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Autumn Budget 2021: A Round Up

Tue, 02 Nov 2021 19:48:40 GMT

Autumn Budget 2021 : A Round Up

Tax Simplified 4 You | 01 November 2021

The Chancellor, Rishi Sunak, delivered the Autumn Budget on 27 October 2021. The key announcements are summarised below.

Individuals

Dividends & National Insurance

The 1.25% Health and Social Care Levy will be introduced from 6 April 2022 via an increase to National Insurance Contributions, before becoming a freestanding levy from 6 April 2023.

From 6 April 2022, the dividend tax rates will also be increased by 1.25%. The basic rate dividend tax will increase to 8.75%, the higher rate dividend tax will increase to 33.75% and the additional rate dividend tax will increase to 39.35%. No increases or changes to the main or savings income tax rates.

Similarly, Employer’s NIC will increase from 13.8% to 15.05% and Employees’ NIC will increase from 12%/2% to 13.25%/3.25%. Self-employed NIC will increase from 9%/2% to 10.25%/3.25%.

It was also confirmed in Finance Act 2021/22 that section 455 tax (paid by companies on overdrawn director’s loan accounts) will also increase from 32.5% of the outstanding balance to 33.75% of the outstanding balance.

The increase in dividend tax and National Insurance rates, along with the previously increased corporation tax rates will have a significant impact on the tax position for employees, employers and those running businesses.

With an increase in the marginal tax rates on salaries and dividends, company owners may wish to look at alternative strategies for profit extraction such as Charging interest on amounts lent by the owner to the company; or Charging rent on property privately owned but occupied by the company.

The increase in National Insurance rates also makes salary sacrifice arrangements more attractive. Employers may wish to consider these for areas such as pensions and electric cars.

The income tax limits and personal allowance will remain at their current level until April 2026.

Business Rates

An additional 50% business rates discount (to a maximum of £110,000) for businesses in the retail, hospitality and leisure sectors. A new investment relief will mean that businesses will be able to make property improvements and pay no extra business rates for 12 months.

An exemption from business rates until 2035 for on-site use of renewable energy (such as solar panels). In addition, revaluations of property will now be made every three years from 2023.

The 50% business rates cut will no doubt be welcomed by the retail, hospitality and leisure sectors which were the hardest hit by the pandemic. We support any reliefs for business rates, although the detailed aspects of the new schemes are yet to be set out.

National Living Wage & Universal Credit

The Chancellor announced an increase to the current National Living Wage to £9.50 an hour with affect from 1 April 2022. Alongside this, the Universal Credit (‘UC’) taper relief has been cut from 63% to 55% and the threshold for when taper relief begins, known as ‘work allowance’, increased by £500.

Taper relief is the rate at which Universal Credit is withdrawn from the claimant, for every £1 they earn over the threshold. A claimant earning £100 over the work allowance will now keep an additional £8 of their universal credit. The Chancellor announced this change will come into effect as soon as possible and at the very latest by 1 December 2021.

Capital Gains Tax

Since 6 April 2020, UK tax resident individuals have been required to file a return (and pay the associated tax) on the sale of UK residential property which is not covered by a relief or exemption within 30 days of the disposal.

Since 2015 (or 2019 for commercial property) non-UK tax resident individuals have also been required to file a 30-day return on the sale of any UK property.

For any property sales which complete on or after 27 October 2021 the deadline for reporting and paying any associated tax is now 60 days, rather than 30 days. The changes also clarify that, for UK tax residents, where a gain arises in relation to a mixed-use property that only the portion of the gain that is the residential property gain is to be reported and paid.

Pensions

The earliest age at which most pension savers can access their pensions without incurring an unauthorised payments tax charge has increased from 55 to 57. This increase will have effect from 6 April 2028. This follows the original rise in pension age from 50 to 55 that took place in 2010.

A subsequent Finance Bill will introduce top-up payments to be made directly to low-earning individuals saving in a pension scheme using a net pay arrangement (starting in respect of contributions made in 2024-25 onwards).

Those schemes with a protected pension age, as well as schemes set up for firefighters, police and the armed forces will not be affected by these new rules, nor will people retiring for ill-health reasons. A consultation document was issued in February 2021 to seek views on this proposed change, but as only 117 people responded, this news may come as an unwelcome surprise to a lot of people.

Clearly, with increased life expectancy comes greater financial burden. Whilst the intention to encourage people to save longer, to have greater financial security in their retirement is commendable, the fact that the lifetime allowance remains stuck at £1,073,100 until 2026 negates this.

Additional contributions and growth over this additional two year period, could push more people into a lifetime allowance charge. This may currently seem like a problem for the wealthy but with the lifetime allowance frozen for five years, it could easily become an issue for those ‘middle-earners’.

Businesses

Basis Periods

Basis period reform for self-employed businesses and Partnerships is expected to commence from 6 April 2024, with a transitional year before this. This is a major change expected to raise an additional £820 million in the first full year.

Partnerships and businesses currently pay income tax and class 4 National Insurance on the profits for the accounting year which ends in the applicable tax year. For example, a business with an accounting period reference date of 30 April will be assessed in 2020/21 on the profits in the accounting year to 30 April 2020, with the tax being due by 31 January 2022.

For the 2024/25 tax year onwards, all sole traders and partners will be assessable on a tax year basis, i.e., the profits that arise between 6 April 2024 and 5 April 2025. The intention is to make the income tax system easier to administer following the move towards ‘Making Tax Digital’.

The equivalence of 31 March (to 5 April) will be retained so that businesses that draw accounts up to 31 March will have no change. There are transitional rules, so that for 2023/24, the business will declare all profit up to 5 April 2023, and any overlap profit will be used.

Note that the transition can result in more than 12 months’ profit being taxed in one tax year. Therefore, a spreading adjustment is allowed where the taxable profit in 2023/24 is larger, than it otherwise would have been without the rule change.

Corporation Tax

The main rate of corporation tax will remain at 19% until April 2023. From this date the main rate will increase to 25%, with a Small Profits Rate of 19% for profits not exceeding £50,000. There will be marginal relief for profits between £50,000 and £250,000 (these thresholds are proportionately reduced for the number of associated companies and short periods).

Close investment holding companies, including most family investment companies, will not qualify for the 19% rate.

Capital Allowances

Between 1 April 2021 and 31 March 2023 (extended in the Budget from 31 December this year), expenditure on new plant and machinery qualifies for a 130% super-deduction.

Expenditure on assets in the special rate pool (such as integral features in buildings and certain cars) will benefit from a 50% first year allowance.

The £1 million annual investment allowance (AIA) limit for expenditure on plant and machinery will be extended until 31 March 2023.

The benefits of this extension will be limited for many businesses, as companies are likely to claim the super-deduction in preference to the AIA (as it provides relief for capital expenditure at an enhanced rate of 130%).

However, the extension to the £1m limit will be still be welcomed by capital intensive LLPs and unincorporated businesses that don’t qualify for the super deduction, or for companies purchasing assets which qualify for AIA but would not otherwise qualify for the super deduction (such as second-hand assets).

Research & Development

From April 2023, Research & Development (R&D) Tax Relief will be extended to include data and cloud accounting costs. In addition, measures to target abuse and improve compliance will be introduced.

These changes will be legislated for in Finance Bill 2022/23 and will take effect from April 2023. Further details of the changes and next steps for the review will be set out in due course.

VAT and indirect taxation

VAT registration threshold will remain at £85,000 until 31 March 2024.

50% business rate discount for companies in the retail, hospitality and leisure sectors, up to a maximum of £110,000.

From 1 April 2022, Residential Property Developer Tax will be introduced at 4% for businesses with profits over £25 million.

Get in touch if you have any questions regarding how these changes may impact your business.

Reporting Obligations of Landlords

Fri, 29 Oct 2021 09:21:59 GMT

Reporting Obligations of Landlords

Tax Simplified 4 You | 29 October 2021

There are about 2.66m private landlords in the UK and many people choose to invest in property to rent, because it can offer excellent returns.

Below are some key tax points to consider when you become a landlord.

Registering for Self Assessment

As a private landlord, you must pay Income Tax on your net rental property profits, which is the amount that’s left once expenses allowed by HMRC have been deducted from the total gross rental income.

Your tax bill will be determined by the size of your net profit and your personal financial/tax circumstances. You can, of course, rent out more than one property or jointly own a rental property, with a relative, partner or spouse, and you will be taxed according to your share.

If your yearly rental income is more than £2,500 after deducting allowable expenses or £10,000-plus before deductions, you’ll need to report your profits via a Self Assessment tax return (SA100) and pay your subsequent Income Tax bill.

If you fall into the above criteria, you must register for Self Assessment, if you’re not already registered.

If you don’t register before renting out your property, you must do so by 5 October following the tax year (6 April to 5 April) in which you received taxable rental profits, otherwise you risk having to pay a penalty.

What records must landlords keep?

As a landlord, you must keep accurate financial records that detail rent you receive and expenses you pay to manage and maintain the property.

You should retain receipts and invoices, because HMRC can ask for proof of your expenses, and ask to look at your bank statements.

Keep a log of mileage you drive “wholly and exclusively” for renting out your property, as these can be claimed as an allowable expense. Records must be kept for six years and you can be fined if your records are inaccurate, incomplete or lost.

How is the tax calculated?

The standard tax free Personal Allowance is £12,570 (2021/22 tax year) if you earn less than £100,000 a year.

The rates are different in Scotland, but in England and Wales:

If you earn between £12,571 and £50,270 a year, you will pay 20% Income Tax (Basic Rate) on your taxable income.

If you earn between £50,271 and £150,000 a year, you will pay 40% (Higher Rate) on your taxable income.

If you earn more than £150,000 a year, you will pay 45% Income Tax (Additional Rate) on your taxable income.

So, what expenses can a landlord claim?

To qualify for allowable expenses, expenses must be “wholly and exclusively” for renting out your property – you cannot claim for personal expenses.

Allowable expenses include:

Property maintenance and repairs
Replacement of domestic items such as a replacement washing machine or microwave
Redecorating between tenancies
Insurance such building, contents or public liability
Gardening and cleaning services
Agent fees/management fees
Legal fees for lets of a year or less
Accountancy fees
Direct costs such phone calls, stationery and advertising for new tenants
Vehicle costs restricted by the private use element or mileage allowance if more favourable (see Gov.uk for approved mileage rates)
Mortgage interest payments

You cannot claim for:

1.Property improvements that increase the value of your property such as underfloor heating in a kitchen when it wasn’t there previously or an extension

2.Mortgage capital repayments.

What About the property allowance?

Property allowance is a tax exemption of up to £1,000 a year for people who earn income from land or property. If you jointly own property with others, all are eligible for the £1,000 property allowance against their share of the gross rental income.

