What are the Current Capital Allowance Rates?

Understanding the rules for capital allowance and how those rules apply to your business’s circumstances can be a complicated process with an ongoing need to stay up to date with changes in tax legislation, although taking professional advice can help to clarify your tax situation.

One important element in this process is an awareness of which capital allowance rates apply to you and your business, hence enabling you to calculate the correct level of available tax relief.

Tax legislation is constantly undergoing change, increasingly complex and often the reason that many businesses are unaware of opportunities to claim tax relief or do not use such relief efficiently.

An excellent example of this is the area of commercial property owners, where under a tenth claim the capital allowances available to them.

From our experience, this unawareness and inefficient use of capital allowances by businesses is not unusual.

Capital allowance claims

Capital allowance is a business related relief available to companies, partnerships, foreign investors, the self employed and in certain circumstances, private individuals, which may be claimed against certain assets purchased for business use. These assets include:

  • equipment
  • machinery
  • business vehicles

which are collectively known as ‘plant and machinery’.

Generally, a capital asset will depreciate in value as it ages. This depreciation is then adjusted for by entering it as an expense in the profit and loss records. However, as part of the calculation of taxable business profits, this depreciation expense is added back in. This is where capital allowance can prove helpful.

Capital allowance may be claimed against the value of an asset at the time of purchase. A capital allowance claim can then be used to reduce a business’s taxable profit.

The percentage that may be claimed will depend on the category of asset and details of its use. For instance, under the Annual Investment Allowance (AIA), 100% may be claimed against purchased business assets up to the AIA limit. Where the total value of business assets purchased is more than the AIA limit, they may be claimed under the Writing Down Allowance (WDA) at 8% or 18%.

Where AIA is used and the limit not exceeded, the purchased asset is effectively written off in that tax year. Where WDA is used, the value of that asset may be written off over more than one tax year.

Where the cash basis is used to work out a business’s profits, the items that you can generally claim for under capital allowance, such as plant and machinery, will instead by registered as an expense, with the exception of the purchase of cars.

Capital allowance claims can only be made for assets that you own. Items that are leased or rented are not eligible and should instead be entered as expenses. In addition to assets in your ownership, there are a number of capital expenditure classes that may be eligible for capital allowance.

There is no complete listing of assets or expenditure that qualify for capital allowance.

HMRC provides the basic level of information on capital allowance and how this form of tax relief may apply to your business’s taxable expenditure, but it is down to you to interpret this information within the circumstances of your business. It is this interpretation, often without professional advice, which can lead to a business’s eligibility for tax relief not being fully recognised.

For instance, the category of fixtures is an allowable asset but is not fully explained on HMRC website which simply provides examples, such as bathroom suites.

Once a list of eligible assets has been drawn, the next step is to decide which of the following capital allowance schemes are right for your claim:

  • Annual investment allowance (AIA)
  • Writing down allowance (WDA)
  • Small pools allowance
  • First-year allowance (FYA)
  • Balancing allowance

Each of these schemes have their own rules and rates, and it may be that more than one allowance applies in any tax year.

Capital allowances rates

To comply with HMRC legislation, it is important that you realise the relevant rates and rules for any capital allowance scheme you make a claim through.

As of January 2019, the capital allowance rates are:

  • Annual investment allowance (AIA) – 100% up to the 2019 annual limit of £1 million
  • First year allowance (FYA) – 100%
  • Writing down allowance (WDA) – main pool 18%, special rate pool 8%, single assets pool 18% or 8%
  • Small pool write-off – 100%
  • Enhanced capital allowances – 100%

Use AIA or FYA to claim for an asset in the tax year of purchase. Both allowances lead to a 100% claim. After remaining at £200,00 since 2016, the AIA annual limit was increased to £1 million in January 2019 for a period of two years.

Where the business asset is a gift, was owned by you before you used it in the business, or is a car, AIA is not applicable. Make a claim through WDA instead.

Although you can’t claim for cars on AIA, you can claim for lorries, vans, and trucks. You can also claim for motorcycles bought after 6 April 2009.

Where you claim for an asset after the year of purchase, use WDA.

Enhanced capital allowances apply to certain water and energy efficient equipment, including:

  • certain low CO2 emission cars
  • new zero emission goods vehicles
  • energy saving equipment on the energy technology product list
  • water saving equipment on the water efficient technologies product list
  • gas, biogas and hydrogen refuelling equipment
  • plant and machinery for gas refuelling stations

Whichever capital allowance scheme you use, submit it as part of your HMRC tax return. If your claim is accepted, the amount will be deducted from your taxable business profit.

Be aware that should you sell an asset, you may have to pay tax at that point. Plan ahead, with the use of professional advice, to ensure that any sale is carried out within the related tax rules and time limits, hence limiting any possible tax liability.

Calculate the value of an asset

Generally, the value of an asset will be the price paid for it. Where the asset was in your ownership before it was used in the business or was a gift, it will not be possible to use the purchase price. Instead, the value of the asset is taken as the market value.

Capital allowance or business expense?

Where capital allowance doesn’t apply to a business expenditure, it may still be possible to make a claim for it under business expenses.
Firstly, a business expense must be made exclusively for the business and not used for any non business purposes.

Secondly, there is some variation on what can be claimed, depending on whether the claim is from a limited company or a sole trader, for instance.

Typical business expenses include stationery, office rent, and insurance costs.

Capital allowance – final word

With the possibility of partial to full tax relief against purchased business assets, it makes sense for any company or eligible party to take full advantage of the various capital allowance schemes available.

Applying the complicated rules and calculations involved with making capital allowance claims, however, can mean that many companies remain unaware of their eligibility for capital allowance or do not claim the full amount available to them.

How Much is Capital Gains Tax?

Capital gains tax (CGT) is a tax levied on the profits arising from the disposal or sale of an asset, such as a second home, a buy-to-let property or a business asset.

That said, the extent to which you are liable to capital gains tax depends upon a number of factors, for example, whether you are classed as UK tax resident or non-resident, where you are domiciled, as well as how much income you earn.

If you are thinking of selling a capital asset it is important to know, in the context of your own individual circumstances, the answer to the all-important question:

“How much is capital gains tax?”

How Much is Capital Gains Tax: Residence & Domicile Status

UK resident taxpayers

When determining your liability to CGT, you will need to establish whether or not you are UK tax resident. Typically, a UK resident is liable to UK capital gains tax arising from the disposal of assets, both at home and abroad.

Under the ‘statutory residence test’, your status will be determined based primarily on the number of days you have spent in the UK during the relevant tax year, although other factors may come into play.

You will be automatically classed as UK resident if either you spent 183 or more days in the UK in the relevant tax year, or your only home was in the UK and you spent at least 30 days there in that year.

For the automatic overseas test, the criteria focuses on a maximum, rather than a minimum, number of days spent in the UK (see non-UK residents below).

In circumstances where your residence status is not conclusive, you may need to apply what’s known as the sufficient ties test.

This concentrates on the number of different ties or connections you have in the UK, such as family or work ties, together with how many days you have spent in the UK in the relevant tax year.

