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Capital Gains Tax (CGT)
For disposals of residential properties, after the 5th April 2020, there will be new rules advancing the dates for both the reporting to HMRC of the capital gain made on the disposal and the payment to HMRC on account of the CGT liability.
Currently, the CGT is paid to HMRC by the 31st January following the end of the tax year – following the residential property disposal. The new CGT rules from the 6th April 2020 will require the reporting and a CGT payment on account to HMRC within ‘30 days’ of the residential property disposal.
- This change to the CGT means that you will need to provide your accountant with the selling details of the residential property and full details of the residential property’s purchase costs, including enhancement expenditure - so that the calculation of the CGT can be completed soon after the completion date.
- The CGT payment on account computation will take into account the annual exemption, any CGT losses and the estimated CGT rate - in this respect; an estimated other income will also be then be needed.
- The CGT computation will then need to be finalised after the end of the tax year during which the disposal of the residential property was made. The CGT payment on account deducted from the final CGT, payable with any balance due payable to HMRC by the 31st January, following the end of the relevant tax year.
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Principal Private Residence (PPR) Tax
Under the CGT heading, also watch out for the changes from 6th April 2020 to the principal private residence (PPR).
PPR allows you to sell your main private residential property without CGT. The new PPR rules state that the current final 18 months of CGT exempt ownership is to be reduced to 9 months. We advise those who are contemplating selling a private residential property, where they’ll be absent from the property for more than the last 9 months, try and achieve a sale (sale contract date not completion date) before 6th April 2020.
The other change is arguably a bigger deal and involves something called lettings relief, which currently provides up to £40,000 of relief (£80,000 for a couple) to people who let out a property that is or has been in the past, their main home. From April 2020, lettings relief will only apply where the owner is sharing occupancy of the property with a tenant – effectively spelling the end of this perk.
Inheritance Tax (IHT)
You may be aware of the IHT rules for your lifetime gifts – namely, you need to survive 7 years from the date of the gift to avoid IHT and that there is a so-called ‘taper relief’ for IHT if you survive at least 3 years from the date of the gift.
The issue that can be overlooked is that when the gift is made, for IHT, it is classed as a potentially exempt transfer (PET). It becomes exempt from IHT if you survive 7 years from the date of the PET. If you do not survive 3 years from the date of the PET, then full IHT is payable on the value of the PET.
If you survive between 3 years to 7 years from the date of the PET, then the IHT taper relief ‘kicks-in’. However, the 20% pa taper relief reduces the IHT payable - i.e. the value of the PET does not reduce your Estate’s total value as liable to IHT.
With the above being said, the problem can arise if the PET is at a value that is less than the £nil rate band for IHT. The reason for this is that when IHT is calculated, the PET is treated before IHT. So, if the value of the PET is less than the £Nil rate band (currently £325,000 but can be £650,000 with the use of a deceased spouse’s unused £Nil rate band) then the £Nil rate band is used to cover the PET, and there is no IHT taper relief obtained!
If you make a potentially exempt transfer (PET), we at HaesCooper recommend you consider taking out an appropriate insurance policy to cover the IHT payable through to the seventh anniversary of the PET. Likewise, consider so-called ‘discounted gift products’ – but, these do have running costs and need to be considered carefully.
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To incorporate or not to incorporate? Our team at HaesCooper have updated the calculation required to decide if trading via a Limited Liability Company (LLP) saves tax.
- For a sole trader, it becomes worthwhile trading as a limited company if annual taxable profits are £45,000+.
- For partnerships, the optimum taxable profit will depend on the number of partners involved but, in general, will need to be higher than the £45,000 annual taxable profit level for a sole trader.
If you are a start-up business or are planning to set up a business, then consider starting as a sole trader or in partnership with your spouse - this provides possible better use of any start-up losses by offset against other personal taxable income. Incorporation can then be completed when the business is generating enough annual taxable profits without incurring a CGT and/or SDLT.
However, if you expect strong growth within a short period of start-up or you consider that the non - tax benefits of trading via a company, e.g. having a limited liability outweigh the tax considerations, then go for a company set up from day one.
Upcoming Tax Changes & How We Can Help
The next HaesCooper blog post will cover:
- Obtaining tax reliefs under the new ‘Capital Allowances’ provision for business buildings
- The enhanced Annual Investment Allowance (AIA) for business capital asset investments
- Entrepreneurs Relief
- The business use of electric cars
If you would like to discuss anything mentioned in this blog post – or anything related to tax accountancy – contact us. Our expert team is on hand to provide advice or guidance to businesses of all sizes. Alternatively, browse our resource centre for more articles and guides related to business tax and recent changes.