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e tax implications of companies becoming ‘associated’. It is not unusual for small company directors, their family members, or other business partners to have interests in multiple companies. However, should any of those companies be deemed as ‘associated’, those directors may wish to review the current structures and tax strategies of those companies.

The importance of the ‘associated companies’ rules

For many years, all companies were taxed at a flat rate of 19%; however, Finance Act 2021 changed the rate, such that companies now pay an effective rate of 19% on taxable profits of up to £50,000, 26.5% on profits between £50,000 and £250,000 (under marginal relief), and 25% on profits of £250,000 and over.

Finance Act 2021 also changed how associated companies are defined, thereby impacting the tax rate and whether tax is paid in quarterly instalments. The more associated companies there are, the lower the profit threshold of each tax rate band (e.g., where there are two associated companies, each profit threshold is divided by two, so that the 25% rate kicks in for each company when profits exceed a relatively modest £125,000, instead of £250,000).

What is an ‘associated company’?

An associated company is a company over which another company has significant influence or control (but not outright control) over another, or the same person or persons has control of both. The definition of ‘control’ includes (but is not limited to) a person possessing or being entitled to acquire more than 50% of the company’s ordinary share capital, voting power, distributable assets or profits on a winding-up.

It does not matter where the companies in question are resident; however, dormant companies are ignored, as are ‘passive’ holding companies where dividends pass straight through to the shareholders.

Note that a company only needs to be associated for one day in the corporation tax accounting period for it to be counted as an associate.

‘Substantial commercial interdependence’

Should two or more companies be ‘associated’, to come under these rules, they must also have ‘substantial commercial interdependence’.

However, the rules apply only to the attribution of rights held by associates of participators; rights held by the participators themselves are always considered. ‘Associates of participators’ include relatives (spouses or civil partners, parents, grandparents, children, grandchildren, siblings), partners, and some trustees and settlors.

When considering whether there is substantial commercial interdependence, HMRC will look to the degree of financial (e.g., supporting loans between the companies), economic (e.g., where one company’s activities support or benefit the other) or organisational interdependence (e.g., operating from the same premises with the same management team) between the companies concerned.

Company tax payment deadlines

Associated companies may also impact company tax payment deadlines. A company must make quarterly payments if it is deemed to be large (i.e., where it has taxable profits of at least £1.5m). This threshold is, however, divided by the number of associated companies at the end of the last accounting period. A typical situation may be where an individual directly holds 100% of the shares in three separate trading companies and is associated with a company owned by their spouse by virtue of control. As these companies will be associated, each is treated as ‘large’ if its taxable profits exceed £375,000 and would immediately come into the quarterly payments regime.

Companies with low profits but a large number of associates are protected from coming within the quarterly payments regime if their corporation tax liability is less than £10,000.

Practical tip

It can be relatively easy to fall into the associated companies ‘trap’. For example, a married couple may each own and run two completely different and separate companies. However, if the husband’s company makes a loan to his wife’s company, the companies will be deemed associated should the husband’s company be entitled to the assets on a winding-up of the wife’s company.

A look at some tax planning opportunities for companies, with the end of the current financial year looming for corporation tax purposes.

This article briefly highlights some tax planning opportunities available to limited companies ahead of their year end to reduce tax liabilities and maximise profit extraction by the effective use of allowances and reliefs.

Capital allowances - When a company incurs capital expenditure for their business, capital allowances can be claimed, which will reduce the company’s taxable profits. Capital allowances are available at various rates depending on the type of expenditure incurred. To ensure the most tax-efficient use of allowances, businesses will need to analyse the costs between the various categories.

The main categories of allowances are:

 • Annual investment allowance (AIA) – maximum of £1m of qualifying expenditure*;

 • 100% first-year allowance (FYA) on brand new main pool expenditure and electric cars;

 • 50% FYA on brand new special rate pool expenditure;

 • 18% writing down allowance (WDA) on the general pool*;

 • 6% WDA on the special pool*;

 • 3% straight line allowance on qualifying structures and buildings*;

 • Small pool write-off where the balance is less than £1,000*.

 *Pro-rated for chargeable accounting periods of less than twelve months.

The maximum AIA allowance is restricted to £1m per year, which is split between a company and any associated companies. Companies are associated with each other where one company controls another, or both are under the control of the same person or persons. Where applicable, the AIA can be allocated between associated companies in any way, as long as the overall maximum is not exceeded.

Where the maximum AIA is exceeded and expenditure has been incurred on both general and special rate pool assets, in most cases, the AIA should be allocated to special rate pool expenditure in priority to the general pool. There is no restriction on FYA claims, which should be considered in addition to the AIA, particularly where the AIA allowance has been exceeded, in order to maximise claims.

For allowances to be claimed, expenditure must have been incurred before the end of the accounting period. The date on which expenditure is incurred is the date the obligation to pay becomes unconditional, which in most cases is on delivery. Where the requirement to pay falls more than four months after the date the obligation to pay becomes unconditional, capital allowances cannot be claimed until the year in which payment is made. For assets financed by hire purchases, this rule does not apply, but the asset must have been brought into use by the end of the period in order to claim allowances.

Pension contributions - When a company makes a pension contribution on behalf of its employees, subject to it satisfying the ‘wholly and exclusively’ conditions, it will be tax deductible. As an added benefit, company pension contributions are a tax-exempt benefitin-kind for the recipient. As HMRC generally accepts that remuneration paid to a controlling director will satisfy the ‘wholly and exclusively’ tests, pension contributions are an efficient way to extract remuneration from a company whilst simultaneously lowering corporation tax liabilities.

Corporation tax relief for pension contributions are generally available in the accounting period in which the payment is made (although larger pension contributions may be subject to spreading over more than one accounting period in certain circumstances, which are beyond the scope of this article). Therefore, companies must ensure that contributions have physically been made and payment has left the company bank account prior to the period end. An accounting provision for the expenditure would not be sufficient to satisfy this requirement.

Whilst theoretically a company can make contributions and receive tax relief without restriction, individuals do not receive corresponding treatment and are subject to an annual maximum pension input allowance. The annual maximum for individuals is based on a tax year, which may not be the same as the company’s year end, so the timing of contributions will be important. From 6 April 2023, the annual maximum pension allowance for individuals is £60,000.

Trusts are often mis-trusted; they are seen as being vehicles of fraud, dodgy dealings and generally something to be avoided. Whilst they could indeed be used for such ends (just as limited companies and any other structure might), trusts are more often used as a perfectly innocuous means of holding assets for other people.

What are they?

Essentially, they are formed when the legal ownership of an asset is separated from the beneficial ownership, i.e., a legal owner (the trustee) holds it ‘on trust’ for another person (the beneficiary) who benefits from it (e.g., occupies the property or receives income from it). The person who establishes (settles) the trust is the ‘settlor’ – they can do this by transferring the legal ownership from themselves to the trustee and beneficial ownership to the beneficiary, or they could simply declare themselves as trustee and pass the beneficial ownership to beneficiaries.

These trusts are known as ‘express trusts’ (i.e., those deliberately created by the settlor in the form of a deed outlining who the parties are and what assets are in the trust); such trusts can also be created by the settlor upon their death, with their will being the constituent document. ‘Implied trusts’ are those imposed by the laws of equity. Trusts now last for a maximum of 125 years.

The most common express trust is a ‘discretionary’ trust, whereby the trustees have total discretion as to the destiny of the trust asset and any income arising therefrom. Beneficiaries are often an identifiable group of people (e.g., the settlor’s grandchildren and future issue).

Another type is the interest in possession (IIP, or life tenant) trust, whereby usually a single beneficiary (the life tenant) is entitled to utilise the asset or receive the income for the rest of their life; the capital remains with the trustees, but the life tenant has the right to use it. Upon the life tenant’s death, the trust is dissolved, and the trust assets go into the absolute ownership of a ‘remainderman’.

Trusts are subject to income tax – discretionary trusts at the additional rate, and IIP trusts at the basic rate (although discretionary trust beneficiaries receive income with a refundable tax credit of 45% representing that tax paid). Trustees are subject to capital gains tax at 24% with the benefit of half an annual exemption. All trusts set up in a settlor’s lifetime are known as ‘relevant property’ trusts, which have their own inheritance tax (IHT) regime of charges every 10 years and when assets leave the trust.

Another person for IHT

As well as facing IHT charges, trusts generally also have the same reliefs and allowances as any individual, including a nil-rate band (currently £325,000) per settlor and the benefit of agricultural and business property reliefs (albeit restricted for 100% relief purposes to £1m after April 2026). So, they are effectively another person for IHT purposes which can relieve a settlor’s estate of that value after seven years of the transfer.

CGT reliefs

Normally, when assets are gifted from one individual to another, the resulting market value CGT charge can only be subject to holdover relief if it is a trading asset (TCGA 1992, s 165). However, if an asset is gifted into a relevant property trust, any asset (whether used in a trade or not) can benefit from holdover relief (TCGA 1992, s 260). Gifting an asset to individuals via a trust can therefore be made with no CGT payable upfront.

Keeping the family silver safe

Aside from any tax considerations, trusts can be very useful by keeping assets out of the ownership of family members whose marriages might be at risk of divorce or whose trustworthiness may be questionable. Those individuals can enjoy all the benefits of owning the assets, but the asset’s actual ownership is safe in the trustees’ hands from the possible implications of divorce settlements or imprudent ownership.

Children

Minors cannot own property, so if a child is to benefit from any asset or the income, it needs to be held in a trust. Under statute, assets left to children under intestacy will be held under parental trusts.

Practical tip

Trusts can have a variety of uses, not all of them to do with tax; they are a way of gifting assets whilst keeping legal ownership separate and allowing the donor some control. They can be used for tax planning (e.g., as another person to which assets can be transferred), but also for keeping assets safe from external influences.

Documentation a taxpayer is obliged to hand over if HMRC issues them with an information notice.

Taxpayers generally prefer not to be contacted by HM Revenue and Customs (HMRC); after all, it is seldom good news when this happens!

Information notices

It is not uncommon for HMRC to issue a notice requiring a taxpayer to provide information or produce documents which HMRC considers are ‘reasonably required’ to check the return (FA 2008, Sch 36, para 1). Taxpayers have a general right of appeal against HMRC’s information notices. However, there is no right of appeal if the information or document forms part of the taxpayer’s statutory records. So, what are ‘statutory records’?

No hiding place?

Information or documents are part of the taxpayer’s ‘statutory records’ broadly if the tax legislation requires the taxpayer to keep them (FA 2008, Sch 36, para 62). For example, there is a general obligation for an individual who files tax returns to keep all such records as may be requisite for the purpose of enabling them to make and deliver a correct and complete return for the year or period. This is not particularly informative. However, for self-employed taxpayers, at present, the business records to be kept include records of the following: (TMA 1970, s 12B(3)):

• All receipts and expenditure in the course of the trade, etc., “…and the matters in respect of which the receipts and expenditure take place; and
• All sales and purchases of goods made in the course of the trade”.

Some commentators have expressed the view that bank statements do not constitute statutory records for information notice purposes. However, HMRC can be expected to challenge such an assertion, particularly in the case of business bank statements, and it has done so successfully before the tax tribunal in the past.

