March Tax Tips & News

Relief for mortgage interest on let properties

As an individual landlord you can‘t deduct finance costs, including interest, from your residential property rents for tax purposes. Instead, you get tax relief for those costs as a basic rate tax credit calculated as 20% of the lower of:

– finance costs for the year plus any unused finance charges brought forward;
– your property income profits with no deduction for finance costs, – or your adjusted total income for the year that exceeds your Personal Allowance.

In years where the property income is low, or a loss, little or no tax credit can be set-off, in which case the excess interest which is not relieved is carried forward to the next tax year.

Example

In 2021/22 Bob the Builder had trading profits of £13,500. It was his first year in which he let out a property and he received rents of £3,000, paid mortgage interest of £4,000 and incurred £6,500 of allowable expenses.

Bob made a loss of £3,500 (£3000 – 6500) on his property which can‘t be set against his trading profits. As Bob has zero property profits for the year, he can‘t set off a tax credit derived from his finance costs against his 2021/22 tax liability.

However, both his property loss of £3500 and the unused finance costs (£4000) are carried forward to the next tax year.

In 2022/23 Bob has a better year. He received rental income of £18,000, paid property expenses of £1500 and £6000 as interest. The loss from 2021/22 of £3500 is set against his rental income. His trading profits have also improved to £26,000.

The amount of tax credit is calculated as 20% of the lower of:

– finance costs= £10,000 (£4,000 + £6000)
– net property profits = £13,000 (18,000 – 1500 – 3500)
– adjusted total income = £26,430 (26,000 + 13,000 – 12,570)

Bob‘s tax credit for 2022/23 is calculated as £10,000 x 20% = £2,000.

He has used all his property loss and obtained tax relief for the unused interest paid in 2021/22.

There is no limit on how many years the unrelieved finance costs can be carried forward.

HMRC homes in on Airbnb landlords

Online platforms such as Airbnb are now obliged to provide HMRC with data about the payments it makes to individuals who let rooms on a short-term basis. HMRC is matching that data to tax returns and writing to taxpayers who have apparently not declared their rental income correctly.

If you receive such a letter don‘t be alarmed by the aggressive tone, as HMRC is asserting that you owe tax, but that may not be the case.

If you have let a room or two in your own home, the rental income may be covered by rent-a-room relief (£7500 per year). If you have let out a separate property for holiday lets, income of up to £1,000 per year can be covered by your property income allowance.

If the rents you received in a tax year do not exceed these two thresholds (which can‘t be combined for the same property) you are not required to report the rental income on your tax return.

Where your rental income has exceeded these thresholds, you may have expenses to deduct from the gross income, which will reduce your taxable profit.

In any event you should respond to the HMRC letter within 30 days, and we can help with that.

We do not recommend that you sign the certificate of tax position enclosed with the HMRC letter, as this is not a legal requirement. The declaration on the certificate that the information is “correct and complete” is not restricted to a specified period, so it could mean you are asserting that an unconnected matter is correct when it isn‘t.

Planning your profit extraction

In his Autumn statement in November 2022 Chancellor Hunt announced cuts to the dividend allowance and the additional tax rate threshold, where individuals start to pay tax at 45%. You need to take these changes into account when planning how and when to extract profits from your company.

Many family companies spread the shareholding over various family members to take advantage of the dividend allowance which allows an individual to receive up to £2,000 of dividends tax free in a tax year.

This dividend allowance will be halved from £2,000 to £1,000 on 6 April 2023, and halved again to £500 on 6 April 2024. Anyone who receives dividends in excess of the dividend allowance needs to report that income to HMRC, so the tax due can either be deducted through their PAYE code, or by way of a self-assessment tax return.

Dividend income is treated as falling into the taxpayer‘s highest tax band where it is taxed at these rates in 2022/23:

– Basic Rate band: 8.75% (other income taxed at 20%)
– Higher rate band: 33.75% (other income tax at 40%)
– Additional rate band: 39.35% (other income taxed at 45%)

These dividend tax rates were increased on 6 April 2022, and they could be increased again in the Spring Budget in March this year.

There are other ways of extracting profit from your company, for example as rent, interest, or pension contributions. The first two methods require the shareholder to have lent property or funds to the company, so are difficult to arrange at short notice.

Pension contributions can be paid by the company on behalf of any employee or director, as long as the total remuneration package for that person is reasonable for the work they perform. Employer contributions are currently very tax efficient as they are tax deductible for the company and don‘t carry NIC.

However, you need to ensure that you don‘t exceed your pension annual allowance (generally £40,000) and lifetime allowance (frozen at £1,073,100 for the last three years). Please talk to your financial adviser before deciding whether to pay more or less into your pension fund.

The additional rate threshold is reduced from £150,000 to £125,140 on 6 April 2023, which is worth noting if your income is in this range.

