax Digital (MTD) is a government programme to move to a digital tax world. HMRC’s stated ambition is to become one of the most digitally advanced tax administrations in the world. MTD involves fundamental changes in the way in which taxpayers keep records and report information to HMRC. MTD launched with MTD for VAT, which was compulsory for VAT-registered businesses with VATable turnover over the VAT registration threshold (currently £85,000) from the start of their first VAT accounting period on or after 1 April 2019.
The next steps in the MTD programme are the extension of MTD for VAT and the launch of MTD for income tax.
Extension of MTD for VAT
Under MTD for VAT, VAT registered businesses must keep digital records and file their VAT returns using MTD-compatible software. Currently, MTD for VAT is only compulsory for VAT-registered businesses whose VATable turnover is above the VAT registration threshold of £85,000. Where VATable turnover is below this level, MTD is optional. However, once a business has joined MTD for VAT, they must remain in it.
This is due to change from 1 April 2022. From that date, MTD for VAT will become compulsory for all VAT-registered businesses. Businesses that are not currently within MTD for VAT will be required to comply from the start of their first accounting period beginning on or after 1 April 2022. They will need to sign up, and be ready to keep digital records and file VAT returns using MTD-compatible software.
MTD for income tax
The start date for MTD for income tax has now been delayed by one year. The next key date in the MTD timetable is 6 April 2024 – one year later than planned.
Self-employed businesses and landlords with annual business or property income of more than £10,000 will now come within MTD for Income Tax from 2023/24. In preparation for this, the Government have consulted on rules to reform the basis period rules, moving from a current year basis to a tax year basis. These reforms were due to take effect from 2023/24, with 2022/23 being a transitional year. These too have now been delayed, and will not now come into effect before 2024/25 with a transitional year no earlier than 2023/24.
Under MTD for income tax, landlords and self-employed businesses within its scope would need to keep digital records. They will also be required to send quarterly summaries of income and expenditure to HMRC using MTD-compatible software. The taxpayer will receive an estimated tax calculation after each submission. The quarterly submissions would be followed by a final end of year submission to take account of necessary adjustments and a final declaration. This will replace the annual self-assessment tax return.
General partnerships will now not be brought within MTD for income tax until April 2025.
Are you trading?
Trading income is taxed for both income tax and corporation tax purposes. In order for a tax charge to arise under the trading income rules, there must be a trade. It is therefore necessary to understand what constitutes trading, and when a trade commenced or ceased.
Indicators of trade
To determine whether a trade exists, historically the courts have looked for the presence of absence of certain key defining features. In 1955, the Royal Commission of Profits and Income Tax reviewed existing case law and identified six ‘badges of trade’. The concept has evolved over time, and the following indicators can be used to provide an overall impression as to whether a trade exists.
An intention to make a profit supports trading, but by itself is not conclusive.
The number of transactions
Systematic and repeated transactions suggest a ‘trade’
Existence of similar trading transactions or interests
Transactions that are similar to those of an existing trade may themselves be trading
Change to the assets
Repairs, modifications or improvements to make the assets more easily saleable or saleable at a greater price may suggest trading
The way in which the sale was carried out
The sale of an asset in a way which is typical of trading organisations may suggest trading, whereas a sale to raise emergency cash is less likely to indicate trading
The source of finance
Where money has been borrowed to purchase the asset and the funds can only be repaid by selling the asset, this may suggest trading – money may be borrowed to facilitate the purchase of an asset at a profit
Interval between sale and purchase
Assets that are the subject of trade will normally be sold quickly; an intention to sell an asset shortly after purchase will support trading, whereas an asset that is held indefinitely is less likely to be the subject of a trade
Method of acquisition
Assets that are inherited or acquired as a gift are less likely to be the subject of a trade.
It is important to note that there is no single ‘badge’ that provides conclusive proof of a trade – rather, it is a question of looking at the characteristics of trading and the extent to which they are present or absent to form an overall impression of whether there is a trade. The weight attached to each ‘badge’ will vary depending on the particular circumstances and the type of business.
NL Wage and NM Wage changes from April 2021
Under the minimum wage legislation, workers must be paid at least the statutory minimum wage for their age. There are two types of minimum wage – the National Living Wage (NLW) and the National Minimum Wage (NMW). From 1 April 2021, as well as the usual annual increases, the age threshold for the National Living Wage is reduced.
National Living Wage - The NLW is a higher statutory minimum wage payable to workers whose age is above NLW age threshold. Prior to 1 April 2021, it was payable to workers age 25 and above. From 1 April 2021, the NLW age threshold is reduced; from that date it must be paid to workers aged 23 and above.
National Minimum Wage - The NMW is payable to workers who are below the age of entitlement to the NLW. Prior to 1 April 2021, the NMW applied to workers above compulsory school leaving age and under the age of 25; from 1 April 2021, the NMW must be paid to workers under the age of 23 and over the school leaving age.
There are three NMW age bands:
Workers aged 21 and 22 (prior to 1 April 2021, workers aged 21 to 24).
Workers aged 18 to 20.
Workers aged 16 and 17.
Apprentices - There is also a separate NMW rate for apprentices. It is payable to apprentices under the age of 19 and also to those who are over the age of 19 and in the first year of their apprenticeship.
