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Using a trust to mitigate capital gains tax on property.

A trust is purely an arrangement where an individual (the settlor) transfers an asset into a trust run by other persons (the trustees) for the benefit of someone else (the beneficiary).

The trust has an independent existence from the trustees, who can retire or join with no implications except if a non-resident trustee is appointed.

Why a trust?

In addition to being a very useful succession planning tool, a trust generally keeps assets safe from the clutches of creditors or estranged spouses and provides a safe conduit for assets destined for younger children or other vulnerable beneficiaries.

A trust is also a mechanism to dissociate the benefit of an asset's use for a defined period from its eventual long-term ownership.

Type of trust

The legally binding trust deed (which must be drafted by a qualified professional) will dictate whether the trust is:

- a discretionary trust, which offers welcome flexibility as the trustees can choose how and when any income or capital is transferred to individuals within the defined class of beneficiaries; or

- an interest in possession trust, when the named beneficiary (life tenant) has an automatic right to the trust income during their lifetime (typically, a spouse) while future ownership will pass to someone else (often the couple's children) on death.

When does CGT arise?

Capital gains tax (CGT) is charged at the following points:

- when property is transferred into the trust;

- on the property's exit from the trust; or

- if the trust becomes non-resident.

As an aside, the above often have inheritance tax (IHT) consequences, although the interaction of CGT with IHT can be beneficial. Any transfer of a mortgaged property will require the lender's permission and may also result in a stamp duty land tax charge (or the equivalent in Wales or Scotland).

Property transferred into trust

When the settlor gifts property to a trust, this is a deemed market value transfer between connected parties. Any resulting gain will be automatically reduced by capital losses on other assets owned by the settlor arising in the same tax year. Further, any available current tax year trading losses or brought forward capital losses can also reduce the gain. Unless a holdover relief claim is made (see below), any remaining amount (after deduction of the immaterial annual exemption) will crystallise a CGT charge for the settlor, subject to rates of 18% for gains falling within the basic-rate band and 24% otherwise.

For property owned by a married couple (or civil partners), it is possible to change the relevant proportions (at nil gain, nil loss) so that, on transfer to the trust, full use is made of both individual's losses, annual exemptions and lower tax rate bands. Care is required, however, to avoid triggering anti-avoidance provisions.

Any CGT arising on residential property disposals must also be reported and paid within 60 days of the transfer using HMRC's CGT on UK property service, and in most cases, reported on the settlor's self-assessment tax return as well.

Property exiting the trust

The transfer of property out of the trust is treated as a disposal, whether by sale or appointment to a beneficiary (which is a deemed market value transfer under TCGA 1992, s 71, although holdover relief could be available). After deducting any available losses, the trustees will be liable to CGT on the gain at a rate of 24%. The tax is payable and reportable within 60 days (for residential property), which requires the trust to have already registered with the trust registration service according to HMRC's Agent Update 140 (hopefully most trusts will have already registered to avoid penalties).

If an appointment results in a loss which cannot be set against gains realised by the trust in the same tax year, it can instead be transferred to the recipient beneficiary for use against future gains arising from the same property (under TCGA 1992, s 71(2)).

Deferral of gains

While not eliminating any gain, holdover relief at least offers a deferral opportunity. It is only available on transfer into the trust, however, where the settlor, their spouse or dependent children cannot (or could not) benefit from the trust, under TCGA 1992, s 169B. On a future transfer to a beneficiary, another holdover claim is often possible, which can encompass the original relief already embedded within the asset's value.

Holdover relief requires a joint claim on form HS295, except for the initial transfer to a trust when it is just the settlor who elects for relief.

Example: Holdover relief on gifted property

Logan owns a buy-to-let property which he acquired for £100,000 but is now worth £400,000. On gifting the property to a discretionary trust, the gain is £300,000. To avoid a 'dry' CGT charge of £72,000, he claims holdover relief, which defers the gain, meaning that the property's base cost for the purposes of any future disposal by the trust is £100,000 (rather than £400,000).

A few years later, the trustees appoint the property to a beneficiary when the property is worth £500,000. The resulting gain of £400,000 (calculated by deducting the base cost of £100,000) can be deferred again so that the beneficiary's base cost is £100,000 with respect to any future disposal. The CGT has successfully been deferred twice.

Restrictions

Holdover relief is only available in respect of:

- business and agricultural assets, including plant, machinery, and trading company shares, under TCGA 1992, s 165; and

- any type of asset where an IHT charge arises, under TCGA 1992, s 260, including transfers covered by the nil rate band of £325,000, exemptions or reliefs, but not merely potentially exempt transfers. For a jointly-owned property, the nil rate band will cover a property value of £650,000 (as reduced by any previous transfers to trusts or companies in the seven years preceding the gift).

When appointing property out of the trust to a beneficiary, timing is important as an IHT charge arises only after three months have elapsed from either the creation of the trust or its most recent tenth anniversary. There is also a clawback period of six years from the end of the tax year of the transfer, where the held over gain will come into charge should the trust become settlor-interested or emigrate (although, as non-residents remain liable to UK CGT on UK land, any clawed back gain can itself be deferred under TCGA 1992, s 168A).

Occupying residential property

A word of caution in relation to residential property is that principal private residence (PPR) relief, which normally exempts the gain relating to the period when the property was occupied as an individual's main residence, may not be available. Any holdover relief (whether claimed on the property entering or exiting a trust) precludes any subsequent PPR relief claim in respect of a beneficiary who occupies the property (under TCGA 1992, s 226A).

This is true no matter whether it is the trust or beneficiary who makes the eventual disposal. A choice therefore has to be made between:

- incurring a CGT charge when property enters the trust, retaining the possibility of a future PPR claim; or

- deferring the gain, which prevents any possible future PPR relief claim, and paying CGT on any appreciation in value in the future at whichever rate then applies.

Practical tip

When transferring residential property into a trust, the long-term effects of any available holdover relief claim must be weighed up against the loss of PPR relief, particularly if the settlor has losses to offset. Specific professional advice should always be sought to ensure the (often irreversible) tax consequences of using a trust are fully anticipated.

Businesses which give away free gifts or samples need to be aware of the VAT implications to ensure that they account for VAT correctly.

Gifts

Where a business makes a free gift, they do not receive any consideration in return.

If input tax has been incurred in relation to that gift which can be recovered, the business must account for VAT on the cost value of the gift unless the gift is a business gift.

Business gifts

A gift is a business gift if it is made in the course of promoting the business and the business is entitled to reclaim the VAT charged as input tax. The range of items that may count as a business gift is wide, including brochures and posters to expensive executive gifts. The definition also includes long service awards and retirement gifts, items given to trade customers, thank-you gifts given to customers and prizes in free lotteries or competitions or dispensed from gaming machines.

A business does not need to account for VAT on business gifts as long as the total cost of business gifts made to the same person does not exceed £50 in any 12-month period. However, where the total cost of business gifts to the same person exceeds this limit and the business is entitled to recover the VAT incurred on the purchase as input tax, they must account for VAT on the total cost value of the gifts.