Non-UK residents

For many expats who have left the UK and are living abroad permanently, you will now regard yourself as non-UK resident.

However, to be automatically classed as non-UK resident for taxation purposes, you must meet one of the following criteria:

  • You were resident in the UK for one or more of the previous three tax years and you spent fewer than 16 days in the UK in the relevant tax year.
  • You were not resident in the UK for any of the three preceding tax years and you spent fewer than 46 days in the UK in the relevant tax year.
  • You work abroad full-time and spent fewer than 91 days in the UK, of which no more than 30 were spent working.

As a non-UK tax resident you will not be chargeable to any gains arising abroad, and you will only be liable to pay CGT on any gains arising in the UK from residential property. This is known as Non Resident Capital Gains Tax (NRCGT).

You may also soon be liable to NRCGT on commercial real estate if the government’s proposals, extending the rules that currently only apply to residential property, come into force.

Non-UK residents are not taxed on gains made on UK assets, other than residential property, providing that they remain non-resident for a qualifying time period.

If, however, you return to the UK after a period of ‘temporary non-residence’ of less than five years, you may still be fully liable to capital gains tax for that period of absence.

Non-domiciled UK residents

If you are UK tax resident but not domiciled in the UK, commonly referred to as non-doms, special rules apply to determine the basis upon which you pay tax on any capital gains.

Whilst a UK tax resident is liable to pay UK taxes on the arising basis of taxation, where all their worldwide gains are chargeable in the UK, a non-domiciled UK resident can elect to pay tax on the remittance basis.

As a non-dom using the remittance basis, whilst any profit from the disposal of an asset in the UK will remain chargeable to capital gains tax, you will only pay CGT on any foreign gains you bring, or remit, to the UK.

However, there is no statutory definition of ‘domicile’, rather it is determined with reference to common law principles and case law.

Your domicile is not necessarily where you are ordinarily resident, rather it is the country in which you have the closest ties or connections. This may be your domicile of origin, ie; where your father considered his permanent home when you were born, although your domicile can change.

However, if you are a long-term resident, you may have to pay for the privilege of not being subject to CGT in the UK on foreign gains. This is known as the remittance basis charge and is calculated as follows:

  • £30,000 for non-doms who have been resident in the UK for at least 7 of the previous 9 tax years immediately before the relevant tax year.
  • £60,000 for non-doms who have been resident in the UK for at least 12 of the previous 14 tax years immediately before the relevant tax year.

Note that for long-term residents who have been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year will now be classed as domiciled in the UK under the ‘deemed domicile’ rules.

These rules also apply to any individual who is currently not domiciled in the UK but was born in the UK, with a UK domicile of origin, and subsequently becomes resident in the UK.

If you fall within the criteria under the deemed domicile rules, you will no longer be able to claim the remittance basis of taxation. As with any domiciled UK tax resident you will then be assessed on your foreign gains on the arising basis.

How Much is Capital Gains Tax: Higher & Lower Rates

The applicable rate of capital gains payable will be determined by the amount of taxable income you earn in the tax year in which the disposal is made.

A basic rate taxpayer will pay 10% on gains on chargeable assets, not including a non-primary residence, which will be charged at the higher rate of 20% (2018/19). For higher rate taxpayers the respective rates are 18% and 28%.

For individuals, net gains are added to your total taxable income to determine the appropriate rate of tax. The standard rates apply only to the net gains which, when added to your taxable income, do not exceed the basic rate band.

The basic rate threshold is currently £46,350 (2018/19). This equates to taxable income of £34,500 plus the tax-free personal allowance of £11,850. The threshold is set to increase to £50,000 for 2019/20.

How Much is Capital Gains Tax: Annual Exempt Amount

Capital gains tax is only payable on any overall gains that exceed your tax-free allowance. This is known as your ‘Annual Exempt Amount’ (AEA).

There is one AEA for UK residents, executors or personal representatives of a deceased person’s estate, as well as trustees for disabled people. A lower rate of AEA applies for most other trustees.

The main AEA currently stands at £11,700 for the tax year 2018/19, and is due to increase to £12,000 for the year 2019/20. The lower rate for trustees stands at £5,850, to increase to £6,000 for 2019/20.

If you are not entitled to any personal allowance, you will be liable to pay tax on all your chargeable gains.

If you are UK non-domiciled and the remittance basis is selected for a particular tax year, you are not entitled to a personal allowance unless you have less than £2,000 of unremitted gains in that year.

Non-UK residents who dispose of residential property in the UK can, in most cases, claim the AEA in the same way as UK residents, although any double taxation agreement in place between the UK and the country in which you reside may affect your overall tax liability.

How Much is Capital Gains Tax: Exemptions & Relief

There are various exemptions and relief from capital gains tax that can be used to reduce or avoid any liability. In particular personal possessions with a value of less then £6,000, or shares held in an ISA or PEP are wholly exempt.

You will also not be liable to pay CGT on what’s known as wasting assets, ie; assets that depreciate in value over time. Your car is a wasting asset and so, even if it exceeds a value of £6,000, any gain made on its disposal will not be chargeable to CGT.

Examples of the main forms of relief from capital gains tax are as follows:

  • Primary residence relief – any gain made on the sale of your only or main residence will not be subject to CGT. A liability will arise, however, in relation to any parts of the property used for business purposes.
  • Business asset rollover relief – this allows you to defer any liability to CGT where you sell or dispose of a business asset, including land and buildings, and use all or part of the proceeds to buy a new asset within three years.
  • Entrepreneurs’ relief – this provides for an effective rate of 10% on gains made from qualifying assets when selling all or part of your business, although there is lifetime cap of £10 million.

How Much is Capital Gains Tax: Key Takeaway

The rules on CGT can be highly complex, not least where either your residence or domicile status are inconclusive.

For a definitive answer on “How Much is Capital Gains Tax?” you should always seek professional advice tailored to your particular circumstances.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

How to Calculate Capital Gains Tax

Capital gains tax (CGT) is a type of tax levied on individuals, sole traders, partnerships and trusts, and becomes payable when you sell an asset such as a second property, a business, shares or an heirloom that has appreciated in value.

It is the gain, or profit, you make on the chargeable asset that is taxed, not the overall amount of money you receive having sold that asset. However, the amount you pay depends on your income and the asset in question.

Below we look more closely at chargeable assets and how to calculate capital gains tax based on your particular level of income.

Chargeable assets explained

Although an individual’s primary residence is exempt from capital gains tax under what’s known as private residence relief, any property that is not your only or main residence will be classed as a ‘chargeable asset’.

This means that any second home, holiday home, buy-to-let or business property will all be potentially liable to capital gains tax in the event that you make any money on these assets when you come to sell.

Capital gains tax is also payable on assets other than land or buildings. In particular, a chargeable asset can include:

  • personal possessions worth £6,000 or more, such as jewellery or artwork.
  • shares that are not in an ISA or PEP.
  • business assets, such as plant and machinery or fixtures and fittings.

Your car is excluded from personal possessions as this is classed as a ‘wasting asset’ with a predicted useful life of less than 50 years.

