It was almost two years ago in the Summer Budget 2015 that the then Chancellor, George Osborne, announced restrictions to income tax relief for interest costs incurred by landlords of residential properties. The proposals became law in November 2015 but it is only from the 6 April 2017 that these provisions came into effect.
In the 2017/18 tax year, the restriction of interest relief to basic rate of tax will apply to 25% of the interest with 75% of the interest getting relief against rental income in the normal way. Landlords will therefore first see the effect in the calculation of their tax liabilities for 2017/18 – the balancing payment for which is due 31 January 2019. A higher rate taxpayer will, in principle, get 5% less relief for finance costs (ie one quarter of 40% higher rate less 20% basic rate). 5% doesn’t sound much but it can be worse than this due to 25% of the interest not being deductible from income. So total income may cross a threshold such as:
- £50,000 – in which case Child Benefit may be clawed back
- £100,000 – in which case personal allowances may be reduced.
The restrictions are only going to get worse, so please talk to us if you want clarification on any aspect of these rules.
HMRC’s Making Tax Digital project also has an impact on many property businesses from 6 April 2017. The government considers that all unincorporated businesses except for the larger property business will benefit from using the cash basis rather than the usual accruals basis and so is proposing to make this the default basis.
The cash basis means the business accounts for income and expenses when the income is received and expenses are paid. The accruals basis means accounting for income over the period to which it relates and accounting for expenses in the period in which the liability is incurred.
Property businesses will remain on the accruals basis if their cash basis receipts are more than £150,000. The cash basis also does not apply to property businesses carried out by a company, an LLP, a corporate firm (ie a partner in the firm is not an individual), the trustees of a trust or the personal representatives of a person.
The government proposals are that the cash basis will first apply for the 2017/18 tax year which means that your tax return for 2017/18, which has to be submitted by 31 January 2019, will be the first one submitted on the new basis. There will be an option to elect out of the cash basis and stay with the accruals basis and we are here to help you make a decision on this later in the year.
Did you know there are new car tax rates?
If you have recently purchased or are in the process of buying a new car, you will know that new rates of Vehicle Excise Duty (VED) apply for purchases of cars first registered on or after 1 April 2017. The big changes are the charges that apply in the year of purchase of the car. As with the system that applied to cars registered before 1 April 2017, the charges are based on CO2 emissions but the new charges are typically much higher than under the old system. For example a car with CO2 emissions of 175 jumps from £220 to £800. But in year two, the new system swings in favour of such a car owner as the charges are not based on CO2 emissions. If the car runs on petrol or diesel there is a fixed charge of £140 and an additional rate of £310 if the car has a list price of more than £40,000.
In percentage terms the purchasers who are most affected are people who buy low emission cars. For a petrol or diesel with 120 CO2 emissions, you would have paid only £30 a year. For new cars the charge is £160 in year one and £140 in subsequent years. Note that a purchase of second hand car such as an ‘ex demo’ continues with the VED system in operation when the car was first registered. So such purchasers are tied into the old VED rates. You can get details of the new (and old) VED rates at www.gov.uk/vehicle-tax-rate-tables
Marriage allowance – now worth £432 for many people
It is now over two years since the Marriage Allowance was introduced and perhaps it is no surprise to learn that most people who are eligible have not claimed the allowance. The allowance lets certain individuals transfer 10% of their personal allowance to their spouse or civil partner. This reduces the tax bill of the recipient of the transfer by up to £212 in 2015/16 and up to £220 in 2016/17. So for anyone who hasn’t claimed it yet, they may be due a tax repayment of up to £432.
The main scenario in which the transfer is allowed and worthwhile is where:
- one of the spouses has little income and is therefore not using the personal allowance
- the other spouse does not pay tax at the higher or additional rate.
The default route for applying is online. If you are an employer, it is a good idea to signpost your employees to gov.uk/marriage-allowance-guide. This link gives full information as to eligibility, how to apply and a link to the online application. As we have just passed the end of a tax year, couples should have a good idea as to whether they qualified in 2016/17. If a successful application is made, changes to the personal allowances are backdated to 6 April 2015. In future years the allowance will transfer automatically to the spouse until either of the couple cancels the Marriage Allowance or there is a change in circumstances.
Making Tax Digital – where are we now?
There are different start dates for businesses however. Unincorporated businesses, including landlords, will be the first to see significant changes in their recording and submission of business transactions.
The government has decided how the general principles of MTDfB will operate. Much of the detail will be set by Regulations which are expected to appear in the summer- sometime after the General Election!
Under MTDfB, businesses will be required to:
- maintain their records digitally, through software or apps
- report summary information to HMRC quarterly through their ‘digital tax accounts’ (DTAs)
- submit an ‘End of Year’ statement through their DTAs.
DTAs are areas where a business can see all of its tax details in one place and interact with HMRC digitally.
