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Month: July 2020

COVID-19 Hit to the housing market

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The COVID-19 pandemic stalled property transactions and first-time buyer mortgage applications, but now the residential property market has opened up estate agents are scrambling to deal with pent up demand.

Price outlook

The range of forecasts is markedly wider than usual, with a forecast price fall for 2020 of anything between 4% and 13% with considerable regional difference. Re-opening will have unlocked many of the estimated 400,000 halted transactions, but it is likely to take longer for new deals to build up in what may well be a buyer’s market. People could be affected in two ways.

  • Negative: Employees face job insecurity, with the furlough scheme being wound down over the coming months and a potential increase in redundancies. Many self-employed people will struggle to get profits back to a pre-Covid level.
  • Positive: Interest rates are historically low, with the bank base rate currently just 0.1%.

The 5 April effect

The estimated number of residential property transactions in April was more than 50% down on the previous year. However, the Covid-19 pandemic was not the sole factor in play here.

From 6 April, tax reliefs for homeowners were cut back, especially letting relief, so many sellers will have made sure they completed prior to then. The introduction of a 30-day due date for paying CGT will have also favoured earlier completion.

Mortgages

Some homeowners will have benefited from the crisis  ̶  remortgages by current homeowners looking to save money from lower interest rates have more than doubled year-on-year.

Although lenders are generally prepared to base mortgage applications on furloughed income, they require confirmation that an employee can go back to work. This means that only the reduced salary is taken into account, so higher earners subject to the £2,500 upper income limit will feel a disproportionate impact. A more expensive home may well have to wait until a return to work.

Although not wholly up to date, the UK house price index at the Land Registry has a vast amount of searchable information.

 

Insolvency Bill To Help COVID-19 Affected Businesses

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A new Corporate Insolvency and Governance Bill, introduced on 20 May, will amend insolvency and company law to support businesses in distress from the impact of the COVID-19 pandemic.

The Bill, to be fast-tracked through Parliament, includes some measures which have been previously announced, but are now being enshrined in law. The aim is to provide businesses with the flexibility and breathing space they need to continue trading during the current crisis. Three key measures are a moratorium period, protection from legal action against Covid-19 debts and relaxation of AGM and statutory accounts requirements.

Moratorium period

The introduction of a new moratorium period will give companies a 20-business day breathing space from their creditors to explore rescue options. This can be extended to 40 business days, with further extensions at the agreement of creditors or the court.

The company will remain under the control of its directors during the moratorium, although the process will be overseen by a licensed insolvency practitioner.

Covid-19 related debts

Temporary measures will prevent aggressive creditor action against otherwise viable companies struggling because of COVID-19.

Although commercial landlords have been prevented from enforcing the forfeiture of leases for unpaid rent, some landlords have resorted to other measures.

There is a temporary relaxation of the wrongful trading rules so that directors can continue trading through the crisis without the threat of legal action. This measure will run from 1 March to 30 June.

Meetings and filing requirements

Backdated to 26 March, a company that has held an AGM adhering to social distancing measures, but not meeting the company’s constitution, will be treated as having complied with the law. If a company has been forced to postpone an AGM after 26 March, they will be allowed to hold the meeting (socially distanced if necessary) up to the end of September.

Companies House has already said that companies can apply for an automatic three-month extension to file statutory accounts, and the Bill adds automatic extensions for confirmation statements and changes of details.

Detailed explanatory notes published in conjunction with the Corporate Insolvency and Governance Bill can be found here.

HMRC Pauses Inheritance Tax Investigations

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HMRC’s recent suspension of IHT investigations during the Covid-19 crisis opens up a brief opportunity for executors to get their IHT accounts in order.

HMRC normally investigates around 5,500 IHT cases every year, around 25% of the estates for which IHT is payable, recovering an average of £50,000 extra tax each time. The complexity of IHT means that extra tax will often be due just because mistakes have been made. There can also be a temptation to use low valuations so that assets are covered by the available nil rate bands. HMRC, not surprisingly, can be expected to look quite closely at such estates.

