> The next step providing ready to use documents, source material, tools, etc.
> Access to Tips & Advice Tax Memo content
The change of government cast doubt on whether the scrapping of furnished holiday lettings (FHL) tax breaks would go ahead. New draft legislation confirms that it will. What’s the full story?
FHLs - not quite the end. In March 2024 the government announced that the long-standing tax breaks for landlords who let furnished holiday accommodation would come to an end on 5 April 2025. However, it was clear that because of the nature of the tax relief a clean break wouldn’t be possible; therefore transitional rules were needed. These have now been published by HMRC.
Key changes. The main changes that landlords of furnished holiday lets (FHLs) will see are:
• tax relief for loan interest and other finance costs relating to their FHLs will follow the general rules for rental properties and so be capped at the basic income tax rate (20%)
• expenditure on equipment, fixtures and fittings used in the FHL business will cease to qualify for capital allowances (CAs) (HMRC’s relief for depreciation of assets); and
• business asset disposal relief (BADR) and other capital gains tax breaks will end.
CAs transitional rules. FHL landlords who incurred or will incur expenditure on or before 5 April 2025 on equipment and other assets that qualify for CAs, will be entitled to CAs beyond 5 April 2025. There will be no clawback of CAs or deemed sale of the assets as was feared.
Tip. Advise clients to maximise CAs by bringing forward qualifying expenditure they intended to make after 5 April 2025 to an earlier date.
CGT transitional rules. For BADR, where the FHL conditions are met on or before 5 April 2025, relief will continue to apply to a sale or transfer of the FHL property that occurs within three years following cessation of the letting business, whenever that occurs (see The next step).
The next step
For more information on the CGT changes, visit https://www.tips-and-advice. co.uk, code TATX25DA01.
› Transitional rules will allow landlords of FHLs to continue claiming capital allowances for qualifying costs incurred on or before 5 April 2025. Capital gains tax breaks will be allowed if conditions are met as at 5 April 2025.
Reduce company car tax with capital contribution
It’s time to replace your client’s company car. They’ve heard that if they make a personal contribution to the cost it will be more tax efficient. The trouble is, they don’t have the cash for this. Is there still a way to achieve the tax saving?
Company cars
As you would expect, generally the more expensive the company car is and the higher its CO2 emissions, the greater the tax bill is for your client and the NI bill is for their company. One way in which both tax and NI can be reduced is via a contribution to the car purchase. What’s more, the higher the tax and NI, the greater the savings. The following examples show the comparative tax and NI bills with and without a capital contribution.
Tip. The maximum contribution that affects the tax and NI payable on a company car is £5,000. Any amount above this has no effect.
Example - no contribution. Ali, a higher rate taxpayer, is one of the owner managers of Acom Ltd. For the whole of 2024/25 Acom provides him with a car which had a new list price of £40,000 and CO2 emissions of 145g/km. The taxable car benefit is 34% of the list price, i.e. £13,600. For 2024/25 Ali’s tax on the car is £5,440 (£13,600 x 40%) and Acom’s Class 1A NI bill is £1,876 (£13,600 x 13.8%).
Capital contribution
If Ali contributes the maximum tax-efficient amount of £5,000 to the cost of the car, the list price is treated as reduced by that amount.
Example - with contribution. Ali’s contribution reduces the tax and NI for 2024/25 by £680 (£5,000 x 34% x 40%) and £234 (£5,000 x 34% x 13.8%) respectively. Therefore, assuming Ali keeps the same company car for three years, the tax and NI saving derived from the £5,000 contribution will be £2,040 and £702.
Tip. If Ali is not able to come up with the cash to
make the £5,000 contribution, Acom can lend it to him interest free. As long as Ali’s total borrowing from Acom never exceeds £10,000 in any tax year the money lent by Acom doesn’t count as a taxable benefit in kind.
Note. Acom incurs a temporary tax charge equal to 33.75% of the £5,000 loan. This is refunded for the accounting period in which the car is sold and the balance of the loan is written off.
Company car loan
Assuming after three years Acom sells the car for 40% of what it paid for it and keeps all the proceeds, Ali would be entitled to a proportionate credit of £2,000 (£5,000 x 40%) against the £5,000 he borrowed. This leaves Ali owing £3,000 which Acom can write off.
Example - contribution plus loan. Over the three years of ownership the £5,000 contribution has saved tax and NI of £2,742 (£2,040 + £702). Against this, tax and NI are payable on the £3,000 loan written off. As the write off must be treated as earnings, Ali’s tax is £1,200 (£3,000 x 40%), plus £60 NI (£3,000 x 2%). Acom’s NI is £414 (£3,000 x 13.8%). The tax and NI bill for the loan is £1,674. Taking account of the tax and NI savings from the £5,000 contribution this still leaves an overall tax and NI saving of £1,068 (2,741 - £1,068) at zero cost to Ali.