Where a gift is used for business purposes by the recipient and VAT is accounted for, as a VAT invoice cannot be issued, the business must issue a tax certificate which must contain the words ‘No payment is necessary for these goods. Output tax of £X has been accounted for on the supply.’

Samples

A sample is defined for VAT purposes as ‘a specimen of a product which is intended to promote the sales of that product and which allows the characteristics  and qualities of that product to be assessed without resulting in final consumption, other than where final consumption is inherent in such promotional transactions’.

Free samples are not liable to VAT.

However, it should be noted that a finished item from a discontinued line does not count as a sample. Further, an item is not regarded as a sample where it is provided in greater quantities than necessary to assess its characteristics and qualities. For example, if a wine importer provided a client with a bottle of wine, HMRC would accept that it was a sample. However, the provision of a case of 12 bottles would suggest more than a sample.

Why there will not always be a partnership for tax purposes where property is jointly owned.

The way in which income from letting properties which are jointly owned is taxed depends on whether a partnership exists and if not, whether the co-owners are spouses or civil partners.

It should be noted at the outset that merely owning property jointly does not in itself give rise to a partnership, and in most cases, the letting of a jointly-owned property will not constitute a partnership.

What then is a partnership, and when will one arise in relation to property letting?

What is a partnership? A partnership is defined in the Partnership Act 1890, s 1(1):

'Partnership is the relationship which subsists between persons carrying on a business in common with a view to profit'.

The Act also provides that:

- joint tenancy, tenancy in common, joint property, common property or part ownership does not of itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof; and

- the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived.

However, it is possible that an individual may own properties which are let out as part of a partnership business. This may be the case where the person is a partner in a trading or professional partnership or, more rarely, where they are a partner in an investment business that does not constitute a trade, and which includes or consists of the letting of property.

Is there really a partnership? Whether a partnership exists will depend on the facts. A partnership is unlikely to exist where an individual is simply one of a group of joint owners of a property which they let out. However, if they provide significant additional services, this may indicate a partnership. For example, where cleaning, maintenance and gardening services are also provided, this may indicate a business. The key is the amount of business activity involved – for there to be a partnership, the level of business activity needed is akin to the level of organisation needed in an ordinary commercial business.

It may be easier to pass this test where the jointly-owned property is let as holiday accommodation, as it is likely more services will be provided than in relation to a long-term holiday let. For example, to run a successful holiday let, it will be necessary to advertise the property, liaise with guests and provide cleaning, laundering, gardening and maintenance services.

Partnerships and tax  A partnership set-up can offer tax advantages, and where this is the preferred route, it is vital to pass the business organisation test – a failure to do so will mean that HMRC is unlikely to accept that a partnership exists and the usual joint ownership rules will be applied.

Where a partnership rental business exists, it is treated as a separate rental business, and the profits and losses must be calculated for that business in isolation. The partnership rental business is separate from any other profit rental business that the individual may have. If the individual is a partner in more than one property partnership, each partnership is a separate rental business. The profits and losses from different rental businesses cannot be set against each other; losses must be carried forward and relieved against future profits from the same rental business.

Tax treatment: Partnership  Where a partnership exists, the normal tax rules apply. The partnership is transparent for tax purposes, and each partner is taxed on their share of the profits.

The profits are allocated in accordance with the agreed profit-sharing ratio. Regardless of the relationship between the partners, they can decide between themselves how to split profits. This can be a massive advantage for partners who are married or in a civil partnership and gives them a flexibility in how they share profits not available outside the partnership.

They do not need to set the profit-sharing ratio in advance. They can simply agree to share profits and losses in such proportion that is agreed among themselves. This allows them to tailor the split each year to achieve the best possible outcome.

Example: Partnership: Airbnb rental income

John and Jane have three holiday cottages that they let out through Airbnb. They also publicise the cottages through their social media account. They provide guests with a welcome hamper. They provide towels and bedding and undertake the cleaning, garden and general maintenance. HMRC accepts that they have a property partnership.

In 2026/27, the rental profits are £60,000. John works entirely in the business. Jane undertakes the administration work. She also runs a separate business as a yoga and Pilates teacher from which she makes £40,000 in 2026/27.

Jane has used up her personal allowance and £27,430 of her basic-rate band, leaving £10,270 of her basic-rate band available. John has his basic-rate band and personal allowance available.

They agree to allocate profits in the ratio 5:1 so that John has 5/6 of the profits (£50,000) and Jane has 1/6 (£10,000) of the profits.

The first £12,570 of John's share of the profits is covered by his personal allowance. The remaining £34,730 is taxed at 20%, a tax bill of £6,946. Jane is taxed at 20% on her share of the profits, a tax bill of £2,000.

If they had shared profits equally, each receiving £30,000, £19,730 of the profits would move from being taxed at 20% to being taxed at 40%, increasing their joint tax bill by £3,946.

Joint ownership – No partnership

Where properties are owned jointly outside a partnership, the way in which the rental income is taxed depends on the relationship between the parties.

Joint owners are married or in a civil partnership

Stricter rules apply to tax rental income when the joint owners are married or in a civil partnership. Where this is the case, the tax planning options depend on how the property is owned.

The default position is that the rental income is treated as allocated equally between the spouses or civil partners, with each being taxed on 50% of the rental profits, regardless of any actual split between them.

This may be a good or a bad thing. If a property is owned solely by one partner and that partner pays tax at a higher marginal rate, transferring a small stake in the property (say 5%) using the 'no gain, no loss' rules will transfer 50% of the rental income for tax purposes to the spouse or civil partner paying tax at the lower rate. This will reduce the overall tax bill on the rental income and make it possible to utilise personal allowances or basic-rate bands that might otherwise be wasted.

However, if a different split would be ideal, this is only an option if the property is owned as tenants-in-common in different shares. This can be done by making a form 17 election for the income to be allocated for tax purposes by reference to the underlying beneficial shares. The ownership split can be changed by making transfers between them on a no gain, no loss basis to achieve the desired result. The election cannot be made retrospectively, and if it is to have effect for the full tax year, it must be made at the start of the tax year.

If the property is jointly owned as joint tenants, the only permitted rental split for tax purposes is a 50:50 split.

Joint owners are not spouses or civil partners

Where property is owned jointly by persons who are not married to each other or in a civil partnership, there is more flexibility as to the allocation of rental income for tax purposes. The usual situation is for the income to be allocated between the joint owners in accordance with their ownership shares.

However, the joint owners may decide to allocate rental profits differently, in which case each person will be taxed on the profits that they actually receive. This achieves the same flexibility as a partnership but without the need to satisfy the business test.

Practical tip

A property rental partnership can offer married couples and civil partners greater flexibility in the sharing of rental profits. This can be very useful from a tax planning perspective. However, it is important that the arrangement passes the 'partnership' test.

