What happens to the tax you pay?

How many of us would feel happier about paying our taxes if we felt the Government was as eager about spending the money wisely and carefully as it seems eager to collect taxes from us?

The amazing incredulous truth is that every penny of income tax the Government collects from us each year it spends on welfare benefits! …..and billions more besides!

The figures are :

Income tax collected each year £160 billion

Welfare benefit payments each year £169 billion

In an era when hundreds of thousands of people can travel to the UK and apparently find jobs with not too much trouble, it seems incredible that welfare benefit spending can be so high. So incredible, that the Government now feels compelled to do something about it. The Government announced its long awaited plans for welfare reform last week.

Under the new proposals anyone claiming unemployment benefit for more than a year will have to carry out at least four weeks of unpaid work. Those claiming benefit for more than two years will be compelled to work in the community full-time.

The plans – in a welfare green paper published on the 21st July 2008 – are based on tough American “work for dole” schemes.

The announcement was welcomed by the Conservatives who claimed that the Government had copied many of their ideas but pledged to support the legislation when voted on in Parliament. So support across Parliament for the reforms.

Also to be introduced

  • Incapacity benefit will be replaced with a new “employment and support allowance”.
  • Claimants will no longer be assessed by their own GPs but will have to go through an independent medical assessment to assess what work they can undertake.
  • The new allowance will be a temporary benefit for all but the most severely disabled.
  • Drug addicts will also have to disclose their dependency and will have to undergo treatment or forfeit their benefits.
  • Single parents with children aged seven or more will also be expected to seek work.

The Work and Pensions Secretary, James Purnell, described the proposals as the biggest shake-up to welfare in Britain since the Beveridge report in 1942, which introduced benefits for families and the unemployed after the Second World War. Mr Purnell said: “The longer people claim, the more we will expect in return…Work works and it is only fair that we make sure a life on benefits is not an option.”

“We reached the situation in the 1980s where there were no requirements on people claiming unemployment benefit.”

” Incapacity Benefit ….traps people on benefits – it pays people more, the longer they stay on, without giving them the support to get back into work.”

The private sector will play a key role in the new welfare system. After a year of claiming unemployment benefit, claimants will be handed to selected private sector providers who will ensure they undertake a rigorous programme of training, job interviews and voluntary work. Claimants will be forced to carry out voluntary work if they are suspected of shirking offers of work. The private firms will receive bonuses of up to £50,000 for each claimant who is successfully returned to the workforce. The bonus will reduce if the claimant does not speedily return to work.

Shadow Secretary for Work and Pensions, Chris Grayling said: “We very much agree with the package of reforms the Government is proposing. It’s particularly helpful that they’re bringing them forward now because we always expected the reforms to take a couple of years to prepare before being ready to yield results.”

“So in reality what this announcement means is that the next Government will inherit a set of proposals that have been turned into action and are ready to bring about real change to our welfare state.”

Restriction of PPR

Restriction of PPR

If part of your home is let it will not affect your exemption from capital gains tax, providing the ‘rent a room’ scheme applies.

HMRC publication IR87 page 9 states:

“The private residence relief is not affected if you have a lodger who is treated as a member of your family, sharing the living rooms and eating with you, even if he or she has a separate bedroom.”

Leaflet IR87 was withdrawn on 23/92005, but has been included in HMRC’s Capital Gains Manual at #64702.

http://www.hmrc.gov.uk/manuals/cg4manual/cg64702.htm

HMRC consider the number of lodgers (at any one time) to be a critical factor, they consider there should be only one lodger. However this view is debateable.

If the rent a room scheme does not apply, it is important to measure the area of the let rooms and any other space for the exclusive use of lodgers (eg do they have there own bathroom?) and compare this to the rest of the house including any shared areas. All private areas and common areas are not in the rented area.

EIS Schemes

EIS-schemes

You can invest in a company wholly owned by yourself, providing it is engaged in a qualifying trade

The Tax Relief

  • An individual with no more than a 30% interest in the company can reduce his income tax liability by an amount equal to 20% of his share subscription. The minimum subscription is £500 per company and the maximum per investor is £400,000 per annum.
  • Deferral of gains realised on a different asset, where disposal of that asset was less than 36 months before the EIS investment or less than 12 months after it. (Deferral relief). This relief is not limited to investments of £400,000 per annum and can be claimed by investors whose interest in the company exceeds 30%. It is available to individuals and trustees. Where gains arise on the EIS investment, taper relief is available. Note that deferral of gains is no longer available by investing in VCTs.
  • No Capital Gains Tax payable on disposal of shares after three years (after five years for investments made before 6th April 2000) provided the EIS initial income tax relief was given and not withdrawn on those shares.
  • If EIS shares are disposed of at any time at a loss, such loss can be set against the investor’s capital gains or his income in the year of disposal.

EIS Investments are exempt from Inheritance Tax after two years of holding such investment.

Purpose

Investment in companies that are not listed on a stock exchange often carries a high risk. The tax relief is intended to offer some compensation for that risk. The EIS offers both income tax and capital gains tax reliefs to investors who subscribe for shares in qualifying companies.

Personal Private Residence

Adopting a property as a personal private residence

Lets start by saying this is a complicated area!

A Principal Private residence is CGT-free only IF two conditions are fulfilled :-

1. the property must not have been purchased for the sole reason of making a profit and

2. that to be exempt the property (dwelling house) must be an individual’s (or married couple’s) only or main residence throughout the period of ownership. (A married couple are only allowed one ppr between them)

There is no minimum period of occupation defined in the legislation to make a property into a residence.
However, if you only occupy a property for a short period of time, HM Revenue & Customs are likely to question your motives for purchasing the property and see if point 1 above applies. The longer you actually spend living in the property the better (from a practical point of view). In some circumstances, it might also be a good idea to gather some evidence of your actual residence.

