Property swaps

QUESTION : Jack and Jill jointly own two investment properties and wish to swap their interests so that they each have ownership of one of the properties. As tenants in common they currently equally own Cornfield with a market value of £210,000 and the original cost of £50,000 and Wheatfield with a market value of £200,000 and the original cost of £49,000. Jack is to have Cornfield and Jill is to have Wheatfield. What are the CGT and SDLT implications?

ANSWER: For CGT there is a form of roll-over relief on the disposal of joint interests in land in s 248A TCGA 1992 where conditions A to E in that section is satisfied. Condition A is that there is a joint holding of land or separate holdings in land; condition B is that there is a disposal of an interest to one or more co-owners; condition C is that the consideration includes an interest in a joint holding in land; condition D is that in consequence of the disposals the co-owners become sole-owners and condition E is that the acquired interest is not an interest in excluded land. The excluded land is defined in s 248C TCGA 1992 as a dwelling-house which would attract private residence relief under ss 222-226 TCGA 1992 arising on its subsequent disposal within six years of acquisition or becomes excluded land within six years in which case any relief is then withdrawn.

In this example the conditions for relief are satisfied and the position for Jack is as follows:

Without the roll-over relief, his disposal of his half share of Wheatfield shows a gain of £80,500 (the half share of the market value acquired of £210,000 less the half share of Wheatfield disposed of amounting to £24,500).  On submitting a claim under s 248B(2) TCGA 1992 the gain is reduced to £5,000 being the excess of the consideration received over the market value of the relinquished interest.  The acquisition cost of the half-share acquired becomes £24,500 (the market value of the acquired interest less the gain on Wheatfield).  The chargeable gain of £5,000 is below the annual exempt amount in s 3 TCGA 1992 so if Jack has no other disposals in the year will not have to pay any CGT.

The position for Jill is as follows:

Jill acquires half of Wheatfield with a market value of £100,000 in exchange for her half share in Cornfield with a cost of £25,000 (half of £50,000) giving a gain of £75,000. With a claim for the roll-over relief under s 248B(1) TCGA 1992 there is no chargeable gain and the base cost of the half-share that Jill acquires in Wheatfield is £25,000. This is achieved by treating the disposal proceeds as being equal to the acquisition cost of the interest transferred and the base cost of the acquired half-share in Wheatfield becomes the market value of £100,000 less the gain rolled-over of £75,000, ie £25,000.

For SDLT the rules on partitions with joint owners going their separate ways are to be found in para 6 Sch 4 FA 2003 and for exchanges see para 5 Sch 4 FA 2003. The property interest given up by one party is not treated as consideration for the acquisition of the interest from the other party.

There is no definition of “partition” in the legislation and this was raised during the Standing Committee Debates on the Finance Bill 2003. The Chief Secretary to the Treasury clarified the definition in an example – “A and B are the joint owners of two properties. They agreed to split ownership, so that A is left as sole owner of one property and B is the sole owner of the other.”  The intention of relief for partitions in para 6 Sch 4 FA 2003 is to give full relief except to the extent that money is paid which is corroborated by the HMRC manual at SDLTM04030A.  Therefore, SDLT will not be due unless there is a balancing payment or other consideration given and in the case of Jack and Jill above that is not the case and, accordingly, no SDLT will be due.

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Disbursement vs recharged expenses

The treatment of recharged expenses is a common cause of VAT errors. A disbursement is where you act on behalf of your customer in arranging and paying for goods or services, but the underlying supply remains between the supplier and your customer.

A common example of a disbursement is the Companies House filing fee. Here the supply is between Companies House and the company, but it is common practice for an accountant to file and pay the fee on their client’s behalf. Because the ‘supply’ remains between Companies House and the client, the accountant can treat this payment as a disbursement, as long as the disbursed amount is clearly shown on an invoice separately from any other supply, and the exact cost is passed on. The accountant, therefore, does not need to account for VAT when they recharge this cost on to the client.