When a sole trader transfers their business to a limited company, a chargeable gain may arise on the assets transferred. As the connected person rules apply, the gain is calculated by reference to the market value at the date of transfer rather than the sale proceeds, if any. However, where rollover relief on the transfer of a business – generally referred to as ‘incorporation relief’ – is claimed, some or all of the gain can be deferred, reducing or eliminating the immediate capital gains tax bill.

Incorporation relief is a capital gains tax rollover relief that can be claimed where a business is transferred to a limited company wholly or partly in return for shares.

Full relief is available where the consideration is wholly in shares. Here, claiming incorporation relief allows the full gain to be rolled over, reducing the base cost of the shares.

Example 1

Peter incorporates his business, transferring all the assets from his sole trader business to the new limited company, P Ltd, in return for 1,000 ordinary shares in the company.

On incorporation, the business was worth £50,000 (£50 per share).In the absence of  incorporation relief, a capital gain of £30,000 will be chargeable immediately.

Peter claims incorporation relief. The gain is rolled over, reducing the base cost of the shares to £20,000 (£20 per share).

If the consideration is received partly in shares in the new company and partly in cash, incorporation relief is only available for so much of the gain as is attributable to the shares. The part of the gain which is attributable to the cash is immediately chargeable.

Example 2

The facts are as in example 1, except that he receives 1,000 ordinary shares in P Ltd and £10,000 in cash. On incorporation, the company was worth £50,000. In the absence of incorporation relief, a capital gain of £30,000 will be chargeable immediately.

Peter claims incorporation relief. In this instance, only the gain attributable to the shares of £24,000 (£30,000 x £40,000/£50,000) can be rolled over, reducing the base cost of the shares to £16,000 (i.e. from £40 per share to £16 per share). The remaining gain of £6,000 attributable to the cash is immediately chargeable.

Claiming the relief

A claim to incorporation relief will not always be beneficial – if the transfer of the business gives rise to a capital loss, which may be the case if the assets have depreciated since they were acquired, or if any gain is sheltered by losses and/or the annual exempt amount, there is no point in claiming the relief. However, where incorporation relief is worthwhile, it must now be claimed; prior to 6 April 2026, it was given automatically. Where the transfer of the business takes place on or after 6 April 2026, the relief must be claimed on or before the first anniversary of the 31 January following the end of the tax year in which the transfer of the business took place. This can be done in the Self-Assessment tax return.

Many people are taking on a side hustle to make ends meet. This can take various forms, such as selling items online, providing services or creating content.

You may need to tell HMRC about your income if your trading income (from all sources including any other self-employments) is more than £1,000. The £1,000 limit is for all trading income – not for each source. You may also need to sell an item and make a capital gain. Normal tax rules apply – there are no special rules for side hustles.

Tax will be payable if your total taxable income from all sources exceeds your personal allowance (set at £12,570 for 2026/27, abating once income reaches £100,000).

Here we look at some popular side hustles and see whether you need to tell HMRC about them.

Selling clothes on Vinted

Where a person simply sells their old clothes on Vinted for less than they paid for them, they do not need to tell HMRC about the income.

However, if they buy second-hand clothes with a view to selling them for a profit, they will need to tell HMRC once their total trading income from all sources exceeds £1,000. Remember, this is income before deducting expenses.

If the income is less than £1,000, it is covered by the trading allowance, and there is no need to tell HMRC.

Tax will be payable on the profit. If expenses are less than £1,000, the trading allowance can be deducted instead.

Providing services

A person may earn extra money by providing services, such as tutoring or gardening services.

Here, HMRC must be told once the income from providing the services reaches £1,000. Tax is payable on the profit after deducting expenses or the £1,000 trading allowance if this is more beneficial.

Selling household items

Normally, it will not be necessary to tell HMRC if you make money from selling unwanted furniture and household items. However, if an item such as a painting or an antique is sold for more than £6,000, you may need to tell HMRC and pay capital gains tax if you have made a gain. Special rules apply which cap the chargeable gain.

These rules do not apply to private cars and assets with an expected lifespan of less than 50 years.

Content creation

Content creators may earn money from reviewing items online. They may also be gifted items to promote a brand. When working out the total income from content creation, it is not enough to only include cash payments – the value of gifted items must also be taken into account.

Where the total income (before deducting expenses) exceeds £1,000, HMRC must be told. The profit is taxable. When calculating the profit, the £1,000 trading allowance can be deducted instead of actual expenses where this gives a better result.

More than one side hustle

If you have more than one side hustle, you will need to add together the income from each source to see if it exceeds the £1,000 trading allowance. Remember to include income from any self-employments too.

Remember, digital platforms provide income details to HMRC.

Fill in a tax return

If you need to tell HMRC about your side hustle, you will need to register for Self-Assessment if you are not already registered and file the return online by midnight on 31 January after the end of the tax year to which it relates.

The Property 118 Tribunal case concerned whether Scheme Reference Numbers (SRNs) issued in respect of two sets of arrangements were validly issued.

The arrangements in question – the SIS and the CAR – were designed to incorporate a property business run by a husband and wife to take advantage of the fact a company can still deduct interest and finance costs incurred in relation to residential lets – the interest relief restriction for unincorporated residential landlords does not apply to companies.

The Substantial Incorporation Structure (SIS) transferred the beneficial ownership of the properties to the company while the existing mortgages and legal title on the properties remained in the landlord’s name. The landlord collected the rents and paid the expenses on the company’s behalf.

The Capital Account Restructure (CAR) worked in a similar way to the SIS but included a bridging loan obtained by the landlord, with the funds being lent by the landlord to the company.

HMRC contended that the arrangements were notifiable arrangements in accordance with FA 2004, s. 306. They argued that both arrangements fell within the scope of the Tax Avoidance Schemes (Prescribed Descriptions of Arrangements) Regulations 2006 (SI 2006/1543), description 5 (standardised tax products) and that the CAR also fell within description 3 (premium fee) and/or description 9 (financial products involving contrived steps). They issued SRNs.

Property 118 and Cotswold Barristers Limited appealed the allocation of the SRNs to the First Tier Tribunal.

The issue was whether the SRNs were validly issued. This required the Tribunal to answer several questions, including whether the tax advantage was the main purpose of the arrangement or whether it was a main purpose among genuine non-tax commercial purposes, and whether the schemes fell within description 5 and the CAR within descriptions 3 and 9.

The First Tier Tribunal allowed the appeals, cancelling the SRNs.

It should be noted that the Tribunal only considered whether the SRNs were validly issued – it did not address whether the schemes work. This is a separate question.

At the beginning of July 2026, HMRC amended several pages of its Business Income Manual relating to business funding and specifically to the withdrawal of capital from unincorporated businesses (BIM45690 – Funding the business and BIM45700 –Withdrawal of capital from a business). HMRC says the changes give clearer context and remove unnecessary calculations – but many commentators believe that the way in which the text has been written restricts interest relief on borrowing used to fund capital withdrawals from a business.

Basic law

Tax law states that interest is allowable only if incurred ‘wholly and exclusively’ for the purposes of the business. ‘Business’ applies to trading activities and property businesses. The test looks at the purpose of the borrowing, not simply where the money ends up. Where a loan serves both business and private purposes, the interest must be apportioned, with only the business element being deductible.

