Tax relief for the expenses of running a property business
In common with other types of business, expenses are unavoidable when running a property business. However, subject to certain conditions, it is possible to obtain tax relief for the expenses of running a property business.
Allowable expenses - The general rule is that a landlord can deduct revenue expenses which are incurred wholly and exclusively for the purposes of renting out the property.
Examples of typical expenses incurred by a landlord running a property business for which a deduction may be available include:
No relief is available for costs met by the tenant. Typically, a tenant in a buy-to-let would pay the utility bills and the council tax. However, where a landlord lets furnished holiday accommodation, the utility bills and any business rates may be paid by the landlord. These can be deducted.
Interest and finance costs - Landlords running a property business cannot deduct interest and finance costs, such as mortgage interest, when calculating their taxable profit. Instead, they can deduct 20% of those costs from the tax that they owe. The deduction is capped at the amount of tax – it cannot generate a repayment. However, any unrelieved interest and finance costs can be carried forward.
These rules do not apply to furnished holiday lettings, in respect of which interest and finance costs can be deducted in full in calculating profits.
Private and business expenses - Relief is only available for business expenses, and where an expense is incurred for both private and business purposes, relief is only available if the business element can be separately identified. If a car is, for example, used both privately and for the business, relief is available for business mileage costs, but not private journeys. Approved mileage rates can be used.
Domestic items - Separate rules also apply to domestic items, such as furniture, furnishings and white goods, in a residential let. No relief is available for the initial cost of the item, but where the item is replaced, the cost of a like-for-like replacement can be deducted in calculating profits.
These rules do not apply to furnished holiday lettings.
Capital expenditure - The treatment of capital expenditure depends on the way in which the accounts are prepared. The cash basis is the default basis where rental receipts do not exceed £150,000. Where this is used, capital expenditure can be deducted in calculating profits unless such as deduction is expressly prohibited. The main exclusions are land and buildings and cars.
Under the accruals basis, relief is available either in the form of capital allowances (which are limited in a residential let) or when computing the gain on the eventual sale.
Keep records - It is important to keep good records of expenses so nothing is overlooked.
Is it worth registering for VAT voluntarily?
You must register for VAT if your VAT taxable turnover for the last 12 months exceeded the VAT registration threshold of £85,000, or if you expect your turnover in the next 30 days to exceed this amount. However, while you are not obliged to register for VAT if your turnover is below this level, you can choose to do so voluntarily.
Is this beneficial?
Need to charge VAT
If you are VAT registered, you will need to charge VAT on taxable supplies that you make. Unless you make zero-rated supplies (for example, zero-rated foods), this will make your products more expensive to the purchaser. If predominantly you supply to VAT-registered businesses, this may not be an issue as they will be able to recover the VAT charged. However, if you supply to individuals, charging VAT may make you less competitive against businesses that are not VAT-registered. If you supply standard-rated goods, you will need to add on 20%.
Ability to recover input VAT
One of the main advantages of registering for VAT voluntarily is that you will be able to recover the VAT associated with making taxable supplies (including those that are zero-rated). However, if you make exempt supplies, you cannot recover the associated input tax.
Businesses that make zero-rated supplies only or mainly should consider registering for VAT voluntarily if their turnover is below the VAT registration threshold as they will be able to recover any associated input tax, but the imposition of VAT at the zero rate will not make their supplies more expensive.
Registering for VAT comes with an associated compliance burden. All VAT-registered traders are now within Making Tax Digital (MTD) for VAT. Consequently, they must maintain digital records and file VAT returns using software that is compatible with MTD for VAT. This will involve both time and costs, which may outweigh any VAT recovered.
Do the sums
To assess whether it is worthwhile registering for VAT voluntarily, there is no substitute for doing the sums to see whether what you could potentially recover is worthwhile.
Paying PAYE by recurring direct debit
Employers must act as a tax collector for HMRC, deducting tax, National Insurance and, if applicable, student loan deductions, from their employees’ pay and pay these over to HMRC with their employer’s National Insurance contributions. The payments must reach HMRC by 22nd of the following tax month where payment is made electronically, and by the earlier date of 19th of the following tax month where payment is made by cheque.
As penalties are charged if the payments are made late for more than one month in the tax year, it is important that these deadlines are not missed. A new recurring direct debit facility may help employers to meet the payment deadlines and avoid penalties.
There are currently a range of payment options available to employers to pay their PAYE. Payment methods include online banking, using a debit card or a corporate credit card or at a bank or building society. Cheques can also be sent in the post, but an earlier payment deadline applies.
It has been possible to pay by direct debit, but only as a one off. However, this is changing, and from 19 September 2022, employers will be able to set up a recurring direct debit to pay their PAYE.
Payment via variable direct debit
Employers wishing to pay by direct debit each month will need to set this up through their business tax account and the Employer’s PAYE Online service.
A new option will be added to the employers’ liabilities and payments screens, which will feature the option to ‘set up a direct debit’. This will provide HMRC with authorisation to collect the PAYE and NIC that they owe, as shown on their RTI payroll submission, direct from the employer’s bank account.
Once the employer has set up a recurring direct debit facility, the link will change to ‘Manage your direct debit’. This will allow the employer to view, change or cancel their direct debit online.
It should be noted that only the employer can set up, amend and cancel the direct debit; this is not something that can be done by their agent on their behalf.
Is it still worth incorporating?
For many years, working out whether tax savings could be achieved by incorporation was relatively straightforward. Once profits reached a particular level, transferring the trade to a limited company and using profit extraction strategies would save a lot of money; the larger the profits, the bigger the saving. This all changed in 2016 with notional tax credits for dividends being abolished such that the question of whether to incorporate depended on a combination of factors. Now with the increase in dividend tax rates as from April 2022 the question as to whether to incorporate (or disincorporate) has even more relevance as in certain instances it is more tax efficient to operate as a sole trader or in a partnership. However, tax savings can still be achieved particularly if there is more than one director-owner and if not all profits are withdrawn. As ever it all depends on the calculations.
Tax savings on incorporation - When you are looking to work out whether incorporation is financially worthwhile, you are looking at the income tax situation for the individual director-owner and the corporation tax liability to give a total tax saving figure. The table below shows the savings per level of income. The calculation assumes that all profit is withdrawn.
Example 1 – Income gains on incorporation
Profit. Sole trader net Company owner net. Extra
after tax and NIC. after tax and NIC received
£ £ £
£20,000 17,520 17,810 290
£30,000 24,495 25,201 706
£40,000 31,470 32,592 1,122
£50,000 38,445 39,983 1,538
£60,000 44,156 47,312 3,156
£70,000 49,830 52,678 2,848
£80,000 55,505 58,045 2,540
£90,000 61,180 63,411 2,231
£100,000 66,856 68,777 1,921
£125,000 76,043 81,554 5,511
£150,000 90,203 90,413 210
£200,000 116,078 116,078 nil
The table shows that as a 'rule of thumb' if all profits are to be withdrawn and the Employment Allowance is not available (as would usually be the case with a sole director-employee) then for 2022/23 incorporation is generally not worthwhile for profits under £40,000 (bearing in mind the additional work and cost involved in preparing more detailed accounts, running a payroll and submitting additional returns to both Companies House and HMRC). However, once profit exceeds £60,000, the situation changes in favour of incorporation. The savings figure then drops at £70,000 profit, becoming exactly level at £200,000, due to the large 'jump' in the higher dividend rate of 33.75% in comparison with the basic rate of 8.75% and, importantly, the abatement of the personal allowance on income over £100,000. The tax savings reaches highest if the profit is £125,000 because at this profit, all the personal allowance of £12,570 for a self-employed taxpayer is cancelled. In contrast, a company profit of £125,000 means a dividend and salary available of £103,170 – allowing £10,985 personal allowances to be deducted.
Other considerations - There are various reasons why the above figures should be used as a guide only. The main one being that they assume all the profit is withdrawn which is not the case with many companies. Pension contributions can be a valuable method of extracting profits with no personal tax implications for the director-owner and tax relief for the company.
In addition, the calculations assume a sole director-shareholder but if the company could be set up with a spouse or civil partner then including two personal allowances, two basic rate bands and two dividend allowances in the mix could still yield large savings.
When deciding whether to incorporate it should not be forgotten that there are other vehicles of operation that may produce higher tax savings in comparison. A partnership could be a more tax-efficient option for those who are married or civil partners because of the availability of double personal allowance and double basic rate band (assuming that there is no other income). However, bearing in mind the protections offered as a company may lead the owner to look at setting up a limited liability partnership.
Finally, it must be said that the above figures could all change in the next few weeks as whoever is the new incumbent of Number 10 may reduce tax rates or National Insurance contributions in the next 'emergency budget'.
How gifting can save you tax
Gifting assets during one’s lifetime is never an easy proposition even though by doing so inheritance tax (IHT) may be reduced in the long run. The dilemma is well-known, namely, that to reduce IHT you have to draw capital out of your estate but if you do - once it's gone, it's gone. Further, any capital that remains in the estate will usually increase in value thereby increasing the final IHT bill assuming that the monies are not needed to be otherwise spent (e.g. care home fees).
