17.02.2021
Pointon Young
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Most people do not expect to pay capital gains tax when they sell their only or main home, particularly if the property has been their only home for their entire time that they owned it. However, what is less well known is that the exemption places a limit on the amount of garden that falls within the main residence exemption. This may catch out those who sell their main residence and have large gardens or land.
What is allowed?
The legislation allows grounds up to the ‘permitted area’ to fall within the main residence exemption. This is set at 0.5 of a hectare (1.24 acres). However, a larger area may be allowed where, 'having regard to the size and character of the dwelling’ this is required for the reasonable enjoyment of the property.
Case law
The case of Phillips v HMRC UKFTT 381 TC concerned the sale of the Phillips’ main residence, which had a garden of 0.94 of a hectare. As it was their main residence, the Phillips did not declare the gain to HMRC. HMRC investigated the disposal while checking SDLT returns in March 2017, having discovered that at 0.94 of a hectare, the grounds exceeded the permitted area of 0.5 of a hectare allowed by the legislation.
In considering whether the larger grounds were needed for the reasonable enjoyment of the property, recourse was made to previous decisions. These included the case of Longston v Baker 73 TC415, in which the taxpayer contended that land in excess of 0.5 of a hectare was needed to house and graze his horses. However, the judge noted that it was ‘not objectively required, i.e. necessary, to keep horses at houses in order to enjoy them as a residence’.
In the Phillips’ case, the Tribunal found in their favour, ruling that the land was required for the reasonable enjoyment of the property, which is large and in a rural area. However, as previous decisions show, it is far from a given that the Tribunal will always rule in the taxpayer’s favour when it comes to deciding whether land sold with a house falls within the main residence exemption.
Caution required
Some caution is required when selling a property that has substantial grounds, particularly if some of the land is used for equestrian purposes. The purchaser will pay SDLT, and where this is at mixed property rather than residential rates, a review of the SDLT returns may trigger an investigation.
For more information on the above please contact a member of our team.
In July last year, the Government announced a temporary increase in the residential stamp duty land tax (SDLT) threshold to £500,000. The higher threshold applies where completion takes place between 8 July 2020 and 31 March 2021. From 1 April 2021, the threshold will revert to £125,000, with a higher threshold of £300,000 applying to first-time buyers where the price of the property is not more than £500,000.Higher (but different) thresholds also apply in Scotland for land and buildings transactions tax (LBTT) and in Wales for land transaction tax purposes (LTT). These are not discussed here.SDLT supplementA SDLT supplement of 3% applies where a buyer purchases a second or subsequent property for £40,000 or more, such as a buy-to-let property or a holiday home. The supplement does not apply where the buyer sells their main residence and buys a new home, even if they also own other properties.Where the higher residential threshold applies, the 3% supplement applies to the rates as reduced during that period. Consequently, those buying second homes or investment properties should look to complete by 31 March 2021; failure to do so may prove costly.The ratesThe SDLT residential rates applying between 8 July 2020 and 31 March 2021, and those applying from 1 April 2021 onwards, are shown in the tables below.8 July 2020 to 31 March 2021From 1 April 2021• First time buyers buying a property costing not more than £500,000 pay SDLT at 0% on the first £300,000 and 2% on the balance.The cost of missing the deadlineFailing to complete by 31 March 2021 can be costly as the following example shows.ExampleTed is in the process of buying an investment property for £400,000. He already owns a main residence and two investment properties, so the supplement applies.If completion takes place on or before 31 March 2021, he will pay SDLT of £12,000 (£400,000 @ 3%). However, if completion takes place on or after 1 April 2021, the SDLT bill will be £22,000 ((£125,000 @ 3%) + (£125,000 @ 5%) + (£150,000 @ 8%)). Missing the deadline will cost Ted £10,000.Remember, the key date is the date of completion, not the date of exchange.For more information on the above please contact a member of our team.
The mechanism by which landlords receive
tax relief for interest and other finance costs is changing from April 2017 …
and not for the better. The current rules are more generous than the new rules
in that they enable the landlord to receive tax relief at his or her marginal
rate of tax. By contrast, the new rules - which are being phased in - will,
when fully implemented, provide relief only at the basic rate. Further, relief
will be given as an income tax reduction rather than as a deduction from rental
income when computing taxable profits.
