Helpsheets ... continued 46 from homepage

With relatively low interest rates on cash deposits, some companies are looking to invest their spare cash elsewhere, especially if investing in the company's own operations is not desired or feasible. Sometimes investing in another company can offer a better return on capital compared with reinvesting in one's own company. Companies also lend to each other not only for investment purposes but for tax efficiency.

There are circumstances in which lending funds one company to another can be tax efficient, allowing the removal of profit from one company and its injection into another, particularly in scenarios where losses have been incurred or where the small company tax rate band has not been fully utilised. Tax implications only arise when 'connected companies' lend to each other; however, if the loan relationship rules are satisfied, such lending can be conducted in a tax-efficient manner.

'Connected companies'

According to HMRC's Corporate Finance Manual at CFM 35120 indicates that two companies are considered 'connected' if:

'if, during the accounting period, one has 'control' of the other, or both are under the control of the same person. ‘The test is whether a person can “secure that the company’s affairs are conducted in accordance with his wishes”. A person (an individual or company) can do this by

holding most of the shares, or

holding most of the voting rights in the company (or another company, such as the ultimate parent), or

through any other powers, given through any document (such as the company’s Memorandum and Articles of Association).’

Connected companies are subject to special tax rules on loan relationships, which apply to all types of loans, whether cash is involved or not, and whether the company is the lender or borrower. These rules require that loans be treated as if they were made on normal commercial terms between unrelated parties. The rules also set out how any gains or losses from changes in loan values or related transactions are dealt with, if relevant.

Should interest be charged?

The transfer of the loan principal itself has no tax effect as tax consequences only arise if interest is charged and received; such interest being tax deductible when accrued, rather than when paid. Loans need not be from a lower profit company to another – it can be the other way round. Lending from a lower profit company to a higher profit-making company can reduce the higher company's corporation tax liability if interest is charged. Such interest will be tax deductible in the hands of the higher profit-making company.

However, care should be taken in the rate charged. A 20% rate will no doubt raise HMRC's interest; however, bank base rate plus about 3% should be more acceptable. The lending is deemed unsecured to a private company, therefore a risk uplift to the rate would seem to be appropriate. With the bank base rate currently at 4%, an inter-company rate of 7% should be reasonable.

Loan written off

Loans between connected companies  written off are usually treated as ’tax neutral’ for corporation tax purposes if they fall within the loan relationship rules. To do so, the loan must be a money debt and have arisen 'from a transaction for the lending of money'. Although trading debts do not arise from the lending of money 'bad' trading debts and property business debts come under these rules. When such loans are written off, the write-off is effectively disregarded for corporation tax purposes such that the lending company cannot claim tax relief but the borrower is not charged to tax on the amount written off.

Practical point

Loans made between family companies that are not ‘connected’ for loan relationship purposes may be deemed to have been granted due to the nature of the family relationship rather than for commercial purposes. If so, and the loan is written off, the borrower company will be taxed on the credit, and the lender company is denied relief under the ‘unallowable purpose’ rules.

When renting out a property it is usual to take a deposit from the tenant to cover the cost of any damage to the property by the tenant. A deposit of this nature may be referred to as a security deposit, a damage deposit or a rental deposit. The landlord may also ask for a holding deposit in return for taking the property off the market while the necessary paperwork is undertaken.

It is important than the landlord understands how this should be treated for tax purposes.

Tenancy deposit scheme

Where a landlord takes a deposit from a tenant to cover damages, the deposit must be placed in a tenancy deposit scheme (TDS) approved by the government. In England and Wales, the deposit must be registered with the Deposit Protection Service, MyDeposits or the Tenancy Deposit Scheme. Separate schemes apply in Scotland and Northern Ireland. The deposit that may be taken from a tenant is capped at five weeks’ rent where annual rent is less than £50,000 and at six weeks’ rent where annual rent is more than £50,000.

At the end of the tenancy, the landlord must give the tenant the deposit back within ten days of agreeing how much is to be returned. Where the tenant disagrees with the amount that the landlord wishes to retain, disputes can be resolved by the TDS used by the landlord as long as both parties agree.

Treatment of security deposits

In the event that some or all of the security deposit is retained by the landlord, the amount retained should be included as income of the property rental business. However, any costs incurred by the landlord can be deducted in working out the taxable profit. These may exceed the deposit recovered.

Holding deposits

A holding deposit may be taken by the landlord in return for taking the property off the market while the necessary paperwork is undertaken. Unlike a security deposit, a holding deposit does not need to be placed in a TDS.

The holding deposit cannot be more than one week’s rent.

If the agreement falls through, the landlord may retain some or all of the holding deposit to cover their costs. The deposit retained is included as income of the property rental business. However, corresponding costs, such as those incurred in drawing up the agreement or undertaking viewings, can be deducted as expenses.

If the deposit is returned to the tenant, it is not treated as income of the property business and as such is simply ignored for tax purposes. However, the landlord can deduct any associated costs.

If the holding deposit is retained by the landlord as a rental payment, it is included as rental income in calculating the landlord’s taxable profit.

If the holding deposit is retained as part of the security deposit, the rules as set out above in relation to security deposits apply.

The possible ways in which principal private residence relief claims might sometimes be incorrect.

For most individuals selling their main home, the expectation is that any capital gains will be largely or fully tax-exempt because of principal private residence (PPR) relief.

However, tax cases have demonstrated the potential for costly mistakes, with incorrect claims leading to substantial capital gains tax (CGT) bills.

To qualify for a PPR relief claim, two conditions need to be fulfilled:

 1. The property must not have been purchased solely for the purpose of making a profit.

 2. It must be the individual’s only or main residence throughout the period of ownership.

Periods of absence from the property may be permitted, depending on the circumstances.

Making a (trade) profit?

A common strategy for tax-free property portfolio sales is to nominate each property as a PPR in turn, prior to the sale. However, whilst HMRC may initially accept PPR relief claims for the first couple of sales, their ‘Connect’ system may flag these transactions when checking Land Registry records. This could lead to a challenge of the PPR relief claims on the basis that the reason for nominating the properties was to avoid paying tax, which may indicate a trading activity.