Before the rewrite, a business owner could withdraw capital they had introduced plus accumulated profits. If the business replaced that funding with borrowing, full interest relief was allowed, even if the money was withdrawn for personal use, the only restriction being where the drawings made the capital account overdrawn.

Change in guidance

The updated guidance states that ‘simply exchanging existing capital for loan finance does not on its own satisfy the wholly and exclusively test’. It adds that interest remains allowable where the borrowing is used for business expenditure or to acquire assets used in the business. However, some commentators read this as meaning that interest on substitute borrowing will almost always fail, because a capital withdrawal is intrinsically private in purpose.

HMRC's example 3 in BIM 45700 explains that when officers are considering how much of a loan has a private purpose, they should look at the borrower's purpose when the funding was obtained and at what could have been withdrawn without the loan.

As an example, if a business property is remortgaged and that extra capital is invested back into the business for repairs, etc., so long as the value of the capital in the business is not exceeded then full interest relief remains deductible.

Problem

The rewrite potentially creates a problem where the owner has invested their own money in the business and now wishes to withdraw that money for personal use. If the business replaces that capital with a loan then, although the funds remain in the business, interest relief may be refused. However, if the full original funding was via a loan, interest will be deductible in full.

The following example shows the differences between the pre- and post-July 2026 text:

Sarah put £100,000 of her own money into her business. She withdraws £60,000 for personal use, and the business borrows £60,000 to replace it at 5% interest. The loan remains in the business, so under the old guidance the £3,000 annual interest was fully deductible. Under the rewritten guidance, HMRC could argue that the loan's purpose was to fund the private withdrawal and disallow the interest. Had Sarah originally funded the property with £40,000 of her own savings and a £60,000 loan, the same £3,000 interest would be deductible in full, and it is this inconsistency that is concerning.

Overdrawn capital account

HMRC’s text states that an overdrawn capital account is merely an indication that borrowing is being used to fund private expenditure. The instruction to officers is that further investigation may be needed to ascertain whether personal drawings have resulted in the overdrawn capital account and, if financed by borrowing, then to restrict any interest.

Is this a new rule?

The rewrite may simply be bringing the manual into line with how some officers already viewed these situations. HMRC's rewritten guidance suggests they may now challenge interest relief more readily where the withdrawn money is used personally.

Practical point

The revised sections cover unincorporated trades and property businesses only, so companies, which fall under the loan relationship rules, are not directly affected. Note that manual guidance is not law, so taxpayers can still appeal if interest is disallowed.

HMRC send out a P800 tax calculation letter where a person who is employed and/or in receipt of a pension has overpaid or underpaid tax. They will not get a letter if they complete a Self-Assessment tax return instead; their Self-Assessment bill will be adjusted automatically.

There are various reasons why a person may receive a letter, for example, because they were on the wrong tax code, they finished one job and started another in the same tax month, they started receiving a pension while they were still working or they received Employment and Support Allowance or Jobseeker’s Allowance. They may owe tax or be due a tax refund as a result.

Claiming a refund

Where the taxpayer is due a tax refund, the P800 letter will explain how to claim that refund. Where the letter states that the refund can be claimed online, the taxpayer can make the claim by visiting the Gov.uk website at www.gov.uk/tax-overpayments-and-underpayments/if-youre-due-a-refund.

Claims can also be made through the taxpayer’s personal tax account or the HMRC app or by contacting HMRC. Where a claim is made online, the refund should be received in five working days.

If the tax calculation letter states that the taxpayer will get a cheque, they do not need to do anything – the cheque will normally be received within 14 days of the date on the P800 letter.

Owing tax

If the P800 tax calculation letter says that the taxpayer owes tax, HMRC will usually collect this by amending the taxpayer’s tax code so as to collect the tax that is owed from the taxpayer’s wages in 12 equal instalments. This will happen automatically where the taxpayer pays tax under PAYE on employment income or a pension, their income exceeds their personal allowance by a sufficient amount to collect the tax due and the amount owed is less than £3,000.

If the tax cannot be collected in this way, HMRC will write to the taxpayer.

Check the calculation

It is dangerous to simply assume the tax calculation is correct – it should always be checked.

Particular problems are known to arise as regards the allocation of allowances where the taxpayer has more than one source of income. Under current rules, allowances should be allocated so as to give the best outcome. However, in practice this does not always happen, and errors can result particularly in relation to the application of the savings nil rate band.

If you think the calculation is wrong, contact HMRC. If they agree that the calculation is incorrect, they will issue a new one. If they don’t agree, they will explain why.

Stamp duty land tax (SDLT) is payable on the purchase of a property in England or Northern Ireland.

There are different rates for residential properties (with a 5% supplement applying to second and subsequent residential properties) and non-residential properties. The non-residential rates also apply to mixed-use properties. The starting point for residential properties is than for non-residential properties and the rates are higher and the rates applicable to residential properties are higher. Thus, the SDLT bill will be lower for a mixed-use property than for a residential property of the same price.

Is the property a mixed-use property?

The fact that part of a property is used for business will not in itself make a property a mixed-use property. HMRC draw a distinction between the use of certain rooms for business in what otherwise would be a dwelling (for example, the use of one room as a home office) and a building containing residential accommodation which has been divided into separate areas, one or more of which is used as commercial or business premises (for example, where part of a house has been converted into a shop).

Where a room in a house is used as a home office or similar, the room usually remains suitable for use as part of the dwelling house. Consequently, the property is a dwelling house not a mixed-use property and as such the residential stamp duty rates apply. Using the dining room as an office does not make a dwelling a mixed-use property.

Where the property is converted, or used without specific conversion, as part residential accommodation and part commercial and sold as a single interest, the position is more nuanced. Where part of the building is set aside for day-to-day commercial use and that part is used separately from the parts used for accommodation, HMRC will accept that the parts used commercially are not part of the dwelling. Consequently, the property is a mixed-use property and the non-residential SDLT rates will apply. An example here would be a house in which two rooms are dedicated to use as a hairdressers; the rooms converted into the hairdressers are not part of the living accommodation.

It is important to note that the use of the rooms does not in itself determine whether the property is a mixed-use property; the degree of conversion and the degree of separation from the living accommodation are key. If the rooms used commercially can easily be incorporated into the residential parts of the building without the need for any adaptation, they will remain part of the dwelling house and the property will not be a mixed-use property for SDLT purposes. However, if the parts used commercially have been converted in such a way that the rooms are not suitable for living accommodation (for example, where part of the property has been converted into a shop, a separate entrance and the installation of shelving, fridges etc.), then the part so converted will no longer be suitable for use as living accommodation; the property will be a mixed-use property and the non-residential SDLT rates will apply.

The way in which an unincorporated landlord receives tax relief for interest and finance costs depends on whether or not the property is a residential property. Relief for interest and finance costs incurred by unincorporated landlords in respect of residential lets is given as a basic rate tax reduction, whereas the interest and finance costs relating to non-residential properties are deducted in calculating the taxable rental profits.

