multiple dwellings relief

SDLT Multiple Dwellings relief

Multiple dwellings relief’ (MDR) allows a rate to be charged at the percentage payable on the ‘average value’ price (referred to as the ‘Average Value SDLT’ (AVSDLT)) should more than one property be purchased at one time, rather than on the total consideration. MDR is only available for residential transactions. 

The purpose of this relief is to simplify the calculation of SDLT when a single transaction includes the purchase of more than one dwelling. As such, rather than separately calculating the SDLT on each property acquired, SDLT is computed as follows:

  1. Calculate the ‘AVSDLT’ i.e. total dwellings consideration/ total number of dwellings.
  2. Multiply the resultant figure by the total number of dwellings.

The answer is the total SDLT liability.

NOTE 1: The SDLT must be at least equal to 1% x total dwellings consideration.

NOTE 2: the dwellings are not the main residence of the purchaser and as such the additional rate of 3% applies.

Basic example

A single transaction (post 1 October 2021) comprises the purchase of 4 ‘dwellings’ for £950,000.

  • £950,000/4 = £237,500 per dwelling

Tax per dwelling =

  • 3% x £125,000 = £3,750
  • 5% x £112,500 = £5,625

£9,375 x 4 dwellings = £37,500

The minimum tax is 1% of the purchase price = £9,500

Tax payable without claiming MDR would be £67,250.

Definition 1: ‘Dwelling’

Legislation does not define ‘dwelling’ but is widely accepted as being a building or part of a building that accommodates all of a person’s basic domestic living needs. The definition has seen granny annexes, converted garages, pool houses, converted party barns and garden offices all qualify for the MDR relief.

The nearest the legislation gets to providing a definition is FA 2003 sch 6B para which states that a dwelling is:

A building or part of a building counts as a dwelling if-

  • It is used or suitable for use as a single dwelling, or
  • It is in the process of being used constructed or adapted for such use.

One area where there have been several tax cases that have considered this definition centre round ‘granny flats’. HMRC has confirmed that provided the granny flat is a self-contained dwelling and the main house comprises more than two thirds of the total, then MDR can be claimed. One of the main issues is where a property has an additional dwelling that cannot be accessed independently. For example, in a recent tax case relief was refused as there was no door separating the house from its annexe; it also did not have a separate postal address, council tax or utility supply.

The relief does not apply to the transfer of a freehold reversion or head lease where a dwelling has a long lease of 21 years or more.

Definition 2 – ‘Single transaction’

MDR can be claimed where the transaction involves an interest in at least two dwellings or at least two dwellings and some other property.

Where six or more separate dwellings are the subject of a single transaction involving the transfer of a major interest in, or the grant of a lease then the SDLT rules treat those dwellings (for that transaction alone) as being non-residential property. This rule applies automatically. Therefore, depending on the figures, it might be better not to make an MDR claim. If one is made it is made on a land transaction return (due within 30 days of completion) or in an amendment to a return, the time limit for which is 12 months from the filing date 

Please get in touch here, if you have any questions.

rent a room relief

Is rent-a-room relief always worthwhile?

Rent-a-room relief aims to encourage those with spare rooms in their homes to let them out to increase the supply of furnished rental accommodation. Under the scheme, a person can earn up to £7,500 each tax year tax-free from letting out furnished accommodation in their own home. The limit is halved where the income is shared by two or more people, each person being able to earn £3,750 tax-free a year.

Automatic exemption

Where rental income is less than the rent-a-room limit of £7,500 (or £3,750 where income is shared), the tax exemption is automatic. There is no need to tell HMRC about the rental income, or claim the relief.

Rental income of more than the tax-free limit

If the rental income that a taxpayer receives from letting a room in their house exceeds the rent-a-room limit of £7,500 (or £3,750 where income is shared), the taxpayer has the option of claiming rent-a-room relief or working out the associated rental profit in the usual way. Where rent-a-room relief is claimed, the taxpayer simply deducts the rent-a-room tax-free limit from their rental income to arrive at their taxable rental profit.

Where rental profit exceeds the tax-free rent-a-room limit, the taxpayer must complete a self-assessment tax return. If the relief is to be claimed, the claim can be made in the tax return. Whether a claim is worthwhile or not will depend on whether actual expenses are more than the rent-a-room tax-free limit.

Example

Maisie lives alone and lets out a furnished room in her home, receiving rental income of £10,000 for the tax year. Her associated expenses are £2,000. If she claims rent-a-room relief, she will pay tax on rental profits of £2,500 (£10,000 – £7,500). However, if she does not claim the relief, she will pay tax on the excess of her rental income over her actual expenses, a taxable rental profit of £8,000 (£10,000 – £2,000). Opting into the scheme is clearly beneficial as this reduces her taxable rental profits by £5,500. If Maisie is a higher rate taxpayer, this will save her tax of £2,200 (£5,500 @ 40%).