HMRC may also pursue taxpayers who frequently buy and sell properties within a relatively short period, arguing that those engaged in such activities are operating as a business and are therefore liable for tax and National Insurance contributions. Similar observations apply to property developers who purchase properties for development, move in after completion, and then resell them shortly afterwards for a profit.

What is ‘permanence’?

Although many tax cases have affirmed the need for a degree of permanence or continuity in residence, the quality of occupation and the expectations regarding residency are more critical factors than the length of time spent living there. Generally, a property should serve as the permanent residence for at least 12 months to strengthen a PPR relief claim, although claims have been successful for shorter periods in some cases.

Evidence is key – there needs to be “some evidence of permanence, some degree of continuity or expectation of continuity” for the claim to be valid even if, in the end, the claimant does not live in the property for as long as originally intended. HMRC will apply this standard at the outset of any HMRC enquiry challenging a PPR relief claim.

It is a matter of fact whether a property is the individual’s PPR or not, but to demonstrate the fact, suggestions include ensuring that utility bills are in the owner’s name at the property address. Other documentary evidence could include receipts for home insurance, telephone bills and DVLA records showing the address as the main residence during the PPR relief claim period. Information considered in evidence by HMRC in the past has included fuel bills indicating that a property was unoccupied for part of a winter when the taxpayer claimed it was being used as their PPR.

Excessive PPR relief claims may arise if the property is not occupied as the individual’s main or only residence throughout their ownership period. While there is no minimum occupancy requirement for a PPR relief claim, many fail because the property needs to be occupied both before and after any period of absence (unless the absence is due to work away from home, in which case returning is not required). If the reason for the absence is work abroad, then any period of absence, no matter how long, is allowable.

Absences can be cumulative so long as one or more of certain conditions apply.

 • Absences of up to three years (or two or more periods of absence which together do not exceed three years) may be treated as a period of residence.

 • Absences of up to four years can be allowed if the distance from the place of work prevents residence at home or the employer requires the taxpayer to work away from home.

Unfortunately, it is often the case that for unavoidable reasons, the individual is unable to move back into the property after an absence. In such cases, even if the previous conditions have been met, the absence will not count, resulting in a potentially substantial portion of a gain being taxable. It does not matter whether the property remains empty or is rented during the absence.

Some relief is available, as the first year and the last nine months of ownership are always treated as periods of occupation, regardless of whether actual occupation occurs. This exemption can be valuable in situations where it takes a long time to sell the property and find alternative accommodation.

Getting ‘flipping’ right An often overlooked tax relief opportunity is the ability to ‘flip’ ownership, which broadly allows PPR relief to be retained even when the owner is not residing in the property. The tax law permits the owner of more than one property to elect which is their main residence. The owner must have lived in the property at some point, but there is no specific duration for these purposes.

Having made the initial election, it can then be varied (flipped) as many times as required by giving a further notice to HMRC. There is no prescribed form or wording for the election, but the rules state that it must be made within two years of acquiring a second (or subsequent) residence unless there is a delay in occupation, in which case the date of moving into the residence is the trigger event.

If no election is made, HMRC will make its own determination on sale. Should the two-year time limit be missed altogether, there needs to be a ‘trigger’ event which will change what is termed the ‘combination of residences’ and reset the election date.

Examples of ‘events’ include:

 • getting married;

 • renting out one of the properties for a short period; when that let period ends, the owner can take up residence as the ‘combination of residences’ will have changed; or

 • selling half the house to a joint owner, such that the seller is no longer in full ownership but is still in residence.

Every owner of two or more properties should elect which residence is to be treated as their PPR. An election should ideally be made as soon as possible following the purchase of the second property. Then, having made the election, the situation can be reviewed at any time up to the two-year anniversary date, thereby keeping all options open. Having made an initial election, there is no statutory limit to the number of times that the address of the property declared on the election can be changed.

Impact of renting a room

Letting a room or rooms in a main residence can be beneficial from an income tax perspective under the rent-a-room relief rules. However, the letting can have CGT implications as letting part of the property removes that part of the property from the cover of PPR relief while it is so let. This may or may not be problematic, depending on whether lettings relief is available to shelter any gain attributable to the let period and, where the gain is not fully sheltered, whether the CGT annual exempt amount is sufficient to cover any chargeable gain remaining.

Lettings relief shelters any gain not covered by PPR relief, such that the gain is only chargeable to CGT to the extent that it exceeds the lower of:

 • the amount of the gain sheltered by PPR relief; and

 • £40,000.

Practical tip

Spouses and civil partners can take advantage of the no gain, no loss provisions and transfer the property into joint names before any property sale where this is beneficial (e.g., to benefit from a second CGT annual exempt amount).

Having tenants who refuse to leave despite being given a valid Section 21 or Section 8 notice is a nightmare for a landlord and places them in the unwanted position of having to evict the tenants. To do this, the landlord will need to incur costs upfront, even if they are ultimately able to recover these from the tenants. It is important that the landlord follows the correct procedures for evicting tenants to avoid being guilty of harassment.

Costs

The landlord will need to apply to the court for a possession order. If they are not seeking rent, they can apply for an accelerated possession order which costs £404. This is usually a quicker route to recovering the property as it does not need a court hearing. The landlord may also incur associated legal or professional costs.

If the landlord is also seeking recovery of unpaid rent, they will need to take the standard possession order route. The claim can be made online and also costs £404. Again, the landlord may also incur legal costs.

The tenants have two weeks to respond after which the landlord can request the possession order. The hope is that the tenants will move out by the date stated on the possession order. If they do not do so, the landlord will need to apply for a warrant possession, which costs £148 plus any associated legal fees.

Once the warrant has been issued, the landlord will be sent notice EX96 which will state the date of the eviction. It is important that the landlord returns this form to confirm the eviction. The landlord may opt to transfer the warrant to the High Court to secure a writ of possession. This will enable a High Court enforcement officer to evict the tenants, which may result in a faster possession. This costs £123 (plus any associated legal fees), but may be worthwhile.

The landlord should keep records of all costs incurred.

Tax relief

The way in which relief is given depends on whether the costs are capital or revenue – confusingly, legal and professional costs can be either, as they follow the nature of the item to which they relate. Consequently, the way in which tax relief is given depends on why the landlord is evicting the tenant.

If a landlord is evicting a tenant for breach of the tenancy agreement and is to re-let the property once the tenant has left, the cost of evicting the tenant is revenue expenditure which can be deducted in calculating the rental profit to the extent that it is not recovered from the tenant.

