Author: Steve Bicknell

Progressive Property Approved Accountant, Business Expert and Trainer/Speaker with Redcliffe Training, MBL Seminars and UK Training ►MD ► Bicknell Business Advisers ✸ family business providing accountancy, tax, and consultancy services to SME's and Start Ups - Xero, Sage One, QuickBooks, Freeagent, Kashflow, Hammock, Dext - Receipt Bank ✸ www.bicknells.net www.stevejbicknell.com

Which is better an LLP or Limited Company?

photo of people near wooden table

As an accountant, I am often asked by my clients what the differences are between an LLP and a Limited company. While both provide limited liability protection, there are some distinct differences between the two.

An LLP is a type of partnership structure that offers limited liability to its partners, which means that their personal assets are not at risk if the business runs into financial difficulties or is sued. An LLP is similar to a general partnership, but unlike general partnerships, the partners are not personally liable for the company’s debts.

A Limited Company is a separate legal entity with its own legal personality, and its owners are known as shareholders. A limited company offers limited liability for its shareholders, which means their liability is restricted to the amount they’ve invested in the company.

Differences and Things to Consider

  • an LLP is typically set up by professionals such as lawyers, accountants, or doctors who wish to operate as a partnership. Limited company can be set up by anyone, including sole traders who wish to take their business to the next level.
  • Property Investors sometimes use a Partnership or LLP as stepping stone to incorporation which benefits from special SDLT treatment.
  • Buy to Let investors prefer Companies as they can then recover all of the mortgage interest. This isn’t possible for individuals or partnerships as interest is removed and replace with the finance allowance. This can have a big impact for higher rate tax payers.
  • Holiday Let owners may prefer LLP’s especially if there are large Capital Allowances to be claimed
  • an LLP is taxed as a partnership, with profits being distributed amongst the partners and taxed at their individual tax rates.
  • In contrast, a Limited company is taxed separately from its owners, and profits are subject to corporation tax rates. This can make an LLP more tax-efficient for its partners. For long term investment and building up assets a company can be more tax efficient because Corporation Tax rates are lower than income tax rates.
  • With a company its easier to control when income is taken by the owners which could result in tax savings, partnership profits are immediately tax on the partners
  • an LLP does not have shares or shareholders, but rather partners who own a percentage of the business.

Funding Differences

One significant difference between LLPs and Limited Companies is that LLPs are relatively easier to set up and require lower capital outlay and less stringent regulatory requirements. The flip side of this is that limited liability protection may not be as comprehensive as it is with Limited Companies.

If you plan to raise funds for your business, Limited Companies have an advantage as investors are more likely to invest in these structures.

Changes in Ownership

Changes in ownership are more straightforward in a Limited company due to the ability to issue and transfer shares. In an LLP, changes in ownership can be cumbersome due to the need to re-do the partnership agreement and potentially consult with partners.

Overall, the decision between setting up an LLP or a Limited company depends on the specific needs of your business.

steve@bicknells.net

Directors Loan ISA (Innovative Finance ISA)

laughing businesswoman working in office with laptop

Individual Savings Accounts (ISA’s) are tax-efficient savings and investment accounts that allow individuals to earn interest or returns without paying income tax or capital gains tax on their earnings. There are several types of ISA’s available to investors, and each has its own limits and rules.

Cash ISA

Cash ISA’s let you save up to £20,000 a year tax-free, and the interest that’s earned is also tax-free. The average returns for cash ISA’s are typically low, as they are considered low-risk investments.

Stocks and Shares ISA

Stocks and Shares ISA’s allow investors to invest in stocks, shares, and various other investment products. They also have a £20,000 limit, but their performance is subject to market risks.

Innovative Finance ISA

Innovative Finance ISA’s (IFISA) are a relatively new type of ISA that allow investors to lend money to borrowers through peer-to-peer lending platforms. The returns on IFISA’s can be high, but they come with greater risk.

Directors Loan ISA and IFISA

One type of IFISA is the Director’s Loan ISA, which is available exclusively from rebuildingsociety.com. This platform enables investors to lend money to businesses while also enjoying tax-free returns.

The IFISA works by enabling investors to lend money to borrowers through peer-to-peer lending platforms, such as rebuildingsociety.com. These platforms then invest the money into various businesses or properties.

The IFISA is regulated by the Financial Conduct Authority (FCA), and many platforms are also members of the Peer-to-Peer Finance Association (P2PFA).

It is important to note that investing in IFISA’s can come with greater risks and it is not suitable for all investors. It is crucial to seek professional advice before investing.

The benefits of IFISA’s include tax-free returns and the ability to invest in businesses or properties that may provide higher returns than traditional investments.

However, investors should consider the risks aspect of investing, such as the possibility of losing their capital, the lack of liquidity, and the reliability of the companies or borrowers they lend their money to.

