Entrepreneurs’ relief minimum period increased from April 2019

Entrepreneurs' relief applies to the sale of a business, shares in a trading company or an individual’s interest in a trading partnership. Where this relief is available Capital Gains Tax (CGT) of 10% is payable in place of the standard rate. CGT on the disposal of chargeable assets is usually chargeable at 20%. There are a number of qualifying conditions that must be met in order to qualify for Entrepreneurs' relief.

There is a lifetime limit that means individuals can qualify for the relief more than once, subject to an overriding total limit of £10m of qualifying capital gains. The relief is available to individuals as well as some trustees of settlements. To qualify the individual should be either an officer or employee of the company and own at least 5% of the company and have at least 5% of the voting rights. There are also some other qualifying conditions that must be met in order to qualify for the relief.

Planning note

The minimum period during which certain conditions must be met in order to qualify for Entrepreneurs' relief increased from one to two years from 6 April 2019. There are special provisions if the business ceased operating before 29 October 2018. This measure means that taxpayers looking to claim ER will be required to have a longer-term interest in their business. There had been suggestions that the relief could have been abolished in its entirety so for most entrepreneurs this is a manageable change.

CGT and chattels

A charge to Capital Gains Tax (CGT) usually arises after an asset is sold. However, there are special rules concerning the sale of certain personal assets that are worth considering.  That is because these assets or possessions with a predictable useful life of 50 years or less are normally exempt from CGT. A chattel is a legal term that defines an article of movable personal property. Chattels include items like household furniture, paintings, antiques, items of crockery and china, plate and silverware, motor cars, lorries, motorcycles and items of plant and machinery not permanently fixed to a building.

The gains on any chattels you sell are exempt if the proceeds do not exceed £6,000 per item. In addition, marginal relief may be available where the proceeds are between £6,000 and £15,000. The taxable gain is calculated as the lower of the actual gain or 5/3rds of the excess over £6,000. The disposal proceeds will normally be the amount of money you received when you disposed of the chattel.

There are also special rules for sets of chattels. A set is two or more chattels together which are similar and complementary to each other, and worth more together than separately. Examples include matching ornaments or a set of chess pieces. Where a set is sold, the £6,000 limit applies to the set and there are special rules to sets that have been broken up and sold separately.

Please call if you are concerned about the CGT consequences of an impending disposal.

Tax on a private pension you inherit

Private pensions can be an efficient way to pass on wealth, but it is important to consider what, if any, tax will be payable on a private pension you inherit. The person who died will usually have nominated you by telling their pension provider that you should inherit any monies left in their pension pot. If the nominated person can’t be found or has since died, the pension provider may make payments to someone else instead.

In general, if you inherit a private pension and the owner of the pension fund died before the age of 75, the benefits left in a private pension can be paid as a lump sum or drawdown income to you, with no tax to pay. If the deceased passed away after the age of 75 the pension will be taxed at your marginal Income Tax rate, so 20% if you are a basic rate taxpayer or 40% if you are in the higher tax bracket and 45% if you pay tax at the top rate. The rates may differ if you are a Scottish taxpayer.

There are restrictions on pensions from a defined benefit pot (usually workplace pensions). In these cases, the pension can usually be paid to a dependant of the person who died, for example a husband, wife, civil partner or child under 23. This rule can sometimes be changed if the pension fund allows, but the inheritance will be taxed at up to 55% as an unauthorised payment.

Take advice if you are in receipt of a relative's pension pot

The rules on inheriting a pension are complex and depend on what type it is and how old the holder was when they died. For example, you may also have to pay tax if the pension pot owner was under 75 but had pension savings worth more than £1,055,000 (the lifetime allowance) when they died. There are also important time limits that must be followed. It is also possible for a private pension you inherit to be passed down to future generations, IHT free. We can help you understand your options. Please note that the rules are different for inheriting a State Pension.

Want to pay-off your student loan in full?

Student Loans are part of the government’s financial support package for students in higher education in the UK. They are available to help students meet their expenses while they are studying, and it is HMRC’s responsibility to collect repayments where the borrower is working in the UK. The Student Loans Company (SLC) is responsible for collecting the loans of borrowers outside the UK tax system.

Whilst many ex-students are happy to continue paying back their loans at the lowest level possible, it is of course an option to pay-off you student loan in full. This might be done for a number of different reasons that could include peace of mind by removing an ongoing debt repayment and reducing your monthly debt repayments. It is important to note that the interest rate payable on student loans varies and typically those started before 01 September 2012 pay lower rates.

Unlike many other debts, there are no penalties for clearing your student loan early so if you have other debts with significant penalties for making early repayments, this may be a good one to tackle first. However, if you have other debt with higher interest rates and no early repayment penalties then it might be more beneficial to tackle those debts first.

If you want to pay off your student loan you must first call the SLS to get an up-to-date settlement figure. If you have been making student loan repayments through your salary, then you should have your last P60 and all your payslips for the current financial year to hand when you call. This will allow the SLC to calculate an accurate figure for you.

Be Data Aware campaign

The Information Commissioner's Office (ICO) has launched a new "Be Data Aware" campaign to help people understand how organisations might be using their personal data to target them online and why, and how people can control who is targeting them. This includes, understanding how organisations use people’s data to reach them with social media adverts to market their goods or services and for political marketing.

One of the recommendations from the ICO's investigation into the use of data analytics for political purposes, was to continue to educate the public on the impact of new and developing technologies and on the use of data analytics in political campaigns. The Be Data Aware campaign is intended to do just that.

The campaign includes a number of resources, such as downloadable factsheets on social media privacy settings (with individual fact sheets available covering each of the main social media websites, e.g. Facebook, Twitter and LinkedIn), how online microtargeting works and political campaigning practices.

