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: July 2011

Buy to Let Properties

Following our post about the tax aspects of property investment, this covers issues relating to ‘Buy to Let’ properties. As always, 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.

Buy to Let Properties

In recent years, the stock market has had its ups and downs. Add to this the serious loss of public confidence in pension funds as a means of saving for the future and it is not surprising that investors have looked elsewhere.

The UK property market, whilst cyclical, has proved over the long-term to be a very successful investment. This has resulted in a massive expansion in the buy to let sector.

Buy to let involves investing in property with the expectation of capital growth with the rental income from tenants covering the mortgage costs and any outgoings.

However, the gross return from buy to let properties – i.e. the rent received less costs such as letting fees, maintenance, service charges and insurance – is no longer as attractive as it once was. Investors need to take a view on the likelihood of capital appreciation exceeding inflation.

Factors to consider

Do

  • think of your investment as medium to long-term
  • research the local market
  • do your sums carefully
  • consider decorating to a high standard to attract tenants quickly.

Don’t

  • purchase anything with serious maintenance problems
  • think that friends and relatives can look after the letting for you – you’re probably better off with a full management service
  • cut corners with tenancy agreements and other legal documentation.

Which property?

Investing in a buy to let property is not the same as buying your own home. You may wish to get an agent to advise you of the local market for rented property. Is there a demand for say, two bedroom flats or four bedroom houses or properties close to schools or transport links? An agent will also be able to advise you of the standard of decoration and furnishings which are expected to get a quick let.

Agents

Letting property can be very time consuming and inconvenient. Tenants will expect a quick solution if the central heating breaks down over the bank holiday weekend! Also do you want to advertise the property yourself and show around prospective tenants? An agent will be able to deal with all of this for you.

Tenancy agreements

This important document will ensure that the legal position is clear.

Taxation

When buying to let, taxation aspects must be considered.

Tax on rental income

Income tax will be payable on the rents received after deducting allowable expenses. Allowable expenses include mortgage interest, repairs, agent’s letting fees and an allowance for furnishings.

Tax on sale

Capital gains tax (CGT) will be payable on the eventual sale of the property. The tax will be charged on the disposal proceeds less the original cost of the property, certain legal costs and any capital improvements made to the property. This gain may be further reduced by any annual exemption available and is then taxed at either 18% or 28% or a combination of the two rates. CGT is payable on 31 January after the end of the tax year in which the gain is made. If the property was previously your main residence then some very significant tax reliefs may be available.

Student lettings

Buy to let may make sense if you have children at college or university. It is important that the arrangement is structured correctly. The student should purchase the property (with the parent acting as guarantor on the mortgage). There are several advantages to this arrangement.

Advantages

This is a cost effective way of providing your child with somewhere decent to live.

Rental income on letting spare rooms to other students should be sufficient to cover the mortgage repayments from a cash flow perspective.

As long as the property is the child’s only property it should be exempt from CGT on its eventual sale as it will be regarded as their main residence.

The amount of rental income chargeable to income tax is reduced by a deduction known as ‘rent a room relief’. This is £4,250 each year. In this situation no expenses are tax deductible. Alternatively expenses can be deducted from income under normal letting rules where this is more beneficial.

Furnished holiday lettings

Furnished holiday letting (FHL) is another type of investment that could be considered. This form of letting is short holiday lets as opposed to letting for the residential market. The property can be situated in the UK or in the European Economic Area (EEA). It has some advantages but it has other disadvantages which should also be considered.

Advantages

You will be able to take a holiday in your own property, or make it available some of the time to your family or friends. However, care would need to be taken to adjust the level of expenses claimed to reflect this private use.

Generally however the rules for allowable expenditure are more generous.

The income is regarded as ‘trading income’ for tax purposes and is treated as earnings for pension contribution purposes. UK and EEA FHL properties are treated as two separate businesses.

For capital gains tax purposes, FHL assets are treated as business assets. Gains on these assets should be eligible for Entrepreneurs’ relief, which means that the first £10 million of gain is taxed at the favourable rate of 10%. The gains alternatively could be deferred using holdover relief on a gift or rollover relief where the asset is sold and another ‘trading’ asset is acquired. If further details on capital gains tax reliefs are required please do get in touch as this is a complex area.

Disadvantages

Holiday letting will have higher agent’s fees, advertising costs, and maintenance fees (for example more regular cleaning).

