Unreported Property Income

2 min read

Landlords in receipt of rental income in excess of £1,000 in a tax year are required to disclose this to HM Revenue and Customs (HMRC).

For various reasons rental income may not be declared sometimes landlords may simply not get round to it or perhaps are unaware that they have tax obligations.

If you become aware of undisclosed income it is always better to come forward to HMRC rather than wait until they catch up with you.

This article looks at the sources available to HMRC to identify undisclosed rental income and the Let Property Campaign which allows arrears of rental income to be disclosed in a simple cost effective manner.

HMRC have various sources to identify undisclosed rental income.

Stamp Duty Land Tax (SDLT), Land Registry and Electoral Register

SDLT is a department of HMRC and they also have access to HM Land Registry records. In both cases, HMRC are able identify, those that own multiple properties which will create a red flag if there has not been any rental income declared.

The electoral registry can also be used to identify who is living in a property.

Letting Agents

Many Landlords rent through a letting agent or use one to find tenants.
High street letting agents are required to make an annual report to HMRC identifying landlords, rental properties and income earned. Online agents such as Air BnB and other online holiday agents will provide details of their electronic payments to HMRC in an annual report.

Security Deposit

The Landlord is normally required to place any security deposit with a government approved deposit scheme. HMRC have access to these records and use them to confirm a rental agreement is in place.

Informants

Ex-spouses/partners, neighbours, colleague and disgruntled tenants have long been a rich source of information for HMRC.

The Let Property Campaign

Help is at hand for Landlords wishing to bring their affairs up to date. The facility allows all undeclared years to be disclosed on one form, penalties will be lower. It will normally be possible to arrange payment of the liabilities in instalments.

How we can help

We offer a wide range of business advisory services to help you make the right decisions for your business to grow and improve.

If you would like to know how Loucas can assist you, please do not hesitate to contact us.

Pension Annual Allowance

2 min read

For many higher earners, changes to the pension annual allowance rules mean that they are now entitled to make increased contributions to their pension scheme.


The annual allowance is the limit that an individual can contribute to a pension scheme, while still receiving tax relief. It is based on your level of your earnings (for personal contributions) or the year but is capped at £40,000.

Tapered Annual Allowance

The tapered allowance was introduced in April 2016 to further restrict the annual allowance for higher earners. Up until April 2020 your annual allowance was reduced by £1 for every £2 that your adjusted income exceeded £150,000.

The maximum reduction was £30,000 so that the annual allowance was reduced to £10,000 if your adjusted income exceeded £210,000. Your adjusted income is your total income for the year plus any employer pension contributions. Up until April 2020 you were not affected by the tapered allowance if your threshold income was in excess of £110,000.

Your threshold income is your total income, less certain deductions including pension contribution and gift aid donations.

Changes to the tapered allowance thresholds from 6 April 2020 have meant that many taxpayers have been taken out the tapered annual allowance altogether or its impact has been reduced.

From 6 April 2020 the annual allowance is reduced by £1 for every £2 your adjusted income exceeds £240,000. The maximum reduction is now £36,000thus reducing the annual allowance to £4,000 for those whose adjusted income is £312,000 or more.

Utilising Earlier Year’s Unused Relief

It is also possible to utilise any unused annual allowance from the previous three tax years.

Money Purchase Annual Allowance

Please be aware that if you have already taken pension benefits from a money purchase scheme in excess of the 25% tax free lump sum that the allowances outlined above will not apply to you. In this scenario, you are restricted to the Money Purchase Annual Allowance of £4,000 and you are not able to utilise any unused relief from the previous three years.

We can help you with all aspects of pensions. Please contact us for further advice and assistance.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice. Each comment posted by third party readers/subscribers of our website on topics is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for advice.

Garden Office Tax Considerations

2 min read

With most of the working population working from home right now, many businesses are considering a permanent change to their working environment and we are being regularly asked about the pros and cons of a garden office.

There are two main considerations when looking at installing a garden office on the grounds of your residential property for business use:

  • will it be solely used by the business or
  • will there also be an element of private use (e.g. as a playroom, hobby room or overnight accommodation for guests).

