Although the way in which landlords obtain relief for finance costs on residential properties is changing, there is no change to the type finance costs that are eligible for relief.
What qualifies for relief
The basic rule is that relief is available for expenses that are incurred wholly or exclusively for the purposes of the property rental business, and this rule applies equally to finance costs. Relief is available for eligible finance costs where they meet this test.
The definition of finance costs includes mortgage interest and interest on loans to buy furnishing and suchlike. Relief is also available for the incidental costs of obtaining finance, as long as the interest on the loan is allowable. Incidental costs of loan finance include items such as arrangement fees, and fees incurred when taking out or repaying loans or mortgages.
Limit on eligible borrowings
A landlord can obtain relief for the costs of borrowings on a loan or mortgage up to the value of the property when it was first let. Buy-to-let mortgages are often more expensive than residential mortgages with interest charged at a higher rate. The loan does not have to be secured on the let property. Where a landlord wishes to buy a rental property and has sufficient equity in their own home, it may make commercial sense to release capital from the home by borrowing against it and using the money to purchase the rental property. Interest on the loan is eligible for relief, despite the fact the loan is not secured on the rental property.
No relief for capital repayments
Capital repayments, such as the capital element of a repayment mortgage or loan repayments, are not eligible for relief. Where the borrowings are in the form of a repayment mortgage, it will be necessary to split the payment between the interest and capital when working out the relief. The lender should provide this information on the statement.
Mervyn wishes to invest in a buy to let property. As he only has a small mortgage on his home, he remortgages to release £150,000 of equity.
Following the remortgage, he has a mortgage of £200,000 on his own home. Using the released equity, he buys a property to let for £150,000. He spends some time renovating the property in his spare time before letting it out. When the property is first let, it has a value of £160,000.
During the 2019/20 tax year, Mervyn pays mortgage interest of 10,000and makes capital repayments of £10,800. The property is let throughout.
Mervyn can claim relief for 80% of the interest costs – this is attributable to the borrowings of £160,000 (80% of the loan of £200,000), being the value of the let property when first let. The interest eligible for relief is therefore £8,000 (80% of £10,000). For 2019/20, 25% (£2,000) is relieved by deduction with the balance giving rise to a deduction from the tax due of £1,200 (75% x £8,000 x 20%).
No relief is available for the capital repayments.
The dividend allowance is quite unusual in that it is available to everyone and everyone has the same allowance. For 2019/20 the allowance is set at £2,000. In common with many allowances, it is a case of use it or lose it.
As the end of the 2019/20 tax year draws closer, what can be done to ensure that the allowance is not wasted?
Nature of the allowance
Although termed the ‘dividend allowance’ its nature is really that of a nil rate band. Dividends which are sheltered by the allowance form part of band earnings, but the dividends that fall within that band are taxed at a zero rate.
Harriet is a basic rate taxpayer. After taking account of her salary, she has £10,000 of her basic rate band remaining. She receives dividend income of £3,000.
The first £2,000 of her dividend income is covered by her dividend allowance and is tax-free. The remaining £1,000 is taxed at the dividend ordinary rate of 7.5%.
Harriet must therefore pay tax of £75 on her dividends.
The dividend income uses up £3,000 of her remaining basic rate band.
In a family company scenario, it is possible to organise the shareholdings so as to spread the dividend income around the family to reduce the combined tax bill and to take advantage of each member’s dividend allowance. This is particularly useful where the family member has no other shares and the allowance would otherwise be lost.
As dividends must be declared in proportion to share holdings, the use of an alphabet share structure, whereby each person has their own class of share (e.g. A ordinary shares, B ordinary shares, etc.) preserves the flexibility to tailor dividend payments to shareholder’s circumstances.
Andrew is the sole director of A Ltd. In 2019/20 the company has profits of £70,000 which Andrew wishes to withdraw as dividends. His wife Anne and his children Beth, Chris, Dawn and Emma all work outside the business. None has any other income from shares.
Andrew also pays himself a salary of £8,628.
To make use of each family member’s dividend allowance, an alphabet share structure is used, under which A ordinary shares are allocated to Anne, B ordinary shares are allocated to Beth, C ordinary shares are allocated to Chris, and so on.
