Tag: Tax

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Inheritance Tax

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Overview

Inheritance Tax is a tax on the estate (the property, money and possessions) of someone who’s died.

There’s normally no Inheritance Tax to pay if either:

  • the value of your estate is below the £325,000 threshold
  • you leave everything to your spouse or civil partner, a charity or a community amateur sports club

If you give away your home to your children (including adopted, foster or stepchildren) or grandchildren, your threshold will increase to £450,000.

If you’re married or in a civil partnership and your estate is worth less than your threshold, any unused threshold can be added to your partner’s threshold when you die. This means their threshold can be as much as £850,000.

Inheritance Tax rates

The standard Inheritance Tax rate is 40%. It’s only charged on the part of your estate that’s above the threshold.

ExampleYour estate is worth £500,000 and your tax-free threshold is £325,000. The Inheritance Tax charged will be 40% of £175,000 (£500,000 minus £325,000).

The estate can pay Inheritance Tax at a reduced rate of 36% on some assets if you leave 10% or more of the ‘net value’ to charity in your will.

Reliefs and exemptions

Some gifts you give while you’re alive may be taxed after your death. Depending on when you gave the gift, ‘taper relief’ might mean the Inheritance Tax charged is less than 40%.

Other reliefs, such as Business Relief, allow some assets to be passed on free of Inheritance Tax or with a reduced bill.

Contact the Inheritance Tax and probate helpline about Agricultural Relief if your estate includes a farm or woodland.

Who pays the tax to HMRC

Funds from your estate are used to pay Inheritance Tax to HM Revenue and Customs (HMRC). This is done by the person dealing with the estate (called the ‘executor’, if there’s a will).

Your beneficiaries (the people who inherit your estate) don’t normally pay tax on things they inherit. They may have related taxes to pay, for example if they get rental income from a house left to them in a will.

People you give gifts to might have to pay Inheritance Tax, but only if you give away more than £325,000 and die within 7 years.

Passing on a home

You can pass a home to your husband, wife or civil partner when you die. There’s no Inheritance Tax to pay if you do this.

If you leave the home to another person in your will, it counts towards the value of the estate.

If you leave your home to your children (including adopted, foster or stepchildren) or grandchildren, your tax-free threshold will increase to £450,000.

Giving away a home before you die

There’s normally no Inheritance Tax to pay if you move out and live for another 7 years.

If you want to continue living in your property after giving it away, you’ll need to:

  • pay rent to the new owner at the going rate (for similar local rental properties)
  • pay your share of the bills
  • live there for at least 7 years

You don’t have to pay rent to the new owners if both the following apply:

  • you only give away part of your property
  • the new owners also live at the property

If you die within 7 years

If you die within 7 years of giving away all or part of your property, your home will be treated as a gift and the 7 year rule applies.

Call the Inheritance Tax and probate helpline if you have questions about giving away a home. They can’t give you advice on how to pay less tax.

Gifts

There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.

There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime, as long as they live in the UK permanently.

Other gifts count towards the value of your estate.

People you give gifts to will be charged Inheritance Tax if you give away more than £325,000 in the 7 years before your death.

What counts as a gift

A gift can be:

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for example if you sell your house to your child for less than it’s worth, the difference in value counts as a gift

Call the Inheritance Tax and probate helpline if you’re not sure.

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

The 7 year rule

If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’.

Years between gift and death Tax paid
less than 3 40%
3 to 4 32%
4 to 5 24%
5 to 6 16%
6 to 7 8%
7 or more 0%

Gifts are not counted towards the value of your estate after 7 years.

When someone living outside the UK dies

If your permanent home (‘domicile’) is abroad, Inheritance Tax is only paid on your UK assets, for example property or bank accounts you have in the UK.

It’s not paid on ‘excluded assets’ like:

  • foreign currency accounts with a bank or the Post Office
  • overseas pensions
  • holdings in authorised unit trusts and open-ended investment companies

There are different rules if you have assets in a trust or government gilts, or you’re a member of visiting armed forces.