Tax-free allowance for capital gains

You are not liable to capital gains tax if all your gains in one year fall below your tax-free allowance. For 2018/19 your tax-free allowance is £11,700, increasing to £12,000 for the tax year 2019/20.

The current annual exempt amount for trustees is £5,850 (2018/19).

The net effect is that if the profit made on the sale of a chargeable asset does not exceed the relevant threshold, there will be no tax to pay for that year. However, you must take into account your overall gains for any given tax year.

Current capital gains tax rates

Capital gains tax is charged at various rates where the applicable rate will be determined by the type of asset disposed of and your total taxable income.

For basic rate taxpayers you will pay the following standard rate of CGT:

  • On residential property 18%
  • On other chargeable assets 10%.

For higher rate taxpayers you will pay the following enhanced rate of CGT:

  • On residential property 28%
  • On other chargeable assets 20%.

If you pay basic rate tax on your income, you will pay capital gains tax at the standard rate up to an amount of gain equal to your unused income tax basic rate band, and at the higher rate on any excess.

For a basic-rate taxpayer the maximum taxable income that you can earn is currently £34,500 (2018/19). This equates to a basic rate threshold of £46,350 minus the tax-free personal allowance of £11,850.

If you pay higher rate income tax (with taxable income in excess of £34,501+), you will pay capital gains tax at the higher rate on the entirety of any profit acquired from a chargeable asset.

How to calculate capital gains tax

The starting point in how to calculate capital gains tax is to work out any taxable gain, ie; any profit made on the disposal of the asset(s) in question.

Broadly speaking, you will deduct the purchase price from the selling price. If the asset was a gift, you will instead need to ascertain the market value of the asset at the time it was bequeathed to you.

All profits made on chargeable assets during any given tax year will need to be added together to give your overall net gains for that year, having deducted any allowable costs as well as your tax-free allowance.

These net gains are then added to your total taxable income to determine the appropriate rate of tax. If your taxable income and chargeable gains added together are less than £34,500, the basic capital gains tax rate applies.

Where the two figures combined are above the higher tax threshold, you pay the basic-rate on the part up to the threshold, and the higher rate on the remainder.

Deducting costs from any chargeable gains

When working out how to calculate capital gains tax you will need to know what costs can be deducted from your overall chargeable gain.

The type of allowable expenses that can be deducted will depend on the asset in question. By way of example, for the sale of a property you will be able to deduct costs incurred in disposing of the property, such as any stamp duty, legal fees, as well as estate agents’ fees.

How to mitigate any capital gains tax liability

Once you have worked out how to calculate capital gains tax, you can then go on to consider how to mitigate your liability.

Needless to say, you will have already deducted the tax-free CGT allowance from any profit made. However, there are other ways to reduce the level of chargeable gains in any given tax year.

In particular, you can use your tax-free allowance against the gains that would be charged at the highest rates, for example, where you would be liable to pay 28% on residential property.

With forward planning and professional advice, it may also be possible to offset any losses from previous years against any gains made in subsequent years.

A tax specialist can additionally advise on any tax reliefs that may be available to you, for example, business asset rollover relief where you use the proceeds from the sale of business assets to buy new assets. Here, any liability to capital gains on the original asset only becomes payable when the new asset is sold.

Deferring your tax liability in this way can be beneficial where your tax-free allowance has been exceeded for that year.

How to calculate capital gains tax for non-UK domiciled

There are special rules in relation to capital gains tax where you are a UK resident but not domiciled in the UK.

If you are non-domiciled in the UK and you pay tax on the remittance basis, you will only be liable to pay capital gains tax on any foreign income and gains that are brought to the UK. However, you will lose your tax-free allowances.

Further, if you are not resident in the UK but own UK residential property, you will be liable to pay non-resident capital gains tax.

How to calculate any capital gains tax in time

Any capital gains will need to be declared by way of a self-assessment tax return and paid within the relevant timeframe.

Any capital gains tax payable will usually fall due by 31 January after the end of the tax year in which the disposal occurred. Alternatively, if you are a UK resident, you can use the ‘real time’ Capital Gains Tax service to report and pay any capital gains straight away.

If you are a non-resident and you have sold a residential property in the UK, you will need to tell HMRC within 30 days. Similar provisions will apply to UK residents for disposals of residential property made on or after 6 April 2020.

Key takeaway on how to calculate capital gains tax

How to calculate capital gains tax is not necessarily straightforward. The rules on capital gains can be complex, not least where numerous assets are disposed of across a number of years, some resulting in losses, others making profit.

However, once you understand how to calculate capital gains tax, you can begin to take full advantage of all available allowances and reliefs to help maximise the benefits and minimise your tax bill.

Is there Capital Gains Tax on Inherited Property?

The following guide looks at how capital gains tax on inherited property applies, including how to calculate gains made by the executors or personal representatives, or those who inherit property from the deceased.

Capital gains tax for executors and personal representatives

As a general rule, when someone dies there is no capital gains tax (CGT) charge. That said, special rules apply in relation to how assets are to be treated during the period of administration.

This is the period during which the executors or personal representatives are settling the estate. It starts on the day following the date of death of the deceased and ends when all necessary steps have been taken to complete the administration of the estate.

Broadly speaking, assets that were owned by the deceased are initially treated as though they had passed to the executors or personal representatives at the date of death.

As such, if any property is sold or disposed of by the executors or personal representatives during the period of administration, and the value of that property has appreciated in value since the date of death, a CGT liability may arise – although this will be paid out of the estate.

However, the distribution of an asset to a beneficiary will not be treated as a ‘disposal’ for the purposes of determining capital gains tax on inherited property.

When the administration of the estate has been completed and the assets remaining in the estate are distributed under the provisions of any will or the rules of intestacy, no capital gains tax is charged.

Instead the assets are treated as though they had passed to the beneficiaries at the date of death, at their market value on that date.

The residence status of the deceased

Broadly speaking, only UK tax residents are liable to capital gains tax. The knock on effect is that the executors or personal representatives of a deceased are treated as having the same residence and domicile status as the deceased.

As such, if the deceased was non-UK resident prior to their death, the executors or personal representatives will not be liable on any disposals even if they are themselves resident in the UK.

In circumstances where, despite being not resident in the UK for tax purposes, the deceased would still have been liable to capital gains tax on the disposal of a particular asset, then the executors and personal representatives will also be liable on any disposal of that asset.

There may also be a liability to capital gains tax on inherited property for the periods up to the date of death where the deceased had recently disposed of assets, but had not yet submitted a return.

Capital gains tax on inherited property for beneficiaries

When you inherit an asset, typically inheritance tax will be paid out of the estate of the person who has died.

Inheritance tax becomes payable in the event that the value of the estate, after any expenses and debts have been paid, exceeds the relevant nil rate band for the tax year in which the deceased passed away.

However, as a beneficiary, you will still be liable to any capital gains tax where:

  • you subsequently dispose of the asset(s) bequeathed to you, and
  • those assets have appreciated in value between the date of acquisition and the date of disposal.

Variation of the terms of the will or intestacy

A deed of variation can be used to change the way in which an estate is distributed. In other words, an individual beneficiary can redirect their inheritance to another person.

