Taxation

Capital Gains Tax and the Family Home

Posted by Kath Docherty on October 16, 2017  /   Posted in Taxation

The capital gains tax (CGT) exemption for gains made on the sale of your home is one of the most valuable reliefs from which many people benefit during their lifetime. The relief is well known: CGT exemption whatever the level of the capital gain on the sale of any property that has been your main residence. In this factsheet we look at the operation of the relief and consider factors that may cause it to be restricted.

Several important basic points

Only a property occupied as a residence can qualify for the exemption. An investment property in which you have never lived would not qualify.

The term ‘residence’ can include outbuildings separate from the main property but this is a difficult area. Please talk to us if this is likely to be relevant to you.

‘Occupying’ as a residence requires a degree of permanence so that living in a property for say, just two weeks with a view to benefiting from the exemption is unlikely to work.

The exemption includes land that is for ‘occupation and enjoyment with the residence as its garden or grounds up to the permitted area’. The permitted area is half a hectare including the site of the property which equates to about 1.25 acres in old money! Larger gardens and grounds may qualify but only if they are appropriate to the size and character of the property and are required for the reasonable enjoyment of it. This can be a difficult test. In a court case the exemption was not given on land of 7.5 hectares attaching to a property. The owner said he needed that land to enjoy the property because he was keen on horses and riding. The courts decided that the owner’s subjective liking for horses was irrelevant and, applying an objective test, the land was not needed for the reasonable enjoyment of the property.

Selling land separately

What if you want to sell off some of your garden for someone else to build on? Will the exemption apply? In simple terms it will if you continue to own the property with the rest of the garden and the total original area was within the half a hectare limit.

Where the total area exceeds half a hectare and some is sold then you would have to show that the part sold was needed for the reasonable enjoyment of the property and this can clearly be difficult if you were prepared to sell it off.

What if on the other hand you sell your house and part of the garden and then at a later date sell the rest of the garden off separately, say for development? Then you will not get the benefit of the exemption on the second sale because the land is no longer part of your main residence at the point of sale.

More than one residence

It is increasingly common for people to own more than one residence. However an individual can only benefit from the CGT exemption on one property at a time. In the case of a married couple (or civil partnership), there can only be one main residence for both. Where an individual has two (or more) residences then an election can be made to choose which should be the one to benefit from the CGT exemption on sale. Note that the property need not be in the UK to benefit although there are additional restrictions from April 2015 detailed below. Also foreign tax implications may need to be brought into the equation.

The election must normally be made within two years of the change in the number of residences and the potential consequences of failure to elect are shown in the case study that follows.

Furthermore the case study demonstrates the beneficial rule that allows CGT exemption for the last 18 months of ownership (36 months prior to 6 April 2014) of a property that has at some time been the main residence. Where the owner of the property is in long term care or a disabled person, and meets the necessary conditions, they continue to benefit from a 36 month exemption.

Case study

Wayne, an additional rate taxpayer, acquired a home in 2007 in which he lived full-time. In 2011 he bought a second home and divided his time between the two properties.

  • Either property may qualify for the exemption as Wayne spends time at each – ie they both count as ‘residences’.
  • Choosing which property should benefit is not always easy since it depends on which is the more likely to be sold and which is the more likely to show a significant gain. Some crystal ball gazing may be needed!
  • The choice of property needs to be made by election to HMRC within two years of acquiring the second home. Missing this time limit means that HMRC will decide on any future sale which property was, as a question of fact, the main residence.

Wayne elects for the second home to be treated as his main residence for CGT purposes. If in 2017 he sells both properties realising a gain of say £100,000 on the first property and £150,000 on the second property.

The gain on the second property is CGT-free because of the election.

Part of the gain on the first property is exempt. Namely that relating to:

  • the four years before the second property was acquired (when the first property was the only residence) and
  • the last 18 months of ownership will qualify providing the property has been the main residence at some time.

