About McPhersons

At mcphersons, we do much more than tick boxes and report on what’s already happened. We look forward to where you want to be, then we work with you to make sure your finances are in the best possible shape to help you move forward on your business journey.

Inheritance tax – don’t pay what you don’t have to

We have all heard the saying before ‘the only two certainties in life are death and taxes’, so when it comes to inheritance tax (IHT) this means they can turn up together.
Almost £4.9 billion was paid in inheritance tax in 2016/17, which is a record high. No wonder the Chancellor Philip Hammond has asked for a review of ‘simplification’.
SO, HOW MUCH WILL YOU PAY?
The first step is to try and work out if you will be affected by IHT. Under normal circumstances, IHT is paid at 40% of the value of your entire estate, which is your property, money, assets and possessions over £325,000 (the normal nil rate band). There’s also an additional allowance if you pass on your family home to a direct descendant, which is currently set at £125,000. The simplest way to check if you might be affected is by using an online calculator, this will work it out for you. Although they won’t take into account all of your personal circumstances.
HOW TO REDUCE YOUR IHT TAX BILL
Making gifts
There are plenty of ways to reduce or remove IHT altogether and, the sooner you do this the better. One way is to make gifts.
Money towards house deposits or university fees, are great ways to give your loved ones that helping hand towards their future. Gifts like this can also reduce the size of your estate and your potential IHT bill, though there are rules to follow and to adhere to.
WHAT TYPES OF GIFTS ARE AVAILABLE?
1. Exempt gifts – these are IHT free immediately.
2. Potentially exempt gifts – these may become IHT free over time.
3. Chargeable gifts – these might mean an immediate IHT charge.
You should however be aware that once you make your gift you can’t take them back, so it is worth considering if the recipient will be responsible with it.
The gift becomes the property of whoever you’re giving it to. Therefore, you will no longer benefit from any income and you won’t be able to access the capital in the future if you needed it.
You should always consider taking professional financial advice when planning life changing financial situations. Your tax advisor at McPhersons will show you the steps to take when planning for IHT.
Tax rules and benefits are constantly changing and depend on personal circumstances. Your tax advisor can check that you are up-to-date and are making the most of your personal allowances.
Contact us or give us a call and we’ll help you understand whether IHT is likely to affect you, and whether you could take action to reduce it.
Ainsley Gill
McPhersons Chartered Accountants
info@mcphersons.co.uk

What are the alternatives to buy to let?

HMRC seems determined to make things less attractive for buy to let landlords by increasing stamp duty as well as phasing out the ability to claim your mortgage interest as an expense. The latter means that some landlords will be paying tax on income that they don’t actually receive due to mortgages. So what are the alternatives?

Rent a Room
Under the Rent a Room scheme, you are allowed to claim rental receipts of up to £7,500 per annum tax free for renting a furnished room in your home. You can rent out as much of your home as you like. This scheme can’t be used for homes converted into separate flats.
In addition, you can also provide services to these guests such as cleaning and laundry, possibly even providing meals. This residence has to be your main or only residence.
Furnished Holiday Let (FHL)
A Furnished Holiday Let is a type of rental property classification in the UK and Ireland. It provides some tax advantages as long as it meets requirements relating to availability, actual bookings and level of furnishings.
Contrary to longer term lets, capital allowances can be claimed to kit out your holiday let (making it higher spec would obviously attract higher income). Other expenses that can be claimed are similar to a buy-to-let property; interest on loans, bills, letting fees, cleaning products, cleaning costs, general maintenance costs. Beware of personal use – if you use the property for half the year, only 50% will be considered commercial expenses.
Earnings are classed as ‘relevant earnings’ so can be used to make pension contributions.
When you sell the property you may be able to claim Capital Gains Tax reliefs which are also not available for normal buy-to-let property owners.
To top it off, council tax is not applicable if you rent the property out for more than 140 days per annum. However, business rate property tax is payable (although you may be eligible for small business rate relief on this.
You may wish to consider whether these benefits outweigh the risk of not filling the property for sufficient days of the year. To qualify for the above, the property must be available to the public to let for at least 210 days as well as actually let for 105 days.
In addition, if your income exceeds the current VAT threshold which is £85,000, you will have to become VAT registered and hence charge VAT on rental incomes. This only becomes an issue with multiple properties (or indeed expensive ones).

