fpdteam, Author at Bennetts Accountancy

Gifts with reservation

28th July 2022 by fpdteam

The majority of gifts made during a person's life are not subject to tax at the time of the gift. These lifetime transfers are known as 'potentially exempt transfers' or 'PETs'. These gifts or transfers achieve their potential of becoming exempt from Inheritance Tax if the taxpayer survives for more than seven years after making the gift. There is a tapered relief available if the donor dies between three and seven years after the gift is made.

The effective rates of tax on the excess over the nil rate band for PETs is:

0 to 3 years before death 40%
3 to 4 years before death 32%
4 to 5 years before death 24%
5 to 6 years before death 16%
6 to 7 years before death 8%

However, the rules are different if the person making the gift retains some 'enjoyment' of the gift made. This is usually the case where the donor does not want to give up control over the assets concerned. These gifts fall under the heading of 'Gifts With Reservation of Benefits rules' or 'GWROBs'.

A common example is a person giving their house away to their children but continuing to live in it rent-free. Under these circumstances, the taxman would contend that the basic position of the donor remained unchanged and that this is a GWROB. If this is the case, HMRC will not accept that a true gift has been made and the 'gift' would remain subject to Inheritance Tax even if the taxpayer dies more than 7 years after the transfer.

A GWROB can usually be avoided in this type of situation if the donor pays full market rent for the use of the asset gifted. We would be happy to help you understand what options are available to reduce your liability to Inheritance Tax whilst at the same time protecting your assets.

Source:HM Revenue & Customs| 24-07-2022

Qualifying for residence nil rate band

21st July 2022 by fpdteam

The Inheritance Tax residence nil rate band (RNRB) is a transferable allowance for married couples and civil partners (per person) when their main residence is passed down to a direct descendent such as children or grandchildren after their death.

The allowance increased to the present maximum level of £175,000 from 6 April 2020. The allowance is available to the deceased person’s children or grandchildren. Any unused portion of the RNRB can be transferred to a surviving spouse or partner. The RNRB is on top of the existing £325,000 Inheritance Tax nil-rate band.

The allowance is available to the deceased person's children or grandchildren. Taken together with the current Inheritance Tax limit of £325,000 this means that married couples and civil partners can pass on property worth up to £1 million free of Inheritance Tax to their direct descendants.

There is a tapering of the RNRB for estates worth more than £2 million even where the family home is left to direct descendants. The additional threshold will be reduced by £1 for every £2 that the estate is worth more than the £2 million taper threshold. This can result in the full amount of the RNRB being tapered away.

The RNRB maximum rate of £175,000 and the taper threshold are currently frozen until at least April 2026.

Source:HM Revenue & Customs| 17-07-2022

Tax when you get your pension

21st July 2022 by fpdteam

There are special rules which allow individuals who have set up private pension scheme(s) to benefit from significant tax reliefs when saving for their retirement. There is no overall limit to the amount of employer or employee contributions and no upper limit to the total amount of pension saving that can be accumulated. However, there are important limits that affect the tax reliefs available. For example, you will usually need to pay a tax charge if your private pension pots total more than £1,073,100. There will also be tax to pay if your pension contributions exceed £40,000 in any tax year, unless covered by unused relief from the previous three years, (this £40,000 limit may be reduced for high income earners).

Certain pension benefits can be taken tax-free. In general, you can take 25% of your pension pot as a one-off lump sum without paying tax but the remaining 75% must be used to buy an annuity, to secure an adjustable income or taken as cash (with tax due on the balance). You can also take smaller cash sums from your pension pot and 25% of each chunk would be tax free.

However, it is important that taxpayers are aware of the tax position when receiving pension income. Apart from the special tax-free benefits, pension income is treated as earned income for Income Tax purposes and any Income Tax payable is calculated as per the usual rules. The personal allowance for the current tax year is £12,570. There is no liability to pay National Insurance contributions on pension income.

Income Tax is also due on the State Pension, earnings from employment or self-employment and any other taxable income received.

Source:HM Revenue & Customs| 17-07-2022

Applying for Marriage Allowance

21st July 2022 by fpdteam

The marriage allowance can be claimed by married couples and those in a civil partnership where a spouse or civil partner does not pay tax or does not pay tax above the basic rate threshold for Income Tax (i.e., one of the couples must currently earn less than the £12,570 personal allowance for 2022-23).

The allowance works by permitting the lower earning partner to transfer up to £1,260 of their personal tax-free allowance to their spouse or civil partner. The marriage allowance can only be used when the recipient of the transfer (the higher earning partner) does not pay tax at the higher Income Tax rates. This would usually mean that their income is between £12,570 to £50,270 in 2022-23. The limits are somewhat different for those living in Scotland.

This transfer of unused allowances could result in a saving of up to £252 for the recipient (20% of £1,260), or £21 a month for the current tax year.