In other words out of the ten years of ownership, a total of five and a half years (66 months) would qualify for the exemption. Therefore 54/120ths of the gain – ie £45,000 will be taxable.

What if no election were made?

Without the election, and the first property being treated as the main residence throughout, the gain on the first property would be wholly exempt and the gain on the second property would be wholly chargeable. Failure to make an election can be an expensive mistake.

Can you claim PPR relief on your property?

From 6 April 2015 a person’s residence will not be eligible for Principal Private Residence (PPR) relief for a tax year unless either:

  • the person making the disposal was resident in the same country as the property for that tax year, or
  • the person spent at least 90 midnights in that property.

The rules apply to both a UK resident disposing of a residence in another country and a non-resident disposing of a UK residence.

Business use

More and more people work from home these days. Does working from home affect the CGT exemption on sale? The answer is simple – it may do!

Rather more helpfully the basic rule is that the exemption will be denied to the extent that part of your home is used exclusively for business purposes. In many cases of course the business use is not exclusive, your office doubling as a spare bedroom for guests for example, in which case there is not a problem.

Where there is exclusive business use then part of the gain on sale will be chargeable rather than exempt. However, it may well be that you plan to acquire a further property, also with part for business use, in which case the business use element of the gain can be deferred by ‘rolling over’ the gain against the cost of the new property.

Residential letting

A further relief is given if your main residence has been let as residential accommodation during the period of ownership. The case study below best demonstrates the operation of this.

The letting exemption can be very valuable but is only available on a property that has been your main residence. It is not available on a ‘buy to let’ property in which you never live.

Case study

Frank bought a property in 2002 and lived in it as his main residence for eight years until 2010. Then he bought a second property which immediately became his main residence and the first property is then let from then until its sale in say 2017.

The gain on sale of the first property amounted to £210,000.

Some of this gain will be exempt as it has been Frank’s main residence.

96 months (8 years actual occupation – from 2002 to 2010)

18 months (last 18 months of ownership – part way through 2016 and 2017)

So 114 months in total is exempt.

As the total period of ownership is 180 months (15 years) the exempt gain will be calculated as follows:

114/180 x £210,000 = £133,000

The balance of the gain (£77,000) relates to the period from 2010 to part way through 2016. The property was let during this period and had previously been Frank’s main residence so that the letting exemption is available. Although the gain relating to this period amounts to £77,000 the exemption for letting is limited to a maximum of £40,000.

Overall £173,000 of Frank’s gain is exempt leaving £37,000 chargeable to tax and this is subject to the annual exemption.

Periods of absence

Certain other periods of absence from your main residence may also qualify for CGT relief if say you have to leave your property to go and work elsewhere in the UK or abroad. The availability of the exemption depends on your circumstances and length of period of absence. Please talk to us if this is relevant for you. We would be delighted to set out the rules as they apply to your particular situation.

Trusts

The exemption is also available where a property is owned by trustees and occupied by one of the beneficiaries as their main residence.

Until December 2003 it was possible to transfer a property you owned but which was not eligible for CGT main residence relief into a trust for say the benefit of your adult children. Any gain could be deferred using the gift relief provisions. One of your children could then live in the property as their main residence and on sale the exemption would have covered the entire gain.

HMRC decided that this technique was being used as a mechanism to avoid CGT and so blocked the possibility of combining gift relief with the main residence exemption in these circumstances.

How we can help

The main residence exemption continues to be one of the most valuable CGT reliefs. However the operation of the relief is not always straightforward nor its availability a foregone conclusion. Advance planning can help enormously in identifying potential issues and maximising the available relief. We can help with this. Please contact us if you have any questions arising from this factsheet or would like specific advice relevant to your personal circumstances.

Capital Gains Tax

Posted by Kath Docherty on October 16, 2017  /   Posted in Taxation

A capital gain arises when certain capital (or ‘chargeable’) assets are sold at a profit. The gain is the sale proceeds (net of selling costs) less the purchase price (including acquisition costs).

What are the main features of the current system?

