Sunday 27 December 2009

Freelancing to avoid 50% tax rate?

With a new 50pc top rate of income tax coming into force in April 2010, many people who earn more than £150,000 are looking for ways to minimise the impact of the increase.

Attention has recently been drawn eo BBC presenters opting to be
"freelancers" to save tax. 

Some new arrangements have appeared, some of which may work if people become freelance or set up a service company, and others that may even work with flexible working conditions, for example:


  • It may be possible to advance payments of salary and bonuses providedthey are paid before April 6 2010.
  • Taking an interest-free loan could defer a liability, especially if income is likely to reduce in later years. 
  • Salary-sacrifice schemes, such as asking for a salary to be paid into a pension scheme, might be used to reduce taxable income, but unfortunately, high-earning individuals are unlikely to be able to set up new schemes.
  • There are ways to reward employees through share option schemes on which capital gains tax (CGT) is paid at 18pc as opposed to 50pc.

All those options are complicated and require a "flexible" employer.


So, if self employment as a freelancer is possible, what is available?


First, high-earning individuals classed as ''freelance'' for tax
purposes have different opportunities to delay paying the new 50pc tax
rate by, for example:



  • Changing their accounts year end to March 31.Anyone with an accountsyear end of April 30 will already effectively be paying tax at 50pcfrom May 1 this year on income above £150,000.
  • Any forthcoming expenses can be delayed and claimed after April 6 next year.
  • A less prudent approach to bad debts might be taken in the last accounting period ending prior to April 6 next year and a realistic approach taken later.
  • Self-employed individuals have more scope than employees to claim a tax deduction against income for travel and office expenses and other business-related expenditure.
  • Also, freelancers usually hire an accountant (tax deductible) to prepare an annual statement of income and expenses.
There is no substantial saving for individuals for National Insurance Contributions (NICs) as they are roughly in line for employees and self-employed. 

However, employers, by designating an individual as freelance rather than staff, can avoid paying NICs, now levied at 12.8pc of salary. Employers will also avoid sick pay and assisting with pension provisions for ''staff'' treated as freelance.

Others go further and set up a service company. This provides the
services of an individual through an intermediary company, in which
the individual is the controlling shareholder or director.


The contract for services is therefore between the contracting company
and the service company. The main advantage is it enables the service
company to shelter the individual's earnings, which are then extracted
in the most tax-efficient way - often through dividends, taxed lower than employment income and not subject to NICs.


In the run up to next year's tax increases, company directors will no doubt consider maximising the salary and dividends taken out of the business before April 6, thereby paying tax at 40pc and 32.5pc, rather than at 50pc on income over £150,000 and 42.5pc on dividends after April 6 2010.

Saturday 26 December 2009

Companies struck off and bona vacantia


 Summary

When a company is struck off some of its assets can pass to the 
Crown as "bona vacantia" – which literally means "vacant
goods", or ownerless property.
The Department for Business, Innovation and Skills (BIS) has 
been consulting on some changes to company law rules in this 
area. Although not primarily a tax issue, dissolving a company 
can have tax implications.
Striking off and tax 
There are basically two ways of bringing a company to an end. 
One is to wind it up by means of a formal liquidation. 
The other is to dissolve it by having the company's name struck 
off by the Registrar of Companies (the directors can ask for this
under s 652A, Companies Act 1985). This latter, strike off, 
route is often preferred for smaller companies, as it is 
quicker, easier and cheaper.
For tax, a distribution of assets to its shareholders by a 
company which is then dissolved is strictly an income 
distribution. But shareholders may prefer their pay-out to be
treated as a capital gain (or loss).
Under Extra-statutory Concession (ESC) C16, providing
certain conditions are met, HMRC is prepared to regard 
the distribution as though it has been made under a 
formal winding up. This means that the amount 
distributed is treated as a capital receipt for the 
shareholders.
To get ESC C16 treatment, the company and its 
shareholders must give HMRC various assurances, before
the transaction goes ahead. 
The requirements are that: 
The company satisfies [HMRC] that:
(a) it does not intend to trade or carry on business in future, and
(b) it intends to collect its debts, pay off its creditors 

in full and distribute any balance of its assets to its
shareholders (or has already done so), and
(c) it intends to seek or accept striking off and dissolution. 
The company and its shareholders agree that:
(a) they will supply such information as is necessary to 
determine, and will pay, any corporation tax (CT) liability 
on income or capital gains and any ACT liability … due on
distributions made prior to 6 April 1999.
(b) the shareholders will pay any CGT liability (or  CT in
the case of a corporate shareholder) in respect  of any
amount distributed to them in cash or  otherwise as if  the 
distributions had been made during a winding-up.