Where there is more than one property used as a residence the situation is more complicated.

Where an owner occupies a property as a residence, even if not as his or her main residence, then PPR is available – subject to some provisos.

Only one property can be your PPR at any point in time. It is up to you (the owner) to nominate one of the eligible properties as your main residence. You must make this election within two years of the change in your situation. If you don’t make the election then HMRC can determine which is your ‘main’ residence based upon where you spend the most time.

So from the date you have two properties available and used as a residence you have 2-years to nominate one of them as your PPR. Another 2 year period would commence if a third residence entered the equation.
The election time limit is important because, if a valid election is made within the 2-year time limit, it allows later revisions to the election to be made. If there is no valid election in the first place, then later revisions in respect of the same combination of properties will be ignored, and HMRC will determine which property was your main residence by reference to the facts, i.e. whichever was ‘the most occupied.’

The gain arising on the disposal of a property is deemed to have accrued over the period of its ownership. Therefore, if you own a property for 10 years, and it has been your PPR for 5 of those years, (by election, or by determination of the Inland Revenue), then 50% of the gain will be set aside. (PPR relief is applied to the gain net of acquisition and improvement costs incurred, but before Taper Relief (TR) and the Annual Capital Gains Exemption (AE)).
It is important to note that the final 3 years of ownership of a property which has been a PPR are exempt from CGT regardless of the actual use during this period. If the property has been a PPR before the last three years, this period will be exempt – in addition to the last 3 years.

Suppose you live in Birmingham and buy a ‘holiday home’ by the coast, and (within the two year time limit) you elect for this holiday home to be your PPR, then perhaps after 1 year you decide to let it for say 6 months. As the property is let and not available to you, this means that now you only have one residence and therefore your original Birmingham home starts to qualify again as your PPR.

You effectively lose 1 years exemption out of your total period of ownership of the Birmingham property. As time goes on, 1 year as a proportion of the total period becomes less significant. There are likely to be other reliefs and exemptions available to you. (eg taper relief and annual exemptions). These exemptions could be enhanced significantly if you were to let this as residential accommodation for a period at some time in during your ownership.

On the other hand, the holiday home will now qualify for the first year due to the election. Additionally, it will also qualify for the final 3 years of the ownership. If it was also let as residential accommodation, you could also qualify for relief from gains of upto a further £40,000. If owned jointly with another, say your spouse, the lettings relief of up to £40,000 is available to each person.

Lets start by saying this is a complicated area!

A Principal Private residence is CGT-free only IF two conditions are fulfilled :-

1. the property must not have been purchased for the sole reason of making a profit and

2. that to be exempt the property (dwelling house) must be an individual’s (or married couple’s) only or main residence throughout the period of ownership. (A married couple are only allowed one ppr between them)

There is no minimum period of occupation defined in the legislation to make a property into a residence.
However, if you only occupy a property for a short period of time, HM Revenue & Customs are likely to question your motives for purchasing the property and see if point 1 above applies. The longer you actually spend living in the property the better (from a practical point of view). In some circumstances, it might also be a good idea to gather some evidence of your actual residence.

Where there is more than one property used as a residence the situation is more complicated.

Where an owner occupies a property as a residence, even if not as his or her main residence, then PPR is available – subject to some provisos.

Only one property can be your PPR at any point in time. It is up to you (the owner) to nominate one of the eligible properties as your main residence. You must make this election within two years of the change in your situation. If you don’t make the election then HMRC can determine which is your ‘main’ residence based upon where you spend the most time.

So from the date you have two properties available and used as a residence you have 2-years to nominate one of them as your PPR. Another 2 year period would commence if a third residence entered the equation.
The election time limit is important because, if a valid election is made within the 2-year time limit, it allows later revisions to the election to be made. If there is no valid election in the first place, then later revisions in respect of the same combination of properties will be ignored, and HMRC will determine which property was your main residence by reference to the facts, i.e. whichever was ‘the most occupied.’

The gain arising on the disposal of a property is deemed to have accrued over the period of its ownership. Therefore, if you own a property for 10 years, and it has been your PPR for 5 of those years, (by election, or by determination of the Inland Revenue), then 50% of the gain will be set aside. (PPR relief is applied to the gain net of acquisition and improvement costs incurred, but before Taper Relief (TR) and the Annual Capital Gains Exemption (AE)).
It is important to note that the final 3 years of ownership of a property which has been a PPR are exempt from CGT regardless of the actual use during this period. If the property has been a PPR before the last three years, this period will be exempt – in addition to the last 3 years.

Suppose you live in Birmingham and buy a ‘holiday home’ by the coast, and (within the two year time limit) you elect for this holiday home to be your PPR, then perhaps after 1 year you decide to let it for say 6 months. As the property is let and not available to you, this means that now you only have one residence and therefore your original Birmingham home starts to qualify again as your PPR.

You effectively lose 1 years exemption out of your total period of ownership of the Birmingham property. As time goes on, 1 year as a proportion of the total period becomes less significant. There are likely to be other reliefs and exemptions available to you. (eg taper relief and annual exemptions). These exemptions could be enhanced significantly if you were to let this as residential accommodation for a period at some time in during your ownership.

On the other hand, the holiday home will now qualify for the first year due to the election. Additionally, it will also qualify for the final 3 years of the ownership. If it was also let as residential accommodation, you could also qualify for relief from gains of upto a further £40,000. If owned jointly with another, say your spouse, the lettings relief of up to £40,000 is available to each person.

Link to Calculator to assist with calculating the gain on a property disposal

cgt calculator

Capital Gains Tax on Property Calculator

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