Top Ten Tax Deductions
By Carl Bayley BSc ACA

Sometimes these days it seems like the World has gone 'Top Ten' crazy. Everywhere you look, there's a 'top ten this' and a 'top ten that'.

Not to be outdone, I present here my 'Top Ten Tax Deductions'. I must admit that there is no statistical basis for my chart rankings, but I have based my list on 20 years of experience in dealing with small businesses.

1. The Car

Sole traders and business partners may claim a proportion of their car's running costs, including petrol, insurance, road tax, repairs and maintenance, based on their annual business mileage. Sadly, your regular home to work travel doesn't count as 'business use' for this purpose.

On top of all the running costs, you can also claim capital allowances on the car at the lower of £3,000 or 25% of the car's 'written down value' each year. The car's 'written down value' is the amount you paid for it less the amount of capital allowances you've claimed on it previously.

For a new car, you get a full year's allowance in the year of purchase, even if you buy it on the very last day of your accounting period. You will usually also get a balancing allowance when you sell your old car. So, changing your car regularly makes good sense for tax purposes!

All your capital allowances must be restricted to your 'business use' proportion in the same way as your running costs.

Company owners face a choice regarding their car.

If their company owns the car, they can claim all of it's running costs plus capital allowances, as described above, but without any restriction to the 'business use' proportion. The price of this is that they must then pay Income Tax and Employer's National Insurance Contributions on a 'Benefit in Kind' equal to somewhere between 15% and 35% of the car's purchase price when new. The total annual tax cost for a company car bought for £30,000, for example, may be as much as £5,544.

On the other hand, if the shareholder/director owns the car personally, they may claim mileage expenses from the company at the rate of 40p per mile for the first 10,000 miles of business travel each tax year and 25p per mile thereafter.

These mileage claims are tax deductible for the company and tax free in the director's hands.

The best choice in each individual case will depend on the director's own personal circumstances. One thing which is pretty clear is that it is almost never worthwhile allowing the company to pay for the director's private fuel costs as this can lead to an extra tax cost of up to £2,661 per annum.

2. Your Home

The owners of most small businesses will work from home at least occasionally, even if just to do the paperwork sometimes.

In these cases, the taxpayer may claim an appropriate proportion of his or her household bills as a business expense, including heating and lighting costs and council tax.

Here the proportion is generally based on the number of rooms in the house, excluding bathrooms, toilets, kitchens and hallways.

Example

David's house has one large living room downstairs, a kitchen, a bathroom, two bedrooms and a small box room.

David keeps some of his business paperwork in the box room and tends to spend one evening most weeks sorting it out. There is also a camp bed in the box room, which is used by house guests about twice a year.

David could justifiably claim around 24% of his household bills as a business expense. This is because he uses one room out of four for business purposes about 95% of the time.

3. Your Family

Sadly, you cannot claim for the cost of supporting your family.

However, there is a way to claim deductions for the support which your family gives to your business. If any member of the family does any work for your business, you may pay them an appropriate salary and claim it as a business expense. Be imaginative - if your wife takes business calls on your house phone then she's working for the business!

If the recipient has no other income, you will be able to pay them up to £4,895 this tax year without any Income Tax or National Insurance costs arising.

4. Making The Most Of Travel and Subsistence

Let's suppose you need to go to Paris on business and stay there overnight.

You could take a cheap flight, slog your way into the city from Charles de Gaul by train and metro and grab a quick bite at McDonalds. Cheap, not cheerful and fully allowable.

Alternatively, you could travel first class by Eurostar, move around the city by taxi and dine at Maxine's. Not cheap, much more cheerful and still fully allowable.

The point is, when you're away on business, your travel and subsistence costs are fully allowable and it's none of the Revenue's business how much you want to spend.

As a result, having a slap up meal while you're away on business will often end up costing you only half as much as the same meal at home. So, why not treat yourself? The Government's sharing the bill!

5. Childcare Costs

There are now some very generous tax reliefs for childcare costs.

For example, if you run a crèche at your company's premises which is available to all employees' children, the cost will be tax deductible and there will be no taxable Benefit in Kind for you if your own children use it.

6. Telephones

Sole traders and partnerships can claim the cost of business calls on home phones and mobiles. Line rental can also be claimed where it is purely a business line.

Director/shareholders may claim reimbursement for the cost of business calls made form home phones.

Your company can also buy you a mobile phone without any taxable Benefit in Kind arising.

7. Loans and Overdrafts

Generally speaking, interest costs which you incur personally are not usually allowable, whereas interest on overdrawn business accounts and loans is deductible.

The best strategy from a tax standpoint therefore, is to borrow within the business rather than personally.

8. Pension Contributions

As long as you stick within the relevant contribution limits, you should be able to get tax relief for pension contributions which you either make personally, as a sole trader or partner, or which your company makes on your behalf.

This will extend to contributions for any family members working in your business.

9. Decorating the Office

The cost of decorating your business premises will be allowable.

This could extend to items such as paintings and antiques which your use to decorate areas which will be seen by customers and the general public. You will need to make a business case for the expenditure, and larger items will only attract relief under the capital allowances system, but, nevertheless, the scope exists for some significant deductions to be claimed.

