Archives for 2011

You may find the notes that follow useful if you raise money by increasing the lending/mortgage in respect of rental property.

The following factors need to be taken into account:

Loan used in property business

Generally speaking if the funds raised from refinancing are reinvested in the property business, for example to purchase new property or refurbish existing property, then any loan interest payable is allowed in full.

Funds withdrawn by property business owners (individuals and partnerships)

If funds are raised to enable the owners to withdraw money from the property business the following considerations need to be taken into account.

1. HMRC will seek to disallow interest on any loan in excess of the original cost of the property, or, the valuation of the property when first taken into business use. For example you may own a property that has been your own home for a number of years that you purchased for £100,000. You decide to move abroad and keep the property but let it out; the current value is £200,000. It would be possible to raise a buy to let loan for up to £200,000 (if the banks were willing!)  and claim interest on the loan against your rental income.
2. A claim can only be made for the interest on the loan not the capital element repaid.
3. There are many pitfalls that can result in a loss of tax relief so it is important to obtain advice before refinancing.

Loans taken out by a property business run by a limited company

Where a property is owned by a limited company any additional cash raised by increasing loans secured on the company’s business property belongs to the company. If directors wanted to withdraw the funds for personal purposes they would need to observe the usual rules:

1. Vote a dividend
2. Take extra salary or bonuses
3. Reduce the amount of any loans they have made to the company.

What seems on the surface a simple issue, ‘Can I borrow against business property and get full tax relief on the interest charged’, is far from a simple issue. Please get in touch prior to taking out such a loan to clarify the tax position, especially if you are relying on a tax deduction to make commercial sense of the loan.

Property, as with most assets, can be owned by individuals, jointly with other parties in partnership, or by a limited liability company or a trust.

In most cases the taxation of rental income derived from letting a property is straightforward. Individuals holding property in their own name or in partnership, companies and trusts all pay tax on the net income received.

The position of jointly owned property can vary and in particular that owned by married couples or registered civil partners who are living together.

Property owned and let by married couples or civil partners (who are living together)

1. HMRC will divide rental profits equally between spouses (civil partners), 50:50.
2. This division of rental income may not reflect the underlying ownership. For example property may be owned 10% by one spouse and 90% by the other.
3. If spouses/partners want the rental income split between them in accordance with the beneficial ownership they must make a formal election to HMRC. Once made the election cannot be revoked or changed, unless the underlying beneficial interest changes.
4. Interestingly, the above rules do not apply to property held in a business partnership or to property that is let as a furnished holiday let.

Property owned jointly by persons not married or in a civil partnership.

In this case the rental income will always be allocated between the joint owners in proportion to the underlying beneficial ownership.

Married couples and civil partners usually have a choice therefore, to split the rental income equally if this produces a lower joint tax liability or, split the rental income in the same proportion as their ownership of the property.

These rates apply to all journeys on or after 1 December 2011 until further notice. For one month from the date of change, employers may use either the previous or new current rates, as they choose. Employers may therefore make or require supplementary payments if they so wish, but are under no obligation to do either.

 

Engine size	Petrol	LPG
1400cc or less	15p	10p
1401cc to 2000cc	18p	12p
Over 2000cc	26p	18p

 

Engine size	Diesel
1600cc or less	12p
1601cc to 2000cc	15p
Over 2000cc	18p

 

PLEASE NOTE: HM Revenue and Customs have changed the engine size categories for diesel engines.

 

Petrol hybrid cars are treated as petrol cars for this purpose.

 

For further information go to: http://www.hmrc.gov.uk/cars/advisory_fuel_current.htm

 

To calculate the Input VAT included: Multiply the numbers of miles, by the pence per mile (above), divide by 6 (and multiply by 1). This calculates the VAT in pence.

 

Remember, to claim the VAT, you must have a fuel VAT receipt for at least as much as the Input VAT claim.

 

The rates are reviewed four times a year. Any changes will take place on 1^st March, 1^st June, 1^st September or 1^st December and will be published on the HMRC website.

George Osborne disclosed his plans to re-invigorate the UK economy yesterday and at the same time, stay focussed on debt reduction. The pundits were forecasting a range of measures including: increasing the bank levy, perhaps scrapping or delaying the January 2012 increase in fuel duty and tinkering with the lower threshold for stamp duty to encourage first time buyers. Additionally the coalition also disclosed additional measures to stimulate the economy. Here’s a selection of the tax and other changes that were announced today.

