Garbetts Newsletter - November 2008

Letting your own home

It has been some time since we were given tax breaks for owning our own homes - remember MIRAS? (Mortgage interest relief at source - tax relief at basic rate, up to certain limits, was deducted from the mortgage interest we paid).

As a consequence we have to fund both interest and capital repayments out of our taxed income.

For instance you would need to earn over £1,000 per month as a 20% tax payer, or more than £1,300 per month as a higher rate tax payer, to pay £800 per month of mortgage interest.

As recession starts to bite and taking into account the difficult property market, we may consider letting either part or all of our homes. This article sets out a number of the tax considerations you will need to consider.

Rent-a-room relief

At present you can elect to claim this relief if you let out a room in your home. The following rules should be considered.

If you don't make such an election you will be taxed on the difference between the rents you charge and directly attributable costs (such as a proportion of gas, electricity, water and general rates, repairs and of course mortgage interest).
If you do make such an election you will be taxed on the difference between the total rents you receive and £4,250. Expenses are ignored.

(If your property is owned jointly the £4,250 will be shared between the partners, as will the rents.)

In most cases it will be necessary to work out the tax charge using both methods to see which is more beneficial.

If the rents received from letting a room are less than £4,250 per annum (£354.17 per month) the income is entirely tax free!

Letting your home

If you decide to move from your home and let the whole property the following points should be considered.

You will be taxed on the rents received less attributable costs. Costs will include mortgage interest paid.
As the property has been your principal private residence any gain that you make on subsequently selling the property will be tax free until you move out plus the last three years of ownership. Consequently if you do not let for more than three years there will be no capital gains tax to pay.
If part of the gain becomes taxable because of the property being let as residential accommodation, then you can also make a claim for lettings relief of up to £40,000. The relief is available to both owners if property is jointly owned including married couples or civil partners.

You should also be mindful in both these situations that letting or part letting of the property may be prohibited by your mortgage lender.

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		Subsistance and accomodation for small companies
	We’ve recently noticed some of our PSC clients making expense claims which are outside of those permitted by HMRC. This may well be a hangover from people being used to the somewhat generous interpretations of expense rules by old style MSCs and the MSCs lack of scrutiny of their clients claims – one of the reasons behind the governments clamp down on the use of MSCs. A few common problems we’ve noticed: 24 month rule. This applies for claiming travel from your home to site, or overnight accommodation. The 24 months is measured on expectations for time in the work place – this means if you sign a 30 month contract then you can’t claim, not even for the first 24 months. If you sign a 20 month contract but extend it for another 12 then you stop claiming as soon as you sign the extension. Also on the 24 month rule, its based on the length of time making a similar journey. If you worked at the same location via a MSC, another PSC or even were directly employed before your current contract, then that time counts towards the 24 month test. If you move to another contract close by so your journey is substantially the same then the move is ignored; the two sites and employments are aggregated. Finally the 24 month rule relates to reimbursing expenses for attending a temporary work place. If you only have one workplace during the life of your employment then HMRC take the view it can’t be temporary – this has caught out a lot MSC operators and employment agencies, but applies equally to someone operating a PSC. Subsistence costs There are no set amounts that can be claimed for daily subsistence on site. It’s a myth perpetrated by MSCs abusing agreements with HMRC. Generally no claim is possible for food and subsistence in your regular work place, with a few exceptions: - If you are staying away overnight then a evening meal plus modest alcoholic beverage is allowable - If you are making a journey away from your regular work place, eg visiting another site or for a course, then reasonable subsistence can be claimed – so called “Occasional business journeys outside of the normal pattern”. HMRC have some useful guidance on the above at http://www.hmrc.gov.uk/manuals/bimmanual/BIM47705.htm Back to top

		The role of the Financial Advisor
	I am frequently being asked by friends and family about the role of financial advisers and how we are coping in these difficult market conditions. They are generally surprised when I reply that we have never been busier. I put this surprise down to the confusion surrounding the role that financial advisers undertake. There is clearly a distinction between how different financial adviser firms operate but, disappointingly, there is no distinction in what we are called. I think the difference boils down to those that ‘briefly advise, sketchily report, skate over the commission payable and move on’ type of advisers and those that ‘conduct a wholesale review, comprehensively report, make clients fully aware of your costs before undertaking any work and provide ongoing support for the client once any business has been transacted’ type of advisers. I do admit that the names need a little work. When the markets are difficult and, therefore, there is little new money coming into the business the first type of adviser finds it more difficult to find work and will struggle to make a living, because they are constantly searching for new business in order to be paid commission. As for the second type of adviser, they are spending a great deal of time ensuring existing client portfolios are staying ahead of the market and still fulfilling the brief for which they were initially created. Garbetts’ Financial Strategies fall into the second category. We are fee based advisers and get paid for everything we do for a client, which does not always involve writing new business. The way we are remunerated is different too, GFS has strict fee guidelines, which are explained clearly and can often involve reductions due to customer loyalty. If business is written, clients have the option of either paying the fee by allowing us to take commission from the contract, or pay us by separate cheque and, in return, securing enhanced contract terms. GFS has recently devised a servicing menu allowing client’s to choose how we can provide an ongoing service for them, which does not necessarily have to be funded by continued new business It has always been a good idea to discuss your financial objectives with a financial adviser, and current conditions mean financial decisions of any consequence shouldn’t be undertaken without professional help. You can usually get a sense pretty quickly which type of adviser you’re meeting. Assess whether or not the person you are speaking to is only interested in writing new business to satisfy their income needs or whether they are actually interested in you – your family, your goals. If it’s the former, I suggest you make your excuses and leave. If the latter (and, of course, all your Garbett’s Financial Strategies advisers fall into this category) why not see if your perception of financial advisors could do with being updated along with your investment or pension portfolio? Contributed by Matt Jones of GFS. Call GFS on 01983 527111. www.garbetts.com/gfs Back to top

		Update to our terms of business
	With advance apologies for the bureaucracy, its been necessary to carry out a rewrite of our standard terms of business – the first comprehensive rewrite for nearly 10 years. The new terms of business will operate from the start of December. The changes will not affect fixed fee levels agreed for routine services, and neither should there be any day to day changes in the services we provide to you or our business relationship. A copy of our amended terms of business, along with a illustration of the main changes, can be downloaded from www.garbetts.com/tcb or, if you’d like a copy sent to you, please call our reception on 01983 400350 or email office@garbetts.com. Back to top


	DISCLAIMER - PLEASE NOTE: The ideas shared with you in this email are intended to inform rather than advise. Taxpayers circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this newsletter, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.