Helpsheets ... continued 48 from homepage

A look at the VAT position on the purchase of commercial property.

To recover the VAT on costs associated with their commercial properties, the owners of most commercial property rental businesses have opted to tax their portfolios of property and would therefore normally charge VAT on the sale of a commercial property.

Transfer of a going concern provisions - However, the transfer of a business as a going concern (TOGC) is treated as ‘neither a supply of goods nor a supply of services’ for VAT purposes and if the sale meets certain conditions, the supply is outside the scope of VAT and therefore no VAT is chargeable. The TOGC provisions can apply to the sale of an opted commercial building, provided certain conditions are fulfilled.

The basic conditions for a TOGC are:

 • an entire business or a part of the business capable of separate operation is transferred as a going concern;

 • the purchaser uses the assets in the same kind of business; and

 • the purchaser registers for VAT if not already registered or is registerable as a result of the transfer.

Conditions for a property business - Additional conditions are required to qualify as a TOGC for a property rental business:

 • The property should be tenanted.

 • The purchaser is registered for VAT and notifies HMRC of its option to tax (using form VAT 1614A) on or before the date of the transfer.

 • The purchaser notifies the vendor that the purchaser’s option will not be disapplied under the anti-avoidance provisions in Special Provisions Order (SI 1995/1268), art 5(2A).

What counts as tenanted? - Here are some examples from HMRC of when the sale of a property can be treated as a TOGC. If a business:

 • owns the freehold of a property which it lets to a tenant and sells the freehold with the benefit of the existing lease. This is a TOGC, even if the property is only partly tenanted. Similarly, if the business owns the lease of a property and it assigns the lease with the benefit of the sub-lease, this is a TOGC;

 • sells a building during an initial rent-free period;

 • granted a lease but the tenants are not yet in occupation;

 • owns a property and has found a tenant but not actually entered into a lease agreement when it transfers the property to a third party (with the benefit of the prospective tenancy but before a lease has been signed); or

 • is a property developer selling a site as a package (to a single buyer) which is a mixture of let and unlet, finished or unfinished properties, the whole site can be regarded as a TOGC.

Examples of where there is not a TOGC are where a business:

 • is a property developer and has built a building and it allows someone to occupy temporarily (without any right to occupy after any proposed sale) or it is ‘actively marketing’ it in search of a tenant;

 • sells a property where the lease that has been granted is surrendered immediately before the sale – even if tenants under a sublease remain in occupation; or

 • sells a property to the existing tenant who leases the whole premises.

This can be a very useful concession, as not only is there a cashflow saving on financing the VAT costs until the input tax on the property can be reclaimed, but there is an absolute saving on stamp duty land tax (SDLT, in England and Northern Ireland) as SDLT is charged on top of the VAT, so if the VAT is avoided there is less SDLT to pay.

Practical tip - If a business is buying an opted commercial property, it can avoid paying VAT if it can obtain TOGC status for it by registering for VAT, opting to tax and having a tenant in place at the time of the transfer.

The tax implications for a business if invoices are not paid.

Bad debts pose a significant challenge for every business. Swoop Funding’s 2025 UK business debt report (April 2025) revealed that the average debt per company stands at £365,375 – funds that could otherwise maintain healthy cashflow and financial stability for the business. Therefore, staying on top of nonpayments is essential.

However, every business will eventually encounter debts that cannot be collected. Writing off bad debts comes with specific tax implications that vary based on whether the debts are trading or non-trading, and whether the business operates as a company, sole trader, or partnership.

When can a claim be made?

Bad debt deductions are relevant only for businesses using the accruals method of accounting, as income from credit sales is recognised when the sale occurs (or invoice issued), not when payment is received. Companies and self-employed businesses with a turnover exceeding £150,000 a year are obliged to prepare their accounts using the ‘accruals’ basis. Therefore, if a debt becomes uncollectible, a deduction is needed to adjust for the invoice that was previously included in the accounts.

HMRC allows for the write-off of bad debts; but, as ever, conditions apply. Relief can be claimed on debts that are irrecoverable or considered to be so. This covers situations where the debtor cannot be traced, has been declared bankrupt or the company has been liquidated (HMRC will accept court documents as evidence of non-recovery, unless the liquidator indicates that some payments will be made). Relief is also possible in cases where the creditor believes that payment is unlikely.

Make an effort

Once potential bad debts are identified, HMRC expects the creditor to have made reasonable and proportionate efforts to recover the amounts owed, including records supporting the decision.

For relatively small debts, a few automated reminder letters may suffice. If no payment is received, the creditor can apply bad debt relief by deducting from profit – HMRC will likely accept a claim. Debts of more significant amounts (e.g., £10,000 or more) will require the claimant to take additional steps, such as employing a debt collector. Be aware that many debt collectors will not take on debts of less than £600.

Bad debt relief is granted in the period when the business determines that a debt is irrecoverable, preferably in the same period the invoice was issued. This way, tax will not be payable on unpaid invoices. If the debt is not identified until the following period, it may take a full year before relief is granted.

VAT implications

If the supplier is VAT-registered, bad debt relief (BDR) can be claimed if the goods have been supplied or services provided but payment has not been 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.

What happens if the debt is paid? If the debt is eventually paid after relief has been claimed, the payment will be classified as income for the year it is received.

If VAT was previously reclaimed, the supplier business will need to repay this VAT.

Practical tip

HMRC rarely accepts ‘general provisions’ for debts. Therefore, it is essential to maintain records of which debts have been reviewed, when they were reviewed, why the debt is believed to be uncollectible, and what actions have been taken to recover. A written debt chase and recovery policy is essential

Significant points

Personal tax allowances and rates on general income frozen for a further three years to April 2031

Also frozen: NICs employer threshold and upper earnings limit, and IHT nil band, to April 2031; Plan 2 Student Loan repayment threshold to April 2030

No immediate changes to reliefs on pension schemes, but salary sacrifices above £2,000 to be subject to National Insurance from April 2029

Increases in income tax rates on dividend income from April 2026, and on rental and savings income from April 2027

Only minor changes to Inheritance Tax rules announced last year

ISA investment limits and rules remain the same, but from April 2027 new £12,000 limit for cash within the £20,000

Corporation tax rates unchanged, but Writing Down Allowances reduced from April 2026; new FYA from 1 January 2026

Council tax surcharge on properties worth over £2 million to apply from April 2028

Personal Income Tax

Tax rates and allowances – 2026/27

In 2023, the previous Chancellor announced that the main personal allowance and the 40% threshold will remain at their 2022/23 levels until the end of 2027/28. In a major tax raising measure, Chancellor Reeves has extended this freeze to the end of 2030/31, in spite of stating explicitly in last year’s Budget that the normal increases in the thresholds would resume in April 2028.

This has been widely criticised as a ‘stealth tax’, in that it increases the amount collected without explicitly increasing rates or reducing allowances. For example, a person with a salary of £50,270 will pay £7,540 in income tax in 2025/26; if their income increases by 10% to £55,297 in any of the years to 2030/31, all of the increase will be taxed at 40%, and they will pay £9,551. The forecasts accompanying the Budget show expected revenue of over £12 billion from this in 2030/31, the largest tax-raising measure in the table.

The income level above which the personal allowance is tapered away also remains £100,000; it will be reduced to zero when income is £125,140, which is also the threshold for paying 45% tax. In the tapering band, the loss of tax-free allowance creates an effective marginal rate of 60%. Once again, annual increases in income will bring more people into these higher rates.

Dividend income - The dividend allowance exempts some dividend income from tax, although that income still counts towards the higher rate thresholds. For 2026/27, the allowance is unchanged at £500. As HMRC does not routinely receive information about dividends received by taxpayers, this low limit is likely to require people to file tax returns to declare even small tax liabilities on dividends.

In 2026/27, the basic and higher rates on dividend income over £500 will rise by 2% to 10.75% and 35.75%; the additional rate will remain 39.35%.

The higher rate also applies to tax payable by close companies (broadly, those under the control of five or fewer shareholders) on ‘loans to participators’ that are not repaid to the company within 9 months of the end of the accounting period. This therefore also increases to 35.75% from 6 April 2026.

Dividends arising in an ISA or a qualifying VCT are not taxed and do not count towards the allowance.

Savings income and property income - The savings allowance remains £1,000 for basic rate taxpayers, £500 for 40% taxpayers and nil for 45% taxpayers. People with savings income above these limits may have to declare it in order to pay tax.

The savings rate band remains at £5,000. Non-savings income is treated as the ‘first slice’ of income, using the tax-free allowance and the savings rate band; if any of the £5,000 band is not used by this ‘slice’, any savings income falling within that band is taxed at 0%.

The Chancellor announced an increase in the tax rates applicable to income from property and savings to apply from April 2027. The basic, higher and additional rates on rental and savings income will all rise by 2% in 2027/28 to 22%, 42% and 47%.

From April 2027, there will be new rules about the order in which certain tax reliefs are deducted from income, so that they must be set first against income which is taxable at the lower rates before they can be set against savings, rental and dividend income.

The Budget document points out that 90% of people do not pay tax on savings income; however, for those whose income from these sources exceed their tax-free allowances, it will be necessary to calculate and settle the liability each year.

These tax increases make tax-free Individual Savings Accounts even more attractive, as any income or gains arising within an ISA are tax-free.

Winter fuel payment - Earlier this year, the government relented and restored the Winter Fuel Payment to pensioners. However, it will be clawed back through the tax system from anyone with income of over £35,000. This can be avoided by disclaiming the payment in advance. The threshold of £35,000 will remain fixed for the duration of this Parliament.

