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One short paragraph in the 2015 Autumn Statement document announced that “The government will publish a consultation on the rules concerning company distributions later in the year.” This consultation document was indeed published at the end of last year and has introduced two new words to the world of taxation – moneyboxing and phoenixism.
Moneyboxing is the scenario where Retained Earnings are allowed to accumulate in a Limited Company over a number of years to be extracted via a solvent liquidation, known as a Members’ Voluntary Liquidation (MVL). This allows the final distribution to be treated as capital rather than income making it subject to Capital Gains Tax. This ensures that the Capital Gains Annual Exempt Amount for each shareholder is utilised which often goes unused. For the 2015-16 tax year this is £11,100.00.
More significantly, in the vast majority of cases, the shareholder would be entitled to Entrepreneur’s Relief which would result in the remaining distribution being taxed at a rate of 10%.
Phoenixism is where the shareholders set up a company to trade for a short period. They then set up a new company carrying on the same or a substantially similar business and use the MVL route to extract the funds as capital from the first company to achieve the same tax benefit. After another period, a third company is formed and the second company liquidated and this cycle can continue.
Given that an individual’s lifetime limit for Entrepreneurs Relief is currently £10m, there is ample scope for this process to be repeated on multiple occasions.
A similar set up to phoenixism is the use of special purpose companies. Often operated in the property development sector, here a business subdivides into separate companies for particular projects with each company then liquidated when the project is completed.
The motivation for the proposals to change the rules concerning company distributions is the seismic reform on the way in which Dividends will be taxed that comes into effect from 6th April 2016. Throughout February, we will be publishing a series of newsletters, guides and holding a Q & A on the new Dividend taxation regime.
Suffice to say, Dividend distributions will be more heavily taxed than is currently the case. In turn, this would increase the incentive for a business owner to opt for their remuneration to be taxed as capital rather than income.
The government is looking to block that option in cases where the business owner is essentially going to carry on the same business in another vehicle.
Although the consultation runs until 3rd February, the draft legislation has already been prepared to be included in the 2016 Finance Bill and to come into force from 6th April 2016.
The current draft legislation states than when a company is wound up via an MVL and the shareholders receive a capital distribution, if an individual or a connected person either carries on a trade or activity that is the substantially the same or is a shareholder of another company that undertakes a similar activity within two years of the date of the distribution, then their distribution will be treated as income and taxed accordingly.
It is important to underline that the MVL will remain the best approach from a tax perspective for those solvent businesses that are being wound up due the business owner retiring, relocating or moving on to new challenges.
In addition, the draft legislation may be modified as a result of the consultation. The full consultation document is here with responses needing to be emailed to adrian.coates@hmrc.gsi.gov.uk by 3rd February.
We will be monitoring the final legislation as part of our comprehensive coverage of the 2016 Budget that is scheduled for Wednesday 16th March.
In the meantime, if you have any questions or would like to discuss your circumstances, please email us at welcome@cooperfaure.co.uk for an initial, free consultation.
The Summer Budget and Autumn Statement contained a quartet of tax changes that will have a massive impact on the on the Buy-To-Let property sector.
In second of a two-part newsletter series, we look at the impact of the changes in Stamp Duty, Capital Gains Tax and the abolition of the Wear and Tear Allowance for furnished properties announced in the Autumn Statement, and what may be around the corner.
From April 2016, a higher rate of Stamp Duty Land Tax (SDLT) will be charged on the purchase of additional residential properties for more than £40,000. The higher rate will be 3% above the current Stamp Duty Land Tax rates and will apply to Buy-To-Let properties and second homes.
On many levels, this seems a sensible proposal especially for parts of the country where much of the local population are unable to afford to buy houses due to the desirability of second homes.
For a £400,000.00 property, the SDLT for a Buy-To-Let or second home buyer will be £20,800.00 compared to £10,000.00 for those buying their own home.
However, announcing that this change comes into effect from April 2016 has seen a surge in property purchases with the Royal Institute of Chartered Surveyors describing the housing market in December as “unusually buoyant”.
Whilst the framework of the policy was set at the Autumn Statement, the details are yet to be finalised. To this end, HMRC published a consultation document in December. The consultation runs to 1st February with the final format to be announced at the Budget on 16th March and the higher rates applying from 1st April 2016.
