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:

• If you are self-employed.
• If you are a partner in a partnership.
• If you are in receipt of rental income.
• If you receive other untaxed investment income such as “director dividends” from a UK company that you control.
• If you receive bank interest in excess of your savings allowance entitlement.
• If you receive foreign income or gains.
• If your household receives child benefit and you are the higher earner in the household with income of over £50,000.
• If your affairs are complicated in relation to residency and domicile.
• If you have to report a capital gains tax liability to HMRC upon the sale of a second home, commercial property, buy to let property, stocks/shares etc.
• If you wish to claim a capital loss in relation to the sale of a second home, commercial property, buy to let property, stocks/shares etc.

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, 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.

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:

• 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 you looking for investors / funding for the business?
• Do you need the protection afforded by limited liability?
• Are you looking for tax efficiency?
• Are you undertaking R&D activities?

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 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.

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.

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.

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.

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.

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:

• Whether the property is owned solely by you or jointly with other parties.
• Whether you have sold other assets in the same tax year such as shares, businesses or other properties.
• Whether you have any capital gains losses to use from earlier tax years or the tax year of sale.
• The level of your income.
• Whether the property has ever been used as a residential property or entirely commercial.
• Whether you have incurred costs of enhancing/improving the property which would have increased the value of the property.

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 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.

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

• What is the asset you are selling?
• Who actually owns the asset?
• Have you ever claimed entrepreneur’s relief before?
• When did you acquire the asset?
• When will you sell the asset?
• How much are you selling the asset for?
• How did you acquire the asset?
• What other income do you have?

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.

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:

• What is the level of the company’s reserves?
• What other income do you have?
• What plans do you have for the future? Particularly if you are planning to undertake similar trading activities.
• Who holds the shares in the company?
• Have you utilised your capital gains tax exemptions for the year already?

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:

• Whether the company is a trading or investment company. It is not always clear, especially where there is a mix of trading and investment activities.
• The value of the company.
• The number / percentage of shares to be gifted.
• The shareholding structure pre and post any gift.
• The reason for the gift – succession, reward etc.
• The residence status of the donor and 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.

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.

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:

• Who you are gifting the property to?
• The current market value of the property.
• The date / cost of acquisition of the property.
• The ownership structure of the property.
• Who will receive the rental income after the transfer of the property?
• The reasons behind the gift.
• The legal ownership of the property and whether any mortgage remains on the property.

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.