Where a property portfolio comprises both residential and non-residential lets or where a property has both residential and non-residential parts, it is important that interest and finance costs are treated correctly.

Mixed property portfolios

Where an unincorporated landlord has a property portfolio which includes both residential and non-residential lets, the treatment of interest and finance costs will depend on the nature of the property to which they relate. Where there are separate mortgages for each property, it is straightforward to identify whether the interest relates to a residential or a non-residential property. The interest relating to non-residential lets can be deducted in calculating the taxable rental profit whereas relief for the interest on the residential lets is given in the form of a basic rate tax reduction.

Example

Hughie owns two properties which he lets out – a flat and an industrial unit. The flat has a mortgage of £100,000 and Hughie pays interest of £4,000 in the tax year. The industrial unit has a mortgage of £60,000 in respect of which Hughie pays interest of £3,600.

He can deduct the interest of £3,600 paid in respect of the industrial unit in calculating the taxable rental profits. However, relief for the interest on the residential mortgage is given as a basic rate tax reduction of £800.

Mixed-use property

Where a property has both residential and non-residential parts, as would be the case for a shop with a flat above it, the interest must be apportioned to the various parts on a just and reasonable basis. For example, this may be by reference to the value of each part or by floor area.

The interest apportioned to the non-residential part can be deducted in calculating the taxable rental profits, whereas relief for the interest apportioned to the residential part is given as a basic rate tax reduction.

Example

Bella lets out a shop with a flat above. She has a mortgage of £200,000 on the premises on which she paid interest of £10,000 in the tax year in question. The flat accounts for 60% of the floor area and the shop for 40%.

£4,000 of the interest (40% of £10,000) is attributed to the shop and deducted in calculating the taxable rental profits. The balance of £6,000 (60% of £10,000) is attributed to the flat and relieved as a basic rate tax reduction of £1,200.

A consideration of some of the inheritance tax implications of parents helping their children pay mortgages.

The difficulties of affording a house and the potential for help from the 'bank of mum and dad' are often discussed. Parents may be willing to assist and this will commonly be by transferring money to children and because there is no 'gift tax' on such payments, it might be thought that this is the end of the matter. However, there may be inheritance tax (IHT) implications.

Generally, a gift of money will be a transfer of value and, subject to any available exemptions, it will be a potentially exempt transfer (PET) for IHT purposes. This means it will not be taken into account in calculating the donor's IHT liability if they survive for seven years after the gift. However, if they die within three years, the full amount gifted will be treated as part of their estate. If they die in years four, five, six or seven after the gift, a decreasing proportion is included.

Structure of gifts

The basic principles above mean that the structure of the financial help is important. A one-off lump sum paid towards a deposit or to reduce the mortgage balance will normally be treated as a PET unless it is covered by one of the standard exemptions. An individual has an annual exemption of £3,000, and any unused amount can be carried forward for one tax year. So, if a parent has not used the previous year's exemption, they may be able to give up to £6,000 without it being added back into the estate for IHT purposes. If both parents make gifts from their own assets, they may each use their exemptions.

Amounts above those exemptions will become relevant if the donor dies within seven years. In brief (and ignoring the residence nil rate band and other reliefs), the first £325,000 of an estate on death is chargeable at 0%, and any excess is charged at 40%. HMRC looks at gifts in chronological order when deciding whether earlier lifetime gifts have used up the nil-rate band.

Gifts out of income

Regular mortgage payments by a parent may be treated more favourably under the exemption for normal expenditure out of income. This is often the most useful relief where parents intend to help over time rather than by a single large payment. To qualify, the payments must: form part of the parent's normal expenditure; be made out of income rather than capital; and leave the parent with enough income to maintain their usual standard of living.

HMRC guidance specifically recognises that mortgage payments made on someone else's behalf may qualify if these conditions are satisfied. In practice, that means the arrangement should look like a settled pattern, such as a monthly standing order, and should be funded from income such as salary, pension income, rental income or dividends, not from savings or the sale of assets. If the exemption applies, the gift is immediately outside the estate and there is no need to survive seven years.

Documentation is essential. Parents should keep clear records showing the source of the funds, their income and expenditure, and the intention behind the payments. A short letter or note stating that they intend to make regular payments towards a child's mortgage from surplus income can be helpful evidence if HMRC later reviews the estate. Bank statements and an annual summary of income and living costs can also support the claim to exemption. Without this, HMRC may treat payments as PETs. Just because payments are made directly to a lender rather than the child, for IHT purposes, a payment made on the child's behalf can still be a gift.

Conclusion

While the IHT considerations must be considered, there are wider estate planning points to consider. Large gifts could reduce the parents' own financial resilience, particularly if care costs or changes in income arise later. Also, will gifts to one child raise fairness issues between siblings?

Practical tip

As an alternative, parents could simply loan money to their children. Because this is repayable in future, there should be no IHT and funds may be protected in case of financial difficulty or divorce.

Over the summer, HMRC consulted on proposals for the timelier payment of income tax due under Self-Assessment (ITSA).

Currently, taxpayers within Self-Assessment must pay their income tax and any Class 4 National Insurance by midnight on 31 January after the end of the tax year to which it relates. This means that income tax and Class 4 National Insurance for 2025/26 must be paid in full by midnight on 31 January 2027.

If the tax and Class 4 National Insurance bill for the previous tax year was £1,000 or more, unless 80% of the amount due for the year was collected at source, such as under PAYE, the taxpayer must make payments on account of the current year’s liability on 31 January in the tax year and on 31 July after the end of the tax year. Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. Any balance due must be paid by 31 January after the end of the tax year.

Taxpayers with PAYE income

Taxpayers who are within Self-Assessment and who have a PAYE source of income will make in-year payments on account of their Self-Assessment tax bill through PAYE from 6 April 2029 (2029/30 tax year).

Other taxpayers

Where a taxpayer has no or insufficient PAYE income for tax and Class 4 NIC that they owe through Self-Assessment to be collected in year through PAYE, HMRC are exploring increasing the frequency of payments on account and advancing them so that all payments on account are made in the same tax year as the income to which they relate. Under this proposal, the payments would be based on the taxpayer’s forecasted liability which in turn would be based on past returns. Once the taxpayer had reported their liability for the year, the amounts paid and owed would be reconciled, with the taxpayer making a balancing payment or receiving a refund as necessary.

Transition year

Moving to in-year payment will mean that in the transition year taxpayers may be paying tax for more than one tax year. Although the actual tax paid will not change, moving the payment dates in year may cause cashflow difficulties for taxpayers. HMRC are considering options to support taxpayers during the transition, such as spreading payments for previous years over a longer time frame.

By now the first quarter’s Making Tax Digital (MTD) submissions should have been made. However, by 12 August, just over 436,000 of the estimated 864,000 taxpayers affected had submitted their first quarterly update. Many taxpayers have questioned why the new system has been introduced, with some wondering whether it is simply a precursor to quarterly tax payments.