Thresholds and rates

There has been a great deal of debate about the effect on employment and business of the increases in employer NICs that took effect on 6 April 2025 following the Chancellor’s first Budget in October 2024. In the present Budget, no changes were announced – the £5,000 threshold for secondary contributions will remain fixed until April 2031 (in the 2024 Budget, the Chancellor said this figure would rise with inflation after April 2028). The Upper Earnings Limit for employee contributions is linked to the 40% income tax threshold, and is therefore also fixed to the same date.

The Lower Earnings Limit and Small Profits Threshold will be increased for 2026/27 in line with inflation at 3.8%.

Class 2 NICs

It has been possible to ‘buy in’ to the State pension by paying voluntary Class 2 NICs in certain circumstances. The Budget included measures to restrict the availability of this route to a State pension for people resident outside the UK with effect from 6 April 2026. There will be a wider review of voluntary NICs in the new year

Savings and Pensions

Individual Savings Accounts (ISA)

The investment limits for ISA have not changed since 2017/18: they are £20,000 for a standard adult ISA (within which £4,000 may be in a Lifetime ISA), and £9,000 for a Junior ISA or Child Trust Fund. These will now remain fixed until 5 April 2031.

From 6 April 2027, no more than £12,000 of the £20,000 will be eligible for investment in a cash ISA, apart from ISAs for those aged 65 and over. The Chancellor presented this as an encouragement to invest in stocks and shares, which have performed substantially better than cash deposits over the years since ISAs were introduced.

Pension contributions

Among the rumours circulating in advance of the Budget was the possibility of restrictions on tax-free pension lump sums or the amounts that can be invested with tax relief. In the event, the Chancellor made no immediate changes to the reliefs available.

The maximum amount that can be withdrawn as a tax-free lump sum remains £268,275 unless the person is entitled to ‘protection’ in relation to the original introduction of the Lifetime Allowance or any of the subsequent reductions of the limit.

The only change relating to pension funds was another measure that was widely predicted: a restriction on ‘salary sacrifice’ arrangements. From April 2029, full tax relief on such an arrangement will be restricted to a contribution of £2,000. On amounts in excess of that, employer and employee NICs will be due as if cash salary has been paid (although the contribution will still be free of income tax).

Venture capital schemes

Generous tax reliefs are available for those who invest in Enterprise Investment Scheme (EIS) companies or Venture Capital Trusts (VCTs), which are quoted investment trusts that invest in EIS-type companies. These schemes have a lot of detailed conditions attached to them, some of which are being changed to make the schemes available to larger companies.

The gross assets requirement that a company must not exceed for the EIS and VCT will increase to £30 million (from £15 million) immediately before the issue of the shares or securities, and to £35 million (from £16 million) immediately after the issue.

The annual investment limit that caps how much companies can raise will increase to £10 million (from £5 million) and, for knowledge-intensive companies, to £20 million (from £10 million).

The company’s lifetime investment limit will increase to £24 million (from £12 million) and, for knowledge-intensive companies, to £40 million (from £20 million).

These increases apply only to qualifying companies that are not registered in Northern Ireland trading in goods or the generation, transmission, distribution, supply, wholesale trade or cross-border exchange of electricity. These companies will remain eligible only for the current scheme limits.

The Income Tax relief that can be claimed by an individual investing in a VCT will reduce to 20% from the current rate of 30%.

These changes take effect from 6 April 2026.

Capital Gains Tax

Rates and annual exempt amount

In her first Budget, the Chancellor increased the rates of CGT and reduced a number of reliefs. The current Budget document included the forecast that the annual yield from the tax will more than double from £13.7 billion at the start of this Parliament to £30 billion in 2030/31.

The CGT annual exempt amount remains £3,000 for individuals and estates and £1,500 for most trusts. Individuals will continue to pay 18% on gains that fall within their basic rate income tax band, and 24% on gains above that.

Disposals to Employee Ownership Trusts

A CGT relief has exempted gains on eligible disposals of shares to Employee Ownership Trusts. The government will reduce the CGT relief available from 100%

of the gain to 50%. This will take immediate effect from 26 November 2025. Business Asset Disposal Relief (see below) will not be available on the remaining chargeable 50%.

Incorporation relief

When a sole trader or partnership transfers a business to a company in exchange for shares, any capital gains arising on the disposal of chargeable assets may be deferred by ‘incorporation relief’. Under the existing legislation, this operates automatically where the conditions are satisfied. From 6 April 2026, it will be necessary to make a claim for the relief to apply.

Business Asset Disposal Relief (BADR) and carried interest

As announced last year, the tax rate on gains that qualify for BADR will rise in 2026/27 from 14% to 18%. The relief remains available on qualifying gains with a lifetime limit of £1 million.

Investors’ Relief can give a reduced CGT rate to qualifying investors in qualifying companies for which they do not work. The lifetime limit is also £1 million and the rate of tax will rise in line with BADR.

In 2025/26, the rate of CGT on carried interest was a flat rate of 32% for individuals, estates and trusts. From 2026/27, carried interest will be brought within income tax and subject to its own specific rules.

Cryptoassets

Gains realised on cryptoassets such as Bitcoin are likely to be chargeable to CGT. In order to make sure that chargeable gains are being reported, the government will require UK-based Cryptoasset Service Providers to report on their UK tax resident customers under the Cryptoasset Reporting Framework. Information for first reports to HMRC will be collected from 1 January 2026 and reported to HMRC in 2027.

Inheritance Tax (IHT)

Rates - The IHT nil rate band has been fixed at £325,000 since 6 April 2009. The Chancellor has extended the freeze on this figure until the end of 2030/31. Holding the threshold at the same amount for 22 years will bring far more people into the scope of the tax. The Budget document states that IHT raised £8.3 billion a year at the start of this Parliament; this is expected to rise to £14.5 billion in 2030/31.

The £175,000 ‘residential nil rate band enhancement’ on death transfers (also frozen, together with the £2 million value of estate above which it is tapered) can reduce the impact where it applies. A married couple may be able to leave up to £1 million free of IHT to their direct descendants (£325,000 plus £175,000 from each parent), but the rules are complicated, and the prospect of the nil rate band being fixed for another

5 years increases the importance of proper IHT planning.

Agricultural and business property

The government has confirmed that the well-publicised restrictions on 100% agricultural and business reliefs will come in, as previously announced, from 6 April 2026. 100% relief will be restricted to £1 million of the total of qualifying agricultural and business property, with 50% relief on any higher value.

It was newly announced that the £1 million 100% allowance will be transferable between spouses, if it is not used on the first death, and this figure also will be frozen until April 2031.

Also from 6 April 2026, qualifying shares quoted on the AIM and similar ‘unlisted’ markets will qualify for 50% relief rather than the current 100% relief.

These changes could potentially create significant IHT liabilities for family farming and trading businesses in the future, including where business assets are held in trust. All businesses should consider their IHT position, including reviewing wills and considering whether some lifetime gifts of qualifying property may be worthwhile.

Unused pension funds and death benefits

The government has confirmed that, from 6 April 2027, most unused pension funds and death benefits will come within the deceased’s estate for IHT purposes, whether written into trust or not.

Making Tax Digital for Income Tax (MTD IT)

The requirement to file tax returns using MTD IT will come into effect from

6 April 2026. Those initially affected by the rules will be those with annual income from a sole trader business or property, or both together, of £50,000. This will drop to £30,000 from 6 April 2027, and it is intended to expand the rollout to those with incomes over £20,000 by the end of the Parliament. Anyone who will be affected by these rules should make sure they are ready to comply with them in good time: understanding the requirements and making sure that it is possible to comply with them is not something that should be done at the last minute.

However, the Budget included the good news that late submission penalties will not apply for quarterly updates during the 2026/27 tax year for taxpayers required to join MTD IT. The new penalty regime for late submission and late payment will apply to all self-assessment taxpayers not already due to join the new system from 6 April 2027. The government will also increase the penalties due for late payment of self-assessment income tax and VAT from 1 April 2027.

State pension

The State pension will rise by 4.8% from April 2026 in line with average earnings,

in accordance with the ‘Triple Lock’. The government is taking steps to deal with the possibility that the State pension on its own, which is paid without deduction of tax, may exceed the personal tax allowance in 2027/28. The government plans to consult on ways to avoid requiring pensioners with no other sources of income having to report to HMRC and pay tax.

Fuel duty

The Chancellor decided to maintain the freeze in fuel duty and to retain the 5p cut beyond 22 March 2026, when it was supposed to come to an end. It will now be reversed in stages between 1 September 2026 and 1 March 2027. Inflationary increases in the duty are planned to resume in April 2027.

Electric Vehicle Excise Duty

The government is introducing Electric Vehicle Excise Duty (eVED), a new mileage charge for electric and plug-in hybrid cars, with effect from April 2028. Drivers will pay for their mileage on a per-mile basis alongside their existing Vehicle Excise Duty. Electric cars will pay half the equivalent fuel duty rate for petrol and diesel cars, and plug-in hybrid cars will pay a reduced rate equivalent to half of the electric car rate. The government will carry out a consultation to gather views on how this will be implemented.

National Living Wage (NLW)

From 1 April 2026, the NLW which applies to those aged 21 or over will rise from £12.21 per hour to £12.71. There are also increases to the rates that apply to workers aged 18 to 20 (£10.85) and under 18s and apprentices (£8.00).

