The Fizz! Blog

Should I sell my rental property now to avoid a bigger tax bill later?

If you’ve got a rental property that you’ll eventually sell for more than you paid for it, then there’s a good chance you’ll have some Capital Gains Tax (CGT) to pay when you come to sell it. Sometimes people worry that the longer they keep the property for, the more profit they’ll make when they sell it (because of rising house prices), and therefore the more tax they’ll pay. It’s worth remembering, though, that the highest rate of tax on capital gains is currently 28%, so if waiting for a year meant making an extra £10,000 of profit, your tax bill would increase by £2,800, but you’d still be £7,200 better off!

Things can seem a bit more complicated if you’ve lived in the property for part of the time you’ve owned it. When you sell your own home for a profit, the gain is generally exempt from tax. When you sell a property that was your home for part of the time you owned it, but has been let out for the rest of the time, then the gain is split into two. The portion of the gain that relates to the time you lived there is exempt from tax, and the portion that relates to the time you were renting it out is taxable.

It’s quite common in these circumstances for people to worry that they’re holding onto a property for “too long”, and creating an unwanted tax bill. In the majority of cases, though, it’s very unlikely that keeping the property for longer will leave you worse off. For example:

If you bought a property for £200k in 2018, lived there for three years, rented it out for one year and then sold it for £240k, you’d make a gain of £40k. You lived in the property for three out of four years in total, so ¾ of the gain (£30k) would be tax-free*. So only one year’s worth of gain (£40k x ¼, i.e. £10k) would potentially be taxable. Worst case scenario, you’d pay tax on that at 28%, so a little under £3k, leaving you with £37k profit after tax.

Of course, the longer you own the property for and continue to rent it out, the bigger the portion of the gain that attaches to the period it was rented, leaving a higher proportion of the gain exposed to tax. So if, for example, you held onto the property until 2028, you would have lived in the house for three years out of ten years in total, so only 3/10 of the gain would be tax-free, instead of ¾ of the gain in the first scenario. But having owned the house for an additional six years might mean that you sell it for quite a bit more – let’s say £300k, meaning a gain of £100k. If that were the case, then the tax-free portion of the gain would be £30k, and the taxable portion would be £70k. Worst case scenario, you’d pay tax on that at 28%, so around £20k. But you’re still left with £80k of profit after tax. So despite the fact that you’ve got a much bigger tax bill, you’ve still got £43k more in your pocket.

One situation that could result in you being worse off is if you kept the property for 10 years, but the value didn’t increase in that time. If you sold it in 2028 and still only got £240k for it, then 3/10 of the £40k gain (£12k) would be tax-free, and 7/10 of the gain (£28k) would be taxable. Tax on that could be up to £8k, leaving you with £32k in your pocket, i.e. £5k less than if you’d sold it in 2018 for the same amount.

But the key point is that the potential size of the tax bill alone is a red herring. Whether or not you keep or sell the property should really be an investment decision, and not be driven by concerns about tax. If renting the property for a few more years means you’ll be able to sell it for a higher price in the future, then although you’ll have a bigger tax bill, you’ll still be left with more in your pocket in the end. The only time the tax can make you worse off is if you hold onto the property for longer and the price stays around the same or falls. But if you thought that was going to happen, you probably wouldn’t hold onto it anyway! So in the vast majority of cases, it’s fine to make your decision based on when you think it’s a good time to sell the property in terms of your expectations about the housing market and whether you feel the property is a good investment for you, rather than being driven by worries about CGT.

There are a couple of situations where tax *might* be a consideration, though:

• If the government announced a change to the rate of CGT, that could be a legitimate reason to consider the timing of selling a property. If you knew that the rate was going to increase significantly next year for example, you might prefer to sell now.

• The first £12,300 of capital gains you make in any tax-year are exempt from tax, so if you’ve already sold other assets that are subject to CGT in the current year, you might want to wait until the next tax year to sell the property, so that you can make use of the following year’s exemption.

But those things aside, the overall message is that you’re always likely to be better off by selling your rental property when you can get a good price for it and it’s the right decision for you from an investment point of view. Selling at the time that makes you the most profit will likely mean a higher tax bill, but you’ll still have more in your pocket in the end.

* This is a slight oversimplification, because the final nine months of ownership are also tax-free (this is always the case for a property that was your only or main home at some point), but we’ll set that to one side for now as including it would make the examples more complicated, and it rarely changes the overall picture.

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Trivial benefits revisited

Some years ago now, HMRC surprised everyone by quantifying the level at which they considered a non-cash benefit given to an employee to be trivial and disregarded for tax purposes.  £50 was much higher than everyone had imagined up to that point.

