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Helpsheets ... continued 17 from homepage

  • Separation, divorce, and private residence relief

    Where a couple separate or divorce, one party may move out of the matrimonial home, with the other party buying them out. This could have capital gains tax implications.

    While a couple are married and in a civil partnership and living together, they can transfer assets between them at a value that gives rise to neither a gain nor a loss. Furthermore, for private residence relief purposes, they can only have one main residence between them.

    However, if the couple separate permanently, any transfers between them that take place after the end of the tax year in which they separate are at market value – the no gain/no loss rule ceases to apply. Further, they are no longer restricted to having only one main residence between them – each partner is entitled to private residence relief on their own main residence.

    Beware the nine-month window

    The final period exemption was reduced from 18 months to nine months from 6 April 2020. This reduction may impact on couples who separate or divorce.

    Where as part of a financial settlement on separation or divorce or on the dissolution of a civil partnership, the spouse or civil partner who has ceased to occupy the marital home transfers an interest in that property to the other spouse or civil partner and the date on which the transfer takes place is more than nine months (for disposals after 6 April 2020) after the date on which they last occupied the property as their main residence, full private residence relief will not be due. The final period exemption now only shelters the last nine months of ownership.

    Special relief

    However, help may be at hand in the form of a special relief.

    The former matrimonial home can be treated as the main residence of the transferring spouse or civil partner from the date that his or her occupation ceased until the earlier of the date on transfer and the date on which the spouse or civil partner to whom the property is transferred ceases to use this as their main residence. The transferring spouse or civil partner must elect for this relief to apply.

    Aside from the final nine month of ownership, relief for one property cannot be given at the same time as relief for another property. As a result, where the transferring spouse has acquired another residence, they may prefer that property to be their main residence. Consequently, this relief may not be beneficial in all cases.

  • Tax implications of student lets

    As the new academic year begins, for student starting or returning to university, the 2020/21 academic year looks very different to normal. While many students may opt to stay at home and study online, those studying away will need somewhere to live – for many, this will be in private rental accommodation. The student market provides opportunities for landlords.

    Letting an entire property

    Landlords with a whole house to let can either let the house as a whole or can let individual rooms to unconnected tenants.

    When letting to multiple households, landlords will need to be aware of the ‘house in multiple occupation’ (HMO) rules. A property is an HMO if there are at least three tenants forming more than one household and toilet, bathroom or kitchen facilities are shared. If at least five tenants live in the house forming more than one household and share toilet, bathroom or kitchen facilities, the property is a large HMO. The landlord will need to obtain a licence (and application for which can be made online on the Gov.uk website) and comply with the rules.

    From a tax perspective, rental income from the let is taxed under the property income rules. All let properties which are owned by the same person or persons form a property rental business, with the taxable profits computed for the business as a whole rather than separately for each individual property. The landlord must declare the income to HMRC on the property pages of the self-assessment tax return unless it is less than £1,000 per year.

    Letting a room in your main home

    If you live near a university or college and have one or more spare rooms in your home, you may consider letting them to students to earn some extra cash. Where the rooms are let furnished, you can take advantage of the rent-a-room scheme. Under this scheme, as long as the rental income is less than £7,500 (or less than £3,750 where the rental income is shared with another person), you do not need to tell HMRC or pay tax on it.

    If the rental income is more than £7,500 (or, £3,750, as appropriate), you can choose to pay tax on the excess or calculate the profit in accordance with usual rules. You will need to complete a tax return where this is the case.

  • Have you got your EORI number?

    From 1 January 2021, you will need an Economic Operators Registration and Identification (EORI) number to move goods between Great Britain and the EU. Prior to 1 January 2021, you only needed an EORI number if you move goods between the UK and non-EU countries.

    If you do not already have an EORI number, you will need to obtain one in order to move goods between Great Britain and the EU. You may also need one you move goods between Northern Ireland and non-EU countries.

    Applying for an EORI number

    From 1 January 2021, you will need an EORI number that starts with ‘GB’ to move goods between Great Britain and other countries.