Where the document is legally valid, and if certain conditions are met, then the variation will be treated for CGT purposes as not being a disposal for which any capital gains tax liability will arise.

However, the deed of variation must be executed within two years of the deceased’s death and must contain a clear statement to the effect that the relevant legislative provisions apply.

Calculating capital gains tax on inherited property

When calculating capital gains tax on inherited property, the chargeable gain is the difference between the value of the asset at the date it was inherited and the value of the asset at the date of disposal or, alternatively, the proceeds of sale.

Typically, the market value of an asset will be ascertained for inheritance tax purposes. This is often referred to as the ‘probate value’.

In such cases, capital gains tax on inherited property on future disposals by executors or personal representatives, or by beneficiaries, will be calculated on the basis that their acquisition cost is the probate value.

In addition, the market value of an asset may need to be considered at the date of disposal, where the asset has been transferred or given away. This is defined as “… the price which assets might reasonably be expected to fetch on a sale in the open market”.

However, you do not need to calculate any chargeable gain on the sale or disposal of an asset where the sale proceeds or market value do not exceed £6,000.

Where the disposal proceeds exceed £6,000, the amount of capital gains tax payable will depend on a number of factors, not least the extent of the chargeable gain and the applicable CGT rate.

Rates of capital gains tax on inherited property

The rate of capital gains tax on inherited property can differ depending on the taxable income of the beneficiary, as well as the nature of the asset disposed of.

To determine the applicable rate, ie; the standard or the higher rate, you will need to add any net gains to your total taxable income.

For assets other than residential property, where the two figures combined are below the basic rate threshold, the standard rate of capital gains tax is set at 10%. The higher rate of 20% is charged on anything exceeding this threshold.

For residential property, the standard rate of capital gains tax is 18%, with a higher rate of 28%.

Tax-free allowance for capital gains tax on inherited property

As an individual, you are only liable to pay CGT on any gains that exceed the tax-free allowance for that year. This is known as your ‘Annual Exempt Amount.’

This means that you will not be liable to pay tax on any increase in value on an asset(s) if all your gains in one year fall below this threshold.

Every beneficiary who is bequeathed property will benefit from a tax-free allowance, if and when s/he subsequently sells or otherwise disposes of this property.

For the tax year 2018/19 the AEA is set at £11,700. This tax-free allowance also applies to executors or personal representatives of a deceased’s estate, as well as trustees of disabled people. The allowance for other trustees is set at £5,850.

The executors or personal representatives will be entitled to the full annual exempt amount for capital gains tax on inherited property for the tax year in which the death occurred and the following two tax years.

There is no entitlement to the AEA if the administration period lasts longer than this.

Key takeaway for capital gains tax on inherited property

The rules relating to capital gains tax on inherited property can be especially complex, not least when ascertaining the market value of a disposal.

Advice should always be sought from a specialist in probate, tax and wills.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

Maximising Capital Gains Tax Allowance on Property

If you are a professional landlord, property investor, sole trader or business partner, your liability to capital gains tax can be significant.

It is therefore vital to consider any capital gains tax allowance on property, maximising all available relief so as to minimise any potential tax bill when you come to sell or dispose of your residential portfolio or business assets.

Capital gains tax explained

Capital gains tax is the tax payable on any gain made, after deducting allowable losses and any available allowances and reliefs, when you dispose of or sell a chargeable asset.

A ‘chargeable asset’ includes property that is not your main residence, for example, a buy-to-let or investment property. It also includes business assets such as land and buildings, plant or machinery, and even shares.

Understanding capital gains tax allowance on property

Capital gains tax only becomes payable on any net gains that exceed your tax-free allowance. All chargeable gains will be added together when assessing your overall capital gains tax allowance on property.

The capital gains tax allowance on property is currently set at £11,700 on any gains accrued on or after 6 April 2018 (for the year 2018/19). For the following tax year (2019/20), your tax-free allowance will increase broadly in line with inflation to £12,000.

The current allowance for executors or personal representatives of a deceased’s estate is also set at £11,700, and similarly for trustees of disabled people. The allowance for other trustees is £5,850.

The net effect of this capital gains tax allowance on property, or other chargeable gains, is that you will not be liable to pay tax on any profit if all your gains in one year fall below this threshold.

Calculating capital gains tax allowance on property

A tax liability will only arise if your net gains, when added to your total taxable income, do not exceed the capital gains tax allowance on property and other chargeable assets.

The tax rate at which any capital gains liability will be payable will depend on whether you are a basic or higher rate tax payer based on your annual income.

For 2018/19 capital gains tax on residential property is payable at either the basic rate of 18% or the higher rate of 28%. The rate of capital gains is much higher for residential property than for other chargeable assets for which the respective rates are just 10% and 20%.

However, you can also use your tax-free allowance against the gains that would be charged at the highest rates, for example, where you would be liable to pay 28% on residential property.

Maximising capital gains tax allowance on property

If you are looking to maximise any available capital gains tax allowance on property, forward planning is essential.

The timing of a sale or disposal of a property can have a significant impact on the availability of any tax allowance or relief, not least when considering what other gains have been made in any given tax year.

By thinking ahead you can plan what property you can dispose of, and when, to make the most of your capital gains tax allowance and any other available relief. For example, you might look at disposing of an asset where you stand to make a significant gain where you have a full tax-free allowance for that year.

Alternatively, in circumstances where other gains made would expose you to tax in the higher bracket, you may want to defer any sale or transfer until the following tax year.

This type of tax planning is especially important in the context of capital gains tax allowance on property, given that only capital losses rather than allowances can be carried forward to another tax year.

Common forms of capital gains tax allowance on property

In addition to the capital gains tax allowance on property, there are various other types of relief available. Some of the main forms of relief are considered below:

Private residence relief

An individual’s primary residence is exempt from capital gains tax under the ‘private residence relief’.

Whilst at first blush this may not seem to offer any financial benefit to the professional landlord or property investor, private residence relief may still provide some tax advantages where the vendor has lived in the property at some stage (so long as this was not designed solely to benefit from this relief).

In particular, you may be eligible for partial relief for the period of time that you lived in the property. You will also be entitled to relief for the final 18 months of your period of ownership, as long as the dwelling house has been your only or main residence at some point.

Lettings relief

Where the property in question has been your only or main residence, and private residence relief is available in respect of part of the gain, additional relief may be available in the form of ‘lettings relief’ if the property has also been let out during your period of ownership.

Accordingly, this allows you to claim the lower of the amount of private residence relief available in respect of the letting, or alternatively £40,000, and the amount of the gain arising by reason of the letting.

Business asset rollover relief

If you are a sole trader or partnership, you may be able to delay paying capital gains tax if you sell or dispose of any business assets, including land and buildings, and use all or part of the proceeds to buy new assets.

The net effect is that any liability to capital gains on the original asset will be rolled over so that it only becomes payable further down the line when the newly acquired asset is subsequently sold.

To qualify for business asset rollover relief you must buy the new assets within 3 years of selling or disposing of the old ones, your business must be still trading and both the old and the new assets must be for use in your business.

This type of relief can prove attractive where your capital gains tax allowance on property has been exceeded and so deferring any tax liability is financially preferable.