Contact our tax department for advice on Rent a Room, holiday lets or buy to let properties
Ainsley Gill
McPhersons Chartered Accountants
info@mcphersons.co.uk

Making Tax Digital

What is ‘Making Tax Digital’?

In 2015, HMRC issued a paper, ‘Making Tax Digital’, which proposes that by 2020 they will have moved to a fully digital tax system. This is not just about software, it signals the end of the traditional tax return.

By 2018 (deferred in Spring Budget to 2019) businesses, the self-employed and landlords will need to use software or apps to keep business records and to provide financial information to HMRC on a quarterly basis.

Digital accounts will give small businesses greater certainty and control over their tax position. Those who pay more than one type of tax (corporation tax, VAT, PAYE) will be able to take a single view of their total liabilities across all taxes. There will also be the option to pay tax as you go to help manage your cashflow.

Will it apply to everyone?

• The gross turnover or property income threshold of £10,000 is currently being discussed and it is likely that only the smallest unincorporated businesses may be exempt. It will not apply to employees or pensioners unless they have additional income of £10,000 through property or through self-employment
• Deferring may be possible by one year for gross turnover or income of over £10,000 but below a threshold to be determined.
• A very small minority who genuinely cannot use digital tools will not have to comply. More details on this are promised.

How do I convert my business to digital?

Digital record keeping will normally mean using a ‘cloud’ or an online accounting package which records income and expenditure as near to real time as possible. McPhersons will be supporting their clients with this transition with software such as Quickbooks Online, live bank feeds and apps such as Receipt Bank as well as assisting with the transition to cloud accounting.

For some clients this will be a huge change. There will be no more handing over a bag of receipts at the end of the year! Even the use of spreadsheets to record transactions will be superseded by cloud accounting. For those who do their own accounts and tax returns, the more involved system could result in them paying more tax than they need to.

What third party information will be included in my digital tax account?

HMRC already has access to third party information and this will be used more effectively and in real time – i.e. not just looking back historically but looking at live data. For example, collating information from employers, pension providers, banks and building societies. Going forward it may also include income from dividends, peer to peer lending and property and savings income.

How will making tax digital work?

HMRC is currently building its own system alongside software providers like Quickbooks, Xero and Sage. Businesses will need to ensure the software they choose is compatible with HMRC.
McPhersons already offer their clients access to licensed software with all these packages with Quickbooks being the preferred choice for many of their clients. Accountants are going to have a key role in helping their clients make the transition and McPhersons have already gone through the move from desktop to cloud with many of their clients.

How can McPhersons help me convert from desktop to the cloud?

McPhersons are cloud accounting specialists and are trained in a variety of cloud accounting software. If you are not yet on the cloud, they will advise the best solution for your business.

What are the benefits of digital accounting?

There are ways to get the most out of on-line/digital accounting and these include:
1. Utilising ‘bank feeds’ which can automate much of the bookkeeping work – automatically posting entries to avoid you keying them in.
2. Expense tracking – taking photos of your expenses and sending these direct to your accounts software which then posts it.
3. Automated invoicing.
4. Digital payslips for payroll.
5. Always having up to date information to enable business and tax planning.

What will it cost my business to convert?

The cost to businesses of introducing digital accounting as well as the continuing costs of maintaining digital records and submitting quarterly updates are concerning.
Free software has been promised by HMRC but seems yet to materialise. However, McPhersons can offer a fixed fee and an affordable monthly payment solution that fits your business model whether you are a sole trader, partnership or limited company. This would cover all the work that is required.

