Helpsheets ... continued 38 from homepage

Anyone who invests in a company is taking a chance, hoping that the directors, as representatives of the company, will use the money to increase the company’s profit. In return for taking this chance, a shareholder receives ‘payback’ usually as a share in the distribution of profits in the form of a dividend, however. payment is not automatic.

For a dividend to be paid, a company needs to have sufficient 'distributable profits' to cover the dividend at the payment date. ‘Profits’ in this instance are ‘accumulated, realised profits’, i.e. accumulated profits from the current and/or previous periods after covering any losses. Therefore, only dividends paid out of accumulated profits can be made. Dividends paid where there are no ‘distributable profits’ or made out of capital are termed 'illegal' under the Companies Act 2006.

How do you know a dividend is 'legal'?

Whether a dividend has been paid 'illegally' may only come to light when the final accounts are prepared for that period. Only then can it be confirmed whether sufficient ’distributable profits’ were available when the dividend was paid. There is a statutory requirement for full accounts to back up payment of a final dividend, but there is no such requirement when making an interim dividend. However, advice is to prepare management accounts before declaring any dividend just to ensure sufficient distributable profits are available to support that payment.

Tax implications of 'illegal' dividends

Should the dividend be found to have been issued ‘unlawfully’, HMRC will treat the dividend as not being received and the shareholder will be required to repay the amount paid. The time limit for recovery of dividends is six years from the date of declaration or the declared payment date, whichever is later. The only time such a dividend will be treated as a distribution and the shareholder is not required to repay, is if the shareholder was unaware of the illegality of the payment and had no reasonable grounds to believe that the dividend was so. However, lack of knowledge may be difficult to prove with director/shareholder dividend payments in owner-managed companies.

If a shareholder cannot repay the dividend, HMRC can argue that the payment was incorrectly designated and was, in effect, a loan. Should the loan not be repaid or written off within nine months and one day after the year end, then the company is liable to a tax charge. The percentage rate is the same rate as the higher dividend rate at 33.75%.

The tax charge payable by the company may not be the only tax implication. Should the total of all outstanding loans from the company exceed £10,000 at any time during a tax year, then the director is considered to have received a benefit in kind from their employment unless interest is paid.

What are the alternatives?

If cash is needed but cannot be paid via a dividend due to the above, an alternative is withdrawal as a salary or bonus, but this comes with extra tax and NI costs.

If payment can be made partly in cash and partly for services or goods which could be normally settled personally, such arrangements count as taxable benefits in kind. Such benefits in kind may be taxable at a lower tax rate than 33.75%.

A company can repay share capital and share premium by crediting the company's profit and loss account, thus allowing the company to pay a dividend where this creates positive balance sheet reserves..

Where illegal dividends are discovered, a note should be added to the year-end accounts. The director must immediately cease taking any further dividends until the company has accumulated future distributable reserves.

t is usual for a landlord to require a deposit from a tenant as security against damage to the property. This cannot be more than five weeks’ rent where the annual rent is less than £50,000 or more than six weeks’ rent where the annual rent is more than £50,000. The landlord can also ask for a holding deposit to reserve the property. This cannot be more than one week’s rent.

The way in which deposits are treated for tax purposes depends on the type of deposit and the basis on which the landlord prepares their accounts.

Security deposits

Security deposits taken by a landlord should be held in a custodial scheme such as those offered by MyDeposits, the Tenancy Protection Scheme or the Deposit Protection Service. During the term of the tenancy, the deposit continues to belong to the tenant. If there is no damage to the property, the deposit is returned to the tenant at the end of the tenancy. In the event that there is some damage to the property, the landlord may be entitled to all or part of the deposit, with the tenant’s agreement or, where the tenant does not agree, following the resolution of a dispute.

As the landlord is not entitled to the deposit at the point that it is taken from the tenant, it does not need to be taken into account as a receipt of the property income business. However, if at the end of the tenancy, all or part of the deposit is retained by the landlord, under the cash basis the retained deposit is brought into account as a receipt in the period in which the landlord received the cash. If the accruals basis is used, the retained deposit is brought into account as a receipt for the period in which the landlord became entitled to it, even if the cash is not paid over to the landlord until a later date.

Holding deposits

Holding deposits are another form of deposit commonly taken by landlords, particularly in periods where the letting market is buoyant and demand for property is high. As the name suggests, a holding deposit is paid by the tenant to secure the property while the tenancy agreement is signed. In return, the landlord will take the property off the market.