More details are in HMRC's Corporation Tax Manual
at CTM 36220. 
The bona vacantia guidelines 
Apart from the tax implications, striking off a
company holds a potential trap for the unwary in the
bona vacantia rules. 
Distributable reserves can be paid out before the 
company is struck off, but the strict legal position
for share capital and any undistributable reserves
 is that they cannot be repaid to shareholders on a 
dissolution. 
Therefore, any share capital etc should pass to the
Crown. If these funds are paid to 
shareholders, it will be an unauthorised 
distribution and the Crown could claim it back. This
might not matter for a £2 company but could be a 
problem where the share capital is a significant
amount. 
However, help is at hand. The Crown can disclaim
assets to which it is entitled under the bona 
vacantia rules. It is prepared to do this in the case of 
a striking off where the company's share capital is 
£4,000 or less. 
Full details are in Guidelines BVC17 published by the 
Treasury Solicitor's Bona VacantiaDivision. These 
say that it would be unreasonable for the 
Treasury Solicitor to expect a company to be put into
formal liquidation when the costs of doing so
would make it uneconomic, especially bearing in mind
that HMRC's ESC C16 permits a distribution for tax
purposes without the company having to incur the costs 
of a liquidation.
The conditions for the Treasury Solicitor to waive the
Crown's right to any funds are that:
  • a company is struck off under s 652A,Companies Act 1985
  • the shareholders take advantage of  ESC C16
  • the amount of the company's share capital etc is £4,000 or less.
Companies Act 2006 – 1 October 2009 changes


The law about company dissolution and bona vacantia 
was replaced by ss 1012–1023 of Companies Act 2006 
with effect from 1 October 2009 which made some
changes to the rules.
In particular, there are changes to the time  within which 
the Crown may disclaim title to the property of dissolved
companies vesting as bona vacantia:
  • The Crown will have three years  to disclaim such property.
  • Anyone interested in the property can firce a decision by the Crown representative by making a written application. 
  • The Crown will have 12 months in which to decide whether or not to disclaim.


Residence, Domicile and Overseas Assets

If you are coming to or leaving the UK, you need to know if you will be treated as resident in the UK for tax purposes. 

Your tax status determines whether you are liable to UK on your worldwide income and gains. The UK tax rules are far reaching and without proper advice you might fall within the UK tax net, even if your assets are situated in another country and/or are held through offshore trusts and companies. 

If you are leaving the UK, it can be difficult to lose your UK tax resident status. It can stick to you for a number of years after you have left. Without careful planning, you may still be subject to UK tax on your income and capital gains even if you are living in another country when your income is generated and your gains realised. 

There are special rules for individuals who are non-UK domiciled. 

Very broadly, an individual is domiciled in the jurisdiction which he regards as his permanent home. 

An individual has a domicile of origin which is determined at birth and is normally governed by the father's domicile. In some circumstances, it is possible to adopt a domicile of choice or dependency.

For those who are non-UK domiciled (non-Doms), there are special tax rules. 

These rules are often referred to as the remittance basis and offer a favourable method of taxation.  The remittance basis was fundamentally changed in 2008 and non-Doms need to be aware of the changes.


Non-Doms now need to consider a number of questions:
  • Should I claim the remittance basis and pay the £30,000?
  • If paying the £30,000, what income/gains should I nominate and how should these be held?
  • Should I make an election to claim relief for overseas losses?
  • Do I need to review my offshore structures (eg. trusts/companies) in the light of the new rules?
  • Do I need to review my overseas bank accounts in the light of the new rules?
  • What funds are being used by my offshore entities to pay for services in the UK and might this give rise to a remittance?

Trustees of offshore trusts will also be specifically affected by the changes contained in the new rules and need to consider a number of questions including:
  • Whether to make the rebasing election to effectively rebase their assets (for payments to non-domiciled individuals) as at 6 April 2008.
  • Whether their record keeping is sufficient to enable UK resident Beneficiaries to comply with the new rules.


Friday 11 December 2009

Surviving a tax investigation

Quit while you are behind: there is no point trying to put one over the HMRC.

KEEP CALM!

An investigation often provokes a number of violent emotions in those under scrutiny – not least sheer terror at the thought of ending up in jail. In reality, very few cases end in a custodial sentence. So there's no need to expect the worst.

GET EXPERT ADVICE AT THE OUTSET

If you are being investigated by HMRC, it is highly recommended that you seek independent advice from a reputable accountant or adviser specialising in this field.

You need somebody on your side who understands the jargon and knows how HMRC operates who can take some of the emotional strain from your shoulders.

It's also likely to be cheaper in the long run.

DON'T DISCUSS YOUR TAX AFFAIRS WITH ANYONE BUT A TIGHT CIRCLE OF TAX ADVISERS

Tempting though it might be to offload your woes at the pub or the golf club, it's never a good idea – unless you want the whole town to know the details of your case; and that might include a taxman. It's also almost certain that what your friends advise you will be wrong and therefore detrimental to your chances of reaching a settlement with HMRC.

DON'T LIE TO HMRC

This is the simplest and most reliable way of avoiding that jail sentence!

DON'T ASSUME HMRC IS IGNORANT OF ANYTHING

An HMRC investigator has a huge number of resources at his disposal and is not afraid to ask questions.