Current
rules
Under the existing rules, interest and
other finance costs, such as fees for arranging a mortgage or loan, are
deducted as an expense when working out taxable profits.
Example
John has two properties which he lets out.
In 2016/17, he pays mortgage interest of £10,000 on mortgages taken out to buy
the properties. He receives rental income of £18,000 in the year and incurs
other allowable expenses of £2,000.
The properties are investment properties.
John is employed as an IT consultant and in 2016/17 he receives a salary of
£70,000. He is a higher rate taxpayer.
For 2016/17 he can deduct the mortgage
interest, along with the other expenses, to arrive at a taxable profit of
£6,000. Thus, he obtains relief for the mortgage interest at his marginal rate
of tax of 40% - thereby reducing his tax bill by £4,000.
Looking
ahead
Relief for finance costs is to be gradually
restricted from 2017/18 onwards, although the restriction only applies in
relation to residential properties. It does not affect commercial lets.
The restriction is to be phased in from
April 2017 and will be fully in place from the 2020/21 tax year.
In the transitional period, some relief
will be given as for the current rules as a deduction in computing profits and
relief for the remainder will be given as a basic rate tax deduction.
For 2017/18, relief for 75% of
the allowable interest and other finance costs will be deductible from rental
income and relief for the remaining 25% will be given as a basic rate tax
deduction.
For 2018/19, relief for 50% of
the allowable interest and other finance costs will be given as a deduction
from rental income and the relief for the remaining 50% as a basic rate tax.
For 2019/20, relief for 25% of
the allowable interest and other finance costs will be given as a deduction
from rental income and relief for the remaining 25% will be given as a basic
rate tax deduction.
From 2020/21, relief for all
allowable interest and finance costs will be given as a basic rate tax
reduction.
Based on the facts in the above example,
once the restriction is fully implemented, John will receive relief for his mortgage
interest costs as a reduction in his tax bill of £2,000 (assuming a basic rate
tax of 20%). The change in the rules will ultimately cost him £2,000 a year
compared to the current position.
The current rules are more generous than
the new rules, and where costs can be brought forward to 2016/17 rather than
2017/18, this can be potentially advantageous to higher and additional rate
taxpayers.
For more information on the above please contact a member of our team.
If you would like to find out how Pointon Young can help you grow your business and save you money, fill in a TRUSTquestionnaire.
The VAT flat rate scheme is an
optional simplified accounting scheme for small businesses. The scheme is
available to businesses that are eligible to be registered for VAT and whose
taxable turnover (excluding VAT) in the next year will be £150,000 or less.
Once in the scheme, a business can remain in it as long as its taxable turnover
for the current year is not more than £230,000.
The flat rate scheme is designed to
simplify the recording of sales and purchases. Under the scheme, a business
works out the VAT that it is required to pay over to HMRC
by applying a flat rate percentage to its gross (VAT-inclusive) turnover. The
flat rate percentage depends on the type of business. The percentages for each
business sector can be found on the gov.uk website at www.gov.uk/vat-flat-rate-scheme/how-much-you-pay.
The percentages are all less than the standard rate of VAT of 20%, reflecting
the VAT that would be recovered on purchases.
Example
Jack is registered for the flat rate
scheme. In a particular accounting period his turnover is £12,000. The flat
rate percentage for his sector is 14%. Jack must pay VAT of £1,680 (14% of
£12,000) over to HMRC. He does not need to work out the VAT on purchases.
Advantages
The main advantage is that it reduces the
record keeping burden, as it is not necessary to keep records of the VAT
incurred on purchases. As the VAT percentages are averages it is possible that
the business may pay less VAT than accounting for VAT under the traditional
rules, particularly if purchases are low. However, the business may also pay
more if purchases are higher than average – you may need to do the maths to see
if it is for you.
Businesses also enjoy a discount of 1% from
their flat rate percentage during their first year in the scheme.
