There are special tax rules for rental income from properties that qualify as Furnished Holiday Lettings (FHLs).
If you let properties that qualify as FHLs:
you can claim Capital Gains Tax reliefs for traders (Business Asset Rollover Relief, Entrepreneurs’ Relief, relief for gifts of business assets and relief for loans to traders)
you are entitled to plant and machinery capital allowances for items such as furniture, equipment and fixtures
the profits count as earnings for pension purposes
The Interest Rate Relief Restrictions don’t apply – these rules only affect Buy to Let Investors
The letting condition
You must let the property commercially as furnished holiday accommodation to the public for at least 105 days in the year (70 days for the tax year 2011 to 2012 and earlier).
The availability condition
Your property must be available for letting as furnished holiday accommodation letting for at least 210 days in the year (140 days for the tax year 2011 to 2012 and earlier).
The government proposes that properties bought as furnished holiday lets should be treated in the same way as all other residential properties – if the property is purchased as an additional property the higher rates will apply.
A Company could help you save tax
The current rate of Corporation Tax is 19%.
Not only that, its the same rate no matter how many companies you have, previously when there were multiple Corporation Rate if you had associated companies the small companies rate was reduce in a marginal rate calculation.
Stamp Duty (SDLT) on selling Shares is 0.5%.
Example – So £1,995 × 0.5% = £9.97. This is rounded up to the nearest £5, which means you pay £10 Stamp Duty.
One of the big benefits of Shares is that its easy to split ownership.
Potentially Exempt Transfers (PET’s) allow you to give away shares provided you survive more that 7 years after the transfer, shares make PETs easy and simple.
When you give away shares it will potentially trigger a capital gain but you will be able to use your personal capital gains allowance of £12,300 to offset this gain.
The Budget announced that from 6 April 2017 any adult under 40 will be able to open a new Lifetime ISA. They can save up to £4,000 each year and will receive a 25% bonus from the government on every pound they put in.
This is why you should get one!
25% Bonus – free money is always good
It encourages you to save – building up savings for a house or retirement will definitely be of benefit
The under 40’s will probably see this as better than a pension plan, as you can’t access pensions until you are 55
Personally Pensions are still my favourite…
Lets say you invest £10,000 per year of earned gross income, increasing each year by 3% for inflation and see the effect of tax relief at 40% and 20%, assuming a return on the investment of 7% (which you should get with Commercial Property Investment)
40% Tax Rate
20% Tax Rate
Year
Pension
No Pension
% Diff
Year
Pension
No Pension
% Diff
1
£10,700
£6,252
71%
1
£10,700
£8,336
28%
2
£22,470
£12,954
73%
2
£22,470
£17,272
30%
3
£35,395
£20,131
76%
3
£35,395
£26,841
32%
4
£49,564
£27,808
78%
4
£49,564
£37,078
34%
5
£65,077
£36,013
81%
5
£65,077
£48,017
36%
6
£82,036
£44,773
83%
6
£82,036
£59,698
37%
7
£100,555
£54,119
86%
7
£100,555
£72,158
39%
8
£120,754
£64,081
88%
8
£120,754
£85,441
41%
9
£142,761
£74,692
91%
9
£142,761
£99,590
43%
10
£166,715
£85,987
94%
10
£166,715
£114,649
45%
11
£192,765
£98,000
97%
11
£192,765
£130,667
48%
12
£221,070
£110,771
100%
12
£221,070
£147,694
50%
13
£251,801
£124,337
103%
13
£251,801
£165,782
52%
14
£285,140
£138,740
106%
14
£285,140
£184,987
54%
15
£321,285
£154,024
109%
15
£321,285
£205,365
56%
16
£360,445
£170,233
112%
16
£360,445
£226,978
59%
17
£402,846
£187,416
115%
17
£402,846
£249,888
61%
18
£448,731
£205,621
118%
18
£448,731
£274,161
64%
19
£498,358
£224,901
122%
19
£498,358
£299,868
66%
20
£552,006
£245,309
125%
20
£552,006
£327,079
69%
Even when you consider:
Your money is locked up till you are 55
You pay tax when you take money out of the pension
You can get 25% out of the pension tax free
The difference in growth is massive
If you do salary sacrifice you can increase the tax effect by saving national insurance too.
