This is a tax on income received by individuals and trusts. That income could be employment or self-employment income, dividend income, interest income, rental income and so forth
Do I need to complete a Tax Return?
There are a variety of reasons that you may be required to file an annual Tax Return with HM Revenue & Customs (HMRC). These include:
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.
What outgoings or expenses can I claim against my tax bill?
This depends upon your status in relation to whether you are employed or self employed / partner in a partnership.
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:
In addition, there is a marriage allowance, which is essentially the transfer of up to 10% of one spouse’s unused personal allowance to the other spouse. Again, a number of conditions need to be satisfied.
Finally, there are a number of reliefs for investments made via HMRC approved schemes such as enterprise investment schemes (EIS) or seed enterprise investment schemes (SEIS). Tax advice should be sought ahead of making such investments and in relation to the claim for the relief as there are a variety of pitfalls in this area.
I own a buy to let property. Do I need to declare my income to HMRC even if I make no profit? If I have to declare the income to HMRC, what expenses can be claimed?
Yes, the income needs to be declared to HMRC, regardless of whether a profit or a loss is made.
It is important to note that even if a loss is made, this can be carried forward and used against future profits from rental activities. If the loss is not claimed, no carry forward is possible, which may result in more tax being paid in the future than is necessary.
Allowable expenses include:
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.
I have received rental income for a number of years but have not declared this to HMRC. How do I tell HMRC now?
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.
I’ve heard that some people are paying 60% tax but I can’t find this rate in any tax tables?
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 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
£37,500 x 20% – £7,500
£50,000 x 40% – £20,000
Total – £27,500
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
£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.
I’ve received a late filing penalty for not filing my Tax Return. Can I appeal?
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.
I am director-shareholder of my own limited company. How should I draw income from the company?
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:
I wish to give my employees some shares in the company I own. How do I do this?
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:
Should I incorporate my sole trade or partnership business into a new limited company?
The first question that we would ask you, is the reasons for the proposed incorporation:
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.
I’ve made a mistake with my Tax Return. How do I put it right?
There are different ways to correct errors, depending upon which Tax Return is incorrect.
You are able to correct a Tax Return, by submitting an amended Return, if there is less than 12 months between the amendment being submitted to HMRC and the statutory filing date for the Return.
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. If a claim can be made, then you are permitted to do so, as long as not more than four years have passed since the end of the tax year for which the claim is being made. For example, you can potentially still make a claim for a refund due to an error or mistake for the tax year to 5 April 2017, as long as this is made by 5 April 2021.
I don’t complete a Tax Return. How do I claim relief for my employment expenses and how many years can I claim tax relief for?
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.
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.
Any claims for these reliefs must be made within four years since the end of the tax year for which the claim is being made. For example, you can potentially still make a claim for tax relief for the tax year to 5 April 2017, as long as the claim is made by 5 April 2021.
Am I regarded as non-UK resident?
The statutory residence test (SRT) was introduced in 2013 to determine an individual’s residency based on legislative tests.
The tests are lengthy and there are a significant number of variables depending upon your personal circumstances that need to be considered before we can say for definite 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.
A man down the pub said I could….
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.
Essentially this is a tax on the profit made from the sale of a capital asset such as land and property, a stock portfolio or perhaps a business or shares in a business. Sometimes the outright gift of a capital asset, can give rise to a capital gains tax charge
I’m selling a property for a profit. What tax do I pay?
The tax that you will pay, will depend upon why you originally acquired the property.
If you originally acquired the property to develop and sell at a profit, then HMRC may decree that you will pay income tax and national insurance upon the profits made.
If the property was a residential property acquired as a home or buy-to-let investment, then the likelihood is that you will pay capital gains tax.
If the property is a home, then you need to consider what reliefs are available. For instance, if you have lived in the property as a home throughout your entire ownership period, then any profit is likely to be completely tax free due to the availability of principal private residence (PPR) relief. However, if you have owned other homes during the period or have not lived in the property for the entire period of your ownership, then some of the profit may be subject to tax.
The amount of tax payable depends upon:
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.
I’m getting a divorce. Do I need to be concerned about capital gains tax?
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 were the case, then you would be treated as selling the asset (even though you may have received no monies) at the open market value. This can therefore lead to some tax liabilities that may not have been foreseen and as a result, not factored into the divorce settlement.
Professional advice is key.
Do I qualify for entrepreneur’s relief?
This is very difficult to answer without knowing background facts such as:
Even once we know these details, there may be further questions to be answered, particularly if the asset is shares held in a company as the rules regarding the entrepreneur’s relief qualifications have become more complex over 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.
Profits are diminishing and I want to wind up my company. Do I have to pay tax?
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:
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.
I am gifting my adult child a share in the business. Do I have to pay tax even though I am receiving nothing in return?
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:
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.
There may also be an income tax charge, payable by your adult child, if the asset gifted is shares in an employing company and could be attacked by HMRC as a reward for their services.
If you are gifting other business assets such as a sole trade business or an interest in a partnership, then, again, we would need to review the position to see exactly what is being gifted, if reliefs are available and what underlying assets are owned by the business.
In addition, you will also need to consider inheritance tax when giving away an asset.
I wish to gift my property to a member of my family. Are there any tax issues to consider?
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 consider:
In addition, you will also need to consider inheritance tax when giving away an asset.
Do non-UK residents pay capital gains tax?
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.
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