Contact the Inheritance Tax and probate helpline if you’re not sure whether your assets are excluded.

When you won’t count as living abroad

HMRC will treat you as being domiciled in the UK if you either:

  • lived in the UK for 15 of the last 20 years
  • had your permanent home in the UK at any time in the last 3 years of your life

Double-taxation treaties

Your executor might be able to reclaim tax through a double-taxation treaty if Inheritance Tax is charged on the same assets by the UK and the country where you lived.

 

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Capital Gains Tax

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Overview

Capital Gains Tax is a tax on the profit when you sell (or ‘dispose of’) something (an ‘asset’) that’s increased in value.

It’s the gain you make that’s taxed, not the amount of money you receive.

ExampleYou bought a painting for £5,000 and sold it later for £25,000. This means you made a gain of £20,000 (£25,000 minus £5,000).

Some assets are tax-free. You also don’t have to pay Capital Gains Tax if all your gains in a year are under your tax-free allowance.

Disposing of an asset

Disposing of an asset includes:

  • selling it
  • giving it away as a gift, or transferring it to someone else
  • swapping it for something else
  • getting compensation for it – like an insurance payout if it’s been lost or destroyed

What you pay it on

You pay Capital Gains Tax on the gain when you sell (or ‘dispose of’):

These are known as ‘chargeable assets’.

Depending on the asset, you may be able to reduce any tax you pay by claiming a relief.

If you dispose of an asset you jointly own with someone else, you have to pay Capital Gains Tax on your share of the gain.

When you don’t pay it

You only have to pay Capital Gains Tax on your total gains above an annual tax-free allowance.

You don’t usually pay tax on gifts to your husband, wife, civil partner or a charity.

What you don’t pay it on

You don’t pay Capital Gains Tax on certain assets, including any gains you make from:

  • ISAs or PEPs
  • UK government gilts and Premium Bonds
  • betting, lottery or pools winnings

When someone dies

When you inherit an asset, Inheritance Tax is usually paid by the estate of the person who’s died. You only have to work out if you need to pay Capital Gains Tax if you later dispose of the asset.

Overseas assets

You may have to pay Capital Gains Tax even if your asset is overseas.

There are special rules if you’re a UK resident but not ‘domiciled’ and claim the ‘remittance basis’.

If you’re abroad

You have to pay tax on gains you make on residential property in the UK even if you’re non-resident for tax purposes. You don’t pay Capital Gains Tax on other UK assets, eg shares in UK companies, unless you return to the UK within 5 years of leaving.

Capital Gains Tax allowances

You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).

 

The Capital Gains tax-free allowance is:

  • £11,700
  • £5,850 for trusts

You can see tax-free allowances for previous years.

You may also be able to reduce your tax bill by deducting losses or claiming reliefs – this depends on the asset.

Gifts to your spouse or charity

There are special rules for Capital Gains Tax on gifts or assets you dispose ofto:

  • your spouse or civil partner
  • charity

The normal rules apply for gifts to others.

Your spouse or civil partner

You don’t pay Capital Gains Tax on assets you give or sell to your husband, wife or civil partner, unless:

The tax year is from 6 April to 5 April the following year.

If they later sell the asset

Your spouse or civil partner may have to pay tax on any gain if they later dispose of the asset.

Their gain or loss will be calculated from when you or they first owned it.

If this was before April 1982, your spouse or civil partner should work out their gain using the market value on 31 March 1982 instead.

They should keep a record of what you paid for the asset.

Gifts to charity

You don’t have to pay Capital Gains Tax on assets you give away to charity.

You may have to pay if you sell an asset to charity for both:

Work out your gain using the amount the charity actually pays you, rather than the value of the asset.

Work out if you need to pay

You need to pay Capital Gains Tax when you sell an asset if your total taxable gains are above your annual Capital Gains Tax allowance.

