Directors often borrow from their companies and this incurs a temporary tax charge.
The rate of tax charged on loans to participators and other arrangements (currently 25%) is being specifically linked to the dividend upper rate, which will be 32.5% from 6 April 2016.
Section 455 CTA 2010 liabilities must be included in a company’s CT600 tax return. The S455 tax forms part of the calculation of tax payable by the company under Paragraph 8 Schedule 18 FA 1998.
A claim to relief under Section 458 is a claim for relief against the original tax charge for the AP in which the loan was made. The time limit for the claim is four years from the end of the financial year in which the loan is repaid, released or written off. COM53120
You must use form L2P to enable a close company which has paid tax on a loan to a participator to reclaim that tax once the loan has been repaid, released or written off.
A 3% surcharge on stamp duty when some buy-to-let properties and second homes are bought will be levied from April 2016.
This means it will add £5,520 of tax to be paid when buying the average £184,000 buy-to-let property. The new charge would have hit 160,000 buyers if it had applied last year.
But, commercial property investors, with more than 15 properties, will be exempt from the new charges.
Stamp Duty on Selling Shares is 0.5% so why aren’t more investors buying property into companies and then selling the shares in the company!
Mortgage Interest
Mortgage Interest offset against property income will be restricted
2017/18
75% of the interest can be claimed in full and 25% will get relief at 20%
2018/19
50% of the interest can be claimed in full and 50% will get relief at 20%
2019/20
25% of the interest can be claimed in full and 75% will get relief at 20%
2020/21
100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayer it’s a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
Capital Gains
From April 2016, the higher rate of Capital Gains Tax will be cut from 28% to 20% and the basic rate from 18% to 10%.
There will be an additional 8% surcharge to be paid on residential property.
Capital Gains Tax on residential property does not apply to your main home, only to additional properties (for example a flat that you let out).
Wear & Tear
Landlords have been used to claiming 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.
The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.
The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.
What could a Property Investor do to reduce the impact of these changes?
Incorporation – could you save money by incorporating your residential investments, would you qualify for incorporation tax relief
Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or another type of commercial property on which the interest restriction won’t apply
Increasing the Rent – Could you charge more to cover the extra taxes?
Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc
It’s estimated that 430,000 contractors will be affected by the new rules!
Under the new rules certain groups of workers will no longer be able to claim tax relief on travel and subsistence expenses, specifically:
Those employed via umbrella companies (employment intermediaries).
If you personally provide services to another person.
The draft legislation confirms that limited company contractors are not affected by this new restriction, except for any contract work they carry out which is caught by the IR35 rules.
We expect that the new rules will prevent claims for routine travel but allow exceptional travel. For example say you normally work in London that would be excluded but they you have to go to a meeting in Birmingham, that trip should be allowed.
From the 6th April 2016 a trivial benefits exemption will become law and set at limit on the benefit of £50 per employee per benefit.
There will be an annual cap of £300 for directors and other office holders of close companies and members of their families and households who are employees of the company.
Its designed for seasonal gifts, flu jabs, small gifts, flowers etc.
It can’t be cash, or cash vouchers.
The employer must bear the cost (salary exchange won’t work)
It must not be in recognition of services or part of a contractual agreement
For years the definition of ‘trivial benefit’ has been undetermined and it was a massive grey area but now we have some definite rules to work to.
In the Budget 2016 George Osborne announced that as from April 2017 it will be the duty of the Public Sector to make sure Personal Service Companies and Intermediaries pay the correct tax.
The government announced at Budget 2016 that it will reform the intermediaries legislation (known as IR35) for public sector engagements. It will do this by moving the liability to pay the correct employment taxes from the worker’s own company to the public sector body or agency / third party paying the company. In partnership with stakeholders, HM Revenue and Customs will develop a new tool that will make the decision on whether or not the rules should apply as simple as possible and provide certainty. A formal consultation will be published later. [Technical Note]
The organisations checking intermediaries will include:
Government departments, legislative bodies, armed forces
Local government
NHS
Schools and further and higher education institutions
Police
The British Museum, BBC, Channel 4
Transport for London
Publically owned bodies
It will be the engagers duty calculate the deemed employment income.
Here are 3 examples…
Will this lead to higher taxes for contractors? will they be converted to employees?
In the 12 months since December 2014 when new SDLT rules came into place home buyers have saved an estimated £657m in Stamp Duty (SDLT).
The Autum Statement 2014 announced the following change to Stamp Duty.
• No stamp duty will be paid on the first £125,000 of a property
• 2% will be paid on the portion up to £250,000
• 5% is paid for the portion up to £925,000
• 10% is paid on the portion up to £1.5m
• 12% is paid on anything above that
Landlords have been used to claim 10% of rental income as a tax deductible wear and tear allowance, but that will change in April 2016.
The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.
The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.
As the old rules apply until the 5th April 2016 it would be worth postponing any renewal purchase until after 6th April 2016, so you can claim a tax deduction in 2016/17.
It also worth noting that the old rules only applied to fully furnished property where as the new rules can be applied by any landlord who includes any items of furniture or equipment in their property.