Tip. Use our calculator to help work out the tax savings your client could make with a contribution (see The next step).
The next step
For our car contribution calculator, visit https://www. tips-and-advice.co.uk, code TATX25DA01.
› Advise your client to borrow up to £5,000 interest free from their company and use it to fund the contribution for the car. After say three years their company sells the car and uses the proceeds to reduce the loan and writes off the balance. For a company car that cost £40,000 the net tax and NI saving is more than £1,000.
Tax and NI planning for multiple directorships
Your client is a shareholder and director of three companies. They currently take a low salary from each company topped up with dividends. But is this really the most tax-efficient option?
Salary plus dividends
As a rule of thumb, the most tax-efficient strategy for taking income from a company is a modest salary plus dividends. Generally, salary should be no more than either £9,100 (the NI secondary threshold) or £12,570 (the NI primary threshold). Which of these is best depends on whether your client’s company is entitled to reduce its NI bill with the employment allowance (EA) (see The next step).
Tip. If it’s not possible or desirable to pay dividends or they have directorships with more than one company, a salary of more than £9,100 can be marginally more tax efficient. Tip. Usually, a separate NI primary and secondary threshold applies for each directorship. This means a director can earn £9,100 from numerous companies without any NI being payable. However, there’s a potential catch.
Trap. For NI purposes companies that are related share one secondary NI threshold and the directors, one primary (see The next step).
Example. Ava is a director of three companies. She’s paid a salary of £9,100 from each. If the companies are not related no NI is payable on any of the £27,300 earnings. By contrast, if the companies are related only £9,100 is NI free. The NI payable on the balance is £2,512 (£18,200 x 13.8%) for the companies plus £1,178 ((£27,300£12,570) x 8%) for Ava.
Advantages of benefits
By taking benefits in kind instead of some salary, Ava can reduce the overall NI liability while keeping the same advantages of salary. This is possible because employees, including directors, don’t
have to pay NI on benefits in kind.
Example. Jane is a director of three related companies. In 2024/25 between them they pay her a salary of £9,100. This means there’s no employers’ or employees’ Class 1 NI payable. The companies also contract for and pay for Jane’s health club membership, various streaming entertainment services and a range of other perks that she would normally pay from her net income. The total cost of these benefits is £13,000; the Class 1A NI is £1,794 (£13,000 x 13.8%). Had the £13,000 been paid as salary, Jane would have had to pay £1,040 (£13,000 x 8%) NI, but as a benefit in kind she pays nothing.
Remuneration planning with benefits
The same strategy that’s typically used for maximising tax and NI efficiency when paying a combination of salary and dividends should be used for salary and benefits. That’s to say, your client should take a salary at least equal to the secondary threshold (£9,100 for 2024/25) divided between their various directorships however they see fit. Additional remuneration is taken as benefits.
Example. If Gill takes all her income from her three directorships, say £27,000, as benefits in kind, the companies would pay Class 1A NI at 13.8%, i.e. £3,726 (£27,000 x 13.8%). Instead, the companies should between them pay Gill a salary of £9,100, plus benefits of up to £17,900. There’s no Class 1 NI for the companies or Gill to pay on the salary but the Class 1A NI bill is £2,470.
The next step
For information on the EA and on related employments, visit https://www.tips-and-advice. co.uk, code TATX25DA01.
› If your client has multiple directorships, taking a salary up to the secondary NI threshold (£9,100 for 2024/25) from each is slightly more tax efficient than dividends. However, if the companies are related for NI purposes then they should take a salary up to the secondary NI threshold and top up with benefits in kind.
Creating a home office tax efficiently
Your client wants to erect a cabin in their garden to use as a home office. They and their family will also use it for private purposes. Will it be more tax efficient for your client or their company to pay for it?
No tax exemption
If your client’s company provides them with an asset, e.g. a computer, solely for the purpose of work to use when they are away from their normal workplace it isn’t a taxable benefit in kind. This exemption applies even if there’s private use as long as it’s not significant. Consequently, if the private use is significant there is a taxable benefit in kind.
How much tax?
The taxable amount depends on two factors: the cost of providing the asset and any additional expenses, e.g. for maintenance of the asset.