Stick with the wartime advice: 'Careless Talk Costs Lives'. Letting a former flatmate know that you paid for your house in the Dordogne in cash is not literally going to kill you. But it may cost you the chance of getting a good deal with the taxman should he begin investigating your affairs.

BE WELL PREPARED FOR ANY MEETINGS

Remember the motto "no one prepares to fail – they fail to prepare". It is pointless trying to evade the HMRC's questions with insufficient preparation – the investigator will simply use his statutory powers to force you to give him the answers he seeks and your lack of preparation will be deemed to be "lack of co-operation".

MAKE SIGNIFICANT (BUT RELEVANT) PAYMENTS ON ACCOUNT

HMRC sees this as an important sign of a willingness to co-operate. It may also save you a huge amount in interest, which accrues from the date when the tax should have been paid to the day it is actually paid.

On the other hand, overpayment of the outstanding liabilities may lead HMRC to an unrealistic expectation of the amount you owe.

DON'T TRY TO DESTROY EVIDENCE

It's usually unhelpful. If you don't have the appropriate records,
HMRC may assume you are trying to hide something when you are not.

NEVER MAKE A PARTIAL DISCLOSURE

Do not suffer from selective amnesia when disclosing information
involuntarily – this is particularly distasteful to HMRC and is likely
to lead to a more punitive settlement since the HMRC will take into
account your lack of co-operation when determining the penalty you
have to pay as part of your settlement.

ONCE YOU HAVE REACHED A SETTLEMENT, DON'T OFFEND AGAIN

HMRC will view those who offend a second time in a much more serious light.

If you follow these rules you should survive a tax investigation – and may even do so with your sanity intact!

PBR - Summary of tax proposals

SUMMARY

There was good news and bad news for small businesses in this Pre Budget Report.

The good news is the freezing of the corporation and income tax rates other than the promised 50% rate of income tax which will be introduced for income over £150,000 and personal allowances are also frozen at the 2009/10 levels. 

The bad news will come from April 2011 when NI rates are set to surge upwards and corporation tax may also increase in this month.

Businesses with empty commercial properties may qualify for an exemption from business rates but only until 31 March 2011. 

There are further anti-avoidance rules to prevent high earners from gaining top level tax relief on pension contributions. 

Tax incentives are introduced to encourage you to buy electric cars and vans, but just how many milk-floats do you need?

CORPORATION TAX

Corporation tax for companies with 'small' profits was due to rise on 1 April 2010 to 22%, a rise originally planned to apply from 1 April 2009. However, the Chancellor has decided to postpone this increase for a second time. The corporate tax rate for companies with 'small' profits will now remain at 21% until at least 1 April 2011. 

'Small' profits are those falling below the single company threshold of £300,000.

ompanies with profits of £1.5 million or more pay corporation tax at 28%. Profits that fall in the range £300,000 to £1.5 million are taxed at a marginal rate of 29.75%.

These profit thresholds are proportionately reduced by the total number of companies associated with the main company. An associated company is any company that is under the common control of an individual, group of related individuals or another company. Thus if you control two companies those companies are associated and only the first £150,000 (£300,000/2) of the annual profits of each company will be taxed at 21%.

Currently any companies controlled by your spouse or civil partner are also associated with your own company, even if your spouse's company has no commercial links to your own company.

As previously announced, the standard rate of VAT increases from 15% to 17.5% on 1 January 2010. The Chancellor emphasised that he has no plans to make further changes to VAT, so we can be fairly certain that the VAT rates will remain as they are, at least until after the election.

The Taxman is aware that some businesses, particularly entertainment venues and pubs, will be trading at midnight on 31 December 2009 when the standard rate of VAT changes. By concession those businesses can treat their standard rated sales made before they close before 6am on 1 January as chargeable to VAT at the 15% rate. This concession does not apply to online retailers or to catalogue companies.

If your business is registered to use the flat rate scheme for small businesses, the flat rate used to determine how much VAT to pay to the Taxman will also change with effect from 1 January 2010. The new flat rates for each business sector are found in the Pre Budget Report Press Notice no. 33 on the HMRC website at http://www.hmrc.gov.uk/pbr2009/pbrn33.htm 


Most, but not all, of these flat rates have reverted to the rates that applied before 1 December 2008. However, some rates have been increased by a greater amount to reduce the gain some businesses make by using the flat rate scheme. You may find that the new flat rate for your business sector does not produce the savings for your business as it did previously. If so you can leave the flat rate scheme at any time. 

NATIONAL INSURANCE

There is no immediate change in the main rates of class 1 employers and employees NI from 6 April 2010. 

From 6 April 2011 a 0.5 per cent rise was planned but this has been increased to 1% for most rates of NI as shown below.
  • Employer's class 1 above primary threshold 2009/10 - 12.8% : 2011/12 - 13.8%
  • Employer's class 1A and 1B 2009/10 - 12.8% : 2011/12 - 13.8%
  • Employee's class 1 below up earnings threshold 2009/10 - 11% : 2011/12 - 12%
  • Employee's class 1 above upper earnings threshold 2009/10 - 1% : 2011/12 - 2%
  • Self-employed class 4 between lower and upper profits thresholds 2009/10 - 8%: 2011/12 - 9%
There is also likely to be increases in the reduced rates of NI for contracted out contributions for both employers and employees, but those rates have not been confirmed as yet.

