Tax Planning Guide

Tax Planning Guide
Welcome to this year’s Tax Planning Guide
February 2016
In this edition:
Page 2
Tax year end planning tips
Property tax
Page 3 Page 5
Income tax
Page 7
International matters
Page 7
Our contacts
Foreword
Due to the election there were two Budgets in 2015, as well as
an Autumn Statement resulting in significant changes to the UK
tax landscape. In particular, we have seen a much more targeted
approach to tackling tax avoidance.
In this briefing, we set out tax planning tips which all taxpayers
should consider as the tax year end approaches. We then provide
more detailed commentary on some of the more significant
changes this year.
The result is a raft of legislation in the form of two Finance
Acts in 2015 and a further Finance Bill published in December
2015. There are a number of consultation documents which will
produce further legislation in 2016. Also on the horizon is the
Chancellor’s 2016 Budget on 16 March 2016.
If you have any queries, please feel free to contact your usual
Blick Rothenberg adviser or any of our partners listed on page 7.
www.blickrothenberg.com
Tax year end planning tips: tax planning points to consider before 5 April 2016
Income tax
• Your personal allowance is phased out where your income is
between £100,000 and £121,200 resulting in an effective rate
of tax of 60%. If your income is within this range, consider
making pension contributions or charitable donations to reduce
the impact of losing your personal allowance.
• If a spouse or civil partner does not have sufficient income to
utilise their personal allowance (£10,600 for 2015/16) or their
basic rate (20% on income up to £31,785), the higher earning
spouse or civil partner may make an outright gift of income
producing assets to them. Income from the date of the gift will
then be taxed on the recipient spouse.
• Any UK resident individual can contribute up to £2,880 (net)
into a pension, irrespective of their earnings, and the pension
provider is able to obtain 20% tax relief, so the policy is credited
with a gross contribution of £3,600. Therefore, consider
contributing to a pension for a non-working spouse/civil partner
or children to benefit from £720 tax relief for each person.
• Use your annual ISA limit for 2015/16 which is £15,240 per
person, and can be split however you choose between cash
and permitted investments, such as stocks and shares. Also
consider using the junior ISA limit for 2015/16 which is £4,080
for children under the age of 18.
• The new Help to Buy ISA has now been introduced which
enables first time buyers to save up to £200 per month (plus
an initial £1,000 on opening the account) which will be topped
up by the Government by 25% (up to a maximum of £3,000 on
£12,000 of savings). It can be put towards homes worth up to
£450,000 in London and £250,000 in other areas of the UK.
• Consider other tax efficient investments that are subject to an
annual maximum such as the Enterprise Investment Scheme,
Seed Enterprise Investment Scheme, Social Investment Tax
Relief and Venture Capital Trusts. These complex investments
are potentially suitable for a sophisticated investor and bespoke
advice should be taken.
• For companies with distributable reserves, consider the
declaration of a dividend prior to 5 April 2016 before the new
dividend rates outlined on page 6 come into effect.
• It is possible to elect to carry gift aid donations back to the
previous tax year. This has the benefit of reducing the tax
liability for the previous year and accelerating tax relief.
• If you are married, consider whether a jointly owned asset
can be held more effectively for income tax purposes.
Married couples are assumed to hold assets equally but this
presumption can be overridden.
Capital Gains Tax (“CGT”)
• The CGT annual exemption is £11,100 for 2015/16 – if you do
not use the annual exemption, it cannot be carried forward and
is lost. Consider realising capital gains so it is fully utilised.
• Gift assets to your spouse or civil partner at no gain/no loss so
that they are able to dispose of the asset and utilise their CGT
annual exemption of £11,100.
• “Bed and spouse” so that shares are disposed of by one
spouse realising a capital gain (or loss). The shares can be
repurchased by your spouse thus retaining the stock exposure
without exiting the market and enabling cost of the shares to
be uplifted.
• If you have assets that have fallen in value or have become
worthless, you may be able to claim a capital loss and offset
this against capital gains, saving tax up to 28%. Where the
capital losses relate to shares in unquoted trading companies, it
can be possible to offset the loss against income, providing tax
relief of up to 45%.
• Where you expect to realise a significant capital gain, consider
delaying the disposal until after 5 April 2016 – this will defer the
date by which the tax is due by 12 months.