The consultation document raises major issues. Whilst the stated intention of the reform was to penalise the purchase of Buy-To-Let properties and second homes, it would also apply to someone buying a property to replace their main residence but who had not sold their current main residence.
As long as the original main residence is sold within eighteen months, a refund of the additional Stamp Duty would apply. However, this does not take the sting out of the additional cost at the time of purchase.
There is some acknowledgement of this in one of the questions:
“Would there be a benefit to a significant number of purchasers if the test for whether someone owns one, or more than one, residential properties, were undertaken at the time of submitting the SDLT return, rather than at the end of the day of the transaction?”
However, given the government is legislating to reduce the time to submit the SDLT return to fourteen days after completion, this would only provide a minimal overlap.
There is also cause for concern for joint purchasers. As the price of housing continues to increase, especially in London and Home Counties, the proposition of two or more unrelated individuals buying a property together is growing more popular.
The consultation intends that, if any of the joint purchasers has another property and is not replacing a main residence, the higher rates will apply to the entire transaction.
For individuals that inherit a property, the current treatment of this being outside the scope SDLT will continue to apply. However, an inherited property will be relevant when determining if a buyer is purchasing second home.
Finally, and most alarmingly, whilst SDLT only applies to purchases of land and property in England, Wales and Northern Ireland, the consultation indicates that property owned globally will be relevant.
Potentially, someone who is purchasing their first or only property in England, Wales or Northern Ireland, may have to pay the higher rates on this purchase if they own property outside these areas.
Homeowners would be legally obliged to declare non-UK property and would be committing a criminal offence if they omitted to do so.
Given that it is estimated that up to a million Britons own property abroad, the impact would be far-reaching.
It is important to emphasize that this is a consultation and there is still time for you to have your say. The full consultation document is here with responses needing to be emailed to sdltadditionalproperties@hmtreasury.gsi.gov.uk by 1st February.
The second change that will impact the Buy-To-Let and second homes markets comes into effect from April 2019.
At present, the Capital Gains Tax on property is part of the annual Self-Assessment Tax Return with the tax due accordingly.
At the maximum, the Capital Gains Tax due on a second home sold on 6th April 2016 would not be due until 31st January 2018. However, from April 2019, the Capital Gains Tax will be due thirty days after the sale of the property.
Finally, those landlords that rent out furnished property face the abolition of the Wear and Tear allowance from April.
Instead of being able to deduct 10% of the rental income in lieu of the wear and tear on fixtures and fittings, landlords will be entitled to a relief to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.
The additional revenue to Exchequer is estimated to be £205m in the 2017-18 tax year and, essentially, this is at the cost of those landlords who have recently refitted their property. Indeed, there is little incentive to replace any fixtures and fittings before April.
This may not be the end of the changes with The Financial Times reporting that the Chancellor is looking at enabling the Bank of England to be able to impose curbs on the levels at lenders can offer loans to prospective private landlords.
At CooperFaure, we are currently working with a number of clients with both individual and corporate property portfolios and would be pleased to review your circumstances. Please email us at welcome@cooperfaure.co.uk for an initial, free consultation.
Much like a Limited Company, if you are Self-Employed, either as a Sole Trader or in Partnership, your business will have various allowable business expenses.
These expenses are deducted from your turnover in calculating the taxable profit. Therefore, if the turnover is £60,000 and there re £25,000 of allowable expenses, tax is payable only the remaining £35,000.
The guide is designed to cut through the myth and misunderstanding to explain what is an allowable expense for a Self-Employed business run on traditional accounting methods.
Broadly, the business running costs fall into the following categories:
In addition, capital allowances are available for the purchase of:
Working from Home
Many in Self-Employment work at least part of the time from home. If this is the case, you are entitled to claim a proportion of the costs of:
The key is to find a reasonable method of allocating the business element of these costs.
For example, if your mortgage is £8,000.00 per year and your office and facilities cover 25% of the area of the property, it would be reasonable to claim £2,000.00.
However, if you only work from home for two days a week, this would reduce to £571.42 as two sevenths of the £2,000.00.
For costs that have both a business and personal purposes, you can claim the business element. For instance, if the quarterly landline phone bill is £200.00 and it is used 60% of the time for business, you can claim £120.00.
