Tax implications – when moving properties from a partnership to a limited company!

From the 6th April the restriction in tax relief on mortgage interest for higher rate tax payers increases so buy to let owners will start to see the profitability of their properties start to decline. Essentially in the 2018-19 tax year 50% of mortgage interest will be allowed as it has previously been, but for the remaining 50% the relief will only be at the 20% basic rate of tax.

Since the changes were announced, landlords have been searching for solutions to ensure the profitability of their buy to lets with the hint of interest rate rises ahead.

One potential solution talked about is the possibility of forming a partnership with the properties and then incorporating the business to fall out of the tax relief restrictions, but this solution is only likely to be accepted in certain circumstances.

The reasoning behind this solution is that normally when you have been operating a business as a sole trader or partnership you are able to sell your trade into to a limited company. When you sell something personally, other than certain personal possessions it falls subject to capital gains tax, but if you do not receive proceeds for the sale, in that you exchange your business for shares in the company, the gain you would be taxed on is rolled into the shares and the tax would be paid on their eventual sale.

The key word is business and where properties are involved it can be more difficult to convince HMRC of this. To achieve the relief on putting properties into a company you in theory would need to demonstrate some history of trading as a business prior to incorporation and it would be likely that HMRC will expect to see the owners collecting the rents themselves and organising any repairs etc, rather than using a management company to do all of what would be classed as the trade. If the properties simply appear to be an investment you could not assume incorporation relief would be accepted by HMRC. They would also be likely to expect to see a sensible number of properties in this business.

Whether the relief would be challenged will be on a case by case basis, it could go through without problem or it could be rejected, leaving a big bill later if the property prices have gone up since they were purchased. The relief would be open to challenge for a number of years after.

If you wanted to be sure you could apply to HMRC for clearance of transaction but this can be costly and time consuming, also giving more chance for scrutiny. There is a case, Elizabeth Ramsey versus HMRC, which does suggest HMRC expect it to be robust property letting business with a proper amount of time each being spent in managing the properties, say 20 hours a week and such as cleaning services provided.

In a case where it is debatable whether the situation could constitute a business, it may be best to formulate a plan based around the properties individually. It has to also be remembered that a company will almost always cost more to administer which has to be balanced against any tax saving, although there is a benefit in that there is currently an additional £2,000 tax free dividend allowance and the tax rates for dividends are generally more beneficial than operating as a sole trader.

The other aspect of this tax planning is that to gain the stamp duty relief on incorporation the business must be demonstrably a partnership prior to the sale, not simply properties with two names on the deeds. Examples of evidence to support a partnership that may be considered is a partnership agreement, joint bank account, leases and agreements in the joint names etc. HMRC do have the potential to reject the partnership under SDLT anti avoidance measures and overturn any relief claimed.

how will the 2017 general election affect business in lincoln

Tax tips for the new year

  1. Use the capital gains annual exemption of £11,700 for 2018/19.  It can’t be carried forward or transferred to another person
  2. Use your ISA allowance of £20,000 for 2018/19.  The Junior ISA allowance has increased slightly to £4,260 (for children under 18). ISA allowances cannot be carried forward.
  3. Maximise the pension annual allowance of £40,000 (but tapered down for someone earning over £150,000 to a minimum of £10,000).  You can carry forward unused pension annual allowances for up to three years, so the 2015/16 allowance needs to be used by 5 April 2019.
  4. Use the inheritance tax gift exemption of £3,000, which can be carried forward one year.  So if you didn’t use it in 2017/18 you have £6,000 available in the current year.
  5. Consider transferring income producing assets to the lower earning spouse to take advantage of their personal allowance and lower tax bands.
  6.           If you make an investment in a venture capital trust (VCT) or the enterprise investment scheme (EIS), consider completing these early so that any tax repayment can be potentially be made sooner, or enabling the relief to be carried back to the previous tax year.
  7.           File your 2017/18 self-assessment tax return – if you think you are due a tax repayment, file your tax return as soon as possible so that you receive the refund.  If you had to make advance payments on account for 2017/18, it makes sense to file your tax return before 31 July 2018, so that the second payment on account could be potentially reduced.  Finally, filing your tax return early starts to limit the time window that HMRC have to raise an enquiry into your return – HMRC have one year from the filing date of your tax return to issue their enquiry.
  8.         Make any charitable donations before filing your 2017/18 tax return and you can decide whether you want to carry back the donation to 2017/18 to achieve the tax relief earlier.
Colm McCoy – Senior Tax Manager