If you have any questions about what you need to declare to HMRC as a landlord, contact us here to see if we can help.

Registering for Self Assessment with HMRC

Tue, 19 Oct 2021 10:25:24 GMT

Registering for Self Assessment with HMRC

Tax Simplified 4 You | 19 October 2021

It is your responsibility to tell HM Revenue & Customs (HMRC) if you think you need to complete a tax return.

If you complete a Self Assessment tax return, you need to include all of your taxable income, and any capital gains. You also claim any tax allowances or reliefs that you are entitled to on the tax return.

You can send the form to HMRC either on paper or online. The information on the tax return is used to calculate your tax liability. This process is called Self Assessment.

Who Needs to Complete a Self Assessment Tax Return?

Most people in the UK pay all their tax ‘at source’, for example, through Pay As You Earn (PAYE) if they are employed, and are not required to file a tax return.

Self Assessment, therefore, does not affect everyone and you will normally only need to complete a form if one or more of the following apply to you:

You are working for yourself – you are self employed
You are a partner in a partnership business;
You are a minister of religion – any faith or denomination;
You are a trustee or the executor of an estate.

You also might need to complete a Self Assessment tax return if:

You are a company director, if you have income that is not taxed under PAYE;
You have untaxed income. This could be, for example, interest that is not taxed before it is paid to you or rental income. If you are an employee or a pensioner and the income (profit) is less than £2,500 a year you might not have to complete a tax return but it is still your responsibility to report such income by contacting HMRC . If you receive other untaxed income and the tax due on it cannot be collected via your PAYE coding notice you will need to complete a tax return;
You receive regular annual income from a trust or settlement, or you receive income from the estate of a deceased person and further tax is due;
You have foreign income on which UK tax is due (although there is an exclusion if your foreign income consists solely of less than £300 of dividend income).
You are non-resident and you have taxable income in the UK. This includes non- UK resident landlords. You can find out more on GOV.UK ;
You have income from savings and investments of £10,000 or more before tax;
You have annual income of £100,000 or more before tax;
You or your partner receive child benefit and your adjusted net income is over £50,000. This is because of the high income child benefit charge ;
You have tax due at the end of the year that cannot be collected via your PAYE coding notice in a later year;
Your untaxed income is £2,500 or more – but if you are a pensioner, you may be able to pay your tax through your PAYE Coding Notice;
Your claims for employment expenses are £2,500 or more;
You have capital gains where:

1. You have given away or sold assets worth £49,200 or more for 2021/22; or

2. You have a capital loss but your gains net of any losses are more than the annual exemption for 2021/22 of £12,300; or

3. You have no losses to claim but your gains are more than the annual exemption for 2021/22 of £12,300; or

4. You need to make any other capital gains tax claim or election for the year.

HMRC may also want you to complete a Self Assessment tax return for other reasons.

Note that if HMRC have sent you a tax return or a notice to complete one, then you must fill it in and return it by the due date unless there is a good reason you do not need to be in Self Assessment and HMRC agree to cancel it.

See below on what to do if you no longer need to complete a self assessment return.

There is a tool on GOV.UK to help you understand if you need to do a tax return.

Note that you if you dispose of UK residential property and you have capital gains tax to pay, then you must file a separate return within 30 days of the disposal. Similar rules apply if you are non-resident in the UK and you dispose of UK land or property, even if there is no capital gains tax to pay.

Information you need when registering for self assessment

If you need to complete and file a tax return and didn’t send one last year, you’ll need to register for Self Assessment. There are different ways to register, determined by whether you’re self-employed, not self-employed or registering as a partner in an ordinary partnership.

If you’re self-employed or soon planning to become a sole trader, you can register online. It’s a simple and relatively quick process, during which you’ll be asked to input your:

- National Insurance number

- Full name (and any previous names)

- Current address (and when you

moved in)

- Date of birth

- Gender

- Phone number

- Email address

- Whether you’ve registered previously

for Self Assessment.

You will also be asked basic information about your new sole trader business.

After you’ve completed the questions, HMRC will create your account. You’ll then receive a letter with your Unique Taxpayer Reference (UTR) number within 10 days (21 if you’re based overseas). You’ll need your UTR to file your Self Assessment tax return. You’ll then receive another letter with an account activation code. Once activated, you can file your tax return at any time before the deadline.

Notifying HMRC

If you’re starting out in self-employment, you should let HMRC know straight away by registering for Self Assessment, but you cannot register if you’re not starting your sole trader business within 28 days.

You must register by 5 October after the end of the tax year where you are required to file a tax return. So, for example, if you need to file for the 2020/21 tax year, which starts on 06 April 2020 and ends on 05 April 2021, you should register by 5 October 2021. If you fail to notify HMRC before this date, you may face a late notification penalty.

If you’re a partner in a partnership, you will need to register for self assessment using form SA401. You will also need to register the partnership for self assessment using form SA400.

If you’ve filed online before, you can sign into your existing account using your Government Gateway user ID and password to register online.

It is worth noting that if you notify HMRC after 5 October, provided you have paid your income tax liability in full by the usual 31 January payment deadline, HMRC may reduce the late-notification penalty to zero. Note in these circumstances that you should also make sure you file your tax return on time.

What do you do if you no longer need to complete a self assessment tax return?

If your circumstances have changed and you think you no longer need to complete a tax return, for example, because you pay all your tax under PAYE, let HMRC know as soon as possible. You can contact HMRC using the details on GOV.UK .

If you have already received a tax return for a year, HMRC might agree to cancel it, if you explain your circumstances to them over the telephone. If they agree to withdraw the return, you will no longer need to submit it and any penalties for missing the filing deadline will be cancelled.

If HMRC do not agree, however, they may ask you to complete the return and to tell them about the change in your circumstances in the Additional Information boxes.

They might also agree to cancel the tax return, but instead issue you with a Simple Assessment, if they think you have not paid enough tax.

If you have not received a notice to file a return for the year but think you might receive one, contact HMRC and let them know why you think you no longer need to complete a Self Assessment return – you might be in time to stop them issuing one.

Submission deadlines

If you have to file a Self Assessment tax return, you normally have:

until 31 October to do so, if you choose to submit a paper tax return;
or until the following 31 January if you file online.

This means you have an additional three months for online filing compared with paper.

HMRC take the date of the first return received by them and this also triggers any late filing penalty. For example, if you file a paper return for 2020/21 after 31 October 2021, you cannot avoid a late filing penalty by filing the return online before 31 January 2022.

When you first register for Self Assessment, you may need to consider the following submission deadlines too:

If you want HMRC to calculate your tax
If HMRC issue you with a tax return before 31 August, you have until 31 October to submit it on paper;
If HMRC send you a tax return to complete on or after 1 September, you have two months from the date of issue to complete and submit the paper form;
If you are happy to calculate your own tax liability (if you submit online, the software will automatically calculate the tax due)
If HMRC ask you to submit a tax return before 31 July, you must submit the return on or before 31 October (paper) or on or before 31 January (online);
If HMRC ask you to submit a Self Assessment tax return after 31 July but by 31 October, you must submit the return within three months of the date of the notice (for paper returns) or on or before 31 January (for online returns);
If HMRC ask you to submit a Self Assessment tax return after 31 October, you must submit the return (whether paper return or electronic) within the three months beginning with the date of the notice.

Get in touch if you're not sure if you need you need to prepare a tax return and to see if we can help.

Working From Home - Allowable Expenses You Can Claim

Tue, 12 Oct 2021 15:10:04 GMT

Allowable Expenses You Can Claim if Self Employed & Working From Home

Tax Simplifed 4 You | 12 October 2021

The coronavirus pandemic has meant many more of us have experienced working from home in recent years, but it’s nothing new for many self-employed people (i.e. sole traders) who run home-based businesses.

When you’re a sole trader running a home-based business, you need to claim your full allowable expenses, as it will minimise your Income Tax bill.

Allowable Expenses You Can Claim

If you make less than £1,000 in a year and don’t pay tax because you use your trading allowance, you cannot claim any allowable expenses.

If you earn more than £1,000, you can minimise you tax bill by claiming business costs as “allowable expenses” in your annual Self-Assessment tax return.

Such allowable expenses must be generated “wholly and exclusively” for business purposes. Personal expenses are not allowable.

If you use something for business and personal reasons (e.g., your mobile phone), you can only claim allowable expenses for business use.

Even if you mostly operate remotely, for example, by delivering a service at customers’ homes, you can still claim allowable expenses for having an office in your home.

As you might expect, you can claim for business use of your landline telephone and broadband. You can also claim for business stationery.

You can claim for an appropriate proportion of your domestic electricity and heating bills when running a business from your home.

You can also claim for some of your water rates, based on business use. If you use a lot of water for your home-based business, you’re advised to get a separate bill from your water supplier, so you can claim the full amount.

If you’re paying a mortgage on your home, you can claim a proportion of your mortgage interest payments – not the mortgage capital repayment.

If you’re paying rent to a landlord, you can claim a fitting proportion. Sole traders who own or are buying their own home with a mortgage cannot rent a room to their business.

Some Council Tax can be claimed if you use a small part of your home for your business. Business rates are payable if, for example, you sell products or services to visitors to your property, or you’ve converted your garage into a gym for paying customers.

You can claim for full repairs to the room in which you run your business, as well as a proportion of “whole-house” repairs (e.g. if you have your roof fixed). You can’t claim anything for having a bathroom or kitchen repaired.

Working Out Your Allowable Expenses

You can work out your allowable expenses as a home-based sole trader business either by finding out the actual or estimated cost of each allowable expense or using simplified expenses to claim a flat rate.

Finding out some allowable expenses is easy, if you have a receipt, invoice or credit card/bank account statement. In other cases, you’ll have to make informed estimates.

If you use something for work and business, for example, your mobile phone, you must work out your business use.

For example: If your yearly bill for mobile phone calls is £240 and you use your phone for business roughly a third of the time, you can claim £80 as an allowable expense. If business calls make up about half of your total use, you can claim £120 as an allowable expense.

For utility bills, people usually claim allowable expenses for use of one room for business. So, if you live in a house with five rooms and one is set up as an office, you would claim for a fifth of each bill.

For example: If your total electricity is £600 for the year, you could claim £120 as an allowable expense. If your yearly Council Tax bill is £1,800, you may claim an allowable expense of £360.

Your other option is to use a flat rate to calculate your simplified allowable expenses, which can save time and effort. However, you should work out whether claiming a flat rate covers your actual business expenses.

The flat rate does not include telephone or broadband expenses, so you can claim the business use proportion of the actual total costs.