Gift Holdover Relief

You may also be able to claim gift holdover relief if you give away business assets, or sell them for less than they are worth to help the buyer.

This effectively means that you do not pay any capital gains tax when you give away the assets, and the person to whom you give the assets only pays tax when they come to sell or dispose of them.

Any capital gains tax liability is simply deferred, where any chargeable gain arising during the period of previous ownership becomes payable by the new owner at the point of future disposal.

Key takeaway on capital gains tax allowance on property

As a landlord, property investor, sole trader or business partner, forward planning is key to the successful disposal of your assets, maximising gains and minimising any tax liability by making the most of your capital gains tax allowance on property.

In this way you can legitimately benefit from the tax-free threshold and other forms of tax relief.

However, it is always prudent to seek professional financial advice in relation to the disposal of any chargeable asset and the wider tax implications.

Non Doms Tax – The Current Position

If you are UK tax resident but not domiciled in the UK, special rules apply to determine the basis upon which you pay UK tax. Below we examine the rules relating to non doms, including recent reforms to the law.

Non doms tax – Determining your domicile status

Your domicile is usually the country in which you officially have your permanent home, whereby you can be domiciled in a different country from the country in which you are ordinarily resident.

Domicile is therefore not necessarily where you are living right now, but typically the place in which you have the closest ties or connections.

This may be your domicile of origin, ie; where your father considered his permanent home when you were born, although your domicile may have changed if you subsequently moved abroad.

You can also acquire a domicile of choice if you have resided in another country with the intention of staying there permanently.

In circumstances where your practical or financial affairs are especially complex, your domicile status may be hard to determine, exposing it to the scrutiny of HMRC. That said, in the UK, only a court can make a formal ruling as to domicile.

There is no statutory definition of domicile, rather your domicile status will be determined with reference to common law principles and previous case law.

Non doms tax – Claiming the remittance basis

If you are classed as UK resident you are liable to pay UK taxes on what’s known as the ‘arising basis’ of taxation. This means that all your worldwide income and chargeable gains will be taxable in the UK.

However, non-domiciled UK residents have a choice of whether to use the arising or the ‘remittance basis’ of taxation.

By using the remittance basis, whilst any income and capital gains arising in the UK will remain taxable in full, you will only pay UK tax on any foreign income or gains to the extent that these are brought, or remitted, to the UK.

Note that by claiming the remittance basis you will lose any available personal tax allowances for your foreign income and gains. You may also be liable to a remittance basis charge if you are a long-term resident (see below).

Non doms tax – Recent reforms to the tax rules

The remittance basis charge

From 6 April 2017 the remittance basis charge became based on two levels of charge, depending on your period of UK residence:

£30,000 for non-doms who have been resident in the UK for at least 7 of the previous 9 tax years immediately before the relevant tax year.

£60,000 for non-doms who have been resident in the UK for at least 12 of the previous 14 tax years immediately before the relevant tax year.

The £90,000 charge no longer applies as from 6 April 2017 because of the deemed domicile changes brought in from that date (see below).

The deemed domicile rules

Up until 5 April 2017 all UK residents whose permanent home or ‘domicile‘ was abroad could elect to pay tax on any foreign income and gains on the remittance basis. However, on 6 April 2017 new deemed domicile rules came into force.

These additional changes affect the following:

long-term UK residents
any individual who is currently not domiciled in the UK but was born in the UK, with a UK domicile of origin, and subsequently becomes resident in the UK.

Under the current rules, if you are not classed as domiciled in the UK under common law principles, you will be treated as ‘deemed domiciled’ in the UK for all tax purposes if either Condition A or Condition B is met:

Condition A

To meet this condition you must:

  • be born in the UK
  • have the UK as your domicile of origin
  • be resident in the UK for 2017 to 2018, or later years.

Condition B

  • Condition B will be met when you have been UK resident for at least 15 of the 20 tax years immediately before the relevant tax year.

In circumstances where you meet the deemed domicile rules, you will no longer be able to claim the remittance basis of taxation and will be assessed on your foreign income and gains on the arising basis.

You will also be deemed UK domiciled for inheritance tax purposes.

Non doms tax: The transitional provisions

The rebasing rules

For long-term residents who have lived in the UK for 15 of the last 20 years, the introduction of the deemed domicile rules introduced in 2017 was significant.

In particular, this represented a major change for non doms who had owned capital assets for many years. Absent the protection of the remittance basis, long-term residents are now subject to capital gains tax on disposals of both UK and foreign assets.

However, the impact of these changes has been lessened by what’s known as the ‘rebasing rules’.

Provided certain conditions are met, this transitional relief has allowed foreign assets owned by newly deemed UK domiciled residents to be treated as if they had been disposed of and reacquired at their market value at 5 April 2017.

This means that only the rise in value beyond 5 April 2017 will be subject to capital gains tax, effectively exempting the earlier gain.

However, this rebasing relief applies only to personally held assets, and not to assets held in other structures, for example, trusts and companies.

Cleansing of mixed funds

Where an offshore bank account contains a mix of unremitted foreign income, gains and tax-free capital, the UK tax rules prescribe the order in which each part is to be deemed remitted, ensuring that the greatest tax liability arises at the earliest possible time.

Following the introduction of the new rules in April 2017, the government provided a one-off window of opportunity for non doms to cleanse any mixed funds held overseas.

Subject to certain conditions being met, this transitional provision allows individuals to cleanse mixed funds by transferring money from one offshore account to another.

However, the two-year window within which to take advantage of this provision ends 5 April 2019.

Non doms tax: Protected settlements

Although it will not be possible to rebase assets to market value under a trust, new protected status has been given to settlor-interested non-UK resident trusts made before an individual becomes deemed UK domiciled under the 15/20 rule.

The regime operates to protect a UK resident, deemed domiciled settlor, from being taxed on the arising basis on trust income and chargeable gains within the protected settlement, subject to all the relevant conditions being met.

However, as with all of the recent reforms relating to non doms tax, the rules here are complex and professional advice should be sought.

Key takeaway for non doms tax

For individuals who became deemed UK domiciled on 6 April 2017, you should be warned that the taxation calculations involved in any gains on foreign assets can be complicated and time-consuming.

Moreover, the window to cleanse any mixed funds is shortly due to expire.

This is a highly complex area of law, where the financial stakes are potentially very high, and advice from a tax specialist should always be sought.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.

The School Fee Plan and Private Education Fees

The cost of school fees continues to soar and, sadly, rarely in line with any annual increase in salary. The average cost for private day schooling currently stands at around £14,000 per annum, a figure that can easily be doubled for boarding fees.

It is therefore essential to plan ahead, considering the most tax efficient way to cover the cost of private education – ideally as soon as you have children! When it comes to saving for school fees, you can’t start planning soon enough.

What is a school fee plan?

School fee plans are investment and saving options designed to help parents and guardians pay for school and university fees when the time comes.

They can be a sensible and tax efficient way of forward planning, helping to build up the necessary funds and minimise the financial burden well in advance.

