MARCH - ISSUE 26
C O N T E N T S | M A R C H 2 0 2 6 -14-13-10-09-06-16-19-20-22-
JOINTLY OWNED PROPERTIES AND MTD
KEEPING DIGITAL RECORDS FOR MTD
CAPITAL GAINS TAX ANNUAL EXEMPT AMOUNT
CLAIMING A TAX REFUND
TAX IMPLICATIONS OF REIMBURSING EMPLOYEES’ EXPENSES
HOW CAN SOLE TRADERS OBTAIN RELIEF FOR TRADING LOSSES?
KEEPING DIGITAL RECORDS FOR MAKING TAX DIGITAL
FREE FUEL – IS IT A WORTHWHILE BENEFIT?
DISINCORPORATION OF A COMPANY
Unincorporated landlords who had combined property and trading income in 2024/25 of £50,000 or more must comply with Making Tax Digital for Income Tax SelfAssessment (MTD for ITSA) from 6 April 2026. This requires them to keep digital records and make quarterly returns and a final declaration to HMRC using MTD-compatible software.
Where landlords jointly own a property, there are some points to note.
A landlord is only within MTD from 6 April 2026 if their combined property and trading income (before the deduction of expenses) is £50,000 or more in 2024/25
Where a landlord receives income from a jointly owned property, they only need take account of their share of the income from that property in working out their qualifying income For example, if two brothers jointly owned a house in respect of which rental income of £20,000 was received in 2025/26 which was shared equally, each brother will need to take into account income of £10,000 in working out their qualifying income
Under MTD for ITSA a landlord must keep digital records of their income and expenses. Where a landlord receives income from a jointly owned property, they only need to keep digital records for their share of the income and expenses.
Landlords with income from jointly owned property can choose to simplify their recordkeeping by creating less detailed digital records for the jointly let properties. This means creating a single digital record for each category of property income received in an update period and creating a single digital record for each category of property expenses incurred in a tax year. For example, where the landlord receives rent of £1,000, they can either create a digital record for each monthly rent payment or a single digital record of £3,000 for the rent received in the quarterly update period
MTD for ITSA requires landlords within its scope to make quarterly returns on property income and expenses using MTDcompatible software However, to simplify matters, where a landlord receives income from a jointly owned property, an easement applies under which the landlord can opt not to include expenses that relate to a jointly let property in their quarterly update Instead, this information is finalised at the end of the tax year
One of the key requirements under Making Tax Digital for Income Tax Self-Assessment (MTD for ITSA) is the need to keep digital records of income and expenses A digital record is a record of income or an expense that is created and stored using software that is compatible with MTD for ITSA There are different software options available A landlord within MTD for ITSA can either choose a single software package that does everything or different software products that work together For example, a landlord could record income and expenses in a spreadsheet that is linked by software (bridging software) to another package for submitting returns to HMRC. It is important to note that where more than one product is used, they are linked digitally. It is not permissible to enter figures manually or to cut and paste from one program to another.
A landlord within MTD for ITSA will need to keep records of property income, such as rent, premiums for the grant of a lease, reverse premiums and inducements, and property expenses, such as repairs, maintenance and cleaning, digitally The landlord will need to record the following in their digital records: the amount; the date on which it was received or incurred; and the category into which it falls
The income and expenditure categories used for MTD for ITSA are the same as for the Self-Assessment tax return
If a landlord has both a UK property business and an overseas property business, they will need to keep separate digital records for each business
A landlord with income from jointly let properties only need include their share of the income and the expenses. There is an easement which allows landlords with income from jointly owned properties to keep less detailed digital records.