You can only use simplified expenses if you work 25 hours or more a month from home. These are the rates:

- If you work between 25 and 50 hours a month, you can claim a flat rate of £10 per month (£120 a year).

- If you work between 51 and 100 hours a month, you can claim a flat rate of £18 per month (£216 a year).

- If you work 101 hours or more a month, you can claim a flat rate of £26 per month (£312 a year).

Government website GOV.UK features a simplified expenses checker so you can compare what you can claim using simplified expenses against actual costs.

Get in touch if you’re in any doubt about what you can claim as allowable expenses when running a sole trader business from your home.

2020-2021 Tax Rates Table

Tue, 14 Sep 2021 16:12:53 GMT

Income Tax

Allowances 2020/21 2019/20

Personal Allowance (PA}* £12,500 £12,500

Marriage Allowance** £1,250 £1,250

Blind Person's Allowance £2,500 £2,450

Rent a room relief*** £7,500 £7,500

Trading Income*** £1,000 £1,000

Property Income*** £1,000 £1,000

*PA is withdrawn at £1 for every £2 by which 'adjusted income' exceeds £100,000. There is no allowance given above £125,000.

**The part of the PA that is transferable to a spouse or civil partner who is not a higher or additional rate taxpayer.

***If gross income exceeds it, the limit may be deducted instead of actual expenses.

Rate bands 2020/21 2019/20

Basic Rate Band (BRB} £37,500 £37,500

Higher Rate Band (HRB} £37,501-£150,000 £37,501-£150,000

Additional rate over £150,000 over £150,000

Personal Savings Allowance (PSA)

- Basic rate taxpayer £1,000 £1,000

- Higher rate taxpayer £500 £500

Dividend Allowance (DA) £2,000 £2,000

BRB and additional rate threshold are increased by personal pension contributions (up to permitted limit) and Gift Aid donations.

Tax rates 2020/21 & 2019/20

Rates differ for General/Savings/Dividend income G S D

Basic rate 20% 20% 7.5%

Higher rate 40% 40% 32.5%

Additional rate 45% 45% 38.1%

General income (salary, pensions, business profits, rent) usually uses personal allowance, basic rate and higher rate bands before savings income (interest). Scottish taxpayers are taxed at different rates on general income (see below).

To the extent that savings income falls in the first £5,000 of the basic rate band, it is taxed at nil rather than 20%.

The PSA taxes interest at nil, where it would otherwise be taxable at 20% or 40%. Dividends are normally taxed as the 'top slice' of income. The DA taxes the first £2,000 of dividend income at nil, rather than the rate that would otherwise apply.

Income tax - Scotland 2020/21 2019/20

Starter rate 19% £2,085 £2,049

Basic rate 20% £2,086-£12,658 £2,050-£12,444

Intermediate rate 21% £12,659-£30,930 £12,445-£30,930

Higher rate 41% £30,931-£150,000 £30,931-£150,000

Top rate 46% over £150,000 £150,000

The Scottish rates and bands do not apply for savings and dividend income, which are taxed at normal UK rates.

High Income Child Benefit Charge (HICBC)

1% of child benefit for each £100 of adjusted net income between £50,000 and £60,000.

Remittance basis charge 2020/21 2019/20

For non-UK domiciled individuals who have been UK resident in at least:

7 of the preceding 9 tax years £30,000 £30,000

12 of the preceding 14 tax years £60,000 £60,000

15 of the preceding 20 tax years Deemed to be UK domiciled

Pensions

Registered Pensions 2020/21 2019/20

Lifetime Allowance (LA) £1,073,100 £1,055,000

Annual Allowance (AA)* £40,000 £40,000

Annual relievable pension inputs are the higher of earnings (capped at AA) or £3,600.

*Usually tapered down, to a minimum of £4,000 (2019/20: £10,000), when adjusted income exceeds £240,000 (2019/20 £150,000).

State pension (per week) 2020/21 2019/20

Old state pension - Single person £134.25 £129.20

- Married couple £214.75 £206.65

New state pension* £175.20 £168.60

*Applies to those reaching state retirement age after 5 April 2016.

Annual investment limits

Individual Savings Account (ISA) 2020/21 2019/20

- Overall limit £20,000 £20,000

- Lifetime ISA £4,000 £4,000

Junior ISA £9,000 £4,368

EIS - 30% relief £2,000,000 £2,000,000

Seed EIS (SEIS) - 50% relief £100,000 £100,000

Venture Capital Trust (VCT) - 30% relief £200,000 £200,000

National Insurance Contributions

Class 1 (Employees) Employee Employer

Main NIC rate 12% 13.8%

No NIC on First £183pw £169pw

Main Rate charged up to* £962pw no limit

2% rate on earnings above £962pw N/A

Employment allowance per business** N/A £4,000

*Nil rate of employer NIC for employees aged under 21 and apprentices aged under 25, up to £962pw.

**Some businesses do not qualify, including certain sole director companies and employers who have an employer's Class 1 NIC liability of £100,000 or more for 2020/21. Employer contributions (at 13.8%) are also due on most taxable benefits (Class 1A) and on tax paid on an employee's behalf under a PAYE settlement agreement (Class 1B).

Class 2 (Self employed)

Flat rate per week £3.05

Small profits threshold £6,475

Class 3 (Voluntary) - Flat rate per week £15.30

Class 4 (Self employed)

On profits £9,500 - £50,000 9.0%

On profits over £50,000 2.0%

Vehicle Benefits

Cars

Taxable benefit: List price of car multiplied by chargeable percentage.

2020/21 chargeable percentage for petrol cars first registered:

Pre 05.04.2020 Post 06.04.2020

CO2 g/km Electric range miles % %

0 N/A 0 0

1-50 >130 2 0

1-50 70-129 5 3

1-50 40-69 8 6

1-50 30-39 12 10

1-50 <30 14 12

51-54 N/A 15 13

Then a further 1% for each 5g/km CO2 emissions, up to a maximum of 37%.

Diesel cars that are not RDE2 standard suffer a 4% supplement on the above figures but are still capped at 37%.

Vans

Chargeable value of £3,490 (2019/20: £3,430) if private use is more than home-to-work. Electric vans £2,792 (2019/20: £2,058).

Fuel

Employer provides fuel for private motoring in an employer-owned:

Car: CO2-based percentage from above table multiplied by £24,500 (2019/20: £24,100).

Van: £666 (2019/20: £655).

Employee contributions do not reduce taxable figure unless all private fuel is paid for by the employee (in which case there is no benefit charge).

Tax-free mileage allowances

Employee's own transport per business mile

Cars first 10,000 miles 45p

Cars over 10,000 miles 25p

Business passengers 5p

Motorcycles 24p

Bicycles 20p

Capital Gains Tax

Annual exempt amount 2020/21 2019/20

Individuals, estates £12,300 £12,000

Most trusts £6,150 £6,000

Tax rate

Individual (to basic rate limit)* 10% 10%

Individual (above basic rate limit)* 20% 20%

Trusts, estates* 20% 20%

Entrepreneurs' Relief (ER)** 10% 10%

Investors' Relief (IR)*** 10% 10%

*Individuals are taxed at 18%/28% on gains on residential property and receipts of carried interest. Trusts and estates are taxed at 28% in these circumstances.

**ER is available for lifetime gains of up to £1m (£10m for disposals pre 11.3.20).

***IR has a lifetime limit for qualifying gains of £10m.

Corporation Tax

Year to 31.03.2021 31.03.2020

Corporation Tax rate 19% 19%

Research and development relief

SME enhanced expenditure deduction scheme* 130% 130%

Large company R&D Expenditure Credit (RDEC) Scheme** 13% 12%

*Additional deduction for qualifying R&D.

**Taxable expenditure credit for qualifying R&D.

SMEs that make losses can surrender the deduction to HMRC in exchange for a payment of 14.5% of the loss.

Main capital allowances

Plant and machinery allowances Rate

Annual Investment Allowance (AIA)

- expenditure 1.1.19 - 31.12.20 £1,000,000 100%

- expenditure pre 1.1.19 and post 31.12.20 £200,000 100%

Energy/water-efficient equipment bought pre 1/6 April 2020 100%

Writing down allowance: general pool (reducing balance) 18%

Writing down allowance: special rate pool (reducing balance) 6%

Motor cars purchased

From 01.04.18 01.04.15-31.03.18 Allowance

CO2 (g/km) CO2 (g/km)

New cars only up to 50 up to 75 100%

In general pool up to 110 up to 130 18% pa

In special rate pool above 110 above 130 6% pa

Structures and buildings allowance

From 29.10.18 to 31.3.20 (companies) or 5.4.20 (others) 2%

From 1.4.20 (companies) or 6.4.20 (others) 3%

Property Taxes

Annual Tax on Enveloped Dwellings (ATED)

ATED applies to 1 high value' residential properties owned via a corporate structure, unless the property is used for a qualifying purpose.

The tax applies to properties valued at more than £500,000.

Property value Annual Charge

31.3.2021 31.3.2020

£0.5m - £1m £3,700 £3,650

£1m - £2m £7,500 £7,400

£2m - £5m £25,200 £24,800

£5m - £10m £58,850 £57,900

£1Om - £20m £118,050 £116,100

Over £20m £236,250 £232,350

Stamp Duty Land Tax (SDLT), Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax {LTT)

Residential property (1st property only)

SDLT- England & NI LBTT - Scotland LTT- Wales

£000 Rate £000 Rate £000 Rate

Up to 125 Nil Up to 145 Nil Up to 180 Nil

125 - 250 2% 145 - 250 2 % 180 - 250 3.5%

250 – 925 5% 250 - 325 5% 250 – 400 5.0%

925 - 1,500 10% 325 - 750 10% 400 – 750 7.5%

Over 1,500 12% Over 750 12% 750 - 1,500 10.0%

Over 1,500 12.0%

A supplement applies for all three taxes where an additional residential property is purchased for more than £40,000 (unless replacing a main residence). It is also payable by all corporate purchasers. The rate is 3% (LBTT: 4%) of the total purchase price.

SDLT: First-time buyers purchasing a property of up to £500,000 pay a nil rate on the first £300,000 of the purchase price.

LBTI: First-time buyer relief increases the nil rate band to £175,000.

SDLT: A rate of 15% may apply to the total purchase price, where the property is valued above £500,000 and purchased by a 'non-natural person' (e.g. a company).

Non-residential or mixed use property

SDLT- England & NI LBTT- Scotland LTT- Wales

£000 Rate £000 Rate £000 Rate

Up to 150 Nil Up to 150 Nil Up to 150 Nil

150 - 250 2% 150 - 250 1% 150 - 250 1%

Over 250 5% Over 250 5% 250 - 1,000 5%

Over 1,000 6%

Value Added Tax

Standard rate (1/6 of VAT-inclusive price) 20%

Registration level from 1.4.2017 £85,000 per annum

Deregistration level from 1.4.2017 £83,000 per annum

Most businesses above the registration threshold must comply with the Making Tax Digital requirements.

