Jet Accountancy

In setting up a trade it is inevitable that expenses will be incurred before the trade actually commences. Expenses may be incurred on acquiring premises and kitting them out, on buying stock, on office supplies, on professional advice, on marketing, on software, on setting up a website, on legal fees and suchlike. These can mount up, so it is important to secure tax relief where possible. Relief for pre-trading expenses is available to both unincorporated business and companies.

Relief is only available to the person (individual or company) who incurred the expenditure and commenced the trade.

Revenue expenses

The general rule is that revenue expenses incurred in the seven years prior to the date on which the trade starts are deductible if they would be so deductible had the expense been incurred once the trade had commenced. The usual rules to determine whether an expense is deductible apply (i.e., whether it is revenue in nature and incurred wholly and exclusively for the purposes of the business). To give effect to the relief, the pre-trading expenses are treated as if they were incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

Capital expenses

Relief for capital expenses depends on whether the accounts are prepared on the cash basis or not. Where the cash basis is used, if the expense is one that would be deductible under the cash basis capital expenditure rules, as with revenue expenses, the expense is treated as incurred on the first day of trading and deducted in calculating the profits for the first accounting period.

However, if relief would be given through the capital allowances system, capital allowances are available for the pre-trading expenditure, the expenditure being treated as if it had been incurred on the first day of trading.

HMRC are sending one-to-many ‘nudge’ letters to taxpayers who included an invalid claim for gift hold-over relief in their 2021/22 tax return. This may be because a separate claim form was not included with the return, or the claim form was included but not signed. If you receive such a letter, it is important that you do not ignore it – without a valid claim, HMRC will require any capital gains tax due to be paid now rather than deferred.

What is gift hold-over relief?

Gift hold-over relief is a useful capital gains tax business relief that allows the capital gains tax due on a gift to be deferred by ‘holding over’ the gain, reducing the transferee’s base cost by the amount of the held-over gain. The relief is often used to aid succession planning.

Eligible gifts

The relief is available for:

• gifts of business assets used for the purpose of a trade or profession carried on by an individual as a sole trader or as a partner in a partnership, by an individual’s personal company or by a member of a trading group where the holding company is the individual’s personal company;
• gifts of unlisted shares and securities in a trading company or the holding company of a trading group where the individual owns at least 5% of the shares (for trustees, the holding must be at least 25%);
• gifts of land deemed to be agricultural land for inheritance tax purposes;
• assets the disposal of which is a chargeable transfer for inheritance tax and not a potentially exempt transfer; and
• certain gifts that are exempt from inheritance tax, such as a gift from a trust for bereaved minors.

Mechanics of the relief

As a gift by its very nature is not made at arm’s length, any gain arising on disposal is calculated by reference to the market value of the asset rather than the proceeds, if any. For an outright gift, the full gain (calculated using the market value as the consideration) can be held over. The transferee’s base cost is the market value as reduced by the held-over gain.

Example

Bill gives his son James his workshop, which cost £50,000. At the time of the gift, the market value was £140,000. The gain is £90,000, which Bill and James agree to hold over. James’ base cost is £50,000 – the market value of £140,000 less the held-over gain of £90,000.

If the transferor receives some proceeds, the gain computed by reference to the actual proceeds is immediately chargeable. However, the difference between the market value and the proceeds can be held over.

Example

Elizabeth sells her studio to her daughter Dawn for £40,000. It cost her £30,000 and has a market value of £75,000. They claim hold-over relief. The £10,000 difference between the proceeds (£40,000) and the original cost (£30,000) is immediately chargeable. However, the remainder of the gain (the difference between the market value and the proceeds) of £35,000 is held over. Dawn’s base cost is £40,000 (£75,000 – £35,000).

Joint claim

The claim must be made jointly by the transferor and the transferee on the dedicated claim form. It must be signed by both parties.

Dealing with the letter

If you receive a nudge letter you should send HMRC a valid claim form signed by both parties or, if the gift is not eligible for the relief, amend your tax return to remove the claim.

If you have unrelieved overlap profits, you will not be able to claim relief for those profits after 2023/24. Overlap profits are profits that have been assessed twice – either in the early years of a business or on a change of accounting date.

From 2024/25, unincorporated businesses will be taxed on the profits for the tax year regardless of the date to which they prepare their accounts. Where the accounting period does not correspond with the tax year, the profits from two accounting periods will be apportioned to arrive at the profits for the tax year. As a result, profits are only ever taxed once, removing the problem of overlap profits.

The current year basis (under which the profits taxed for the tax year are those for the accounting period ending in that tax year) came to an end in 2022/23. Under the current year basis, relief for overlap profits was given either on a change of accounting date which resulted in more than 12 months’ profits being taxed in a tax year, or on cessation.

The 2023/24 tax year is a transitional year moving from the current year basis to the tax year basis. The profits for that year are those from the end of the accounting date in 2022/23 to the accounting date ending in 2023/24 (the standard part) plus those from the end of that period to 5 April 2024 (the transition part). Any unrelieved overlap profits can be deducted from the transition profits.

If relief for remaining overlap profits is not claimed for 2023/24, it will be lost.

Establishing overlap profits

On 11 September 2023, HMRC launched an online service to help unincorporated businesses establish their overlap profits available for relief. The service is available on the Gov.uk website at www.gov.uk/guidance/get-your-overlap-relief-figure.

You may be able to make a claim for overlap relief for 2023/24 if:

• your accounting date does not align with the tax year (i.e., it is not a date between 31 March and 5 April inclusive);
• you changed your accounting date to align with the tax year but did not claim relief for overlap profits on the change of accounting date; or
• you changed your accounting date in 2023/24to align with the tax year.

You may also be able to claim overlap relief in 2023/24 if you stopped trading in that year.

It may be that you are able to find your overlap profits from your previous tax returns, entered as ‘Overlap Profit Carried Forward’ on either the self-employment pages (SA103) or the partnership pages (SA104).

If you cannot find your overlap relief figure, you can use the online service to establish your overlap profits – but only if you provided this information in a previous return.

Using the service

To use the service, you will need to sign in with your Government Gateway user ID and password for Self Assessment. Your agent can also use the service on your behalf.

You will need to provide the following information, so it is advisable to ensure that you have it to hand before you start:

• your name;
• the name of your business or a description of it;
• your business address;
• your unique taxpayer reference;
• details of whether your business is a sole trader or a partnership;
• the date that your business started or you became a partner in the partnership (you can provide the starting tax year if you are unsure of the exact date);
• the most recent period of account or basis period used by your business; and
• if you have changed your accounting date, the year or years of the change.

You will also be asked for your contact details and whether you would like a response by email or by letter.

After providing your information you will receive a confirmation email or letter containing your submission reference. HMRC will generally aim to provide details of your overlap relief within three weeks. However, for complex cases, it may take longer.