Rent a Room and earn £7,500 tax free 1

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The Rent a Room Scheme lets you earn up to a threshold of £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.

You can let out a room or an entire floor.

How it works

The tax exemption is automatic if you earn less than the threshold. This means you don’t need to do anything.

You must complete a tax return if you earn more than the threshold. From 6 April 2016, this is £7,500. For the 2015 to 2016 tax year, the threshold was £4,250.

When you can use the Rent a Room Scheme

You can use the scheme if:

  • you let a furnished room to a lodger
  • your letting activity amounts to a trade, for example, if you run a guest house or bed and breakfast business, or provide services, such as meals and cleaning

When you can’t use the Rent a Room Scheme

You can’t use the scheme if the accommodation is:

  • not part of your main home when you let it
  • not furnished
  • used as an office or for any business – you can use the scheme if your lodger works in your home in the evening or at weekends or is a student who is provided with study facilities
  • in your UK home and is let while you live abroad
  • the whole of your home, rather than a part of it

SpareRoom

SpareRoom, the UK’s busiest flatshare site. Every three minutes, someone finds a flatmate with SpareRoom.

The table below shows the change in monthly rents between 2009 and 2014 according to Spareroom:

Ave Rent 2009 (£) Ave Rent 2014 (£) Rental Increase %
London & suburbs £549 £691 25.8%
East Anglia £345 £398 15.4%
East Midlands £314 £353 12.6%
North England £304 £334 9.8%
North West England £316 £359 13.8%
South East England £390 £449 15.2%
South West England £347 £394 13.7%
West Midlands £334 £366 9.7%
Yorkshire & Humberside £312 £347 11.3%
Northern Ireland £238 £260 9.5%
Scotland £325 £403 24.2%
Wales £302 £332 9.9%
UK £500 £550 10%

How will the Residential Nil Rate Band (IHT) work? 5 key points Reply

Contemporary house with pool

The new rules come into force in April 2017.

The current nil rate band for Inheritance Tax is £325,000. Which can be transferred between spouses, so basically £650k for a couple.

The maximum amount of RNRB per person will be phased in so that it is:

  • £100,000 for 2017 to 2018
  • £125,000 for 2018 to 2019
  • £150,000 for 2019 to 2020
  • £175,000 for 2020 to 2021

It will then increase in line with CPI for subsequent years.

Key points to note:

  1. It is transferable between spouses – A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.
  2. The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one in the estate. A property which was never a residence of the deceased, such as a buy-to-let property, will not qualify.
  3. If the net value of the estate (after deducting any liabilities but before reliefs and exemptions) is above £2 million, the additional nil-rate band will be tapered away by £1 for every £2 that the net value exceeds that amount. The taper threshold at which the additional nil-rate band is gradually withdrawn will rise in line with CPI from 2021 to 2022 onwards.
  4. You need to be a linear descendant to benefit – A direct descendant will be a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
  5. Downsizing is catered for – legislation in Finance Bill 2016 will provide that where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015, that part will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants. However, the total amount available will not exceed the maximum available residence nil-rate band. The technical details of how the additional nil-rate band will be enhanced to support those who have downsized or ceased to own their home will be the subject of a consultation to be published in September 2015 ahead of the draft Finance Bill 2016.

steve@bicknells.net

Hooray! we have now paid our tax – Tax Freedom Day was 2nd June 2016 Reply

tax free icon, red round glossy metallic button, web and mobile app design illustration

According to the Adam Smith Institute

Taxpayers worked 154 days this year to pay their taxes, four days longer than 2015

  • Tax Freedom day falls four days later than it did in 2015
  • Brits work 154 days of the year solely to pay taxes; every day from 1st January to 2nd June
  • Tax receipts projected to be 42.27% of net national income this year
  • Government needs to cut spending and keep tax reform a priority
  • Adam Smith Institute calling on government to raise National Insurance Threshold to help lowest paid in society

This is first time in 15 years that Tax Freedom Day has moved into June!

Whilst net national income has increased by £34.6bn from 2015, government has actually gobbled up £35.4bn more in taxes, meaning the government has actually left Britons £1bn worse off than last year, a reminder that tax reform must remain a priority.

Director of the Adam Smith Institute, Dr Eamonn Butler, said:

“The Treasury hates Tax Freedom Day because they don’t want us to know how much tax we really pay. They conceal the tax burden with stealth taxes that we don’t even realise we’re paying.

“But it’s shocking that the government takes over two-fifths of the country’s earnings – and then borrows more. We work longer for the government than mediaeval serfs had to work for their Lords!

“It is absurd that people on the minimum wage are liable for National Insurance Contributions, which raise their cost to employers and make it harder to move from benefits into work. The poor are also worst hit by regressive taxes like excise duties on what they buy.”