    If you do not already have an EORI number that starts with ‘GB’ and you have yet to apply for one, this should be done as soon as possible.

    Applications for an EORI number can be made online.

    To make an application, you will need:

     • your VAT number and the effective date of your registration (which can be found on your VAT registration certificate);

     • your National Insurance number (if you are applying as an individual);

     • your Unique Taxpayer Reference (UTR);

     • the date that your business started and its Standard Industrial Classification (SIC) code (which can be found on the Companies House register for a company); and

     • your Government Gateway User ID and password.

    Making an application using the online service should only take 5—10 minutes. You will receive your EORI number straight away unless HMRC need to make further checks, in which case it will take up to five working days.

    Once an application has been made, the status of that application can be checked online.

    Moving goods between Great Britain and Northern Ireland

    The Northern Ireland Protocol comes into effect on 1 January 2021. Special rules apply to the movement of goods between Great Britain and Northern Ireland. From that date, an EORI number that starts with ‘XI’ will be needed to:

     • move goods between Northern Ireland and other countries;

     • make a declaration in Northern Ireland; or

     • get a customs decision in Northern Ireland.

    To obtain a EORI number that starts with ‘XI’ you will need to have one that starts with ‘GB’ – if you don’t, you will need to apply for one first. If you already have an EORI number that starts with ‘GB’ and HMRC have identified that you are likely to need one that starts with ‘XI’, then they should send you one automatically, Expect to receive this from mid-December 2020.

    Trader Support Service

    If you move goods between Great Britain and Northern Ireland, sign up to the Trader Support Service (see www.gov.uk/guidance/trader-support-service) for help and support on moving goods between Great Britain and Northern Ireland.

  • Extended off-payroll working rules

    The delayed extension to the off-payroll working rules will come into effect from 6 April 2021. Under the extended rules, where services are supplied via an intermediary, such as a personal service company, to a medium or large private sector organisation, the private sector engager will be responsible for determining whether the off-payroll working rules apply. This will be the case where the worker would be an employee of the end client if they supplied their services directly, rather than through an intermediary. Where the rules apply, the private sector engager, or the fee payer if different, must deduct tax and National Insurance from payments made to the worker’s intermediary.

    The impact of the changes on workers supplying their services through a personal service company will depend on the nature of both the end client and the arrangement under which the services are provided.

    End client is a medium or large private sector company

    Where services are supplied through a personal service company or other intermediary to an end client which is a medium or large private sector organisation, from 6 April 2020, the personal service company will no longer need to ascertain whether the IR35 rules apply and operate those rules.

    Instead, the end client will need to determine whether the off-payroll working rules apply by deciding whether the arrangement between the parties is such that if the worker supplied their services to the end client directly, rather than through their personal service company, the worker would be an employee of the end client.

    The worker will be given a copy of the determination reached as to their status by the end client. The worker should check they agree with the determination, and bring it to the end client’s attention if they do not.

    If the off-payroll working rules apply, payments made to the personal service company will be made with tax and National Insurance deducted. The worker will receive a credit for the tax and National Insurance paid against the tax and National Insurance due on payments made by the personal service company to the worker.

    If the off payroll working rules do not apply, the personal service company will be paid gross. Tax and National Insurance, as appropriate, will be due on payments made by the personal service company to the worker.

    End client is a small private sector organisation - The extended off-payroll working rules do not apply to small private sector organisations. Where a worker supplies their service via a personal service company to a small private sector organisation, the personal service company must continue to assess whether the IR35 rules apply. Where they do (which will be the case if the worker would be an employee of the end client if they supplied their services directly), the personal service company must calculate the deemed payment on 5 April at the end of the tax year, and account for tax and National Insurance on that deemed payment.

    The end client will continue to make payments to the worker’s intermediary gross.