  • From 6 April 2016 capital gains tax (CGT) is charged at the rate of 10% on gains (including any held over gains coming into charge) where net total taxable gains and income is below the income tax basic rate band threshold. Gains or any parts of gains above the basic rate band are charged at 20% with a few exceptions which are considered in the ‘Exceptions to the CGT rates section’ below.
  • Entrepreneurs’ Relief (ER) or Investors’ Relief (IR) may be available on certain business disposals.

Entrepreneurs’ Relief (ER)

ER may be available for certain business disposals taking place on or after 6 April 2008 and has the effect of charging the first £10m (from 6 April 2011) of gains qualifying for the relief at an effective rate of 10%.

The relief will apply to gains arising on a disposal of:

  • the whole, or part, of a trading business that is carried on by the individual, either alone or in partnership;
  • shares in a trading company, or holding company of a trading group, provided that the individual owns broadly a 5% shareholding and has been an officer or employee of the company;
  • assets used by a business or a company which has ceased;
  • assets used in a partnership or by a company but owned by an individual, if the assets disposed of are ‘associated’ with the withdrawal of the individual from participation in the partnership or the company.

A trading business includes professions but only includes a property business if it is a ‘furnished holiday lettings’ business.

Restrictions on obtaining the relief on an ‘associated disposal’ are likely to apply in certain specific situations. This includes the common situation where a property is currently in personal ownership, but is used in an unquoted company or partnership trade in return for a rent. Under ER the availability of relief is restricted where rent is paid from 6 April 2008 onwards.

In the Autumn Budget 2017 the government announced that they will consult on how access to ER might be given to those whose holding in their company is reduced below the normal 5% qualifying level as a result of raising funds for commercial purposes by means of issues of new shares. Allowing ER in these circumstances would incentivise entrepreneurs to remain involved in their businesses after receiving external investment.

Careful planning will be required with ER but if you would like to discuss ER in detail and how it might affect your business, please do get in touch.

Investors’ Relief

Entrepreneurs’ Relief has been extended to external investors (other than certain employees or officers of the company) in unlisted trading companies. To qualify for the 10% CGT rate under ‘investors’ relief’ the following conditions need to be met:

  • shares must be newly issued and subscribed for by the individual for new consideration
  • be in an unlisted trading company, or an unlisted holding company of a trading group
  • have been issued by the company on or after 17 March 2016 and have been held for a period of three years from 6 April 2016
  • have been held continuously for a period of three years before disposal.

An individual’s qualifying gains for investors’ relief are subject to a lifetime cap of £10 million.

Simplification of the share identification rules

All shares of the same class in the same company are treated as forming a single asset, regardless of when they were originally acquired. However, ‘same day’ transactions are matched and the ‘30 day’ anti-avoidance rules will remain.

Example

On 15 April 2017 Jeff sold 2000 shares in A plc from his holding of 4000 shares which he had acquired as follows:

1000 in January 1990
1500 in March 2001
1500 in July 2005

Due to significant stock market changes he decided to purchase 500 shares on 30 April 2017 in the same company.

The disposal of 2000 shares will be matched firstly with the later transaction of 500 shares as it is within the following 30 days and then with 1,500/4,000 (1000+1500+1500) of the single asset pool on an average cost basis.

CGT annual exemption

Every tax year each individual is allowed to make gains up to the annual exemption without paying any CGT. The annual exemption for 2018/19 is £11,700 (2017/18 £11,300). Consideration should be given to ensuring both spouses/civil partners utilise this facility.

Exceptions to the CGT rates

The rates of CGT are generally 10% and 20%. However 18% and 28% rates apply for carried interest and for chargeable gains on residential property that does not qualify for private residence relief. In addition, the 28% rate applies for ATED related chargeable gains accruing to any person (principally companies).

Other more complex areas

Capital gains can arise in many other situations. Some of these, such as gains on Enterprise Investment Scheme and Venture Capital Trust shares, and deferred gains on share for share or share for loan note exchanges, can be complex. Please talk to us before making any decisions.