Rental properties

Some residential property landlords use their personal bank account to receive rents and pay property expenses. This is not to be recommended. For example, in Smith v Revenue and Customs [2015] UKFTT 200 (TC), the taxpayer received rental income but did not operate separate business and private bank (and credit card) accounts. The First-tier Tribunal (FTT) found that the information was reasonably required and decided that the taxpayer must provide the bank and credit card statements, but omitting any personal information. In Perring v Revenue and Customs [2021] UKFTT 110 (TC), the FTT held that the following formed part of the taxpayer’s statutory records of a property rental business:

•  i. Details of rent and expenditure relating to a property, including its address.
•  ii. The dates of acquisition and disposal can be part of a statutory record for a rental business where the acquisition or disposal occurs in a year in respect of which the rental business was carried on.

However, the FTT in Perring also stated: “The source of funding is not relevant to the computation of the rental business profits. It can only form part of the statutory records of the rental business in a year if the cost of finance would be a deductible item in that year.”

Practical tip

Even if bank statements do not form part of a taxpayer’s statutory records, that does not necessarily preclude HMRC from seeking access to them, if those bank statements are ‘reasonably required’ by HMRC for checking the taxpayer’s tax position (or collecting tax debt). Expert professional advice in these areas is strongly recommended.

Simple Assessment is used by HMRC to collect tax underpayments from taxpayers with straightforward tax affairs. It removes the need for the taxpayer to complete a Self Assessment tax return.

HMRC will issue a Simple Assessment where there is an underpayment of tax which cannot be collected through PAYE. Each year HMRC undertake a PAYE reconciliation process and issue a P800 calculation. Where this shows that tax is owing which cannot be recovered through PAYE, they may issue a Simple Assessment. A Simple Assessment letter will be sent by post or issued to the taxpayer’s personal tax account if they have one. The letter will show the taxpayer’s taxable income, tax that has been paid and the amount that is owed.

Check if it is correct

It is important to check that the figures in the Simple Assessment are correct – HMRC can, and do, make mistakes. You should check the amounts shown in the Simple Assessment against your P60, bank statements, letters from the Department for Work and Pensions, and similar. If you do not understand the figures, it is prudent to take advice.

If you think the calculation is wrong, you should tell HMRC, either by writing to them or by calling them. You must do this within 60 days of the date on the letter. You should tell HMRC which figures you think are wrong and what you think they should be. If HMRC agree with you, they will send you a new Simple Assessment with the revised figures. If they think their figures are correct, they will send you a decision letter explaining why. If you still do not agree with them, you can appeal. This must be done within 30 days of the date on which the decision letter was issued.

Payment must still be made on time while the appeal is dealt with unless HMRC instruct otherwise.

Paying your Simple Assessment

Tax owed under Simple Assessment can be paid online, by bank transfer or by cheque. The date by which payment must be made depends on the date on which the Simple Assessment letter was received. Where the letter for the 2024/25 tax year is received before 31 October 2025, payment must be made by 31 January 2026. Where the letter for 2024/25 is not received until after 31 October 2025, payment must be made no later than three months from the date on the Simple Assessment letter.

Interest will be charged on payments made late.

Cars are a special case when it comes to capital allowances. While capital allowances may be claimed on cars used in a business, partners and sole traders have the option of using the simplified expenses system instead.

Where the cash basis is used, it is not possible to deduct the full cost of the car in the year of purchase – such a deduction is prohibited under the cash basis capital expenditure rules.

No annual investment allowance

The annual investment allowance (AIA) allows immediate write-off for the full purchase cost in the year of acquisition, as long as enough of the £1 million AIA allowance for the year remains available. Unlike vans, cars do not qualify for the AIA, and unless the car is eligible for a first-year allowance, it is not possible to obtain 100% relief immediately.

Full expensing and 50% first-year allowance not available

Similarly, companies are unable to benefit from full expensing or the 50% first-year allowance for new cars that are not eligible for the 100% first-year allowance.

100% first-year allowance for electric cars

While the AIA and full expensing are unavailable, a 100% first-year allowance is available for expenditure on new electric cars. This provides immediate relief for the full cost of a new electric car in the year of purchase. The 100% first-year allowance is only available in respect of expenditure on a new electric car; it is not available on the purchase of a second-hand electric car. Writing down allowances are available instead.

Writing down allowances

If the first-year allowance is not available and simplified expenses have not been claimed, relief for expenditure on a car used for business purposes is given by means of writing down allowances. The rate of the allowance depends on the car’s CO2 emissions.

Main rate writing down allowances at the rate of 18% are available for new and second-hand cars whose CO2 emissions are 50g/km or less (including second-hand electric cars). New or second-hand cars with CO2 emissions of more than 50g/km qualify for special rate capital allowances at the rate of 6%.

Private use adjustment

If a car is used for both personal and business use, capital allowances are only available in respect of the business use. For example, if a sole trader uses their car for both business and private use and estimates that business use accounts for 60% of the total use, an adjustment would be needed to account for the private use. To do this, the writing down allowance would be reduced by 40%.

Consider simplified expenses instead

Sole traders and partnerships can take advantage of the simplified expenses system and deduct an amount based on the business mileage in the tax year when calculating their taxable profit. The deduction is given at a rate of 45p per mile for the first 10,000 business miles in the tax year and at 25p per mile for any further business mileage. Where simplified expenses are used, capital allowances cannot be claimed as well. Likewise, if capital allowances have been claimed, the simplified expenses system cannot then be used.

Companies are not able to claim simplified expenses and instead obtain relief for expenditure on cars in the form of capital allowances.

Using a Self Invested Personal Pension (SIPP) to hold commercial property which can be rented to your personal or family company can be beneficial. Instead of paying rent to a third party, it is paid into your pension scheme. The company is able to deduct the rent paid when calculating its taxable profits, but the SIPP does not pay tax on the rent, which builds up in the pension scheme, nor does it pay capital gains tax when the property is sold.

However, there are some downsides to be aware of, which can prove costly.

Connected person rules apply where the property is let to a connected tenant. The rules bite if the tenant is:

• the scheme member, their spouse or civil partner, or their relative;
• a partnership where one or more of the partners is a scheme member or a relative of a scheme member; or
• the member’s employer.

They apply if the property is let to a company to which the member is connected. Consequently, the rules will bite if the property is let to the member’s personal or family company.

Open market rent

Under the connected person rules, the rent must be set on an arm’s-length commercial basis. The member cannot set the rent. Consequently, the company cannot enjoy the use of the property rent-free or for a low rent.

The lease must be enforced in the same way as if the tenant was a third party, for example, by chasing late paid rent. Periodic rent reviews must also be carried out.

Unpaid rent and unauthorised payment charges

Failure to pay the rent can have disastrous consequences. Not only will the pension trustees seek to recover the rent as for a third-party tenant, failure to pay the rent can trigger unauthorised payment charges under the pension tax rules.

If the rent remains unpaid, an ‘event report’ must be submitted to HMRC. This must be done by 31 January after the end of the tax year to which it relates. So, if rent for 2045/25 is unpaid, an event report must be submitted to HMRC no later than 31 January 2026.

If the rent remains unpaid by 31 January after the end of the tax year, the member will be liable for an unauthorised payments charge of 40% of the amount of the unauthorised payment (the unpaid rent). A surcharge of 15% may also apply depending on the amount of the unauthorised payments as a percentage of the overall pension pot. The pension scheme will also be liable to a charge, which is normally 15% but can be as much as 40%.

Where an unauthorised payment charge arises, the member must include it in their Self Assessment tax return for the tax year to which it relates. Payment must be made by the normal Self Assessment payment date of 31 January after the end of the tax year to which it relates.

It is important when using a SIPP to hold commercial property let to a connected person that these rules are understood. The property is owned by the pension scheme rather than the member which means that the member does not have the flexibility to reduce the rent or allow a rent holiday when things get tough. The risk of an unauthorised payment charge means that the cost of not paying rent to a SIPP is significant.

The hot weather often brings thoughts of holidays, but for those in business, work is always on the mind. So, what is the tax position if you combine business with pleasure by visiting a supplier in the area where you are also on holiday?

As a general rule, if you operate as a business, you can deduct expenses incurred ‘wholly and exclusively’ for the purposes of the trade. This test will be met where an expense is incurred solely for business purposes. However, in reality, it is sometimes not easy to separate everything into clear categories of ‘business’ and ‘private’.

Identifiable proportion

The 'wholly and exclusively' test, while a crucial criterion, does not have to be applied to the expense as a whole. HMRC acknowledges this and allows for a degree of flexibility in identifying the business element of an expense. Consequently, the extent to which it is possible to claim a deduction where there is both business and private use depends on whether it is possible to identify the business element. The split between business and private can be made using any reasonable basis for apportionment, which provides some leeway in applying this test. What is important is the nature of the expense.

Duality of purpose expenditure

Where expenditure has a dual purpose and cannot be split between business and private elements, the 'wholly and exclusively' test is not met and consequently no deduction is permitted. HMRC is very strict about dual-purpose expenses; the expense usually quoted is the running of a car used partly for business and partly for private purposes.

In the example of a business/holiday, if a business owner drives to Exmouth on holiday but then makes a separate trip from Exmouth to Exeter to meet with a supplier, the cost associated with the business trip to Exeter and back only will be allowed. It is advisable to keep a mileage log incurred for business visits and then a claim can be made just for the business mileage. Hotel costs will not be allowed.

The legislation provides:

‘If an expense is incurred for more than one purpose, this section does not prohibit a deduction for any identifiable part or identifiable proportion of the expense which is incurred wholly and exclusively for the purposes of the trade.’

Intention is important such that should the main purpose of the trip be personal but then you decide to do some business whilst there, you have waived your right to claim any expenses.

Incidental private benefit

In some situations, there may be an incidental private benefit associated with what is essentially a business expense. If this benefit is not significant, its existence will not prevent the expense from being deductible.

If the sole purpose of the trip is for business reasons, the expense will usually be allowable in full, notwithstanding any incidental private benefit. For example, if you travel to Spain solely for the purpose of meeting with a supplier, the fact that you are able to enjoy pleasant weather whilst there does not negate the deductibility of the trip's cost.

Practical tip

As with all expenses, proper documentation is crucial. Whether tickets to an event or minutes from a meeting, having these records can substantiate the business-related travel. If you have a limited company, it is advisable to pay for the flights via the company bank account. HMRC has been known to scrutinise airline tickets to verify the business nature of overseas trips including whether the business owner was accompanied by their spouse, civil partner or family. The costs relating to non- business partners or employees will have to be adjusted.

Adjusted net income is a key measure of income for tax purposes. It is total taxable income before taking account of any personal allowances and after deducting trading losses, pension contributions and certain tax reliefs, such as Gift Aid.

The calculation

Step 1

Calculate your net income for the year.

To do this you first need to work out your taxable income. This will include:

• income from employment;
• profits from self-employment;
• taxable state benefits;
• most pensions, including the state pension and personal and occupational pensions;
• interest;
• dividends;
• rental income;
• trust income; and
• any foreign income.

You then need to deduct any trading losses and payments made gross to pension schemes (i.e. without tax relief).

The result is your ‘net income’. This is ‘adjusted’ to arrive at your ‘adjusted net income’.

Step 2

Deduct the grossed up amount of any Gift Aid donations.

Step 3

Deduct the gross amount of any pension contributions in respect of which tax relief has been given. The amount of the contributions must be grossed up at the basic rate of tax (so multiply the amount of the contribution by 1.25).

Step 4

Add back any tax relief for payments to trade unions or police organisations.

Tax relief of up to £100 is available for payments in respect of superannuation, life insurance or funeral benefits. If this has been deducted in step 1, it should be added back.

