Saturday, 11 April 2015

Budget 2015

Income Tax
  • The personal allowance increases to £10,800 for 2016/17 and £11,000 by 2017/18.
  • The higher rate tax threshold will increase to £43,300 in 2017/18.
  • A new personal savings allowance will apply from 2016/17: the first £1,000 of interest is tax free for basic rate taxpayers, the allowance for higher rate taxpayers will be £500. This will not apply to additional rate taxpayers.
  • From 6 April 2015, £1,060 of a personal allowance can be transferred to a spouse or partner where the transferor’s income is less than £10,600 and the recipient doesn’t pay tax at the higher rate or additional rate of income tax.
  • The annual income tax return will be abolished from 2020 by introducing digital tax accounts to remove the need for individuals and small businesses to submit annual tax returns. (Comment:  ta doesn't have to be taxing or the burden the proposal will place on small businesses and that costs will increase for everyone?)
  • Farmers: from April 2016 the period over which they can average will be increased from the current two year years to five years. 

National Insurance
  • Class 2 NICs will be abolished in the next parliament. Class 4 NICs to introduce a new contributory benefit test.
  • From 6 April 2015 every employer with employees under the age of 21 will no longer be required to pay Class 1 secondary National Insurance contributions on earnings up to the upper earning limit.
  • From 6 April 2015 the Employment Allowance relief will be available to individuals who employ care and support workers. (Comment: Removing this exclusion from care and support workers will support individuals who need to purchase care for themselves or others).

  • From 2018 the lifetime allowance will be indexed.
  • The lifetime allowance decreases from £1.25m to £1m in 2016/17, with no changes anticipated to the annual investment limit of £40,000.
  • Existing pensioners who are receiving annuities will be able to cash these in for lump sums without a 55% tax charge. Tax will be applied at the marginal rate.

  • From April 2015, ISA annual savings limit £15,240 and Junior ISA £4,080.
  • From autumn 2015, introduction of a flexible ISA to allow people to withdraw and replace money from their cash ISA in-year without it counting towards their annual ISA subscription limit.
  • From autumn 2015, introduction of a help-to-buy ISA: a 25% top up by government on saving for deposits to buy a first home (available only to first time-buyers). Invest £200 maximum per month and the government will top it up by 25%. (Comment: In many ways this is equivalent to letting you save for a home deposit from your pre-tax income as the 25% on top is equivalent to the tax a basic-rate taxpayer would pay).

Child Trust Funds
  • From 6 April 2015 the subscription limit increases to £4,080.

Employment taxes
  • The national minimum wage will increase to £6.70 in the autumn.

Capital Gains Tax
  • Entrepreneurs’ Relief associated disposals rules: ER will not be available to reduce CGT on gains accruing on the disposal of personally held assets used in a business carried on by a company or a partnership unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company, or a 5% share in the partnership assets. This affects disposals made on and after 18 March 2015.
  • Entrepreneurs’ Relief joint ventures and partnerships: ER will only apply to an investment of at least 5% in a directly held shareholding in a genuine trading company. No relief will be given in respect of shareholdings in a company that has no other trade than holding shares in a joint venture company or holding an interest in a Limited Liability partnership unless the company has a significant trade of its own. It will affect disposals on and after 18 March 2015. 
  • Entrepreneurs’ Relief and incorporation: ER will not be denied for the relevant partners who, when a partnership incorporates, do not hold or acquire a stake in the new company. This measure is back-dated to 3 December 2014.
  • From 6 April 2015, non-UK resident individuals, trusts, personal representatives and narrowly controlled companies (controlled by 5 or fewer persons) will be subject to CGT on the disposal of UK residential property. Non-resident individuals will be subject to CGT at same rates as UK taxpayers (28% or 18% on gains above the annual exempt amount). Non-resident companies will be subject to tax at the same rates as UK companies (20%) and will have access to indexation allowance. There will be rebasing as at 6 April 2015.
  • Non-UK domiciled persons: from April 2015, a new annual charge of £90,000 will apply to individuals who have been resident in the UK in at least 17 out of the last 20 years, and the charge paid by individuals who have been resident in the UK in at least 12 out of the last 14 years will increase from £50,000 to £60,000. No other measures to clamp down on non-domiciled individuals.