Common problem areas are:

  • Business relief – Some business activities are borderline and holding non-business assets within a company may mean relief is not available.
  • Agricultural relief – This is only available if land and property is used for agricultural purposes, so HMRC may query whether there is active use, especially if land is just rented out under a grazing licence.
  • Pension transfers – A particularly confusing area of tax, pension transfers are normally not subject to IHT. However HMRC will look at any transfer made within two years of death to see if this was done to avoid IHT. If so, the pension will be included as part of the deceased’s estate.
  • Lifetime gifts – Gifts made to individuals within seven years of death can easily be overlooked, and whether gifts are exempt under the normal expenditure out of income rule can be unclear given the lack of a statutory definition.
  • Post Covid-19

    Given how much the Covid-19 crisis has cost the government, expect to see HMRC being quite aggressive once compliance work resumes.

    There have been calls to simplify IHT and the Office for Tax Simplification published two reports into the issue last year. This now seems unlikely to be high on the Chancellor’s to do list when it comes to the next Budget.

    Find out how to work out and report the value of an estate to HMRC here.

Empty baskets: calculating inflation under lockdown

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The disappearance of normal spending habits has created problems for the statisticians who calculate the rate of inflation.

Source: Office for National Statistics

Inflation, as measured by the Consumer Prices Index (CPI), fell sharply in April to just 0.9% against 1.5% in the previous month. The main reason for the drop was energy costs:

  • Ofgem’s new price caps for gas and electricity standard variable rate took effect in April and these were about 10% lower than the rates from April 2019. Even so, the bills set by the caps are generally much higher than those that can be found on any comparison website.
  • Petrol and diesel prices were also much reduced year on year – by 15.1p a litre for petrol and 17.0p a litre for diesel.

Missing items

In addition to the sharp moves in energy costs, there was also a serious problem with gathering the data. The Office for National Statistics (ONS) has an annually reviewed ‘shopping basket’ of goods and services which it uses to calculate the various inflation indices. However, for the latest numbers, the ONS discovered about 90 of the items in its basket – about one sixth of the total value – “were unavailable to consumers in the UK”. Haircuts, cinema tickets and a pint in a pub are just some of the many examples. Other items were theoretically available but in short supply, making the ONS’s price-tracking task more difficult – self-raising flour being a typical problem item. Ultimately the ONS was forced to “impute” (i.e. estimate) some prices.

Although some of the goods are still available, the restrictions on our movements mean they are no longer being bought. The ONS basket contains items which can be bought but are just being ignored in lockdown – many travel services fall into this category. For now, at least, the basket is not representative of historical spending patterns. We may find that creates problems in the long term, as inflation indices are widely used by government to adjust benefits, prices and tax allowances.

Inflation may be under 1% and somewhat distorted at present, but it has not gone away. Some economists fear that it could roar back because of all the borrowed money being pumped into the economy by the government. Others think a recession/depression will keep inflation in check. Either way, it still needs to be factored into your plans: £1 in April 2015 has only 92p of buying power today.

Deferring July’s income tax payment

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HMRC is allowing your second self-assessment payment due on 31 July 2020 on account for the tax year 2019/20 to be deferred, due to the Covid-19 pandemic.

This means no interest or penalties will be charged on the deferred payment provided it is paid by 31 January 2021. All taxpayers within self-assessment can take advantage of the deferral option, not just those who are self-employed. There is no need to tell HMRC that the payment on account is being deferred.

Paying the deferred amount

Although you can still make the payment by 31 July 2020 as normal if you’re able to do so, deferral will be attractive if cash flow is a concern. The deferred amount can then be paid between 31 July 2020 and 31 January 2021:

  • in full using normal payment methods, or
  • in instalments by setting up a budget payment plan with HMRC.

Snowball effect

Although you do not need to pay the deferred payment until 31 January 2021, there is likely to be a snowball effect if it is not paid off by then. This is because that is also the deadline for paying any balancing amount for 2019/20, plus the first payment on account for 2020/21. If you make your accounts up to 31 March or 5 April, then these amounts will be based on profits for the year ended 31 March/5 April 2020, so mainly pre-COVID-19.

Photo by Leon Dewiwje on Unsplash

Even though payments on account for 2020/21 can be reduced to an estimate of the tax and NICs that will actually be due for this year, these might not be as low as you expect once council COVID-19 grants and amounts received under the self-employment income support scheme are included.

As things currently stand, HMRC will apply the usual interest, penalties and debt collection procedures for payments missed from 31 January 2021 onwards.