Example

Alison has the following income:

salary: £60,000;

rental income: £18,000;

bank interest: £325; and

dividends: £1,250.

She also made trading losses of £4,000 from a self-employment and Gift Aid donations (net) of £50.

She also made contributions of £4,000 to a personal pension scheme net of basic rate tax.

Alison’s taxable income is £79,575 (£60,000 + £18,000 + £325 + £1,250).

Her net income is £75,575 (£79,575less trading losses of £4,000).

Her adjusted net income is £70,512.50 (net income of £75,575 less grossed up Gift Aid donations of £62.50 (£50 x 1.25) less gross pension contributions of £5,000 (£4,000 x 1.25)).

Personal allowance

A person’s adjusted net income is used to determine whether the personal allowance is reduced or lost. The personal allowance (set at £12,570 for 2025/26) is reduced by £1 for every £2 by which adjusted net income exceeds £100,000. It is lost entirely once adjusted net income reaches £125,140.

High Income Child Benefit Charge

The High Income Child Benefit Charge claws back child benefit from the claimant or their higher earning partner once adjusted net income exceeds £60,000. The charge is equal to 1% of the child benefit for the year for every £200 by which adjusted net income exceeds £60,000. Once adjusted net income reaches £80,000, the charge is equal to the child benefit for the year.

Some possible traps a business can fall into when deregistering from VAT that can result in an unexpected bill from HMRC.

Businesses have been going through difficult times recently and some smaller businesses selling to the public, particularly services, find that they have fallen below the VAT deregistration threshold (currently £88,000 p.a.) and think that they would be better off deregistered.

The reasoning behind considering VAT deregistration is that they can either decrease their prices by the VAT amount and become more competitive, keep their prices the same and increase their profit by the VAT amount or even do a mixture of the two.

Potential problems

However, there is a potential pitfall to be considered before contemplating deregistering for VAT. When a business deregisters from VAT, if the VAT on the current value of the assets on hand at the time of deregistration is more than £1,000, it has to be repaid to HMRC; it includes any stock or capital equipment, etc. This could wipe out any potential savings from deregistering from VAT unless the deregistration is going to be permanent rather than temporary until the economy picks up.

Even more of a worry are the effects of the capital goods scheme (CGS). The CGS applies to the purchase of land or buildings and the refurbishment or extension of existing buildings with a value of more than £250,000 where VAT has been reclaimed. If you change the use of the asset from taxable to exempt (or vice versa) or deregister from VAT within a ten-year period, then you have to adjust the amount of VAT reclaimed.

You could end up either reclaiming more VAT or, more likely, paying some back to HMRC on deregistration.

Example: An unexpected VAT bill

Mr and Mrs Brown bought a small seaside hotel four years ago for £400,000 and the previous owners had opted to tax it (decided to charge VAT on the sale). The VAT was on top of the sale price and totalled £80,000, which they recovered on their VAT return because their business was fully taxable.

Their turnover was originally about £90,000 p.a. but has fallen slowly until they now only turn over £62,000 p.a. They are now below the deregistration threshold and are considering deregistering so they can increase their profits (increased profit = £62,000 x 7/47 = £9,234). They would obviously also have to take account of the input VAT that they could no longer reclaim of ongoing costs which would reduce this amount.

If they deregister now, the CGS will come into play, and they will have to repay some of the VAT. The deregistration will result in a deemed exempt supply of the property in year four of the CGS adjustment period. The remaining six years will be viewed as exempt use, so the calculation will be:

 £80,000 x 6/10 (60%) = £48,000

Mr and Mrs Brown would be extremely unhappy to find that they owe HMRC £48,000 plus the VAT on the stock and fixtures and fitting as well!

One might think that they could avoid the CGS adjustment by opting to tax, but then it would be regarded as a taxable supply at deregistration and they would owe the VAT on the current value of the property which could be even more than the £80,000 claimed!

Based on this, Mr and Mrs Brown would be much better off remaining registered for VAT and continuing to trade until business improves and their turnover once again goes over the VAT registration threshold, as it would take about five years to break even if they deregistered!

Practical tip

If a business is considering deregistering from VAT, it will need to take account of any input tax it needs to repay to HMRC on deregistration as well as the input tax on purchases it will no longer be able to reclaim, so taking advice before deregistering would be recommended.

Parents should check whether they and their children are eligible for tax-free childcare.

In May, HM Revenue and Customs (HMRC) reminded parents of the savings they can make on childcare costs when a child starts primary school for the first time.

The government’s tax-free childcare scheme allows eligible persons to pay money into a designated National Savings & Investments (NS&I) account in respect of an eligible child. HMRC then tops up the account by paying an additional 25% into it. For example, if a parent pays £800 into the account, HMRC would add £200.

Are you eligible to claim?

A family could be eligible for tax-free childcare if they satisfy the following main conditions:

 • They have a child or children aged 11 or under. Eligibility ceases on 1 September following the child’s 11th birthday. A disabled child is eligible until 1 September after their 16th birthday.

 • The parent and their partner (if they have one) must earn, or expect to earn, at least the national minimum wage or living wage for 16 hours a week, on average. Dividends, interest, property and pension income do not count towards the minimum income threshold.

 • The claimant and their partner must each earn no more than £100,000 a year.

 • The claimant and their partner must not be entitled to universal credit or childcare vouchers, although receipt of incapacity benefit, severe disablement allowance, carer’s allowance or carer support payment or contribution-based employment and support allowance by the claimant is not necessarily a bar to a claim if their partner is working.

 • The claimant and their partner (if they have one) must have a National Insurance number and have British or Irish citizenship, settled or pre-settled status (or be in the process of claiming this) or permission to access public funds.

 • The claimant must reconfirm their details every three months.

Is your child eligible?

The child must also meet specific eligibility criteria as follows:

 • They must be 11 or under and usually live with the claimant.

 • They cease to be eligible on 1 September following their 11th birthday.

 • Adopted children are eligible, but foster children are not.

 • A disabled child who usually lives with the claimant may be eligible for the scheme until 1 September after their 16th birthday. The child will be eligible for an increased HMRC contribution if they receive disability living allowance, personal independence payment, armed forces independence payment, child disability payment (Scotland only) or adult disability payment (Scotland only) or are certified as blind or severely sight-impaired.

The childcare fund and its use

Once a childcare account is open, money can be deposited in it by the parents or others. The government adds 25% of the deposits, and this can be used as and when required. If the maximum amount of £2,000 is deposited every three months, a top-up payment of £500 will be made every quarter. This can be used immediately or kept in the account and used as required on approved childcare or holiday club costs. Money in the account that is not required for childcare can be withdrawn, but the related top-up payment will be returned to HMRC. For a disabled child, up to £4,000 can be deposited quarterly, meaning that £1,000 would be added by HMRC.

Conclusion

The tax-free childcare scheme is a source of government support towards childcare costs, but its interaction with other childcare provision is complex.

The government’s eligibility checker tool (www.gov. uk/get-tax-free-childcare) can be used to compare whether, for example, a claim would outweigh the loss of other benefits.

Practical tip

Each eligible child must have a separate NS&I account, but if there is more than one child in a family, the separate accounts can be managed through the same online portal. Those unable to access the portal can apply through the Childcare Service helpline: 0300 123 4097.

What is allowable expenditure for capital gains tax purposes.

Capital expenditure cannot be offset as an expense against income.

There is a huge body of case law concerned with the (sometimes fine) line to be drawn between capital and revenue expenditure. One of the founding principles was stated by Viscount Cave in Atherton v British Insulated and Helsby Cables Ltd, HL 1925,10 TC 155, describing capital expenditure as being “made, not only once and for all, but with a view to bringing into existence an asset or advantage for the enduring benefit of the trade”.

Allowable expenditure

Whether such expenditure may instead be allowable for capital gains tax (CGT) purposes most frequently arises when the asset in question is disposed of. TCGA 1992, s 38 (‘acquisition and disposal costs’) is regarded as definitive in this respect. If expenditure is within the wording of section 38, it is allowable; if not, then it is not.

There are three categories of allowable expenditure within TCGA 1992, s 38:

 • acquisition costs;

 • enhancement expenditure; and

 • incidental costs of acquisition and disposal.

Acquisition costs are relatively straightforward, being the amount or value of the consideration given wholly and exclusively for the acquisition of the asset.

Enhancement costs

Enhancement costs can be a bit trickier. The expenditure must be incurred wholly and exclusively on the asset for the purpose of ‘enhancing the value’ of the asset, but it must also be reflected in the ‘state or nature’ of the asset on disposal. Included in this category are also costs of establishing, preserving or defending the title to or rights over the asset.

HMRC stresses the importance of the words in italics and makes the point that expenditure may be incurred in connection with an asset, but not on the asset itself. The example given concerns payments made as compensation by a parent company to officers of a subsidiary to secure their resignations, as required by the purchaser of the subsidiary. The payments are made in connection with the sale of the shares in the subsidiary but not on the asset (the shares) itself (see HMRC’s Capital Gains Manual at CG15180).

In another example given by HMRC, the owner of a plot of land builds a tennis court at a cost of £5,000 but later demolishes it and builds a swimming pool at a cost of £20,000. The cost of the swimming pool is allowed as enhancement expenditure on disposal of the land but not the cost of the tennis court, which is, of course, not reflected in the state or nature of the asset at the time of disposal (see CG15190).

One might also question whether either the tennis court or the swimming pool were constructed wholly and exclusively for the purpose of enhancing the value of the asset (the land).

Incidental costs

The incidental costs of acquisition and disposal must (again) be wholly and exclusively incurred for that purpose, but are quite narrowly defined as:

 • fees, commission, or remuneration paid for the professional services of a surveyor, valuer, auctioneer, accountant, agent or legal adviser;

 • conveyancing and transfer costs (including stamp duty, stamp duty land tax (or devolved equivalents));

 • advertising costs to find either a buyer or a seller; and

 • in the case of a disposal, any costs of making a valuation or apportionment for the purpose of working out the gain.

Again, if the incidental costs in question do not fit within these categories, they are not allowable and are, in effect, tax ‘nothings’.

Overpayment relief, which should be welcome in theory but, in practice, can be quite a slippery claim to pin down.

There is generally a ‘cooling-off period’ of about a year, during which a taxpayer can amend most aspects of their tax return. For an individual’s self-assessment, the time limit is 12 months following the statutory filing date of the return, usually 31 January following the tax year of the return (TMA 1970 s 9ZA).

So, if I discover that some expenses were omitted from my 2023/24 tax return that was filed in November 2024, I have until (31 January 2025 + 12 months) 31 January 2026 to amend my return, include those additional expenses and reduce my self-assessment liability.

Enter ‘overpayment relief’

However, there is provision in the tax code for a taxpayer to amend their tax return when they find that they have made a mistake that goes well beyond the customary one-year window.

We used to call this ‘error or mistake relief’, but this was replaced by ‘overpayment relief’ from April 2010 (TMA 1970, Sch 1AB). One of the key differences between the old error or mistake relief and the new overpayment relief is the timeframe:

 • Error or mistake relief could be claimed within six years or, under self-assessment, within five years of 31 January immediately following the tax year of assessment of the return.

