The Government love making changes to property tax, often in order to increase tax.
Legislation will be introduced in Finance Bill 2019-20 amending sections 222 to 224 TCGA. These changes will:
reduce the final period exemption from 18 months to 9 months (there are no changes to the 36 months that are available to disabled persons or those in a care home)
reform lettings relief so that it only applies in circumstances where the owner of the property is in shared-occupancy with a tenant
make some revisions to job related accommodation relief by extending it to serving members of the armed forces, who are required to live away from home and, instead of being provided with job-related accommodation, receive payments from the MOD under its Future Accommodation Model and uses those funds to pay for accommodation
legislate 2 ESC – D21 Late claims in dual residence cases and D49 Short delay in owner occupiers taking up residence
clarify the rules concerning the transfer of residential properties between spouses or civil partners – those rules will make clear that where an individual transfers all or part of an interest in a residential property that they own to their spouse or civil partner, the receiving spouse or civil partner will inherit the transferring spouse’s or civil partner’s previous history of use of that property, resulting in a fairer outcome
Finance Bill 2017 introduces a new corporation tax deduction for contributions to grassroots sports.
From 1 April 2017 Companies will be able to make deductions for all contributions to grassroots sports through recognised sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions to grassroots sports. Sport governing bodies will be able to make deductions for all their contributions to grassroots sports.
Qualifying expenditure will be drawn quite widely and will, for example, include payments to coaches and officials. However, no payments to participators will be eligible, other than to cover the cost of travelling to competitions.
The legislation will contain similar protections to the charity and CASC legislation to ensure that payments are made for the intended purposes and to prevent payments being made for personal benefit. gov.uk
Currently, the following provisions provide a relief for CT on payments to sports clubs or in connection with sporting events:
Under section 189 of the Corporation Tax Act 2010, sporting bodies registered as charities can receive payments that can be deducted against the donating company’s CT liability.
Under section 202 of the Corporation Tax Act 2010, payments made to Community Amateur Sports Clubs (CASC) can be deducted for CT in the same way as payments to a charitable body.
Otherwise, section 54 (1) (a) of the Corporation Tax Act 2009 is likely to prevent payments being deductible for CT because they do not meet the test of being ‘wholly and exclusively for the purposes of the trade’.
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.
David Gauke, the Financial Secretary to the Treasury, said a review of pension taxation would keep savers in mind.
“We need to ensure it is effective in terms of encouraging saving, and it is going in the right place,” he said.
Basically there are 2 changes under review..
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.
The purpose of private residence relief is to relieve gains arising on the disposal of an individual’s residence so that the whole of the disposal proceeds are available to be used to buy a new residence of a similar standard. It is not intended to relieve speculative gains or gains arising from development.
The exclusion of speculative or development gains is achieved by TCGA92/S224 (3). It is important to understand the scope and limitations of this subsection so that you can apply it in suitable cases.
The subsection applies
where a dwelling house is acquired wholly or partly for the purpose of realising a gain from its disposal, or
where there is subsequent expenditure on the dwelling house wholly or partly for the purpose of realising a gain from its disposal.
Where the first part of the subsection applies no relief is due on any gain accruing from the disposal of the dwelling house. Where the second part of the subsection applies no relief is due on any part of the gain attributable to the expenditure.
If you plan to develop your property prior to sale it could be worth transferring it to company before any work is carried out, this could help to ensure that any gain to the date of transfer will be exempt from tax.
There is a further potential risk that HMRC may view the property development as a trading activity.
There are many reasons why residential property investors are now rushing to incorporate, the biggest reason being the Restriction of Mortgage Interest Tax Relief.
Clause 24 of the Finance Bill sets out plans is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows
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 its 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.
When you sell or give a residential property to your Company you will incur Capital Gains Tax if you make a gain, its for this reason many investors and their advisers believe that they are ‘automatically’ entitled to claim Incorporation Tax Relief, but in many cases Incorporation Tax Relief will NOT be available!
In summary Incorporation Tax Relief allows Sole Traders to postpone/hold over a gain by transferring all their business assets into a limited company in return for Shares.
The key problem area is the Property Investment is generally not considered to be a Trade.
Mrs Ramsey arranged and attended to maintenance issues (drains)
Mrs Ramsey and her son maintained the garages and cleared rubbish
Mrs Ramsey dealt with post
Mrs Ramsey dealt with fire regulation issues
Mrs Ramsey arranged for a fence to be erected
Mrs Ramsey created a flower bed
Shrubs were pruned and leaves swept
The parking area was cleared of weeds
The flag stones were bleached
Communal areas were vacuumed
Security checks were carried out
She took rubbish to tip
She cleaned vacant flats
she helped elderly tenants with utilities
This work equated to at least 20 hours per week and Mrs Ramsey had no other employment.
It is because she did the work herself that her property investment was considered a ‘Business’ and eligible for Incorporation Tax Relief. In summing up the Judge said…
If Mrs Ramsay had employed a Property Management Company or Letting Agent to do the work she would NOT have been able to claim ‘Incorporation Tax Relief’.
Most Buy to Let Landlords with one or two properties are Passive Investors who delegate all the responsibilities to professional letting agents, they will not be doing enough to comprise a business!
R&D Relief is a Corporation Tax relief that may reduce your company or organisation’s tax bill.