10. Staff Parties

The cost of staff parties and any other form of staff entertaining is usually deductible. Typically, this will cover the Xmas party or annual dinner.

As long as the annual cost of any staff functions is kept under £150 a head, there will be no taxable Benefit in Kind for the employees either. This allowance can be used to exempt one or more functions each year, the total cost of which does not exceed £150 per head.

In Conclusion

I have tried to list some of the most common types of deduction available to almost any kind of business. As I said before, however, be imaginative - almost anything which you can demonstrate has been purchased for business purposes will qualify for some kind of deduction. Most of us wouldn't be able to claim for reindeer food, for example, but Santa Claus can!

Carl Bayley is the author of several Tax Planning Guides, including Bonus Versus Dividends , his guide to tax efficient company profit extraction, How to Avoid Property Tax and How to Avoid Inheritance Tax. Carl also frequently lectures on the subject of taxation and has spoken on BBC radio and television.

There's No Place Like a Former Home
By Nick Braun

Most tax shelters come with a catch.

For example, venture capital trusts offer massive income tax relief. but you have to give your money to companies that are more likely to go bust.

Commercial property offers massive capital gains tax savings. but only if your tenants are unquoted companies (in other words, small and risky).
 

Pensions offer an extremely attractive cocktail of tax savings. but only if you keep your money tied up until you retire.

So most tax shelters are designed to make you do something that you wouldn't normally contemplate, such as invest in high-risk assets, take on less reliable customers or tie your money up for many years.

And that's why Governments sanction them in the first place: to influence our economic decisions.

However, at Taxcafe this is what we call letting the 'tax tail wag the investment dog'. We also call it spending £1 to save 40p in tax.

Very rarely should you let tax be the number one factor influencing your investment decisions. It rarely works out for the best.

There is, however, one tax shelter that is not designed to make you do something risky or out of the ordinary.

If you want to invest in residential property and enjoy some handsome tax savings you should consider renting out a former home.

If you sell an investment property which used to be your main residence, some of the profit - representing the time you lived there - is tax free. This is what's known as the principal private residence exemption (PPR). Most people know this.

That's not the interesting part, however. There is an extra PPR concession that could save you a small fortune in capital gains tax.

What it says is that the last 36 months of your ownership of the property are regarded as being a period of private occupation, irrespective of whether you actually lived in the property during that period.

In other words, you can move out of your home, rent it out for three years, and not pay a penny in capital gains tax.

If you hold on to the property for more than three years capital gains tax will again come into play. However, if you're renting out the property you will also qualify for something called private letting relief. The calculation of this latter relief can be quite complex, but, under the right circumstances, the maximum relief of £40,000 per person can be obtained.

Quite a few people know about these reliefs but very few, in my experience, realize just how powerful they are.

The following example illustrates what I mean.

Example

Mr and Mrs Blenkinsop acquire a second property in their neighbourhood for £300,000. They can either rent out the new house or move into it and rent out their old house, which is also worth £300,000.

There may be a host of reasons why they would want to live in either property. However, capital gains tax should be near the top of their priority list.

Let's say they decide to stay where they are and rent out the new property. They sell it 10 years later for £600,000. (This assumes that property prices rise by around 7% per year which is probably a reasonable long-term growth rate).

After deducting 40% taper relief and their annual capital gains tax exemptions their combined capital gains tax bill is likely to be in excess of £60,000.

Let's say they decide instead to move into the new property (Mrs Blenkinsop likes the jacuzzi bath at the new property) and rent out their old house.

What will the capital gains tax bill be when they sell their old home in 10 years time?

Once again they are entitled to deduct 40% taper relief and two annual capital gains tax exemptions. This time, however, they also qualify for principal private residence relief, not only for their period of occupation of the property as their own private residence but also for the last 36 months of their ownership (even though the house has been an investment property for a whole decade).

Furthermore, they also each qualify for £40,000 private letting relief (because they are renting out a property that used to be their main residence).

Their combined capital gains tax bill will now be somewhere in the region of £20,000 (at most) - a saving of over £40,000.

Clearly old homes are much better tax shelters than ordinary buy-to-let properties.

It's a mouth-watering tax break and one that should be made use of whenever you get the opportunity.

So next time you move house try your level best to hold onto your old home. It might be the best investment you ever make.

Nick Braun is the founder of Taxcafe.co.uk and author of Grow Rich with a Property ISA and Retire Rich with a Property Pension .

Property Magazines

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The folks at Property Investor News are offering a complimentary copy of the monthly magazine exclusively to readers of Taxcafe's Tax Tip Newsletter.

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A Very Scary Website!
By Aileen Smith MA PhD

There'a fantastic free website that I would encourage every person reading this newsletter to visit. You may find the information you find there a bit worrying but I guarantee it will be a worthwhile experience.
 

I'm referring to Pension Calculator, a rather unimaginatively named, but extremely useful little website for anyone trying to accumulate retirement capital.

It's sponsored by the FSA and the Association of British Insurers.

The web address is http://www.pensioncalculator.org.uk

On that website you will find out how much retirement income you are likely to get from the amounts you save.

A Bit of Light Relief!