There is a view that reporting online could lead to mistakes and fines.
HMRC is attempting to reassure people that they can report online with confidence and are also being more lenient when mistakes are made. The consultation proposes a graduated model with each non-deliberate failure to submit information on time attracting penalty points. Only once the points reach a set level would a penalty be charged.
They are also willing to share more information with software developers about the triggers of tax investigations. Developers can then adapt their software to warn taxpayers to make amendments before final submission of information.

Tax is a complex issue and most businesses will retain their accountant to ensure they are not paying more tax than they have to.

How will I pay my tax going forward?

You will be able to view your current tax position at any time and can choose whether to pay in a single payment or pay as you go. Voluntary Pay As You Go will apply to those unincorporated businesses, sole traders and landlords, in respect of their Income Tax/National Insurance Contributions/Capital Gain Tax, from 1 April 2018, to VAT from April 2019 and to incorporated businesses, in respect of their corporation tax affairs, from 2020

Contact us on 01424 730000 or info@mcphersons.co.uk and we will get you fully prepared for the important changes ahead.

Auto Enrolment Explained

The state pension was first introduced in May 1908 by the then recently appointed Prime Minister, H. H. Asquith. The Old Age Pensions Act received royal assent in August of that year and the first payments were made to pensioners in January of the following year.

At that time eligible people over the age of 70 were entitled to a maximum payment of five shillings per week – in today’s terms this is equivalent to £20.

Comparing the first 100 years of the state pension it’s clear to see why the government’s pension budget is now under strain. In 1908, there were 500,000 pensioners – in 2008 there were 12 million. The £20 per week payment had increased to £90, and the ratio for surviving to age 100 had increased from 1:200 to 1:4. The government decided to push an initiative for us to save for our own retirement to compliment the state provision.

In 2008, a revised Pensions Act was made for all eligible employees to be automatically enrolled into their company pension. The membership of this scheme runs between October 2012 and February 2018 by which time every organisation of any size will need to offer a workplace pension to their workers.

Employees – will you be automatically enrolled?

As a worker you will fall into one of three categories, one of which automatically places you in your workplace pension. This most common category covers all UK workers aged between 22 and state pension age who earn over £10,000 per year.

If this means you – contributions to your pension will begin at the next pay day after the company’s ‘staging date’ (or after a maximum 3-month postponement period if this has been utilised by your employer). Although you have a right to opt-out, this can only be done once you have been assessed for eligibility, i.e. after staging date.

Pension contributions are based on a qualifying band of income (£5,824 – £43,000 for this tax year). Initially you will pay 1% including tax relief, rising to 5% in April 2019. Your employer will pay 1% of your qualifying earnings, rising to 3% in April 2019. These are minimum amounts and you are normally able to increase your contributions if you wish, however your employer is not obliged to follow suit.

Employers – Is your company ready for auto-enrolment?

Choosing a pension scheme for auto-enrolment is a complicated and time consuming process. There are a number of steps your company will need to go through; starting with finding out your company’s staging date, assessing your workforce, keeping them up-to-date with the pension changes, and informing the Pensions Regulator that you have met your obligations. Once the pension scheme is up and running you then need to make contributions and manage opt-outs and new joiners.

Furthermore, there are a number of other issues that you will need to consider to practically implement the regulations:

Which product solution will best suit your company’s needs?
What will you choose as your default investment and contribution level?
How the costs and admin burden affect your business?
How will you retain and maintain your records?
How will you notify your eligible jobholders?
Can McPhersons help?

The Pensions Regulator has stated that 7/10 employers are seeking advice on meeting their Auto-Enrolment obligations. If you require assistance, Aron Gunningham is our pension specialist and an independent financial adviser. Aron will be happy to help answer your questions and guide you through your duties.

