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Leaflet IR87 was withdrawn on 23/92005, but has been included in HMRC’s Capital Gains Manual at #64702.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

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EIS-schemes

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

The Tax Relief

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.

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Adopting a property as a personal private residence

Lets start by saying this is a complicated area!

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.’

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!

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.’

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

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From 1 July 2008 the Revenue have published new mileage rates that company car users can use to calculate the fuel cost of running their vehicles for private purposes. The new rates may be used from 1 June 2008. If this private element is repaid to employers the employees will avoid the penal car fuel benefit charge. The new rates are:

Engine size:

* 1400cc or less:           petrol 12p, diesel 13p, LPG 7p.
* 1401cc to 2000cc:      petrol 15p, diesel 13p, LPG 9p.
* Over 2000cc:               petrol 21p, diesel 17p, LPG 13p.

Employers can also use these rates to calculate the VAT input tax on fuel included in staff mileage claims - employers will need to retain fuel receipts from staff to prove the fuel was purchased. It is unlikely that staff will have receipts that exactly match the fuel element on their claim forms. Receipts should cover the same time period and be sufficient to cover the VAT claimed.

The rates for use of the employees vehicle for business mileage remain unchanged at

First 10,000 miles      40p per mile

thereafter                    25p per mile

These rates have remained unchanged for many years despite the dramatic fuel price rises, an increase is long overdue!

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Many entrepreneurs have purchased commercial property that has been fully or partly occupied at various times by their business, and rent may have been charged for the use of the property; either the property owner has been paid rent by his business, or by other third parties.

The way in which the new capital gains tax rules apply to the disposal of these properties changed on 6 April 2008.

Under the new rules, all taxable capital gains are now subject to a flat 18% tax chargem with one important exception. If a disposal qualifies as the sale of a business asset you may be able to claim entrepreneurs’ relief. In which case, the first £1m of qualifying lifetime disposals are subject to tax at the reduced rate of 10%. Generally speaking the disposal of a business property should qualify for entrepreneurs’ relief as long as it is sold in conjunction with the sale or cessation of the business, or within 3 years of that date.

Obviously, if you have purchased a property for the purposes of running your business you may feel that this relief will be available to you when you sell the property. Unfortunately the position of certain property owners, particularly those who have charged rent to their business, may not be so straightforward.

The issues that affect the availability of entrepreneurs’ relief when commercial property has been rented to a business, are complex and if you have commercial property please feel free to speak to us for more details. However, we have highlighted below the fundamental difference between a disposal by a sole trader and a disposal by a partner or company shareholder.

1. Sole traders are treated differently to partners and owners of limited companies.

If you are a sole trader there would be no commercial or tax purpose in charging your business rent for the use of your property - both property and business are in your name. There could be circumstances where part of the property has been let to a third party. However as long as part of the property is in use by the owner’s business when the property is sold, a claim to entrepreneurs’ relief should be effective; at least to some extent.
2. Partnerships and limited companies.

If a partner or shareholder has purchased a property and made this available to the business for a rental payment, the CGT position on disposal is more complex. If rent has been charged by the owner to the partnership or company, a claim for entrepreneurs’ relief on sale may be precluded.

A final point. Relevant legislation has not yet completed its passage through Parliament. The Treasury are aware that a sale of a business property prior to 6 April 2008, that would have qualified for taper relief, may not now qualify for entrepreneurs’ relief; purely due to the rental payments issue. There is therefore a possibility that there may be some relaxation of the rules in any amended legislation.

If you are contemplating a sale of this type of property please contact us before completing the sale in order that we can help you organise contracts in the most tax efficient way.

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Like it or not, your future relationship with H M Revenue & Customs has been changed forever, thanks to the Finance Act 2008. Read on to find out how……

In the past regular visits have been restricted to VAT audits and PAYE visits. Additionally inspectors may have picked up on areas of concern in your annual tax return and launched a formal aspect, or full enquiry into your affairs.

Unfortunately the Finance Act 2008 takes this process to a new level!

In future you will be penalised if HMR&C believe you have not taken reasonable care in preparing any information (accounting or otherwise) that underpins any return made to them. It is likely that any under-declared tax that is discovered will be subject to a penalty approaching 30%, and if HMRC can prove negligence or fraud this can increase to 100%.

The way in which these errors will be discovered are set out in changes to HMRC’s legal powers to investigate tax returns. It is envisaged that an officer of HMRC might begin a compliance check in respect of any of the relevant taxes for one or more of a number of purposes. These include checking that:

* a tax return, amendment to a return or claim is correct;
* statutory record keeping requirements are being met;
* tax has not been underpaid or over-claimed; or
* any issues concerning possible tax avoidance are considered.

This means you can expect that future visits by tax officers will take a great interest in the care that has been taken to keep proper accounting records. In particular how these records affect your VAT and payroll returns.

Access to information.

HMRC have included changes to the law in the Finance Bill 2008 that would give them rights regarding access to records that underpin your returns.

There is to be no right to appeal against HMRC seeing records.

Another interesting development recognises the use of computers in storing relevant data. HMRC state:

“An authorised person may, at any reasonable time, obtain access to, and inspect and check the operation of, any computer and any associated apparatus or material which is or has been used in connection with a relevant document.”

This would provide officers of HMRC access to any computer which has been used in connection with the accounting records (including supporting documents) required of the taxpayer. This is a new development, as normally taxpayers would expect HMRC to have access to the records themselves, but not the computers on which the records have been prepared or maintained. The practical implications of this are significant.