Universal Credit

As expected, the Chancellor removed the ‘two-child benefit cap’ with effect from

April 2026, increasing the entitlement to Universal Credit for claimants with more than two children. This measure will cost between £2.3 billion and £3.2 billion a year over the forecast period. By contrast, the freezing of income tax bands and allowances

is expected to raise £12.4 billion in the year 2030/31 alone.

Student loans

The repayment threshold for Plan 2 student loans will be frozen at £29,385 for three years from April 2027. This means that graduates are likely to be liable for higher repayments as their income increases above that level, in the same way that freezing income tax thresholds and allowances increases income tax. It will not increase the outstanding loan itself, but it will require faster repayment of it.

Directors of limited companies are generally not personally liable for unpaid corporation tax as limited liability usually protects them. A company is a separate legal entity and limited liability is one of its core features.

However, in some circumstances, HMRC may pursue directors personally. The risk increases where non-payment of corporation tax is due to deliberate behaviour, negligence or fraud. If directors pay themselves rather than settling their company tax bills then HMRC may view this as evidence of misconduct. Similarly, if the business pays connected creditors such as family or friends but does not pay its corporation tax then the directors could face personal claims. HMRC is more likely to pursue directors for payment under a liquidation where HMRC is a preferential creditor.

Fraudulent and wrongful trading - Under insolvency law, directors can be personally liable if they engage in fraudulent trading or wrongful trading.

Fraudulent trading occurs where a business operates with intent to defraud creditors or for any fraudulent purpose. If proven, the court can order directors to contribute to the company’s assets personally.

Wrongful trading has a lower threshold applying if directors continued to trade at a time when they knew, or ought reasonably to have known, that there was no reasonable chance of avoiding insolvent liquidation.

If corporation tax increases during the period where fraudulent or wrongful trading is proved, a liquidator may seek a court order requiring directors to contribute personally. Although this action would be brought by a liquidator rather than HMRC directly, unpaid corporation tax often forms a substantial part of any claim.

Unlawful dividends - Shareholders are generally protected by limited liability. However, if dividends are paid unlawfully, shareholders and directors who knew or had reasonable grounds to believe that the distribution was unlawful may be required to repay.

Under the Companies Act 2006, dividends may only be paid out of distributable profits. These are defined as accumulated realised profits less accumulated realised losses. Consequently, a dividend may be paid in a loss-making year provided sufficient retained profits are brought forward. Alternatively, if there is a profit for the year but past accumulated losses exceed total realised profits then a dividend cannot be paid.

In addition to the substantive requirement for distributable reserves, proper corporate procedures must be followed. If a director authorises a dividend when there are insufficient reserves, and knew or had reasonable grounds to believe the payment to be unlawful, then the dividend may be repayable. This can happen even if the director was unaware at the time that the accounts did not support the payment.

A liquidator may seek recovery from shareholders should it be found that a dividend was paid but corporation tax was unpaid and the payment contributed to the company’s insolvency. In owner-managed companies, where directors and shareholders are often the same individuals, the exposure can be significant.

Capital distributions following asset disposals - Further risk may arise where capital distributions are made to directors following asset sales. A capital distribution is defined as a distribution in money or money’s worth that is not treated as income in the hands of the shareholder, either because it falls outside the income tax definition of a distribution or because it is paid to another corporate shareholder.

Where a company disposes of assets and realises chargeable gains, corporation tax may arise on those gains. If the company then makes a capital distribution to a shareholder and fails to pay the associated corporation tax within six months of the due date, HMRC has statutory powers to pursue that shareholder. An assessment may be raised on the recipient within two years of the corporation tax due date.

Practical point - Trading whilst insolvent, paying connected parties, paying unlawful dividends or making distributions without paying the corporation tax due can all lead to personal claims on the directors. Directors should prioritise paying corporation tax, pay dividends only from distributable reserves and check that the company is solvent before paying dividends.

Some important tax issues when considering incorporation.

The question as to whether a business should operate through a limited company is often dictated by the tax implications, though not always – insulation of the individual from commercial risks is often reason enough.

The term ‘incorporation’ can also include transferring a business (usually a partnership) into a limited liability partnership (LLP) as they, like limited companies, are bodies corporate with a separate legal identity.

However, LLPs are treated exactly the same as ordinary partnerships for tax purposes, i.e., they are transparent with the partners (or ‘members’ as LLP partners are known) taxed on their profit or capital shares. When a partnership becomes an LLP, it is essentially a non-event for tax purposes, even though a new legal entity is operating the trade; however, becoming a limited company is very much an event for tax purposes.

Capital gains tax

The main issue is that when a sole trader, or partnership, transfers business assets into a limited company, it is treated as a disposal for capital gains tax (CGT) purposes on the owner, even though they own the recipient company and the business is one of a going concern.

The default position, assuming all assets have gone across to the company, is that the notional capital gain will be rolled over into the value of the shares, which the owner will receive in consideration. However, this default relief – ‘incorporation relief’ (under TCGA 1992, s 162) – can be disapplied and the CGT paid instead.

Incorporation relief is quite an unusual relief. First, it is automatic (unless disapplied); second, it applies to ‘businesses’ and not just trades as required by the other CGT reliefs. This is useful for those businesses which might resemble more of an investment than trade, such as a rental property portfolio; whilst renting land will never be a trade, it might be a business if it is operating as such when sufficient hours and activity are provided by the owner.

The main criterion for TCGA 1992, s 162 relief is that all assets (except cash) go into the company; if that is not the case, section 162 relief is not available and CGT will be chargeable. However, one reason why business owners might disapply the relief is because they do not want a latent gain with the shares; they may prefer to ‘have it over with’, pay the tax at the current rate and, more importantly, claim business asset disposal relief if they can.

If TCGA 1992, s 162 is not activated and the disposal remains chargeable, the consideration received by the business owner will be mainly in the form of a directors’ loan account; this can then be drawn down, tax-free, whenever the company has the funds to make repayments. It is therefore important to value the business assets properly, as an overvalued sale may lead to a greater loan account, with corresponding ‘excess’ drawdowns being taxable as dividends.

Stamp duty land tax, etc.

The tax which may be of most concern is stamp duty land tax (SDLT) in England and Northern Ireland (or its devolved equivalents); under FA 2003, s 53, the transfer of land or buildings to a connected company attracts a deemed charge based on market value consideration; SDLT must be paid within 14 days of completion, so it is a major strain on cashflow.

Incorporating a family partnership, all of whose partners are related or are the same people as the subsequent shareholders, can potentially avoid the charge via provisions in FA 2003, Sch 15; however, there are anti-avoidance provisions within FA 2003, Sch 15, para 17A acting as an effective exit charge within the first three years; also, the antiavoidance rule in FA 2003, s 75A is a much wider provision striking down any arrangement made to avoid SDLT. A legitimate business partnership looking to incorporate for genuine commercial reasons should have nothing to fear, but SDLT is a complicated area, and an expensive one if you get it wrong.

Practical tip

When considering incorporation, factor in the CGT or SDLT cost of doing so, as well as the company and individual’s tax position going forward. If faced with a high upfront cost for those taxes, the potential long-term savings of incorporation may still make it a worthwhile cost.

The abolition of the furnished holiday lettings regime abolished day counting for tax purposes from 6 April 2025 onwards. However, where a property is let as a holiday let, there is still a need to count the days on which the property is available for letting and actually let to check that the property is within business rates rather than council tax. As many holiday lets will be eligible for small business rate relief, this is a definite bonus, as there will be nothing to pay.

Business rates, like council tax, are paid to help fund local services. Business rates rather than council tax are paid on properties that are used commercially, which includes holiday lets.

The business rates system depends on where the holiday let is located. In England, a holiday let will be within business rates if it is available for short-term letting for at least 140 days and actually let for at least 70 days in a 12-month period. When counting the days, no account is taken of nights when the property is used privately by family or friends free or at a discounted rate, nights where the property is unavailable as it is under repair or future bookings which have yet to happen. Short-term lets are lets of 28 days or less. Stays of more than 28 days are disregarded.

Where these tests are not met, council tax will be payable instead.

Valuation

Single properties and complexes of up to four properties are valued by bed space. Complexes with five or more properties are valued as a percentage of the fair maintainable trade.

New valuations apply from 1 April 2026.

Small business rate relief

Small business rate relief applies where the rateable value of the property is £15,000 or less. Properties with a rateable value of £12,000 or less pay no business rates. Where the rateable value is between £12,001 and £15,000, the rate of relief reduces gradually from 100% to nil.

Multiplier – retail, hospitality and leisure

Where small business rate relief is not available, the business rates that are payable are calculated using the relevant multiplier. From April 2026, a new lower multiplier is introduced for businesses in the retail, hospitality and leisure (RHL) sector. The lower multiplier replaces the relief previously available to this sector. The RHL multiplier is set at 43p where the rateable value is £51,000 or more and less than £500,000 and 38.2p if the rateable value is below £51,000.

Transitional reliefs

Following the 2026 revaluation, transitional relief is available to limit the amount by which business rates can increase as a result of the revaluation. In addition, supporting small business relief is available where the rateable value increases as a result of the 2026 revaluation and the business has lost some of its small business rate relief, rural rate relief, RHL relief or 2023 supporting small business relief.

From 6 April 2026, the 100% rate of agricultural property relief (APR) and business property relief (BPR) is only available on the first £2.5m of qualifying business and agricultural property. The allowance was increased to £2.5m from £1m following extensive lobbying by farmers.