The rules are to be amended at a later stage to ensure that:
  • All investments are made with the intention to grow and develop a business.
  • All investors are required to be independent from the company at the time of the first share issue.
  • A new qualifying criteria is introduced to limit in some circumstances, relief to companies where the first commercial sale predated the investment.
  • There will be an investment cap for the investee of EIS and VCT of £15m, or £20m for knowledge-intensive companies
  • The employee limit for knowledge-investment companies increases to 499 employees.

  • The requirement that 70% of SEIS money must be spent before EIS or VCT funding can be raised will be removed at some later stage.

Corporation Tax
  • The main rate of corporation tax will be reduced to 20% from April 2015. The small profits rate remains at 20%.

Construction Industry Scheme
The Income Tax (Construction Industry Scheme) (Amendment) Regulations 2015 amend the Income Tax (Construction Industry Scheme) Regulations 2005 to remove the obligation to file a return in cases where the contractor has not paid any subcontractors in a tax month and also amend the rule that any repayment can only be made to a subcontractor after the end of the tax year in which the deductions were made where the subcontractor is insolvent. The Regulations come into force on 6 April 2015.

A series of changes will be introduced to improve the operation of the Construction Industry Scheme (CIS) making it easier for businesses to access gross payment status, reduce administration burdens and move more transactions online. These include: 
  • the threshold for the turnover test will be reduced to £100,000 in multiple directorships
  • the initial and annual compliance tests will focus on fewer obligations
  • the nil return obligation will be amended
  • joint ventures where there is already one member with gross status will be allowed easier access to gross payment status
  • allow an earlier repayment to liquidators in insolvency proceedings
  • mandation of filing of CIS returns and online verification.

  • Registration threshold will increase to £82,000. De-registration threshold will increase to £80,000.

Capital Allowances
  • The Annual Investment Allowance is £500,000 up to 31 December 2015. It will revert back to £25,000 per annum from 1 January 2016 unless reviewed and changed by the next government.

Research and development tax credit reform
  • The rate of the expenditure credit will be increased from 10% to 11% and the rate of the SME scheme from 225% to 230%.

Business rates
From 1 April 2015 the government is: 
  • increasing the business rates discount for smaller retail premises with a rateable value of £50,000 or below to £1,500 to 31 March 2016
  • doubling small business rate relief for a further year to 31 March 2016
  • capping the rise in the business rates multiplier at 2%
  • Extending transitional rate relief to support 16,000 small business facing significant rates bill increases due to the ending of transitional rate relief. 

Annual tax on enveloped dwellings
From 1 April 2015 the annual charges for the annual tax on enveloped dwellings (ATED) will be increased by 50% above inflation (Consumer Prices Index). The measure ensures that non-natural persons holding residential property in corporate and other ‘envelopes’ and not using them for a commercial purpose pay a fair share of tax. This improves the fairness of the way property is taxed. 

  • New penalties for tax evasion and for advisers who assist evaders.
  • From 18 March 2015 entrepreneurs' relief (ER) will not be available to reduce capital gains tax (CGT) on gains which accrue on personal assets used in a business carried on by a company or a partnership, unless they are disposed of in connection with a disposal of at least a 5% shareholding in the company, or a 5% share in the partnership assets.
  • The government will consult on perceived abuse of IHT using deeds of variation.
  • Changes to inheritance tax that had been trailed before the Budget, were left out of the speech and are now likely to appear in the Conservative manifesto instead. The Chancellor had reportedly drawn up plans to cut inheritance tax on main properties worth up to £2m.
  • Changes to enterprise investment schemes (EIS) and venture capital trusts (VCTs) will be introduced to comply with the latest state aid rules and increase support for high growth companies. Seed enterprise investment schemes (SEIS) will be affected by the new rules, which include the requirement for companies to be less than 12 years old when receiving their first EIS or VCT investment, except where the investment will lead to a substantial change in the company’s activity. A cap on total investment of £15m will be introduced under the tax-advantaged venture capital schemes, increasing to £20m for knowledge-intensive companies. The employee limit for knowledge-intensive companies will also increase, subject to state aid approval, to 499 employees from the current limit of 249. The government also wants to make it easier for money to be moved between schemes by removing the requirement that 70% of SEIS funds be spent before VCT or EIS fundraising can occur.
  • The government will restrict the corporation tax relief a company may obtain for the acquisition of goodwill when a business is acquired from a related individual or partnership. The change will be effective for acquisitions on or after 3 December 2014.
  • Legislation to tackle diverted profits by a Diverted Profits Tax (DPT 25% of diverted profits relating to UK activity). This will apply to foreign companies exploiting permanent establishment rules and to companies using transactions that lack economic substance. The tax will only apply to large multinationals (“Google tax”).
  • Travel rules: includes a clamp down on agencies, umbrellas and personal service companies who abuse the temporary tax travel rules. Any changes will take place after "full and formal" consultation and would be intended to take effect from 6 April 2016 and legislated for in a future Finance Bill.
  • IR35: HMRC estimates that the annual administrative burden of IR35 is £16m and the cost to the exchequer of abolishing it is £550m. The government holds the view that the administrative burden of IR35 is proportionate when considered against the fiscal risk to the exchequer of those incorporating to disguise employment income. 