Gifts out of income - Arguably the cost-effective way to make IHT-free gifts and prevent unused income accumulating as capital liable to IHT is to make the gifts out of income. Such transfers are considered exempt transfer if the following conditions apply:
the payment is shown as part of the transferor’s normal expenditure (i.e. regular or habitual payments)
Gifts must be made out of regular income (i.e. out of disposable income or surplus income after paying taxes and all other living expenses).
The transferor must retain normal income to maintain his/her normal standard of living.
The smaller exemptions - Advantage should be taken of the smaller reliefs available e.g. the annual exemption of £3,000 potentially saves £1,200 IHT each year, and any number of smaller £250 gifts can also be made in any one year free of IHT. There are other exemptions, although these are aimed at specific events and are of relatively restricted benefit in tax saving terms. For example, £5,000 can be gifted by a parent on the marriage or civil partnership of a child, £2,500 where the transferor is either a remoter ancestor than a parent or is one of the parties to the intended marriage or civil partnership, or £1,000 in respect of any other transferor.
Gifting monies above such amounts can be made IHT-free as long as the donor lives for more than seven years (a 'potentially exempt transfer'). However, should the donor die within that period, HMRC will treat the money as part of the death estate and charge IHT accordingly. Gifts given in the 3 years before death are taxed at the full rate of 40% however, gifts given between three and seven years before death are taxed on a sliding scale known as ‘taper relief’.
Transfers to UK spouses are exempt (for CGT as well as IHT) and transfers to non-UK spouses are exempt up to £325,000.
Trusts - Trusts can be an effective method of taking capital out of the estate so IHT is reduced but again the amount that can be transferred tax-free is limited. Should the trust be created during the settlor’s lifetime, IHT is due at 20% of the transfer value more than the Nil Rate Band (NRB) amount (£325,000 for 2022/23 - frozen until 5 April 2026). Therefore, placing an asset valued at less than the NRB will not produce a tax charge if the full NRB is available. PETs are aggregated with the transfer to determine the amount remaining of the NRB and if this total figure is higher, then the tax charge is on the excess amount only.
Insurance products - The insurance industry offers products that can ensure no or minimal IHT is paid in the form of discounted gift trusts, or investment funds. However, these products are inflexible and costly to set up and run. Under such trusts the amount gifted is invested into a life insurance investment bond and transferred/gifted to a Discounted Gift Trust established at the same time. The transfer constitutes a PET for IHT purposes. A regular income for the settlor can be achieved by permitting regular withdrawals determined at the outset and paid at a pre-determined frequency during the settlor's lifetime -- these payments cannot be subsequently altered.
Open ended loans - As an alternative to insurance products or making a straight gift to the intended beneficiary, the donor could gift an interest-free, open-ended loan, which the beneficiary could use to buy investments. The value of such planning is that the income generated by the investment forms part of the donee's estate for IHT purposes rather than the donors. A loan can also be used in conjunction with the annual exempt gifts allowance whereby up to £3,000 is written off each year as this counts as a gift and reduces the amount to be repaid.
Otherwise leave everything to charity or a political party. Gifts, during lifetime or on death, to most UK charities or registered community amateur sports clubs are IHT exempt, as are gifts to any UK political party (as long as at the last election it had either at least two MPs in the House of Commons or one MP and received at least 150,000 votes).
Can you be penalised for submitting a return too early?
The supposed reason why HMRC issue penalties is to deter future late payment of tax and/or late submission of tax returns. There are set dates for self assessment returns, payment, VAT and corporation tax etc., but submissions for payroll under the real time information (RTI) system do not have deadlines on set dates. Instead, the law states that submission must be “on or before making a relevant payment.” HMRC can impose a penalty where an employer does not file “on or before.” The penalty increases depending on the number of employees in the PAYE scheme. The penalty starts at £100 a month for late filing where there are one to nine employees and rises to £400 a month for 250 or more employees. Further penalties are charged for those filing over three months late. However, there is an exception for the first failure in the tax year.
Late filing penalties are not supposed to be levied if returns are submitted early. However, recently a company named Quayviews Ltd found that this is not always the case. Quayviews had been late in submission previously, therefore, to ensure that this would not happen again they 'batch filed' submissions for the tax months 7, 8, 9 and 12, submitting all in tax month 5. HMRC’s Basic PAYE Tools software allowed early filing, and Quayviews thought nothing was wrong as they received an acknowledgement of submission. However, HMRC issued a late filing penalty for tax months 7, 8 and 9 (why none was issued for month 12 was not explained). The company appealed and the case ended up at the First Tier Tribunal.
Although it was acknowledged that the returns had been received, HMRC’s National Insurance and PAYE Service (NPS) was unable to process the returns and allocate any FPS to a specific tax month. HMRC confirmed that it had issued penalties because in their view the company had no 'reasonable excuse' for the returns not being filed within the relevant tax month. The Tribunal disagreed and found for the company stating that the company did have a reasonable excuse for a number of reasons not least that HMRC's guidance states that a FPS must be filed “on or before.” In addition, HMRC’s Basic PAYE Tools allows files to be submitted early without indicating that 'early' could mean 'too early'.
Based on this case employers need to be aware that in HMRC's view a late filing occurs when a FPS is submitted late, that is, not on or before payday or HMRC does not receive the FPSs that they expected to receive. Non-filing is where HMRC does not receive the FPS within the tax month, between the 6th of one calendar month and the 5th of the next.
Therefore, although it would appear that HMRC's systems do not comply with what is stated in law, to ensure no penalties are levied, RTI returns should not be made before the beginning of the relevant tax month; rather wait until the relevant month has begun before submitting each return. Also be aware that if a 'success' messaged is received whichever payroll software is used, it means that the submission has been received and not that it is correct.
Rising mortgage costs – What tax relief is available?
In a climate of interest rate hikes and rising mortgage rates, property investors will want to ensure that they do not miss out on tax relief where it is available. The rules that provide relief for interest and finance costs depend on the type of let, and the rules on traditional residential lettings are now much less generous than they have been in the past. Where a landlord has a mortgage on a let property, tax relief is only available for the interest, not for any capital repayments.
Unincorporated landlords letting residential property obtain relief for interest and finance costs as a basic rate tax reduction. This means that the landlord can deduct 20% of their interest and finance costs from the tax that they owe on their rental profits.
If the profit is less than the interest costs or the profit is sheltered by the personal allowance, the basic rate reduction is capped at 20% of the lower of:
This prevents the tax reduction from generating a tax repayment – at best it can reduce the tax bill to nil if the taxpayer is a basic rate taxpayer. Any unrelieved interest costs can be carried forward to the following year.
Different rules apply to landlords letting commercial property. Regardless of whether the landlord is an unincorporated landlord or a property company, they can deduct the interest and finance costs in calculating the profit for the property business. The costs can be deducted in full, even if this results in a loss. This means that an unincorporated landlord letting non-residential property will receive relief for mortgage interest and other finance costs at his or her marginal rate of tax, whereas if the landlord lets residential property, relief is restricted to the basic rate.
Furnished holiday lets
Furnished holiday lets have their own set of rules and enjoy a more generous tax regime than that for residential lets. Where a landlord has a mortgage on a furnished holiday let, they can deduct the interest and other finance costs in full in calculating the profit or loss of the furnished holiday lettings business. Consequently, relief is given at the landlord’s marginal rate of tax.
Where the property business is operated through a company, regardless of the type of let, interest and finance costs can be deducted in full in calculating the company’s profit or loss for tax purposes. As a result, relief is given at the corporation tax rate, which for the financial year 2022 (running until 31 March 2023) is 19%.
Main residence exemption – When does it apply?
Generally, when a person sells a home that they have lived in as their main residence, they will not have to pay tax on any gain that has arisen since they purchased the property. This is because of the capital gains main residence exemption which takes the resulting gain outside the capital gains tax charge. However, as for all tax exemptions, it is subject to the associated conditions being met. The fact that a property is occupied as a home is in itself not enough to ensure that a capital gains tax liability will not arise on disposal. Therefore, it is important to be clear as to the conditions that must be met for the exemption to apply.
Nature of the exemption
The main residence exemption provides relief from capital gains tax on the disposal of a taxpayer’s only or main residence. For any gain to be fully exempt, the taxpayer must have occupied the property as their only or main residence for the whole time that they have owned it (or the full period less the last nine months). Where a property has been the taxpayer’s only or main residence for some but not all of the period of ownership, the gain is time apportioned and the exemption applies to the period occupied as the only or main residence and the final nine months of ownership.
The final period exemption means that the gain relating to the last nine months of ownership is exempt from tax. This is increased to the last 36 months if the taxpayer is disabled or in residential care.
Relief is only available for a property occupied as a residence; it does not apply for any period, or to any part, which is let (subject to any available lettings relief) or used for business purposes. Where this is the case, the gain must be apportioned as only the part used as a main residence qualifies for the exemption.
The property can be anything lived in as a home – ranging from houses and flats to houseboats.