Purchases for Resale
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Goods for resale (stock) | Goods or materials bought for private use |
| Raw materials | Depreciation of equipment |
| Direct costs of producing goods |
Advertising and Marketing
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Advertising in newspapers or directories | Entertaining customers and suppliers |
| Advertising online | Event hospitality |
| Bulk mail advertising (mailshots) | |
| Free samples | |
| Website costs |
Staff Costs
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Employee and staff salaries | Carers |
| Bonuses | Domestic Help |
| Pensions | Nannies |
| Benefits | |
| Agency fees | |
| Subcontractors | |
| Employer’s National Insurance |
Business Premises
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Rent for business premises | Any non-business use of the premises |
| Business and water rates | Costs of buying a business premises |
| Utility bills | |
| Property insurance | |
| Security | |
| Repairs and maintenance |
The costs of any structural alterations to install or replace equipment or to replace integral parts of the building would qualify for capital allowances.
Vehicle and Travel Costs
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Fuel | Non-business driving or travel costs |
| Repairs and servicing | Fines and penalties |
| Vehicle insurance | Travel between home and work |
| Vehicle licence fees | |
| Parking | |
| Hire charges | |
| Breakdown cover | |
| Train, bus, air and taxi fares | |
| Hotel rooms | |
| Meals on overnight business trips |
The costs of buying a vehicle for your business would qualify for capital allowances.
Alternatively, you can calculate your car, van or motorcycle expenses using a flat rate for business mileage instead of the actual costs of buying and running your vehicle as follows:
| Vehicle | Flat rate per mile |
| Cars and goods vehicles first 10,000 miles | 45p |
| Cars and goods vehicles after 10,000 miles | 25p |
| Motorcycles | 24p |
Office Costs
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Phone, mobile, fax and internet bills | Personal use of phones and stationery |
| Postage | |
| Stationery | |
| Printing | |
| Printer ink and cartridges | |
| Computer software for under 2 year’s use | |
| Computer software licence renewal |
The costs of buying office equipment and long-term computer software would qualify for capital allowances.
Professional Fees
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Legal fees | Legal costs of buying property or machinery |
| Accountancy | (these are claimed as Capital Allowances) |
| Professional fees | Fines, penalties and surcharges |
| Consultancy fees | |
| Professional indemnity insurance | |
| Public and employer’s liability insurance |
Finance Costs
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Bank, overdraft and credit card charges | |
| Interest on bank and business loans | |
| Hire purchase interest | |
| Leasing payments | |
| Alternative finance payments |
Clothing Expenses
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Uniforms | Everyday clothing (even if it is bought for work) |
| Protective clothing needed for your work | |
| Costumes for actors or entertainers |
Bad Debts
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Unrecoverable debts included in turnover | Debts not included in turnover |
| Debts related to the disposal of fixed assets | |
| Bad debt provisions |
Subscriptions
| ALLOWABLE EXPENSE | DISALLOWED EXPENSE |
| Trade or professional journals | Payments to political parties |
| Trade or professional body membership | Gym membership fees |
| Donations to charity |
Self-employment turnover and expenses information is recorded and submitted to HMRC as part of the annual personal tax return.
There is no requirement to send proof of expenses with the tax return. However, you must keep proof and records should HMRC request them.
An alternative is to use the ‘Cash Basis’ to work out your income and expenses for your tax return. For full details on this and to see if it would suit your business, please click here.
At CooperFaure, we have helped our clients follow their dreams by making this process as painless as possible. If you would like to discuss your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.
If you are Self-Employed and running a small business, cash basis accounting may suit be a better option rather than traditional accounting.
Under Cash Accounting, you only declare money as it moves in and out of the business. As a result, at the end of the tax year, there will not be any Income Tax due on invoices sent to customers if they have not been paid in the period. However, you cannot claim for expenses unless they have been paid for.
In the following circumstances Cash Accounting would definitely not be the better option:
To qualify for the Cash Accounting scheme, you must run a small Self-Employed business either as a Sole Trader or in Partnership and have an annual turnover of under £82,000.
If you have more than one business, you must use Cash Accounting for all and the combined turnover must be less than £82,000.
However, you stay in the scheme until the total business income exceeds £164,000 per year. Thereafter, you will need to use traditional accounting for your next tax return.
