Archives for 2015

For 2015-16 any dividends drawn by shareholders that form part of their income taxed at the standard rate, will attract no personal tax on amounts taken. If the dividends form part of their income taxed at 40% or 45%, then the additional personal tax due is calculated as 32.5% or 37.5% respectively – of the gross dividend received – less the present 10% tax credit.
As previously discussed, from 6 April 2016, the way dividends are being taxed will change. The 10% tax credit is being abolished and each individual will have available a flat rate dividend allowance of £5,000. Any dividends received by an individual in excess of £5,000 will be taxed as follows:
• 7.5% if your dividend income is within the standard rate (20%) band
• 32.5% if your dividend income is within the higher rate (40%) band, and
• 38.1% if your dividend income is within the additional rate (45%) band
A director shareholder who presently receives a £27,000 net dividend as part of their remuneration package, and all of this income falls to be part of their standard rate band, then no additional tax is payable. With no change in strategy, for 2016-17 the same dividend will create an extra personal tax liability of £1,650.
This amount will usually form part of the director’s Self Assessment underpayment for 2016-17 and be due for payment 31 January 2018. On the same date the director will be required to make a payment on account for 2017-18; accordingly, the extra tax of £1,650 coverts into tax payable of £2,475 on 31 January 2018 (£1,650 plus 50% of this amount as payment on account for 2017-18), with a further 50% or £825 payable as a second payment on account 31 July 2018.
Should you compensate for this tax increase by increasing your salary? The answer would generally be no, as that would mean 12% employees’ NICs and 13.8% employers’ NICs. It may be possible to offset any additional employers’ NICs due by claiming the £2,000 Employment Allowance (£3,000 from April 2016, but beware new restrictions from this date for “one-person” companies).
Unfortunately, in most, if not all cases, where dividend income is a significant part of your remuneration package, this change in legislation is likely to mean that you will pay more personal tax from April next year.
Interestingly, a higher rate tax payer receiving the same £27,000 cash dividend will only be £400 worse off.
It should also be noted that the £5,000 allowance is not an exemption but a nil rate tax band. The full dividends still count as income e.g. for calculating the effect on personal tax allowances.
There are limited planning options, including changing the scale of dividends taken before 6 April 2016. Business owners need to plan for these tax increases and we recommend that you seek professional advice as soon as possible.

If you own property in the EU you may be advised to revisit your Wills and make sure that you are not affected by the automatic succession rules that apply in many countries. For example, in France it is the usual practice to ensure that property is left to children rather than the surviving spouse.
Recent changes in EU law and practice mean that you can now nominate the jurisdiction that you wish your EU property to be ruled by. This may mean a change to your current Will in the UK, or by creating a second Will to cover your EU property.
In effect, citizens are able to choose whether the law applicable to their succession should be that of their last habitual residence or that of their nationality.

If you are concerned about the annual cost of a VED license you may want to consider your car replacement options before the new VED regime starts April 2017. It will apply to all cars first registered after 1 April 2017.
From this date, VED will still be based on CO2 emissions, but the present generous rates for low CO2 vehicles will largely disappear. The only exception is zero emission vehicles which will continue to have a £0 charge.
VED will be split into two bands: a starter band, which will apply for the first year, and a standard rate, which will apply to subsequent years of ownership.
The rates gradually increase for the initial starter band. For emissions between 1 to 50g/km the starter rate is just £10. At the other extreme, cars with a CO2 rating in excess of 255g/km, the starter rate is a significant £2,000.
Owners of all vehicles with a CO2 emission rate in excess of 0g/km will then pay an annual, standard rate of £140 for the second and subsequent years of ownership.
Finally, cars with a list price above £40,000 will pay a supplement of £310 a year for the first 5 years at which the standard rate is applied. i.e. the annual standard rate for these vehicles will be £450 not £140.

The Government is undertaking a review of the Sunday Trading legislation. The review aims to deal with the concerns of larger high street retailers, who are concerned that they cannot compete effectively with online retailers unless they are open seven days a week at normal opening hours.
The Government is consulting on plans to give local areas the power to allow large shops to open for longer on Sundays.
The reforms would give metro mayors and local authorities the power to determine Sunday trading rules that reflect the needs of local people and allow shops and high streets to stay open longer and compete with online retailers.
Local authorities would have the discretion to zone which part of their local authority area would benefit from the longer hours, allowing them to boost town centres and high streets.
The existing Sunday trading laws were introduced more than 20 years ago before high-street shops faced competition from online retailers. The law currently prevents large stores from opening for more than 6 hours. Small shops covering less than 3,000 sq ft can open all day.
The Government is committed to giving the UK’s major cities the power to compete for international tourism while increasing consumer choice. Paris has recently extended Sunday trading opening hours in areas of international tourism, and Dubai and New York shops open into the evening 7 days a week.

