Understanding Payroll Taxes: A Beginner’s Guide

by Abdul Wahab | Oct 12, 2024 | Uncategorized

Managing payroll taxes is a crucial responsibility for any business owner in the UK. While they can seem complex, understanding payroll taxes is essential for staying compliant with tax laws and avoiding costly penalties. This beginner’s guide will break down the basics of payroll taxes in the UK to help you stay informed and manage your payroll smoothly.

What Are Payroll Taxes?

Payroll taxes are taxes imposed on employers and employees, deducted from employees’ wages, and paid to HM Revenue and Customs (HMRC) by the employer. These taxes are essential for funding government services, such as the National Health Service (NHS) and social security benefits.

Types of Payroll Taxes

There are two main categories of payroll taxes in the UK: employer taxes and employee taxes.

1. Employer Taxes

Employers are responsible for paying several types of payroll taxes, including:

• National Insurance Contributions (NICs): Contributions paid by employers to fund social security benefits and the NHS.
• Class 1A NICs: Paid on employee earnings above the National Insurance threshold, particularly for directors and employees with higher salaries.
• Class 1B NICs: Paid by employers on earnings for employees who earn below the National Insurance threshold, typically applied in special circumstances.
• Class 2 NICs: Contributions made by self-employed individuals to secure certain state benefits.
• Class 4 NICs: Paid by self-employed individuals with profits exceeding a specific threshold.
• Construction Industry Training Board (CITB) Levy: A tax levied on employers in the construction sector to fund industry training programs.

2. Employee Taxes

Employee payroll taxes are deducted directly from their wages and include:

• Income Tax: Tax on an individual’s income, calculated based on income tax bands.
• National Insurance Contributions (NICs): Employees contribute to social security and NHS funding through NICs, deducted from their wages.

Payroll Tax Rates

Payroll tax rates can change from year to year, depending on government regulations. It’s essential to stay up to date with the latest guidance from HMRC to ensure you’re applying the correct rates for National Insurance Contributions and income tax. Visit the HMRC website for the most current payroll tax rates.

Payroll Tax Deadlines

Payroll tax submission deadlines depend on the size of your business and your payroll schedule. Typically, employers must:

• Submit payroll information to HMRC on or before each payday using Real Time Information (RTI).
• Pay taxes either monthly or quarterly, depending on the business’s PAYE (Pay As You Earn) scheme.

Missing deadlines can incur penalties, so process payroll on time to avoid them. Refer to HMRC’s official guidance for specific deadlines and details.

Payroll Tax Penalties

Failure to comply with payroll tax regulations can result in severe penalties, including:

• Fines for late submissions or incorrect tax filings.
• Interest charges on unpaid taxes.
• Potential audits from HMRC if discrepancies are found in your payroll records.

Avoid penalties by staying compliant and using payroll software or working with an accountant to ensure your taxes are accurate and submitted on time.

Using Payroll Software

Managing payroll taxes manually can be overwhelming. Payroll software simplifies the process by automating payroll calculations, generating reports, and filing tax returns directly with HMRC. Popular payroll software options include Xero Payroll, QuickBooks Payroll, and Sage Payroll. Using payroll software ensures accuracy and compliance, saving you time and reducing the risk of errors.

Conclusion

Understanding payroll taxes is vital for any business owner in the UK. By familiarizing yourself with the various types of payroll taxes, staying updated on the latest tax rates, and meeting deadlines, you can ensure compliance with HMRC’s regulations and avoid costly penalties. If you’re unsure about handling payroll taxes, it’s highly recommended to consult with a professional tax advisor or use payroll software to manage your tax obligations efficiently.

Need help managing your payroll? Contact us today to learn how we can simplify your payroll process and ensure your business stays compliant.

What are Tax Credits and How They Work?

by Abdul Wahab | Dec 7, 2021 | Uncategorized

Inheritance Tax Guide and Updates

by Abdul Wahab | Dec 3, 2021 | Uncategorized

Inheritance Tax (IHT) is a tax imposed on a deceased person’s estate, including all of their property, assets, and money. Even if you don’t have any Inheritance Tax to pay, you must still notify HMRC. IHT is a section of the UK tax system, which is exceedingly extensive, complex, and intricate. There are different exemptions and laws concerning gifts that, with the correct knowledge and assistance, can help you lower the size of your estate and minimise your tax burden.

What is Inheritance Tax?