It doesn't represent carte blanche to give people an onslaught of things worth £50 in lieu of taxable pay!  If the provision of benefits becomes regular enough that it's effectively become just part of the deal with the employee and therefore contractual, it'd just be taxable as normal.  So a £50 John Lewis voucher every Friday or every month isn't going to work.  But sporadic £50 vouchers are fine.

The rules are tighter for directors - there's also a tax year cap of £300.  But that's still six £50 vouchers!  Or, if you're particularly prone to getting the wrong card out of your wallet and accidentally using the company one from time to time, the trivial benefits allowance can be used as a backstop so that you don't have to repay the company when that happens.

A small win perhaps, but small wins at the expense of HMRC can be disproportionately satisfying!

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It's not your *January* tax return!

The last tax year finished a couple of months ago, which means that those of us who have to do a Self Assessment Tax Return can do it any time from now on.  The ultimate deadline is 31 January, but that doesn't mean you have to do it in January!  We've ploughed through a good number of client tax returns already.  There are loads of benefits to doing your tax return as early as you can:

• You don't have to have it in the back of your mind, hanging over you.
• You don't have to go around searching for year-end documents nine and a half months after you received them.
• You don't have to desperately try and remember what happened the best part of two years ago.
• If you've got, tax, NI or student loan repayments to make, you know how much they'll be well in advance.
• If you're due a refund you get it sooner.
• If you're applying for a mortgage, you can get evidence of income quickly if you need it.
• Your accountant will love you and shower you with praise!

So don't think of it as a January return that you might do early.  It's an April return that you're going to get on to RIGHT NOW!

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The last tax year finished a couple of months ago, which means that those of us who have to do a Self Assessment Tax Return can do it any time from now on.  The ultimate deadline is 31 January, but that doesn't mean you have to do it in January!  We've ploughed through a good number of client tax returns already.  There are loads of benefits to doing your tax return as early as you can:

• You don't have to have it in the back of your mind, hanging over you.
• You don't have to go around searching for year-end documents nine and a half months after you received them.
• You don't have to desperately try and remember what happened the best part of two years ago.
• If you've got, tax, NI or student loan repayments to make, you know how much they'll be well in advance.
• If you're due a refund you get it sooner.
• If you're applying for a mortgage, you can get evidence of income quickly if you need it.
• Your accountant will love you and shower you with praise!

So don't think of it as a January return that you might do early.  It's an April return that you're going to get on to RIGHT NOW!

www.fizzhq.com

Your company doesn’t have to die just because you’ve stopped working

Often limited company owners - especially those that essentially sell their own services through the company - assume that, when they stop working, that will necessarily be the end of the life of their limited company too.  It’s easy to see why people default to believing that their personal company is tied to their own working life in that way, but it needn’t be.  It will often be appropriate to close down a company when its owners stop working, but not always.

Although owners will often use their company to channel year-on-year income to themselves, and they might consider the dividends they get this year to be “this year’s” profit, there’s no actual link between a £1 of revenue coming in and £1 of dividends going out.  Money is a fungible asset (a few years ago, it was mostly just accountants who knew what that meant, but now the concept is rather more widely known!).

It can be helpful to think of the profits in a company as being like a reservoir, where profits go in, and dividends get drawn out.  If a company is making significantly more profit than its owner is taking out in dividends, the reservoir will fill up.  Just because the owner stops working, and therefore stops filling up that reservoir, it doesn’t have to be drained immediately.  There’s no special link between the work done to create the profits and the dividends that are paid out (if you own some shares in Vodafone, you’ll get a dividend from time to time, but you’d not expect to be told it was the profit from Dave selling an iPhone last Thursday).

Sometimes it can be efficient to empty the reservoir right away!  There can be tax planning opportunities from winding up a company like that.  Equally, though, it might be appropriate to keep taking dividends for the time being - gradually emptying out that reservoir.  It could be a way of getting money out even more tax-efficiently than a liquidation, and some people might prefer the gradual, planned drawing-down of the money to one big hit of cash.

It can be hard to separate your company from yourself (especially if you’ve been working through it for a long time and it’s called Your Name Limited!).  But if you can get to the point of seeing it as a separate entity (or reservoir!) that can be very helpful.

