Mike Tombs's Blog

This blog provides information about tax, accounting and other issues affecting small owner-managed businesses in the UK. It is intended as a general source of information but you should not assume that everything applies to your specific circumstances. We are always happy to discuss providing tailor-made solutions to suit your individul needs. Visit www.tlaservices.co.uk to sign up for our free monthly Tax Tips and News newsletter.

Monthly Archives: June 2011

Property Investment : Some Tax Aspects

A number of clients have raised questions concerning property investment. This post covers some of the general issues, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Property Investment: Some Tax Aspects

Investment in property has been and continues to be a popular form of investment by many people. It is seen as a route by which:

  • relatively secure capital gains can be made on eventual sale
  • income returns can be generated throughout the period of ownership
  • mortgage finance is covered in repayment terms by the security of the eventual sale of the property and in interest terms by the rental income.

Of course, the net returns in capital and income will depend on a host of factors. But on the basis that the investment appears to make commercial sense what tax factors should you take into account?

This posting summarises the main tax issues which apply for the current (2011/12) tax year.

Who or what should purchase the property?

An initial decision needs to be made whether to purchase the property:

  • as an individual
  • as joint owner or via a partnership (often with a spouse)
  • via a company.

There are significant differences in the tax effects of ownership by individuals or a company.

Deciding the best medium will depend on a number of factors.

Commercial property

If you are currently trading as a limited company the personal purchase of new offices or other buildings and the charging of rent for the use of the buildings to your company can very tax efficient from an income tax position as:

  • the rental you receive from the company allows sums to be extracted without national insurance contributions
  • the company will claim a corporation tax deduction for the rent
  • finance costs will be deductible from the rents.

Capital gains

Capital gains on the disposal of an asset are generally calculated by deducting the cost of the asset from the proceeds on disposal. Tax is paid on the gain after deduction of the annual exemption, at a flat rate of 18% for disposals made before 23 June 2010. For disposals on or after this date the gain will be treated as an individual’s top slice of income and will be liable to tax at 18% or 28% or a combination of the two.

Capital gains tax and Entrepreneurs’ Relief (ER)

Unfortunately ER is unlikely to be available on the disposal of business premises used by your company where rent is paid. This is due to the restrictions on obtaining the relief on what is known as an “associated disposal”. These restrictions include the common situation where a property is currently in personal ownership, but is used in an unquoted company or partnership trade in return for a rent. Under the ER provisions such relief is restricted where rent is paid from 6 April 2008 onwards.

Residential property

The decision as to who should own a residential property to let is a balancing act depending on overall financial objectives.

The answer will be dependent on the following factors:

  • do you already run your business through your own company?
  • how many similar properties do you want to purchase in the future?
  • do you intend to sell the property and when?

Do you already have a company?

If you already run your business through a company it may be more tax efficient to own the property personally as you will be able to make use of your CGT annual exemption (and spouse’s annual exemption if jointly owned) on eventual disposal to reduce the gain.

The net rental income will be taxed at your marginal rate of tax, but if you are financing the purchase with a high percentage of bank finance, the income tax bill will be relatively small.

In contrast, a company can still currently use indexation allowance to reduce a capital gain. This effectively uplifts the cost of the property by the increase in the Retail Price Index over the period of ownership. Indexation is not available to reduce the gain on the disposal by an individual so in situations where indexation allowance is substantial, this could result in lower gains.

The net rental income will be taxed at the company’s marginal rate of tax, which is generally lower than for an individual but again if the purchase is being financed with a high percentage of loan/bank finance, the corporation tax bill will be relatively small.

But there are other factors to consider:

  • there is frequently a further tax charge should you wish to extract any of the proceeds from the company
  • inserting the property into an existing company may result in your shareholding in that company not qualifying for ER
  • if you form another company to protect the trading status of the existing company, that may increase the corporation tax bill on your trading company (because of ‘associated company’ rules).

If you do not have a company at present

Personal or joint ownership may be the more appropriate route but there are currently significant other advantages of corporate status particularly if you expect that:

  • you will be increasing your investment in residential property and
  • you are unlikely to be selling the properties on a piecemeal basis or
  • you are mainly financing the initial purchases of the property from your own capital.

If so, the use of a company as a tax shelter for the net rental income can be attractive.

Use of company as a tax shelter

Profits up to £300,000 are currently taxed at 20%. This rate applies for trading companies or property investment companies.

Where profits are retained the income may be suffering around half of the equivalent income tax bills. That means there are more funds available to buy more properties in the future.