A holding deposit cannot be more than one week’s rent. The terms governing the use of the deposit and the circumstances in which it may be retained by the landlord should be set out in a holding deposit agreement so all parties know where they stand.

Should the let fall through and under the terms of the agreement the landlord retains some or all of the deposit as compensation for the inconvenience and costs incurred in relation to the prospective let, the amount of the retained deposit should be included as income of the property rental business. However, the landlord would be able to claim a deduction for any costs actually incurred in relation to the aborted let, such as advertising or legal fees.

If the let goes ahead, the holding deposit would either be returned to the tenant or used to form part of the security deposit (see above). If the holding deposit is returned, it does not form part of the income of the business. Where the holding deposit is used as part of the security deposit, the rules set out above governing the treatment of security deposits should be followed.

Where a landlord makes a loss on their property rental business, the options for using that loss are limited. The rules depend on whether the business is carried on by an unincorporated landlord or by a company.

Unincorporated landlords

Where a landlord has an unincorporated property business, the general rule is that if a loss is made in that property rental business, it is carried forward and set against the first available profits of the same property rental business. The relief is given automatically and there is no need to make a claim.

Example

Peter lets out a property on a long-term residential let. In 2023/24 he makes a loss of £1,200. In 2024/25 he makes a profit of £4,600.

The loss of £1,200 from 2023/24 is carried forward and set against the profit of his property rental business for 2024/25 of £4,600, reducing the taxable profit for that year to £3,400.

Where a landlord has more than one property in a single property business, the losses from one are set against the profits from another in arriving at the profit or loss for the business as a whole for a particular year – there is no need to consider each property separately.

Example

Jane lets out three properties. The properties comprise a single property rental business. In 2024/25 she makes a loss of £6,000 on one property, a profit of £4,300 on another property and a profit of £7,100 on the third property. Her profit for the business as a whole is £5,400. The loss on property 1 is automatically relieved against the profits on properties 2 and 3.

Where a landlord has more than one property rental business, the losses made in one business cannot be set against the profits of another property business. For example, a loss in 2023/24 on an FHL business could not be set against a profit in 2023/24 on a separate property rental business.

However, the abolition of the FHL regime from 6 April 2025 will mean that any unused losses from the former FHL business as at 5 April 2025 can be used against the profits from the amalgamated property business beyond that date.

If a property business ceases, relief for unused losses is lost, even if the landlord starts up a new rental business at a later date. Care must be taken if there is a pause in letting where there are unused losses as relief will only be available if the same business, rather than a new business, continues after the pause.

Corporate landlords

Where the property business is carried on through a company, the loss must first be set against the company’s total profits for the accounting period. Thereafter, it must be carried forward and set against future total profits of the same property business. Any unrelieved losses at the date of cessation are lost.

As outlined before the election, the new Government are to go ahead with their proposal to impose VAT on school fees. Legislation was published in draft on 29 July, together with a technical note.

From 1 January 2025, education services and vocational training supplied by a private school will be liable to VAT at the standard rate of VAT. Where fees are paid on or after 29 July 2024 in respect of a term starting on or after 1 January 2025, these too will attract VAT at the standard rate of 20%. Boarding services which are closely related to the supply of education services and vocational training will also be liable to VAT at the standard rate of 20% from 1 January 2025. The funds raised by the imposition of VAT on private school fees are to be used to fund education in the state sector.

For these purposes, a ‘private school’ is defined as a school at which full-time education is provided for pupils of compulsory school age, or an institution at which education is provided for those over compulsory school age but under the age of 19 (such as a sixth-form college), and in respect of which fees are paid for the provision of that education.

Nurseries, whether standalone or attached to a primary school, are to remain outside the VAT charge, which will apply from the first year of primary school.

Education provided at private sixth-form colleges, whether standalone colleges or attached to a private school, will be within the charge. However, education and vocational training which is provided by further education colleges will not be subject to VAT. Education and boarding provided by state schools remain exempt from VAT.

Private schools will also be required to charge VAT on any other services that they provide, for example, education provided before or after school and for extra-curricular activities, such as arts and sports clubs. However, where before and after-school clubs and holiday clubs only provide childcare and there is no education element, VAT will not be chargeable.