Plugging NIC gaps

Many people don‘t realise that they have significant gaps in their National Insurance Contribution (NIC) record, and as a result they won‘t be entitled to the full state retirement pension. This can come as a shock when you start to receive your state pension, but by that time it may be too late to fill the gaps in your NIC record.

A taxpayer needs 35 complete NIC years (as payments or national insurance credits) in order to receive the maximum state retirement pension, and at least 10 completed NIC years to receive any state retirement pension.

You can easily check your NIC record for your complete working life on your online personal tax account on gov.uk (https://www.gov.uk/personal-tax-account).

If your NIC record shows there are gaps, don‘t assume the record is completely correct. You need to investigate the reason for any gap and challenge HMRC to look for missing NI contributions or credits.

It is not uncommon for NI credits to be missed by HMRC for periods where you were claiming child benefit or universal credit, and not working. You should have been given NI credits automatically for these periods. In other circumstances (e.g., when acting as foster carer, or a grandparent caring for a child), you need to apply for NI credits.

Where there is a genuine a gap in your NIC record you can normally go back up to six years and pay voluntary contributions to fill in the missing weeks to make a tax year complete for NIC. For example, gaps in your NIC record for the tax year 2016/17 can be filled by voluntary payments made before 6 April 2023.

However, currently there is a special dispensation that allows women born after 5 April 1953 and men born after 5 April 1951, to complete gaps in their NIC record right back to 6 April 2006. This opportunity to make up these old years with voluntary NIC payments closes on 5 April 2023, so there is not much time to take action!

 

March Questions and Answers

Q. My company is buying an electric car for me to use for business and private journeys. In truth there will be very few business journeys. Can the company still claim the 100% first year allowance, although the business use will be small?

A: Your company can claim the 100% first year allowance if the car is acquired brand new and not second hand. It is irrelevant that you use the car mainly for private journeys, as you will be taxed on that benefit calculated at 2% of the list price of the car each year. This taxable benefit will increase on 6 April 2025 to 3% of the list price.

Q. I will have to register my business for VAT soon, but I‘m confused as how to work out net and gross amounts, when the VAT rate is 20%. If I want to receive £2000 for a job, after VAT, what do I quote as the VAT inclusive price for the customer? If my customer will only pay £1600, how do I calculate what I will get after paying over VAT.

A: If you start with the net figure and need to work out the gross amount including VAT, multiple the net amount by 1.2. Using your figures above:

£2000 x 1.20 = £2400. The VAT is £400.

When you start with the gross figure (the maximum the customer will pay) you need to divide by 6 to find the VAT. When the customer pays £1600:

£1,600/ 6 = £266.67. The VAT is £266.67. The net sale is £1333.33 (1600 – 266.67)

Once you are registered for VAT you will be able to reclaim VAT on your purchases, so the amount of VAT you pay to HMRC will be after deducting VAT you paid on things you buy for the business.

You may also qualify for the VAT flat rate scheme which could make the VAT calculations easier, but that will depend on your business sector.

Q. My wife and I lived in our joint-owned property for 12 years and it is now let it out, but we plan to sell it in two years time. What will be the impact of capital gains tax on that sale?

A: When you sell the property you need to calculate the gain made, being the difference between the sales and purchase price after deducting selling/ purchase costs in each case, including stamp duty land tax paid on purchase. Let‘s assume the capital gain made on the property will be £180,000.

If you own the property for exactly 15 years: 180 months, you will make an average gain of £1,000 per month. The period you lived in the property as your main home (12 years: 144 months) and the last 9 months are free of CGT: 153 months: £153,000.

Your taxable gain is £27,000 (180,000 – 153,000). As you owned the property jointly (presumably 50: 50), you have £13,500 of gains each. There is no deduction for a period of letting after you have moved out.

If you were selling the property before 6 April 2023 that gain would be mostly covered by your individual annual exemptions of £12,300. But this exempt amount is cut to £6,000 in 2023/24 and cut again to £3,000 in 2024/25.

If you sell in 2024/25 you will each have to pay CGT on £10,500 (13,500 – 3000)

March key tax dates

2 – Where income tax, CGT, class 2 NIC or class 4 NIC remains unpaid for 2021/22 a 5% penalty is imposed. This penalty can be avoided if a time to pay arrangement is agreed in advance with HMRC.

10 – Last day to set up a variable direct debit to pay PAYE for payment this month.

15 – Chancellor Hunt to present his Spring Budget

22 – PAYE, NIC and student loan deductions to be paid to HMRC by electronic means for month to 5 March 2023, unless the employer has set up a direct debit so HMRC can collect the amounts due.

31 – Last day to amend returns and pay any outstanding ATED charge for the year 1 April 2021 to 31 March 2022.