Example of Property Income: Interest deduction

In 2017/18, if a landlord incurs loan costs on a let dwelling, the allowable deduction is only 75% of the cost. The remaining 25% gets tax relief at 20% in the income tax calculation.

  • This restriction does not apply to furnished holiday accommodation.
  • This also does not apply in case landlord is a company.
  • This applies only in case of residential property.

Example

Jack has employment income of £26,000 and rental income of £20,000. Costs are loan interest of £2,000 and other allowable expenses of £3,000.

£
Employment 26,000
Property £(20,000-(75% x 2,000) – 3,000 15,500
Personal allowance (11,500)
Taxable Income 30,000
Income Tax £30,000 x 20% 6,000
Less tax reducer £(2,000 x 25%x 20%) (100)
Income tax liability   5,900

Apologies, I lifted this straight out of ICAEW Vital magazine. I could not resist seeing such a simple and beautiful example.

Conclusion:

Basically, this change effects only tax payers whose total income goes over higher rate threshold (i.e. £46,351 for the tax year 2017-18) without deducting finance cost.

Example 1 : John has salary income of £30k and rental income of £15k and finance cost of £10k. John’s total income without deducting finance cost is £45k , this is below £46,351 thus no effect for John.

Example 2  : Jane has salary income of £30k and rental income of £25k and finance cost of £10k. John’s total income without deducting finance cost is £55k , this is above £46,351 thus this will effect Jane.

To learn how it will effect, see HMRC guidance.

Bonus fact:

  1. HMRC guidance mentions 82% of landlord will not be effected as their total income, without a deduction for finance costs, does not exceed the higher rate threshold.
  2. In tax year 2016-17, out of UK adult population of 53.2 million , c 30.2 million were tax payers (57% of adult population). Around 4.4 million (8%) were paying tax at 40% and 333k (0.6%) tax payers are in 45% tax bracket. Click here for Source.
  3. As per BBC article date June 2017. There are 15k individuals with incomes over £1m and 4k over £2m.

Incorporating a letting business

Should I transfer my existing properties in a new company ?

Three taxes are considered when considering the question of incorporating a letting business:

  1. Corporation/Income Tax
  2. Capital Gains Tax ; and
  3. Stamp Duty Land Tax (SDLT).

1. Corporation/Income Tax

  • Corporation tax rates are lower than income tax rates
  • Continued tax relief on mortgage interest
  • Flexibility in timing of profit extraction.

 

2. Capital gains tax (CGT)

Transfers between connected parties are deemed at market value (MV) but there is `incorporation relief ` available.

Incorporation relief

No CGT payable if transfer is for shares in the business.

Eligibility conditions:

  • Rental activity is a business. Main case law here is `Ramsay Vs HMRC` to determine whether the activity is really a business. HMRC guidance CG65715 states the activity should be carried for around 20 hours a week personally.

    Please note HMRC no longer provides non-statutory clearances as conformation that a particular property letting is sufficient to qualify as a business.

  • Consideration in new issued shares only – not a credit in director’s loan account.
  • Transferred as a going concern i.e. profitable business.

Please note annual exemption allowance, currently £11,700 not available to companies

3. SDLT – no relief available.

SDLT payable on MV, irrespective of consideration actually paid.

Future purchase – In case buyer is a company it pays 3% surcharge (threshold £40k) in all cases, whether or not company owns another property or not. Thus landlords cannot avoid the 3% surcharge by buying properties via company.

SDLT Calculator

Practical considerations:

  • Refinance costs
  • Increase in interest rates – as bank usually charge more to limited company landlords.
  • Huge SDLT bill on transfer of assets.
  • Other fees – Lawyer, accountant, valuer etc.

Lastly, there is no guarantee HMRC will not change the rules for finance costs relief for companies in the future.

Conclusion:

I think the sensible approach will be to leave the existing portfolio as it is but to buy new properties in a limited company if the aim is to expand the portfolio rather than profit extraction from the business. This will require another article in greater detail.

PS – There maybe inheritance tax implications as well which are not considered above.

Pensions: Banded earnings and savings for employers

Ensure correct pay is used to calculate pension

We recently took a new restaurant client and were reviewing their employee pension arrangements under auto enrollment.

We noticed that the client (employer) was contributing pension on full pay rather than qualifying earnings.

Qualifying earnings  – These are your earnings from employment, before income tax and National Insurance contributions are deducted, that fall between a lower and upper earnings limit that are set by the Government.

Example: CD Ltd has an employee Jane and her monthly salary is £1,500.

Pension on full pay Pension on qualifying earnings
Monthly salary

£1,500

Monthly salary

£1,500

Threshold – full pay

£0

Threshold – lower band

£503

Pensionable pay

£1,500

Pensionable pay

£997

Employer contribution @ 2%

£30

Employer contribution @ 2%

£20

Additional employer’s contribution under full pay method is of £10.

This employer has c30 employees. Thus yearly savings are of c£3,500.

This employer also has couple of employees over upper limit, thus additional savings.

Restaurant trade inherently has a high staff turnover and it’s advisable to postpone staff pension deductions for three months to avoid deducting pension for staff members who work for a short time with the employer. We also implemented at this client which will result in additional savings.

Caution: Please ensure employees are communicated about these changes.

 

 

Can a child hold shares in a company ?

Can a child hold shares in a company

There is no statutory provision prohibiting a child from owning shares.

Please note contracts cannot be forced against minor thus it’s advisable that that shares are fully paid up.

Dividend income is deemed under ITTOIA/S629 to be that of the parent for tax purposes, and is not treated as the child’s. So there is no tax advantage in holding shares in a child’s name.

I read a good article which gives alternatives to registering child as a shareholder. Click here.

If the client still wants to allot share to a child. Then a bare trust is needed. There is no legal requirement to create a formal document to create a bare trust.

Name in the register of members can be simply – Mr Parent as bare trustee of Mr Child.

National Minimum wage (NMW) a matter of months

What should be NMW for an employee who is 20 years and x months old.

My colleague Neel was working on a client and asked me this interesting question.

What should be NMW for an employee who is 20 years and x months old.

NMW is given in terms of whole years like

25 years and over                            £7.83

21 to 24                                                £7.38

18 to 20                                                £5.90

As always HMRC has been kind enough to make a manual about NMW and share it with us.

See link NMWM03050.

Its states that the worker should be paid £5.90 till he reaches his 21st birthday.