 • Overpayment relief must be claimed within four years of the tax year of assessment of the return. Restrictions on making an overpayment claim

Perhaps understandably, there are numerous limitations in the legislation to the kind of scenarios where a taxpayer should be permitted to make a claim; the legislation lists various ‘cases’ including, amongst others, (and put quite simply):

 a. various mistakes in the making of a tax claim, such as loss relief or capital allowances, including failure to make one at all;

 b. where relief is available by other means (such as still being in time to ‘repair’ one’s tax return);

 c. where relief was available by other means and the taxpayer knew (or should have known) but failed to act in time to take advantage of that other route;

 d. where the grounds for claim have already been covered at tribunal (or the taxpayer knew earlier but failed to take their argument to tribunal in time); or

 e. where the return was made in accordance with ‘practice generally prevailing’ at the time.

One might conclude it would be easier to list the fewer scenarios where an overpayment relief claim can be made rather than where it cannot.

Mistakes in a claim

The restrictions are widely drawn, but the main themes seem to be that the relief should not be easy to use to circumvent a particular claim process or time limit, nor to support laxity in one’s affairs.

On the other hand, there is little point to overpayment relief if it cannot be used, and the idea that HMRC might simply argue: “You are too late because you should have known”, is potentially concerning.

But what does it mean that the taxpayer cannot secure relief for a ‘mistake in a claim’? This has been considered in two recent cases, with quite different results:

 • BTR Core Fund v HMRC [2024] UKFTT 00885 (TC), (taxpayer lost); and

 • Candy v HMRC [2025] UKFTT 416 (TC) (taxpayer won).

BTR core fund

The taxpayer had acquired a substantial block of residential properties in April 2019, alongside a modest commercial part. In November 2020, HMRC announced a change in its interpretation of how stamp duty land tax (SDLT) multiple dwellings relief worked; too late by that stage just to amend its SDLT return, the taxpayer put in an overpayment relief claim to reduce its SDLT, in line with HMRC’s new guidance, in January 2021 (NB the overpayment relief mechanism for SDLT is found at FA 2003 Sch 10, para 34A, rather than in TMA 1970, but it broadly works in the same way for our purposes).

HMRC initially granted overpayment relief but then changed its mind, arguing that the taxpayer had made a mistake in their multiple dwellings relief claim, so overpayment relief couldn’t change it.

The taxpayer argued its ‘claim’ was simply to ask for multiple dwellings relief in the first place, which it had done and was still asking for. The change was in how the claim was then calculated, and that calculation was part of the wider SDLT return, not the claim itself. The taxpayer relied on R (oao Derry) v HMRC [2019] UKSC 19 and income tax law to argue that the claim here was simply a mechanism – broadly, a tick in a box – while the resulting liability, as ultimately calculated, was a separate matter.

In refusing the taxpayer’s claim, the tribunal decided that the faulty calculation must have formed part of the claim, essentially because a specific amount was being claimed. While the senior member of the tribunal held sway, the junior member disagreed and would have granted the taxpayer’s claim to overpayment relief. Perhaps that junior member would have preferred the next case.

The Candy case

More recently, in Candy v HMRC [2025] UKFTT 416 (TC), that taxpayer won an SDLT overpayment claim that, at first glance, looks quite similar to the BTR Core Fund claim. The taxpayer initially acquired a series of leases in a large residential property in 2012, and paid SDLT on the aggregate consideration immediately on starting development even though, strictly, the contracts had not yet ‘completed’ (because of the rules that state SDLT is payable when a chargeable contract is ‘substantially performed’ – such as when work starts on a property).

However, the taxpayer transferred his property interests to his brother in 2014, basically still before the contracts had been fulfilled, so that the taxpayer had overpaid his original SDLT. He tried to reclaim the excess on his return. Unfortunately, the particular rules for that regime stated such claims must be made within 12 months of the original return, so he was almost a year too late. He therefore made a separate claim for overpayment relief.

This time, the tribunal held that Mr Candy was entitled to overpayment relief. At the time of writing, HMRC may yet appeal (and I suspect they will). Even so, it is potentially arguable that both decisions should stand. In particular, note that in Candy, the taxpayer was well past a more conventional claim by the time circumstances changed and his original payment proved excessive – he never had a chance at a ‘normal’ refund: only overpayment relief.

When is a claim NOT a claim? Given the potential issues around reworking old claims, it is worth considering what are not actually claims. Some reliefs, etc., are effectively given automatically, so changing these amounts later on should not amount to rectifying a ‘mistake in a claim’, and then being denied overpayment relief.

For example:

 • Ordinary expenses in a set of business accounts are not ‘claimed’. The starting point is that the profits (i.e., net of such expenses) should be taxed (ITTOIA 2005, ss 7, 271E; CTA 2009, ss 2, 210, for trades or property businesses aside from the cash basis).

 • Carry forward of property business losses (ITA 2007, s 118) are given automatically but not trading losses; the latter must be claimed (ITA 2007, s 83).

 • Carry forward of capital losses – while a loss must be ‘notified’ or included in a return within four years (‘as if it were a claim’ for the purposes of time limits), the relief itself is automatic (TCGA 1992, s 16(2A)).

 • CGT incorporation relief – it is granted automatically and must be actively disclaimed in order not to apply (TCGA 1992, ss 162, 162A).

Conclusion

It is arguable that, if the approach in BTR Core Fund is correct, then overpayment relief has been hobbled, while HMRC considers its broadly parallel powers of ‘discovery’ as near-unstoppable.

Given the further restriction on overpayment relief that it cannot be used to overturn ‘practice generally prevailing’ at the time of the return (see (e) above) it is quite surprising that HMRC decided to remove that point from its original defence in the BTR Core Fund case. While we wait for the courts to provide much-needed clarity, it seems careful consideration of this oft-overlooked relief may be the best approach.

Looking at whether tax relief is available for interest paid on all loans taken out to fund a business.

At some time during the life of a business, that business may need funding, whether the monies come from the owner’s personal resources or via a bank.

To ensure that the interest paid is tax-deductible, it is essential that not only is the loan ‘wholly and exclusively’ used for business purposes from the outset, but also throughout the borrowing period.

It is often the case that qualifying loans become non-qualifying loans without the borrower being aware.

Conditions

When the business is funded using borrowed money and that money is used for business purposes, the interest is allowable as a deduction to compute the trade profits.

A tax deduction can also be made where the money is used to finance:

 • the purchase of 5% or more of the ordinary share capital in a ‘close’ company, i.e., one controlled by five or fewer individuals (the condition is also met if the owner shareholder and spouse or civil partner together own 5% of a company’s ordinary share capital);

 • loans to a close company for use in its business, such as for working capital or the purchase of an asset. The individual claiming the relief must either work for the company or hold more than 5% of the company’s share capital (however, relief is not due if the individual or spouse claims relief under the enterprise investment scheme);

 • investment in a trading company (i.e., the company’s main activity is not owning investments); or

 • the acquisition of an interest in a trading or professional partnership, provided the partnership is not a special type of investment business, known as an investment limited liability partnership.

Note that interest paid by companies that invest in land and property is allowed if the intention is for the purchased land or property to be rented out on a ‘commercial basis’.

Non-qualifying loans

Even if the borrowed funds are used for business purposes, the interest paid can easily become nonqualifying.

For example, HMRC may consider loans with terms that do not reflect market conditions (such as high or low interest rates compared to the prevailing market rate) to be non-arm’s length transactions, making the interest payments non-qualifying loans.

Loan interest ‘cap’

While interest paid on qualifying loans may qualify for tax relief, there is a cap on the amount that can be relieved each tax year.

This cap is the greater of £50,000 or 25% of the adjusted total income (i.e., total income minus payroll giving and gross pension contributions paid).

Private use of assets

Where a loan is used to buy an asset that is partly used for business and partly for personal purposes, only the business proportion of the interest is generally tax-deductible. Cars and other vehicles used in a business can fall into this category.

Note, however, that a deduction for finance costs is not allowable where a fixed-rate mileage deduction is claimed.

Change in circumstances

It is important to keep track of changes in circumstances, as they can impact the tax relief on loans.

However, if the company expands such that it is no longer a ‘close company,’ the loan will still qualify even where it subsequently ceases to be a close company.

Practical tip

Interest paid on bank loans is tax-deductible, but when financing is required for the business, a flexible loan account should be utilised instead of a current account overdraft or credit card, as tax deductions are not permitted for either of these options.

The favourable tax regime for furnished holiday lettings (FHLs) came to an end on 5 April 2025. For 2025/26 and later tax years, furnished holiday lets are treated in the same way as other residential lets for tax purposes.

The end of the FHL regime has implications for jointly held properties.

Where a property is jointly owned by spouses or civil partners, the general rule is that the income is treated as arising to each partner equally for tax purposes, regardless of their individual shares in the property. Where the property is owned as tenants in common in unequal shares, the parties can jointly elect (on Form 17) for the income to be allocated for tax purposes by reference to their beneficial ownership shares.

These rules did not apply under the former FHL regime. Instead, where a property was jointly owned, the owners could choose how to allocate the profits and losses. This applied equally where the joint owners were married or in a civil partnership.

Following the end of the FHL regime, spouses and civil partners who jointly own holiday lets will need to review the position and decide if they need to make a Form 17 election. If they do nothing, they will each be taxed on 50% of the rental profit. This may not give the best result.

Case study

David and Lisa jointly own a holiday cottage on the Suffolk coast. As David has income of £90,000 a year and Lisa has income of £20,000, they have historically opted to split the profits from their FHL in the ratio of 5:95. The profits are around £20,000 a year, meaning £1,000 are allocated to David and taxed at the higher rate and £19,000 are allocated to Lisa and taxed at the basic rate.

If they do not take any action, for 2025/26, the profits will be allocated equally for tax purposes. This means that Lisa will be taxed on £10,000 of the profits at the basic rate and David will be taxed on £10,000 of the profits at the higher rate. This will move profits of £9,000 from the basic rate to the higher rate, meaning that they will pay £1,800 more in tax in 2025/26 than in 2024/25.

If they own the property as tenants in common in unequal shares, they can elect for the profits to be allocated for tax in accordance with their actual ownership shares. If they wish to preserve the previous allocation, Lisa will need a 95% share in the property and David will need a 5% share. If the property is not already held in this way, they could take advantage of the no gain/no loss capital gains tax rules applying to spouses and civil partners to transfer shares in the property between them to achieve the desired ownership shares and then make a Form 17 election for the profits to be allocated for tax purposes in accordance with their ownership shares.

Making a Form 17 election

A Form 17 election can be made jointly by spouses and civil partners where they own property in unequal shares as tenants in common. It cannot be made where the property is owned as joint tenants – where this is the case, the spouses/civil partners jointly own the whole property.

The election must be submitted to HMRC within 60 days of being signed. The election is effective from the date of the election – it cannot be backdated. This means that a couple cannot wait until the end of the tax year to decide if an election would be beneficial for that year.

A Form 17 election will not always be beneficial. Where a property is owned in unequal shares and the spouse/civil partner with the highest marginal rate of tax owns more than 50% of the property, the default 50:50 split will give the best result.

In addition to this, any unused allowances from the previous three tax years can be utilised as long as the individual was a member of a pension scheme during this period. In addition to any gross personal contributions and defined benefit scheme growth a recipient may have, company contributions count towards the annual limit. Where the annual allowance is exceeded, an income tax charge will arise on the recipient at their marginal rate of tax. Companies planning large pension contributions ahead of their period end will need to consider this in order to avoid creating additional tax liabilities.

Trivial benefits - Trivial benefits are a tax-efficient way for companies to reward their employees and for owners to extract value from the company. Trivial benefits are taxdeductible for the company and tax-exempt for the employee.