What is a Close Company?

A Close Company is broadly defined as a company that is controlled by:

  • five or fewer participators or
  • any number of participators who are also directors or
  • where more than half the assets would be distributed to five or fewer participators, or to participators who are directors, in the event of the winding up of the company.

A participator is broadly somebody who has a share or interest in the capital or income of a company, such as having share capital, voting rights or a right to capital on winding up of the company. This can be a shareholder, director or a loan creditor.

Most small private companies will meet the definition of a Close Company and there are some specific tax rules that apply to these companies, for example, where a close company pays for personal expenses of a director, or makes a loan to one of its participators.

How to treat post-cessation items if property business ceases

There are special rules for the taxation of post-cessation receipts after a trade has ceased. The legislation clearly states that the person who receives or is entitled to the post-cessation receipt is the person who is subject to Income Tax or Corporation Tax on the income. This does not have to be the same person who carried on the original trade.

HMRC manuals state that: a receipt which arises from a property rental business, after it has ceased, is taxable under special rules provided, it is assumed that the taxpayer has not already included that receipt in the computation of their rental business profits.

The taxpayer may also be able to claim relief for post-cessation expenses for which they have had no relief. One example might be the cost of background heating for empty premises to keep down condensation and so maintain the value of the property for later sale.

A claim for post-cessation property relief is possible if a taxpayer ceases to carry on a UK property business and within 7 years makes a 'qualifying payment' or a 'qualifying event' occurs in relation to a debt of the business. A claim to relief must be made on or before the first anniversary of the 31 January following the end of the tax year in which the payment is made.

Chargeable benefits from cheap loans

An employee can obtain a benefit when provided with an employment-related cheap or interest-free loan. The benefit is the difference between the interest the employee pays, if any, and the commercial rate the employee would have to pay on a loan obtained elsewhere. These types of loans are referred to as beneficial loans.

A taxable cheap loan is an employment-related loan:

  • which is outstanding for all or part of the year in which the employee is in employment, and
  • no interest is paid on the loan, or the interest paid is less than is due at the official rate of interest, and
  • none of the exceptions listed in sections 176-179 ITEPA apply.

The official rate of interest on beneficial loan arrangements is currently 2.5%. A change in the rate is only made in the event of significant changes in interest rates. An employee can also benefit if an employment-related loan is released or written off. He or she is then no longer obliged to repay the amount that was lent.

A benefit in kind will be applicable where a loan is provided at an interest rate of less than 2.5%. In addition, employers must also pay Class 1A National Insurance. It is not necessary for the loan to be advantageous to the recipient for a chargeable benefit to arise.

Child benefit payments

The weekly rates of child benefit for the only or eldest child in a family is currently £20.70 and the weekly rate for all other children is £13.70. These rates have remained unchanged for some time. Taxpayers entitled to the child benefit should be aware that HMRC usually stop paying child benefit on the 31 August following a child’s 16th Birthday. Under qualifying circumstances, the child benefit payment can continue until a child reaches their 20th birthday if they stay in approved education or training.

Child benefit is usually payable for children who come to the UK, however, there are a number of rules which must be met in order to claim. HMRC must be notified without delay if a child receiving child benefit moves permanently abroad.

It is also possible to claim Guardian’s Allowance if you are bringing up someone else’s child because one or both parents have died. The Guardian’s Allowances is paid on top of child benefit and is currently £17.60 per week.

Beware related tax charge

The High Income Child Benefit charge applies to higher rate taxpayers whose income exceeds £50,000 in a tax year and who are in receipt of child benefit. The charge either reduces or removes the financial benefit of receiving child benefit. Where both partners have an income that exceeds £50,000, the charge will apply to the partner with the highest income.

For taxpayers with income above £60,000, the amount of the charge will equal the amount of child benefit received. Taxpayers have the choice: to keep receiving child benefit and pay the tax charge through Self Assessment or elect to stop receiving child benefit and not pay the charge.

Last call, are you ready for revised digital filing of your VAT returns?

Most VAT registered businesses with a turnover above the VAT threshold need to be ready to keep digital records for VAT purposes, and to file their VAT returns, as required by the new Making Tax Digital (MTD) rules.

What does this mean?

For VAT return periods starting on or after 1 April 2019, businesses with a turnover above the VAT threshold (currently £85,000) have to:

  • keep their records digitally (for VAT purposes only), and
  • provide their VAT return information to HMRC through MTD functional compatible software.

Businesses need to sign up for MTD for VAT in order to submit VAT returns digitally. HMRC has confirmed that businesses that pay VAT by Direct Debit cannot sign up in the 7 working days leading up to, or the 5 working days after sending a VAT Return.

HMRC has also confirmed that during the first year of the changes that they will take a light-touch approach to digital record keeping and filing penalties where businesses are doing their best to comply with the law. HMRC is clear that this does not mean a blanket 'no penalties promise' and businesses need to be aware to do all they possibly can to meet the MTD requirements.

But I am exempt from online filing

Any businesses that are currently exempt from online filing of VAT will remain so under MTD. There are also provisions for those who cannot adapt to the new service due to age, disability, location or religion to apply for an exemption.

There is also a deferral group for certain entities that have until the first VAT Return period starting on or after 1 October 2019 to start using MTD for VAT. This includes businesses that are part of a VAT group or VAT division, use the annual accounting scheme or that make payments on account. If your business has a turnover under the VAT registration threshold, you are not currently mandated to use the MTD for VAT service but can opt to do so if you wish.

Need help?

If you are uncertain how to proceed, either to register for MTD filing, find appropriate software or deal with any other aspect of MTD for VAT, please call asap as we are running out of time to keep you compliant.