The Fizz! Blog

A big change from April when you sell a Buy To Let

If you sell a Buy to Let property (or any other property that's not clearly your own home, for that matter) at a profit, it's pretty likely you'll have to pay Capital Gains Tax.  At present that's paid via a Self Assessment Tax Return for the year in question.  So if someone realises such a profit today, it's going to go on their tax return for the year ending 5 April 2020, and that means that the tax is payable in January 2021.

By the time the payment deadline comes around, it's not uncommon for there to be a problem.  The seller hasn't got the money any more.  It's reasonably common for people to labour under the misapprehension that if they use the money to buy another property, then the profit somehow isn't taxable.  Or for them to believe that there's some interaction with mortgages and repayments that makes a difference.  But those things aren't relevant in the slightest.  Or they might simply think that there's no tax on selling a house.  There is, unless it's unambiguously and genuinely your own home.

From 6 April 2020, therefore, the rules are changing.  If you sell that BTL and make a profit, you've got to tell HMRC and pay the tax within 30 days.  It'll be impossible for many people to be 100% sure of what that tax bill will be - the tax rate on capital gains in someone's basic rate tax band is currently 18%, and on gains above that 28%, and you might not know how much of your basic rate band is going to end up being used up by other things.  But that's fine - you just pay your best estimate, and then the difference can be sorted out later on.

Of course, the people in the best position to warn sellers about this are the conveyancing solicitors.  But a similar regime came in for overseas sellers of UK properties already, and we can tell you that there's no evidence at all that solicitors are advising sellers about it, and we've had to belatedly help more than one seller declare and pay the tax to HMRC.

Even if you're not planning on selling any time soon, one practical thing to do now might be to make sure you've got all the details of how much a property cost, easily and clearly available.  That way, you won't be frantically looking for them in years to come when faced with an unexpectedly tight deadline for paying the tax.

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What's a Personal Pension?

As accountants, we deal with the increasingly complicated world of pensions every day. But although it's all (fairly) clear to us, it's actually an area that's obtuse and intimidating to many people. So here's a primer on the basics of how personal pensions work!

A personal pension is just a tax-advantaged method of saving for retirement. The good thing is that the government will add something to the pot in addition to whatever you save, and the contents of the pot can grow tax-free. The bad thing is that the price you pay is being unable to get your hands on any of the money until you're at least 55 years old.

How much can I save into my pot?

Fundamentally, the maximum contribution (the Annual Allowance) in a year is £40,000. It's more complicated than that, though. That £40,000 allowance starts to get reduced if you have income greater than £150,000, and if you have income greater than £210,000 your Annual Allowance is only £10,000. But you can generally carry forward unused Annual Allowance for up to three years, so in certain circumstances someone might be able to contribute £160,000 in one go!

Although getting 20% tax relief on contributions generally relies on having enough income that you've actually paid a matching amount of tax, anyone can contribute £3,600 in a tax year, even if they're paying no tax at all.

So, how does this tax relief work?

For every £80 you put in, the pension company asks the government for a further £20. So that means you've £100 in your account, and you're out of pocket by only £80. That's basic rate tax relief (i.e. you've saved 20%).

Should I put the contributions on my tax return?

If your income is below £50,000, nothing happens, so including the contributions won't make any difference to your tax bill. Your income has topped out in the basic rate tax band where tax is charged at 20%, and you've had all the tax relief you're due.

But if your income is above £50,000, you'll save some more tax. If someone who has contributed that £80 to their pension is in the higher-rate band, the government will knock another £20 off their tax bill. So now they've got £100 in their account and are only £60 out of pocket. That's higher-rate tax relief (i.e. you've saved 40%).

You can save even more if your income is in a higher tax bracket.

What about if I work via my own limited company?

In that case, it's generally marginally better for the company to make contributions directly to the pension company as your employer, rather than you making them personally.  The company puts the whole amount into the pension, and its corporation tax bill is reduced as a result.  It's vital that the pension company knows they're receiving an employer contribution rather than a personal one, though.

Where do I get a pension?

There are lots of providers. Because we're not Independent Financial Advisers (IFAs), we're not allowed to tell you exactly where to put your money, though we've some more content we can share about the options and what we see people doing. For personal advice, we've a handful of IFAs who trust and are happy to recommend.

What happens to my money whilst it's in my pension?

It'll generally be invested in something - funds, shares, bonds, that kind of thing.

In the simplest, cheapest products that may simply be done for you, based on your age and anticipated retirement date. Broadly, the younger you are, the riskier the investments will be - since you've a long time horizon, more volatile investments with a greater anticipated long-term return are likely to be more appropriate than something more steady and boring. As you approach retirement, they'll be gradually switched into less volatile investments - it's a process known as lifestyling.

At the other end of the spectrum, some people like to actually pick and choose their own investments within the pension, or have an adviser do it for them. And there are points in between where you can make high-level choices but leave the detail to someone else, or to a robot.

How do I get money out of my pension?