Page 2
Inheritance Tax (“IHT”)
Pensions
• Each individual can make gifts of up to £3,000 in total each
year without any IHT implications. If the £3,000 exemption
was unused in the previous tax year, the exemption can be
carried forward so the maximum available exemption can be
up to £6,000.
• If you are likely to be affected by the tapered annual allowance
outlined on page 6, consider accelerating your future pension
contributions and maximising what you can pay within the
current higher allowance and before the new restrictions
curtail your options. Likewise, if the lower lifetime allowance of
£1m will affect you, consider a final contribution before 5 April
2016 and then register for IP16 and/or FP16.
• Other exemptions from IHT for gifts are available, such as
the small gifts exemption allowing gifts of up to £250 to any
number of people and gifts in consideration of marriage of up
to £5,000 by a parent.
• A potentially valuable exemption from IHT is available for gifts
out of surplus income that are both regular and do not affect
your standard of living. Such gifts, if properly documented, are
immediately outside the scope of IHT.
Property tax
Increased Stamp Duty Land Tax (“SDLT”) for purchases of additional residential property
In a further attempt to slow the “buy-to-let” market and second
home ownership, it was announced in the Autumn Statement
that a supplementary 3% SDLT will apply to the purchase of
additional residential property. The increased SDLT will apply to
the purchase of a second or subsequent property which is not the
purchaser’s main residence. The increased SDLT will apply from
1 April 2016.
Property price (£)
A consultation document was published on 28 December
2015 detailing the proposals for the new legislation and inviting
responses by 1 February 2016. It is likely that the final details
of the legislation will be announced at the Budget on 16 March
2016.
The rates of SDLT are as follows:
Tax rate charge on part
of property price within
each tax band –
first property
New SDLT rate on
additional properties
from 1 April 2016
0 – 125,000
0%
3%
125,001 – 250,000
2%
5%
250,001 – 925,000
5%
8%
925,001 – 1,500,000
10%
13%
1,500,001 +
12%
15%
Page 3
It is intended that the higher rates will not apply “if at the end of
the day of the transaction an individual only owns one residential
property, irrespective of the intended use of the property”.
So, for example, if an individual lives in rented accommodation
and sells the only residential property that they own, a buy-to-let,
and purchases another buy-to-let, they will not be subject to the
additional rates of SDLT because at the end of the day of the
transaction, they only own one residential property.
If a purchaser already owns two or more properties, whether the
higher rates of SDLT apply will depend on whether the purchaser
is replacing their main residence. If the previous main residence
has not been sold at the point of purchase of the new main
residence, the higher rates of SDLT will apply. However, a refund
will be available if the previous main residence is sold within 18
months. It is not proposed that there will be an ability to elect a
property as the main residence for the purposes of SDLT.
Interestingly, there is no relief proposed for parents helping
children onto the property ladder. So if parents are purchasing a
property for their child to live in, this will be treated as a purchase
of a second property and the higher rates of SDLT will apply.
However, if a parent were to give their child money towards a
deposit and act as guarantor on the mortgage, but not own the
property jointly with them, the higher rate of SDLT will not apply
as they will not own more than one residential property.
The additional duty could also affect those who own property
overseas, though the consultation document is unclear. It is
therefore advisable for those who own a home abroad to be
cautious about buying in the UK until the detail is known.
The consultation asks for responses to the proposals that the
higher rates of SDLT should not apply to corporates and funds
owning more than 15 properties, and whether this should be
extended to individuals in the same position.
If you are currently in the process of buying a second property
consider whether it is possible to accelerate completion before
1 April 2016.
Property will need to be revalued every 5 years from 1 April
2012. This date is rapidly approaching at 1 April 2017. Property
owners will need to be prepared to consider obtaining valuations
at this date.
Inheritance tax (“IHT”) – residential property held
via an offshore structure
We are still awaiting a consultation further to the announcement
in the Summer Budget that UK residential property held via
offshore vehicles will now be chargeable to IHT. Previously, UK
residential property owned by non-UK domiciled individuals via
non-UK company structures were regarded as excluded property
and outside the scope of IHT.
