Letting relief

Posted on 13th April 2023 by Solutions Accountancy

In general, there is no Capital Gains Tax (CGT) due on the disposal of a property which has been used as the main family residence. This relief from CGT is commonly known as 'private residence relief'. However, where all or part of the home has been rented out the entitlement to relief may be affected. Homeowners that let all or part of their house may not benefit from the full private residence relief, but may benefit from letting relief.

Homeowners that lived in their home at the same time as tenants, may qualify for letting relief on gains they make when they sell the property. Letting relief does not cover any proportion of the chargeable gain made while the home is empty.

The maximum amount of letting relief due is the lower of:

The amount of private residence relief due
£40,000
The amount of gain you've made on the let part of the property

Worked example:

You used 40% of your house as your home and let out the other 60%.
You sell the property, making a gain of £60,000.
You're entitled to private residence relief of £24,000 on the part used as your home (40% of the £60,000 gain).
The remaining gain on the part of your home that's been let is £36,000.

The maximum letting relief due is £24,000 as this is the lower of:

£24,000 (the private residence relief due)
£40,000
£36,000 (the gain on the part of the property that's been let)

The letting exemption is only available when the conditions outlined above apply, most importantly that the property owner(s) were / are in shared occupancy with a tenant. The letting relief was more generous prior to 6 April 2020, when the requirement for the property owner to live in the property at the same time as their tenants did not apply.

Tax-free allowance on trading and property income

Posted on 13th April 2023 by Solutions Accountancy

A reminder that there are two separate annual £1,000 tax allowances for property and trading income. If you have both types of income highlighted below, then you can claim a £1,000 allowance for each.

The £1,000 exemptions from tax apply in the following circumstances:

If you make up to £1,000 from self-employment, casual services (such as babysitting or gardening) or hiring personal equipment (such as power tools). This is known as the trading allowance.
If your annual gross property income is £1,000 or less, from one or more property businesses, you will not have to tell HMRC or declare this income on a tax return. For example, from renting a driveway or power tools. This is known as the property allowance.

Where each respective allowance covers all the individual’s relevant income (before expenses) the income is tax-free and does not have to be declared. Taxpayers with higher amounts of income will have the choice, when calculating their taxable profits, of deducting the allowance from their receipts, instead of deducting the actual allowable expenses.

You cannot use the allowances in a tax year, if you have any trade or property income from:

a company you or someone connected to you owns or controls;
a partnership where you or someone connected to you are partners; and
your employer or the employer of your spouse or civil partner.

You cannot use the property allowance if you:

claim the tax reducer for finance costs such as mortgage interest for a residential property; and
deduct expenses from income from letting a room in your own home instead of using the rent-a-room scheme.

Losing your personal income tax allowance

Posted on 13th April 2023 by Solutions Accountancy

If you earn over £100,000 in any tax year your personal allowance is gradually reduced by £1 for every £2 of adjusted net income over £100,000 irrespective of age. This means that any taxable receipt that boosts your income over £100,000 will result in a reduction in personal tax allowances. Accordingly, your personal Income Tax allowance would be reduced to zero if your adjusted net income is £125,140 or above.

Your adjusted net income is your total taxable income before any personal allowances, less certain tax reliefs such as trading losses and certain charitable donations and pension contributions.

For the current tax year if your adjusted net income is likely to fall between £100,000 and £125,140 you would pay an effective marginal rate of tax of 60%.

If your income sits within this band you should consider what financial planning opportunities are available in order to avoid this personal allowance trap by reducing your income below £100,000. For example, by giving gifts to charity, increasing pension contributions and participating in certain investment schemes.

A higher rate or additional rate taxpayer who wanted to reduce their tax bill could make a gift to charity in the current tax year and then elect to carry back the contribution to 2022-23. A request to carry back the donation must be made before or at the same time as the 2022-23 Self-Assessment return is completed and filed, i.e., by 31 January 2024.

Exempt gifts paid out of income

Posted on 13th April 2023 by Solutions Accountancy

There is a flexible exemption from IHT for taxpayers who make tax exempt gifts and payments that are paid as normal expenditure out of income. With proper planning this can be a useful tool to enable grandparents, for example, to help pay school fees for their grandchildren.