Certain specific types of businesses are not eligible for the scheme:
Cash Accounting started from the 2013-14 tax year onwards. For an existing business to switch from traditional accounting would in all likelihood require some adjustments in the year of change.
Unlike traditional accounting, you claim other equipment you buy to keep and use in your business as a normal allowable business expense rather than as a capital allowance.
For VAT registered businesses, you can record your business income and expenses either excluding or including VAT. However, you must treat both income and expenses the same way.
If you choose to include VAT, you have to record:
If you would like to discuss your whether cash Accounting would suit your circumstances or have any questions, please contact welcome@cooperfaure.co.uk to arrange an initial free consultation.
The Summer Budget and Autumn Statement contained a quartet of tax changes that will have a massive impact on the on the Buy-To-Let property sector.
In this first of a two-part newsletter series, we look at the impact of the changes in mortgage interest relief announced in the Summer Budget and how running a property portfolio through a Limited Company is now a much more attractive option.
The second newsletter next weekend will look at the impact the changes in Stamp Duty and Capital Gains Tax, the abolition of the Wear and Tear Allowance for furnished properties and what may be around the corner.
The change in mortgage interest relief, which will be phased in between 2017 and 2020, was totally unexpected and implemented without the usual consultation process. Moreover, the new system is complex and, although the stated intention is to prevent Higher Rate tax payers gaining an unfair tax advantage, it could also impact Basic Rate tax payers and lead to a situation where investors will have tax to pay even if their property is making a loss.
Before we look into the mechanics of how this tax change will work, it is noteworthy that a pair of private landlords have raised the monies through crowdfunding to seek a judicial review on the basis that this change runs contrary to “a long-established principle of taxation that expenses incurred wholly and exclusively for the purposes of the business are deductible when calculating the taxable profits”.
As those who followed the judicial review on Accelerated Payment Notices will be aware, these are notoriously difficult to win. Nevertheless, the group has until mid-February to submit their challenge.
Under the change, mortgage interest relief will be phased out over time by being restricted to:
Instead, individuals will be able to claim a basic rate tax reduction from their Income Tax liability on the portion of finance costs not deducted in calculating the profit. In practice this tax reduction will be calculated as 20% of the lower of:
Importantly, this will apply to existing Buy-To-Let properties as well as future purchases.
Taking the example of the two landlords, one a Basic Rate Taxpayer and the other a Higher Rate Tax Payer, who each have property income of £12,000 per year, mortgage interest of £8,000 per year and £2,000 of other allowable costs. The impact would be:
| Basic Rate Landlord
Mortgage interest disallowed |
|||||
| 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | |
| 25% | 50% | 75% | 100% | ||
| Rental income | £12,000 | £12,000 | £12,000 | £12,000 | £12,000 |
| Mortgage interest | £8,000 | £8,000 | £8,000 | £8,000 | £8,000 |
| Other costs | £2,000 | £2,000 | £2,000 | £2,000 | £2,000 |
| Operating Profit | £2,000 | £2,000 | £2,000 | £2,000 | £2,000 |
| Mortgage interest restriction | – | (£2,000) | (£4,000) | (£6,000) | (£8,000) |
| Taxable Profit | £2,000 | £4,000 | £6,000 | £8,000 | £10,000 |
| Tax @ 20% | £400 | £800 | £1,200 | £1,600 | £2,000 |
| Tax deduction at 20% | – | (£400) | (£800) | (£1,200) | (£1,600) |
| Total Tax Payable | £400 | £400 | £400 | £400 | £400 |
| Higher Rate Landlord
Mortgage interest disallowed |
|||||
| 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | |
| 25% | 50% | 75% | 100% | ||
| Rental income | £12,000 | £12,000 | £12,000 | £12,000 | £12,000 |
| Mortgage interest | £8,000 | £8,000 | £8,000 | £8,000 | £8,000 |
| Other costs | £2,000 | £2,000 | £2,000 | £2,000 | £2,000 |
| Operating Profit | £2,000 | £2,000 | £2,000 | £2,000 | £2,000 |
| Mortgage interest restriction | – | (£2,000) | (£4,000) | (£6,000) | (£8,000) |
| Taxable Profit | £2,000 | £4,000 | £6,000 | £8,000 | £10,000 |
| Tax @ 40% | £800 | £1,600 | £2,400 | £3,200 | £4,000 |
| Tax deduction at 20% | – | (£400) | (£800) | (£1,200) | (£1,600) |
| Total Tax Payable | £800 | £1,200 | £1,600 | £2,000 | £2,400 |
For the Basic Taxpayer there would be no change whilst the Higher Rate taxpayer would see a steady year-on-year increase on their tax due until in 2020-21 the tax would actually exceed the Operating Profit.