When will this start?
Sole traders, partnerships and landlords with annual turnover:
- above the VAT threshold (£85,000 from 1 April 2017) will need to comply with the requirements of MTDfB from the start of accounting periods which begin after 5 April 2018
- at or below the VAT threshold but above £10,000 will need to comply from the start of accounting periods which begin after 5 April 2019
- Businesses and landlords with turnovers under £10,000 are exempt from the requirements.
Companies will not come within MTDfB until April 2020.
What will quarterly accounting mean?
This is the still the big question to which there are no definitive answers at present.
HMRC are starting a pilot of reporting of income and expenses online with some businesses and their agents.
As your accountants, we will continue to monitor the MTDfB project and will continue to assist you with your tax affairs – and keep you up to date with what you are required to do.
Planning for the reduction in the Dividend Allowance
We are used to tax reliefs being changed when a new government comes into power but it is more unusual to see a tax relief being created and then severely cut by the same government within a two year time period.
In April 2016 higher rates of taxes on dividends were introduced but with a £5,000 ‘tax-free’ Dividend Allowance to compensate. Despite the rise in rates, many taxpayers, particularly higher rate taxpayers, found themselves better off. The announcement to reduce the Dividend Allowance to £2,000 from April 2018 will put paid to that amount of benefit.
However there is time to mitigate the effects. If your portfolio yields an average 3%, approximately £67,000 will be protected from income tax. If your portfolio exceeds this figure, consideration needs to be given to transferring some shares to a spouse or a civil partner. Equity ISAs should also be one of the first things to consider. By investing the maximum £20,000 into an Equity ISA now with a further £20,000 on 6 April 2018, protection can be given for £40,000 of a portfolio. For a married couple or civil partners, that figure doubles to £80,000.
Your existing shares can be sold and bought back again within the ISA wrapper but choose carefully which shares will be sold as the transactions will be disposals for capital gains tax (CGT). There are also two lots of annual exemption from CGT to potentially make use of – this year and next. The current annual exemption is £11,300. Married couples and civil partners also have the added facility to make transfers to the other partner prior to selling into an ISA. Any share transfer between such couples is at a ‘no gain no loss’ price with the result that the transferee will effectively acquire the shares at the transferor’s base cost and so will make the gain in selling the shares.
Please do contact us if you have any queries.
Financing companies and tax relief
Your company or perhaps a company of a relative requires additional finance to expand. You have the funds to help. What is the best way to provide the funds to the company?
The natural inclination is to make a loan to the company rather than an issue of shares by the company. Loans have the advantage of simplicity in the initial lending to the company and the repayment or partial repayment of the loan when the funds are no longer required by the company. For the issue of shares, the formalities of the issue and repayment of share capital have to be considered.
The optimist, ie the person who thinks the monies will soon be repaid, will prefer the simplicity of a loan arrangement. However, to guard against the possibility that the finance will not be repaid because the company may get into such financial difficulties that it is forced to be wound up. A loss will have been made by the provider of the finance but can that blow be softened by any tax relief? Here’s where the shareholder wins out over the loan provider.
How much relief is available?
A loss made on a loan made to a trading company potentially qualifies as a capital loss and thus is available to relieve against capital gains in the year in which the loss relief is claimed or in a future year. The maximum tax relief therefore is 28%, for example if the gain was on the disposal of certain residential properties but other gains may well be taxed at lower rates than this.
A loss made on shares is also a capital loss but there is a potential claim that can be made to offset the gain against income in the year of the loss and/or the previous year. So a higher rate taxpayer could get 40% tax relief.
Please do talk to us if you are considering additional finance for your company or any other company. It is better to weigh up the advantages and disadvantages of the different methods at an early stage.
Leading your team to success
One of the key ingredients for making your business a success is effective teamwork. This requires you as the business leader to harness the collective efforts of your people and direct them towards achieving your overall business goal. So what are the key characteristics that mark out a team for success and what can you do to put them in place within your team?
A common goal
Everyone in your team needs to know what the ultimate business goal is. This needs to start from the top with clear strategic goals for the business, and then finally with individual team member’s goals. Once team members understand what they are aiming for they can pull together.
Leaders provide the vision and adopt the right behaviours to instil a team approach. They share management and involve others where appropriate. They look to develop and enable their team members, building the future leaders of their businesses. A more empowering style of leadership can be much more effective, engendering greater commitment from team members as well as generating new ideas and improvements to current working practices.
The team needs the right balance of membership and not just in respect of the number of people and their respective technical skills but also an appropriate mix of personalities who bring a range of other skills, values and motivations. Try and find them roles within the team that allow them to play to their individual strengths, instead of focussing on their weaknesses.
Where individual team members have a sense of belonging and a spirit of commitment to the aims and purposes of their team, this can lead to remarkable successes.