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Glasgow
+44 (0)141 221 2984

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Stirling
+44 (0)1786 451745

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+44 (0)1389 765238

Hamilton
+44 (0)1698 459444

French Duncan

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Happy New Year? Looking ahead to taxes in 2018/19

5 April has passed with many stockbrokers and IFA’s breathing a sigh of relief as last minute pension contributions, ISA investments and share sales to make use of capital gains tax annual exemptions were processed by the 5 April end of tax year deadline.

What changes does the new 2018/19 tax year bring for us?

Many tax reliefs and allowances increase, notably, the income tax personal allowance from £11,500 up to £11,850 and the capital gains tax annual exemption up from £11,300 to £11,700.

For Scottish tax payers, there is also some additional tax bands, compared to English taxpayers who remain with rates of 20%, 40% and 45%. In Scotland, there is a new 19% band, but only in respect of £2,000 of income while a new 21% band is introduced and the higher rate and additional rate bands both increase by 1% to 41% and 46%. Many on lower incomes will notice modest tax reductions while those on slightly higher incomes and beyond will suffer more income tax.

The big downsides of this tinkering are additional complexity for Scottish tax payers and the costs to HMRC of implementing changes which could easily be tens of millions. It will be interesting to see, in a year or two, when HMRC publish the figures, the amount of additional income tax generated versus the costs of doing so.

Another complication is that the Scottish rates of income tax apply to earnings, pensions and rental income and not to dividends and interest. So while Doctors, Judges and other high earners are caught, those with their own companies can actually reduce their earnings and instead receive dividends from their companies. They would either be completely unaffected or perhaps even be better off as a result of behavioural changes resulting from the higher Scottish rates of income tax. Again, another one where we may be able to glean any behavioural changes when the figures for the Scottish tax take are published.

A final one which, at first glance is a negative but is actually beneficial is that many employees will notice a drop in their take home pay in April. This is because the rate of employees’ pension contribution under auto enrolment is rising from 1% to 3%. The additional contribution is deductible for income tax but nevertheless, after tax net pay will reduce, all other things being equal. The benefit is that when employees retire, there will be more in their pension pot and more available to spend in retirement. Anyone who does not wish to participate in work place pensions can opt out but they have to approach their employer to do this. There may be a short term gain but, in the long run, probably not a good idea bearing in mind that the employer also contributes to these pension schemes for their staff.

Nothing stands still and those of us north of the border can look forward to increasing complexity in our tax system. Many people look back to the olden days when life seemed simpler. They certainly were in the taxation field when, at one stage, we had two rates of income tax: 25% and 40%. Golden years indeed.

Furnished Holiday Lets - Inheritance Tax

Inheritance Tax (IHT) is another factor which landlords of Furnished Holiday Let (FHL) properties should consider.

Whether or not a particular property can qualify for Business Property Relief (BPR) for IHT purposes remains a tricky area. If BPR applies, you can get relief of either 50% or 100% on the asset, which can be passed on during your lifetime, or as part of your will.

As demonstrated in the case of HMRC v Nicolette Vivian Pawson 2013 (the Pawson case), the level of services provided highly impacts on whether a FHL landlord is entitled to claim BPR. The extent of services provided must differentiate from those that would be provided by a standard landlord. An increase in the additional services which can be provided in turn increases the chances of a successful BPR claim.

Additional facilities and services might include:

  • operation of a website
  • personal welcome on arrival, to show customers around the property and ensure they know where everything is and how it works
  • facilities for accommodating pets
  • swimming pool and maintenance thereof
  • barbeque facility and fuel supplies
  • access to games and sporting activities
  • arrangements for the enjoyment of local tourist activities
  • provision of a welcome pack
  • provision of some meals

The key to these additional services is it is not essential for all customers to use these additional services, they simply must be offered, many of which could be at an additional charge.

The more recent case of Vigne v HMRC (2017) however has cast doubt on this judgement, arguing that it should not be assumed that a business is an investment business and that the proper starting point is to make no assumption one way or the other.

This decision means that business relief may now be available on activities which would have previously been challenged.

HMRC do provide a clearance service, in which they will advise whether or not your FHL business qualifies for BPR. This service is only worthwhile using if you are confident that the relief will potentially be due.

As things currently stand, a standard FHL business is unlikely to qualify for BPR and although the Vigne case has cast doubt on the Pawson decision, it should be noted that the Vigne case is currently a First-Tier Tribunal case which could be appealed by HMRC. It could however prove to be an unexpectedly significant case in terms of the availability of BPR for FHL’s and the level of services which are required to be provided.

If you are looking for advice relating to your FHL, please contact French Duncan Tax Senior Jen Kinnear either by email to j.kinnear@frenchduncan.co.uk or call 01786 451 745.

This blog is part of a series of eight - you can see all blogs here:

1. Furnished Holiday Lets - an introduction & your obligations

2. Furnished Holiday Lets - qualifying conditions & elections

3. Furnished Holiday Lets - Income Tax & Capital Gains Tax

4. Furnished Holiday Lets - Non Resident Landlords

5. Furnished Holiday Lets - VAT

6. Furnished Holiday Lets - Making Tax Digital (MTD)

7. Furnished Holiday Lets - Conclusion & Services

Furnished Holiday Lets – Conclusion and Services

To conclude our series of blogs, there are a variety of complex tax rules, reliefs and allowances which apply to FHLs, many of which must be considered on an annual basis.

Fulfilling your tax reporting obligations as a landlord is a continuous process, and by forward planning, considering the rules carefully and utilising the reliefs available to you, tax liabilities can be minimised and your FHL can benefit from reinvestment.

French Duncan can offer the peace of mind that your tax affairs are being completed correctly to avoid any potential penalties that could occur if errors are found from an HMRC enquiry, and that you are fully utilising any tax reliefs available to you.  

The services we could offer are:

  • Completion of individual tax returns to show income from rental properties.
  • Where there is a rental business, completion of both partnership tax return as well as individual partners tax returns.
  • Review joint ownership position to determine if it meets relevant conditions to be deemed a rental business.
  • Non Resident Landlord (NRL) individual tax return.  Review of income position for Non-residents to establish if qualify to not be taxed at source, as well as completion of relevant NRL forms.
  • Review the structure of ownership for rental properties so that individuals are taxed in the most efficient way.
  • Planning advice should individuals be adversely affected by changes to loan interest relief.

If you have any queries, please get in touch with a member of our team.

If you are looking for advice relating to your FHL, please contact French Duncan Tax Senior Jen Kinnear either by email to j.kinnear@frenchduncan.co.uk or call 01786 451 745.

This blog is part of a series of eight, you can see all other blogs here:

1. Furnished Holiday Lets - an introduction and your obligations

2. Furnished Holiday Lets - qualifying conditions & elections

3. Furnished Holiday Lets - Income Tax & Capital Gains Tax

4. Furnished Holiday Lets - Non Resident Landlords

5. Furnished Holiday Lets - VAT

6. Furnished Holiday Lets - Making Tax Digital

7. Furnished Holiday Lets - Inheritance Tax 

 

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