However, if the landlord has issued a Section 21 notice to reclaim the property to sell, the cost of evicting the tenant is capital expenditure and is deducted as a cost of sale when working out the capital gain or loss on disposal.

If the landlord is able to recover costs under an insurance policy, the insurance proceeds must be taken into account as well as the costs.

In the event that the tenants have unpaid rent, which is recovered, either from the tenants or under an insurance policy, the recovered rent or insurance proceeds must be taken into account in calculating the taxable rental profit.

There are many possible situations in which a person may make a loan to a family member, for example, a parent may lend money to an adult child to provide them with a deposit for a property. Where the parent has a personal or family company and there are unextracted profits in the company, it may seem sensible for the company to lend the money rather than for the parent to do so personally. However, this may have tax consequences which can be easily overlooked.

Loans to participators

Where the company is a close company (broadly one under the control of five or fewer people) as most personal and family companies are, the loans to participators rules need to be considered. Under these rules, a tax charge will arise on the company on any amount of the loan which remains outstanding nine months and one day after the end of the accounting period in which the loan was taken out.

The charge (known as the ‘section 455 charge’) is payable at the rate of 33.75% of the outstanding loan balance. This is the same rate as the upper dividend tax rate.

Associates

The reach of the loans to participators rules is wide. The recipient of the loan does not need to be a participator (broadly a shareholder) for the charge to apply – it also applies where the loan is made to an associate of the participator. This includes a relative of the participator, which for these purposes means a spouse or civil partner, a parent, grandparent or remoter forebear a child, grandchild or remoter issues or a sibling. It also applies where a loan is made to a partner of a participator.

Example

Louise is the director and sole shareholder of her personal company, L Ltd. The company makes a loan of £100,000 to Louise’s daughter Sophie to help her get on the property ladder. The loan is interest free. It is made on 1 January 2025.

The company prepares accounts to 31 March each year. If the loan remains outstanding on 1 January 2026 (as is the expectation), despite the fact that Sophie is not a participator in L Ltd, the company will need to pay section 455 tax of £33,750 on 1 January 2026.

The tax will become repayable nine months and one day after the end of the accounting period in which the loan is repaid, so in that way it is a temporary tax. However, it may be a significant cost to the company in the interim.

Benefit in kind charge

If the loan balance exceeds £10,000 at any point in the tax year, a benefit in kind charge will also arise as the loan is made to a member of the director’s family or household. The charge will be based on the difference between the interest payable at the official rate and that actually paid, if any. The company will also pay Class 1A National Insurance on the taxable amount.

Planning issues

While it is possible to make a loan from a personal or family company of up to £10,000 for up to 21 months tax-free, tax consequences will arise where the loan is for a higher amount and/or is made for a longer period.

This does not mean it will never be beneficial to make a loan to a family member – it is a question of weighing up the cost of paying the section 455 tax and tying up the associated funds until after the loan has been repaid against the interest that the family member may pay if they were to borrow the money elsewhere. The section 455 tax will be repaid if the loan is repaid, while any interest paid on a third-party loan will not. The cost of the benefit in kind charge should also be factored in

The Construction Industry Scheme (CIS) is a tax deduction scheme requiring contractors to deduct tax from payments made to subcontractors working in the construction industry. Contractors must register for the scheme and verify the tax status of subcontractors that they engage. They are also required to submit monthly returns online to HMRC detailing all payments made to subcontractors in the previous month.

Contractors must deduct a percentage of tax from these payments and remit the withheld tax to HMRC by the 22ndh of the month following online payments (19th of the month for postal payments). The deduction rate is 20% for registered subcontractors and 30% for unregistered. Many subcontractors, however, are unaware that they can apply to HMRC to obtain gross payment status, which allows for no tax deductions.

Gross payment status

When subcontractors initially register for CIS, they are automatically assigned net payment status. Gross payment status can be obtained only after successfully completing three tests:

The business test

The business must undertake construction work (or provide labour for construction work) and have a business bank account. HMRC will check the application to ensure that these tests are met and will verify the bank account details provided.

Turnover test

For sole traders, the annual turnover (excluding VAT and materials) must exceed £30,000. In the case of partnerships, each individual partner must have a turnover of £30,000. If the partnership includes corporate members, the turnover limit of £30,000 is multiplied by the number of relevant persons associated with each corporate partner. For companies, the turnover limit is also multiplied by the number of relevant persons, which includes directors and, for close companies (those with five or fewer directors or beneficial owners), any beneficial owners of shares. An individual is counted only once if they hold both director and beneficial owner status.

Compliance test

Failing the compliance test is a common reason for rejection by HMRC. Importantly, the requirement for timely compliance is part of the CIS legislation and is applied strictly.

HMRC's Construction Industry Scheme Reform Manual at CISR46060 states that any of the following will result in a failed compliance test:

“Four or more late submissions of the contractor’s monthly return CIS300, or VAT return within the preceding 12 months where the returns were less than 28 days late

Any submission of the contractor’s monthly return CIS300, VAT or SA return within the preceding 12 months made later than 28 days after the due date

A contractor’s monthly return already due but remaining outstanding at the date of application

Any SA return due in the qualifying period but outstanding at the date of application

Any Corporation Tax return (CT600) due in the qualifying period but outstanding at the date of application

Any VAT return due in the qualifying period but outstanding at the date of application”.

Late payments will also result in automatic refusal, for example, if any PAYE, VAT or CIS remittance of £100 or more within the preceding 12 months was paid more than 14 days after the due date. Similarly, refusal will be actioned if more than three remittances of £100 or more are paid late but within 14 days of the due date in the preceding 12 months. Importantly, any late NI contributions will result in an automatic refusal.

Annual review

HMRC will review any gross payment status annually and, should the subcontractor fail any of the tests, gross status will be withdrawn. If the subcontractor is a company, HMRC will review the company itself, rather than individual directors or shareholders.

Practical point

Whether there is any benefit in gross status depends on whether the subcontractor is disciplined enough to put money aside, ensuring that tax payments are made by the correct dates. The benefit of holding gross status is mainly cash flow, but also that such status demonstrates that the business is compliant, possibly giving a competitive edge when bidding for contracts.

