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Changes to business asset disposal relief and why timing matters.

Business asset disposal relief (BADR) reduces the rate of capital gains tax (CGT) payable on a qualifying disposal of business assets. The relief (which was formerly known as entrepreneurs’ relief) is available to individuals and some trustees when they dispose of all or part of their business, their business assets or shares in their personal company.

Currently, the relief reduces the rate of CGT on qualifying disposals within the lifetime £1m limit to a very attractive 10%. However, there remains only a small window of opportunity to benefit from this rate. As announced by Rachel Reeves in her first Budget on 30 October 2024, the rate of CGT on assets qualifying for BADR is to rise to 14% from 6 April 2025 and to 18% from 6 April 2026.

Individuals looking to dispose of their business in the near future may wish to reconsider the timing to ensure that they are able to benefit from the best possible rate of BADR. However, before making a disposal, they must check that the necessary qualifying conditions have been met throughout the qualifying period.

Nature of the relief

The relief applies to reduce the rate of CGT payable on disposals of qualifying assets. The relief is subject to a lifetime limit of £1m. However, spouses and civil partners each have their own £1m limit, so by making use of the ability to transfer assets between spouses and civil partners at a value that gives rise to neither a gain nor a loss, it is possible for a couple to benefit from the favourable capital gains rate on gains of up to £2m.

However, each individual must meet the qualifying conditions for the necessary two-year period to access the relief.

Qualifying conditions

The availability of BADR is contingent on the qualifying conditions being met throughout the requisite two-year period. The precise conditions depend on the nature of the disposal.

BADR is only available on the disposal of business assets where there is a disposal of all or part of the business; relief is not available for disposals of business assets by a continuing business. To qualify, the business must be owned by the individual, either directly or by a partnership in which the individual is a member, for a period of at least two years up to the date on which the business is sold or otherwise disposed of.

Relief is also available where a business is closed, as long as it was owned by the individual or a partnership in which the individual was a member for at least two years up to the date of cessation. The qualifying business assets must be disposed of within three years of the date on which the business ceased to benefit from BADR.

The relief may also be available on the disposal of an asset owned by the individual personally and used by the business or partnership if the disposal is an associated disposal.

An individual may also be able to benefit from BADR, where they dispose of shares in or securities of their personal company. However, again there are conditions to satisfy. The company must be a trading company or the holding company of a trading group.

It must also be the individual’s personal company, which will be the case if they hold at least 5% of the ordinary share capital, and this gives them at least 5% of the voting rights, entitles them to at least 5% of the profits available for distribution and at least 5% of the distributable profits in a winding-up. The individual must also be entitled to at least 5% of the proceeds in the event of a company sale.

These conditions must be met for the two-year qualifying period, which normally runs to the date on which the shares are sold. However, although relief may still be available if the company ceases to be a trading company or a member of a trading group in the three-year period prior to the date on which the shares are sold, in this situation, the two-year qualifying period runs to the date on which the company ceased to be a trading company or a member of a trading group.

A look at capital gains tax principal private residence relief when a house is held in a trust for a beneficiary to occupy.

Principal private residence (PPR) relief is probably the most well known and commonly used capital gains tax (CGT) relief. In many cases, it exempts a gain on an individual’s disposal of a dwelling house which is an only or main residence.

PPR relief applies not only to disposals by individuals; the relief also applies to trustees, on gains from the disposal of settled property. A trust can be ‘express’ (i.e., by a trust deed) or ‘implied’ (i.e., by a person’s intentions and actions); this article focuses on the former.

PPR relief for trustees

PPR relief is available where, during the trustees’ period of ownership, the property was a dwelling house occupied as the only or main residence of a person entitled to occupy it under the terms of the settlement. If those requirements are satisfied, the PPR relief rules generally apply to the trustees as they do for an individual. However, the PPR rules require the trustees (unlike individuals) to claim the relief.

Example: Trust property for daughter

Parents wish to buy a house for their adult daughter to occupy. They set up a trust to own the property. The parents buy the property and then transfer it to the trustees. The trust deed allows their daughter to occupy the property as a beneficiary. She lives in the house throughout the trustees’ period of ownership. Some years later, the trustees sell the house and advance the proceeds to the daughter, who uses the funds towards buying a property with her boyfriend. The trustees claim PPR relief in full on the capital gain arising on disposal of the property. No CGT liability arises, and the proceeds pass to the daughter.

In the above example, the trust was set up during the parents’ lifetime, but it is also possible for a trust to be included in a parent’s will.

Which trust?

PPR relief is available to the trustees of an interest in possession trust (i.e., broadly where the beneficiary has a ‘present right to present enjoyment’ of trust property: Pearson v IRC [1981] AC 753). In addition, HM Revenue and Customs (HMRC) accepts that PPR relief is available if the trustees are exercising a discretionary trust power to permit a beneficiary to occupy the trust property (Samson v Peay [1976] 52 TC 1).

HMRC distinguishes between the trustees’ ‘managerial’ and ‘dispositive’ powers. The latter power is consistent with an entitlement to claim PPR relief, whereas the former is not. HMRC provides an example (in its Capital Gains Manual at CG65407) where trustees own a farm and allow a retired farmworker (who is not a trust beneficiary) to occupy a farm cottage rent-free. The trustees are entitled to allow this occupation, but it is the exercise of a managerial (not a dispositive) power, so no PPR relief is due.

Practical tip

If the trustees charge a beneficiary rent for occupying the dwelling this does not, of itself, affect a PPR relief claim on a later disposal of the property, where there is an entitlement to occupy under the terms of the settlement. For example, the trustees may charge rent where there are several trust beneficiaries, only one of whom occupies the property as their residence, so that the other beneficiaries do not miss out on the rental income that the trustees would otherwise have received from letting to property to a third party.

An outline of tax implications associated with the selling of a property below its market value.

There are various reasons why an owner sells a property at less than its market value. However, doing so can have serious tax implications, depending on the circumstances and the relationship between the buyer and seller, particularly if the sale is made to a family member.

While the intentions behind such transactions are often genuine, HMRC can compare sale prices with other similar properties, scrutinise these sales closely and use the market value as the sale proceeds instead of the actual proceeds. ‘

Arm’s length’

Typically, HMRC will accept the sale of a property for less than market value where the property is a main residence or a second home or buy-to-let property provided the transaction has been conducted at ‘arm’s length’.

An ‘arm’s length’ transaction occurs when the sale takes place between two independent, unrelated parties, both acting in their own best interests. The property should be sold under normal market conditions, without any special agreements that influence the price. Essentially, there should be no underlying motives for the discounted sale price; any reduction must be fully acknowledged by both parties.

Note that the ‘arm’s length’ rule applies not only to property but also to any asset, such as shares or paintings.

Tax calculation

Should HMRC determine that a transaction has not been made at ‘arm’s length’, it will require an independent valuation to establish the market value.

This figure will then serve as the proceeds amount in the capital gains tax (CGT) calculation (less private residence relief and possibly lettings relief, if relevant) rather than the actual proceeds received (if any).

Selling to a family member

In transactions involving the sale of property to connected persons, HMRC will be looking to impose market value should the seller offer a ‘discount’ or the property is gifted without any expectation of payment.

HMRC’s guidance points out that a person is ‘connected’ with another if that person is:

 • a ‘relative’ – brothers, sisters, ancestors, or other direct descendants;

 • the spouse or civil partner of a relative;

 • a relative of the individual’s spouse or civil partner; or

 • the spouse or civil partner of a relative of the individual’s spouse or civil partner.

Family relations such as nephews, nieces, uncles, and aunts are not included under these rules.

A tax case illustrating the rules is Brookes v HMRC [2016] UKUT 0214 (TC). In that case, Mr Brookes sold a property to his girlfriend at cost. He argued that there was no capital gain, on the basis that the transfer was exempt because his girlfriend was his common law wife.

However, the appeal failed because UK law does not recognise the concept of a common law spouse and the judge ruled that no ‘arm’s length’ transaction rule applied; it was Mr Brookes’ choice to accept less than market value.

Where an asset is sold to a connected person at a loss, the usual loss relief rules do not apply. The loss may only be offset against gains arising from future disposals to the same connected person whilst they remain connected.

Selling or transferring property to a spouse

The market value rule does not apply to transfers between spouses or civil partners, whether made as a gift or reduced sale. In such scenarios, the recipient is treated as having acquired the property on the transaction date on a ‘no gain, no loss’ basis and, importantly, at the original purchase price. No charge to CGT can arise until the receiving spouse or civil partner sells the property. The transfer must be an outright gift with no conditions attached.

Where there is an inter-spouse or civil partner transfer of a principal private residence (PPR) (including properties where a PPR claim has been made), the donee is still treated as having acquired the property at the donor’s base cost (‘no gain, no loss’).

Additionally, any period of ownership is deemed to start not at the transfer date but at the original acquisition date by the donor. Any period during which the property was the donor’s main residence is also deemed to be the ownership period for the recipient, effectively backdating the transaction.

A look at the implications on capital taxes for companies holding investment assets.

Over time, profitable companies will increase their cash and distributable reserves if not paid out to shareholders. To facilitate further growth, these reserves may be invested into non-trading assets.

Business property relief

Where an individual dies owning shares in a trading company which they have held for two years, business property relief (BPR) provides relief from inheritance tax.

For deaths up until 5 April 2026, the BPR legislation (IHTA 1984, s 105(bb)) provides for 100% BPR to apply to all shareholdings in unlisted trading companies. From 6 April 2026, 100% relief will only apply to the first £1m of combined qualifying agricultural and business assets, with 50% relief for qualifying assets over £1m.

For listed trading companies (under IHTA 1984, s 105(cc)), 50% relief is available, but only where the individual has a controlling shareholding. Where a company exists ‘wholly or mainly’ for the purpose of making investments, no BPR relief is available (IHTA 1984, s 105(3)).

For BPR, the ‘wholly or mainly’ test is satisfied if the company’s trading activities are more than 50% of its total activities. The ‘wholly or mainly’ test is important because, if passed, it means that a company will qualify for BPR when it holds investment business assets. The 50% threshold is based on a ‘balance of indicators’, which are outlined later in this article.

Investment business assets are treated differently for BPR purposes than ‘non-business’ or ‘excepted’ assets. These latter assets are always disallowed for BPR (under IHTA 1984, ss 110 and 112, respectively). An excepted asset is one which has not been used ‘wholly or mainly’ for trading purposes throughout the two years preceding the transfer (or such lesser time as the asset was owned), or is not required for future business use.

Where they produce an income stream, investment properties held within companies would likely satisfy the business use test and not be treated as excepted assets. Therefore, as long as the ‘wholly or mainly’ trading threshold is reached for the company as a whole, BPR will be available on the shareholding.

BPR and lifetime transfers

A lifetime gift of unquoted shares will be either a ‘potentially exempt transfer’ (PET) between individuals, or a ‘chargeable lifetime transfer’ (CLT) in other cases. If the transferor dies within seven years of making the gift (or if earlier, on the death of the transferee), the gift will be reassessed for IHT purposes.

Where the original gift qualified for BPR, under IHTA 1984, s 113A(3)(a) and 113A(3A)(b) the relief will still be available, as long as the transferee has retained ownership of the shares since the original gift, and they are still unquoted at the date of death. If the shares have been disposed of, relief will still be available if qualifying replacement property has been purchased (IHTA 1984, s 113B).

As there is no requirement that the company itself must still satisfy the ‘wholly or mainly’ trading condition at the date of death, BPR will not be lost where, following a lifetime gift, a company alters its activities to become ‘wholly or mainly’ an investment company.