The cost of the renewal is reduced by any sale proceeds for the item it replaces.
Following a sentencing hearing at Milton Keynes Magistrates’ Court on 8 January 2016, Mr William To, a company director from Beaconsfield in Buckinghamshire, has been sentenced to 33 weeks imprisonment after pleading guilty to 3 counts of failing to preserve company books and accounting records for a period of 3 years, for three separate restaurant management companies.
Mr To’s conviction follows an initial investigation by the Insolvency Service and a full criminal investigation and Prosecution by the Department for Business Innovation and Skills (BIS).
The three BMBQ Ltd, ,Shef Ltd and Broads Cat Ltd, based in Sheffield and Birmingham, went into liquidation with an as-yet-unpaid combined debt of £302,105.89 to HMRC.
The investigation found the director had failed to ensure the companies’ were in order, as such, they could not be delivered up to the liquidator as required.
The Companies Act 2006 states
Section 386 Duty to keep accounting records
(1)Every company must keep adequate accounting records.
(2)Adequate accounting records means records that are sufficient—
(a)to show and explain the company’s transactions,
(b)to disclose with reasonable accuracy, at any time, the financial position of the company at that time, and
(c)to enable the directors to ensure that any accounts required to be prepared comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
(3)Accounting records must, in particular, contain—
(a)entries from day to day of all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure takes place, and
(b)a record of the assets and liabilities of the company.
(4)If the company’s business involves dealing in goods, the accounting records must contain—
(a)statements of stock held by the company at the end of each financial year of the company,
(b)all statements of stocktakings from which any statement of stock as is mentioned in paragraph (a) has been or is to be prepared, and
(c)except in the case of goods sold by way of ordinary retail trade, statements of all goods sold and purchased, showing the goods and the buyers and sellers in sufficient detail to enable all these to be identified.
Section 388 Where and for how long records to be kept
(1)A company’s accounting records—
(a)must be kept at its registered office or such other place as the directors think fit, and
(b)must at all times be open to inspection by the company’s officers.
(2)If accounting records are kept at a place outside the United Kingdom, accounts and returns with respect to the business dealt with in the accounting records so kept must be sent to, and kept at, a place in the United Kingdom, and must at all times be open to such inspection.
(3)The accounts and returns to be sent to the United Kingdom must be such as to—
(a)disclose with reasonable accuracy the financial position of the business in question at intervals of not more than six months, and
(b)enable the directors to ensure that the accounts required to be prepared under this Part comply with the requirements of this Act (and, where applicable, of Article 4 of the IAS Regulation).
(4)Accounting records that a company is required by section 386 to keep must be preserved by it—
(a)in the case of a private company, for three years from the date on which they are made;
(b)in the case of a public company, for six years from the date on which they are made.
The changes are outlined in this document – CIS Link
Key Changes
Reducing the Gross Status minimum turnover threshold to £100,000 a year for businesses with multiple directors (from April 2016)
Initial and annual compliance tests will focus on fewer obligations
There will be further amendments to the need to submit Nil returns
It will be easier for Joint Ventures to obtain Gross Status if one party already holds Gross Status
Online verification will be mandatory from April 2017
Earlier repayments can be made to liquidators in insolvency proceedings. Currently where a subcontractor is a company, no repayment of any amount deducted and paid over to HMRC by a contractor can be made to the subcontractor until after the end of the tax year in which the deduction was made. These rules will be amended so that in certain cases where the amount deducted by the contractor is excessive, a repayment can be made during the tax year.
Mandatory online filing of CIS returns will be introduced with the offer of alternative filing arrangements for those unable to access an online channel by reason of age, disability, remote location or religious objection.
The directors’ self assessment filing requirements will be removed from the initial and annual compliance tests.
You must re-submit returns for any period that you amend
We await the budget on 16th March 2016 for full details.
On the 5th March George Osborne announce that he would drop the changes that were proposed on 20th January 2016.
The changes that had been proposed were…
The ISA idea
Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.
I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment
Flat Rate Tax Relief
The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.
The BBC explained how this might work
At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.
It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.
Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.
IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.
You can now nominate anyone not just dependents to be the beneficiary.
Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.
Business Premises
Your pension can own Commercial Property, including your own business premises.
In many cases it is better for business premises to be owned by the business owners pension fund because:
The object of the business is not to own its own property, the objective should be for the business to make profits from trading
The business could use cash tied up in the premises to invest in trading activities
Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
You may be able to use 3 year Carry Forward to get funds into your pension scheme
Commercial Investment Property
Your pension scheme can own commercial investment property – shops, offices, industrial units.
It can borrow up to a third of the value of the pension scheme.
There is no capital gains tax and no tax on the rental income.
In Specie Transfers
In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.
Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.
HMRC say…
In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.
Net Relevant Earnings (NRE)
Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.
If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.
But one thing you may not know is that connected parties can lend to the fund…
Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).
A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.
A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .
This is useful where you have paid in the maximum allowed pension contributions but you still have cash, so you could lend to your pension to buy a property.
25% Tax Free
When you retire you get 25% of you pension fund tax free.