The conditions to be satisfied to meet the exemption are:

 • the benefit is not cash or a cash voucher;

 • the cost of the benefit does not exceed a VAT inclusive value of £50;

 • the employee is not entitled to the benefit as part of any contractual obligation; and

 • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties.

An employee can receive an unlimited number of trivial benefits each year. Examples that can be given include vouchers, hampers and birthday gifts. Where the company providing the benefit is a close company, whilst directors and members of their family or household can receive tax-exempt trivial benefits, the maximum amount that can be received is £300 over the tax year, subject to the usual conditions being satisfied. Where a member of the director’s family or household is also an employee of the company, they are each entitled to their own £300 allowance.

Bonuses - A company may consider paying its directors and employees a bonus based on its year end results. Where the necessary conditions are met, a company can include a tax-deductible provision for the bonus payments in its accounts (under CTA 2009, s 1288). Where a bonus is properly evidenced and documented, this allows a company to accelerate the corporation tax relief it receives on the bonuses ahead of when they are paid for PAYE purposes. In normal circumstances, corporation tax relief would be given in the period that the remuneration is paid.

For this treatment to be available, the company must have a constructive obligation to pay the bonus at its year end. This can be evidenced by a board minute prior to the year end, which is then ratified at the AGM, or if a company has a history of paying bonuses, by past practice. In addition to having a constructive obligation, the company must also actually pay the bonus within nine months of the period end, or if earlier, the date of filing of the corporation tax return. At the time the bonus is paid, PAYE will need to be operated, with the associated tax and National Insurance contributions liabilities paid.

It is important to be cautious that discussions and provision of bonus payments prior to the period end do not trigger an immediate PAYE liability (under ITEPA 2003, s 18). These rules determine when remuneration is treated as paid and when PAYE should be applied. These rules are stricter for directors than employees. If a bonus is determined before the end of a period of account, this becomes the trigger date for PAYE to be operated. However, this can be avoided if the bonuses are allocated to a ‘pool’ for a later distribution by shareholders at the AGM, but this is an area where caution should be exercised.

Don’t forget…

 • Working from home allowance – Where directors and employees are required to work from home, they can be paid a tax-free flat rate expense of £6 per week which is tax deductible for the company.

 • Dividend allowance – For the 2024/25 tax year, individuals can receive total tax-free dividends of £500 per year. Dividends can only be paid to shareholders and only if the company has sufficient distributable reserves.

 • Check time limits – Ensure that any claims for reliefs are submitted in time. For example, for companies making a rollover relief claim, the time limit is four years from the end of the accounting period to which the claim relates.

 • Check director salaries – Where directors take a low salary, ensure that the amount declared through the payroll is at least equivalent to the lower earnings level to receive a qualifying year’s credit for state pension entitlement. For 2024/25, the lower earnings limit is £6,396 per year.

Practical tip - Do not wait until after the year end and when the corporation tax payment date is almost due to start considering tax planning. Business owners need to be proactive to ensure their business is as tax-efficient as possible and all available expenses and reliefs have been claimed.

For many years, unlike normal rented properties, the rent from a furnished holiday letting (FHL) was treated as trading rather than investment income, which had several tax benefits.

Broadly, a property could be treated as an FHL if, in each tax year, it was available for short-term letting for 210 days and was in fact, let for 105 days or more and it was not used as a long-term let of more than 31 days for significant periods.

Unfortunately, this distinction and the accompanying tax advantages ceased to have effect from 6 April 2025 (or 1 April if the property was owned by a company) and the rent received will now be treated the same as for any other let residential property. The main effects are outlined below.

Income tax

Although the rent from an FHL property was subject to the same rates of income tax as any other letting, the FHL income could be reduced by capital allowances, related mortgage or loan interest and pension contributions.

From April 2025, instead of claiming capital allowances on new domestic items (such as furniture, furnishings, and ‘white goods’), the initial cost cannot be claimed but a deduction can be claimed when it is replaced. Note that if writingdown allowances were being claimed before that date, the balances remaining can continue to be claimed until exhausted. The costs of renewing fixtures (such as baths, washbasins, toilets, boilers, etc.) would normally be allowed as building repairs if they are ‘like-for-like’ and not an improvement. The cost of replacing small low-value items (e.g., cutlery, crockery and bed linen) can be claimed when incurred.

Mortgage or loan interest relating to the property can no longer be claimed in full as a deduction from the rental income. Instead, a deduction is given at 20% of the interest from the income tax liability on the rental income. This means that tax relief is given only at the basic rate rather than at 40% or 45% if the owner is liable at those higher rates.

Because the rent is no longer treated as trading income, pension contributions cannot be deducted from it. An owner with other earned income could pay premiums relating to that or would be restricted to the basic contribution of £3,600 (£2,880 net) a year.

From April 2025, FHL properties are no longer treated separately from any other properties owned by the taxpayer. They should be included in the taxpayer’s UK or overseas property business and any FHL losses brought forward can be set against future income from such sources.

Capital gains tax

While FHL rents were previously treated as trading income, qualifying properties were subject to a lower capital gains tax rate under the business asset disposal relief rules when sold or disposed of. In general, this relief ended on 5 April 2025.

Similarly, rollover relief, whereby the gain on the sale of one FHL property could be deferred if another was purchased, is also no longer available.

Inheritance tax

HM Revenue and Customs never accepted that FHL properties were trading businesses for inheritance tax purposes; the properties are instead regarded as investment assets.

Consequently, business property relief was not available, and there is no change here as a result of the end of the FHL regime.

Conclusion

Owners of FHL properties will need to take the above changes into account when preparing their tax returns for the tax year ending 5 April 2026. The capital gains tax liability on the sale or disposal of such properties will now potentially be higher. Similarly, the income tax liabilities for 2025/26, which become payable on 31 January and 31 July 2027, may also be higher than in previous years.

Practical tip

Note that ‘anti-forestalling’ rules applied from 6 March 2024 to prevent FHL properties from being disposed of under unconditional contracts in an attempt to retain entitlement to the previous beneficial tax rules.

What is the tax position should a company pay a director’s personal expenses?

Directors of small companies, especially those with prior experience of self-employment, often overlook the distinction between company funds and personal finances. It can be hard for some directors to resist the temptation to channel all expenses through the business bank account, whether those expenses are company related and tax-deductible or personal. However, such a practice has tax implications.

To obtain a tax deduction for an expense incurred by a director (or any employee), three conditions must be met:

 • The director-employee must be obliged to incur the expense.

 • The expense must have been incurred in the performance of the employment duties.

 • It must have been incurred ‘wholly, exclusively and necessarily’ in carrying out work on the company’s behalf.

The test of ‘necessity’ has been considered relatively recently in the tribunal case HMRC v Kunjar [2023] UKFTT 538, where it was confirmed that merely fulfilling a condition imposed by the employer (e.g., having to reside within a certain distance from the workplace and claiming the cost of travel) does not necessarily make the expenses allowable.

Any expense paid from the company bank account that does not meet these criteria or was not incurred directly to conduct company business will be taxed as a personal expense for the director. This will be treated similarly to a salary payment, attracting both income tax and National Insurance contributions (NICs).

Tax and NICs liability

How the tax is accounted for and whether it is solely the employee who is liable to NICs or both the employer and employee who are liable will depend on whose name the bill is made out to and who pays it. If the employee arranges for payment in their own name and the employer pays the bill, the employer has effectively discharged the employee’s debt. In this scenario, the director will be responsible for both income tax and NICs, while the employer will also incur employer’s NICs, just as if the employer had paid the employee directly in cash.

Conversely, if the employer pays the bill directly, this expense will be deductible for the company accounts. The director will then be charged to tax and NICs, which could be classified either as salary or as a benefit-in-kind. Whether the employer is liable for NICs depends on whether they can claim the employment allowance.

Type of expense

Although the payment may be taxable on the employee as a personal expense, whether a tax charge is actually levied will depend on the type of expense. For example, many companies pay for an employee’s professional subscription fees. In such cases, even if the invoice is issued in the employee’s name, the payment remains tax and NICs free for both employee and employer being also deductible from the company’s profits.

Director’s loan account

Many directors, particularly those of their own companies, have personal expenses paid for by the company, which are then charged to their director’s loan account (DLA). Where this occurs, the DLA may become overdrawn and then be cleared by crediting with salary, bonuses or dividends. HMRC has been known to argue that personal expenses regularly paid from the company account and then debited to the loan account should be treated as ‘an advance’ of salary, so PAYE, etc., should have been accounted for earlier, at the date of payment.

However, regular payments reimbursed through dividend payments cannot be regarded as ‘in advance of salary.’ Therefore, it is acceptable to declare a dividend credited to a DLA at the beginning of the accounting year and withdraw over subsequent months. Distributing dividends early in the accounting year can reduce the risk of the DLA becoming overdrawn, which may otherwise result in a beneficial loan interest tax charge on the director.

Practical tip

Many companies provide credit cards for business use, but it is important to remember that any personal expenses charged to these cards may also be subject to the tax rules outlined above.

There are various ways to enjoy savings income without paying tax on it. In addition to the personal allowance, basic and higher rate taxpayers benefit from a personal savings allowance. Taxpayers whose taxable non-savings income is not more than £5,000 can also enjoy a zero rate on savings income in the savings rate band. In addition, savings income held in tax-free accounts such as ISAs can also be enjoyed free of tax.

Personal allowance

If the personal allowance has not been fully used elsewhere, the balance can be set against savings income allowing it to be received tax-free.

Savings allowance

Basic and higher rate taxpayers are entitled to a savings allowance. This is in addition to their personal allowance.

For 2025/26 the savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. The allowance is available in addition to the personal allowance and also the dividend allowance.

Rising interest rates in recent years may mean that basic and higher rate taxpayers now receive interest in excess of their savings allowance on which tax is payable and which must be notified to HMRC on their Self Assessment tax return. Consequently, they may need to file a tax return where previously they did not need to.

Taxpayers who pay tax at the additional rate (which applies to taxable income in excess of £125,140) do not benefit from a personal savings allowance and must pay tax on any savings income unless it is otherwise exempt. They do not receive a personal allowance either as the personal allowance is fully abated at this level. Unless savings income is derived from tax-free accounts, additional rate taxpayers will pay tax on it.

Savings starting rate

Savings income which falls within the savings starting rate band is taxed at the savings starting rate of 0%. Depending on an individual’s personal circumstances, they may be able to enjoy up to a further £5,000 of savings income tax-free.

The savings starting rate band is set at £5,000 for 2025/26, but is reduced by any taxable non-savings income. This is other taxable income in excess of the personal allowance (but excluding any dividends). Consequently, the full £5,000 savings starting rate band is available where other taxable income is less than the individual’s personal allowance. The standard personal allowance is £12,570 for 2025/26. The savings starting rate band is eroded once taxable income in excess of the personal allowance reaches £5,000 (income of £17,570 and above).

The savings starting rate is applied before the personal savings allowance.

Tax-free savings accounts

If savings are held within a tax-free wrapper such as an Individual Savings Account, the associated savings income is tax-free. A taxpayer can invest up to £20,000 in an ISA in 2025/26. ISAs are attractive to additional rate taxpayers who do not benefit from personal and savings allowances.

Maximum tax-free savings income

Where a person has the personal allowance available in full to set against their savings income, they can enjoy tax-free interest on their savings of £18,570 in 2025/26 (personal allowance of £12,570 plus savings starting rate band of £5,000 plus savings allowance of £1,000), plus that from tax-free savings accounts.