Colm leads Nicholsons’ dedicated tax department and joined the firm in August 2014. Colm started his tax career in 1984, passed the chartered tax exams in 1989 and has now amassed over 30 years of experience. At Nicholsons, Colm advises SMEs and owner-managed businesses on their personal and business tax affairs.

When he’s not at work, Colm trains fanatically to compete in the obscure but growing sport of Crossfit. In his more sedentary moments he dabbles in problems in physics while listening to German opera or heavy metal.


Do you look after the finances within your business?

Financial Management Forum – May 24th 2018 at Lincolnshire Showground

We invite you to attend the next Finance Management Forum, kindly sponsored by Lincolnshire Showground, which is designed for you to network with like-minded people, as well as keep you up to date with changes that affect your business and to provide you with guidance on topical subjects.

Optional tour of showground site and facilities at 10am — 10.30am
Coffee/tea and breakfast roll will be served on arrival

Graham Dawson – Finance Manager at Lincolnshire Showground

Formed in 1869, Lincolnshire Agricultural Society has seen many changes. Graham will give you an insight into how the Society has diversified over the last 10 years.

Richard Hallsworth – Director at Nicholsons

Richard will take a look at technology and how it is affecting accounting and finance today and what the future looks like. He will also give you a brief insight into Brexit and what it means for supply chains.

Colm McCoy – Tax Manager at Nicholsons

Colm will guide you through topical tax issues facing companies including: P11d expenses and benefits, changes to company loss rules, ending of indexation and quarterly instalment payments.

Joanne Brown – Director at Nicholsons

With the new accounting regime in force, Jo will explain the accounting and audit issues businesses have to face.

To book your place click here


Charity Badminton Tournament creates competition

There is just one week to go until the Nicholsons 2nd Annual Charity Badminton Tournament which will be held at Deans Sport and Leisure on Monks Road. The money raised this year will go to the Lincs and Notts Air Ambulance.

Eight teams have entered the tournament and our thanks go to NatWest, JHWalter, Gelder Group, Selenity, Brewin Dolphin, Yorkshire Bank, Wilkin Chapman and team Nicholsons.

I am sure there will be some strong competition!  I hear some of the teams have been booking practice sessions – so who will take the trophy back to the office?  Will Wilkin Chapman make it to the top after taking a close 2nd place last year?

All will be revealed next Thursday.




What next for interest rates?

The Bank of England has embarked on the first rate rise for a decade, but there remains a long way to go.

The pain goes on for savers. Despite the Bank of England increasing interest rates from 0.25% to 0.5% in November, interest rates on savings accounts remain at dismally low levels, with no end in sight. With inflation reaching a six-year high in the same month, growing your savings in real terms remains a considerable challenge.

Certainly, the rate rise failed to deliver the upturn in savings rates many hoped. December 2017 research by Moneyfacts found the number of savings accounts paying a higher rate than 0.5% fell by 150 in the month that followed the base rate rise – the biggest drop in almost a decade.

The average easy access account rate crept up by just 0.06% to stand at 0.45% – showing banks and building societies were failing to pass on the full benefit of the base rate rise.

According to figures from the Building Societies Association, in November 2017, the average bank and building society savings instant account was paying just 0.12%, including bonus. The average one-year fixed rate bond offered just 0.72%. Back in July 2016 – just after the EU Referendum and before the decision to reduce base rate to 0.25% – these accounts were paying an average 0.34% and 0.93% respectively. In other words, average rates remain worse now than before the last rate cut.

Slow progress

The Bank of England’s first rate rise since the global financial crisis was a clear signal of its growing confidence in the UK economy, following the initial uncertainty over Brexit. But savers hoping it would be followed up by further rate rises – such as the US has experienced – have been disappointed. That seems to be it, for the near future at least.