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The problem is often domestic consumption, not business profits

“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery” - Wilkins Micawber

A frequent frustration for accountants (at least, accountants like us who try to help people form a holistic view of their finances, rather than just preparing legally-mandated accounts and returns for signature) is that you generally only really get to assess and consult on 50% of a client’s position. You see the income coming into their business, you see the costs going out, and you see the profits. You’ll have conversations about how the income might be increased, or the costs decreased - or the costs increased so that the income might be increased even more, or the costs increased so that the owner’s life might become happier or more satisfying (or the income decreased so that the owner’s life might become happier or more satisfying!). You’ll see the year-end snapshot of the position of the business (i.e. its balance sheet), and talk about the liquidity of the business, its resilience to short and medium term adversity and the “runway” it has to continue stably paying its owners and workers without persistent worry about short-term cashflow. This is all really useful and important.

However, there’s a similar picture in everyone’s personal life, and you often get little or no insight into that. If an individual or household kept and assessed similar records, they could consider all those same issues, which are just as important in a domestic context - and, for a business owner, considering the interaction of the finances and their own could bring an extra layer of insight. It doesn’t matter so much if there’s little runway in a business if there's masses of it in the owner’s own life, and it doesn’t matter so much if the owner has minimal personal savings if there’s a big reservoir of profits to draw on in her business.

When there’s an incompatibility between income and outgoings, it’s actually often not between the income of a business and the outgoings of the business - it’s just as likely to be between the income of a business and the domestic outgoings of its owner! Often the owner might be fixated on relatively trivial costs in the business and trying to drive them down a bit. But a bigger question than “can I reduce the £50 a month business mobile phone contract?”, and one that would probably unlock greater revelations and behaviour changes, might be - “what’s happening with the £100,000 that’s being drawn out of the business by its owner each year?”.

Unfortunately, we don’t have much of a culture in this country of that kind of personal financial record-keeping, and there’s no outside mandate forcing anyone to do it. On top of that, people often seem to have a more fatalistic attitude about personal and household finances than business ones, and may feel that they simply can’t be materially changed. If you’re a business owner, though, it pays to think about business finances and personal finances as two sides of one coin, not two entirely separate systems.

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Should I put my Buy To Let property into a company?

Owners of rental properties pay tax on the profits, and often the biggest cost associated with the property is mortgage interest. Over the last few years, the tax relief on that interest has gradually been tapered down for those with higher income, and people who might once have saved tax at 40% (or more) on that interest now save tax at a maximum of 20%.

As a result, the idea of putting a Buy To Let property into a limited company is often floated as a possibility. Is it a good idea? For most people, on balance it’s unlikely to be. Here are a few significant factors:

• If it’s a property that you already own, then transferring it to a limited company will be taxed as if you’d sold it at market value. If it’s gone up materially in value since you bought it, you’ll probably pay some Capital Gains Tax.
• There’ll also be Stamp Duty to pay on such a transfer; Stamp Duty on the transfer of a property from an individual to a company is calculated on the basis of market value, not the amount paid.
• Although the tax-efficiency of the rental income in the company might be a bit better, it’s quite likely that the tax position when you come to sell the property might be worse. An individual has a tax-free allowance for capital gains and only has to pay tax on profits above that Annual Exemption. A company pays tax on every penny. And then, as the owner, you’re likely to want to get the profits out of the company - and you’re likely to pay tax then as well. That kind of double taxation is always an issue when appreciating assets are held within a company.
• The professional fees you’ll incur in having a company’s accounts and taxes properly looked after are greater than those for an individual, so a bit of the year-on-year tax efficiency is absorbed by that anyway.
• It’s often the case that it’s more expensive for limited companies to borrow than it is for individuals.
• Fundamentally, it’s a big punt on the tax regime remaining stable for a long time, and such punts are pretty risky. It’s easy to imagine the rules changing to eat away at tax efficiency for the company ownership route - and you’ll still have paid the switching costs if you used to own the property personally, and you’ll still be stuck with double taxation on exit!

A limited company is more likely to be indicated where there are multiple properties and where there’s a really long term vision for the business. If it’s intended that a rental business will have multiple properties and it might be contemplated that it might even last generations, a limited company could well be indicated. But in 90% of situations, our view is that personal ownership is still more appropriate.

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Can I pay for private medical insurance through my limited company?

Yes you can.  It’s unlikely to make much of a difference to you financially though, so don’t get too excited!

If a company pays for private medical insurance on behalf of an employee (including a director) then it’ll save corporation tax on the cost – currently at 19%, though it could be at as much as 26.5% if corporation tax goes up as planned in 2023.

Great!  But, although there’s that tax saving, it creates two further liabilities.