The benefits or otherwise of voluntary VAT registration

Many businesses strive to keep their turnover under the VAT registration limit (currently £90,000) because not only are they wary of the additional administrative costs but also because they believe that adding VAT to the invoice will make their business uncompetitive. However, even if a business has not reached the limit, voluntary VAT registration can offer significant benefits, not least including creating a more professional image and enhancing credibility, signalling to customers and potential business partners that the business has reached the VAT threshold, a significant milestone in the growth of any business.

Claiming pre-registration VAT

One of the main benefits of voluntary VAT registration is the financial benefit that can be gained. Input VAT paid on goods or services before registration can be reclaimed, subject to certain conditions. This can result in a much-needed cash lump sum during challenging initial phases for a start-up. VAT on goods (e.g. stock and equipment) can be reclaimed if purchased within four years of registration. The goods must be in stock on the registration date or used to make taxable supplies after registration and not fully used. However, the company must have been in operation for those four years in order to be eligible to make this claim. Additionally, VAT invoices and records must be available from that time.

VAT on services can also be reclaimed but in a shorter window of up to six months before registration (e.g. a typical cost being for website design paid for five months before registration). The services must have been used to establish the business and the VAT must not have been passed on to customers. Valid VAT invoices are required to support any input claim.

Improved cash flow

Reclaiming input VAT on purchases can improve cash flow, especially if the business needs to purchase a lot of stock, equipment or services from VAT-registered suppliers. The business can use the reclaimed VAT to invest in other areas of the business, rather than tying up cash in VAT payments.

Improved business opportunities

Many other VAT-registered businesses prefer to work with other VAT-registered suppliers since they can reclaim VAT on purchases.

Ensure registration is on time

Registering the business from the start can help avoid fines or penalties for late registration if the business accidentally exceeds the threshold. This proactive approach ensures that the business is compliant and prepared for any potential growth that might push it over the threshold.

Downsides of voluntary registration

The most evident downside to becoming VAT registered is the requirement of the business to charge customers VAT and thereby increasing prices (unless the business makes zero-rated supplies). If customers are VAT-registered businesses themselves, the fact that there is additional VAT to pay will not be an issue for them as they will be able to reclaim on their own VAT return. However, if the customers are the general public, they will not be able to reclaim, and the higher price may mean they look elsewhere for their purchase (possibly a non-VAT-registered business) – it will depend on what is being sold. Of course, just because a business is VAT registered does not mean the full 20% uplift needs to be passed on to the customer.

Another downside to being VAT registered is the additional administration required, including compliance with Making Tax Digital for VAT.

Practical point

HMRC allows businesses to register as ‘intending traders’. An intending trader is an individual or entity that, on the date of the registration request, is engaged in business activities, has not yet begun making taxable supplies, but intends to do so in the future. Registration is therefore possible even if the business is still in the planning stage. This allows businesses to reclaim VAT on costs incurred during this time, preventing some claims, especially for services, from falling outside the pre-registration time limits.

All good things come to an end, and a property rental business is no exception. However, expenses may be incurred in relation to that property rental business after it has ceased. Where this is the case, it may be possible to obtain tax relief for those expenses.

End of the property rental business

A property business may comprise more than one let property (including holiday lets). The business will only come to an end when all the properties have been disposed of or are being used for other purposes.

If one property in that business ceases to be let or is sold, the business will not come to an end. However, if the property rental business comprises only one property, the business will cease when that property is sold or used for other purposes.

Post-cessation expenses

Expenses may be incurred in relation to a property rental business after it has come to an end. However, all is not lost. Special rules allow tax relief for expenses that are incurred within seven years from the date on which the property business ceased, which would have been deductible had they been incurred while the property business was ongoing. For example, a former landlord may incur expenses in recovering unpaid rent from a tenant or recovering cleaning and other costs from a tenant who vacated a property without leaving it in good order.

Where relief is claimed, a claim must be made on or before the first anniversary of the 31 January following the tax year in which the payment was made. For post-cessation expenses incurred in 2025/26, the claim must be made no later than 31 January 2028. Where there are also post-cessation receipts in the same year, the post-cessation expenses are deducted from those receipts.

It may be that there are no post-cessation receipts from which to deduct the expenses. Where this is the case, relief may be available against general income or capital gains.

Post-cessation receipts

In the same way that relief may be available for expenses incurred after the property rental business has ceased, any post-cessation receipts, such as overdue rent or an insurance payout, are taxable in the year in which they are received.

Dividend waivers for inheritance tax purposes

It is not uncommon for shareholders in family and owner-managed companies to waive their rights to receive dividends. In broad terms, a waiver is where a shareholder forgoes (or ‘waives’) their right to be paid a dividend. Dividend waivers are often used as part of a tax planning exercise by spouses (or civil partners), such as where, in the absence of a waiver, a dividend would push one of the spouses into a higher income tax bracket.

However, the inheritance tax (IHT) implications of dividend waivers in income tax planning should not be overlooked.

Waivers and IHT

Dividend waivers can also play a significant role in IHT planning. For example, an elderly shareholder in a family company may prefer to waive their entitlement to a dividend so that their estate (and the IHT liability thereon) is not enhanced by the funds that would otherwise be received. This could also help to sustain the company’s funds for future business use. If a person (i.e., an individual or a company) waives a dividend within 12 months before they become entitled to it, the waiver does not of itself constitute a transfer of value for IHT purposes (IHTA 1984, s 15). The relief applies only to a waiver of dividends on shares; it does not extend to a waiver of (say) rent, or interest on loans to the company

Attention to detail

Of course, dividends must satisfy company law requirements to be valid. Furthermore, the 12-month timeframe for dividend waivers means that it is necessary to establish the timing of the shareholder’s entitlement to a dividend in terms of ensuring that the dividend is not waived too late. In particular, it is important to distinguish between ‘interim’ and ‘final’ dividends:

 • Interim dividends are due and payable when paid. A resolution to pay an interim dividend does not create a debt until the dividend is paid (see Potel v CIR (1970) 46 TC 658).

 • Final dividends are legally due when declared by the company in general meeting (unless a later date for payment is specified, in which case they are due on that payment date).

For example, a person who waives a right to a final dividend would, in the absence of the IHT relief, dispose of a right, the value of which would generally be that of the dividend. The 12-month period for a waiver to be effective for IHT purposes should therefore be measured carefully.

The relief from IHT only applies ‘by reason of the waiver’. In other words, it does not necessarily apply if the waiver is part of a series of operations aimed at achieving a transfer of value for IHT purposes not related solely to the dividend waived (see HM Revenue and Customs’ Inheritance Tax Manual at IHTM04220). In addition, the waiver should be affected by deed, which cannot be backdated.

Practical tip

It is always better to ensure that a company’s shareholdings are properly structured in the first place, so that dividend waivers are unnecessary. However, where dividend waivers are unavoidable, they should be approached with caution, as anti-avoidance rules exist for other tax purposes in certain circumstances (e.g., the ‘settlements’ income tax provisions). HMRC may particularly seek to challenge waivers used on a regular or long-term basis, so consider other tax planning options instead (e.g., different classes of shares in the company). Professional advice should be sought, if necessary.

If you are running a business, regardless of whether you operate as a sole trader, in partnership or the business is run as a limited company, you will need to register for VAT if your total taxable turnover in the previous 12 months exceeds the VAT registration threshold of £90,000 or if you expect your taxable turnover to be more than £90,000 in the next 30 days.

If both you and your business are based outside the UK and you supply goods or services to the UK (or expect to do so in the next 30 days), you must register for VAT regardless of your taxable turnover.

Taxable turnover

The trigger for registration for a UK-based business is its taxable turnover. For VAT purposes, this is everything that is not exempt from VAT or outside the scope of VAT. It includes zero-rated goods; reduced rate goods and goods charged at the standard rate. In working out your taxable turnover, you must also take into account:

• goods hired or loaned to customers;
• business goods used for personal reasons;
• goods received in barter or part-exchange or as gifts;
• services from other countries that are subject to the reverse charge;
• goods and services subject to the domestic reverse charge; and
• building work over £100,000 that the business did itself.

Registration deadline

Where taxable turnover in the previous 12 months exceeded £90,000, the business must register for VAT within 30 days of the end of the month in which the threshold was exceeded. The registration is effective from the first day of the second month after which the threshold is exceeded.

Example

Bella is a sole trader. On 7 July 2025 her VAT taxable turnover in the previous 12 months exceeded £90,000 for the first time. Bella must register for VAT by 30 August 2025. Her registration is effective from 1 September 2025.

Where taxable turnover will exceed the VAT registration threshold in the next 30 days, the business must register for VAT by the end of that 30-day period. The registration is effective from the date that the business realised that the threshold would be exceeded.

Example

Cameron signs a contract to deliver goods worth £102,000 on 17 July 2025. He must register for VAT by 16 August 2025. His registration is effective from 17 July. He must therefore charge VAT on those goods.

Where a business registers late, it must pay VAT on taxable goods and services supplied after the date by which it should have registered. A late registration penalty may also be charged.

Businesses which exceed the threshold temporarily can apply for a registration exception.

Registration process

A business can register for VAT online (see www.gov.uk/register-for-vat/how-register-for-vat). The information required will depend on whether the business is run by an individual or as a partnership, or by a company.

To register as an individual or partnership, you will need your National Insurance Number, an identity document (such as a passport), bank account details, your unique taxpayer reference (UTR), details of your annual turnover and an estimate of your taxable turnover for the next 12 months. For a company registration, the company registration number, bank account details, UTR, annual turnover and estimated turnover for the next 12 months will be required.

In certain circumstances it is not possible to register online and registration must be done by post, such as if you are applying to join the agricultural flat rate scheme.

Voluntary registration

A business whose taxable turnover is below the VAT registration threshold can register for VAT voluntarily. If you do this, you will need to charge VAT on taxable supplies that you make, but you can claim back VAT on things that you buy for your business. Voluntary registration is worthwhile if you make zero-rated supplies but incur VAT on items that you buy.

Tax bills need to be paid on time otherwise interest and possibly penalties will accrue. HMRC is amenable to payment by instalments under the Time to Pay scheme should payment not be made by the due dates. However, if no contact is made, HMRC will commence its debt management process including passing the debt to its Debt Management and Banking department. Time to Pay should ideally be sought before the debt becomes due and, while there is no automatic right to pay tax by instalments after the due date, if an individual or business is experiencing temporary financial difficulty and meets certain criteria, HMRC is found to be approachable.

Initial contact

HMRC uses a variety of methods to pursue tax debts. In the first instance, it will start by issuing payment reminders in the form of letters, telephone calls and SMS texts. Although HMRC does not have a fixed timeline (dependent on the nature of the debt and the taxpayer's response), the collection process usually commences 30 days after the missed payment. Further letters and a final demand are issued within 30–90 days after initial notice. If ignored, further letters, including final demand letters or a Notice of Requirement to Pay are issued.

Debt collection agency

Further failure to pay may mean that collection is outsourced to a private debt collection agency (DCA). HMRC has started to use these debt collection agencies more and more in recent years and increasingly the time lag between issue of reminders and transfer to an agency is becoming  shorter. Such agencies have their own reminder methods of letters and telephone calls. DCAs do not have direct access to HMRC’s systems, and cannot deal with any dispute over the amount of the debt. Be aware that if a Time to Pay (TTP) arrangement is in place for one tax, this does not necessarily mean that another department dealing with another tax will not seek collection. It is not unusual for a TTP arrangement to be made for corporation tax and VAT, for example, and for the taxpayer to receive letters from the DCA for personal tax.