Turnover of under £90,000
If the landlord’s total property turnover is less than £90,000, they can choose to categorise their digital records in less detail If a landlord has income from residential lettings, they can record only whether a transaction is an income or an expense, and for expenses, whether the expense is a restricted finance cost
Landlords claiming the property income allowance do not need to record this in their digital records Instead, it is claimed at the end of the tax year when the position for the year is finalised
The 2025/26 tax year comes to an end on 5 April 2026 If you are thinking of selling assets that may realise a gain and have yet to use your 2025/26 capital gains tax annual exempt amount, it may be worth making the disposal before the end of the current tax year
All individuals have an annual exempt amount for capital gains tax purposes Net gains for the year (after the deduction of allowable losses for the tax year) are free of capital gains tax where they are sheltered by the annual exempt amount For 2025/26, it is set at £3,000 and is worth £540 to a basic rate taxpayer and £720 to a higher rate taxpayer If the annual exempt amount is not used in the tax year, it is lost
Example
Ben is thinking of selling two lots of shares, one that will realise an expected gain of £4,000 and one that will realise an expected gain of £5,000 He is having a new kitchen in June 2026 and needs to sell the shares to finance the project
Ben is a higher rate taxpayer He has not used his annual exempt amount for 2025/26 If Ben waits until May to sell the shares, he will realise a gain of £9,000 in the 2026/27 tax year Setting his 2026/27 annual exempt amount of £3,000 against the gain reduces the chargeable gain to £6,000 on which he will pay capital gains tax at 24%, giving rise to a tax bill of £1,440
However, if Ben sells one lot of shares before 6 April 2026 realising a gain of £4,000 against which he can set his annual exempt amount for 2025/26 of £3,000, this will reduce the chargeable gain to £1,000 on which he will pay capital gains tax of £240. If he sells the remaining shares after 5 April 2026, he will be able to set his 2026/27 annual exempt amount of £3,000 against the gain of £5,000, reducing his chargeable gain to £2,000 on which he pays tax of £480.
It is reasonable to assume that if a person pays too much tax, HMRC will automatically send the overpayment back to them. Unfortunately, this is not the case, and where a taxpayer is due a tax refund, they may need to claim it.
There are various reasons why a person may pay more tax than they need to. For example, where a taxpayer is in SelfAssessment and makes payments on account, if their circumstances change and their income falls, they may have paid more than they need to An employee may pay too much tax if they have been given the wrong tax code, or if they have only worked for part of the tax year and not had the benefit of their full personal allowance
There are various routes by which a tax overpayment can come to light For example, taxpayers who do not complete a Self-Assessment tax return and have paid too much tax will receive either a P800 calculation or a Simple Assessment letter These are normally sent out between June and March following the end of the tax year The letter will tell them that they have paid too much tax and how to claim a refund. If the taxpayer is within SelfAssessment, they will not receive a letter. However, they may find out that they have overpaid tax when they complete their Self-Assessment tax return.
However, if HMRC’s return software is used to complete the return, remember the tax calculation does not take into account any payments that have already been made, and when these are deducted from the amount that the taxpayer owes, it may become clear that the taxpayer has paid too much.
A taxpayer can also check whether they have paid too much by looking at their personal tax account online or via the HMRC app
Where a taxpayer needs to claim a tax refund, there are various ways in which this can be done A claim can be made online using the tool on the Gov uk website at www gov uk/claim-tax-refund A tax refund can also be claimed through the taxpayer’s personal tax account or via the HMRC app The refund will normally be made within five days of making the claim online
If the tax calculation letter tells the taxpayer that they will receive a cheque, they do not need to claim a refund The cheque will normally be sent within 14 days of the date on the letter Where the taxpayer is within SelfAssessment, HMRC may not issue a tax refund if a tax payment, for example, a payment on account, is due within 45 days. Instead, they will set the refund against the next tax bill.
Interest is paid on overpaid tax at a rate of 1% below the Bank of England base rate, subject to a minimum level of 0.5%.