1. The company has to tell HMRC the amount paid for the director’s cover (and, if applicable, their family’s) each tax year – the Benefit in Kind - on a form called a P11D.  The company has to pay Class 1A National Insurance on the cost at 13.8%.  It’s going to save corporation tax on that payment, but it’s already wiped out more than half of the tax saved. 
2. Then the director has to pay income tax on that Benefit in Kind too.  The rate depends upon how the person’s income is made up, but though it’s just about possible that it could fit into their 0% tax band without shifting anything else up into a higher rate of tax, it’s far more likely that it’s going to effectively be taxed at 7.5%, 20%, 25%, or maybe some other rate.

 So it’s actually pretty unlikely that the arrangement is going to save any tax overall (and it’s also likely to involve paying your accountant to do the paperwork, or be implied in whatever overall fee you’re paying them).  If you can get a much better deal if the company pays, fine.  Otherwise it’s not going to make much difference to you whether you pay personally or through your company.  In practice, it’s really quite rare to see an owner-managed company paying for medical cover for its directors – most people keep it simple and pay for themselves.

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Tax-Free Childcare

Tax-Free Childcare doesn’t have anything to do with tax at all.

You set up an account with the government, save into it, and the government adds £20 (up to a maximum of £2,000 a year per child) for every £80 you save, if the money’s to be used on qualifying childcare costs. The tenuous link to tax is that the 20% top-up claimants receive happens to match the basic rate of income tax (and even that’s not true if you’re in Scotland!).  It’s really just called “tax-free” so that governments can claim they’re collecting less in tax, which tends to play better with the public than the reality, which is that they’re paying out more in state benefits.  But it does provide extra funds for some childcare costs for working households (that aren’t claiming Working Tax Credit, Child Tax Credit or Universal Credit) where nobody earns over £100,000.  If that could be helpful to you, look into it:

https://www.gov.uk/tax-free-childcare

Most parents of 3 or 4 year old children also qualify for up to 30 hours of free childcare each week.  Applying for that forms part of the same process (and still has nothing to do with tax!).

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I'm a limited company owner - how do mortgages work?

One of the most common concerns that people have when starting to work through a limited company is mortgages. In particular, they worry that the typical way in which limited company owners get paid - a relatively small PAYE salary with most income coming from dividends - will mean they can only take out a tiny loan based on the salary part. If you’ve obtained a mortgage before and the lender principally wanted to see your payslips, that’s quite understandable!

The good news is - that isn’t the case. No lender looks at a company owner’s salary and their salary alone.

Historically, when looking at the borrowing capacity of a limited company owner, lenders would disregard entirely how much money the owner was extracting from the company, by whatever mechanism. Instead, they’d look beyond the owner, and look at the underlying profitability of the company and how much the owner *could* take out. The amount they’d lend would be based on the underlying profits of the company, not the tax-planning decisions of its owner.

Then came the financial crash of 2007-08. Lenders panicked, and decided that any profits you were sheltering inside your company for the future were technically at risk if your company went bust, and so they’d only lend based on how much you were actually taking out. They didn’t care about the split between salary and dividends in the slightest, so that mix of a small salary and bigger dividends wasn’t affected, but it did mean that there was a period when some company owners did have to take bigger dividends out of their company than they really wanted to in order to satisfy the requirements of a bank or building society.

For a long time now, we’ve been on an even keel again. The vast majority of lenders have gone back to the old basis and are interested in how much you *could* take from your company, not how much you *do* take. There are one or two who still consider only what you’ve actually taken, but they’re few and far between and it only really matters if you’re with one of them already and are keen to remortgage with them. And none of them care about the split between salary and dividends.

It’s admittedly generally a slightly more time-consuming process for a limited company owner (or any other self-employed person) to get a mortgage offer than it is for a PAYE employee.
Lenders all cleave to the idea that an employee is inherently a less risky proposition than a business owner and ask for less evidence of income from them. This is clearly preposterous - a full time employee’s income could disappear overnight if they lose their job or their employer goes out of business, whereas many people who work for themselves are getting income from multiple customers, which is clearly less perilous. On the other hand, to be fair to lenders, assessing the stability of each applicant’s job and employer robustly would be unfeasible.

And for a self-employed person to be able to choose from a wide range of lenders and deals, you’re probably going to want to have a couple of years of business under your belt - one set of accounts will get some lenders interested, but two will increase the number. That can sometimes rationally lead to people staying in PAYE employment (or as a sole trader), a little longer than they might otherwise do, so as to be able to get a mortgage or remortgage before beginning to work through a limited company and restarting that two year clock.