For the business community:

Credit easing: National Loan Guarantee Scheme The Government will make available up to £20bn of guarantees for bank funding over two years. This should encourage banks to lend at lower rates to businesses. In his speech, Mr Osborne speculated that this would reduce average rates by 1%. Credit easing: Business Finance Partnership An initial £1bn will be made available for investment in SME’s and mid-sized businesses in the UK. Youth employment scheme As previously announced the £940m proposal to subsidise work placements for the young unemployed was confirmed. Branded as the Youth Contract it will target 18 – 24 year olds. Extra support will be provided by Job Centre Plus and will include provision of work experience or a Sector Based Work Academy place. Those still in unemployment after nine months on Job Seekers Allowance will transfer to the Work Programme that was introduced to help in the government’s key aims of fighting poverty, supporting the most vulnerable and helping people break the cycle of benefit dependency. Additional incentives for employers include: The provision of funding for an estimated 160,000 wage incentives, each payment to employers amounting to £2,275. Further funding for at least 40,000 incentive payments to encourage smaller firms to take on apprentices. Additional Government funding will provide £50m a year to support disadvantaged 16-17 year olds. Small Business Rate Relief The present relief will be extended for a further 6 months from 1 October 2012. Additionally there will be an opportunity to defer 60% of any increase in business rate bills for 2012-13 as a result of RPI uprating. This will be repaid equally in the following two years.

Other boosts for the economy:

Infrastructure investment The government is launching a £30bn plan to improve national infrastructure. The first tranche of £5bn will be provided by the government during the current parliament and a further £5bn in the next. The Treasury is to seek a further £20bn in total from the National Association of Pension Funds and the Pension Protection Fund. It is also promoting investment from insurance companies and China. The Government’s share, totalling £10bn will be funded from areas where there have been under-spends and from a crack-down on tax avoidance. Schemes targeted for support include: the Trans Pennine Express line between Leeds and Manchester, the Tyne & Wear Metro, and improvements to M25, M3 and M56. Mortgage indemnity scheme On the 21st November 2011 the Government announced a guarantee for up to 100,000 new mortgages, at up to 95% loan to value, for new build properties in England. Rail charges capped The planned January 2012 increase in regulated rail fares to be capped at 6.2% not 8.2%. This effectively limits the increases for London and regulated rail fares to RPI plus 1% and not the expected RPI plus 3%. Water bills in the South West Government is to fund South West Water in order that bills for household customers are cut by £50 per year. Free childcare places Places for deprived two-year-olds are to be doubled to 260,000. This will involve Government investing a further £380m a year by 2014-15 so that 15 hours of free education and care on a weekly basis can be offered to those that need it the most. Fuel duty change The expected 3.02p per litre rise in fuel duty due to take effect on 1 January 2012 has been deferred to 1 August 2012. The further increase of 1.92p per litre due to take effect from 1 August 2012 will be cancelled.

Tax changes:

Bank levy increased The promised increase in the bank levy is confirmed. In order to meet the £2.5bn target each year from 1 January 2012 the rate of Bank Levy will increase to 0.088% Employers’ pension contributions Employers making asset-backed pension contributions to registered pension schemes will have tax relief restricted to accurately reflect the amount of payments made. Seed Enterprise Investment Scheme (SEIS) This new scheme is to be set up to encourage inward investment into qualifying, new start-up companies. SEIS will provide income tax relief at 50% for individuals who invest in shares in qualifying companies. There will be an annual investment limit of £100,000 and cumulative investment limit for companies of £150,000. There is also a capital gains tax exemption for investments realised in 2012-13 and invested through SEIS in the same year. The existing Enterprise Investment Scheme Changes include: Relaxation of connected person rules and definition of shares qualifying for relief. Tighten the focus of the schemes by introducing a new test to exclude companies set up for the purpose of accessing relief. Exclude acquisition of shares in another company and exclude investment in Feed-in-Tariffs businesses. Remove the £1 million investment limit per company for VCTs to reduce the administrative burdens of the scheme. Capital gains tax The annual exempt amount for CGT is to be frozen at present levels for 2012-13 at £10,600. Capital Allowances: Enterprise Zones Enterprise Zones in six assisted areas will qualify for enhanced capital allowances. In these areas, 100 per cent allowances will be available for plant and machinery investment incurred between April 2012 and March 2017. Zones are: the Black Country, Humber, Liverpool, North East, Sheffield and Tees Valley. VAT low value consignment relief As previously announced the VAT exemption for low value goods below £15 sent to the UK from the Channel Islands will be removed from 1 April 2012. Gifts of pre-eminent objects New legislation is to be introduced that will enable individuals and companies to receive a reduction in their income tax, capital gains tax and corporation tax liabilities in return for donations of pre-eminent works of art or historical objects.

