** KPSK NEWS **

HMRC has recently announced that it has launched a campaign targeted at people who have income from property and have not declared it on their tax returns.

The income includes:

• income from renting a room
• buy to let income
• furnished holiday letting income

This HMRC campaign is targeted at those who have income from property that has not been declared in their tax return. They will issue a letter with a help sheet and declaration form requesting details of property income from 2001/02 to date.

Below is a basic guide, please note - it should not be used as a definitive guide, since individual circumstances may differ. Specific advice should be obtained. Call KPSK or email. Click here!!

Further Descriptions are set out below...

Rent a room relief – income tax

Where a home owner lets part of his main residence to a lodger, rental income is only chargeable to income tax to the extent that it exceeds £4,250. There is no limit to the number of rooms, but only £4,250 in total is exempt. This figure has remained unchanged since 1997-98. HMRC state that income from property that is within the total exemption is to be disregarded for tax return purposes.

Buy to Let

Letting property, a ‘business of letting’ for income tax purposes, is not a trade, but is treated as one for many tax purposes.

Expenses available include:
* advertising for tenants
* rent collection costs
* bad debts
* agents’ charges for management
* accountancy fees for accounts preparation
* repairs to property
* 10% wear and tear allowance (i.e. 10% of net rental income, excluding rates, water rates and council tax if paid by the landlord) etc will be deductible for income tax.

Capital expenditure is not allowable.

Interest paid

Interest paid on loans used to buy the land or property used in the rental business, for improvements or alterations, repairs etc. will be deductible, together with incidental costs of arranging loan finance.

Using the home loan

People often use the equity in their own home to fund buy to let properties. It does not matter what the borrowing is secured upon, provided the interest is incurred wholly and exclusively for the purposes of the business of letting.

Joint accounts

It may be the case that the buy to let property is in one person’s name but the main residence is in joint names. HMRC usually normally allow relief for the home funded interest provided the letting business bears the cost of the interest. It is advisable to ensure that money passes from the business account to the joint account to fund the interest.

Losses

Losses can only be set off against other income from UK property (if they are losses from UK property) or overseas property if they arise from overseas property. The two exceptions are losses arising from capital allowances which can be offset against other income or furnished lettings losses(see below).

Furnished Holiday Letting

Furnished holiday lets are treated as a business of letting, but certain advantages, for example loss relief provisions and taper relief provisions (up to 2007-8) are more advantageous than for ordinary letting.

To qualify the property must be let on a commercial basis and with a view to profit.

In any tax year:
* the property must be available for letting to the general public not less than 140 days in the tax year; and
* the property must be actually let to members of the public for a period of 70 days in the tax year.

Letting to any person for a period of more than 31 days does not count towards the 70 days, but is a period of ‘longer occupation’.

If the property is an overseas property held by a company, occupation by a director or employee will count as a benefit in kind up to and including 2007-8. From 2008-9, this is to be disapplied.

Qualification as furnished holiday let is important as the total mortgage interest for the tax year is allowable, not just a proportion.

In addition, all general property expenses for the year will be deductible, but unlike other furnished lettings capital allowances on plant and machinery for use in a dwelling house are not precluded, but cannot be claimed in addition to the 10% wear and tear allowance.

Holiday accommodation is standard rated for VAT. If the owner has a significant portfolio of properties, his total turnover may exceed the compulsory registration threshold.

Where the property is situated in another EC country, local VAT must be charged, if that country’s threshold is exceeded. Spain, for example, has no exempt threshold.

Losses

Losses on furnished holiday letting are available against general income. They should therefore be included on the land and buildings supplement of the self assessment tax return.

Taper relief

Taper relief is available to individuals, trustees and partnerships for disposals prior to 6 April 2008. It is not available to companies, but shares in a qualifying company may qualify for the relief, if owned by an individual etc.

Taper relief for business assets was not normally given for residential property, but was available for furnished holiday let properties.

Everyone at KPSK would like to take this opportunity to wish you

a Very Merry Christmas and a

Happy and Prosperous New Year!

We look forward to seeing you in 2008 and would like to remind you that our offices are open from Wednesday 2nd January 2008.

The Government announced in the Pre Budget report (PBR) that it intends to abolish some tax relief and replace them with a flat rate of 18% for gains exceeding the annual allowance. KPSK has used the limited information available to update you accordingly

Planning to sell before or after April 2008?

The proposals will be sent out for consultation by HM Revenue and Customs, but as they currently exist they could influence your plans to sell before or after April 2008.