Limited
cost businesses
From 1 April 2017, a new flat rate
percentage of 16.5% applies to a `limited cost business’. This is one whose VAT
inclusive expenditure on goods is either less than 2% of their VAT inclusive
expenditure in a prescribed accounting period or greater than 2% but less than
£1,000 if their prescribed accounting period is one year. The figure of £1,000
is adjusted accordingly for periods that are not one year. In determining
whether this test is met, capital expenditure, food and drink for consumption
by the flat rate business or its employees, and vehicle, vehicle parts and fuel
(except where the business is one that carries out transport services) are
excluded from the calculation.
However, a business with a VAT inclusive
turnover of £20,000 in an accounting period would only need to incur
expenditure of £400 or more to fall outside the definition of a limited cost
business – for most businesses this will be doable, even taking account of the
exclusions.
For more information on the above please contact a member of our team.
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Young can help you grow your business and save you money, fill in a TRUST questionnaire.
In his 2016 Budget speech, the Chancellor
announced two new allowances would be introduced from April 2017 for money
earned from `the sharing economy’. One allowance will be for trading income and the other
for property income.
Trading
income allowance:
A new allowance of £1,000 will be available
for people who make money from selling goods or providing services. Under
current rules, small amounts of trading income, for example from undertaking
occasional jobs or selling goods on eBay must be declared to HMRC and, to the
extent that the income is not covered by the personal allowance, the income is
taxable.
However, once the new allowance is
introduced from April 2017, income from trading which is covered by the new
allowance will not need to be declared to HMRC and can be enjoyed tax-free.
Where trading income exceeds £1,000,
traders will have the option of working out their taxable profit in the usual
way by deducting expenses from income, or instead they can choose to deduct the
allowance (rather than actual expenses) from their gross income. This will be
beneficial where expenses are less than £1,000 a year or where the trader
wishes to avoid the hassle and expense of recording expenses.
Example
1
Holly is employed in an office, in respect
of which she earns £15,000 a year. She also sells cupcakes locally, from which
she makes £800 a year.
In 2016/17 she will need to declare the
income from her cupcake business on the self-employed pages of her tax return
and pay tax on the profit.
However, as a result of the introduction of
the new trading allowance for 2017/18, she will no longer need to tell HMRC
about her income as it is fully covered by the £1,000 allowance. She will no
longer need to pay tax on the income.
Example
2
Beth has a small business selling knitted
toys on e-bay. Her income is £3,000 a year and her expenses are £750.
Although she will need to declare the
income on the self-employed pages of her tax return for both 2016/17 and
2017/18, for 2016/17 her taxable profit will be £2,250 (£3,000 less expenses of
£750). For 2017/18, she can instead choose to deduct the new allowance of
£1,000 from her income rather than the actual expenses. This will give her a
lower profit figure of £2,000, saving her time and tax.
Property
allowance
The second allowance to be introduced from
April 2017 is in respect of income from property. It will also be set at £1,000
and will allow people to receive small amounts of property income tax
free. This will mean that people who
earn less than £1,000 from, say, renting out their driveway or offering storage
in their loft, will no longer need to tell HMRC about this income or pay tax on
it.
Where income is in excess of £1,000,
taxpayers will have the option of computing their profit in the usual way (income
from property less associated expenses) or by deducting the allowance from
their gross income. As with the trading allowance, this will be beneficial if
actual expenses are less than £1,000.
The new allowance does not affect the
option of receiving income from letting a room in your house tax-free under the
rent-a-room scheme.
Need
to know: Where trading or property income is less
than £1,000, it will no longer need to be declared to HMRC from 6 April 2016.
For more information on the above please contact a member of our team.
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It is possible for a business to set the
full cost of a car against profits in the year of the purchase if the car is a
low emissions car that qualifies for the first-year allowance. A 100% first-year allowance is
available in respect of cars that meet the definition of a `low emission car’
for capital allowances purposes.
To qualify, the expenditure must be
incurred before 31 March 2021 – the deadline was recently extended by three
years.
To be a qualifying low emission car, the
car must satisfy certain conditions. A low emission car is one that is either
electrically propelled or one in respect of which the CO2 emissions are below
the level specified in the legislation. This is set at 75g/km where the
expenditure is incurred on or after 1 April 2015 and before 1 April 2018. The
threshold is reduced to 50g/km for expenditure incurred on or after 1 April
2018 and before 1 April 2021.