There are lots of things you can do to save inheritance tax.
Pensions
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.
The original owner must live for 7 years after giving the gift. Any gifts made less than 7 years before death count towards the Inheritance Tax threshold (£325,000). They count towards the threshold before the rest of the estate.
If the donor gave away more than £325,000 of gifts in their final 7 years, tax is due on everything over that threshold.
Gifts made 3 to 7 years before the death
The rate of tax is reduced for gifts over the threshold made between 3 and 7 years before the person died. This is known as ‘taper relief’.
Annual Exemptions
The estate doesn’t pay Inheritance Tax on up to £3,000 worth of gifts given away by the deceased in each tax year (6 April to 5 April). This is called the ‘annual exemption’.
Leftover annual exemption can be carried over from one tax year to the next, but the maximum exemption is £6,000.
Certain gifts don’t count towards the annual exemption and no Inheritance Tax is due on them, eg gifts worth up to £250 and wedding gifts.
Wedding gifts
There’s no Inheritance Tax on a wedding or civil partnership gift worth up to:
£5,000 given to a child
£2,500 given to a grandchild or great-grandchild
£1,000 given to anyone else
The gift must be given on or shortly before the date of the wedding or civil partnership ceremony.
Gifts up to £250
There’s no Inheritance Tax on individual gifts worth up to £250. You can give as many people as you like up to £250 each in any one tax year.
You can’t give someone another £250 if you’ve given them a gift using a different exemption, eg the £3,000 annual exemption.
If you give someone more than £250 in a tax year, the whole amount counts – the first £250 is not exempt.
The days of ‘wet’ signatures may be numbered, sending documents by post to get original ink signatures is slow process, times are changing.
The UK government divides electronic signature into three groups:
Simple electronic signatures – these include scanned signatures and tick box declarations
Advanced electronic signatures – can identify the user, is unique to them, is under the sole control of the user and is attached to a document in a way that it becomes invalidated if the contents are changed
Qualified electronic signatures – an advanced electronic signature with a digital certificate encrypted by a secure signature creation device eg Smart Card
An electronic signature, or e-signature, is a simple, legally binding way to indicate consent or approval on digital documents and forms. A digital signature is a specific implementation of an e-signature that requires signers to have certificate-based digital IDs. Adobe eSign services supports both and helps your organization speed time to revenue, reduce risk, and gain greater control and visibility.
Adobe e-signatures are trusted, legally valid and enforceable in industrialized countries around the world. Our eSign services comply with industry security standards including SOC 2 Type 2, ISO 27001, PCI and HIPAA.
The most quoted case law is Golden Ocean Group Ltd v Salgaocar Mining Industries PVT Ltd and Another [2012] EWCA Civ 265, in the case a guarantee was negotiated over several weeks via e mail and although no formal guarantee document was signed the High Court accepted that the e mails could be accepted as evidence of agreement and signature.
Electronic signatures save time and make life easier for everyone.
Basically, if an employer makes a declaration on the P11D, which the employee and HMRC agree can be counted as tax deductible, this is referred to as a S336 Claim. In order to claim the employee would need to show the expense was wholly and exclusively for business.
Here are some suggestions of expenses employees may claim….
Flat Rate Expenses by Occupation – HMRC have a list EIM32712 for example Healthcare staff in the National Health Service, private hospitals and nursing homes – Uniformed ancillary staff: maintenance workers, grounds staff, drivers, parking attendants and security guards, receptionists and other uniformed staff – get a flat rate of £60 per year – this link explains how it works – Money Saving Expert
Mileage in your own vehicle on business – the approved rates are list below if your employer pays you mileage already deduct the rate from the amounts below and claim the difference
Tax: rates per business mile
Type of vehicle
First 10,000 miles
Above 10,000 miles
Cars and vans
45p (40p before 2011 to 2012)
25p
Motorcycles
24p
24p
Bikes
20p
20p
3. Professional Subscriptions – if you personally pay for a professional subscription that you need for your work you can claim the cost against tax – here is a list of HMRC approved professional organisations
4. Traveling Costs – you may have business travel costs for hotels and meals that haven’t been reimbursed and these costs can be reclaimed against your tax
7. Training – where training was an intrinsic contractual duty of the employment (see also EIM32535 & EIM32546) and where any personal benefit, unlike most CPE/CPD courses, would be incidental and not therefore give rise to a dual purpose of the expenditure.