APR

Agricultural property relief (APR) allowances a person to pass on agricultural property either free of inheritance tax or at a reduced rate either during their lifetime or on their death. Agricultural property eligible for relief includes growing crops, stud farms for breeding and rearing horses and grazing, short rotation coppice, land not currently been farmed under the Habitat Scheme or under a crop rotation scheme, the value of milk quotas associated with the land, some agricultural shares and securities, farm buildings, farm cottages and farmhouses.

Farm equipment and machinery, derelict buildings, harvested crops, livestock and property subject to a binding contract for sale do not qualify for APR.

The relief is now only available where the property is part of a working farm in the UK. It can be owner occupied or let. Prior to the transfer, the land must have been owned and occupied for agricultural purposes for two years if occupied by the owner, a company controlled by them or by their spouse or civil partner and for seven years if occupied by someone else (such as a tenant).

The 100% rate is available where the person who owned the farm farmed it themselves, the land was used by someone else on a short-term grazing licence or it was let on a tenancy that began on or after 1 September 1995. Some properties owned before 10 March 1981 qualify for 100% relief.

BPR

Business property relief (BPR) reduces the value of an asset for inheritance tax purposes by 100% or by 50% depending on the nature of the asset. Relief is currently available at the 100% rate on a transfer of a business or shares in an unlisted company.

Relief is available at 50% for:

shares controlling more than 50% of the voting rights in a listed company;

land, buildings or machinery owned by the deceased and used in a business in which they were a partner or they controlled; and

land, buildings or machinery used in a business and held in a trust that the business has the right to benefit from.

Relief is only available if the deceased owned the business or the asset for at least two years prior to their death. Shares in certain companies, such as those dealing mainly in stocks, shares, land and buildings do not qualify.

Relief is not available if the asset also qualifies for APR, if the asset has not been used in the business in the two years before it was passed on as a gift or it is not needed for use in the business in the future.

The £2.5m allowance

The £2.5m allowance is available in addition to the nil rate band (NRB) and the residence nil rate band (RNRB). However, as the RNRB is reduced by £1 for every £2 by which the deceased’s estate exceeds £2m, being lost entirely for estates worth £2.35m and above, where a person uses their £2.5m APR/BPR allowance in full, they will not also be able to benefit from the RNRB.

As with the NRB and the RNRB, where an individual’s estate does not use the allowance in full, it can be used by the estate of their surviving spouse or civil partner.

Once the allowance has been used in full, transfers of assets that would otherwise qualify for 100% APR or BPR will receive relief at 50%.

In personal and family companies, director shareholders often borrow money from the company. Where a company is close, as most personal and family companies are, if a loan to a director or other participator remains outstanding on the corporation tax due date for the period in which the loan was taken out, the company must pay tax on the outstanding amount of the loan. Corporation tax is due nine months and one day from the end of the accounting period.

The tax that is due on the outstanding loan balance is known as section 455 tax. While it is payable with the corporation tax for the period, it is not corporation tax. Unlike most taxes, it is a temporary tax as it is repayable nine months and one day after the end of the period in which the loan is repaid.

The rate of section 455 tax is linked to the dividend upper rate. This is set at 33.75% for 2025/26 and will rise to 35.75% for 2026/27.

Where a director is thinking of taking a loan from a company and is unlikely to repay it within nine months of the company year end, taking the loan in 2025/26 rather than in 2026/27 will reduce the section 455 tax paid by the company on the outstanding loan by 2%.

As the rate of section 455 tax paid on a loan depends on the dividend upper rate at the time the loan is made, when clearing loans, it makes sense to clear those that will generate the highest repayment first (i.e. those on which the rate of section 455 tax is the highest).

Example

A Ltd is Andrew’s personal company. The company prepares accounts to 30 June each year.

Andrew, the sole director shareholder is planning on taking a £30,000 loan from the company in April 2026. He is planning on repaying it in 2028 when a savings policy matures. The loan will remain outstanding on 1 April 2027 when the corporation tax for the period is due.

If Andrew takes the loan on 30 April 2026 as planned, the company will need to pay section 455 tax of £10,725 (£30,000 @ 35.75%) on 1 April 2027. However, if instead Andrew takes the loan a month earlier on 31 March 2026, the company’s section 455 tax bill will be £10,125 (£30,000 @ 33.75%). Taking the loan before 6 April 2026 saves the company £600. in tax.

A company purchase of own shares (CPOS) can be a useful ‘exit’ strategy for an individual shareholder (e.g., upon retirement), subject to certain company law requirements being satisfied.

Income vs capital

When a company buys back its own shares from the shareholder, any ‘premium’ (i.e., payment exceeding the capital originally subscribed for the shares) is normally a taxable income distribution (i.e., like a dividend). The income tax rates on distribution income are 8.75%, 33.75% and 39.35% respectively (for 2025/26), depending on whether the individual is a basic, higher or additional-rate taxpayer. However, if certain conditions are satisfied, the individual vendor is treated as receiving a capital payment instead. The lower and main rates of capital gains tax on capital payments (for 2025/26) are 18% or 24% respectively, depending on the individual’s taxable income. However, if business asset disposal relief is available, an individual’s qualifying gains (up to a lifetime limit of £1m) are taxable at 14% (for 2025/26). Thus, in many cases, capital treatment on a CPOS will be preferred.

Does it help the trade?

The requirements for capital treatment on a CPOS (in CTA 2010, Pt 23, Ch 3) include conditions about the length of ownership of the shares, and the extent of any ongoing connection with the company. Because the conditions are detailed and potentially difficult, it is easy to overlook a basic requirement for capital treatment (subject to an uncommon exception not considered here) – the ‘trade benefit’ test. This requirement is that the CPOS must be wholly or mainly for the purpose of benefiting a trade carried on by the company (or any of its 75% subsidiaries). However, the trade benefit test is subjective, so the company should be prepared to satisfy HM Revenue and Customs (HMRC) that this requirement is met. The potential uncertainty caused by the trade benefit test was eased to some extent by HMRC guidance (Statement of Practice 2/82). Examples of where the test is satisfied include:

 • disagreements between shareholders over the management of the company that are having an adverse effect on its trade, where the CPOS removes the dissenting shareholder;

 • death of a shareholder – where the deceased’s personal representative or beneficiaries do not want to keep the shares;

 • external equity finance providers wishing to withdraw their investment, resulting in the company initiating a CPOS; and

 • company proprietors wishing to retire, to make way for new management (NB HMRC considers that the proprietor should generally resign as an officer; see HMRC’s Capital Gains Manual at CG58635). However, HMRC should not object if a retiring director keeps up to 5% of the company’s issued share capital for sentimental reasons.

Conversely, if the individual vendor is selling all their shares but stays connected with the company (e.g., as a board member or consultant), HMRC considers it “unlikely” that the CPOS would benefit the company’s trade, so the trade benefit requirement will probably not be satisfied. It should also be remembered that the CPOS is being undertaken for the company’s benefit, not the individual vendor’s benefit. This requirement has been the downfall of some taxpayers (e.g., see Moody v Tyler, ChD 2000 72 TC 536; Allum & Allum v Marsh [2004] SpC 446).

Practical tip

A clearance application can be made in advance to obtain certainty about HMRC’s view of the tax treatment on the CPOS (tinyurl.com/HMRC-CPOS-HS). Specialist advice before a CPOS is strongly recommended

As the end of the 2025/26 tax year approaches, it is a good idea to undertake a financial review and assess whether there is any action you can take to cut your tax bill.

Tip 1 – Don’t waste your personal allowance

If you have not used your 2025/26 personal allowance, it will be lost – you cannot carry it forward to 2026/27. To prevent wasting it, consider whether you can advance income so that you receive it in 2025/26 rather than in 2026/27. If you are claiming capital allowances, consider tailoring your allowances so you do not waste your personal allowance. If you have a family company, consider paying a dividend to mop up your dividend allowance and any unused personal allowance.

If you cannot use your personal allowance and you are married or in a civil partnership and your spouse/civil partner pays tax at the basic rate, consider making a marriage allowance claim to transfer £1,260 of your allowance to them – this can cut your joint tax bill by £252.

Tip 2 – Reduce your income to protect your personal allowance

Once adjusted net income reaches £100,000, your personal allowance is reduced by £1 for every £2 by which your income exceeds this level. Once adjusted net income reaches £125,140, the personal allowance is lost. However, consideration could be given to making pension contributions or Gift Aid donations to charity to reduce your income and claw back some or all of your personal allowance.

Tip 3 – Invest in an ISA

If you have not already invested the full £20,000 in an ISA in 2025/26, consider using the full allowance before 6 April 2026. Interest and dividends within an ISA are tax-free.

From 6 April 2027, the tax rates on savings income will rise by two percentage points. From the same date, under 65s will only be able to invest £12,000 of their £20,000 ISA allowance in a cash ISA.

Tip 4 – Beat the dividend tax rise

From 6 April 2026, the dividend ordinary rate (which applies to dividends falling in the basic rate band) and the dividend upper rate (which applies to dividends falling in the higher rate band) increase by two percentage points. The dividend ordinary rate rises from 8.75% to 10.75% and the dividend upper rate rises from 33.75% to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

If you have a personal or family company which has retained profits, consider paying a dividend before 6 April 2026 to beat the dividend tax rises.

Tip 5 – Make pension contributions

Tax-relieved contributions can be made to a registered pension scheme up to 100% of earnings (or £3,600 if lower) subject to having sufficient available annual allowance. The annual allowance is set at £60,000 for 2025/26. However, where threshold income exceeds £200,000 and adjusted net income exceeds £260,000, it is reduced by £1 for every £2 by which adjusted net income is more than £260,000 until the allowance is reduced to £10,000. Unused allowances can be carried forward for up to three years. Any allowance from 2022/23 will be lost if not used by 5 April 2026; however, you must use up all your 2025/26 allowance before using allowances from earlier years.

