Tax

There are a variety of reasons that you may be required to file an annual Tax Return with HM Revenue & Customs (HMRC). These include:

• Being self-employed.
• If you are a partner in a partnership.
• You receive rental income.
• If you are in receipt of other untaxed investment income, such as “director dividends” from a UK company that you control, applies.
• Bank interest received above your savings allowance entitlement needs to be considered.
• Foreign income or gains should be taken into account.
• When your household receives child benefit and you are the higher earner with income over £50,000, certain rules apply.
• Complexities in your affairs related to residency and domicile require attention.
• Reporting a capital gains tax liability to HMRC is necessary upon the sale of a second home, commercial property, buy-to-let property, stocks, or shares.
• Claims to offset a capital loss on the sale of a second home, commercial property, buy-to-let property, stocks, or shares may be made.

Sadly, this is not an exhaustive list and you should always check your particular circumstances with an appropriately qualified tax adviser.

You should be aware that company directors are not formally obliged to complete a Tax Return, for this reason alone, despite older HMRC guidance to the contrary. We have successfully appealed against many penalties for non-filing of Tax Returns, imposed by HMRC on directors who have no other income to report, aside from their director’s salary.

In relation to the capital gains tax reporting, there may also be a specific Tax Return required to be filed within 30 days of the sale of a residential property. Please see here for more information.

This depends upon your status in relation to whether you are employed or self employed / partner in a partnership.

Employed

Whilst this is not an exhaustive list and much depends upon your personal circumstances, you may be able to claim tax relief for outgoings such as:

• Professional fees and subscriptions not reimbursed by your employer.
• Costs of acquiring and cleaning specialist clothing / protective wear.
• Mileage allowances reimbursed by your employer at less than HMRC authorised rates.
• Costs of compulsorily working from home.
• Gift aid donations, if you are a higher rate taxpayer (income over £50,000).
• Personal pension contributions, usually, if you are a higher rate taxpayer.

In addition, the marriage allowance lets one spouse transfer up to 10% of their unused personal allowance to the other spouse, provided certain conditions are met.

Finally, several reliefs apply to investments made through HMRC-approved schemes like the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). You should seek tax advice before making these investments and when claiming relief, as this area involves various pitfalls.

Yes, you must declare the income to HMRC, whether you make a profit or a loss.

Even if you make a loss, you can carry it forward and offset it against future rental profits. If you don’t claim the loss, you won’t be able to carry it forward, which could cause you to pay more tax than necessary in the future.

Allowable expenses include:

• Accountancy fees.
• Letting agent’s fees.
• Costs of repairs and gas servicing etc.
• Utility costs such as light and heat.
• Telephone – mobile and landline.
• Rates – local and water (when empty).
• Property insurance.
• Advertising
• Bad debts.

The most significant cost to landlords is mortgage interest. From the tax year 2020/21 onwards, mortgage interest costs can no longer be deducted as an expense from rental income.

Instead, a maximum of 20% of the mortgage interest can be claimed as a “tax reducer”, thus reducing your income tax liability. However, there are restrictions to this amount, particularly if there is a rental loss, before interest is considered.

It is important to remember that any capital repayment element of a mortgage payment is not deductible at all, for income tax purposes.

In addition, costs of enhancing the property such as adding an extension, converting a garage etc cannot be claimed as a repair to the property.

We would always advise that if you find yourself in this situation (regardless of the type of income), that you should make a voluntary disclosure to HMRC.

You can make such a disclosure, for property income, by advising HMRC that you wish to make a “let property disclosure”.

By doing so voluntarily, HMRC will impose a lower rate of penalty, in relation to any previously unpaid taxes compared to the penalties that they would charge, if they find out that you have not declared rental income. They could find out that you have received rental income from other sources such as other Government departments, letting agents etc.

This is an effective rate of income tax imposed on those earning between £100,000 and £125,000, rather than an actual tax rate.

Alex

Alex earns £100,000 from employment, in 2020/21. This is his only source of income and he has no reliefs to claim. Alex’s tax liability is:

Income                                                 –                              £100,000

Less: Personal Allowance              –                              (£12,500)

Taxable income                                 –                              £87,500

Tax payable:

£37,500                 x              20%        –                              £7,500

£50,000                 x              40%        –                              £20,000

Total                                                      –                              £27,500

Barbara

Barbara earns £125,000 from employment, in 2020/21. This is her only source of income and she has no reliefs to claim. Barbara’s tax liability is:

Income                                                 –                              £125,000

Less: Personal Allowance              –                              (£0)

Taxable income                                 –                              £125,000

Tax payable:

£37,500                 x              20%        –                              £7,500

£87,500                 x              40%        –                              £35,000

Total                                                      –                              £42,500

Comparing Alex and Barbara, the differential £25,000 of income has created a further tax liability of £15,000. This is essentially a 60% rate of tax.

The reason is, that as Barbara earns over £100,000, her entitlement to a personal allowance is reduced. For every £2 of income over £100,000, £1 of the allowance is lost. This means that once Barbara’s income goes over £124,999, she has lost her full personal allowance.