Mathew also lives alone renting out a furnished room in his home. His rental income is also £10,000, but his associated expenses are £9,000. In Matthew’s case, opting into the rent-a-room scheme is not beneficial as doing so will increase his taxable profit from £1,000 (£10,000 – £9,000) to £2,500 (£10,000 – £7,500).

Preserving losses                                                                       

The rent-a-room scheme cannot be used to create a loss, and where actual expenses exceed rental income, it will generally be better not to opt into the scheme in order to preserve the loss so that it can be carried forward and set against future rental profits. However, if the likelihood of being able to use the loss is small, it may be preferable to take advantage of the rent-a-room exemption to save work.

Example

Maud lets a furnished room in her own home, receiving rental income of £3,000. The associated expenses are £4,000. If she chooses to use the rent-a-room scheme (which may be attractive due its simplicity) she does not need to report the income to HMRC. However, if she wishes to preserve the loss of £1,000 (£3,000 – £4,000), she will need to complete the property pages of the self-assessment tax return.

No one size fits all

The extent to which it is beneficial to claim rent-a-room relief will depend on personal circumstances. 

Please get in touch here, if you have any questions.

self employment losses

Losses in the early years of a trade

It is not uncommon to realise a loss in the early years of a trade. However, traders who commenced their self-employment in 2019 or 2020 may also have suffered as a result of the pandemic. Although the Self-Employment Income Support Scheme (SEISS) provided help for traders who also suffered from the impact of the pandemic, those who started trading in 2019/20 were unable to benefit from the first three grants (qualifying only for grants 4 and 5 if they had filed their 2019/20 tax return by 2 March 2021 and met the other eligibility criteria). Traders who started a business in 2020/21 are not able to benefit from the SEISS.

However, they may be able to claim loss relief under the early trade losses relief rules, and generate a tax repayment in the process.

Nature of the relief

The relief for losses in the early years of the trade allows a trader who makes a trading loss in any of the first four years of a new trade to carry that loss back against taxable income of the previous three years. The loss is set against the income of the earliest year first.

Accruals basis not cash basis

Relief for the loss under these rules is only available where the accounts are prepared on the accruals basis. Thus, if losses in the early years are likely, it is worth considering preparing accounts using the accruals basis to open up a claim to relief. This relief is not available where accounts are prepared under the cash basis –  where this is the case, the loss can be carried back against any previous trading profits of the same trade, should they exist, or carried forward and set against future profits of the same trade.

Case study

Polly was employed as a beautician earning £25,000 a year prior to setting up her own beauty business on 1 June 2020. Her business was badly affected by the pandemic, and in the 10 months to 5 April 2021, she makes a loss of £10,000. This is a loss for the 2020/21 tax year.

She can carry the loss in her first year back against her income of 2017/18, 2018/19 and 2019/20, setting the loss against her income for 2017/18 first.

She carries the loss back to 2017/18, setting it against her employment income for that year of £25,000, reducing her taxable income to £15,000 in the process. Carrying the loss back generates a tax repayment of £2,000 (£10,000 @ 20%).

Personal allowances may be lost

It should be noted that the loss carried back cannot be tailored to preserve personal allowances, which may be lost as a result.

Please get in touch here, if you have any questions.

Untitled design-2

Tax relief for additional costs of WFH

During the Covid-19 pandemic, the advice was ‘work from home if you can’. As a result, millions of employees found themselves working at home, often at very short notice. Many still have not returned to the workplace, and homeworking (whether fully or flexibly) is here to stay.

Employees will generally incur additional costs as a result of working from home. They will use more electricity to run their computer and light their workspace and may use more gas as a result of having the heating on during the day. 

While for many years there has been a statutory exemption that allows employers to meet or contribute towards the additional costs of working from home, in recognition of the homeworking requirements imposed by the pandemic, employees who do not receive homeworking payments from their employer are able to claim tax relief for the extra household costs that they have incurred while working from home.

Exemption for costs met by the employer

Employers can pay employees a homeworking allowance of £6 per week (£26 per month) tax-free, and without the employee having to demonstrate that they have actually incurred additional household costs of at least this amount as a result of working from home. The tax-free amount is the same, regardless of whether the employee is required to work from home full-time or one day a week. Consequently, the payments can be made to employees who work flexibly, working from home part of the time and at the employer’s workplace part of the time.