Tax efficient long-term plans

There are two potential long-term advantages of the corporate route for residential property:

  • is there an intention to sell the properties at all? May be the intention is to retain them into retirement (see below Using the company as a retirement fund)
  • can the shares be sold rather than the property?(see below for issues regarding Selling the shares)

Using the company as a retirement fund

A potentially attractive route is to consider the property investment company as a ‘retirement fund’. If the properties are retained into retirement, it is likely that any initial financing of the purchases of the property has been paid off and there will be a strong income stream. The profits of the company (after paying corporation tax) can be paid out to you and/or your spouse as shareholders.

To the extent that the dividends when added to your other income do not exceed your personal allowances and the basic rate band (currently £42,475), there will be no income tax to be paid.

Selling the shares

CGT will be due on the gain on the eventual sale of the shares.

The share route may also be more attractive to the purchaser of the properties rather than buying the properties directly, as they will only have 0.5% stamp duty to pay rather than the potentially higher sums of stamp duty land tax on the property purchases.

Stamp duty land tax (SDLT)

SDLT is payable by the purchaser and is a flat percentage of the consideration paid (up to 5%).

Where the consideration on residential property is £125,000 or less no SDLT is payable. For residential property in a ‘disadvantaged area’ the limit is £150,000 (see www.hmrc.gov.uk/so for further details).

How we can help

This posting has concentrated on potentially long-term tax factors to bear in mind. You need to decide which is the best route to fit in with your objectives. We can help you to plan an appropriate course of action so please do contact us.

Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take or do not take action as a result of reading this colum, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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Tax Tips – June 2011

This is a round-up of questions that have been raised by clients over the past few weeks. They are being posted here for general information, but please see the disclaimer at the end!!! if you want to discuss how any of these issues – or other tax and related business matters – may affect your business please get in touch (email here or telephone 01905 21411) for a free, no-obligation discussion.

To sign up for our monthly Newsletter for Small Business visit our webpage here.

Can I use my loss?

Q: I paint in my spare time and sometimes, my friends and family buy my paintings from me. Because artists’ materials can be expensive and some pieces don’t work out and I throw them in the bin, I run at a loss. Luckily, I have a full-time job to keep the money coming in but is there any way I can use my painting loss to reduce my tax bill?

A: HM Revenue & Customs stipulate that losses may only be offset if the trade is commercial and it aims to generate a profit. Your outline of your circumstances suggests you are not optimistic of ever turning a profit, and therefore, you are unlikely to be able to offset your losses against your employment income. Instead, the losses will be carried forward and can only be offset against any profits your business makes.

It also sounds as if you need to review what constitutes a trade, before you register as self-employed. You need to consider for example, if you have ulterior motives (i.e. it’s a hobby), the frequency of the paintings, the turnaround times of the paintings, and (as mentioned above) if you really hope and intend to make a profit.

There is no conclusive definition of what constitutes a ‘commercial’ basis or a ‘trade’. And whilst HM Revenue & Customs provides guidance on these areas, it is in part, a judgment call.

 Selling on Ebay

Q: I own a shoe shop but due to cash-flow problems, I have been selling some of my personal belongings and old stock on Ebay recently. Should I include my income from Ebay on my tax return?

A: All your trading sales (whether you sold through the internet, at car boot sales, through small ads or any other means) should be included in your total sales figure. If you are VAT registered, you should also charge VAT on sales to your customers where applicable. Remember to include any sales to friends and family and don’t forget to include cash sales too.

As for the sales of your personal belongings, it is unlikely you will need to declare the proceeds on your tax return, unless you can answer yes to at least one of these points:

  • buy goods to then sell online
  • sells items that you have made, and you made them with a view to profit
  • sell goods for others, on commission
  • sell a service and get paid for it

And a word of warning- HMRC has a tax evasion hot line for people to ‘tip-off’ plus it uses computer programmes to scan internet sites like Ebay and look for people making multiple transactions.

If you are unsure or would like to discuss this further, please feel free to contact us..

HMRC are knocking at the door!

Q: HMRC have sent me a letter asking to visit my premises. I work from home and have young children, so I am not keen on them visiting my house. Is there any way I can refuse to let them visit? If not, can I hold the meeting somewhere else?

A: If you do not co-operate in trying to arrange a visit, HMRC have the power to arrange an unannounced visit, so this may only defer the problem; not eliminate it.

Whether you accept their proposed arrangement for their visit or they turn up unannounced, they cannot force entry on to your premises. So you are entitled to refuse entry, although the inspector will try to establish why and they will try to re-arrange another appointment with you.

In either case, you are entitled to suggest an alternative venue, such as your accountant’s or a HMRC office.

During the course of an inspection, you are also entitled to ask them to leave, but again, they will note down the circumstances and ask you for a reason, and will want to arrange another time for them to complete their inspection.

Note that if you never used your home for business purposes, they would have had no right of entry whatsoever to your home unless you offered that venue to them.