Business asset disposal relief

For the tax year 2024/25, business asset disposal relief (BADR) provides for the first £1m of lifetime qualifying capital gains to be taxed at a rate of 10% (14% from 2025/26). Relief for gains on share disposals in trading companies is available (TCGA 1992, s 169). To qualify for relief, an individual must have held the shares for a minimum two-year qualifying period, have been an officer or employee of the company, and the company must qualify as an individual’s ‘personal company’ (TCGA 1992, s 169S(3).

For BADR, a trading company is defined (by TCGA 1992, s 165A(3)) as a company which carries on trading activities, and does not carry on other activities to a ‘substantial’ extent. It is important to note that for BADR purposes, the ‘substantial’ threshold has a different definition from that in relation to BPR. For BADR, the threshold test is a minimum of 80% trading activities, compared to 50% for BPR. The balance of indicators used for BADR is the same as for BPR.

Last October Chancellor Rachel Reeves announced some far-reaching National Insurance changes which will affect employers from April 2025. She also confirmed the rates applying to employees and to the self-employed.

Employers

The 2025/26 tax year starts on 6 April 2025. From that date, the secondary threshold (which is the point at which employers start paying secondary contributions on employees’ earnings unless one of the higher secondary thresholds applies) falls to £96 per week (£417 per month; £5,000 per year). From the same date, the rate at which employers pay secondary contributions is increased from 13.8% to 15%. The fall in the threshold will mean employers may now need to pay secondary contributions for the first time on the earnings of some part-time workers who previously were below the threshold.

There is some help at hand in the form of an increase in the Employment Allowance, which rises from £5,000 to £10,500. From 2025/26, it will be available to larger employers as the former condition that the secondary Class 1 NIC bill in the previous tax year must not exceed £100,000 in order to benefit from the Employment Allowance is lifted. However, personal companies in which the sole employee is also a director remain ineligible.

The rise in the Employment Allowance will mean that smaller employers may find their secondary National Insurance bill falls, despite the cut in the secondary threshold and the increase in the rate. However, at the other end of the spectrum, large employers will face significant hikes in their National Insurance bill.

There are no changes to the upper secondary thresholds. The upper secondary threshold for under 21s, the apprentice upper secondary threshold and the veterans’ upper secondary threshold remain at £967 per week (£4,189 per month; £50,270 per year). Employers looking to mitigate the impact of the changes may wish to take on more workers falling within these categories. The thresholds applying to new employees in Freeports and Investment Zones are also unchanged at £481 per week (£2,083 per month; £25,000 per year).

The Class 1A and Class 1B rates are aligned with the secondary Class 1 rate and these too rise to 15% for 2025/26.

Employees

Employees have been spared from increases in their National Insurance bills. There is no change to the starting point at which contributions become payable as the primary threshold remains at £242 per week (£1,048 per month; £12,570 per year) and retains its alignment with the personal allowance. The upper earnings limit is also unchanged at £967 per week (£4,189 per month; £50,270 per year). The main primary rate remains at 8% and the additional primary rate remains at 2%.

Employed earners whose earnings are between the lower earnings limit and the primary threshold are treated as if they have paid contributions at a zero rate, which gives them a qualifying year for state pension purposes. The lower earnings limit is increased by £2 per week to £125 per week (£542 per month; £6,500 per year).

Self-employed earners

Self-employed earners pay Class 4 contributions if their earnings exceed the lower profits limit. This remains at £12,570 for 2025/26. The main Class 4 rate, payable on profits between the lower profits limit and the upper profits limit, which is also unchanged at £50,270, stays at 6% and the additional Class 4 rate, payable on profits above the upper profits limit, stays at 2%.

Self-employed earners whose profits are between the small  profits threshold and the lower profits limit receive a National Insurance credit, which provides them with a qualifying year for state pension purposes. The small profits threshold has increased to £6,845 for 2025/26. Self-employed earners with profits below this can opt to pay voluntary Class 2 contributions to secure a qualifying year. For 2025/26, these are payable at the rate of £3.50 per week.

Voluntary Class 3

Individuals who want to plug a gap in their contribution record can opt to pay voluntary Class 3 contributions if they are not eligible to pay voluntary Class 2. For 2025/26, Class 3 contributions are set at £17.75 per week.

Partner note: Social Security (Contributions) (Rates, Limits and Thresholds Amendments, National Insurance Funds Payments and Extension of Veteran’s Relief) Regulations 2025 (SI 2025/288).

Official rate of interest

The official rate of interest is a rate set by HMRC which is used to calculate the benefit in kind tax charge on cheap employment-related loans, and also the amount charged to tax in respect of the provision of employer-provided living accommodation where the cost of that accommodation is more than £75,000.

Employment-related loans

The amount charged to tax in respect of the benefit of a taxable cheap employment-related loan is found by comparing the amount of interest paid by the employee (if any) with that which would have been payable had the employee paid interest at the official rate. Where the interest actually paid is less than that chargeable at the official rate, the employee is taxed on the difference. If the loan is interest free, the taxable amount is the interest that would be payable on the loan at the official rate. The charge may be calculated in one of two ways, either by using the average balance outstanding during the tax year (or such shorter period for which the loan was outstanding) or by using the precise method which is based on the actual balance outstanding on each day of the tax year.

Living accommodation

The official rate of interest is also relevant in calculating the additional yearly rent that applies where the cost (or market value, where appropriate) of living accommodation provided by an employer is more than £75,000. This is added to the difference between the annual value or, if greater, the rent paid by the employer and any rent paid by the employee to arrive at the measure of the taxable benefit. It is found by multiplying the official rate of interest by the amount by which the cost (or market value, as appropriate) of the accommodation exceeds £75,000.

Move to quarterly updating

In January 2000, the then Inland Revenue made a public commitment that the official rate of interest would not increase in-year. For 2024/25 and earlier tax years, the official rate of interest applying for the year was announced in advance. For 2024/25, the rate is 2.25%.

However, from 6 April 2025, the public commitment made in 2000 will no longer stand and for 2025/26 and later tax years, the official rate of interest may be changed in-year where appropriate. The official rate of interest will be reviewed quarterly and any changes in the rate will be made following a quarterly review. Thus, from 6 April 2025, the official rate of interest may be increased, decreased or maintained following a quarterly review. This will allow the official rate of interest to track movements in actual interest rates more closely.

From 6 April 2025, the official rate of interest is increased to 3.75%. The official rate of interest is published on the Gov.uk website at www.gov.uk/government/publications/rates-and-allowances-beneficial-loan-arrangements-hmrc-official-rates/beneficial-loan-arrangements-hmrc-official-rates.

The move to in-year changes will remove some of the certainty as to the tax that an employee will pay on the benefit of a cheap employment -related loan or on employer-provided living accommodation and potentially make the calculation of the taxable amount more complex.

If as an employer you provided employees with taxable expenses and benefits in the 2024/25 tax year, you will need to ensure that you meet your reporting obligations in respect of those benefits. This will include providing information to HMRC and to your employees. The exact nature of your reporting obligations will depend on whether or not you payrolled those benefits.

Payrolled benefits

Where benefits are taxed through the payroll (payrolling), much of the reporting to HMRC is done on an ongoing basis throughout the tax year under real time information. However, this does not mean that there is nothing to do after the end of the tax year. As an employer, you must provide employees with details of their 2024/25 payrolled benefits before 1 June 2025. This can be done by email, by letter or on their payslip.

It is also important to include payrolled benefits in the calculation of your 2024/25 Class 1A National Insurance liability on your P11D(b). Even if all benefits provided to employees in 2024/25 have been payrolled, it is still necessary to file a P11D(b) as this is the Class 1A National Insurance return. This must be filed online, either via PAYE Online for Employers or by using a commercial software package. It must reach HMRC by 6 July 2025.

Other taxable benefits

Taxable benefits that have not been payrolled and which have not been included within a PAYE Settlement Agreement must be reported to HMRC on form P11D. This must be filed online by 6 July 2025, either via HMRC’S PAYE Online for Employers service or by using commercial software. It should be noted that HMRC’s PAYE Online service can only be used by employers who have fewer than 500 employees. Paper forms are not accepted.

Employers must also file a P11D(b) online by 6 July 2025. This is their declaration that all required P11Ds have been submitted, and also their Class 1A return. When calculating the Class 1A liability, it is important to include both payrolled benefits and those reported on P11Ds.

Employers must provide employees with details of their taxable benefits as reported on their P11D by 6 July 2025. The easiest way to do this is to give the employee a copy of their P11D. The information can also be provided by email or by letter.

It is important that the deadlines are met and returns are correct as penalties may be charged for both late and incorrect returns, and these can be significant.

After years of deferral, the long-anticipated Making Tax Digital (MTD) for Income Tax  start date has finally been confirmed. This is a significant development that will impact millions of business owners and landlords, necessitating a change in the way their earnings are reported to HMRC. In the Autumn Budget 2024 the government confirmed that by the end of this parliament all self-employed individuals and landlords with incomes over £20,000 will come within the MTD regime. In comparison, no timescales have been announced as to when companies will need to comply. The intention remains to roll out MTD for corporation tax but not until after MTD for Income Tax has commenced. This begs the question: is it time to consider incorporation, even if it is just to delay joining the MTD compliance regime?

As a reminder, under the MTD system, the method of tax return submissions (termed 'updates') will change. Transactions will need to be recorded digitally and the details submitted using specific MTD compatible software. The annual tax return in its current form  will be abolished. Instead, taxpayers mandated to the scheme will be required to submit 'updates' every quarter (or more frequently if the taxpayer so wishes). A 'final declaration' will then be required by 31 January following the year end to confirm data submitted in previous updates as well as to include claims and declaration of other taxable income (e.g. investment and employment income). Overall, this represents an increase in compliance and costs for self-assessment taxpayers.

Tax position

Until recently, incorporation was recommended for tax saving reasons. However, whatever savings there might have been have gradually diminished over the years. Calculations show that from a tax savings perspective, incorporation may no longer be beneficial regardless of the level of profit. Each business is different and, depending on the level of profit and amount of withdrawals by directors from the company, there may be a slight advantage of incorporation over self employment. Ultimately, the final decision to incorporate will likely be based more on commercial considerations, such as separation of liability and credibility, rather than purely on tax implications.

Compliance

Overall, MTD will increase the administrative workload for self-assessed taxpayers by introducing quarterly submissions. While companies currently face less frequent but often more complex reporting obligations, many find the practicalities and administration required (including setting up and running a payroll scheme, submitting monthly or quarterly employer's NIC payments, submitting accounts and returns to both Companies House and HMRC) within strict timelines wipe out any tax savings there may be.

Penalties

Under MTD, the self-employed and landlords will face stricter penalties for late or inaccurate quarterly submissions compared with the current system. If a self-employed individual fails to keep up with quarterly reporting, they could face fines for each missed update. Furthermore, with 'real time' data being sent to HMRC quarterly, there is a higher chance of discrepancies being flagged earlier, leading to more frequent audits or queries.

In contrast, although companies also currently face penalties for late corporation tax returns, because returns are currently filed annually, there is less frequent risk of error compared with the intended quarterly submissions.

Increased costs?

It costs £50 to incorporate a company and £34 every year to submit a confirmation statement. Currently, self-assessment taxpayers do not incur such costs, however under MTD, they will need to use commercial software to submit their returns, which will add to the cost of compliance.

Practical point

Under the Economic Crime and Corporate Transparency Act currently going through Parliament, all small companies, including micro-entities, will be required to file their profit and loss accounts as well as the balance sheet as required now. This means that anyone will be able to view the profit (or loss) of any company – possibly one good reason against incorporation.

How the courts have treated some recent research and development claims that HMRC has rejected.

