CHARTERED ACCOUNTANTS (ICAEW)

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Extracting profits in 2024/25

If you run your business as a personal or family company, you will need to extract your profits in order to use them personally outside your company, for example, to meet your living expenses. There are various ways of doing this, some more tax efficient than others. Although there is no ‘one size fits all’ and your optimal profit extraction strategy will depend on your personal circumstances, a popular approach is to pay a small salary and to extract further profits as dividends.SalaryThere...

Should I sell before the end of the FHL regime?

Furnished holiday lettings (FHLs) enjoy tax advantages not available to landlords letting residential property on long-term lets. The advantages are particularly beneficial when it comes to capital gains tax as landlords disposing of an FHL are able to benefit from a range of reliefs, including business asset rollover relief, business asset disposal relief and gift-holdover relief. However, the special tax regime for FHLs is to come to an end on 5 April 2025. From 6 April 2025 onwards, FHLs will...

Relief for replacement domestic items

Landlords letting residential property are not entitled to a deduction for the cost of the domestic items that they provide in the property. They are not able to claim capital allowances for the cost of those items either. However, relief is available when they replace the items, allowing the landlord to deduct the cost of the replacement, as long as the associated conditions are met. The relief is available regardless of whether the property business is an unincorporated property business or op...

HMRC revise stance on replacement boilers

In 2023, HMRC wrote to some taxpayers with property income asking them to check that the information provided in the property pages of their 2021/22 Self Assessment tax return was correct. The letter advised that the cost of ‘upgrading a central heating boiler from an older, less efficient model’ was not allowable in calculating the profits of the property business.However, HMRC have now revised their position and sent a correction letter to taxpayers who were sent the original letter admitt...

Post-cessation expenses – When and how are they allowable?

When an unincorporated business stops trading, accounts are prepared to the date of cessation. Where a limited company ceases trading, it is either registered as dormant or its directors can apply for the company to be struck off or go into liquidation, if the company is unlikely to be required again in the future. HMRC states that a business ends when it ‘permanently ceases to carry on a trade’.Sometimes a business that has stopped operations receives income and incurs expenses after cessat...

HMRC informers – How important are they in reducing the 'tax gap'?

The 'tax gap' is a phrase that has been around for almost twenty years and refers to the difference between HMRC’s expected tax revenue and the total tax received from all taxpayers. Notably, it is an estimated figure compiled on an annual basis and, although there has been a decline in the 'tax gap' amount since first recorded in 2005, when it stood at 7.5%, the reduction to 4.8% in 2021/22 still equates to £35.8 billion in absolute terms.HMRC uses various methods to compile information on t...

Partnerships – Cessation on death of a partner

Partnerships exist in either ordinary format or as limited liability partnerships (LLP).An ordinary partnership is legally defined by the Partnership Act 1890 and is commonly chosen to set up a business to be owned by two or more sole traders. The partners share all the risks, costs and responsibilities, as well as the profits. The most important consequence is that each partner is jointly liable for the debts and obligations of the partnership as a whole without limit. Liability is joint in the...

Training costs and the self-employed

A sole trader or proprietor of an unincorporated business may incur training costs. The tax treatment of those costs depends on whether the costs are regarded as ‘revenue’ or ‘capital’ expenditure. HMRC have revised their guidance in this area, expanding the range of training for which a deduction is available.Old rulesPreviously, HMRC only treated training costs as revenue expenditure where they updated existing knowledge or expertise. Any training that provided the proprietor with a ne...

Reform of the High-Income Child Benefit Charge

The High-Income Child Benefit Charge (HICBC) is a tax charge that operates to claw back child benefit where the claimant and/or their partner have adjusted net income in excess of the clawback threshold. For 2023/24 and previous years, this was set at £50,000. The HICBC was equal to 1% of the child benefit paid for every £100 of adjusted net income in excess of £50,000. Once income reached £60,000 the HICBC is equal to the child benefit paid for the year.Where both the claimant and their par...

Make the most of your ISA allowance

Rising interest rates mean that individuals may now be paying tax on their savings income which previously they received it tax free. Where this is the case, it is prudent to consider the options available to earn savings income tax free. ISAs feature on this list.Savings allowance for basic and higher rate taxpayersIndividuals who pay tax at the basic or higher rate are entitled to a savings allowance. For 2024/25, the savings allowance is set at £1,000 for basic rate taxpayers and at £500 fo...

Income tax rates and allowances for 2024/25

The 2024/25 tax year starts on 6 April 2024. Although many of the rates and thresholds are the same as for 2023/24, there are some changes.Income taxThe income tax rates for 2024/25 for England, Northern Ireland and Wales are set out in the table below.Rate Band of taxable incomeBasic rate 20% £1 to £37,700Higher rate 40% £37,701 to £125,140Additional rate 45% Over £125,140The income tax rates applying to the non-savings non-dividend income of Scottish taxpayers are set by the Scottish Gove...

NIC cuts and what they mean for you

As widely predicted, in his 2024 Spring Budget, the Chancellor announced a 2% cut in the main rates of Class 1 and Class 4 National Insurance contributions. We explain what employees and the self-employed will now pay in 2024/25.EmployeesThe main rate of primary Class 1 National Insurance contributions, which are payable by employed earners on earnings between the primary threshold and the upper earnings limit, fell from 12% to 10% with effect from 6 January 2024. The rate was due to remain at 1...