Pre-payments

The tax point is normally the time at which the services are performed. However, if a payment is made or a tax invoice is issued before the service is performed, this may instead be the tax point. To prevent parents from escaping VAT on payments for education services provided on or after 1 January 2025 by paying the fees in advance, retrospective legislation is to be included in the Finance Bill to provide that, where a payment is made on or after 29 July 2024 for education to be provided on or after 1 January 2025, VAT will be due on the fees. This will render attempts to save VAT by paying multiple years' fees in advance ineffective. The Government have stated that they will challenge the validity of lump sums paid before this date which do not relate to specific fees and will seek to collect VAT on fees where they believe this to be due.

Private schools who are not currently registered for VAT will be able to register from 30 October 2024.

No tax charge arises in respect of the provision of a nursery place for an employee’s child at a workplace nursery provided that the associated conditions are met. Unlike the exemptions for childcare vouchers and employer-supported childcare to the extent that these remain available, the tax exemption for workplace nursery places applies without limit.

For the exemption to apply, the employer must either make available the premises in which the care is provided or meet the partnership requirements. The partnership requirements make it possible for smaller employers without the resources to open a workplace nursery on their premises to provide nursery places to their employees within the terms of the exemption. To meet the partnership requirements, the care must be provided under arrangements that include the employer on premises made available by one or more of those persons and, under the arrangements, the employer is wholly or partly responsible for financing and managing the provision of the care.

An employer may enter into a partnership with a commercial nursery to provide the care. However, to satisfy the partnership condition, the employer must have some responsibility for financing the provision of the care and for managing it.

As far as financing the care, this requires more than simply buying places at a commercial nursery and making a contribution to fixed costs. HMRC do not regard this condition as being met if the employer pays a set amount per child per month towards the fixed costs of an existing commercial nursery. Rather, the employer must accept the financial risk of running a childcare facility, contributing to total costs and taking joint responsibility for any losses.

Responsibility for managing the provision of care, either wholly or in part, requires input and influence on management decisions and the way in which the childcare is provided. This may include monitoring staff performance or allocating places.

Commercially marketed schemes

A number of commercially marketed schemes are available which take advantage of the tax exemption for workplace nurseries. Typically, they include some or all of the following features:

• the employee enters into a salary sacrifice scheme, giving up an amount of pay equal to the cost of a nursery place;
• the employer pays for a nursery place for an employee’s child (either at a nursery run by a scheme promoter or at an independent nursery);
• the employer pays the nursery an additional sum in addition to the cost of the place (typically about £400 a year); and
• the employer appoints the scheme promoter as their agents to act on their behalf at meetings of the nursery’s management committee.

The scheme is usually offered as a package.

While HMRC are of the view that most partnership schemes meet the exemption condition, they are aware of marketed schemes where the partnership requirement is not met because the employer does not share the financial risk and has no real say in how the nursery is run. Where this is the case, the tax exemption does not apply and a tax charge will arise if the employer meets the cost of a nursery place for an employee’s child.

Smaller employers looking to offer workplace nursery places to employees should be aware of this when considering a commercially marketed scheme.

Over the past few years, tax enquiries aimed at identifying and correcting errors or deliberate under-reporting in tax returns have increased. HMRC generates substantial revenue from all compliance activities and although the exact proportion relating to tax enquiries is not always separately reported, latest figures show that for 2023-24 the amount secured from all tax compliance activities was in the region of £41.8 billion. Read this article to find out more.

Receiving an enquiry letter

The first indication that a taxpayer's return is under enquiry is via an official notification letter. The envelope will be A4 size, containing a number of pages informing the taxpayer that the check has started, notifying them of the process and their legal rights and obligations. HMRC is not obliged to reveal why the taxpayer has been chosen for enquiry and if no reason is stated, a phone call may elicit an indication. Enquiries can be costly for both the taxpayer and HMRC and are usually the result of HMRC receiving information from third parties that has not been declared on the taxpayer's tax return. Years of unprofitability may also be investigated, as may large, unexplained changes in income and figures returned that may be inconsistent with comparable businesses.

Information requested

The letter will state what documents are needed (although HMRC often requests documents which may not be legally required). The self-employed and taxpayers with capital gains are required to retain documents for five years from the 31 January submission deadline; sixth years from the end of the accounting period.. However, it is advisable to retain for at least another year. Note that HMRC has four years from the end of the tax year to issue a discovery assessment and can go back 20 years if the taxpayer is found to be dishonest.