IHT is a tax that may be imposed if you intend to leave assets to your heirs after you die. Your estate is made up of your property, goods, and money, and it may be gifted to your spouse or civil partner tax-free. Depending on your circumstances, you may be able to pass on some, most, or all of your assets tax-free to other family members or people.

IHT in the UK?

IHT is calculated at 40% of the value of your estate. However, a £325,000 tax-free allowance is known as the nil-rate band (NRB). The value of an individual’s estate beyond the nil rate band is subject to IHT at 40% unless it is handed directly to a spouse or registered civil partner when they die. The worth of your estate includes everything you possess, including your home.

The value of your estate for inheritance tax includes:

• your savings
• possessions including property
• money for pensions (certain payments from payment funds may be subject to Inheritance Tax)
• the value of any money or property you gave away in the seven years leading up to death, subject to certain exceptions

Regardless of who you leave it to, the nil-rate band ensures that no tax is levied on the first £325,000 of your estate. When a married couple or registered civil partners dies, the unused portion of their IHT-free allowance can be transferred to their living spouse. There are also a number of different techniques that may be used, depending on your specific financial status, to either reduce the amount of your estate or boost your NRB, thereby lowering your tax liability. These are discussed in greater depth later in this article.

What’s exempt from Inheritance Tax?

The amount you pay is determined by the value of the deceased’s estate, which is calculated by their assets (cash in the bank, investments, property or company, cars, life insurance payouts), less any debts.

• There will be no Inheritance Tax if you leave your whole estate to your spouse, wife, or civil partner.
• Any unused portion of a husband, wife, or civil partner’s £325,000 tax-free threshold can be handed to their surviving partner.
• Anything you give to charity is exempt from Inheritance Tax. If you leave 10% or more of your estate to charity, the remainder of your estate may be taxed at a reduced rate of 36 per cent. However, there are certain restrictions, so get legal counsel if you want to do so.
• Inheritance Tax exemptions apply to gifts of up to £3,000 each tax year, as well as small gifts to individuals and some wedding or civil partnership gifts. However, depending on how much you gave and when you gave it, gifts made while you were alive may be subject to Inheritance Tax.
• If you give away your home to your children or grandchildren, your threshold can increase to £500,000.

How to calculate the size of your estate?

On estates valued more than £325,000, IHT is usually applied. Of course, there are exceptions to this rule. You must value your estate in order to determine whether the profits of your will would be subject to IHT. You can list everything you possess, including your assets, and calculate their value:

• Properties
• Investments
• Savings (including ISAs)
• Debtors (money you’re owed)

Pension funds and life insurance policies, for example, are often excluded from your estate. After establishing your total value, you’ll need to tally up all of your debts and liabilities. This is most likely to include:

• Borrowing on a mortgage
• Loans for individuals
• Debt on a credit card
• Tax liabilities
• Bills that have not been paid
• Expenses for the funeral

Then you deduct all you owe from everything you own to get at your estate’s net current worth. You’ll be able to see if your estate is worth more than the NRB of £325,000 or £500,000 if you own your property.

The NRB for couples can be as high as £650,000, or even £1 million in the case of property ownership, depending on your financial circumstances. The value of your estate is likely to rise over time, and you should be aware that this might result in increased tax liability.

Transfer of nil rate band or IHT Allowance

Every person has their own NRB. Even if some or all of the NRB remains unused when the individual dies, it is often impossible to transfer the NRB to someone else. There is an exemption in married couples and members of a civil partnership, which allows the first spouse’s or civil partner’s unused portion of the NRB to be passed to the survivor. This implies that any part of the NRB that isn’t utilised when the first spouse or civil partner dies can be transferred to the surviving spouse or civil partner for use after the first spouse or civil partner’s death.

The special rules for married couples or those in civil partnerships are:

• When you die, assets left to your spouse or registered civil partner are excluded from inheritance tax if they live in the UK.

• Furthermore, your partner’s inheritance tax allowance is increased by the amount of your allowance you did not spend, allowing a couple to leave £1 million tax-free (2 x £325,000 tax-free allowance + 2 x £175,000 main residence allowance).

Family Home Inheritance TaxHH

In the tax year 2021/22, there is no inheritance tax on the first £325,000 of an estate, with a 40% rate applied to anything beyond that. However, you will be taxed less if you leave your house to your direct descendants, such as children or grandchildren.

If you’re passing your family home to a lineal descendant or a spouse/civil partner of a lineal descendant, it’s considered slightly differently for IHT purposes. Direct descendants do not include nieces, nephews, or friends. This implies that you must leave your home to your children, grandchildren, or their spouse/civil partner.