Business rates for 2024/25 and changes to empty property relief

Business rates, rather than council tax, are payable on non-domestic properties. The rates are worked out by applying the relevant multiplier to the property’s rateable value.However, there are a number of reliefs that are available which may reduce or eliminate the bill.MultipliersThere are two multipliers – the small business multiplier and the standard multiplier. The small business multiplier applies to properties with a rateable value of less than £51,000 and the standard multiplier ap...

End of multiple dwellings relief for SDLT

As announced at the time of the Spring Budget, multiple dwellings relief for stamp duty land tax (SDLT) is to be abolished from 1 June 2024. The relief is available where a purchaser buys two or more dwellings in a single transaction or series of linked transactions.Nature of the reliefThe relief was introduced in 2011 to remove barriers to investment in property and to promote the supply of homes for the private rental sector.A buyer is able to claim the relief where they buy two or more dwelli...

Reduction in higher rate of capital gains tax on residential property gains

For capital gains tax purposes, residential property gains have their own, harsher, rules. Not only is taxed charged at a higher rate, but taxpayers also have a shorter window in which to report the gain and pay the corresponding tax over to HMRC.In the 2024 Spring Budget, the Chancellor announced that the higher rate of capital gains tax on residential property gains would be reduced from 28% to 24% from 6 April 2024.However, this is likely to provide little in the way of comfort for landlords ...

Employer-provided equipment – Tax implications for employees of working from home

Since the start of COVID-19 in March 2020, the number of people working from home in the UK has dramatically increased. As of January 2023, research shows that 44% of workers in the UK work from home – which translates into approximately 23.4 million people.Many of the companies those employees work for would have provided equipment, even if it was only a computer. Supplying equipment for business use is usually viewed as a tax-deductible expense for the business where the employee works in th...

Advertising or promotion verses entertainment or hospitality – Which is allowable?

To be allowable as a tax deduction whether under the corporation tax or income tax rules, most expenses must be incurred ‘wholly and exclusively for the purposes of the trade’. Unlike the equivalent rule for employment expenses, the expense is not required to be ‘necessarily’ incurred. This means that as long as an expense is incurred for the business and only for that purpose, a deduction is given.An area of tax deductions where confusion reigns is in the difference between advertising ...

The confusion surrounding the VAT reverse charge

VAT can be confusing at the best of times, with the reverse charge being arguably one of the more complex applications. It does not help that different rules depend on different scenarios. For example, the reverse charge mechanism does not apply in the case of a zero-rated supply of services (e.g. most food items and children’s clothing).Under the UK VAT system, the supplier usually pays the balance of VAT owing to HMRC but with the reverse charge it is the other way round. Instead, the buyer ...

Understanding your tax code

Tax codes are fundamental to the operation of PAYE. If your tax code is correct, you should pay the right amount of tax on your PAYE income. However, if your tax code is not correct, PAYE will not work as intended and you may find that you have paid too much or too little tax. It is important, therefore, that you understand your tax code and also that you check that it is correct.Your tax code will normally comprise letters and numbers; however, there are special codes which may not follow this ...

Making use of your inheritance tax allowances

It is often said that inheritance tax (IHT) is a voluntary tax, and one that can be avoided if you give away sufficient assets at least seven years before you die so the value of your estate is sheltered by your available nil rate bands. This is not always practical – people do not generally know when they are going to die and they need somewhere to live and the ability to fund their life in the meantime. However, there are various IHT allowances and exemptions that allow lifetime gifts to be ...

Check your National Insurance record

Paying National Insurance contributions allows individuals to earn qualifying years, which in turn provides them with entitlement to the state pension and certain contributory benefits. Entitlement may also be provided by the award of National Insurance credits.State pension entitlementA person reaching state pension age on or after 6 April 2016 needs 35 qualifying years to benefit from the full state pension. A person who has less than 35 qualifying years but at least ten on reaching state pens...

Selling online – When do you need to tell HMRC?

Earlier in the year, it was erroneously reported in the press that new tax rules were coming into force which would mean that anyone selling online would need to tell HMRC and pay tax on their earnings.There is, however, no change in the tax rules, which apply to online sellers as they do to other traders. However, from 1 January 2024 onwards, digital platforms are now required to collect information on online sellers and their income, and they must report this to HMRC by January 2025. Consequen...

Calculating the capital gain on the sale of an investment property

Rising interest rates have forced many landlords to sell up. When selling an investment property, capital gains tax is payable at the residential rates to the extent that the gain is not sheltered by the annual exempt amount or available capital losses. Where the property has at some point been the landlord’s only or main residence, some private residence relief will also be available to reduce the chargeable gain.The capital gain (or loss) is found by deducting the allowable costs from the di...

Inflationary gains and the CGT trap

The current capital gains tax rules do not provide any relief for inflationary gains. This can mean that when an investment property or second home which has been owned a long time is sold, there is a significant amount of capital gains tax to pay. The rules effectively treat the entire gain over the period of ownership as if it were a gain in the year of disposal, such that only the current year’s annual exempt amount is available to reduce the amount of the gain. This can be particularly pro...

Boost your income by letting out your spare room

As the cost-of-living crisis continues to bite, the idea of earning tax-free income is appealing. If you have a spare room, you can make this a reality by letting it out and taking advantage of the rent-a-room scheme.What is rent-a-room?The rent-a-room scheme allows you to earn up to £7,500 tax free each tax year by renting out one or more rooms in your own home. If the income is shared between two or more people, each can earn up to £3,750 tax free each year.To qualify, the let room must be i...