The Pension Regulator has issued financial penalties for companies who do not comply by their staging date, or for errors in the scheme once it has been setup. Coupled with the admin involved in meeting your duties, it would be prudent to speak to a financial professional. Please get in touch now to arrange your free meeting on 01424 730000 or info@mcphersons.co.uk

Inheritance Tax Update 2016

Inheritance tax can cost loved ones hundreds of thousands in the event of your death, yet it’s possible to legally avoid some if not all of it. Here are some ways to reduce your Inheritance Tax Bill.

What is Inheritance Tax (IHT)?

When you die, the Government assesses the value of your estate (property, cash etc.) and deducts any debts owing by you. If the remaining amount exceeds the threshold (£325,000 until 2018), you must pay tax at 40% on the extra amount. This is reduced to 36% if you donate at least 10% to charity.

What about Assets left to my spouse?

If your spouse is UK domiciled, any assets left to them are exempt from IHT. In addition, your partner’s IHT allowance is increased by the amount you didn’t leave to others. This means a couple can leave £650,000 tax free. Being UK domiciled will mean all overseas assets are subject to IHT.

How can I reduce my Inheritance Tax bill?

GIFTING – Money you give away before you die is normally counted as part of your estate. However, it is not counted if you live for 7 years after giving the gift.

This is why it is important to plan as early as possible. However, gifts to charities are inheritance tax free

REDUCED CHARGE ON GIFTS WITHIN 7 YEARS OF DEATH

Years before death 0-3 3-4 4-5 5-6 6-7
% of death charge 100 80 60 40 20

ANNUAL GIFT EXEMPTION – The first £3,000 gifted each year is ignored. If you don’t use it, it can be carried into the next year (no more than this though).

THE £250 ‘PRESENTS’ – You can give £250 to as many people as you like and this is not counted in the £3,000 referred to above. For example, if you have 10 grandchildren, you can give each of them £250 each year and this would be exempt from inheritance tax.

GIFTS ON CONSIDERATION OF MARRIAGE – Each parent can gift £5,000, grandparents/bride/groom £2,500 and anyone else £1,000. However, it is not a wedding gift, it must be conditional, for example, “If you marry my daughter, I’ll give you £5,000!”

GIFTS FROM INCOME – This is referring to gifts from pensions or other earnings. You can’t give it all away though, you must show that giving it away does not affect your lifestyle.

GET ADVICE FROM AN ACCOUNTANT/TAX ADVISOR – This is the most effective way of finding the best solution for you. After all, you’ve already paid tax at the time of earning your money, why should you pay more than you have to on what you leave your beneficiaries?

What is the £1 million homes allowance?

This is based on parents or grandparents passing on a home that’s worth up to £1million (or £500,000 for singles). It will be phased in gradually between 2017 and 2020, starting at £100,000 from April 2017, rising by £25,000 each year until it reaches £175,000 in 2020.

CALCULATION FOR COUPLE

£175,000 x 2 = £350,000 plus £325,000 x 2 = £650,000

£650,000 + £350,000 = £1,000,000

Questions on new Pension Freedoms

Recent changes mean that you can choose how to take your money from your pension. For example, you could take unlimited lump sums as and when you like, or even take the whole amount if you wish. As previously, you can take up to 25% of your pension pot tax-free, and a taxable income from the rest, which is added to other income for tax purposes. So how do you decide? Here are some of the key questions you may have
How long will my money last?
We are all living longer, on average a 65 year old in good health is expected to live for 24 years after retirement and it is thought that 25% of us will live to see our 95th birthday. Retirement savings will have to last for a long time, possibly 30 years or more. Leaving your money invested for longer could make a big difference to your lifestyle along your retirement journey.

How much State Pension will I get?
The amount of state pension is not the same for everyone and it depends on your employment history and when you were born. Remember the State Pension is designed to cover only a very basic standard of living without any luxuries.

What about savings I have?
If you have bank saving accounts, premium bonds or ISAs, it may be better for you to take money from these first before drawing from your pension plan. If you own your home you might think about downsizing or renting it out to fund your retirement.