Further, first-year allowances are only
available for expenditure on new and unused low-emission cars. Expenditure on
second-hand cars does not qualify for the first-year allowances, although
writing down allowances are available. Likewise, new cars with emissions above
the threshold are not eligible for the first-year allowance, although
writing down allowances (at 18% or 9% depending on the emissions level) can be
claimed.
Private
use
Where the car is used for both business and
private use, the first-year
allowance must be reduced proportionately to reflect the private use.
Example
Jed is a sole trader. He buys a new low
emission car with emissions of 60g/km, which costs him £16,000. He uses the car
80% for business and 20% for private. He claims a 100% first-year allowance.
The allowance is proportionately reduced to reflect the private use. The
allowance available to set against profits is therefore £12,800 (80% of
£16,000).
Not
mandatory
It is not mandatory to claim a first year
allowance for a car which qualifies. It may be beneficial not to claim where
claiming the full allowance would otherwise create a loss or waste personal
allowances. It is also possible to tailor the claim to suit the taxpayer’s
circumstances. Writing down allowances can be claimed for any expenditure not
relieved by means of a first-year
allowance.
Electric
charge points
As announced in the 2016 Autumn Statement,
expenditure incurred on or after 23 November 2016 and on or before 31 March
2019 (corporation tax) or 5 April 2019 (income tax) on electric charge points
will also qualify for a 100% first-year
allowance.
For more information on the above please contact a member of our team.
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Young can help you grow your business and save you money, fill in a TRUST questionnaire.
Most benefits in kind are taxable
and the employee is taxed on the cash equivalent of the value of that benefit.
Where the employee is required to make a payment to the employer in return for
the provision of the benefit and actually does so, the cash equivalent of the
benefit is reduced by the amount `made good’ by the employee. Making good
allows the employee to reduce or eliminate the tax charge.
Example
Harry’s employer provides private medical
insurance for Harry and his family. The cost to the employer is £500 a year.
Harry is required to make a contribution of £200, which he does. By `making
good’ £200 of the cost, the cash equivalent of the benefit on which tax is
charged is reduced from £500 to £300.
Where the benefit in question is fuel for a
company car, the amount made good by the employee can be computed using the
advisory fuel rates.
Example
Helen has a company car. The car is a
petrol car, which for 2016/17 has an appropriate percentage of 22%. Helen’s
employer pays for all fuel for the car, but Helen is required to make good the
cost of fuel for private motoring.
In the year, Helen drives 10,000 private
miles. Assuming the advisory fuel rate for her 1600 cc car is 14p per mile and
Helen pays her employer £1,400 in respect of her private mileage, she will be
regarded as having made good the cost of her private fuel. Consequently, the
tax charge is reduced to nil.
Time
for making good
Earlier in the year the Government
consulted on the deadline by which the employee must make good in order to
reduce or eliminate the tax charge that would arise on the benefit in kind. At
the time of the 2016 Autumn Statement, it was announced that from 2017/18 the
making good deadline for all benefits will be set at 6 July after the end of
the tax year in which the benefit was provided. Previously, different dates
applied to different benefits, with a deadline of the end of the tax year in
which the benefit was provided applying to many.
Better
to pay the tax
When thinking about whether to `make good’
to reduce the tax, remember
that as the tax rate is less than 100%, you will always be better off paying
the tax than making good. A higher rate taxpayer will only save £40 in tax for
every £100 `made good’ – better to pay the £40 tax and keep the remaining £60.
For more information on the above please contact a member of our team.
If you would like to find out how Pointon
Young can help you grow your business and save you money, fill in a TRUST questionnaire.
Company cars are a popular benefit and are often something
of a status symbol. But, they have also been an easy target for the taxman.
Where a company car is available for private use, the
employee is taxed on the associated benefit that this provides. The amount that
is charged to tax – the cash equivalent value – depends on the list price of
the car and the appropriate percentage.
The list price is essentially the manufacturer’s price when
new. This remains the reference point by
which the tax charge is calculated – it does not matter how much was actually
paid for the car, whether it was bought second-hand or that cars tend to
depreciate rapidly.