Holding residential property via a structure may now not be the
preferred route for non-UK domiciled individuals. It has been
hinted that there may some form of de-enveloping relief available
but no details have been released as of yet. Therefore, for the
time being, review your options with your advisers.
Inheritance tax – Residence Nil Rate Band
(“RNRB”)
For deaths on or after 6 April 2017, the RNRB will be available
as an enhancement to the existing nil rate band (“NRB”) where
the deceased’s residence is closely inherited (inherited by a lineal
descendant such as a child or a grandchild). The extra allowance
will be phased in from 2017/18 at £100,000 increasing to
£175,000 by 2020/21. There will be a tapered withdrawal of the
RNRB for estates valued at more than £2 million. The basic NRB
will be frozen at £325,000 until 5 April 2021.
With the ability for both the basic and residence nil rate bands
to be transferred to surviving spouses and civil partners, the
government were able to claim that the effective IHT threshold
for a couple will increase to £1 million in 2020/21. Where the
first death occurs prior to 6 April 2017, the RNRB remains
transferrable where the second death occurs after this date.
However, a claim must be made within two years of the second
spouse or civil partner’s death.
Annual Tax on Enveloped Dwellings (“ATED”)
extension
Income tax – buy-to-let – wear and tear allowance
Following the extension to ATED announced in the 2014 Budget,
the second stage of this extension will come into force from
1 April 2016 (2016/17), bringing properties valued over £500,000
within the regime. The relevant charge will be £3,500 per year
and this is due, together with the annual return, in April 2016.
The wear and tear allowance will be abolished from 6 April 2016
and a form of renewals basis will be introduced. This will mean
that the cost of replacing furnishings (not the original outlay) in
a rental property (whether let furnished or unfurnished) will be
allowable as a deduction.
The ATED rates have not yet been announced for 2016/17,
however, it is anticipated that they will be increased by inflation.
The new renewals basis will cover items such as moveable
furniture, white goods, carpets, curtains, linen, crockery or
cutlery. This is certainly preferable to the current position for
landlords of unfurnished property who have not been allowed
relief for replacing such items.
It is important to remember that the ATED charge is based on the
value of the property on 1 April 2012, so property owners should
revisit their 1 April 2012 valuation to check if their property now
falls within the lower threshold for ATED. It is also important to
remember that even if the property qualifies for relief from ATED
(for example, it is commercially rented), an ATED return still needs
to be filed to claim the relief.
www.blickrothenberg.com
Those claiming the wear and tear allowance may wish to
consider deferring replacing items until after 6 April 2016.
Page 4
Income tax – buy-to-let – relief for finance costs
From 6 April 2017, there will be a restriction on the relief that
landlords of residential property obtain for finance costs (mortgage
interest, arrangement fees etc). The restriction will be phased in
over four years so that by 2020/21, relief for finance costs will only
be available as a basic rate reduction.
The restrictions will apply to individuals, trustees and partnerships
and will not apply to furnished holiday lettings, commercial
premises or corporate owners.
The impact of the changes have yet to be felt, but individuals with
high mortgage costs will see an increase in their tax liability and
may affect the affordability of their rental business, or result in the
additional tax costs being passed on to the tenant in increased
rental costs.
Landlords may therefore wish to review their mortgage
arrangements or even consider incorporation if the income stream
is not required. However, incorporation is not appropriate for
everyone and specialist advice should be obtained.
Income tax
Personal allowance and tax bands
From 6 April 2016, a new tax free personal savings allowance
will be introduced for basic and higher rate taxpayers. This will
be £1,000 for basic rate taxpayers and £500 for higher rate
taxpayers. Savings income below these limits will be exempt
from tax. There will be no savings allowance for additional rate
taxpayers. The deduction of basic rate tax at source from bank
interest will be abolished from this date.
For 2016/17, the personal allowance will be £11,000. It is intended
that this increases to £12,500 by 2020.
The basic rate band will increase to £32,000 meaning that an
individual will need income of £43,000 before falling into the higher
rate of taxation.
The additional rate of 45% continues to apply where total income
exceeds £150,000.
Where income exceeds £100,000, the personal allowance is
tapered away by £1 for every £2 of income in excess of this
amount so those with income of more than £122,000 will not
benefit from the personal allowance.