But that’s just the way it is. It does mean that a limited company owner is generally well advised to work with a mortgage broker who is experienced in working with self-employed people. They’ll know which lender is interested in which kind of borrower right now, and what kind of evidence of income each is looking for. You can’t prepare some kind of standard “pack” that’ll be presented to any lender. Most of them are likely to require a certificate or reference from your accountant vouching for the numbers - and they all have their own format!

But there’s no need to worry that a limited company owner is at a serious disadvantage when it comes to mortgages. They get them every day.

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Investing in cryptocurrency? Here’s how the tax side works

Cryptocurrency and tax has fast gone from being a largely theoretical subject to a quite practical one. Buying and selling them has become both more popular and more easy, and far more people are having to address the consequences of the activity now.

So, how are profits on selling cryptocurrencies taxed on an individual?

For 99.99% of people it’s a Capital Gains Tax (CGT) matter. CGT is fundamentally a tax on disposals (i.e. sales) of assets. The principles and calculations are the same ones you’d follow when figuring out CGT on profits from selling shares. Most people seem to assume that the fluctuating value of their cryptocurrency during the year has some impact, but it doesn’t. Similarly, often people think that the value of what they hold at the end of the tax year makes a difference, but it doesn’t. If you don’t sell any cryptocurrency, there’s nothing to declare and no gain to tax. It doesn’t matter if you bought it for £10,000 and it’s now worth £200,000. It’s not until you actually sell something that tax becomes a consideration.

A useful thing to bear in mind is that we can all make some capital gains free of tax each tax year. For 2021-22, your first £12,300 of capital gains are tax-free and it’s only the surplus above that amount that’s taxable. If your gains are below £12,300 and the total proceeds are less than four times that amount - £49,200 - then you don’t even need to tell HMRC about the transactions at all.

So, what are those principles?

Let’s say you sell some Ethereum for £15,000. You need to figure out how much it cost you. This might be quite simple. If that’s all the Ethereum you have, and you bought it all in one go for £7,000, you’ve a profit of £8,000 to be taxed. Easy!

What if you didn’t buy it all in one go? If you’ve bought Ethereum on two or more occasions, you have to keep track of all the times you bought Ethereum, and keep a running record of the average cost of each unit - a record of your “pool” of units and their average cost. Then, when you sell X units, you need to take the relevant number of units at the average cost out of the pool, and figure out the profit you made on selling them. Fairly easy!

There’s a further complexity, though. Sometimes you have to look at the units you bought afterwards as well. This is because of rules designed to stop people realising tax-free profits at the end of one tax year and then buying the same things back a day or two later at the start of the next. In our example, if you buy some Ethereum in the 30 days after you sell some, then you need to match that purchase against the disposal instead of the older units, and for tax purposes you’ll still be deemed to hold those older ones at their original cost. Not easy!

These rules are thorny enough for share trades, but there are a few factors that make them trickier still for cryptocurrencies:

1. Cryptocurrency transactions are often far more frequent. When you sell some shares, it’s usually fairly easy to identify when you bought them and how much for, and to therefore work out the profit you’ve made. With cryptocurrency there are often far more transactions to assess (though in fairness this may become more common in share trading too, as apps and push notifications encourage people to trade more frequently).
2. Most people do their share trading via a single broker account, but many people have multiple accounts/wallets for cryptocurrency. You might need to match a sale of cryptocurrency from one wallet against a purchase made via one or more other wallets.
3. A big trap is that you might not even dispose of cryptocurrency for actual money. If, say, you exchange some Ethereum for some Bitcoin, that represents a disposal of Ethereum to declare and pay tax on, even if you’ve no GBP to show for it. Someone may never have cashed out any cryptocurrency at all, but still have multiple taxable disposals. We’ve written about this before.
4. Similarly, you may use some cryptocurrency to pay for something - that represents a disposal of the cryptocurrency at its market value and a potential tax bill.
5. Finally, even if you gift the cryptocurrency to someone, that’s also a disposal at whatever its market value is at that point (unless you're gifting it to your spouse or civil partner, anyway), with tax to pay if you’ve made a gain - that’s the same with shares and any other assets too.

All this means that, for someone with complex cryptocurrency activities, some software that can pull everything together is likely to be necessary!

For the time being, the £12,300 annual exempt amount is likely to keep most people from having to report anything to HMRC (though if you make losses you might want to report them, so you can offset them against future gains). Even so, make sure you keep proper records - if you’ll be selling cryptocurrency in future it’s important to have your precise trading history on record so that you can figure out the profit on each disposal when the time comes.

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