For broadly the last couple of years, HMRC has been ‘cracking down’ on claims for tax relief on qualifying research and development (R&D) by SMEs, involving a concerted effort to challenge a much greater proportion of claims than previously, as a targeted campaign of compliance checks or enquiries.

These efforts have raised questions of competence – on both sides.

To qualify as R&D for a tax claim, the requirements may be rudely summarised as follows: The company must be able to demonstrate it has qualifying costs in a project that attempts to secure an advance in a field of science or technology (not just an advance in the company’s own knowledge, and that is also relevant to the company’s trade or intended trade), through the resolution of scientific or technological uncertainty – being something not readily available to, or deducible by, a competent professional working in that field.

There are numerous other conditions, such as whether the company is a going concern, has enjoyed ‘too much’ state aid, or whether the expenditure has been subsidised, but the previous paragraph is meant to cover the main theme.

The following tribunal cases cover key themes likely to be considered in the majority of R&D claims, and HMRC’s review of them.

Carelessness

H&H Contract Scaffolding v Revenue and Customs [2024] UKFTT 00151 (TC) is not really a case about qualifying R&D, but speaks more widely to HMRC conduct. The company had already conceded that its projects did not amount to qualifying R&D, but objected to HMRC’s assertion that it was liable to a penalty for carelessness – arguably, HMRC’s default approach to enquiry work in general, caught by the judge as:

“The Tribunal does not accept [HMRC’s] case that where the taxpayer cannot show that it qualified for a given relief then it follows that the taxpayer will have been careless, since that would entail the mere existence of an inaccuracy determining that the same inaccuracy was careless” (emphasis added).

Readers might muse that the court’s assertion that an inaccuracy is not automatically careless will be news to a good proportion of HMRC officers. The judge had similarly choice words for HMRC’s argument that the taxpayer had to prove that it was not careless, rather than for HMRC to prove that the taxpayer was careless in the first place.

Not the competent professionals we need

Flame Tree Publishing v Revenue and Customs [2024] UKFTT 00349 (TC) involved a traditional publisher engaging with the digital age, and claiming for costs incurred in that transition. While there may have been innovation in the broader sense, the claim fell down when the company tried to argue that its employees, who were no doubt competent professionals in the publishing world, also qualified as competent professionals in software and programming – crucial to the projects involved.

Without evidence that a competent professional would stand up and say: “This exercise was innovative or not readily deducible to a professional working in this field”, the company’s claim failed (but note that a competent professional does not have to hold a degree or professional qualifications and may be qualified by experience, so long as it is in the fields being tested).

The right competent professional…but not at the right time

Tills Plus Ltd v Revenue and Customs [2024] UKFTT 00614 (TC) also involved IT and programming but was a more complex case. In one of the threads to this case, there arguably was a (relevant) competent professional involved in making the report to assist the claim, but with little evidence or reasoning to back up their opinion given in their report.

Alas, nor were they subsequently available at the hearing to provide further evidence to the court; had they been available, the court might have upheld the claim based on that further evidence.

HMRC cannot keep saying: “Not enough evidence”

Get Onbord Ltd v Revenue and Customs [2024] UKFTT 617 (TC) also involved IT and programming. There were various parts to this quite long case but one particular aspect, with which those involved with R&D claims will likely be painfully familiar, was that HMRC’s position after opening the enquiry was repeatedly reworked along the lines of:

Thank you for providing copious evidence that you are trying to make an appreciable advance in (science or) technology. Unfortunately, we are just not satisfied that there has been an appreciable advance in (science or) technology…and we think everything was readily deducible to a competent professional.

HMRC seemed to believe that its approach was unassailable; the company has to prove its case, and if HMRC really does not want to believe, then it’s ‘hard cheese’.

The tribunal was very much on the side of the hardworking taxpayer on this. While it is inarguably the case that the company must justify its claim, at some point HMRC also has to explain why it still disagrees in the face of the company’s mounting good evidence.

One or two other comments by the judge in this case will also ring true to claimants over the last few years:

1. The taxpayer complained of HMRC’s “lack of scientific knowledge and rigour.”

2. “Despite asking, [the claimants] were unable to speak to anyone at HMRC who had domain expertise.”

3. “The HMRC officer responsible for this case…was in a difficult position, as he has no technology experience or expertise.”

If at first you don’t succeed… In Collins Construction Ltd v Revenue and Customs [2024] UKFTT 00951 (TC), perhaps surprisingly, HMRC did not argue that the projects qualified on the “technological uncertainties” aspects but more on the fact that the company was being paid by another party to undertake the work – so it was ‘subsidised’ or ‘contracted-out’ and therefore ineligible for the enhanced relief (in other words, another party was bearing the real cost of the R&D, so Collins Construction itself should not qualify).

This was an argument adopted by HMRC from a previous case (Quinn London Ltd v Revenue and Customs) [2021] UKFTT 437 (TC)), which HMRC comfortably lost. HMRC clearly dislikes the idea that a company should be earning profits from work that involves R&D, even though a fundamental premise of the R&D tax regime is that the company’s R&D should assist the trade from which it earns its profits.

It is particularly precious that HMRC wheeled out a big gun as a witness – a technical adviser on HMRC’s R&D Policy Team; an expert in the history of the statutory provisions, the consultation process and on HMRC’s view of the aims and purpose of the statute. His offerings were roundly ignored, and HMRC’s arguments were comprehensively demolished. It might be said that HMRC also sometimes brings the wrong competent professional into the fray.

Simply put, the courts have consistently found that it is perfectly okay to be paid to do work under a commercial contract that in consequence involves R&D being undertaken by the claimant company, broadly as long as the fruits of that effort and knowledge will accrue to the claimant company.

Conclusion

The last two cases should offer some hope to beleaguered claimants and their advisers, that the courts’ approach to the fundamentals of the R&D tax regime has not changed, even if HMRC’s strategy has.

When challenged in a recent Treasury Committee hearing on HMRC’s change of approach to R&D claims over the last couple of years, its Chief Executive argued: “My people are tax inspectors. They are not software engineers or rocket scientists and they meet a vast range of claims in areas in which they do not have expertise.” And yet they routinely refuse claims on the basis that there has been “no appreciable advance in a field of technology”, in which they possess such scant knowledge.

The annual tax on enveloped dwellings (ATED) is a tax that is payable mostly by non-natural persons (mostly companies) owning UK residential property valued at more than £500,000. Unless one of the exemptions applies, the company will need to file an ATED return and pay the associated tax.

The return

Where a property within the charge is held on 1 April 2025, the ATED return for the period from 1 April 2025 to 31 March 2026 must be filed by 30 April 2025. The return will normally be filed online using HMRC’s ATED online service. Where the return cannot be filed online, a paper form can be used. However, this must be requested from HMRC. Taxpayers using a paper form should allow two weeks for HMRC to receive it.

Where a property within the charge is acquired after 1 April 2025, the deadline is 30 days from the date on which the property came into charge.

It is important that the return is filed on time as penalties are charged for returns filed late.

Valuation

The ATED only applies to non-exempt residential properties valued at more than £500,000 at the valuation date. For properties owned on or before 1 April 2022, the key date is 1 April 2022. Where the property was acquired after this, the key date is the date of acquisition.

The tax

The amount of tax payable depends on the value of the property. The rates applying for 2025/26 are shown in the table below.

Property value                                              Annual charge

More than £500,000 up to £1 million                £4,450

More than £1 million up to £2 million.              £9,150

More than £2 million up to £5 million.              £31,050

More than £5 million up to £10 million.            £72,700

More than £10 million up to £20 million           £145,950

More than £20 million                                       £292,350

The tax for 2025/26 must be paid by 30 April 2025 (or within 30 days of the property coming into charge where later). The charge may be reduced if the property is only owned for part of the year.

Exemptions

The first point to note is that the charge only applies to dwellings. This is a property that is, or could be used, as a residence, such as a house or flat. Certain properties do not count as dwellings for ATED purposes, including hotels and guest houses, boarding school accommodation, student halls of residence and care homes.

There are also a number of reliefs and exemptions which take certain properties outside the scope of ATED. For corporate landlords, the main exemption is that for properties that are let to a third party on a commercial basis and which are not, at any time, let to or occupied by anyone connected with the owner (such as a director shareholder of the property company). An exemption is also available for properties that are being developed by a property developer.

A look at the mechanism designed to help people to reclaim VAT costs on building their own home, and some tips and traps for those hoping to make the best of their claim.

VAT on construction can be complex. For example, the VAT treatment of building a simple wall as part of a project might depend on:

 • the category of building – residential, commercial, etc.;

 • whether it is a repair to an existing property or new development;

 • whether it merely extends an existing property or counts as a separate property in its own right; or

 • its intended use once the work is complete.

It will also depend on whether we are considering the property asset overall or work being done on the property. For the purposes of this article, let’s assume we are dealing with work to create a new, single-household residential property or dwelling.

Construction services: What is being supplied?

Readers who are unfamiliar with VAT (and particularly on construction) may be surprised to find that the scope of ‘construction services’ is quite wide.

For example, if you pay a builder to build a brick wall as part of a house, this will not be a supply of goods – the bricks – but rather the supply of bricklaying services that just happens to involve the goods and materials of bricks and mortar. The fact that the cost of the materials might well exceed the actual labour component is largely irrelevant. What matters is that the building materials comprised in that service are:

 • incorporated into the building;

 • of a type that is ordinarily incorporated by builders in that type of building, however:

 • most fitted furniture is excluded other than kitchen furniture (although things like airing cupboards may qualify);

 • most appliances are excluded other than space or water heaters, burglar or fire alarms; and

 • carpets and curtains are also excluded from treatment as building materials.

Broadly, if I buy materials directly from a supplier, the supplier must charge VAT at the standard rate of 20%. If I pay a builder for materials as part of the supply of construction services, as above, the builder will charge VAT on the materials element according to the rate applicable to the construction services they are supplying.

Why does it matter?

The sale of the freehold (or long lease) in a new dwelling is generally zero-rated. Strictly, the seller is charging VAT, but at 0% - which means that developers can generally still recover the VAT on their costs (e.g., such as the bricks and mortar that they buy from builders’ merchants) even if they are charging zero VAT to the new homeowner. This should eliminate most of the VAT cost otherwise chargeable on someone buying a new house.

This is all fine; but what about when somebody wants to manage their own self-build, and buys some or all the eligible materials themselves, directly from merchants, etc? Builders will commonly source their basic materials but expect the client to source their own decorative elements, such as bathroom and kitchen fittings. If I, as a homeowner, were to pay £5,000 for sinks, bath, shower cubicle and shower, then a showroom would charge me £1,000 in VAT. But all of these would be eligible as building materials, as fittings, etc., (rather than fitted furniture). The special DIY Housebuilder Scheme allows me to reclaim the VAT on these costs from HMRC, basically to put a self-build on the same VAT cost footing as if buying a finished new home (almost) VAT-free from a developer.

The claim process

The private homeowner makes a claim directly to HMRC (perhaps via an accountant or agent). With narrow exceptions, the property in question must be:

 • new build;

 • a conversion from non-residential use (or derelict or not used as a dwelling for at least 10 years);

 • a replacement for an existing dwelling that has been demolished to ground level (retaining no more than foundations, cellars, or similar, although sometimes external facades may also be kept); or

 • extending an existing building, to create an additional dwelling in the new space.

The claim can be made online or on paper and must include:

 • plans and planning permission for a dwelling;

 • a building regulations completion certificate; and

 • be submitted no more than six months after construction is completed (it was a three month window for completions before 3 December 2023).