In conclusion, IFISA’s are an innovative way to invest and save tax-free earnings. Individuals should undertake thorough research and seek professional advice before investing to make an informed decision.

steve@bicknells.net

How does the Property Strategy -Purchase Lease Options and Purchase Options work?

happy couple holding and showing a house key

This is a relatively new strategy for residential property, although it has been used for many years in commercial property and property development. Basically, the seller agrees to lease the property now (so potential buyer doesn’t need the cash to buy it today) and then sell to buyer at future date at price agreed now. As property prices historically rise that means the future purchase will be at a discount to market price at that time.

Purchase Options


A purchase option gives the buyer the right to purchase the property at a specific price within a certain timeframe. This option is normally created by a written agreement between the buyer and the seller. The buyer must pay an option fee to the seller, which is normally non-refundable. If the buyer decides to exercise the option, the option fee will be deducted from the final purchase price. If the buyer decides not to exercise the option, the option fee will be retained by the seller.

Purchase Lease Options (Rent to Purchase/Rent to Own)


A purchase lease option (rent to purchase) allows the buyer to rent the property for a period of time with the option to purchase the property at a specific price. This agreement is normally set for a fixed term and in some agreements the monthly rent payments will be credited towards the final purchase price. If the buyer decides not to purchase the property at the end of the rental period, the option to purchase will expire and the buyer will not be entitled to a refund.

Advantages


Purchase options and purchase lease options (rent to purchase) allow the buyer to secure the property without having to pay the full purchase price upfront. This can be an advantage for buyers who do not have the cash available to purchase the property outright.

It may be of benefit to seller for example if they need to relocate, sales can take months to go through legals, this could be a faster option. It can also work well where the seller has little or no equity, so seller would probably leave them out of pocket.

Basically, this can be advantageous if the seller is in a hurry to sell but does not want to accept a lower price.

Disadvantages


Predicting the future is difficult and the option price agreed now might produce a big discount for the buyer, losing out on the sale uplift is potentially a downside for the seller, there is a risk that the buyer may not exercise the option, leaving the property unsold.

Heads of Terms in the Contract


The heads of terms in the contract should include details such as

  • Name and Address for both the buyer and seller
  • Property address
  • Agreed option fee which must be at least £1
  • The amount for which the property can be purchased
  • The length of the option period
  • Monthly lease (if applicable)
  • Any special terms and conditions

We recommend using a solicitor and taking legal advice Purchase Lease Option Solicitors | Bonallack & Bishop Solicitors (bishopslaw.co.uk)

Things to Check and what to say to vendors


Buyers should check if the mortgage lender will consent to letting the property as this may affect the agreement. Additionally, buyers should check the cost of the option and the typical length of the option period.

Typical Length of Option Period:
The typical length of the option period is between 3 to 5 years.

What to Say to Property Owners:
When approaching property owners, buyers should ask if the vendor would be interested in renting on a long-term let for between 3 to 5 years and if they would be interested in selling the property to them in the future.

In conclusion, purchase options and purchase lease options (rent to purchase) can be advantageous for both buyers and sellers. Buyers can secure the property without having to pay the full purchase price upfront, and sellers can secure a buyer without having to sell the property outright. It is important to have a written agreement in place and to ensure that both parties understand the agreement.

steve@bicknells.net

What are the occupancy conditions for holiday lets?

tender traveling woman on board of sailing yacht

If you own a furnished holiday let in the UK, it’s important to understand the occupancy rules set out in the HM Revenue & Customs (HMRC) HS253 guidelines. Meeting these conditions can make your holiday let a profitable and tax-efficient business. In this post, we’ll explain what the occupancy rules are, what records you need to keep, when you can use a grace period, and how to monitor your occupancy, along with some examples of records.

Occupancy Rules

To qualify as a furnished holiday let, your property must be:

  • available for bookings for at least 210 days per year
  • rented out to paying customers for at least 105 days of the year
  • lettings that exceed 31 continuous days must not exceed more than 155 days during the year. Lettings exceeding 31 days don’t count as holiday lets unless there are unforeseen circumstances.

If your property meets these criteria, you can take advantage of certain tax benefits, such as:

  • claiming capital allowances on furnishings and equipment – these allowance can be substantial where a previously residential property is changed to Holiday Lets (Serviced Accommodation)
  • paying business rates rather than council tax
  • Business Assets Disposal Relief
  • Business Asset Rollover Relief
  • Gift Holdover Relief
  • Splitting profits with your spouse without needing a Form 17
  • Full recovery of Mortgage Interest

Record-keeping

To prove that your property meets the occupancy rules, you need to keep accurate records. These should include:

  • all rentals, including dates and names of customers
  • evidence of the availability of the property for rent, such as an online listing or booking system
  • any periods when the property was unavailable for rent, such as maintenance or personal use

Monitoring occupancy

To ensure that you meet the occupancy criteria, it’s important to keep track of your bookings and availability. You can use a booking calendar to monitor the number of days your property is rented out and avoid exceeding the 31-day limit. There are also software programs that can help you manage your bookings and maintain records.