Where the employee’s actual additional household costs as a result of working from home are more than £6 per week, the employer can meet the actual costs tax-free, as long as the employee is able to provide evidence in support of the actual additional costs.

Tax relief for employees

Employees who have been required to work from home can claim tax relief for the additional costs of doing so where these are not met by the employer. HMRC will accept claims of £6 per week/£26 per month without needing evidence of the actual additional costs. Where these are higher, the higher amount can be claimed, as long as this can be substantiated.

HMRC are now accepting claims for 2021/22. Claims can be made online at www.tax.service.gov.uk/claim-tax-relief-expenses/only-claiming-working-from-home-tax-relief?_ga=2.193253997.1398232652.1624373729-980780301.1612354164

Relief is given for the full tax year, even if the employee returns to the workplace before 5 April 2022. Employees who were entitled to the relief for 2020/21 can also claim for that year if they have not yet done so.

Where an employee is required to complete a self-assessment tax return, the claim can be made on the return.

A claim of £6 per week (£312 for the year) will save a basic rate taxpayer £62.40 in tax and a higher rate taxpayer £124.80 in tax.

Please get in touch here, if you have any questions.

new stamp duty

New lower SDLT residential threshold

Back in July 2020, the residential stamp duty land tax threshold in England and Northern Ireland was increased to £500,000 to help stimulate the property market after the first wave of the Covid-19 pandemic. The increased threshold was originally due to apply from 8 July 2020 until 31 March 2021, but as the Covid-19 pandemic continued to run, the Chancellor announced at the time of the 2021 Spring Budget, that the temporary threshold would remain at £500,000 until 30 June 2021. From 1 July 2021, the threshold falls to £250,000, remaining at this level until 30 September 2021, before reverting to the usual level of £125,000 from 1 October 2021. For first time buyers, the threshold reverted to £300,000 from 1 July 2021 for properties costing £500,000 or less.

Similar initiatives were introduced in Scotland in relation to land and buildings transaction tax (LBTT) and in Wales in relation to land transaction tax (LTT). In Scotland, the LBTT threshold was increased to £250,000 from 15 July 2020 until 31 March 2021. However, there was no extension beyond 31 March 2021, and the threshold reverted to £145,000 from 1 April 2021. In Wales, the LTT was increased to £250,000 from 27 July 2020, originally until 31 March 2021. However, this was extended until 30 June 2021. The threshold reverted to £180,000 from 1 July 2021.

Missed the 30 June deadline

If you are looking to buy property in England or Northern Ireland and missed the 30 June 2021 deadline, there is still the opportunity to benefit from a reduced temporary threshold, as long as the purchase completes by 30 September 2021.

Completing by this deadline could save up to £2,500.

Investment properties

For SDLT purposes in England and Wales and for LTT purposes in Scotland, investors and second-home owners were able to benefit from the increased threshold, with the second property supplement (3% for SDLT purposes and 4% for LTT purposes) being applied to the rates as reduced. However, those buying second homes in Wales were not able to benefit.

Example

Julia is looking for a property to let out as a holiday let. She finds a property in June 2021 and her offer of £400,000 was accepted.

If she is able to complete by 30 September 2021, she will pay SDLT of £19,500 ((£250,000 @ 3%) + (£150,000 @ 8%).

However, if she misses this deadline, completing on or after 1 October 2021, she will pay SDLT of £22,000 ((£125,000 @ 3%) + (£125,000 @ 5%) + (£150,000 @ 8%)).

Completing by 30 September 2021 will save her £2,500 in SDLT.

Please get in touch here, if you have any questions.

Limited,Liability,Partnership

Limited liability partnerships

A limited liability partnership (LLP) is not a partnership but a body corporate with a difference – there are no shareholders or guarantors (as there would be for a company limited by guarantee) but partners (designated ‘members’) carrying on a trade or business with a view to profit. It is a structure commonly used by professionals such as doctors, attorneys, and accountants who go into practice together.

As a ‘body corporate’ it must be registered with Companies House however, the entity does not pay Corporation tax, instead the individual members are subject to the normal partnership rules (i.e. taxed individually as being self-employed on their respective share of the profit) regardless of the amount they withdraw from the business. 

Members receive an income/profit share proportionate to their capital account balance. However, certain members can be allocated a disproportionate amount of profit by allowing a ‘salary’ in recognition of the work they do, which could be disproportionate to their income/profit share e.g. a new member may contribute little or no equity but take on a significant share of the management of the business. There are anti avoidance rules in place that treat a member as employed should they receive a fixed rather than varied amount of partnership profit. 