Once a pension has been flexibly accessed, the annual allowance is reduced to £10,000.

Grandparents might consider using tax reliefs to help future generations.

A little under a year ago, Rachel Reeves, the Chancellor of the Exchequer, announced plans to remove the inheritance tax (IHT) relief on unused pension funds when a taxpayer died after the age of 75. Reeves said that the aim was to “restore the principle that pensions should not be a vehicle for the accumulation of capital sums for the purposes of inheritance, as was the case prior to the 2015 pension reforms”.

On 21 July 2025, the government published the draft legislation to put this into effect and, subject to parliamentary approval, IHT will become chargeable on these funds from 6 April 2026.

Once upon a time…

Historically, pension funds – contributions to which attracted income tax relief along with valuable tax relief on the funds themselves – were to provide an income in retirement. Granting IHT relief on the funds meant that – for those who could afford it – there were tax advantages to using other savings and assets to fund retirement and then passing the pension funds to the next generation. Since 2015, some savers may have added extra contributions to their pension funds with a view to passing on wealth in this way.

That option – which may have been attractive to those thinking of skipping a generation and bequeathing the pension fund to, say, their grandchildren – will now disappear. This, combined with the forthcoming reductions in IHT relief for agricultural and business property, may have prompted individuals to consider other taxefficient options for their descendants.

Individual savings accounts

Although a junior Individual Savings Account (ISA) can only be opened by a parent or guardian, anyone can contribute to it up to the maximum annual limit of £9,000. NFU Mutual has reported a 115% rise in new junior ISAs opened in the first quarter of 2025 compared to the same period in 2024. Additional contributions to existing junior ISAs have nearly doubled and the amounts being invested have also increased.

As with standard ISAs, junior ISAs can hold either cash or stocks and shares. The money or assets in the junior ISA cannot be accessed until the beneficiary reaches the age of 18, but this may add to its attraction as a useful means of accumulating wealth for the next generation. As always, the donor must survive for seven years after the gift for this not to be taken into account in calculating IHT.

Stick with pensions? Rather than a grandparent seeking to bequeath their own pension, remember that a pension plan can be opened for a child as soon as they are born. Unless they have earned income, the net annual contributions will be limited to £2,880. This can be paid into the pension and is treated as net of 20% income tax, so the government will add a further £720, so £3,600 is in the pension fund.

The restrictions on withdrawal are strict, and generally the beneficiary will not be able to access the pension funds until they reach the normal minimum pension age (55 now, but increasing to 57 from 2028) but this may be seen as an advantage, providing means for a long-term investment and a secure retirement. Financial advice should be taken because the existence of a pension plan could potentially have tax implications on future pension savings in adulthood.

Tax-free gifts

The above payments to a junior ISA or pension may be treated as potentially exempt transfers for IHT purposes. However, those making gifts should remember the annual exemption of £3,000 and small gift exemption of £250. There are also exemptions for weddings.

If regular annual payments are being made, the ‘normal gifts out of income’ exemption may be relevant, although this is subject to conditions.

Practical tip

Advantageous tax treatment is only one aspect of saving and investment. The information above should be reinforced by professional financial advice to ensure that the transfers of money match the requirements of the donee as well as the donor.

The distinction between legal and beneficial ownership of land and buildings (e.g., rental property) is important when it comes to identifying which individual is liable to tax on rental income, or capital gains tax (CGT) on any chargeable gain from a property disposal.

This is because CGT on property gains, and income tax on rental income, is determined by beneficial ownership, rather than legal ownership (NB this article considers the law in England, Wales and Northern Ireland). Whilst the same person will normally be the legal and beneficial owner of the property, this will not necessarily be the case.

HM Revenue and Customs (HMRC) will generally assume that the legal and beneficial owners are identical, unless there is evidence to the contrary. HMRC’s guidance (in its Capital Gains Manual at CG70230) lists various indicators that a person has beneficial ownership of land. In some cases, a ‘constructive trust’ may arise. Broadly, the parties may have an understanding (or a ‘common intention’) about beneficial ownership that differs from the legal ownership. HMRC’s Trusts, Settlements and Estates Manual (at TSEM9710) lists certain key questions to consider in establishing whether a common intention constructive trust exists.

Family and friends

Establishing beneficial ownership, and particularly whether a constructive trust exists, can be challenging (e.g., there is no legal requirement for a constructive trust to be in writing), but is not insurmountable.

For example, in Akhtar v Revenue and Customs [2025] UKFTT 395 (TC), the taxpayer was a director and shareholder of a taxi company. HMRC issued discovery assessments to the taxpayer. HMRC considered that the source of some funds used by the taxpayer to purchase several properties was the taxi business he ran, which reflected undeclared income. HMRC did not believe the taxpayer’s story that unexplained bank deposits came from friends and relatives. HMRC also asserted that the properties were beneficially owned by the taxpayer alone, not (as the taxpayer alleged) by himself and his wife. The First-tier Tribunal (FTT) had to consider (among other things) the source of the funds for the purchase of the properties, and who the beneficial owners of the properties were. This would determine who was responsible for CGT on the sale of those properties, and who was responsible for income tax on the rental income derived from them.

The FTT concluded that the contributions to the purchase of certain properties (A, B, C, and D) were (as the taxpayer asserted) made by the husband of the taxpayer’s sister (MA), and the contribution to the purchase of another property (E) was (also as the taxpayer asserted) made by a friend (DK). Furthermore, beneficial ownership of B was vested in MA from the date that property was purchased until it was subsequently conveyed to the taxpayer. The FTT also held that beneficial ownership of E was vested in DK from the date the property was purchased until it was subsequently conveyed to the taxpayer. In addition, from the dates on which the beneficial ownership of B and E were conveyed to him by their beneficial owners, and from the date of acquisition of another property (F), those properties were held by the taxpayer on trust for himself and his wife, in equal shares.

Practical tip

The legal principles on the existence of constructive trusts are beyond the scope of a tax article. The FTT in Akhtar provided a helpful outline in the Appendix to its decision (tinyurl.com/TNA-FTT-Akhtar). However, expert professional advice is recommended.

Company cars

The basis for taxing company cars and fuel provided for private use is set out in the Table. Annual increases in the rates for use of the car have already been set up to 2029/30 ‘to provide long-term certainty for taxpayers and industry’. The rates are intended to provide a strong incentive to use electric vehicles, while rates for hybrids will be increased to align more closely with the rates for internal combustion engine vehicles.

The figures used to calculate the following benefits all increase for 2026/27 by 3.8% in line with inflation:

l        the benefit of free use of business fuel for private journeys;

l        the taxable amount for the availability of a van for more than incidental private use;

l        the taxable amount for an employee’s private use of fuel in a company van.

Expenses and benefits

From 6 April 2026, employees will no longer be able to claim a tax deduction for expenses of working from home, if these are not reimbursed by their employer. Employers will still be able to reimburse such costs where they are eligible without deducting income tax or NICs.

Also from 6 April 2026, the income tax and NICs exemption for employer-provided benefits will be extended to cover reimbursements for eye tests, home working equipment, and flu vaccinations.

Enterprise Management Incentive (EMI) Scheme

Under this scheme, employees and directors can be granted options over shares in the company for which they work. No Income Tax or NICs arise if options are exercised within ten years of being granted. Other conditions apply.

For eligible companies, the following maximum limits will apply to EMI contracts granted on or after 6 April 2026:

l        the total value of company options that can be unexercised at any time will be increased from £3 million to £6 million;

l        gross assets will be increased from £30 million to £120 million;

l        the number of employees will be increased from 250 to 500 employees.

The maximum value of unexercised options an individual employee can hold remains £250,000.

The limit on the exercise period will be increased from 10 years to 15 years. Existing contracts can be amended without losing the tax advantages the schemes offer.

Image rights payments

From 2027/28, all image rights payments related to an employment will be treated as taxable employment income and subject to income tax, employer NICs and employee NICs. This will affect sports people who set up image rights companies to accumulate payments for the rights and follows a recent case involving the former England football captain Bryan Robson, which HMRC lost.

Business rates

From 1 April 2026, business rates bills in England ‘will be updated to reflect changes in property values since the last revaluation in 2023’. The small business multiplier is being reduced to 43.2p and the standard multiplier to 48p.

The government will also introduce permanently lower multipliers for retail, hospitality and leisure (RHL) properties with rateable values under £500,000, set 5p below the national rates, making the small business RHL multiplier 38.2p and the standard RHL multiplier 43p. This will benefit over 750,000 RHL properties.

A new high-value multiplier will apply to properties above £500,000, such as the big warehouses of online retailers. This higher rate is being set at 2.8p above the national standard multiplier, making the high-value multiplier 50.8p in 2026/27.

Umbrella companies

An umbrella company employs workers on behalf of agencies and the businesses that the workers do the work for (the end client). From 6 April 2026, recruitment agencies and end clients will be jointly and severally liable for any payroll taxes on payments

to workers supplied through umbrella companies, where a non-compliant umbrella company fails to remit them to HMRC on their behalf.

If the labour supply chain has:

• more than one agency, the rules apply to the agency that has the direct contract with the end client to supply the worker;
• no agency, the rules apply to the end client.

Corporation Tax

Rate of tax

The rates of corporation tax have not changed, and last year’s Budget appeared to rule out changes for the life of the Parliament.