You’ll be assigned a primary residence band phased between 2017 and 2020. This might increase your NRB by £175,000 to £500,000, as long as your family home generates at least £175,000 of the value of your estate.

Only one house may qualify for the primary residence nil-rate band or RNRB, and it must be included in your estate. A trust cannot be used to hold your house. To qualify it as your home, you must also have lived in it at some point throughout your life, but not necessarily at the time of your death. If you own more than one house that qualifies for the RNRB, your estate executor can choose which one to utilise.

Couples who own their own house essentially obtain a combined allowance, allowing the RNRB to grow to £1 million, where £350,000 of that value comes from their home.

• The £175,000 main residence allowance only applies if your estate is worth less than £2 million.
• On estates worth £2 million or more, the main residence allowance will decrease by £1 for every £2 above £2 million that the deceased’s estate is worth.

Techniques to cut your IHT tax bill

Some gifts are free from IHT regardless of whether they are given during your lifetime or after your death, while others are exempt only if given during your lifetime. If a gift is exempt from IHT, it will not be considered to determine whether IHT is due.

Unless you live for another seven years or more after making the gift, the money given away before you die is usually regarded as part of your estate. If you give away more than £325,000 in the seven years before your death, those you give gifts to will be charged inheritance tax (on a sliding scale up to a maximum of 40%) – therefore, it’s critical to prepare ahead of time how to pass on your assets.

Other methods to save money on your tax bill

There are several other tax exemptions to consider in order to reduce your tax bill:

Gifts to your spouse or civil partner

If you give a gift to your spouse or civil partner during your lifetime or after your death, it is free from IHT if they are UK-domiciled or deemed domiciled. If you have any doubts about your domicile status, we highly advise you to seek expert guidance. These lifetime transfers to individuals are called Potentially Exempt Transfers (PETs).

If you live for seven years from the day you made the gift, it will be entirely free of IHT. If you pass away within seven years, the gift may be subject to IHT. However, you will have to pay IHT only if the amount of your taxable estate on death, together with the value of PETs made during the past seven years, exceeds the nil rate band at the time of death.

When you make a PET, you do not need to tell HMRC, and there will be no tax to pay at the time of the gift. You should keep track of all the PETs you create throughout time, in date order, until the seventh anniversary of each gift, when you should remove them from your list.

Values up to the current nil rate band limit (currently £325,000) may be transferred to a non-domiciled spouse or civil partner as of April 6, 2013. If the transfer is made on death, any additional cash transferred is subject to IHT. PETs are lifelong transfers to a non-domiciled spouse or civil partner. Gifts to unmarried partners or partners with whom you are not in a registered civil partnership are not covered by this exemption for gifts to spouses or civil partners.

Gifts to charities

Most UK charities and registered community amateur sports clubs are eligible for IHT exempt gifts, which can be made during your lifetime or after your death. This exemption also applies to qualified charities based in the European Union and a few other countries.

Gifts to political parties

You can give an IHT-free gift to any UK political party if at least two MPs in the House of Commons or one MP and received at least 150,000 votes in the last general election.

Inheritance tax-free yearly gifts

You may give significant gifts up to £3,000 per tax year, and if you don’t spend it, you can carry it over to the next tax year. You can also make as many smaller gifts as you choose, up to £250 each. These are referred to as “lifetime gifts.”

You may give gifts for a number of occasions. Some options include:

• The expense of your grandchildren’s schooling
• Junior ISAs for children
• Deposits throughout a lifetime ISA to assist the family with a first-time buyer’s deposit
• Wedding Costs
• Contribute to the funding of further education.

Wedding gifts

If your children get married, you can give them presents without paying inheritance tax on them. However, there are certain limitations: A present from a parent is worth £5,000, a gift from a grandparent is worth £2,500, and a gift from anybody else is worth £1,000. This gift must be given on or shortly before the wedding or civil partnership ceremony.

It’s worth noting that while IHT may not be due on some lifetime gifts but some may result in a chargeable gain, resulting in a capital gains tax bill. This is why you should get tax guidance that considers all of your affairs not to receive any unexpected tax bills.

IHT and your pension

Private pensions can be a valuable tool for avoiding IHT. This is because any unused pension funds can be passed on to your heirs. This isn’t the case with defined-benefit pensions, however. There is no tax to pay if you die before reaching the age of 75. If you die beyond that age, your beneficiaries will have to pay income tax on the money you leave them.

