Changes to the taxation of Buy To Lets

With effect from April 2017 the new Restricted Mortgage Interest Relief came into effect on BTLs, which is where the interest on any form of mortgage/finance which has been an allowable cost of the property in the past is slowly being phased out over the next three years for those who are higher rate tax payers (40%).

What does this mean in reality?  For the tax year ended 05 April 2018 this means that only 75% of the finance costs will be an allowable deduction for all BTL owners, and the additional 25% is only allowable if you are a basic rate taxpayer.  However, the complication lies where the finance costs must be disallowed before calculating whether or not the tax payer is basic rate tax payer.  If, when 25% of the finance costs are disallowed, the tax payer is still in the basic rate bracket then all the finance costs are then allowable in the calculation of the taxable profits.

For the year ended 05 April 2019 this changes to 50% allowable costs, and for 05 April 2020 reduces again to 25%.  Therefore this means by 05 April 2021, that 100% of any mortgage or finance costs are wholly disallowable if you are a higher rate tax payer.

This may well have an impact on your tax charge, as well as being able to offset any residential property losses against other properties.  It is anticipated that one in five landlords will receive lower relief and therefore pay higher taxes.  Tax planning in advance is highly recommended.

The new rules only apply to individuals and partners who have residential rental properties.  It does not apply to Furnished Holiday Lets, commercial properties, property development nor companies.

Paying your income tax bill

The Self Assessment Tax Return filing and payment deadline is just around the corner (31 January 2018 for the tax year ended 05 April 2017).  However, credit card payment for outstanding tax will no longer be accepted by HMRC from 13 January 2018!  Other ways to pay:-

  • Bank transfer
  • Debit Card
  • Credit Card (but not accepted from 13 January 2018!)
  • Cheque
  • At your bank or building society
  • Budget payment plan (payment in advance)

Click here to pay your outstanding tax bill … https://www.gov.uk/pay-self-assessment-tax-bill 

Wills and tax planning for business owners

Wills and Business Assets

When running a business, it is common to concentrate on the everyday needs of your business, rather than your own financial affairs.  However, it is extremely important to ensure that all business owners have an up to date Will and Power of Attorney in place.

Having a Plan

Succession planning is essential, as the death of a business owner or business partner can have a major impact on the running of the business.

When making a Will, it is important to look at the structure of the business to avoid problems after death.

Sole traders

After the death of a sole trader, the Executor in the Will is usually required to take over the running if the business. Do you have someone in mind who would be suitable to take on this responsibility?  You can appoint a specialist solicitor to take on this role, relieving a lay Executor from the burden of administering the business.

Partnerships

Many business owners are not aware that a partnership may dissolve on the death of a partner, in the absence of an appropriately worded partnership agreement. This would not be the intention of most partners in a partnership.  They would, instead, wish for the surviving partners to purchase their share from their Executors, with reference to agreed valuations.  This can be put into effect with a partnership agreement.

It is, however, extremely important that a partnership agreement does not create a binding agreement to sell on death, as this may result in the loss of ‘Business Property Relief’ on death.

It is important to review an existing partnership agreement as your business evolves.

Limited Companies

A shareholders’ agreement is similar way to a partnership agreement, as it enables the shareholders to specify how to proceed in the event of their deaths. A cross option agreement generally allows the surviving shareholders an option to purchase the deceased’s shares on their death. It is usually linked to a life insurance policy (sometimes called ‘keyman insurance’ ) to provide the funds on death.

Inheritance Tax (‘IHT’)

Inheritance Tax is generally charged if an estate is worth more than £325,000.  This amount is known as the ‘nil rate band’.  Certain exemptions apply, should the estate pass to a spouse or charities.  An additional ‘residence nil rate band’ of £100,000 also applies, should the deceased own a residence, which is inherited by a statutory class of beneficiaries on death, such as a spouse, children, grandchildren etc.  IHT is generally charged at the rate of 40% above the ‘nil rate band’ and ‘residence nil rate band’.

Some businesses qualify for Business Property Relief (‘BPR’) from Inheritance Tax on death. BPR can result in a 50% to 100% reduction in Inheritance Tax depending on the type of business and other statutory provisions.

Tax Efficient Wills

When a business owner is married, it is usual to leave their estate to their partner on death.  However, it may be more tax efficient to divert the business assets into a trust. Their spouse can still benefit from the business assets (or cash equivalent should the assets be sold after death), although they do not ‘own’ the assets, therefore they are not part of the surviving spouse’s estate on their death. This potentially saves up 40% tax on the second death.

Powers of Attorney

Who would manage your finances if you lose capacity in the future?  This could be by way of something sudden, like an accident or something degenerative, such as dementia.  Unfortunately, this could happen to any of us at any age, and we must be practical in order to protect or loved ones.  A Power of Attorney enables to you appoint someone that you trust to manage your personal affairs, should you become incapable of doing so in the future.  You can also make an additional Power of Attorney to deal with your business affairs only.

If you have any questions, would like some advice or a new Will please contact Emma Pringle TEP, Private Client Partner at Savage Silk on 0774 385 7503 or at emma.pringle@savagesilk.co.uk.

Changes to reporting income for SMEs and Individuals

I would urge you to spend just a few minutes reading this … I’ll do my best to keep this as short as possible, sticking to the key points …

Making Tax Digital (MTD) is a HMRC initiative which is due to come into effect from April 2018.  Essentially, all businesses (sole traders; partnerships; limited companies) and individuals who are required to submit Self Assessment Tax Returns with income over £10,000 per annum, will be required to submit details of their income and expenditure to HMRC on a quarterly basis, digitally, in a pre-prescribed format.