Each family member receives a dividend of £2,000. As this is sheltered by their dividend allowances, this enables £10,000 of dividends to be paid tax-free. Had Andrew received the dividends paid to family members, they would have been taxed at the dividend higher rate of 32.5%.
Making use of the family’s dividend allowances reduces the overall tax bill by £3,250.
Where one spouse or civil partner has substantial shareholdings and their partner does not hold any shares (with the result that their dividend allowance is unused) the shareholding partner could consider transferring shares to their spouse/civil partner (taking advantage of the ability to transfer the shares for capital gains tax purposes on a no gain/no loss basis). This will shift dividend income from one spouse/civil partner to the other and enable dividends that would otherwise be taxed to be received tax-free.
Taxpayers with unused dividend allowances could also discuss their investment strategy with their financial adviser with a view to exploring whether it would be beneficial to hold shares – but remember not to let the tax tail wag the dog.
Promoting employee health and wellbeing is increasingly seen as a vital part of a successful business. According to government figures, in 2016/17, 1.3 million workers suffered from work-related ill-health, which equated to 25.7 million working days lost.
This has been estimated to cost £522 per employee, and up to £32 billion per year for UK business. There are several areas where employers can use tax breaks and exemptions to help promote health and fitness at work.
Larger organizations are often able to offer gym or leisure facilities for staff in the workplace (or at a location convenient to work) run either by the organization directly or by a third-party provider. The facilities can be offered to employees to access for free or on a paid-for basis.
In-house gym facilities may be provided tax and NIC free if the following conditions are satisfied:
The facilities must be available for use by all employees, but not to the general public;
They must be used mainly by employees, former employees or members of employees’ families and households (employees of any companies grouped together with to provide the facilities also count);
The facilities must not be located in a private home, holiday or other overnight accommodation (including any associated sporting facilities); and
They must not involve use of a mechanically propelled vehicle (including road vehicles, boats, and aircraft).
Where an employer is unable to provide in-house gym facilities, it may be possible to negotiate favorable membership rates with a local gym or leisure centre. Whilst this may lead to a tax liability for employees, the preferential rate can often be up to 20% – 30% cheaper than the normal price, so this is still an attractive offer for employees. Depending on how the cost of the gym membership is funded, the fees will either be taxed as earnings or as a taxable benefit-in-kind.
So, for example, if an employer gives the employee an additional salary to pay for their gym membership, the money is taxed as earnings through PAYE. If the employer pays the gym membership direct, a taxable benefit-in-kind arises on the employee and should be reported to HMRC on form P11D
Tax-breaks to promote good health
It’s a well-established fact that a healthier workforce is a more productive workforce. The government recognizes these benefits too and has introduced several tax breaks to promote good health.
A tax and NIC-free exemption allow employers to fund one health-screening assessment and/or one medical check-up per year per employee. Subject to an annual cap of £500 per employee, employer expenditure on medical treatments recommended by employer-arranged occupational health services may be exempt for tax and employee NICs. ‘Medical treatment’ means all procedures for diagnosing or treating any physical or mental illness, infirmity or defect. Broadly, in order for the exemption to apply, the employee must have either:
Been assessed by a health care professional as unfit for work (or will be unfit for work) because of injury or ill health for at least 28 consecutive days;
Been absent from work because of injury or ill health for at least 28 consecutive days.
Employer-funded eye, eyesight test, and ‘special corrective appliances’ (i.e. glasses or contact lenses) may also be exempt for tax and NICs, providing certain conditions are satisfied.
Fitness and health issues inevitably become more popular following several weeks of seasonal festivities and the dreaded over-indulgences. Anything an employer can do to help employees beat the post-Christmas bulge is likely to be most welcome.
Although there is no specific allowance for a Christmas party, or any other employer-provided social function, HMRC do allow limited tax relief against the cost of holding an ‘annual event’ for employees, providing certain conditions are met.
Broadly, the cost of staff events is tax deductible for the business. Specifically, the legislation includes a let-out clause, which means that entertaining staff is not treated for tax in the same way as customer entertaining. The expenses will be shown separately in the business accounts – usually as ‘staff welfare’ costs or similar.