Saturday, 16 June 2012

Budget 2012

Main points:

Company taxes

Main corporation tax rate cut to 24% was announced, with effect from 1 April 2012. Main corporation tax rate to be 23% from 1 April 2013, dropping eventually to 20%, unifying the income tax basic rate and two corporation tax rates. Small companies rate remains 20%.

(Comment: good move to make the UK more competitive and attractive for investment from abroad).

Income tax rates
  • Increase in the income tax personal allowance for the under-65 to £8,105 but the basic rate limit will be reduced to £34,370. For 2013/14 the personal allowance will be increased by £1,100 to £9,205 but the basic rate limit will be reduced by £2,125 to £32,245. 

(Comment: the forthcoming reductions in basic rate limits will place many thousands into the higher rate of income tax band).

  • In 2012/13 an age-related allowance  for people aged 65 and over to be £10,500  and £10,660 for people aged 75 and over. Freeze in age-related allowance from 2013/14 for those receiving them by then and abolition for those reaching 65 thereafter. From 2013/14 the allowance of £10,500 wil be restricted to people born after 5 April 1938 but before 6 April 1948. The allowance of £10,660 will be restricted to people born before 6 April 1938.
  • Reduction in the top rate of income tax from April 2013 from 50% to 45%. 

(Comment: Apparently, the rate is going because it did not raise the amounts that was hoped for. Barely mentioned that this is not happening until another whole year. Also, remains the fact that there will still be an effective 60% income tax on income between £100k ans £118,200 as the personal allowance is reduced by £1 for every £2 of income).
  • Announcement of legislation from April 2013 to cap tax reliefs claimed by individuals where reliefs are currently unlimited; reliefs will be limited to the higher of 25% of taxable income and £50,000 p.a. 

(Comment: it is feared that the rule may restrict relief in areas where not recommended, e.g. restriction is relief for for trading losses might discourage investment and harm business at a time where more investment is needed).

Small Businesses
  • Announcement that the Government intend to consult on allowing businesses with turnover up to  £77,000 to move to the cash basis for calculating taxable profits. 
  • Lending incentives: 
    • On 20 March 2012 the Government launched the National Loan Guarantee Scheme, which allows Small and Medium Sized Enterprises (SMEs) with an annual turnover of not more than £50 million to obtain finance (loans, hire purchase and leases) from participating banks at a 1% discount. 
    • Increase in the size of Government guarantees under the Enterprise Finance Guarantee Scheme from 13% to 20%.
    • Increase in funds available to SME's through the Business Finance Partnership to £1.2 billion.
    • Enterprise Investment Scheme (EIS): The 30% tax relief on investment up to £500k has been doubled to £1 million. New SEIS offers 50% tax relief on investment up to £100k in  start-up companies. (Comment: good move to encourage new business).
  • Personal service companies: (once again) the Government announced a package of measure to tackle avoidance through personal service companies and to make the IR35 legislation easier to understand.  (Comment: in other words, standby for another attack on personal service companies?)
  • Research & Development: 
    Tax deductions available to SME's for R & D expenses are increased from 100% to 125% from 1 April 2012. This will result in increased tax credits.

Stamp Duty Land Tax
  • New rate of charge 7% on the purchase of residential property where the purchase price exceeds £2 million from 22 March 2012.
  • Purchases of residential property through a company  (and other non-natural persons) from 22 March 2012  for £2m or more will be taxed at 15%.
  • Announced that the Government will extend after consultation from April 2013, the capital gains tax regime on the disposal of UK residential property and shares by non-resident, non-natural persons.


Means test child benefit from 7 January 2013. 

(Comment: reducing income of both parents under £50k each can avoid child benefit reduction).