The treatment of the garden office costs, various tax implications and some other additional points hinge on which of those options is chosen. Each individual circumstance may be slightly different, so it’s always good to seek specific advice but the following table outlines the broad considerations, based on a Limited Company purchasing the garden office as a company asset.

Initial Purchase of structure

The structure will be an asset of the company but no tax deduction is available for cost of the structure itself.

It is possible to claim capital allowances on certain elements such as power supply, heating and thermal insulation as well as fixtures and fittings. It is a good idea to obtain breakdown of the cost of these allowance items.

VAT

If VAT registered you will be able to reclaim the VAT on the cost of the structure and items mentioned above. If there is private use of the office then an appropriate apportionment should be made.

Running Costs

These can be claimed as tax deductible, again an appropriate restriction must be made for any private usage.

Capital Gains Tax (CGT)

Ordinarily, the disposal of a primary residence is exempt from CGT. If the office is used solely for business then this element of the property may become liable to CGT.

This is not an issue of there is some private use of the office.

Benefit in Kind

If there is private use of the office then an annual benefit in kind charge will occur. This is calculated by using the assets made available for private use rules and could be as high as 20% of the purchase price per annum.

Transfer a Property to Children via a Trust

2 min read

There are a number of reasons that you may wish to gift an investment property to a trust rather than directly to your children. The two most common are Asset Protection and Capital Gains Tax.

From a tax perspective, it is important that neither you, your spouse nor any minor children are able to benefit from the trust. Typically a trust will be a discretionary trust with adult children and/or grandchildren being beneficiaries.

Asset Protection

As the trust owns the asset, it means that the asset can be protected and remain in the family as it does not form part of the beneficiary’s estate in the event of a bankruptcy, divorce or death. Additionally, the settlors can also be trustees, which means they will have a say on how and when funds or assets are distributed to beneficiaries.

Capital Gains Tax (CGT)

A gift of an asset to a child or to a trust is treated as a disposal at market value which, in the case of an investment property, would create a CGT liability based on the increase in value during its ownership. However, it is possible to hold over the gain on a disposal to a discretionary trust as it is chargeable to Inheritance tax (IHT) so that no tax is payable at this time.

Inheritance Tax (IHT)

The disposal to the trust is a chargeable lifetime transfer (CLT), assuming you have made no other CLTs in the last seven years each individual has a nil rate band of £325,000. A couple could therefore transfer a property valued up to £650,000 without incurring an immediate IHT charge (any excess would be charged to IHT at 20%).

As with an outright gift, if you survive the transfer by seven years it will fall out of your estate for IHT purposes. Every ten years the trust will be assessed to IHT based on the value of the assets in the trust at that time. If it exceeds the nil rate band/bands at that time the excess is charged to IHT at a rate of 6%.

It is possible at a future date to pass the property directly to a beneficiary and again hold over the gain for CGT purpose. There may be an IHT exit charge if there was IHT payable when setting up the trust if the transfer is within ten years of this event or, if not, IHT was payable at the most recent ten year anniversary.

Next Step

If you have any questions on gifting an investment property to a trust, our team of expert Accountants would be happy to assist.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Your Guide to Furnished Holiday Lettings

2 min read

Much of the country is holidaying in the UK due to the current uncertainty around foreign travel, which has led to increased rents for UK furnished holiday lets (FHL). This article looks at the tax benefits of investing in such properties.

What is a Furnished Holiday Let?

In order to qualify a property should be fully furnished, commercially let and satisfy all of the following:-

Availability – It must be available for letting as furnished holiday accommodation for at least 210 days in the year.

Letting – It must be let as furnished holiday accommodation to the public for 105 days a year. You cannot include long term lets of more than 31 days.

Pattern of occupation – The total days where lettings exceed a continuous 31 days cannot exceed 155 days.

It is possible to average the days across properties where you have more than one FHL and you can make a period of grace election in certain circumstances when you have not quite satisfied the tests.

Income Tax

Capital allowances can be claimed on furniture and furnishings. You cannot claim relief on the original purchase of these items for ordinary residential lettings. There is greater flexibility for splitting profits with a spouse compared with ordinary residential lettings.