Page 5
Taxation of dividends
From 6 April 2016, the notional dividend tax credit of 10% will be
abolished and a new dividend tax allowance of £5,000 per annum
will be introduced.
The tax rates will also change for dividend income in excess of the
£5,000 allowance: 7.5% for basic rate payers; 32.5% for higher
rate payers; and 38.1% for additional rate payers.
This will trigger an actual tax increase for those with savings and
dividend income in excess of £16,000 in 2016/17. Those who
are able to do so may wish to consider whether it is worth taking
increased dividends prior to 5 April 2016.
Pensions
From 6 April 2016, the annual allowance of £40,000 is to
be tapered for those with total income from all sources over
£150,000. The allowance will be reduced by £1 for every £2 of
income over £150,000 to a possible £10,000 for annual income
over £210,000. Income for this purpose includes employer pension
contributions.
Any unused allowance from earlier tax years can still be carried
forward for up to three years.
Pension contributions in excess of the available allowance are
taxed as income.
The lifetime allowance, the upper limit on the value of tax favoured
pension arrangements, is to reduce to £1 milliion on 6 April 2016.
It will then increase in line with inflation (as measured by CPI) from
6 April 2018. The current limit of £1.25 million can be secured
by stopping all pension contributions before 6 April 2016 and
registering with HM Revenue & Customs (“HMRC”) for Fixed
Protection 2016 (“FP16”).
Individuals with pension arrangements valued at more than
£1 million at 6 April 2016 will be able to register for Individual
Protection 2016 (“IP16”), which provides a personal lifetime
allowance equal to the April 2016 value, but capped at £1.25
million. Pension contributions may continue post 6 April 2016
without affecting the IP16 allowance.
Pension funds in excess of the available lifetime allowance are
taxed at 55%.
Page 6
International matters
Changes to the non-domicile regime
Following the announcement in the Summer Budget, a
consultation document was released on 30 September 2015
with some draft legislation. The consultation period has closed
and we can expect legislation to be included in Finance Act
2016 and be effective from 6 April 2017.
Our contacts
Caroline Le Jeune
Partner - Private Client
+44 (0)20 7544 8986
[email protected]
The main points under consultation are:
• Non-domiciled individuals who have been resident in
any part of 15 out of the past 20 years will be treated as
“deemed domiciled” for all UK tax purposes with effect
from the start of their 16th year of residence. It is possible
to restart the clock for the purpose of the 15 year rule,
provided an individual is non-resident for at least six
complete UK tax years.
• The 15 year rule will not impact an individual’s domicile
under general law, only the UK tax treatment. It will not
impact the domicile of the individual’s children, whose
domicile under general law and deemed domicile for tax
purposes will be tested separately and by reference to the
child’s own circumstances.
Nimesh Shah
Partner - Private Client
+44 (0)20 7544 8746
[email protected]
Susan Spash
Partner - Private Client
+44 (0)20 7544 8991
[email protected]
• Individuals born in the UK (to UK-domiciled parents) who
have acquired a domicile of choice in another country
under general law will not be able to claim non-dom status
if they return to the UK and become tax resident.
• The UK tax treatment of offshore trusts is being
considered. The consultation document confirmed that
trusts established prior to an individual becoming deemed
domiciled will remain protected and outside the scope
of IHT. Additionally, it may be possible for the assets in
the trust to benefit from a pseudo-remittance basis - i.e.
income and gains will not be taxed on the settlor until
payments or benefits are received from the trust. If a
non-UK domiciled individual does benefit, how those
benefits are taxed may change, although the detail of how
those benefits may be taxed has not yet been announced.
The £90,000 remittance basis charge for those resident in the
UK in 17 out of the last 20 tax years will become redundant
from 6 April 2017. There are no changes to the £30,000
and £60,000 remittance basis charges for those resident in
the UK for seven out of nine years and 12 out of 14 years
respectively.
The proposed changes are wide reaching and it is important
that non-UK domiciled individuals review their personal
circumstances in preparation for the changes.
Page 7
This newsletter has been prepared for clients and contacts of
Blick Rothenberg LLP. We take every care to ensure that the
information given is correct, but it should not be taken to be
sufficient for making decisions.
Blick Rothenberg LLP is authorised and regulated by the
Financial Conduct Authority to carry on investment business.
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