Accommodation offset - Employers who provide their workers with accommodation are able to pay a lower minimum wage to allow for the cost of the accommodation provided. The amount that you are obliged to pay is found by deducting the ‘accommodation offset’ from the appropriate minimum wage for the worker’s age. The daily accommodation offset rate can be deducted for each full day for which accommodation is provided. For these purposes, a day runs from midnight to midnight. The weekly accommodation offset rate is seven times the daily rate.
Rates from 1 April 2021
NLW: Workers aged 23 and above £8.91 per hour
NMW: Workers aged 21 and 22 £8.36 per hour
NMW: Workers aged 18 to 20 £6.56 per hour
NMW: Workers aged 16 and 17 £4.62 per hour
NMW: Apprentice rate £4.30 per hour
Accommodation offset £8.36 per day £58.52 per week
Check you are paying the correct rates
Employers should ensure that the amounts that they pay workers on the NLW or NMW from 1 April 2021 are in line with the new rates. They should also ensure that they have processes in place to identify when a worker moves into a new age bracket. From 1 April 2021, this will include workers aged 23 and 24 who will be entitled to the NLW from that date.
Taxing the SEISS - what’s the latest?
HMRC has published new guidance which explains when you might need to amend your self-assessment tax return if you claimed Self-Employment Income Support Scheme (SEISS) payments.
HMRC’s notice published on 2 July advises anyone who has claimed and received one or more coronavirus support payments under the Self-Employment Income Support Scheme (SEISS) to check their 2020/21 tax returns. The notice is part of HMRC’s clampdown on incorrect and false claims; it’s currently investigating around 12,000 such cases. However, the latest guidance is to ensure that the correct tax is paid on genuine claims.
Disparities. The new guidance follows HMRC’s discovery that many of the self-assessment tax returns submitted for 2020/21 include entries which don’t match the figures it already has on record. Either SEISS payments haven’t been reported at all or the figures differ from those HMRC has on record.
What to report. Payments from the first, second or third SEISS grants (received on or before 5 April 2021) should be included on your 2020/21 return in the “Self-Employment Income Support Scheme grant” box. If you haven’t yet submitted your tax return remember this.
If you have submitted your 2020/21 return, check you’ve reported the SEISS payments in the right box. If you put them in the wrong place, you must send an amendment to your tax return otherwise HMRC will assume you haven’t reported the payments and will automatically amend your return. This will result in you being taxed twice on the same income.
Mismatched figures. HMRC will also automatically amend your tax return if the amount of SEISS payments you reported doesn’t match its records. It will send you a revised tax calculation which you should check. HMRC explains how to do this in its latest guidance. It also explains what to do if you don’t agree with the amendment made by HMRC.
Make sure you entered any SEISS payments in the right place. If you haven’t you must amend your tax return to show them correctly or you will be taxed twice.
Pension annual allowance – Making tax relieved contributions
Tax relief is available to encourage individuals to make contributions to registered private pension plans. However, while there is no limit to the amount that an individual can contribute to their pension plans, there are limits on the contributions that qualify for tax relief. One of those limits is the annual allowance.
Tax relieved contributions for a tax year cannot exceed the higher of 100% of earnings or £3,600, and must be covered by the available annual allowance.
Nature of the annual allowance
The annual allowance limits the amount that an individual can make in tax-relieved pension contributions across all their registered pension schemes. The basic annual allowance is set at £40,000 for 2021/22. However, an individual’s annual allowance may be less than this if they are a high earner or if they have already flexibly accessed their pension.
If an individual has not used up their annual allowance in the previous three years, they may be able to make tax relieved contributions of more than £40,000 in 2021/22. However, where earnings are less than the available annual allowance, tax-relieved contributions are capped at earnings (or £3,600 where this is amount is more than earnings).
Only one annual allowance is available regardless of the number of registered private pensions that an individual has. The annual allowance applies to total contributions made to a defined contribution scheme in the tax year and any increase in the value of a defined benefit scheme in the tax year. Pension contributions made by an employer to a private pension scheme count towards the annual allowance.
The amount of the annual allowance is reduced where, for the tax year in question, a person has both adjusted net income of more than £240,000 and threshold income of more than £200,000. Broadly, adjusted net income is income including pension contributions and threshold income is income excluding pension contributions.
Where both tests are met, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £240,000 until the minimum amount of the annual allowance is reached. For 2021/22, this is set at £4,000. No reduction is made to the annual allowance if the threshold income is £200,000 or less, regardless of the level of adjusted net income.
Consequently, anyone with adjusted net income of £312,000 and threshold income of more than £200,000 will have an annual allowance of £4,000 for 2021/22.
Money purchase annual allowance
A lower annual allowance, the money purchase annual allowance (MPAA), also applies if a person has flexibly accessed their pension on reaching age 55 or above. This is to prevent recycling of contributions to secure further tax relief.
For 2021/22, the MPAA is set at £4,000.
Unused annual allowances
If a person has not used their annual allowance in full for a year, the unused amount can be carried forward for up to three years. However, unused allowance for earlier years can only be used once the allowance for the current year has been used in full. Unused allowances from an earlier year are used before those of a later year.
Contributions in excess of the annual allowance
If tax-relieved contributions are made in a tax year in excess of the available annual allowance for that year, a tax charge applies to claw back the tax relief to which the individual was not entitled.