An umbrella company is a business which may be used by a recruitment agency to pay temporary workers. However, many umbrella companies are not tax compliant and umbrella company fraud is widespread. HMRC are taking a number of steps to crack down on fraud by umbrella companies, including educating workers to spot signs of umbrella company fraud. To this end, they have recently published Spotlight 71 which highlights warning signs that an umbrella company may be involved in tax avoidance. Workers are asked to be vigilant and to check their employment contract, pay slips and salary payments for signs that something may be amiss.

Employment contract warning signs

Workers are advised to check their employment contract carefully, including the small print and any disclaimers. Factors which may indicate that the umbrella company could be involved in tax avoidance include:

• an unexpected move to a new umbrella company which happens at very short notice and with very little paperwork;
• signing a contract with one company but being paid by another company which may have a very similar name or be based overseas;
• being asked to sign a new employment contract or a different agreement, such as an annuity agreement in addition to the employment contract.

Signing more than one employment contract is not standard practice and may indicate that the worker is being moved to another scheme.

Pay slip warning signs

A worker has a legal right to a pay slip and it is prudent to check that their pay slip is as it should be. The following are warning signs that the umbrella company may not be tax compliant:

the PAYE reference, employer name or way in which the worker is being paid changes unexpectedly;

• the pay shown on the pay slip is significantly less than the worker expected to receive or had received previously;
• the amount of net pay shown on the pay slip is less than the amount paid into the worker’s bank account;
• the correct amount of tax and National Insurance has not been deducted from the worker’s gross pay;
• the worker suddenly receives a hard copy pay slip rather than one online;
• the worker is moved to a new payroll system or is unable to access the online portal of the previous umbrella company to view their pay slips.

Salary payment warning signs

The worker should also check their bank statements to make sure what they are paid ties up with the net pay amount on their pay slip. They should also check that their pay is received as a single payment rather than comprising a number of payments, some of which may not have been taxed.

A move to a new payroll system

An unexpected move to a new payroll system is a red flag. The worker may be told that nothing will change and that the move is because the current payroll has too many workers. Workers should not simply accept this – payrolls are not subject to limits.

What to do if fraud is suspected

Workers who have concerns should raise these with their umbrella company, which might be able to allay their fears. However, if they are involved in tax avoidance, the company may be unwilling to answer questions.

If a worker suspects that their umbrella company is not tax compliant, they should move to a new umbrella company as soon as possible, checking that the new company seems compliant.

Workers can also report non-compliant umbrella companies to HMRC. This can be done anonymously.

Businesses must register for VAT when their turnover exceeds the registration threshold (currently £90,000). This must be done if, at the end of any month, the taxable supplies in the previous 12 months or less exceed the registration threshold or if the business expects that in the next 30 days alone their turnover will exceed the registration threshold.

Businesses whose turnover does not reach the threshold do not need to register; however, they may choose to do so voluntarily. This can be advantageous, for example, if they make zero-rated supplies but buy goods or services which are liable for VAT at the standard or reduced rate as it will enable them to recover the VAT suffered.

Start date

When a business registers for VAT voluntarily, they can choose the date from which their VAT registration takes effect. It is important that this date is chosen carefully as once the VAT registration is effective, the business can recover VAT incurred from that date but must also charge VAT on taxable supplies that it makes from that date. It is not possible to recover VAT incurred on purchases prior to the date of registration, so if the business is planning a large purchase on which they hope to recover the VAT, they should ensure that their VAT registration is effective before making the purchase.

A business can apply for their voluntary registration to be backdated by up to four years from the date that they register for VAT. Where the registration is backdated, the business will be able to recover VAT charged on taxable supplies from that date. On the flip side, the business must also account for VAT at the correct rate on all taxable supplies made on or after that date.

Amending the registration date

It is important that businesses voluntarily registering for VAT consider carefully when they want their registration to take effect as there is no automatic right to change it and there is no right of appeal if HMRC deny a request to amend the effective date of registration. Where a mistake is made in choosing the effective date of registration and this affects the pre-registration cost calculations of what the business can recover and what the business must account for, HMRC will not normally allow the registration date to be changed.

A Simple Assessment is used for taxpayers with very straightforward tax affairs. A taxpayer may receive a Simple Assessment letter from HMRC if they owe income tax that cannot be taken out of their income automatically, they owe HMRC more than £3,000 or they have tax to pay on their state pension. A person may also receive a Simple Assessment letter if they have tax to pay on their bank or building society interest.

A Simple Assessment letter will be sent by post and, where the taxpayer has a personal tax account, to their personal tax account. The letter will show the person’s taxable income, such as that from employment income, a state pension or investments, any income tax that they have already paid (for example, under PAYE) and the balance that they owe.

If you receive a Simple Assessment letter, it is important that you check that the figures shown on it are correct. For example, you can check that the figure for your employment income matches that shown on your P60. If you do not agree with the figures shown or the calculation, you should contact HMRC within 60 days of the date on the letter.

If you receive a Simple Assessment but you complete a Self Assessment tax return, you should contact HMRC (on 0300 200 3300) within 60 days of the date of the letter to get the Simple Assessment withdrawn.

Paying the bill

The deadline for paying a Simple Assessment bill depends on the date on which the letter is received. If a Simple Assessment letter for 2024/25 is received before 31 October 2025, the tax owing must be paid by 31 January 2026. However, if the letter is not received until after 31 October 2025, the tax must be paid within three months of the date on the letter.

The tax due can be paid online, by bank transfer or by cheque.

Help to pay

Taxpayers who will struggle to pay their Simple Assessment bill by the due date can now spread the cost and pay in instalments by setting up a Time to Pay arrangement. A taxpayer can set up a Simple Assessment payment plan online if they owe between £32 and £50,000 and do not have any other payment plans or debts with HMRC.

Taxpayers within Simple Assessment who want to pay in instalments but are not able to set up a plan online will need to contact them to see if they can agree an instalment plan with them.

Where an instalment plan is agreed, interest is charged on tax paid after the due date, but there are no late payment penalties.