In the good old days, one had to provide all invoices/receipts as evidence of VAT incurred as part of the application, but HMRC now wants a summary of costs (using its template) and will then ask for specific copy VAT documentation, if deemed appropriate (i.e., high-value or unusual items).

Common traps

When is a building ‘complete’? – Self-builds can be arduous, and circumstances may dictate that the homeowner moves in uncommonly early (or late).

In Sansom v HMRC [2020] UKFTT 198 (TC), the taxpayer moved to the property in 2013, but did not achieve formal completion until more than five years later in 2018. HMRC refused to accept his claim made shortly after the formal certificate, arguing that the property had clearly been habitable several years beforehand, so Mr Sansom was too late. Observing that HMRC usually insisted on a completion certificate, the First-tier Tribunal (FTT) found that HMRC could accept alternative evidence in lieu of a certificate but could not refuse to accept a claim made in time against a formal completion certificate.

Is it a new build or an extension? – In Dunne v HMRC [2023] UKFTT 88 (TC), the claimant had originally gained planning approval for a two storey side extension to his existing home but ultimately created a free-standing ‘bungalow’ without the planned connecting corridor. The FTT upheld HMRC’s refusal of the claim; permission had been granted for an extension, not a separate dwelling; moreover, the council still referred to the new property as “an extension…not attached to your main house”.

A separate garage may be eligible for inclusion in a claim, but only if built at the same time as the (qualifying) new dwelling, and for use with the dwelling. A garage built later will not be eligible.

Only ONE claim? – HMRC insists that it will pay out against only one DIY claim; it will refuse any later or ‘mop-up’ claims. In Ellis & Bromley v HMRC [2021] UKFTT 0343 (TC), the FTT disagreed:

 • There was nothing in the primary legislation (VATA 1994, s 35) to limit a new dwelling project to a single claim; HMRC’s subordinate VAT regulations that included that requirement were therefore ‘ultra vires’.

 • Moreover, the claimants strictly made their initial DIY claim ‘too early’ as the property was incomplete, so the second claim was the only valid claim made.

Notwithstanding, HMRC continues to insist that only a single claim can be made.

Restricted payout where VAT charged incorrectly?

 – HMRC likewise insists that it will refuse to reimburse any VAT that was not charged at the correct rate for the work that was done, stating that it is the claimant’s responsibility to check that their builders have charged the appropriate rate of VAT or the claim will be restricted accordingly.

However, in Poulton v HMRC [2025] UKFTT 240 (TC), the FTT refused HMRC’s request to strike out the taxpayer’s claim for VAT on invoices for groundwork that should have been zero-rated but had been charged instead at the standard 20% rate. The tribunal felt that Mr Poulton was potentially correct in trying to claim against HMRC (broadly based on ‘old’ pre-Brexit European law – referred to as the Reemstma case – that he should be entitled to claim from his domestic tax authority where it was impossible or “excessively difficult” to get his builder to re-do their invoice without charging VAT; here, they had gone into liquidation). The FTT was also highly critical of HMRC’s conduct in the case; note, however, that (at the time of writing) the courts have not yet decided Mr Poulton’s claim itself, merely that he has a reasonable case that should be heard.

Conclusion

A VAT DIY housebuilder claim can be quite valuable in recovering significant VAT costs – largely on materials. But there are numerous important rules, and expert guidance is strongly recommended.

Partnerships are the only business entities that can be formed by oral agreement, created automatically when two or more persons engage in a business ‘with a view’ (to making) ’a profit’. ‘Persons’ include artificial persons as well as individuals and as such a partnership could comprise an individual, a company and even a trust.

Unless the partners agree terms (written or otherwise), the Partnership Act 1890 applies to all unlimited partnerships. Under the Act, profits and losses are shared equally, and partners are jointly liable for the partnership's debts and any loss or damages arising from the wrongful acts or omissions of any partner. The Act also imposes a clause that states that partnerships will be automatically dissolved from the date of death or bankruptcy of any partner, unless a partnership agreement is in place that states otherwise.

The partnership's activities are treated as being carried on by the individual partners and not by the partnership itself (as the partnership is not a separate legal entity). As such, for income tax purposes a partnership has no legal existence distinct from the partners themselves (this is not the case in Scotland where a partnership is a legal person). As such, each partner is taxed on their share of profit as an individual. The effect of this provision ensures that an individual is treated as commencing their business when they start to trade, even if that was before they became a member of the partnership. Similarly, the cessation of their business does not necessarily occur when the partnership is dissolved but may cease if a partner dies.

Limited liability partnerships (LLPs) have similar tax status as ordinary partnerships but with the benefit of each partner only being liable for the amount of capital invested. Therefore, LLPs benefit from the same protection as a limited liability company.

The importance of an agreement

Under the provisions of the Partnership Act 1890 (relevant when no agreement is in place), on the death of a partner, the partnership changes such that it will be required to sell its assets to pay off any creditors and distribute the funds between any remaining partners and the deceased's estate. For inheritance tax (IHT) purposes, the value of the partnership share forms part of the deceased's estate as a transfer of value would have been made. However, there may be no IHT charge as business property relief may apply. The value of a partnership interest without an agreement that states otherwise is the market value. The deceased person's estate is also entitled to the share of the profits made since death attributable to their share of the partnership, or to interest at 5% per annum on the value of their share until the share is paid out. The choice between which of the two the estate receives lies with the personal representatives.

For income tax purposes, even if a partnership agreement is in place, the income tax position of the partner's estate will be the same as if a sole trader ceases trading, being taxed on any profits made from the end of the accounting/basis period in the previous tax year to the date of cessation.

Contents of a partnership agreement

In practice, most partnership agreements contain provisions allowing for the continuation of the partnership after the death of a general partner, confirmation of what happens to the partnership interests and whether the partners' heirs can sell the interest to another. Invariably, the agreement also allows for the deceased partner’s share to be bought by the remaining partners. The agreement should also include details as to how the deceased partner's share  of the partnership should be valued, procedures on how to pay out the deceased partner’s capital, a requirement to remove their name from all partnership materials and contracts, and the practicalities of paying the deceased partner’s share.

HMRC can enquire into any tax return and request information to establish whether that return is correct. No reasons need be given for the enquiry and will invariably not be disclosed. Regardless of the reasons for failing to declare income, HMRC has extensive means to uncover undeclared and under-reported income.

'Connect'

At the core of HMRC's investigation efforts is a powerful computer program called 'Connect'. This software analyses large quantities of data to identify fluctuations, patterns and associations between seemingly unrelated information. 'Connect' helps prioritise where HMRC should focus its time, using data to decide which cases are most worth pursuing. In the past, HMRC enquiries were often triggered by a tip-off to the department by a disgruntled employee or former spouse or were random enquiries. Now, more than 90% of enquiries are prompted by data and analysis generated by 'Connect'.

Over time, HMRC has broadened the reach of 'Connect', enabling it to automatically gather information from a diverse range of sources. These include social media, flight sales and passenger data, tax returns, the UK Border Agency, Google Street View, cryptocurrency exchanges, online payment platforms like PayPal, as well as the usual government agencies and departments such as Companies House, DVLA, the Land Registry and the DWP.

Digital platforms

Since January 2024, digital platforms across several industries have been required to share specific taxpayer information with HMRC for the first time. Previously, HMRC could request this information, but now operators must collect and verify data from sellers and submit an annual report to HMRC within set deadlines. The digital platforms include those facilitating short-term property rentals (e.g. Airbnb), private hire vehicles (e.g. Uber), food delivery networks (e.g. Deliveroo) and online private sales activity (e.g. eBay). Agencies and booking platforms are required to report data annually on or before the 31st of January following the end of the reportable period. The first report had to be submitted by 31 January 2025 to cover the reporting period  1 January 2024 to 31 December 2024. There is no obligation  to report ‘occasional’ sellers (e.g. those who make fewer than 30 sales).

Use of AI

HMRC sees the value in AI not in collating data ('Connect' already does that) but in the software’s ability to learn and analyse data. The intention is for AI to work alongside other tools such as geo-mapping (the process of taking location-based data including sales numbers, demographic info, etc), using the resulting information to create informative maps. By collating information from the various sources available, AI will analyse and assess taxpayer behaviour patterns to identify high-risk areas and individuals, allowing for a more targeted approach and ultimately saving resources and time.

New reward scheme for informants

Despite the power of computing technology, HMRC still relies on tips from individuals, such as disgruntled ex-partners and former employees, as an essential source of information. Such tip-offs can be submitted online anonymously or by using HMRC's 'tax evasion hotline', with reports that include specific information being more likely to be investigated.

Building on this, in March 2025 HMRC announced a reward scheme for 'informants' – paying cash to people who report serious non-compliance in large corporates, wealthy individuals, and offshore and avoidance schemes. Informants providing information leading to the recovery of previously unpaid tax could receive up to 25% of the extra tax raised as a direct reward. The implementation of this scheme is pending, so any rewards offered currently will be at HMRC's discretion.

Other measures

HMRC has announced other enforcement measures, including a joint initiative with the Insolvency Service to increase the use of securities in tackling 'phoenixism'. Phoenixism is the practice of carrying on the same business successively through a series of companies where each company becomes insolvent and does not pay its debts. HMRC will require upfront tax payments from these new companies, making more ‘rogue’ directors personally liable for their company's outstanding taxes.

Special rules apply for stamp duty land tax (SDLT) purposes where there is more than one sale and purchase between the same buyer and seller. It is important that property investors are aware of this as it may lead to a much higher SDLT bill than they were expecting. The rules outlined below apply for SDLT purposes on transactions in England and Northern Ireland.

Nature of linked transactions

Two or more property transactions that involve the same buyer and seller are treated as ‘linked’ for SDLT purposes where they are part of a single arrangement or a series of transactions. People connected to a buyer or seller may be treated as the same person as the buyer or seller for these purposes, so for example a transaction between a husband and a seller would be linked to a transaction between his wife and the same seller.

Under the linked transaction rules, SDLT is calculated by reference to the total value of all the linked transactions. Where all the properties are residential properties, the residential rates are used. However, if any or all of the properties are non-residential, the non-residential rates are used.

A single arrangement

Where more than one property is purchased by the same buyer from the same seller as part of a single arrangement, SDLT is calculated by reference to the total consideration for all properties rather than for each property individually.

Example

David is a property investor. He agrees with a developer to buy four new-build houses on a new development. The houses are priced at £400,000 each, but the developer gives David a 5% discount, so that he pays £1,520,000 for the properties.

SDLT is calculated using the residential rates inclusive of the 5% supplement for second and subsequent residential properties on the total consideration of £1,520,000. This results in an SDLT bill at the residential rates of £172,150. By comparison, if SDLT is calculated separately for each property by reference to the amount actually paid of £380,000 per property, SDLT of £28,000 is payable per property – a total of £112,000 for the four houses. Under the linked transaction rules, the SDLT bill is £60,150 more.

A series of transactions

Where a sale is followed by one or more related transactions between the same buyer and seller, the linked transaction rules apply. There is no limit on the time between the transactions for the rules to bite.

Where a transaction is followed by subsequent transactions, the SDLT must be calculated on the total consideration for the linked transactions at that point and apportioned to the properties in relation to their chargeable consideration. A subsequent linked purchase may increase the SDLT payable on an earlier transaction.

Example

Dawn buys an investment property from a builder in April 2025 for £300,000. She pays SDLT at the residential rates including the 5% supplement of £20,000. Later in the year she buys a further investment property from the builder for £500,000. The transactions are linked. The total consideration is £800,000, on which SDLT of £70,000 is payable. This is apportioned between the properties by reference to their chargeable consideration so that SDLT of £26,250 (3/8ths) relates to the first house costing £300,000 and SDLT of £43,750 relates to the second house costing £500,000. On the completion of the second purchase, she must pay not only SDLT of £43,750 in relation to that property, but also an additional £6,250 in respect of the earlier linked purchase.