Other reliefs which you may be entitled to

And finally, many existing reliefs continue to be available, such as:

  • private residence relief;
  • business asset rollover relief, which enables the gain on a business asset to be deferred until a point in the future;
  • business asset gift relief, which allows the gain on business assets that are given away to be held over until the assets are disposed of by the donee; and
  • any unused allowable losses from previous years, which can be brought forward in order to reduce any gains.

How we can help

Careful planning of capital asset disposals is essential. We would be happy to discuss the options with you. Please contact us if you would like further advice.

Capital Allowances

Posted by Kath Docherty on October 16, 2017  /   Posted in Cars, Taxation

Overview

The cost of purchasing capital equipment in a business is not a revenue tax deductible expense. However tax relief is available on certain capital expenditure in the form of capital allowances.

The allowances available depend on what you are purchasing. Here is an overview of the types of expenditure which qualify for capital allowances and the amounts available.

Capital allowances are not generally affected by the way in which the business pays for the purchase. So where an asset is acquired on hire purchase (HP), allowances are generally given as though there were an outright cash purchase and subsequent instalments of capital are ignored. However finance leases, often considered to be an alternative form of ‘purchase’ and which for accounting purposes are included as assets, are denied capital allowances. Instead the accounts depreciation is usually allowable as a tax deductible expense.

Any interest or other finance charges on an overdraft, loan, HP or finance lease agreement to fund the purchase is a revenue tax deductible business expense. It is not part of the capital cost of the asset.

If alternatively a business rents capital equipment, often referred to as an operating lease, then as with other rents this is a revenue tax deductible expense so no capital allowances are available.

Plant and machinery

This includes items such as machines, equipment, furniture, certain fixtures, computers, cars, vans and similar equipment you use in your business.

Note there are special rules for cars and certain ‘environmentally friendly’ equipment and these are dealt with below.

Acquisitions

The Annual Investment Allowance (AIA) provides a 100% deduction for the cost of most plant and machinery (not cars) purchased by a business up to an annual limit and is available to most businesses. Where businesses spend more than the annual limit, any additional qualifying expenditure generally attracts an annual writing down allowance of only 18% or 8% depending on the type of asset.

The maximum amount of the AIA depends on the date of the accounting period and the date of expenditure. The AIA from 1 January 2016 is £200,000.

Where purchases exceed the AIA, a writing down allowance (WDA) is due on any excess in the same period. This WDA is currently at a rate of 18%. Cars are not eligible for the AIA, so will only benefit from the WDA (see special rules for cars).

Please contact us before capital expenditure is incurred for your business in a current accounting period, so that we can help you to maximise the AIA available.

Pooling of expenditure and allowances due

  • Expenditure on all items of plant and machinery are pooled rather than each item being dealt with separately with most items being allocated to a main rate pool.
  • A writing down allowance (WDA) on the main rate pool of 18% is available on any expenditure incurred in the current period not covered by the AIA or not eligible for AIA as well as on any balance of expenditure remaining from earlier periods.
  • Certain expenditure on buildings fixtures, known as integral features (eg lighting, air conditioning, heating, etc) is only eligible for an 8% WDA so is allocated to a separate ‘special rate pool’, though integral features do qualify for the AIA.
  • Allowances are calculated for each accounting period of the business.
  • When an asset is sold, the sale proceeds (or original cost if lower) are brought into the relevant pool. If the proceeds exceed the value in the pool, the difference is treated as additional taxable profit for the period and referred to as a balancing charge.

Special rules for cars

There are special rules for the treatment of certain distinctive types of expenditure. The first distinctive category is car expenditure. Other vehicles are treated as general pool plant and machinery but cars are not eligible for the AIA. The treatment of car expenditure depends on when it was acquired and is best summarised as follows:

Acquisitions from April 2018

The government has announced the following changes to the capital allowance rules for cars.

