Find out what we have been answering for you this month…
Q
I had a question about claiming trading losses against a client’s employment income.
He is a partner of an LLP which ceased trading on 31 March 2025 – this was a property rental business and before cessation he sold one of the properties so the LLP ended up making a big loss in the final year.
Can this loss be allocated against his employment income (which is not of the same trade as the LLP)?
I understand that there may be a limited of up to £50,000 or 25% of total income in the year, does this limit apply to this situation?
A
Only trading losses can be set against other income under s.64 ITA 2007, which I understand is the relief you are referring to.
Firstly, a property rental business is not a trade for these purposes, there are different rules for dealing with losses for property businesses.
In this case the sale of a property (which increased the loss) would also not be a trading loss nor a property business loss – it would be a capital loss so that partner’s share of the capital loss would only be available against current or future (carry forward) capital gains they make. They could not offset it against employment income.
Q
One of my clients person A is currently a 50:50 shareholder. The other shareholder person B wants to sell his shares and no longer work with the company.
My client A now is looking at buying the shares for £22,500 from his own funds.
-It looks like an SH03 form is needed- is that right? There is a reference to HMRC authorisation codes on the letter- what is this?
-Do they have to pay 0.5% in stamp duty? And complete a stock transfer form? Is this something you do as a service?
-Then Companies House is updated to reflect the change is share capital.
Then in terms of personal tax liability for B- it looks like capital gains tax with the potential to utilise BADR- is that right?
Is any formal paperwork needed for lawyers etc?
Is there anything else that I should be aware of?
A
SH03 form is only relevant when a share buyback occurs i.e. when the company itself buys back the shares. In this case person A is buying the shares individually rather than from Company funds so it isn’t a “share buyback”. As it is a private share transfer between the shareholders a stock transfer form (J30) would be required. Stamp Duty would be payable as the consideration is over £1,000. The company will need to update its register of members internally and reflect the change on the next confirmation statement (or it can file an updated CS straight away).
Depending on the Articles of Association and any existing shareholders agreement (if there is one) these may need to be considered to check if any resolutions are required to approve the transfer. Sometimes a share purchase agreement is recommended to document the transaction, but this is entirely for the clients to decide and take legal advice on.
We don’t do the forms – normally a solicitor will handle this (including the stamp duty filing). This is our understanding from handling multiple exit transactions however its best to obtain the opinion of a solicitor for the legal side.
For Person B, as they would be disposing of their shares to another individual this would be subject to CGT and provided they meet the BADR conditions (which as a ‘quick summary’ are that the co is a personal trading company, they own at least 5% voting/capital, they are an office holder/employee, they have met these conditions for 2 years and not previously used lifetime limit of £1m) then they can claim BADR on the sale.
Q
It has recently come to light that in May 2024 a client transferred a residential property he owned into a Ltd company (not his PPR). He did not realise this was a Capital gains tax event.
I am now completing his 2024/25 self assessment tax return and he has set up a Capital Gains on UK property account to report the CGT details. The 60 day reporting deadline was almost 12 months ago so this will presumably incur penalties and interest.
The Capital Gains on UK property account says the service can’t be used if the 2024/25 self assessment return has been filed. Is it better just to file the self assessment and pay the tax now and so not use the Capital gains on UK property account? Does it make any difference that the account has been set up?
A
As the deadline for the 60-day CGT return has passed, penalties and interest are likely to apply. Despite this, HMRC still requires that the disposal be reported using the Capital Gains on UK Property account. Submitting the details via the 2024/25 self-assessment return alone is not sufficient and does not remove the obligation to file the CGT return separately.
If the self-assessment tax return has not yet been submitted, we recommend completing and filing the CGT UK Property return as soon as possible, even though it’s late. Once that is submitted, the disposal can also be reflected in the self-assessment return for completeness.
However, if the 2024/25 self-assessment return has already been filed, and the online CGT reporting service is now unavailable, we would suggest contacting HMRC directly. They may advise on filing a paper return or provide an alternative method of disclosure, and they’ll also confirm how any penalties and interest will be dealt with.