A significant advantage of FHLs compared with normal residential lettings is that there is no restriction on tax relief for interest payments for higher rate taxpayers.

Capital Gains Tax

Disposals of FHLs can qualify for Entrepreneur’s Relief which are taxed at 10% as opposed to the normal 18%/28% for residential properties. Gifts of FHL are deemed to take place at market value for capital gains purposes. An individual gifting a FHL can claim hold over relief so that no capital gains crystallize at that time.

This can be particularly beneficial for passing a FHL to the next generation as it is unlikely that a FHL will qualify for Inheritance Tax business property relief.

Capital Gains Rollover Relief is available where proceeds from the sale of a business asset are reinvested into another business asset. A FHL is a qualifying business asset. At Loucas, we help clients with a wide range of business interests including furnished holiday lets (FHL).

If you are considering buying a FHL or would like to discuss an existing property or portfolio, Loucas would be happy to advise on the matter.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Selling Part of your Garden

2 min read

Pressure on local authorities to increase the housing stock in the UK has meant that more and more home owners have had success in obtaining planning permission and selling part of their garden to a developer or developing the land themselves.

The tax implications of such transactions are not straight forward. One needs to consider whether the transaction is a capital transaction or if it constitutes a trade and is therefore, at least partly, liable to income tax.

Trading or Capital

Normally HMRC will accept that the transaction is a capital one, if the only way you have enhanced the property is by obtaining planning permission.

However, if you purchase the property with a view to making a profit on the sale of the garden then HMRC would argue that it is a trading transaction and liable to income tax.

Similarly, if you develop the land yourself or are entitled to a profit share on the eventual sale of the developed property, you would be deemed to be trading and at least part of the profit will be liable to income tax.

Principal Private Residence (PPR) Relief

If the transaction is capital in nature, then it is possible PPR relief is available. PPR relief allows gains on the sale of the majority of main residences to be free from tax entirely. You can sell part of the garden and still qualify for the relief.

The relief extends to land of half a hectare (including the plot of the dwelling house), but this can extend to a larger area where it was required, for the reasonable enjoyment of the residence.

Therefore, if the garden being sold has been used as part of the residence and is within the half a hectare, it should qualify for PPR and no tax would be payable on disposal.

If it is outside the half hectare, you would need to be able to show that the larger grounds/garden were necessary for the reasonable enjoyment of the property. This could be difficult to prove as the fact that you are selling the garden separately from the main house would indicate it was not required for the reasonable enjoyment of the property.

However, there could be circumstances where you had to sell the land, for example out of financial necessity, and relief may still be available in this scenario.

How we can help

If you have any questions, our team of expert Accountants would be happy to assist.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Covid-19: The tax implications of working from home

2 min read

Employees who work from home due to measures to control the coronavirus pandemic are covered by home-working expenses rules, HMRC has confirmed. Many of us are now working from home as offices are closed during the COVID-19 pandemic. This can mean additional expenditure for both employers and employees.

What tax reliefs are available?

Employer Reimbursed costs

Employers can make payments to employees to cover the reasonable costs of working from home.

Payments of fixed amounts of £6 per week or £26 per month can be paid tax free.

In order to qualify the employee must work at home regularly as part of a homeworking arrangement.

HMRC have confirmed that during the COVID-19 pandemic employees working from home because their office is closed or if they are following advice to self-isolate will meet these requirements.

Other working from home considerations

Alternatively the employer can reimburse the actual increased costs of working from home but this can be onerous to calculate and to evidence.

If an employee does not have internet access and needs this to work from home the employer can reimburse the costs of the internet connection tax free.

An employer can also purchase office equipment and furniture for an employee. Provided there is no significant private use there will be no taxable benefit in kind.

Prior to the COVID-19 pandemic an employee would be taxed on monies received if they had purchased office equipment and then been reimbursed by their employer. However, a temporary tax exemption has now been made for such reimbursements.