The rate of SDLT payable on the purchase of a property depends on whether it is a residential property or not, and if so, whether the supplement applies. As SDLT payable on residential properties can be significantly higher than on non-residential properties, it can be tempting to claim that a property is not a residential property because it is not habitable. However, following the decision of the Court of Appeal in Amarjeet and Tajinder Mudan v HMRC [2025] EWCA Civ 799, HMRC issued a press release warning agents against making refund claims on this basis as most will fail. The case highlights the need to understand when a property counts as a residential property for SDLT purposes.

The decision

In Amarjeet and Tajinder Mudan v HMRC [2025] EWCA Civ 799, the claimants paid SDLT initially at the residential rates but their tax agent submitted a refund claim on their behalf as the property was in a poor state of repair and, as such, the agent advised that it would not count as a residential property. The point at issue was the definition of a residential property for SDLT purposes and whether the requirement that, for a property to be a residential property meant that it must be ‘suitable for use as a dwelling’ meant that the purchaser should be able to move in straight away.

The Court of Appeal rejected the claimant’s appeal, agreeing with the findings of the Upper Tribunal, finding that the fact that, while the property needed some repairs, this did not prevent it from being a residential property. Consequently, SDLT was due at the residential rates.

More specifically, the Court of Appeal upheld the findings of the Upper Tribunal that:

being suitable for use as a dwelling does not mean that the property must be ready for immediate occupation;

it is important to assess the extent to which the property has the fundamental characteristics of a dwelling and whether it is structurally sound;

if the property has previously been used as a dwelling, this will be relevant in determining whether it is suitable for use as a dwelling; and

consideration of whether the defects result in the property no longer having the characteristics of a dwelling is key.

Uninhabitable dwellings

HMRC warn that only a small minority of properties will have deteriorated or been damaged to such an extent that they no longer comprise a dwelling and it will be a question of fact as to whether this is the case. HMRC pursue refund claims made on the basis that a property is uninhabitable and have a high rate of success, and anyone thinking of making such a claim should proceed with caution.

It should be noted that even significant renovations or repairs, such as the temporary removal of bathrooms or kitchens, substantial repairs to walls, doors, windows or roofs, damp proofing, rectifying flood damage or structural repairs, rewiring or replacing a boiler or pipework will not prevent a building from being ‘suitable for use as a dwelling’. Consequently, SDLT remains payable at the residential rates.

The importance of ‘period of ownership’ and ‘occupation’ in relation to a capital gains tax principal private residence relief claim.

Principal private residence (PPR) relief is one of the most important and familiar of reliefs against a capital gains tax (CGT) charge on the sale of a residence.

However, as is often the case with tax matters, this relief is not straightforward and comes with a set of conditions.

Lacking definitions

The relevant section of the Taxation of Chargeable Gains Act (TCGA) 1992 is s 222(1)(a), where PPR relief exempts a capital gain arising on a disposal of, or of an interest in:

‘(a) a dwelling house or part of a dwelling house which is, or has at any time in his period of ownership, been his only or main residence; or

(b) land which he has for his own occupation and enjoyment with that residence as its garden or grounds up to the permitted area.’

It is easy to overlook the phrase ‘period of ownership’ and focus instead on ‘at any time’ and ‘only or main residence,’ leading to the assumption that PPR relief automatically applies – but when do ‘ownership’ and ‘occupation’ begin?

Notably, the legislation refrains from providing definitions; therefore, we must refer to HMRC guidance and tax case law for clarity.

‘Period of ownership’

Generally speaking, the ‘period of ownership’ refers to the time during which the individual legally owns the property, starting from the date the property was initially acquired (usually the date of completion of the contract or 31 March 1982, if later), ending at the date of disposal.

The Upper Tribunal case HMRC v Lee [2023] UKUT 242 (TCC) illustrates this point. The case centred upon HMRC’s argument that a dwelling house cannot be owned separately from the ground upon which it stands, meaning that the period of ownership must include the entire duration of ownership of the land.

The facts in Lee were that the taxpayers had bought a property with land, demolished the house and spent two and a half years building a new one. They moved in and lived there for just over a year before selling, claiming full PPR relief on the gain made. The taxpayers argued that full PPR relief was available because the expression ‘period of ownership’ referred to the time they owned the new house. The critical period for them was the 15 months between the completion of the new house and the date of sale. Therefore, under the PPR relief rules at the time, this period would qualify for the final exemption of 18 months (this statutory period was subsequently reduced to nine months).

HMRC argued that the taxpayers had effectively owned the property for 43 months, from the date of acquisition of the land to the date of sale of the house, calculating that PRR would be available for 18/43rds of the gain due to the 18-month final period exemption.

The tribunal disagreed with HMRC’s view, upholding the First-tier Tribunal’s decision that the section of TCGA 1992 referred to a ‘dwelling house’ and therefore the start date for PPR relief was the date that the construction work on the property was completed. Although the house existed for a quarter of the time the land had been owned, the ‘period of ownership’ test related to the house only.

Planning opportunities

This ruling seemingly presents a valuable tax planning opportunity. It implies that a taxpayer could strategically purchase a plot of land with the intention of obtaining planning permission to build a larger house, or they could opt to acquire a smaller residence with the plan of demolishing and constructing a more substantial dwelling. Although obtaining planning permission can take years, once granted, the value of the land or property would undoubtedly increase. This case indicates that even if land remains vacant for an extended period prior to the construction of a house, once it becomes occupied as the PPR, the seller may be eligible for full PPR relief, even if the structure was present for a short period before the sale.

Another planning opportunity could arise where an owner lives in their main residence while constructing a new property within the garden. Any gain on the sale of the original house would qualify for full PPR relief as the main residence, and any gain on the future sale of the new property could also be fully exempted if it was occupied for the full period of ownership (starting on the contract completion date or date of occupation, not when the original land was acquired).

Furthermore, the Court of Appeal has confirmed that the date of acquisition of an off-plan property for PPR relief purposes is the date of completion and not at exchange of contracts (Higgins v HMRC [2019] EWCA Civ 1860).

‘Occupation’

To qualify for PPR relief, the owner must have occupied the property as their main home during the period owned. ‘Occupation’ refers to actual physical residence (i.e., the period during which the owner genuinely lived in the property as their main home). Those periods of occupation will be covered automatically under a PPR relief claim. However, there are some periods when actual presence in the residence is not possible but which can still qualify if certain conditions are met (e.g., working away or a delay in moving in due to refurbishment).