Employees often incur expenses in doing their job and they may be able to claim these back from their employer through the expenses system. Where an employer reimburses expenses, there may be tax implications to consider
Exemption for paid and reimbursed expenses
A tax exemption applies to certain paid and reimbursed expenses It is available if the expenses which are paid or reimbursed by the employer would be fully deductible from an employee’s earnings had the employee met the cost themselves Employees are allowed a deduction for expenses which are incurred wholly, exclusively and necessarily in the performance of the duties of the employment The tax legislation also allows a deduction for a number of specific expenses, such as certain travel expenses and fees and subscriptions paid to bodies approved by HMRC.
As long as this test is met, the exemption applies regardless of whether the employer meets the cost at the outset or the employee pays initially and is reimbursed by the employer For example, if an employee is required to attend a meeting at a client’s office, the employee would be able to deduct the associated travelling costs if they met them themselves As this test is met, if the employer pays the cost, for example by purchasing a train ticket for the employee, or reimburses the employee’s travel costs, the exemption would apply and there would be no tax consequences in either case.
However, if the test is not met, and the employer paid or reimbursed the employee’s expenses, the amount paid or reimbursed would be taxable. An example of this would be where an employer reimbursed the cost of the employee’s home to work travel (which is not tax deductible)
There are some anomalies in the tax legislation that mean no tax charge arises where the employer provides an employee with a benefit, but a tax charge will arise if the employee provides the same thing and is reimbursed by their employer For example, an employer can provide an employee with an eye test and corrective appliances without triggering a tax charge, but if an employee books and pays for an eye test and is reimbursed by their employer, the amount reimbursed is taxable as the employee is not entitled to a deduction for the cost of an eye test.
To counter this, new exemptions are to be introduced which will level the playing field in respect of certain benefits, meaning that the tax outcome is the same regardless of whether the employer provides the benefit or reimburses the employee for the costs From 6 April 2026 exemptions will be introduced to ensure that where an employer pays for or reimburses an employee for the cost of eye tests, flu vaccines or homeworking equipment no tax charge will arise This will align the tax position with that where these benefits are provided directly by the employer.
In difficult trading conditions, a sole trader may realise a loss rather than a profit Where this is the case, it is important that the trader realises that they may be able to claim tax relief for that loss. There is more than one way in which this can be done, and the best route will depend on the trader’s other income and personal circumstances The relief must be claimed
Option 1: against other income of the same or previous tax year
Where the trader has other income, such as income from employment, property or investments, they can claim to set the loss against their income of the same tax year and/or the previous tax year. The trader can make a claim for one or both of these years, depending on the amount of the loss, and the claims can be made in any order
It is important to note that it is not possible to make a partial claim, for example to prevent the loss of personal allowances A claim is not mandatory, and where it is not beneficial, for example, because personal allowances may be lost, the trader can take a different route
Example
Joe is a self-employed decorator In 2024/25 he made a loss of £12,300 He has a part-time job, from which he earns £14,000 In 2023/24 Joe had total income of £42,000
If Joe opts to set the loss against his other income of 2024/25, he will waste all but £1,700 of his personal allowance It is not possible to use only £1,430 of the loss to reduce his income to £12,570 which would be covered by his personal allowance.
However, if he sets the loss against his income of 2023/24, he will reduce his income to £29,700, saving £2,460 in tax
Option
Where the taxpayer has claimed relief against other income and is unable to use all the loss, the taxpayer may be able to use the balance against capital gains of that year. Depending on the numbers, this route may result in the loss of the capital gains tax annual exempt amount, although despite this, it may still be worthwhile
Although conventional wisdom is to secure relief for a loss as early as possible, if a claim against other income would waste the personal allowance, it may be preferable to carry the loss forward and set it against future profits of the same trade. Where this route is taken, the loss must be set against the first available trading profits
Opening and closing years
Additional claims are available for losses made in the opening and closing years of a trade
A loss made in the first four years of a trade may be set against an individual’s income for the previous three tax years, setting the loss against the earliest of those years first Where a loss is made in the final 12 months of a trade (a terminal loss), it may be set against profits from the same trade in the same tax year as the loss and in the previous three tax years The loss is relieved against the profits of a later year first
Loss relief cap
The amount of loss relief that a person can claim in any one tax year is in certain cases capped at the higher of £50,000 and 25% of their adjusted net income for that tax year
Many employees see being allowed the use of their own company car as acknowledgement of their status in a company While the employee will be taxed on the benefit, the tax charge is usually not as high as having to finance the car out of their own savings or taking out a loan. However, should the employer also offer to pay for all fuel (usually via use of a company fuel card), including for personal use, the employee could face a sizeable tax (and NIC) charge. Many company car users are unaware that unless they fully reimburse their employer for private fuel use, they will be taxed on a fuel benefit – even if the private mileage is relatively low. Private fuel use includes commuting to and from work.