Alternatively, if your company or organisation is small or medium-sized, you may be able to choose to receive a tax credit instead, by way of a cash sum paid by HM Revenue and Customs (HMRC)
But your company or organisation can only claim R&D Relief if it’s liable for Corporation Tax.
The Small and Medium-sized Enterprise Scheme
This scheme has higher rates of relief. Since 1 April 2015, the tax relief on allowable R&D costs is 230% – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £130 on top of the £100 spent. It also includes a payable credit in some circumstances.
The Large Company Scheme
If your company isn’t small or medium-sized, then you can only claim under the Large Company Scheme.
Since 1 April 2008, the tax relief on allowable R&D costs is 130% – that is, for each £100 of qualifying costs, your company or organisation could have the income on which Corporation Tax is paid reduced by an additional £30 on top of the £100 spent. If instead there’s an allowable trading loss for the period, this can be increased by 30% of the qualifying R&D costs – £30 for each £100 spent. This loss can be carried forwards or back in the normal way.
Government Statistics show a steady growth in claims
Construction Examples of R&D
The investigation into the removal of contamination from sites, including land remediation
Advancements in structural techniques that aid construction relating to unusual ground conditions
The innovative use of green or sustainable methods and technology
Development or adaptation of tools to improve efficiency
The use of new or unique materials, e.g. recycled products
Improvement on existing construction methods or development of new ideas to solve ongoing issues related to the site environment or project specifications
Innovative architectural design
IT Systems Examples of R&D
The design, construction and testing of systems, devices or processes e.g. new hardware or software components, digital interface and control systems
Integration of legacy and new systems e.g. following a corporate merger or acquisition, the adoption of an Enterprise Architecture or externally with partners in joint ventures
Advances in network management and operational tools, development of wired or wireless technologies, designing mobile and interactive services, evolution of new generation network switching and control systems
Data intensive activities e.g. the collection, storage and analysis, distribution and retrieval. Defining or working with new or emerging data models and metadata standards, integration with third party content
The Summer Budget 2015 was not great news for Landlords!
The 10% Wear & Tear allowance will end in April 2016 and landlords will only be able to claim for actual expenditure, this could have a ‘cap’ and restrictions, we await the full details. Many landlords will be disappointed at the loss of this useful tax relief.
From April 2017 tax relief on interest will be restricted so that by 2020 it will not be an allowable expense against profit but will attract 20% tax relief.
Until the Summer Budget 2015 when you purchased a business (not its shares) into a limited company from an unrelated party you could write off the goodwill (Intangibles) against your corporation tax but that has now changed and you can’t, another tax relief bites the dust!
In accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired. Goodwill can therefore be thought of as representing the value of a business’s reputation and customer relationships.
This measure removes the tax relief that is available when structuring a business acquisition as a business and asset purchase so that goodwill can be recognised. This advantage is not generally available to companies who purchase the shares of the target company. The current rules allow corporation tax profits to be reduced following a merger or acquisition of business assets and can distort commercial practices and lead to manipulation and avoidance. Removing the relief brings the UK regime in line with other major economies,reduces distortion and levels the playing field for merger and acquisition transactions.
Intangibles acquired before 8 July 2015 will continue to be treated under the old rules, so a corporation tax deduction will continue to be available for amortisation, and any loss on disposal will be treated as part of the company’s trading profit or loss for the year of disposal.
Overlap Profit affects Sole Traders and Partnerships, here are a couple of examples from BIM81080
Example 1 – one overlap period
A business commences on 1 October 2010. The first accounts are made up for the 12 months to 30 September 2011 and show a profit of £45,000.
The basis periods for the first three tax years are:
2010-2011
Year 1
1 October 2010 to 5 April 2011
2011-2012
Year 2
12 months to 30 September 2011
2012-2013
Year 3
12 months to 30 September 2012
The period from 1 October 2010 to 5 April 2011 (187 days) is an `overlap period’.
Example 2 – more than one overlap period
The business in Example 1 continues. In 2015-2016 the accounting date is changed from 30 September to 30 April. The accounts for the 12 months to 30 September 2014 show a profit of £75,000. The relevant conditions for a change of basis period are met (see BIM81045).
The basis periods are:
2014-2015
Year 5
12 months to 30 September 2014
2015-2016
Year 6
12 months to 30 April 2015
2016-2017
Year 7
12 months to 30 April 2016
The period from 1 May 2014 to 30 September 2014 (153 days) is an `overlap period’.
If the taxable profit for 2015-2016 is computed using days, it includes the profits for the `overlap period’ of 153 days (£75,000 x 153/365 = £31,438).
Adding together the overlap profits for the first overlap period of 187 days in Example 1 (£23,054) and the second overlap period of 153 days (£31,438), gives total overlap profits of £54,492 over 340 days.
Why Hasn’t Everyone ‘Cashed In’ Their Overlap Relief Already?
There are two ways to gain access to your overlap relief: cease trading or change your accounting date.
Ceasing to trade is a drastic step: generally not something you are likely to do purely for tax planning purposes. However, it is worth noting that transferring your business to a company is also classed as ‘ceasing to trade’ for these purposes.
Changing your accounting date to access your overlap relief is less drastic, but the downside is that the relief only arises where you are being taxed on more than twelve months’ worth of profit. Despite this, however, there is still generally an overall saving to be made where current profits are at a lower level than the profits arising when the ‘overlap’ first arose. So, with the economy in the state it’s in, now could be a good time to ‘cash in’!
There is also some useful advice in Helpsheet HS222