Additionally, the period of non-occupation between buying the property and moving in can also be treated as a period of occupation, limited to a 24-month period on the condition that no other person uses the property as their residence during that time. Problems can arise when there is a delay in taking up residence or when the taxpayer already owns the land on which a house is to be built or buys a plot specifically to do so. A typical situation can arise when properties are being developed, not least because sometimes the development takes longer than 24 months through no fault of the owner. Therefore, the date of ‘occupation’ needs to be considered carefully.

The case White & Anor v HMRC [2019] UKFTT 659 (TC) centred around the 24-month rule (as an extra-statutory concession), highlighting the difficulty in determining when ownership starts and, therefore, from when the clock starts ticking. In that case, HMRC considered the date of acquisition of a property acquired in stages commenced from the time of entering into an unconditional contract for the first part of the property acquired.

The taxpayers bought four adjacent properties to convert into one residence. The first property was purchased in June 2001 and the final one in April 2002. There was a dispute around the date of taking up residence – somewhere between September and November 2003. On the eventual sale, HMRC challenged the PPR relief claim, going for the date of exchange of contracts of the first property as the start date. Depending on when occupation was held to begin, the delay was 27 or 29 months. This meant the existing concession for delayed occupation could not apply and more than two years of the ownership period was chargeable.

The importance of records

HMRC is known to look carefully at developments for residential property undertaken by builders who then claim PPR on sale.

A typical example is Ives v HMRC (2023) UKFTT 968 (TC), where in a period of five years, the taxpayer (a plasterer) bought and sold three properties at a substantial gain following work undertaken to each property. HMRC argued he was trading as a property developer, but the First-tier Tribunal disagreed, allowing a PPR relief claim to succeed. Reading the judgement, it is clear the courts require a great deal of background information when making their decisions. In this case, the court looked at whether contents insurance had been taken out in each case (it had not), although it was confirmed that furniture had been moved. Witness statements were presented from 20 family and friends asserting that they visited the properties for parties (which would not have been possible in a non-habitable property), water and electric bills were produced, evidence taken from estate agents, pictures printed from Zoom, whether addresses had been changed for such items as a driving licence, car insurance, the doctor and milkman.

Ultimately, the court determined that ‘on the balance of probabilities’ the taxpayer intended each property to be his main residence, despite relatively short-term occupancy due to changing family circumstances.

Practical tip

Mr Ives could be seen as fortunate in winning his case, possibly because HMRC’s presentation of the case had flaws. However, the case does indicate HMRC’s area of interest and the importance of keeping documents to support any PPR relief claim.

Overview

• Many possible changes were the subject of speculation leading up to the Budget: this list includes things that have been ruled out, as well as changes that the Chancellor announced
• These key points include measures that were announced previously but are about to come into force
• Measures which will not take effect until future dates are listed separately below

​​​​​​​​​​​​Implemented immediately

• Capital Gains Tax rates for disposals on or after 30 October 2024 rise from 10% to 18% (basic rate taxpayers) and 20% to 24% (higher rate taxpayers); the higher rate for residential property remains 24%
• Lifetime limit for gains qualifying for Investors’ Relief is reduced from £10 million to £1 million for disposals on or after 30 October 2024
• Stamp Duty Land Tax surcharge for purchase of additional dwellings increased from 3% to 5% for purchases from 31 October 2024
• Rules tightened for close company loans to participators, transfers of UK pension funds abroad, Employee Ownership Trusts, Employment Benefit Trusts and liquidation of Limited Liability Partnerships to close loopholes from 30 October 2024

From January 2025

• Confirmation that VAT will apply to private school fees from 1 January 2025

From April 2025

• Increase in rate of Employer National Insurance Contributions (ERNIC) from 13.8% to 15%, together with reduction of Secondary Threshold from £9,100 to £5,000
• Increase in Employment Allowance for small businesses’ ERNIC from £5,000 to £10,500 for 2025/26
• Certain ‘double cab pickup vans’ to be treated as cars for some tax purposes
• Extension until March 2026 of the 100% first year allowance for qualifying expenditure on zero-emission cars and charging points for electric vehicles
• Abolition of the remittance basis of taxation for foreign domiciled individuals, to be replaced by a ‘residence-based scheme’
• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 10% to 14%
• CGT rate on ‘carried interest’ increased to 32%
• IHT Agricultural Property Relief to be extended to land managed under an environmental agreement with government or other approved bodies
• 40% business rates relief for retail, hospitality and leisure businesses for 2025-26 on values up to £110,000
• Charitable business rates relief no longer available for private schools
• Fuel duty remains frozen, and the temporary 5p cut announced in March 2024 will be extended to 22 March 2026
• Rate of interest on late paid tax will increase by 1.5 percentage points
• Security for certain tax reclaims increased by introduction of a requirement for a digital signature
• Above inflation increases in National Living Wage and State pension
• As previously announced, the advantageous tax treatment of Furnished Holiday Lettings no longer applies in 2025/26

From April 2026

• CGT rate on disposals qualifying for Business Asset Disposal Relief increased from 14% to 18%
• ‘Carried interest’ moved to the income tax regime, with a discount for certain qualifying disposals
• IHT Agricultural Property Relief and Business Property Relief at 100% will only apply to the first £1 million of combined value; above that limit, the maximum relief will be 50%
• IHT Business Property Relief restricted to 50% for all ‘unlisted’ shares which are quoted on recognised stock exchanges such as the Alternative Investment Market
• Tightening of rules on charitable tax reliefs and closure of an avoidance scheme involving company cars from 6 April 2026
• Confirmation of the introduction of Making Tax Digital for Income Tax Self-Assessment from April 2026

No change, or later

• Unused pension funds and death benefits payable from a pension will be included in a person’s death estate for IHT purposes from 6 April 2027
• No changes to the ability to draw tax-free lump sums from pension funds, or reintroduction of a lifetime allowance
• The freezing of personal income tax allowances and rate bands will end with 2027/28: inflationary increases will be reintroduced for 2028/29
• Corporation tax rates appear to be fixed for the duration of the Parliament
• Inheritance tax nil rate bands will be frozen at their present levels until April 2030 (extended by two years from the previously announced date); no change to the availability of the additional Residence Nil Rate Band
• ISA and Junior ISA investment limits fixed at their current levels until April 2030
• Company car tax rates announced for 2028-29 and 2029-30, to provide long-term certainty; the incentives for purchasing electric vehicles will be maintained
• Previous Government’s proposal to base High Income Child Benefit Charge on combined household income will not be taken forward – HICBC still based only on the income of the higher earner of a couple

The liability for self-employed earners to pay Class 2 National Insurance contributions was abolished with effect from 6 April 2024. Now Class 2 National Insurance is a voluntary charge which self-employed earners with profits below the small profits threshold can choose to pay to secure a qualifying year for state pension and benefit purposes. Where a self-employed earner has profits in excess of the small profits threshold, they receive a National Insurance credit if their profits are between the small profits threshold and the lower profits threshold. If their profits exceed the lower profits limit, they will pay Class 4 contributions.