Flat Rate Scheme (FRS)

Annual taxable turnover to enter scheme Up to £150,000

Must leave scheme if annual gross turnover Exceeds £230,000

Inheritance Tax

2020/21 2019/20

Nil rate band (NRB)* £325,000 £325,000

NRB Residential enhancement (RNRB)** £175,000 £150,000

Tax rate on death*** 40% 40%

Tax rate on lifetime transfers to most trusts 20% 20%

**RNRB is available for transfers of a main residence to (broadly) direct descendants. It tapers away at the rate of £1 for every £2 of estate value above £2m.

Up to 100% of the proportion of a deceased spouse's/civil partner's unused NRB and RNRB band may be claimed to increment the current NRB and RNRB when the survivor dies.

***Rate reduced to 36% if at least 10% of the relevant estate is left to charity. Unlimited exemption for transfers between spouses/civil partners, except if UK domiciled transferor and foreign domiciled transferee, where maximum exemption £325,000.

100% Business Property Relief for shareholdings in qualifying unquoted trading companies, qualifying unincorporated businesses and certain farmland/buildings.

Reduced tax charge on gifts within 7 years before death

Years before death 0-3 3-4 4-5 5-6 6-7

% of full death tax charge payable 100 80 60 40 20

Annual exemptions for lifetime gifts include £3,000 per donor and £250 per recipient.

Key dates and deadlines

Payment dates

Self-Assessment 2020/21 2019/20

1st payment on account 31 January 2021 2020

2nd payment on account 31 July 2021 2020

Balancing payment 31 January 2022 2021

Capital Gains Tax** 31 January 2022 2021

*UK residential property 2020/21: CGT due within 30 days of completion.

**Non-residents with gains on any UK land and buildings must pay CGT within 30 days of completion, except in 2019/20 when already filing a self assessment tax return.

Other payment dates

Class 1A NIC 19 July 2021 2020

Class 1B NIC 19 October 2021 2020

Corporation tax is due 9 months and 1 day from the end of the accounting period, unless a ·1arge' company paying by quarterly instalments.

2019/20 Filing deadlines

Issue P60s to employees 31 May 2020

P11D, P11D(b) 6 July 2020

Self Assessment Tax Return (SATR) paper version 31 October 2020

Online SATR if outstanding tax to be included in 2021/22 PAYE code 30 December 2020

Online SATR 31 January 2021

Non-resident CGT return is due within 30 days of completion of sale of UK land and buildings by a non-resident.

You are advised to consult us before acting on any information contained herein.

Tax Planning Using Alphabet Shares

Fri, 26 Mar 2021 16:04:57 GMT

Tax Planning Using Alphabet Shares

Tax Simplified 4 You | 26 March 2021

When a company pays a dividend, all shareholders receive payment in proportion to their individual shareholdings.

For one shareholder to be paid in preference to another or be paid at a different rate, the company needs either to have different types of shares, the underlying shareholdings need to be changed, or the use of dividend waivers is required (e.g. all shareholders have the same type of share but one shareholder ‘waives’ their right to the dividend).

In the past dividend waivers were sometimes used to pay dividends in different proportions, but this is often ineffective from a tax mitigation viewpoint because of rules about “settlements” which apply to waivers between spouses and their dependent children.

So what are Alphabet Shares?

Alphabet shares are shares of different classes (often termed “A shares”, “B shares”, “C Shares” etc), each having different rights with respect to dividends.

They are often used to enable a company to pay dividends at different rates per share to individual shareholders. They are also used in family companies and joint ventures and other situations where particular rights (e.g. to appoint a director) are given to specific shareholders.

Alphabet shares are not restricted to being used just for differing levels of dividend. They may also be used to give entitlement separate from the rules for ordinary shares (for example, preferential dividends, or limited rights to vote at general meetings), but their main use is to enable payment in respect of a particular class of share without being required to pay the same dividend to each shareholder.

This may be of particular benefit if one or more of the shareholders is a higher or additional rate taxpayer and the other(s) either basic rate taxpayers or do not pay tax.

Alphabet share arrangements are particularly effective when setting up a new trading company from scratch, they can usually be set up from the start with relatively little complication and without fear of challenge from HMRC.

When changing the shares of an existing company, however, care must be taken to prevent HMRC invoking the settlements rules. Also, if shares are issued to family members at less than their market value and “by reason of their employment”, the transaction may need to be reported to HMRC on form 42 and an income tax charge may result.

To prevent problems with the settlements rules, generally any shares that are to be issued or gifted to family members should have full voting and capital rights, since shares that carry the right to a dividend (but no voting rights etc) represent a right to income (rather than anything more substantial). The gift of a right to income to a spouse or dependent child falls within the settlements rules.

If existing shareholders wish other family members to become shareholders, this is often best achieved by reclassifying and gifting some of the existing shares, rather than the company issuing entirely new shares. A gift of shares to family members does not need to be reported to HMRC on form 42 and, assuming the company is a trading company (rather than an investment company), any chargeable gain on the gift can be held over.

HMRC’s stance

Dividends are a return on capital invested. HMRC often try to contend that, rather than being a dividend, a payment to a shareholder (particularly a director shareholder) is in reality a payment for salary (subject to higher Income Tax rates than dividends and National Insurance) rather than a return on capital (subject to lower Income Tax rates than salary and no National Insurance).

Example 1: Husband and Wife Company

Derek and his wife Charlotte are shareholders in a company. Derek is the sole fee earner and is a higher rate taxpayer because he receives other investment income. He does not take any salary from the company and owns 50 ‘A’ shares with no entitlement to dividend. Charlotte is a basic rate taxpayer who owns 50 ‘B’ shares, but with an entitlement to receive dividends.

In this situation, HMRC may query why, if Derek does all the work, he does not receive all the distributable profit as an ‘employment reward’ taxable under PAYE at higher rates and liable to National Insurance. However, so long as the share rights have been structured correctly, there should be no contention.

Example 2: Family Company

Janet holds 100 ordinary shares in her trading company XYZ Ltd. She is married with two adult daughters. She reclassifies the shares into 80 A shares, 10 B shares, 5 C shares and 5 D shares, each holding the same rights with respect to voting and capital, but with independent rights to dividends.

Janet then gifts the B shares to her husband, and the C and D shares to each daughter. If the market value of the shares gifted to each daughter exceeds their original cost, there will be a chargeable gain.

The gift to her husband will be exempt from capital gains tax (CGT) under the spousal transfer exemption, and the gains on the gifts to her daughters can be held over provided both parties make a hold over claim within the prescribed timescales.

Dividends can then be voted independently with respect to each class of share.

Janet still retains 80% of the issued share capital and 80% of the voting rights, and therefore retains, for all practical purposes, complete control of the company.

If and when XYZ Ltd is sold or liquidated, there will also be CGT consequences for the shareholders. Unless Janet’s husband or daughters happen to be directors or employees of the company and meet other qualifying criteria, any gain they make on the subsequent disposal of their B/ C/ D shares may not be eligible for Entrepreneur’s Relief (“ER”), in which case they would pay CGT at rates of up to 20%, rather than, potentially, just 10%.

With four shareholders as opposed to just one, collectively they might benefit from four CGT Annual Exempt Amounts, but the benefit of that would need to be weighed up against any potential loss of ER.

A company that wishes to adopt alphabet shares will need to ensure its articles of association contain appropriate provisions spelling out the rights attached to each class of share; legal advice is therefore normally required. The wider consequences, particularly in terms of shareholder control, also need to be carefully considered.

The ‘settlements’ legislation explained

The relevant tax legislation (ITTOIA 2005, Pt 5, Ch 5) covers income derived from a settlement, and defines a settlement widely as including ‘any disposition, trust, covenant, agreement, arrangement or transfer of assets’ (s 620).

Within owner managed companies a ‘settlement’ situation may apply where an individual enters into an ‘arrangement’ of diverting income from one to another, resulting in a tax advantage.

These anti-avoidance provisions are therefore designed to prevent a person diverting their income to obtain a tax advantage.

In example 1 above, HMRC could also seek to challenge the arrangements on the basis that the payments fall foul of the ‘settlements’ legislation, thus denying the allocation of dividends away from Derek (the higher rate taxpayer) to Charlotte (the lower tax rate shareholder).

Taxes Cases

There have been a number of tax cases brought by HMRC under the settlements legislation, the most infamous one being the Arctic Systems case (Jones v Garnett [2007]).

In this case, Mr. Jones was responsible for earning all of the profits, but the share-owning structure gave the company the ability to pay large dividends to his wife. The House of Lords held that Mr Jones had indeed created a settlement in which his wife had an interest.

However, the Lords went on to say that, in their opinion, the “husband and wife” exception (s626 ITTOIA 2005) applied such that the settlement had been at a “no gain/no loss” value of an outright gift.

In addition, the shares transferred did not just represent an entire or substantial “wholly right to income”, they came with other rights including the right to attend and vote at general meetings, rights to capital growth on a sale, and to obtain a return of capital on a winding-up.

Therefore, as long as a spouse or civil partner is given ordinary shares carrying the normal full range of rights, any dividends paid on the shares should be treated as their income.

Had the circumstances in the Arctic Systems case been different, for example if the shareholders had not been married or the shares had been split so as to not have the same full joint rights, then it is likely that HMRC would have succeeded in their claim.

Alphabet shares for employees

Alphabet shares can be used to give company employees dividends as part of their remuneration package. Structured correctly, such schemes can be an incentive for employees as well as being a tax-efficient means of payment. The shares are usually non-voting and may be redeemable at par value (i.e. £1 on a £1 share) thus allowing them to be returned should the employee cease working for the company.

Make sure that:

The “new” shares created under an alphabet scheme are an outright gift and have the same rights as the original ordinary shares. There must be no restrictions such as being non-voting or carrying lesser rights to capital or a promise to return the shares on demand. Do not make the shares redeemable preference shares.
It might be advisable not to create alphabet shares just before a dividend is due or as soon as the company has posted large reserves as income transfer could be viewed as being the only reason for creation of the shares.
Where shares are being gifted to spouses it would be helpful to show that they have an interest in the running of the company, ideally becoming a director or at least by taking on the formal role of company secretary and administrator.
HMRC looks very carefully at where the dividends are paid. A joint account is acceptable, but it must be into an account with the receiving spouse’s name.
It should be remembered that a share of at least 5% is required to claim Entrepreneurs’ relief on the eventual sale of the company.
To minimise the risk of HMRC raising an enquiry, it would be preferable for at least some dividend to be paid to each type of share.