HMRC has previously stressed that MTD quarterly reporting is intended to move record-keeping closer to real time and not mean quarterly payments. However, one sentence in the 2025 Budget potentially casts doubt over whether more frequent tax payments could eventually become part of the MTD regime; the sentence being:

‘More timely payment for Self-Assessment – the government will require income tax Self-Assessment taxpayers with Pay As You Earn (PAYE) income to pay more Self-Assessment liabilities in-year via PAYE from April 2029.’

Although this was not an announcement specifically about quarterly payments, the Budget document went on to say that the government would consult on more timely payments for self-assessment taxpayers overall. The consultation paper ‘Timely Payments in Income Tax Self Assessment’ was published on 23 June and closed on 4 August with a response expected sometime in the autumn.

Consultation paper

HMRC has made no secret of its aim to align self-assessment payment dates with PAYE, believing that by doing so tax is ‘paid closer to real time, reducing the likelihood of late payments or taxpayers falling into tax debt’. The consultation paper states that approximately one in five self-assessment tax bills are paid late, estimating that a delay of up to 22 months is the norm. This not only affects taxpayers’ (and the government’s) cash flow, making it difficult to budget, but also means HMRC spends time  chasing debts, issuing reminders, employing debt collectors (who obviously charge a fee for their services) and agreeing to time to pay arrangements.

The new system

The proposal is that from April 2029, employees who are also self-employed will have to make payments on account through their PAYE earnings on their forecasted self-assessment liabilities, each pay period, divided into equal payments throughout the year. The intention is that the forecasted payments will be based on the taxpayer’s last filed tax return. The consultation document gives examples of how the system will work including within the transitional period. The current amount of tax that can be collected through PAYE in any pay period is capped at 50% of PAYE income – whether that limit will be retained is being considered as part of the consultation.

The problems

HMRC believes that for someone with steady income, their tax payments would be largely in real time and accurately reflect their final tax bill. However, this method of calculation could mean some taxpayers making payments before they receive the associated income, which may be difficult for those with seasonal or irregular income. To alleviate this problem, HMRC intends those taxpayers to be able to update their forecast, using more recent information, so their payments are adjusted accordingly.

The first implementation year would be a transition year in which taxpayers would be required to make their balancing payment for the prior tax year (2028/2029) alongside their forecasted tax liabilities for 2029/2030. HMRC is looking at various payment options for this year including spreading the liability for the previous tax year over a longer time period (as was the case under the basis period reform in 2023/24).

Should a taxpayer not have sufficient PAYE income to make the additional payments, HMRC is considering 12 monthly payments or four quarterly payments in April, July, October and January; the amount being based on the previous year's tax liability, with a final adjustment when the self-assessment return is submitted.

Practical point

The consultation does not specifically align MTD quarterly updates with quarterly payments as updates are intended to move record-keeping closer to real time. Rather, the government is consulting on increasing the frequency of self-assessment payments on account.

Where a personal company is run from the director’s home, the payment of rent by the company for the use of the space can be a handy way of extracting profits. However, to avoid HMRC scrutiny, the rent should be set at a commercial level.

Company’s position

The company can deduct the rent paid in calculating their taxable profits for corporation tax purposes.

The director’s position

If the home is owned solely by the director, they will be taxed on the rent received. However, where property is jointly owned by spouses or civil partners, the rent will be treated for tax purposes as if they had each received 50% of it.

The rent is taxed under the property income rules and must be reported on the property pages of the Self-Assessment tax return.

It should be noted that the property allowance is not available where a person receives property income from a company that they own or control or which is owned or controlled by someone connected to them. This means that any rent received from a personal company will be taxable unless sheltered by the personal allowance, even if it is less than £1,000.

Where the director has rental income from other properties owned in the same capacity, the rent from the personal company, together with any associated expenses, must be amalgamated with the income and expenses from the other properties (including any holiday lets) to work out the taxable profit for the property business as a whole.

Companies become dormant for several reasons and not necessarily because the company may close down sometime in the future. Usually this is because the company has stopped trading and the directors want to keep the name, hold assets or intellectual property, or keep the company in reserve for the future.

When a company ceases trading, many directors withdraw whatever monies remain in the bank account, not being mindful of any tax implications this action may have.

Impact of corporation tax

Depending on the type of bank account (current or deposit), interest may accrue on any balance if the account remains open. In this situation, HMRC expects to receive a tax return and payment of tax on any interest received. If the company has taxable income and fails to notify HMRC or file a return, penalties can be charged. Therefore, any remaining cash should be transferred to a non-interest-bearing account, so no taxable income accrues and dormant status is retained. HMRC will stop requesting corporation tax returns when advised that the company has ceased trading and has no tax liabilities (via a tick box on the tax return) unless HMRC issues a further notice to deliver one.

Companies House treats dormancy slightly differently; a company becomes dormant if it has had no ‘significant accounting transactions’ in the period (except for narrow exceptions such as payment of the Companies House filing fee). A dormant company must still file a confirmation statement and dormant accounts each year and keep its registered office and statutory records up to date. Failure to file attracts penalties and may lead to compulsory strike-off.

Withdrawing any monies remaining

Closing the bank account too early can leave nothing to pay final liabilities including tax and accountants’ fees. However, after paying such liabilities, any surplus cash can be withdrawn either via dividends or, if the company owes the director money, by repaying the director's loan account (which is not taxable). However, as it is still a transaction, claiming dormant status will not be possible for that period.

However, having a credit balance in the bank account is not enough – to declare a dividend, profits must have been earned which have not been withdrawn. The company needs to set aside sufficient profits to cover the full dividend amount at the payment date. If such profits exist, the total dividend can be varied payment by payment, which can be tax efficient should a shareholder’s marginal tax rate change in any following year.

A dividend paid in any accounting period means the company is not dormant in that period and it will usually be required to file small company accounts, returning to dormant accounts if no other transactions take place.

Capital distribution

The only method by which any withdrawal can be treated as a capital distribution taxed under capital gains tax rates (18% or 24% for 2026/27) is by closing the company. Even so, treating a distribution as capital is only available if the total amount paid to all shareholders is less than £25,000 (tax relief may be available by claiming  business asset disposal relief). Where the distributable amount exceeds this amount, the shareholders pay income tax at their marginal dividend tax rates after taking into account the dividend allowance and any personal allowance, if available.

Practical point

A company can only pay a dividend from retained profits. Should insufficient retained profits be available, any dividend paid is deemed unlawful, and the payment may be recharged to the shareholder as a director's loan.

A look at how the fiscal rules apply where a company meets an employee's or a director's personal bills.

In a personal or family company, it may be commonplace for the company to pay directors' personal bills. Companies may also meet employee's personal liabilities.

This may happen in various ways:

• 1. The company contracts with the supplier and pays the supplier.
• 2. The employee contracts with the supplier and the company pays the supplier on the employee's behalf.
• 3. The employee contracts with the supplier and pays the supplier. The company reimburses the employee.
• 4. Employer gives the employee cash to pay a personal bill.