If the taxpayer is in business, they are expected to retain various documents including receipts, invoices and employment contracts (to verify salary and employment benefits). Property documents such as rental agreements, mortgage statements and ownership details for properties are expected to support income declarations and capital gains.

With the increased requirement for digital record-keeping under Making Tax Digital (MTD), HMRC now accepts electronic records instead of paper documents. These records must be kept digitally, ensuring traceability, linked to quarterly tax submissions and must be authentic, complete and legible. There are now apps linked to mobile phones that stream automatically into cloud storage and input into accounting software. HMRC is expecting businesses to take advantage of such facilities under MTD.

Bank statements are the most important documents to retain but be aware that banks retain statements online for the legal timeframe only.

VAT registered businesses are required to retain a valid VAT invoice. However, there is no requirement to keep receipts relating to specific types of supplies up to a value of £25 (including VAT), such as car parking charges. For supplies not exceeding £250, the supplier may issue a less detailed invoice.

Cash payments

Under an enquiry, HMRC invariably disallows claims for cash payments unless proper invoices and receipts can be presented. If an entry in the business records are not enough to allay HMRC's doubts, duplicate invoices could be requested should the supplier be contactable and willing to supply. HMRC has been known to require a signed letter from the supplier businesses stating the amount received (with their name and address/NI number, etc).

Third party information

HMRC may request information from third parties, such as customers, suppliers or financial institutions, to cross-check the taxpayer’s information.

Practical point

The taxpayer is expected to show that identifiable sums have been spent on deductible expenses. HMRC has won tax cases where a deduction has been disallowed because inadequate or no evidence was presented.

As ever, the answer to this question depends on what type of professional fees have been incurred.

Professional fees are income and corporation tax deductible if incurred 'wholly and exclusively' for the purpose of the trade, profession or business. However they must not be capital in nature or losses not connected with/ arising out of the trade. The situation is not always clear-cut and the circumstances surrounding the payment and the precise nature of the professional services provided must be examined.

Wholly and exclusively

Whether a payment can be claimed under the 'wholly and exclusively' rules can be explained using accounting fees as an example. Fees incurred for preparing accounts for commercial reasons satisfy the ‘wholly and exclusively’ test. In strictness, any additional fees incurred for computing and agreeing the tax liability on trading profits are not allowable. However, HMRC will not disallow the fees where the work relates to normal, recurring expenses incurred in preparing accounts or agreeing the tax liability.

In comparison, the costs of completing a personal tax return or a capital gains tax computation are not allowable as they are not wholly and exclusively incurred. However, in practice, HMRC's approach is that the cost of preparing the return as a proportion of the total fee would be too small to be material.

Capital assets

Where professional fees are incurred in connection with the acquisition, disposal or modification of a capital asset, the situation becomes more complex. Fees relating to capital expenditure are allowable but against capital gains tax rather than income tax.

Leases

Fees incurred on the renewal of a short lease with the owner’s consent are a capital expense, but HMRC has stated that, as the amount is likely to be small, such fees may be allowed against income tax on de minimis grounds. Situations where the amounts are sizeable and as such deductible as a capital expense include:

• where the new lease is for a long term (e.g. more than 50 years); or
• where the lease provides for the payment of a premium – the disallowance may be limited to a proportion of the renewal expenses appropriate to the premium, etc.

Restructuring of a business

Professional fees incurred in connection with the acquisition, alteration, enhancement or defence of the fundamental structure of a business are generally deemed to be capital. HMRC gives these activities as examples:

• forming, renewing, varying or dissolving a partnership
• negotiating a merger between companies or partnerships
• forming and registering a company
• defending against a petition by shareholders to wind up a company.

Loan finance

Fees incurred in connection with raising, repaying or replacing long-term finance, or rearranging the terms on which such finance is borrowed, would not be income tax deductible as the loan would be capital. The expense would follow the reason for the loan which is raising capital. However, a statutory deduction applying only to income tax allows the incidental costs of raising loan finance. Any costs not expressly relieved (e.g. a penalty for early repayment) remain allowable but as capital.

In calculating the profits of a trade using the cash basis of accounting, the general rule is that no deduction is allowed for interest paid on a loan. For companies, the incidental costs of raising loan finance are dealt with under the loan relationships rules.

Plant and Machinery

Should the business use traditional invoice accounting, professional fees (e.g. survey fees, architects’ fees, quantity surveyors’ fees, legal costs) incurred relating to the acquisition, transport and installation of plant or machinery are added to the cost as expenditure incurred under capital allowances on the provision of the plant or machinery.

