9 - Direct Investments

Question 1

Cash/Savings income

How is income from savings taxed?

Answer 1

Your salary or trading income is brought in first, then the savings income sits on top of that. Depending on which bucket you are in (basic, higher or additional rate) it will be taxed at those rates (20%, 40%, 45%).

There are however some tax free allowances, depending on which bracket you fall into. So effectively it depends on how much salary/trading income you have before you add in your savings income.

Question 2

Cash/Savings Income

What are the tax free allowances for savings?

Answer 2

You have a tax free savings personal allowance of £5k, that sits on top of your standard personal allowance £11.5k.

Your salary and trading income are put in the pile first, the savings income sits on top of that. If any of the savings income sits within the £16.5k total of both personal allowances it will be tax free. Note that the £5k extra personal allowance can only be used for savings income, and if you have over £16.5k of salary/trading income it is no use to you.

In addition basic and higher rate tax payers have an additional tax free allowance of £1k and £500 respectively.

Question 3

Savings/Cash Income

What is the tax treatment of building society demutualisation:

Cash bonus?

Free shares?

Answer 3

The cash bonus is considered a payment of consideration for your rights in the building society, so subject to CGT.

There is no tax charge on receiving the free shares, but when you sell them there will be a CGT charge.

Question 4

NS&I

How is interest on NS&I bank accounts (investment account, direct saver) taxed?

Answer 4

Interest is paid gross but is taxable (as savings income).

Question 5

NS&I

How are NS&I certificates taxed?

What are they?

Answer 5

NS&I certificates were withdrawn on 6/9/11 and had a max holding of £15k per issue per person.

They are free of all taxes, and some have a penalty for withdrawal.

So people should be advised to hang on to them!

Question 6

NS&I

What is the treatment of most NS&I bonds (eg income bonds, growth bonds, guaranteed bonds, investment bonds).

Any exceptions?

Answer 6

They are generally taxable as income tax (savings income).

Childrens bonds are an exception, they are tax free.

Question 7

Bonds

What is the general tax treatment of bonds?

Answer 7

The interest payments are subject to income tax (as savings income) but subject to the bonds being qualified, no CGT is due on any gains (and of course losses are not allowable either).

Note that your personal savings allowances can of course be used on the income of these bonds in the same way as interest from savings accounts.

Question 8

Bonds

For the following bond types is interest paid gross or net?

Gilts, Local Authority Bonds, Corporate Bonds, Permanent Interest Bearing Shares (PIBS)

Answer 8

• Gilts: Interest paid gross, but you can elect to have 20% deducted.
• Local Authority Bonds: Interest paid net of 20%. Note that these are qualifying corporate bonds, so exempt from CGT.
• Corporate Bonds: Net of 20% tax. CGT exempt if qualifying.
• PIBS: Interest paid gross.

Question 9

Bonds

What are deeply discounted securities?

Answer 9

Deeply discounted securities are bonds issued at a discount, meaning the price you pay for them on day one is more than 15% below the price they pay out at maturity.

This means that interest payments are reduced since you get a lot of income from the rise in value of the bonds.

These are still exempt from CGT if qualifying, which presents a good way of avoiding tax.

Question 10

Shares

How are shareholders taxed?

Answer 10

Dividends are taxed when you receive them. They are paid gross and you get a £5k tax free allowance (regardless of other income, unlike the savings allowance). Then at rates depending on your tax band (see tax tables).

In addition to that you will be liable to CGT on any gains you make when you sell the shares.

Question 11

Shares

What are stock dividends and how are they taxed?

Answer 11

Stock dividends are when you are given extra shares instead of cash for dividends.

You are taxed as if you had received a dividend based on the value of the shares.

For CGT purposes therefore (when you eventually sell those shares) your acquisition price is assumed to be the value used for that tax charge.

Question 12

Shares

What issues are there with income from overseas shares?

Answer 12

Foreign dividends are usually subject to a withholding tax in the country the shares are based in (the US is a good example).

You can’t claim this back, but you can offset it against tax paid in the UK.

Question 13

Property

How is income from UK and overseas property treated?

Answer 13

UK property income is pooled together and treated as investment income.

Overseas property income is taxable in the UK, but is taxed separately to UK income.

Question 14

Property

Is property income included in relevant earnings for pension contribution purposes?

Answer 14

Relevant earnings is the amount that restricts how much you can contribute to your pension each year.

Generally property income isn’t allowed, except for furnished holiday lets, which are included.

Question 15

Property

What kind of expenses are deductible?