As a result, it will be the small property investor with a couple of to Buy-To-Let properties in their overall savings portfolio who will bear the brunt of these changes.
Large companies investing in residential property will be unaffected as will those wealthy landlords investing with cash rather than mortgages.
However, with the extraordinary decision to announce in December that the 3% surcharge in Stamp Duty Land Tax on second homes would come into effect from April 2016, continued low interest rates and the volatility in world stock markets, the demand to invest in property shows no signs of abating.
Instead, landlords are seeking to mitigate the tax increases. For many, using a Limited Company structure is providing a solution. In October 2015, the proportion of Buy-To-Let mortgages advanced to companies was roughly 15% of the total. Now this figure stands at over 30%.
Under a Limited Company, the mortgage interest is classed as a business expense and, therefore, wholly deductible in calculating the Taxable Profit of the business. Corporation Tax is a standard 20% irrespective of the personal tax bands of the shareholders. Indeed, Corporation tax is set to reduce to 19% from April 2017.
At CooperFaure, we are currently working with a number of clients with both individual and corporate property portfolios and would be pleased to review your circumstances. Please email us at welcome@cooperfaure.co.uk for an initial, free consultation.
As of 1st January 2016, the level of protected savings in UK Banks and Building Societies under the Financial Services Compensation Scheme has been reduced. The cap has gone down from £85,000.00 to £75,000.00 per financial institution.
Similarly, the protected savings in joint accounts has been cut from £170,000 to £150,000.
The reason for this change is that this is a European Union rule set at maximum compensation of €100,000.00. Therefore, the British level has been reduced to reflect the growing strength of the pound gaining strength against the euro.
Whilst this seems a simple and straight-forward change, there is some complexity that needs to be understood.
The definition of a financial institution is based on the ‘Firm Reference Number’ held at the Bank of England and multiple brands can be under one reference number.
For example, if you hold £75,000 on deposit with HSBC, any additional monies held at First Direct would not be covered.
Similarly, if you £75,000 on deposit with Lloyds Bank, any additional monies held at Cheltenham & Gloucester would not be covered.
The largest multiple brand group is Bank of Scotland plc which, although now owed by Lloyds Bank plc, has a separate Firm Reference Number. This group comprises of The AA, Bank of Scotland, Birmingham Midshires, Capital Bank, Halifax, Intelligent Finance, Saga and St James’s Place Bank.
As a result, for those with large amounts of money on deposit wishing to spread the risk, this is an important consideration.
The List of Bank and Building Society complied by the Bank of England as at 31st December 2015 can be found here.
A further complication arises if funds are held with foreign banks that operate in the UK such as Handelsbanken from Sweden. For these banks, the level of compensation would be €100,000 converted into sterling determined by the exchange rate at the time.
There is some better news for those depositors with ‘temporary high balances’. These will now be protected for up to £1m for six months from the date the account is first credited with the money. For personal injury compensation the amount is unlimited.
Payments in connection with the following could generate ‘temporary high balances’:
◾Real estate transactions (property purchase, sale proceeds, equity release)
◾Benefits payable under an insurance policy
◾Personal injury compensation
◾Disability or incapacity (state benefits)
◾Claim for compensation for wrongful conviction
◾Claim for compensation for unfair dismissal
◾Redundancy (voluntary or compulsory)
◾Marriage or civil partnership
◾Divorce or dissolution of their civil partnership
◾Benefits payable on retirement
◾Benefits payable on death
◾A claim for compensation in respect of a person’s death
◾Inheritance
◾Proceeds of a deceased’s estate held by their Personal Representative
If you would like to discuss your financial or tax affairs, please email us at welcome@cooperfaure.co.uk for an initial consultation that is free and without obligation.