This increase in NI rates is double the increase announced in the 2008 Pre Budget Report. It amounts to a 7.8% rise in NI costs for employers in respect of the wages of every person employed. Employees will also suffer a 9% to 10% increase in NI charges, and the self-employed will be paying at least 12.5% more in NICs in 2011/12.

There will be an increase in the point at which individuals start to pay NI, meaning that people with an income below £20,000 will be protected from this change.

These NIC increases will bring in a significant amount of additional revenue for the Government from April 2011.

PROPERTY

Business Rates

From 1 April 2008 most vacant business properties became liable to business rates, when previously such properties were exempt from rates. In last year's Pre Budget report the Chancellor announced an exemption from business rates for empty properties which had a rateable value of less than £15,000, but only for the 2009/10 financial year.

This exemption is now to be extended for the year to 31 March 2011, and expanded to cover empty properties with a rateable value of less than £18,000. The higher threshold reflects the increase in rateable values following the business rates revaluation that comes into effect from 1 April 2010.

Furnished Holiday Lettings

The favourable tax concessions for the commercial letting of furnished holiday lets will be removed with effect from 6 April 2010 for unincorporated businesses and from 1 April 2010 for companies. Hoteliers and bed and breakfast proprietors are not affected by these changes.
  • Losses - future profits and losses from furnished holiday lettings will be treated as income from a property business, and thus relief for losses will be available only against the property lettings business. Any current losses from the furnished holiday lettings, which have not been used before April 2010, will be carried forward to be set against the future property lettings business.
  • Pensionable income - from 6 April 2010 income from a furnished holiday lettings business will not count as pensionable income, which may reduce the amount of pension contributions available for tax relief in any tax year.
  • CGT - the capital gains reliefs associated with disposing of a property used in a commercial furnished holiday letting business will cease to apply for disposals made after 5 April 2010.

Stamp Duty

A stamp duty 'holiday' was announced for residential property in September 2008, which effectively raised the lower threshold property values where SDLT is imposed at 1%, from £125,000 to £175,000. This lower threshold will revert to £125,000 on 1 January 2010. Where the residential property is located in a disadvantaged area the threshold from which the 1% rate of SDLT is imposed is £150,000.

SDLT is normally imposed at the completion date for the property sale, not the date on which contracts are exchanged. If the buyer takes possession of the property before the completion date, SDLT is charged on that earlier date.

To take advantage of the zero rate of SDLT on a property costing no more than £175,000 you need to complete or take possession of the property before 1 January 2010.

CGT on Homes

Some commentators expected the rules that exempt one's 'main home' from capital gains tax on sale would be tightened up. This has not happened. Instead there is a relaxation of the rules where part of the home is occupied exclusively by an adult in care, and the owner of the property is paid to care for that adult. In such cases the whole of the property will qualify for exemption from capital gains tax.

INDIVIDUALS

Income Tax

All the income tax rates and thresholds will be frozen from 6 April 2010, with the exception of the 50% rate of income tax that will apply on income above £150,000.

2010/11 Income Tax Rates
  • Savings rate (on savings income only) 10% for £0 - £2,440
  • Basic rate 20% for £0 - £37,400
  • Higher rate 40% for £37,401 to £150,000
  • Additional rate 50% for over £150,000
All personal allowances have also been frozen at the 2009/10 rates for 2010/11 as follows:

Personal allowances: 2010/11
  • Under 65 - £6,475
  • 65-74- £9,490
  • 75 and over - £9,640
  • Minimum marriage allowance* - £2,670
  • Marriage allowance born before 6 /4/1935* - £6,965
  • Blind persons allowance - £1,890
  • Income limit for age allowances - £22,900
* given at 10% rate only

Tax Relief for Pensions

Some incredibly complex rules were brought in from 22 April 2009 to discourage those with incomes above £150,000 from piling money into their pension schemes. This was because tax relief on pension contributions will be reduced for these high earners from 6 April 2011. 

Many people with earnings around the £150,000 mark thought up cunning plans to reduce their taxable income to just below £150,000, so they wouldn't be caught by the restrictions on tax relief for pensions. In response to this planning the Government has changed the rules, by stating that anyone with income above £130,000 will be caught by the pension relief restrictions with immediate effect.

Inheritance Tax

Although the value of an estate that is exempt from inheritance tax was set at £350,000 with effect from 6 April 2010, this exempt threshold is to be frozen at the current level of £325,000. The justification for this freeze is that property prices have not increased over the last year.

COMPANY CARS AND VANS

Electric cars are cool! Or so the Government would like us to believe. 

