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Assignment:

You work for Hawthorne Tax Advisers and one of your clients, Darren Jones, has approached you for some tax advice regarding investing in a portfolio of properties. He is trying to decide whether to invest in long-term residential property rentals or furnished holiday lets.

Darren is also trying to decide whether to set up his property portfolio as a sole trader or limited company. If Darren sets up his property portfolio as a limited company, he is currently proposing that he will be the only shareholder and director. He does not intend to take a salary from the limited company but will instead distribute all the profits from the company by way of a dividend.

Your manager met with Darren yesterday and made notes of Darren’s proposals for his property portfolio in the file note provided on page 2 below. At the meeting, Darren only provided information about the rental income and finance costs. He understands that there may be other expenditure he is able to deduct when calculating the taxable profits of his property portfolio, but he would like some guidance from you regarding the type of expenditure that can be deducted for tax purposes.

Darren also works for Gilliland Maintenance Limited and receives an annual gross salary of ￡42,000 per annum. He contributes 2% of his gross salary to his employer’s occupational pension scheme and his employer contributes 5% of his gross salary.

Darren is married to Dawn. Dawn works part time as a cleaner earning ￡10,000 per annum. She does not contribute to a pension scheme.

Assignment requirement continues on the next page.

Darren Jones
File Note: Property Portfolio Proposals

Property Portfolio:
Proposal 1: Long-term residential rental properties
Purchase two residential properties for ￡350,000 each and rent them to tenants on a long-term basis.
Each property will be financed with ￡100,000 cash deposit and ￡250,000 on a buy-to-let mortgage.
Mortgage interest on is estimated to be ￡500 per property each month.
Each property is expected to generate rental income of ￡1,200 per month. You should assume that these properties are occupied by tenants for the entire 12 months of the tax year.
Darren will not have time to manage these properties due to his commitments at his full-time job. As such, he intends to use an Estate Agent to help him to manage this property.
Darren would like some guidance from us regarding other tax-deductible expenses. This should be included in the tax planning report only, you do not need to estimate other expenditure for the purposes of the calculations.

Proposal 2: Furnished Holiday Let
Purchase a five-bedroom house in St Ives, Cornwall for ￡650,000 to rent to holiday makers on a short-term basis. Darren estimates that he will be able to let the property for around seven months of the year. He plans to use the property himself when it is not occupied by holiday makers.
The property will be financed with ￡200,000 cash deposit and ￡450,000 on a mortgage.
Mortgage interest on this property is estimated to be ￡900 per month.
This property is in a very popular tourist area. As such, rental income from this property is expected to be ￡5,000 per month. You should assume that the property is occupied by holiday makers for the expected seven months of the year.
Darren does not live close to the furnished holiday let and will not have time to manage this property due to his commitments at his full-time job. As such, he intends to use a holiday letting agent to help him advertise the property, run the booking process, property maintenance, cleaning and laundry, and guest support and check in.

Tax-deductible expenses
Darren would like some guidance regarding other expenses which can be deducted from his rental income for both the residential long-term rental properties and the furnished holiday let property. He would also like to understand whether there are any differences in the type of expenditure which can be deducted from furnished holiday let properties compared to residential long-term rental properties. This should be included in the tax planning report only, you do not need to estimate other expenditure for the purposes of the calculations.

Assumptions:
All tax calculations should be in accordance with Finance Act 2023 (tax year 2023/24).
All property purchases have been completed by 6 April 2023 and are immediately available to let.
Darren’s property portfolio will be set up as one of the following four scenarios:
oResidential long-term rental as a limited company,
oResidential long-term rental as a sole trader,
oFurnished holiday let as a limited company, or
oFurnished holiday let as a sole trader.
Your answer should include a separate tax and national insurance calculation for each of these four scenarios (personal pension contributions do not need to be taken into consideration at this stage).

For the limited company calculations:
oDarren is the only shareholder, and all the limited company profit after tax is distributed to Darren via dividend.
oassume that the company year end is 31 March 2024, and all profits are subject to corporation tax in FY2023.

Notes on the task:
The use of generative AI within this assignment is not permitted. Please refer to page 4 for further details.
Please ensure computations are clearly presented and that workings are shown for all calculations. There are some marks available in the mark scheme for presentation.
The word limit is a maximum of 1,500 words. Reports that exceed this will be penalised with the following grade point deductions:
oUp to 10% over: no penalty
o11% to 20% over: 5% penalty
o21% to 30% over: 10% penalty
oMore than 30% over: 15% penalty
Tables, figures, the reference list, and the appendix do not count towards the word count.
Please ensure that the structure follows that of a report format with clear headings. Remember reports are formal documents which can include headings, sub-headings, numbered sections, and graphics such as tables, flow charts, diagrams, or graphs (where appropriate). All these devices help the reader navigate the report and understand its content.
However, please ensure that any tables, and/or graphics are referred to in the main body of the report.
The use of external sources must be appropriately cited and referenced. You are required to use the Harvard referencing style.
If you have any questions related to the assignment, please use the discussion forum on Canvas or speak to the module leader in class.
Please read the discussion forum prior to submitting your work to ensure you have read all information relevant to this assignment.

Required:

1.For each of the four scenarios listed in the assumptions section above, prepare a computation to calculate any additional* income tax, national insurance contributions and corporation tax (if relevant) due on the income from the property portfolio.

* Tip: “additional” means after any tax and national insurance paid on his employment income.

(30% of marks)
2.Write a report to Darren Jones which:
a)outlines any tax planning points that could be considered in respect of the four different scenarios you calculated in part (1) above, explaining how these may reduce his tax liability. This discussion should include advice on the rules and reliefs of both furnished holiday lets and residential long-term rentals. Additional calculations are not required in this part of the report.
b)explains whether or not Darren will need to pay national insurance contributions on the profits from his property portfolio in each of the four scenarios. Provide reasons for your decisions.

c)outlines the typical expenditure that can be deducted from rental income in each of the four scenarios. Explaining any key difference in the treatment of certain expenditure when taxing income from furnished holiday let properties compared to residential long-term rental properties.
d)explains the tax advantages of furnished holiday let properties.
e)explains whether it is more tax advantageous to set up as a sole trader or limited company for both the residential long-term rental business and furnished holiday let business. Provide reasons for your decision.
(65% of the marks)

The remaining 5% of the marks are allocated to presentation, grammar and referencing (please see the marking rubric and the guidance below).

Module Learning Outcomes:
In this assessment the following learning outcomes will be covered:

Evaluate a real life-scenario to provide tax planning advice in areas such as: the choice of business form, personal taxation, loss relief, capital gains tax, inheritance tax, capital expenditure or VAT.