Benefits and pensions:

Welfare benefits Most working age and disability benefits will be increased in line with CPI from April 2012. The actual increase for 2012-13 will be 5.2%. Tax Credits The child element of Child Tax Credit will be increased in line with CPI and will rise by £135 per year in 2012-13. The £110 above inflation increase that was planned for 2012-13 will not go ahead. The disability elements of tax credits will be increased by reference to CPI. The couple and lone parent elements of the Working Tax Credit will not be increased in 2012-13. State Pension The Government is standing by its triple guarantee. From April 2012 a full basic pension will rise by £5.30 to £107.45 per week. The full couple rate where entitlement is based on their spouse’s or civil partner’s pension will rise by £8.50 to £171.85 per week. State Pension age change The increase in the age at which the State Pension can be drawn is to be increased from age 66 years to 67 years in 2026. Public sector pay From the end of the current pay freeze, average public sector pay increases will be limited to 1% for a further two years.

The following changes will apply from 6 April 2012:

For a let property to qualify as a FHL the following tests will need to be met:

1. Accommodation must be available to let as holiday accommodation for at least 210 days (140 days 2011/12).
2. Accommodation must actually be let as holiday accommodation to the general public for at least 105 days (70 days 2011/12).
3. The accommodation must not be let for periods of longer term occupation (greater than 30 days) for more than 155 days.

A period of grace election can be made to smooth your lettings history if you have a property that reaches the required criteria in some years but not others.

And don’t forget loss relief changes.

From 6 April 2011 it is no longer possible to set off FHL losses against other earnings or other non-FHL rental income. Losses can only be set off against income from the same FHL business.

Where an older spouse is currently claiming a dependency increase in their state pension, and for a wife or husband who has not yet reached retirement age, they will be advised to review the claim when the younger spouse reaches retirement age.

Issues to be considered include:

• The younger spouse’s own state pension, even if funded by the other spouse’s contributions (in which case it is known as a Category B pension), would create income for the younger spouse that may be covered by their personal allowance, so tax free.
• A continuing claim for the adult dependency allowance will likely be taxable when received by the older claimant, perhaps at higher rates.
• The present adult dependency allowance is £58.80 per week, the full Category B state pension that the younger spouse may be able to claim is now £61.20 per week.

Note: The adult dependency increase is not available for new pensions from April 2010 and will cease for existing claims by 5 April 2020 at the latest.

Download our flyer about the new workplace pension scheme that will be introduced in 2012 click here

HMRC’s director of customer operations recently disclosed that: “Most employers get their PAYE returns right. The few who do not can cause problems for their employees, for example, incorrect deductions of tax.”

Here’s a few examples of a number who did not get their returns right! Based on incorrect returns submitted HMRC now have the following data in their files:

• 40 people were apparently 200 years old or more, according to incorrect dates of birth on their paperwork.
• 824 employees with forenames but the surname recorded as “unknown”.
• 75 people have simply been named “casual”, 11 as “cleaner”, nine as “worker” and six as “students”.
• 572 people are listed as Mr or Mrs X on their PAYE forms.
• 128 staff are known in their workplace as Mr, Ms or Mrs “Dummy”.

HMRC conclude:
“Around 80% of errors in employee data are due to an incorrect name, date of birth or national insurance number; straightforward information that can be collected and checked quite easily.

So, whether you are employing ‘Mr or Mrs J Smith’ – or even ‘Mr or Mrs A N Other’, please use the full and official name on your PAYE paperwork. First names are very important, especially for common surnames.”

Thank you to everyone who came to the Expo.

Charities only need to account for VAT on those parts of its activities that are within the scope of VAT. A quick checklist follows:

• Sale of donated goods from a charity shop – zero rated supply
• Investment income, bank interest etc – outside the scope of VAT
• Donations from general public – outside the scope of VAT
• Fundraising events – exempt from VAT
• Grants, see below

The VAT status of the charity shops is advantageous. Even if the zero rated sales are below the current registration limit of £73,000, it would be worthwhile registering the trade voluntarily as any associated costs that include VAT can be reclaimed.

Grants received

Although most grants received by a charity are outside the scope of VAT, occasionally grant providers will require the charity to provide services to individuals or groups as a direct condition of grants made. If this is the case the grant is a standard rated transaction. In most cases this will not cause difficulties as most grant providers are Local Authorities that are VAT registered and can claim back any VAT charged.

Nevertheless charities should take care to seek advice and ensure that they charge VAT on grant income when appropriate.