From 6 April 2010 if you provide your employee with an electric car or van for their own use, it will be a tax free benefit. What's more when your company buys a new electric van from 1 April 2010 it will be able to write-off the full cost for tax purposes in the year of acquisition. This tax treatment already applies to all new low emission and electric cars. These new tax incentives only apply to fully electric vehicles, hybrids don't count.

The taxable benefit charged for the use of ordinary company cars and vans, and fuel for those vehicles, is set to increase from 6 April 2010. For example the driver of a car with CO2 emissions of 160g/km is currently taxed at 20% of the vehicle's list price. From 6 April 2010 the driver of the same car will be taxed at 21% of its list price. Currently the fuel benefit for that vehicle is based on a fixed value of £16,900, From 6 April 2010 this value will increase to £18,000. Hence the taxable benefit of having free fuel for the car will increase from £3,380 to £3,780.

The taxable benefit charged when fuel is provided for private use in a company van will increase from 6 April 2010 from £500 per year to £550 per year.




Saturday 5 December 2009

Flat Conversion Allowance


Did you know that under the Flat Conversion Allowance scheme you can get income tax relief on the cost of converting or renovating the empty space above a shop, café, office or surgery and turning it back into use as residential flats?



This relief will be withdrawn for expenditure incurred on or after 1 April 2013 for businesses within the charge to corporation tax, and on or after 6 April 2013 for businesses within the charge to income tax.


The entitlement to claim writing down allowance  on any outstanding residue of qualifying expenditure will also cease with effect from the same dates.


However, as always with such a nice tax break, there are some rules.



Qualifying Expenditure

To qualify for the allowance, the money spent has to be on items of a “capital nature” 




Qualifying expenditure is capital expenditure incurred on, or in connection, with:
  • the conversion of part of a qualifying building into a qualifying flat, or
  • the renovation of a flat in a qualifying building to create a qualifying flat, or
  • repairs incidental to the conversion or renovation of a qualifying flat, or
  • the provision of access to a qualifying flat.
The part of the building on which the expenditure was incurred must have been unused or used only for storage for the year before the work begins.

Examples of qualifying expenditure are the costs of dividing a single property to create a number of separate flats, and the costs of building dividing walls or installing a new kitchen or bathroom. Capital repairs to the property incidential to the conversion or renovation may also qualify.


Expenditure incurred in connection with the conversion or renovation of a flat may include costs outside the direct boundary of the new or renovated flat such as the creation of stairwells within the building or provision of extension, solely to provide access to the new flats. It may also include architect's and surveyor's fees.

Examples of associated costs that may qualify are:
  • inserting or removing walls, windows, or doors,
  • installing and upgrading plumbing, gas, electricity or central heating,
  • re-roofing incidental to the conversion/renovation,
  • providing access to the flat(s) separate from the commercial premises, including extensions to the building to contain this access, if required,
  • providing external fire escapes where regulations require.
Some expenditure does not qualify for flat conversion allowance (FCA). Expenditure does not qualify if it is incurred on or in connection with:
  • the acquisition of land or rights in or over land,
  • an extension to the building (unless it is required to give access to a qualifying flat),
  • the development of land adjoining or adjacent to the building. This includes conversions forming part of a larger scheme of development, and
  • the provision of furnishings or other chattels.
Example Rick runs a café-bar. It is in the ground floor of a 3- storey building. Rick has a 75-year lease of the building. He uses the first floor for storage. He does not use the second floor. He converts the two upper floors into flats for letting. He incurs expenditure on installing bathrooms and central heating and on furniture for the flats. The cost of the bathrooms and the central heating qualifies for FCA. The cost of the furniture does not. The only access to the upper floors is a staircase from the café. Rick builds an outside staircase to provide separate entrances for the flats. The cost of constructing the staircase also qualifies for FCA.



Qualifying Buildings




qualifying building is one:
  • in which all or most of the ground floor is authorised for business use,
  • where it appears that, when the building was constructed, the storeys above the ground floor were for use primarily as one or more dwellings,
  • which has no more than 4 storeys above the ground floor, and
  • whose construction was completed before 1 January 1980.


The ground floor (or part of it) is "authorised for business use" if it is approved for use for specific business activities. These are defined in terms of the use for which the premises are rated in ratings legislation.

Broadly, the classes of business use that qualify are retail shops, premises for the provision of financial and professional services, premises for the sale of food and drink, other offices and premises for research and development activities and industrial processes which can be carried out in residential areas, and premises for medical and health services, such as doctor's surgeries and dental practices. In detail, this means:

Building in England or Wales

Authorised for use within class A1, A2, A3, B1 or D1(a) as set out in the Schedule to the Town and Country Planning (Use Classes) Order 1987.

Building in Scotland

Authorised for use within classes 1, 2, 3 or 4, as set out in the Schedule to the Town and Country Planning (Use Classes) (Scotland) Order 1997 or specified in Article 3(5)(j) of that Order.