Example. Carol is an owner manager of Acom Ltd. She wants to spend less time commuting and so arranges for Acom to pay for a fancy garden office so she can work at home. It pays £25,000 for the installation. The taxable benefit is 20% of this, i.e. £5,000 each year. Assuming the structure is used for 15 years Carol will be taxed on a whopping £75,000. In addition, Acom pays Class 1A NI on the same amount. If Carol is a higher rate taxpayer throughout the 15 years, and assuming the tax and NI rates stay as they are, the tax and NI cost would be £40,350 ((£75,000 x 40%) + (£75,000 x 13.8%)).
Alternative tax charges
If in our example Acom rented or leased the structure, the taxable benefit in kind for any year will not be 20% of its cost but the amount of rent etc. paid by Acom. Carol pays for lighting and heating the office personally. If Acom paid these costs it would increase the taxable benefit. Despite this it could be more tax and NI efficient for Acom to pay them. We’ll look at this in another article.
Reduction for unused periods?
Some days Carol won’t use the garden office at all. The bad news is that this doesn’t reduce the taxable benefit. The benefit applies to any day where the office is “available” for private use, even if it’s not used. Unless Acom is able to prevent its use, the garden office will always be available.
Reduction for business use?
The tax rules for employment income include various exemptions and deductions relating to benefits in kind where there is business use associated with the benefit. We’ve already mentioned one which applies where private use of a benefit is insignificant. However, in our example, the private use is significant so the exemption cannot apply. Also, while a reduction in the taxable amount is allowed where there’s business use of some types of benefit, this rule doesn’t apply to use of an employer-owned asset.
More tax-efficient alternative
The long-term use of employer-owned assets can result in a disproportionate tax and NI bill.
Tip. Rather than making an asset available to a director or employee for long-term use, the NI cost can be reduced if a dividend is paid. In our example, the tax cost to Carol would be just under £15,300 with no NI for Acom to pay. Even though Acom will lose corporation tax relief on the cost of the asset (up to £7,500), the overall tax bill is far less. When providing use of an asset always consider the tax and NI cost over the expected period for which it will be used.
› If private use of the home office is significant, an annual taxable benefit will apply equal to 20% of the cost of the office. Over many years the resulting tax and NI can easily exceed the original cost of the asset. It would be more tax and NI-efficient for your client’s company to pay them a dividend to enable them to purchase it.
Can cash
savings in your client’s company save IHT?
Our subscriber recently read a report about inheritance tax business property relief. It claimed that holding very large cash savings in a company can reduce the tax bill on your estate. Is this tactic something your clients should consider?
IHT BPR
Before we get to our subscriber’s situation we need to set the scene. Inheritance tax (IHT) business property relief (BPR) reduces the amount of an estate on which IHT is payable. As the name implies, BPR is relevant where the estate includes business assets. The relief is equal to either 100% of the value of assets owned and used by your client’s business for its trade or 50% if they personally own the assets but they are used by their business, e.g. if they personally owned their company’s trading premises.
Conditions
For BPR to apply your client must own the assets for at least two years during which time its activities must not consist wholly or mainly for the purpose of holding investments, i.e. the business must be mainly trading. For example, a business can own investments, e.g. quoted shares, bonds, land and buildings, and qualify for BPR as long as their total value is less than the value of its trading assets.
Trap. Although investments may not fall foul of the trading condition, it doesn’t mean they will qualify for BPR. Where a company qualifies for BPR but owns non-qualifying investments, the value of the investments is excluded for BPR purposes. In HMRC’s words, they are “excepted assets”.
Example. Gita is the sole shareholder of Acom Ltd which runs a retail business. At the date of Gita’s death her shares in Acom are worth £2 million. However, £500,000 of Acom’s value relates to nonqualifying investments (excepted assets). While Acom is mainly a trading company and therefore BPR applies to Gita’s shares, it is limited to the value of its business assets, i.e. £1,500,000.
Cash savings
Cash savings, e.g. money in the bank, are not investments and therefore even substantial amounts won’t usually affect a company’s trading status for BPR purposes. However, cash savings might be excepted assets.
Tip. HMRC doesn’t consider cash savings held by a business for trading purposes to be excepted assets. Acceptable business purposes might be cash held and used for working capital, or to fund future trading expenditure such as structural repairs or improvements to a business premises.
Subscriber’s query
The report referred to by our subscriber related to a case where HMRC agreed that substantial cash savings held by a company weren’t excepted assets. It suggested HMRC accepted it was a trading activity in its own right and so BPR could apply. As our subscriber has very substantial savings, he wanted to know if by giving these to his trading company (in which he owns all the shares) it would qualify for BPR and so save his estate IHT in event of his death. We read the report and confirmed our subscriber’s understanding. However, it was light on facts and we suspect there was more involved in HMRC’s decision than met the eye. In fact, HMRC’s internal guidance explicitly says it will treat excess cash savings as excepted assets. Because of other negative tax consequences of giving cash to your client’s company, we don’t recommend doing so just for a slim chance it will qualify for BPR (see The next step).