However, careful consideration has to be given to ensure that these payments form part of the transferor’s normal expenditure and is made out of income and not out of capital. The person gifting the money must also ensure that they are left with enough money after making the gift to maintain their normal standard of living.

HMRC’s internal manual states that "…although the normal expenditure gifts must have left the transferor with ‘sufficient income’ to maintain their usual standard of living, they do not need to have actually used this for living expenses. The transferor may in fact choose to use capital to meet their living expenses and use the income remaining, after making the gifts, for some other purpose. It is enough, for the exemption to apply, that the income was enough to meet both the normal expenditure gifts and the usual living expenses".

If the income that is left after making the gifts is not enough to meet the usual living expenses, the exemption is not available in full, but part of the gifts may still qualify for the exemption.

Students and tax

Posted on 13th April 2023 by Solutions Accountancy

Students that work may need to pay Income Tax and National Insurance. Employers are required to calculate the amount of tax they need to pay on the basis that the students would be working for the rest of the tax year.

This means that an overpayment of Income Tax can occur when a student or temporary worker earns more than their monthly tax-free allowance of £1,042, but over the course of the tax year earn less than their annual allowance. For example, a student only working over the summer period and earning more than £1,042 a month is unlikely to have exceeded the current £12,570 tax free personal allowance.

Students (and other temporary workers) are not required to pay Income Tax if their earnings are below the tax-free personal allowance, currently £12,570.

A refund of overpaid tax can be requested using an online version of the P50 form entitled Claim for repayment of tax. The P50 form can only be used if you are not going to work for at least the next 4 weeks and are not claiming certain state benefits.

Any students that are continuing to work for the rest of the tax year in part-time jobs should consider waiting until the end of the tax year to make a claim.

NMW non-compliance penalties

Posted on 13th April 2023 by Solutions Accountancy

Employers must ensure they are paying staff at least the National Minimum Wage (NMW) or National Living Wage (NLW). The NMW and the NLW are the minimum legal amounts that employers must pay their workers.

The new NMW and NLW rates came into effect on 1 April 2023. The hourly rate for the NMW (for 21-22-year-olds) is £10.18 and for the NLW is £10.42. The NLW is the minimum hourly rate that must be paid to those aged 23 or over.

It is important that employers ensure they pay the necessary minimum wage rates as there are significant penalties for employers who are found to have paid workers less that they are entitled to by law. If an employee has been underpaid, the employer must pay any arrears without delay. There are penalties for non-payment of up to 200% of the amount owed. The penalties are reduced by 50% if all of the unpaid wages and 50% of the penalty are paid in full within 14 days.

The maximum fine for non-payment can be up to £20,000 per employee. Employers who fail to pay, face a 15-year ban from being a company director as well as being publicly named and shamed.

Cause for optimism?

Posted on 11th April 2023 by Solutions Accountancy

As we have moved into the new tax year, since 6 April 2023, the March hares have had their opportunity for madness and there is just a glimmer of warmer weather ahead. And perhaps, we may even witness a growing measure of control over rising prices.

There were a few good tidings for business owners in the recent Budget, for example, the unlimited expensing (100% write-off) of qualifying capital expenditure for companies, and the abolition of the lifetime limit on pension pots.

But whilst we may draw deeper breaths and enjoy the sun on our faces in the coming weeks there are still challenges ahead and we would do well to be mindful…

Is now a good time to take stock? To quantify any damage to balance sheets and to reappraise our trading prospects in the coming year? We would say yes, it is.

And whilst we can undertake this “planning” while we soak up the spring sun, it is more productive to give yourself half-a-day away from your desk and create a formal business plan that you can use to measure performance in the coming months.

Every business and business owner will have a unique set of circumstances to deal with during 2023. If you are keen to make the most of any upturn in trade, now is the perfect time to consider your options.

We can help.

Tax when you sell property

Posted on 6th April 2023 by Solutions Accountancy

The annual exempt amount applicable to Capital Gains Tax (CGT) has been reduced to £6,000 (from £12,300) for the new 2023-24 tax year.

