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Loss Of Overlap Relief

Overlap Relief versus Capital Allowance

Guest House owners since 2008 trading as a partnership considering Capital Allowance claim for embedded fixtures prior to January 31st. The knock on effect would release repayment of tax from 2016/17 and 2017/18 plus minimise any payment to account for 2019 leaving little liability for tax.

However as we are currently changing the accounting year (01.05.2017 - 30.04.2018) (01.05.2018 - 31.03.19) thus preparing 12 month and 11 month accounts to 31st March 2019 this will attract overlap relief.

As overlap relief would be mandatory and be given as a deduction for that tax year we are seeking to understand whether the reduction in 2017/18 profits by virtue of the Capital Allowance claim would negate the overlap relief, meaning it would be lost ?

Any thoughts or pointers would be most appreciated.

Gandonas

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19th Jan 2019 12:14

Probably the wrong year to be making the change if that's so. That's my immediate thought.

Work out the overlap relief on an annualised basis and compare it to the current annual profits. If current profits are higher than overlap, profits will increase if you change the year end.

If they're lower, profits will decrease and that's where you might not get effective relief.

The other option is to move the year end to, say, October and make the transition in two stages.

Hard to be constructive without some numbers.

Why are people so scared of overlap relief ?

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to lionofludesch
20th Jan 2019 10:07

Many thanks again !

The overlap relief available to each person is £13.3K. Partnership profits for period to 30/04/2018 is £25.5K, same to 31/03/2019. This gives £25.5K less £13.3K = £12.2K less personal allowance = £350 liable to tax, hence reduced payment to account 31/01/19

Should the Capital Allowance claimed be lodged by 31/01/2019 to allow claim on 2016/17 tax year the 2016/17 and 2017/18 profits are reduced giving rise to repayment and a similar reduction of payment to account.

So we are trying to establish any methodology to enjoy retaining the benefit of both , rather than lose one or the other ?

Happy to receive comments accordingly

Gandonas

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to GANDONAS
21st Jan 2019 09:01

GANDONAS wrote:

Many thanks again !

The overlap relief available to each person is £13.3K. Partnership profits for period to 30/04/2018 is £25.5K, same to 31/03/2019. This gives £25.5K less £13.3K = £12.2K less personal allowance = £350 liable to tax, hence reduced payment to account 31/01/19

Profits are £25.5k in total for each period, divided between two people ?

No change of year end £12750

Year end changed to 31 Mar, £12750 + £12750 - £13300 = £12200. Not much in it really - especially taking into account that you can't know with any accuracy what the March 2019 profits are.

There's always the option to disclaim Capital Allowances and claim them in a subsequent year. Sure, you won't get them so quickly but there's no point in quick capital allowances that you don't get any tax relief for.

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21st Jan 2019 09:53

Thanks lionofludesch,

Yes £12.2K as per your note , the business doesn't trade Jan / Feb and therefore March 19 estimated profits are an accurate guestimate
Period to 30/4/2018 £25.5K
Period to 31/03/2019 £25.5K
Total £51.0K , thus £25.5K each
Partner 1 profits 2018/19 will be £25.5K-£13.3K= £12.2K less personal allowance
Partner 2 profits 2018/19 will be £25.5K- £13.3K=£12.2K less personal allowance
As you say, not much in it.
Do you feel there would be merit in putting back or essentially maintaining the existing accounting to year end 30/04/19. Claim Capital Allowance , then trigger overlap relief at a later date or even on cessation as the business may be sold in the next two or three years, albeit with lowered profits which may nullify any overlap relief, unless its recovered in some other way.
Thanks for your input, much appreciated.

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to GANDONAS
21st Jan 2019 10:06

On the basis of the information available, no, not really.

It looks like they're going to chug along, earning just over the personal allowance, so you're never going to have room for a big Capital Allowances claim.

Why are you changing the year end ?

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21st Jan 2019 13:20

Many Thanks

Capital Allowance claim details are complete but not submitted by tax agency , amounts to reduction in 2016/17 and 17/18 profits and reduced payment to account 31/1/19. Expected repayment of £3.5K to agent 3.0K to business owner and WDA carried forward which may be useful at point of sale via s198 fixture elections with any purchaser.

Change of year end advised to bring basis period into line with tax year, which in itself would trigger overlap relief due. If postponed how would overlap relief be credited if profits fell below personal allowance as it is tax that has been paid twice and surely due in some for of repayment, regardless of falling prfoits.

And yes "chug along" as this is a "lifestyle" business as is often referred to !

Best Wishes

Gandonas

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to GANDONAS
21st Jan 2019 17:33

GANDONAS wrote:

Capital Allowance claim details are complete but not submitted by tax agency , amounts to reduction in 2016/17 and 17/18 profits and reduced payment to account 31/1/19. Expected repayment of £3.5K to agent 3.0K to business owner and WDA carried forward which may be useful at point of sale via s198 fixture elections with any purchaser.

Please explain how this £6500 repayment arises when the partners seem to be paying next to no tax.

Quote:

Change of year end advised to bring basis period into line with tax year, which in itself would trigger overlap relief due. If postponed how would overlap relief be credited if profits fell below personal allowance as it is tax that has been paid twice and surely due in some for of repayment, regardless of falling prfoits.

While they're making pretty much the same rate of profit as the overlap relief, a change of accounting date isn't going to change things much. Your danger point is where profits begin to fall behind overlap and drop below personal allowances. You've already identified this risk, apparently. Generally, where profits are falling, you're better off changing your year end to 31 March and claiming the overlap. But this only applies if profits are high enough to cover personal allowances.

Quote:

And yes "chug along" as this is a "lifestyle" business as is often referred to !

There's a possibility that these taxpayers may need to chug along until some other source of income arises. Such as their pensions.

You'll need to make an assessment of their future income prospects.

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to lionofludesch
21st Jan 2019 17:25

To clarify £6.5K repayment
Total tax paid 16/17 £5.0K and 17/18 £5.0K
Liability is reduced to £3.5K by virtue of 18 and 8% WDA on main and special rate pooled qualifying items.

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to GANDONAS
21st Jan 2019 17:35

OK - well, it sounds like their income is plummeting if their tax bill has gone from £5000 to £500.

You're best placed to make the call, drawing on the past and best estimates of the future.

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to lionofludesch
21st Jan 2019 18:45

Indeed , appreciate all of your input

Many Thanks

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