The next step
For information about the other tax consequences of giving cash to a company, visit https://www.tipsand-advice.co.uk, code TATX25DA01.
› Cash held in a company which is in excess of its trading requirements is an “excepted asset” and won’t qualify for business property relief. What’s more, giving your client’s personal savings to their company has other negative tax consequences and we don’t recommend it.
Disincorporation - is it worth it?
Your client’s business has suffered a dip in the last couple of years and they are looking to downsize. As part of the process they want to close their company and operate as a sole trader instead. What are the tax consequences?
Out of date advice
In the past many sole traders were advised to run their business through a company to save tax, typically by taking most of their income as dividends. The trouble is increased tax rates on dividends and other factors mean that the advantages have eroded, particularly for smaller businesses. Some business owners can now reduce their tax bills by running their business as a sole trader or partnership.
Tip. Apart from tax and NI costs, running a business through a company usually involves additional expenses.
A simpler life
The tax rules for unincorporated businesses are less complicated compared with companies. For example, you can work out your client’s taxable profits using the cash basis and simplified expenses. In contrast, a company must navigate a tricky regulatory landscape of company law, accounting and corporation tax (CT) before any remuneration even reaches the director shareholder.
Tips & Advice Tax Memo
For detailed commentary on the cash basis and simplified expenses, visit https://www.tips-andadvice.co.uk, code TATX25DA01.
What is disincorporation?
Disincorporation is when a company transfers its business and assets to a sole trader or partnership. For the reasons we’ve mentioned this can be attractive, but it can also trigger CT charges which must be factored into your client’s decision on whether or not to disincorporate.
CT consequences
In the accounting period up to disincorporation your client’s company is liable to CT on trading profits in the usual way plus CT on gains arising on the business transfer.
Trap. Any losses the company made from trading which haven’t been used to reduce its CT liability can’t be transferred to use against the profits from the sole trader/partnership business.
Stock and equipment. The transfer of stock and equipment to the sole trader/partnership business is usually at market value. If this exceeds the value for tax purposes, the difference is chargeable to CT. Tip. This tax can be avoided by making elections to transfer stock and equipment at their tax value.
Property and goodwill. If your client’s company owns property, say its trading premises, which has increased in value, the gain is chargeable to CT. The same may be true for goodwill. Stamp duty isn’t usually payable but it might be if there’s a mortgage on the property.
Tip. No tax is due on the transfer of goodwill that the company created from scratch and which doesn’t show in its accounts.
VAT. If the company is VAT registered the transfer of a going concern rules mean there’s no VAT chargeable on the transfer of assets.
Tip. Avoid surprises by forecasting the immediate, short-term and ongoing consequences of disincorporation.
› Transferring your client’s company’s trade and assets to a sole trade/partnership (disincorporation) can reduce tax and NI liabilities on profits, especially for small businesses. However, it can trigger immediate corporation tax bills for the company. Make a forecast to help your client decide if disincorporation is worthwhile.
Sale of old equipment - is it VATable?
Our subscriber sold a machine which he had used in his business before he was VAT registered. He’s been advised that he should have charged VAT on the sale and that he must now account for it out of the proceeds. Is this correct?
VATable supplies
When a VAT-registered business sells an asset, the VAT treatment depends on several factors, including what type of asset is sold. In this article we’re only looking at the sale of equipment, e.g. an item of machinery.
Output tax
Generally, where your client used an item of machinery for their business they must charge VAT (output tax) if they sell it, whether or not they reclaimed VAT when you bought it. It’s a common misconception that you don’t need to charge VAT on the sale if you didn’t reclaim it on the purchase.
Tip. However, there is a limited exemption which applies where the input tax is specifically blocked by the rules.
Blocked VAT
Input tax paid on the types of goods or services listed below is not reclaimable (blocked). For some other types of purchase input tax is not fully blocked, instead the VAT recoverable is limited to the difference between purchase and sale cost, i.e. the margin or profit. If your client sells an item on which the VAT was blocked the sale is VAT exempt. The list below shows items where input tax is blocked:
• cars - purchased or leased
• goods installed in dwellings in the course of construction
• private imports
• services and goods acquired by tour operators
• goods related to the supply of accommodation to a company director
• goods and services acquired under a margin scheme, such as the second hand goods scheme
• business entertainment.