Work out your total taxable gains

  1. Work out the gain for each asset (or your share of an asset if it’s jointly owned). Do this for the personal possessions, shares, property or business assets you’ve disposed of in the tax year.
  2. Add together the gains from each asset.
  3. Deduct any allowable losses.

The tax year runs from 6 April to 5 April the following year.

You’ll need to report and pay Capital Gains Tax if your taxable gains are above your allowance.

If your total gains are less than the tax-free allowance

You don’t have to pay tax if your total taxable gains are under your Capital Gains Tax allowance.

You still need to report your gains in your tax return if both of the following apply:

  • the total amount you sold the assets for was more than 4 times your allowance
  • you’re registered for Self Assessment

There are different rules for reporting a loss.

If you’re non-resident

You need to tell HMRC when you sell residential property even if your gain is below the tax-free allowance or you make a loss. Non-residents don’t pay tax on other capital gains.

Report and pay Capital Gains Tax

You can report any Capital Gains Tax you need to pay either:

  • straight away using the ‘real time’ Capital Gains Tax service
  • annually in a Self Assessment tax return

If you use the ‘real time’ service but need to send a tax return for another reason, you’ll have to report your gains again through Self Assessment.

If you’re a non-resident and you’ve sold a residential property in the UK, tell HM Revenue and Customs (HMRC) within 30 days, even if you have no tax to pay.

Before you report

You’ll need:

  • calculations for each capital gain or loss you report
  • information from your records about the costs and what you received (the ‘proceeds’) for each asset
  • any other relevant details, such as any reliefs you’re entitled to

Report your gain and pay straight away

You can use the ‘real time’ Capital Gains Tax service if you’re a UK resident. You’ll need a Government Gateway account – you can set one up from the sign-in page.

When you use the service you’ll need to upload PDF or JPG files showing how your capital gains and Capital Gains Tax were calculated.

When to report

You can use this service as soon as you’ve calculated your gains and the tax you owe. You don’t need to wait until the end of the tax year.

You must report by 31 December after the tax year when you had the gains.

The tax year runs from 6 April to 5 April the following year.

After you’ve reported your gains, HMRC will send you a letter or email giving you a payment reference number and telling you ways to pay.

Report in a Self Assessment tax return

You can file a Self Assessment tax return to report your gain in the tax year after you disposed of assets.

If you don’t usually send a tax return, register for Self Assessment after the tax year you disposed of your chargeable assets.

If you’re already registered but haven’t received a letter reminding you to fill in a return, contact HMRC by 5 October.

You must send your return by 31 January (31 October if you send paper forms).

You can get help with your tax return from an accountant or tax adviser.

After you’ve sent your tax return

HMRC will tell you how much you owe. The Capital Gains Tax rate you pay depends on your Income Tax rate.

You’ll need to pay your tax bill by the deadline.

You’ll have to pay a penalty if you send your tax return late, miss the payment deadline or send an inaccurate return.

Capital Gains Tax rates

You pay a different rate of tax on gains from residential property than you do on other assets.

You don’t usually pay tax when you sell your home.

If you pay higher rate Income Tax

If you’re a higher or additional rate taxpayer you’ll pay:

  • 28% on your gains from residential property
  • 20% on your gains from other chargeable assets

If you pay basic rate Income Tax

If you’re a basic rate taxpayer, the rate you pay depends on the size of your gain, your taxable income and whether your gain is from residential property or other assets.

  1. Work out how much taxable income you have – this is your income minus your Personal Allowance and any other Income Tax reliefs you’re entitled to.
  2. Work out your total taxable gains.
  3. Deduct your tax-free allowance from your total taxable gains.
  4. Add this amount to your taxable income.
  5. If this amount is within the basic Income Tax band you’ll pay 10% on your gains (or 18% on residential property). You’ll pay 20% (or 28% on residential property) on any amount above this.