Landlords with furnished holiday lettings (FHLs) currently enjoy favourable tax advantages compared to those letting residential property on longer term lets. However, these advantages are to come to an end, and from 6 April 2025 FHLs will be treated as for other residential lets. However, transitional rules will allow landlords to access some of the capital gains tax reliefs for a limited period.

Interest and finance costs

Landlords with FHLs were unaffected by the restrictions in the relief for interest and finance costs that apply to unincorporated landlords letting residential property and were able to continue to deduct interest and finance costs in full in calculating the taxable profit for their FHL business. However, from 6 April 2025 this is to come to an end and relief for interest and finance costs will be given as a basic rate tax reduction. Corporate landlords letting holiday accommodation will still be able to deduct interest and finance costs in full.

Capital gains tax reliefs

One of the main advantages of the current FHL regime is the ability to access a range of capital gains tax reliefs available to traders. These include access to Business Asset Disposal Relief (BADR), business asset rollover relief and gift holdover relief.

Under transitional rules, where the FHL business ceased prior to 6 April 2025 and the conditions for BADR were met, the relief will continue to apply beyond that date to a disposal occurring within the normal three-year period following cessation. The ability to access BADR is very valuable as it reduces the rate of tax on the gain on the gain to 10% – saving £1,400 for every £10,000 of gain where the gain would otherwise be chargeable at the higher residential rate of 24%. Unincorporated landlords looking to bring their FHL business to an end may wish to consider a cessation date prior to 6 April 2025, particularly where the properties are pregnant with gain.

Access to the other capital gains tax reliefs will also be lost from 6 April 2025. However, where the criteria for relief include conditions that apply in a future tax year (such as the business asset rollover relief requirement that the new asset must be acquired within three years from the date of disposal of the old asset), the conditions will not be disturbed where the FHL rules were met prior to the abolition of the regime.

It should be noted that an anti-forestalling rule will apply which will prevent the use of unconditional contracts in a bid to secure access to the reliefs. This will apply to contracts entered into on or after 6 March 2024.

Losses

From 6 April 2025, an unincorporated landlord with both holiday lets and other lets will have a single property business. The profits and losses from all properties will be combined to arrive at the profit or loss from the business as a whole. Where a landlord has unused losses from an FHL business as at 5 April 2025, these will be carried forward and will be available to offset against the future profits of the combined property business going forward.

Pensions

Currently, profits from an FHL business count as relevant earnings for pension purposes. This will cease to be the case from 6 April 2025. As tax relieved pension contributions are capped at 100% of earnings (or £3,600 where this is higher), subject to the availability of the annual allowance, FHL landlords may wish to consider making pension contributions in 2024/25.

Furnishings and fixtures

Landlords with FHL are currently able to claim capital allowances on furnishings and fixtures. This will usually be in the form of the Annual Investment Allowance to secure 100% relief for the expenditure in the year in which it is incurred. However, the landlord has the option to claim a writing down allowance instead and, where the landlord has a balance on the capital allowances pool, they will be able to continue to claim capital allowances beyond 5 April 2025 until that balance has been extinguished.

Going forward, no relief will be available for new domestic items from 6 April 2025. Instead, relief will be available on a like-for-like basis when these are replaced under the rules for replacement of domestic items.

More flexibility

Access to the FHL rules require the property to meet strict conditions as to availability for letting and days actually let. Although the landlord will need to meet reduced requirements to access business rates relief, the removal of the FHL rules will provide greater flexibility as to how the property is let. For example, a landlord could let a property as a holiday let over the summer and on a longer-term let over the winter without worrying about falling foul of the FHL rules. This may lead to an increase in rental income.

If you are entitled to a refund of tax deducted from savings and investment income, you can claim the refund using form R40 if you do not complete a Self Assessment return. If you do complete a Self Assessment tax return, you do not need to make a separate claim as any tax due to you will be taken into account in computing the amount due or repayable under Self Assessment. A claim can be made on form R40 for the current tax year and the previous four tax years.

If you are making the claim for yourself, you make the claim online or by using the postal form. If you are making the claim on behalf on someone else, you will need to use the postal form, which is available on the Gov.uk website at www.gov.uk/guidance/claim-a-refund-of-income-tax-deducted-from-savings-and-investments.