On the surface there may appear to be little difference between the different approaches – in each case, the company ultimately meets the bill. However, from a tax and National Insurance contributions (NICs) perspective, the outcomes are different. It is important therefore to determine who has the contract with the supplier and whether the employer pays the bill or reimburses the employee or gives the employee cash to pay the bill.

Scenario 1: Employer contracts with the supplier and pays the bill

In this situation, the employer is providing an employee with a benefit. This may or may not be taxable under the benefits-in-kind legislation, depending on whether an exemption is available.

Example 1: Gym membership

An employer organises an employee's gym membership with a local private gym. The contract is between the employer and the gym, and the employer pays the membership of £100 a month.

Here, the employer is providing the employee with a benefit-in-kind. As the tax exemption for recreation benefits does not apply as the gym is open to members of the public. The employee is taxed on the cash equivalent of the benefit – here the annual cost to the employer of £1,200. The employer pays Class 1A NICs on the taxable amount. The way in which a benefit is provided is particularly important when it comes to accessing exemptions for benefits-in-kind.

Example 2: Mobile phone

An employer provides all employees with a mobile phone for personal use. Each employee only receives one mobile phone. Ownership of the mobile phone remains with the employer. The contract is between the employer and the mobile phone provider. The employer pays the bills direct to the provider.

Here, the tax exemption of mobile phones applies and there is no tax for the employee to pay and no Class 1 NICs for the employer to pay. This can be contrasted with the outcome in Examples 3, 4 and 5.

Scenario 2: Employee contracts with the supplier and the employer pays the supplier on the employee's behalf

Where an employer pays an employee's personal bill a principle known as 'pecuniary liability' applies.

As the employer is unable to operate PAYE when making a payment to a third party, the payment of the bill on the employee's behalf must be reported on the P11D or payrolled. The employee is taxed on the cash equivalent of the resulting benefit (i.e. the bill paid on their behalf). However, here the National Insurance liability is to Class 1 NICs, rather than Class 1A NICs, meaning that both an employer and an employee's liability arises.

If the employee would have been able to claim a tax deduction had they met the cost personally, the exemption for paid and reimbursed expenses would apply.

Example 3: Employer paying for employee's mobile phone

An employee takes out a contract in his name for a mobile phone. His employer pays the bill on his behalf, making payment direct to the supplier. The bill is £75 a month.

Here, rather than providing an employee with a mobile phone for their personal use as in Example 2 above, the pecuniary liability principle applies. The employer reports the pecuniary liability on the employee's P11D, and the employee pays tax on the amount paid on his behalf (i.e., £900 a year).

However, here the National Insurance liability is to Class 1 NICs, rather than to Class 1A NICs, so both the employer and the employee pay Class 1 NICs on the amount paid on the employee's behalf.

While the end result here is the same as in Example 2 in that the employer meets the cost of the phone bill, the different approach means that the tax exemption for mobile phones does not apply – the employer is paying the employee's personal bill rather than providing him with the use of a phone for personal use.

Scenario 3: Employee contracts with the supplier and pays the bill and is reimbursed by the employer

As in Scenario 2, the contract is between the employee and the supplier. But here, the employee pays the bill and is reimbursed by the employer. Where the employee would be entitled to a deduction if they met the cost personally, the exemption for paid and reimbursed expenses applies. This would be the case if the employee booked and paid for a train ticket to attend a business meeting and the employer reimbursed the cost.

Where the exemption does not apply, and the reimbursement is not otherwise exempt, the amount reimbursed is liable to PAYE and Class 1 NICs. It should be included in gross pay for tax and Class 1 NICs purposes.

Example 4: Employer reimbursement of employee's mobile phone bills - An employee takes out a contract for a mobile phone for personal use. They pay the bill, which is subsequently reimbursed by their employer. The amount reimbursed is liable to PAYE and Class 1 NICs.

The tax exemption for mobile phones does not apply – the employer is meeting an employee's personal cost rather than providing them with a mobile phone for personal use.

Scenario 4: the employer gives the employee cash to pay a personal bill - Where an employee gives the employee cash to meet a personal bill and the contract is between the employee and the provider, the cash is simply treated in the same way as payments of wages and salary and liable to PAYE and Class 1 (employer's and employee's) NICs.

Example 5: Cash allowance towards mobile phone use - An employee is given a cash allowance of £60 per month to cover the cost of a mobile phone for private use. The £60 allowance is included in gross pay for tax and Class 1 NICs.

The tax exemption for mobile phones does not apply.

Close company directors - In a 'close' company, transactions between the director and the company are commonplace – the company may pay the director's personal bills, and the director may meet company expense personally. The director's loan account is the means of keeping track of the transactions.

Where the company contracts with a third party and provides the director with a benefit-in-kind, the benefit-in-kind rules apply, as in Examples 1 and 2 above.

However, if the company pays a bill on the director's behalf, and the understanding is that the director will eventually cover the bill, this is recorded in the director's loan account as for a loan to the director. If the director's account is overdrawn at the end of the accounting period and remains so at the corporation tax due date nine months and one day after the end of the accounting period, the company must pay 'section 455 tax' (under CTA 2010, s 455) on the outstanding loan balance. The director will face a benefit-in-kind charge, and the company a Class 1A NICs bill, if the outstanding balance tops £10,000 at any point in the tax year.

However, if from the outset the intention is that the company meets the personal bill, the position is as in Example 3 above.

Likewise, if the company reimburses the director for the cost of a personal bill or gives the director cash to meet a personal bill, the outcome is as for other employee's as shown in Examples 4 and 5.

Takeaways - Not all routes are equal when it comes to a company meeting the cost of an employee's personal bills. The route taken will affect the way in which tax is reported and paid and the nature of the NICs liability. More importantly, it may determine whether a tax exemption is available.

The tax and NICs rules place more emphasis on the route taken than the net outcome and it is important to take the right road to avoid unnecessary liabilities.

Practical tip - Where an employer ultimately meets the cost of an employee's private bill, it is important to structure the arrangement correctly to avoid unexpected bills, particularly where an exemption is at stake.

How to keep dividends lawful and pitfalls to avoid.

A dividend is a distribution of a company's retained profits to its shareholders. Paying dividends can be a tax-efficient way to extract profits from a company, as dividends are taxed at dividend tax rates, which are lower than the standard income tax rates, and there is no National Insurance contributions (NICs) liability to worry about. However, the profits from which dividends are paid have already suffered corporation tax.

Companies thinking of paying dividends need to ensure that they comply with the associated company law requirements, which can be complex. Here, we take a look at some of the practical issues surrounding the payment of dividends, and highlight some pitfalls that may arise.

Interim and final dividends

A distinction is drawn between an interim dividend and a final dividend. An interim dividend is made during the financial year, and the articles of association will normally allow the directors to pay an interim dividend by passing a board resolution. However, a director's resolution to pay an interim dividend does not create an enforceable shareholder right.