However, expenses such as hotel accommodation, travel and meals are being supplied to and are consumed by you, not your customer. Therefore, this is not a disbursement, and your must treat any recharge of these types of expense as further consideration for the main supply.

Guidance on how to show recharges and disbursements on your invoices can be found on the GOV.UK website VAT: costs or disbursements passed to customers

Class 2 National Insurance

Class 2 national insurance contributions are payable by the self-employed. Contributions are payable at a flat weekly rate and entitle the contributor to short-term contributions based employment and support allowance, maternity allowance, widowed parent’s allowance, state pension, and bereavement benefits.

The current weekly for 2018/19 is £2.95 and is based on whether profits are at least equal to the small profits threshold and the number of weeks of self-employment in the year. This is determined when the individual completes their self-assessment tax return and paid alongside their income tax and Class 4 national insurance. Voluntary contributions may also be paid if profits are below the threshold.

The Government had originally planned to abolish Class 2 national insurance contributions from 6 April 2018 but it was announced in November 2017 that the abolition was to be delayed until 6 April 2019.

There has however been a further announcement made (September 2018) by the Exchequer secretary to the Treasury that the government will not proceed with the Class 2 changes following a review of evidence concerning the impact on self-employed individuals with low profits.

It was announced that ‘A significant number of self-employed individuals on the lowest profits would have seen the voluntary payment they make to maintain access to the state pension rise substantially.

‘Having listened to those likely to be affected by this change we have concluded that it would not be right to proceed during this parliament, given the negative impacts it could have on some of the lowest earning in our society.

‘Furthermore, it has become clear that, to the extent that the government could address these concerns, the options identified introduce greater complexity to the tax system, undermining the original objective of the policy.’

It is understood that there are currently no plans to reintroduce the abolition.

Employee stress

Employee stress is a problem for all businesses (and all employees). Stress naturally occurs in the workplace. When left unchecked, it can wreak havoc on employee health and productivity.

 Relationships

Relationships can make or break a work environment. When people don’t get along and don’t know how to communicate effectively, it can create a lingering tension in the office. Consider investing in some training. Training sessions can promote an understanding of personality types in order to help people to work together more effectively.

New, more modern policies

Consider if there are new policies that could be introduced that would make the office less stressful, such as a casual dress policy. People feel less stressed if they are comfortable so maybe it is time to say goodbye to suits and ties. Another positive change could be to introduce an open door policy. This will encourage people to communicate more freely with their managers.

Office environment

Take the time to walk around your office space and consider if it is possible to make it a more enjoyable working environment. Perhaps there is a lack of natural light or a lot of clutter around the office. An office cleanup followed by some fresh paint and a few new features like a coffee machine and some plants can make it more enjoyable to work in. It doesn’t have to cost a fortune but a few tweaks can make all the difference.

Promote activities that make the office more pleasant for your employees.

This might include reassigning workloads in order to spread the work more evenly between teams, giving public recognition for a job well done or starting a weekly lunchtime barbecue during warm weather. You might add perks such as office yoga classes, gift certificates after completion of a difficult project or health and wellbeing initiatives such as healthy eating week, lunchtime running sessions, etc.

Agile working

The world of work is changing and agile working is becoming the norm. Giving your team members the flexibility to work from home or at different times of the day can help them to improve their work life balance. If someone needs to focus on a particular project, they can work from home or somewhere quiet, away from the office, in order to get their project over the line. This can help to reduce their stress levels and improve their productivity.

Utilising unused pension relief

HMRC have updated their guidance on the rules for carrying forward the unused pension savings annual allowance, together with a calculator on their website.

For most taxpayers the maximum amount of pension savings that qualifies for tax relief each tax year is £40,000. It is possible to increase this amount by utilising unused relief brought forward from the previous 3 tax years, provided the individual was a member of a pension scheme that year.

The brought forward relief from the earliest year is utilised before later years. Thus for the current tax year 2018/19 the unused relief from 2015/16 may be utilised in addition to the current year relief, followed by 2016/17 and then 2017/18.

