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Relief for finance costs use of home

Relief for finance costs use of home

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If a director has the following income:

P60 £8424

Use of home £255 (50% interest)

Dividends £20,000

Taxfiler shows tax due of £14,829 x 7.5% = £1,112.17 with no further relief for finance costs.

Is this correct i.e. the personal allowance cannot be allocated more efficiently?

 

 

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13th Aug 2019 11:41

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to Accountant A
13th Aug 2019 12:03

Who appointed you as Guardian of the AA?

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to Trannysister
13th Aug 2019 12:18

Quote:

Who appointed you as Guardian of the AA?

Who appointed you?! I'm quoting the site owner's "rules", what are you doing??

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By DJKL
13th Aug 2019 11:54

To what does the use of home £255 (50% interest) refer?

Why is it taxed?

you currently have:

Salary £8424
Use of home £255 ???????????
Dividends £20,000
Total 28,679
PA 11,850
Bal 16,829

Divs

20000 @0%
14829 @7.5%

Why is use of home a taxable benefit?

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to DJKL
13th Aug 2019 11:59

I assume that the £255 is a 'use of home' charge in the company's P&L, which should therefore strictly be assessed on the individual - but after deduction of relevant costs.

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to DJKL
13th Aug 2019 12:12

Quote:

Divs

20000 @0%

Jeez - that's a lot of Dividend Allowance.

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By DJKL
to lionofludesch
13th Aug 2019 14:20

Four years at the old rate- over enthusiastic typing.

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13th Aug 2019 11:54

Thank you for starting with "If". Makes a nice change from the overused "So".

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13th Aug 2019 11:57

Director has 'earned' income of £8,660 otherwise taxable at 20%. He has dividend income of £20,000 otherwise taxable at 0%/7.5%. Surely the personal allowance is most efficiently set against the income subject to tax at the highest rate? Unless you're trying to leave £255 in charge to tax?

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13th Aug 2019 12:11

If the director has a spouse paying tax at either 20% or 7½% he could transfer marriage allowance to her, pay tax at 7½% on £1190 (£89) and the spouse gets a £238 deduction.

Such is the Madness of Marriage Allowance.

Apart from that, hard to say how the personal allowances aren't being used efficiently, bearing in mind the top tax rate is 7½%.

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By Triggle
13th Aug 2019 12:48

If you are saying that the director has a formal rental agreement with the company so as to charge a portion of their mortgage interest to the company and £255 is the 50% finance cost disallowed under the new mortgage restriction rules, what happened to the 20% tax reducer on the other 50% of the finance costs?

Edit: Forget that - it's not deductible.

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13th Aug 2019 16:26

[Duplicated]

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13th Aug 2019 13:06

@Anonymous OP

What do you think the tax calculation should be ?

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to lionofludesch
13th Aug 2019 15:10

Presume they want to leave some of their income at 20% so they can offset the 20% deduction from the mortgage interest against it i.e. allocate personal allowance to £8,424 salary and rest to dividends leaving the £255 rent as taxable at 20%.

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to Paul Hawes
13th Aug 2019 16:24

Never going to happen on an income of <£9000, before dividends.

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to lionofludesch
13th Aug 2019 16:33

lionofludesch wrote:

Never going to happen on an income of <£9000, before dividends.

Isn't this (or perhaps "why not?") the question?

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to Tax Dragon
13th Aug 2019 16:55

HMRC guidance says it will be 20% of total income excluding savings and dividends exceeding the personal allowance.

https://www.gov.uk/government/publications/restricting-finance-cost-reli...

Would be interesting to see what the legislation actually says about this if anyone has picked that apart.

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to Paul Hawes
13th Aug 2019 17:06

I sneaked a look at s274A before asking the "why?" (or was it "why not?"?) question. My reading would not be consistent with that (pre-enactment, to be fair, so it's not really an) 'interpretation' by HMRC: ss4 talks about liability "for income tax on N% of those profits".

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to Tax Dragon
13th Aug 2019 17:42

Quote:

Isn't this (or perhaps "why not?") the question?

Surely the question is "Why was the question asked?"

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13th Aug 2019 14:53

@Anonymous OP

What do you think the tax calculation should be ?

Seems only fair, given the responses so far.

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to Chris.Mann
13th Aug 2019 22:05

Evening all,

Thanks for the response..........I think.

The £255 is the 'profit' on the use of home property income after the disallowed finance costs (50%). I had thought that, as a basic rate taxpayer, a further deduction of 20% of these disallowed costs would wipe out the tax charge but Tax Filer has reduced this to the'maximum allowable' i.e. 0 so £255 is subject to tax at 20%.