To make the claim, you will need to provide your personal details and details of your income. This will include employment income, pension income, state benefits, interest and dividend income, income from trusts, settlements and estates and income from UK land and property. You will also need to provide details of payments made under gift aid, and indicate whether you are entitled to the blind person’s allowance and/or the married couple’s allowance. You must also provide details of the address to which the repayment should be sent.

Using an agent

An agent can also make a refund claim on your behalf. Since 30 April 2024, agents claiming a refund of income tax deducted from savings and investment income on behalf of their clients must use the new standard HMRC R40 form. In the event that the agent is the nominated third party to whom the repayment is to be paid, they must complete the nomination section on the new form and provide their agent reference number (ARN). If the claim is made on a different version of the form, it will still be accepted, but the nomination section will be disregarded and the claim will be paid direct to the client rather than to the agent. The client will also need to complete the section of the form indicating that they are nominating a professional to act on their behalf. If this section of the form is not completed correctly, the repayment will be made to the client rather than to the agent.

R40 claims for interest paid on payment protection insurance

Where the R40 repayment claim relates to interest on payment protection insurance (PPI), evidence of the original PPI payment must be submitted when making the claim. The document must show the gross interest, the tax deducted and the net interest. This could be a certificate from the company that made the refund, showing the tax deducted from the refund, or a final response letter from the company making the refund.

If it works correctly, the tax that is collected under PAYE will exactly match the tax that is due for the year. However, in practice, this balance may be disturbed, for example, because benefits included in a tax code change or a wrong tax code is used, and an employed taxpayer may pay too much or too little tax as a result. Where this is the case, HMRC will send out a letter. This may be a tax calculation letter (P800) or a Simple Assessment letter. The letter will explain how to pay any taxed that is owed or, where the taxpayer has overpaid tax, how to claim a refund. A letter will only be sent out where the taxpayer is employed or in receipt of a pension. Where the taxpayer is within Self Assessment, over and underpayments are dealt with through the Self Assessment system.

The letters are normally sent out between June and the end of November each year. A person may receive a tax calculation letter if the wrong tax code has been used, if they finished one job and started another in the same month and were paid for both jobs in that month, they started receiving a pension or received Employment and Support Allowance or Jobseeker’s Allowance.

A Simple Assessment letter will be sent where a person owes tax that cannot be collected via an adjustment to their tax code, they owe tax of more than £3,000 or have tax to pay on their state pension.

Claiming a refund

HMRC have changed the way in which they deal with refunds where tax has been overpaid under PAYE. Previously, where a refund had not been claimed, HMRC would send a cheque out automatically 21 days after the issue of the tax calculation letter. They no longer do this and, where tax has been overpaid under PAYE, the taxpayer will only receive a refund if they actually claim it. The tax calculation letter will explain how to do this.

Where the letter states that the refund can be claimed online, this can be done by visiting the Gov.uk website at www.gov.uk/tax-overpayments-and-underpayments/if-youre-due-a-refund. The refund can be made via bank transfer. Alternatively, a cheque can be requested.

Refunds can also be claimed through the taxpayer’s personal tax account or the HMRC app. A taxpayer can also contact HMRC on 0300 200 3300 and request a cheque.

Taxpayers who do not receive a tax calculation letter but who think that they have paid too much tax under PAYE should contact HMRC.

The remittance basis of tax is an optional tax treatment that allows individuals who are resident but not domiciled in the UK to pay tax on foreign source income and gains only if they are remitted to the UK in exchange for paying a fee. The fee is set at £30,000 where the person has been resident for at least seven of the previous nine tax years and at £60,000 where the person has been resident in at least 12 of the previous 14 tax years. Where unremitted income and gains are less than £2,000 in the tax year, no fee applies.

For all UK tax purposes, an individual is deemed to be domiciled in the UK if they have been resident in the UK for at least 15 of the previous 20 tax years.

The remittance basis will cease to apply from 6 April 2025. Instead, it will be replaced with a new residence-based regime.

The new regime

At the Spring 2024 Budget, the then Government announced a serious of changes to the rules for non-doms, including the abolition of the remittance basis and, subject to some transitional rules, the introduction of a new residence-based regime. The proposals are being taken forward by the current Government, albeit with some changes, and will apply from 6 April 2025.