Relief for Employee Costs

If the employer does not pay the fixed amounts for use of home costs  it is possible for employees to make a claim for tax relief using the same scale rates of £6 per week or £26 per month. Again the actual additional expenditure can be claimed with the suitable evidence.

The relevant expenditure is additional heating and light costs and metered water

In addition an employee can also claim the cost of any extra phone costs due to business calls.

Claims for relief by an employee for the cost of office equipment that is not reimbursed by an employer should be approached with caution. To qualify costs have to relate to equipment used in the performance of an employee’s duty. Items such as desk and chair would arguably not qualify as they put you in a positon to perform your duties.

Additionally, HMRC will only accept a claim for computer equipment in limited circumstances as they would normally expect the employer to supply such equipment or at least make it available if it was necessary for the role.

If you are unsure on the tax treatment of working from home, or have any other employment tax queries, our team of expert Accountants would be happy to assist.

Stay up to date with the latest news. Read more on tax exemptions for home office expenses here.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

Budget Highlights

2 min read

Chancellor Rishi Sunak unveiled his first budget on 11 March 2020. Our summary focuses on the range of tax and financial measures which may affect you.

Entrepreneurs’ relief lifetime allowance reduced to £1m

It had been widely reported that the chancellor would abolish the generous relief where gains on certain qualifying shares and business assets are only taxed at 10%. Instead the lifetime limit on gains that can attract the relief has been reduced from £10M to £1M. In effect we have come full circle as Gordon Brown introduced the relief with a £1M limit in 2008.

Pension tapered annual allowance raised

The chancellor has raised the pension tapered annual allowance threshold in response to reports that senior medical NHS staff were restricting their hours due to large, and often unexpected, tax bills being incurred.

From 2020/21 the threshold income at which the tapered annual allowance needs to be considered is being raised from £110,000 to £200,000.

Many higher earners will now be able to take advantage of the full £40,000 annual allowance for pension contributions.

Various new measures in response to Coronavirus

New measures announced included the following:-

A £3,000 cash grant for businesses that qualify for small business rates relief

100% discount on business rates for retailers and businesses in the hospitality and leisure sectors where the rateable value of the property is less than £51,000

A dedicated helpline (0800 0159 559) for companies and self-employed individuals who are concerned about meeting tax payments due to the Coronavirus.

The government will repay statutory sick pay paid for absences due to the Coronavirus. The refund is available to employers with fewer than 250 employees and covers absences of up to 2 weeks.

Our comprehensive Budget Summary outlines the key measures, including some of the less-publicised changes that may impact upon your business or personal finances. For a detailed overview of the 2020 Budget information, please read our 2020 Budget Summary.

How we can help

For any help or assistance with areas of taxation, business growth or development please contact us for advice.

Disclaimer: Content posted is for informational & knowledge sharing purposes only, and is not intended to be a substitute for professional advice related to tax, finance or accounting. Each comment posted by third party readers/subscribers of our website on topics of tax and accounting is their personal opinion and due professional care should be taken by you before you act after reading the contents of that post. No warranty whatsoever is made that any of the posts are accurate and is not intended to provide, and should not be relied on for tax or accounting advice.

The construction industry and VAT: analysing the changes

6 min read

The VAT domestic reverse charge for building and construction services comes into effect from 1 October 2019. Given the scale of the changes, it would be appropriate for businesses to plan for the reverse charge now.

The reverse charge: an overview

The reverse charge represents part of a government clamp-down on VAT fraud. Large amounts of VAT are lost through ‘missing trader’ fraud. As part of this type of fraud, VAT is charged by a supplier, who then disappears, along with the output tax. The VAT is thus lost to HMRC. Construction is considered a particularly high-risk sector because of the potential to make supplies with minimal input tax but considerable output tax.

The reverse charge does not change the VAT liability: it changes the way that VAT is accounted for. In future, the recipient of the services, rather than the supplier, will account for VAT on specified building and construction services. This is called a ‘reverse charge’.

The reverse charge is a business-to-business charge, applying to VAT-registered businesses where payments are required to be reported through the Construction Industry Scheme (CIS). It will be used through the CIS supply chain, up to the point where the recipient is no longer a business making supplies of specified construction services. The rules refer to this as the ‘end-user’.