Pension savings are often excluded from estate planning and, as a result, from IHT. This is why pensions should be considered when saving for later life. It would help if you kept in mind the annual pension limit of £40,000 per year, as well as the lifetime allowance, which is now £1,073,100.

What pushing up the IHT receipts

You may not have to pay taxes right away when you inherit anything, but you may have to pay taxes later. This is because you may be required to pay income tax on earnings earned by the asset you inherit, as well as capital gains tax if you later sell the item. Consider the revenue from dividends on stocks or the rental income from inherited property.

If IHT is due on gifts you got before the person who gave them to you dies away, you will almost likely have to pay the tax. The charge will be transferred to your estate if you cannot pay the debt. Any income tax or capital gains tax due to assets you inherit must be reported on your tax return.

Due to the number of unexpected fatalities, the Office for Budget Responsibility anticipated that the COVID-19 pandemic would result in a 20% rise in the number of households with IHT obligations. If they come as a shock, they’re less likely to be factored into the estate and tax planning. HMRC’s receipts from inheritance tax (IHT) between April and July 2021 jumped to GBP2.1 billion, a third higher than in the same period in 2020. The extra GBP0.5 billion received in the period is believed to be due to higher volumes of wealth transfers during the COVID-19 pandemic. Receipts in the 2020/21 tax year were 4 per cent higher than the previous tax year.[1]

As a consequence of the freeze, the Treasury expects to raise an additional £1 billion in IHT over the following five years. This emphasises the importance of following the guidelines in this article and seeking expert assistance so that planning may be tailored to your specific situations to ensure that your liability to IHT is as minimal as feasible.

With this in mind, make sure you grasp the current rules and budget for your retirement and inheritance in accordance with them. Because tax treatment is dependent on your particular circumstances, you should get professional advice from a certified tax adviser before acting on this information. Any tax exemptions or thresholds listed are subject to change based on specific circumstances and current legislation. Please do not hesitate to contact Bloom Financials’ highly skilled tax consultants for more assistance and guidance.

[1] ^{https://www.step.org/about-step/covid-19-technical-hub}

What is Construction Industry Scheme? – CIS Tax Simplified

by Abdul Wahab | Dec 2, 2021 | Uncategorized

The Construction Industry Scheme (CIS) in the United Kingdom is a nationwide tax-deduction scheme for British contractors and subcontractors. Contractors deduct money from subcontractor payments and submit it to HM Revenue & Customs (HMRC) under the Construction Industry Scheme (CIS).

The initiative attempts to address unethical industry practices such as hiring people on a “cash-in-hand” basis and failing to comply with tax requirements. This article provides a simplified insight to look at the scheme, including instructions on how to register with HMRC, file monthly returns, and define who and what type of work is included.

How Construction Industry Scheme (CIS) Works

If you work as a contractor in the construction sector, you should be aware of your obligations under the Construction Industry Scheme (CIS). It is essentially a PAYE-like scheme that demands that the contractor is usually obliged to withhold tax on its payments to the subcontractor and pay the deduction to HMRC.

Contractors are businesses that work in the construction sector and hire subcontractors to do the actual job. According to UK law, contractors can be any legal business entity, including companies, sole traders, and partnerships, which can include real estate developers, construction companies, and even labour agencies. 

CIS covers the following types of work:

• Alterations
• General works related to buildings
• Decorating
• Dismantling or demolition
• Heating, lights, electricity, water, and ventilation works
• Repairs
• Groundworks and preparation of site

If a business that isn’t in the construction sector spends $1 million or more on construction work in three years, it may be considered a contractor. Housing associations registered in the United Kingdom or operating in the United Kingdom are examples of this. The scheme does not cover construction work done outside of the UK. A company headquartered outside the UK that performs construction work in the UK, on the other hand, is subject to the rules and must register and pay tax.

If you meet the following criteria, you must register with the CIS as a contractor:

• you pay subcontractors to do construction work.
• Your company does not conduct construction work, yet you spend more than £1 million on it every year.

Before you hire your first subcontractor, you must first register with CIS. Check HMRC’s status guidelines. You should also consider if the subcontractor should be treated as an employee.

Contractors that perform certain types of construction work must comply with CIS and:

• Register with the scheme before hiring their first subcontractor
• Always check if they should hire individuals instead of subcontracting the work
• Verify with HMRC that subcontractors are registered with CIS
• make necessary deductions from subcontractor payments
• pay the money to HMRC
• give subcontractors with deduction statements
• all CIS deductions must be reported to HMRC on a monthly basis
• maintain complete CIS records
• notify HMRC of any changes to their business

Subcontractors should register for CIS as well. If they are eligible, subcontractors who do not want any CIS deductions might apply for “gross payment status”. Failure to comply with the CIS programme might result in penalties for contractors.