The main residence exemption extends to any land and gardens up to the permitted area that the taxpayer occupies and enjoys with the residence. The permitted area is set at 0.5 of a hectare by the legislation. However, a larger area may qualify for relief where this is required for the reasonable enjoyment of the property, having regard to its size and character.
Only one main residence
A taxpayer can only have one main residence for tax purposes at a time, and married couples and civil partners can only have one main residence between them. Where the taxpayer or a couple have more than one home, they will need to elect which one is to be their main residence for capital gains tax purposes. The election must be made within two years of a change in the mix of properties. Once made, the taxpayer can ‘flip’ their main residence by varying the election where this is beneficial to ensure the exemption is used to shelter the greatest potential gain.
Extended carry back of losses – don’t miss the claim deadlines
To help businesses that suffered losses during the Covid-19 pandemic, temporary measures were introduced to increase the period for which certain losses could be carried back. This is helpful as it enables businesses to obtain relief for those losses earlier, generating a useful tax repayment at times when the business may be suffering from cash flow difficulties.
Relief is available to both unincorporated business and companies, although the mechanics of the relief is different. To take advantage of the extended carry back period, the relief must be claimed by the relevant deadline.
The extended carry-back rules apply to losses for the 2020/21 and 2021/22 tax years. Under the rules, unrelieved losses can be carried back and set against profits from the same trade for the three years before the tax year of the loss. The extended rules apply where a claim has been made to relieve the loss against the general income of the year of the loss and/or the previous tax year, and the loss has not been fully relieved by that claim. Losses carried back under the extended rules are set against the trading profits of a later tax year before that of an earlier tax year. Losses carried back under the extended rules are capped at £2 million for each loss-making tax year within the scope of the relief.
If a business wishes to use the extended carry-back rules in respect of a 2020/21 loss, it must claim by 31 January 2023. The deadline to claim relief for a 2021/22 loss under the extended carry back rules is 31 January 2024. Claims are normally made in a tax return, but a stand-alone claim can be made where the claim affects more than one tax year.
A sole trader makes a loss in 2020/21. He has no other income in that year. He makes a claim for sideways relief to carry back the loss against his general income for 2019/20. If he wishes to take advantage of the extended carry-back rules to carry back any unrelieved loss against trading profits of 2018/19 and, where loss is not fully relieved, against trading profits of 2017/18, he must claim by 31 January 2023.
It should be noted that the claim cannot be tailored to prevent personal allowances from being wasted. Where this will occur, consideration should be given to whether it would be preferable to carry the loss forward instead and set it against future trading profits.
Under normal rules, a company can carry back a loss for an accounting period back one year against the profits of the previous accounting period. Under the extended carry-back rules, losses for accounting periods ending between 1 April 2020 and 31 March 2022 can be carried back up to three years. Losses must be set against the profits of a more recent accounting period before those of an earlier accounting period. A cap of £2 million applies to losses for accounting periods ending between 1 April 202 and 31 March 2022 which can benefit from the extended carry-back. A separate £2 million cap applies to losses for the accounting period ending between 1 April 2021 and 31 March 2022.
Claims must be made within two years of the end of the accounting period in which the loss arose.
A company prepares accounts to 31 March each year. It made a loss in the year to 31 March 2021. Under normal rules, the loss can be carried back against profits for the year to 31 March 2020. If the loss is unrelieved, a claim can be made under the extended carry back rules to set the loss first against the profits of the year to 3 March 2019 and, if still not fully relieved, against the profits of the year to 31 March 2018.
The claim must be made by 31 March 2023.
File your tax return by 30 December to pay tax through PAYE
If you need to file a self-assessment tax return for 2021/22, you must do this online by 31 January 2023 if you want to avoid a late filing penalty. However, if you received your notice to file a tax return after 31 October 2022, a later deadline applies; you must file the return within three months of the date of the notice to file.
You must also pay any remaining tax that you owe for 2021/22 by 31 January 2023. If you are self-employed, this is also the deadline for paying Class 2 and Class 4 National Insurance for 2021/22. Where your tax and Class 4 National Insurance liability for 2021/22 is at least £1,000, you must also make your first payment on account for 2021/22 by the same date, unless at least 80% of your tax liability for the year is collected at source, for example, under PAYE.
The need to pay any remaining tax and National Insurance for 2021/22 plus the first payment on account for 2022/23 by 31 January may present something of a financial challenge, particularly given the cost of living crisis. However, if you have a source of income that is taxed under PAYE, there is a way to spread the cost without the need to agree to a Time to Pay arrangement -- by opting to pay your self-assessment bill through PAYE. However, there are certain eligibility conditions to be met, and you must also file your 2021/22 tax return online by the earlier date of 30 December 2022.
Am I eligible?
You can pay your self-assessment tax bill for 2021/22 through PAYE if:
you owe less £3,000 on your tax bill;
However, you will not be able to choose this route if:
If you owe more than £3,000, you cannot use this option – it is not possible for £3,000 to be collected under PAYE and the balance to be paid by 31 January. However, if you are struggling to pay, you could consider setting up a Time to Pay arrangement to spread the cost.
Where you elect to pay your 2021/22 self-assessment tax bill through PAYE, your 2023/24 tax code will be adjusted to collect the tax throughout the 2023/24 tax year. This effectively allows you to spread the cost over 12 months and pay in interest-free instalments. In a climate of rising interest rates, this is an attractive option (although on the downside, it will reduce your take-home pay each month).
Should I pay Class 2 NIC voluntarily?
Entitlement to the state pension and certain contributory benefits depends on an individual having paid, or been credited with, sufficient National Insurance contributions.
To qualify for the full single-tier state pension, an individual needs 35 qualifying years. A reduced state pension is paid where a person has less than 35 qualifying years, but at least 10.
There are different Classes of National Insurance contribution and the Class paid depends on whether an individual is employed or self-employed. A further Class, Class 3, can be paid voluntarily where an individual wants to top up their contribution record.
Although self-employed earners are required to pay both Class 2 and Class 4 National Insurance contributions once their profits reach the relevant thresholds, it is only the payment of Class 2 that counts towards their state pension entitlement.
Class 2 contributions are weekly flat-rate contributions which must be paid by self-employed earners whose earnings exceed the relevant threshold.
For 2022/23 and later tax years, Class 2 National Insurance contributions are payable once profits exceed a new threshold, the lower profits threshold. This is aligned with the lower profits limit for Class 4 contribution and for 2022/23 is £11,908. This means that the starting point for Class 2 and Class 4 contributions is now the same. Where profits are at or above this level, the contributor must pay Class 2 contributions. For 2022/23 these are at rate of £3.15 per week. Class 2 contributions are paid through the self-assessment system with tax and Class 4 contributions. Where the earner has been self-employed throughout 2022/23 Class 2 contributions for the year are payable in a lump sum of £163.80 (52 weeks at £3.15 per week) by 31 January 2024.
Where earnings from self-employment are between the small profits threshold, set at £6,725 for 2022/23, and the new lower profits threshold, for 2022/23 onwards the self-employed earner is treated as having paid Class 2 contributions at a zero rate. The effect of this is that the year counts as a qualifying year for state pension and benefit purposes despite the earner having paid no actual Class 2 contributions. This places a self-employed earner with low earnings in a similar position to an employed earner with low earnings. For 2021/22 and previous tax years, Class 2 contributions were payable at the usual weekly rate once earnings reached the small profits limit.
A self-employed earner with profits below the small profits threshold does not benefit from notional contributions, and unless they pay another Class or receive National Insurance credits, they will need to pay sufficient voluntary contributions for the year to be a qualifying year.
While a self-employed earner whose earnings are below the small profits threshold is not obliged to pay Class 2 National Insurance contributions, they are entitled to. This opens up a low cost route to securing a qualifying year, as paying Class 2 contributions at £3.15 per week for 2022/23 is far cheaper than paying voluntary Class 3 contributions at £15.85 per week – an annual saving of £660.40.
Is it worthwhile?
Whether paying Class 2 contributions is worthwhile will depend on an individual’s circumstances. If they already have 35 qualifying years, or expect to do so without making voluntary contributions by the time that they reach state pension age, there is nothing to be gained from paying Class 2 contributions voluntarily. You can check your state pension entitlement via the HMRC app or online at www.gov.uk/check-state-pension.
Where a person also has a job and will pay Class 1 National Insurance contributions on earnings equal to 52 times the weekly lower earnings limit (£6,396 for 2022/23), they will secure a qualifying year from the payment of Class 1 contributions. Likewise, if an individual receives National Insurance credits, for example, because they are registered for child benefit for a child under the age of 12, it will not be worthwhile paying voluntarily Class 2 National Insurance contributions.
However, where a person has less than 35 qualifying years and is looking to build up their state pension entitlement, serious consideration should be given to paying Class 2 contributions. At 2022/23 rates, each additional qualifying year increases the state pension by £5.29 per week. For a cost of £3.15 a week, this is definitely worthwhile.
Can you benefit from the trading allowance?
The trading allowance enables an individual to earn up to £1,000 from self-employment, the provision of casual services (such as gardening or babysitting) or from hiring out personal equipment without having to pay tax on that income or tell HMRC about it. You may also make use of it if, for example, you sell items on sites such as eBay and Depop.