So whilst Barbara has 40% tax to pay on her additional income of £25,000 i.e. £10,000, she has also lost her personal allowance of £12,500 and therefore faces a 40% tax charge on the personal allowance amount due to the loss of this allowance i.e. £5,000.  Therefore, Barbara has paid £15,000 tax on £25,000 of earnings.

Anyone with a flat salary of at or below £100,000 but with the potential to earn a bonus, may be faced with this problem but there is tax planning that can be done to mitigate such a problem.

If you have received a late filing penalty or a daily penalty, then you will be able to appeal to HMRC to cancel the penalty, if you are able to show that you had a reasonable excuse for the late filing of the Return or potentially if HMRC made an error in sending you a Return to complete.

Therefore, much depends upon the circumstances surrounding the late filing of the Return and your individual circumstances. We have a great deal of experience in these appeals.

This is one of the most frequently asked questions that we receive. There is no specific answer as there are a number of different scenarios that could be tax efficient, depending upon your personal circumstances.

In very general terms, it can be more tax efficient for director-shareholders to draw a basic level of PAYE income (c£8,500) and dividends thereafter. However, before we could give such specific advice, we would consider the salient points below:

• Are there other shareholders in the company?
• Is the company loss making?
• Is the company undertaking research and development activities (BM TO INSERT LINK!!)?
• Are the any restrictions or impediments upon taking dividends?
• Does the director have a contract of employment with the company?

Again, this is another question that is posed to us, by our client base many times in each year.

There are a number of simple ways to give the employee some shares but those may not be tax efficient and may cause the person giving the shares away, a headache in terms of a tax bill and completing HMRC forms.

There are a number of HMRC “approved” share schemes that can be implemented. To determine the best route forward, we would need to understand:

• Why do you wish to give shares to the employees? Is it to retain them?
• Is there a sale of the company envisaged in the next, say, ten years?
• What percentage are you prepared to give away?
• Are you looking for the employee to acquire some of your shares?
• Do you want the employee to pay the market rate for the shares or a nominal sum?
• Do you want the offer to be open to all employees?

The first question that we would ask you, is the reasons for the proposed incorporation:

• Are investors or funding being sought for the business?
• Is protection through limited liability required?
• Is tax efficiency a priority?
• Are research and development (R&D) activities being undertaken?

Once again, there is no “one size fits all” answer and we would tailor our answer to your personal circumstances and there are a number of advantages and indeed disadvantages of running a limited company.

There are different ways to correct errors, depending upon which Tax Return is incorrect.

You can correct a Tax Return by submitting an amended Return, provided you do so within 12 months of the statutory filing date.

For example, if you have made an error in your 2019/20 Tax Return, you can amend this anytime until 31 January 2022 as the statutory filing date for the Return is 31 January 2021.

However, you cannot submit an amended Return in February 2022. If the error results in you owing taxes to HMRC, then you will need to write to HMRC disclosing the error with calculations of the additional taxes owed.

If the error means that you are due tax back from HMRC (for instance by not claiming certain reliefs such as pension contributions) then depending upon the error made, you may be able to claim “overpayment relief” from HMRC. This is a very specific claim to make to HMRC as it needs to include a number of details and statements. You can make a claim as long as no more than four years have passed since the end of the relevant tax year. For example, you can still claim a refund for an error or mistake in the tax year ending 5 April 2017, provided you submit the claim by 5 April 2021.

If you don’t complete a Tax Return and have expenses to claim relief on, such as those below, then you will need to complete a form P87 and submit this to HMRC. If the expenditure is more than £2,500 then HMRC may request that you complete Tax Returns to claim tax relief for the costs.

• Professional fees and subscriptions not reimbursed by your employer.
• Costs of acquiring and cleaning specialist clothing.
• Mileage allowances reimbursed by your employer at less than HMRC authorised rates.
• Costs of compulsorily working from home.

If you have paid gift aid donations and pension contributions and wish to claim further tax relief, as a higher rate taxpayer, then you will need to claim these by writing to HMRC.

You must make any claims for these reliefs within four years after the end of the relevant tax year. For example, you can still claim tax relief for the tax year ending 5 April 2017, as long as you submit the claim by 5 April 2021.

The statutory residence test (SRT) was introduced in 2013 to determine an individual’s residency using specific legislative criteria.

Because the tests are complex and depend on many personal factors, we need to carefully review your circumstances before confirming whether an individual is non-UK resident.

We would always recommend that you take specific tax advice in relation to your residency status before leaving the UK and before you return to the UK. In addition, we will consider this on an annual basis when completing your Tax Return. It is important that we are kept aware of any changes to your personal circumstances as this may impact your non-residency status.

Unless the man down the pub is a chartered accountant or chartered tax adviser, then we would always recommend that you seek specialist advice regarding your circumstances.

The tax that you will pay, will depend upon why you originally acquired the property.

