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Tax-efficient childcare

Childcare is expensive; however, the tax system can provide a helping hand. In recent years, there has been a shift from tax relief for employer-supported childcare and vouchers to a Government top-up scheme. 

Government scheme

The Government operate a tax-free childcare scheme whereby parents deposit money into an account which can be used to meet childcare costs and the Government provide a tax-free top up.

To qualify for the scheme, the parent (and their partner if they have one) must each expect to earn at least £1,853.28 over the next 3 months. This is equivalent to 16 hours a week at the National Living Wage of £8.91 an hour. However, if either the claimant or their partner expect to have adjusted net income of more than £100,000 in the current tax year, they cannot benefit from the tax-free top up.

Eligible parents can access the tax-free top up by setting up an online childcare account for their child. For every £8 that is deposited into the account, the Government will add a further £2, to a maximum of £2,000 a year (or £4,000 a year where the child is disabled). The funds can be used to provide approved childcare, including that provided by childminders, nurseries, nannies, after-school clubs and playschemes, as long as the provider has signed up to the scheme. The care can be provided until the September after the child’s 11th birthday (or up to the child’s 17th birthday if the child is disabled). 

The Government top-up scheme is not available to universal credit claimants, and cannot be used in addition to employer-provided vouchers or employer-supported care.

Employer-supported childcare and childcare vouchers

Where an employee joined their employer’s childcare or childcare voucher scheme on or before 4 October 2018, they can continue to benefit from the associated tax relief while their employer continues to operate the scheme. Childcare vouchers and/or employer supported childcare are tax-free up to the employee’s exempt amount. Where the employee is a basic rate taxpayer or joined the scheme prior to 6 April 2011, the exempt amount is £55 per week. Otherwise the exempt amount is £28 per week where the employee is a higher rate taxpayer and £25 per week where the employee is an additional rate taxpayer. The exemption also applies for National Insurance purposes. Employees only have one exempt amount for employer-supported care and vouchers, regardless of the number of children that they have.

It is also possible for employer-provided childcare and childcare vouchers to be made available under a salary sacrifice scheme without triggering the alternative valuation rules. 

Workplace nurseries

No tax charge arises under the benefit in kind rules where childcare is provided in a workplace nursery. Unlike the exemption for employer-supported care and vouchers, there is no cap on the value of childcare that can be provided tax-free in a workplace nursery. However, there are stringent conditions that must be met for exemption to be forthcoming.

Which is best?

Where a parent could potentially benefit from more than one scheme, they should evaluate the options and can choose the one best suited to their needs. Employees in an employer-supported scheme or employer voucher scheme will need to leave that scheme if they sign up for the Government scheme, and will not be able to re-join the employer’s scheme if they change their minds.

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

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SDLT and uninhabitable properties

For many the lure of a renovation project is strong and for those looking to generate rental income, doing up a dilapidated property to let out may make commercial sense.

When buying an investment property, the addition of the 3% SDLT supplement means that the SDLT hit may be significant. However, as this only applies to residential dwellings, buying a derelict property that does not meet the definition of a ‘dwelling’ can deliver substantial SDLT savings. Not only is the purchase price on which SDLT payable low as the renovation costs are incurred post sale and SDLT-free, SDLT is charged at the non-residential rates and the 3% supplement does not apply.

The Bewley case

In 2019, the First Tier Tribunal ruled in the case of Bewley v HMRC that a bungalow and plot of land, which had planning permission for the demolition of the existing building and the construction of a new dwelling was not suitable for residential use at the effective date of the transaction. As a result, SDLT was payable at the non-residential rates rather than the residential rates, and consequently the 3% SDLT supplement did not apply.

Use or suitable for use as a dwelling

The legislation defines a ‘dwelling’ as a building that is used or suitable for use as a single dwelling or which is in the process of being constructed or adapted for such use.

In the Bewley case, the property was not used as a dwelling on the effective date of the transaction; the question therefore was whether it was ‘suitable’ for use at that date. 

The radiators and heating pipes had been removed from the bungalow and the presence of asbestos prevented repairs and alterations being carried out without posing risks. As a result, the tribunal found that the property was not suitable for use as a dwelling. Consequently, SDLT was payable at the lower non-residential rates, in respect of which the 3% supplement does not apply.

Effective date

The test as to whether the property is a dwelling is undertaken at the effective date of the transaction – the completion date. All that matters is whether it is used as or is suitable for use as a dwelling at that date or in the process of being constructed or adapted at that date – it is irrelevant whether it has previously been used as a dwelling, or may be used as one in the future.

More than modernisation

The test of whether a property is uninhabitable is a strict one and an uninhabitable property will lack basic facilities necessary to live in it, such as a functioning bathroom and kitchen and heating. A property which is in need of modernisation and redecoration may still be habitable and count as a dwelling – the fact that a property is a renovation project will not in itself mean that non-residential rates apply.

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