When starting a business, there are various decisions to make and tasks to perform. One of the first questions to address is whether to run the business as a sole trader, whether to set up a partnership with others or whether to form a company. The way in which a business is operated will determine the taxes that are payable and legal obligations that must be met.

A person operating as a sole trader is in business for themselves. This is arguably the simplest way to run a business.

Registering with HMRC

A person operating as a sole trader will need to register with HMRC for Self Assessment if they have trading income of £1,000 or more. This is the total from all unincorporated businesses, not per business.

If a person is already registered for Self Assessment, for example, because they have investment income or income from property to report to HMRC, they do not need to register again. Rather, they will simply need to complete the Self-Employment pages of the return to report details of their business income.

If a new trader is not registered for Self Assessment, they will need to do so by 5 October following the end of the tax year in which they first became liable to register. For example, if a person started a business in 2024/25 and their turnover was more than £1,000, they will need to register for Self Assessment no later than 5 October 2025. A person can register via the Gov.uk website (see www.gov.uk/register-for-self-assessment).

A person who has previously been registered for Self Assessment, but did not file a return for the last tax year, will need to register again to reactivate their account.

Tax and National Insurance

A sole trader must pay income tax on their profits. Their profits form part of their total taxable income, which will be liable to income tax to the extent that it exceeds their personal allowance for the tax year. For 2024/25 and 2025/26, the personal allowance is £12,570. Income tax is charged at 20% on the first £37,700 of taxable income. Taxable income in excess of £37,700 up to £125,140 is taxed at 40%, and anything over £125,140 is taxed at 45%. Where adjusted net income exceeds £100,000, the personal allowance is reduced by £1 for every £2 of income in excess of £100,000, such that anyone with adjusted net income in excess of £125,140 does not receive a personal allowance.

Self-employed individuals must pay Class 4 National Insurance if their profits exceed £12,570. This is payable at a rate of 6% on profits between £12,570 and £50,270 and at 2% on any profits in excess of £50,270. Where profits exceed the small profits threshold (set at £6,725 for 2024/25 and increasing to £6,845 for 2025/26), no Class 4 National Insurance contributions are payable. However, the trader will earn a National Insurance credit which will provide them with a qualifying year for state pension purposes. Sole traders with profits which are below the small profits threshold can opt to pay voluntary Class 2 contributions to build up their state pension entitlement. At £3.45 per week for 2024/25 (increasing to £3.50per week for 2025/26), this is a much cheaper option than paying voluntary Class 3 contributions, and may be beneficial if the sole trader would not otherwise secure a qualifying year.

Tax and Class 4 National Insurance contributions must be paid by 31 January following the end of the tax year. Once the tax and Class 4 liability reaches £1,000, payments on account must be made for future tax years.

VAT

A sole trader will need to register for VAT if their VATable turnover exceeds the VAT registration threshold of £90,000 in the previous 12 months, or is expected to do so in the next 30 days.

Records

The sole trader will need to keep records of their business income and expenses to enable them to work out their taxable profits. It is a good idea to have separate personal and business bank accounts to avoid personal and business expenses getting mixed up. The trader should also keep invoices, receipts, etc.

Landlords selling a furnished holiday letting are able to access BADR if they cease the furnished holiday lettings business on or before 5 April 2025 and dispose of the property within three years of cessation, assuming the qualifying conditions have been met.

Qualifying assets The relief is only available on the disposal of qualifying assets. The following count:

 1. Assets, with the exception of goodwill in certain cases, used in the business. Business premises count as qualifying business assets; however, shares, securities and other assets held as investments do not count.

 2. Assets that were used in the client’s business or a partnership in which the client was a partner.

 3. Assets comprising shares in or securities of the client’s personal company.

 4. Assets owned by the client personally but used by a business carried on either by a partnership in which the client is a partner or by the client’s personal trading company or, where the client’s personal company is a holding company, by a trading company in that group. The disposal will only qualify for BADR if it is associated with a qualifying disposal of the partnership of the shares or securities in the client’s personal company.

It is important to note that where the disposal of the business is to a close company in which the individual (or a relevant connected person) owns at least 5% of the ordinary share capital, BADR will not apply to any gain on goodwill. However, in certain cases, this rule does not apply if the shares are sold within 28 days.

Timing

To minimise the CGT payable on a disposal of business assets, timing is everything.

The best rate of 10% applies to disposals made in the current tax year (i.e., on or before 6 April 2025). Where a disposal is in process, accelerating the disposal date so that it falls within 2024/25 is only beneficial if the qualifying conditions have been met for the two-year qualifying period on the new disposal date. If the conditions have been met for less than two years, BADR will not be available, and gains will be taxed at the standard CGT rates, which since 30 October 2024 is 18% where income and gains fall within the basic rate band, and 24% thereafter.

Consequently, it is better to wait until the conditions have been met for two years so that BADR will be available. Where the disposal takes place in 2025/26, qualifying gains will be taxed at 14%. If the disposal does not take place until 2026/27 or later, gains will be taxed at 18%.

Prior to 30 October 2024, the rate of BADR was aligned with the CGT rate applying to basic rate taxpayers – both being set at 10%. From 30 October 2024, the CGT rate for basic rate taxpayers was increased to 18%, with the rate applying to BADR gains remaining at 10% for the remainder of the 2024/25 tax year.

Accessing BADR in this period is a very good deal, allowing an individual to save tax of up to £140,000 where the gains would otherwise be taxed at the higher CGT rate of 24% if BADR was not available. Basic-rate taxpayers, too, can benefit from savings by claiming BADR, where gains fall within the basic-rate band.

For 2025/26, the rate of BADR is 14%, but this is still below the CGT rate for basic rate taxpayers of 18%. A rate of 14% provides savings of up to £100,000, where the gains would be taxed at the higher rate of 24% in the absence of BADR. Basic rate taxpayers also save 4% on qualifying gains.

From 6 April 2026, the rate of tax for BADR gains is once again aligned with the CGT rate for basic rate taxpayers, both being set at 18%. Accessing BADR will save up to £60,000, where the gains would otherwise be taxed at the higher rate of 24%; however, there are no savings where the gains fall in the basic rate band.

Practical tip

As long as the qualifying conditions have been met for the two-year qualifying period, consider bringing forward a disposal of qualifying business assets to secure the best rate of BADR and minimise the CGT payable on the disposal.

Most individuals are entitled to receive a personal allowance. This is the amount that they are able to earn before they pay tax. For 2024/25, the personal allowance is set at £12,570. The allowance is for the tax year only – if you do not use it in the tax year, you lose the benefit of it; you cannot carry any unused amount forward to the next tax year.

As the end of the tax year approaches, if you have yet to use your 2024/25 personal allowance, you may want to consider whether there is scope to do so.

1. Pay a salary or a bonus

If you operate a personal or family company, you may wish to consider withdrawing further profits in the form of a salary or bonus before 6 April 2025. For 2024/25, the optimal salary is one equal to the personal allowance of £12,570 where the allowance is not used elsewhere. If you have yet to pay a salary of this level, there is still time to do so before the end of the tax year.

2. Advance income or defer expenses

For 2024/25 onwards, the cash basis is the default basis of assessment for unincorporated businesses. Under the cash basis, income is assessed when received and expenses recognised when paid. If your taxable profit for 2024/25 is less than your personal allowance and you have no other income, consider whether you can bring profit into 2024/25 rather than 2025/26 by accelerating income (for example, by invoicing early) or by delaying paying expenses.

3. Consider pension payments

If you have reached the age of 55 and have already flexibly accessed your pension, for example, by withdrawing your 25% tax-free lump sum, consider taking further payments from your pension to use up any remaining personal allowance as this will enable you to withdraw further amounts from your pension tax-free.

4. Preserve the allowance if you are a high earner

The personal allowance is reduced once adjusted net income reaches £100,000. For every £2 by which adjusted net income exceeds £100,000, the personal allowance is reduced by £1 until fully abated once income reaches £125,140. Individuals whose adjusted net income is £125,140 or more in 2024/25 do not receive a personal allowance. However, to prevent the loss of the personal allowance, consideration could be given to delaying income, for example, deferring bonus or dividend payments from a personal or family company, or reducing adjusted net income by making pension contributions or charitable donations.

5. Consider the marriage allowance

If you are married or in a civil partnership and are unable to use your 2024/25 personal allowance in full, consider whether you can make use of the marriage allowance to save tax. If your spouse or civil partner is a basic rate taxpayer, you can transfer £1,260 of your personal allowance to them by making a marriage allowance claim. This will reduce their tax bill by £252.

Mortgage problem

If the property being sold is encumbered with a mortgage, UK law stipulates that should the mortgage still be in place at the time of sale, the property must be sold for no less than the amount owed on the mortgage to fulfil the mortgage obligations. This is to satisfy the requirement for the mortgage to be ‘paid off’ before the property changes hands.

If no consideration or less than market value consideration is given, the buyer may need to cover the shortfall if the agreed price is significantly lower than the mortgage.

Assuming that the seller does not need the proceeds of sale immediately, one way to mitigate the mortgage problem is for the intended buyer (e.g., a family member) to rent the property from the seller for an agreed upon period instead of selling or gifting the property.

At the end of that period, the tenant can be given the option to purchase the property. The tenant-buyer pays a higher amount per month, which is used as a gradually accumulating ‘down payment’ on the property. There is usually a fee to ‘purchase’ the option, although in practice this can be as low as £1.

Stamp duty land tax

Stamp duty land tax (SDLT), Land and Buildings Transaction Tax (LBTT - Scotland) and Land Transaction Tax (LTT -Wales) is based on the price paid for the property. If no consideration is given, no SDLT/LBTT/LTT is due unless the property is mortgaged. In such cases where the buyer assumes responsibility for any existing mortgage obligations as part of the transaction, the amount of the mortgage is treated as chargeable consideration.

Nevertheless, HMRC may still impose SDLT/ LBTT/LTT in certain situations, such as when the property is partially gifted or sold for a nominal amount.

Inheritance tax: Reservation of benefit rules

If the property is sold (or gifted) to a family member or someone close and the donor-seller continues to benefit (e.g., living at the property rent-free or still using the property), HMRC may apply the gift with reservation of benefit rule whereby the full market value of the property at the time of the donor’s death (not just the gifted portion) is included in the estate for inheritance tax (IHT) purposes.

Pre-owned asset rules

A charge to income tax can arise (under FA 2004, Sch 15) on benefits received by a property’s former owner (termed a ‘pre-owned assets’ (POAT) charge). It applies to individuals who continue to receive benefits from certain types of assets they once owned (after 17 March 1986) but have since disposed of.

If the disposal has been by way of a gift (or by selling at a less than market value price), they are potentially liable to the charge. Here, we are looking at scenarios such as a connected person buying a property for less than the market value and the donor remaining in the property they used to live in, or the cash on sale helps someone else acquire the property by contributing to its acquisition (the ‘contribution condition’).

The conditions for the POAT charge are broad, covering many situations where people continue to enjoy assets they no longer officially own.

Practical tip In some situations, paying the POAT charge may be cheaper than keeping the cash and being charged to IHT. The POAT charge can be excluded if the transferee pays full market rent (although the transferee may need to pay income tax on the rental income).

Where a company holds large cash reserves or other investment assets, this may mean that BADR is not available on the disposal. For borderline cases, it is advisable for companies to keep records and board minutes of the intended use of any substantial cash reserves, which would support a trading motive.