Broadly then, the reverse charge means that a contractor receiving a supply of specified construction services has to account for the output VAT due – rather than the subcontractor supplying the services. The contractor then also has to deduct the VAT due on the supply as input VAT, subject to the normal rules. In most cases, no net tax on the transaction will be payable to HMRC.

The charge affects only supplies at standard or reduced rates where payments are required to be reported via CIS and not to:

  • zero-rated supplies;
  • services supplied to ‘end-users’ or ‘intermediary suppliers’.

Under the scheme a VAT-registered business, receiving a supply of specified services from another VAT-registered business, for onward sale, on or after 1 October 2019:

  • should account for the output VAT on supplies received through its VAT return
  • does not pay the output VAT to its supplier on supplies received from them
  • can reclaim the VAT on supplies received as input tax, subject to normal VAT rules.

The supplier should issue a VAT invoice, indicating the supplies are subject to the reverse charge. An end-user should notify its end-user status, so the supplier can charge VAT in the usual way.

Example

Safe as Houses Ltd is a VAT-registered contractor. It uses Brickyard Bill, who is also VAT-registered. Brickyard Bill tells Safe as Houses that the reverse charge applies.

Safe as Houses does not pay VAT to Brickyard Bill. It accounts for the VAT on its own VAT return, entering it as both output and input tax. It enters the value of the purchase from Brickyard Bill as part of its inputs. It does not include the value in its outputs.

Their VAT returns will look like this:

  • Brickyard Bill puts the value of the sales in box 6 of the VAT return, but no output tax in box 1
  • Safe as Houses uses box 1 to declare the output tax on the services from Brickyard Bill to which the charge applies. It doesn’t include the value of the transaction as an output in box 6. It reclaims the input tax on reverse charge purchases in box 4 and includes the value of purchases in box 7.

Consequences for businesses

Details of the charge have changed since it was first announced. Originally, the charge was to apply to ‘labour-only’ supplies. Now however, the charge applies to construction services, including materials. With the domestic reverse charge, the value of reverse charge supplies will not count towards the VAT registration threshold of the recipient business.

For many construction businesses, the change is likely to have far-reaching consequences. Processes will need to be in place to ensure VAT accounting systems are compliant with the unusual requirements of the reverse charge. The rules require a number of verification checks to ascertain VAT status of customers, CIS registration (in some circumstances) and end-user or intermediary supplier status.

Given that output VAT currently provides many businesses with a positive cashflow advantage, the impact on cashflow and liquidity will also need appraisal. Changing to a monthly VAT return cycle to accelerate payments due from HMRC may be of benefit. The VAT Flat Rate Scheme (FRS) may no longer be of benefit, and reverse charge transactions cannot be dealt with through the Cash Accounting Scheme.

Specified services

Construction services covered by the reverse charge are those falling within the category of ‘construction operations’ for the CIS, and include the construction, alteration, repair, extension, demolition or dismantling of buildings or structures, including offshore installations.

Works forming part of the land are also included, such as walls; pipe and power lines. So too are preparatory services such as site clearance and scaffold erection; the installation of systems of heating and lighting; and painting and decorating. The reverse charge includes goods, where supplied with specified services.

Supplies excluded from the charge, where these are supplied on their own, include the services of architects, surveyors and some consultants; and the manufacture of building or engineering components, materials or plant.

Services with reverse charge and excluded elements

Where excluded services are supplied with services subject to the reverse charge the whole supply is subject to the reverse charge. As it can be difficult to determine in some situations whether the reverse charge applies, if there has already been a reverse charge supply on a construction site, any subsequent supplies on that site between the same parties may be treated as reverse charge supplies, if both parties agree.

Where there is any doubt, HMRC recommends reverse charging, if the recipient is VAT-registered and payments are subject to the CIS.

Considering end users

The domestic reverse charge applies to VAT-registered businesses throughout the CIS supply chain, but is designed not to apply to ‘end-users’ or ‘intermediary suppliers’. ’End-users’ are VAT-registered businesses receiving supplies of specified services which are not sold on as construction services.