Examples of records

Here are some examples of records you should keep:

  • A record of all bookings, including the dates of arrival and departure, and the names of the customers
  • An availability calendar that shows when the property is available for rent
  • Invoices and receipts for all expenses related to the property, such as maintenance, cleaning, and repairs

Many operators use Channel Managers such as

Airbnb and Vacation Rental Channel Manager Feature – Guesty

or property managers for example

Book Your Stay | Property management — Grandeur Property

Or you could use systems like

Bedful Booking System

These will easily link to modern accounting systems like Accounting Software – Do Beautiful Business | Xero UK

Conclusion

Meeting the HMRC’s furnished holiday let occupancy rules can help you run your holiday let as a profitable and tax-efficient business. By keeping accurate records of your bookings, availability, and expenses, you can ensure that you meet the criteria and take advantage of the tax benefits. With the help of software and a good booking calendar, you can monitor your occupancy and avoid exceeding the 31-day limit.

steve@bicknells.net

How do Trusts work?

sign pen business document

It’s important to understand the most popular types of trust and how they work to protect assets, reduce taxes and manage tax affairs. Here are the top 7 types of trust:

  1. Bare Trusts: These trusts are simple and straightforward. The beneficiary receives the assets of the trust upon reaching legal age or at the discretion of the trustee. The income and gains from the trust are taxable income for the beneficiary.
  2. Interest in Possession Trusts (IIP): The beneficiary has the right to the income generated by the assets of the trust for a set period or for the rest of their life. The trust assets will be passed on to others after the beneficiary’s death.
  3. Discretionary Trusts: The trustee has control over when and how the income or assets of the trust are distributed among the beneficiaries. This provides flexibility if there are uncertain future circumstances or if the beneficiaries are not yet clear.
  4. Accumulation Trusts: Income earned by the trust is reinvested into the trust, rather than distributed to the beneficiaries immediately. This is useful if the trust is designed to support future beneficiaries, such as grandchildren who are still young.
  5. Mixed Trusts: These trusts combine elements of different trust types, suitable for complex estate planning or asset protection.
  6. Settlor-interested Trusts: These trusts come into play if the beneficiary is also the settlor (or creator) of the trust. The tax consequences are different and careful advice is required.
  7. Non-resident Trusts: If the trust is not based in the UK, it won’t be subject to UK inheritance tax regulations, but may be liable to tax in other jurisdictions. This can cause complications for UK residents who set up trusts overseas.

Trust law uses many specific terms which must be understood when dealing with trusts. Some common examples are:

  • Settlor: the person who creates the trust by transferring assets to it.
  • Trustee: the person who holds the property on trust for the benefit of the beneficiaries.
  • Beneficiary: the person who is entitled to use or enjoy the income or assets of the trust.

Trust Taxation

Trustees are responsible for paying tax on income received by accumulation or discretionary trusts. The first £1,000 is taxed at the standard rate.

If the settlor has more than one trust, this £1,000 is divided by the number of trusts they have. However, if the settlor has set up 5 or more trusts, the standard rate band for each trust is £200.

The tax rates are below.

Trust income up to £1,000

Type of incomeTax rate
Dividend-type income8.75%
All other income20%

Trust income over £1,000

Type of incomeTax rate
Dividend-type income39.35%
All other income45%

Dividends

Trustees do not qualify for the dividend allowance. This means trustees pay tax on all dividends depending on the tax band they fall within.

Interest in possession trusts

The trustees are responsible for paying Income Tax at the rates below.

Type of incomeIncome Tax rate
Dividend-type income8.75%
All other income20%

Sometimes the trustees ‘mandate’ income to the beneficiary. This means it goes to them directly instead of being passed through the trustees.

If this happens, the beneficiary needs to include this on their Self Assessment tax return and pay tax on it.

There are changes to the tax of trusts coming in 2024 HMRC Trusts and Estates Newsletter: April 2023 – GOV.UK (www.gov.uk)

Capital Gains Tax

For the 2023 to 2024 tax year, the tax-free allowance for trusts is:

10 Year Charge

There are other charges that can be applied to trusts including the 10 year charge Trusts and Inheritance Tax – GOV.UK (www.gov.uk)

Our Expert

We have our own expert – Claire Forth ACMA CTA – if you need help with Trusts please get in touch

We recommend Bonallack & Bishop Solicitors for the legal work.

steve@bicknells.net

Charity News Update

Download a free copy from our website we have 9 pages of guidance covering

  • The Cost of Living Crisis
  • Charity Law Reform
  • Annual Return Changes
  • Use of Social Media
  • The risk from Cyber Crime
  • Accountancy and Tax update
  • Fundraising update
  • VAT update

Plus lots of other great advice for Charities.

steve@bicknells.net

How and when do you report capital gains tax on residential property disposals?

real estate agent holding a signage

As a property owner in the UK, it is important to understand the capital gains tax (CGT) rules and regulations. CGT is a tax on the profit made when you sell or dispose of an asset, such as a property. In this blog, we will cover the 60-day reporting rule, how to calculate capital gains, how to report capital gains, how to get a reference, and how to appoint an agent.