While school fee plans can be tailored to your individual circumstances and needs, there are generally three main options to choose from:

Capital schemes: these types of scheme involve making an initial lump sum investment in a fund that usually guarantees that you’ll at least get back your original investment. The earlier you invest the more chance you have of making money on the investment.

Income or regular savings schemes: here you will need to make regular monthly or annual payments into a savings scheme. Again, the earlier you start saving the more money your investment could earn.

Combined schemes: as the name suggests, this type of scheme is a combination of the first two. You combine an initial lump sum investment at the start of the plan, with regular or even irregular top ups over time.

When should I start a school fee plan?

The stage at which you start a school fee plan depends on how much you will need to fund your child’s education and at what age you are thinking of commencing their private education.

A financial investment generally needs around a minimum of five years to grow, although the longer you can give your money, the better. You will also need to factor in the likely annual increase in school fees, say 4% a year, to ensure that your school fee plan covers for this.

What risks are involved with school fee plans?

A school fee plan often comes with some measure of protection for your investment, although different plans will offer varying degrees of protection.

However, as with all investments, there is no absolute guarantee of how much you will get by way of a final financial return. Indeed, the value of your investment can fall as well as rise.

For school fee plans without any financial guarantee, you run the risk of your return being less than your initial investment, resulting in insufficient funds to cover the cost of your child’s education.

Further, while school fee plans are generally designed to be tax efficient, there may be financial penalties, administrative fees and tax implications if you cash in your plan early.

Before deciding on a school fee plan, you should talk to the provider and make sure you understand what measure of protection is in place. You should also inquire about any set up and annual management charges involved.

What alternative funding options are available?

Given the potential risks involved in school fee plans it is always worth considering alternative funding options. It is also possible to combine these options so as to cover the total cost of school fees.

ISAs

You could consider using your annual individual savings account (ISA) allowance specifically for school fees, allowing tax-free contributions of up to £20,000.

Other longer-term savings products are also available such as flexible savings plans. These can be beneficial for those of you who wish to retain the ability to access funds without financial penalty.

Pensions

Under the new rules, anyone aged 55 or over can take up to 25% of their pension pot as a lump sum payment, tax-free. Anything over and above this will be taxed as if it were your salary at your income tax rate.

Thanks to these pension freedom rules, a suitable proportion of your pension pot could be used to fund your child’s school or university fees.

Mortgages

Provided you have sufficient equity in your family home, a minimum of 25%, you may be able to remortgage your property, releasing some of that equity to help pay for your child’s school fees.

You could then opt to release a proportion of your pension fund tax-free at 55, using this to help pay off your outstanding mortgage.

Gifts

In the event that grandparents or other relatives are willing and able to contribute toward your child’s school fees, it is possible to gift a lump sum of up to £3,000 per annum free from inheritance tax.

This annual gift exemption can also be carried over from a previous year into the next, and can be used to top up the cost of school fees on a yearly basis.

Trusts

A trust is a legal arrangement where money or assets can be set aside by grandparents or other relatives to help with the cost of your child’s education, in some cases without any inheritance tax implications.

In particular, a bare trust can be used by relatives wanting to contribute more than the £3,000 permitted under the annual gift exemption.

Under this type of trust, the child is the beneficial owner and becomes automatically entitled to the trust fund once they reach the age of 18, but until then, the trustees can withdraw money for the benefit of the child, for example, to pay for school fees.

Typically there is no tax to pay as long as income generated by the investment is within your child’s personal allowances, and any gains made are within the child’s capital gains tax allowance.

Fees up-front

Many of the larger private schools offer advance payment schemes. While these require parents to pay the school fees up front as a lump sum, the capital is invested by the school and will result in parents being offered a percentage discount on fees, typically anywhere between 3% and 5%.

You should contact the school in question to make inquiries about what schemes they offer and the available discount rates.

Scholarships

Your child may be eligible for a scholarship or bursary from their school, although these are generally mean-tested. That said, there may be other financial awards available to children who are particularly gifted in a certain area, such as music, art or sport, regardless of household income.

Again you should contact the school in question to see what scholarships, bursaries and awards are available.

Key takeaway

It is never too soon to think about school fee plans and other funding options. The cost of private school fees can be significant, but spread over time these can be affordable.

Indeed, if you sensibly invest your finances early enough, you can accumulate sufficient funds to cover the cost of your child’s education, from primary through to university.

When considering whether to invest in a school fee plan or any other financial product, you should always speak to an independent financial adviser.

Research and Development Tax Credit for SMEs

Research and development (R&D) tax credits can potentially offer small and medium-sized enterprises (SMEs) a lucrative form of corporation tax relief.

That said, many SMEs who have made capital investments in innovative projects that would qualify for R&D relief, are failing to take advantage of the available tax reductions or cash payments available.

There may be a number of reasons for this lack of uptake, not least the perceived complexities involved in the following:

  • identifying qualifying activities
  • identifying qualifying expenditure
  • calculating the amount of available relief applying the relevant rate
  • justifying a claim to HMRC.

It is also often the case that many businesses are simply unaware of the availability of research and development tax credits, or that their company can qualify for SME R&D relief, in the first place.

Below is a simple guide to understanding research and development tax credits for SMEs, from who can claim to how to submit your final calculations.

Does my project qualify for SME R&D relief?

Research and development tax credits are designed to recognise and reward scientific or technological innovation. As such, to qualify for R&D relief, your project must satisfy the following criteria:

It must be part of a specific project to make an advance in science or technology, excluding work relating to the social sciences.

It must fall within your particular field of work, although this extends to a proposed area of work that you intend to start up, based on the result of the research and development undertaken.

Your R&D project can include creating new processes, products or services, improving existing ones, or even using science and technology to duplicate existing processes, products and services in a new way.

Does my company qualify for SME R&D relief?

R&D relief is open to companies across all sectors, where it is the nature of the innovative project rather than the nature of the business itself that must meet the ‘research and development’ requirements.

However, to specifically qualify for SME R&D relief you must:

  • have less than 500 staff
  • have a turnover under £100m or a balance sheet total under £86m.

The staff, turnover and balance sheets of any linked or partner companies should be included in your total when you work out if you qualify as an SME.

In circumstances where the criteria for the SME R&D scheme has not been met, your business may still be eligible for relief under the alternative Research and Development Expenditure Credit (RDEC) scheme.

SMEs may also claim relief under the RDEC scheme where they are prevented from using the R&D SME scheme because of a grant or subsidy, or because they are carrying out subcontract R&D for a large company.

What constitutes qualifying SME R&D expenditure?

Broadly speaking, you can claim research and development tax credits for the day-to-day operational costs directly relating to the R&D project. This can include:

  • staffing costs
  • externally provided workers
  • consumables & utilities
  • software directly used in the project
  • clinical trial volunteer costs.

However, you cannot include any capital expenditure, although a separate tax allowance may be available on any capital assets such as plant, machinery or buildings used in the R&D project.

The cost of production and distribution, land, and the use and creation of trademarks and patents are also excluded.

How do I calculate a claim for SME R&D tax credits?

The level of relief available depends upon which of the two schemes your company uses. The R&D SME scheme offers more generous rates than the RDEC scheme, intended primarily for larger companies.