Late filing

From 1 April 2026, the penalties for late filing of corporation tax returns will be doubled. They will become £200 for any lateness (£1,000 for the third successive offence); a further £200 (or £1,000) if the return is still not filed after 3 months; and tax-geared penalties of 10% of the amount unpaid if they are still not filed after 6 and again after 12 months.

Capital allowances for plant and machinery

The 2025 Budget introduces several changes to capital allowances that will affect the timing of tax relief for businesses over the next two years.

The 100% First Year Allowance for new zero-emission cars and chargepoints has been extended until 31 March 2027 (5 April 2027 for unincorporated businesses), giving an additional year for businesses to secure full upfront relief on electric vehicles before these assets revert to slower relief through writing-down allowances.

A new 40% First Year Allowance will apply to qualifying main-rate plant and machinery from 1 January 2026, where full expensing or the £1 million Annual Investment Allowance are not available. This relief will be available to all businesses, including unincorporated businesses and those acquiring assets for leasing in the UK. Cars and second-hand assets are excluded.

From April 2026, the main rate writing-down allowance will reduce from 18% to 14%, slowing tax relief where upfront allowances cannot be claimed. The special rate writing-down allowance remains unchanged at 6%.

Full expensing continues unchanged for companies and remains the most beneficial route where available. Businesses with material or recurring capital expenditure should review investment plans ahead of the April 2026 changes to optimise relief.

R&D

The government will pilot a targeted advance assurance service from spring 2026, enabling small and medium-sized enterprises to gain clarity on key aspects of their R&D tax relief claims before submitting them to HMRC.

Value Added Tax

Registration threshold

The VAT registration and deregistration thresholds last increased to £90,000 and £88,000 with effect from 1 April 2024. The March 2024 Budget stated that they will be again frozen at these new levels, but it did not say for how long. No changes or dates have been announced.

Private hire vehicles

The VAT treatment of private hire vehicles has been thrown into doubt by several court decisions involving Uber and other operators. The Tour Operators Margin Scheme (TOMS) has been held to allow firms to account for VAT only on the difference between the fare and the amount paid to the driver. While the past tax treatment is still the subject of ongoing litigation, the government will put the position beyond doubt going forward: from 2 January 2026, taxi and private vehicle hire services will not be eligible for the TOMS, except where they are provided as part of a package with certain other travel services. This means that a firm will have to account for VAT on the whole of a customer’s fare, where the firm has a contract with the customer as principal responsible for providing the ride.

Gifts to charity

A new VAT relief will be introduced from 1 April 2026 for business donations of goods to charity which are for distribution to those in need or for use in the delivery of their charitable services. Currently a business making such a gift could be liable for output tax on a deemed disposal of the goods.

E-invoicing

From April 2029, it will be a requirement to issue all VAT invoices in a specified electronic format. The government will work on a ‘roadmap’ towards implementation of this measure and will publish this next year.

Low value imports: customs duty

The government intends to remove the customs duty relief on goods imported into the UK valued at £135 or less, making them subject to customs duty from March 2029 at the latest, and is consulting on implementing a new set of customs arrangements for these goods.

Motability

The Motability scheme enables eligible people to buy vehicles that are adapted to enable them to use them, and provides some VAT reliefs. The Budget will impose, with effect from July 2026, 20% VAT on top-up payments that a user can make to have a more expensive vehicle through the scheme.

Property Taxation

‘Mansion tax’

The High Value Council Tax Surcharge (HVCTS) is a new charge on owners of residential property in England worth £2 million or more (in 2026), which will take effect in April 2028.

Homeowners, rather than occupiers, will be liable to the surcharge and will continue to pay their existing Council Tax alongside the surcharge.

The Valuation Office will conduct a targeted valuation exercise to identify properties above £2 million. Revaluations will be conducted every five years.

Properties above the £2 million threshold will be placed into bands based on their property value. Charges will increase in line with CPI inflation each year from 2029/30 onwards.

The surcharge will be £2,500 for properties between £2 million and £2.5 million and rises to £7,500 for properties above £5 million.

For owner-managed businesses, paying school or university fees through the company can appear attractive, especially if the company has surplus cash. However, tax consequences may arise for the individual.

Should the company reimburse the individual, the amount counts as earnings subject to PAYE income tax as well as employee and employer Class 1 NIC. Therefore, reimbursement is generally the least efficient method of funding.

Company’s tax position

Where a company pays for a course undertaken by an employee or director, the expense is only tax deductible if it is incurred ‘wholly and exclusively’ for business purposes. Direct payments to an educational establishment will generally fail this business purpose requirement and are therefore not tax deductible.

Benefit in kind

The most straightforward method is for the company to contract directly with the school or university. The employee will be charged a benefit in kind (BIK) on the payment made, the company pays tax Class 1A NIC, but no employee NIC arises. As Class 1A NIC is corporation tax deductible, this route is typically marginally more efficient than paying additional salary.

For higher rate taxpayers, the corporation tax deduction rarely offsets the combined income tax and NIC exposure for the employee.

The loan alternative

An employer may lend funds to an employee to cover tuition fees. A formal loan agreement should be drawn up, including interest and repayment terms.

Provided the total outstanding loans do not exceed £10,000 at any point in the tax year, no taxable benefit arises on an interest-free or low-interest beneficial loan. The employee’s only cost is any interest charged under the agreement.

If the loan exceeds £10,000, a taxable benefit arises based on the difference between the interest charged and HMRC’s official rate (currently 3.75%) The rate can change year on year.

Value of this approach

This approach does not eliminate tax but alters the timing of the tax payment. If the loan is later released or written off, the amount is treated as earnings subject to income tax and Class 1 NIC. The NIC is collected through PAYE, however the income tax is reported on the employee’s Form P11D. The employee is then required to file a Self-Assessment tax return.

Dividend planning and the settlements constraint

A child can own shares at any age (although dividends are typically held in a bare trust until the child reaches 18 years), therefore another possible route that avoids employment income is through share ownership. However, the settlements legislation remains the principal obstacle. If a parent provides shares or funds to their child and the income from those investments exceeds £100 per year, the income is taxed as if it were the parent's. Therefore, to have dividends taxed on the child, funds need to be provided by someone other than a parent (e.g. a grandparent).

Value of this approach

This approach aims to set aside income for future school fees in a tax-efficient manner rather than as a quick method in which to raise funds. Whether it works depends on the source of the invested money.

Salary sacrifice: Restricted relief

Salary sacrifice is no longer an effective way to reduce the cost of school fees. The employee benefits from reduced gross pay (and therefore lower income tax and NIC), but the taxable benefit is based on the higher of the salary foregone or the benefit value; any excess is treated as taxable earnings.

Value of this approach

Any potential saving may come if the employer negotiates a genuine group discount with the education provider (e.g. with a nursery which several employees’ children attend). The planning opportunity is therefore commercial rather than tax-driven.

Practical point

Calculations are required to ascertain the method that results in the lowest overall tax and NIC liability.

Three main changes to Employer’s National Insurance contributions (NICs) were announced in last October’s Autumn Statement, all of which came into effect from 6 April 2025:

 • The rate of Employer’s NICs increased from 13.8% to 15%.

 • The threshold at which Employer’s NICs start to be due reduced from £9,100 to £5,000 per employee.

 • The employment allowance (EA) went up from £5,000 to £10,500, with a removal of the £100,000 test which previously prohibited larger employers from claiming it.

Winners and losers

The interaction of these changes will result in winners and losers, particularly in relation to the EA, which was significantly increased. The EA is an allowance for businesses (which meet certain criteria) to reduce their Employer’s NICs liability.

When she delivered the Autumn Statement 2024, Rachel Reeves said: “This will allow a small business to employ the equivalent of four full-time workers on the national living wage without paying any National Insurance on their wages.”

Let’s break that down. The national living wage (NLW) is the minimum hourly rate which must be paid to employees and workers over 21. Lower amounts apply to those under 21 or those in their first year of an apprenticeship. It’s worth noting that company directors, although treated as employees for tax purposes, are not required to be paid the NLW unless they have a separate employment relationship with the company.

For 2025/26, the NLW is £12.21 per hour, so for a full-time employee working 35 hours per week, that comes to £427.35 per week, or £22,222 per year. Employer’s NICs is calculated as 15% above the £5,000 threshold, so the tax due would be (£22,222 - £5,000) x 15% = £2,583.30. With four employees, the total NICs comes to £10,333.20 which would be covered by the £10,500 EA - meaning no employers’ NIC is due on their wages.

Of course, this is a simplification and does not take into account factors like overtime, benefits-inkind or paying annual or performance bonuses. It also assumes a 35-hour working week rather than, for example, a 37.5-hour or 40-hour week, which some people work. But it makes good rhetoric at the despatch box.

Do the sums

Interestingly, the £5,000 threshold creates an incentive to employ more people for fewer hours. For example, if the business employed part-time workers for 20 hours per week, their pay at the NLW rate would be 20 x £12.21 = £244.20 per week or £12,698 per year, resulting in NICs of £1,155 per employee. They could employ nine part-time employees and still have the NICs covered by the £10,500 allowance. Employing part-time workers gives them 9 x 20 = 180 working hours per week rather than 4 x 35 = 140 hours per week with fulltime employees.

A similar principle applies for employees. If I have one job earning £36,000 a year, I would pay NICs of £1,874.40, but if I have three jobs each paying £12,000, I pay no NICs (unless certain ‘aggregation’ rules apply) because each job pays below the £12,570 primary Class 1 NICs threshold.

Points to note

A couple of things to bear in mind relating to the EA:

 • The EA has to be claimed each year via payroll software.