From April 2016, the present dividend tax credit of 10% is being abolished and is being replaced with an annual dividend allowance of £5,000.
To recap, dividends received in excess of the £5,000 allowance will be taxed at increasing rates according to your highest rate of Income Tax:
• 7.5% if you are a basic rate taxpayer
• 32.5% if you are a higher rate tax payer, and
• 38.1% if you are an additional rate tax payer.
These changes will make a difference to all limited company shareholder/directors who presently receive a small salary and large dividends. Many will be paying more tax as a result.
We recommend that all affected readers undertake a review of their tax position from April 2016 so that they are aware of the financial impact on their personal disposable income.
But what about tax payers who receive significant dividend income from diverse investments and do not, necessarily, run their own company?
If your dividend income is likely to exceed the £5,000 limit you could consider the following actions to minimise any additional dividend tax:
1. Make sure you use the ISA limit to transfer high dividend yield shares into this tax free environment.
2. Each person will be entitled to the £5,000 relief so spouses could consider equalising their share holdings in an attempt to make the most of their individual £5,000 allowance.
3. As the additional tax, on dividends received in excess of the £5,000 limit, is at higher rates for higher rate and additional rate Income Tax payers, consider transferring shares to a lower taxed spouse to restrict tax to the lower 7.5% rate.
4. If you are a higher or additional rate tax payer and you have significant dividend income, you could look for ways to reduce your overall taxable income and therefore reduce an additional dividend tax charge. For example, by deferring withdrawals from a drawdown pension.
If it is likely that you will be crossing the £5,000 Rubicon next year, now is the time to plan an effective tax mitigation strategy. Please call if you would like our assistance.

Some of the key changes that will impact small businesses in particular are set out below:

• Taxation of dividend income from April 2016. The present 10% dividend tax credit is being abolished from April 2016. In its place an annual dividend tax allowance of £5,000 is being introduced. Dividends received will be free of further charge to Income Tax up to this limit. Above the £5,000 limit dividend income will be taxed as follows:
  • Basic rate tax payers at 7.5%
  • Higher rate (40%) tax payers at 32.5%, and
  • Additional rate (45%) tax payers at 38.1%

Shareholder directors of small companies that pay limited salaries and high dividends may be affected by this change and should review their dividend strategy.

• National Insurance Employment Allowance. From April 2016 the present £2,000 allowance is being increased by 50% to £3,000. The Chancellor has also announced that the allowance will be withdrawn for one person shareholder/employee companies.

 

• Annual Investment Allowance (AIA). The annual limit for this generous tax allowance, presently up to £500,000 of qualifying expenditure can be written off against taxable profits, was due to revert to £25,000 from 1 January 2016. It has been confirmed that the £25,000 limit will instead increase to £200,000 with no further changes currently tabled.

It was also announced that Corporation Tax rates would fall to 19% in 2017 and 18% in 2020.

A number of counter measures will also be introduced to curb tax avoidance. This continues HMRC’s strategy to root out and penalise businesses that continue to misuse tax legislation in a way not intended by parliament.

Legislation in Summer Finance Bill 2015 introduces a tapered reduction in the annual allowance from 6 April 2016, for those with an ‘adjusted income’ of over £150,000.

The ‘adjusted income’ definition adds-back any pension contributions, to prevent individuals from avoiding the restriction by exchanging salary for employer contributions.

To provide certainty for individuals with lower salaries who may have one off spikes in their employer pension contributions, a net income threshold of £110,000 will apply. If the individual’s net income is no more than £110,000 they will not normally be subject to the tapered annual allowance. However, anti-avoidance rules will apply so that any salary sacrifice set up on or after 9 July 2015 will be included in the threshold definition. The rate of reduction in the annual allowance is by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum reduction of £30,000.

All pension input periods open on 8 July 2015 are closed on that date, with the next pension input period running from 9 July 2015 to 5 April 2016. All subsequent pension input periods will be concurrent with the tax year.

To prevent retrospective taxation, individuals will have an £80,000 annual allowance for 2015-16, but subject to a £40,000 allowance for savings from 9 July 2015 to 5 April 2016. To achieve this, the 2015-16 tax year will be split into two notional periods: 6 April 2015 to 8 July 2015, the ‘pre-alignment tax year’ and 9 July 2015 to 5 April 2016, the ‘post-alignment tax year’. All individuals will have an annual allowance of £80,000 for the ‘pre-alignment tax year’. Where this amount has not been used in the ‘pre-alignment tax year’, it will be carried forward to the post-alignment tax year, subject to a maximum of £40,000. In addition, any unused annual allowance from the previous 3 years can be added to these amounts in the normal way.

The transition arrangements for 2015-16 mean that taxpayers who paid sizeable pension premiums in the period to 8 July 2015 (perhaps in anticipation of Budget changes) may be able to have a second bite at the cherry.
As readers will appreciate these are complex changes. Taxpayers who feel they may be affected should take professional advice.