Find out what we have been answering for you this month…
Q
I have a client who owns several limited companies, including a group holding company where he is the main shareholder. He is considering selling his shares in one of the limited companies to the group holding company. The company in question has not generated any profit, and the value of its assets has remained unchanged since incorporation. Could you please advise whether there would be any Capital Gains Tax implications for the client personally if he proceeds with this share transfer to the group holding company?
A
“Assuming that your client has control of the holding company, the transaction would take place at market value for tax purposes under s18 of TCGA 1992. However, so long as the market value of the shares now is the same as your client’s base cost for them then there would be no gain being made and therefore no Capital Gains Tax to pay.”
Q
We have had a query from a client about getting a valuation from HMRC re issuing new EMI share options. I have copied the extract below.
We are now at the point in the year where we’d like to allocate additional options to employees, and have had advice from elsewhere to say that we would likely now not be able to obtain a ‘par’ valuation from HMRC due to tightened restrictions (rather than an actual change in the rules) and that we should be asking for maximum 70% of the share price from our last funding round (which closed in May 2024).
Do you have any comments on the point about obtaining a par valuation or advice we should give to the client.
A
Where there have been recent transactions in shares, HMRC will take that valuation into account and as this will usually be above par value, HMRC will be reluctant to agree par value for EMI. Of course the terms of the fund raising would also be taken into account, for example preferential rights on shares etc. Maybe HMRC would accept slightly higher than 70% but it depends on the facts. Presumably the EMI options will be for a very small percentage of the share capital so a significant minority discount would be appropriate.
Q
We have a self-employed client who last tax year made losses of £25,974 and this year made a profit of £37,554. Offsetting one against the other gives taxable profits this year of £11,580. Do we have to utilise all their loss brought forward, or can we limit the loss used to £24,984 so the client makes full use of their personal allowance this tax year and carries the remaining £990 to future years?
A
A loss carried forward under s83 ITA 2007 must be relieved against the first profits of the same trade until such as point as there is no more loss remaining. As such it is an ‘all or nothing; claim, so its not possible to only relieve enough of the loss b/f to take advantage of the personal allowance.
The method of giving relief for losses in this way is set out in s84 ITA 2007 and in HMRC’s manual at BIM85060.
Find out what we have been answering for you this month…
Q
I have a client who has hurdle shares which he has contributed cash to purchase in their employer. in the contract of employment and share agreement, he negotiated an option that on any exit unvested shares which is what he has would vest automatically. this is still at boards discretion which they are fine with.
The question is, if those shares are vested if he decides to leave, will he pay CGT on the gain or will he pay Income tax?
A
“If they purchased shares at the market value when they were offered, the resulting sale of the shares will give rise to a capital gain on any growth in value. However, given a hurdle share is a common type of restricted security whereby the employee cannot do anything with them until certain criteria have been met, did the employer and employee make an election under section 431 ITEPA 2003 which allows the employer and employee to ignore the restrictions in place allowing the employee to pay the MV on acquisition? If so, the employee will be subject to CGT only. If not, the employee will be potentially subject to income tax under chapter 2 of part 7 ITEPA 2003 ‘restricted securities’.
See HMRC commentary on the principle of the calculation of charge to income tax (if applicable) in ERSM30400 along with worked examples in ERSM30420 & ERSM30430.”
Q
One of my clients, a company director, is using company car Tesla with a list price of £58,000.
How are we calculating the P11D.
Do we need to add repair and insurance paid by the company?
A
All the associated costs of the employer (the company) providing the car (i.e. the costs of repairs and insurance) are already included as part of the car benefit calculation, so there is no need to report a separate benefit for the repairs or insurance (and I don’t believe there is the box to do this on the P11D form regardless)
For reference, HMRC guidance at EIM44105 refers to this explaining that as below:
‘When a car is made available to an employee, the employee is often provided with connected benefits such as insurance, servicing, vehicle tax and breakdown recovery. The exemption under section 239 ITEPA 2003 means that there is no separate charge to tax under the benefits code in respect of those connected benefits.’