Subcontractor Verification

Verify if your subcontractor has registered with CIS and what their payment status is. The method for verifying that a subcontractor is genuinely self-employed and should not be classified as an employee of your company for taxation purposes is a critical component of the scheme. It is important to understand that even though a contractor withholds tax on payments made to you and may receive paperwork that looks similar to payslips, you are not being considered an employee and hence will not be entitled to any of the employment rights that come with being an employee.

You should also establish that the subcontractor is self-employed in the contract between your company and the subcontractor. However, if the contract is for employment, you must regard them as employees for tax purposes and pay PAYE instead of registering them for CIS.

Who pays the tax under the CIS Scheme?

After properly verifying a subcontractor under CIS and based on HMRC’s response, the contractor is obligated by law to withhold the following taxes from any payment owed to a subcontractor (they will be listed in the subcontractor’s Self-Assessment tax return):

• If they are not registered as sub-contractor – 30% from non-CIS-registered subcontractors, excluding the equivalent of VAT and the cost of plant hire or supplies.
• If sub-contractors are registered at the standard/ net rate – 20% from CIS-registered subcontractors who are eligible to receive gross payments, excluding the equivalent of VAT and the cost of plant hire or supplies.
• If the sub-contractor is registered with gross payment status, there are no deductions if a subcontractor qualifies for gross payments.

The contactors will not deduct amounts from invoices (sent by the subcontractors) for direct expenses such as material costs. The contractor’s deductions are subsequently remitted to HMRC, who regards these as advance payments of the subcontractor’s income tax and national insurance contributions.

The contractor must provide a PDS (Payment Deduction Statement) to the subcontractor within 14 days of the end of the current tax month for any deductions made. The subcontractor should keep these statements since they will be helpful in completing a Self-Assessment tax return.

A subcontractor may seek a duplicate copy of a PDS document that has been lost or misplaced. The contractor must furnish it, but it must be properly labelled as duplicate.

You can utilise the CIS online service to submit monthly returns, as well as to verify your list of subcontractors, view previously filed returns, and alter any data that need to be changed.

CIS Compliance

There should be no outstanding HMRC payments or tax returns. While HMRC frequently overlooks minor compliance errors, having many failures recorded might result in your gross payment status being revoked (which is reviewed once per year). HMRC laws require subcontractors to notify any company changes, including:

• Change in company type, address (private or registered)
• Changing your business name
• Changing the business structure (which necessitates a new gross payment status review)
• Addition of any new shareholders (in the case of companies)
• The core trade has come to an end

A contractor accountant can assist you in staying on top of intricate compliance rules, claiming overpayment CIS, and ensuring that you are paying the smallest amount possible.

Support from Bloom Financials

This is a brief overview of the processes you’ll need to follow to verify subcontractors and stay in compliance with CIS.

If you have any questions about the scheme or require assistance with the verification procedure or tax deductions, our team of experienced professionals would be happy to assist you. Don’t hesitate to get in touch with us for more information.

Substantial Shareholding Exemption (SSE) Guide and Updates

by Abdul Wahab | Dec 2, 2021 | Uncategorized

The Substantial Shareholding Exemption (SSE) was legislated as part of the UK Finance Act of 2002. The substantial shareholding exemption applies to companies and exempts certain gains from UK corporation tax following the disposal of shares. It can also be used to structure pre-transaction deals. This exemption, however, only applies to corporations selling shares, not to partnerships or individuals.

The SSE provisions exclude from UK tax any gains realised by trading companies and groups on the disposal of qualifying substantial shareholdings while disallowing relief for any losses. If certain precise conditions are met, the legislation takes effect automatically, subject to anti-avoidance clauses meant to prevent the legislation from being used solely to obtain a tax benefit. Gains or losses on shares held on a trading account, and the Act does not cover assets held under loan arrangements or derivatives provisions.

How SSE works

The substantial shareholding exemption legislation is pretty complicated, and several requirements must be met for the exemption to apply. When determining whether or not the exception applies, a review of the statute is highly recommended.

The rules, which were first implemented in 2002, were significantly changed and modified on April 1, 2017, making them far more -friendly. The significant change is the elimination of the requirement that the selling firm (or group) be in trade. One effect of these changes is that, with proper preparation, SSE may now be utilised effectively in the typical OMB/SME environment.