One of the tax issues that the Conservative Party promised to legislate for, a promise they made during the recent election campaign, was the easing of the Inheritance Tax charge for home owners in the UK. The much publicised change was to take family homes of up to £1m out of Inheritance Tax charge completely.

The Chancellor’s announcement last month confirmed this intention, but it will not happen for some time. The mechanism to achieve this relief is to be called the main residence nil-rate band (MRNB).

This will be set at:

• £100,000 from April 2017
• £125,000 from April 2018
• £150,000 from April 2019
• £175,000 from April 2020

It will then increase in line with Consumer Prices Index (CPI) from April 2021 onwards. Any unused nil-rate band will be able to be transferred to a surviving spouse or civil partner.

The additional nil-rate band will also be available when a person downsizes or ceases to own a home on or after 8 July 2015 and assets of an equivalent value, up to the value of the additional nil-rate band, are passed on death to direct descendants.

There will be a tapered withdrawal of the additional nil-rate band for estates with a net value of more than £2 million. This will be at a withdrawal rate of £1 for every £2 over this threshold.

The existing nil-rate band will remain at £325,000 from 2018-19 until the end of 2020-21.

The MRNB relief will be available to married couples and civil partners.

The £1m overall relief will not be achieved until April 2020. From this date, on the death of the first spouse or civil partner, if they leave their share in the family home to the surviving spouse or civil partner, this will pass IHT free and the deceased parties’ unused MRNB will pass to the surviving spouse. If the rest of the deceased person’s estate passes to the surviving spouse then their unused nil rate band of £325,000 will also pass to their surviving partner.
On the subsequent death of the survivor, if they leave their home to a direct descendant, their estate may be able to claim a combined MRNB of £350,000 (2 x £175,000) plus £650,000 combined nil rate band (2 x £325,000); a total relief of £1m.

There were a number of measures in the Summer Budget that will impact the taxation of property income. These include:

• the abolition of the 10% wear and tear allowance (see details below);
• the restriction of tax relief to the basic rate (20%) for loan interest on funds raised to purchase residential property for letting. This will be phased in over four years from April 2017; and
• the current £4,250 rent-a-room allowance is to be increased to £7,500 from April 2016.

The abolition of the wear and tear relief will apply from April 2016. It will be replaced by a new replacement furniture relief. The new relief will be available to landlords of unfurnished, part furnished and furnished properties. The relief will not apply to ‘furnished holiday letting’ (FHL) businesses and letting of commercial properties, because these businesses receive relief through the Capital Allowances regime.

The new replacement furniture relief will only apply to the replacement of furnishings. The initial cost of furnishing a property would not be included.

Under the new replacement furniture relief landlords of all non-FHL residential dwelling houses will be able to claim a deduction for the capital cost of replacing furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the dwelling house, such as:

• movable furniture or furnishings, such as beds or suites,
• televisions,
• fridges and freezers,
• carpets and floor-coverings,
• curtains,
• linen,
• crockery or cutlery,
• beds and other furniture

Landlords of furnished residential let property considering the replacement of these qualifying items in the current tax year, 2015-16, may be advised to defer expenditure until after 5 April 2016. In this way they will still maximise their claim to the present wear and tear allowance of 10% of rents for 2015-16, and be able to claim the new replacement furniture relief from 6 April 2016.

If you are an old hand at setting up a new business most of the content of this article will be a timely reminder of the issues you need to cover in your project to-do list. For first timers, use this article as a guide to see you through what can prove to be an exhilarating and challenging adventure.

Planning and research

Your planning and research should at least cover the following issues:

• What does it take to run your own business?
• What skills will you need?
• What do you know about your competitors?
• How much capital will you need to raise?
• What resources will you need, plant, equipment, computers etc?
• Could you start on a part-time basis and delay leaving the day job?
• Can you run your business from home?

Also be aware that none of us operate in a vacuum. What special considerations do you need to look out for taking into account the present economic conditions?

Red tape

There is no doubt that at times you will just have to deal with it. Here are a few tips that may make the process less painful.

• Find out exactly what is required, what forms need to be filled in and when they need to be submitted.
• If you feel that a particular process is beyond your abilities find a professional advisor to help, the cost will generally be recovered by time that you are able to free up to work on your business.
• If you want to complete the online filing or form filling make sure you read the fine print…

Red tape seems to be a necessary evil in our highly organised society. If you do find yourself beating your head against a brick wall, save yourself the headache, get some help.

Tax planning

Whatever you do, don’t underestimate the UK tax system. Be very clear what your obligations are and the ways you can organise your business affairs to save tax. There is no point in planning for your tax liabilities after the event! The time to plan is before you act. This is a really important point. Tax specialists, us included, take no joy in advising tax payers that they could have saved themselves tax if only they had acted in a certain way at some time in the past. The tax system is riddled with deadlines that once passed, deny you tax saving opportunities.