Alphabet shares permit flexibility in the payment of dividends, allowing for future changes in the dividends paid to each shareholder without having to change the shareholding.

In the context of family companies, and in particular, when looking to reward non-minor children, alphabet shares and dividend waivers can still be used effectively. There remains no one-size-fits-all solution though – bespoke, careful tax planning remains (as always) the key.

Get in touch here to see if we can help.

Gifting Shares to Employees

Sun, 31 Jan 2021 17:15:46 GMT

Gifting Shares to Employees

Tax Simplified 4 You | 31 January 2021

A company may decide to gift shares to an employee(s) for different reasons. For example, you may wish to reward a particular employee’s recent performance or continued loyalty to your company, or you may do this with more corporate or commercial reasons in mind such as wanting to incentivise and motivate employees to invest their time and skills in helping to grow and build the company’s business.

Employees will be keen to accept shares in the company as a gift due to the tax benefits. Rather than any profits made on the sale of such shares being subject to income tax and national insurance contributions, the gifted shares attract Capital Gains Tax (“CGT”). This is because the gain on any sale or transfer of the shares by the employee is taxed as capital.

CGT rates are lower than Income Tax rates at 20% or even 10% if Entrepreneurs’ Relief (“ER”) applies. The liability to pay the tax will rest with the employee, not the employer.

How to gift shares to your employees

When a company is contemplating gifting shares to its employees, there are various ways it could go about doing this.

The company could decide to issue completely new shares or ask shareholders to transfer existing shares already owned by them to the employees. Unfortunately, the latter constitutes a disposal for CGT purposes, and ultimately the attractiveness of transferring existing shares over issuing new shares depends on the CGT bill resulting from the transfer.

In terms of price, the board of the company could determine a value for the shares or the employees could be given the shares completely free or at some discounted value.

If shareholders agree to transfer some of their existing shareholding as gifts to employees, they should be informed that the employees would then receive dividends at the same rate as the shareholder who gifted the shares.

Existing shareholders may prefer to gift some of their existing shareholding to the employees as using existing shares means that other shareholders do not suffer from any dilution (which would be the case if new shares were issued in the company and gifted to the employees).

On the other hand, issuing new shares has benefits in that no CGT will arise or be charged for the existing shareholder and the company could create a new class of shares for the employees receiving the gifted shares. This may help to keep existing shareholders happy as it would mean that the company could give the employee shares a lower dividend rate when compared to the existing shareholders’ dividend rate.

Enterprise Management Incentives (“EMI”)

Employee share incentive plans provide employers with a tax-efficient way to remunerate their employees and given that employees are more incentivised to stay with a company if they own shares in it, share incentives can often help reduce employment costs.

Share incentives can also help to align the interests of the company’s owners and its employees as both will be more united in wanting to build long-term shareholder value through growing the business in the expectation that everyone will eventually benefit from an exit event.

Qualifying companies can set up an EMI scheme whereby options are granted over shares, worth up to £250,000 per employee up to a cap of £3 million for the company, to eligible employees.

Particularly for start-ups, share options can be an important part of the package in attracting high calibre employees who can be persuaded to join a company for a lower cash salary when they see the potential for realising a significant capital gain in the future, i.e. on an exit event when their EMI options will commonly be exercised.

The company and the employee receiving the gift of shares will need to meet HMRC reporting obligations. As mentioned, employees are responsible for paying any tax arising in respect of shares gifted to them by their employer and must report the gift of shares to HMRC on their tax return (deadlines will apply). Employers have to report the award of shares to employees by 6 July each year following the award, and reporting is done via the PAYE reporting portal.

A number of statutory requirements must be met in order for a company to qualify to grant EMI options. In particular, a company must be an independent trading company with gross assets of no more than £30 million and fewer than 250 full-time employees. Certain trading activities will not qualify and there are detailed rules relating to the independence requirement, the trading requirement and the shares that can be used not detailed in this blog post.

The shares granted to employees under an EMI share option scheme must meet certain requirements, including that the shares must be fully paid up, ordinary shares.

To be eligible to be granted an EMI option, an employee must work for the company for at least 25 hours per week, or if less, 75% of their working time. Employees cannot be granted EMI options if they, or their “associates”, have a “material interest” in the company whose shares are used for the scheme, or in certain related companies.

A material interest is either:

A) beneficial ownership of, or the ability to control directly or indirectly, more than 30% of the ordinary share capital of the company, or

B) where the company is a close company, possession of or entitlement to acquire rights that would give 30% of the assets, if the company were to be wound up, and make them available for distribution among the participators.

EMI options can only be granted to employees and cannot be granted to non-executive directors or consultants, although you can choose to grant non-qualifying options to such employees.

The EMI options must be capable of being exercised within ten years of the date of grant.

It is best practice for EMI option agreements to specify exactly when options will lapse, particularly at the end of a window period for exercise.

Points to be aware of when gifting shares to employees

Gifting shares to employees involves an element of risk and therefore it is always advisable to seek professional advice when wishing to do this and to make sure that the company’s articles of association and any shareholders’ agreement include provisions to protect the company’s shareholders.

One of the risks for the company gifting shares is that the employee they gift the shares to may ultimately cease working for the company (note that this will usually result in the options lapsing). If the employee was a valued member of staff, the directors may not want that employee to have to relinquish their shareholding in the company just because they are no longer an employee. On the other hand, the directors may want certain employees to relinquish their shares in the company and not continue to benefit from the prosperity of the company because of the circumstances surrounding the termination of their employment.

It is possible, and common in practice, to address these risks attaching to the gifting of shares to employees through good leaver and bad leaver provisions in a shareholders’ agreement or within the legal documentation governing the EMI share option scheme. An employee will usually be classed as a good leaver if they leave employment on the grounds of death or disability.

Alternatively, the existing management / directors may view an employee as a good leaver because they have worked for the company for a significant amount of time and therefore want that employee to continue to benefit despite no longer being an employee of the company.

A bad leaver is usually defined as any employee that does not come within the good leaver definition. An employee will also often be determined to be a bad leaver if they leave in circumstances justifying dismissal e.g. gross misconduct.

Another risk when gifting shares to employees is that the situation may arise whereby some shareholders wish to sell their shares on an exit event, but others do not. This risk can be addressed by inserting drag along rights into the company’s articles of association. A drag along right means that if a majority of the shareholders wish to transfer all (not some) of their shares to a bona fide purchaser on arm’s length terms, this majority can require all other minority shareholders to sell and transfer all of their shares to the proposed buyer as well.

Tax issues

Once an employee exercises their shares and they subsequently sell or transfer the shares on to a third party at a profit, the employee will then be liable to pay CGT as they will be in receipt of a capital gain.

If the employee finds that they are liable to pay CGT in relation to the gifted shares, they should consider whether they qualify for ER, which would bring the CGT rate down to 10% (from the usual 20% rate).

The employee will qualify for ER if the shares are held for at least 12 months from the date they were granted the shares to the date they sell them.

The employer could issue the relevant employee a bonus which the employee could then use to meet any income tax and national insurance liability in relation to the gifted shares. Although the bonus payments made by the company will attract income tax liability for the employee and national insurance contributions for both the employee and employer, this may be offset by the fact that the bonus payments will help to decrease the company’s corporation tax liabilities as the bonus payment is an allowable deduction against trading profits.

For the employee, the tax treatment of an EMI qualifying option is as follows:

At the point of grant, there is no income tax liability.

At the point of exercise, there is no income tax liability if the exercise price was at least equal to the market value of the shares at grant. If the exercise price was less than the market value of the shares at grant, then income tax is due on the difference between the exercise price and the market value at grant.

On a disposal of the option shares, CGT may be payable on any gain over the market value at grant, that is, the difference between the sale proceeds and the market value of the shares at grant.

Valuation of Shares

The exercise price of an EMI option can be set at any value and can be nil if option shares are not newly issued.

Setting an exercise price that is less than market value at grant has consequences for the tax treatment of the EMI option on exercise, as mentioned above. The exercise price is usually agreed with HMRC at the outset before the options are granted.

The Shares and Assets Valuations (“SAV”) team is the specialist department within HMRC that will value, amongst other things, unquoted shares for tax purposes.

The SAV must be sure to carry out valuations for tax purposes on the basis of ‘market value’ as defined in the relevant statute.

The definition of market value for CGT can be found in section 272(1) of the Taxation of Chargeable Gains Act (“TCGA”) 1992, which provides as follows: “In this Act “market value” in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market”.

As part of the valuation process, you will most likely be required to prepare and submit a valuation of assets to HMRC’s SAV team.

Get in touch here if you would like to find out more.

Incorporation – An Overview

Sat, 30 Jan 2021 15:32:43 GMT

Incorporation - An Overview

Tax Simplified 4 You | 18 January 2021

The two methods of incorporation

The trade of a sole trade or a partnership can be incorporated either by:

a) Transferring the business to a company in exchange for shares in the company; or

b) Selling the assets of the business to a company already incorporated by the Sole Trader/Partners either at market value or at a value lower than market value. Usually the company will not have the funds readily available to pay the purchase price of the assets, and so the consideration is left outstanding as a loan due to the former sole trader/partners.

This loan can be repaid free of all tax as and when the company has the available funds.

Capital Gains Tax ("CGT")

Under general capital gains principles, the transfer of assets from a sole trade/partnership to a connected party, such as a company owned by the Sole Trader/Partners, is deemed to be a disposal occurring at market value.

Where the actual consideration is in the form of shares, or where the consideration is lower than the market value, reliefs from CGT can be claimed to reduce and often eliminate the CGT liability arising on incorporation.

Relief for a share for share incorporation is under TCGA 1992 section 162, while relief for a sale at under value is under TCGA 1992 section 165.

Trading Losses

Where a trade is carried on by a sole trader or individuals in a partnership and the trade is transferred to a company for consideration consisting wholly or mainly of the allotment of shares in the company, then any unrelieved trading losses of the Sole Trade or Partnership can be carried forward under ITA 2007 section 86 and relieved against future income received from the company, whether by way of dividends, salary or other income.

The loss relief continues to be available as long as the company continues to carry on the transferred trade and the individual sole trader or partners retains all the shares in the business, although in practice HMRC will not refuse a claim as long as the individual retains at least 80% of the shares.

The key condition for this relief to apply is that the consideration for the transfer must be wholly or mainly in shares. It is understood that HMRC regard “wholly or mainly” as meaning at least 80%. Therefore the availability of carrying forward trading losses is usually only available in circumstances where an incorporation has been carried out under TCGA 1992 section 162 (i.e. transfer of business in exchange for shares) rather than section 165 (sale of assets at market value or under market value).