If you meet the eligibility requirements and have not yet claimed the allowance, you can backdate your claim to 6 April 2018. This could result in a total tax refund of up to £1,220 if you can claim for 2018-19, 2019-20, 2020-21, 2021-22 as well as the current 2022-23 tax year. If you claim now, you can backdate your claim for four years (if eligible) as well as for the current tax year. In fact, even if you are no longer eligible but would have been in all or any of the preceding years then you can still claim your entitlement.

Source:HM Revenue & Customs| 17-07-2022

NIC threshold increased

21st July 2022 by fpdteam

In the Spring Statement earlier this year, the then Chancellor, Rishi Sunak, announced an NIC tax-cut to take effect from 6 July 2022. This change sees the National Insurance threshold increased from £9,880 to £12,570. This increase means that the Primary Threshold (PT) for Class 1 NICs and Lower Profits Limit (LPL) for Class 4 NICs are now aligned with the personal allowance of £12,570. It was also confirmed as part of the Spring Statement measures that the thresholds will remain aligned going forward.

The NIC tax cut is worth up to £330 for thirty million taxpayers across the UK and represents a £6 billion tax cut. According to government figures this means that around 70% of employees will pay less NICs, even accounting for the introduction of the Health and Social Care Levy.

The NIC PT and LPL remained at £9,880 (as previously announced) from 6 April 2022 – 5 July 2022. Whilst it is unusual for tax rates to change during a tax year the short period remaining after the Spring Statement and the start of the 2022-23 tax year meant that the increase was delayed for 3 months until 6 July 2022. This means that the average LPL will be £11,908 for the 2022-23 tax year which is equivalent to 13 weeks of the threshold at £9,880 and 39 weeks at £12,570.

Source:HM Treasury| 17-07-2022

Entitlement to National Minimum Wage

21st July 2022 by fpdteam

Employers must ensure they are paying staff the new National Minimum Wage (NMW) and National Living Wage (NLW) rates for the period from 1 April 2022 – 31 March 2023. The NLW is the minimum hourly rate that must be paid to those aged 23 or over. The rate for the NLW is £9.50. The hourly rate of the NMW (for 21-22-year-olds) is £9.18. The rates for 18-20-year-olds is £6.83 and the rate for workers above the school leaving age but under 18 is £4.81. The NMW rate for apprentices is £4.81.

HMRC’s manuals discusses the legal entitlement for employees to be paid the NMW. Most workers in the United Kingdom who are over compulsory school leaving age (and those who ordinarily work in the United Kingdom) are entitled to be paid at least National Minimum Wage rates.

This entitlement to the NMW is set out in the National Minimum Wage Act 1998, section 1 as follows:

(1) A person who qualifies for the National Minimum Wage shall be remunerated by his employer in respect of his work in any pay reference period at a rate which is not less than the National Minimum Wage.
(2) A person qualifies for the National Minimum Wage if he is an individual who-

is a worker.
is working, or ordinarily works, in the United Kingdom under his contract, and
has ceased to be of compulsory school age.

It is important that employers ensure they pay employees at least the minimum wage to which they are entitled. There are penalties for non-payment of minimum wages of up to 200% of the amount owed. The penalty is reduced by 50% if all of the unpaid wages and 50% of the penalty are paid in full within 14 days.

The maximum fine for non-payment can be up to £20,000 per employee. Employers who fail to pay, face up to a 15-year ban from being a company director as well as being publicly named and shamed.

Source:HM Revenue & Customs| 17-07-2022

Non-resident company taxation

21st July 2022 by fpdteam

Non-resident companies with a trading business in the UK are liable to pay UK Corporation Tax on their profits made through a permanent establishment/branch or agency.

If the non-resident company is deemed liable to pay Corporation Tax, then its chargeable profits are:

any trading income arising directly or indirectly through or from the permanent establishment/branch or agency,
any income from property or rights used by, or held by or for, the permanent establishment/branch or agency except dividends or other distributions received from companies resident in the UK, and
chargeable gains falling within TCGA92/S10B.

There are however some differences in the taxation of non-resident companies as opposed to resident companies. For example, a non-resident company:

is not liable to account for ACT on distributions made before to 6 April 1999,
cannot have 'franked investment income',
cannot have surplus franked investment income for the purposes of ICTA88/S242,
cannot set trading losses against dividend income to augment its trading income for the purposes of absorbing losses brought forward.

Any UK-source income received by a non-resident company which does not carry on a trade in the UK through a permanent establishment/branch or agency is subject to UK Income Tax. Any Income Tax due is calculated at the basic rate only without any allowances, subject to any applicable Double Taxation Agreement.

Source:HM Revenue & Customs| 17-07-2022

Joining the MTD ITSA pilot

14th July 2022 by fpdteam

Some businesses and agents are already keeping digital records and providing updates to HMRC as part of a live pilot to test and develop the Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA). Under the pilot, qualifying landlords and sole traders (or their agents) can use software to keep digital records and send Income Tax updates instead of filing a Self-Assessment tax return.