Balance of indicators

The availability of BPR and BADR depends on the company passing the ‘trading’ thresholds. These thresholds differ for each relief, but the balance of indicators is broadly the same, and can be summarised as follows:

 • Asset base – does the value of trading assets outweigh non-trading assets?

 • Income – does the majority of turnover come from trading or non-trading activities?

 • Time spent – is the majority of time spent by employees on trading or non-trading activities?

The indicators should be looked at in the context of the company as a whole to determine if the threshold is met. A more detailed analysis of how HMRC applies these indicators is given in their Capital Gains Tax Manual at CG64090.

Due to the different trading thresholds for BPR and BADR, it is important to understand which relief is likely to be more valuable to a taxpayer. If a shareholder has no intention of selling their shares during their lifetime, there is more scope for the company to hold investment assets if BPR will be claimed on death.

Gift relief on shares

For gifts of shares in unlisted trading companies, gift relief can be claimed (under TCGA 1992, s 165). Where full relief is available, this allows shares to be transferred between individuals without incurring an immediate capital gains tax charge, with the gain on the disposal being deducted from the transferee’s base cost.

For companies holding non-business assets, relief is restricted when:

 • at any time within the period of 12 months before the disposal, the donor was able to exercise at least 25% of the voting rights in respect of the company; or

 • the donor is an individual and, at any time within the period of 12 months before the disposal, the shares gifted were in their personal company.

The amount of relief available is restricted by multiplying the gain by ‘A/B’ where:

 • A is the value of ‘chargeable business assets’; and

 • B is the total value of ‘chargeable assets’.

When looking at the definition of ‘business assets’ for gift relief purposes, it is not sufficient for the asset in question to just be used within the business. To qualify as a ‘business asset’ it must be used in a ‘trade, profession or vocation’ carried on by the company. An investment property would therefore not qualify as a business asset and would result in a restriction to the relief.

Rollover relief

Rollover relief (under TCGA 1992, s 152) can be claimed when a company disposes of a trading asset within TCGA 1992, s 155. This includes land and buildings, fixed plant and machinery, and goodwill. Any gain arising on disposal can be deferred by reinvesting the proceeds into other qualifying assets.

For almost all assets listed within TCGA 1992, s 155, to qualify for relief the whole asset must have been used wholly for trading purposes. However, for buildings, TCGA 1992, s 152(6) provides a relaxation for this condition. This applies where, at the time of sale, only part of a building is used for trade purposes, with the trading and non-trading parts treated as separate assets.

This is applicable if a company uses part of its trading premises for investment purposes (e.g., by letting out surplus space). Whilst rollover relief cannot be claimed for the part let out, the usual rules apply to the trading portion under section 152.

Where the replacement building is only used partly for trade purposes, section 152(6) works in the same way to allow relief to be claimed on the purchase of the part which will be used for trading purposes. Where applied, consideration for the qualifying and non-qualifying elements is apportioned on a ‘just and reasonable’ basis (under s 152(11)).

If the building disposed of was used for nonbusiness purposes during the period of ownership, relief is also restricted (by s 152(7)) to the period the building was used within the trade.

Practical tip

A taxpayer’s capital tax position should be regularly reviewed. As capital taxes generally have a longerterm horizon than those affecting the day-to-day running of the company, changes in the taxpayer’s plans and legislation can significantly impact the tax position.

Putting money into a registered pension scheme can be tax efficient. Individuals can make contributions in their own right, or even for someone else, and employers can make contributions on their employees’ behalf (and indeed must do so under auto-enrolment). Tax relief is available on contributions up to certain limits.

Auto-enrolment

Under auto-enrolment, employers must enrol eligible employees into a registered pension scheme and make contributions on their behalf. An eligible employee is one who is between the ages of 22 and state pension age and who earns at least £10,000 a year. The total contribution to the scheme must be 8% of qualifying earnings, of which the employer must contribute at least 3%. While employees can choose to opt out of auto-enrolment, they will lose the valuable employer contributions, and as such, this is not a decision that should be made lightly.

Contributions to a personal pension scheme

Individuals can make tax-relieved contributions to a relevant pension scheme up to the lower of 100% of their earnings (or £3,600 if higher) and their available annual allowance. Tax relief is given at the contributor’s marginal rate of tax.

For 2025/26, the annual allowance is set at £60,000. However, where both threshold income (broadly income excluding pension contributions) exceeds £200,000 and adjusted net income (which includes pension contributions) exceeds £260,000, the annual allowance is reduced by £1 for every £2 by which adjusted net income exceeds £260,000 until the allowance is reduced to the minimum amount of £10,000.

Where the annual allowance is not used in full, it can be carried forward for up to three years. However, the current year’s allowance must be used before utilising those from earlier years (with allowances from earlier years being used in chronological order).

The annual allowance was set at £60,000 for 2024/25 and 2023/24 For 2022/23 it was set at £40,000 (with abatement applying where threshold income was more than £200,000 and adjusted net income was more than £240,000 until the minimum allowance of £4,000 is reached).

Individuals who have not made contributions in 2022/23 and later tax years can make tax-relieved contributions of up to £220,000 in 2025/26, earnings permitting. However, it should be remembered that high earners may have a reduced annual allowance as abatement may apply.

There is no longer any cap on lifetime tax-relieved pension savings following the removal of the former lifetime allowance. However, the maximum tax-free lump sum is capped at £268,275 where this is less than 25% of the value of the pension pot when accessed.

Once an individual has accessed their pension savings (currently an option on reaching the age of 55), they are only entitled to a lower annual allowance – the money purchase annual allowance – thereafter. For 2025/26 this is set at £10,000.

Personal and family companies

Directors of personal and family companies often only take a small salary equal to the personal allowance of £12,570 and withdraw further profits as dividends. This can limit the tax-relieved pension contributions that they are able to make, as dividends do not count as earnings, capping potential pension contributions at £12,570 a year. This problem can be overcome if the company makes employer contributions on their behalf, as while employer contributions count towards the annual allowance, they are not limited to 100% of the employee’s earnings. Making pension contributions to the director’s pension scheme can be a tax-effective way to withdraw profits from the company. The contributions are also deductible when calculating the company’s profits for corporation tax purposes.

Employees with a company car available for their private use pay tax on the benefit. The amount that is charged to tax is a percentage of the list price of the car and any optional accessories, as adjusted to reflect any capital contributions made by the employee up to £5,000. The percentage, which is known as the ‘appropriate percentage’, depends on the level of the car’s CO2 emissions. A supplement applies to diesel cars that fail to meet emissions standards. The charge is adjusted to reflect certain periods during the tax year when the car was not available to the employee for their private use, and also any contributions made by the employee in respect of their private use of the car.

Changes applying from 2025/26

For the 2025/26 tax year, having a company car will become slightly more expensive. The appropriate percentages are increased by one percentage point up to the maximum charge of 37%. This means that an employee with an electric car will now be taxed on 3% of the list price of the car and optional accessories, compared to a charge of 2% for 2024/25. At the other end of the scale, the maximum charge of 37% will apply to cars with CO2 emissions of 155g/km and above.

This change will mean that an employee with a company car with a list price of £30,000 paying tax at the higher rate will pay £120 more in tax on their company car in 2025/26 than in 2024/25. Employers will also pay more in Class 1A National Insurance, both as a result of the increase in the appropriate percentage and also as a result of the increase in the Class 1A charge from 13.8% to 15%.

Looking ahead – 2026/27 and beyond

With the number of company car drivers choosing electric company cars increasing, the Government are reducing the tax breaks in order to maintain their revenue stream. For 2026/27, the appropriate percentages applying to cars with CO2 emissions of 74g/km or less are increased by one percentage point, while the appropriate percentages for cars with CO2 emissions of 75g/km and above are maintained at their 2025/26 level. It is a similar story for 2027/28 – the appropriate percentages for cars with CO2 emissions of 69g/km and below are increased by one percentage point, with the appropriate percentages for cars with CO2 emissions of 70g/km and above remaining unchanged.

There are further changes to come in both 2028/29 and 2029/30. In each of those years, the appropriate percentage for zero emission cars will increase by two percentage points. This means that for 2028/29, electric company car drivers will be taxed on 7% of the list price of their car and optional accessories. For 2029/30, this will increase to 9%.

From 2028/29, the amount charged to tax in respect of cars in the 1 to 50g/km band will no longer depend on the car’s electric range. Instead, the appropriate percentage for cars in this band will be set at 18% in 2028/29 and at 19% in 2029/30. For cars with the greatest electric range (more than 130 miles), this is a significant hike – from 5% in 2027/28 to 18% in 2028/29.

As far as other cars are concerned, the appropriate percentages will increase by one percentage point in both 2028/29 and in 2029/30. The maximum charge will also rise – to 38% in 2028/29 and to 39% in 2029/30.

Plan ahead

Drivers typically have a company car for three or four years. When changing their company car, employees should not only consider the current rates, but also those applying in future tax years. For electric and low emission cars in particular, significant tax hikes are on the horizon.

HMRC’s rules state that expenditure on business entertainment or gifts cannot be claimed as a deduction against profits (and therefore also non-VAT deductible), even if a genuine expense of the trade or business. However, that is not entirely true – there are a few exceptions.

What is 'entertaining'?

The rules are designed to prevent tax relief from being used as a means to subsidise personal or social costs, but interestingly there is no legal definition of what constitutes 'entertaining'. Therefore, the courts have taken a broad interpretation, considering 'hospitality of any kind' as entertaining when provided free of charge. HMRC's Business Income Manual at 45034 states that when determining whether an expense comes under the heading of 'entertaining', the consideration needs to be as to whether the business would have paid for the event if no guests were present. If the business would not, then the event is classified as business entertainment.

One example HMRC quotes is where a director or employee takes a customer to lunch. In this situation, the entire cost of the lunch is business entertainment and not allowable, because the company would not have paid for the lunch if the guest had not been present. The employee’s lunch is incidental to that of the customer.

Despite the ruling above, in practice HMRC accepts that the cost of light refreshments (tea, soft drinks, biscuits, etc.) at business meetings or events is tax deductible except where the underlying motive is hospitality.

Exceptions

HMRC's view is that expenditure incurred on the provision of business entertainment to business contacts who are not customers cannot be claimed against income and is blocked from VAT recovery. Consequently, claims are only permissible for non-customers (i.e. employees). Entertaining employees

When entertainment is provided exclusively for employees, tax relief and VAT can usually be reclaimed. However, for VAT purposes this does not apply should the entertainment be solely for the benefit of the company's directors and/or partners or for non-employees, such as employees' relatives.

However, there are some grey areas for input VAT recovery purposes despite the strict rules. For example, when directors and  partners attend staff parties along with other employees, tax relief and VAT can be claimed so long as all employees have been invited to the event. Events attended by both employees and non-employees permit a partial claim for the entertainment of employees only.

Note that the £150 benefit in kind specific allowance for annual functions (usually the Christmas party, though it need not be) can be claimed even if the only employees are directors.

Contractual obligation

Despite the disallowance rules, tax relief and VAT reclaim are possible if the business entertainment is supplied under a contractual obligation (i.e. an obligation that requires the other party to provide something of value in return). The cost will be allowed so long as the obligation is genuine and the business can demonstrate a full and direct return for the entertainment. The most common scenario under this heading will be where hospitality is provided as part of a package of services for which some payment is received.

Keeping to the rules

It is important for businesses to track and document their business entertainment expenses to ensure compliance. On enquiry, HMRC would expect records to itemise invoices and receipts so that VAT is only claimed on the portion directly related to the business purpose. Records should be accurate enough to show the names of individuals entertained, the business purpose of the expense, with any supporting documentation – these records should be kept for at least six years.