For example, if a Partnership has estimated trading losses of £1mn as at incorporation, these losses would be available to be offset against future dividends or salary received from the company. In simple terms, £1mn can be extracted from the Company without any further tax liability arising on the shareholders.

Share consideration v cash/loan consideration

The trading losses can therefore only be preserved where a business is incorporated wholly or mainly in exchange for shares. Salary or dividends can be extracted from the Company and the losses can be used to eliminate any tax liability on such income in the hands of the shareholder.

However, this position must be compared with a sale of assets at undervalue. Under this scenario, the assets of the business that are chargeable assets for capital gains tax purposes are usually sold at less than market value for an amount equal to their capital gains tax base cost.

Business Asset Gift Relief

Under general capital gains principles, a transaction otherwise than at arm’s length, such as an intentional sale at an undervalue, is deemed for capital gains tax purposes to be a disposal occurring at market value.

Where the conditions of TCGA 1992 section 165 (known generally as Business Assets Gift Relief) are satisfied, the deemed disposal proceeds are reduced to such an amount as will give rise to neither gain nor loss. The recipient of the asset has a corresponding reduction in the acquisition cost of the assets for the purposes of a future disposal.

The general scheme of TCGA 1992 section 165 is uncomplicated as far as its application to business incorporation.

The first and overriding condition is that the relief applies to disposals ‘otherwise than by way of bargains at arm’s length’.

Consequently, it applies to sales which occur at a value less than market value. There are then three other types of condition for a claim to be made, which are:

a) the transfer must be made by an individual or partner (other than a corporate partner);

b) the transfer must be made to a person who is resident in the UK; and

c) the assets transferred must be used in a trade, profession of vocation carried on by the transferor.

There is a restriction in the availability of the relief if the assets in question have not been used for business purposes throughout the period of ownership.

Capital Allowances

Annual Investment Allowance (AIA), Writing-Down Allowances (WDAs) or First-Year Allowances (FYAs) are not given in the final year of trading.

The transfer on the incorporation of a business of plant and machinery is a disposal of those assets for capital allowances purposes.

Where the assets are sold, the disposal value is the amount charged for the transfer.

As the Sole Trade/Partnership and the Company are connected, and the assets are being sold to the Company, rather than gifted, then the Sole Trade/Partnership has 2 options:

a. The disposal can be brought into the tax computation at the actual sale proceeds; or

b. the Sole Trade/Partnership and the Company can make a joint election for the assets to be transferred, for capital allowances purposes, at their tax written down value ("TWDV"). The deadline for making the election is two years from the date of the transfer.

The most tax efficient scenario is likely to be a sale of the assets to the Company at a price that creates a balancing charge in the Sole Trade/Partnership which uses up all or most of the available tax losses at the date of incorporation.

This will allow the Company to claim capital allowances on as high a value as possible.

Note that the value of the assets used for the transfer must not exceed their market value.

Stamp Duty Land Tax ("SDLT")

SDLT is only payable when there is chargeable consideration in respect of a transaction in land. For the purposes of this section, transactions in land refer to UK land. Chargeable consideration is usually the purchase price paid for the land in money or money's worth, but it also includes the purchaser/acquirer taking over an existing debt (e.g. a mortgage).

With effect from December 4, 2014, SDLT is payable on the portion of the purchase price that falls within each band, rather than a single rate being charged on the whole transaction value.

The tax rates and bands for non-residential and mixed-use land and property are:

Property transfer value SDLT rate

Up to £150,000 0%

Next £100,000 (from £150,001-£250,000) 2%

The remaining amount (above £250,000) 5%

Inheritance Tax ("IHT")

For persons domiciled in the UK, IHT is chargeable on death on their worldwide estate. The rate chargeable on death is 40%.

There are a number of reliefs and exemptions available. For example, assets bequeathed to the surviving spouse are exempt from IHT.

Business property relief ("BPR")

An important relief is BPR. An asset which is a business or an interest in a business is eligible for 100% BPR.

Similarly shares in an unquoted trading company qualify for 100% BPR, as do securities of a company which are unquoted and which either by themselves or together with other such securities owned by the transferor and any unquoted shares give the owner control of the company.

A person has “control” of a company for these purposes if he has sufficient powers of voting on all questions affecting the company as a whole which if exercised, would yield a majority of the votes capable of being exercised.

A person can include related property for these purposes, which includes the shares owned by their spouse.

Certain businesses are excluded from the relief, such as businesses dealing in securities, stocks, shares, land or building and businesses that make or hold investments.

The general rule is that property does not qualify for business property relief unless it was owned by the transferor throughout the two years immediately preceding the transfer.

The general rule is relaxed in three situations:

a. Where the transferor became entitled to the property on the death of another person

b. Where the transferred property replaced other business property

c. Where the transferred property had been acquired on an earlier transfer within the two year period

Other Tax Consequences of Incorporation

Where an unincorporated business is transferred from a Sole Trade/Partnership to a company, the following additional tax consequences arise:

The transfer will result in a cessation of the Sole Trade/Partnership business and, depending upon the date concerned, may lead to more than 12 months profit being assessable for the final year of assessment, subject to overlap relief.
The sale, if it qualifies as a ‘transfer of a going concern’, will be outside the scope of VAT. After the transfer the transferor should take steps to deregister;
Liability for National Insurance Class 2 contributions will cease if the transferor(s) has no continuing self-employed earnings.
The former proprietors will normally become directors and shareholders of the company and therefore chargeable to income tax on employment income and dividends

Thinking of incorporating? Get in touch to see if we can help you.

Multiple Dwelling Relief (“MDR”) and Mixed-Use Relief for Stamp Duty Land Tax (“SDLT”) Purposes

Fri, 04 Dec 2020 19:12:58 GMT

Multiple Dwelling Relief (“MDR”) and Mixed-Use Relief for Stamp Duty Land Tax (“SDLT”) Purposes

Tax Simplified 4 You | 04 December 2020

Multiple Dwellings Relief

Multiple Dwellings Relief (MDR) is available for purchasers of residential property who acquire interests in more than one dwelling.

The purpose of the relief is to reduce the rate of Stamp Duty Land Tax (SDLT) on the purchase of more than one dwelling closer to the rate that would apply if the dwellings were purchased independently.

Where a transaction, or a scheme, arrangement or series of linked transactions, includes multiple dwellings, the rate of tax charged in respect of those dwellings is determined by the mean consideration: that is, the total consideration attributable to the dwellings, divided by the number of dwellings.

However, the relief cannot be such as to reduce the tax payable to less than 1% of the total consideration.

The meaning of ‘dwelling’

For the purposes of the relief, a building or part of a building that is used or suitable for use as a single dwelling or is in the process of being constructed or adapted for such use, counts as a ‘dwelling’.

Land that is, or is to be, occupied or enjoyed with the dwelling such as a garden or grounds (including any building or structure on such land) and land that subsists, or is to subsist, for the benefit of the dwelling, is also taken to be part of the dwelling.

Mixed-Use Relief

The statutory definition of 'residential property' is: ''FA 2003, s 116(1):

1) In this Part "residential property" means:

a) a building that is used or suitable for use as a dwelling, or is in the process of being constructed or adapted for such use, and

b) land that is or forms part of the garden or grounds of a building within paragraph (a) (including any building or structure on such land), or ...''

The test that HMRC will apply is similar to that applied for the purposes of the capital gains tax relief for main residences (TCGA 1992, s 222(3)). The land will include that which is needed for the reasonable enjoyment of the dwelling having regard to the size and nature of the dwelling.

Therefore, land that is not so needed falls outside the definition of residential property.

Example

An individual purchases an estate which comprises of a farmhouse, a barn conversion and paddocks with stabling within 10 acres of land.

We would therefore need to consider if MDR and Mixed-Use Relief are available for SDLT purposes.

The farmhouse and the barn conversion will qualify for multiple dwellings relief because each building and the land surrounding it, is suitable for use as a single dwelling.

The next step is to consider whether a single purchase of the entire plot would constitute a 100% residential purchase, or whether we can claim it is a mixed-use purchase.

The question is whether the additional land is required for the reasonable enjoyment of the property; if it is required, then it will be regarded as residential property and the full SDLT rates will be applicable.

If it is not so required, then the additional land is not residential property and the entire purchase should be treated as a mixed-use acquisition with the non-residential rates applying to the entire purchase price.

A good test, therefore, is whether the loss of the land in question would be a substantial deprivation to the reasonable enjoyment of the dwelling house, judged objectively and not according to the subjective tastes or interests of the owner of the house for the time being.

If there is no reference to any current commercial activity or the prospect of future development in the particulars and there is no suggestion that the property is anything other than a country residence, then it can be argued that looking at the character of the Estate as a whole, the land surrounding the house is very much essential to its character, to protect its privacy, peace and sense of space, and to enable the enjoyment of typical country pursuits such as horse riding.

As to the paddocks, these are an adjunct to the stables. If there does not seem to be any evidence that anything approaching a commercial arrangement was made at any material time for the use of the paddocks, then it can be argued that they form part of the grounds for recreational purposes.

In this case it is likely to be concluded that the land being acquired is not in excess of what is required for the reasonable enjoyment of the Estate.

Land is being acquired within the definition of residential property and therefore the mixed-use rules will likely not apply.

This could be further verified by the fact that there is no business use of the excess land either before or after the purchase.

Over the last couple of years, HMRC have continually been pushing back on mixed-use claims even where such claims fall within the ambit of their published guidance.

Case Law: Goodfellow & Anor 2020

The First-Tier Tribunal (‘FTT’) rejected a claim by the appellants subsequent to their purchase of a property that it was mixed-use rather than residential and hence dismissed their appeal against HMRCʼs refusal of their refund claim.

Nearly 18 months after they had purchased an extensive property and paid SDLT on the basis that the property was residential, the appellants lodged a claim under FA 2003, Sch. 10, para. 34 for a partial refund of tax on the grounds that the property was mixed-use and hence qualified for the lower rates applicable to non-residential and mixed-use property.

They argued that the space above the garage was used as an office for the first appellant’s business, that the stable yard and paddocks were used by a neighbour for grazing horses and that the paddocks were undeveloped land, all instances of non-residential use.

HMRC maintained that the office room was suitable for use as a dwelling and that the stable yard and the paddocks were part of the grounds, which were commensurate with the size of the dwelling-house.

The FTT agreed. The grounds as a whole were essential to the character of the property and provided a country setting in an area of outstanding natural beauty. There was no sign that anything approaching a commercial arrangement for their use had been made at any material time, and the rent paid by the neighbour was a nominal, peppercorn rent. The fact that the paddocks were not developed was irrelevant.