 • It is available to most employers (including self-employed, partnerships, LLPs, companies, etc.).

 • Single-director companies with no other employees cannot claim. You must have at least one other employee paid above the £5,000 threshold to qualify.

 • You cannot claim for personal, household, or domestic staff.

 • The allowance may have to be split between ‘connected companies’ depending on the circumstances. Practical tip

With the EA now worth £10,500 per year, make sure you are claiming it if you are eligible. You can also claim for previous years if you’ve missed an eligible claim in the past

The tax regime for furnished holiday lettings will unwind over 2025.

The government of the time announced that it would abolish the furnished holiday letting (FHL) regime (sometimes referred to as the furnished holiday accommodation (FHA) regime), with effect from April 2025 (i.e., 1 April 2025 for companies, and 6 April 2025 for income tax – individuals, partnerships, trusts, etc.)

In truth, the government had been toying with abolishing the FHA regime entirely since as far back as 2009, when it was forced to accept that restricting the regime’s scope solely to UK properties was discriminatory under EU law. At the time, FA 2011 grudgingly widened the scope of FHA to include properties in the European Economic Area, but removed perhaps the most valuable tax income tax reliefs (flexibility for FHA losses). There appears to have been little substantive outcry since the 2024 announcement, so maybe the post-2011 regime was just not worth that effort. Even so, there are numerous consequences to the loss of FHA status, as now prescribed in FA 2025, s 25 and Sch 5.

This article focuses on the main changes and their implications.

Key changes

The main aims of the 2025 legislation are to withdraw the remaining favourable tax treatments surrounding FHA status, while smoothing a path towards ‘ordinary property business’ status, either as part of the landlord’s pre-existing property business, or simply to comprise that ordinary or mainstream property business now in its own right, from April 2025 (and note HMRC largely intends to treat that business as continuing, just without the tax breaks):

(NB. Companies with periods that straddle the 1 April 2025 transition will be treated for transition purposes as having two periods: one running up to 31 March 2025, and one running from 1 April 2025).

Key effects

 (a) Mortgage interest relief – Going forward, landlords subject to income tax at higher rates will have to suffer the same restrictions on finance costs deducted against their former FHAs as for ordinary residential lettings (i.e., tax relief on finance costs limited to 20%). As many mainstream property business landlords will already know to their cost, the precise mechanism may well push formerlyFHA landlords into higher tax brackets, by initially disallowing finance costs in their entirety and then allowing a tax ‘credit’ (reduction) afterwards.

 (b) Profits split between spouses or civil partners – Another benefit of having FHA status was that coowned FHA property in joint names between only spouses (or only civil partners) was not automatically split 50:50, but largely as those two spouses (or civil partners) decided. This quasi-partnership ‘protection’ (formerly at ITA 2007, s 836(3)) has now disappeared, so married couples, etc., will now need to be particularly mindful of their profit allocations for such joint property.

 (c) Losses – Losses from the formerly-FHA business will be ‘converted’ to corresponding ordinary property letting business losses from April 2025. Previously, FHA losses were streamed separately from any ‘ordinary’ property letting losses, but they are now aggregated into one amount (but UK losses remain separate from overseas losses). Where the FHA business was formerly running at a loss but the landlord’s mainstream letting business was making profits, this will be beneficial. Likewise, broadly, where the landlord had previously been making losses in their mainstream property business, while their FHA lettings are profitable, they will now be able to absorb those losses, going forward.

 (d) Fixed assets – Fresh capital expenditure on items in FHAs will no longer be potentially eligible for capital allowances. Any remaining ‘pool’ of expenditure already in the capital allowances regime by April 2025 will be treated as the pool (or part of the pre-existing pool) of the corresponding mainstream property business going forward, so eligible to be written down until that mainstream property itself ceases, or a small pool allowance is claimed for pools standing at £1,000 or less (CAA 2001, s 56A).

The fact that the assets that gave rise to that residual expenditure may now be in an ‘ordinary’ let dwelling does not trigger a balancing adjustment (but if a third party buys that property, they will not be able to access your capital allowances like they could previously). The fresh or future expenditure on replacing those fixed assets will, in many cases, potentially rank for replacement of domestic items relief, where freestanding, or even as simple ‘repairs’ to the overall fabric of the residential property, where fixed to the building (fixtures, etc.).

 (e) Pensions and relevant earnings – FHA profits used to count as ‘relevant earnings’, thence to support an individual’s making qualifying personal pension contributions (or at least where they wanted to make contributions exceeding £3,600 in a tax year); but from April 2025, individuals will need to rely on trading profits, or employment earnings.

 (f) CGT reliefs – Properties within the FHA regime used to enjoy special ‘quasi-trading asset status’ for the purposes of:

 • gift relief (business assets);

 • rollover relief;

 • business asset disposal relief (formerly entrepreneurs’ relief);

 • irrecoverable loans to traders (i.e., to FHAs); or

 • substantial shareholdings exemption (companies).

FHAs will no longer be able to shelter fresh gains going forward, but April 2025 will not itself trigger forfeiture of relief for gains already sheltered, so long as the properties in question continued to qualify as FHA up to the April 2025 transition. In fact, a 2024/25 gain could still be ‘rolled over’ into an FHA property acquired even up to 1 or 5 April 2025, and a claim could yet be made afterwards, for a property acquired up to that date (the anti-forestalling regime is largely aimed at scenarios where the completion of a property transaction has been deferred, for tax reasons, beyond April 2025).

In a similar vein, where the FHA business has actually ceased before 6 April 2025, a business asset disposal relief claim for CGT purposes can be made for otherwise-qualifying disposals within the usual subsequent three-year window.

What does not change?

 (a) VAT – Short-term ‘holiday-type’ occupation will remain exposed as a VAT-able supply, unlike mainstream long-term letting.

 (b) IHT and business property relief (BPR) – FHA status was only potentially indicative of a claim to BPR status, that ultimately depended on the extent of (broadly) ‘non-rental activity’ such as a concierge, laundry, meals, excursions, etc., and this remains the case.

Beware the traps

Those formerly FHA landlords with mortgage interest costs but who assume that they will not be adversely affected (“I am only a basic-rate taxpayer, so I should be OK”) should be careful they are not caught out by the way the finance costs regime works in the detail – such as where their personal incomes are already skirting the 40% income tax threshold (£50,270 for 2025/26). This is not the only income trap; adjusted incomes around the band where the personal allowance is forfeit (£100,000 - £125,140) could see some harsh marginal rate effects; exposure to child benefit clawback is another.

Profit share and joint ownership between married couples or civil partners

HMRC (and most commentators) say all properties owned jointly between a married couple (or civil partnership) must have their profits split 50:50, from April 2025, pending a Form 17 joint notice to HMRC, only then applying the (non-50:50) split of beneficial ownership.

To my understanding, the Form 17 is, strictly, required only for property held ‘in joint names’, meaning ‘in joint legal ownership’ (such as per HM Land Register).

While not a trap of losing FHL status itself, beware trying to ‘fix’ profit splits by changing the split in beneficial ownership; gifts other than between spouses, and civil partners, (living as a couple), generally trigger CGT; also, changing the beneficial ownership of a property subject to a mortgage can trigger stamp duty land tax, (or its devolved equivalent), even between married couples, etc.

Conclusion

Many landlords do not have FHAs, so they will not be affected by losing FHA status, and the transition seems fairly genteel. But each FHA landlord will need to consider their specific circumstances as there are several fine points: notably orienting around profit share, and matters like the cash basis, child benefit, and even MTD. Better to model outcomes guided by a suitable adviser, sooner rather than later. Some FHA landlords may feel that they are actually operating in partnership, rather than as ‘mere’ coowners – maybe trading, even. The implications are far-reaching and should be considered carefully.

State pension entitlement depends on a person having sufficient qualifying years, which in turn depends on them having paid or been treated as having paid sufficient National Insurance contributions. A person will receive the full single tier state pension (also known as the new state pension) if they have at least 35 qualifying years. Where a person has less than 35 qualifying years but at least ten, they will receive a reduced state pension. A person with less than ten qualifying years does not receive a state pension. Only the individual’s own qualifying years count – a person cannot qualify for the new state pension by virtue of contributions paid by their spouse or civil partner.

Employed earners

It is the payment of primary Class 1 National Insurance contributions which provides a qualifying year for employees. An employee will secure a qualifying year for state pension purposes if their earnings for that year are at least equal to the lower earnings limit for Class 1 National Insurance purposes. For 2025/26, this is £6,500. For 2026/27, it will rise to £6,708.

However, a person’s liability to pay Class 1 National Insurance only starts once their earnings exceed the primary threshold, which for 2025/26 and 2026/27 is £242 per week (£1,048 per month; £12,570 per year). Where an employee’s earnings are between the lower earnings limit and the primary threshold, they do not actually pay Class 1 contributions but are treated as if they have paid notional primary Class 1 contributions at a zero rate. This provides them with a qualifying year for zero contribution cost.

Self-employed earners

For 2024/25 and later tax years, self-employed earners secure a qualifying year through the payment of Class 4 National Insurance contributions. A self-employed earner is liable to pay Class 4 contributions for a year in which their profits exceed the lower profits limit, which for both 2025/26 and 2026/27 is set at £12,570. However, where a self-employed earner’s profits are between the small profits threshold (set at £6,845 for 2025/26 and £7,105 for 2026/27) and the lower profits limit, the self-employed earner receives a National Insurance credit which provides them with a qualifying year. Self-employed earners whose profits are below the small profits threshold can opt to pay voluntary Class 2 contributions, at a rate of £3.50 per week for 2025/26 and £3.65 per week for 2026/27.