We can help you to prepare for the visit and attend, so please feel free to contact us if this would interest you.

Newly let!

Q: Last year, I purchased a flat which my letting agent lets for £500 per month. After the agent has taken their 10% commission, I receive about £5,400 per annum. I’ve got an interest-only mortgage on the property, which annually costs me about £3,000. I am employed and pay tax via PAYE, and have never completed a tax return before. But one of my friends said that I need to complete a tax return now, because I need to declare this rental income and I should be paying tax on the profits too. Are they right?

A: If you don’t already complete a tax return (and assuming you don’t meet other criteria), you will need to do so if you your income from property is higher than:

  • £10,000 before deducting allowable expenses; or
  • £2,500 after deducting allowable expenses

You don’t meet either of the above rules; however, you must still inform HM Revenue & Customs about any new sources of income or changes to your income if:

  • You pay tax through PAYE on employment/ pension income and your other taxable income changes or becomes liable to higher rate tax; or
  • You don’t pay tax through PAYE and your total taxable income is more than the personal allowance you’re entitled to

Clearly, you meet the first rule and therefore you must inform HMRC of the rental income. They will then decide if you need a tax return. As you pay your tax via PAYE, they may be able to collect any additional tax due through your tax code though, which will cut down on the administrative burden.

If you would like to discuss this further or would like someone to handle this for you, please feel free to contact us.

Interest on start-up capital

Q: I am setting up my own business soon and I plan to re-mortgage my current home to raise the start up capital.  Will the interest payable on my mortgage be considered a tax deductible expense against my business profits?

A: Whether or not the interest is deductible depends on the purpose of mortgage. Although the mortgage will be secured on your personal asset, in the circumstances outlined the interest is an allowable deduction when establishing the net profit of the business.

However, you will need to ignore the interest on the original mortgage element, as this is entirely personal. Also, if any of the re-mortgage funds are to be used for personal reasons, then the interest must be restricted further.

If you would like reassurance that you are claiming all the expenses available to you or you would like to discuss this further, please get in touch.

Bookkeeping – what do I do?

Q: I’ve just started my own business having been made redundant from my last job. I’ve registered with HMRC as self-employed, but could you tell me what my obligations are with regards to record-keeping for HMRC?

A: Under current legislation, business owners must retain their records for 6 years. Payroll records, CIS records and personal tax return information may be retained for less.

HMRC provide no rules regarding the format of the records, but as a minimum they should include all sales and purchase invoices.

Ultimately, the most important factor is that you keep accurate, timely records. So these could be anything from manual cashbooks, to computerised spreadsheets, to a sophisticated computerised bookkeeping package.

Penalties will apply if HMRC ever enquired into your affairs and found no evidence to back up the figures in your income tax or VAT returns. HMRC are also clamping down on poor records, and can impose fines in severe cases where the records are felt to be inadequate and inaccurate.

We can give you advice on finding the right bookkeeping solution for you and more detail on your obligations..

Giving personal assets to my business

Q: I’ve just started my own business and wondered if it was possible to ‘give’ the business one of my personal computers and get tax relief on it? 

A: You may bring an asset into your accounts regardless of the original reason for it being purchased (i.e. personal), provided it will be used for the trade.

There are a few unusual circumstances, but normally the asset should be valued in your accounts at market value; rather than cost.

You may continue to use it occasionally for personal purposes, but the tax relief on the computer will be restricted accordingly between business and private use.

Starting a business can be a stressful time, but we can help put your mind at ease and assist with your administrative obligations.

Working for their pocket money

Q: I run a cafe and would like my kids to work there during the summer holidays when they’re off school. I would really like to pay them for the hours they work- to make them appreciate money! But I don’t want too much paperwork to deal with- is there any way I can get round it?

A: In order to avoid paperwork and calculations, firstly make sure that they only work during holidays; and not term-time.

Each of them must also complete and sign form P38(S) which you can download from HM Revenue & Customs’ website.

If they receive over £102 per week, you will need to ‘add’ them to your payroll records, as their details and pay will need to go on the year end forms submitted to HM Revenue & Customs.

But, provided they do not earn any more than £136 per week, you won’t need to calculate or deduct any PAYE or National Insurance; and nor will you have to pay Employer’s National Insurance.

Also make sure their hourly rates are in-line with the National Minimum Wage for their age group:

  • £5.93 – aged 21 and over
  • £4.92 – aged 18-20
  • £3.64 – aged 16-17 (for workers above school leaving age but under 18)

There are also lots of restrictions on when and how long children can work and their breaks, so please make sure you are aware of these requirements. You may also need to contact the Council depending on their age. Note, children under the age of 13 generally cannot be legally employed.

If you would like to discuss this further, please feel free to contact us.

Disclaimer – advice shared in this column is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this column, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.