April questions and answers

Newsletter issue - April 2018.

Q. I have traded through a two-man partnership for many years, but my partner has recently announced that he has decided to leave. I intend to continue trading as a sole trader. We have agreed an outgoing payment, which includes amounts for various items but mainly consists of plant and machinery. What is the position regarding capital allowances?

A. Although the partnership will be ceasing and a sole trade commencing, the business will be treated as continuing for tax purposes if the same business is being carried on.

If this is the case, you will not need to make any adjustments for capital allowances purposes.

Whether the same business is carried on is a question of fact depending on the particular circumstances involved. HMRC's guidance in their Business Income Manual (BIM 80635) is a useful reference tool where there is a partial change in ownership.

With regards to capital allowances, CAA 2001, s 61 deals with 'disposal events and disposal values' and includes a table of events and the disposal values to use. Broadly, if the same business is continuing, the change of ownership should not fall within the disposal events listed in s 61(1), which in turn means that no capital allowances event will take place. As the continuing business already owns the plant and machinery, no plant additions will be made.

Q. I own a property in the UK that is rented out but I live and work in Italy. The taxable profit from the rental property is less than £10,000. Will I have to pay UK tax on this property income?

A. Whether or not you will be liable for UK tax on this income will depend on your residence status for tax purposes and whether you are entitled to the personal allowance for the relevant year. If you are entitled to the personal allowance (£11,500 for 2017/18 rising to £11,850 for 2018/19), this will cover your rental income and no further tax will be due.

When you're UK resident you're normally taxed on the arising basis of taxation. This means that all your worldwide income and gains will be taxable in the UK. Therefore, even if your foreign income and gains have already been taxed in another country they will still be taxable in the UK and you must declare all of your foreign income and gains on your tax return.

If you're not resident in the UK and sell a UK residential property you may have to pay capital gains tax on the gains you make. See HMRC's guidance Capital Gains Tax for non-residents: UK residential property for more information on this.

Q. I am hoping to start my own business very soon, but I am not sure whether I should incorporate straight away or not. The business will require a substantial capital investment, so it is likely that it will make a loss in the first, and maybe even second, year of trading. Are the loss relief rules better for sole traders or companies in the early years of trading?

A. There are of course, various advantages and disadvantages of incorporating a business. You will need to weigh everything up and may come to the conclusion that you're best to carry on your business as a sole trader in the early years. This situation may be particularly relevant if you envisage making losses in the early years of trading, because you can carry back losses made in the first four years against personal income of the three preceding years, often resulting in a substantial refund of tax becoming due. However, don't miss out on the opportunity of forming a limited company later on when the benefits of company status may be more valuable.