The £1,000 limit applies to total income from all self-employments. This means that if you have a main self-employment and a side-line earning less than £1,000 a year, you cannot use the allowance against the sideline – the income is taxable and must be reported to HMRC with that from your main self-employment.
If your income is less than £1,000 but you have made a loss, you may prefer to tell HMRC to calculate your loss in the usual way and tell HMRC about the income so that you can claim relief for the loss. This can be done either against other income of the same year or against future profits of the same business.
If you are starting a new self-employment and you do not expect your income to exceed £1,000 you do not need to register for self-assessment. However, you will need to register if your income reaches £1,000 as you will need to report it to HMRC.
Income exceeds £1,000
If your income exceeds £1,000 you must register for self-assessment and tell HMRC about your income. However, you may still be able to make use of the allowance.
If your income is more than £1,000 you have a choice as to how you calculate your taxable profit, and can choose the way which gives the best result. The first option is to calculate your profit in the usual way, deducting allowable expenses from your income. The second option is to deduct the trading allowance of £1,000 rather than the actual expenses. This will be beneficial where your actual expenses are less than £1,000.
Whichever option you choose, you will need to tell HMRC about your income on your self-assessment return and pay tax on it.
The trading allowance cannot be used for a tax year in which you receive trading income from:
a company that you own or control or which is owned or controlled by someone close to you (such as a family or personal company);
a partnership where you, or someone connected to you, is connected to the partners (for example, from a partnership where one of your children is a partner);
your employer, or your spouse or civil partner’s employer.
Reduction in the dividend allowance
The dividend allowance is available in addition to the personal allowance. It allows all taxpayers regardless of the rate at which they pay tax to receive dividends up to the level of the dividend allowance free of any personal tax. This is in addition to any dividends sheltered by the personal allowance which are also received free of tax.
The dividend allowance has been a useful planning tool for family companies; where family members are shareholders, paying dividends to utilise any available dividend allowance increases the profits that can be extracted tax-free.
However, the dividend allowance, currently set at £2,000, is to be reduced. It will fall to £1,000 for 2023/24 and to £500 for 2024/25. The reduction will affect personal and family companies who extract profits as dividends, and also those who receive dividend income from investments in shares.
Taxation of dividends
Dividends have their own rates of tax, which are lower than the income tax rates. They also benefit from a dedicated allowance – the dividend allowance. Although termed an allowance, it is really a nil rate band, and dividends covered by the allowance are taxed at a zero rate. However, the allowance uses up the part of the tax band in which it falls, with dividends being taxed as the top slice of income.
The dividend tax rates were increased by 1.25% from 2022/23 as part of a package of measures brought in alongside the now cancelled Health and Social Care Levy. Despite the cancellation of the levy and the reversal of the associated temporary National Insurance rises, the dividend tax rates are to remain at their 2022/23 rates whereby dividends are taxed at 8.75% where they fall within the basic rate band, at 33.75% where they fall within the higher rate band and at 39.35% where they fall within the additional rate band.
Impact of reduced dividend allowance
Taxpayers who receive dividend income in excess of £1,000 which is not sheltered by the personal allowance will feel the effect of the reduction in the dividend allowance. Where dividend income is at least £2,000 in 2022/23 and 2023/24, the extra tax paid by a basic rate taxpayer on their dividend income in 2023/24 is £87.50; for a higher rate taxpayer the increase is £337.50 and for an additional rate taxpayer, it is £393.50.
Dividends can only be paid from retained profits and must be paid in proportion to shareholdings.
A popular strategy in a family company is to use an alphabet share structure whereby each family member has their own class of share (A shares, B shares, etc.). This allows dividends to be tailored to utilise unused dividend allowances and basic rate bands. The fall in the dividend allowance will reduce the extent to which this strategy can be used to extract profits tax-free. Family and personal companies will need to review their profit extraction strategies as a result.
Where company profits are more than £50,000, the corporation tax increases from April 2023 will reduce the post-tax profits available for distribution as a dividend, and the reduced dividend allowance will increase the tax payable by shareholders where those profits are extracted as dividends. These changes will reduce the post-tax profits available for use by the shareholders outside the company.
LLP v a company - Which is best?
Limited liability partnerships (LLPs) are a relatively new type of business structure that came into being following the financial crisis of the late 1980s, and early 1990s. In the UK, before 2000, generally, each partner was jointly and severally liable for the firm’s liabilities which meant that a partner could become liable for the negligent acts of another partner, possibly someone they had never met or who even lived on the other side of the world. An LLP is therefore a hybrid of a private limited company and a traditional partnership designed to combine a company's limited liability with the benefits of flexibility, confidentiality and tax transparency provided by unlimited general partnerships.
A general partnership is an informal agreement between two or more individuals and there is no liability protection when it comes to exposure to potential claims or other issues. In comparison, an LLP is a formal arrangement that has been lodged with Companies House and has specific rules and regulations attached to it for the management of the business. The format is popular with professionals who would normally operate as a general partnership, such as solicitors, doctors, accountants, and architects. An LLP does not have directors, shareholders or guarantors, instead it has members/ 'partners'. There must be at least two members to register an LLP but there is no upper limit to the number of members permitted.
The main benefit of an LLP is that it enables individual partners to only be personally liable for the amount they have invested into the business. Their personal assets and income are protected such that if the partnership fails, creditors cannot come after them. LLP members and the directors of a limited company will generally only become personally liable for the debts or liabilities of the LLP or company in certain limited circumstances (such as wrongful or fraudulent trading). Despite this treatment, an LLP is taxed in the same way as other partnerships (except for minor differences in the treatment of losses) and is not liable for Corporation Tax (although a company can be a partner). Individual partners are responsible for their own profits and for paying Income Tax and National Insurance on their individual profits. Therefore the calculation as to whether becoming an LLP or company is more beneficial taxwise is the same as the comparison with a general partnership.
The benefits come under other headings such as flexibility. For example, an LLP allows partners to agree on how the profits are divided, not being restricted on the number of shares held; this gives greater scope to cater to individual needs or tax rates than if the arrangement was through a limited liability company.
One of the 'downsides' of becoming an LLP in comparison with being a general partnership is the extra administration. Similarly as with a company, the entity must be registered with Companies House and submit accounts, including the earnings of individual partners. This means the information will be of public record with little or no privacy. Also, if the LLP is only comprised of two members, the partnership will be compulsorily dissolved if one decides to leave.
Take advantage of the limited window to save SDLT
In the ill-fated mini Budget, the then Chancellor increased the residential stamp duty land tax threshold from £125,000 to £250,000 with effect from 23 September 2023. The first time buyer threshold was also increased by £125,000 to £425,000; it now applies where a first-time buyer buys a home costing £625,000 or less.
Unlike many of the mini Budget announcements, the current Chancellor did not reverse this measure. However, he did impose a time-limit on the increase, announcing a sunset clause in the 2022 Autumn Statement. As a result, the higher thresholds will now only apply until March 2025, after which they will revert to their pre 23-September 2022 levels.
With falling house prices, buying may be attractive to those looking to purchase an investment or second home where the purchase can be funded without the need for a mortgage. There is no urgent rush as the higher thresholds are to remain until 31 March 2025. However, completing on or before 31 March 2025 will save residential purchasers SDLT of £2,500 (£125,000 @ 2%).
First-time buyers benefit from a higher threshold, as long as the property that they purchase does not cost more than the ceiling price for the first-time buyer threshold.
From 23 September 2023, the first-time buyer threshold is £425,000 and applies where the price paid is £625,000 or less. A first-time buyer will pay no SDLT on the first £300,000 and SDLT on the excess over £425,000 at the rate of 5%. If the price of the property is more than £625,000, the normal residential rate and thresholds apply.
The first-time buyer threshold is to revert to £300,000 from 1 April 2025 and once again will only apply where the price of the property is £500,000 or less. First-time buyers thinking of buying a property costing between £500,000 and £625,000 may wish to consider doing so on or before 31 March 2025. Delaying the purchase beyond 31 March 2025 could be expensive.
Tom is a first-first buyer looking to buy a flat in London. He has a budget of £600,000.
If he completes the purchase on a £600,000 on or before 31 March 2025, he will benefit from the first-time buyer threshold of £425,000. He will pay SDLT on the purchase of £8,750.
However, if he buys the flat on or after 1 April 2025, he will not benefit from the first-time buyer threshold as the price of £600,000 is more than the ceiling price applying from that date. Consequently, he will pay SDLT at the normal residential rates. This will cost him £20,000. Delaying the purchase increases the SDLT he must pay by £11,250.
The tax implication of renting accommodation to your business
Many director-owners of companies own the commercial property from which their company trades. The reasons for this vary and could be historic e.g. the business was initially run as a sole trader and is now trading as a company. However, most company owners hold their business premises personally so that if the company should become insolvent, a property owned by the director will usually be safe from the liquidator and any creditors (unless fraud or negligence is involved).