Q
I have a client that wishes to list a property on AirBNB and other online hosting services.
I am under the impression having looked at HMRC that this rental income ( from an inherited property ) however the client has read the following online …
If you simply rent out a room or property without providing additional services, it’s likely to be treated as a rental investment.
However, if you offer services beyond basic accommodation, like cleaning, linens, or amenities, it’s more likely to be classified as a trading business
For clarification we will be offering services beyond accommodation, including cleaning, linens and amenities possibly in the form of a hot tub or gym / workout room, access to gardens and log burner, guided local walks, locally supplied produce from local farm shops as a welcome hamper etc.
With this in mind we are thinking it will fall more into the trading classification than investment?
A
“We have rental investment income, a business, and a trade. We need to draw a distinction between them.
This has echoes of the Ramsay case and in particular incorporation relief. This case eventually resulted in HMRC accepting that the letting of property could qualify for relief even though they typically see rental income as an investment activity – if the owner spent typically 20 hours a week on the matter and there were other indications that a ‘business’ was being carried on. If this is not met then it would fall back to being letting/investment income.
The Ramsay case did not make letting a trade. It made it a business.
However, depending on the scale of the guided walks etc there may be an argument to be made that there is a trade. This would have to become the focal point of any business.
The question is are you substantially offering more services than a passive investment landlord would be offering?
The provision of a gym and log burner etc and local produce are neither here nor there. These are all common offerings for higher end holiday lets.
At the moment, there is no trade. If they work on offering additional services and specifically services that are not minor and not incidental to letting then we might have to revisit this.”
Q
Our client has moved overseas in the 24-25 tax year and is applying for split year treatment Case 1. He has sold shares in the overseas part of the year – is he liable to UK CGT?
A
For non-UK resident individuals, CGT is generally only applicable to the sale of UK-based assets, such as property or shares in UK companies. Non-residents are not subject to UK CGT on the disposal of assets outside the UK, unless they are specifically connected to UK activities, such as certain disposals of residential property or business assets.
I have client that is receiving pension here in U.K. but lives and is a tax resident in Portugal. She is also renting out property here in U.K.
Does she needs to do tax return here in U.K. regarding the property income?
A
Yes, as the client is receiving UK sourced income, this Is taxable in the UK, and reportable on their Self-Assessment tax return.As a non-resident landlord, the client should register for the Non-Resident Landlord Scheme (NRLS). Under this scheme, letting agents or tenants are required to deduct 20% tax from the rental income before paying it to the landlord unless HMRC approve their application to receive the rent without tax deductions.To receive the rental income gross, your client will need to complete the NRL1 form and submit it to HMRC.Even if tax is deducted under the NRLS, your client must report their rental income annually through a UK Self-Assessment Tax Return.
Q
Saw this online under “CAN YOU DECLARE A DIVIDEND AND NOT PAY IT.” Retained Earnings – Companies can work on retained earnings. No need to pay out money as a result no tax implications
Can you explain what it means?
A
In general the tax treatment of the dividend depends on the type that is paid/declared ie:
Interim dividends are due and payable when physically paid. A resolution to pay an interim dividend does not create a debt until the dividend is paid. The shareholder is taxed when the dividends are physically received.
Final dividends are legally due when declared unless a later date for payment is specified, in which case they are due on that payment date.
If the client has already taken the funds from the business during the year and this was originally treated as a directors loan but now being treated as a distribution then this is reportable as a dividend.If the client has what is simply a repayment of a loan then there are no tax consequences.
Q
We have a client who has an open enquiry by HMRC into their personal tax return for 2022/23 due to a disposal relief claim. We are happy with answering most of the questions, however one question HMRC have asked is as follows:
“Provide the full name and address of each company in which you were a shareholder”.