Tax avoidance

Government to issue a consultation document in summer 2012 (based on the Aaronson Report) with the intention of introducing  in the Finance Bill 2013 a General Anti-Abuse Rule(GAAR),  targeted at abusive and artificial tax avoidance schemes . 

(Comment: the rule is likely to add more confusion to an already complex tax system). 

Sunday, 22 January 2012

The gifts that were never gifts for inheritance tax!

If you gift an asset (e.g. a house) but you continue living in it (or have some benefit from it or you don't pay for the use of the asset), the taxman says, you never gave it away for inheritance tax! So, it will be part of the death estate on the donee's death, even though the donee survives for longer than 7 years.

However, if you die within 7 years of the gift, there is a problem: is the gift to be taxed as a lifetime gift or as part of the deathe estate? The answer is, the taxman will prepare two tax computations and the one with the highest tax will apply. 

If the donee gives up any benefit from the asset just before he/she dies, the asset will not come back into the death estate! But, the taxman will treat it as a lifetime gift - with inheritance tax implications of course if death happened in less than 7 years from the date the benefit was given up! At least that way there is some hope!

Of course, having a gift being taxed as lifetime gift as opposed to being in the death estate has certain advanatages: The amount taxed is often lower for appreciating assets (e.g. houses) and the lifetime gift will attract annual exemptions and taper relief.

So, did you think you were the clever one?

Sunday, 15 January 2012

How to minimise inheritance tax if assets in the death estate stand at a loss after the death!

If during the estate administration period, any losses arising from the sale by the personal representatives of death estate assets (within 1 year for quoted shares and 3 years for land & buildings), will reduce the value of the estate and hence the inheritance tax due on death - thus resulting in practice in inheritance tax repayment.

However, once the administration of the estate has ended and assets have been distributed to the beneficiaries, there will be no IHT repayments should the beneficiaries sell their assets at a loss. So, where there are assets in the estate that have depreciated in value post death, PR's should move quickly in realizing any assets if they have to, in order to have the IHT bill reduced and hence protect the beneficiaries!

And another thing: there anti-avoidance provisions in place to ensure that PR's do not deliberately sell quoted shares at a loss in order to generate an inheritance tax refund. According to those, all purchases of shares up until 2 months after the last sale in the 12 months period after the death, are taken into account for the loss calculation. In the case of land & buildings, we need to look at purchases up to 4 months after the last sale in the 3 years period after the death.

As we can see, the way the law has been designed acknowledges the fact that in practice it is not so unusual for administration periods to drag for way too long periods!

Friday, 6 January 2012

Inheritance tax valuation of similar assets owned collectively

The default position for valuing gifts is NOT open market values (i.e. how much the assets would fetch to the donee if sold on the open market.

Instead, we measure the value of gifts by how much the donor has lost as a result of the gift, i.e. by how much the donor's estate has gone down ("loss to the donor principle").

For the purpose of valuing similar assets owned jointly by spouses (e.g. shares), we look at them as one - doing so increases the value of shares when together spouses have control in the company (more than 50%) but individual shareholdings looked in isolation do not.

However, when similar assets are held jointly by individuals who are not married, the position is different. We value gifts of those assets using the loss to donor principle as explained above. But, there are special rules for real property (land and buildings) to take account of market realities.

Friday, 30 December 2011

Give away your assets as soon as possible to save your beneficiaries inheritance tax!

The longer you delay to gift your assets during your lifetime, the higher the inheritance tax your inheritors will have to pay on your death (because some of the inheritance tax exempt band will go towards the lifetime gifts, thus leaving more of the estate taxable).

Tuesday, 27 December 2011

Have it your way with inheritance tax where asset values go up or down between gift and death!

If inheritance tax is due on the death of the donor because the gift was made to you within 7 years prior to the death, you can make a claim to ensure that the tax you pay is based on the value of the gift on death as opposed to the value at the date of the gift, provided the asset has fallen in value between the gift date and the donor's death date. This works well with property and cash.

However, extra care needs to be taken with assets which are valued differently for inheritance tax (and hence, the reduction in the value of the donor's estate after the gift is not equal to the value of the gift for the donee (that is very much the case with shares).

So, the inheritance taxman is quite generous (for once!) and allows you to have it both ways, because as the normal rules say, the gift date value is used by default to value gifts on death. Hence, there is protection in-built from increased asset values between gift and death!