• The investing company (the seller)
• The shareholding held in the company being invested in (the target)

The company being sold (the investee company) does not need to be traded before or after the disposal, which is significantly different from the general new substantial shareholding exemption rules. It is also not necessary for the investment firm to trade before or after the disposal.

The SSE might apply whenever there is a disposal of shares, and it does not have to be on an outright sale since this guide refers to a “seller”. Liquidation of a subsidiary firm, for example, would often result in the sale of shares in that company, which the SSE may apply to.

Conditions Relating to The Target

The target must be a “qualifying company” from the beginning of the most recent 12-month period considered to determine whether the shareholding condition applies.

If the target is a trading firm or the holding company of a trading group, it is a qualified company. A trading company engages in trade operations and does not engage in non-trading activities “to a substantial extent.” HMRC defines’ substantial’ for these purposes as more than 20%. However, it has stated that it would evaluate the facts and circumstances of each case when evaluating whether a corporation engages in non-trading activities to a substantial extent.

On the other hand, a trading group is a group in which one or more members engage in trading activities, and the actions of all members of the group, when added together, yield a profit.

New Updates in UK Substantial Shareholdings Exemption (SSE) Regulations

The rules are extensive, and anything beyond a brief overview to establish the introduction is beyond the scope of this article:

• The legislation distinguishes between the investing company, which makes the disposal, and the investee company, whose stock is being sold.
• A substantial shareholding is defined as owning at least 10% of the ordinary share capital, 10% of the earnings for distribution to equity holders, or being entitled to 10% of the assets in the event of a liquidation.
• For a period of 12-month, the investment company must have the applicable qualifying shareholding.
• Even though the12 months of ownership are usually the most important, changes made in 2017 increased the actual holding time from any 12 months period in the two years leading up to the date of sale to six years. This is especially useful when there is a time limit on the amount of money you may earn.
• In 2017, a further amendment removed the requirement that the investment business be a trading company
• A reform made in 2017 abolished the need that the investee firm be a trading company immediately after disposal, which may present complications if the purchaser promptly completely cut up the trade the off. Where the disposal is to a linked person or the trade has been transferred within the last 12 months, the requirement still applies.
• The investing company’s 12-month holding term is extended to encompass any time within the group company’s final 12-month asset holding period.
• Other factors, such as the seller’s holding term, may be significant in some cases. For example, the seller’s holding period may be able to be extended if:
• The target is carrying on a trade that was previously carried out by the seller or another member of the seller’s group.

Other exemptions:

There is tax relief if the main exemption requirements are met and a sale of assets is “connected” to shares. An asset is “related” to a company’s shares if it is one of the following:

• Option to purchase or sell that company’s stock. Or
• A security that enables the holder to purchase or sell shares in a firm.
• When the primary exemption criteria were previously met but not satisfied at the time of sale, both shares and related assets are sold. The exemption applies if a sale that qualified for the primary exemption occurred during the preceding two years.

As a result, when the business has one or more trading operations, preparing for the pre-sale packaging of the trading activities utilising newco (s) as a clean (and hence more appealing) vehicle to enable them to be sold without the seller company incurring a tax charge is conceivable.

SSE and degrouping charges

A degrouping fee may be triggered if a corporation leaves a capital gains group with an asset transferred to another group member within the preceding six years. The degrouping charge increases the seller’s selling consideration for the subsidiary. As a result, any capital gains degrouping charge will also be exempted if the sale of a trade subsidiary firm qualifies for SSE.

These amendments and updates are unlikely to be of much use. It might be helpful in a circumstance when there is an earnout (say, over three years) with unknown consideration. Any value obtained above and beyond the initially valued entitlement to the unascertainable consideration would not qualify for SSE in normal circumstances.

Using the amendments above, it should be viable to keep a portion of the firm being sold, with a put option to sell it at a specific price in three years. The additional consideration received in three years would now be considered SSE since the seller would have satisfied the SSE requirements during the previous six years. However, a larger exemption will be available for companies owned by qualified institutional investors. Many clients are unlikely to be affected also.

Bloom Financials and SSE

This change is positive and should help the government achieve its goal to boost the UK’s competitiveness as a hub for holding companies. It should make the investment in Intellectual Property firms and other comparable investment companies more appealing, as they would not have previously gotten a tax exemption on disposal.

