Tax tips for Family Businesses

Under the dreadful cloud of COVID-19 some major tax changes are seemingly going under the radar. One such change is lettings relief, a previously valuable tax break available to those selling their home which was rented out at some stage. This tax mitigation opportunity has now been abolished and has been replaced with a much less attractive tax break which severely restricts the circumstances in which relief is available. We explain the changes here.

Lettings relief provided additional relief for tax where a property that has been occupied as a main residence is let out. For disposals prior to 6 April 2020, a substantial tax relief was available where a property was let as long as that property had at some time been the owner’s only or main residence.

However, availability of the relief is now seriously curtailed in relation to disposals on or after 6 April 2020. Under the new rules, lettings relief will only be available where the homeowner and their tenant are in occupation of the property at the same time – shared occupation. So from 6 April 2020, relief is only available where the owner shares the property with the tenant, a move which seriously narrows any claim that could have been made under the previous rules.

The new-style (narrow) relief

For disposals on or after 6 April 2020, the new lettings relief is available where:

• part of the property is the individual’s only or main residence and
• another part of that property is let out by the individual, otherwise than in the course of a trade or a business.

The gain relating to the let part is only chargeable to capital gains tax to the extent that it exceeds the lesser of:

• the amount of private residence relief; and
• £40,000.

Spouses and civil partners can take advantage of the no gain/no loss rules to transfer the property or a share in it to each other without a loss of lettings relief. Where lettings relief would be available to a transferring spouse or civil partner for the period prior to the transfer, it remains available to the recipient.

Example

Let’s look at how this works in a real life scenario.

Idris brought a three-bedroom house in 2015. He lived in the property for five years until it was sold in May 2020, realising a gain of £90,000. Throughout the time that he lived in the property, he let out two rooms. The let rooms comprised one-third of the property by floor area.

Two-third of the property was occupied as Henry’s main residence, and thus two-thirds of the gain qualifies for private residence relief. This equates to £60,000 (2/3 x £90,000). The remaining gain of £30,000 is attributable to “letting”.

As Idris occupied the property with the tenants, he can claim lettings relief. Previously, Idris would have been able to claim the relief irrespective of whether he lived with the tenants at the same time.

Thus, in Idris’ example, the gain attributable to the letting is only chargeable to capital gains tax if, and to the extent, that it is greater than the lower of:

• 60,000 (the amount of the private residence relief); and
• £40,000.

As the gain attributable to the letting is less than £40,000, lettings relief is available to shelter the full amount of the gain. As such no capital gains tax arises.

Although in this example the entire gain is free from tax, the circumstances in which the relief can be claimed is much narrower than before and will definitely bring more people into the tax net.

In addition, the requirement for shared occupation will apply not only to future lettings but also any let periods before 6 April 2020.

This means that people who have let properties after they moved out will lose the relief that they would have been entitled to for those letting periods. In effect, the change is retroactive and, as such, will have a massive impact on unwary homeowners.

This change to how selling your home is taxed is harsh, both because of the retroactive impact and because of the sudden impact of the change. There are no transitional measures are in place and, considering letting relief has been around for 40 years, this has been criticised by tax advisory sector.

If you need tax advice in selling your home please call us on 0114 272 4984 or email info@shipleystax.com.

Most businesses have suffered due to the COVID-19 pandemic, but should you take the option to defer your tax payment on account to 31 January 2021? We weigh up the option below.

To help those suffering cashflow difficulties as a result of the Covid-19 pandemic, the Government have announced that self-assessment taxpayers can delay making their second payment on account for 2019/20. The payment would normally due by 31 July 2020.

Under self-assessment, a taxpayer is required to make payments on account of their tax and Class 4 National Insurance liability where their bill for the previous tax year is £1,000 or more, unless at least 80% of their tax liability for the year is deducted at source, such as under PAYE. Each payment on account is 50% of the previous year’s tax and Class 4 National Insurance liability. The payments are made on 31 January in the tax year and 31 July after the end of the tax year. If any further tax is due, this must be paid by 31 January after the end of the tax year. In the event that the payments on account are more than the final liability for the year, the excess is set against the tax due for the next tax year or refunded.

The normal payment dates for payments on account for the 2019/20 tax year are 31 January 2020 and 31 July 2020, with any balance due by 31 January 2021.

Delay not cancellation

The thing to note is that the option on offer is a deferral option not a cancellation. Where this is taken up, the payment on account must be paid by 31 January 2021. As long as payment is made by this date, no interest or penalties will be charged.

Should I pay if I can?

The deferral option is clearly advantageous to those who have taken a financial hit during the Covid-19 pandemic, particularly those operating in sectors where working is not possible during the lockdown, such as hairdressers and beauticians and those operating in the hospitality, leisure and retail sectors.

For those who have not taken a financial hit or who are otherwise able to pay, from a cashflow perspective it may be attractive to defer the payment. However, this may simply be a case of delaying the pain; not only will the delayed payment on account be due on 31 January 2021 together with any Class 2 National Insurance liability, but also the first payment on account for 2020/21. This may amount to a sizeable bill and as such it may be better to spread the payments rather than be faced a lump sum on 31 January 2021.