The appropriate percentage – the percentage of the list
price charged to tax – depends on the car’s CO2 emissions.
Adjustments are made when calculating the cash equivalent to
reflect the periods when the car was unavailable, capital contributions and
contributions to private use.
Appropriate percentage
Linking the appropriate percentage to the CO2 emissions has
the effect of rewarding those who choose lower emission cars. However, it also
provides the Government with an easy mechanism for increasing the tax charge
year on year by making the emissions criteria stricter.
The appropriate percentage is set for a year for the relevant
threshold (95g/km). For 2017/18, the appropriate percentage for a car with CO2
emissions of 95g/km is 18% - For 2017/18, it was 16%.
Thereafter, the appropriate percentage is increased by 1%
for every 5g/km by which the CO2 emissions exceed the relevant threshold, to a
maximum of 37%. Diesel cars attract a 3% supplement on top of what the relevant
percentage is; however, the over percentage is capped at 37%.
Increasing the appropriate percentage each year means that a
company car driver will pay more tax in 2017/18 than in 2016/17 on the same
car, despite the fact it is a year older, has higher mileage and will have
generally depreciated.
Example
Max has a company car. It has CO2 emissions of 120g/km. The
car cost £30,000 when new. Max is a higher rate taxpayer.
In 2016/17, the appropriate percentage was 21% and in
2017/18 it was 23%. This means that the cash equivalent value of the benefit has increased from £6,300 for 2016/17 to £6,900
for 2017/18 and the associated tax bill has
increased from £2,520 to £2,760 – an increase of £240.
Fuel
A separate charge applies where fuel is provided for private
motoring in a company car. The amount taxed is the appropriate percentage as
determined for the purposes of the tax charge on the car multiplied by the
multiplier for the year, set at £22,600 for 2017/18. In the above example, if
Max were to receive fuel for private journeys, he would be taxed on a benefit
of £5,198 – a further tax bill of £2,079.20.
Unless private mileage is very high, employer-provided fuel
is rarely an efficient benefit.
Practical tip – Choosing
a cheaper low emission company car will minimise
the associated tax charge.
The cash basis is a simpler way for smaller businesses to
work out their taxable profit. Under the cash basis, profit is calculated by
reference to cash in and cash out, rather than by reference to income earned in
the period and expenditure incurred, as is the case under the traditional
accruals basis.
Prior to 6 April 2017, the cash basis was only open to sole
traders and unincorporated businesses with a turnover
below the VAT registration threshold (which was set at £83,000 from 1 April
2016 and increased to £85,000 from 1 April 2017).
However, in preparation for the introduction of Making Tax
Digital, under which businesses will be required to maintain records digitally
and to provide digital updates to HMRC quarterly, the cash basis threshold has
been increased. Availability of the cash basis is also extended to
unincorporated landlords from 2017/18 onwards.
New look cash basis
From 6 April 2017, the entry threshold for the cash basis is
increased to £150,000. Once using the cash basis, businesses can remain in it
until their turnover exceeds the exit threshold, set at double the entry
threshold. Thus, the exit threshold is £300,000 from 6 April 2017.
From 6 April 2017, the cash basis also becomes the default
accounting basis for unincorporated businesses with rental income of £150,000
or less. Such businesses can still use the accrual basis if they prefer – but
will need to elect to do so.
Capital expenditure
Simplified rules for treating capital expenditure under the
cash basis are also introduced from 6 April 2017. Instead of the general
prohibition on capital expenditure that applied prior to that date, the new
rules only prohibit the deduction of certain items, namely:
·
capital items incurred in connection with the
acquisition or disposal of a business or part of a business;
·
any asset not acquired or created for use on a
continuing basis in the trade;
·
a car;
·
land;
·
certain intangible assets, including education
or training; and
·
financial assets.
Capital expenditure that does not fall into the above categories
can be deducted as for revenue expenditure.
Is it for me?
The cash basis will suit many small businesses, but it is
not for all businesses. This may be the case if the business has high stock
levels or has losses that would be beneficial to offset against other
businesses. On the plus side, tax is only
payable on money that has actually been received by the year end.
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