What are my future financial needs?
Consider all of your living expenses, like household bills and family costs, and how these may change over the coming years. Remember to budget for holidays, transport and house repairs. Also factor in the fact that your financial needs are likely to reduce as you get older and become less active, but keep in mind that in your later years costs of long term care may be required.

How can I minimise my tax bill?
Consider your personal tax allowances and plan to take your retirement savings in a way which makes the most use of your personal tax allowance so you don’t have to pay tax unnecessarily.

Should I buy an annuity?
An annuity is a promise by an insurance company to pay you an income for the rest of your life. You should check the terms of the annuity before you commit as they cannot usually be changed afterwards. It is worth shopping around different insurance companies before you buy as prices can vary.

Will I lose any my welfare benefits?
If you are receiving state benefits or Tax Credits then taking your retirement savings could impact on the level of those benefits. This is a complicated area and expected to change in the near future. Make sure you understand how your state benefits, tax credits or long term care needs would be affected before deciding to access your retirement benefits.

What happens when I die?
If you die before age 75, any money left in your pension plan will be paid to your survivors free of any tax. If you die after 75, money paid to your survivors may be subject to tax depending on their circumstances. Retirement savings which remain in pension plans are not normally counted for inheritance tax purposes. If you have purchased an annuity, benefits payable after your death will depend on the insurance contract.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.
McPhersons Financial Solutions 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority

Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk

What is the best way to save on Inheritance tax?

George Osborne fulfilled an election promise in the recent Budget to lift main family homes worth up to £1million out of inheritance tax if they are left to children or grandchildren.
However, the way it works is more complicated than it sounds so people are understandably thinking about where this leaves them in terms of inheritance planning.

In line with these changes, the Government is also still working out the details of an ‘inheritance tax credit’, so people who own an expensive home and want to sell it before they die can still benefit from the changes.

This is to avoid elderly people skewing the housing market by staying put rather than moving to a smaller property or into a care home.

The tax overhaul of last April produced the pension freedom reforms giving over-55s greater control over how they save, spend and invest their retirement pots.

People are stashing more into their pensions and trying hard to preserve what is already in there, according to recent research among over-50s by Investec Wealth & Investment.

How to make the best use of these changes

The good news is that you may not need to move house to benefit from the full inheritance allowance. The bad news is that the full allowance may not be £1million depending on your circumstances.
If we look at what we know so far about the new ‘Main Residence Nil Rate Band’, the Chancellor was eager to stress that £1million could now be passed onto your children tax free, but in practice a number of conditions must be met for that to happen.
Firstly, the £1million is made up of the £325,000 standard nil rate band for both husband and wife or civil partners, plus an additional Main Residence Nil Rate Band of £175,000 for both husband and wife.
The total of those allowances, assuming all are fully available, is £1million. However, the MRNRB will be introduced in April 2017 at only £100,000 and increase in stages to £175,000 by April 2020. It will also be means-tested, with estates above £2million losing £1 of their MRNRB for every £2 their estate exceeds £2million. In practice, this means that to pass down £1million to your children you must:

a) Be married or in a civil partnership
b) Own a house worth £350,000 or more
c) Have a total estate of less than £2million
d) Die after April 2020, or your spouse must die after that, because on first death any unused nil rate band is transferred to the surviving spouse.

The key point to all of this is that your property only needs to be worth £350,000 to fully utilise the MRNRB, so you may not need to move house after all. You could waste your MRNRB if the property is left to someone other than your children or spouse on death. With pensions as the alternative, it used to be the case that you had to die before age 75 having not touched your pension, in order to receive the fund tax free, any funds remaining on death were taxed at 55 per cent.