Examples could be a construction firm selling an interest in land as a newly built office, or a large retail business having trading premises built for its own use. Intermediary suppliers are VAT and CIS registered businesses that are connected or linked to end-users. Examples could be landlords and tenants, or recharges of building and construction services within a group of companies.

Businesses will need to know when they are dealing with an end-user or intermediary supplier, so they can invoice appropriately. The end-user or intermediary supplier should inform the supplier of their status so that VAT can be charged as normal. If the end-user does not provide confirmation of status, the supplier should issue a reverse charge invoice.

Businesses dealing frequently with end users may wish to include a statement, in business terms and conditions, to the effect that it is assumed that the customer is an end-user, unless they indicate otherwise.

Effective invoicing

To invoice correctly under the new rules, suppliers should mark the invoice to the effect that the domestic reverse charge applies, and that the customer must account for VAT. The amount of VAT due under the charge should be clearly stated on the invoice. It should not be included in the amount shown as total VAT charged.

The rules require that when the customer is liable for VAT, an invoice should include the reference ‘reverse charge’. Any of these are acceptable:

  • Reverse charge: VAT Act 1994 Section 55A applies
  • Reverse charge: S55A VATA 94 applies
  • Reverse charge: Customer to pay the VAT to HMRC.

Where invoices are created with an IT system that cannot show the amount to be accounted for, HMRC refers suppliers to VAT Notice 735, ‘Domestic reverse charge procedure’ bit.ly/2OsGJWK.

HMRC’s policy

HMRC has issued technical guidance bit.ly/2WHQ5R2.

There will be a ‘light touch’ approach to genuine mistakes and penalties for six months from October where businesses are aiming to comply and act in good faith. Businesses knowingly claiming end-user status when the reverse charge should have applied, however, will be liable for the tax due and may be liable for penalties.

How will the changes affect you

The new rules will have a significant effect on VAT compliance and cash flow. Key questions to consider include:

  • is the reverse charge likely to apply to supplies to and from other VAT-registered contractors and subcontractors you deal with?
  • how will your accounting systems calculate and report reverse charge supplies?
  • how will you check on an ongoing basis that supplies and purchases are treated correctly?
  • will your cashflow suffer if you no longer hold output tax, and would changing to monthly VAT returns help?
  • if you use the VAT Flat Rate Scheme, how will the charge impact you?

Overall, the change may mean that the construction sector is likely to be subject to considerable HMRC scrutiny in the foreseeable future. Under the rules, for example, some subcontractors, with VAT to reclaim on inputs but no VAT to charge on outputs, will regularly receive VAT refunds.

A regular repayment position could trigger a VAT inspection. For these reasons, we would recommend taking stock of VAT and CIS compliance across the board.

How we can help

In this blog, we have only been able to touch on some of the key issues. Please contact us for an in-depth discussion on the matter.

Extra resources

DISCLAIMER: This blog is for guidance only, and professional advice should be obtained before acting on any information contained herein. Neither the publishers nor the distributors can accept any responsibility for loss occasioned to any person as a result of action taken or refrained from in consequence of the contents of this publication.

End of Year Tax Planning Tips

By Stuart Shaw

3 min readWith less than a month left of the current tax year, it is time to consider end of year tax planning opportunities.

Pension and Gift Aid contributions

Pension contributions and gift aid contributions made prior to the end of the tax year can help mitigate your tax liabilities – even more so when your income is near certain thresholds. For example, your personal allowance is reduced by £1 for every £2 that your income exceeds £100,000. This means that for the income band from £100,000 to  £123,700 the effective rate of tax is an eye-watering 60%. The flip side to this is that if your income is within this band you will get tax relief on pension contributions and gift aid payments at 60%.

Another scenario where additional relief is available is in respect to the withdrawal of child benefit. This occurs when the highest earner in the household’s income exceeds £50,000 and the benefit is clawed back at a rate of 1% for every £100 of income in excess of £50,000. The benefit is fully withdrawn when the individual’s income exceeds £60,000. Pension contributions and gift aid payments within this band of £50,000 and £60,000 will, therefore, attract a higher rate of effective relief. The rate of relief will depend on the number of children you are claiming benefit for.