Reductions to income caused by Covid-19 could affect your tax bill in other ways:

  • It may now make sense to restart child benefit payments because your drop in income means they will not be taxed away to zero.
  • You may have regained some or all of your personal allowance for 2020/21.
  • You might become eligible for a higher personal savings allowance.

If you have suffered a drop in income, it is worth checking with on which actions to take now and which can be left to come out in the final HMRC tax calculation.

HMRC guidance on options for paying a deferred payment on account is available.

 

Time to look at an alternative tax?

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The adoption in the UK of a transatlantic approach to income tax could appeal to a cash-strapped Chancellor.

“…only the little people pay taxes.”

That 1980s comment by the New York Hotel owner Leona Helmsley sums up an attitude that many taxpayers still believe to be true. Today the same idea often comes up in headlines suggesting that the chief executive pays a lower rate of tax than his (it’s usually his) cleaner. There is an element of truth in such assertions, as the wealthy generally have greater opportunity to plan when, where and how they receive their income.

The US has long attempted to address the problem with the Alternative Minimum Tax (AMT). The rationale behind AMT is simple: those with income above a certain threshold ($197,900 in 2020) must pay a minimum rate of tax on their income after deducting a flat exemption. If their tax bill calculated on a normal basis is lower than the one produced by applying the AMT rates, then it is the AMT amount that must be paid. There comes a point, therefore, at which tax planning has no benefit.

Two UK academics with links to leading think tanks recently published a paper examining the possibility of a UK version of AMT. With the help of anonymised HMRC data, the pair were able to show that the average effective rate of tax paid by one in ten people with income (including capital gains) of over £1m was lower than for somebody earning £15,000. The inclusion of capital gains is open to challenge and one reason why the result was produced – capital gains are more lightly taxed than income.

The headline proposal of the paper was that the UK government could raise £11bn a year – about the same as 2p on the basic rate of tax would produce – by applying an AMT rate of 35% to anyone with income (again including gains) above £100,000. For a government that was elected with a pledge not to increase income tax rates, AMT offers an interesting revenue raising opportunity.

If nothing else, these AMT proposals are a reminder that – at least for now – tax planning can save you money.

 

Revised furlough scheme stretched through October

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The Covid-19 furlough scheme has been effectively revised into a new scheme running from 1 July until 31 October, but this comes with a level of complexity that did not exist in its original guise.

Much of the complexity arises because employers can now bring furloughed employees back to work flexibly on a part-time basis, while still being able to claim under the scheme for the hours not worked.

One very important change is that claims cannot now straddle months. This is because the scheme rules will change from month to month.

From 1 July, only employees who were furloughed under the original scheme ending on
30 June are eligible for further grants. However, the minimum three-week furlough period has now been removed.

Hours worked

For flexibly furloughed employees, employers will have to calculate the employee’s:

  • Usual hours – There are two different calculations depending on whether an employee works fixed or variable (or zero) hours. The calculation can be confusing and may not always deliver the obvious answer, especially for employees on variable or zero hours.
  • Actual hours worked – This could be an issue for directors who have no fixed hours. Accurate record keeping will be essential for both employees and directors. For hours actually worked, employees must be paid their normal wage.
  • Furloughed hours worked – Simply calculated as usual hours less worked hours.

A new written agreement is required for flexibly furloughed employees to confirm the new arrangements.

When claiming for flexibly furloughed employees, employers should not claim until they are sure of the exact number of hours that will be worked during the claim period. If a claim is made in advance and fewer hours are worked than expected, a refund will have to be made to HMRC.

Maximum number

With certain exceptions, the maximum number of employees included in a furlough claim from 1 July onwards cannot exceed the highest number of employees included in any claim up to and including 30 June.

HMRC has provided various worked examples of how to calculate an employees’ wages, NICs and pension contributions.

 

Calling time on the triple lock?

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The state pension triple lock may not survive much longer.

The impact of Covid-19 on earnings could mean a change in the way that state pensions are increased in each year. If nothing is done, it could give pensioners a large income boost, but cost the government dearly.

At present, the new (single tier) state pension and its predecessor, the basic state pension, both benefit from increases based on the ‘triple lock’. This was introduced by the Coalition government in 2010 and means that these two state pensions increase each April by the greater of:

  • yearly CPI inflation to the previous September;
  • average weekly earnings growth to the previous July; or
  • 2.5%.