Crucially, the charge is not based on how much fuel is used privately Rather, it is based on the cost of an average company car (£28,200 for 2025/26) multiplied by the appropriate percentage based on the car’s CO2 emissions
For 2025/26, the appropriate percentages range from 3% to 15% for cars with CO2 emissions of 1–50g/km to 37% for cars with emissions greater than 155g/km Diesel cars are charged a 4% supplement on these percentages (although the appropriate percentage is ‘capped’ at 37%)
A table of the specific percentages can be found at:
https://www gov uk/guidance/company-car-benefit-the-appropriate-percentage-480appendix-2#petrol-powered-and-hybrid-powered-cars-for-the-tax-year-2025-to-2026
In the not-too-distant past, incorporation was synonymous with automatic tax savings However, successive governments have eroded these tax benefits With additional administration and costs, many directors are considering disincorporation As ever, there are tax implications for both the company and individual.
Whatever the reason for disincorporation, when a company with assets closes, HMRC generally treats the company as disposing of those assets to the directors at market value For the company, this would usually crystallise either balancing charges or allowances However, where there is a business succession between connected parties, a balancing charge or allowance can be avoided by making an election. The effect is for any actual or deemed disposal proceeds to be ignored and for the capital allowance pool to be transferred at its tax written-down value
A valid election must be made jointly by the company and individual within two years of the date of succession. The succeeding business then includes the transferred closing written-down value as an addition in its opening capital allowance pool No writing down allowances are given on the purchase of plant or machinery in the company’s final basis period, and a balancing adjustment is calculated
Similar to the transfer of assets, the transfer of stock is deemed to be at ‘market value’ However, it should be possible for the parties to make a joint election to transfer the stock at its actual transfer value (or, if higher, the book value).
A company that has been in business for a while may have built up a significant value of ‘goodwill’ when they decide to disincorporate Goodwill is an asset that will be transferred to the new business along with any other 'relevant' assets (e g land and buildings) HMRC usually taxes such a transfer as a chargeable gain, again at market value as the transfer will take place between ‘connected parties’. However, unlike for assets subject to capital allowances, there are no reliefs available to defer or hold over any gains As such, this tax charge is often the largest hidden tax cost in disincorporation
If a property used by a company is transferred to someone connected to the company (e.g. a shareholder who becomes a sole trader), HMRC treats the transaction as if the individual bought at market value, even if no money changes hands However, if a property is transferred as a distribution in specie (non-cash), this should be exempt from SDLT This is provided that the property is not encumbered with a loan and the distribution does not give rise to the creation of a debt. Where there is a third-party (non-shareholder) loan secured on the property, the transfer will attract SDLT where there is an assumption by the shareholder of liability for the debt
As a general rule, when a trade ceases the VAT-registered entity is deemed to make a taxable supply of all goods held by the business However, on a transfer from a company to sole trader, there should be no VAT charged by virtue of the ‘transfer of going concern’ provisions.
There will be the usual considerations (i.e. tax rates and timing, etc.) when deciding how to withdraw any remaining cash from a solvent company, but the outcome will probably be a straight choice between taking a dividend or a capital distribution