The full introduction of MTD for ITSA is expected to start from 6 April 2024. The rules will initially apply to taxpayers who file ITSA returns with business or property income over £10,000 annually. General partnerships will not be required to join MTD for ITSA until a year later, in April 2025. A new system of penalties for the late filing and late payment of tax for ITSA will also apply.

HMRC’s guidance on who can use the pilot has been updated. We have listed the main categories of who can and can’t join the pilot below:

You can voluntarily sign up for the service if all of the following apply:

you’re a UK resident,
you’re already registered for Self Assessment,
your accounting period aligns to the tax year — for example, 6 April 2021 to 5 April 2022,
you have submitted at least one Self Assessment tax return,
you’re keeping digital records,
one or more of the following were included in your last return: an existing self-employment income, a UK property source, a foreign property source.
you’re up to date with your tax records — for example, you have no outstanding tax liabilities.

You cannot sign up yet if you:

need to report income from any other sources,
have an Income Tax charge — for example, high income Child Benefit charges or certain pension tax charges,
have a payment arrangement,
do not have an up to date address with HMRC,
are a partner in a partnership,
are currently, or are going to be, bankrupt or insolvent,
are a Minister of religion, Lloyds underwriter or foster carer,
have a third party capacitor, this includes (but is not limited to): trusted helpers, insolvency practitioners, nominees and solicitors.

The option to sign-up as an individual for MTD for ITSA is currently only available to individuals using a recognised provider offering software that is compatible with MTD for ITSA.

Source:HM Revenue & Customs| 10-07-2022

Furnished Holiday Lets and VAT

14th July 2022 by fpdteam

The furnished holiday let (FHL) rules allow holiday lettings of properties that meet certain conditions to be treated as a trade for some specific tax purposes. As an FHL is treated as a business, it is important to remember that VAT must be accounted for on furnished holiday lettings once the VAT registration threshold is surpassed.

This means that all FHL income would be subject to VAT at the 20% standard rate once the VAT registration threshold, currently £85,000, is breached. Anyone with an FHL with gross rentals exceeding £85,000 in the previous 12 months or expected to exceed £85,000 in the next 30 days is required to register for VAT. If the owners of an FHL business already hold a VAT registration in relation to other business activity, then the FHL income would be subject to VAT from the start. Of course, VAT registration may offer some benefits in allowing for the VAT recovery on refurbishment, maintenance and day-to-day running costs associated with the property in question.

In order to qualify as a furnished holiday letting, the following criteria need to be met:

The property must be let on a commercial basis with a view to the realisation of profits. Second homes or properties that are only let occasionally or to family and friends do not qualify.
The property must be located in the UK, or in a country within the EEA.
The property must be furnished. This means that there must be sufficient furniture provided for normal occupation and your visitors must be entitled to use the furniture.

In addition, the property must pass the following 3 occupancy conditions.

Pattern of occupation condition. The property must not be used for more than 155 days for longer term occupation (i.e. a continuous period of more than 31 days).
The availability condition. The property must be available for commercial letting at commercial rates for at least 30 weeks (210 days) per year.
The letting condition. The property must be let for at least 15 weeks (105 days) per year and home owners should be able to demonstrate the income from these lettings.

Source:HM Revenue & Customs| 10-07-2022

Filing and paying company tax returns

14th July 2022 by fpdteam

If you have recently setup a new limited company or are thinking of doing so then one of the areas that you need to be aware of is the accounts and tax filing regime for companies.

After the end of its financial year, a private limited company must prepare full annual accounts and a company tax return. In most cases a company’s tax return must be submitted within 12 months from the end of the accounting period it covers. Online Corporation Tax filing is compulsory for company tax returns. Company tax returns must be submitted using either HMRC’s own software or third-party commercial software approved by HMRC and in the required format.

The accounting period for Corporation Tax is normally the same 12 months as the company financial year covered by the annual accounts. There is a separate fixed date for the payment of Corporation Tax which is 9 months and 1 day after the end of the relevant accounting period. This means that a company is usually required to pay any Corporation Tax due in advance of the filing deadline for a company tax return.

A company has a right to amend its company return within 12 months from the statutory filing date. Examples of when a return may be amended include claims for group relief and elections rebasing for capital gains.

There are penalties for late submission of company tax returns. There is a standard penalty of £100 for a late submission of the return within 3 months of the due date and a £200 penalty if the return is over 3 months late. Companies that submit late returns for 3 or more accounting periods in a row are subject to increased penalties. There are further tax based penalties for companies that do not file a return within 18 months of the end of the relevant accounting period and which have not paid the tax due. These penalties can be either 10% or 20% of the unpaid tax depending on the lateness of the filing.

Source:HM Revenue & Customs| 10-07-2022