Tax collection via coding notices

HMRC can alter individuals’ coding notices to collect self-assessment tax, contract settlement debts following an enquiry and tax credit overpayments by deduction at source from salary or pension. The amount that can be collected using this method varies depending on the taxpayer’s earnings. If a taxpayer earns less than £30,000 per annum, the amount is £3,000; if earnings are higher, up to £17,000 if the taxpayer earns in excess of £90,000. However, the limit for collecting self-assessment balancing payments and PAYE debts remains £3,000. If the amount owed exceeds these limits, the debts can be split (partially coded out).

Direct recovery of debts

HMRC’s Direct Recovery of Debts (DRD) is a procedure by which it can withdraw owed tax directly from taxpayers’ bank accounts. This process has been reinstated as of 6 April 2025 following suspension during the pandemic. DRD can only be considered for debts in excess of £1,000. There are a number of safeguards in place under these provisions, including the restriction that at least £5,000 remains in the taxpayer's bank account in most cases. Every debtor must receive a face-to-face visit from HMRC agents before their debts are subject to the process, being allowed 30 days to object before any money is transferred.

It should be noted that as from a date to be announced, HMRC may soon begin automating smaller debt recoveries. Broader powers (digital wallets, rental deposits, goods) are also being considered but will require legislative updates following consultation.

Court action

HMRC may initiate court action via the magistrates’ court often three to six months after the debt has arisen for tax debts of less than £2,000. For larger debts, the case will be heard in the county or high court. In practice, a county court judgment (CCJ) is generally only sought where its threat is believed likely to elicit settlement of the debt on the basis that the CCJ would impact a taxpayer's access to credit. For a company, HMRC will seek a winding-up petition.

Although many companies are facing difficult times, some have managed to accumulate a sizeable amount of cash in their business's current account. Leaving this cash where it is brings with it the impact of inflation eroding the amount, together with potential tax problems when withdrawn by the director, including sometimes being taxed at a high tax rate. Paying off any loans should be a priority, as should ensuring compliance with HMRC payments. If the company plans to expand, acquire another business or hire additional staff, retaining cash may be necessary.

However, should the cash not immediately be needed, in the short term transferring the funds into a company savings account with a good rate is advisable. Interest rates are competitive, with one provider offering an interest rate of 4.5% However, interest income is subject to corporation tax’ which could result in a net rate of only3.38% if the company's tax rate is 25%.

Retaining cash

Should the director shareholder be nearing retirement, tax planning may involve retaining the cash to withdraw at a future date when their marginal tax rate may be lower than that applicable if the cash is withdrawn whilst a director.

If the intention is to sell or liquidate the company, consideration should be given to the availability of Business Asset Disposal Relief (BADR), under which qualifying disposals are taxed at a capital gains tax rate of 14% (18% for disposals on or after 6 April 2026), rather than 24% (higher and additional rate taxpayers).

One condition for BADR on share sales and company liquidation distributions is that the relevant company must be a  trading company during the relevant period. HMRC’s Capital Gains Manual CG64090 (Business Asset Disposal Relief: trading company and holding company of a trading group – the meaning of "substantial") states that a company can have some non-trading (typically investment) activities without affecting its qualifying trading status, provided the non-trading element is not ‘substantial’. However, if the company holds a large amount of cash, HMRC may question whether the company was really trading. The only relevant (non-binding) tax case precedent in relation to cash balances is Potter v HMRC [2019] UKFTT 554 (TC), where the company's trade went into a semi-suspended state and approximately £800,000 of its ‘accumulated reserves’ were ‘safeguarded’ by putting them into mid-term bonds generating interest income of approximately £35,000 a year. The Tribunal concluded that, despite the temporary suspension becoming permanent, the company's activities remained wholly trading.

Alternatives to retaining cash – pension contributions

Making pension contributions is the main way to withdraw cash tax efficiently. The company can pay contributions on the director's behalf (as long as sufficient annual pension allowance is available) and the company deducts the cost of the pension contributions in calculating its taxable profits. Even if the director plans to retire in a few years, surplus cash can be deposited in the pension scheme and at least some can be withdrawn tax free (25%).

The general rule is that you can contribute to a registered pension fund and receive income tax relief each tax year but only up to certain limits. Any excess over the limits paid into the fund is subject to a recovery charge .

For a company director, the business can contribute directly to their pension scheme up to £60,000 a year even if the company's profits are less than this amount. Contributions exceeding this limit are subject to a tax charge.

Alternatives to retaining cash – invest in shares’

Although investing in shares, etc is not a guaranteed way of increasing capital, history shows that the return is typically better than investing in a deposit account.

Alternatives to retaining cash – invest in property

Extracting cash from one company to lend to another for property purchases is a common tax-efficient strategy of cash withdrawal. A separate company, known as a special purpose vehicle (SPV), is incorporated to acquire a property, be it residential or commercial, both companies sharing the same shareholders. The trading company then lends to the SPV company, which uses the cash as funding for the property purchase.

The mechanism by which landlords letting furnished residential property can secure relief for the cost of domestic items.

Landlords letting residential property cannot claim capital allowances for the fixtures and fittings that they provide. Since 6 April 2025, this applies equally to landlords letting furnished holiday accommodation; prior to this date, capital allowances were available under the former regime for furnished holiday lettings. However, it is not available where a landlord lets one or more furnished rooms in their own home and claims rent-a-room relief.

The lack of capital allowances does not mean that landlords are not entitled to any tax relief for the cost of domestic items provided to tenants. While they are not able to deduct the cost of the original item, a dedicated relief is available for the cost of replacement domestic items. The relief applies equally to individual and corporate landlords.

Meaning of ‘domestic items’

A domestic item is defined in the legislation as ‘an item for domestic use (such as furniture, furnishings, household appliances and kitchenware)’. However, fixtures are expressly excluded from the definition. A ‘fixture’ is an item of plant and machinery that is installed so as to become part of the property. This includes boilers and radiators installed as part of a heating system.

Domestic items that commonly fall within the scope of the relief include movable furniture (e.g., sofas, beds, tables and chairs), furnishings (e.g., curtains, carpets and rugs), household appliances (e.g., fridges, freezers and washing machines) and kitchenware (e.g., crockery and utensils).

However, the relief does not apply to items such as baths, toilets, washbasins and fitted furniture, such as a fitted kitchen. These count as fixtures.

When does the relief apply?

The availability of the relief is contingent on four conditions being met.

The first condition is that the individual or company looking to claim the relief is carrying on a property business that includes the letting of one or more dwelling houses. This now includes landlords letting furnished holiday accommodation.

The second condition is that an old domestic item that has been provided for use in the dwelling house is replaced with the purchase of a new domestic item. Further, the old item must no longer be available for use by the tenants and the new item must be available for their exclusive use.

The third condition is that the expenditure on the new item must be incurred wholly and exclusively for the purposes of the property business. Further, the landlord must not otherwise be able to claim a deduction for the capital expenditure.

Landlords preparing their accounts using the accruals basis are not able to deduct capital expenditure in calculating their profits. However, landlords who use the cash basis (which is the default basis of accounts preparation where annual rental income is £150,000 or less) can deduct capital expenditure unless it is of a type for which such a deduction is not permitted. Landlords within the cash basis can only claim relief for replacement domestic items if the expenditure is not deductible in the computation of profits under the cash basis expenditure rule. As the cost of most domestic items can be deducted by landlords using the cash basis to prepare their accounts, the relief for replacement domestic items is predominantly of relevance to landlords using the accruals basis.

The final condition is that capital allowances must not have been claimed on the new domestic item. Prior to 6 April 2025, landlords letting furnished holiday lettings were able to claim capital allowances.

Nature of the relief

Relief for expenditure on replacement domestic items is given as a deduction in computing the profits of the property rental business. However, the deduction is capped at the cost of a like-forlike item, plus any costs of acquisition and disposal.

HMRC will accept that an item is a like-for-like replacement if it is of broadly the same quality and standard as the old item. The fact that the item is new does not in itself make it an improvement over the old item. For example, if a mid-range washing machine is replaced with a similar midrange washing machine for broadly the same price allowing for inflation, the replacement will count as a like-for-like replacement.

However, where the replacement item is not of the same quality and standard as the original, the deduction is capped at the lesser of the cost of the new item and the cost that would have been incurred had the new item been a like-for-like replacement of the old item. A deduction is denied for any enhancement element.

Example 1: Partial deduction on upgrade Ali is a landlord letting furnished residential flats. One of the flats needs a new washing machine. The old washing machine was a budget model. Ali replaces it with a washer-dryer costing £550. Had he chosen an equivalent budget model, the cost would have been £210.

Although Ali spent £550 on the new washer-dryer, he is only able to deduct £210 in respect of the replacement item in calculating his taxable rental profits.

Where a landlord upgrades a domestic item, a deduction for the enhancement element is not available at the time of the upgrade. However, when the upgraded item is replaced, the landlord will be able to deduct the cost of an equivalent item. So, in Example 1, while Ali is unable to deduct £340 of the cost of the washer-dryer when he purchases it, if in a few years’ time he replaces the washer-dryer with an equivalent model, which due to inflation costs £600 at that time, he will be able to deduct the full £600 when calculating his taxable rental profits.

If the replacement item is inferior to the original item, the full cost can be deducted.

Incidental expenditure

It is likely that when replacing a domestic item, the landlord will incur related costs, such as the cost of the delivery and installation and the cost of disposing of the old item. These costs can also be deducted in addition to the cost of the replacement like-for-like item.

Example 2: Relief for delivery, installation and disposal costs Bella lets out her holiday home as furnished holiday accommodation. She replaces the oven with a like-for-like replacement costing £700. She also pays £50 for delivery and £100 for the oven to be installed. She pays a further £75 for the disposal of the old oven.

Bella is able to claim a deduction for the cost of the replacement oven, and also for the cost of delivery, installation and disposal – a total deduction of £925.

Part exchange

The old item may be given in part-exchange for the new item, reducing the amount that the landlord pays for the new item. Here, the deduction is the amount that the landlord pays on top of the tradein value (assuming the replacement is equivalent to the old item).

For example, if a landlord trades in an old fridge for an equivalent new model costing £300 and receives £30 for the old fridge, the landlord would be able to deduct £270.

If the replacement is superior to the original item, the deduction is capped at the cost of a like-forlike replacement less the trade-in allowance.

Sale proceeds from the old item

The landlord may be able to sell the old item. Where this is the case, any proceeds are deducted from the cost of the new items in working out the amount of the relief.

For example, if a landlord buys a replacement washing machine for £400 and sells the old one for £50, assuming the replacement is a like-for-likereplacement, the landlord will be able to deduct £350 (i.e., the cost of the replacement less the proceeds from the sale of the old washing machine). If the replacement is superior to the original item, the deduction is capped at the cost of a like-forlike replacement less the sale proceeds.

Practical tip

When replacing domestic items in a residential or holiday let, remember to claim relief for the cost of a like-for-like replacement where a deduction is not otherwise available for the cost of the item.

When and how it is necessary to report a gain on the disposal of a residential property and pay the associated tax.

Not all residential property is equal when it comes to the tax treatment of capital gains.