HMRC’s new policy on tax debts
Debt collection. Over the last 16 months the government has created schemes to help businesses and individuals spread their tax bills. HMRC has also taken a relaxed approach to demanding and collecting tax. However, in a recent policy paper it says that this is coming to an end shortly as the UK emerges from the pandemic. The document says that HMRC is restarting its debt collection work and will contact everyone who has fallen behind with their tax. It says it will take enforcement action to collect what’s owed but it will take an understanding approach, including allowing more time to pay. It can only do this if you contact it in response to its demands. Regardless of temptation, don’t just file demands in the bin.
HMRC is restarting its more aggressive approach to collecting tax debts. If you receive a demand, don’t ignore it. If you’re struggling to pay, contact HMRC which says it will take an understanding approach.
Making mileage payments to employees
As the country emerges from the Covid-19 pandemic, business travel is once again on the agenda. Where employees undertake business travel, they will usually be able to claim the associated expenses from their employer. If the journey is by car, the easiest way to do this is for the employer to pay a mileage allowance for the business miles undertaken.
Where a mileage allowance is paid, there may be tax consequences depending on the amount that is paid. The rules differ depending on whether the employee uses their own car for business travel or has a company car.
Employee uses their own car
The Approved Mileage Allowance Payments (AMAP) scheme allows employers to make tax-free mileage payments up to an ‘approved amount’ where the employee undertakes a business journey in their own car. The approved amount for the tax year is found by multiply the number of business miles driven by the employee in their own vehicle in that year by the approved mileage rate for that particular vehicle. The approved mileage rates are set out in the table below:
So, if an employee drives 12,000 business miles in the tax year in their own car, the approved amount is £5,000 ((10,000 miles @ 45p per mile) + (2,000 miles @ 25p per mile).
If the employer pays mileage at a higher rate, the excess over the approved amount is taxable, and must either be taxed through the payroll or reported to HMRC on the employee’s P11D. If the employer pays less than the approved amount (or does not pay an allowance), the employee can claim tax relief for the difference between the approved amount and the amount that they receive, if any.
The employer can also pay the employee a tax-free passenger rate of 5p per mile for each passenger for whom the journey is also a business journey. However, there is no tax relief available if the employer does not pay passenger payments, or pays them at a rate of less than 5p per mile.
For National Insurance purposes, similar rules apply, except that the calculation is performed for each pay period. For cars and vans, an ‘approved’ rate of 45p per mile is used for all business mileage, even if this exceeds 10,000 miles in the tax year. If the amount paid in the pay period is more than the ‘approved’ amount, the excess is included in gross pay. National Insurance purposes only.
If the employee has a company car and the employer does not pay for the fuel, a different set of mileage rates – the advisory fuel rates – apply to determine the amount that can be paid tax-free. These are lower than the AMAP rates, which include an element to reflect the running costs and the depreciation of the employee’s own car.
The advisory rates are set quarterly. The rates applying from 1 June 2021 are as follows:
Payments of 4p per mile can be made for business travel in an electric company car.
Any amounts paid in excess of the advisory rate are taxable and liable to Class 1 National Insurance.
If the employer pays for all fuel, including that for private journeys, a fuel benefit tax charge will arise unless the car is an electric car.
RTI penalties and period of grace
Under real time information (RTI), employers are required to report pay and deductions information to HMRC ‘at or before’ the time that the payment is made to the employee. This is done by means of the full payment submission (FPS).
Penalties are charged if the FPS is filed late or if HMRC did not receive the expected number of FPSs or an Employer Payment Summary in a tax month in which no payments were made to employees. However, a penalty is not charged for the first default in the year.
Period of grace
HMRC operates a risk-based approach to penalties and historically have allowed a three day period of grace, not charging a penalty if the FPS is received within three days of the date on which the payment was made to the employee. They are continuing this approach for the 2021/22 tax year and will not charge a penalty where the FPS is received in this three-day window as long as there is no pattern of persistent late filing by the employer.
However, it should be noted that this is a concession, not an extension to the filing deadline. Employers should treat the concession as an occasional ‘get out of jail free card’ and continue to file the FPS at or before the time that they make the payment, unless one of the limited circumstances in which the FPS can be filed after the payday applies. These are listed in the ‘Running payroll’ guidance on the Gov.uk website.
HMRC will monitor employers who persistently file after the statutory deadline and may be contacted or considered for a penalty as part of HMRC’s risk-based approach.
Amount of the penalty
Where a penalty is charged for late filing, the amount of the penalty depends on the number of employees that the employer has.
If an employer has more than one PAYE scheme, penalties are assessed and charged separately for each scheme.
Where penalties arise, these are charged in-year on a quarterly basis.
SDLT and shared ownership
Shared ownership can enable an individual to own a stake in a property where they would not otherwise be able to get on the housing ladder. As with other property purchases, stamp duty land tax (SDLT) is payable where you buy a property through a shared ownership in England or Northern Ireland. SDLT does not apply in Scotland and Wales where, respectively, land and buildings transaction tax and land transaction tax apply instead.
To complicate matters, there are different ways of paying the SDLT.
Buying through an approved shared ownership scheme
Where a property is purchased through an approved shared ownership scheme, there are two ways in which the SDLT may be paid:
• a one-off payment based on the total market value of the property; or
• in stages.