Type of car purchase Allocate Allowance
New low emission car not exceeding 50g/km CO2 Main rate pool 100% allowance
Not exceeding 110 g/km CO2 emissions Main rate pool 18% WDA
Exceeding 110 g/km CO2 emissions Special rate pool 8% WDA

From 1 / 6 April 2015 to 31 March / 5 April 2018

The capital allowance treatment of cars is based on the level of CO2 emissions.

Type of car purchase Allocate Allowance
New low emission car not exceeding 75g/km CO2 Main rate pool 100% allowance
Not exceeding 130 g/km CO2 emissions Main rate pool 18% WDA
Exceeding 130 g/km CO2 emissions Special rate pool 8% WDA

Acquisitions from April 2013 to 31 March / 5 April 2015

Type of car purchase Allocate Allowance
New low emission car not exceeding 95g/km CO2 Main rate pool 100% allowance
Not exceeding 130 g/km CO 2 emissions Main rate pool 18% WDA
Exceeding 130 g/km CO 2 emissions Special rate pool 8% WDA

Non-business use element

Cars and other business assets that are used partly for private purposes, by the proprietor of the business (ie a sole trader or partners in a partnership), are allocated to a single asset pool irrespective of costs or emissions to enable the private use adjustment to be made. Private use of assets by employees does not require any restriction of the capital allowances.

The allowances are computed in the normal way so can in theory now attract the 100% AIA or the relevant writing down allowance. However, only the business use proportion is allowed for tax purposes. This means that the purchase of a new 70g/km CO2 emission car which costs £15,000 with 80% business use will attract an allowance of £12,000 (£15,000 x 100% x 80%) when acquired.

On the disposal of a private use element car, any proceeds of sale (or cost if lower) are deducted from any unrelieved expenditure in the single asset pool. Any shortfall can be claimed as an additional one off allowance but is restricted to the business use element only. Similarly any excess is treated as a taxable profit but only the business related element.

Environmentally friendly equipment

This includes items such as energy saving boilers, refrigeration equipment, lighting, heating and water systems as well as new cars with CO2 emissions up to 75 g/km (reducing to 50 g/km from  April 2018).

A 100% allowance is available to all businesses for expenditure on the purchase of new environmentally friendly equipment.

  • www.gov.uk/guidance/energy-technology-list gives further details of the qualifying categories.
  • where a company (not an unincorporated business) has a loss after claiming 100% capital allowances on green technology equipment (but not cars) they may be able to reclaim a tax credit from HMRC.

Short life assets

For equipment you intend to keep for only a short time, you can choose (by election) to keep such assets outside the normal pool. The allowances on them are calculated separately and on sale if the proceeds are less than the balance of expenditure remaining, the difference is given as a further capital allowance. This election is not available for cars or integral features.

For assets acquired from 1 April 2011 (6 April for an unincorporated business) the asset is transferred into the pool if it is not disposed of by the eighth anniversary of the end of the period in which it was acquired.

Long life assets

These are assets with an expected useful life in excess of 25 years. These assets are combined with integral features in the 8% special rate pool.

There are various exclusions including cars and the rules only apply to businesses spending at least £100,000 per annum on such assets so that most smaller businesses are unaffected by these rules.

Other assets

Capital expenditure on certain other assets qualifies for relief. Please contact us for specific advice on areas such as qualifying expenditure in respect of enterprise zones and research and development.

Claims

Unincorporated businesses and companies must both make claims for capital allowances through tax returns.

Claims may be restricted where it is not desirable to claim the full amount available – this may be to avoid other allowances or reliefs being wasted.

For unincorporated businesses the claim must normally be made within 12 months after the 31 January filing deadline for the relevant return.

For companies the claim must normally be made within two years of the end of the accounting period.

How we can help

The rules for capital allowances can be complex. We can help by computing the allowances available to your business, ensuring that the most advantageous claims are made and by advising on matters such as the timing of purchases and sales of capital assets. Please do contact us if you would like further advice.