Number of members

Each LLP must have at least two ‘designated’ members responsible for various administrative tasks; however there is no upper limit to the number of members. Members can be either individuals or limited companies with each member being able to sign binding contracts on behalf of the LLP (thus avoiding a problem sometimes encountered by ordinary partnerships where every partner has to sign certain documents).

Advantages of an LLP

The main advantage of setting up an LLP is to give some protection to a member going bankrupt where claims are made against the LLP only and members’ personal liability is limited to their capital contribution. However, all members can be held responsible for another member’s negligence if that negligent member is operating within the scope of their authority in the business. In comparison a partner’s personal assets can be seized to settle the partnership’s debts in an ordinary partnership. 

A further potential advantage is that under an LLP structure different proportions of income and capital entitlements can be allocated each year to the different members; this makes LLPs a flexible method of withdrawing profits particularly where different members have different percentage interests in the business e.g. one member may undertake the majority of the administration but have a lower percentage interest in the partnership. In this instance that member can be allocated a higher (variable) share of the profit rather than being paid a fixed salary for the work involved. This ability to change the profit split year on year is also a benefit for those partnerships with different members with different marginal tax rates.

If an LLP goes into liquidation it is treated as a company rather than a partnership for Capital gains tax purposes. 

Please get in touch here, if you have any questions.

HMRC enquiry

A HMRC enquiry, what you need to know

HMRC has the power to enquire into any return and request any information to establish whether that return is correct. No reasons need be given and invariably will not be disclosed. 

An enquiry may be:

  • Full – checking a return as a whole including the accounts.
  • Random – standard procedures as part of the overall crackdown on tax avoidance possibly targeting specific businesses deemed as high-risk. Previous enquiries have targeted the construction industry, private health care professionals and more recently, those involved with cryptocurrencies and obviously ‘cash’ businesses.
  • Aspect (or ‘compliance check’).

A full enquiry is both costly and time-consuming, for both sides, therefore should a business find itself the subject of one then it will be for a good reason – at least in the HMRC’s eyes. As such, an enquiry letter will more likely be for an aspect enquiry where HMRC look at specific areas or claims relating to a return e.g. HMRC may have received information that a property is let but the owner has not completed the letting pages of the return or the taxpayer may declare a small amount of tax when turnover is high. Some compliance checks begin as ‘aspect’ checks before being upgraded to full enquiries if HMRC believes serious issues are evident. 

Which businesses can be chosen?

HMRC identifies cases using various means, having invested in technology that collects data, analyses information, highlighting potential cases. Their ‘Connect’ computer system obtains information from a range of sources – newspaper advertisements showing a trade but no accounts submitted, lists of market stall holders, DVLA records, data of racehorses and their owners, estate agents details of rental properties or house sales, local authority lists, planning applications, Land Registry, credit card information from issuers, data from companies such as eBay, PayPal and Airbnb. 

However, a sizeable number of investigations are made due to calls to HMRC’s fraud hotline or submission of an online form headed: “HMRC Fraud Hotline – Information report form”. Currently HMRC is concentrating on ‘compliance checks’ specifically relating to suspected CJRS fraud. HMRC believes that between 5% and 10% of CJRS grants contain mistakes or have been illegally claimed and has apparently received over 21,000 reports from the public of suspected CJRS fraud; 26,000 cases are being looked into, some of which include criminal investigations. The process is part of the government’s pledge to invest in a Taxpayer Protection Taskforce created to focus on fraud committed on any coronavirus support package.  

Enquiry process

The first indication of a full enquiry is the receipt of a letter accompanied by a Code of Practice leaflet, confirming the type of enquiry, the information expected to be provided and the deadline for providing this information. A Statement of Assets may be included enabling the Inspector to ascertain whether any assets have been acquired of which HMRC was unaware, payment of which might have been via the use of undisclosed earnings. 

A Disclosure Report will be issued at the end of an enquiry to include a Certificate of Full Disclosure signed by the taxpayer to the effect that a full disclosure has been made ‘to their best knowledge and belief’. Should any additional tax be due then a tax penalty will be levied, the amount being determined by consideration of the reasons why the underpayment arose and the amount.

CJRS grant compliance check letters confirm that HMRC are looking into whether the taxpayer has ‘received a CJRS grant payment and may need to repay some or all of the grant you have received. This is because you may have:

– claimed for a CJRS grant which is more than you are entitled to based on the information we hold about your employees

– not met the conditions to receive a CJRS grant – for example by including employees in your CJRS claim who are not eligible.’

 A response is required within a set timescale (sometimes just two weeks from the date of the letter) otherwise a full compliance check will be opened.

HMRC has an official time limit of five years and ten months after the tax year end for compliance investigation which can be extended to 20 years where fraud or negligence is suspected.

Please get in touch here, if you have any questions.