I suspect this is HMRC fishing for more information, but I am inclined to not provide this information as it has no affect on the disposal claimed in the year, any dividends from any shares would be declared as and when received, and any CGT declared if there were a sale in future.
I would be interested to hear your thoughts on if you think this information would be required or not.
A
HMRC should only be asking for information where it is reasonably required by the officer for the purpose of checking the taxpayer’s tax position.The definition of what is “reasonably required” is going to vary from person to person, and HMRC provide guidance to their staff which is publicly available at CH21620.In your circumstances, is a list of all shareholdings owned by your client reasonably required to determine their tax position? You may argue not, as holding shares in a company doesn’t impact someone’s tax position until such point as income or gains occur in respect of those shares.If you think HMRC are on a fishing trip looking for further information, you are well within your rights to push back and refuse to provide the information requested on the grounds you do not believe it is reasonably required. If HMRC disagree, they may issue a formal notice under Schedule 36 FA2008 requesting the information, which gives your client the right of appeal to HMRC in the first instance and subsequently to the First Tier Tribunal.
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We have supported our Tax Partner Pro members via email and call-back service. Here’s an overview of some of the more recent questions we have answered during November 2024
Q
Could I have some information on the 10-year anniversary trust return completion, I have looked at HMRC and its very contradictory.
My client has a trust this has a GIA ( originally investment £66,500), the income is generated from dividends and interest from the GIA portfolio of stocks and shares (2024 was < £1,000.00)
Does the client fall into the category to report its 10 year anniversary?
What does qualify a trust to complete a 10 year anniversary form?
A
In general, if the trusts assets are valued at less than 80% of the NRB then it would be an excepted estate and no 10 year anniversary charge return is required.
Q
We have a client how earns £488,000 through PAYE per year gross and is having RSU Gains and Tax withheld through his payslip.
Are there any additional disclosures we need to make on the self-assessment other than reporting the P60?
A
No there shouldn’t be. The income has been declared and the tax paid via PAYE so just the P60 is all you’d need.
You’ll need to report on the CGT pages when the shares are sold if there is a gain to be declared.
Q
I have a one person company client who is considering ceasing trading as his last trading receipt was in January, though he has just quoted for a small project and is waiting to hear if it will go ahead. Meanwhile, he’d like to make a £60,000 pension contribution from the company. My concern is that – especially if the small project does not materialise – that the contribution will be 9 months after the last trading receipt and may not be allowable for corporation tax – being considered part of the process of closing the company down rather than say part of the director’s remuneration.
A
My concern would mirror yours, as the business appears to have ceased to trade.
Contributions made as part of the arrangements for going out of business, in particular where there is no pre-existing contractual obligation to make such a contribution, are not considered as meeting the ‘wholly and exclusively for the purpose of the trade’ test.
In the case of CIR v Anglo Brewing Co Ltd [1925] 12 TC 803, the company decided to close down its business. In the past, the company had granted pensions to employees on their retirement. The company promised to treat its present employees with equal generosity. The company therefore agreed pension amounts (which were later commuted for lump sums) and compensation payments. The company claimed the costs as a deduction in computing its profits.
The high court took the view that the payments were made for the purpose of winding up the company and that no deduction was due for the pensions or the compensation. There is now a statutory relief for redundancy payments but the principle of the decision, that payments to go out of business are not allowed, remains valid.
Q
I have a client who is a musician. He is looking to “book some music related events next year for research purposes in order to keep track of current and new trends in the electronic music market. “
He has asked me about whether this is tax deductible.
I am aware of wholly and exclusively and have shared this with him but he’s shared with me an example of a business package referencing VAT etc
I am not sure what to advise. It makes sense for him to attend these events for research but by the letter of the law is looks like it could be entertaining it and then would it be disqualified in full!! I cannot find any similar case law.
Are you please able to advise?
A
I think it would be hard to justify this as an expense and would expect HMRC to disallow if challenged.
