Introduction
The festive season is over, back to reality. Life’s trying to get back to its regular pace. And the harsh truth is the self-assessment return filings for the year 2018-19 due dates have just passed by (31 st January 2020). The tragic part is most of us paid attention to our self-assessment at the last moment and so the lengthy tax bills looked too scary. (HMRC claims that roughly 1 million self-employed failed to do the return in 2020). At the same time, we felt helpless as the possibility to bring the numbers down at the last moment was almost zero. Do you want this history to repeat, after all, it has a habit to repeat itself until people learn from it? But we are sure you don’t. Let us guide you through some marvelous tax-saving tips for 2020 that can help you plan your taxes for this year. You can thank us later!
The year has just begun, isn’t it just the right time to plan everything in advance after all “prevention is better than cure”. There are several changes in the tax regime that could drastically impact the tax bills. In this blog, we shall discuss them and will provide you with the tips to plan your taxes properly (and of course, the legal way).
Capital gains taxes
1. PAYMENTS ON ACCOUNT OF SALE OF RESIDENTIAL PROPERTY
One of the major changes that are around the corner, with the effect from 6th April 2020, is the changes in the capital gains tax. From April 2020 onwards, whenever any capital gains on disposal of residential property gain accrue, such gain needs to be reported to HMRC within a period of 30 days from the date of disposal. Furthermore, capital gains tax on the property shall be made in form of payments on account, that is to say, the tax shall become payable within 30 days from the date of completion of the disposal of residential property. This will have a drastic financial implication as currently, the capital gain tax is payable by the 31st of January following the tax year in which the capital asset is sold or disposed of, which gave individuals around 10 to 22 months’ time before actually having to pay capital gain tax.
Tip 1: It is advisable to sell the residential house property in the tax year 2019/20 itself if there are any plans to do so, so that the capital gains tax will be due by 31 st January 2021.
Tip 2: The information related to property and its disposal (e.g. Original cost, cost of improvement, etc) should be gathered as soon as possible and shall be kept handy as the return and tax payment need to be made within 30 days of disposal. This would end up saving the individuals from unwanted penalties due to non-filing or late filing of the required information.
Tip 3: Another tip is to sell the residential property after selling a loss-making capital asset so that the loss from the capital asset can be set off against the profits from the residential house property and lower capital gain tax becomes payable.
2. PRIVATE RESIDENCE RELIEF AND CGT LETTING RELIEF
Individuals selling residential property are allowed to avail private residence relief from the chargeable gains for the years they have lived in the property and the last 18 months they’ve owned the home even if they had not been living there. This 18 months period (aka final period exemption) shall now be reduced to just half, i.e. 9 months with effect from 6th April 2020.
The CGT letting relief will now be available only to those individuals who share the ownership of the residential property with their tenants. Thus, if any residential property is let out and the owner lives elsewhere, then such an individual shall no longer be eligible for letting relief.
Tip 4: While selling out residential property that has been let out, these changes need to be kept in mind so that the tax impacts of such situations are dealt with correctly, after all ‘ignorance of the law is no excuse’.
3. DIFFICULTY IN DETERMINING THE CAPITAL GAINS TAX RATE APPLICABLE
The capital gains tax is payable at 10%/18% by individuals falling in the basic rate tax band and in all the other cases at 20%/28%. There will now be a major difficulty in determining the rate of tax while paying the capital gains tax since the taxable income of an individual can be known only after the end of the relevant tax year while the capital gains tax would have to be paid within 30 days of the disposal of the property.
Tip 5: It’s suggested to push the selling of capital assets towards the end of the tax period, if possible, so as to avoid any unnecessary hassle. Otherwise, you will have to reconsider the numbers at the time of working out the annual self-assessment return and be extremely careful while assessing the amount already paid and the amount due to be paid or received after performing all the calculations.
4. RELIEF ON LOANS TO TRADERS
When a loan is lent:
- to the UK registered limited company, sole trader, or partnership
- for the trade purpose or profession, vocation or setting up of trade and
- it subsequently became irrecoverable,
then such amount due but not recovered is allowed as a permissible loss to the trader. This relief was earlier available only if the borrower was based in the UK.
From 6th April 2020 onwards, the new legislation will allow relief to traders regarding the irrecoverable loans regardless of the fact that whether the borrower is located in the UK or abroad.
Tip 6: The traders should now ensure that they take benefit of this relief as its scope has now widened - extending the relief covering the borrowers located around the globe.
Annual investment allowance
AIA refers to a tax allowance available every year towards the capital expenditure incurred for business purposes. AIA can be claimed on most of the plant and machinery except cars, items owned before they were started to be used in the business, items gifted to the owner, or the business. This allowance allows businesses to deduct the full value of the plant and machinery up to £1 million from their profit currently. This allowance shall be reduced back to £200,000 after 31 December 2020. A day delay in buying eligible plants and machinery shall reduce the tax-deductible benefit by £800,000, which indeed is a huge amount.
Tip 7: If you plan to buy any plant and machinery in the upcoming tax year, you should consider buying it before 31st December 2020 and avail the AIA of £1 million.
IR 35 rules: Off-Payroll working 2020
Another key change being introduced in April 2020 is in IR35 rules increasing its scope by extending its applications to the private sector. The off-payroll working rules (IR 35) apply only if a worker provides his/her services through an intermediary that is actually his/her own personal service company but would be classed as an employee if the worker would have been contacted directly. If this PSC falls within the ambit of IR35, then the amount received by it from the client would be treated as deemed salary, so PAYE and National Insurance become payable on the same as salary to any other employee.
You can read more about IR35 2020 in our article.
Tip 8: Under these rules the onus of determining the status of the worker, whether he/she is treated as an employee or not, lies on the employer’s shoulder. So, it’s time to be cautious and make a good judgment of the relationship with each off-payroll worker in light of these new rules. You might consider taking tax advice from an expert so as to identify the worker’s status correctly.
Share loss relief
Where an individual invests in the shares of a small and medium unlisted trading company and makes a loss upon a sale of such shares, then he/she is allowed tax relief equal to the loss suffered in form of allowable loss from the income (instead of against capital gains as would normally be the case).
Earlier shares of only UK-based companies were considered for the relief, but with effect from 24th January 2019, the relief now is extended to the disposal of shares of a small and medium unlisted trading company located anywhere in the world and not just UK.
Tip 9: The taxpayer should be aware of the extension of such relief and avail its benefit in case he/she incurs a loss from the disposal of shares from a small and medium unlisted trading company located within or outside the UK. Moreover, there is an additional reporting requirement attached to this benefit, whereby the claimant will have to inform HMRC of the tax residency of the company that issued the shares. Consequently, the individuals should take note of this requirement too.
I hope these tips help you in planning your taxes well in advance. For any further assistance feel free to call us on 020 3960 5080 or write to us at info@debitam.com
