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 2017

New state pension and contracted-out NICs

Most people will be aware that the state retirement pension system has changed for people who reach state pension age on or after 6 April 2016 – that is men born after 5 April 1951 and women born after 5 April 1953. The full new state pension is currently £159.55 per week, but the amount that employees who have previously paid National Insurance contributions (NIC) at the contracted-out rate may be affected under the new system. The introduction of the new state pension from 6 April 2016 brought an end to the contracting-out rules.

In very broad terms, to qualify for the minimum amount of state pension an individual needs 10 years of NIC contributions. 35 years or contributions or credits will be needed to qualify for the full amount.

For those people who were already in the workforce at April 2016, transitional arrangements were put in place which means that everyone will be assessed for a ‘starting amount’ under the new system. Using the number of qualifying years on the individual’s National Insurance record as at 5 April 2016, their ‘starting amount’ will be the higher of either:

  • the amount they would get under the old state pension, or
  • the amount they would get if the new state pension had been in place at the start of their working life.

Both amounts will reflect any periods when they have been contracted out of the additional state pension.

The rules governing contracting out and new state pension are complex, but broadly, if an individual has a ‘starting amount’ of less than the full amount of new state pension, then for each ‘qualifying year’, a certain amount is added to their National Insurance record after 5 April 2016. This equates to around £4.56 a week, (£159.55/35). This amount will be added to the person’s ‘starting amount’, until they reach the full amount of the new state pension, or they reach state pension age, whichever happens first.

For some people it is possible to have a starting amount higher than the full new state pension if they have some ‘additional’ state pension. The difference between the full new state pension and their ‘starting amount’ is called a ‘protected payment’. Those who have a ‘starting amount’ which is equal to the full new state pension will get the full new state pension when they reach state pension age. Before the new state pension was introduced, state retirement pension was made of two parts, namely:

  • basic state pension, and
  • additional state pension, often referred to as state second pension or SERPS (State Earnings-Related Pension Scheme).

If an individual was in what is known as a defined benefit company pension scheme – where what they are paid in retirement is related to salary – they are likely to have been ‘contracted out’ of the additional state pension. This means that they would have paid a lower rate of NICs and will have earned replacement pension benefits in an employer scheme or a personal pension.

Despite having what they thought were 35 years of qualifying years, they will not necessarily get the full amount of new state pension – although entitlement can be improved by paying contributions after 5 April 2016. The Government has advised that while someone in this situation will get less than the full amount, retirees will still be paid at least what they would have got under the old state pension.

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Working from home

Over recent years, it has become increasingly popular for employers to allow their employees to work from home, and in doing so, pay an amount to cover any additional household costs incurred. What are the tax implications of such expenses for the employee?

Broadly, no tax liability will arise where an employer makes a payment to an employee for reasonable additional household expenses, which the employee incurs in carrying out duties of the employment at home under ‘homeworking arrangements’.

‘Homeworking arrangements’ are arrangements between the employee and the employer under which the employee regularly performs some or all of the duties of the employment at home. There is no requirement for any part of the employee’s home to be used exclusively for the purposes of the employment – in fact, if any part of the home is used exclusively for work, problems could arise on the future sale of the house as part of the capital gains tax exemption on private residences may be lost.

HMRC have stated that they will accept that homeworking arrangements exist where:

  • there are arrangements between the employer and the employee; and
  • the employee works at home regularly under those arrangements.

The HMRC guidance also advises that:

‘the arrangements need not be in writing but usually will be. They do not need to apply to all employees. The exemption does not apply where an employee works at home informally and not by arrangement with the employer. For example, it will not apply where an employee simply takes work home in the evenings. It applies where an employee works at home by arrangement with the employer instead of working on the employer’s premises.’

HMRC accept that the ‘regularly’ condition is met if working at home is frequent or follows a pattern. The fact that the days spent at home vary from week to week is not a bar to claiming the exemption.

‘Household expenses’ are defined as expenses connected with the day-to-day running of the employee’s home. The exemption applies to additional household expenses, and HMRC have given the following guidance:

‘Typically this will include the additional costs of heating and lighting the work area or the metered cost of increased water use. There might also be increased charges for Internet access, home contents insurance or business telephone calls. Where working at home leads to a liability for business rates the additional cost incurred can also be included.

The additional household costs must be reasonable and must be incurred in carrying out the duties. This excludes costs that would be the same whether or not the employee works at home, for example mortgage interest, rent, council tax or water rates. It also excludes expenses that put the employee into a position to work at home, for example building alterations or the cost of furniture or office equipment.’

Amount of exemption

To minimise the need for record-keeping, employers can pay up to £4 per week (£208 per year) without supporting evidence of the costs the employee has incurred. If an employer pays more than that amount, the exemption will still be available but the employer must provide supporting evidence that the payment is wholly in respect of additional household expenses incurred by the employee in carrying out his duties at home.

If an employer wishes to pay more than the guideline rate per week tax-free, then it is recommended that the employer should agree in advance with HMRC a scale rate. Failing that, records will need to be kept of the actual additional costs incurred by each employee.

July 2017 Q&A

Q. Can I give my house to my children and continue to live in it and avoid inheritance tax?

A. It may be possible if you pay a full market rent for your home, but if you do this, then your children will have to pay income tax on the rent they receive. Capital gains tax may also be payable at some time in the future if they sell the house. The new inheritance tax residence nil rate band (RNRB), which is being phased in from April 2017 over a 4-year period, is designed to help people in your position to pass on the family home to children or grand- children, tax-free after their death. HMRC’s guidance Inheritance tax: additional threshold (RNRB) provides further information. Always seek professional advice before entering into any arrangement where the main purpose, or one of the main purposes, is to obtain a tax advantage.

Q. I am thinking of selling a property that I have owned and rented out for the last ten years, and once it is sold, I will reinvest the proceeds in another property. Will I have to pay capital gains tax on the proceeds from the sale even if all the money is reinvested in another property that is also let?

A. Yes, you will be liable to capital gains tax on the gain arising on the sale, even though you will be reinvesting the money in another property that is also let. Rollover relief is available for residential investment property only in relation to qualifying furnished holiday lettings, and for compulsory purchases.

Q. I lent my brother some money, which I borrowed from my company, for him to use in his business. He is paying it back in monthly instalments over three years. What are the tax implications of this loan?

A. I presume that you are a director and a substantial shareholder of the limited company. I also presume that the company lent the money on an interest-free basis.

The tax implications for the company are that the loan is deemed to have been made to an associate of a participator in the company, and as such, it will be caught by what are commonly referred to as the ‘section 455 rules’. Broadly, these rules mean that the company will have to pay tax at 32.5% on the amount of the loan outstanding nine months after the accounting year end of the company. When the loan has subsequently been repaid to the company, HMRC will refund the tax paid.

There is an exception to this, namely where a loan does not exceed £15,000, but only when the shareholder does not own more than 5% of the shares.

If a relative of an employee receives an interest-free loan from an employer, this will be a benefit-in-kind for the employee. Interest at the ‘official rate’ (currently 3%) is calculated, and this deemed interest is subject to tax. However, there are exceptions to this tax charge where:

  • the loan is a ‘qualifying loan’;
  • a qualifying or non-qualifying loan is less than £10,000; and
  • the employee can show that they received no benefit from the loan to the relative.

As your brother used the loan for business purposes, it should be a qualifying loan because ‘the interest would be deductible in computing the borrower’s profit from a trade’ (HMRC Employment Income Manual, paragraph EIM26136). With regard to the ‘no benefit received from a loan to a relative’, HMRC are generally reluctant to apply this when the employee is a director who controls the company.