You could perhaps claim a portion of the cost and argue that there is a duality of purpose but I’d emphasise the risk of it being disallowed if HMRC were to challenge it.
That being said, in an article in Tax Weekly magazine in May 2024 there is some commentary on this and the adviser quoted “If a performer incurs research expenditure to research their role, such as attending performances, this will probably be allowable.”
I note the commentators use of the word ‘probably’ in that passage as it’s a subject that no one will be able to offer iron clad case law backed opinion on the matter.
I’d suggest making the client aware of the risk, but ultimately letting them make the call on it.
Q
We have a client who invested in a US fund (not listed in HMRC’s reporting fund listing) in the last 2-3 years and according to her financial advisers, the fund is making losses. She is looking into selling the fund to realise the losses. From reading HMRC’s manual IFM13550, I understand the losses would be treated as a capital loss – please confirm that my understanding is correct?
Furthermore, could you also please confirm that the above losses can be offset against capital gains arising (in the same year/future) in the normal way.
A
Yes, the losses will be capital losses and relievable in the normal way (against current year or future years capital gains)
Next Steps
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We have supported our Tax Partner Pro members via email and call-back service. Here’s an overview of some of the more recent questions we have answered during October 2024
Q
Our client incorporated a rental portfolio into a limited company but had a latent gain during incorporation due to remortgaging properties.
I understand the latent gain is subject to CGT, but is the gain reported as normal CGT rates (10/20%) or residential property rates (18/28% in the year they did it)? Additionally, how is the CGT reported? I assume if the latent gain is based on the incorporation of a business and at 10/20% then it would be done via a tax return, but if it is done as a property, do we need to complete a property return within 60 days of incorporation, and is it one return for the whole portfolio or an individual return for each property involved?
A
From your email my understanding is that here the equity in the property rental business was not sufficient to cover the capital gains and therefore left outstanding gains payable on the transfer.
Here the individual will be disposing of the assets of their business which, as they are residential properties, will be subject to the residential property rates of 18/28%. Therefore would follow the usual CGT obligations of disposing the properties, such as the 60 day reporting.
Q
I noted an error on a new Ltd co client’s submitted accounts as follows:
20k Sale in turnover was in fact for a disposal of plant.
Journal Required was:
Dr 20000 Sales
Cr 20000 Disposal
Cr 25000 Plant
Dr 5000 Depn on Disposal
Dr 20000 Disposal
Company is loss making in all years – so would be a slight adjustment to CT loss cf.
Looking to File 31/12/23 this month
Should we re state all 31/12/22 and re file with Co house /HMRC
Or can we post some restatement in 2023 accounts for 2022 and file that (adjusting tax comp loss where necessary this year)
Would prefer not to have refile if that is an option.
A
We can’t comment from an accounts perspective in regards to Companies House filings but we can comment from a Corporation Tax perspective/HMRC.
Essentially from what I understand of your email below is that the accounts submitted with the CT600 for the y/e 31 Dec 2022 were incorrect.
As the CT600 was submitted with an incorrect loss figure originally, you will need to amend the original return to reflect the correct loss figure to carry forward. You are not able to make adjustments in future Tax Return’s for previous errors.
Q
We have a client that is a limited company with income mainly coming from property (plus a small amount of income from shares).
The company, several years ago, made a loan to another company. I’m not sure of all the details as it was before our time, however it was definitely a loan of money, total £120,000k. The other company is not connected in any way (I think it was effectively an ‘investment opportunity’ structured as a loan).
They may get back a small amount c£20,000 but not the rest, so we are writing off the 100K in this year’s accounts.
I just wanted to check if the amount written off is allowable a an NLTR debit or not? I can’t tell from what I’m reading if only banks etc would be able to claim, or if any loan of money not to a connected party is covered?
The client had a capital gain in the year as they sold some properties so it is relevant in terms of whether the NTLR loss could be offset against the gain.
A
We assume that the entities are all UK resident for tax purposes.
I would recommend that you ask for a copy of the loan agreement between your client company and the third party to ensure that this was a formal loan.