Practical point

BIM45014 states that for entertainment to be allowable something of equivalent value must be given in return....'a purely nominal service (such as the completion of a questionnaire) is unlikely to provide sufficient value to cover the cost of the hospitality.’

Drive along a country road and you may come across signs advertising 'Woodlands for sale'. Such signs invite investment in commercial woodlands which can come with valuable tax breaks.

Tax on profits

Profits from selling the timber, whether felled or standing, are exempt from income and corporation tax but only if the woodland is managed on a 'commercial basis' with a view to making profits. The downside of non-taxable profits is that there is no tax relief for losses or costs incurred in managing the land.

It takes a while for newly planted trees to grow and the gaps between timber harvests can be long, therefore many woodland owners use the land for other purposes in the meantime, e.g. as grazing land. The tax exemption does not apply to such business profits and the usual rules for the taxation of profits on letting land or trading apply.

An anomaly of the tax system is that whilst income from commercial woodland is exempt from income and corporation tax, there is no exemption under VAT law. Therefore, VAT registration is necessary should the usual conditions for VAT registration apply, i.e. the 12-month historic test should the turnover exceed £90,000 or the future 30-days test where taxable sales are expected to exceed £90,000 in the next 30 days.

Capital gains tax

A large part of the value of woodlands lies in the timber. The more mature the wood is, i.e. close to felling, when the land is sold, the greater the price of the woodlands. The increase in value attributable to the value of timber is exempt from capital gains tax (CGT), although the growth in value of the land itself is chargeable. Therefore, when making the calculation it is necessary to separate the proceeds (and costs) relating to each.

CGT roll-over relief

For commercially run woodlands, gains on the sale of land may be deferred by roll-over relief. This relief allows a capital gain made on the disposal of a business asset to be deferred by rolling it over against the cost of acquiring a replacement business asset or assets. The assets do not have to be of the same type but must be used for the purposes of a trade.

The CGT cost of the new asset is reduced by the rolled-over gain so when the replacement asset is sold the gain comes back because of the reduced deductible cost.

Inheritance tax

Business property relief (BPR) is available on commercial woodland (and underlying land), as long as it has been owned for at least two years at the date of death. Where the woodland has not been used commercially, agricultural property relief (APR) may apply, e.g. APR will be relevant if the woodland is non-commercial and ancillary to agricultural land (or pasture).

There is also a rarely claimed relief specifically for woodlands on the value on death (not on a lifetime transfer). BPR or APR are usually applied first before any claim to woodlands relief as the former are more generous. In order to qualify for woodlands relief, the land must have been owned for at least five years at the time of death if purchased, but if acquired otherwise (e.g. by inheritance or gift) there is no minimum ownership period.

Woodlands relief is only a deferral of IHT until the sale of the timber, deferring on the value of the trees (not the land they stand on) until they are sold or gifted. If the new owner dies still owning them (the same trees, not just the same land), then the original charge is extinguished.

Practical point

The court applies the definition of 'commercial basis' strictly. For example, in the case of Jaggers (t/a Shide Trees) v Ellis [1997], it was established that a business of growing, cultivating and selling Christmas trees was not a commercial occupation of woodlands, as the trees were not mature.

Some important tax implications of swapping properties.

Swapping properties (HMRC generally terms this as ‘exchanging’ properties) can lead to various tax implications, depending on the nature of the transaction, the parties involved, and the types of properties being exchanged.

Typical examples include the scenario where two unconnected parties exchange properties that they each solely own. A further example involves two or more people being joint owners of two or more properties exchanging ownership, resulting in each owning one property (or possibly a division of a jointly held buy-to-let portfolio).

Capital gains calculation: Sole ownership exchange

Where two unconnected parties exchange land they each own in their own name, the exchange is treated as two separate capital gains tax (CGT) transactions. The gain is calculated based on the difference between the market value at the time of exchange and the original purchase price minus any allowable costs or reliefs.

For example, if Jeremy and James each own a property in London valued at £500,000, upon exchanging properties, each creates a CGT and stamp duty land tax (SDLT) scenario, even though no cash changes hands. The base cost for each will be the acquisition costs of the property they originally owned prior to the exchange. If the property being exchanged is the main home of either party, principal private residence relief may apply, potentially reducing or eliminating any CGT liability on the gain.

Capital gains calculation: Joint ownership

While there are no CGT reliefs for straightforward exchanges, reliefs may be available for partitions. When joint ownership of property is exchanged between parties, a form of rollover relief exists (under TCGA 1992, s 248A). This provision was introduced to simplify the CGT implications of property exchanges when no immediate cash element is involved.

Those rollover relief provisions allow each participant to defer the gain from disposing of the old interest into acquiring the new interest, provided certain conditions are met. These rules only apply when the result is that each party ends up owning their respective properties outright. HMRC’s Capital Gains Manual (at CG73000) points out that the provisions only apply when:

 • two or more people jointly own two or more properties;

 • one of the joint owners disposes of their interest in one property to the other;

 • the consideration for the disposal is the transfer of another jointly owned property by the other owner;

 • as a result of the exchange, each owner becomes the sole owner of one property; and

 • the properties are not the main residences of the owners.

By claiming this relief, the parties can avoid incurring an immediate CGT charge. Each party can then assume the CGT base cost of the other party, potentially increasing any capital gain realised upon a future sale. An election to claim this relief must be made, but each owner can independently choose whether or not to claim.

Note that spouses or civil partners living together are treated as single property owners or single co-owners under this relief.

Unequal property values

When properties being exchanged are not of equal value, or if one joint owner pays extra for a larger share, different rules apply. A typical scenario would be where one party receives a property of lower value; that party can claim the rollover relief on their portion, any excess value realised being liable to CGT.

Another scenario would be where one joint owner pays an additional cash amount to balance the value during the transaction. Here, the recipient of the payment will realise a capital gain equivalent to the cash received. Any remaining gain from the exchange may still be eligible for the rollover relief.

Unequal property interests

A claim under TCGA 1992, s 248 remains viable if properties are owned in unequal proportions, requiring the exchange to align proportionally with the shares of the assets owned. The final result must be for each participant to own their

Example 1: A tale of three properties John and Adam own three properties, each with a market value of £100,000. John owns 1/3 of each property; Adam owns the balancing 2/3 share.

An exchange of properties, giving John one property and Adam the remaining two properties, would be possible.

Example 2: Rollover relief not available John, Adam, and Julian own two buildings in proportions of 50%:25%:25% respectively. John disposes of his 50% share of Property 1 to Adam and Julian together in exchange for 50% of Property 2. As a result, John owns 100% of one building, while Adam and Julian each own 50% of the other.

No rollover relief can be claimed since neither Adam nor Julian end up as sole owners of either property.

Note that there is one exception to this relief. If the property includes land that has been or is currently the ‘only or main residence’ of one of the owners, or if it becomes their main residence within six years, that owner cannot benefit. If they have already benefited from it, the relief will be reclaimed at the time (within six years) when the property becomes their main residence.

SDLT transaction relief

When properties are exchanged, SDLT (or land and buildings transaction tax in Scotland, or land transaction tax in Wales) is due only if certain conditions are met.

SDLT obligations arise when the exchange results in a chargeable consideration, or if the market value of the properties involved exceeds the SDLT threshold. ‘Consideration’ refers to anything that is money or money’s worth and in the context of property exchanges, is calculated on the higher of the market values of the properties being exchanged.

Unequal property values HMRC’s Stamp Duty Land Tax Manual at SDLTM04020A (‘Non-cash consideration: exchanges’) gives an example of a situation where the properties being exchanged have unequal values and a cash balance is given to make up the value. The example is reproduced below:

“Ahmed and Katrina decide to exchange their homes. Ahmed’s is valued at £375,000, but Katrina’s is valued at £400,000, so Ahmed gives Katrina £25,000 in cash as well. Ahmed pays tax on chargeable consideration of £400,000 since this is both the value of the interest he acquires and the amount of consideration he gives to acquire it.

It is just and reasonable for Katrina to apportion the £400,000 market value of her house (i.e., the value of what she gave) to £375,000 for the property and £25,000 for the cash received. The chargeable consideration is £375,000 for Katrina’s acquisition – this is equal to both the value of the interest she acquired and the amount of apportioned consideration she gave to acquire it.”

Therefore, as SDLT is only chargeable on acquisitions of property, an apportionment is made to reflect that a proportion of the amount paid was in cash, and cash is not subject to SDLT.

Joint ownership

An exemption from SDLT can apply where jointly owned property is partitioned.

HMRC’s guidance (at SDLTM04030) states: “Where two or more people are jointly entitled to land (whether a single chargeable interest or more than one chargeable interest) and there is a partition or division of the land this is not treated as an exchange. The giving up of a share in one part of the land is not treated as chargeable consideration for the acquisition of a share in another part”.

Practical tip

There are exceptions and conditions to ensure that the CGT relief in TCGA 1992, s 248 is not used for tax avoidance. These include situations whereby the transaction might be seen as effectively a ‘sale’ in disguise, or where there are additional elements (such as loans or other forms of financial consideration).

What making tax digital for income tax self-assessment will mean for landlords and how this will change their compliance obligations.

Making tax digital for income tax self assessment (MTD for ITSA) is being introduced progressively from 6 April 2026.

It will apply initially to unincorporated landlords and unincorporated businesses with property or business income of more than £50,000 a year, who must comply with the requirements of MTD for ITSA for 2026/27 onwards. It will be extended to unincorporated landlords and unincorporated businesses with property or business income of more than £30,000 a year from April 2027. At the time of the October 2024 Budget, the government stated that unincorporated landlords and unincorporated businesses with property or business income of more than £20,000 would be brought within the MTD for ITSA net before the end of the current parliament; however, a firm start date has yet to be announced.

Landlords who fall within the scope of MTD for ITSA will need to keep digital records, use MTD compatible software and send quarterly updates to HMRC. This will impose new compliance obligations on them and change the way they interact with HMRC.

Current compliance

Under the current system, landlords must keep records of their rental income and their expenses. However, there is no stipulation as to how these should be kept and the landlord is free to choose whatever system works best for them, be that manual records, records on a spreadsheet or records maintained via a software package. The landlord does not need to send these to HMRC (unless they are requested as part of a compliance check).

Where income from property exceeds the property allowance of £1,000 (other than where it falls within the scope of the rent-a-room scheme and is less than the rent-a-room limit), it must be reported to HMRC on the property pages of the self-assessment tax return. While the majority of taxpayers file their tax return online, a paper return can still be submitted if preferred; however, the landlord will need to contact HMRC to request one. Returns filed online must be filed by midnight on 31 January following the end of the tax year. However, where a paper return is used, this must reach HMRC by 31 October following the end of the tax year.

If the total tax and National Insurance contributions due under self-assessment is less than £1,000, it must be paid by 31 January after the end of the tax year. Once the liability reaches £1,000, it becomes necessary to make payments on account of the current year’s liability on 1 January in the tax year and 31 July after the end of the tax year, with each payment on account being 50% of the previous year’s liability. Any balance must be paid by 31 January following the end of the tax year. If the landlord has other income taxed at source (e.g., a job taxed under PAYE), payments on account are not required where 80% or more of the landlord’s total liability is collected at source.

Obligations under MTD for ITSA

The MTD regulations require an individual within the scope of MTD for ITSA to preserve their tax records electronically and submit reports to HMRC using approved software. The reports will comprise an annual report of businesses’ trading or property income, details of allowable expenditure, claims for allowances and reliefs to be submitted each tax year, and also interim quarterly reports.