You may want to ensure that no critical business information is kept on the same computer as the accounting records, so that risk of breach of confidentiality, or even business disruption, is kept to a minimum should HMRC require access to the computer during the course of an enquiry.

Visits will be made during the year to check that the record keeping provisions are being complied with during the accounting period, and given the significant concern expressed about the quality of accounting records by HMRC and the impact on tax take, this is likely to be the main HMRC compliance contact that small businesses will have in the future.

What does this mean for me?

For most businesses the new rules will have effect for accounting years ending 31 March 2009. Therefore the records that you are presently updating for this period of account may be open to inspection.

Please contact us if you are interested in a formal review of your accounting and related administration systems, in order to minimise any possible financial consequences of future HMRC visits.

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Working from home allowance

You may be interested to learn that HMRC have increased the tax free allowance that employers can pay their employees if they are required to work from home. The allowance is intended to compensate employees for the additional costs of home working, heat and light etc. From 2008-09 onwards the allowance has been increased to £3 a week. (Previously £2 per week)

If by chance you work from home and your employer does not pay you the allowance, you may be able to make a claim for the cost of running a home office. Unfortunately the present agreed weekly allowance is still £2 per week - HMRC have not yet confirmed that they will allow a similar 50% increase. However it is reasonable to assume that this would apply.

In both cases if it can be demonstrated that actual additional costs of home working are more than £2/£3 per week, employers could pay more than the £3 allowance and un-reimbursed employees may be able to claim their actual costs.

Unfortunately the criteria which apply to the tax free payment from employers is less restrictive than the rules which apply to a claim from employees who have to meet their own homeworking costs. If you would like more information on this issue please call.

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To accommodate non-UK tax considerations, a growing number of UK taxpayers have been advised to purchase property abroad by using a company to make the purchase. Potentially this created a risk that owners who were directors or shadow directors of the company, would be assessed on their private use of the property as a benefit in kind.

The Finance Bill 2008 now includes legislation that exempts most owners from this potential benefit in kind charge.

To qualify for the exemption the following conditions must be met:

1. The property is owned by a company owned by individuals. If the shares in the company are owned by a family trust the exemption will not apply.
2. The property is the company’s only or main asset.
3. The company’s only activities are those that are incidental to its ownership of the property, and
4. The property is not funded directly or indirectly by a connected company.

The Finance Bill 2008 has clarified that exemption is extended to include ownership by certain groups of companies, and that letting of the property to third parties will not disqualify application of the exemption.

Please note that this exemption only applies to overseas properties. If you own a UK property through a company a potential benefit in kind charge will still apply.

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In certain circumstances it may be possible to claim expenses from your employer and not be required to include a formal receipt. In brief the company can set ’scale rates’ for frequently incurred expenses and get these rates agreed by HMRC.

New guidance has been published by HMRC which empowers employers to set scale rates for particular expenses. Where these scale rates are agreed employees can claim them without the normal requirement to produce a receipt.

Examples illustrated by HMRC’s web site include subsistence payments and cleaning of protective clothing or uniforms.

The following notes outline some of the issues that need to be considered when setting scale charges that will qualify under this concession.

• It is only possible to claim the scale charge when the underlying expense has been incurred. For example if a daily subsistence allowance was paid, irrespective of the employee actually incurring subsistence expenditure every day, HMRC would treat this as a payment of earnings and tax it accordingly.
• HMRC intend that scale rate payments only cover expenses which are widely incurred and for which it is often difficult to get receipts.
• Scale rates should be set at “modest” levels - at an amount that will be enough to cover the relevant expense.
• Scale rates must be agreed with HMRC before any payments are made to employees.

HMRC make suggestions for a process of sampling in order to quantify the level at which scale rates are set.

If your reimbursements to employees are significant it may simplify your accounting if you consider introducing scale rates for appropriate expenses, we can help.

A “tasty” footnote: Whilst researching this article we came across the following HMRC directive regarding claims for subsistence, in particular a claim for the cost of sandwiches/packed lunch if working away. If you make yourself a pack-up lunch using your domestic supplies, the cost of the food cannot be reimbursed tax free by your employer nor can you make a claim on your tax return if you are not reimbursed. If however you purchase a ready made sandwich this cost can be reimbursed or a claim made on your tax return!

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In order to deal with complaints from its backbenchers Gordon Brown, or more accurately his Chancellor Alistair Darling, has announced two changes to the taxation of earnings for 2008-09. The changes attempt to compensate taxpayers on low earnings who were disadvantaged by the loss of the 10% starting rate of income tax.

The additional changes are:

1. The basic personal tax allowance has been increased by £600 to £6,035, and
2. The income limit where earnings will be taxed at the 40% higher rate has been reduced from £36,000 to £34,800.

The effect of these changes is to reduce the income tax bill for basic rate tax payers by £120 this year. If you pay your income tax by PAYE as a deduction from your salary, the changes to your tax code will be effective from September 2008 when you could pay up to £60 less tax. The ongoing tax reduction will be £10 per month to the end of the tax year.

As the income limit at which earnings are taxed at the higher rate has been reduced, if you are a higher rate tax payer there will be no change in your total tax bill this year.

Previous changes to address this issue included adjustments to tax credits. We are also promised further assistance for disadvantaged low income groups to be announced in the pre-budget report Autumn 2008.

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