To August’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
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We are committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.
Please contact us for advice in your own specific circumstances. We’re here to help!
Managing LISAs on death or terminal illness
Lifetime ISAs (LISAs) continue to provide a tax-efficient savings vehicle for investors as there will be no income tax to pay on interest earned and no capital gains tax to pay on subsequent profits arising on the money invested. Up to £4,000 a year can be invested in a LISA, with the government providing a 25% bonus on contributions at the end of each tax year up to the age of 50.
LISAs can generally held by an individual who:
– is 18 years old or more;
– is under 50 years old (individuals between 18 and 40 may open accounts, but investments may be made up to age 50);
– has not made and will not make any payments into any other Lifetime ISA in the same tax year;
– has not exceeded the overall subscription limit (see below);
– has not exceeded the overall Lifetime payment limit of £4,000; and
– is UK-resident or has earnings from overseas Crown employment (or is married to or in a civil partnership with a person who has such earnings).
The funds in the account, including the government bonus, may be used to buy a first home worth up to £450,000 at any time from 12 months of opening the account and can be withdrawn from age 60 for any other purpose. Savers are also able to access the funds in their account if they become terminally ill.
Under the normal rules, most withdrawals that are made from accounts will be subject to a 25% charge of the amount withdrawn, which is deducted by the plan manager and paid to HMRC. However, to help with the impact of the coronavirus (COVID-19) pandemic, in May 2020, the government announced that the charge for unauthorised withdrawals from a LISA during the period 6 March 2020 to 5 April 2021 inclusive would be reduced from 25% to 20%.
What happens if the investor dies?
On the death of an account holder, the Lifetime ISA funds will form part of the estate, but a spouse or civil partner may inherit the ISA tax advantages and will be able to transfer the funds into his or her own ISA in addition to their own allowance (the ‘additional permitted subscription’).
When an investor dies, no further payments can be accepted into the account. However, since 6 April 2018, the LISA can remain open as a continuing account of a deceased investor.
The government bonus can be accrued on payments made into the LISA on or before the date the investor died and claimed accordingly. The investor’s estate can only receive the government bonus once the Lifetime ISA has been closed.
Any government bonuses claimed on payments made after the date of death of the investor must be withdrawn and repaid, although there will be no withdrawal charge payable if the person managing the account was unaware that the investor had died.
What happens if an investor becomes terminally ill?
When a Lifetime ISA investor is terminally ill and has obtained written evidence from a UK registered medical practitioner that they have less than 12 months left to live, any subsequent withdrawals will be charge-free. A withdrawal in these circumstances does not require a closure of the account. Subject to the wishes of the investor, the account can remain open and further amounts can be paid in.
Evidence from a UK registered medical practitioner proving that an investor has a terminal illness applies to the whole period in which the LISA remains open, even if this is longer than the 12 month period set out in the written evidence provided by the investor.
CGT reporting deadline
Under new rules capital gains tax (CGT) on disposals of UK residential property must be reported by 31 July to avoid a penalty.
Finance Act 2019 made certain changes regarding payment of CGT, which took effect from April 2020 and broadly align the position of UK residents and non-UK residents. From 6 April 2020, a UK resident who sells a residential property in the UK will have 30 days to tell HMRC and pay any CGT owed. Failure to notify HMRC within 30 days of completing a sale may result in penalty and interest charges.
However, in response to the COVID-19 pandemic the government extended the reporting deadline so that no late filing penalty will be charged for any transactions completed between 6 April 2020 and 1 July 2020 which are reported by 31 July 2020.
The extended deadline applies only to UK resident taxpayers for whom the requirement is new – non-residents have to file within 30 days of completion.
The requirement to pay any CGT due within 30 days of completion was not deferred and interest will be charged on any tax not paid within 30 days of completion.
UK residents are required to report gains on UK residential property only where tax is due.
A CGT report and accompanying payment of tax may be required where the taxpayers sells or otherwise dispose of:
- a property that they have not used as their main home;
- a holiday home;
- a property which has been let out for people to live in;
- a property that has been inherited and not used as a main home.
There is no requirement to make a report make a payment of tax when:
- a legally binding contract for the sale was made before 6 April 2020;
- the individual satisfies the for Private Residence Relief (generally a main residence);
- the sale was made to a spouse or civil partner;
- the gains (including any other chargeable residential property gains in the same tax year) are within the tax free allowance known as the annual exempt amount (£12,300 in 2020/21);
- the property is sold for a loss; or
- the property is outside the UK.
HMRC have launched a new online service that allows taxpayers to report and pay any CGT owed. (https://www.tax.service.gov.uk/capital-gains-tax-uk-property/start/report-pay-capital-gains-tax-uk-property?_ga=2.237065728.1433627935.1588839395-504776228.1588839395)
Reduced property transaction charges
Recent research revealed that property transactions fell by more than 50% in May and house prices have fallen for first time in eight years. In an attempt to help boost the housing market, a temporary reduction in stamp duty land tax (SDLT) in England and Northern Ireland has been introduced. The Scottish and Welsh Governments have also announced corresponding reductions to Land and Buildings Transaction Tax (LBTT) and Land Transaction Tax (LTT).