8. Other costs – where the cost is wholly and exclusively for business
If you are an employee use this form to tell HMRC about employment expenses you have had to pay during the year for which tax relief is due.
Only fill in this form if your allowable expenses are less than £2,500 for the year.
If your claim is more than £2,500 you will need to fill in a Self Assessment tax return. Please contact the Self Assessment Helpline on 0300 200 3310 or register at
I think the most important changes for businesses are:
Corporation Tax
The main rate of Corporation Tax has already been cut from 28% in 2010 to 20%, the lowest in the G20. It will now be cut again to 17% in 2020, benefiting over 1 million businesses.
Business Rates
From April 2017, small businesses that occupy property with a rateable value of £12,000 or less will pay no business rates.
Currently, this 100% relief is available if you’re a business that occupies a property (e.g. a shop or office) with a value of £6,000 or less.
There will be a tapered rate of relief on properties worth up to £15,000. This means that 600,000 businesses will pay no rates.
Capital Gains Tax
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 percentage point surcharge to be paid on residential property and carried interest (the share of profits or gains that is paid to asset managers).
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).
Employers Allowance
The NICs Employment Allowance was introduced in April 2014, for the purpose of supporting businesses and charities in helping them to grow by cutting the cost of employment. Eligible employers can claim the allowance, which reduces their Employer NICs bill by up to £2,000 a year. This is an ongoing allowance. Once an employer has claimed the allowance, they will continue to enjoy it in future years, without needing to do anything further. Over a million employers have benefited from the allowance since its introduction.
This measure will increase the Employment Allowance by £1,000 to £3,000 from April 2016. This means eligible business and charities will be able to claim a greater reduction on their employer NICs liability.
This is fantastic news for employers, but there is a potential sting in the tail.
HMRC plan to exclude one person businesses!
But many believe that HMRC’s plan won’t work because all you need to do is employ a family member or friend and then the one person should qualify for the allowance.
John Cullinane, CIOT tax policy director, said: “The government may find its plan to be ineffective in reducing employment allowance claims because it is open to abuse. It will simply have the effect of penalising single director-employee limited companies that are unable to, or do not know that they could, appoint another person as director or employee to claim the allowance.”
I have often heard sole traders say that it will cost too much to become a limited company. This is because many sole traders prepare their own accounts and do their own self assessment returns and are unaware that the cost involved in becoming a limited company really aren’t that high.
What is a Limited Company?
A limited company is an organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.
The Incorporation Spreadsheet created by Practice Track is an Excel spreadsheet which shows the tax savings that are available to sole traders and partnerships if they chose to incorporate. It can also be used for incorporated clients to compute the taxes payable under the new dividend regime.
It is therefore a useful tool to use for planning purposes for clients who are already incorporated and can reinforce the point to many clients that they are still saving tax by being incorporated.
It also caters for salary and dividend profit distribution between multiple director-shareholders (up to six).
The detailed output sheets are not password protected so you can insert extra calculations or override the formulae if you wish.
Often using an agent will mean the company is formed quickly, sometime within a couple of hours.
There are three different ways in which the sole trader can be incorporated. It’s highly likely that Incorporation Relief will be the best way to incorporate in most cases, however, it is worth considering all the options when advising clients.
These are:
Incorporation Relief
Incorporation Tax will apply automatically unless the transferor elects for it not to in writing.
To benefit from Incorporation Relief the business will need to be valued at open market value including Goodwill prior to transfer to the limited company
There are 3 conditions which must be satisfied before incorporation relief can be claimed:
The business transferred must be a going concern;
All assets owned by the business (except cash) must be transferred to the limited company.
The consideration paid for the business assets must be wholly or partly in shares.
Example You transfer your business in return for shares worth £100,000. You make a profit of £60,000. You later sell the shares and need to work out the gain – their cost for your Capital Gains Tax calculations is £40,000 (£100,000 – £60,000).
Example Your business is valued at £100,000 when you transfer it, and you receive 80% in shares (£80,000) and 20% in cash (£20,000). You made a gain of £50,000. You can postpone 80% of the gain (£40,000) until you sell the shares. You need to pay Capital Gains Tax on 20% of the gain (£10,000) in your next tax return.
