from A newsletter for proactive planning... In this edition... Cash basis by default Tax-free savings income in 2024/25 Five common capital gains tax errors IHT transferable nil rate bands Advantages of filing your 2023/24 tax return early June Tax Diary June 2024 Issue www.compassaccountants.co.uk
PAGE 2 Cash basis by default For 2024/25 and later tax years, unless they elect otherwise, unincorporated businesses must prepare their accounts and calculate their taxable profit using the cash basis. This is a reversal of the position applying for 2023/24 and earlier tax years, where the accruals basis was the default, but traders who were eligible to use the cash basis could elect to do so if they preferred. To enable the cash basis to operate by default, the restrictions which applied previously have been lifted. Cash basis v accruals basis The cash basis works on a cash in and cash out approach. Income is only taken into account when received, and expenses when paid. Consequently, there is no need to account for debtors and creditors or prepayments and accruals. As income is not recognised until received, relief for bad debts is automatic. By contrast, the accruals basis matches income and expenditure to the accounting period to which they relate. This necessitates the computation of debtors and creditors and prepayments and accruals. Removal of cash basis restrictions For 2023/24 and earlier tax years, traders were only able to elect to use the cash basis if their turnover (as computed under the cash basis) was £150,000 a year or less. Once in the cash basis, they could remain in it until their turnover reached £300,000; once turnover reached this level, the trader had to move to the accruals basis. The turnover limits are removed from 2024/25. Under the cash basis as it applied for 2023/24 and earlier tax years, traders were only able to deduct interest and finance cost up to a maximum of £500 a year. The cap does not apply from 2024/25, enabling traders to deduct all allowable interest and finance costs. The cash basis rules as they applied for 2023/24 and earlier tax years also imposed restrictions on the ways in which losses could be used. Prior to 2024/25, where accounts were prepared under the cash basis, it was not possible to relieve the loss sideways against income of the current and previous tax year. The ability to carry a loss back in the early years of a business against income of the previous three years was also denied where the cash basis was used. These restrictions have been lifted from 2024/25. Accruals basis election For 2023/24 and earlier tax years, traders who did not elect to use the cash basis simply prepared their accounts using the accruals basis by default. As the cash basis is the default basis from 2024/25, traders who wish to continue to use the accruals basis will need to elect to do so. Moving between the cash basis and the accruals basis To prevent some income and expenditure being counted twice and some not being included at all, adjustments are needed when moving between the cash basis and the accruals basis and vice versa. Adjustments may also be needed where capital allowances have been claimed under the accruals basis but the expenditure has not been relieved in full to ensure relief is given for the balance of the expenditure.
PAGE 3 Tax-free savings income in 2024/25 Up to certain limits, it is possible to enjoy some savings income tax-free. The extent to which this is possible depends on the rate at which you pay tax; not all routes are open to all. Personal allowance If you do not fully use your personal allowance elsewhere, any balance not otherwise used can be set against your savings income, allowing it to be received tax-free. Savings allowance Basic and higher rate taxpayers are entitled to a savings allowance. This is in addition to their personal allowance. For 2024/25, the savings allowance is set at £1,000 for basic rate taxpayers and at £500 for higher rate taxpayers. The allowance is available in addition to the personal allowance and also the dividend allowance. Rising interest rates in recent years may mean that basic and higher rate taxpayers now receive interest in excess of their savings allowance on which tax is payable and which must be notified to HMRC on their Self Assessment tax return. This may mean that they need to file a tax return where previously they were not required to. Where this is the case, it is important to register for Self Assessment. Taxpayers who pay tax at the additional rate (which applies to taxable income in excess of £125,140) do not benefit from a personal savings allowance and must pay tax on any savings income unless it is otherwise exempt. They will also not receive a personal allowance, as the personal allowance is fully abated at this level. Savings starting rate Savings income which falls within the savings starting rate band is taxed at the savings starting rate of 0%. Depending on the individual’s personal circumstances, they may be able to enjoy up to a further £5,000 of savings income tax-free. The savings starting rate band is set at £5,000, but is reduced by any taxable non-savings income. This is other taxable income in excess of the personal allowance (but excluding any dividends which are treated as the top slice of income). Consequently, the full £5,000 savings starting rate band is available where other taxable income is less than the individual’s personal allowance. The standard personal allowance is £12,570 for 2024/25. The savings starting rate is eroded once taxable income in excess of the personal allowance reaches £5,000. The savings starting rate is applied before the personal savings allowance. Tax-free savings accounts If savings are held within a tax-free wrapper such as an Individual Savings Account (ISA), the associated savings income is tax-free. A taxpayer can invest up to £20,000 in an ISA in 2024/25. Maximum tax-free savings income Where a person has the personal allowance available in full to set against their savings income, they can enjoy tax-free interest in 2024/25 of £18,570 (personal allowance of £12,570 plus savings starting rate band of £5,000 plus savings allowance of £1,000), plus that from tax-free savings accounts.