Owning a holiday property may be more time consuming than you think and you may find yourself spending your precious holiday sorting out problems.

Changes to the rules

As can be seen from the above FHL are treated as trades for certain taxation purposes, which is generally more preferential in terms of loss reliefs and CGT reliefs. The tax treatment of FHL has been advantageous for many years. Provided that certain conditions are met, FHL are treated as a trade. This can be preferable to the tax regime for normal let property in a number of specific areas, as the rules and reliefs for trades are often more generous.

Currently the FHL treatment potentially applies to properties in the EEA but certain conditions need to be satisfied including that the property must be:

  • available for letting for at least 140 days a year and
  • actually let for at least 70 days.

From April 2011 there will be two types of FHL business; a UK FHL business consisting of properties in the UK and an EEA FHL business consisting of properties in one or more EEA states. FHL losses will only be able to be set against income from the same FHL business.

From April 2012 the property must be available for letting for at least 210 days a year (generally the tax year) and actually let for at least 105 days.

A ‘period of grace’ will be introduced to allow businesses that do not continue to meet the ‘actually let’ requirement for one or two years to elect to continue to qualify throughout that period.

If you would like any further advice in this area please get in touch.

How we can help

Whilst some generalisations can be made about buy to let properties it is always necessary to tailor any advice to your personal situation. Any plan must take into account your circumstances and aspirations. Whilst a successful buy to let cannot be guaranteed, professional advice can help to sort out some of the potential problems and structure the investment correctly.

We would be happy to discuss buy to let further with you. Please contact us for more detailed advice.

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.

Tax Tips – July 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.

July 2011

Companies making donations

Q: I am a director of a small limited company and want to make a donation to a local children’s hospice. Can you advise me on the implications?

A: Assuming that the children’s hospice is a registered charity, your company will get corporation tax relief on the donation. To get the tax relief, the company simply makes the payment to the charity and deducts the amount as a ‘non-trading charge’ when working out its profit for corporation tax purposes.

Charitable donations cannot be used to create or increase your company’s trading losses, and they cannot be carried over from year-to-year. So if you make a donation of more than your taxable profit, the excess is not tax deductible.

Please note, if the company receives any benefit from the charity as a result of the donation, such as an advertisement in its newsletter, there are restrictions of the value of the benefit, in order that the donation still qualifies for relief.

Furthermore, there are different rules if you were to gift anything other than cash, such as land or equipment.

Donations to charity

Q: I am a sole trader, and my business had an unexpected rise in profits in the year to March. Accordingly I recently made a big donation to Cancer Research. A friend of mine mentioned you can get tax relief on donations- could you tell me a bit more please?

 A: You may be able to get some tax relief for the donation. To do this, firstly make sure that you have signed a Gift Aid declaration from Cancer Research, and that you have completed all of the necessary details on this form.

Next, make sure you will pay enough tax to cover the tax the charity will be claiming. To check this, divide your donation by four, and make sure it is less than your tax bill for the tax year the donation is made.

Because you have made this donation after your ‘bumper’ tax year, the donation should be claimed on next year’s return. However, you can carry the donation back; provided you paid enough tax in that year (calculation above) and you must not have filed that tax return yet.

As a rough guide, the tax relief you will obtain will be 25% of the donation if you are a higher rate tax payer and 3/8 if you are an additional rate tax payer. The charity itself will also get an additional amount related to your basic rate tax.

Mature donor

Q: My wife has recently been looked after by a local hospice during her Cancer treatment. Now she’s out and on the mend, I’d like to make a donation to the hospice to say thank you for looking after her. I am over 65 but still run my own sole trade.  Can you tell me the tax implications please?

 A: You may be able to get some tax relief for the donation. To do this, firstly make sure that you have signed a Gift Aid declaration from Cancer Research, and that you have completed all of the necessary details on this form.

Next, make sure you will pay enough tax to cover the tax the charity will be claiming. To check this, divide your donation by four, and make sure it is less than your tax bill for the tax year the donation is made.

As you normally complete a tax return, you can tell HMRC about your Gift Aid donation by completing the section on Gift Aid payments.