    End client is a public sector body - The off-payroll working rules have applied since 6 April 2017 where services are supplied to a public sector body through an intermediary. The extension of the rules from April 2021 do not change this (subject to small tweaks to ensure the rules work for end clients in the private sector). The public sector body remains responsible for deciding whether the rules apply, and for deducting tax and National Insurance from payments to the worker’s intermediary where they do. The personal service company does not need to decide whether the IR35 rules apply.

  • Tax implications of making loans to directors

    Where a family company has cash in the bank but profits have been adversely affected by the pandemic, directors of a family company may wish to take a short term loan to enable them to meet personal bills, with a view to clearing the loan with a dividend payment when business picks up. This can be a tax-efficient strategy, although there are tax implications to be aware of if the loan balance exceeds £10,000, or if the loan is not repaid by the corporation tax due date.

    A tax-free loan

    It is possible to enjoy a loan of up to £10,000 tax-free for up to 21 months. To enjoy the maximum tax –free period, the loan must be taken out on the first day of the accounting period. Where the loan is taken out during the accounting period, as long as it is does not exceed £10,000, it can be enjoyed tax-free until nine months and one day after the end of the accounting period.

    Provided the loan is for £10,000 or less, there is no benefit in kind tax to pay. But if the outstanding loan balance exceeds £10,000 at any point, the director is taxed on the benefit of the loan.

    Section 455 charge

    To avoid a section 455 charge, the loan must be repaid within nine months and one day of the end of the accounting period. This is the day by which corporation tax for the period must be due. A section 455 charge (named after the legislative provision imposing it) is a charge on the company set at 32.5% of the outstanding loan balance. The charge is aligned with the higher dividend tax rate.

    If the loan is cleared by the corporation tax date, there is no section 455 tax to pay. There are various ways in which the loan could be cleared, for example, by declaring a dividend (assuming that the company has sufficient retained profits) or by paying a bonus. However, there will be tax implications of these too. Unless the director can use funds from outside the company to clear the loan or will pay tax on the dividend or bonus being used to clear it at a rate which is less than 32.5%, it may be better to pay the section 455 charge instead.

    The section 455 charge is a temporary charge which is repaid if the loan is repaid. The repayment is made nine months and one day from the end of the accounting period in which the loan was repaid, usually be setting it against the corporation tax liability for that period.

    It should be noted that anti-avoidance provisions apply to prevent a director from clearing the loan shortly before the corporation tax due date and re-borrowing the funds shortly afterwards.

    Benefit in kind charge

    A tax charge will also arise on the director under the benefit in kind legislation if the loan balance exceeds £10,000 at any point in the tax year. The amount charged to tax is the difference between interest due on the loan at the official rate (set at 2.25% since 6 April 2020) and the interest, if any, paid by the director. The company must also pay Class 1A National Insurance (at 13.8%) on the taxable amount.

  • Renovating the holiday let during lockdown

    The Covid-19 pandemic has hit the hospitality and leisure industry hard. Landlords with furnished holiday lettings have been unable to let their properties for considerable periods of time as a result of national and local lockdowns.

    Properties need regular maintenance and refurbishment, and while being in lockdown is not ideal, it does provide a window in which to undertake repairs and generally refresh and improve the property. Where expenses are incurred during a period for which the property is unavailable for letting, are the associated expenses deductible in computing the profits or losses of the furnished holiday business?

    General rule

    Expenses are deductible in computing the profits and losses for a property business as long as they are revenue in nature and are incurred wholly and exclusively for the purposes of the business. If the accounts are prepared using the cash basis, capital expenditure may also be deductible in accordance with the cash basis capital expenditure rules.

    Impact of property closure

    It will generally be the case that repairs and refurbishments are undertaken while the property is not let – no one wants to rent a holiday home to find they are sharing it with builders.

    Where the property is kept solely for letting as furnished holiday accommodation, but is in fact closed for part of the year because there are no customers or no business, HMRC allow a deduction for all associated expenses incurred in this period as long as there is no private use. Consequently, where the furnished holiday let is closed during lockdown, a deduction should be forthcoming for expenses incurred in this period.