The relief a company can claim under the SME scheme is 230% on qualifying R&D costs. If you make a trading loss, you can choose to surrender this and claim a payable tax credit instead.

Under the RDEC scheme, a taxable credit is available at just 12% of qualifying R&D expenditure (with effect for expenditure incurred on or after 1 January 2018.).

How do I claim the right amount of SME R&D relief?

It is important to know when an R&D project starts and ends, because that will help to ensure that your company claims the right amount of relief.

You can claim qualifying costs on your R&D project from the date you start working on the scientific or technological uncertainty, until you develop or discover the advance, or the work to resolve it ceases.

Where the project is a success, the activity you claim R&D relief for should end once you have a working prototype that solves the problem, and before you go into production.

Will a grant or subsidy affect my SME R&D claim?

If your company has received a grant or subsidy this could affect its eligibility for research and development tax credits.

The R&D SME scheme is what’s known as a notifiable state aid, whereby a company cannot benefit from the tax relief provided under this scheme if it is receiving any other notifiable state aids for the same R&D project.
However, you can instead claim for eligible expenditure that has been subsidised by the grant or subsidy under the RDEC scheme, and you won’t need to reduce the RDEC eligible expenditure by the value of the grant received.

Any expenditure not covered by the grant or subsidy can also still be claimed under the SME R&D scheme.

How do I submit a claim for SME R&D tax credits?

Any claim for research and development tax credits can be made by entering the total qualifying expenditure on your Company Tax return form (CT600).

You should show a breakdown of your total expenditure and how these costs were apportioned to the R&D project, for example, the percentage of total staff costs. For SMEs that subcontract qualifying R&D activities, you can claim tax relief on 65% of the payment to the subcontractor.

If your company has been undertaking qualifying research and development and has not yet claimed R&D relief, you may make a backdated claim. Typically, you have two years from the end of your accounting period to which the R&D relates to submit a claim for relief.

What additional information should be provided?

Any CT600 claim for research and development tax credits should be supported by a short technical report, to include a summary of the R&D project undertaken and how this falls within the relevant definition.

The nature of the information to be included will vary depending on the type of scientific or technological work involved, but generally this report should explain how your project:

  • looked for an advance in science and technology
  • had to overcome uncertainty
  • overcame this uncertainty
  • could not easily be worked out by a professional in the field.

You should therefore focus on the advances being sought and the uncertainties faced, rather than just a description of the finished product.

The report, whilst technical in nature, should be written in a way that can be understood by someone who is not an expert in that field.

Key takeaway for R&D tax credits

Research and development tax credits are designed to recognise and reward innovation by reducing your company’s tax bill. That said, the onus is on you to correctly submit and support a claim to HMRC.

Understanding how research and development tax credits work can help you to successfully claim the tax relief to which your company is entitled.

That said, where your SME has made a significant capital investment in an innovative project, seeking professional advice from a financial specialist will help you to maximise the value of your claim.

Does your Company Qualify for R&D tax credits?

Far too many businesses are letting their inventiveness go to waste and are missing out on money they could claim back from HMRC.

If your company has made a capital investment in an innovative project, you may be able to recoup a large chunk of that expenditure by way of R&D tax credits, even where that project has not proved to be profitable.

R&D tax credits are a form of corporation tax relief that encourages UK companies to research and develop advances in science and technology.

Who can claim R&D tax credits?

R&D tax credits can be claimed by companies across a wide range of industry sectors, including but by no means limited to manufacturing, engineering, construction, transport and retail, as well as food and drink.

In theory, this type of relief is open to companies across all sectors. Generally speaking, it is the nature of the innovative project rather than the nature of the business that has to meet the R&D requirements.

It is therefore crucial that the R&D project meets the definition of ‘research & development’ (R&D).

What are the qualifying criteria for R&D tax credits?

To qualify for R&D tax credits the work undertaken by your company must satisfying the following criteria:

  • It must be part of a specific project to make a scientific or technological advancement in your particular field. Any work relating to the social sciences, such as economics, or theoretical fields like pure maths, will be excluded from this form of tax relief.
  • It must also relate either to your company’s existing trade or a trade that you intend to start up based on the result of the research and development undertaken. In other words the project must fall within your particular, or proposed, field of work.

How can a claim for R&D tax credits be supported?

To qualify for R&D tax credits your company can research or develop a new process, product or service or improve on an existing one. However, in order to successfully claim back any tax relief you will need to explain how the project:

  • looked for an advance in science and technology – your project must aim to create an advance in the overall field, not just for your business. This means an advance can’t just be an existing technology that has been used for the first time in your sector.
  • had to overcome uncertainty – your company should be researching or developing something that isn’t known to be scientifically or technology feasible when you make or discover it. This means that your company or experts in the field can’t already know about the advance or the way you achieved it.
  • tried to overcome this uncertainty – you will need to be able to explain the work you did to overcome the uncertainty, although this can be a simple description of the successes and failures you had during the course of the project.
  • could not be easily worked out by a professional in the field – you will need to explain why a professional couldn’t easily work out your advance, for example, by showing that other attempts to find a solution had failed.

Although your claim for R&D tax credits will require you to demonstrate to HMRC the innovative nature of the project for which you are claiming, the requirement is simply that you are ‘seeking’ to make an advance in science and technology, not that you have successfully done so.

Furthermore, if you have professionals working on a project, they ought to easily be able to explain to the satisfaction of HMRC the nuances of the R&D aspects, and what uncertainties had to be overcome.

How are R&D tax credits calculated for SMEs?

Companies of any size can claim tax credits for research and development, although small and medium-sized companies (SMEs) tend to get a much better deal than the larger companies.

The level of R&D relief will depend on the scheme under which you apply. You can claim SME R&D relief if you are a SME with fewer than 500 employees, or revenue under €100m or a balance sheet total under €86m.

Under the SME scheme companies can deduct an extra 130% of their qualifying costs from their yearly profit, as well as the normal 100% deduction. The overall level of relief is therefore 230% on qualifying R&D expenditure.

An SME may also be entitled to claim a tax credit, ie; a cash payment, if the company is loss making, worth up to 14.5% of the surrenderable loss.

How are R&D tax credits calculated for larger companies?

For larger companies, there is what’s known as ‘Research and Development Expenditure Credit’ (RDEC). This replaces the relief previously available under the large company scheme.

RDEC can also be claimed by SMEs who have been subcontracted to do R&D work by a large company, or who have received a grant or subsidy for their R&D project.

The RDEC is a tax credit for 12% of your qualifying R&D expenditure. Depending on whether your company is profit or loss making, the credit may be used to discharge the liability or result in a cash payment.

What can you claim for under the R&D tax credits scheme?

You can claim R&D tax credits on qualifying expenditure relating to projects that meet the definition of ‘research & development’. This includes expenditure in respect of the following:

  • Direct R&D staffing costs
  • Externally provided R&D workers
  • Consumables and utilities
  • Software directly used in the R&D
  • Clinical trial volunteer costs.