Businesses and individuals will inform HMRC of their income and expenditure for a three month period, and HMRC will calculate the tax payable.  This calculation will not take account of accounting and tax adjustments, this will be just a simple calculation of income less expenditure, which will need to be submitted within 30 days of each quarter.   Larger businesses and those who are VAT registered should not find this too onerous task, as these businesses will already be in the habit of collating information for tight deadlines.  However, smaller businesses and those who are, shall we say, a little less organised, need to get organised for Making Tax Digital coming into force.

I have heard some businesses saying “Oh, it doesn’t matter my accountant will take care of it” …. Yes, we shall where clients want us to deal with the additional filing, however …. or maybe “but” would be a more appropriate word, there are a couple of issues:

Firstly, as springs to most smaller business owner’s minds, what will the costs be for this extra work carried out by my accountant?   There will be additional fees where we are instructed to deal with the additional quarterly filing.  However, at the moment until we can see exactly what the requirements will be we are unable to confirm costs.  We generally anticipate though that the smaller the business, the lower the fees.

Secondly, and this is probably the factor of more concern, is the impact on cashflow once quarterly tax payments come into effect.   At some point, a date yet to be confirmed, tax payers will be expected to pay the tax payable each quarter (in real time).  Clearly, spreading the payment of tax throughout the year is a great idea – not having a large tax bill nine/ten months after a year end is a far improved process.    However, the information which will be submitted to HMRC will not take account of tax adjustments and therefore it is far more likely that tax will be overpaid throughout the year, and then refunded once the final year end accounts and tax returns are submitted.

There is also the effect on cashflow on the transitional year where we move from paying tax once or twice a year (depending on the business structure) to paying on a quarterly basis.  There will be a year where many are paying tax for the previous year (as we do currently) and also need to pay any tax due every three months, with that same year.

Quarterly reporting is due to take effect from April 2018 for businesses (sole traders and partnerships) and individuals who have income over the VAT threshold (£85,000).  Limited companies and those that are VAT registered will move over later.  Those with a turnover under £10,000 are exempt.  It may well be that in light of Brexit and other challenges that the Government has, that MTD going live is pushed back until 2019.   However, it has been made clear that this will go ahead at some stage.  The UK are basing their model on that of Sweden, which went live four years.  Much of Europe and the US already file quarterly tax returns.  The dates are yet to be confirmed as to when quarterly payments will take effect.

I hope that I don’t sound too negative about these changes … I am all for it … At Clarand we work digitally with our clients and we anticipate the transition should be smooth, however there will be some challenges ahead for some businesses and individuals in the transitional years.  I think the saying goes …. “By failing to prepare … you are preparing to fail”.  Clarand Accountants have already held a seminar about MTD for their clients, and will be holding more later in the year.

Claire Priestley

A New Role ….

Great news !!! Not only have we been shortlisted for North East Small Accountancy Practice of the Year, we are also looking to expand our team! 

We are looking for an apprentice trainee accountant to join us from September 2016. This is a three year fixed term apprentice contract which includes working toward the AAT qualification through day release and on the job training.  The selected candidate will be involved in many projects and experiences due to being part of a small team, which will add to their skills and knowledge. At Clarand we have a strong work ethic and reward well.

Three Years Old!

We are celebrating Clarand’s third birthday this month, and what better way to do so than to sponsor and present at the Community Foundation Women’s Fund lunch on Friday 4 March 2016 in Newcastle Upon Tyne.  Over three hundred business women attended the event and over £18,000 raised on the day.  We have been delighted to be to involved in the event and it was great to share our journey so far.

Five Reasons to Consider Venture Capital Investments

This guest post comes from Richard Charnley,  Investment Manager at Northstar Ventures.

Five Reasons to Consider Venture Capital Investments

Whether you’re a small business looking to expand or you’re a startup that needs seed funding, you might have considered seeking investment from a venture capital firm. Unlike traditional bank loans or private equity, venture capital can help support higher risk companies in the early stages of development. Here are five reasons why you should consider speaking to a VC Investment Manager if you are looking to grow your company.

Online Accounts Software (Cloud accounting)

With more and more of our clients turning to using online accounts software to help support them with their day to day finances, we thought we’d share some of the benefits that our clients have reaped from going digital …..

  • Real-time accounting
  • Easy access by their accountant throughout the year
  • Access whilst on the go
  • Saving time
  • Reducing costs
  • Helping with forecasting/planning
  • Going paper-free
  • No year-end surprises
  • Monthly fees; no upgrade costs and no contracts
  • Secure and no backups

Supply digital products to the EU? This will effect you!

With effect from 1 January 2015 the EU has brought in a new EU VAT scheme which directly affects UK businesses making digital supplies to customers in the EU.

Essentially the change is to “the place of supply”. Up until the end of 2014 the place of supply was where the supplier is based – ie here in the UK. If you are VAT registered you would charge UK VAT on your supply, and if you are not VAT registered you wouldn’t charge VAT. However, now the “place of supply” is where your customer is based.

Being Human

So what do you need to do to have a successful business?

Well I’m not going to compile the whole list. As I’m managing a small business myself it would probably make me panic a little. I’ll stick with what I know best, marketing.  How do you market your services or products with as little resources, (time and money) for maximum return?

Think human.

That’s it. Thanks for reading.

… ok, I’ll expand on that a little.