Tax Efficient Investments

The end of the tax year is the perfect time to consider making tax efficient investments:-

ISAs

A range of ISAs are available to savers, including the Lifetime ISA for those under the age of 40; the Help to Buy ISA for first-time homebuyers; and the Junior ISA for individuals aged under 18.

Savers are able to invest in any combination of cash or stocks and shares, up to the overall annual subscription limit of £20,000. An individual may only pay into a maximum of one Cash ISA, one Stocks and Shares ISA, one Help to Buy ISA, one Lifetime ISA and one Innovative Finance ISA

Venture Capital Trusts (VCT)

These are investment vehicles that are invested in small higher-risk trading companies.

Investments in VCTs attract an income tax relief of 30% of the amount invested. This tax relief will be recouped if the investment is sold within 5 years.

Dividends and capital gains are tax-free.

The maximum annual investment for a taxpayer is £200,000.

EIS/SEIS

These are tax advantaged schemes that involve direct investments into small higher-risk trading companies.

EIS shares attract income tax relief of 30% and SEIS shares attract income tax relief of 50%. The relief is clawed back if the shares are sold or if there is a disqualifying event within 3 years.

Any gains on the shares are tax-free provided they are held for a minimum of 3 years and in most cases are fully relieved from Inheritance tax if held for two years.

In addition to the above, capital gains tax on gains invested in EIS shares where the relevant disposal was either 36 months prior to or 12 months after the EIS investment can be deferred until the subsequent disposal of the EIS shares.

The maximum that can be invested in EIS shares annually is £1M (or £2M for knowledge intensive companies) and for SEIS shares the limit is £100,000.

Inheritance Tax (IHT)

There is an annual £3,000 IHT gift exemption and you can also utilise any unused exemption from the previous year. Gifts covered by the exemption will fall outside of your estate immediately for IHT purposes.

There is also a £250 small gift exemption which allows you to give up to £250 annually to any number of friends and family. Again qualifying gifts will fall out of your estate immediately for IHT purposes.

Gifts to individuals that are not covered by the exemptions are potentially exempt transfers and you would have to survive the gift by seven years for them to fall outside your estate.

Capital Gains Tax

Each individual has a capital gains tax exemption of £11,700 for the year ended 5 April 2019. If it is not utilised then it is lost.

If you have investments standing at a gain you may wish to you consider making an appropriate disposal to utilise the annual exemption.

Alternatively, you may have already made gains in excess of the annual exemption and look to crystallize a loss prior to 5 April to offset against the gain.

Care should be taken if you are looking to bed and breakfast a share (i.e. sell the holding and then repurchase it shortly afterwards). If you repurchase the share within 30 days of the disposal then this purchase is matched with the recent disposal for tax purposes so is unlikely to crystallize a gain or loss as intended.

You could still dispose of a shareholding then immediately have your spouse purchase the same shareholding or alternatively, a SIPP could purchase the shares if you have one.

Loucas can help you to build a tax-efficient financial plan that ensures you are making the most of the reliefs and allowances available to you.  If you would like to discuss any of the issues raised in this guide please call 01622 758257.

Self Assessment Tips and Advice

4 min read

Self assessment tax returns can be complicated, with many tax payers struggling to complete these correctly. A recent study found that 735,258 tax returns in January 2019 were submitted less than 24 hours before the self-assessment filing deadline at midnight 31st January 2019.

Legislation changes frequently, meaning that taxpayers risk paying too much tax and/or incurring penalties through failing to get things right.

As more information moves online, and tax becomes more digital, taxpayers may increasingly need help in understanding their obligations, ensuring that the information HMRC holds about them is correct and meeting the increased filing obligations.

Do I need to complete a Tax Return?

The Self Assessment deadline of 31st January 2020 for filing a 2019 Tax Return is fast approaching. The 2019 Return covers the period 6 April 2018 to 5th April 2019.

So how do you know if you should complete a Tax Return ?