Tax Freedom Day is designed to reveal to the public how much they really pay out in taxes, which Britain’s lengthy tax code can often obscure. ASI calculations include direct taxes like income tax and national insurance, as well as indirect taxes like VAT and corporation tax.

steve@bicknells.net

HMRC have raised over £500m in unpaid tax and penalties! 1

HMRC Undeclared 8169099509_3860d7f26c

Taskforces are specialist teams that undertake intensive bursts of activity in specific high risk trade sectors and locations in the UK. The teams will visit traders to examine their records and carry out other investigations.

HM Revenue and Customs (HMRC) taskforces have recovered more than £500 million since they were launched five years ago.

The targeted bursts of enforcement activity have brought in progressively higher amounts every year, and the total now stands at more than £540 million. This includes nearly £250 million raised in 2015-16 alone, almost double the previous year’s yield.

Since 2011, HMRC has launched more than 140 taskforces targeting sectors that are at the highest risk of tax fraud including the retail sector, the tobacco industry and the adult entertainment industry.

Jennie Granger, Director-General for Enforcement and Compliance at HMRC, said:

The message is clear: if you try to cheat on your tax, we are going to catch you. A small number of people still think they can cheat the tax system; these figures prove we can track them down and take back what they owe.

We have increasing levels of intelligence, and use state-of-the-art digital tools to help us to identify and target high-risk areas.

Taskforces are just one strand of HMRC’s compliance strategy, which brought in a record £26.6 billion in 2014-15, up 43% from 2011-12.

Nearly 50 new taskforces were launched last financial year, including ones targeted at property, partnerships and hidden wealth. In 2015, a single taskforce focused on Income Tax led to 45 arrests for tax evasion and fraud.

Money brought in through taskforces in previous years:

Year Taskforces yield
2011-12 £24.3 million
2012-13 £47 million
2013-14 £85 million
2014-15 £138.1 million
2015-16 £248 million

Here are 6 tips should you be get an enquiry:

1. Establish Enquiry Type

It is important that the type of enquiry is established. If it is an Aspect Enquiry make sure it is fully dealt with. Remember HMRC needs a reason to extend an enquiry from aspect to full – challenge any extension where necessary.

2. Choose the Best Adviser

Does your accountant have experience of dealing with enquiries and investigations? do you need a specialist to help? do you have tax insurance or FSB membership?

3. Revenue Manuals

These manuals are a good source of information – particularly if the HMRC asks for something and you are wondering whether this should be allowed. We have seen the enquiry manual being quoted successfully to HMRC a number of times.

4. Reduce your risk by filing and paying on time

Events such as late returns or a poor compliance record can increase the likelihood of an investigation.

Once the investigation has started the standard of record keeping becomes important.

5. Own up to your mistakes

I you know of mistakes and errors its much better to declare them at the start of the enquiry.

6. Be Accurate

Or “tell the truth”. Be sensible in what the Inspector is told. Do not be tempted to say the first thing that comes to mind just to satisfy HMRC.

steve@bicknells.net

 

 

How can you avoid being taxed on a directors loan? 2

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Directors loans are common particularly in a small limited company. Loans over £10,000 require an ordinary resolution and there are additional rules for loans over £50,000.

In general, the directors take a small salary, generally at £11,000 the tax free level for 2016/17 or £8,060 the NI and Tax free level, they then take dividends.

During the year the directors take out payments as they need them and periodically a dividend is repaid to offset the directors loan.

However, if the Directors Loan Account is not repaid within 9 months of year end then 32.5% tax will be charged as part of the corporation tax.

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.

When the loan is repaid the company can reclaim the tax.

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

32.5% is a lot of tax to pay!! even if you can reclaim it later on

On top of that any interest free loan over £10,000 will be a benefit in kind! so you will get taxed on the notional interest set by HMRC.

What can you do to avoid this tax?

Dividends

Provided you have distributable reserves, paying a dividend might solve the problem.

Companies Act 2006 Section 830 – Distributions to be made only out of profits available for the purpose

(1)A company may only make a distribution out of profits available for the purpose.

(2)A company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

(3)Subsection (2) has effect subject to sections 832 and 835 (investment companies etc: distributions out of accumulated revenue profits).

A distribution must be justified by

  1. The Company’s last published accounts
  2. Interim Accounts
  3. Initial Accounts

The problem with using this approach is that the directors loans may not match the share ownership so you might have to pay more dividends than you intended to or use you end up trying to justify the use of dividend waivers.