Business Motoring – Tax Aspects

Posted by Kath Docherty on October 16, 2017  /   Posted in Cars, Taxation

This factsheet focuses on the current tax position of business motoring, a core consideration of many businesses. The aim is to provide a clear explanation of the tax deductions available on different types of vehicle expenditure in a variety of business scenarios.

Methods of acquisition

Motoring costs, like other costs incurred which are wholly and exclusively for the purposes of the trade are tax deductible but the timing of any relief varies considerably according to the type of expenditure. In particular, there is a fundamental distinction between capital costs and ongoing running costs.

Purchase of vehicles

Where vehicles are purchased outright, the accounting treatment is to capitalise the asset and to write off the cost over the useful business life as a deduction against profits. This is known as depreciation.

The same treatment applies to vehicles financed through hire purchase with the equivalent of the cash price being treated as a capital purchase at the start with the addition of a deduction from profit for the finance charge as it arises. However, the tax relief position depends primarily on the type of vehicle, and the date of expenditure.

A tax distinction is made for all businesses between a normal car and other forms of commercial vehicles including vans, lorries and some specialist forms of car such as a driving school car or taxi.

Tax relief on purchases

Vehicles which are not classed as cars are eligible for the Annual Investment Allowance (AIA) for expenditure incurred. The AIA provides a 100% deduction for the cost of plant and machinery purchased by a business up to an annual limit. The amount of AIA available varies depending on the period of the accounts. The current amount of AIA is £200,000 and prior to 1 January 2016 was £500,000.

Where purchases exceed the AIA, a writing down allowance (WDA) is due on any excess in the same period. The WDA available is currently at a rate of 18% or 8% depending on the asset. Cars are not eligible for the AIA, so will only benefit from WDA.

Capital allowance boost for low–carbon transport

A 100% First Year Allowance (FYA) is currently available for businesses purchasing zero-emission goods vehicles or gas refuelling equipment. Both schemes were due to end on 31 March 2018 but have been extended for a further three years.

Writing Down Allowances (WDA)

The writing down allowance rates are 18% on the main rate pool and 8% which applies to many higher emission cars which are part of the special rate pool.

Complex cars!

The green car

Cars generally only attract the WDA but there is one exception to this and that is where a business purchases a new car with low emissions – a so called ‘green’ car. Such purchases attract a 100% allowance to encourage businesses to purchase cars which are more environmentally friendly. From April 2015 a 100% write off is only available where the CO2 emissions of the car do not exceed 75g/km (reducing to 50g/km from April 2018). The cost of the car is irrelevant and the allowance is available to all types of business.

When did you buy?

There have been significant changes to the basis of capital allowances for car purchases and the tax relief thereon. The allowances due are determined by whether the car was purchased

  • from April 2018 (proposed)
  • from April 2015 to April 2018
  • or between April 2013 and April 2015.

The dates are 1 April for companies and 6 April for individuals in business.

For purchases from April 2018:

The annual allowance is dependent on the CO2 emissions of the car.

Cars with emissions between 51 – 110 gm/km inclusive will qualify for main rate WDA.

Cars in excess of 110 gm/km are placed in the special rate pool and will qualify for an annual WDA of 8%.

The 100% first year allowance (FYA) will be available on new low emission cars purchased (not leased) by a business is generally available where a car’s emissions do not exceed 50 gm/km.

If a used car is purchased with CO2 emissions of 50gm/km or less, this will be placed in the main pool and will receive an annual allowance of 18%.

For purchases from April 2015 to April 2018:

Cars with emissions between 76 – 130 gm/km inclusive currently qualify for main rate WDA.

Cars in excess of 130 gm/km are placed in the special rate pool and will qualify for an annual WDA of 8%.

The 100% first year allowance (FYA) available on new low emission cars purchased (not leased) by a business is generally available where a car’s emissions do not exceed 75gm/km.

If a used car is purchased with CO2 emissions of 75gm/km or less, this will be placed in the main pool and will receive an annual allowance of 18%.