SSE does not have a claim mechanism, and the exemption is automatic if the prerequisites are met. There is no way to refuse the exemption. Nonetheless, it will be critical for businesses to ensure that the SSE’s requirements are followed in order to optimise their company tax profile and reduce the possibility of unanticipated corporation tax payments. Don’t hesitate to contact us at Bloom Financials for further information, guidance, and advice concerning tax planning, reliefs and SSE.

Capital Gains Tax (CGT) – Investors’ Relief Allowances & Exemptions

by Abdul Wahab | Dec 2, 2021 | Uncategorized

Wealth in the form of money or property utilised to produce additional wealth is referred to as capital. A rise in the worth of that wealth is referred to as a gain. When you sell or give away an asset, you must pay capital gains tax (CGT). Making disposal is the term for this. CGT applies to various assets, including real estate (though not generally your primary residence, stocks and shares, and other artworks).

Capital Gains Tax

If you sell, give away, swap, or otherwise dispose of an asset and make a profit or ‘gain,’ you must pay capital gains tax (CGT). It is the gain you earn on the asset that is taxed, not the amount of money you get for it. To calculate the gain, you compare the selling profits (or the asset’s worth at the time it was disposed of) to the asset’s initial cost (or value when it was acquired).

As stated earlier, an asset might be sold or given away for less than its market worth, but the market value takes the place of any actual consideration paid. You must pay CGT on your net gain in order to deduct your costs from your gains. The components listed below help in reducing the amount of charged gain:

• Ancillary cost of acquisition (e.g. legal fees)
• Expenditure to increase the asset’s value (e.g. building an extension)
• Ancillary costs of disposal (e.g. agents fees)
• Allowances and tax relief

CGT Application

• When you sell, give away, trade, or otherwise dispose of an asset, you must pay capital gains tax (CGT), though some gains are explicitly excluded from CGT.
• If you live in the UK, you may be subject to CGT on the disposal of assets situated anywhere globally, not only in the UK.
• Non-residents who carry on a business in the UK are subject to CGT. You may be subject to CGT on UK land and property disposal if you are a non-resident (including during the overseas portion of a split-year) (private residence relief may apply).
• Individuals who are typically resident in the UK but temporarily live outside the UK are subject to specific CGT regulations (non-resident in the UK for less than five years). 
• CGT is applicable when you give someone an asset as a gift.  There are various requirements based on who you donate the gift to and special reliefs for commercial assets. 
• CGT may also apply if you transfer assets as a result of a civil partnership dissolution, divorce, or separation.

You may be viewed as though you have disposed of an asset in specific circumstances. This may happen, for example, if a personal item, such as an antique, was damaged and you were compensated with a capital sum, such as an insurance payout.

Individuals are subject to CGT when they sell assets; businesses, on the other hand, are subject to Corporation Tax on any gains. The CGT rate is determined by the type of asset sold and the amount of personal income earned in the year the asset was sold. The rates are 18% or 28%, respectively. The basic capital gains tax rate was cut to 10% in April 2016, while the higher rate was dropped to 20%. The increased tariffs, however, do not apply to residential property sales.

Non-UK residents will be subject to capital gains tax on gains accrued on the sale of UK residential property after April 2015. On gains above the yearly exempt level, non-resident individuals will be taxed at the same rates as UK taxpayers (28 per cent or 18 per cent).

Capital gains that are exempt

The sale of your primary or only residence but may be partially taxable in specific instances, such as if you have rented or utilised part of the property for commercial purposes.

• Transfers of property between spouses or civil partners. These transfers are classified as no-gain/no-loss transactions.
• The majority of items whose value depreciates over time.
• Non-wasting and commercial possessions with a disposal value of less than £6,000.
• Private and vintage automobiles
• Donations to charity and membership in certain sports clubs.
• Some financial instruments like SAYE contracts, savings certificates, and premium bonds
• Life insurance policies entitle to the original owner or beneficiaries.
• Prizes and wins from sports betting, as well as the lottery.
• Compensation for personal or professional injury or damages.
• Some compensation payments for pensions that were mis-sold.
• Foreign currency held for your own use.

Capital Gains Tax Reliefs

The government have introduced several CGT reliefs that you may be able to take advantage over time. Here are a few examples:

• Investors’ Relief
• Business Asset Disposal Relief (BADR), formerly known as Entrepreneurs’ Relief
• Principal Private Residence
• Rollover Relief
• Holdover Relief for gifts

However, we will discuss Investors’ Relief here.