When you originally acquired the property to develop and sell at a profit, HMRC may require you to pay income tax and national insurance on the profits made.

For residential properties acquired as a home or buy-to-let investment, capital gains tax will most likely apply.

In the case of a home, it’s important to consider available reliefs. For example, living in the property as your main home throughout the entire ownership period usually means any profit is exempt from tax under the principal private residence (PPR) relief. However, owning other homes during that time or not residing in the property for the full ownership period could result in some of the profit being taxable.

The amount of tax payable depends upon:

• Ownership status of the property, whether solely owned or jointly with others.
• Sale of other assets in the same tax year, such as shares, businesses, or additional properties.
• Availability of capital gains losses from previous tax years or the current tax year to offset.
• Your income level.
• Previous use of the property, whether residential at any point or entirely commercial.
• Costs incurred to enhance or improve the property that have increased its value.

There may also be a Tax Return required to be filed within 30 days of the sale of a residential property. Please see here for more information.

Given the pitfalls in this particular area of capital gains tax, we would advise that you seek professional tax advice prior to any sale.

Normally, transfers of assets between co-habiting spouses (not unmarried partners) are free of capital gains tax. This continues where the couple separate but only until the end of the tax year of the separation.

Therefore, there may be some capital gains tax issues, if you are transferring assets between yourself and your ex-spouse, after the tax year of separation.

If that happens, tax authorities treat you as if you sold the asset (even if you didn’t receive any money) at its open market value. This can create unexpected tax liabilities that you might not have anticipated or included in the divorce settlement.

Professional advice is key.

This is very difficult to answer without knowing background facts such as:

• What type of asset are you selling?
• Who holds ownership of the asset?
• Have you previously claimed entrepreneur’s relief?
• On what date did you acquire the asset?
• When do you plan to sell the asset?
• What is the expected sale price of the asset?
• By what means did you acquire the asset?
• What other sources of income do you have?

Even after we have these details, further questions may arise—especially if the asset is company shares—because the rules for qualifying for entrepreneur’s relief have become more complex in recent years.

Given the pitfalls in this particular area of capital gains tax, we would advise that you seek professional tax advice well in advance of any sale, as if the answer is “no”, then you need to start a two year clock ticking to be eligible for entrepreneurs relief, if this is even possible.

Proper professional tax advice is required.

Yes, is the probable answer, as the distribution of monies remaining once a company has ceased to trade will be subject to capital gains tax or income tax.

We would need to know further information such as:

• The company’s level of reserves.
• Other sources of income you have.
• Your future plans, particularly regarding similar trading activities.
• The current holders of the company’s shares.
• Whether capital gains tax exemptions have already been utilised this year.

Clearly you want to pay the lowest amount of tax but it could be the case that income tax liability is actually lower than the capital gains tax liability, as much depends upon your personal circumstances. If planning is undertaken before the decision to cease trading, then you can control the tax liabilities ensuring that these are minimised.

The answer is, potentially, yes. As ever, this depends upon the facts of the case.

If you are gifting shares in your limited company then there may be a capital gains tax charge on the transfer of the shares to any individual or indeed another limited company.

We would need to ascertain:

• Determining whether the company is a trading or investment company, which can be unclear when both trading and investment activities are involved.
• Assessing the value of the company.
• Considering the number or percentage of shares to be gifted.
• Reviewing the shareholding structure before and after any gift.
• Understanding the reason for the gift, such as succession or reward.
• Taking into account the residence status of both the donor and the donee.

There may be a relief available to reduce or eliminate the amount chargeable to tax but the availability of the relief depends upon the facts of the case.

Your adult child may also face an income tax charge if you gift them shares in an employing company, as HMRC could challenge this as a reward for their services.

If you gift other business assets, such as a sole trade business or a partnership interest, we will need to review the details to determine exactly what you are gifting, whether any reliefs apply, and what underlying assets the business owns.

In addition, you will also need to consider inheritance tax when giving away an asset.

If the gift is an interest in a buy-to-let residential property then it is possible that there may be a tax charge to pay, even though you are not receiving any monies.

We would need to:

• Identify the recipient of the property gift.
• Determine the current market value of the property.
• Note the date and cost of acquisition of the property.
• Understand the ownership structure of the property.
• Clarify who will receive the rental income after the property transfer.
• Explain the reasons behind making the gift.
• Verify the legal ownership of the property and check if any mortgage remains.

In addition, you will also need to consider inheritance tax when giving away an asset.

First of all, we are assuming that you have confirmed your residency position with a qualified tax adviser. If not, then you need to do so first as the rules regarding whether an individual is resident or non-resident are extremely complex.

Assuming that you are non-resident then the answer depends upon what the asset being sold is. If the property is the sale of a UK property, then the answer may be yes. Although there are different options available to calculate any capital gain, depending upon the exact circumstances of the non-resident individual and the ownership of the property.

In addition, there is a 30-day reporting deadline for non-residents disclosing details of the sale to HMRC and paying the tax to HMRC. Penalties will apply where these deadlines are missed.