This basis means that for 2021, the increase is likely to be 2.5% because CPI inflation will be lower (it was 0.5% in May) and earnings could well be falling due to the impact of furloughing.

It is in 2022 that a potential problem emerges for the Treasury. The furlough scheme ends at the end of October 2020, and if the economy starts to recover, by July 2021 earnings could be back to near ‘normal’. The fact that by then some of the formerly furloughed employees will be unemployed makes no difference to average earnings figures.

Economists reckon that the difference between ‘normal’ average earnings in July 2021 and furlough-depressed average earnings in July 2020 could be significant. In its Covid-19 ‘reference scenario’ the Office for Budget Responsibility has estimated earnings growth of over 18% in 2021 (against a 7.3% fall for 2020). No Chancellor would want to fund such a large rise in state pensions, not only because of the expense, but also on grounds of intergenerational fairness.

The Treasury and many economists have long argued that the triple lock is an unnecessary cost, but politicians have always been wary of upsetting an important section of the electorate. This additional problem now created by Covid-19 gives the government the best justification it is ever likely to have to dispense with the lock. There are even suggestions that state pensions could be frozen for the next two years until the issue (hopefully) disappears.

State pensions play an important role in many people’s retirement income planning, but their payment is ultimately a state decision, as evidenced by the many changes of recent years (for example to starting age). For that reason, if no other, private provision remains a vital component of your retirement planning.

 

Consumer credit Covid-19 measure extended

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Help for consumers to manage their credit and debt has been extended to the end of October.

In mid-June, the Financial Conduct Authority (FCA) told firms to extend measures to provide help to people with credit cards, store cards, catalogue credit and personal loans who faced difficulties with their finances as a result of the Covid-19 crisis. This help was set to last initially for three months from April, but a recent update means there will now be a further three months’ flexibility ending on 31 October 2020.

Payment freeze

If you have already taken a payment freeze, you may now be able to take a further payment deferral or reduce payments to what you can afford. For anyone who has not yet requested a payment freeze, they can do so during the extended period.

A very important consideration is that you must still pay the debt back at the end of the deferral period, so there is potential to simply store up problems for a later date. With many people now returning to work, it makes sense to try to resume payments as soon as possible. It is at the discretion of the firm involved whether you will be charged interest during the payment freeze.

In theory, payment deferral should not affect your credit rating, but there is no guarantee that all loan providers will abide by this.

Overdrafts

Bank customers have been able to apply for an interest-free overdraft of up to £500. The interest-free period will now also run until 31 October 2020. Anyone who has not yet taken advantage of this measure has further time to do so. You can also request a lower rate of interest on borrowing in excess of the £500 interest-free buffer.

However, the FCA has not extended the temporary measure that meant overdraft customers were no worse off, with regards to their potential overdraft charges, than before April when a new temporary pricing structure for overdrafts was introduced. Although only a single rate of overdraft interest can now be charged, this can be around 40%.

The FCA provides detailed guidance on what Covid-19 means for your finances.

Card tax payments to incur charges

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When making tax payments to HMRC, you are currently only charged a fee if you pay by business credit card, while payments by personal credit card are not permitted. However, from 1 November 2020, payments made using a business debit card will also attract a fee.

The rationale behind the change is to avoid any cost to the public purse, so business debit card users will be charged a fee equal to the total cost incurred by HMRC when receiving the card payment.

Alternatives

HMRC accepts a wide range of alternatives which will not incur charges for the taxpayer, including:

  • Online banking – Quick and easy to set up, with the advantage that details are saved for the future, with Faster Payments normally being immediate. You can also pay with CHAPS or Bacs or use telephone banking.
  • At your bank or building society – This method is only an option if you still receive paper statements from HMRC and also have the paying-in slip HMRC sent you (printing one is not an option).
  • Direct debit – Set up is via your HMRC online account, this is not quite as convenient as online banking, with payments normally taking longer to process. You need to plan ahead if paying by direct debit. HMRC says to allow five working days to process a Direct Debit the first time one is set up, and three working days the next time if you’re using the same bank details.
  • By cheque through the post – You can print a payslip to use if HMRC has not sent you one. Allow three working days for the payment to reach HMRC, with an obvious delay if the cheque is not completed correctly.

The fee-change is only to business debit cards, so payments made using a personal debit card can continue to be made to HMRC free of any charges.

HMRC has online guidance on paying your taxes.