Investors’ Relief

Investors’ Relief is a capital gains tax (CGT) relief on the disposal of qualified shares in an unlisted firm. Investors’ Relief (IR) is a kind of extension of entrepreneurs’ Relief that allows investors to benefit from the same tax reduction under slightly different qualifying criteria. Despite being a separate relief, the rules for investors’ Relief were designed to complement and mimic the rules for Business Asset Disposal Relief (BADR – formerly Entrepreneurs’ Relief) to some extent. Investors’ Relief combines BADR and Enterprise Investment Scheme (EIS) legislation elements. It is designed to encourage entrepreneurial investors to bring new capital into uncited trading companies where the BADR or EIS/Seed EIS (SEIS) reliefs do not apply.

Investors’ Relief Highlights

• Individual investors are eligible for Investor’s Relief (IR), a Capital Gains Tax exemption.
• It decreases the Capital Gains Tax on the disposal of ordinary shares investments to 10% if the investments were made on or after March 17, 2016, and the sale is made after April 6, 2019, and the shares were held for at least three years.
• Investor’s Relief has a lifetime limit of £10 million.
• Investor’s Relief differs from Entrepreneur’s Relief in that it is meant for passive investors who are not actively participating in the firm. There is also no minimum proportion of shares that you must hold to qualify for this Relief.

Investors’ Relief is intended to encourage external investment. The investor can be an individual or a partnership, but not a limited liability partnership (LLP). Individuals whose natural source of capital gains relief on a disposal would be business asset disposal relief are not eligible for it. As a result, the majority of employees and directors will not be eligible for investor relief. Individual investors can get a CGT reduction on their ordinary share investments if they dispose of them.

Term Relevant Employee

Anyone who is an official of the issuing company, such as a director or company secretary, or anyone who is an employee of the issuing company is considered a “relevant employee.” The same applies to any associated company’s officials or workers.

CGT and Investor’s Relief

Any financial gain from selling a portion or all of a company or any commercial asset is subject to CGT in the corporate world. This involves the sale of shares and other securities. Entrepreneurs’ Relief is a tax relief that reduces a qualifying person’s CGT to a flat rate of 10% if they qualify.

Like Entrepreneur’s Relief, Investors’ Relief operates by reducing the amount of Capital Gains Tax that must be paid on the gain of the sale of qualifying shares. Those who meet the investors’ Relief requirements will only have to pay 10% CGT on any gains they get from the sale of shares. Dispositions must be made after April 6, 2019, and investments must be kept for three years and made on or after March 17, 2016. Furthermore, unlike enterprise asset disposal relief, no minimum number of shares in the company is required.

Investors’ Relief is still available if the investor’s shareholding comprises of both qualifying and non-qualifying shares. On the other hand, the shareholder can only claim investors’ Relief on the percentage of gain earned from qualified shares.

The Relief has a lifetime limit of £10 million, which is in addition to the amount payable through business asset disposal relief. The subscriber should not be an employee or official of the firm throughout the time of ownership, with two exceptions. The rules are complex and should be considered prior to the investment and monitored in the years following the acquisition.

Investors’ relief Exceptions

Although IR isn’t as generous as the more well-known Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) schemes, it includes businesses and trades that aren’t eligible for EIS, such as farming, hotels and real estate development. A few other exceptions are:

• The individual becomes an employee of the firm after a period of at least 180 days following subscription unless there was no reasonable chance of their becoming an employee at the time of subscription.
• After subscribing, the individual assumes the function of an unpaid (dividend-free) director, although having no prior ties to the firm.

Investors can benefit from Investors’ Relief since it is one of the most attractive tax relief alternatives available. However, high gain rewards aren’t easy to accomplish; double-check that you meet all of the requirements before submitting your claim.

Capital Gains Tax Payment

Capital Gains Tax is paid via the self-assessment system, and gains and losses must be reported on your tax return. The tax must be paid by January 31, following the year in which the gain occurred. If you do not qualify for any of the reliefs mentioned above, your tax rate will be applied to the gain after deducting your yearly exemption.

How Can Bloom Financials Help

It’s vital to think about how these taxes interact with others, as it is with many taxes. Stamp Duty, VAT, Income Tax, and Inheritance Tax are frequently combined in CGT tax planning, so don’t treat it as an individual matter. Bloom Financials has ample expertise assisting private clients on their business matters. When considering an investment, we can help you determine the applicability of IR and other potential reliefs to structure the most suitable transaction to meet the legal and eligibility requirements. If you have any questions concerning IR or any other venture capital tax reliefs, please feel free to contact us.