To comply with the requirements of MTD for ITSA, landlords within its scope will need to acquire suitable MTD-compatible commercial software or appoint an agent to file their quarterly reports for them, although HMRC has indicated that free software will be made available which can be used by those with the most straightforward affairs (in the same way that employers with nine or fewer employees can use HMRC’s free basic PAYE tools to comply with electronic reporting obligations under real time information.

To meet the digital record-keeping requirements, landlords will need to record each individual transaction digitally. However, the supporting documentation, such as invoices and receipts, can be kept in paper format and the landlord will not need to scan these and store them digitally (although they can do so if they prefer).

HMRC is keen that landlords maintain, as near as possible, digital records in real time as this is likely to reduce the scope for error. If the landlord’s current approach is to put everything in a box file and sort it out when they do their tax return, this will necessitate a new way of working. However, under MTD, the landlord can still use a bookkeeper to create the digital records quarterly, if preferred, as part of the quarterly submission process.

The quarterly returns are simple summaries of the income and expenses which are generated from the digital records. There is no need to make accounting adjustments – this is done at the end of the tax year. The figures submitted each quarter are the cumulative figures for the year to date. This allows corrections to be made for previous quarters without having to resubmit the information for those quarters.

Following simplifications to the original proposals, where a landlord has income from a jointly owned property, they can opt not to submit quarterly updates in respect of expenses relating to jointly owned properties and also choose to keep less detailed records of jointly-owned properties. This will minimise the in-year transfer of information needed between joint owners. However, the figures will still be needed before the tax position for the tax year can be finalised.

The quarters run to 5 July, 5 October, 5 January and 5 April, although taxpayers can report to calendar quarters instead (30 June, 30 September, 31 December and 31 March). After the final quarterly update for the year has been submitted, the taxpayer will need to make a final declaration to finalise their income for the tax year. This is like the current tax return, and it is at this stage that the taxpayer will claim reliefs and allowances and also reflect other income that they may have which is not within MTD process, such as savings and investment income and income from employment. The taxpayer will also need to make a declaration that the information is complete and correct, as is currently the case on the self-assessment tax return.

It is important to note that MTD for ITSA does not change how the taxpayer’s liability is calculated, only how records are maintained and information is reported to HMRC.

Identifying the start date

For the first phase, the MTD trigger is trading or property income of more than £50,000. The relevant income will be that for 2024/25, as reported on the self-assessment tax return, which must be filed by 31 January 2026. Once the 2024/25 tax year has ended, landlords within an unincorporated property business will be able to work out if they will be within the scope of MTD for ITSA from April 2026.

It is important to appreciate that the income from different sources is not considered in isolation; where a landlord has more than one unincorporated property business or has both trading and property income, they will need to work out the total from all sources, and also their share of any income from jointly owned properties. The relevant figure is the total income before the deduction of expenses.

For example, if a landlord has income from property in 2024/25 of £35,000 and income from self-employment of £21,000, they will be within MTD for ITSA from 6 April 2026 as their total business and property income is £56,000; it does not matter that individually, their property income and business income are both less than £50,000. Once within MTD for ITSA, the taxpayer must remain in it, even if their income falls.

MTD for ITSA pilot

To ensure that the systems work correctly from April 2026, HMRC is running an MTD pilot. Eligible taxpayers who wish to embrace MTD early can sign up for the pilot.

Details can be found on the Gov.uk website (see www.gov.uk/guidance/sign-up-your-businessfor-making-tax-digital-for-income-tax).

Practical tip

The countdown to the start of MTD for ITSA is under way, and it is not too early for landlords to determine whether it will apply to them from April 2026 and to start preparing if it does.

The favourable tax regime that applies to landlords letting furnished holiday accommodation comes to an end on 5 April 2025. For 2025/26 and later tax years, furnished holiday lets will be treated in the same way as other residential lettings. While this will absolve the landlord from the need to hit letting and availability targets (other than the less onerous ones needed for business rates purposes), the ability to benefit from valuable capital gains tax reliefs will also be lost. However, there remains a very limited window in which to access these reliefs.

Business Asset Disposal Relief

Business Asset Disposal Relief (BADR) is a valuable relief that reduces the rate of capital gains tax payable on the disposal of a qualifying asset on gains up to the lifetime limit of £1 million.

Under the tax regime for furnished holiday lets that applies until the end of the 2024/25 tax year, an unincorporated landlord is able to benefit from BADR as long as the associated conditions are met. The rules allow BADR to be claimed on disposals of business assets made within three years of the date on which the business ceased.

Under the transitional rules that apply to furnished holiday lettings, as long as the landlord met the conditions for BADR in relation to a FHL business that ceased prior to 6 April 2025, the landlord has three years in which to dispose of the business assets and claim the relief.

This is a good deal. As long as the landlord ceases their FHL business on or before 5 April 2025, and sells their properties within three years of the cessation date, they will benefit from the reduced rate of capital gains tax applying to gains eligible for BADR. However, it is important to note that the business must cease; the relief does not apply if a landlord has a number of furnished holiday lets and sells some but not all of them. In this scenario the business would be ongoing, albeit with less properties.

Ceasing the business prior to 6 April 2025 and securing BADR on the disposal of the properties may be particularly attractive where the properties are pregnant with gains, as the ability to benefit from BADR can deliver significant savings. The exact amount of the savings depends on the date of disposal. Where the disposal takes place in 2024/25, the capital gains tax rate is 10% where BADR applies (offering potential savings of up to £140,000). The rate increases to 14% for qualifying disposals in 2025/26 (and the potential savings fall to £100,000). The rate is further increased to 18% from 6 April 2026, reducing the potential value of the relief to £60,000.

Gift holdover relief

Gift holdover relief allows the gain that would arise on the gift of business assets to be held over, reducing the recipient’s base cost. Where the disposal is to a connected person, the gain would be computed by reference to the market value of the property. Holdover relief is very useful here, as where the property is gifted, there are no proceeds from which to pay the tax. The relief must be jointly claimed by both parties. The gift of the furnished holiday let must be made before 6 April 2025 to benefit from this relief. Making use of the relief can be a good way to pass on a holiday let to the next generation.

Running a property business through a limited company has become increasingly popular, not least because the rate of corporation tax paid on profits will generally be lower than the rate of income tax paid by an unincorporated landlord and interest and finance costs are deductible in full. With the end of the favourable tax regime for furnished holiday lettings, landlords with holiday lets may be considering incorporating their business. What are the pros and cons?

Advantages

One of the main advantages is that the highest rate of corporation tax at 25% is considerably lower than the top rate of income tax at 45%. Generally, the rate of corporation tax payable on profits will be less than the income tax paid on equivalent profits made by an unincorporated landlord.

The second big advantage is that, regardless of the type of let, interest and finance costs are deductible in full; the interest rate restriction applying to residential properties let by unincorporated landlords does not apply to property companies. For holiday let landlords who will now be subject to the interest restriction, incorporation may be an attractive option to preserve the deduction for interest on loans.

Companies pay corporation tax on chargeable gains. Where the effective rate of corporation tax is less than 24%, the bill will be less than that for a landlord paying tax at the higher or additional rate, who will pay capital gains tax at 24%. The capital gains tax rules for residential properties are not mirrored for corporation tax, giving a significantly longer payment window.

A further key advantage of a company is that it has limited liability.

Disadvantages

For a landlord looking to incorporate an existing property business, it can be costly to transfer the properties into the new company. There will be stamp duty land tax to pay again. A chargeable gain may arise on the disposal of the property to the limited company (calculated by reference to market value under the connected persons rule), although under incorporation relief (which is given automatically unless disclaimed), the gain will be rolled over, reducing the base cost of the shares received in exchange.

Unlike an individual, a company does not have a personal allowance or an annual exempt amount for capital gains tax purposes, so tax is payable from the first £1 of profit or gain.

A company is a separate legal entity, so if the shareholders want to use the profits personally outside the company, they must be extracted. Depending on the extraction route chosen and the extent to which the individual’s personal allowance is available, this may trigger additional tax and National Insurance liabilities.

Running a company involves additional compliance obligations and costs, which add to the administrative burden.

Look at the whole picture

In assessing whether incorporation is worthwhile, it is necessary to look at the whole picture and consider not only the tax payable by the company, but also that on profits extracted for personal use. There is no substitute to doing the sums.

Landlords letting holiday accommodation may be able to pay business rates rather than council tax on their property. This will generally be cheaper, and if they qualify for small business rate relief, depending on the value of the property, they may not have anything to pay.

Properties in England

A property will be treated as a self-catering property for business rates purposes if, in the previous 12 months, it was available to let commercially for short periods for at least 140 nights and was actually let for 70 nights.

Where the landlord only lets one property in England and its rateable value is £15,000 or less, the landlord may be eligible for small business rate relief. The rateable value is determined by reference to its size and location and how much income the landlord is likely to make. This is normally based on the number of bedrooms.

If the rateable value is £12,000 or less, the landlord will not pay any business rates. Where the rateable value is between £12,001and £15,000, the rate of relief gradually reduces from 100% to 0%.

Where a landlord has more than one property, the relief remains available for 12 months after the date on which the second property was acquired. Thereafter, small business relief remains available if none of the other properties have a rateable value in excess of £2,899 and the total rateable value of all the properties is less than £20,000 (or £28,000 in London).

Landlords should check their bills and contact their local council to claim the relief if it has not been given.

Properties in Wales

Stricter tests apply to access business rates in Wales and to qualify the property must have been available for letting commercially for short periods for at least 252 nights in the last 12 months and actually let for at least 182 nights.

Different rules apply to properties in Scotland and Northern Ireland.

Keep records

Although landlords no longer need to keep records of the number of nights on which the property was available for letting and actually let for tax purposes, they still need to maintain records for business rates purposes. However, for properties in England, the business rates test is less stringent than that which applied under the former FHL regime, allowing the landlord the option of longer lets in the off-season without jeopardising access to business rates relief.

The off-payroll working rules apply where a worker provides their services to a medium or large private sector company or to a public sector body through an intermediary, such as a personal service company. To comply with the rules, the end client must undertake a status assessment. If this reveals that the worker would be an employee if they provided their services direct to the end client, rather than through the intermediary, the end client (or the fee payer if different) must deduct tax and National Insurance from payments made to the worker’s intermediary and pass them over to HMRC. The worker will receive credit for this against the tax and National Insurance due on payments made by their intermediary to them personally.

Where the end client is a small private sector organisation, the off-payroll working rules do not apply. Instead, the worker’s intermediary is responsible for assessing whether the engagement falls within the IR35 rules. This will be the case if the worker would be an employee if they provided their services directly to the end client. Where this applies, the worker’s intermediary must calculate the deemed payment under the IR35 rules at the end of the tax year and account for tax and National Insurance on that deemed payment.

HMRC produce a check employment status for tax (CEST) tool which can be used to determine a worker’s status. This can be found on the Gov.uk website www.gov.uk/guidance/check-employment-status-for-tax.

Thresholds

Companies Act thresholds are used to determine whether a company is ‘small’ for the purposes of the off-payroll working rules. These have been updated recently and the revised thresholds apply from 6 April 2025 for the purposes of the off-payroll working rules. A company will be ‘small’ if at least two of the following apply:

turnover of not more than £15 million (previously £10.2 million);

balance sheet total of not more than £7.5 million (previously £5.1 million); and

monthly average employees of 50 or fewer.

Implications

The change in the threshold will shift the compliance burden from the end client to the worker’s intermediary where the end client was not small under the former thresholds but meets the definition of ‘small’ under the revised thresholds. Workers providing their services through an intermediary after 5 April 2025 will need to check whether the end client is now small. End clients that are now ‘small’ will no longer need to comply with the IR35 rules. However, where the end client has become ‘small’, the worker’s intermediary will now need to check whether the IR35 rules apply, and comply with them where they do.