If you are thinking of waiving dividends, bare the following in mind:

  1. A formal Deed of Waiver is required, the Deed will say that the Dividend is Irrevocably Waived, it must be dated before the right to dividend arises, it must be signed and witnessed and filed with the company statutory records
  2. You should have a good commercial reason for the Waiver which could be to retain funds for a specific purpose and this could be stated in the Deed
  3. Don’t make a habit of waiving dividends as it will increase the risk of questions from HMRC
  4. Don’t give inducements to encourage Dividend Waivers
  5. Make sure your dividends are legal

The other point to note is that you will be taxed on the Dividends https://stevejbicknell.com/tax-calculators/

Bonus

You could choose to pay yourself a bonus but salaries will generally be the most expensive option because:

  • PAYE is 20%, 40% or even 45%
  • Employee NI is 12% then 2% (over £827 per week)
  • Employers NI is 13.8%

Write Off the Loan

Writing off the loan is expensive.

It is treated as a distribution for Income Tax Purposes and subject to NI and Class 1 NIC will be charged to company.

The write off will be disallowed for Corporation Tax purposes.

On the positive side the s455 tax will be released.

Get a external loan

If the directors loan is likely to be repaid and is relatively short term, it might be better to get a loan and repay the debt.

A small amount of interest could be cheaper than paying 32.5% and then waiting to claim it back.

But make sure you don’t get caught by the ‘Bed and Breakfast’ rules

HMRC were concerned that some participators were avoiding this tax by raising funds short term to repay an outstanding loan.  They would then draw a new loan very shortly afterwards – HMRC refer to this as “bed and breakfasting”. New anti-avoidance rules were therefore  introduced in 2013.

These new rules incorporate two provisions – the “30-day rule” and the “intentions and arrangements” rule.

30-day rule

This applies where within a 30-day period:

  • a shareholder makes repayments of their s455 loan; and
  • in a subsequent accounting period, new loans or advances are made to the same shareholder or their associate.

So basically prevents the use of ‘Bed & Breakfasting’

‘intentions and arrangements’ Rule

Relief is denied regardless of the 30 day rule, if prior to repayment there is an outstanding amount of at least £15,000 and at the time the amount is repaid to the company, any person intended to redraw any of that amount or had made arrangements to make a new withdrawal; and a new withdrawal is made.

The relief denied is the lower of the amount repaid and the amount redrawn.

 

steve@bicknells.net

HMRC continue to target small businesses – are you ready for a visit? 1

I want you

According to recent reports HMRC has increased the number of small business investigations and they continue to be seen as soft targets.

About 7% of tax inspections are random, the majority are triggered because HMRC believes that something is wrong.

What can you do to reduce your chances of being selected:

1. File your tax returns on time and pay what you owe – If you file late or at the last minute HMRC will think you are disorganised and as such there are more likely to be errors in the return

2. Declare all your income – HMRC get details of bank interest and other sources of income, sometimes they test them and match them to returns

3. Use an accountant – Unrepresented taxpayers are more likely to be looked at, mainly because many of them don’t know what they are doing

4. Trends – if your business doesn’t match the profile of similar business in the same sector or your results suddenly fluctuate it could raise concerns at HMRC, for example, if you suddenly request a VAT refund

You might also consider tax investigation insurance, FSB include tax investigation insurance as a member benefit, they also have some great advice if you do get selected

steve@bicknells.net

HMRC changes the rules again on the Employment Allowance! Reply

Business team.

The employment allowance was introduced in April 2014 and employers can save up to £3000 in employers national insurance.

The problem is that HMRC wanted to stop one-person businesses from getting the allowance and from the 6th April 2016 new rules came into place.

However, many one-person business thought that employing another person, for example their Spouse would get round the rules.

So HMRC have tightened the rules a bit more in their Employer Bulletin April 2016 and set out the rules for employing another person.

employment allowance

steve@bicknells.net

The tax advantages of Furnished Holiday Lets 1

Traditional Old English Cottage with Thatched Roof

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

https://www.gov.uk/government/publications/furnished-holiday-lettings-hs253-self-assessment-helpsheet/cvgg

In addition:

  • The Interest Rate Relief Restrictions don’t apply – these rules only affect Buy to Let Investors
  • Losses can be set against total income and are not restricted to the rental business; PIM4200 onwards deals with normal rental business losses and PIM4130 deals with furnished holiday lettings losses.

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).

But the extra stamp duty will apply

Furnished holiday lets

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 20% but its falling year on year and by 2020 it will be 18%.

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%.

ExampleSo £1,995 × 0.5% = £9.97. This is rounded up to the nearest £5, which means you pay £10 Stamp Duty.

https://stevejbicknell.com/budget-2016/budget-3/

HMRC have a calculator, here is link

http://www.hmrc.gov.uk/tools/sdlt/land-and-property.htm

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 £11,100 to offset this gain.

steve@bicknells.net

It’s good to share and earn a £1,000 tax free Reply

Fotolia_45741373_XS cash

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.

According to http://www.theguardian.com/money/2016/mar/21/sharing-economy-1000-tax-free-allowances-ebay-airbnb-micro-entrepreneurs

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.

steve@bicknells.net

Overdrawn directors accounts will now cost 32.5% 2

with computer

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.

Click here to use form LP2

steve@bicknells.net