To help fund our retirement my wife and I are letting our second home in London to get some extra income. We understand that in the near future all reporting of property income to HM Revenue & Customs will have to be done digitally on a quarterly basis. However, we have always kept paper records and submit a self assessment return on paper. What new requirements does Making Tax Digital involve and how should we prepare before it becomes mandatory?
Zena Hanks, partner in the private wealth team at accountant Saffery Champness, says the government’s Making Tax Digital (MTD) programme is intended to move the UK towards a fully digital tax system, which we are told will make it easier for taxpayers to keep digital records and report their tax liabilities and payments in real time.
From April 2024 individuals with business and rental income of more than £10,000 a year will need to make quarterly reports for income tax self-assessments. This includes sole traders and landlords.
This will be a major change. While there is no doubt the change will initially add another layer of complexity and reporting, there is plenty of software available to help. If it is set up correctly it can take information straight from the bank account into the quarterly reports.
What we know so far is that taxpayers will be able to keep their underlying records, including receipts and invoices, in paper format and there will be no requirement for all of a landlord’s underlying paperwork to be scanned and included in their digital records.
However, the MTD legislation makes it clear that there will need to be an accompanying digital record for each transaction, with amounts allocated to the relevant income or expense category, broadly aligned to the current income and expense categories on the self-assessment tax return. It is the totals from these categories — not the underlying transactional data — which will then be reported to HMRC on a quarterly basis.
HMRC’s ambition is for taxpayers to record transactions in as near to real time as possible, to help increase record-keeping accuracy.
If you do not currently use software to keep records, now is a good time to start to think about moving to digital record keeping. Moving to a cloud accounting system will ensure your records are MTD-ready and could also make it quicker and easier to keep on top of your rental accounts. There are various cloud systems available at a low monthly cost — in the region of £20 a month — which offer very good value for money when time saved is taken into account.
What are tax implications of being the Bank of Mum and Dad?
My husband has recently retired and we are ready to plan the next stage of our lives. Our first decision is to sell our historic but rambling country home and downsize to something more manageable. Once we have bought a cottage to live in, we would like to use the remaining proceeds to help our two sons purchase family homes of their own in London when they are ready. They are both in their 20s now. What tax or gifting considerations do we need to account for?
Andrew Mason, an associate in the trusts, tax and estate planning team at Collyer Bristow, says the Bank of Mum and Dad supported more than half of first-time buyers under the age of 35 in 2020, so your concerns will be widely shared.
I would first ensure you are comfortable that you can afford to make these gifts and that you will not need the funds released by downsizing to supplement your income in retirement.
The principal tax to consider when making gifts is inheritance tax (IHT). You can give away up to £3,000 a year tax-free (£6,000 if you haven’t made any gifts in the previous tax year). You can also make a tax-free gift to a child of up to £5,000 in the year in which they get married.
Larger gifts will be “potentially exempt transfers”, commonly referred to as “seven-year rule” gifts. If you survive the gift for seven years, it will fall out of account for IHT but if you were to die within the seven years, the gift will be taxable at 40 per cent (with the potential tax liability tapering down after three years).
You should formally document any substantial gifts in a letter or deed of gift so that there is a record for future reference. A mortgage company may also require evidence of the gift, for example. If your sons will be purchasing the property with a partner, you may also consider a cohabitation agreement to determine how the property will be divided if their relationship ends.
As further security, you may wish to put the money into a trust — of which you can be the trustees. These days, the principal benefit of trusts is asset protection, rather than tax mitigation. A trust may be especially useful, therefore, if you have any concerns about how your sons might manage the money if it is not immediately invested in a house.
Provided you do not put any more than your tax-free allowance for IHT, or “nil rate band” (currently £325,000 each) into trust, there will be no immediate IHT implications of doing so, apart from starting the seven-year clock running to remove the funds from your estates. As trustees, you can continue to control the funds until such time as your sons are ready to purchase a property.
An alternative might be to lend the money to your sons. This will not reduce your IHT bill, as the loan will instead be an asset in your estates, but does offer a little more control than an outright gift. If you later choose to waive repayment of the loan, you will make a gift of the outstanding balance at that point, which will be subject to the seven-year rule for IHT. As with gifts, any loans should be formally documented.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
Our next question
My mother, a widow for the past three years following the death of my father, remarried this year. She was terribly lonely throughout the Covid lockdowns but her decision to remarry so quickly after meeting her partner was a surprise. They are now spending an awful lot of money and my brother and I suspect her new partner is encouraging this. She is also increasingly reluctant to spend time with us and her grandchildren. We suspect she is being manipulated by her new husband who is deliberately isolating her from family and friends to access her money, but we are not sure. Is there anything we can do?
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