The decision as to whether to pay or defer is a personal one; but the option to choose is a welcome one. We recommend you aim to work out your 2019/20 tax liability early and have a discussion with your accountant as to the best course of action. At the same time, looking further forward and doing an estimated calculation of your potential tax liability for 2020/21 (COVID-19 tax year) will help identify any planning opportunities.

If you would like help deciding whether to defer or not please call us on 0114 272 4984 or email at info@shipleystax.com.

The Government today (29‌‌ May) announced what seemed like the final countdown further details about the extension of the Coronavirus Job Retention Scheme (CJRS) and the Self-Employment Income Support Scheme, we’ve outlined these below for you.

The Chancellor announced three changes to the job retention scheme:

1. From 1‌‌ July 2020, the scheme will be made more flexible to enable employers to bring previously furloughed employees back part time and still receive a grant for the time when they are not working.
2. From 1‌‌ August 2020, employers will have to start contributing to the wage costs of paying their furloughed staff and this employer contribution will gradually increase in September and October.
3. The scheme will close to new claimants from 30‌‌ June.

Part time furloughing

From 1‌‌ July 2020, businesses using the CJRS scheme can bring previously furloughed employees back to work part time.

• The government will continue to pay 80% of wages for any of the normal hours they do not work up until the end of August. This flexibility comes a month earlier than previously announced to help people get back to work.

• Employers will decide the hours and shift patterns their employees will work on their return and will be responsible for paying their wages in full while working. This means that employees can work as much or as little as the business needs, with no minimum time that they can furlough staff for.

• Any working hours arrangement agreed between a business and their employee must cover at least one week and must be confirmed to the employee in writing.

• When claiming the CJRS grant for furloughed hours, they will need to report and claim for a minimum period of a week. They can choose to make claims for longer periods such as on monthly or two weekly cycles if preferred.

• Employers will be required to submit data on the usual hours an employee would be expected to work in a claim period and actual hours worked.

If employees are unable to return to work, or employers do not have work for them to do, they can remain on furlough and the employer can continue to claim the grant for their full hours under the existing rules.

Employer contributions

From August, the CJRS grant will be slowly tapered with contributions made by employers as follows:

Note that many smaller employers have some or all of their employer NIC bills covered by the Employment Allowance so will not be significantly impacted by that part of the tapering of the government contribution.

Important dates

It’s important to note that the scheme will close to new claimants from 30‌‌ June. From this point onwards, employers will only be able to furlough employees that they have furloughed for a full three-week period prior to 30‌‌ June.

This means that the final date by which an employer can furlough an employee for the first time will be 10‌‌ June for the current three-week furlough period to be completed by 30‌‌ June. Employers will have until 31‌‌ July to make any claims in respect of the period to 30‌‌ June.

Errors in CJRS claims

CJRS claims are not always straightforward to calculate: for example, they can be particularly complex where an employer has a salary sacrifice for a pension contributions scheme in place. If you are struggling with the calculation, you can always contact us for help.

HMRC has made it clear that if an employer identifies that they have made an error in a CJRS claim for a previous period, this should not be corrected by making an adjustment (i.e. deliberately under/over claiming) in a claim for a later period – HMRC says this could result in delayed payments.

HMRC is working on a process to allow employers to amend errors in submitted claims, and any corrections should be made when this service becomes available. Remember that all records supporting CJRS claims must be maintained for six years, as HMRC may later make enquiries where it appears that incorrect claims have not been rectified. It is also important to remember that only one CJRS claim should be submitted per period; each claim should include all furloughed employees paid during that period – employers cannot submit CJRS claims for overlapping periods.

What should employers do now?

• If you intend to make use of the furlough scheme to assist with protecting the future viability of your business, if you have not already done so, you will need to ensure that you furlough staff for whom you want to claim the furlough grant by no later than 10 June and for at least 3 full weeks.
• You need to ensure that that you make a claim for the furlough grant in respect of any member of staff furloughed up to 30 June through the government’s furlough scheme portal (click here) by 31 July.
• You should start assessing your business needs and which staff are or will be furloughed by no later than 10 June and consider whether there is a need to bring furloughed staff back on a part time basis from July. Some staff may have been out of work since March and so this may be a useful way of easing them back into the workplace in line with any increase in business demand.

The government has stated that further guidance on flexible furloughing and how employers should calculate claims will be published by 12 June. Once this guidance is received, will let you know.

Self-Employment Income Support Scheme 

The Chancellor also announced plans to extend the Self-Employment Income Support Scheme (SEISS) for those people whose trade continues to be, or is newly, adversely affected by COVID-19 (coronavirus). Eligible self-employed people will be able to claim a second and final SEISS grant in August; this will be a taxable grant worth 70% of their average monthly trading profits for three months, paid out in a single instalment and capped at £6,570 in total.

The eligibility criteria for the second grant will be the same as for the first grant. People do not need to have claimed the first grant to claim the second grant: for example, their business may have been adversely affected by COVID-19 more recently.

Claims for the first SEISS grant, which opened on 13‌‌ May, must be made no later than 13‌‌ July. Eligible self-employed people must make a claim before that date to receive the first SEISS grant (a taxable grant of 80% of their average monthly trading profits, paid out in a single instalment covering 3 months’ worth of profits, and capped at £7,500 in total).

If you need help with the issues above, please call us on 0114 272 4984 or email info@shipleystax.com – we are ready to assist.