However, not all costs qualify for R&D relief, where the following are excluded:

  • The production and distribution of goods and services
  • Capital expenditure, although an allowance may be available on capital assets, such as plant, machinery and
  • buildings used for R&D activity
  • The cost of land
  • The cost relating to the use and creation of trademarks and patents.

How is a claim for R&D tax credits submitted?

Claims for R&D tax credits will need to be submitted on your company tax return form. You will need to include the tax computation, including your R&D expenditure, as well as a technical narrative to support your claim.

Completing your CT600 form for corporation tax can be challenging and seeking specialist help is always advisable, not least where you wish to submit a backdated claim for R&D tax credits.

Typically, you have two years from the end of your accounting period to submit a claim for R&D relief.

Key takeaway for R&D tax credits

It is estimated by HMRC that only a small proportion of companies who would be eligible to claim R&D relief are currently doing so, notwithstanding that R&D tax credits can offer significant financial benefits in the form of a tax reduction or cash payment.

Many companies simply don’t know that this type of tax relief applies to them, or they feel that they haven’t got the time to justify any claim to HMRC.

It is therefore important to familiarise yourself with how R&D credits work to ensure that your company can maximise any potential tax benefits when embarking on a new scientific or technological project.

You should also seek professional financial advice in the event of any uncertainty, or if you need help completing and filing your CT600.

Expatriate Tax: Liability When Moving to the UK

By moving to the UK you may become liable to pay UK income and capital gains tax, in addition to any tax liability in your home country.

Understanding how expatriate tax works can be crucial in determining whether relocating to the UK is a financially viable move for you and your family.

The following guide looks at the basic rules relating to expatriate tax and how these could affect you.

Expatriate tax: Residence status

When determining your liability to UK tax, Her Majesty’s Revenue & Customs (HMRC) will look at your residence status.

Typically, a UK resident is liable to UK tax on all worldwide income and capital gains. A non-UK resident is only chargeable to tax on income, as well as gains from residential property, arising in the UK.

The ‘statutory residence test’ will be used to determine if you are UK tax resident and comprises three different components:

  • The automatic overseas test
  • The automatic UK test
  • The sufficient ties test.

You will be treated by HMRC as resident in the UK if you do not meet the criteria under the automatic overseas test and you meet any of the criteria under the automatic UK test or, alternatively, you satisfy the sufficient ties test.

Expatriate tax: Statutory residence test

Whether you are UK resident usually depends on how many days you spend in the UK during the relevant tax year.

Automatic overseas test

You are automatically non-resident if either:

  • You were resident in the UK for one or more of the previous three tax years and you spent fewer than 16 days in the UK in the relevant tax year.
  • You were not resident in the UK for any of the three preceding tax years and you spent fewer than 46 days in the UK in the relevant tax year.
  • You work abroad full-time and spent fewer than 91 days in the UK, of which no more than 30 were spent working.

Automatic UK test

You are automatically resident if either:

  • you spent 183 or more days in the UK in the relevant tax year.
  • your only or main home was in the UK and you spent at least 30 days there in the relevant tax year.

If you do not conclusively meet the requirements of the automatic overseas or UK tests, you will instead need to apply the sufficient ties test to determine your residence status.

Sufficient ties test

The sufficient ties test looks at the number of different ties or connections you have in the UK, such as family or work ties, together with how many days you have spent in the UK in the relevant tax year.

The number of days you spend in the UK in any given tax year will dictate the number of UK ties that are needed for you to be UK resident.

Expatriate tax: Non-domiciled residents

If you are classed as UK resident, you are liable to pay UK taxes on the arising basis of taxation. This means that all your worldwide income and gains will be taxable in the UK.

However, there are special rules for UK residents whose permanent home or ‘domicile‘ is abroad.

In taxation terms, domicile and residence are quite different. Your domicile is usually the country your father considered his permanent home when you were born, although this may have changed if you subsequently moved abroad.

If you are UK tax resident but not domiciled in the UK, you have a choice of whether to use the arising or remittance basis of taxation. If you use the remittance basis this means you only pay UK tax on any foreign income or gains you bring, or remit, to the UK.

However, by using the remittance basis you will lose any available personal tax allowances, and may have to pay a remittance basis charge if you are a long term resident. Any income and gains arising in the UK will also remain taxable in full.

Expatriate tax: Double taxation agreements

As a UK resident, even if your foreign income and gains have already been taxed in another country, they will still be taxable in the UK.

That said, relief may be available for tax paid on foreign income under the provisions of any relevant Double Taxation Agreement (DTA). The UK benefits from DTAs with a number of countries.

If a DTA is in place, you may be entitled to some or all of the foreign tax back. In this way you will avoid being taxed twice. How much relief you get, and how you claim, depends on the double-taxation agreement.

If you are UK resident and resident in another country, known as dual residency, and the UK has a DTA with the other country, there may be special provisions that determine where you will pay tax.

In relation to capital gains you will usually pay tax in the country where you are resident and be exempt from tax in the country where you made the gain, albeit with the exception of gains made on UK residential property (see non-resident capital gains tax below).

Expatriate tax: Split-year treatment

The statutory residence test is designed to determine residence status for the whole tax year. However, if you move in or out of the UK part way through a tax year, that year may be split into two parts.

Subject to meeting the relevant criteria, in one part of the tax year you will be treated as UK resident and in the other part you will be treated as non-UK resident. This is known as ‘split-year treatment’.

The split-year treatment means you will only pay UK tax on foreign income and gains based on the time you were living in the UK.

Expatriate tax: Non-resident income tax

If you are classed as non-UK resident, you will not be liable to pay UK tax on income arising overseas. However, you will still be subject to UK tax on income earned in the UK, such as employment earnings.

If you are an employee in the UK, tax will be deducted directly from your salary via the ‘Pay As You Earn’ system (PAYE). Any UK based self-employed earnings must be disclosed to HMRC by submitting a self-assessment tax return.

Expatriate tax: Non-resident capital gains tax

You will not usually be liable to pay capital gains tax arising in the UK if you are non-UK resident. The exception to the rule is for non-residential property. You will have to pay UK capital gains tax on any profit arising from the sale of UK residential property, even if you are not classed as resident in the UK.

As a result of proposed changes, non-UK residents may also soon be chargeable on gains accruing on the disposal of commercial property.

Additionally, you may be liable to both income and capital gains tax where you used to be a UK resident and you return to the UK within five years of leaving. This is known as ‘temporary non-residence’, whereby special rules apply to prevent tax avoidance.

Expatriate tax: Key takeaway

Applying the statutory residence test, and the different definitions within its three components, can involve complex calculations.

Equally, the taxation rules relating to non-domiciled UK residents, double taxation agreements or split-year treatment can become complicated.

If you are not conclusively resident or non-resident, or you need help working out your domicile status and the advantages of claiming the remittance basis, or you are unclear about any of the other expatriate tax rules, then professional advice should always be sought.

Legal disclaimer

The matters contained in this article are intended to be for general information purposes only. This article does not constitute legal or financial advice, nor is it a complete or authoritative statement of the law and should not be treated as such.

Whilst every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy and no liability is accepted for any error or omission.

Before acting on any of the information contained herein, expert legal or other advice should be sought.