For 2024/25, Class 2 contributions are only payable where a self-employed earner has profits below the small profits threshold (which for 2024/25 is £6,725) and they have opted to pay Class 2 voluntarily. For 2024/25, voluntary Class 2 contributions are payable at the rate of £3.45 per week; an annual liability of £179.40.

The problem

Some self-employed taxpayers have been charged Class 2 National Insurance contributions for 2024/25 in error. The nature of the error depends on their particular circumstances. Some self-employed earners with profits in excess of the lower profits limit (set at £12,570 for 2024/25) have had a Class 2 National Insurance charge of £358.80 added to their account. This is twice the voluntary Class 2 charge for 2024/25. Self-employed earners with profits in excess of £12,570 are liable to pay Class 4 National Insurance on their profits only.

In some cases, the amount added in error is less than £358.80.

Resolving the issue

HMRC have stated that they have taken action to correct the error where the information that they hold has enabled them to do so. Some self-employed taxpayers have also reported that their Self Assessment calculation (SA302) has been amended to revert to the correct liability initially reported on their 2024/25 Self Assessment tax return.

However, incorrect Class 2 National Insurance letters will continue to be sent out until HMRC have resolved the IT issue in September. Once the problem has been resolved, HMRC will correct the remaining accounts showing a Class 2 National Insurance charge in error. Those affected will be notified when this has been done.

Where a payment has already been made in respect of the incorrect Class 2 National Insurance charge, it will either be refunded or a credit will be added to the taxpayer’s Self Assessment account.

Taxpayers have until 31 January 2026 to submit their 2024/25 Self Assessment tax return. Self-employed taxpayers who have yet to submit their return may wish to wait until this issue is resolved before doing so. Where the return has already been submitted, check the calculation and if it is wrong, make sure HMRC correct it.

A question often asked is: “Can I give all my assets to my children and avoid inheritance tax (IHT)?”.

The short answer is yes, but to avoid the tax, you need to live seven years from the gift and cannot benefit from the asset after the gift. If you continue to ‘enjoy’ the gifted assets, this is treated as a gift with reservation of benefit (GROB) and remains in your estate for IHT purposes.

Family home

Due to the GROB anti-avoidance rules, it is therefore not possible to simply transfer your home to your children and continue to live there.

Nor could you give a rental property to your children but continue to receive the rental income.

In either scenario, the property remains in your IHT estate.

All is not lost

There are, however, some relaxations to these rules relating to property, which can be useful if structured correctly:

(a) Paying rent - If you pay full market rent for the use of the property after you have given it to your children, this takes it outside of the GROB rules. Note that you will need to continually monitor the level of rent to make sure it is at a market rate, and your children will need to pay tax on their rental income.

If you stop paying the rent, then the house immediately becomes a GROB and is back in your estate, so you need to be prepared to continue paying rent until you die or move out of the house.

(b) Joint Occupation - The GROB rules do not apply if you give away a share of a property and occupy it jointly with the donee. So, you could give a share of the house to your child and cohabit with them. This is not a GROB, and after seven years, the value of the gift is outside of your estate.

However, you need to make sure you share the running costs of the house between you, proportionate to the share gifted. Again, the child would need to continue to live with you until your death to avoid it subsequently becoming a GROB.

(c) No Occupation - A further exemption exists for a gift of a share of a property which you do not occupy.

This could be useful if you wanted to gift a former home or a rental property to your children and you do not want or need to live in it in the future.

Have your cake and eat it too?

The final exemption (where you do not live in the property) has no restriction on receiving the ongoing rent. So, you could transfer (say) 50% of a rental property to your children but agree with them that you would continue to receive (say) 85% of the rent.

As this is a gift of a share of the property and you do not occupy the property after the gift, there is no GROB even though you receive more than your 50% share of the rent. You will, of course, need to pay income tax on the rent you receive (i.e., the 85%), with your children being taxable on the rent they receive.

Practical tip

If you have a holiday home or rental property and rely on the income to fund your expenditure, consider transferring part of the property to your children and retaining the bulk of the income. Assuming you survive seven years, you can get a substantial amount of value out of your estate without losing the benefit of the rental income. Remember that you may have to pay capital gains tax on the gift if the property has appreciated in value, and if there is a mortgage on the property you will have to deal with the bank and potentially stamp duty land tax (or equivalent taxes in Scotland or Wales, if applicable) on the transfer too.

There are various ways in which profits can be extracted from a personal or family company. A popular and tax-efficient extraction strategy is to pay a small salary and to extract further profits as dividends as long as the company has sufficient retained profits.

One of the advantages of paying a salary is to secure a qualifying year for state pension and benefit purposes. A person needs 35 qualifying years when they reach state pension age to receive a full state pension and at least ten qualifying years to receive a reduced state pension. If the director does not yet have 35 qualifying years, it is worth paying a salary which is sufficient for the year to be a qualifying year.

A year will be a qualifying year if an individual has qualifying earnings subject to National Insurance that are at least 52 times the lower earnings limit. Payments of salary and bonus are liable to Class 1 National Insurance. By contrast, dividends do not attract National Insurance.

For 2025/26, the lower earnings limit is set at £125 per week. Thus, it is necessary to pay a salary or bonus of at least £6,500 (52 x £125) for the year to be a qualifying year.

Where earnings are between the lower earnings limit and the primary threshold, which for 2025/26 is aligned with the personal allowance at £12,570, primary contributions are payable at a notional zero rate. This means that the director or employee benefits from a qualifying year for state pension purposes without having to actually pay any primary Class 1 National Insurance contributions.