These options are available if the shared ownership lease is granted by an approved qualifying body, which may be:
• a local housing authority;
• a housing association;
• a housing action trust;
• the Northern Ireland Housing Executive;
• the Commission for the New Towns; or
• a development corporation.
Where the decision is to pay the SDLT up front, a market value election is made. The SDLT is paid on the market value of the property at that time. Where this option is chosen, it is necessary to send in a SDLT return and make a one-off SDLT payment as if the freehold or leasehold had been purchased outright from the start.
Under this route, no further SDLT is payable, even if a bigger share in the property is purchased later on (known as ‘staircasing’).
This option is advisable where the total market value is less than the SDLT threshold, or first-time buyer threshold, as appropriate.
A market value election can be made when the SDLT return is submitted, or within the period of 12 months after the return deadline by amending the return.
Leasehold properties and market value elections
If the property is a leasehold property and the lease allows the purchaser the freehold to the property, HMRC will charge SDLT on the market value of the freehold. This will be the value at first sale and stated in the lease. It usually applies to houses.
Where the lease does not allow the purchaser to have the freehold, where a market value election is made, SDLT is payable on the open market premium. This is the premium that would be payable at that time for the largest share of the property that the purchaser can have under the terms of the lease.
Paying SDLT in stages
If a market value election is not made, the SDLT is payable in stages. For the first transaction, SDLT is charged on the premium paid for the grant of the lease. If there is a high annual rent, the net present value of the rent will be taken into account in working out the SDLT payable.
Where further shares in the property are purchased, no more SDLT is payable under the ownership share reaches HMRC. Until this point, HMRC do not need to be told about further transactions.
Once the share reaches 80%, SDLT is payable on the transaction that breaches the 80% threshold and on any further transactions. The SDLT is payable on the total amount paid for the property so far.
The transactions are treated as linked transactions.
Under this option, less SDLT may be payable at the outset, but if subsequent shares are purchased when the value of the property has increased, the total SDLT payable may be more.
Can you claim SEISS 4th & 5th payouts during 2021?
If you commenced self-employment after 5th April 2019
If you started your self-employment after 5 April 2019, you were denied support under this scheme from the first three quarterly payouts to 31 January 2021.
The good news is that due to lobbying by tax professionals and self-employed support groups the SEISS is being opened to traders who commenced after 5 April 2019. However, there is an additional hurdle to jump before you can make a claim; your tax return for 2019-20 needs to have been filed by midnight 2 March 2021.
Additionally, your business must be adversely affected by the pandemic and your profits from self-employment must be at least 50% of your income and less than £50,000.
If you commenced self-employment on or before 5th April 2019
If you qualified for the first three grants, you should qualify for the further grants due this year unless your circumstances have changed, for example, if you are no longer adversely affected by COVID disruption.
For those of you who may be claiming for the first time, you will need to claim using your online tax account. HMRC should advise you when the claims process is open for business.
If claiming the fourth grant – 1 February 2021 to 30 April 2021
The fourth grant under the scheme covers February to April 2021. It is worth three months’ average profits capped at £7,500 and can be claimed from late April.
If claiming the fifth and final grant – 1 May 2021 to 30 September 2021
The fifth and final grant covers the period from May to September 2021. The amount of the grant will depend on the impact that Covid-19 disruption has had on your profits.
The final grant can be claimed from late July.
There is a potential misfit in this fifth grant. Although it covers a five-month period (May – September 2021) the actual payout for this period is based on three months. What about the other two months?
HMRC agrees system for CGT refunds
CGT reporting. Since April 2020 if you make a gain from the sale or transfer of your home or other residential property on which capital gains tax (CGT) is payable, you must report it to HMRC and pay an estimate of the tax due within 30 days of the transaction. After the end of the tax year you must report the transaction on your self-assessment return. It’s not uncommon that the original estimate of the tax due might be over or understated. A problem arises where it was overstated.
HMRC’s self-assessment system ignores the overpayment so that overpaid tax is neither refunded nor set against other tax you owe. HMRC is aware of this problem and following pressure from tax and accountancy bodies has a temporary solution while it works on a permanent one.
If you have overpaid CGT because of the 30-day reporting which cannot or has not been amended using this service, call HMRC on 0300 200 330 to explain that an overpayment has been made. It will then make a manual adjustment to credit or refund the tax.
When might HMRC demand a VAT security deposit?
The vast majority of businesses pay their tax bills on time however, any that are finding it hard to make payment in full and/or on time can contact HMRC to agree payment by instalments under the 'Time to Pay' scheme.
If a business fails to pay its tax bills or does not keep to the 'Time to Pay' agreement HMRC can demand an 'upfront' payment of a 'security deposit'. The idea is that if you fail to pay, HMRC will use the deposit to settle the amount. Security deposits can be demanded for a number of different taxes however, they are more prevalent when it comes to VAT.
HMRC see this measure as a 'final' resort' for businesses where there is clear evidence that a significant amount of revenue, relative to the size of the business, may not be paid. They are mostly used where a company has closed without paying their tax bills, failed to comply with return filing obligations and then the directors have become involved with another or effectively the same business. In the majority of cases, the security deposit is paid by way of a cash payment (or bank guarantee) levied on a company director or possibly another officer of the failed company who knew or ought to have known of the past business' financial situation.