Although these proposals may impact you if you are selling property, shares or other assets, you will also need to consider them if you are intending to hold onto your property, shares in your company or other assets. There may also be action you could take before April 2008 to make use of the current relief available.

Please contact Elaine Ray to discuss these matters in more detail.

Broadly Speaking...

If the proposals are implemented as they currently stand, it will mean that, after 6 April 2008, individuals who sell non-business assets will be subject to less tax, while those selling business assets are likely to be liable for significantly higher Capital Gains Tax bills.

There are however exceptions to this generalisation due mainly to the abolition of indexation allowance and taper relief for assets sold after 5 April 2008.

The regime for charging companies corporation tax on their chargeable gains has not been changed so they will still be entitled to indexation allowance but not taper relief.

The following information may be appropriate for some individuals:

1

Those running a trading company who are currently questioning if they should continue trading as a limited company and who are entitled to business asset taper relief on the sale of the company may consider dis-incorporation to take advantage of indexation up to March 1998 and taper relief (75% if asset owned for two years) then continuing to run the business as a sole trader or partnership.

2

Individuals who have held assets like properties for some time and who are considering if they should trade through a company in the future may wish to consider accelerating that decision.

3

For individuals considering selling an asset which is subject to capital gains tax in the near future, the capital gains tax should be calculated under both the old and new systems so that the individual can decide whether to sell before or after 5 April 2008.

4

AIM (alternative investment market) shares qualify for 75% business asset taper relief if held for at least 2 years. Shareholders may wish to review these holdings before 6 April 2008 to take advantage of the current relief.

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To help explain the type of impact we have highlighted a few common examples below.

Example 1: 40% tax payer selling a business asset

A sole director/shareholder set up the company in August 1982. The shares were issued at a cost of 20,000. The shares will be sold in April 2008 for 250,000. Indexation is 20,940 (cost multiplied by 1.047). Taper relief 156,795. You are a 40% tax payer and make no other disposals.

If it is sold before April 2008, the gain will be (250,000 less indexation 20,940 less taper relief 156,795 less cost 20,000 less annual exemption 9,200 =) 43,065 chargeable at 40% = 17,226.

If sold after then, the gain will be (250,000 less cost 20,000 less annual exemption 9,200 =) 220,800 chargeable at 18% = 39,744.

A delay in sale would result in a higher tax charge of 22,518.

Example 2: 40% tax payer selling a non-business asset (1982 market value)

A property was bought in 1978 for 34,000. Its market value in 1982 was 25,000. Indexation is 35,598 (higher of 34,000 and 25,000 multiplied by 1.047). Taper relief 112,160. Sale proceeds will be 350,000. You are a 40% tax payer and make no other disposals. The option to use cost of an asset owned before March 1982 has been abolished from 6 April 2008.

If it is sold before April 2008, the gain will be (350,000 less indexation 35,598 less taper relief 112,160 less cost 34,000 less annual exemption 9,200 =) 159,042, chargeable at 40% = 63,617.

If sold after then, the gain will be (350,000 less market value March 1982 25,000 less annual exemption 9,200 =) 315,800 chargeable at 18% = 56,844.

A delay in sale would result in a lower tax charge of 6,773.

Example 3: 40% tax payer selling a non-business asset

A holiday home used solely by the owner and his family was bought in June 1996 for 80,000 to be sold in April 2008 for 265,000. Indexation is 5,040 (cost multiplied by 0.063). Taper relief 71,984. You are a 40% tax payer and make no other disposals.

If it is sold before April 2008, the gain will be (265,000 less indexation 5,040 less taper relief 71,984 less cost 80,000 less annual exemption 9,200=) 98,776 chargeable at 40% = 39,510.

If sold after then, the gain will be (265,000 less cost 80,000 less annual exemption 9,200=) 175,800 chargeable at 18% = 31,644.

A delay in sale would result in a lower tax charge of 7,866.

Example 4: 40% tax payer selling a non-business asset

A property was bought in November 1985 for 140,000 to be sold in April 2008 for 400,000. Indexation is 97,300. (Cost 140,000 multiplied by 0.695). Taper relief 65,080. You are a 40% tax payer and make no other disposals.

If it is sold before April 2008, the gain will be (400,000 less indexation 97,300 less taper relief 65,080 less cost 140,000 less annual exemption 9,200 =) 88,420, chargeable at 40% = 35,368.

If sold after then, the gain will be (400,000 less cost 140,000 less annual exemption 9,200 =) 250,800 chargeable at 18% = 45,144.

A delay in sale would result in a higher tax charge of 9,776.