However, the same is not true for the employer. The reduction in the secondary threshold to £5,000 from 6 April 2025 means that the secondary threshold is now below the lower earnings limit and, unless the employment allowance is available to shelter employer contributions, paying a salary equal to the lower earnings limit will come with a secondary Class 1 National Insurance bill.

Personal companies where the sole employee paid above the secondary threshold is also a director do not benefit from the employment allowance. Consequently, where a salary is paid which is of a level which is sufficient for a year to be a qualifying year for state pension purposes, secondary contributions will be payable. On a salary of £6,500 (the minimum needed for a qualifying year), the associated secondary Class 1 National Insurance bill will be £225 (15% (£6,500 – £5,000)).

In a family company where the employment allowance is available, it is possible to pay a salary which is sufficient to secure a qualifying year without an associated secondary Class 1 liability.

Although it is only necessary to pay a salary of £6,500 for the year to be a qualifying year for state pension purposes, if the personal allowance is available in full, it is more tax efficient to pay a salary of £12,570, as the corporation tax deduction on the salary and secondary Class 1 National Insurance will outweigh the secondary Class 1 National Insurance bill.

Having the company pay for all your fuel might seem like a major perk. However, whether it is truly a valuable benefit depends on a number of factors, not least how the company structures its fuel policy, the type of car and how much, if any, fuel is reimbursed for private use.

Car fuel benefit

When an employer provides all the fuel for a company car, this usually triggers a car fuel benefit charge. The company fuel benefit is the value HMRC places on the fuel provided by the employer for the employee's personal use of a company car, the actual amount being dependent on the car's co2 emissions.

The same percentage figures used to calculate the car benefit charge are also used to calculate the fuel benefit charge, the relevant percentage figure being multiplied by £28,200 for 2025/26. HMRC's  fuel charge table for 2025/26 shows tax charges ranging from £846 for a car with 1 to 50 co2 emissions to £10,434 for a 160 co2 or more emission (producing a tax bill of £2,086.80 for a basic rate taxpayer; £4,137.20 for a higher rate taxpayer and £4,695.30 for an additional rate taxpayer). In addition, an employer Class 1A charge of 15% is levied. Petrol hybrid cars are treated as petrol cars for this purpose. Be aware that a small 50 co2 emission engine in a hybrid car system may generate just enough power to recharge the electric motor's battery during low-speed driving and result in a car fuel benefit.

A way round the charge

Avoiding the tax charge may seem simple; the employer avoids paying for fuel for any purpose other than for business. In practice, that may be difficult to achieve as the charge applies regardless of the actual private mileage or cost of the fuel unless the employee 'makes good' the full cost of private fuel to the employer. It is this calculation of 'full cost' which creates most problems – which is where use of HMRC's advisory fuel rates (AFR) table can assist. Importantly, should the employee contribute less than the full cost of private fuel, or the employee contributes a fixed amount per month (but less than full private use), the benefit charge still applies in full.

AFR are set by HMRC and are mainly of use in two situations. Firstly, where the business pays for all fuel (e.g. via a company fuel card or account at a petrol station) and requires the employee to reimburse it for the cost of their non-business mileage. Secondly, where an employee personally pays for fuel used in their company car and claims reimbursement from their employer for business mileage.

The AFR are intended to avoid a taxable benefit on the employee for the fuel used on business trips and avoid the company needing to calculate the actual cost of fuel per mile for each of its company vehicles. They provide a set rate for different types of vehicles (based on engine size in cc and fuel type) that ensures the fuel reimbursement is not too high or too low. As long as the amount paid does not exceed the AFR, no taxable benefit arises and no employer’s Class 1A NI is levied. The rates are based on calculations made using actual pump price data, being reviewed on a quarterly basis.

Practical point

Despite increases in car benefit charges over the years, it may still be advantageous for the company to pay for all  fuel and the employee  repay the cost of fuel used for private travel – records of private mileage incurred will prove whether this statement is correct. It may not be known until after the tax year has ended whether it is more tax efficient for the company to pay for the fuel. Therefore, a suggestion could be for the company to pay for all fuel initially and, after the tax year, calculate if doing so was tax efficient. If not, the employee needs to reimburse the company in full for all private mileage by 6 July following the tax year. Tax cases have proved that a formal agreement with the company confirming private use reimbursement is valuable.

When a landlord buys a new property to let out, they may need to undertake some work prior to the first let, particularly if the property is tired or in need of updating. The extent to which relief will be available for the costs of updating the property will depend on the nature of those costs.

Start of the property business

If the property in question is the landlord’s first property, they will not have an existing property rental business. The property rental business normally starts when the letting first commences. The landlord may incur costs before the first property is let for the first time.

Once the letting has commenced, all activities relating to letting are treated as carried out in the course of the property business. Any expenses incurred in relation to preparatory work for second and subsequent properties relate to the existing property business and are deductible if they are revenue expenses incurred wholly and exclusively for the purposes of that property business.

Capital expenses are only deductible if the cash basis is used and the capital expenses are of a type that is deductible under the cash basis expenditure rules.

Pre-commencement expenses

Expenses which are incurred before the start of the property business can be deducted once the letting begins if the expenditure is:

• incurred within a period of seven years before the date the property business started;
• not otherwise deductible for tax purposes; and
• would be deductible if it had been incurred once the letting had commenced.

Thus, relief is available for costs incurred in updating the first property prior to letting if the above conditions are met. The expenses are treated as if they were incurred on the first day of the property business.

Capital v revenue expenditure

To determine whether relief is given in computing the profits of the property rental business, it is necessary to ascertain whether the expenses incurred in updating the property are revenue in nature. This will be the case if they are in the nature of repairs, such as decorating and making good.

Where the expenditure is revenue in nature, relief will be given under the pre-commencement rules if it related to the landlord’s first property. However, where a property business already exists, revenue expenditure incurred in updating a second or subsequent property prior to letting will be deductible in calculating the profits of the existing property rental business.

However, where there is significant improvement, for example, replacing an existing kitchen with a superior kitchen (taking into account developments since the original kitchen was fitted), or the property has been extended, the expenditure will be capital expenditure and will not be deductible in computing the profits of the property rental business. Instead, relief may be available in computing the capital gain or loss when the property is sold.