    However, a deduction is not permitted where the property is used privately. Consequently, if the landlord is living in the property during lockdown and undertaking the work at the same time, a deduction will be denied for expenses incurred during the period of private use. The landlord may need to balance the convenience of living in the property while doing the work against the loss of associated deductions for tax purposes.

    Repairs v improvement

    Where significant work is undertaken, it is important to understand the distinction between repairs, which essentially maintain the property, and improvements, which enhance it. A repair will include replacing roof tiles blown off in a storm, whereas a new extension would constitute an improvement. Repairs are revenue expenses which can be deducted, whereas improvement expenditure is capital expenditure which cannot in computing profits.

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  • Picking up on van benefits

    An income tax charge will generally arise where an employee, or a family member, is able to use a work’s van for private use. This will nearly always include home-to-work travel.

    From 6 April 2020, the flat-rate van benefit charge crept up once again and currently stands at £3,490 (rising from £3,430 in 2019/20), which equates to an additional £12 a year for a basic rate taxpayer. A lower cash equivalent applies for zero emissions vans.

    If an employer also provides the employee with fuel for private use, then a tax charge on the provision of fuel will also arise based on an annual fixed rate. For 2020/21 the flat-rate van fuel benefit charge has been increased from £655 to £666.

    The benefit charge applies regardless of the employee’s earnings rate but may be proportionately reduced if the van is only available for part of a tax year, and/or by any payments made by the employee for private use.

    For 2020/21, a basic rate taxpayer will pay £698 for the use of a work’s van (£3,490 x 20%), which equates to around £13.40 a week. For a higher rate taxpayer, the cost will be £1,396.

    If fuel is also provided for private use, for 2020/21, a basic rate taxpayer will pay additional tax of £133.20 (£666 x 20%), and a higher rate taxpayer will pay £266.40.

    Tax is normally collected through a restriction to the employee’s Pay As You Earn (PAYE) tax code.

    The trouble with pick-ups

    Given their versatility and ‘outdoorsy’ nature, double-cabbed pick-ups are increasingly becoming a popular choice for a family vehicle. So, how does this work for the van benefit-in-kind (BIK) tax charge?

    To qualify as a van for BIK purposes, a vehicle must be:

    • a mechanically propelled road vehicle; and

    • of a construction primarily suited for the conveyance of goods or burden of any description; and

    • of a ‘design weight’ which does not exceed 3,500kg; but

    • not a motorcycle as defined in the Road Traffic Act 1988, s. 185(1). Broadly, this means that it must have at least four wheels.

    The design weight of a vehicle, also known as the ‘manufacturer's plated weight’, is normally shown on a plate attached to the vehicle. What it means is the maximum weight which the vehicle is designed or adapted not to exceed when in normal use and travelling on the road laden.

    Human beings are not ‘goods or burden of any description’ so vehicles designed to carry people (such as minibuses) will not be a van for these purposes.

    When it comes to double cab pick-ups, former contention has arisen as to whether they should be treated as cars or vans. HMRC now interpret the legislation that defines cars and vans for tax purposes in line with the definitions used for VAT purposes.  This means that a double cab pick-up that has a payload of 1 tonne (1,000kg) or more will be accepted as a van for benefits purposes. Payload means gross vehicle weight (or design weight) less unoccupied kerb weight. The 1 tonne rule only applies to double cab pick-ups, not to any other vehicle.

    A word of warning though - under an agreement between HMRC and the Society of Motor Manufacturers and Traders (SMMT), a hard top consisting of metal, fibre glass or similar material, with or without windows, is accorded a generic weight of 45kg. Therefore, the addition of a hard top to a double cab pick-up with an ex-works payload of 1,010 kg will convert the vehicle into a car because the net payload is reduced to 965 kg. This in turn, will have the potential knock-on effect of throwing up a much higher BIK tax charge.

  • Selling a property at below the probate value

    The property market is often volatile but throw a Coronavirus pandemic and a stamp duty holiday into the mix and it is easy to see how property prices can vary dramatically, even in a relatively short period.