Setting the scene

Where a property is sold or otherwise disposed of (e.g., given to a family member other than a spouse or civil partner) and a gain arises, there will be no capital gains tax (CGT) to pay if the property has been the owner’s only or main residence throughout the full period of ownership (or for all but the last nine months). If this is the case, the private residence exemption will shelter the gain from CGT.

However, for properties such as investment properties and second homes which have not been occupied throughout as a main home, there may well be CGT to pay if a gain arises on the disposal of the property.

The end of the favourable tax rules for furnished holiday lettings and the increase in tenants’ rights in the Renters Reform Bill, together with the fear that the freeze in the higher residential rate of CGT at 24% may be a limited time offer, may lead many landlords to the decision that it is time to exit the market. Those looking to sell second homes may also opt to do this sooner rather than later to ensure that any gain is taxed at 24%, in case the rate is increased.

Residential property gains have their own rules when it comes to CGT, with a limited window in which to report the gain to HMRC and pay the associated tax. Taxpayers who fail to comply with the rules will face interest and penalties, with ignorance of the rules offering no defence.

Reporting the gain

When a chargeable gain arises on the disposal of a residential property, that gain must be reported to HMRC within 60 days of the completion date. HMRC has a dedicated online service for doing this, and taxpayers will need to set up a ‘Capital Gains Tax on UK Property’ account to report their gain online. Guidance on how to do this can be found on the Gov.uk website at: www.gov.uk/taxsell-property.

To report the gain, the following information is required, and it is sensible to ensure that it is all to hand before starting the reporting process:

 • address and postcode of the property;

 • the date that the property was acquired;

 • the date of exchange of contracts on the sale of the property;

 • the completion date of the sale;

 • the amount paid for the property or, where relevant (e.g., if a gift from a connected person or if the property was inherited) its market value or probate value;

 • the sale proceeds (or, where relevant, the market value at the date of disposal);

 • the cost of any capital improvements;

 • the costs associated with buying the property, such as stamp duty land tax (or equivalent), legal fees, etc.);

 • the costs of selling the property (such as estate agents’ fees and legal fees); and

 • details of any available reliefs and exemptions (e.g., private residence relief for periods occupied as a main home).

Where the property in question is jointly owned, each co-owner should report their share of the gain.

Once set up, taxpayers can log into their Capital Gains Tax on UK Property account to view and, where necessary, amend previous returns.

Taxpayers who are unable to report a property gain online can do so using a paper form. However, the taxpayer will need to contact HMRC to request a copy of the form.

Reporting the gain online does not remove the need to complete the CGT pages of the self-assessment tax return. These still need to be completed to enable the taxpayer’s CGT position for the year to be finalised. Once the taxpayer has submitted their self-assessment return for the tax year, they will no longer be able to amend returns made through their Capital Gains Tax on UK property account.

If an investment property or second home is sold at a loss, the loss does not need to be reported to HMRC online within 60 days. However, it should be reported on the taxpayer’s self-assessment return to preserve the loss for set-off against future capital gains.

Working out the tax on the gain

The CGT on residential property gains must be paid within 60 days of the completion date. This will be the best estimate of the tax due at that time.

However, the amount paid at this time may not be the final figure. The taxpayer’s CGT position for the year is finalised after the end of the tax year when their self-assessment return is filed. There may be additional tax to pay after the year end (e.g., if the taxpayer expected to be a basic-rate taxpayer and was actually a higher-rate taxpayer or if they realised non-residential gains on which CGT is due by the usual date of 31 January after the end of the tax year).

Alternatively, the taxpayer may be due a refund if losses were realised later in the tax year after the sale of the residential property completed, or if tax was actually due at a lower rate than used when calculating the payment on account.

The gain on the property is computed in the usual way, taking into consideration the acquisition cost, any enhancement expenditure, the sale proceeds and the costs of buying and selling the property.

Any reliefs to which the taxpayer is entitled should also be taken into account. If the property had been the taxpayer’s main residence at some point, private residence relief may be due for the periods it was occupied as such, any qualifying periods of absence and the final nine months of ownership. Likewise, if the taxpayer shared property with a lodger, lettings relief may be in point.

Taxpayers are entitled to an annual exempt amount for CGT, which for 2024/25 is set at £3,000 and is to remain at this level for 2025/26. If this has not already been used, it can be taken into consideration in calculating the tax due on the chargeable residential property gain. Capital losses brought forward, and any losses realised earlier in the tax year, can also be taken into account in working out the CGT bill.

However, losses realised after the completion date cannot be taken into account, even if they are realised within the 60-day reporting and payment window before the tax is paid. Instead, these will be taken into account when finalising the taxpayer’s CGT position for the year once they have filed their self-assessment tax return.

The tax due on the gain is calculated at the CGT rates for residential property gains. This is 18% where income and gains do not exceed the basic rate band and 24% once the basic rate band has been used up. Despite speculation before the Autumn Budget on 30 October 2024 that these rates would increase, the Chancellor opted instead to raise standard CGT rates, leaving the residential rates unchanged. They are to remain at 18% and 24% for 2025/26.

The tax due on the residential property gain can be paid online through the online account using a debit or corporate credit card or by approving a payment through an online account. Payments can also be made by bank transfer or by cheque. The 14-character CGT payment reference should be quoted.

Any further tax due when the taxpayer’s CGT position for the year is finalised should be paid through the self-assessment system by 31 January after the end of the tax year. If the taxpayer is due a refund (e.g., as a result of losses realised after the completion of the residential property gain, this can be claimed once the position for the year has been finalised).

Practical tip

When selling an investment property or second home, remember to report any chargeable gain to HMRC within 60 days of the completion date and pay the CGT due on the gain in the same timeframe.

Some of the basics of trusts for law and tax purposes.

Trusts are formed when the legal ownership of an asset is separated from the beneficial ownership, i.e., a legal owner (the trustee) holds it ‘on trust’ for another person (the beneficiary) who benefits from it. The person who establishes the trust is the ‘settlor’.

These trusts are known as ‘express trusts’, i.e., those deliberately created by the settlor in the form of a deed outlining who the parties are and what assets are in the trust; such trusts can also be created by the settlor upon their death with their will being the constituent document.

Common types of trust

The most common trust is a ‘discretionary’ trust, whereby the trustees have total discretion as to what happens with the trust’s income and capital.

Another type is the interest in possession (IIP, or life tenant) trust, whereby usually a single beneficiary (the life tenant) is entitled to utilise the asset or receive the income for the rest of their lives; the capital remains with the trustees, but the life tenant has the right to use it. Upon the life tenant’s death, the trust is dissolved and the trust assets go into the absolute ownership of a ‘remainderman’.

How are they formed?

To create a trust, there are three ‘certainties’ (laid down in Knight v Knight (1840) 3 Beav 148 by Lord Langdale MR) required to settle an express trust:

 • certainty of intention, i.e., the intention to create a trust and not just make an absolute gift; it must be clear that the creation of a trust was intended – ideally using the words ‘in trust’ rather than precatory words such as the donor would ‘hope’ that the donee holds the asset for the benefit of someone else, or that they ‘have confidence’ that they would do so, etc.;

 • certainty of subject matter, i.e., it must be clear exactly which assets are being placed into trust; and

 • certainty of objects, i.e., precisely who the beneficiaries are. The trust’s deed must be able to clearly identify the relevant people and provide certainty that a given person is a beneficiary, ‘my children and future issue’ or something along those lines means that every potential beneficiary can be traced from that description, whereas ‘my old friends’ was too uncertain conceptually in Brown v Gould [1971] 2 All ER 1505. Discretionary trusts, having a class of beneficiaries, need to be particularly careful with this last criterion and the class of potential beneficiaries must also have some evidential and administrative certainty; settling a trust for the entire population of West Yorkshire is just unworkable (Re. Hays Settlement [1982] 1 WLR 202).

The settlor can create the lifetime (or inter vivos) trust by transferring the legal ownership from themselves to the trustee and beneficial ownership to the beneficiary, or they could simply declare themselves as trustee and pass the beneficial ownership to the beneficiaries. These trusts are usually created by a deed – indeed, transactions of beneficial ownership in land must be in writing; other assets can potentially be conveyed verbally or by physically handing them over. Trusts can also be created upon death via someone’s will – which doubles up as the trust’s constitution.

Tax basics

Trustees are subject to income tax – discretionary trusts at additional rate, IIPs at basic rate (though discretionary trust beneficiaries receive income with a refundable tax credit of 45% representing that tax paid). Trustees are also subject to capital gains tax at 24% with the benefit of half an annual exemption.

All trusts set up in a settlor’s lifetime are known as ‘relevant property’ trusts, which have their own inheritance tax (IHT) regime of charges every ten years and when assets leave the trust.

Practical tip

Trusts can be very useful for tax and non-tax purposes, and the concept is relatively simple; but there are some rules that need to be followed for their successful creation. If the settlor wants to create a trust, it must be made abundantly clear that they are doing so, with which assets, and benefitting which people.

Bad debts pose a significant challenge for every business. Staying on top of non-payments is essential for maintaining a healthy cash flow and ensuring the financial stability of a business, but what is the VAT situation if an invoice is not paid?

Credit note or bad debt relief?

The rules for claiming bad debt relief (BDR) on a VAT return and issuing credit notes to customers are very different. When faced with an unpaid invoice, the temptation may be to issue a credit note, as tax relief would be available immediately on the VAT return. In contrast, a BDR claim requires specific conditions to be met.

Credit note

A credit note is issued by a seller to a buyer when:

there has been an overcharge or billing error;

goods are returned; or

a discount has been applied after invoicing.

Issuing a credit note reduces the amount the customer owes and adjusts the VAT returns and accounting records for both parties. However, a credit note cannot be used for BDR. It should only be issued when the original invoice was either incorrect or modified due to a commercial agreement. Importantly, a credit note only has legal status when issued to a customer as they will need the document to support their input tax reduction if they are VAT registered.

Bad debt relief

A bad debt situation occurs when a business has issued an invoice expecting to be fully paid but for some reason the customer does not or has refused to pay.

If the supplier business is VAT registered, BDR can be claimed if the goods have been sent or services provided but no payment made.

To claim BDR, the following conditions must be met for each individual invoice:

The VAT on the supply must have already been accounted for and paid to HMRC.

The debt must be written off in the supplier's regular VAT accounts and transferred to a separate bad debt account.

The value of the supply must not exceed the usual selling price.

The debt should not have been paid, sold or factored through a valid legal assignment.

The debt must remain unpaid for at least six months after the later of the payment due date or the supply date. If an invoice does not specify a payment date, the invoice date is used.

If the debt is eventually paid, the supplier business will need to repay the VAT claimed under BDR on its next VAT return.

Is there another option?

The only other time that the original VAT charge can be amended is if a genuine reduction in price occurs after the supplier has already accounted for the output tax on the original supply in a VAT return. A 'Regulation 38' adjustment applies where:

a genuine price reduction occurs; and

the supplier issues a refund to the customer.

the supplier has 14 days to issue a credit note from the time the decrease occurs;

the supplier must account for the decrease in the VAT period in which it takes place;

a VAT-registered customer must reduce the amount of VAT it has claimed by the same amount; and

where a 'Regulation 38' adjustment is made -credit notes can be issued before refunds are made, but must be issued no later than 14 days after payment.

Practical point

There is no time restriction for a Regulation 38 adjustment, e.g. a credit note can still be issued for a five-year-old invoice if appropriate, and it can be adjusted on the next return. However, it will be too late for any potential BDR claim.