The whole of the property was residential within the meaning of FA 2003, s. 116, and the appeal was therefore dismissed.

Other Points to Consider

The MDR claim in the above example depends on acquiring 2 or more dwellings, which could itself cause the 3% surcharge rate to become payable.

However, although a separate dwelling is acquired and MDR can be claimed, if the second dwelling, being the barn conversion, is a subsidiary dwelling then the 3% surcharge does not become due.

The second dwelling is “subsidiary” if the value of the second dwelling is less than 1/3 of the value of the total acquisition.

Therefore, the definitions are different, and both reliefs may be claimed.

There would be no 3% surcharge if the individual is replacing their main residence i.e. if the farmhouse is replacing the individual’s previous main residence even if the individual has other properties around the world but there is a potential 3% surcharge on the barn conversion as it is the purchase of a second dwelling which won’t be considered the individual’s main residence.

The rules were amended in Finance Act 2016 to make it possible for someone to buy in a single transaction a property which counts as two or more dwellings and not pay the 3% surcharge.

For this to be the case, the following subsidiary dwelling test is applied:

1. Dwelling A is situated within the grounds of, or within the same building as, dwelling B and

2. The chargeable consideration justly and reasonably attributable to dwelling B is equal to or greater than two-thirds of the chargeable consideration justly and reasonable attributable to the combination of (a) dwelling A; (b) dwelling B and (c) each of the other purchased dwellings situated within the grounds of, or within the same building as, dwelling B

Therefore, the purchase price needs to be apportioned on a just and reasonable basis to each of the 2 dwellings. The value of the most valuable dwelling (B) must be more than 2/3rds of the value of both dwellings put together.

For example, if the whole of the estate is purchased for £2.5mn, the main dwelling (B), being the farmhouse, must be worth at least £1.67mn based on a just and reasonable apportionment.

If that is the case, the combination of a) MDR and b) the replacement of main residence relief from the 3% surcharge and c) the recent increase in the threshold to £500,000 would produce an SDLT charge equal to 2 x £1.25mn purchases.

Therefore, SDLT on £1.25mn would be £53,750, calculated as follows:

First £500,000 x 0% 0

The next £425,000 x 5% 21,250

The next £325,000 x 10% 32,500

In total, SDLT due will be £107,500 (£53,750 x 2), rather than SDLT of £198,750 where no MDR is available and the SDLT is calculated on one purchase of £2.5mn, generating a tax saving of £91,250.

You must intend to live in the most valuable dwelling as your main residence but can let out the other dwelling rather than occupy it if you want without affecting the position.

Get in touch here if you have an SDLT query to see if we can help you.

The Tax Implications of Foreign Domiciliaries Buying UK Real Estate

Thu, 26 Nov 2020 16:09:10 GMT

The Tax Implications of Foreign Domiciliaries Buying Real Estate in the UK

Tax Simplified 4 You | 26 November 2020

With effect from April 2019, the scope of UK taxes on gains realised on, or in connection with, UK real estate has been extended to include the following;

Non-residents without a permanent establishment in the UK can now be taxed on gains realised on the disposal of UK commercial property. Until now, such tax exposure has only existed with respect to UK residential property.
There is now scope for a UK tax charge on a non-resident disposing of an asset that is not itself UK land, but derives all or most of its value from UK land – whether such land is residential or commercial. Clearly, this is aimed at shares and securities issued by property holding companies.

There are various rebasing dates, depending on the nature of the asset. Importantly, ATED-related CGT is being abolished, and for any company currently within the scope of that tax, all residential property purchased prior to April 2015 can now be rebased to April 2015. However, ATED itself is being retained.

The ‘all or most’ referred to above is the requirement for the asset to derive at least 75% of its value from UK land, whether directly or through assets that themselves derive their value from UK land.

Moreover, the tax charge on indirect disposals will only apply if the person making the disposal has a substantial indirect interest in the underlying UK land.

In relation to a company, the requirement is broadly that the person making the disposal has 25% or more of the voting rights, or an entitlement to 25% or more of a distribution or the proceeds of a liquidation.

This requirement must be met at some point in the period of two years running up to the date of the disposal. Shareholdings of connected persons must be included when calculating whether the 25% threshold has been breached.

Two points to note are;

There is scope for the same economic gain to be taxed twice if a non-resident shareholder disposes of his shares, realising a post-April 2019 gain on which he is taxable and the company then disposes of the property, realising a gain which is taxable on the company.
Non-resident trustees and individuals realising post-April 2019 gains in respect of indirectly owned residential property will be taxed on such gains at ordinary rates (10%/20%), instead of the elevated rates that apply to residential property gains (18%/28%).

Furthermore, the rules on UK property income with effect from April 2020 have changed, so that from that date any such income accruing to a company will be within corporation tax. Prior to April 2020, rental income of a non-UK resident company was subject to basic rate income tax in the company’s hands.

Structuring:

There are still significant differences between the treatment of UK residential and commercial property. IHT planning through the use of a property holding company is still possible where the underlying property is commercial.

The shares in such a company are excluded property in the hands of a non-UK domiciled and non-deemed domiciled shareholder, provided that those shares are non-UK situated (e.g. on the basis that the company is not UK registered and that the shares are registered, and the register is kept outside the UK). In addition, the default 15% SDLT rate for corporate purchasers of UK residential property does not apply to commercial property purchases.

However, for an UK resident non-UK domiciled individual, it may be preferable for the company to be managed and controlled from the UK, so that there is no possibility of the company’s income/profits being attributed to him under the transfer of assets abroad legislation.

By contrast, where UK residential property is concerned, there may be an advantage where the property will be let to third parties on commercial terms, or will be redeveloped, so that the 15% SDLT charge will not apply to the purchase, and relief will be available from ATED, and subsequent rental profits or redevelopment profits will benefit from the (currently) attractive UK corporation tax rate, instead of personal income tax rates.

But it is hard to make any kind of case in favour of creating a company to buy and hold residential property that will be used by the shareholder or connected persons. The 15% SDLT charge, ATED and the absence of IHT protection together can make it less appealing.

When it comes to UK residential property that is already held by a company, the question of whether it is preferable to buy the property, or the company can be complex.

The scope to avoid SDLT on the purchase is obviously attractive, despite the risks and extra costs involved in buying a company.

Where the foreign domiciled individual elects to buy the company, with the intention of using the property personally, there are usually strong arguments in favour of collapsing the company after the purchase, so that the property is held directly. One of which is the elimination of ATED. However, here too the tax and other considerations can be complex and need to be weighed carefully.

If you'd like to find out more then please contact us here .

Inheritance Tax ("IHT") and Gifts with Reservation ("GWR")

Thu, 26 Nov 2020 15:38:17 GMT

Inheritance Tax ("IHT") and Gifts With Reservation ("GWR")

Tax Simplified 4 You | 26 November 2020

The gift with reservation of benefit anti-avoidance rules were introduced in FA 1986.

These rules are designed to prevent individuals from seeking to reduce their exposure to IHT by making a lifetime gift, which they hope to survive by at least seven years, whilst continuing to have the use or enjoyment of the gifted asset.

They ensure that a donor must genuinely give away all the rewards and benefits of an asset for it to be excluded from their estate for IHT purposes.

If the GWR provisions apply, the gifted asset is generally treated as remaining part of the donor’s estate for IHT purposes.

Furthermore, if the donor releases the reservation sometime after the initial gift and the asset genuinely becomes gifted to the donee, there is a second deemed Potentially Exempt Transfer (“PET”) at this date.

The second PET is not able to use any annual exemptions to reduce its value, but it will not be in the estate of the donor at death.

Exceptions from the anti-avoidance legislation

Fortunately, there are various exceptions to the general rule that gifts caught by the GWR rules are treated as remaining part of the donor’s estate for IHT purposes.

In the case of gifted land or personal property, the retention of a benefit, i.e. where the donor has actual occupation or enjoyment, is disregarded if he/she pays full consideration in money or money's worth.

Further exceptions apply for gifts of shares of interests in land.

For example, if a parent gifts an equal interest in a property to their child, so that they become joint owners, there is no gift with reservation broadly if the following conditions are satisfied:

Parent does not occupy the property
Parent occupies the property and pays a market rent. I.e. if the child lives in another property, not the gifted property, there should be no GWR if the parent pays a genuine full market rent for continued occupation of the gifted share of the property
Parent and child both occupy the property, and parent receives no (or negligible) benefit for the gifted share. For example, if the child buys all the groceries or pays all the utility bills, the parent would receive a benefit from the asset given away and would continue to be in a reservation of benefit situation.

A change in circumstance

There is a further exception to the GWR provisions in respect of the gift of land, or the share of an interest in it. This applies if the donor occupies the land where the occupation would be disregarded for GWR purposes in the following circumstances:

it results from an unforeseen change of circumstances; and
the donor has become unable to maintain him/herself through old age, infirmity, etc; and
it represents a reasonable provision by the donee for the care and maintenance of the donor; and
the donee is a relative of the donor or his/her spouse (or civil partner).

Note that all of the conditions must be satisfied. In addition, in practice it may be difficult to determine what constitutes a ‘reasonable’ provision by the donee for the donor’s care and maintenance.

However, whilst the conditions are fairly comprehensive, the relaxation in the GWR provisions can be helpful in some unfortunate situations.

Practical points

If the donor pays a market rent for occupying the gifted property, the rent must be a genuine full commercial rental value and be kept up to date by appropriate market rent reviews on a regular basis. The rental contract should also be made as a proper legal obligation and not a casual promise to pay.

It is important to consider any non-IHT implications of sharing arrangements, such as Income Tax for the recipient of any rents and Capital Gains Tax implications in respect of the gifted land or property for the donor and the donee, on a subsequent disposal.

For more IHT advice, then please get in touch here .

Sole Trade or Limited Company? The Age-Old Question

Mon, 23 Nov 2020 21:59:42 GMT

Sole Trade or Limited Company? The Age-Old Question

Tax Simplified 4 You | 23 November 2020

A very common question we get is whether it would be best to run the business as a sole trader or start a limited company. There are several issues an individual should consider before making the right decision.

All rates and thresholds mentioned below are for the 2020/21 tax year.

Trading as a Sole Trader

For self-employed individuals or sole traders, all profits are taxable in the year they are earned, in addition to any other sources of income. There is no flexibility for deferring some of those profits to another year if they happen to have a particularly good year and are taxed at the higher rate.

A sole trader will pay income tax on profits at 20% on annual earnings above the personal allowance of £12,500 up to £50,000, 40% on annual earnings from £50,001 to £150,000 and 45% on annual earnings above £150,000.

Class 4 National Insurance at 9% is paid on profits between £9,501 and £50,000 and 2% on profits over £50,000.