Example

Your taxable income (your income minus your Personal Allowance and any Income Tax reliefs) is £20,000 and your taxable gains are £12,300. Your gains aren’t from residential property.

First, deduct the Capital Gains tax-free allowance from your taxable gain. For the 2018 to 2019 tax year the allowance is £11,700, which leaves £600 to pay tax on.

Add this to your taxable income. Because the combined amount of £20,600 is less than £45,000 (the basic rate band for the 2018 to 2019 tax year), you pay Capital Gains Tax at 10%.

This means you’ll pay £60 in Capital Gains Tax.

If you have gains from both residential property and other assets

You can use your tax-free allowance against the gains that would be charged at the highest rates (for example where you would pay 28% tax).

If you’re a trustee or business

Trustees or personal representatives of someone who’s died pay:

  • 28% on residential property
  • 20% on other chargeable assets

You’ll pay 10% if you’re a sole trader or partnership and your gains qualify for Entrepreneurs’ Relief.

If you make a loss

You can report losses on a chargeable asset to HM Revenue and Customs (HMRC) to reduce your total taxable gains.

Losses used in this way are called ‘allowable losses’.

Using losses to reduce your gain

When you report a loss, the amount is deducted from the gains you made in the same tax year.

If your total taxable gain is still above the tax-free allowance, you can deduct unused losses from previous tax years. If they reduce your gain to the tax-free allowance, you can carry forward the remaining losses to a future tax year.

Reporting losses

Claim for your loss by including it on your tax return. If you’ve never made a gain and aren’t registered for Self Assessment, you can write to HMRCinstead.

You don’t have to report losses straight away – you can claim up to 4 years after the end of the tax year that you disposed of the asset.

There’s an exception for losses made before 5 April 1996, which you can still claim for. You must deduct these after any more recent losses.

Losses when disposing of assets to family and others

Your husband, wife or civil partner

You usually don’t pay Capital Gains Tax on assets you give or sell to your spouse or civil partner. You can’t claim losses against these assets.

Other family members and ‘connected people’

You can’t deduct a loss from giving, selling or disposing of an asset to a family member unless you’re offsetting a gain from the same person.

This also applies to ‘connected people’ like business partners.

Connected people

HMRC defines connected people as including:

  • your brothers, sisters, parents, grandparents, children and grandchildren, and their husbands, wives or civil partners
  • the brothers, sisters, parents, grandparents, children and grandchildren of your husband, wife or civil partner – and their husbands, wives or civil partners
  • business partners
  • a company you control
  • trustees where you’re the ‘settlor’ (or someone connected to you is)

Claiming for an asset that’s lost its value

You can claim losses on assets that you still own if they become worthless or of ‘negligible value’.

HMRC has guidance on how to make a negligible value claim.

Special rules

HMRC has guidance on the special rules for losses:

Record keeping

You need to collect records to work out your gains and fill in your tax return. You must keep them for at least a year after the Self Assessment deadline.

You’ll need to keep records for longer if you sent your tax return late or HM Revenue and Customs (HMRC) have started a check into your return.

Businesses must keep records for 5 years after the deadline.

Records you’ll need

Keep receipts, bills and invoices that show the date and the amount:

  • you paid for an asset
  • of any additional costs like fees for professional advice, Stamp Duty, improvement costs, or to establish the market value
  • you received for the asset – including things like payments you get later in instalments, or compensation if the asset was damaged

Also keep any contracts for buying and selling the asset (for example from solicitors or stockbrokers) and copies of any valuations.

If you don’t have records

You must try to recreate your records if you can’t replace them after they’ve been lost, stolen or destroyed.

If you fill in your tax return using recreated records, you’ll need to show where figures are:

  • estimated – that you want HMRC to accept as final
  • provisional – that you’ll update later with the actual figures

Market value

Your gain is usually the difference between what you paid for your asset and what you sold it for.

There are some situations where you use the market value instead.