Example - pre-registration asset. Acom Ltd purchased a brand new van several years before it registered for VAT. The input tax could not be reclaimed at the time of purchase nor when Acom registered for VAT (because such a claim is time limited to four years). The input tax was not blocked, it’s simply that Acom was not entitled to reclaim it, therefore the exemption doesn’t apply and so when Acom sells the van it must charge VAT.
Tips
& Advice Tax Memo
For detailed commentary on time limits for recovering pre-registration input tax, visit https:// www.tips-and-advice.co.uk, code TATX25DA01.
Example - used for exempt supplies. Bcom Ltd bought a yacht solely to provide business entertainment and so the VAT input tax is not deductible (it’s blocked). Note, it does not hire out the yacht for customers to use for entertainment purposes. That would be a VATable supply and would mean Bcom could reclaim the input tax. The sale of the yacht by Bcom is exempt.
Example - used for mixed supplies. Ccom Ltd purchased a piece of machinery and has not reclaimed the input tax it paid as it expects it to be used for exempt supplies. In practice the machine is used for both exempt and VATable supplies. Ccom now intends to sell the machinery. Because the machinery was used for both taxable and exempt supplies the input VAT was not entirely blocked. Therefore, Ccom must charge VAT on the full sale price.
› VAT must usually be charged on assets sold after registration even if they were bought previously. There are exceptions to this rule. Where the VAT was not deductible, e.g. for a car available for private use so that VAT recovery is blocked, the subsequent sale of the asset is VAT exempt.
Important change to PAYE repayment procedure
New HMRC tax letters. Every year HMRC reviews the income and tax paid by everyone who’s an employee or has pension income and who it hasn’t asked to complete a self-assessment tax return. Where it appears that the taxpayer has over or underpaid tax, HMRC will send a tax calculation letter (Form P800) or a simple tax assessment. Until recently if these showed overpaid tax HMRC would automatically make a refund.
Claim required. HMRC now requires your client to make a formal claim to get back any tax they’ve overpaid according to Form P800. If they don’t make a claim the government will hang on to their money indefinitely. They can make a claim for a refund online or by post (see The next step). Tip. HMRC’s window for reviewing tax records for 2023/24 runs until 30 November 2024. If your client thinks they have overpaid tax but they don’t receive a P800 an alternative claim can be made (see The next step).
The next step
For links to HMRC’s repayment claim services, visit https://www.tips-and-advice.co.uk, code TATX25DA01.
› If your client is not required to complete a self-assessment form for 2023/24, HMRC will review their tax position by 30 November 2024. It will send them a Form P800 if it believes they have overpaid tax. Unlike previous years, they’ll need to make a formal claim to get their money back.
SELF-ASSESSMENT
HMRC’s student loan tax trap
Self-assessment bug. In 2023 HMRC acknowledged an error in its selfassessment tax system which can result in inflated tax bills. The error is yet to be fixed and so HMRC has provided a workaround (see The next step). To prevent your clients overpaying tax you need to follow HMRC’s workaround when completing their 2023/24 self-assessment returns.
Who’s affected? Your client is affected if all the following apply for the 2023/24 tax year:
• they were an employee
• they made student loan repayments
• they received taxable benefits in kind not liable to Class 1 NI, e.g. company car, private health insurance and so on
• one or more of the benefits was taxed payrolled.
The next step
For details of HMRC’s workaround, visit https://www.tips-and-advice.co.uk, code TATX25DA01.
› Due to a bug in the self-assessment system, if in 2023/24 your client received benefits in kind from their employer and made student loan repayments they are at risk of HMRC demanding too much tax. A workaround prevents this, so make sure they use it when completing their selfassessment.
Editor-in-Chief: Tony Court
Contributing Editors:
Andrew Rainford - BA(Hons) ACA CTA
Sarah Bradford - BA(Hons) ACA CTA
Roger Lawes - Tax Advisor
Graham Palmer - Inst. of Cert. Bookeepers
Nick Avis - FCA
Simon Louis Cooper - Senior Tax Manager
Neil Warren - CTA (Fellow) ATT
Pete Miller - CTA (Fellow)
Steve Kesby - FCA, CTA
Publishing Director: Duncan Callow
A publication by:
Indicator - FL Memo Ltd Calgarth House, 39-41 Bank Street Ashford, Kent TN23 1DQ
Registered in England Company Registration No. 3599719
We’re now on social media! Follow us @Indicator-FLMemo
Subscriptions:
Subscriber queries: Lisa Woods
Telephone: (01233) 653500
Fax: (01233) 647100
E-mail: subscription@indicator-flm.co.uk editorial@indicator-flm.co.uk www.indicator-flm.co.uk Download the app:
