The Limited Company contractor’s guide to Entrepreneurs Relief

Entrepreneurs Relief

 

What is Entrepreneurs Relief (ER)?

ER was created to encourage people to set up and grow their own businesses, by providing a reduced level of Capital Gains Tax (CGT) on business disposals (when you decide to either sell or dissolve your Limited Company).

 

Who can claim ER?

ER is available to shareholders who are trading using a Limited Company and who have held the business assets in question for more than 12 months. It’s usually applied to a business disposal or share sale, but can also be claimed for other assets.

 

You must have been a serving partner, director or employee and have held at least 5% of the share capital in the year preceding the sale, If you’re disposing of business shares.

 

How does ER work?

To calculate your personal ER, you must firstly deduct your CGT annual exemption from the amount of your gain. Then, multiply this gain by 10% to leave you with your CGT liability.

 

Should you be fortunate enough to reach the lifetime allowance threshold of £10 million, then any further gains are made at the standard CGT rates.

 

Remember!

There are deadlines for when ER must be claimed. If business assets were disposed of during the 2015/16 tax year, then you must make your ER claim by 31 January 2018.

 

You are able to make a claim on your Self-Assessment Tax Return, but we strongly advise you seek the professional advice and support of an expert Limited Company contractor accountant.
For more information Entrepreneur’s Relief, please visit HMRC’s website.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

The new tax year – how today’s changes could impact your contracting life

The new tax year

Today marks the start of the new tax year, that will bring changes which could affect many contractors’ take home pay. In this blog we outline the top 10 changes, to ensure you’re fully prepared.

 

1Dividend allowance

The first £5,000 you take in dividends annually will be tax free (this is on top of the income tax personal allowance), then anything over that will be taxed at the following rates:

Basic rate: 7.5%

Higher rate: 32.5%

Additional rate: 38.1%

 

Our new dividend calculator will give you a clear indication as to how much more tax you’ll pay for 2016/17.

 

Tax will not be deducted at source and taxpayers will have to use their Self Assessment Tax Return (SATR) to pay any tax owed. So basic rate taxpayers receiving £5,000 or more must complete a SATR.

 

2. Capital Gains Tax (CGT) will reduce

If you sell an asset that has gone up in value, then CGT is the tax you will have to pay on that asset. Depending on the rate of income tax you pay, CGT will either be payable at the basic or higher rate. If you’re selling residential property, CGT only applies to any additional properties you may have (other than your main home).

 

From today the rates for CGT are:

Basic rate: cut from 18% to 10%

Higher rate: cut from 28% to 20%

 

3. Flexible ISA

From today should you wish to withdraw and replace your ISA funds within the same tax year, you will not lose the full ISA tax benefits.

 

If you have money in stocks and shares ISAs you should also be able to do the same, if you withdraw and replace via a cash trading account.

 

4. Personal Saving Allowance

Anyone aged 18 + will be able to earn up to £1,000 a year on their personal savings – tax free.

Take a look at the tax rate bands to see how you can benefit:

  • Basic-rate (20%) taxpayerscan earn £1,000 of savings tax free (saving a maximum of £200 compared with 2015/16 tax year).
  • Higher-rate (40%) taxpayers can get a personal savings allowance of £500 (saving a maximum of £200 compared with 2015/16 tax year).
  • Additional-rate (45%) taxpayers earning above £150,000: £0unfortunately do not get an allowance.

 

See the Treasury’s factsheet for more information. The Personal Savings Allowance is being dubbed as the ‘biggest savings shake-up for a generation’, so don’t miss out!

 

5. Income Tax and Personal Allowance thresholds increase

Taxable income rate: from today will rise from £10,600 to £11,000

Higher rate income tax: the 40p threshold will rise from £42,385 to £43,000

 

6.New State Pension is introduced; current state pension rises

You will receive the new State Pension if you retire today and are:

Female: born on or after 6 April 1953

Male: born on or after 6 April 1951

 

The flat rate State Pension is £155.65 per week but the amount you’ll receive will depend on your National Insurance (NI) contributions:

35 years of NI contributions: you qualify for the full allowance

At least 10 years of NI contributions: to qualify for part of the weekly allowance

Less than 10 years of NI contributions: you will not receive any of the State Pension

 

If you retired earlier, you’ll receive the old state pension, which will increase to £119.30.

 

7. Innovative Finance ISA (IFISA) will launch

If you use peer-to-peer (P2P) platforms to save then the new IFISA will allow you to get tax free returns. Whilst one of the attractive qualities is the higher rates of interest, it’s worth being aware that P2P isn’t protected by the Financial Services Compensation Scheme (FSCS).