Usually the original reason for personal ownership has nothing to do with income tax but charging the company may prove to be more or as tax efficient than withdrawing money in the form of a dividend depending on the individual's marginal income tax rate. Whether charging rent is tax-efficient needs to be looked by taking into account the immediate tax position of both the director and the company, but also the future capital gains tax (CGT) position when the property or the company is sold.
Benefit to the director
The main benefit for the director is that, unlike dividends, there is no legal requirement for the company to have sufficient distributable profits for the payment to be made. In addition, as the payment is not in the form of salary or a bonus no NIC charges will be due for either the director or the company. Further, tax relief can be obtained against rental income from the commercial property should there be a mortgage on the property. The 'downside' is that the director will be liable for income tax on rent received less rental expenses at his or her marginal tax rate. Benefit to the company
The company is allowed full corporation tax relief on payments made and there is no employer NIC cost (as not salary or a bonus).
On sale of the company
If the company owns the property problems could arise should the company be sold. Many buyers may not also want to buy the premises as they may have their own. However, by holding the premises personally outside of the company, the advantage is that the purchaser can buy just the trade, without also buying the premises.
If there is a qualifying disposal of shares and an 'associated asset' is also sold at a gain, it may be possible to claim Business Asset Disposal Relief (BADR). The asset needs to have been owned by a shareholder and be in use by their 'personal company' at the time the business has ceased or part or all has been sold, BADR is available on disposals of business assets, reducing the rate of CGT on qualifying gains to 10%, subject to a £1 million lifetime limit. However, by charging full market rent all relief is lost as the property will count as an investment asset. If the company pays rent lower than the market rent or has paid rent since 6 April 2008 (when the rules changed) the proportion of gain on which BADR can be claimed is restricted in proportion to the amount of rent paid.
Five ways to save inheritance tax
Inheritance tax is often described as a voluntary tax. While most of us do not know in advance when we are going to die, there are steps that you can take to reduce the amount of inheritance tax on your estate. Here are five suggestions.
Leave everything to your spouse or civil partner
The inter-spouse exemption means that there is no inheritance tax to pay on anything that you leave to your spouse or civil partner. On their death, their estate can claim the unused portion of your nil rate band and your residence nil rate band, meaning that these are not wasted. The allowances allow a married couple or civil partners to, between them, leave £1 million free of inheritance tax.
Alternatively, you can leave assets to the value of your nil rate band, and a main residence or share in a main residence to your children or direct descendants, and anything in excess of this to your spouse or civil partner. This too will ensure that there is no inheritance tax to pay on your estate.
Give away cash and assets early
Gifts made more than seven years before your death fall out of charge for inheritance tax purposes. Also, taper relief means that the rate of tax payable on assets gifted made more than three years before your death is reduced on a sliding scale. Lifetime gifts are known as potentially exempt transfers and remain exempt if you survive for at least seven years after making the gift. However, if you do die within seven years, lifetime gifts come into charge. This may give rise to an unintended problem in that the nil rate band is applied chronologically, meaning that it may shelter a lifetime gift which would, if taxable, benefit from generous taper relief, rather than a death bequest which is chargeable at 40%.
The earlier gifts are made, the greater the likelihood that they will fall out of charge.
Make gifts out of income
An inheritance tax exemption means that it is possible to make lifetime gifts which are not treated as potentially exempt transfers by making them out of your income. To benefit from the exemption, the gift must be made as part of the normal expenditure from the income of the donor and, after making the gift, the donor must be able to maintain their standard of living. This exemption could be used, for example, to pay for your grandchildren’s school fees or your child’s rent or to set up a regular standing order to help meet your children’s living costs.
Use the annual and gifts exemptions
There are a number of specific inheritance tax exemptions that allow you to make small gifts that fall outside the scope of inheritance tax. These exemptions can be used in addition to the gifts from income exemption outlined above. Further, they apply if the gifts are made from capital.
The annual exemption allows you to give away £3,000 of gifts each year. You can use the allowance to make a single gift to one person, or several gifts totalling not more than £3,000. If you do not use all of the exemption for a tax year, you can carry the unused portion forward to the following tax year. However, if it is not used by the end of that tax year, it is lost.
The small gifts allowance allows you to make as many gifts as possible of up to £250 per person each tax year. However, the recipient cannot benefit from more than one allowance (so you cannot give £3,250 to one person using the annual allowance and the small gift allowance). You do not need to count birthday and Christmas gifts, which are exempt.
You can also make tax free gifts on the occasion of a wedding or civil partnership. The exempt amount depends on your relationship to the recipient – £5,000 for a child, £2,500 for a grandchild or great-grandchild and £1,000 for any other person.
Make a charitable bequest
Your estate can benefit from a reduced rate of inheritance tax of 36% if you leave at least 10% of your estate to charity. Gifts to charities are themselves exempt from inheritance tax.
Family Investment companies - how do they work?
Although Family Investment Company's (FIC) have been around for several years, awareness of the flexibility that such a vehicle affords has been growing in recent years. The use of such companies is particularly attractive to director-owners of family businesses who have children, enabling parents to retain control over assets whilst accumulating wealth in a tax efficient manner and facilitating future succession planning.
What is a FIC?
A FIC is a bespoke vehicle which can be used as an alternative (or in addition) to a family trust. It is a private company that invests rather than trades (the investments typically being equity portfolios or property). The shareholders are family members taking advantage of the use of Alphabet shares enabling each direct descendent family member to be allocated a different class of share.
Usually a FIC is set up with a founder share held by the individual(s) providing the capital, being either a cash loan or assets where no chargeable gain has yet to accrue. If a cash loan, the FIC uses the money to acquire assets (e.g. property), which generate a return. Such income is either re-invested within the FIC or can be used to repay the original loan tax-free.
'Alphabet shares' enables family members to have different levels of control over company decisions, rights to receive dividends and entitlements to the company's capital value. In the incorporation of a FIC, the individual setting up the company could still be a Director and preferential Shareholder holding 'A' shares. Such a shareholder will have the right to appoint a director and vote at general meetings (and therefore hold control of the company), however, they must have no entitlement to dividends or to any return of capital. Other family members and often family trusts are then brought in as shareholders, each holding one ‘B’ share each. These ‘B’ shares have no voting or control rights but full entitlement to any dividends and/or return on capital. The shares can be held in trust if the child is a minor.
Benefits of a FIC
should assets rather than a cash loan by transferred into the FIC, after seven years the value of the money or property transferred falls outside the transferors' estate for IHT purposes. However, it is important that no beneficial interest in the company is held.
there is no upper limit in the value of assets that can be placed into a FIC whereas there is a limit of £325,000 in placing capital into a Lifetime Discretionary Trust before any IHT is charged. Any value transferred into a trust above this amount is taxed at 20%.
being a company a FIC is subject to corporation tax on the income received which (currently) is at a lower rate than income tax. Where the property is residential mortgage interest is fully reclaimable and not restricted to the basic rate tax credit as applied to personally held buy-to-let property holdings.
the company shareholders will be liable to tax when profits are extracted. However, a FIC offers the possibility of allocating dividend payments, which could potentially be spread amongst family members tax-efficiently;
the company's article of association can be set up to include specific clauses that protect the shares in specified circumstances (e.g. by preventing shares from being transferred outside of the family.)
Transferring assets (as opposed to cash) into a FIC can have CGT consequences for the donor and/or Stamp Duty Land Tax in the case of property used to subscribe for shares in the company. As such these costs can render the use of the FIC structure prohibitive.
Five tax-efficient ways to extract profits
If you operate your business as a personal or family company, you will need to extract some or all of the profits if you wish to use them personally. When it comes to tax, not all profit extraction methods are equal. While personal circumstances will dictate the most efficient way for you to extract profits, the following five extraction methods should be considered as part of a tax-efficient profit extraction strategy.
Method 1: salary - Paying a small salary can be tax-efficient where the recipient has not used their personal allowance elsewhere. Paying a salary that is at least equal to the lower earnings limit for National Insurance purposes (£6,396 for 2022/23), will ensure that the tax year is a qualifying year for state pension purposes; this can be useful where the recipient does not already have the 35 qualifying years needed for a full state pension.
For 2022/23, the optimal salary will depend on whether the National Insurance Employment Allowance is available to shelter any employer’s National Insurance on the salary. Assuming the personal allowance remains available in full, the optimal salary where the Employment Allowance is not available (as is the case in a personal company where the sole employee is also a director), is one equal to the primary threshold for 2022/23 of £11,908. If the Employment Allowance is available (or one the higher secondary Class 1 National Insurance thresholds applies), the optimal salary is one equal to the personal allowance, set at £12,570 for 2022/23.
Method 2: dividends - Dividends are paid from post-tax profits, and the profits from which they are paid have already suffered corporation tax. As all taxpayers benefit from a dividend allowance (set at £2,000 for 2022/23), where this remains available, paying a dividend up to this amount allows profits to be extracted free of any further tax. Once the optimal salary has been paid and the dividend allowance has been used, if further profits are needed outside the company, it is generally preferable to take dividends rather than additional salary as the dividend tax rates are lower and there is no National Insurance to pay on dividends.