If any of the following were applicable to you then you may be required to register for Self Assessment and complete a Tax Return:

  • Were self employed or a partner in a partnership business
  • Were a company director
  • Had income over £100,000
  • Received more than £10,000 from dividends or investment income
  • Received rental income
  • Had foreign income
  • You or your partner earned over £50,000 and claimed child benefit
  • Made a capital gain on the sale of an asset

HM Revenue & Customs have developed a useful online check which will also help you decide whether or not you need to complete a Tax Return.

If you discover you need to file a Tax Return, the first step is to register for Self Assessment.  The easiest way to do this is through HMRC’s website.  Shortly after registering, HMRC will issue you with a tax reference number (UTR).  You will need your UTR to file your Return.

If you miss the Self Assessment deadline then an automatic penalty will be issued, whether or not you actually owe any tax.

How to spread the payment of your Self Assessment tax liability

Your Self Assessment liability has to be paid by 31 January following the end of the tax year, with a possible 2nd payment due on 31 July depending on what your liability is.

There are a number of different methods you can use to actually make the payment, details of which can be found on the HM Revenue & Customs’ website.

As any alternative to actually making the payment in a lump sum, you can spread payment of your Self Assessment liability over twelve months through your PAYE tax code as long as all these apply:

  • you owe less than £3,000 on your tax bill
  • you already pay tax through PAYE, for example you’re an employee or you get a company pension
  • you submitted your paper tax return by 31 October or your online tax return online by 30 December

If you find yourself in a position were you are unable to pay your liability, you should contact HMRC’s Business Payment Support Service as soon as possible, ideally before the payment deadline.  You may be able to agree an instalment plan to settle the debt over a period of time and whilst interest may still be payable, you should be able to avoid the penalty charges.

If you do not agree a payment plan and fail to settle your liability in full by the due date interest will be charged and if paid more than 30 days late a 5% surcharge will be issued.

Reducing your payments on account

Payments on account are payments made towards your eventual Income Tax and Class 4 NIC liability.

Each payment is based on half your previous year’s tax bill and are payable by 31 January and 31 July following the end of the tax year.

You have to make the payments on account every year unless:

  • your last Self Assessment tax bill was less than £1,000
  • you’ve already paid at source more than 80% of all the tax you owe

If you believe your tax bill will be lower than in the previous year, you can ask HMRC to reduce your payments on account.

This can be done through your online digital account or by completing form SA303.

It is possible to reduce the payments on account at anytime, even after the first payment has been made.  This will result in any over payments being refunded.

It should be noted that if you reduce down your payments on account lower than they should have actually been this will result in interest being charged.

You can find out more information about our personal tax services here.

Missed Deadline

HM Revenue and Customs (HMRC) must receive your tax return and any money you owe by the deadline midnight 31st January 2020. You’ll usually pay a penalty if you’re late submitting your tax return. You can appeal against a penalty if you have a reasonable excuse.

If you do not pay the tax you owe for the previous tax year on time, the more you delay, the more you will be required to pay. This is why it is imperative that you pay the tax as soon as you can. The information below details the penalties you will have to pay if your tax return is late. If a partnership tax return is late, then each partner will be required to pay the penalties shown below.

Penalties for missing the tax return deadline:

  • 1 day late: A penalty of £100 which will apply even if you have no tax to pay or have already paid the tax you owe.
  • 3 months late: £10 for each following day – up to a 90 day maximum of £900. This is in addition to the fixed penalty above.
  • 6 months late: £300 or 5% of the tax due, whichever is the higher. This is in addition to the penalties above.
  • 12 months late: £300 or 5% of the tax due, whichever is the higher.

How we can help

Loucas aims to ease the stress caused by self assessment and help you avoid costly mistakes, by offering a complete self assessment service.

We can save you time, worry, and money by handling this process for you. We will do all the necessary calculations, complete your return, and offer advice on how you might better manage your tax liabilities.

We do not believe that dealing with tax correspondence should be stressful or confrontational. We work towards having a constructive relationship with HMRC and believe that this works in the best interests of our clients.

Please do contact us at Loucas for help.  Alternatively, you can reach us on 01622 758257.