The official helpsheet with further advice is HS276.
Holdover Relief
Holdover relief applies when business assets are transferred from an individual and avoids capital gains on the chargeable assets becoming immediately liable to capital gains tax.
Example
You sell a shop worth £81,000 to your brother for £40,000. It cost you £23,000. Include the £17,000 gain (£40,000 minus £23,000) when you’re working out your total taxable gain.
This method is useful if you want to keep a property outside of the company and prefer instead for the company to pay a rent for the property. This will have certain tax advantages but it is important to note that this can mean that the owner will lose entitlement to entrepreneurs’ relief on the property, because the property would then be regarded as an investment property.
Selling your Sole Trader Business to your Limited Company
Until December 2014, this was often the preferred option because Entrepreneurs Relief could be applied to gains and in many cases the company could write down the Goodwill against Corporation Tax.
However, this option could still be worth considering.
Let’s take a typical scenario:
Mr Smith has been running a small garage for a few years
he decides to incorporate his business and sets up Smiths Garage Limited with himself as the sole director and shareholder
he transfers the goodwill of the business and its other assets and liabilities to Smiths Garage Limited but does not claim incorporation tax relief under Taxation of Chargeable Gains Act (TCGA) 1992, s162, nor does he claim hold-over relief under TCGA s162
at the time of incorporation, the goodwill of the business is valued at £11,100
Mr Smith makes a chargeable gain on the transfer of the goodwill, which is deemed to be at market value, of £11,100 which, after deducting the annual CGT exemption (£11,100 2015-16) the company will pay
the acquisition of goodwill is done by way of a credit to Mr Smiths director’s loan account. Mr Smith is able to draw down on this account without any further tax charges.
In Summary
These considerations all show that incorporating a sole trader business is not only straightforward but can also greatly benefit the sole trader client both financially and in the potential flexibility it can provide for their business.
From April 2017, there will be two new tax-free £1,000 allowances – one for selling goods or providing services, and one income from property you own.
People who make up to £1,000 from occasional jobs – such as sharing power tools, providing a lift share or selling goods they have made – will no longer need to pay tax on that income.
In the same way, the first £1,000 of income from property – such as renting a driveway or loft storage – will be tax free.
Under the new allowances, from April next year individuals with property or trading income won’t need to declare or pay tax on the first £1,000 they earn from each source per year. Should they earn more than that amount they will have to declare it, but they can still take advantage of the allowance.
The Treasury has said that they new relief will be for “self-starters”, from mothers who supplement their income with a bake sale to those who do some trading on eBay.
A spokesman said: “Property income would come about from any income that you make from renting out a residence, home, building, property or land – so you could rent out your driveway as a parking space. You can rent out your home to tourists, which is the Airbnb bit. Or you can rent out your garden space.” He added: “Trading income covers any sale of goods or services. You could do tasks such as cleaning or odd jobs, hiring out your own equipment such as power tools, or selling goods through a website like TaskRabbit, Etsy [or] eBay.” The government claims 700,000 people will benefit from the new tax break, a figure based on self-assessment data from HMRC.
Last week the Bank of England turned up the heat on Landlords.
The Bank of England expressed concerns about Buy-to-Let Investment and lending levels. New rules have been proposed that aim to tighten requirements for landlords involved in investment properties and limit the amount that can be borrowed for these types of endeavours.
This reaction comes from recent suggestions that mass buy-to-let property management could have a destabilising effect on the UK economy.
The rules put a spotlight on lenders, encouraging them to require more extensive financial information from the potential landlord before granting a mortgage.
The requirements go beyond ensuring the rental income of the property is significantly higher than the mortgage payments (the income coverage ratio), to also considering an individual’s overall financial situation.
The Prudential Regulation Authority (PRA) – an arm of the Bank – has recommended that banks and building societies take account of:
all the costs a landlord might have to pay when renting out a property
any tax liability associated with the property
a landlord’s personal tax liabilities, “essential expenditure” and living costs.
a landlord’s additional income – where this is being used to support the borrowing. This income should be “verified”.
If adopted, the new rules could reduce lending to landlords by up to 20% over the next three years.
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