    Where a deceased’s estate includes land, inheritance tax is computed by reference to the probate value. However, this may be substantially different to the amount that is realised by the executors when the land is finally sold. If the sale proceeds are less than the probate value, the estate may have paid inheritance tax on a value that was never realised.

    However, the tax legislation provides for a specific inheritance tax relief where there is a loss on the sale of the land.

    The relief

    The relief applies where the appropriate person – usually the executor – sells an interest in land included in the deceased estate within four years of death for a value different to its value at the date of death. Where this is the case, the executor can make a claim for the sale value to be substituted for the value on death.

    Example

    Harold died in September 2019. His estate included his home which was valued for probate purposes at £800,000. It was subsequently sold for £750,000 in June 2020.

    His executor claimed to have the sale price substituted for the probate value, reducing the inheritance tax payable on his estate.

    The sting in the tail

    A problem can arise if the deceased’s estate includes more than one property. Where relief is claimed, the sale price must be substituted for the probate value for all properties sold within the four-year period. The executors cannot choose the value which gives the best result – the same approach must be applied consistently.

    Example

    Bill died leaving his family home and three investment properties. The investment properties were valued for probate purposes at, respectively, £200,000, £300,000 and £500,000. All three properties were sold within four years of Bill’s death realising, respectively, £250,000, £290,000 and £540,000.

    Despite the fact that the second property sold for less than its probate value, it is not worthwhile making a claim to substitute the sale price for the probate value as this would also apply to properties 1 and 3, increasing the value of the three properties for inheritance tax purposes from £1 million to £1,040,000 – an increase of £40,000.

  • Annual investment allowance

    The annual investment allowance (AIA) was increased from its usual level of £200,000 to £1 million for the two-year period from 1 January 2019 to 31 December 2020. As this period draws to a close, it may be prudent to review planned capital expenditure, particularly where this has been put on hold due to the Covid-19 pandemic. The AIA will revert to £200,000 from 6 April 2021.

    What is the AIA?

    The AIA is a capital allowance which provides for 100% relief for qualifying expenditure up to the available AIA in the period in which the expenditure was incurred. However, the allowance does not have to be claimed – writing down allowances can be claimed instead for some or all of the expenditure. Once the AIA has been used, relief for any further expenditure is given in the form of writing down allowances.

    Incur expenditure in 2020 rather than 2021

    The AIA for an accounting period depends on when the period falls. If the period falls wholly within the two-year period from 1 January 2019 to 31 December 2021, the allowance is £1 million. This is proportionately reduced where the accounting period is less than 12 months.

    So, where a company prepares accounts to 31 December each year, it will have an AIA of £1 million for the year to 31 December 2020 and an AIA of £200,000 for the year 31 December 2021.

    Consequently, if the company is planning to incur qualifying capital expenditure of more than £200,000, it would be beneficial from a tax perspective to incur the expenditure in 2020 rather than 2021 to maximise the immediate relief against profits.

    Periods spanning 31 December 2020

    Where the accounting period spans 31 December 2020, transitional rules apply to work out the AIA for the period. This is found by applying the formula:

    (x/12 x £1,000,000) + (y/12 x £200,000)

    Where:

    • x is the number of months in the accounting period prior to 1 January 2021; and

    • y is the number of months in the accounting period after 31 December 2020.

    Therefore, if a company prepares its accounts for the year to 31 March 2021, the AIA for that year is £800,000 ((9/12 x £1,000,000) + (3/12 x £200,000)).

    However, the transitional rules have a sting in the tail – a cap applies to expenditure incurred in that part of the accounting period falling on or after 1 January 2021.

    The cap is found by applying the formula:

    y/12 x £200,000

    Where:

    • y is the number of months in the accounting period after 31 December 2020.

    This means that where the accounting period is the year to 31 March 2021, the cap is £50,000 (3/12 x £200,000). The cap operates to limit the AIA for expenditure incurred in the period 1 January 2021 to 31 March 2021 to £50,000, even if the expenditure for the year is with the AIA of £800,000.