Remember, dividends must be paid in proportion to shareholdings. However, using an alphabet share structure preserves flexibility. Remember, dividends can only be paid if you have sufficient retained profits from which to pay them.
Method 3: rent - Many personal or family companies are based at home. The company can rent a room from the director and pay rent for the privilege. This can be tax efficient, as the company will benefit from a deduction for the rent paid when calculating its profits for corporation tax purposes. While the rent is taxable in the hands of the director, if the director does not have other rental income, he or she may be able to benefit from the property income allowance to receive £1,000 of rent tax-free. Paying rent has the added advantage that there is no National Insurance to pay.
Method 4: pension contributions - The company can also make pension contributions on behalf of the director (and/or his or her family). The company will usually be able to deduct the pension contributions in full when calculating its profits. Providing the contributions do not exceed the available annual allowance or take total tax relieved contributions above the level of the lifetime allowance, there will be no tax charges on the recipient.
Method 5: benefits-in-kind - It can be particularly tax-efficient to provide directors and family employees with exempt benefits in kind, such as a mobile phone or workplace parking, as the recipient will enjoy the benefit tax-free, while the company can deduct the cost in calculating its taxable profit. Where an exemption applies, there is no Class 1A National Insurance for the company, and most benefits in kind are free of employee National Insurance.
Benefits-in-kind can still be tax efficient even if a tax charge applies; for example, it may be beneficial for the employee to have an electric company car rather than be given more salary from which to fund the car. Providing a benefit rather than additional salary will also save employee’s National Insurance as most benefits-in-kind are liable to Class 1A (employer-only) rather than Class 1.
What are determinations and can they be cancelled?
HMRC can issue a determination when a taxpayer has failed to submit a tax return. The determination is HMRC's formal calculation of tax that it calculates as being due. In arriving at the amount HMRC will consider any information it has available (e.g. on a P60 submitted by an employer).
There is no right of appeal against a determination and unless the submission of a return supersedes it, the determination will stand, and the tax shown as due must be paid. A determination does, in effect, stand in the place of an actual return for the amount of tax payments due and the calculation of any interest on unpaid tax. Therefore the due date for tax payment is the date which would have applied if the return had been delivered by the filing date.
A tax return displacing a determination, must be made/filed within three years from the due filing date for the tax return or if later, within 12 months of the determination date. If the return is not filed within this period, the tax charge created by the determination stands. Any related interest, surcharge and payment on account calculations will be automatically amended to reflect the figures declared on the replacement tax return. Importantly, the issue of a determination enables HMRC to commence formal proceedings to recover any late paid tax.
With regard to any underpayment of PAYE, a determination will be issued against an employer for a failure to operate PAYE correctly and require any under payment of tax and NIC to be restored by the employer; any underpayment not being sought from the employee.
It should be noted that determinations are usually only issued when informal requests for payment of the underpaid tax have been ignored.
Once a Revenue Determination has been raised HMRC's Manual confirms that the taxpayer is given 30 days to file the return before any enforcement action is taken, such as Distraint or County Court action. Allowing the taxpayer 30 days to send in the return is the Debt Management Department policy, not a legislative requirement.
'Special overpayment relief'
Where HMRC makes a determination, but the tax charged is excessive, a special overpayment relief is available if certain conditions are satisfied. Unlike normal overpayment relief claims, there is no time limit for claiming this special relief. However, HMRC detail three conditions under which compliance may be difficult to achieve as follows:
Condition A - it would be “unconscionable” for HMRC to seek to recover the amount which has been charged by the determination (or refuse to repay it, if it has already been paid);
Condition B - The person’s tax affairs are otherwise up to date, or arrangements have been made to HMRC’s satisfaction to bring them up to date as far as possible; and
Condition C - The person has not previously claimed special relief or if previously claimed are exceptional circumstances for a further claim to be made.
Condition A is the one more likely to be difficult to fulfil. HMRC defines ‘unconscionable’ as “completely unreasonable” or “unreasonably excessive.” Circumstances in which the unconscionable requirement in Condition A above may be satisfied include where a person is suffering from an illness which makes tax compliance difficult or has not received HMRC notices for reasons outside their control or is insolvent (and where pursuing the determination would be detrimental to other creditors).
Recent SDLT changes
In his recent mini-Budget, the then Chancellor announced a number of stamp duty land tax (SDLT) changes. What are the changes and how will they affect the SDLT that you will pay on your property purchase?
SDLT on residential property is payable at the residential rates where the consideration exceeds the residential threshold. A supplement of 3% applies where the purchase is of a second or subsequent residential property costing £40,000 or more which is not an exchange of your main residence.
The SDLT residential duty threshold was doubled from £125,000 to £250,000 with effect for completions on or after 23 September. The rates and thresholds applying from that date are as shown in the table below. SDLT is calculated on each slice of the consideration at the rate applying to that band.
From 1 October 2021 to 22 September 2022, the residential threshold was £125,000 and SDLT was payable at the rate of 2% (5% for additional properties) on consideration between £125,001 and £250,000. The increase in the SDLT residential threshold reduces the SDLT payable on a property costing at least £250,000 by £2,500 (£125,000 @ 2%).
First-time buyers benefit from a higher residential SDLT threshold. This was increased from £300,000 to £425,000 with effect from 23 September 2022. The first-time buyer threshold only applies if the property costs £625,000 or less (£500,000 prior to 23 September 2022).
Consequently, from 23 September 2022, a first-time buyer will pay no SDLT if they purchase a residential property for £425,000 or less. If the purchase price is between £425,000 and £625,000, they will pay no SDLT on the first £425,000 and SDLT at 5% on the excess over £425,000. For example, a first-time buyer purchasing a property costing £500,000 will pay SDLT of £3,750 ((£500,000 - £425,000) @ 5%). The increase in the threshold will mean that a purchaser who is eligible for the first-time buyer threshold will pay £6,250 less in SDLT than previously on a residential property costing at least £425,000 (£125,000 @ 5%) and less than the first-time buyer ceiling.
If the first-time buyer pays more than £625,000 for their property, the first-time buyer threshold does not apply; the normal residential threshold of £250,000 applies instead. SDLT is calculated at the normal residential rates as shown in the above table.
Does Limited liability work?
Does Limited liability work? When a director can be sued by HMRC for unpaid tax
It can be a risky business being a director of a UK company these days. It is a common myth that the limited liability status protects directors personally against being sued for action by shareholders, employees, clients, suppliers, regulators, or just about anyone else who believes that they have suffered loss because of something they believe the company has done or should have done.
Limited liability can afford some protection when the company goes into liquidation as the directors would not usually be held liable for the company’s debts. This means that HMRC would also be unable to recover unpaid tax relating to the company from the directors personally as these debts are those of the company and not the individual.
However, legislation gives HMRC the power to make directors personally liable where evidence shows that failure to make payment was deliberate or the result of neglect or fraud e.g. where a director continues to pay their salary while deliberately not paying HMRC, despite suspecting that the company is officially insolvent. As such, any company director who has ‘wilfully failed’ to deduct PAYE tax can be made personally liable for the business’s missed payments. This power is limited to PAYE debts associated with payments to the directors themselves or connected parties such as family members. For that reason, this power is usually applied to small owner-managed businesses where the director controls the company’s finances.
The law aims to target directors who repeatedly fail to meet tax liabilities through repeated insolvency (known as Phoenixing). 'Phoenixing' is where a company is liquidated and then the same business re-appears as a new company thereby avoiding its debts including to HMRC (usually the majority creditor). This should not prove to be too much of a problem if done once as a way of preserving the business but if more than once with a pattern arises then this might indicate a ploy to get out of paying tax rather than a necessity to keep the business alive.
HMRC also has the power to recover all outstanding NICs from a company director where the failure to pay is again the result of fraud or neglect by the director but unlike PAYE, the liability for NIC covers all outstanding NIC debts. HMRC does this by issuing a Personal Liability Notice (PLN). In November 2021 Mr Eames found himself the subject of a PNI for just this situation (Eames v HMRC 2022) UKFTT 119 (TC)). HMRC did not allege that there had been any fraud; the question for this tribunal was whether the failure by the company to pay outstanding NICs debt following the liquidation of the company was due to neglect on the part of Mr Eames. The Tribunal found that Mr Eames made the positive choice to meet his own companies’ costs (including paying himself) out of funds which he knew were owed to HMRC, confirming that there is a statutory duty to make payment to HMRC of PAYE and NICs amounts withheld from employees. The Tribunal stressed that companies cannot use those amounts for their own purposes.
Can you benefit from tax-free childcare?
In a climate of rising interest rates and rising inflation, every penny is likely to count. For working parents, help with their childcare costs is welcome. The tax-free childcare system can provide up to £2,000 a year tax-free.
The Government’s tax-free childcare scheme allows working parents to open an online childcare account to pay for their childcare costs and receive a tax-free top-up from the Government on the amount that they deposit in the account. The top-up is worth 25% of the amount deposited to a maximum of £500 a quarter (£2,000 a year). This means that every £80 deposited by the parent pays for £100 of childcare costs until the cap is reached. A parent paying £667 a month into the account will receive the maximum top up.