Ross Martins website says: When total income (excluding any savings or dividend income which are taxed as top-slices) is low, so that some or all of the rental profits fall within the personal allowance, the deduction is restricted to 20% of the profits that are actually taxed.

A CTA/ACA colleague questioned this and provided the following link:
https://ion.icaew.com/taxfaculty/f/tax-news---forum/2674/interest-and-di...

Apologies for posting as Anonymous.

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to CWservices6064
13th Aug 2019 22:40

Quote:

Evening all,

Thanks for the response..........I think.

The £255 is the 'profit' on the use of home property income after the disallowed finance costs (50%). I had thought that, as a basic rate taxpayer, a further deduction of 20% of these disallowed costs would wipe out the tax charge but Tax Filer has reduced this to the'maximum allowable' i.e. 0 so £255 is subject to tax at 20%.

You're wrong there. The excess relief is available to carry forward.

And - clearly - you're paying no tax on the £255.

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to lionofludesch
14th Aug 2019 09:02

lionofludesch wrote:

And - clearly - you're paying no tax on the £255.

Let me ask the question a different way.

Could the taxpayer pay tax on the £255 if s/he so wanted?

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to Tax Dragon
14th Aug 2019 11:35

Not now - but, if he'd planned early enough, yes.

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to lionofludesch
14th Aug 2019 11:42

Why not now, by the method the OP gives below?

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to Tax Dragon
14th Aug 2019 12:10

OK - fair comment ....

He could allocate his personal allowance

£8424 general income
£3426 dividends

Then he'd have £255 interest charged at 20% and the rest at 7½% dividend tax.

And he still can't use his 20% credit because his general income is only £8679.

Costs him another £20.

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to lionofludesch
14th Aug 2019 12:22

lionofludesch wrote:

And he still can't use his 20% credit because his general income is only £8679.

This is the key point that the OP has missed.

Hold on.... yes, I think I am missing it too.

Can you run it past us again in a bit more detail? Please, thanks.

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to Tax Dragon
14th Aug 2019 12:39

OK - but not now.

Later this afternoon, happen.

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to Tax Dragon
14th Aug 2019 14:12

Yeah, so, as I was saying, the credit is limited to basic rate on the lower (sic) of
* Finance Costs (£255)
* Property business profits (£255)
* Adjusted total income in excess of personal allowance (£0)

So 20% of £0, which is £o, according to my calculator.

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to lionofludesch
14th Aug 2019 14:31

That seems to accord with s274AA. I suppose I should have read that this morning [though citations are always handy...].

But, as you know, I am (always!) happy to agree :-)

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to Tax Dragon
14th Aug 2019 15:15

You learn summat every day.

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to lionofludesch
14th Aug 2019 15:34

....and forget twice as much.

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to Tax Dragon
14th Aug 2019 15:42

My brain's already full.

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14th Aug 2019 11:02

Morning,

I probably did not explain it very clearly but my point was really about allocation of the personal allowance in that what specifically prevents the personal allowance being used against the dividend income first as discussed here (albeit not related to property income):

https://ion.icaew.com/taxfaculty/f/tax-news---forum/2674/interest-and-di...

'Personal allowances can and should be used in the way that is most favourable to the taxpayer (s25 Income Tax Act 2007)'

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to CWservices6064
14th Aug 2019 11:47

They are being used in the most favourable way.

If you allocated it in the way you propose, you still wouldn't be able to use the tax credit, as there are different rules for that.

Who'd use a 20% credit to save 7½% tax, anyway ?

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to lionofludesch
14th Aug 2019 12:02

lionofludesch wrote:

Who'd use a 20% credit to save 7½% tax, anyway ?

Someone that would otherwise never use the 20% credit.

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to Tax Dragon
14th Aug 2019 12:14

Not many of those, are there ? Never's a long time.

Better a 20% credit which you might use than a loss of personal allowances that you can never, ever use.

This new system is much better for folk whose income floats around the personal allowance level.

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to lionofludesch
14th Aug 2019 12:34

I don't have many of those.

Is it personal allowance or is it dividend allowance that's wasted? I'm reaching for the rule book.

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to Tax Dragon
14th Aug 2019 12:38

OK I've read the rule book and I'm missing your point. Dividend allowance starts with the basic rate band.

Edit: comment intended for a Lion, not a Dragon.

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to Tax Dragon
14th Aug 2019 12:48

I'm thinking more generally.

Example - 2020/21 rules for interest, personal allowance still £12,500.

Taxpayer has rental income of £15,000, interest of £5000.

Old rules, net income £10,000, no tax, loses personal allowance of £2,500 for ever.

New rules, net income £15,000, tax £500 less credit for interest £500, still nothing to pay. Credit to carry forward £500. Ta dah !!

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