    Thus, to prevent the cap biting and to obtain maximum benefit from the AIA for the year, the bulk of the expenditure should be incurred in 2020 rather than 2021. This can catch the unwary.

  • Statutory redundancy pay and furloughed employees

    Employers may face the difficult decision to make some employees redundant. Legislation was introduced at the end of July to protect furloughed employees.

    Entitlement

    An employee is entitled to statutory redundancy pay if they have at least two years’ continuous employment when they are made redundant. Where an employee has been furloughed during the Coronavirus pandemic, the time that they are on furlough counts as part of their continuous employment.

    Amount

    The amount of statutory redundancy pay to which an employee is entitled depends on:

    • how many complete years they have been employed at the date that they are made redundant;

    • their age at the date of redundancy; and

    • how much they are paid.

    It is paid at the rate of:

    • one and a half week’s pay for each full year the employee was aged 41 or older;

    • one week’s pay for each full year the employee was 22 or older but younger than 41; and

    • half a week’s pay for each full year that the employee was younger than 22.

    The number of years’ service that is taken into account in calculating statutory redundancy pay is capped at 20 and is counted back from the date of the redundancy. This works in the employee’s favour as the rate at which statutory redundancy is paid increases with age.

    Pay is also capped. For 2020/21, the cap is set at £538 per week, meaning that the maximum statutory redundancy pay that is payable for 2020/21 is £16,140 (£538 x 1.5 x 20).

    Pay and furloughed employees

    Where an employee has been furloughed and a grant claimed under the Coronavirus Job Retention Scheme, the employee may only be receiving minimum furlough pay of 80% of their pay to a maximum of £2,500 per month, rather than their usual pay.

    However, when working out an employee’s statutory redundancy pay, the employee’s pre-furlough pay is used rather than their furlough pay where this is lower. This applies where the calculation date for statutory redundancy pay is on or before 31 October 2020 (the date on which the furlough scheme comes to an end).

    Where the employee’s pay varies, statutory redundancy pay is based on average pay over the previous 12 weeks. Where that period includes at least one week where the employee was furloughed, the averaging calculation must be performed over 12 weeks of full pay.

  • Exploiting the staycation trend – Buying a holiday let

    Those looking to buy an investment property may wish to consider a holiday let. Not only do the second and subsequent homes benefit from SDLT savings as a result of the temporary increase in the SDLT threshold, they can also benefit from the favourable tax regime for furnished holiday lettings.

    Tax advantages

    There are special tax rules for properties that qualify as furnished holiday lettings:

    • plant and machinery capital allowances can be claimed for furniture, equipment and fixtures;

    • capital gains tax reliefs for traders – business asset disposal relief, business asset rollover relief, relief for gifts of business assets --- are available;

    • profits count as earnings for pension purposes.

    However, to qualify, the let must meet the conditions to qualify as an FHL.

    Conditions

    The property must be in the UK or in the EEA, it must be let commercially and it must be let furnished. In addition, it must meet three occupancy conditions:

    1. pattern of occupancy condition -- the total of all lettings that exceed 31 days is not more than 155 days in the year;

    2. the availability condition -- the property must be available for letting as furnished holiday accommodation for at least 210 days in the tax year (excluding any days in which the landlord stays in the property); and

    3. the letting condition –the property must be let commercially as furnished holiday accommodation to the public for at least 105 days in the year (ignoring lets of more than 31 days unless the let exceeds 31 days as a result of unforeseen circumstances and lets to family or friends).

    Second chances

    If the let does not meet the letting condition (which may be the case, for example, if there are further lockdowns) all is not lost. Where the landlord has more than one property let as a FHL, the letting condition is treated as met if the average rate of occupancy for all properties is at least 105 days in the year. To take advantage of this, the landlord must make an averaging election no later than one year from 31 January following the end of the tax year (i.e. by 31 January 2023 in respect of an election for 2020/21).