Class 2 National Insurance is also payable at £3.05 per week.

The trading profits of a sole trade are reported on a Self-Assessment Tax Return.

Payments on account are advance payments towards the tax liability, including Class 4 National Insurance, for sole traders.

Two payments on account are made every year unless:

1.The sole trader’s last Self Assessment tax bill was less than £1,000 or

2.The sole trader has already paid more than 80% of all the tax they owe, for example through their tax code or because their bank has already deducted interest on their savings

Each payment is half of the previous year’s tax bill. Payments are usually due by midnight on 31 January and 31 July.

For example, if in the tax year 2020/21 a sole trader’s tax liability was £3,000, two payments on account of £1,500 will be due in addition to the £3,000 tax liability, payable in January 2022 and July 2022. These 2 payments of £1,500 will go towards their 2022/23 tax liability.

No payments on account are due in your first tax year of trade.

Trading as a Ltd Company

Limited Companies are taxed on their trading profits, in addition to other sources of income such as interest and rent.

Corporation tax at 19% is assessed on the profits for the year but there is flexibility on when income is taken out of the company. This means that some profits can be retained in the company if the owner would otherwise be likely to pay higher rate tax personally.

The income is usually largely distributed as dividends on which no National Insurance Contributions are charged. And the dividend rate is considerably lower for basic rate taxpayers.

After taking into account the personal allowance of £12,500, the first £2,000 of dividend income is tax free. Dividend income between £14,501 and £50,000 is taxed at 7.5%, dividend income between £50,001 to £150,000 is taxed at 32.5% and anything above £150,000, is taxed 38.1%.

Dividends can only be drawn from the Limited Company subject to the company having sufficient distributable reserves, after taking into account any liabilities such as corporation tax or creditors for example.

When running a limited company, the optimal remuneration structure is to receive the majority as a dividend.

The owner, who will also be the director in most cases, is paid a salary of £9,500 per annum. This is the Primary Threshold for National Insurance purposes at which no Employers or Employees National Insurance is payable.

The payment of £9,500 will still count as a qualifying year for state pension purposes, even though no National Insurance is paid, because the payment is above the Lower Earnings Limit of £6,240.

This salary is a deductible expense for Corporation Tax purposes.

The balance is paid as a dividend, taxed at the lower rates that apply to dividend income mentioned above.

However, dividends are taken out of after-tax profits and are not tax deductible for the company.

Losses

Under a Sole Trade, losses can be utilised to offset against the Sole Traders total income including employment income and capital gains in the same or previous tax year (subject to certain restrictions) and potentially get a tax rebate.

Alternatively, they can be carried forward and offset against future trading profits of the same trade.

If a sole trader is in their first 4 tax years of trade, losses can also be carried back and offset against total income (subject to restrictions) of the previous three tax years prior to the year of loss on a First In First Out basis.

As a limited company, any trading losses you make will be offset against the company's current year total income, carried back or carried forward to be offset against total company profits. However, the maximum available for offset on brought forward losses is subject to restrictions.

Why Should a Sole Trader Incorporate?

There are several reasons for forming a limited company:

In some sectors (such as IT), it is hard to obtain contracts unless an individual trades through a limited company. There is not always an obvious reason for this; it is just the way things are.

If ordering large stock for an order which could be cancelled, then there can be a real benefit in the limited liability offered by trading as a company. The owner’s own personal possessions are generally protected from any claim against the company. However, in some circumstances, taking out a good insurance policy can resolve this issue.

There is more flexibility in handling the owner’s remuneration in such a way as to minimise the tax liability and using different classes of shares makes the tax position potentially even more favourable.

If the owner requires external investment, then a company provides the structure to separate investors (shareholders) from directors and employees.

What are the Disadvantages?

Accountancy costs will increase if running a company, so sufficient savings to justify the cost are necessary.

The company will be regulated by Companies House, which has strict rules for reporting trading accounts, hence the increased costs, and for the conduct of directors and other company officials.

Can a Sole Trader Change from Self Employment to A Limited Company?

Yes. An individual can start as a sole trader and later incorporate. In fact, this is a common route when a new business is unsure of how large it will grow and whether the saving will outweigh the costs.

If you’re thinking of whether you should run your business as a sole trader, or a limited company then get in touch here to see if we can help you.

Tax Planning-Practical Points to Consider

Thu, 19 Nov 2020 17:30:11 GMT

Tax Planning - Practical Points to Consider

Tax Simplified 4 You | 19 November 2020

Income Tax

Individuals with total income in excess of £150,000 pay the additional rate of income tax, currently 45%, however individuals with income between £100,000 and £125,000 (in 2020/21) are subject to an effective 60% tax rate due to the phased withdrawal of the personal allowance. Some tax efficient options to consider are:

Transferring assets to spouse or civil partner

If one spouse or civil partner does not have enough income to utilise their personal allowance or their nil, basic or higher rate tax bands, it may be possible for the other to give sufficient income producing assets to them to enable them to do so.

Charitable donations

If a 45% taxpayer makes a cash donation to a charity of £20,000 under the ‘Gift Aid’ scheme, the charity may reclaim £5,000 from HM Revenue & Customs (HMRC) and the donor will obtain tax relief of £6,250 via their tax return.

Pensions

The amount of pension savings that can be made for each individual and still receive tax relief is limited to the ‘annual allowance’ of £40,000. From 6 April 2020 the annual allowance for individuals with income of more than £240,000 has been reduced by £1 for every additional £2 of income between £240,000 and £300,000, resulting in an annual allowance of £4,000 for those with taxable income of £300,000 or more.

If the individual was a member of a UK registered scheme in the relevant tax year, unused annual allowance for the last three years can be utilised in the current year. Therefore in 2020/21, unused allowances from 2017/18 onwards could be utilised.

Capital Gains Tax (CGT)

Use the CGT annual exemption

Consideration could be given to selling assets to realise gains below any available CGT annual exemption (£12,300 in 2020/21).

However, anti-avoidance rules mean that if shares and securities are sold and repurchased within the following 30 days, the disposal will be matched with the later acquisition when the gain is calculated.

Gift to spouse or civil partner prior to a disposal

Transfer of assets between spouses or civil partners is normally free of tax.

If the receiving spouse or civil partner were to sell the asset, the resulting gain may be covered by their CGT annual exemption or their capital losses and possibly result in a lower rate of tax.

The gift of assets must be absolute and unconditional.

If the spouse or civil partner is non-UK domiciled, the inheritance tax implications of any gift should be considered.

Non-Resident Capital Gains Tax (NRCGT)

Since 6 April 2015, any gains realised by non-UK residents (including individuals, trustees and companies) who dispose of UK residential property are within the scope of CGT.

Each disposal needs to be reported on a NRCGT return within 30 days of the date of completion and any CGT due may need to be paid within the same 30-day time period.

Since 6 April 2019, NRCGT also applies to disposals of directly owned UK non-residential property, such as commercial buildings and farmland, and, in certain circumstances, to disposals of assets which primarily derive their value from UK property including, for example, shares in companies that own a high-proportion of UK land, whether residential or non-residential. Rebasing will be available to 5 April 2019.

Using current year exemptions and allowances

Other exemptions and allowances to consider are:

Inheritance Tax (IHT) annual exemption of £3,000 per annum

This is the amount individuals can give each tax year, without any IHT implications. If the previous tax year’s (2019/20) £3,000 annual exemption was unused, £6,000 can be given away tax-free in 2020/21.

Stakeholder pensions of £3,600 per annum (gross)

Any UK resident individual under the age of 75 can contribute up to £2,880 (net) into a stakeholder pension each year, irrespective of their earnings or whether or not they are employed.

The pension provider will reclaim 20% tax relief direct from HMRC, and therefore the policy will be credited with a gross contribution of £3,600.

It is important to note that the funds will not be accessible until pension age (currently 55).

Individual Savings Accounts (ISAs)

The annual overall subscription limit for an ISA for 2020/21 remains at £20,000.

There are various types of ISA available although the investment limit applies across all ISAs in total. ISAs are available to UK resident individuals aged 18 or over and aged 16 or over for cash ISAs.

The interest earned from ISAs is free from income tax and CGT.

Junior ISAs may also be worth considering for children under 18, with an annual subscription limit in 2020/21 of £9,000. Ordinarily, when a parent gives money to a child under 18 in excess of £100, the whole of the income is taxable on the parent, but this provision does not apply to a Junior ISA.

If you have any questions with regards to how best you can maximise your tax savings, then get in touch here .

Pensions Tax Relief Changes

Wed, 18 Nov 2020 10:24:36 GMT

Pension Tax Relief Changes

Tax Simplified 4 You | 18 November 2020

The main change for pensions in the Budget 2020 was a change to the tapered annual allowance.

Old Rules

Most people can pay in up to £40,000 a year into their pension, but the Tapered Annual Allowance rules, introduced in 2016, limit the amount high earners can pay in.

Under the old rules, the Tapered Annual Allowance is triggered when both the threshold income, being gross income less personal pension contributions, exceeds £110,000 and the adjusted income, being gross income plus employer pension contributions, exceeds £150,000.

The £40,000 annual allowance is reduced by £1 for every £2 that the adjusted income exceeds £150,000, to a minimum annual allowance of £10,000. Tapered annual allowance can be carried forward from the previous three tax years in the same way as the normal annual allowance.

New Rules

Under the new changes introduced by the government, the threshold income has been raised to £200,000 with effect from 06 April 2020, meaning individuals with income below this level will not be affected by the Tapered Annual Allowance.

The annual allowance will only begin to taper down for individuals who also have an adjusted income above £240,000.

For individuals who continue to be affected by the tapered annual allowance, the minimum tapered annual allowance will reduce to £4,000.

The lifetime allowance, the maximum amount you can in a pension over time, has increased from £1,055,000 for the 2019/20 tax year to £1,073,100 for the 2020/21 tax year.

Impact on Individuals

Those earning more than £300,000 will see a reduction in their annual allowance and will consequently pay more tax. On the other hand, those earning below £300,000 adjusted income are likely to see a reduction in the tax they pay because they are either no longer impacted by the tapering rules and are entitled to the full £40,000 annual allowance, or they are still impacted by the tapering rules, but their tapered annual allowance has increased.

The most high-profile impact of these changes will be felt in the National Health Service where many doctors can have high earnings and build up sizeable pension benefits. The tapered annual allowance rules have resulted in some doctors receiving high tax bills or seeing their future pension benefits reduced, which in turn has made some doctors reluctant to take on additional overtime.

With the pressure on the NHS arising from the coronavirus outbreak, these changes may help reassure some doctors that they can take on additional work without worrying about unexpected tax bills.

For more information e nquire he re