There is no monetary limit on the amount that an employer can spend on an annual function. If a staff party costs more than £150 per head (see below regarding this threshold), the cost will still be an allowable deduction, but the employees will have a liability to pay tax and National Insurance Contributions (NICs) arising on the benefit-in-kind.
The employer may agree to settle any tax charge arising on behalf of the employees. This may be done using a HMRC PAYE Settlement Agreement (PSA), which means that the benefits do not need to be taxed under PAYE, or included on the employees’ forms P11D. The employer’s tax liability under the PSA must be paid to HMRC by 19 October following the end of the tax year to which the payment relates.
The full cost of staff parties and/or events will be disallowed for tax if it is found that the entertainment of staff is in fact incidental to that of entertaining customers.
VAT-registered businesses can claim back input VAT on the costs, but this may be restricted where this includes entertaining customers.
The employee’s position
A staff event will qualify as a tax-free benefit if the following conditions are satisfied:
- the total cost must not exceed £150 per head, per year
- the event must be primarily for entertaining staff
- the event must be open to employees generally, or to those at a particular location, if the employer has numerous branches or departments
The ‘cost per head’ of an event is the total cost (including VAT) of providing:
- a) the event, and
- b) any transport or accommodation incidentally provided for persons attending (whether or not they are the employer’s employees),
divided by the number of those persons.
Provided the £150 limit is not exceeded, any number of parties or events may be held during the tax year, for example, there could be three parties held at various times, each costing £50 per head.
The £150 is a limit, not an allowance – if the limit is exceeded by just £1, the whole amount must be reported to HMRC.
The £150 exemption is mirrored for Class 1 NIC purposes, (so that if the limit is not exceeded, no liability arises for the employees), but Class 1B NICs at the current rate of 13.8%, will be payable by the employer on benefits-in-kind which are subject to a PSA.
If there are two parties, for example, where the combined cost of each exceeds £150, the £150 limit is offset against the most expensive one, leaving the other one as a fully taxable benefit.
Generous Ltd pays for a Christmas party for its employees, which costs £150 per head and a further social event in the same tax year costing £45 per head. The Christmas party will be covered by the exemption, but employees will be taxed on subsequent social event costs as a benefit-in-kind.
When deciding what to give as Christmas gifts, the possibility of triggering an unintended inheritance tax liability is not one that immediately springs to mind. However, there are traps that may catch the unwary.
Income or capital
When making a gift, it is important to ascertain whether the gift is being made out of income or from capital. There is an inheritance tax exemption for normal expenditure from income. To qualify, the gift must be made regularly and only from surplus income. It is important that after making the gift you have sufficient income left to maintain your usual lifestyle. To avoid unwanted questions, it is a good idea to set up a regular pattern of giving and keep records to show that the gifts were made from income.
A gift that is made from capital – for example, from the proceeds from the sale of a property or a gift of a valuable antique – will reduce the value of the estate. Unless the gift falls within the ambit of another exemption, the gift will be a potentially exempt transfer (PET) and will be taken into account in working out the inheritance tax due on the estate if you die within seven years of making the gift.
Gifts to spouses and civil partners
The inter-spouse exemption protects gifts between spouses and civil partners. Consequently, gifts of any value can be given to a spouse or civil partner without worrying about the inheritance tax implications.
Everyone has an annual allowance for inheritance tax purposes of £3,000. The annual allowance enables you to give away £3,000 every year in assets or cash, in addition to gifts covered by other exemptions, without it being added to the value of your estate.
You can also carry forward the annual exemption to the following year if it is not used, so if you did not use it in the last tax year, you can make gifts of up to £6,000 this year without having to worry about inheritance tax. However, any unused allowance can only be carried forward to the following tax year, after which it is lost.
The small gifts exemption enables you to make gifts of up to £250 a year to as many people as you like without having to keep a tally for inheritance tax purposes. However, the same person cannot benefit from a small gift of £250 in addition to the annual gifts allowance.
If a family wedding is on the horizon, you can take advantage of the wedding gifts exemption to make further gifts. To qualify, the gifts must be made before the wedding not afterwards. The exempt amounts are set at £5,000 for gifts to a child, £2,500 for gifts to a grandchild or great-grandchild and at £1,000 for a gift to another relative.