PAGE 4 Five common capital gains tax errors HMRC have revealed that every year lots of simple errors are made in tax returns in relation to capital gains tax which result in the taxpayer suffering additional tax, interest and penalties. Here are some common mistakes, and how to avoid them. the taxpayer’s only or main residence throughout the period of ownership, the reporting requirements do not apply. If the taxpayer has also made other gains or losses in the year, the capital gains tax for the year is finalised in the Self Assessment tax return. 1. Using the correct annual exempt amount When calculating how much capital gains tax you need to pay, it is important to make sure that you use the annual exempt amount for the correct tax year. This is the capital gains tax equivalent of the personal allowance, and is the amount of gains that you are allowed tax-free for a tax year. The annual exempt amount is applied to net gains (gains for the year less losses for the year), and before using losses brought forward from earlier years. Spouses and civil partners each have their own annual exempt amount. The annual exempt amount is £3,000 for 2024/25, reduced from £6,000 for 2023/24. It is lost if not used in the tax year to which it relates. 3. Private residence relief – final period exemption Where a property has for some time been the taxpayer’s only or main residence, the gain relating to the final nine months is covered by private residence relief, even if the taxpayer no longer lives in the property. This is increased to the final 36 months where the taxpayer leaves their home to go into care. Prior to 6 April 2020, the final period exemption was 18 months. In calculating the amount of private residence relief, it is important that the correct final period exemption is used, and that it is only applied once. 2. Disposals of UK residential property Earlier payment and reporting deadlines apply to gains on UK residential property. UK residents who make a chargeable gain on the disposal of a UK residential property must report the gain to HMRC within 60 days of completion and pay the capital gains due on the gain within the same time frame. If no capital gains tax is due, for example, on the disposal of property which has been 4. Lettings relief The scope of lettings relief was drastically reduced from 6 April 2020 and now only applies where the taxpayer lets out part of their home and lives in part of it as their main residence and is eligible for private residence relief on part of the gain. It does not apply if the whole house has been let out, even if this was prior to 6 April 2020 when the old lettings relief rules applied. Now lettings relief is only available to live-in landlords. It is equal to the lower of: CONT ON PAGE 5
PAGE 5 ·the amount of private residence relief; ·£40,000; and ·the gain relating to the let part. It is important that lettings relief is only claimed where due and the relief is calculated correctly. 5. Business asset disposal relief Business asset disposal relief (formerly entrepreneurs’ relief) is subject to a lifetime limit of £1 million. The limit includes amounts of entrepreneurs’ relief – the clock did not restart with the name change. Taxpayers have also mistaken the limit for an annual limit. IHT transferable nil rate bands The nil rate band is the amount that a person may leave free of inheritance tax. Each person has their own nil rate band, which for 2024/25 is set at £325,000. A person’s estate may also benefit from a further nil rate band – the residence nil rate band (RNRB) – where they leave a residence to a direct descendant or descendants. The nil rate band is available regardless of the amount of a person’s estate. However, the RNRB is reduced where the value of the estate exceeds £2 million, being abated by £1 for every £2 by which the value of the estate exceeds £2 million. This means that the RNRB is not available for estates valued at more than £2.35 million, while a reduced RNRB is available for estates valued at between £2 million and £2.35 million. Spouses and civil partners The inter-spouse exemption means that there is no inheritance tax to pay on anything that a person leaves to their spouse or civil partner. This means where a person leaves their entire estate to their spouse or civil partner, they will not use their own nil rate band or RNRB. However, this is not a problem as the bands are transferable, allowing the surviving spouse or civil partner’s estate to benefit from their spouse or civil partner’s unused nil rate bands on their death. Consequently, it is not necessary to leave bequests to the value of an individual’s nil rate bands to someone other than their spouse to prevent their own nil rate bands from being wasted. CONT ON PAGE 6
PAGE 6 Claiming the transferable nil rate band On the death of the surviving spouse or civil partner, their estate can claim the unused portion of their spouse or civil partner’s nil rate band, which can be set against the value of the surviving spouse/civil partner’s estate. It is the unused percentage that is claimed, rather than the absolute amount. This provides an automatic adjustment for changes in the nil rate band, so that the amount that is available for transfer is at current rather than historical amounts. If the first spouse or civil partner to die left everything to their spouse/civil partner, the surviving partner’s estate will benefit from 100% of the nil rate band at the value at the time of the surviving partner’s death. It should be noted that the transferable nil rate band can only be claimed, usually by the surviving partner’s personal representative, on or after their death. The claim must be made within two years from the end of the month in which the surviving partner dies (or, if later, within three months from the date on which the personal representatives first act). The surviving partner is not able to claim the transferable nil rate band during their lifetime, and as such, it is not available to shelter chargeable lifetime transfers. If the surviving partner remarries or enters a new civil partnership and is again widowed, their estate can only benefit from one transferable nil rate band. Transferable RNRB As with the nil rate band, the unused portion of a person’s RNRB can be transferred to the estate of their surviving spouse or civil partner. The RNRB is only available where a residence is left to a direct descendant. As noted above, the RNRB is subject to a taper and, when planning ahead, consideration should be given to the likely value of the estate on each spouse’s/civil partner’s death. For example, if a person has an estate of £1.5 million which includes their share in a residence and they leave it to their spouse, there will be no tax to pay and the taper will not apply. However, on the death of the surviving spouse/civil partner, having inherited everything on their partner’s death, their estate may exceed £2 million, such that the RNRB may be fully or partially lost. If this is likely, it may be better for each spouse to leave their share of a residence to a direct descendant rather than to each other to preserve the availability of the RNRB. As long as the value of neither estate exceeds £2 million, a married couple or civil partners can leave £1 million free of inheritance tax as long as they leave a residence worth (or funds from a former residence having downsized of) at least £350,000 to one or more direct descendants.