Under the new regime, all UK residents will be taxed on their worldwide income wherever arising, regardless of their domicile. This is subject to an exemption for new arrivals who will benefit from a 100% tax exemption for foreign source income and gains for their first four years of residence, provided that they have not been UK resident in the previous ten years.

A form of Overseas Workday Relief will continue to apply. This provides relief from UK tax for earnings from work performed abroad which are not remitted to the UK. The Government are to consult on what this will look like going forward.

The previous Government’s proposals included a 50% reduction in the foreign income subject to UK tax in 2025/26 (the first year of the new regime) for individuals who lose access to the remittance basis from 6 April 2025 and who are not eligible for the 100% exemption for new arrivals. The new Government are not going ahead with this.

UK residents who are not able to benefit from the four-year exemption for new arrivals will be liable to capital gains tax on foreign gains. However, where the remittance basis has been used, UK capital gains tax will only apply to gains arising after the ‘rebasing date’ which is to be announced at the October 2024 Budget.

Foreign income and gains that arose prior to 6 April 2025 while the individual was taxed under the remittance basis will continue to be taxed when remitted to the UK. This will apply to remittances of pre-6 April 2025 foreign income and gains of individuals eligible for the four-year exemption for new arrivals.

A temporary repatriation facility will be available to individuals who have been taxed on the remittance basis which will enable them to remit foreign income and gains arising before 6 April 2025 and pay tax at a reduced rate on the remittance for a limited period after the remittance basis has ended. The length of this period has yet to be announced.

Inheritance tax

The current inheritance tax rules are domicile based. This will cease to be the case from 6 April 2025 when inheritance tax will also become residence based. This change will affect the property within the charge to inheritance tax.

The proposal is that a basic test will apply to determine whether non-UK assets are liable to UK inheritance tax. This will depend on whether the person has been resident in the UK for ten years prior to death or another chargeable event and will be subject to a proviso that will keep the person within the scope of UK inheritance tax for ten years after they leave the UK.

The use of excluded property trusts to keep assets outside the scope of inheritance tax will also be brought to an end.

Following the pandemic, flexible working hours are on the increase. This shift has provided employees with the legal right to request flexible working from the first day of their employment. However, there is no statutory right for employees to work from home as yet. Homeworking is already the norm for many self-employed.

Where existing space is not suitable at home for a room to be set aside as an office, many may look to build an extension, convert a loft or build a garden room. Should the employer pay the cost, a benefit-in-kind charge may arise as the employee is deemed to gain a benefit from using a company asset.

For the self-employed, tax relief cannot be claimed on the cost of the structure itself nor for any other costs directly associated with the building and office installation, including delivery charges if a ready-made office is purchased. The cost of initial decoration also falls within this category. However, repairs, including redecoration costs, are allowed. The cost of heating and lighting is tax deductible, as is the water supply if metered separately from the home.

Capital allowances

Tax relief may be available under the plant and machinery rules for certain payments. HMRC has issued a definitive list of claimable items and the contractor must itemise their invoice accordingly to show items that can be claimed. Such items include the thermal insulation of the building, electrics, kitchen equipment and fittings, washbasins/sinks/sanitaryware, furniture and furnishings (e.g. curtains, desks, etc.) and fire alarm systems.

Remember that capital allowances can only be claimed if accounts are prepared using the traditional (accruals) accounting method; capital allowances cannot be claimed if the cash based accounting method is used.

VAT

The VAT rules differ from those for income tax and corporation tax. Not only can VAT be reclaimed on any running expenses relating to office use but also on the cost of building or purchase of a ready-made office, as well as for any decoration. The VAT relating to the business proportion can be reclaimed should the office be used partly for business and partly for private purposes - any apportionment must be on a just and reasonable basis.

Businesses on the flat rate scheme (FRS) can reclaim the VAT paid on invoices exceeding £2,000 only if that invoice shows the cost of goods purchased separate from the labour cost; no split is required for invoices under £2,000. In addition, there is no restriction on private use under the FRS.

Business asset disposal relief (BADR)

A claim under the BADR rules may be possible where BADR is claimable on the disposal of shares, and there is an associated disposal of assets used by the company. Such assets can include premises used by the business but personally owned by the director. The main requirement for relief in such circumstances is for the asset to have been used in the trade throughout the two years before the share disposal.

Practical point

Problems may arise should the office be attached to the main residence as areas of a private residence 'used exclusively for the purpose of a trade or business, or of a profession or vocation' are denied principal private residence relief.