Calculating the amount
To calculate the amount, HMRC will make detailed enquiries into the financial position of the new company (assuming that the new business is similar in size to the old one) and calculate using an approved formula based on:
This calculation is for the deposit amount only, HMRC still expecting payment of the arrears in full. The deposit is typically held for 12 months for a business that submits monthly returns and 24 months for those on quarterly submissions. In addition, HMRC will usually expect submission of monthly VAT returns rather than quarterly. If the current business is not of similar size or the turnover of the new business is lower than that shown on the original company's returns, HMRC can reduce the size of the demand proportionately under negotiation.
The penalties for non-compliance is high - it is a criminal offence if Security has been demanded but not been paid and the company (or new company) continues to make taxable supplies. In addition, HMRC may prosecute if not paid upon demand and a magistrate can impose a fine of up to £5,000 for each taxable supply (i.e. each invoice). Should HMRC issue a notice for a security deposit to be made but the taxpayer ignores the notice continuing to make taxable supplies then HMRC has the right to prosecute. If successful, the fine is a maximum of £20,000 for each taxable supply made without the Security having been paid.
If the deposit is paid but the outstanding VAT bill is not, HMRC will use the deposit to satisfy payment and should some amount remain outstanding, then further security will be required. Should the company comply with all requirements, the deposit will be returned but only after HMRC has checked that there are no other outstanding debts with HMRC. If there are, the Deposit will be used to satisfy those debts before returning any balance.
A business could probably successfully challenge the imposition of a security deposit demand if it can prove that it was forced out of business due to some of its customers having gone into liquidation due to the coronavirus.
Stamp duty land tax refunds
The additional stamp duty land tax (SDLT) rate of 3% is payable by purchasers of residential properties costing £40,000 or more and if all of the following conditions apply:
The charge applies even where the second property is the buyer’s new home (main residence), and they intend to sell the other property but have not done so because, for example, they have not been able to find a buyer. However, the legislation recognises that such difficulties can arise and allows a refund to be claimed in specific circumstances. The buyer will initially have to pay the 3% SDLT surcharge and then apply for the refund provided that their existing main residence is disposed of within 36 months of completing the purchase of the ‘replacement’ home.
Extensions due to exceptional circumstances
In the vast majority of cases, this 36 month timeframe provides sufficient time for people to sell but, in certain specific cases, an extension to the 36 months can be granted if an affected taxpayer has not been able to sell due to exceptional circumstances outside of their control (e.g. the coronavirus pandemic). Such taxpayers must make a sale as soon as practicable once the exceptional impediment to sale ceases to apply; this applies to those whose refund window ended on or after 1 January 2020.
SDLT refunds can also be claimed on property transactions where the purchaser was a first-time buyer who has purchased a shared ownership property for £500,000 or less and paid on the purchase. The chancellor removed the liability for SDLT payable on these transactions in the autumn Budget and made the change retrospective thereby applying to first-time buyers who purchased their homes on or after 22 November 2017.
SDLT refunds for uninhabitable properties
In addition, SDLT refunds may also be available in situations where a second property has been purchased, which was unfit to live in at the time of purchase but was purchased with intent to renovate it as a buy-to-let investment. The additional 3% may have been charged at the time of purchase but following the tax case of P N Bewley Ltd v HMRC  UKFTT 65 (TC), it was ruled that properties that are not habitable at the time of completion do not constitute a 'dwelling' and therefore are not liable to the 3% additional SDLT charge. The judge ruled that 'a dwelling will, as a minimum, contain facilities for personal hygiene, the consumption of food and drink, the storage of personal belongings, and a place for an individual to rest and to sleep’.
Purchasers of property who have incurred the surcharge since 2016 (on properties that they believe were uninhabitable at the time of purchase) can apply for a SDLT refund if they are able to prove that the property is not a dwelling. Furthermore, a property deemed not suitable to be a dwelling is not only not subject to the 3% surcharge, but it is treated as a non-residential property liable to SDLT at the applicable rates.
Applying for a refund under the 36 months 'replacement' rules can be online with the time limit for making the refund being 12 months after the sale of the previous main residence (or 12 months from the filing date of the return for a new return). HMRC may permit this deadline to be extended in exceptional circumstances such as if the house could not be sold due to Covid. Refunds under other circumstances are usually via a letter.
What is meant by taking 'reasonable care'?
All taxpayers have a responsibility to complete their tax returns correctly, to the best of their ability. However, inevitably, mistakes occur which may not be the taxpayer's fault; other times the 'error' may be deliberate. There is a statutory definition of 'careless' which provides that an ‘inaccuracy in a document given by [a person] to HMRC is “careless” if the inaccuracy is due to the failure by [the person] to take reasonable care’.
HMRC provides its understanding of 'reasonable care' in its Compliance Handbook by giving examples of errors made despite reasonable care having been taken (for which no penalty would be due) as well as examples of 'careless' errors (HMRC CH81145). However, it must be remembered that HMRC’s guidance is only their view of the rules rather than the actual law.
Deliberate or careless?
The difference between ‘deliberate’ and ‘careless’ behaviour can be narrow. In deciding whether the non-disclosure was 'reasonable', HMRC will look at several factors including the taxpayer's abilities and circumstances, the complexity of the taxpayer's tax affairs and whether any systems of control and records were in place. They will also consider whether the taxpayer is represented, the belief being that in most cases an unrepresented taxpayer will have a lower understanding of the complexities of tax law than a represented taxpayer. If a taxpayer consulted with a tax adviser with appropriate expertise, HMRC would normally consider this as having taken 'reasonable care' unless the information submitted was not 'accurate and complete'.
HMRC offers the following basic guidance as to what might constitute a 'reasonable excuse':
Bereavement – this may apply if one of the taxpayer’s close relatives or their domestic partner passed away around the time they should have filed their return or paid tax.
Serious illness – if the taxpayer or a close relative fell seriously ill around the time that the tax should have been paid.
Unforeseen events – including delays due to industrial action or returns/ payments being lost in the post.
Deemed to be self-employed
HMRC also quotes a rare instance where a taxpayer believed that they were employed but on further investigation was deemed to be self-employed. In this situation their 'reasonable' excuse for not submitting a self-assessment return and possibly VAT returns would be valid.
HMRC has a penalty regime in place where it is found that an inaccuracy leading to an underpayment of tax has been made. The level of penalty depends on whether the error was ‘careless’ or ‘deliberate but not concealed’ or ‘deliberate and concealed’. Reductions are possible if the disclosure of the error is ‘prompted’ or whether HMRC discovered it themselves as well as the level of assistance the taxpayer gives HMRC in ascertaining the accuracy of the disclosure (e.g. giving HMRC access to records). No penalty is levied if the taxpayer took 'reasonable care' however, the maximum penalty for a ‘careless’ error is 30% of the additional tax. If the penalty was a 'deliberate but not concealed' error the maximum penalty is 70% or 100% for an error which is ‘deliberate and concealed’ (but note that if the error involves an offshore matter, the penalties are potentially much higher, up to a statutory maximum of 300%). 'Deliberately' means that the taxpayer was aware of the error but either chose not to come forward and declare or that they knew the figures on the return were wrong when submitted.
Burden of proof
The burden of proof that the taxpayer acted 'deliberately' falls on HMRC which must back up whatever assertion they are making. HMRC’s Compliance Handbook manual (CH54300) confirms this when it states: 'the onus of proof of careless or deliberate behaviour is on HMRC and that the standard of proof is on the ‘balance of probabilities’.
Tax-free help with childcare costs
Childcare costs can be very expensive and any help is welcomed, particularly where you can benefit from that help tax-free. There are various routes by which this is possible.
Government tax-free top-up scheme
Under the Government scheme, you can open an online account and deposit money which is used to pay for your childcare. For every £8 that you deposit in the account, the Government will add a further £2, to a maximum of £2,000 per child per year. The maximum top-up is doubled to £4,000 for disabled children. This top-up is tax-free.
The money in the account can only be used to pay for approved childcare, such as childminders, nurseries, nannies, after-school clubs and play schemes. The childcare provider must be signed up to the scheme.
To benefit from the scheme, you (and your partner if you have one) must be working or on statutory leave, and you must expect to earn at least the National Living or Minimum Wage for your age for 16 hours a week on average over the next three months. At the current NLW, this is £1,853.28. You can also use the scheme if you are self-employed.
You cannot benefit from the top-up scheme if you, or your partner, earn more than £100,000 a year.
If your employer provides you with a place in a workplace nursery, you can enjoy the benefit of this tax-free, as long as conditions governing the tax exemption for workplace nurseries are met. There is no financial limit on the tax-free benefit.
The exemption remains available if the benefit of a place in a workplace nursery is made available under a salary sacrifice scheme.
Employer-supported care is childcare provided by someone where the contract is between the employer and the childcare provider, and the employer meets the costs. The benefit is tax-free up to your exempt amount.
You have one exempt amount, which applies to both employer-supported care and employer-provided childcare vouchers. This is £55 per week if you joined the scheme before 6 April 2011. If you joined the scheme after this date but on or before 4 October 2018, the exempt amount depends on your marginal rate of tax. It is £55 per week if you are a basic rate taxpayer, £28 per week if you are a higher rate taxpayer and £25 per week if you are an additional rate taxpayer.
If you joined such a scheme on or before 4 October 2018, you can continue benefitting from the exemption as long as your employer continues to provide the care. However, the exemption is lost if you sign up for the Government tax-free scheme.
The exemption remains available if the care is provided under a salary sacrifice scheme.
Employer-provided childcare vouchers
The tax exemption for employer-provided childcare vouchers operates in a similar way to that for employer supported childcare and shares the same tax-exempt amount. To benefit, you must have joined the scheme on or before 4 October 2018. However, you cannot benefit from the exemption and also the Government tax-free scheme.
The exemption remains available if the care is provided under a salary sacrifice scheme.
Disposing of assets where capital allowances have been claimed
Capital allowances are the tax equivalent of depreciation, and the mechanism of providing tax relief for certain items of capital expenditure. However, with the exception of cars, capital allowances are not available where accounts are prepared under the cash basis; instead relief may be available as a deduction in computing profits under the cash basis capital expenditure rules.
Plant and machinery capital allowances - Plant and machinery capital allowances are available for items such as machinery, fixture and fittings, tools, computer equipment, plant and vehicles. Capital allowances may be given at different rates.
100% allowances - The annual investment allowance (AIA) is given at the rate of 100% on qualifying expenditure up to the AIA limit. This is set at £1 million until 31 December 2021, reverting to £200,000 from 1 January 2022. Special rules apply where the accounting period spans 31 December 2021.
100% first-year allowances are also available in limited cases, such as for expenditure on new zero emission cars and goods vehicles
18% writing down allowances - Writing down allowances on main rate expenditure is given at the rate of 18% on a reducing balance basis. Main rate capital allowances are available for most plant and machinery.
6% writing down allowances - Some items, such as high emission cars and long life assets are allocated to the special pool and attract writing down allowances at the lower rate of 6%.
Enhanced capital allowances - For a limited period companies are able to claim enhanced capital allowances in respect of qualifying expenditure that is incurred between 1 April 2021 and 31 March 2023. A super deduction of 130% is available where the expenditure would otherwise qualify for main rate capital allowances at 18%, and a 50% first-year allowance is available where the expenditure would otherwise qualify for special rate capital allowances of 6%.
Balancing charges and allowances - The capital allowance system provides tax relief for the net capital expenditure (cost less sale proceeds) over the life of the asset. Consequently, when an asset is sold, is it necessary to take account of the disposal proceeds. If the capital allowances that have been claimed over the life of the asset exceed the cost less disposal proceeds, it may be necessary to claw back some of the allowances. This is done by means of a balancing charge.
Let’s assume a van is purchased for £10,000 and the AIA allowance is claimed, providing immediate tax relief for the full £10,000 of expenditure. If the van is sold three years later for £5,000, the net cost to the business is £5,000 (cost of £10,000 less proceeds of £5,000). However, without adjustment, the company would have received tax relief of £10,000. The position is corrected by means of a balancing charge of £5,000. The balancing charge effectively increases the profits that are charged to tax. Where the AIA or a 100% first year allowance has been claimed, the balancing charge will be equal to the sale proceeds.
There will not always be a balancing charge on disposal – it depends on whether the tax written down value is more or less than the sale proceeds. If it is more, there will be a balancing charge and if it is less, there will be a balancing allowance.
Example - A car is purchased for £15,000 on which main rate capital allowances are claimed at the rate of 18%. In year 1, the writing down allowance is £2,700, in year 2, it is £2,214 and in year 3 it is £1815. At the end of year 3, the written down value is £8,271.
If the car is sold for £8,000, balancing allowances of £271 will be available; however, if the car is sold for £10,000, a balancing charge of £1,729 will arise. The net allowances equal the cost less the disposal proceeds.
The balancing allowance increases taxable profits in the year of sale, while a balancing allowance will reduce the taxable profits.
Add proceeds to the pool - Unless the item is in a single asset pool, balancing charges and allowances are calculated globally for the ‘pool’ rather than on an individual asset-by-asset basis. Thus, when an asset is sold, it is not necessary to calculate the balancing charge individually for that asset – instead, the sale proceeds are simply added to the pool.
Super-deduction and balancing charges
Special rules apply where an asset has benefited from the super deduction of 130% and depending when the asset is disposed of, it may be necessary to inflate the sale proceeds when working out the balancing charge.
Childcare is expensive; however, the tax system can provide a helping hand. In recent years, there has been a shift from tax relief for employer-supported childcare and vouchers to a Government top-up scheme.
The Government operate a tax-free childcare scheme whereby parents deposit money into an account which can be used to meet childcare costs and the Government provide a tax-free top up.
To qualify for the scheme, the parent (and their partner if they have one) must each expect to earn at least £1,853.28 over the next 3 months. This is equivalent to 16 hours a week at the National Living Wage of £8.91 an hour. However, if either the claimant or their partner expect to have adjusted net income of more than £100,000 in the current tax year, they cannot benefit from the tax-free top up.
Eligible parents can access the tax-free top up by setting up an online childcare account for their child. For every £8 that is deposited into the account, the Government will add a further £2, to a maximum of £2,000 a year (or £4,000 a year where the child is disabled). The funds can be used to provide approved childcare, including that provided by childminders, nurseries, nannies, after-school clubs and playschemes, as long as the provider has signed up to the scheme. The care can be provided until the September after the child’s 11th birthday (or up to the child’s 17th birthday if the child is disabled).
The Government top-up scheme is not available to universal credit claimants, and cannot be used in addition to employer-provided vouchers or employer-supported care.
Employer-supported childcare and childcare vouchers
Where an employee joined their employer’s childcare or childcare voucher scheme on or before 4 October 2018, they can continue to benefit from the associated tax relief while their employer continues to operate the scheme. Childcare vouchers and/or employer supported childcare are tax-free up to the employee’s exempt amount. Where the employee is a basic rate taxpayer or joined the scheme prior to 6 April 2011, the exempt amount is £55 per week. Otherwise the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer. The exemption also applies for National Insurance purposes. Employees only have one exempt amount for employer-supported care and vouchers, regardless of the number of children that they have.
It is also possible for employer-provided childcare and childcare vouchers to be made available under a salary sacrifice scheme without triggering the alternative valuation rules.
No tax charge arises under the benefit in kind rules where childcare is provided in a workplace nursery. Unlike the exemption for employer-supported care and vouchers, there is no cap on the value of childcare that can be provided tax-free in a workplace nursery. However, there are stringent conditions that must be met for exemption to be forthcoming.
Which is best?
Where a parent could potentially benefit from more than one scheme, they should evaluate the options and can choose the one best suited to their needs. Employees in an employer-supported scheme or employer voucher scheme will need to leave that scheme if they sign up for the Government scheme, and will not be able to re-join the employer’s scheme if they change their minds.
Paying inheritance tax in instalments
Where inheritance tax is payable on an estate, it must normally be paid by the end of the sixth month after that in which the death occurred. For example, if the deceased died on 22 August 2021, inheritance tax on the estate would be due by 28 February 2022.
The six-month deadline does not leave very long if the executors need to sell assets in order to realise funds from which to pay the inheritance tax on the estate. HMRC recognise this, and allow inheritance tax to be paid in instalments in some circumstances. Where the executors wish to pay the inheritance tax in instalments, they must indicate this on the inheritance tax account (IHT400).
When payment can be made in instalments
The instalment option is only available in respect circumstances and in respect of certain assets:
• Houses – where the estate includes one or more houses, inheritance tax can be paid in instalments where the beneficiaries keep the house/houses to live in.
• Shares and securities – an instalment option is available if the shares or securities allow the deceased to control more than 50% of a company.
• Unlisted shares and securities – payment can be made in instalment if the shares are worth more than £20,000 and they represent at least 10% of the total value of the shares in the company at the price at which they were first sold (their ‘nominal’ value) or 10% of the total value of ordinary shares held in the company, at the price at which they were first sold.
It is also possible to pay the inheritance tax due on the whole estate (including that on assets which do not fall into the above categories) if at least 20% of the inheritance tax owed by the estate relates to assets that qualify for payment by instalment, or where paying the inheritance tax in a single lump sum would cause financial difficulty.
Interest is charged from the normal due date at the end of the sixth month following that in which the deceased died to the date of payment. Interest is not charged on the first instalment unless it is paid late.
Payment over 10 years
Where the instalment option is available, payment can be made over 10 years. The first payment must be made by the normal due date of the end of the sixth month following that in which the deceased died. Payment must then be made annually on that date. The amount payable each year is 10% of the tax payable in instalments, plus the associated interest.
If the asset in respect of which the tax is being paid in instalments is sold, the remaining tax owing must be paid in full.
Clearing the balance
Where the option to pay in instalments is taken, the outstanding balance can be cleared at any time.
HMRC and the work of the Adjudicators office
The Adjudicators Office (AO) is a little known but powerful government department independent of HMRC. Its remit is to rule on whether HMRC have handled a complaint 'appropriately and given a reasonable decision' however, their work is restricted to the following specific types of complaints:
• Unreasonable delays
• Poor and misleading advice
• Inappropriate staff behaviour
• The use of discretion
Recently the AO has been reporting on the last point on this list as it is under this heading that most complaints are made by 'customers' (under the 'Extra Statutory Concession' (ESC A19) rules). This concession refers to the situation where HMRC delays in using information presented to them with the result being an underpayment tax despite the customer and HMRC believing their tax affairs were up to date. Such information includes details of a change in income e.g. a new job or additional job, a taxable benefit provided by the employer or starting to receive a private or state pension. HMRC had been told of such instances but for whatever reason did not act on the information when it should have done.
Under this concession HMRC is permitted to 'use their discretion' to agree to a request to cancel collection of tax owing in respect of income tax, capital gains tax or Class 4 NIC only, even if the tax arrears are due to their mistakes.
All of the following need to apply before any application for cancellation can be made:
• HMRC has not used the information provided to them in a timely manner
• HMRC advised the taxpayer of the amount of tax owed more than 12 months after the end of the tax year in which they received the information.
• the taxpayer believed that their tax affairs had been in order for the years owed and HMRC agreed.
It may be possible to request cancellation of tax that it now transpires is owed for the last tax year but only in very exception circumstances and if all of the following apply:
• HMRC failed to act on information given about the same source of income more than once
• it is the first time HMRC have advised that the tax for an earlier tax year is outstanding
• the reason that the tax is owing for an earlier tax year and the last tax year are the same
• the tax has built up over 2 whole tax years or more
• the taxpayer believed that their tax affairs had been in order for the years owed and HMRC agreed.
Cases reach the AO after a customer has exhausted the formal complaints process which can be started online. The AO have become increasingly aware of inconsistencies in HMRC's dealings, so much so that they felt the need to collect evidence of the impact of the 'incorrect application of ESC A19' stating that HMRC's 'misinterpretation was undermining their reputation' and recommending that staff be better trained in this area.
Should a case reach the AO they have powers to award compensation if they deem that a claimant has lost out financially, or suffered anxiety or distress, as a result of HMRC's error or delay. However, the amount of compensation is pitifully small such that during the year 2016/17 HMRC paid a total of only £576,562 in redress for wrong and distress, poor complaint handling, costs, and 'liability given up' (i.e. the amount not collected) with only £165 granted for 'financial loss' and £22,020 awarded for 'worry and distress'.
Some 98.5% of complaints made to HMRC are resolved internally but if, after the taxpayer has gone through the usual complaints procedure they are still unhappy, they can ask to be referred to the independent AO. Statistics show that 41% of complaints which reach the AO are upheld in full or in part.