The 60-day reporting rule

From 27 October 2021 (before that it was 30 days from 6 April 2020) the reporting deadline was re-set at 60 days and requires UK residents to report and pay CGT on the sale of a residential property within 60 days of completion. Failure to report within this timeframe can result in penalties and interest charges. Non-UK residents are also required to report and pay CGT within 60 days of completion, unlike UK residents they need to report under the CGT rules even if they made a loss or had no tax to pay.

Companies are not required to report under the 60 day rules.

The rules apply to:

  • Individuals
  • Trusts
  • Personal Representatives
  • Partnerships
  • LLPs
  • Joint Property Owners
  • Non UK Residents

Calculating capital gains

To calculate your capital gains, you need to subtract the cost of the property from the sale price. The cost of the property includes the purchase price, any fees or expenses incurred during the purchase, and any improvements made to the property. You can also deduct certain expenses, such as estate agent fees and legal fees, from the sale price. Once you have calculated your capital gains, you need to work out how much tax you owe. The amount of tax you pay depends on your income and the amount of capital gains you have made. The current CGT rates for residential property are 18% for basic rate taxpayers and 28% for higher rate taxpayers.

There is an annual exempt amount for individuals

  • 2022/23 £12,300
  • 2023/24 £6,000
  • 2024/25 £3,000

For Trusts the amounts above are halved

If the UK Resident lived in the property they could qualify for Private Residence Relief HS283 Private Residence Relief (2023) – GOV.UK (www.gov.uk)

If there is no gain then UK Residents don’t need to report under the 60 day rules. Non UK Residents need to report even if its a loss.

Reporting capital gains

UK Residents need to use Report and pay your Capital Gains Tax: If you sold a property in the UK on or after 6 April 2020 – GOV.UK (www.gov.uk)

Even if they want an Agent to report for them they at least need to start the process and get an X reference to pass to their Agent/Accountant. The Agent can use the X reference in the Agent Gateway to generate a link for the client to accept to appoint them as Agent.

You only need one X reference/Property Account even if you have multiple property disposals.

The gain also need to be reported on the their Self Assessment Return showing the tax already paid.

Non UK Residents need to use HMRC: Structured Email (tax.service.gov.uk)

Problem Areas

Personal Representatives – Trusts can’t create accounts – the executors register and tick to report for someone else

Estimates – if the estimates are unreasonably low, HMRC will put in their own figures and charge interest

Overpayments – need to go back and change the figures

steve@bicknells.net

What is a Non Dom?

city view at london

Non-Dom status is a term used to describe individuals who are not domiciled in the United Kingdom for tax purposes. This means that they are not considered to be permanent residents of the UK and are therefore not subject to UK tax on their foreign income and gains, unless they choose to be.

The UK residency status test is used to determine an individual’s residency status for tax purposes. The test takes into account a number of factors, including the number of days spent in the UK, the individual’s ties to the UK, and their intentions for the future. If an individual spends more than 183 days in the UK in a tax year, or has significant ties to the UK, they will be considered a UK resident for tax purposes.

You might find this blog helpful Where should you pay tax? (Statutory Residence Test) – Steve J Bicknell Tel 01202 025252

If an individual is a Non-Dom and chooses to be taxed on the remittance basis, they will only be taxed on their UK income and gains, as well as any foreign income and gains that they bring into the UK. This means that they can avoid paying tax on their foreign income and gains that are kept outside of the UK.

However, there is a 7-year charge for Non-Doms who have been resident in the UK for 7 out of the previous 9 tax years. This charge is designed to discourage individuals from using Non-Dom status as a way to avoid paying UK tax on their foreign income and gains. The charge is currently set at £30,000 per year, but may be higher for individuals who have been resident in the UK for longer periods of time.

In conclusion, Non-Dom status can be a useful tool for individuals who have significant foreign income and gains, but it is important to understand the UK residency status test and the potential tax implications of choosing to be taxed on the remittance basis. The 7-year charge for Non-Doms is also an important consideration for those who are considering using Non-Dom status as a way to avoid paying UK tax. It is always advisable to seek professional advice before making any decisions regarding tax planning.

steve@bicknells.net