News & Updates

There were few surprises in the announcements made on 29 November. We have listed below a few of the more topical issues:

• Small Business Rate Relief to be extended for a further six months from 1 October 2011.
• Public transport in London and regulated rail fares will benefit from a reduction in fare increases next year. From 1 January 2012 fares will increase by 6.2% not the expected 8.2%.
• The expected increase of 3.02p per litre in the cost of fuel due 1 January 2012 is deferred to 1 August 2012. The further rise due in August is scrapped.
• Bank Levy to be increased.
• A new relief announced that will extend the Enterprise Investment Scheme to small, new business start-ups. To be called the Seed Enterprise Investment Scheme. 50% tax relief for individuals investing and the offer of a capital gains tax holiday.
• Capital gains tax annual exemption frozen for 2012-13 at £10,600.
• New 100% Capital Allowance for firms trading in six assisted areas: the Black Country, Humber, Liverpool, North East, Sheffield and Tees Valley.
• State Pension increases confirmed from April 2012:  the full basic pension will rise by £5.30 to £107.45 per week; the full couple rate where entitlement is based on their spouse’s or civil partner’s pension will rise by £8.50 to £171.85 per week.
• State Pension age to rise to age 67 in 2026.
• From the end of the current pay freeze, average public sector pay increases will be limited to 1% for a further two years.

Property, as with most assets, can be owned by individuals, jointly with other parties in partnership, or by a limited liability company or a trust.

In most cases the taxation of rental income derived from letting a property is straightforward. Individuals holding property in their own name or in partnership, companies and trusts all pay tax on the net income received.

The position of jointly owned property can vary and in particular that owned by married couples or registered civil partners who are living together.

Property owned and let by married couples or civil partners (who are living together)

• HMRC will divide rental profits equally between spouses (civil partners), 50:50.
• This division of rental income may not reflect the underlying ownership. For example property may be owned 10% by one spouse and 90% by the other.
• If spouses/partners want the rental income split between them in accordance with the beneficial ownership they must make a formal election to HMRC. Once made the election cannot be revoked or changed, unless the underlying beneficial interest changes.
• Interestingly, the above rules do not apply to property held in a business partnership or to property that is let as a furnished holiday let.

Property owned jointly by persons not married or in a civil partnership.

In this case the rental income will always be allocated between the joint owners in proportion to the underlying beneficial ownership.

Married couples and civil partners usually have a choice therefore, to split the rental income equally if this produces a lower joint tax liability or, split the rental income in the same proportion as their ownership of the property.

You may find the notes that follow useful if you raise money by increasing the lending/mortgage in respect of rental property.

The following factors need to be taken into account:

Loan used in property business

Generally speaking if the funds raised from refinancing are reinvested in the property business, for example to purchase new property or refurbish existing property, then any loan interest payable is allowed in full.

Funds withdrawn by property business owners (individuals and partnerships)

If funds are raised to enable the owners to withdraw money from the property business the following considerations need to be taken into account.

• HMRC will seek to disallow interest on any loan in excess of the original cost of the property, or, the valuation of the property when first taken into business use. For example you may own a property that has been your own home for a number of years that you purchased for £100,000. You decide to move abroad and keep the property but let it out; the current value is £200,000. It would be possible to raise a buy to let loan for up to £200,000 (if the banks were willing!)  and claim interest on the loan against your rental income.
• A claim can only be made for the interest on the loan not the capital element repaid.
• There are many pitfalls that can result in a loss of tax relief so it is important to obtain advice before refinancing.

Loans taken out by a property business run by a limited company

Where a property is owned by a limited company any additional cash raised by increasing loans secured on the company’s business property belongs to the company. If directors wanted to withdraw the funds for personal purposes they would need to observe the usual rules:

• Vote a dividend
• Take extra salary or bonuses
• Reduce the amount of any loans they have made to the company.

What seems on the surface a simple issue, ‘Can I borrow against business property and get full tax relief on the interest charged’, is far from a simple issue. Please get in touch prior to taking out such a loan to clarify the tax position, especially if you are relying on a tax deduction to make commercial sense of the loan.

At this time of the year business owners and their employees are wont to celebrate. The article that follows explains how to organise a well deserved works party this Christmas and make the most of the tax reliefs available.