Additionally, I think I would seek confirmation from the client company as to whether they complied with company law, Financial Conduct Authority regulations and Anti-Money Laundering regulations when they made the loan in the first place. As this loan was made before your appointment as agent of the Company, you want to ensure that these matters were covered.
From a tax perspective, if the companies are not connected, the waiver of the remaining debt would ordinarily mean that the lender would have a non-trading loan relationship debit. Whether this is allowable for corporation tax depends on the commercial justification for making the loan and for waiving the loan. The loan relationship regime contains various anti-avoidance rules- which can be found in Chapter 15 Part 5 CTA 2009. For ease of understanding (as tax law can be unnecessarily complex) here is a link to HMRC’s summary CFM38000.
If the non-trading loan relationship debit is allowable and if this results in the company having a non-trading loan relationship deficit in the accounting period, a claim can be made to offset this loss against total profits (including chargeable gains) of the company.
Assuming the shareholder is not involved with the third party in any capacity, it may be difficult for HMRC to argue that the write off creates an indirect distribution, taxable in the hands of the shareholder.
If the loan appears uncommercial, then there could be other issues such as a benefit on the director under s.201 ITEPA 2003 or fall within the Disguised Remuneration regime under Part 7A ITEPA 2003 so I am hopeful this is not the case.
Q
My client operates a restaurant and charges a discretionary service charge on the gross amount of the bill, which includes VAT. We want to ensure that we are only paying income tax on the tronc for the employees. Could you please advise if this approach is accurate, or do we need to calculate the service charge on the net amount excluding VAT?
Additionally, could you share the rules and regulations from HMRC regarding this, along with relevant links?
A
How the discretionary service is computed is at the discretion of the business, this can be on the NET of VAT amount or VAT inclusive amount. What is key is that, for VAT purposes, the service charge is optional in order to be exclusive of VAT, see VATSC06130 for commentary on this point.
The income tax and NIC treatment is not linked to VAT – for the service charge to be free of class 1 NIC, the gratuity/offering must meet the conditions of the exclusion under para 5 or part 10 of the Social Security Contribution Regulations 2001 – https://www.legislation.gov.uk/uksi/2001/1004/schedule/3 (see below exert).
Under the new legislation, the Employment (Allocation of Tips) Act 2023 which comes into force from October 1 2024, the employer must pass on the total amount of the discretionary service charge to the employees. If using an independent TRONC scheme, this must be passed in full to the Troncmaster in order to retain the NIC free treatment as mentioned above. If paid via the employer PAYE scheme, this will represent earnings for both tax and class 1 NIC (ee & er).
(1) A payment of, or in respect of, a gratuity or offering which—
(a) satisfies the condition in either sub-paragraph (2) or (3); and
(b) is not within sub-paragraph (4) or (5).
(2) The condition in this sub-paragraph is that the payment—
(a) is not made, directly or indirectly, by the secondary contributor; and
(b) does not comprise or represent sums previously paid to the secondary contributor.
(3) The condition in this sub-paragraph] is that the secondary contributor does not allocate the payment, directly or indirectly, to the earner.
(4) A payment made to the earner by a person who is connected with the secondary contributor is within this sub-paragraph unless—
(a) it is—
(i) made in recognition for personal services rendered to the connected person by the earner or by another earner employed by the same secondary contributor; and
(ii) similar in amount to that which might reasonably be expected to be paid by a person who is not so connected; or
(b) the person making the payment does so in his capacity as a tronc-master.
(5) A payment made to the earner is within this sub-paragraph if it is made by a trustee holding property for any persons who include, or any class of persons which includes, the earner.
In this sub-paragraph “trustee” does not include a tronc-master.
(6) A person is connected with the secondary contributor for the purposes of this paragraph if his relationship with the secondary contributor, or where the employer and secondary contributor are different, with either of them, is as described in subsection (2), (3), (4), (5), (6) or (7) of section 839 of the Taxes Act (connected persons).