For 2023/24 and earlier tax years, it was the payment of Class 2 National Insurance contributions which provided the self-employed earner with a qualifying year. Class 4 National Insurance had no associated benefit entitlement prior to 6 April 2024. A self-employed earner needed to pay 52 weeks of Class 2 contributions to earn a qualifying year. For 2022/23 and 2023/24, the liability arose where profits exceeded the lower profits threshold. However, where profits were between the small profits threshold and the lower profits threshold, the self-employed earner received a credit, providing them with a qualifying year. For 2021/22 and earlier years, self-employed earners whose profits exceeded the small profits threshold were liable for Class 2 contributions. Self-employed earners with profits below the small profits threshold could pay Class 2 contributions voluntarily to secure a qualifying year.

National Insurance credits

There are a number of circumstances in which an individual may receive a National Insurance credit which will provide them with a qualifying year. This is the case where a person receives or is entitled to receive child benefit or is in receipt of certain state benefits.

Voluntary contributions

A person can pay voluntary Class 3 or, if eligible, voluntary Class 2 National Insurance contributions to plug gaps in their contribution record. Where a person is eligible to pay voluntary Class 2 contributions, this is a much cheaper option.

Check your state pension forecast

A person should check their state pension forecast online to see how many qualifying years they have and whether they will have 35 qualifying years by the time they reach state pension age. Where a person will not qualify for a state pension, they can consider paying voluntary contributions to make up a shortfall. This will only be worthwhile if, after making the contributions, the individual will have at least ten qualifying years when they reach state pension age.

As the tax year draws to a close, directors of personal and family companies should consider whether it is worthwhile paying a dividend before 6 April 2026. However, it is only possible to pay a dividend where the company has sufficient retained profits from which to pay it. Also, where a class of share has more than one shareholder, dividends must be paid in proportion to shareholdings.

Unused allowances

Where a shareholder has not used their dividend allowance (set at £500 for 2025/26) or their personal allowance in full, consideration should be given to paying a dividend before the end of the tax year to mop up unused dividend and personal allowances. This allows profits to be extracted from the company without an additional tax liability. Where the company has an alphabet share structure, dividends can be tailored to the shareholder’s circumstances.

Beat the dividend tax rise

Once the dividend and personal allowances have been used up, dividends are currently taxed at 8.75% where they fall in the basic rate band, at 33.75% where they fall in the higher rate band and at 39.35% where they fall in the additional rate band. From 6 April 2026, the dividend ordinary rate is increased from 8.75% to 10.75% and the dividend upper rate is increased from 33.75% to 35.75%. There is no change in the dividend additional rate which remains at 39.35%.

Where dividends fall in the basic or higher rate band, an additional 2% will be payable in tax if the dividend is paid on or after 6 April 2026 compared to a dividend paid before that date. Where retained profits allow, consideration could be given to accelerating a dividend payment so that it is made before 6 April 2026 rather than on or after that date. This will save £20 in tax for every £1,000 paid as a dividend. However, if a dividend will be taxed at the ordinary dividend rate if paid in 2026/27 and at the upper dividend rate if paid in 2025/26, there is no point accelerating the dividend – 10.75% is a lot less than 33.75%.

The lifetime individual savings account (LISA) was introduced in the UK in 2017 as a longterm investment for those between the ages of 18 and 39. The maximum annual subscription is £4,000 (which counts towards the annual ISA limit) and the government will add £1 for every £4 invested. Funds can be held as cash, stocks and shares or a combination of these. No further contributions to the LISA are possible after age 50, but the account will remain open and savings will still earn interest or investment returns.

A penalty-free withdrawal can only be made from a LISA if the saver is buying a first home, is aged 60 or over, or is terminally ill with less than 12 months to live. A LISA can therefore be used, with savings enhanced by government contributions, to save the deposit for a first home or for additional pension, but if withdrawals are made for any other reason, a 25% charge is made. This and other issues mean that savers should be aware of drawbacks as well as the benefits.

Withdrawal charges

Because the government enhances the savings with a contribution of 25%, it is easy to think that the 25% penalty on withdrawal for non-qualifying purposes simply cancels this out. However, this is not the case.

For example, if a person saved £4,000, the government would add £1,000, making a total amount in the LISA of £5,000. But 25% of £5,000 is £1,250, meaning that as well as clawing back the government’s contribution, the saver potentially loses £250 (6.25% of their own money) from their original savings.

The limited flexibility of LISAs also means that a change of circumstances – such as needing to access savings in an emergency or indeed if the account holder never buys a home or requires funds before 60 – can mean penalties on withdrawal.

Property problems

LISA funds can only be used for a deposit for a property that costs no more than £450,000. In times of rising property prices, particularly in London, even first-time buyers may not find a suitable home. There are also other conditions that can cause difficulty for homebuyers:

 • The property must be purchased at least 12 months after the first payment into the LISA.

 • A conveyancer or solicitor must act in the purchase as the LISA provider will pay the funds directly to them.

 • A mortgage must be used and this cannot be a private mortgage from a spouse, civil partner or other specific relatives or their spouses or civil partners.

Pension possibilities

If the LISA funds are not used for a property purchase, the saver might think that use as a pension is a fallback position; but remember that a standard pension allows for withdrawals from age 55 (57 from April 2028). Although LISA withdrawals are tax-free and a 25% bonus is paid, tax relief is given on pension contributions at the marginal rate and 25% can be taken as a tax-free lump sum.

Further, an employer could also contribute to an employee’s pension and there is a much higher threshold for normal pension contributions. Also, unlike other personal or workplace pension schemes, LISA savings will be relevant when calculating eligibility for universal credit or housing benefit.

Conclusion

The subject of LISAs has also been considered recently by the House of Commons Treasury Committee which, among other things, reported that the dual-purpose design of the LISA was complicated; the withdrawal charge meant holders risked losing a significant part of their savings due to withdrawals to cover unforeseen circumstances; and people might be diverted from saving in more efficient pensions. The aims of supporting firsttime buyers and encouraging long-term retirement savings were valid, but LISAs may not be the most efficient use of taxpayers’ money to achieve those disparate objectives.

These issues and possible unexpected losses may mean that less financially literate savers may lose out and be put off using LISAs.

Practical tip

Savers should seriously consider whether investing in a LISA will help them achieve their financial goals. As with all financial decisions, independent advice should be obtained.

A recent case regarding capital losses on loans to traders.

In HMRC v Bunting [2025] UKUT 00096 (TCC), the Upper Tribunal (UT) considered when a loan to a trading business can be regarded as ‘outstanding’ and ‘irrecoverable’, meaning that the lender can claim an allowable capital loss.

The facts

Timothy Bunting (TB) made a series of loans, totalling £3.45m, to a trading company (Rectory Sports Limited) in which his wife was the sole shareholder and director. The company traded in sports memorabilia and books. By 2012, it was clear that the business was likely to prove unsustainable.

On 31 January 2013, TB and the company agreed to capitalise £2.2m of the loan, so 2.2 million ordinary shares of £1 each were issued in discharge of part of the loan. This was with a view to TB making a claim to set a capital loss on the shares against income (ITA 2007, s 131). However, the company and shares had no value at the time of issue, making such a claim invalid.

On 18 March 2013, the remaining loan balance was discharged by the transfer of assets to TB, before the company entered liquidation the following month.

TB claimed a capital loss under TCGA 1992, s 253 (loans to traders) in respect of the £2.2m element of the loan for which worthless shares had been issued. HMRC argued that the capitalisation of £2.2m of the loan satisfied that part of the debt, so there was no amount of loan outstanding which had become irrecoverable.

The legislation

TCGA 1992, s 53(3) provides that an allowable loss will arise for CGT purposes where ‘a person who has made a qualifying loan makes a claim and at that time…any outstanding amount of the principal of the loan has become irrecoverable’.

A ‘qualifying loan’ is (inter alia) a loan where the money lent is used by the borrower wholly for the purposes of a trade carried on by them. Money used by the borrower for setting up a trade that is subsequently carried on by them is treated as used for the purposes of that trade.

Tribunal decisions

The First-tier Tribunal (FTT) allowed TB’s appeal, deciding that when the section 253 claim was made on 29 February 2016, there was an ‘outstanding amount which had become irrecoverable’ in respect of the £2.2m of loan that had been capitalised three years earlier on 31 January 2013. By receiving worthless shares, TB had not been ‘paid’ £2.2m; there had been no satisfaction of the debt for valuable consideration in money or money’s worth, so the debt remained unpaid and hence was outstanding at the date the section 253 claim was made.

HMRC appealed to the UT, which held that the FTT had erred by focusing on whether the loan had been ‘paid’; what mattered was whether the loan was ‘outstanding’. In section 253(3), the words ‘outstanding’ and ‘irrecoverable’ must be given their ordinary meaning. The loan had been replaced with shares, which were fully paid up by the voluntary release of the £2.2m loan. The loan was therefore no longer outstanding, as evidenced by the fact that:

 • there was no ongoing obligation to pay that amount; and

 • TB had no entitlement to recover it.

The UT decision is in line with HMRC’s policy in this area (see HMRC’s Capital Gains Manual at CG65934) and also aligns with how most practitioners would view the law, so it should come as no great surprise.

Practical tip

If a loan to a trading business has become irrecoverable, it is disadvantageous to exchange the loan for worthless shares. The latter will not attract tax relief, but the irrecoverable loan may save some CGT.