 

8. Lifetime Allowance cut

Today will see a reduction in the amount you can save into your pension without a tax charge – AKA your Lifetime Allowance – from £1.25m to £1m. Your pension benefits are tested against the lifetime allowance as soon as you start to draw your benefits.

 

Despite the government’s claims that the reduction will only impact 4% of the wealthiest population, it will also hit those people working hard to save for retirement. You can protect your pot if it exceeds the Lifetime Allowance.

 

Remember! Be careful with Auto-Enrolment, as any contributions you make could wipe out any protection you may have. We advise that you discuss this with an Independent Financial Adviser, to ensure you have the right advice and support for you and your circumstances.

 

9. Annual Allowance Taper will be introduced

For higher earners, the annual pension allowance will gradually be reduced. At present it’s set at £40,000, but the government is set to introduce a taper system that will reduce the limit for those whose income exceeds £150,000. The reduction rate will be set at £1 for every £2 of income, meaning that if you’re earning £210,000 or more, your annual allowance will be reduced to £10,000.

 

10.National Living Wage and Stamp Duty Land Tax increases

Both have already been enforced, as from 1 April:

 

National Living Wage (NLW): anyone aged 25 or over will receive £7.20p/h, an increase from the previous NLW of £6.50p/h.

Stamp Duty Surcharge: an additional 3% has been added onto the current stamp duty rates for anyone who purchases a second home or a buy-to-let property. Whether you’ll have to pay or not will depend on your individual circumstances. But it is likely to hit tenants who are charged more rent to cover the additional cost to their landlord’s.

 

So there you have it, 10 changes for the new tax year that every contractor should be aware of. If you’re wondering what these changes will mean for you, we’ve created our top 10 new tax year resolutions to aid contractors in staying financially fit this new tax year. Download them today for the ultimate in contracting success.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Main residence election

Main residence election

The 2013 Autumn Statement contained details about the extension of capital gains tax (CGT) to non-residents when they dispose of residential property held in the UK, and the Government and have now issued a Consultation document entitled “Implementing a capital gains tax charge on non-residents”.

The main changes proposed aren’t a massive surprise as they reflect the way things work in most other countries, which is to charge tax based on the location of the property rather than the location of the seller.  But the consultation document also contains a global proposal to alter the ability to elect which of several properties you own is your main residence, and thus exempt from CGT upon sale. The motivation behind this change is to remove the ability for a non-resident to simply elect the UK property as their main residence and therefore avoid UK tax entirely, so it is understandable and fair to make such a change. But it will also have a knock on effect on UK residents who own more than one property…

Under the current system you can elect, for any specific period, which property is your main residence and it will then quality for tax relief.  The Consultation document sets out two ways the new rules could work:

  • Remove the ability to elect which property is your main residence and instead determine it based upon the balance of evidence – where does any immediate family live, where is mail sent, what address is used for electoral roll purposes etc.  This is the way the law currently works when someone has not made an election and there is any dispute.
  • Replace the ability to elect which property is your main residence with a fixed rule – for example which property the person has been present in for the most days in the tax year.

Both of these suggestions will require additional records to be maintained by the taxpayer to support their case, which could be quite onerous if they regularly swap between two or more properties.  The Consultation does mention the possibility of allowing the current election process to be retained in some circumstances, but unfortunately does not expand on what those circumstances may be.

How these changes will work in practice has not yet been disclosed, but the Institute of Chartered Accountants in England & Wales have promised to make strong representations as they foresee many difficulties is establishing which property is a taxpayer’s main residence in various circumstances.

The slight saving grace for non-residents is that if they do have to pay CGT on their UK property, which will likely be collected via a withholding tax mechanism, then they will also become entitled to an Annual CGT Allowance, reducing the gain by £10,900.  CGT rates will then apply at the normal 18% or 28%.

Due to the complexity of the proposed changes they won’t be effective until April 2015, but the Consultation deadline is 20th June, so we’ll update when we know more.  Read the full document, including the changes discussed above in section three.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

PPR (Principal Private Residence) – the tax implications of selling property

PPR (Principal Private Residence) – the tax implications of selling property

If you own any property at all – whether you’re letting it out or living in it yourself – it’s useful to understand the basics of how Capital Gains Tax (CGT) works and what might be applicable if you decide to sell it.
Capital Gains Tax applies to the amount of profit you make when you sell or give away an asset that has increased in value since you first acquired it. This tax is applied to the amount of gain you make, not the total sum of money you’ve received. Generally, you won’t have to pay this tax if you give an asset away to a spouse or civil partner.