PAGE 7 Advantages of filing your 2023/24 tax return early The deadline for filing your 2023/24 Self Assessment tax return online is 31 January 2025. An earlier deadline of 30 December 2024 applies if you owe £3,000 or less and wish to pay the tax that you owe through an adjustment to your PAYE code. While these dates are some way off, there can be advantages of filing your 2023/24 tax return early. Self-employed taxpayers If you are self-employed and you prepare your accounts other than to 31 March, 5 April or a date in between, there will be more work involved in calculating your taxable profit for 2023/24. This is because the 2023/24 tax year is the transition year between the current year basis which applied for 2022/23 and earlier tax years and the tax year basis applying from 2024/25. The profit for 2023/24 will comprise that for the year to the accounting date ending in 2023/24 (the standard part) and also the profits for the period from the end of that period to 5 April 2024 (the transition part). For example, if you prepare accounts to 30 June, the standard part is the year to 30 June 2023 and the transition part is the period from 1 July 2023 to 5 April 2024. This is found by apportioning the profits for the year to 30 June 2024. The 2023/24 tax year is the last year in which relief can be given for any unrelieved overlap profits that arose on commencement or a change of accounting date. Where the accounting period does not correspond to the tax year, there will be more than 12 months’ profit to assess in 2023/24. Accounting periods ending on 31 March, 5 April or a date in between are treated as corresponding to the tax year. However, the transition part of the profits less any overlap relief is automatically spread over five years (2023/24 to 2027/28 inclusive) unless you elect for these to be assessed earlier (for example, where your personal allowance is available or they would be taxed at a higher rate). Consequently, your tax bills may be higher than normal for the next five years. Filing your tax return early will give you more time to ensure that you have the funds available to pay the higher bills, and to make arrangements to pay in instalments where payment might otherwise be difficult. Employed taxpayers If you are employed you may need to file a tax return if you have other sources of income, such as rental income or investment income. If you owe less than £3,000, you can elect for the tax to be collected through your PAYE code if you file your return by 30 December 2024. This saves you paying the tax in a lump sum, providing an interest-free instalment option. Filing the return now the 2023/24 tax year has ended ensures the 30 December 2024 deadline is not missed. Earlier repayments If you have overpaid tax for 2023/24, the sooner you file your tax return, the sooner you are able to receive a repayment. The money is arguably better in your bank account that in HMRC’s. Certainty as to tax bills Once you have filed your return, you will know what you need to pay by 31 January 2025 and, where you need to make a payment on account for 2024/25, what you need to pay by 31 July 2025. This provides certainty as to future tax bills and allows you to organise your finances to ensure that you have the necessary funds available. If you know you will struggle to meet your tax bills, you can set up a Time to Pay arrangement to allow you to pay your bill in manageable instalments. You may be able to do this online. Peace of mind Filing your tax return ahead of the deadline provides peace of mind that the job has been done and that it has been ticked off the ‘to do’ list.
PAGE 10 TAX DIARY JUNE 2024 1 June 2024 – Due date for corporation tax due for the year ended 31 August 2023. 19 June 2024 – PAYE and NIC deductions due for month ended 5 June 2024. (If you pay your tax electronically the due date is 22 June 2024). 19 June 2024 – Filing deadline for the CIS300 monthly return for the month ended 5 June 2024. 19 June 2024 – CIS tax deducted for the month ended 5 June 2024 is payable by today. For further information on any of the stories in this month’s newsletter, or for any other matter that Compass Accountants can assist you with, please contact us on 01329 844145 or contact@compassaccountants.co.uk To subscribe to the newsletter, so that each edition is delivered to your inbox, go to www.compassaccountants.co.uk and add your contact details. Compass Accountants, Venture House, The Tanneries, East Street, Titchfield Hampshire. PO14 4AR
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