Please note in each of the examples the following assumptions have been made:

the annual exemption is not yet known and will be announced in the 2008 Budget, so for illustration the 2007/08 figure has been used

it has been assumed that there are no other gains in 2007/08 or 2008/09

for the purposes of illustration, tax rates and allowances have not been altered

prior to April 2008, gains are treated as a top layer of income, but this will no longer be the case from 6 April 2008.

Relief not affected

• principal private residence relief
• business asset rollover
• enterprise investment scheme and venture capital trusts
• business asset gift hold over relief
• losses brought forward

For further infomation please contact KPSK on 01359 259999 or email Paul Raven or Elaine Ray direct.
Paul Raven
Elaine Ray

KPSK NEWS

The Companies Act 2006 has now become law from 1st October 2007.

This new legislation, as well as introducing a number of changes, allows companies greater flexibility in choosing how they operate. Its provisions will be brought into force in stages, with all of it in effect by October 2008.

Here is an overview on those parts of the new legislation which will be of interest to most small private companies.

Company Secretaries from April 2008

There is no need to appoint a company secretary unless you want to. If you do have one, he/she will have the same rights and responsibilities as now and will continue to be registered with Companies House.

Directors from October 2008

All companies must have at least one actual person as a director (ie not acting as a director). All directors must be at least 16. Existing underage directors will cease to be directors from October 2008.

Directors can file service addresses on the public record, with residential addresses held as protected information at Companies House.

The act also defines the duties of a director…

• must respect the terms of the company constitution and act within their powers

• must act in such a way as to promote the 'success' of the company, take account of specified consequences of an decision, the interest of the company's employees and the impact of the company's operations on the environment

• must exercise independent judgement

• must exercise reasonable skill, care and diligence

• must avoid conflicts of interest

• should not accept benefits from third parties

• must declare an interest in any proposed transaction or arrangement

Shareholder meetings – from October 2007

Private companies will no longer need to hold an AGM. 10% of shareholders can demand a meeting (5% in certain circumstances).

If private company meetings take place they will require a 14 day notice period.

Decision making

Written resolutions will become easier to use, requiring a simple majority (for ordinary
resolutions) or 75% (for special resolution) of eligible votes.

Arrangements can be made so that communications can be sent and received in certain ways, especially electronically.

If there is agreement from shareholders, emails and websites can be used much more than at present. Individual members can still ask for hard copies.

Electronic Documents from January 2007

A company’s name, number, registered office and other particulars, currently required to be displayed on business letters and other documents, must now also be provided on electronic documents, as well as on any company website.

Articles

Companies formed under the new Act can choose to have new streamlined default model Articles. Existing companies can also choose to take advantage of these new model articles in whole or in part.

Financial assistance

The statutory rule that private companies can’t give financial assistance to buy their own shares has been abolished and should make these types of transactions easier.

Accounts from April 2008

Private companies must file their annual report within nine (previously ten) months of the year end. The medium-sized group exemption from preparing consolidated accounts has now been removed so it only applys to small groups.

Capital reductions

There is now a simpler solvency-based procedure to enable private companies to reduce capital without court approval.

General Compliance

There is very little companies have to do now, but they can take steps to take advantage of the deregulatory benefits of the Act. Transitional arrangements will make it as easy as possible for companies to take up these benefits.

Should you have any queries regarding these point or if you would like to discuss them with someone from KPSK, plese contact us directly.

Telephone: 01359 259999 Email: jasonford@kpsk.co.uk
More information is available from www.companieshouse.gov.uk/companiesAct/companiesAct

KPSK Client Alert

One of our clients at KPSK have just told us about an email he supposedly had from HMRC.

The email apparently looked pretty official and said he was due a refund of £225. To fulfill the refund he was asked for his credit card details and CVV code.

This was not a bone fide email and we are encouraging our clients to be aware of scams using this ‘phishing’ technique.

What is Phishing??

• Phishing is a scam that is used by criminals. They send out thousands of emails under the guise of banks, credit card companies, shops and as we have seen HMRC.

• Victims are encouraged to engage by clicking on a link which takes them to a bogus website, however this is really hard to tell and asks for various forms of personal details such as credit card numbers and verification codes, passwords or other personal details.

We understand that HMRC states that it is committed to maintaining high levels of security for all personal information held for their customers and do NOT send unsolicited emails requesting personal information.

If you receive an email containing an embedded link that asks you to enter any personal details, we recommend that you treat it as suspicious and do not input any personal information.

Below is the link for the HMRC website re the scams and also the scam our client received!

• www.hmrc.gov.uk/security/spoofs.htm

• www.hmrc.gov.uk/security/taxrebate-2.htm