The new changes now mean that if you die before 75 any remaining pension funds, whether they have been used to provide benefits or not, can be passed tax free to nominated beneficiaries. If you die after 75, the pension fund will be exempt from inheritance tax, but your nominated beneficiaries will pay income tax at their own tax rate as they withdraw the funds. If you are a higher rate income tax payer and you believe your children to likely be basic rate when they take the funds, then living on other assets and leaving your pension to your children will probably be the most tax efficient way of passing on your estate. If you are a basic rate taxpayer and they are higher rate, then it will probably be better for you to take your pension at basic rate to fund your retirement and leave the other assets in your estate to your children. You can also take more than you need and gift the excess to your children over a number of years. Before making any life changing financial decisions, it is recommended that you should always consult your professional financial adviser.

McPhersons Financial Solutions 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority


Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk

Stamp Duty Reforms

George Osborne recently announced sweeping changes to stamp duty. He claimed 98% of buyers, particularly first-time buyers and low and middle-income families would benefit financially. But now professionals in the property business believe the reforms would not benefit first-time buyers in the long run. The widely held view is, like all property taxes, these changes to stamp duty will very likely be quickly reflected in house prices. This tax saving will allow first-time buyers more money to put towards their property and with all buyers in the same situation, prices would rise accordingly.
The industry thinking is the stamp duty changes will add around 1% to house prices. As stamp duty is normally paid in cash and higher property prices would add to the buyer’s mortgage, that they would pay more in interest. Some allegedly take the view that the Chancellor was trying to engineer a mini house price boom just before a general election without considering peoples’ indebtedness.

How has stamp duty changed?

Under the old “slab” system, house purchasers had to pay their relevant rate on
the whole purchase price. Previously stamp duty started at 1% on sales from £125,000 to £250,000, rising to 3% on sales of up to £500,000 and 4% on homes costing up to £1m. Houses that sold for between £1m and £2m attracted 5% tax, rising to 7% for houses worth more than £2m. Under this system a family buying a house for £400,000 would have to pay 3% on the whole sum, or £12,000.

House prices are expected to rise as sellers cash in on the stamp duty savings
The new stamp duty will consist of “marginal” tax rates, as with income tax. There will be no tax on the first £125,000, then 2% on the cost between £125,000 and £250,000, and 5% up to £925,000. A rate of 10% will apply to the cost between that sum and £1.5m, and 12% on the value above £1.5m.
Now buying a £400,000 home they would pay 2% on the portion between £125,000 and £250,000 and 5% on the remaining £150,000. This reduces their total tax bill to £10,000.

Stamp duty bills will rise for purchases worth more than £937,500. This is likely to affect buyers in London and the South East most, where prices are much higher.

First-time buyers

Many typical aspiring home owners have been hit hard by the combination of stamp duty and rising house prices. People in London know this all too well, many have tried to buy in earlier years but were unable to make their budget stretch to cover the stamp duty.

Such examples are common place. Many first time buyers find their dream property at the top end of their budget, but are all too often unaware of stamp duty and find themselves unable to afford this additional cost, leaving them no option but to pull out and lose their dream home.
Many people who are looking at properties in more affordable areas of London are grateful for the reduction in stamp duty, but fear that if house prices rise further they will be priced out of the market.

But it’s not all bad news for first-time buyers. Those already in the process of buying will save money. Typically someone buying a £175,000 house will see their stamp duty cut from £1,750 to £1,000

Need more help?
This feature aims to give some informal hints and McPhersons are offering small businesses free advice so get in touch now to arrange your free meeting 01424 730000.
McPhersons Financial Solutions c/o 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority

Landlords – How to beat new tax changes

The chancellor’s plan to remove mortgage interest tax relief, announced in the Budget and effective from 2017, will hit hundreds of thousands of property investors.
George Osborne at a stroke wiped almost 11% off the gross returns from buy-to-let properties, leaving many landlords facing the prospect of a future with increasing year on year losses, when he slashed higher-rate relief on mortgages in the Budget.

These losses could compound further should interest rates rise. This tax change, which begins in 2017, will see landlords lose a quarter of their higher-rate relief each year until 2020, when it will be restricted to 20% on all mortgage interest.