Building in Northern Ireland

Authorised for use within classes 1, 2, 3, 4 or 15(a) as set out in the Schedule to the Town and Country Planning (Use Classes) (Northern Ireland) Order 1989 or specified in Article 3(5)(b), (c) or (h) of that Order.

The upper floors must have been originally primarily for use as dwellings. Normally the original use should be clear from the design and appearance of the building.

There may have been some business use in the upper floors. For example there may have been storerooms, offices or workshops or, indeed, the shop may have extended above the ground floor. A building will be a qualifying building provided the greater part of the storeys above the ground floor were for use primarily as dwellings. For example, a four-storey building could qualify if it was built with a showroom or office on the first floor, provided that it appears that the original purpose of the second and third floors was residential.

Do not count the attic when you consider the number of storeys unless it can be lived in. An indication of this would be windows in the roof and proper stair access. An attic or loft that is not suitable for living in does not count as a storey, even if it can be used for storage.

The requirement that the building must have been completed by 1 January 1980 is met even if it has been extended subsequently, as long as the extension was completed on or before 31 December 2000. An extension to a qualifying building only to provide access to a qualifying flat can qualify for flat conversion allowance (FCA). FCA cannot be claimed in respect of conversion or renovation work on an extension that was completed after 31 December 2000.

You may make a FCA claim on the cost of converting a basement into a flat. The conversion costs will qualify provided that the building is a qualifying building.

Example Rick's café has a basement that is disused. If Rick converts it into a flat for short-term letting the conversion costs will qualify for FCA.
What is a Qualifying Flat?

qualifying flat is a flat that:
  • is in a qualifying building;
  • is suitable for letting as a dwelling;
  • is held for short-term letting;
  • is accessible without using the business premises;
  • has no more than 4 rooms ignoring kitchens and bathrooms and closets, cloakrooms and hallways that are not more than 5 square metres in area;
  • is not a high value flat;
  • was not created as part of a scheme involving the creation or renovation of one or more high value flats; and
  • is not let to a person connected with the person who incurred the conversion or renovation expenditure.
Short-term letting of a flat is letting the flat as a dwelling for a term or period of not more than 5 years. A letting under an assured shorthold tenancy will be short-term letting provided that any initial fixed-term lease does not exceed 5 years. The potential for a period of statutory periodic tenancy after the expiry of the fixed term does not alter this.

Example  Rick runs a café-bar. It is in the ground floor of a 3- storey building. Rick converts the top two floors to qualifying flats and lets them to Sam on a 20- year lease on the understanding that Sam will use them for short-term letting. Sam lets the top flat to Louis on a 5-year lease and the first floor flat to Lisa on a 4-year lease. Rick can claim flat conversion allowance (FCA).

A qualifying flat does not need to occupy only a single floor within the building.

A flat must remain a qualifying flat for a period of 7 years from the time it is first suitable for letting if the person holding the relevant interest wants to avoid a balancing adjustment.

A flat is suitable for letting from the time it, and any other necessary conversion or renovation work, has been completed, so that it would be reasonable to regard the flat as available for short- term letting. There is no requirement that the flat is actually let. A flat could be held for letting if it is being actively marketed and a tenant is being sought.

A flat will not cease to be a qualifying flat during a period while it is temporarily unsuitable for letting, provided it was a qualifying flat immediately before that period. This means, for example, that a flat would not cease to be a qualifying flat because it is being redecorated between tenancies.

A flat is not a qualifying flat if it is a high-value flat, or is part of a scheme that contains a high- value flat.

A flat is a 
high value flat if its "notional rent" exceeds specific limits. The notional rent is the rent for which the flat could be reasonably let at the date the expenditure is first incurred on its conversion or renovation. In arriving at the notional rent you should make the following assumptions. They are that, at the time the expenditure is first incurred:
  • the conversion or renovation had been completed,
  • the flat is let furnished,
  • the lease does not require a premium or other payment to be made to the landlord,
  • the tenant is not connected with the person who incurred the expenditure on the conversion or renovation, and
  • in England or Wales the flat is let on an assured short hold tenancy or in Scotland it is let on a short assured tenancy.
The notional rent limits are as follows:
Number of rooms in flatFlats in Greater LondonFlats elsewhere
1 or 2 rooms£350 per week£150 per week
3 rooms£425 per week£225 per week
4 rooms£480 per week£300 per week
Ignore kitchens and bathrooms, and closets, cloakrooms and hallways not exceeding 5 square metres when determining the number of rooms in a flat.

A flat does not become a high-value flat if, at some time after the conversion or renovation expenditure is first incurred, the rent it could achieve exceeds these limits. The test operates independently of any future movements in the property letting market.




You have to own the property and let it out for seven years after conversion because the allowance can be withdrawn if you sell the flats or the flats stop being used for letting during this period. 


Initial Allowance


The rate of initial allowance is 100%. It is made for the chargeable period in which the qualifying expenditure is incurred.

A person entitled to initial allowance may claim less than the full 100%. If so WDA may be claimed in later chargeable periods.