It'll depend on the rules when the time comes. They're quite different now to the way they were 10 or 20 years ago, and you can expect them to be different in the future too. The general shape of things at present for most people is that you can get 25% of the pot tax-free, then as you draw out the remainder you'll pay tax on it as part of your income as you take it. If someone can save 40% tax when they contribute, grow their pot tax-free, and then get a quarter of it out without paying any tax and potentially pay tax at no more than 20% on the rest, that could be pretty attractive.

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So, what's going on with IR35?

From April, as many contractors with limited companies will know, there's a significant change coming to IR35.  Those are the rules that say that if your limited company's income is really derived from you doing an "employee-style" role, you're not supposed to take advantage of the tax efficiencies a company offers and instead must pay more or less full employment taxes.  At present, unless you're working for a customer in the public sector, it's your initial call as to whether IR35 applies.  Given the bigger tax and National Insurance burden it generally imposes, and the grey area between modern employment and self-employment which means that employment status for many people is genuinely unclear, few contractors choose to declare under IR35.

 

From 6 April, if your customer is a medium or large private sector company, it's going to be their call, not yours.  Many contractors are going to find their customer deducting full employment taxes (including two lots of NI, both employer's and employee's) before receiving what's left.  And many others have already been told by their customer that they need to become a member of PAYE staff, or use an umbrella company (which amounts to more or less the same thing in tax and NI terms).

 

There's a process for disputing your customer's assessment, and maybe it'll work sometimes.  But fundamentally the idea is to shift the risk of non-compliance from contractors to customers, to encourage the customers to play it safe.  And at the moment it's clearly working to at least some degree - HSBC and Vodafone, for example, hitherto massive users of contractors with limited companies, have said they won't use them any more - it's PAYE or an umbrella company (i.e. also PAYE) if you want to work for them.

 

So, what might this mean to you in financial terms?

 

To do a very basic comparison:

• If someone invoices £80,000 through their company in a year (imagining zero expenses to keep it simple), then if they extract as much money as they can, as tax-efficiently as they can, they'll end up with about £58,000 in their bank account after tax.
• If their customer decides they'll only pay them via PAYE, and their budget is £80,000, then the person will be given a gross salary of about £71,000 (as the employer is going to have to pay Employer's National Insurance on top of it of about £9,000, making their total outlay £80,000).  On a gross salary of that amount, take-home pay after tax and Employee's National Insurance would be about £50,000.  So the second person is £8,000 worse off than the first one.

It's much more nuanced and complex than that.  The limited company owner, for example, might well delay or reduce tax further by *not* taking as much money as they could, leaving some in the company for the future, making a limited company even more beneficial.  They might be able to avoid repaying Child Benefit that way too.  And they might be able to split their income with a spouse, saving much more.  On the other hand, the second person would be getting paid holiday and pension, and might feel more secure.  There are lots of other aspects too.  But you can see that at the very least it'll result in a substantial reduction in take-home income.

 

Some people are saying that contractors should simply demand an increased day rate so that their take-home remains unaffected, but that's obviously likely to be wishful thinking for many people, though in the medium term perhaps supply and demand means that customers/employers will have to pay more.  But right now, if a contractor could command a higher fee, then they should be doing that anyway.  Changing tax regimes are just a fact of life that we need to be prepared for, and your utility and value to a customer is unchanged.

 

At present, the important thing is to be informed.  You'd be sensible not to agree a long-term contract running beyond April 2020 without certainty as to how you'll be paid.

 

The government are doing a last-minute review of the rules, and we've got a Budget coming up in March, so some people are holding out hope of the changes being postponed.  A year ago we'd have thought that was a futile hope, but since the ludicrous last minute postponement of new VAT rules in the building industry, anything's possible.  But if it doesn't come this year, it'll come soon (and it will probably come this year).

 

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Should I take extra dividends out of my company to pay down my mortgage?

Mathematically, if your income is already taking you to the higher-rate tax threshold, the answer is almost certainly no. But sometimes it’s not just about the maths.

Imagine having £67,500 left to go on your mortgage and phoning the bank to ask about paying it off in full. They tell you it’ll cost £100,000 to pay it off. You’d think that was pretty crazy - a £32,500 penalty charge for paying off a loan of £67,500. But if someone with income over £50,000 takes further dividends in order to overpay their mortgage, that’s exactly what they’re doing (and it could be an even bigger penalty than 32.5%, if it means losing child benefit, or taking income over the £100,000 or £150,000 marks).

Clearly, in that situation, most people would decide to keep their £100,000, and carry on paying off the mortgage month-by-month, given the historically trivial interest rates that most of us pay on our mortgages.

Looking at it from the other side, someone with plenty of money in their company wanting to buy a house might think “if only there was some kind of low-interest loan available which I could use to pay for this house that would enable me to avoid extracting money from my company at high tax rates”. There is! It’s called a mortgage.

Having said that, for many people it can still be overwhelmingly psychologically important to pay it off. And it might well be that for those people the tax cost is worth it for the peace of mind. But it’s smart to at least be aware of the true financial cost before going for it!

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