Because you are over 65, you will be receiving the larger, age-related Personal Allowance. To calculate the value of your Personal Allowance, HMRC will subtract the amount you donate plus the basic rate tax (that is, the ‘grossed’ up donation) from your total income and use the reduced figure. This may have the effect of increasing your Allowance if your income was above the relevant ‘income limit’ that applies, and therefore, more of your income could be tax-free!

Sponsorship

Q: My young boy plays in a local under 13s football team and they are looking for a new sponsor for next season. I run my own business as a sole trader and would really like to pay for the strip and put it through the business. But can I get tax relief for it?

A: As you can imagine, this is a particularly ‘grey’ area of tax. To be an allowable expense, the sponsorship must be incurred ‘wholly and exclusively for the purposes of the trade’.

To try and make this as transparent and business-related as possible, you need to demonstrate that you hope the sponsorship will benefit your business. So for instance, there should be:

  • an agreement in place, detailing things like:
    • what the team offers your business in return for the sponsorship (your name on their shirts, advertising around the pitch, attendance at their corporate events etc)
    • the size of the sponsorship
    • the duration of the sponsorship
  • correspondence documenting the negotiation of the payments and terms
  • evidence of how you found out about the opportunity to sponsor them
  • evidence of your decision to choose them over the alternatives
  • business plans
  • details of how the sponsorship will be exploited (i.e. local media)

It’s not ideal that you had pre-existing knowledge of the team before the sponsorship or that your son plays for them. But if you can follow HMRC guidance and essentially treat the relationship like any other business relationship, you stand a good chance of attracting tax relief against the sponsorship.

As this is such a murky area of tax legislation, please seek professional advice before entering into an agreement with the team.

Commuting

Q: I operate my business from home and spend one or two days a week where my staff work. Can I count my travel costs as tax-deductible?

A: This depends on the address of your business. If the address where the staff are located, is where the business trades from, that address will be the business place of work. If you travel to that address, the cost would not be an allowable deduction for tax purposes as it would count as simply travel from your home to your place of work.  This applies even if you do some work from home.

If, however, your home is the business address then travel to your staff would be allowable.

Discounted Loan Rates for Employees

Q: As part of my employee benefits package, my employers have offered me a mortgage at a discounted rate. However, they have mentioned I will have to pay tax on this. Is this correct?

A: Unfortunately it is correct. If an employer provides an employee with a subsidised loan, the employee will be assessed on the difference between the interest rate actually charged and what is known as the “official rate of interest”.  The employee will then pay income tax (20% if you are a basic rate taxpayer, 40% if you are a higher rate taxpayer and so-on) on the value of the benefit received each year. So it is still more beneficial to take up the low interest loan you have been offered.

Despite being charged tax on the benefit of having the low interest loan, you would not be liable to make any National Insurance Contributions, as your employer would be liable to pay these.

Beneficial Loans and Paying Interest

Q: I have received a loan of £10,000 from my employer, on which interest is chargeable at the current HMRC official rate. However, the interest is not payable until the end of the loan period. In the interim period the interest is rolled up and carried forward. Does this give rise to a benefit in kind?

A: You will have a benefit in kind, based on the difference between interest calculated at the HMRC official rate and the amount actually paid to the company during the same year.

Therefore because you will not physically pay the interest until a later tax year, the accrued interest cannot be taken into account when calculating the benefit in kind.

The benefit in kind should therefore be reported on form P11D for each tax year until the year in which the loan is repaid and the accrued interest is settled.

Once the interest has been paid, a retrospective claim for relief can be made for up to six years after the tax year the benefit occurred in.

If you would like more advice on expenses and benefits or wish to discuss other tax or accountancy related issues, please feel free to contact us.

Employer’s credit card

Q: In error, one of my employees recently paid for an expensive handbag on the company credit card; rather than her own. She’s performed really well in the last year, so I said she could keep it and not bother paying the company back. But are there any tax implications?

A: Firstly, you will need to add it to her earnings when calculating her National Insurance deductions. For the purposes of her PAYE calculation, it will be ignored though.

You will also then need to report it on form P11D in box C, but this will not trigger any Class 1A National Insurance for you to pay.

And finally, she will then need to complete a tax return and declare her income and the ‘benefit’ shown on her P11D.

Therefore, National Insurance will be deducted from her almost immediately via the payroll. And then she will be taxed on the benefit once the tax year end has passed. In effect, the cost of the bag is treated like any normal wages; there’s just a delay in the collection of the tax.

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.