    The second way of qualifying as a FHL in a year where the letting condition has not been met is to make a period of grace election. This route can be taken where there was a genuine intention to meet the condition but this did not happen due to unforeseen circumstances (such as letting cancelled due to lockdowns). To be eligible to make an election, the pattern of occupation and the availability conditions must have been met and, for the first year for which a period of grace election is made, the lettings condition was met in the previous tax year. Where a period of grace election is made, the lettings condition is treated as met. A further period of grace election can be made for the following year if the lettings condition is not met that year. However, if after two successive period of grace elections the letting condition is not met, the property will cease to qualify as a FHL.

    Separate FHL business

    Lettings that are FHLs are taxed as a separate FHL property business.

    SDLT deadline

    The residential SDLT threshold is increased to £500,000 where completion takes place between 8 July 2020 and 31 March 2020. This also benefits those purchasing second and subsequent residential properties as the 3% supplement is added to the residential rates, as reduced. However, the clock is running and completion must take place by 31 March 2021 to benefit from the savings.

  • Tax relief on business loans

    Interest paid on loans used for qualifying businesses purposes should be eligible tax relief and can save up to 45% of the cost of the interest.

    The repayment of the capital element of a loan is never deductible for income tax relief purposes. However, interest paid on loans to a business will be a deductible revenue expense, provided that the loan was made ‘wholly and exclusively’ for business purposes. For example, interest paid on a loan taken out to acquire plant and machinery (a capital asset) is a revenue expense and will therefore be allowable for income tax and corporation tax.

    The incidental costs of obtaining loan finance are deductible. Given that business owners often borrow funds personally, and then introduce the capital to the business by way of a loan, it is essential that tax relief is not only secured at the outset of the loan, but also maintained throughout the borrowing period. It is often the case that qualifying loans become non-qualifying loans so care is needed.

    Broadly, the loan will become non-qualifying if either the capital ceases to be used for a qualifying purpose or is deemed to be repaid.

    For example, Bob borrows £100,000, secured on his house, and lends this to his business. The loan is a qualifying loan, so he can initially claim tax relief on the interest payments. Unfortunately, the rules relating to the repayment of qualifying capital mean that each time a capital credit is made to the account it is deemed to be the repayment of qualifying loan. Since the capital value of the loan is reduced every time a payment is made, credits totalling £50,000 per year will mean that all tax relief is lost within just two years. Re-borrowing shortly after making a repayment is not a qualifying purpose so future relief is also lost.

    It is also worth noting that a business cannot claim a deduction for notional interest that might have been obtained if money had been invested rather than spent on (for example) repairs.

    Double counting is not permitted, so if interest receives relief under the qualifying loan rules, it cannot also be deducted against profits so as to give double tax relief.

    Restrictions under cash basis - Tax relief on loan interest is restricted where the ‘cash basis’ is used by a business to calculate taxable profits. Broadly, businesses using the cash basis are taxed on the basis of the cash that passes through their books, rather than being asked to undertake complex and time-consuming accruals calculations.

    Under the cash basis, bank and loan interest costs and financing costs, which include bank loan arrangement fees, are allowed up to an annual amount of £500. If a business has interest and finance costs of less than £500 then the split between business costs and any personal interest charges does not have to be calculated. Businesses should review annual business interest costs - if it is anticipated that these costs will be more than £500, it may be more appropriate for the business to opt out of the cash basis and obtain tax relief for all the business-related financing costs.

    Private use of assets - Where a loan is used to buy an asset that is partly used for business and partly for private purposes, only the business proportion of the interest is generally tax deductible. Commonly cars and other vehicles used in a business fall into this category. Note however, that a deduction for finance costs is not allowable where a fixed rate mileage deduction is claimed.

    Example - Bob takes out a loan to buy a car and calculates that he uses it in the business for 40% of the time. The interest on the loan he took out to buy the car is £500 during 2020/21. He can therefore deduct £200 (£500 x 40%) for loan interest in calculating his trading profits.

    Finally, interest paid on loans used to fund the business owner’s overdrawn current or capital account is generally not deductible for tax purposes.

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