Answer 15

• Repairs and maintenance can be deducted but improvements and alterations cannot;
• Interest costs are partly deductible, see separate card on rules;
• Legal fees (e.g. lease documentation);
• Professional fees (e.g. estate agents, property management);
• Bills like council tax, utilities only if paid by the landlord;
• Cost of any other services paid for by the landlord, eg cleaning.

Question 16

Property

What are the rules around interest deductibility?

Answer 16

Used to be fully deductible, but we’re now transitioning so that by 2020/21 they will only be deductible at basic rate.

That means don’t deduct interest costs from your income, but you can deduct 20% of the interest costs from the tax bill.

No impact on basic rate landlords, higher and additional rate landlords get hit.

In 2017/18 75% of the interest cost can be deducted directly in the old way, 25% of it must be treated in the new way. This will step up 25% a year until 2020/21.

Question 17

Property

What capital allowances can be claimed?

Answer 17

Capital allowances is the HMRC approved way of charging depreciation of long term assets to your profits for tax calculations.

Plant and machinery installed in the rental property, or used to maintain it, can claim capital allowances.

Furniture in commercial property can claim capital allowances.

You can claim the first £200k each year (Annual Investment Allowance) and an 18% depreciation charge (called Writing Down Allowance) on the rest.

Question 18

Property

How do residential landlords claim for furniture costs?

Answer 18

Unlike commercial lettings they can’t use capital allowances.

Instead they get simple Replacement Furniture Relief.

Take the cost of the new furniture, plus any costs involved in disposing of the old furniture, deduct anything you got from selling the old furniture.

That amount can be deducted from your profits.

Question 19

Property

What is the basis of assessment?

Answer 19

Taxed on income received during the tax year.

Question 20

Property

How is a property partnership taxed?

Answer 20

There needs to be substantial business activity required to justify taxing as a partnership, not just a jointly owned rental property.

It would be treated as a trading partnership (i.e. trading income under self-assessment) instead of as investment income of the individual.

Question 21

Property - Short Term Lease Premium

What is it and tax impact?

Answer 21

If you sell a very long lease on your property (eg 999 years) you have effectively sold the property, so you would get taxed as a capital gain.

On the other hand a 1 year lease (typical property rental) is taxed as income since you still own the property and get it back very soon.

However a “short term lease” (up to 50 years) is somewhere in the middle, so the tax rules make you charge a part of the premium received as income over the life, and a part as a capital gain.

Question 22

Property - Short Term Lease Premium

What are reverse premiums and how are they taxed?

Answer 22

Reverse premium is where the landlord pays the tenant a premium to get them to take out a lease.

The tenant must treat this as taxable income.

The landlord can’t deduct this from rental expenses, but can treat it as enhancement expenditure and deduct from the capital gain when they sell the property.

Question 23

Property

When might a landlord be able to treat income as trading income?

Why do that?

Answer 23

If the landlord provides substantial services along with simply letting the property they could be taxed as a trade.

This is preferable since:

• There is more scope for deductions and offsetting losses;
• The earnings count as relevant earnings for pension contributions;
• CGT rollover and holdover relief are available.

Question 24

Property

CGT implications

Partially let properties

Answer 24

CGT is payable on any property that is used for rental income.

You get an exemption for your main residence, but not on any part of it that is used for rental income.

However even if part of it is let you get an exemption amounting to the smaller of:

• £40k;
• The amount of the gain on the part of the property not let out;
• The amount of gain on the let portion of the property.

Question 25

Property

What is rent-a-room relief?

Answer 25

When a propert owner lets out a furnished room in their main residence for residential purposes, they can claim tax relief on the rental income.

Up to £7,500 pa is tax free.

If they receive over £7,500 they can choose to pay tax on the excess without having expenses deducted, OR pay tax on all income (so no £7,500 allowance) but with expenses deducted.

Question 26

Property

Special treatment for commercial holiday lets

Answer 26

If the conditions are met the letting is considered a business which means:

• Income is included in relevant earnings for pension contributions; and
• CGT rollover relief, holdover relief and even entrepreneurs relief available (especially valuable since residential property CGT is 8% higher than normal CGT rates!).

Question 27

Property

Requirements for treatment as a commercial holiday let

Answer 27

• Furnished and let on a commercial basis;
• Available for letting for >= 210 days per year;
• Actually let out for >= 105 days per year;
• Not let on a continuous basis for more than 155 days per year.

Question 28

What is the tax treatment of woodlands?

Answer 28

Profits are exempt from income tax.

IHT can be postponed as long as owned for 5 years.

CGT exempt.