Situation Use market value at
Gifts Date of gift
Assets sold for less than they were worth to help the buyer Date of sale
Inherited assets where you don’t know the Inheritance Tax value Date of death
Assets owned before April 1982 31 March 1982

Checking the market value

HM Revenue and Customs (HMRC) can check your valuation.

After you’ve disposed of the asset, complete a ‘Post-transaction valuation check’ form. Return it to the address on the form – allow at least 2 months for HMRC’s response.

 

 

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Income Tax rates and Personal Allowances

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Current rates and allowances

How much Income Tax you pay in each tax year depends on:

  • how much of your income is above your Personal Allowance
  • how much of your income falls within each tax band

Some income is tax-free.

The current tax year is from 6 April 2018 to 5 April 2019.

Your tax-free Personal Allowance

The standard Personal Allowance is £11,850, which is the amount of income you don’t have to pay tax on.

Your Personal Allowance may be bigger if you claim Marriage Allowance or Blind Person’s Allowance. It’s smaller if your income is over £100,000.

Income Tax rates and bands

The table shows the tax rates you pay in each band if you have a standard Personal Allowance of £11,850.

Income tax bands are different if you live in Scotland.

Band Taxable income Tax rate
Personal Allowance Up to £11,850 0%
Basic rate £11,851 to £46,350 20%
Higher rate £46,351 to £150,000 40%
Additional rate over £150,000 45%

You can also see the rates and bands without the Personal Allowance. You don’t get a Personal Allowance on taxable income over £123,700.

If you’re employed or get a pension

Check your Income Tax to see:

  • your Personal Allowance and tax code
  • how much tax you’ve paid in the current tax year
  • how much you’re likely to pay for the rest of the year

Other allowances

You have tax-free allowances for:

You may also have tax-free allowances for:

Find out whether you’re eligible for the trading and property allowances.

You pay tax on any interest, dividends or income over your allowances.

Paying less Income Tax

You may be able to claim Income Tax reliefs if you’re eligible for them.

If you’re married or in a civil partnership

You may be able to claim Marriage Allowance to reduce your partner’s tax if your income is less than the standard Personal Allowance.

If you don’t claim Marriage Allowance and you or your partner were born before 6 April 1935, you may be able to claim Married Couple’s Allowance.

Previous tax years

The standard Personal Allowance from 6 April 2017 to 5 April 2018 was £11,500.

Tax rate Taxable income above your Personal Allowance for 2017 to 2018
Basic rate 20% £0 to £33,500
People with the standard Personal Allowance started paying this rate on income over £11,500
Higher rate 40% £33,501 to £150,000
People with the standard Personal Allowance started paying this rate on income over £45,000
Additional rate 45% Over £150,000

ExampleYou had £35,000 of taxable income and you got the standard Personal Allowance of £11,500. You paid basic rate tax at 20% on £23,500 (£35,000 minus £11,500).

Your Personal Allowance would have been smaller if your income was over £100,000, or bigger if you got Marriage Allowance or Blind Person’s Allowance.

Other rates and earlier tax years

HM Revenue and Customs (HMRC) publishes tables with full rates and allowances for current and past tax years.

Income over £100,000

Your Personal Allowance goes down by £1 for every £2 that your adjusted net income is above £100,000. This means your allowance is zero if your income is £123,700 or above.

You’ll also need to do a Self Assessment tax return.

If you don’t usually send a tax return, you need to register by 5 October following the tax year you had the income.

 

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The big IR35 consultation

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HMRC has published its keenly awaited consultation on the future of IR35. Radical changes are ahead for some freelancers and those who hire them. How could you be affected?

Consultation. On 18 May 2018 HMRC published its long-awaited consultation on the future of IR35 (see link below) . This makes clear that the public sector rules which were introduced in April 2017 will be extended to the private sector, but probably with a few minor changes.