2015/16 PENSION ANNUAL ALLOWANCE LAPSES ON 5 APRIL 2019

To utilize the 2015/16 unused relief any additional pension savings would need to be paid to the pension fund by 5 April 2019, otherwise the relief from 2015/16 will lapse.

Note however that for some taxpayers the method of calculating unused relief for 2015/16 is extremely complicated as the government changed the pension rules part way through the year on 8 July 2015. The amount of pension allowance will depend on the pension input period of your scheme.

Declaring offshore income

HMRC is urging UK taxpayers to come forward and declare any foreign income or profits on offshore assets before 30 September to avoid higher tax penalties.

New legislation called ‘Requirement to Correct’ requires UK taxpayers to notify HMRC about any offshore tax liabilities relating to UK income tax, capital gains tax, or inheritance tax.

Some UK taxpayers may not realise they have a requirement to declare their overseas financial interests. Under the rules, actions like renting out a property abroad, transferring income and assets from one country to another, or even renting out a UK property when living abroad, could mean taxpayers face a tax bill in the UK.

From 1 October more than 100 countries, including the UK, will be able to exchange data on financial accounts under the Common Reporting Standard (CRS). CRS data will significantly enhance HMRC’s ability to detect offshore non-compliance and it is in taxpayers’ interests to correct any non-compliance before that data is received or be faced with higher penalties.

The most common reasons for declaring offshore tax liabilities are in relation to foreign property, investment income and moving money into the UK from abroad. Over 17,000 people have already contacted HMRC to notify them about tax due from sources of foreign income, such as their holiday homes and overseas properties.

HOW DO I NOTIFY HMRC?

Taxpayers can correct their tax liabilities by using HMRC’s digital disclosure service as part of the Worldwide Disclosure Facility

Once the taxpayer has notified HMRC by 30 September of their intention to make a declaration, they will then have 90 days to make a full disclosure and pay any tax owed.

 

Redundancy & Maternity pay

Do you have to continue paying SMP after the redundancy?

The simple answer is yes, as for an employee receiving SMP at the time they are made redundant the employer must discharge their full liability by either continuing to pay SMP to the employee based upon what would have been their normal pay period or by paying the SMP as a lump sum payment.

When SMP continues to be paid in the same way and at the same time when the employee stops working you should agree with them whether they require a form P45 or not. If they do then deduct tax on the remaining statutory payments using code 0T (S0T, if they are taxed at the Scottish rate) on a ‘week 1’ or ‘month 1’ basis. If they don’t require a form P45 then use their usual tax code for the statutory payments. If the employee requests their form P45 upon termination or before all of the SMP has been paid it is an indicator that the employee has or will be starting work for a new employer that she did not work for during the Qualifying Week (QW) and you will be able to explore this further. Where the employee requests their form P45 after termination but before all SMP has been paid or the form P45 is to be issued because you have made all payments of SMP then record the final payment date as their leaving date.

A lump sum payment of SMP can be paid to the employee where both the employer and the employee agree to payment in this way. There are however risks associated with lump sum payments as both the employer and the employee may pay more in National Insurance Contributions and the employee may pay more tax (although any overpaid tax would be repaid at the end of the tax year). Also if the employee starts work for another employer after the QW but before the birth of the baby the liable employer remains liable to pay SMP throughout the MPP for any complete weeks the employee does not work for that employer. If the employee ends her employment with that employer SMP will resume until the end of the Maternity Pay Period. If the employee were to start work for a new employer after the baby is born, but before the end of the Maternity Pay Period, who did not employ them in the QW their entitlement to SMP will stop. You would in either of these circumstances have overpaid wages which you will then need to recover from the employee and you will also need to recalculate and repay to HMRC any SMP recovered incorrectly.
For an employee who undertakes any work in a self-employed capacity during their Maternity Pay Period, then such work will not affect their payment of SMP.