The nil rate band threshold for SDLT payments on residential property has been temporarily increased from £125,000 to £500,000. This change applies from 8 July 2020 until 31 March 2021.
Current rates are:
|Portion of value||Rate %||Additional property rate %|
|£0 – £500,000||0||3|
|£500,001 – £925,000||5||8|
|£925,001 – 1,500,000||10||13|
From 1 April 2021 the £500,000 threshold will revert to £125,000.
Treasury estimates suggest that the average homebuyer will see their SDLT bill fall by £4,500 as a result of this temporary measure, and nearly nine out of ten main home buyers will pay no duty at all.
In Scotland, the LBTT nil threshold has been increased from £145,000 to £250,000 between 15 July 2020 and 31 March 2021.
Current rates are as follows:
|Purchase price||LBTT rate|
|Up to £250,000||0%|
|Above £250,000 to £325,000||5%|
|Above £325,000 to £750,000||10%|
The rates for the additional dwelling supplement (ADS) and non-residential LBTT remain unchanged.
The reduced charges mean that someone buying a house at the average Scottish house price of £179,541 would expect to save £690 in LBTT. Overall, it is estimated that an additional 34% of property transactions will be taken out of LBTT, taking the total to 79%.
The Welsh Revenue Authority (WRA) has also announced changes to LTT charges, which apply from 27 July 2020 onwards.
The new rates and threshold are as follows:
|Price threshold||LTT rate|
|The portion up to and including £250,000||0%|
|The portion over £250,000 up to and including £400,000||5%|
|The portion over £400,000 up to and including £750,000||7.5%|
|The portion over £750,000 up to and including £1,500,000||10%|
|The portion over £1,500,000||12%|
Higher residential tax rates for additional properties remain unchanged.
The Welsh Government estimates that around 80% of homebuyers in Wales will pay no tax when purchasing their home, and that buyers of residential property who would have paid the main rates of LTT before 27 July 2020 will save up to £2,450 in tax.
VAT FRS temporary rate reductions confirmed
In the Government’s Summer Update on 8 July 2020, the Chancellor announced a six-month reduction in the VAT rate on supplies of food and non-alcoholic drinks from restaurants, pubs, bars and cafes, as well as to supplies of accommodation and admission to tourist attractions.
The rate cut from 20% to 5% took effect on 15 July 2020 and will be in place until 12 January 2021 to support businesses and jobs in the hospitality sector across the UK.
Many smaller businesses use the VAT flat rate scheme (FRS) as it helps simplify their VAT reporting obligations. Broadly, the FRS allows users to calculate VAT using a flat rate percentage by reference to their particular trade sector. When using the FRS, the business ignores VAT incurred on purchases when reporting VAT payable, with the exception of capital items which cost £2,000 or more.
As a consequence of this temporary reduction, the flat rate percentages used for catering (including restaurants and takeaways), accommodation and pubs have also been reduced from 15 July to 12 January 2021.
Updated Government guidance confirms the new rates as:
- Catering services including restaurants and takeaways: flat rate from 15 July 2020 to 12 January 2021 – 4.5%; flat rate up to 14 July 2020 and from 13 January 2021 – 12.5%;
- Hotel or accommodation: flat rate from 15 July 2020 to 12 January 2021 – 0%; flat rate up to 14 July 2020 and from 13 January 2021 – 10.5%
- Pubs: flat rate from 15 July 2020 to 12 January 2021 – 1%; flat rate up to 14 July 2020 and from 13 January 2021 – 6.5%.
For further details, see the Government guidance VAT Flat Rate Scheme.
August questions and answers
Q. I am a sole trader trading as a graphic designer. I am voluntarily registered for VAT and I have several commercial clients who are also registered for VAT VAT. Due to the coronavirus outbreak my graphic design business is very quiet, so to supplement my income I want to buy and sell bicycles to private individuals. Can I run the bicycle business as a different non VAT-registered business whilst keeping the graphic design business registered for VAT?
A. HMRC’s VAT Registration manual at VATREG02200 states that ‘In all cases it is the person (natural or legal) rather than the business which is registered, so a trader must take into account all their business activities’. Therefore, in your situation it may be beneficial to deregister the graphic design business for VAT purposes. You can always re-register as and when this side of your business picks up again.
Q. My father died in 2019 and my brother and I inherited a small commercial business unit. Probate is nearly complete now. If we sell the property in the future, will capital gains tax be payable on the disposal proceeds?
A. The acquisition value for future capital gains tax computation purposes will be the market value at the date of death. This is known as the ‘probate value’. Capital gains tax will be calculated under the normal rules on any increase in value from that date until the date of disposal.
Q. How long do I need to keep VAT records for?
A. VAT-registered businesses must:
- keep records of sales and purchases;
- keep a separate summary of VAT; and
- issue correct VAT invoices
In the UK, VAT records must be kept for at least six years (or ten years the trader uses the HMRC VAT mini-one-stop-shop (VAT MOSS) service. VAT records may be kept on paper, electronically or as part of a software program (e.g. book-keeping software) – but whichever method is used, the records must be accurate, complete and readable. HMRC can visit businesses to inspect record-keeping and impose penalties if the records are not in order.
August key tax dates
2 – Deadline for PAYE settlement agreement for 2019/20
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/8/2020