The cost of a staff party or other annual entertainment is allowed as a deduction for tax purposes. Also, as long as the criteria below are followed, there will be no taxable benefit charged to employees:

• The event must be open to all employees at a particular location.
• The cost is only tax deductible for employees and their guests (which would include directors in the case of a company) but not sole traders and business partners in the case of unincorporated organisations.
• An annual Christmas party or other annual events offered to staff generally is not taxable on those attending provided that the average cost per head of the functions does not exceed £150 p.a. The guests of staff attending are included in the head count when computing the cost per head attending.
• All costs must be taken into account, including the costs of transport to and from the event or accommodation provided, and VAT. The total cost of the event is merely divided by the number attending to find the average cost. If the limit is exceeded then individual members of staff will be taxable on their average cost, plus the cost for any guests they were permitted to bring. No deduction will be allowed for the £150 exemption.
• VAT input tax can be recovered on staff entertaining expenditure. If the guests of staff are also invited to the event the input tax has to be apportioned, as the VAT applicable to non-staff is not recoverable. However, if non-staff attendees pay a reasonable contribution to the event, all the VAT can be reclaimed and of course output tax should be accounted for on the amount of the contribution.

If these limits are breached employers can pick up the tax cost by using a PAYE settlement agreement.

A final note on ‘Trivial’ gifts for employees.

Employers may find the following Revenue concession useful - we have copied the note directly from the HMRC handbook:

"An employer may provide employees with a seasonal gift, such as a turkey, an ordinary bottle of wine or a box of chocolates at Christmas. All of these gifts are considered to be trivial and as such are not taxable. For an employer with a large number of employees the total cost of providing a gift to each employee may be considerable, but where the gift to each employee is a trivial benefit, this principle applies regardless of the total cost to the employer and the number of employees concerned."

One final cautionary note regarding VAT and staff gifts, VAT is chargeable by the employer when an employee receives gifts totalling more than £50 in a year. Turkeys however, are zero rated for VAT purposes!

Merry Christmas!

HMRC's director of customer operations recently disclosed that: "Most employers get their PAYE returns right. The few who do not can cause problems for their employees, for example, incorrect deductions of tax.”

Here’s a few examples of a number who did not get their returns right! Based on incorrect returns submitted HMRC now have the following data in their files:

• 40 people were apparently 200 years old or more, according to incorrect dates of birth on their paperwork.
• 824 employees with forenames but the surname recorded as "unknown".
• 75 people have simply been named "casual", 11 as "cleaner", nine as "worker" and six as "students".
• 572 people are listed as Mr or Mrs X on their PAYE forms.
• 128 staff are known in their workplace as Mr, Ms or Mrs "Dummy".

HMRC conclude:
“Around 80% of errors in employee data are due to an incorrect name, date of birth or national insurance number; straightforward information that can be collected and checked quite easily.

So, whether you are employing 'Mr or Mrs J Smith' - or even 'Mr or Mrs A N Other', please use the full and official name on your PAYE paperwork. First names are very important, especially for common surnames.”

Where an older spouse is currently claiming a dependency increase in their state pension, and for a wife or husband who has not yet reached retirement age, they will be advised to review the claim when the younger spouse reaches retirement age.

Issues to be considered include:

• The younger spouse’s own state pension, even if funded by the other spouse’s contributions (in which case it is known as a Category B pension), would create income for the younger spouse that may be covered by their personal allowance, so tax free.
• A continuing claim for the adult dependency allowance will likely be taxable when received by the older claimant, perhaps at higher rates.
• The present adult dependency allowance is £58.80 per week, the full Category B state pension that the younger spouse may be able to claim is now £61.20 per week.

Note: The adult dependency increase is not available for new pensions from April 2010 and will cease for existing claims by 5 April 2020 at the latest.

The following changes will apply from 6 April 2012:

For a let property to qualify as a FHL the following tests will need to be met:

• Accommodation must be available to let as holiday accommodation for at least 210 days (140 days 2011/12).
• Accommodation must actually be let as holiday accommodation to the general public for at least 105 days (70 days 2011/12).
• The accommodation must not be let for periods of longer term occupation (greater than 30 days) for more than 155 days.

A period of grace election can be made to smooth your lettings history if you have a property that reaches the required criteria in some years but not others.

And don’t forget loss relief changes.

From 6 April 2011 it is no longer possible to set off FHL losses against other earnings or other non-FHL rental income. Losses can only be set off against income from the same FHL business.

Many self-employed traders have suffered losses in recent years as the effects of the banking crisis and recession have slowed economic activity. Some of these business people will have taken on other, perhaps unrelated, part-time jobs to supplement their income?

Sound familiar?

If you have found yourself in this position be aware that HMRC may challenge your ability to set off losses. For instance:

• 1. Losses will only be made available for sideways relief against other earnings when you can demonstrate that a trade is conducted on a commercial basis with a view to making profits.
• HMRC can use present powers to restrict loss relief claims if the trader does not spend at least 10 hours a week working in the business – this restriction normally applies to losses in excess of £25,000.

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