Public bodies. The April 2017 changes shifted responsibility to public bodies for deciding if freelance contractors they use are caught by IR35 , rather than it being a question for those doing the work. Faced with fines for getting it wrong, many public bodies have either assumed IR35 applies or changed their working practices by not hiring freelancers.

Fine tuning. Naturally, HMRC is very happy with the 2017 changes and wants to see them rolled out to the private sector. However, there are shortcomings in the public sector model which even HMRC recognises. Therefore, much of the consultation is devoted to asking for suggestions on how it can be improved before being rolled out.

No change. Importantly, the consultation says that the rules for determining if IR35applies won’t be changed. This will still depend on whether the person doing the work would be self-employed if they worked for the client directly, i.e. not through their company or partnership.

When and how? Our guess is that the changes resulting from the consultation won’t take effect until April 2020. But if you want to have your say on how they take shape, you have until 18 August 2018 to submit your comments. Tip. If you use freelancers who work through a company or partnership, use the time before any new rules are implemented to review the contracts and terms of work to ensure that IR35 won’t apply. Loosening the level of control you have over the workers and how they do their job will be key to this.

The question of whether IR35 applies will be shifted from the worker to the hirer as is currently the case for public bodies. This will probably happen in 2020.
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Cash basis – decision time for some landlords

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As a landlord you might need to make extra calculations when completing your 2017/18 tax return because of the new basis for working out profit. What sort of adjustments are required and is there a way to avoid having to make them?

Yet more new rules

The tax position for landlords has become more complex and tough in the last few years. One change which, we suspect, many will have overlooked is the imposition of the cash basis for working out profits for 2017/18 and subsequent years. This affects most landlords who are individuals, but not those who are companies, limited liability partnerships or trusts. It applies to commercial and residential lets.

When does the cash basis apply?

The cash basis automatically applies to individuals who receive rents (before expenses) of £150,000 or less per year. This is the reverse of the rules which applied prior to 2017/18. Until then, as a landlord you were required to work out your profits using normal accounting rules. The transition from one basis to the other requires special adjustments.

Tip. You can elect for the cash basis not to apply. This will avoid having to make the adjustments that are required because of the change (see The next step ).

Cash basis v normal accounting rules

As the name suggests, the cash basis means that you work out your profit taking account of rents etc. you’ve received and expenses you have paid. Profit using the normal accounting rules is worked out on rent receivable by you and expenses payable. So, as a rule of thumb, if your tenants are often in arrears with rent while you pay your bills on time, the cash basis will work well for you. But if the circumstances are reversed then the normal accounting basis is probably your best option.

Trap. If you elect to use the normal basis, it only applies for one year. If you want to continue on the same basis you must make an annual election.

Example. Jim lets out a shop for £2,000 per month payable in advance on the first of every month. When he prepares his 2017/18 tax return Jim must ensure the correct rents and expenses are reported. The £2,000 rent he received for April 2017 didn’t show in his accounts for 2016/17 because it related (except for a few days) to 2017/18. But because he received it on 1 April 2017, it won’t show in his cash basis accounts for 2017/18. Jim must make an adjustment by adding the £2,000 rent received on 1 April 2017 to what he receives in 2017/18. He might need to make similar adjustments for expenses he pays in advance, e.g. service charges, or he’ll miss out on tax deductions.

Other adjustments

Other adjustments might be required as a result of the switch to the cash basis. The most significant of these is for expenditure on equipment etc., which would have qualified for capital allowances under the normal rules, and interest on loans. The amount of tax relief for these can be permanently lost or gained; it’s not just the timing (see The next step ).

Tip. When completing your 2017/18 tax return review the adjustments required. You can then decide if you would be better off electing to stick with the normal basis.

For 2017/18, individuals who are landlords and receive rents of no more than £150,000 per year must work out their profit using the cash basis, i.e. income received minus expenses paid. Transition adjustments are required to avoid double accounting. You can elect to continue with normal accounting rules.