CGT is normally charged at a simple flat rate of 20% and this applies to most chargeable gains made by individuals. If taxpayers only pay basic rate tax and make a small capital gain, they may only be subject to a reduced rate of 10%. Once the total of taxable income and gains exceed the higher rate threshold, the excess will be subject to 20% CGT.

A higher rate of CGT applies to gains on the disposal of residential property (apart from a principal private residence). The rates are 18% for basic rate taxpayers and 28% for higher rate taxpayers.

Most people are aware that they do not usually have to pay CGT when they sell their qualifying residential property used wholly as a main family residence. However other sales of property that are not a principle private residence (PPR) will be subject to CGT.

This includes:

buy-to-let properties
business premises
land
inherited property

The deadline for paying any CGT due on the sale of a residential property is 60-days. This means that a CGT return needs to be completed and a payment on account of any CGT due should be made within 60-days of the completion of the transaction. This applies to UK residents selling UK residential property where CGT is due.

There are various reliefs available from CGT for the sale of qualifying business assets.

Full expensing started 1 April 2023

Posted on 6th April 2023 by Solutions Accountancy

The new 100% first-year capital allowance for qualifying plant and machinery assets known as full expensing came into effect on 1 April 2023. This measure expected to help boost business investment and growth.

The Financial Secretary to the Treasury, said:

“We are determined to make the UK the best place in the world to do business, which is why businesses can start to benefit from the raft of tax cuts on offer to boost their growth. With full expensing, the more a company invests the less tax they’ll pay, and I encourage companies of any size to take full advantage of this world-leading reform.”

To qualify for full expensing, expenditure must be incurred on the provision of “main rate” plant or machinery. It should be noted that full expensing is only available to companies subject to Corporation Tax.

Plant and machinery that may qualify for full expensing includes (but is not limited to):

machines such as computers, printers, lathes and planers;
office equipment such as desks and chairs;
vehicles such as vans, lorries and tractors (but not cars);
warehousing equipment such as forklift trucks, pallet trucks, shelving and stackers;
tools such as ladders and drills;
construction equipment such as excavators, compactors, and bulldozers; and
some fixtures such as kitchen and bathroom fittings and fire alarm systems in non-residential property.

The new measure will initially apply from 1 April 2023 until 31 March 2026 although this may be extended. The super-deduction that was introduced during the pandemic ended on 31 March 2023. Under full expensing, for every pound a company invests, their taxes will be cut by up to 25p.

For “special rate” expenditure, which doesn’t qualify for full expensing, a 50% first-year allowance (FYA) can be claimed instead. The 50% FYA was introduced alongside the super-deduction and was also due to end on 31 March 2023. It will now be extended by three years to 31 March 2026.

Businesses can also continue to use the Annual Investment Allowance (AIA) to claim a 100% tax deduction on qualifying expenditure on plant and machinery of up to £1m per year. This includes unincorporated businesses and most partnerships.

VAT guidance for overseas sellers

Posted on 6th April 2023 by Solutions Accountancy

New simplified VAT guidance for overseas sellers has been published by HMRC. The guidance also includes a new translation into simplified Mandarin to help support Chinese retailers that sell goods online into the United Kingdom.

The guidance provides further information about the rules and obligations for overseas sellers that using online marketplaces and selling goods directly to UK consumers. This includes details of when and how VAT and import duties must be charged to customers by international sellers.

In 2022, the UK imported £83.3 billion in goods and services from China and Hong Kong. Online shopping accounted for 26.5% of all UK retail sales in 2022, with a substantial number of goods being bought from international sellers via online marketplaces.

Commenting on the publication of the simplified guidance, HMRC’s Director for Individuals and Small Business Compliance, said:

'We have acted on feedback from businesses to simplify and compile this online guidance into one, easily accessible place on GOV.UK. We have also recently published a simplified Mandarin translation of our guidance following research conducted with Chinese businesses.

By making our VAT and import duty rules easier to understand, we will be able to increase tax compliance levels for online sellers. We are asking UK freight, customs and shipping agents to help us reduce the tax gap by sharing this simplified guidance with their customers. By working together, we can help everyone pay the right amount of tax at the right time.'