A final dividend is usually declared after the end of the year. The dividend is proposed by the directors, but must be approved by the shareholders. Once approved, there is a legal obligation to pay the dividend to the shareholders. Most private companies do not pay final dividends, their dividends having the characteristic of an interim dividend.

There is no restriction on the number of interim dividends that can be paid as long as proper procedures are followed. However, during the year, it is common for payments made to directors to be debited to their loan account, with the overdrawn balance being cleared by a dividend declared before the corporation tax due date, nine months and one day after the end of the company's accounting period.

Need for sufficient distributable profits

In order to pay a dividend, the company must have sufficient retained profits. These are profits after tax which have not been distributed by the company. If a company pays a dividend without having sufficient retained profits from which to pay the dividend, the dividend will be unlawful. This has consequences.

Thus, before paying a dividend it is important to assess the company's financial position, not only at the date of the previous accounts, but also in light of what has happened since.

For micro companies, the balance sheet will show a single figure for capital and reserves. It is therefore important to establish how much of those reserves are distributable. This will be realised profit, such as that from normal trading activity.

If the financial position has deteriorated since the accounts, the company may no longer have the retained profits shown in the accounts available to distribute to shareholders. It is important to consider whether this might be the case before declaring a dividend.

On the other hand, if the position has improved since the last accounts, it may be possible to pay a higher dividend. Here, interim accounts should be produced for this purpose to support the higher payment. If management accounts are used for this purpose, the directors will need to take account of the tax payable on the profits shown in the management accounts.

Evidence to show that the company had sufficient retained profits from which to pay the dividend should be kept. Cashflow should also be considered to ensure that paying the proposed dividend will not cause financial problems for the company.

Therefore, before declaring a dividend, the directors should:

• - check that the proposed dividend is covered by the retained profits shown in the previous annual accounts;
• - check that the financial position has not subsequently deteriorated to the point that the company no longer has sufficient retained profits to cover the dividend; and
• - check that paying the dividend will not leave the company unable to pay its debts.

Dividend paid in proportion to shareholdings

Where there is more than one shareholder for a class of shares, dividends must be paid in proportion to shareholdings. This can be limiting in a family company scenario where the wish is to distribute profits in a tax-efficient manner; if there is only one class of share, dividends can't be tailored to the shareholders' personal circumstances.

However, this limitation can be overcome by using an 'alphabet share' structure so that each shareholder has their own class of share (e.g., A ordinary shares, B ordinary shares, C ordinary shares, etc.). Where this approach is used, it is possible to tailor dividends to the shareholders' circumstances by declaring a different dividend for each class of shares, ensuring a tax-efficient distribution of profits.

Check the articles

The company's articles of association typically set out the process for paying dividends. As regards a final dividend, the articles usually provide (and the model articles do provide):

• - for the directors to recommend a dividend;
• - for the dividend to be declared by ordinary resolution (by a vote at the AGM or by a written resolution); and
• - that the members cannot vote to pay more than the amount recommended by the directors.

The articles will also normally provide for the directors to pay an interim dividend at any time.

The company should keep appropriate records and evidence to support the payment of a dividend, including a copy of the written resolution, copies of accounts, evidence that the proposed dividend was accepted, etc. Minutes should record the amount of the dividend (per share), the type of share in respect of which it is being paid, the date on which it is to be paid, and the date on which shareholders need to be registered with Companies House in order to qualify for the dividend.

It is important that directors check the articles' provisions as regards dividends, and that they comply with them.

Dividend vouchers

Every time that a dividend is paid, the recipient must be given a dividend voucher that contains the following information:

• - company name, registered office and company number;
• - name of shareholder and address of the shareholder receiving the dividend;
• - date;
• - the amount of the dividend paid; and
• - the signature of the director or a company officer.

Shareholders should retain dividend vouchers for tax purposes.

Unlawful dividends

A dividend is unlawful if it does not comply with the requirements of the Companies Act 2006. This may be because the company did not have sufficient distributable profits from which to pay the dividend, or because the company failed to comply with the formalities set out in the Act for declaring and documenting the payment of a dividend.

Although the Companies Act 2006 does not specify sanctions in respect of unlawful dividends, there can be a number of consequences.

If the shareholders knew or had reasonable grounds to know that the dividend was unlawful, they may be required to repay it to the company. The directors may become personally liable if they authorise an unlawful dividend which cannot be recovered.

There may be tax implications too. If an unlawful dividend was declared to clear an overdrawn balance on a director's account, this will be ineffective and 'section 455 tax' (under CTA 2010, s 455) will be payable by the company if the balance remains outstanding at the corporation tax due date.

HMRC may also argue that the payment is a payment of salary rather than a dividend on which tax and Class 1 NICs is due.

Taxation of dividends

All individuals, regardless of the rate at which they pay tax, are entitled to a dividend allowance, which for 2026/27 is set at £500. The allowance acts as a nil rate band and dividends sheltered by the allowance are taxed at a zero rate. To the extent that dividends are not sheltered by the dividend or personal allowances, they are treated as the top slice of income and taxed at the dividend ordinary rate where they fall in the basic-rate band, at the dividend upper rate where they fall in the higher rate band, and at the dividend additional rate where they fall in the additional rate band.

For 2026/27, the dividend ordinary rate is 10.75%, the dividend upper rate is set at 35.75% and the dividend additional rate is set at 39.35%.

Practical tip

It is important to understand the rules governing the payment of dividends and ensure that dividends are properly declared and paid out of retained profits to avoid the unwanted implications of paying an unlawful dividend.

The former tax regime for furnished holiday lettings (FHL) came to an end on 5 April 2025. Prior to this date, properties which qualified as FHLs were kept separate from other lets. This meant that where a loss was made on FHL, that loss could only be carried forward and set against future profits from the same FHL business.

However, from 6 April 2025 onwards, FHLs are treated in the same way as other residential lets. This means that income and expenses from properties let as furnished holiday accommodation are amalgamated with rental income and expenses from other properties owned by the same person in the same capacity to arrive at the profit or loss for the property business as a whole.

Where the former FHL business had unrelieved losses on 6 April 2025, these losses can be set against future profits from the combined property business, regardless of whether those profits derive from holiday lets, other residential lets or commercial lets.

Example

Georgina lets out two flats on long-term lets. She also lets out two holiday cottages as furnished holiday accommodation through Airbnb.

On 6 April 2025, she has unrelieved losses from her former FHL business of £12,000. The residential lets have always made a profit. She owns all the properties outright.

For 2025/26, the income and expenses in respect of each property are as follows:

Property       Rental income   Expenses

Flat 1              £20,000               £4,000

Flat 2              £12,000               £2,500

Cottage 1       £16,000               £8,500

Cottage 2       £5,000                 £7,000

Total              £53,000               £22,000

The profit for the property rental business is £31,000.

Georgina is able to set the losses brought forward from the former FHL business against the profit of the amalgamated property business, reducing the taxable rental profit to £19,000. It does not matter that in isolation she only made a profit of £5,500 from her holiday cottages. Relief for the loss is claimed in her 2025/26 tax return.