Company Tax planning

UNDER PRESSURE FROM his party, the Chancellor in his November 2022 budget made a significant alteration to the annual allowance for gains made on disposal of property assets.

In today’s Shipleys Tax brief, we look at the consequences of the upcoming change in the Capital Gains Tax (“CGT”) allowance and what it means for you and how you could save tax by being a little pro-active.

So, what’s happened?

Currently, the annual exemption for profits on disposal of property (amongst other assets) is £12,300. The government will reduce this to £6,000 on 6 April 2023 with a further reduction to £3,000 on 6 April 2024.

What does this mean for me?

Any gains made in excess of the annual exemptions above will be subject to capital gains tax at 10%, 20%, 18% and/or 28%, depending on the nature of the assets sold and on your individual taxable position.

The annual exemption for profits on disposal of property (amongst other assets) is £12,300. The government will reduce this to £6,000 on 6 April 2023 with a further reduction to £3,000 on 6 April 2024.

Also, as the basic threshold for inheritance tax (IHT) has been frozen at £325,000 since 6 April 2009 (and will be until at least 2026), property tax planning is increasingly important to mitigate the charge.

Gifting an asset to remove it from your estate as soon as possible is something many will consider. For example, an individual who makes a gift but survives them by seven years will not be charged inheritance tax on its value on death.

For CGT purposes, when an asset is gifted, this is treated as a “deemed disposal” meaning that even though no money has exchanged, the market value of the asset will replace sale proceeds.

Accordingly, the CGT allowance is a valuable relief. The allowance at its current level is worth up to £3,444 in cash terms. Once fully reduced, it will be worth a maximum of £840. This reduction greatly diminishes the value of the allowance as an effective planning tool.

So, what should you do?

If you were already thinking of making some gifts, it is worth giving some serious thought to doing so ahead of the reduction in the allowance to maximise tax relief.

As each person has their own annual exemption and transfers between spouses are generally tax-free of CGT, the benefit can be doubled.

Married couples tax planning

Consider a rental property worth £300,00, purchased for £150,000, owned in the sole name of a spouse. If the spouse gifted his half of the property to his wife and together they gifted the whole property to their son, they would remove the £300,000 from their estates, saving up to £120,000 in inheritance tax (assuming they survive seven years).

If the gift took place on or before 5 April 2023, the capital gain of £150,000 is reduced by the two annual exemptions, which means they will have a total CGT allowance of £24,600. At the 40% band, this represents a tax relief of £9,840.

As each person has their own annual exemption and transfers between spouses are generally tax-free of CGT, the benefit can be doubled

If they took this same action in May 2024, the annual exemptions would reduce and their maximum CGT allowance would be £6,000 between the two. This is a loss of £18,600 tax relief, which at 40% tax band means extra tax payable of £7,440!

The CGT annual tax exemption is a valuable tax relief, and used carefully in the right manner, could help you save significant amounts of tax by being pro-active.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

THE GOVERNMENT HAS announced a further delay to the introduction of Making Tax Digital for Income Tax Self-Assessment, the government’s attempt to fully digitise the tax return sphere.

What is Making Tax Digital for Income Tax and why is there a delay? In today’s Shipleys Tax blog we look at the next step in the UK government’s master plan of the much vaunted “digital tax revolution”.

What is Making Tax Digital for Income Tax Self-Assessment?

This is essentially a personal tax reporting process designed to ultimately replace the current annual Self-Assessment tax return dubbed Making Tax Digital for Income Tax (MTD for ITSA).

Under MTD for ITSA, it is proposed that businesses, self-employed individuals and landlords will need to:

• keep digital records (much for like VAT records currently),
• send quarterly summary of their business income and expenses to HMRC using MTD-compatible software, and
• file quarterly estimated tax calculations based on the information provided to help them budget for their tax.

This is essentially a personal tax reporting process designed to ultimately replace the current annual Self-Assessment tax return dubbed Making Tax Digital for Income Tax (MTD for ITSA).

At the end of the year, they can make adjustments to finalise their tax affairs using MTD-compatible software. This will replace the need for a Self Assessment tax return. Clearly, not the simple overhaul the government would have us believe.

So what was the original plan?

Before today’s announcement, MTD for ITSA was mandated from April 2024 for taxpayers with a total gross income over £10,000 from self-employment and property in a tax year.

And now?

In a statement released on 19 December, the government finally acknowledged that MTD ITSA is a significant change for all concerned, and that launching a much criticised process during an economic crisis is not really the best thing to do. As such the plans have been revised as follows:

• MTD for ITSA will now be delayed until April 2026, with the self-employed and landlords with turnover in excess of £50,000 joining first.
• Those with income over £30,000 but not exceeding £50,000 will not need to join until April 2027.
• A start date for general partnerships has not yet been announced.

The government will also now review the needs of smaller businesses before asking those earning less than £30,000 to join.

Given the expected additional costs and administrative burden for small businesses this will undoubtedly be a very welcome change. However, HMRC will have its work cut out when operating different systems for self-assessment customers so further delays could well be on the cards.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

MAKING DECENT RETURN from rental income is getter harder and harder due to tax legislation changes and increasing costs. However, there is a small tax allowance which may help you turn a loss into a profit – all potentially tax free.

When paying tax on property income, there is a £1000 property allowance which allows you to earn up to £1,000 tax free. This allowance can be used in various beneficial ways.

In today’s Shipleys Tax blog we explore the many ways you can use your £1000 property allowance and start to maximise your rental income in some circumstances.

Tax exemption

If your income from property is less than £1,000, the property allowance allows you to receive that income free from tax. Where the income is covered by the allowance, you do not need to tell HMRC about it.

However, claiming the allowance may not be beneficial if your property income is less than £1,000, but your expenses are more than £1,000 so that you make a loss. Claiming the exemption will mean that the loss is lost. To preserve the lost, you must provide HMRC of details of your income and expenses on your tax return.

However, as the loss can only be set against future profits from the same property income business, if you do not expect future receipts to exceed £1,000, there may be little benefit claiming the loss. You may prefer instead to take advantage of the exemption, saving the work associated with establishing the loss.

Expenses less than £1,000

The property allowance can also be beneficial if your income from property is more than £1,000, but your expenses are less than £1,000. Where this is the case, you will not benefit from the exemption, but you can instead deduct the property allowance of £1,000 to arrive at your taxable profit. This will give a favourable result.

Example

Wendy has income of £3,000 from letting a flat. Her associated expenses are £600. Under the normal rules, her taxable profit is £2,400.

However, she can claim the property allowance and deduct £1,000 rather than her actual expenses of £600. This reduces her taxable profit to £2,400.

Jointly-owned property

Where a property is jointly-owned, each owner can benefit from the property allowance in respect of their share of the income. Where this is less than £1,000, the income is exempt and does not need to be reported to HMRC; where this is more than £1,000, the allowance can be deducted instead of actual expenses where this is beneficial.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.