Speaking in January 2018, Bank of England policymaker Silvana Tenreyro expects two further increases in base rate would be needed over the following three years, but that the Bank had “ample time” before considering the next rise. This view mirrors the governor Mark Carney, and other senior officials at the Bank. Economists themselves are divided over the prospects for 2018, with a Financial Times survey finding one-fifth of economists believe there will be no increase, whilst two-fifths expect it to rise by at least 0.5%.

But whatever happens in the near future, one simple truth will remain unaltered for savers. It is going to be a long time, if, indeed, ever, before interest rates return to the 5%+ levels seen in 2007.

Re-evaluating your long-term plans

Savings accounts will always play a part in a sensible investor’s portfolio. The security, and ease of access, makes them ideally suited for your short-term financial needs.

Yet when it comes to your long-term financial priorities, the personal finances world has simply changed. Savings accounts are no longer able to generate meaningful, lifealtering returns. If you have money ear-marked for your future and are prepared to commit it for the long-term, other options need to be considered.

Investing your money offers the potential to achieve higher returns. You will need to accept risk to your capital, but speaking to a financial adviser can help to develop an investment strategy that’s right for your needs.

The value of your investment can go down as well as up and you may not get back the full amount invested. Investments do not include the same security of capital which is afforded with a deposit account.


City supports Lincoln City FC to Wembley

Seeing the City decorated in red and white makes everyone feel proud to be associated with Lincoln, and more importantly with Lincoln City Football Club, but no more than the team at Nicholsons Chartered Accountants, who have sponsored the team’s shorts for the last 3 years.

With crowds now approaching 10,000 we can safely say that football fever has hit Lincoln. Although losing to Arsenal In the FA Cup quarter final over a year ago, the team now return to London, this time for a first ever Wembley appearance, in the Checkatrade Trophy final against Shrewsbury.

Nicholsons has supported the team through their up’s and down’s and were delighted when Lincoln City FC got promoted last year.   With a strong hold of over 30 members of staff and their families from the office going to Wembley to support Lincoln City FC, it’s safe to say Team Nicholsons will be out in force.

Team Nicholsons will be having a red and white dress down and cake baking day to start the weekend off!

All that is left to say is – Good Luck Lincoln City.


Do pension contributions have to be cash?

Until now, the prevailing view, largely driven by HMRC, was that contributions to a pension scheme had to be in cash to get Income Tax relief.

In order to get an asset, typically the business premises, into a pension scheme, a cash contribution would be made, and then the scheme would buy the asset in question.  This often involved borrowing the cash short term, then repaying it immediately after purchase.  This could add significant costs to the whole transaction making it less attractive. 

However a recent First Tier Tribunal ruling has gone against this.  In the case in point, the contributor submitted a form pledging a contribution of £68,000 net to his company SIPP (self-invested pension plan).  The SIPP administrator formally acknowledged the obligation and asked how the debt was to be settled.  The individual replied that it would be an in-specie transfer of shares of equal value.  If the value of the shares changed prior to the transfer, any shortfall would be made in cash.   

HMRC contended that the relevant clause in the tax legislation required a money payment.  The Tribunal disagreed, and ruled that the legislation as written did not prevent a contribution being satisfied by transfer of an asset. 

As this is only a First Tier decision, and can be appealed by HMRC, It is too early to take this as a green light to start making contributing assets to your pension scheme.  But the fact that the FTT was very decisive in its ruling is a pleasing development.

Colm McCoy – Senior Tax Manager

Colm leads Nicholsons’ dedicated tax department and joined the firm in August 2014. Colm started his tax career in 1984, passed the chartered tax exams in 1989 and has now amassed over 30 years of experience. At Nicholsons, Colm advises SMEs and owner-managed businesses on their personal and business tax affairs.

When he’s not at work, Colm trains fanatically to compete in the obscure but growing sport of Crossfit. In his more sedentary moments he dabbles in problems in physics while listening to German opera or heavy metal.