For purchases from April 2013 to April 2015:

Cars with emissions between 96 – 130gm/km inclusive qualify for main rate WDA.

Cars in excess of 130 gm/km are placed in the special rate pool and will qualify for an annual WDA of 8%.The 100% first year allowance (FYA) available on new low emission cars purchased (not leased) by a business is generally available where a car’s emissions do not exceed 95 gm/km.

If a used car is purchased with CO2 emissions of 95gm/km or less, this will be placed in the main pool and will receive an annual allowance of 18%.

Non-business

Any cars used by the self employed where there is part non–business use will still be separately allocated to a single asset pool. The annual allowance will initially be either the current 18% or 8% depending on the CO2 emissions and then the available allowance will be restricted for the private use element.

Example

A company purchases two cars for £20,000 in its 12 month accounting period to 31 March 2017. The dates of purchase and CO2 emissions are as follows:

White car Blue car
1 May 2016 1 May 2016
125 145

Allowances in the year to 31 March 2017 relating to these purchases will be:

White car (main pool as emissions less than 130) Blue car (special rate pool as emissions more than 130)
£20,000 @ 18% = £3,600 £20,000 @ 8% = £1,600

In the following year to 31 March 2018 the allowances will be:

White Blue
£16,400 @ 18% = £2,952 £18,400 @ 8% = £1,472

Disposals

Where there is a disposal of plant and machinery from the main or special rate pools any balance of expenditure, after taking into account sale proceeds, continues to attract the annual allowance.

Where there is a disposal of a car held in a single asset pool, the disposal proceeds are deducted from the balance of the pool and a balancing allowance or a balancing charge is calculated to clear the balance on the pool.

This applies to any cars used by the self employed with part non business use whenever purchased.

What if vehicles are leased?

The first fact to establish with a leased vehicle is whether the lease is really a rental agreement or whether it is a type of purchase agreement, usually referred to as a finance lease. This is because there is a distinction between the accounting and tax treatment of different types of leases.

Tax treatment of rental type operating leases (contract hire)

The lease payments on operating leases are treated like rent and are deductible against profits. However where the lease relates to a car there may be a portion disallowed for tax.

Currently a disallowance of 15% will apply for cars with CO2 emissions which exceed 130gm/km.

Example

Contract signed 1 April 2017 by a company:

The car has CO2 emissions of 136 gm/km and a £6,000 annual lease charge. The disallowed portion would be £900 (15%) so £5,100 would be tax deductible.

Tax treatment of finance leased assets

These will generally be included in your accounts as fixed assets and depreciated over the useful business life but as these vehicles do not qualify as a purchase at the outset, the expenditure does not qualify for capital allowances unless classified as a long funded lease. Tax relief is generally obtained instead by allowing the accounting depreciation and any interest/finance charges in the profit and loss account – a little unusual but a simple solution!

Private use of business vehicles

The private use of a business vehicle has tax implications for either the business or the individual depending on the type of business and vehicle.

Sole traders and partners

Where you are in business on your own account and use a vehicle owned by the business – irrespective of whether it is a car or van – the business will only be able to claim the business portion of any allowances. This applies to capital allowances, rental and lease costs, and other running costs such as servicing, fuel etc.

Providing vehicles to employees

Where vehicles are provided to employees irrespective of the form of business structure – sole trader/partnership/company – a taxable benefit generally arises for private use. A tax charge will also apply where private fuel is provided for use in an employer provided vehicle. For the employer such taxable benefits attract 13.8% Class 1A National Insurance.

Vans

No charge applies where employees have the use of a van and a restricted private use condition is met. For details on what this means please contact us. Where the condition is not met there is a flat rate charge per annum. These benefits are £3,230 for the unrestricted private use plus an additional £610 for private fuel 2017/18 (£3,350 and £633 for 2018/19).

How we can help

If you would like further details on any matter contained in this factsheet please contact us.

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