How to beat the tax changes

If landlords remortgage now, they will protect themselves against rising borrowing costs and they may be able to claw back the shortfalls from the new tax changes. With tax relief available to higher-rate taxpayers being phased out, it will become more important for landlords to reduce their borrowing costs.

Remortgage

As an example, if a buy-to-let landlord is paying 5% on a typical £120,000 mortgage, which has a rental income of £750 per month or £9,000 annually. After allowing for expenses, agents’ fees and mortgage interest he could be left with a £612 annual profit after tax.
However, when tax relief is reduced to 20% this £612 profit turns into an annual loss of £588. By remortgaging typically at, 3.79% with a five-year fixed-rate loan, he could save £1,452 annually on his interest bill, turning that annual loss back into a profit of £574.
By taking no action and if interest rates rise to say 7% by the time that higher rate tax relief has completely disappeared in 2020, you could be looking at an annual loss of £2,784.

Utilise your spouse’s personal allowance

When a profit is made, if your spouse is not working, you may be able to assign part or all of the rental income to them, allowing them to exploit their personal tax allowance, due to rise to £12,500 by 2020, or 20% tax band.

Form a company

The Government is cutting corporation tax to 19% in 2017 and 18% in 2020. One way for higher-rate taxpayers to cut their tax bills might be to invest via a company, but proceed with caution, as there can be complications. By being a business, all costs can be offset against rental income, so in theory profits may be further improved.
Within a business, income can only be paid out to the directors as a dividend. From next April they can each receive £5,000 annually tax free. After that, dividends paid to higher rate taxpayers are reduced by 32.5%, while basic-rate taxpayers pay a 7.5% dividend tax.

Reduce borrowings by selling

Some landlords, as a consequence of this new tax law, may review selling up or paying off some of the loan, while others will wish to reorganise their arrangements.
Where a landlord has a portfolio, it may make sense to sell one property and reduce the borrowings on the others.

Rent increases

Many professionals believe rents will have to rise, due to the chancellors’ tax change. There has been a substantial shift, with rents climbing faster than property prices, but now there is still further to go, particularly given that landlords have been targeted in the Budget
How buy-to-let mortgages work
The crucial difference with a buy-to-let mortgage is that the lender takes rent as the primary source of income, unlike with a residential mortgage where it is your salary that counts. Some may also take landlord’s personal income into account. Most buy-to-let mortgages are also interest-only. This means lower monthly payments and tax efficiency, but the debt is not being paid off. Typically lenders will want prospective rental income, verified by independent sources, to meet at least 125 per cent of the monthly interest payment on the loan. This will either be based on the pay rate for fixed and tracker deals (i.e. the initial rate before the deal ends) or the lender’s standard variable rate (potentially plus an extra 1 per cent or more). They may stress test you against higher rates arriving once a deal period ends. The rental cover test is to ensure landlords can handle periods when their property may not manage to be let, reassure the lender that they will not default and make sure they are lending against a reasonable asset. Lenders will generally lend only to those with larger deposits, with most deals asking for at least 25 per cent put down by borrowers. The best deals are at the lowest loan-to-values of 60 per cent and below. Any mortgage you have on your own home can potentially cut the amount you can borrow under the buy-to-let scheme if you are relying on personal income to shore up the deal.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

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Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority

Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk

Stamp Duty – what are the new rates?

On the subject of stamp duty land tax in George Osborne’s Autumn budget statement, the Chancellor declared that it “is a badly designed tax system” and had to be changed. From midnight 3rd December, no duty is to be paid on a sale price up to £125,000. It’s then 2% on the next £125,000, 5% on the next £675,000, 10% on the next £575,000 and 12% on the remainder of the purchase price. As a result, stamp taxes “will be reduced for 98% of people buying homes,” according to George Osborne, who points out that “on an average home sale price of £275,000, a buyer would pay £4,500 less tax than previous levels.” This, he stated, shows the Government’s backing for individuals that want to “work, save and own your own home.”