An initial allowance may be claimed before the flat is let. It is withdrawn if the flat is not a qualifying flat when it is first suitable for letting as a dwelling. It is also withdrawn if the person sells the relevant interest in the flat before it is first suitable for letting.

If an initial allowance is withdrawn assessments can be made or adjusted to withdraw any initial allowances that have already been given.

Example Rick runs a café-bar. It is in the ground floor of a 3 storey building Rick has a 75 year lease of the building. Rick converts the second and third floors of the building into qualifying flats. The work is done during the year ended 31 December 2006. Rick claims an initial flat conversion allowance (FCA) for 2005/06. He sells his lease of the building in January 2007. The FCA claimed for 2005/06 is withdrawn.



Writing Down Allowance (WDA)


If you do not claim the full Initial Allowance, you may claim the balance of the expenditure as a writing down allowance.



The annual rate of WDA is 25% of the qualifying expenditure. You may claim less than the full amount.

There is a limit on the amount of a WDA. A WDA for a chargeable period cannot be more than the residue of qualifying expenditure at the beginning of that chargeable period. The 
residue of qualifying expenditure is the qualifying expenditure that has not yet been written off.

This is how to write off qualifying expenditure. You deduct an allowance from the qualifying expenditure at the following times.
  • An initial allowance is written off at the time the flat is first available for letting.
  • Writing down allowance is written off at the end of the chargeable period for which it is made.
A person who has incurred qualifying expenditure on a qualifying flat may claim a WDA if:
  • the person is entitled to the relevant interest in the flat, and
  • the person has not granted a long lease of the flat out of the relevant interest for a capital sum.
A long lease is one that is for more than 50 years.




How to claim



Making a claim is easy though. 

You simply claim for the flat conversion allowance in the tax return for the year in which the conversion or renovation money is spent - and there are no special requirements beyond the usual self assessment.


The allowance is 100 per cent in the year in which the expenditure happens or if you prefer, you can claim a lower amount, with the balance of the cost spread over later years. 


It’s possible to set the allowance against other income from property and if you don’t have enough property income in that year, the excess capital allowance can be carried forward and set off against future property profits.


Alternatively, excess capital allowances may be set against the person's other income for the year, or the following year.

Getting The Profits Out Of Your Business Tax Efficiently



Business owners will be looking closely at tax-efficient ways of extracting cash in the light of the new 50% tax rate from next year. 

Let's take a look at the four main ways of extracting cash from owner-managed companies – 
  • salaries/bonuses; 
  • dividends; 
  • pension contributions; and 
  • EFRBS 

although there are others such as company payments for use of assets and other benefits in kind.

In all cases it is important to make careful calculations as the position will vary depending on shareholding arrangements and the company's marginal tax rates.

Salaries/bonuses

The net amount received by an individual from extracting £100 of profit by way of salary or bonus taxed at 40% is £52 and, post-April 2010, at 50% this will be £43. 


The key planning point is that it is clearly beneficial to pay bonuses before 5 April 2010.


Dividends

Similarly (assuming a corporation tax rate of 28%), the net amount received by a top rate taxpayer extracting £100 of profit by way of dividend, currently taxed at 32.5%, is £54. 

Post-April 2010 this dividend will be taxed at 42.5%, and the amount received by the individual will be £46. 

In both cases this is marginally better than a bonus. 

Again, it is clearly beneficial to pay dividends before 5 April 2010.

For smaller companies paying tax at 21%, the net cash from a dividend per £100 of profit rises to £59 and will be £50 post- 5 April 2010. So dividends become much more attractive than salaries and bonuses, and pre-5 April 2010 dividends look particularly beneficial.

Pension contributions

Pensions continue to be a tax-efficient form of cash extraction. 

However, the Chancellor announced in the 2009 Budget that with effect from 6 April 2011, tax relief will be restricted for individuals whose taxable income exceeds £150,000 and he immediately introduced antiforestalling rules that could impose a tax charge on pension contributions paid by such individuals in the current tax year 2009/10 and in 2010/11. 

Consequently this whole area has once again become very complicated and expert advice should be sought on how the tax changes impact on existing and proposed arrangements. 

Pension contributions will continue to be tax deductible for the company and the pension funds themselves will accumulate tax-free until they are paid out, either in the form of a tax-free lump sum (capped at 25%) or as a pension subject to income tax rules.

EFRBS

An Employer-Financed Retirement Benefits Scheme (EFRBS) is essentially an unregistered pension scheme. Although its purpose is to provide retirement benefits to employees, it will also help in respect of the new 50% tax rate and new pension capping rules. Short-term access to cash by way of loans is also a possibility. 

EFRBS can be particularly attractive to non-UK domiciled individuals and those seeking to mitigate the impact of the £30,000 remittance basis charge. A corporation tax deduction is deferred until pension or earnings are drawn down.

Landlords' Energy Saving Scheme

I have written a short article on this which can be seen here.

Basic Capital Gains Tax (CGT)


When do I have to pay capital gains tax (CGT)?