If the child is disabled, the maximum top-up is doubled to £1,000 a quarter (£4,000 a year).
The money in the childcare account can only be used to pay for approved childcare, such as that provided by a childminder, nursery nanny or by an after-school club or play scheme. The childcare provider must be signed up to the scheme.
To be eligible for the tax-free top-up, a parent must be working, on sick or annual leave or maternity, paternity or adoption leave. A parent may also be eligible if their partner is working and they are on certain benefits and are re-starting work within the next 31 days.
The parent must also pass an income test. Over the next three months, the parent and their partner if they have one must earn at least:
£1,967 where they are aged 23 or over;
£1,909 where they are aged 21 or 22;
£1,420 where they are aged 18 to 20; or
£1,000 if they are under 18 or an apprentice.
This is equivalent to 16 hours a week at the relevant National Living or Minimum Wage. Dividends, interest, income from property and pension payments are not taken into account. Where a person is not paid regularly, average income over the year can be used.
The childcare provided with the money from a tax-free childcare account must be for a child aged 11 or under living with the claimant. Eligibility ceases from 1 September following the child’s 11th birthday. Where the child is disabled, they must be under the age of 17.
The tax-free childcare top-up cannot be claimed at the same time as universal credit, working tax credit or child tax credit. Employees who joined their employer’s childcare voucher or supported childcare scheme on or before 4 October 2018 cannot benefit from both tax relief under the scheme and tax-free childcare.
Where more than one source of help is available, it is advisable to do the sums to see which is most beneficial.
Capital expenditure planning & permanent increase to AIA limit
The Annual Investment Allowance will now remain at £1 million permanently rather than reverting to £200,000 from 1 April 2023. This change of plan may mean that businesses will want to consider their capital expenditure plans. However, companies wishing to take advantage of the time-limited super-deduction and 50% first-year allowance will need to ensure that they incur the qualifying expenditure by the 31 March 2023 deadline.
Annual Investment Allowance
The Annual Investment Allowance (AIA) allows 100% relief for qualifying expenditures up to the AIA limit. Both companies and unincorporated businesses can benefit from the allowance. Whilst most expenditure on plant and machinery qualifies, there are exclusions, the main one being cars.
The news that the AIA limit will now remain at £1 million is good news. However, businesses that were rushing to meet the 31 March deadline or delaying capital expenditure to avoid being caught under the harsh transitional rules that would have applied had the limit reverted to £200,000 from 1 April 2023 may now wish to revisit their plans.
The transitional rules that would have applied where an accounting period spanned 31 March meant that capital expenditure incurred in the period from 1 April 2023 to the end of the accounting period may not have benefitted for the AIA in full, despite being within the AIA limit for the period of a whole. There is now no need to avoid incurring capital expenditure in this period as the cap is no longer relevant. Consequently, expenditure can be delayed beyond 31 March 2023 without losing the AIA.
Also, businesses planning significant investment can now benefit from an AIA limit of £1 million a year beyond 31 March 2023. Consequently, where cash flow is tight, the pressure to meet a 31 March 2023 deadline to benefit from the AIA on qualifying expenditure up to £1 million is removed.
In addition to the AIA, companies can also benefit from alternative claims for qualifying expenditures incurred in the period from 1 April 2021 to 31 March 2023. Where the expenditure would normally qualify for main rate writing down allowances of 18%, a super-deduction of 130% of the expenditure can be claimed instead. A lower 50% first-year allowance is available where the expenditure would otherwise qualify for special rate capital allowances at 6%. This will be beneficial where the AIA limit has been used and is likely also to be used in future accounting periods, otherwise, the AIA gives relief at a higher rate.
Review expenditure and optimise claims
Business should review their capital expenditure claims and consider, where possible, how expenditure can be timed to maximise reliefs. Remember, the AIA, super-deduction and 50% first-year allowance do not need to be claimed or claimed for the full amount of the expenditure. Writing down allowances can be claimed for expenditures not relieved under these routes.
While the permanent increase in the AIA limit has removed some deadline pressure, companies wanting to take advantage of the super-deduction will need to incur the expenditure on or before 31 March 2023 to benefit from the generous 130% relief that it provides.
Are electric cars still a tax-efficient benefit?
As well as a mechanism for collecting revenue, the tax system is also used to encourage certain behaviours and discourage others. Once example where this is evident is in the way in which company cars are taxed. To encourage company car drivers and their employers to make environmentally-friendly choices, the taxable amount increases as the car’s CO2 emissions increase. The financial incentive to opt for an electric or ultra-low emission car is significant – a higher rate taxpayer will pay tax of just £240 on an electric company car costing £30,000, while the tax hit on a car with the same list price but emissions of 160g/km or more is £4,440.
Tax advantages of electric cars
The tax system confers a number of tax advantages on electric and ultra-low emission cars.
For 2022/23, 2023/24 and 2024/24, electric cars are taxed on 2% of their list price. The charge for ultra-low emission cars depends on their electric range, with the charge for cars in the 1—50g/km emissions bracket ranging from 2% for those with an electric range of at least 130 miles to 14% for those with an electric range of less than 30 miles. At the other end of the scale, the charge for petrol cars with CO2 emissions of 160g/km and above is 37% of the list price.
Employers can also pay for the electricity for private mileage in an electric company car without the employee suffering a fuel benefit charge as HMRC do not regard electricity as a ‘fuel’ for these purposes. By contrast, if fuel is provided for private mileage in a petrol or diesel company car, a fuel benefit charge arises, found by multiply the appropriate percentage for the car’s CO2 emissions by the multiplier for the year. As this is set at £25,300 for 2022/23, rising to £27,800 for 2023/24, the potential savings of going electric are again significant.
Employees using their own electric car for work can also benefit, as if their employer has workplace charging facilities, they can charge their car at work without any tax consequences.
Employers too benefit from choosing electric cars for their car fleet as they are able to claim a 100% first-year capital allowance if they purchase electric cars. A first-year allowance of 100% is also available for electric charge points until 31 March 2023 (corporation tax/1 April 2023 (income tax). Companies can also benefit from the 130% super-deduction on charging points where the expenditure is incurred before 1 April 2023.
Electric cars are exempt from vehicle excise duty until April 2025.
In the 2022 Autumn Statement, the Chancellor announced that some of the tax advantages for electric cars are to be reduced. The OBR estimate that by 2025 at least half of new cars will be electric; consequently, there is less need for tax incentives (while the Government will still need to preserve their revenue stream).
From April 2025, the appropriate percentage for electric cars and ultra-low company cars is to be increased, rising by one percentage point for each of the tax years, 2025/26, 2025/27 and 2027/28. This means that electric cars will be taxed on 3% of their list price in 2025/26, on 4% of their list price for 2026/27 and on 5% of their list price for 2027/28. Despite the increases, an electric company car remains a tax efficient benefit – assuming the higher rate remains at 40% in 2027/28, the tax bill for a £30,000 electric car will still only be £600.
Completing the property pages of the self-assessment tax return
If you receive rental income from properties that you let out, you will need to tell HMRC about it on the property pages of your self-assessment tax return. The exception to this is where you let a furnished room or rooms in your home and the income that you receive is below the rent-a-room limit (£7,500 a year where one person receives the income and £3,750 where it is received by two or more people), or if your total income from property is less than the £1,000 property allowance.
You will need to file your 2021/22 tax return (covering property income for the period from 6 April 2021 to 5 April 2022) online by midnight on 31 January 2023. Any tax that you owe for 2021/22 must be paid by the same date.
If you also have PAYE income and want HMRC to collect the tax that you owe on your property income through PAYE by adjusting your 2023/24 tax code, you will need to file your online return by 30 December 2022 unless you have already filed a paper return by 31 October 2022.
Details of income from UK property are provided on the property supplementary pages (SA105) to the return. By indicating that you have property income, the pages will be generated in the online return for you to complete. The information that you will need to provide will depend on the nature of your rental income. You will need to tell HMRC how many properties you let out, whether any of your let properties are jointly-owned and whether you are claiming rent-a-room relief.
Furnished holiday lettings
If you have income from furnished holiday lettings in the UK or EEA, you will need to complete the furnished holiday lettings section. You will need to tell HMRC the amount of rental income you received, details of property expenses (such as rent paid, insurance, repairs; loan interest and other financial costs; legal, management and professional costs; and other allowable expenses). If you are claiming capital allowances, you will need to claim these on the form by entering the amount you are claiming in the relevant box. You will also need to work out your profit or loss. If you have losses from previous years, you can also claim loss relief.
If you have property income other than from furnished holiday lettings, this is entered in the property income section. You will need to provide details of your rental income and expenses and calculate the rental profit. If you have replaced domestic items, you can claim relief for the replacement cost in the appropriate box.
Care must be taken in relation to property finance costs. You cannot deduct finance costs relating to residential lets; instead, relief is given as a tax reduction. Loan interest relating to residential lets should be entered in box 44 not box 26 to ensure relief is given correctly.