Capital Gains Tax on property

If you sell your only, or principal home you won’t usually pay CGT on any profit you make from the sale because you will qualify for Private Residence Relief. This tax relief is automatically applicable in the following circumstances:

  • The property has been your only or main home for the whole time you’ve owned it.
  • You have only ever used the property as your own private residence. (If you have, for example, rented it out or used it as business premises you may have to pay CGT in certain circumstances.)

If you usually live between a number of properties you can nominate one property as your main home (known as your Principal Private Residence). In this case you will have to write to HMRC to inform them of the property you are nominating and do so within 2 years of starting to live in more than one home.

If you spend a lot time away from home, for example for business purposes if you’re contracting away from home, you can still claim full Private Residence Relief in the following circumstances:

  • For up to 1 year from when you first bought the property.
  • For up to 3 years before you sold it, as long as it was your only or main home for at least some of the time that you owned it.

There are restrictions on this though, for example you may not get the full amount of relief if you used part of your home only for business, or the main reason for buying the property was to make a profit on selling it, or if you rent the property out. However, in the case of renting out all or part of your home you may be able to offset this by claiming Lettings Relief instead.

Lettings Relief

If you’ve been renting out property you own you may be allowed to claim this relief in some circumstances. It’s important to get the maths and timings right on this though to make sure that your claim is valid and that you’re claiming the correct amount.  An example of a Lettings Relief calculation is given below to give you an idea of how this works.

Let’s say you rented out a house that was once your main residence. For CGT purposes the last three years of rental are treated as if you had lived there.  So, if you only rented it out for three years or under there would be no CGT to pay.

If you rented it out for longer then there is a further relief possible in addition to the 3 year relief above.  Any gain is apportioned over the total period of ownership, with the last three years and any period you lived there being exempt.  The remainder of the gain is then taxable, but the amount taxable is reduced by the lower of £40,000 or the exempt fraction.
For example:

Period of ownership: 6 years. The first year you lived there and then you rented it out.

  • Purchase price: £100,000   Sale price: £200,000   Gain: £100,000.
  • Lettings Relief calculation:  1/6 is your main residence plus 3/6 is your lettings relief = 4/6 exempt.  This leaves a taxable part of 2/6.
  • The exempt fraction of 4/6 = £66,666
  • The taxable fraction of 2/6 = £33,333
  • The relief amount on the exempt part is the lower of £40,000. So, £66,666 is more than £40,000 which means the allowable amount is £40,000.
  • The total taxable gain is calculated as £33,333 less £40,000 = nil.

So, in this case there would be no CGT to pay.

As you can see, this could potentially get quite complicated! Fortunately, with the support of Intouch to help, you can relax. If you need guidance on Capital Gains Tax on your properties, or on any other tax matter, you can speak to or email your own personal Intouch accountant for friendly, professional advice. We really know our stuff, so you really can count on us.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.

Buying property in my own Limited Company

Buying property

Can I or should I in my own Limited Company? Is it common, what are the risks and basic consequences? Does it only affect commercial property?

For contractors the question of buying property through their own Limited Company arises when considering possible ways to invest their profits. It is definitely possible to do this. Whether it is actually advisable and tax efficient is a different question and can vary from case to case.

 

Tax considerations

Buying a second property in your own name will mean that any rent you receive will be taxed on you personally, using up some of your tax band and thus leaving less availability for basic rate dividends, and any gain you make on the eventual sale will be subject to Capital Gains Tax at either 18% (basic rate) or 28% (higher rate).

If you decide to buy through your company on the other hand, any rent received and eventual gain on sale are both subject to Corporation Tax at 20%.  If you are registered under the flat rate VAT scheme then any rent you receive will constitute turnover for VAT purposes, and you’ll have to pay a proportion to HMRC each quarter.

 

Company ownership considerations

The property will be owned by your Limited Company and will therefore be tied to its fortunes. Should the company experience any difficulty, either legally or financially, then the property would be at risk as an asset of that company. Should you wish to dissolve the company then the property would need to be transferred back to you before this could occur. This would of course involve additional related legal costs and taxes payable.

If the property is your main private residence then company ownership is not recommended.

Firstly, you would incur a benefit in kind, unless you paid commercial rent to the company. Secondly, any gain on selling the property would be subject to Corporation Tax. Under normal circumstances any gain on your own home is usually exempt from tax entirely.

 

Mortgage availability

In order to secure a mortgage, particularly with newer Limited Companies, a director’s personal guarantee may be required. If given this takes you out of limited liability protection of your own personal assets.

If this is something you are currently considering then speak to your accountant who will be able to advise you on the best course of action based on your particular circumstances.

 

This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.