As a general rule, you have to pay CGT at a rate of 18 per cent if you sell something for more than you paid for it. Shares, land, buildings, part of a business and expensive antiques or jewellery are the sorts of things that will usually attract a CGT liability. However, you may also have to pay CGT if you merely give something away or receive compensation or prize money.

Exceptions to the tax

If your gains come to less than £10,100 for the tax year 2009-10, you will not have to pay any CGT.

Capital gains tax explained


You also do not have to pay CGT if you are selling or otherwise passing on personal belongings that are worth less than £6,000, or if you give assets to a registered charity.

Nor do you have to think about CGT when selling your private car and your main home, or when you receive money from Isas, Premium Bonds, betting, lottery or pools winnings, or personal injury compensation.

How to get out of paying CGT

Believe it or not, there are ways to avoid paying CGT that will not attract the ire of the taxman, though most of these techniques merely defer CGT to a later date or transfer it to another person.

One popular method is to transfer your assets to your spouse or civil partner. As long as you are legally married and living together there is no CGT to pay at that point. However, this transfers the legal ownership and CGT will have to be paid if and when he or she sells the assets.

You can also escape CGT in the short term by reinvesting your gains under the Enterprise Investment Scheme. 

You need to make sure that you meet the qualifying conditions.

You can also reduce the amount of CGT payable on some assets by offsetting a loss. For example, if you make a loss when disposing of one asset that would attract CGT, you may be able to deduct this loss from capital gains that you have made on other assets.

Recent changes

In April 2008 the Government abolished taper relief, which had
previously allowed some taxpayers to reduce their CGT bill by up to 40 per cent. Instead, a flat rate of 18 per cent now applies. At the time, owners of small businesses protested against the changes, which effectively increase the amount of tax that they have to pay because they are now no longer able to receive taper relief.


The Chancellor announced a partial climbdown when he unveiled plans for entrepreneurs' relief. 

Business owners with a stake of more than 5 per cent in the company they work for will pay only 10 per cent tax on gains up to £1 million.

Calculating your CGT liability

First add up all the gains you have made from the sale of assets during the tax year, from April 6 one year to 5 April the next year.

The tax applies on the gain, not on the amount you sell it for. For example, if you bought shares for £500 and sold them for £2,000, you have made a gain of £1,500.

Then subtract costs, as well as any losses made on the disposal of other assets. You may also subtract the annual exempt amount, currently £10,100 for every individual.

You pay 18 per cent on anything left.

CGT when you give something away

You may have to pay CGT when you give something away, even if you do not receive any money for it or receive less than it is worth, if the asset has increased in value since you bought it.

Say you bought a flat for £75,000 and allowed a relative to use it.

You later decide to sign the flat, now worth £100,000, over to the relative. You have made a capital gain of £25,000 and must pay CGT on that amount. It does not matter whether you receive any money for the flat from the relative.


Paying the taxman

If you do not usually complete a tax return but wish to report a gain or loss, contact your local tax office and ask for a self-assesment tax return, including the relevant pages for CGT.

If you already receive a self-assessment tax return, it will tell you if you need to request and fill in the CGT pages.

You need to tell your local tax office in writing by the October 5 deadline if you have gains or losses to report from the previous tax year.

CGT on an inheritance

You do not have to pay CGT if you inherit something. However, if you later sell or give away the asset, you will have to pay CGT. 

For example, if a relative's will leaves you £6,000 of shares, you do not have to pay any CGT, but if you sell them later for £9,000, you may have to pay CGT on the gain of £3,000.

Disclaimer

The information contained on this site is for general guidance only. You should neither act, nor refrain from action, on the basis of any such information. You should take appropriate professional advice on your particular circumstances because the application of laws and regulations will vary depending on particular circumstances and because tax and benefit laws and regulations undergo frequent change.

Whilst I will do the best i can to ensure that the information on this site is correct at the date of first posting, I shall not be liable for any loss or damages (including, without limitation, damages for loss of income or business or increased liabilities) arising in contract, tort or otherwise from the use of or inability to use this site, or any information contained in it, or from any action or decision taken as a result of using this site or any such information. Third parties are responsible for ensuring that material submitted for inclusion on this site complies with appropriate law. I will not be responsible for any error, omission or inaccuracy in the material submitted by third parties.

I accept no responsibility for the availability or content on any site to which a hypertext link from this site exists. The links are provided on an "as is" basis and I make no warranty, express or implied, for the information provided within them.


You are permitted to access, print and download extracts from this site on the basis that the use of all material on this site is for information and non commercial or personal use only; any copies of these pages saved to disk or to any other storage medium may only be used for subsequent viewing purposes or to print extracts for personal use.


By accessing any part of this site, you shall be deemed to have accepted these terms in full.


These terms shall be governed by and construed in accordance with English Law and the courts of England shall have exclusive jurisdiction.

I will not respond to individual queries posted as comments on this blog. If you need advice on a specific situation, email the full details to me at jpointon@gmail.com.