Notes on completing the property income pages can be found on the Gov.uk website. It is advisable to read the notes before completing the return and make sure that all required information is at hand.
When is a loan not a loan?
When a loan is taken out with a bank the repayment terms are usually confirmed in a formal loan arrangement. However, if you are a director of your own company and you withdraw monies that are not salary or dividends, then those payments are normally considered a loan even where no formal loan arrangement exists. A loan can even arise from using company funds for private expenses or because the company pays a personal bill on the director’s behalf. In the absence of special rules, it would be easy for directors to take loans from the company and not repay, allowing the director or family member to use the money tax-free, possibly indefinitely.
To counter this, the tax legislation imposes a charge on loans made to participators that remain outstanding nine months and one day after the end of the year unless an exception applies. The charge is linked to the dividend’s higher rate of tax (currently 33.75%) so HMRC effectively recovers from the company the tax that the director (or participator) would have paid had they received the outstanding loan as a dividend and paid tax at the higher dividend rate. The charge is repaid when the loan is cleared.
Such loans are outside the scope of the charge but the following conditions must apply:
The amount cannot exceed £15,000, either alone or taken together with any other outstanding loans and advances made by the company or by any of its associated companies. Loans to a spouse or civil partner are not considered, each having its own £15,000 limit.
The borrower must work full-time for the company or any of its associated companies (full-time means at least three-quarters of the company's normal working hours).
The borrower does not have a material interest in the close company or any of its associates. If the borrower subsequently acquires a material interest when the whole or part of any loan is outstanding, the company is treated as making the loan of the amount outstanding when the material interest is acquired.
'Material interest' is where the person (with or without one or more associates) either:
controls more than 5% of the ordinary share capital of the company; or
possesses or is entitled to acquire such rights as would in the event of winding up of the company or in any other circumstance entitlement that person to receive more than 5% of the assets, which would then be available for distribution among participators.
Note: if the director has a material interest then all loans are caught - not just those over £15,000.
There are exceptions to the charge:
Using dividend waivers as a tax planning tool
If used correctly, dividend waivers can be an effective planning tool, particularly where one shareholder is a higher-rate or additional rate taxpayer and others are not. However, several points need careful consideration.
When a private limited company is incorporated, it is usual for the issued shares to be created as ordinary shares divided into set proportions amongst shareholders (invariably, these shareholders are also the directors). In time, this proportional allocation may result in dividends being paid to a shareholder who does not need or want the money or, more often, is or becomes a higher-rate or additional rate taxpayer. Should a shareholder not wish to receive the dividend, they may voluntarily waive (give up the entitlement to) the payment, such that no payment is received, but the remaining shareholders still receive their allocation. As a result, the company’s distributable profits are divided between the remaining shareholders in the proportion of their holdings whilst the shareholder who has waived their dividend receives nothing - their share of the profit remaining in the company’s bank account.
Importantly, HMRC can attack such an arrangement under the 'settlements' legislation where there is ‘an arrangement’ to create a bounty for another person. For example, where HMRC believes that income has been intentionally diverted from one shareholder to another rather than the dividend waived remaining within the company. The classic situation here is in a husband and wife owner company where one spouse is a higher rate and the other a basic rate taxpayer. Although the settlements legislation provides an exemption for inter-spousal bounty, that exception does not apply if it is merely a gift of income as the underlying share ownership remains. Another common instance is where one or more shareholders receive a larger dividend than would have been possible had no dividend waiver taken place - here again, an element of ‘bounty’ is needed for the settlement provisions to apply. HMRC may also challenge waiver arrangements if retained profits would not have covered the dividends that have been paid without a waiver having taken place.
Dividend waivers lasting more than a year are rare because a longer-term waiver could reduce the value of that shareholding or a shareholder's circumstances may change over time. Also, increased dividends following a waiver may result in the shareholder being taxed at a higher tax rate. In addition, if there has been a succession of waivers over several years, HMRC may look to see whether the total dividends payable would have exceeded the total accumulated realised profits should the waiver not have taken place; which is what happened in the Donovan & McLaren v HMRC  UKFTT 048 (TC) tax case. A series of waivers by two sets of husband and wife shareholders to equalise dividends paid and allow the wives to utilise their basic rate bands was held not to work. Importantly, without the dividend waivers the company did not have sufficient distributable profits to pay the dividends.
Importantly, dividend waivers must be in place before the right to receive a dividend arises because income that has already been received (or entitled to be received), cannot be waived. This must be before formal declaration and approval by shareholders, for final dividends. For interim dividends, the waiver must be in place before the dividends are paid.
‘Alphabet share’ arrangements (where different dividends can be paid on different classes of share), negate the need for dividend waivers but can produce their own tax issues.
Dividend waivers are only effective if executed by deed because there is no consideration to support a contract. The main tax advisory bodies are of the opinion that the drafting, preparation and execution of deeds is a “reserved activity” under the Legal Services Act 2007 and, as such, can only be conducted by an authorised or exempt person. As a result, all waivers or deeds should be drafted by solicitors.
VAT penalties – New rules
The VAT default surcharge is being replaced with a new VAT penalty and interest regime. The new rules apply to VAT accounting periods beginning on or after 1 January 2023.
Late filing penalties
The new penalty regime operates on a points-based system. Each VAT return received late, including nil and repayment returns, will receive one late submission penalty point. A penalty will be charged when the points reach a certain threshold. The penalty trigger depends on the frequency with which returns are submitted.
Once the penalty threshold is reached, a penalty of £200 is charged. Further penalties of £200 are charged for each subsequent late submission.
The points total can be reset to zero if all returns are submitted on or before the due date for the period of compliance and all returns due for the previous 24 months have been submitted to HMRC.
Late payment penalties
A penalty may also be charged if VAT owed to HMRC is paid late. The penalty depends on how late the payment is made.
No penalty is charged if payment is made within 15 days of the due date. If payment is made between 16 and 30 days after the due date, a penalty equal to 2% of the VAT owing at day 15 is charged. Where payment is made 31 days or more after the due date, the penalty charged is equal to 2% of the VAT owing at day 15 plus 2% of the VAT owing at day 31. Where a time to pay agreement is agreed, penalties are calculated by reference to the date on which the arrangement is made.
A further penalty is charged when the balance is cleared or a time to pay arrangement agreed. This is calculated at a daily rate of 4% a year for the duration of the debt.
To allow traders time to become familiar with the new rules, late payment penalties will not be charged during the first year (1 January 2023 to 31 December 2023) where payment is made in full within 30 days of the due date.
Late payment interest
From 1 January 2023, late payment interest will be charged on late paid VAT from the due date until the date payment is made in full. Late payment interest is charged at a rate equal to the Bank of England bank base rate plus 2.5%.
The repayment supplement is withdrawn from 1 January 2023. Instead, for accounting periods beginning on or after 1 January 2023, HMRC will pay repayment interest on VAT that they owe. The interest period will run from the due date (or date the VAT was submitted if this is later) to the date that payment is made in full by HMRC.
Repayment interest is paid at a rate equal to the Bank of England base rate minus 1%, subject to a minimum rate of 0.5%.
Time sale to take advantage of higher annual exempt amount
A gain on the sale of an investment property, such as a buy-to-let or second home, will be liable to capital gains tax to the extent that it is sheltered by losses or the annual exempt amount. The annual exempt amount is like a personal allowance for capital gains tax purposes and allows individuals to realise net gains in the tax year up to the level of the annual exempt amount free of capital gains tax. Where losses are realised in the year, these are set against gains before applying the annual exempt amount. If the taxpayer has losses brought forward from earlier years, these can be used to shelter any gain remaining after the annual exempt amount has been deducted from net gains for the year. If the annual exempt amount is not used in full in the tax year, it is lost.
All taxpayers have an annual exempt amount regardless of the rate at which they pay tax. Spouses and civil partners each have their own annual exempt amount. However, the rules that allow assets to be transferred between spouses and civil partners at a value that gives rise to neither a gain nor a loss. This make it possible to utilise unused annual exempt amounts of both parties by making transfers prior to disposing of the asset.
Reduction in annual exempt amount
The annual exempt amount is set at £12,300 for 2022/23. This means that spouses and civil partners have £24,600 to play with if they are thinking of selling an investment property before capital gains tax is due.
However, this is a limited-time offer as the annual exempt amount is to be reduced to £6,000 from 6 April 2023 and to £3,000 from 6 April 2024, seriously reducing the gains that can be realised free of capital gains tax.
If the intention is to sell an investment property that will realise a capital gain, completing before 6 April 2023 will save an individual capital gains tax of up to £1,764 and a couple capital gains tax of up to £3,528.
Paying the bill
Where a capital gain is realised on a residential property, the gain must be reported to HMRC within 60 days and the associated tax paid within the same window. In many cases, the tax can be paid from the sale proceeds. However, if the landlord has remortgaged the property to release equity, it may be the case that there is not enough left once the loan has been cleared to pay the tax bill, meaning the funds must be found from elsewhere. When selling an investment property, the need to pay the tax bill within 60 days must not be overlooked, and this may impact on the decision whether to sell or not. A penalty may be charged if the deadline is missed.