Prepare for the New Tax Year
With the end of the tax year upon us, it is time to think about tax year-end planning. Here are some points worth thinking about (that will hopefully provide a form of distraction in these odd, challenging times!):
Income splitting – Married couples (or civil partners) should review their level of taxable income received in the year to make use of tax savings by structuring their affairs to ensure that both spouses use their personal allowances and basic rate tax bands (where applicable) – being £12,500 and £50,000 respectively for the tax year ending 5 April 2020. These amounts also remain at this level for the 2020/21 tax year.
Intra-spouse transfers of income producing assets should be considered and these come with the bonus of any transfer being exempt from capital gains tax.
Watch the stealthy 60% band – If you anticipate your taxable income falling within the £100,000 – £125,000 band, you will pay the maximum effective rate of income tax of 60%. Hence, it is best to avoid where possible. This can be done by making pension or qualifying gift aid contributions.
Other planning such as ‘income splitting (see above), and the use of limited companies (see below) should also be considered.
If you (or your partner) claim Child Benefit, the amount is restricted for those with taxable income between £50,000 and £60,000. Income in excess of £60,000 reduces the entitlement for Child Benefit to nil. This restriction applies if either partner falls in the bracket, therefore one partner earning £100,000 and the other £nil will have to repay all child benefit received whereas both partners earning £50,000 will not have to repay anything.
Dividend allowance –The £2,000 dividend allowance is available to anyone that has dividend income. Dividends within your allowance are free of income tax but will still count towards your basic or higher rate bands, and may, therefore, affect the rate of tax that you pay on dividends you receive in excess of the £2,000 allowance.
If a company has sufficient distributable reserves, it will be sensible to pay an extra dividend before 5 April 2020 if shareholders have not fully used their dividend allowance in the year.
UK tax residence – UK tax resident individuals are required to pay UK income and capital gains tax on their worldwide income and gains. For those wishing to retain a non-UK tax resident status, it is vitally important to keep travel diaries and review the number of midnights of presence in the UK, ensuring to stay within the limits allowed by the Statutory Residence Test.
As an aside, given the current situation, HMRC have stated that in some situations the current restrictions on travel will be treated as ‘exceptional circumstances’, meaning the days spent in the UK as a result of the restrictions should not count as days of presence in the UK for these purposes.
Pensions – Review whether you have utilised your annual allowance in the year and whether you (or your limited company business) should seek to make use of any unused annual allowances from the previous three years. Pension contributions made individually increase the thresholds at which you pay higher/additional rate tax, whereas contributions made by a company are deductible for corporation tax purposes.
To ensure that the option to use unused annual allowances is available in future years, it is prudent to become a member of a registered scheme if you are not a member of such a scheme already.
You can also contribute up to £2,880 net (£3,600 gross) per year into a pension on behalf of your children or grandchildren and still obtain tax relief. The funds will be protected from tax charges but cannot be drawn on until the child/grandchild is aged at least 55.
Flexible pension drawdown changes highlight the need for expert planning. The drawdown restricts the future ability to invest more into a pension scheme. The Money Purchase Annual Allowance limit reduced from £10,000 to £4,000 from April 2017. The 25% tax free amount doesn’t have to be taken at once on retirement. Smaller amounts are possible, each with 25% tax free.
Use of a company – If you are a higher or additional rate taxpayer, structuring your business or investments through a limited company has the potential to cut your tax bills significantly. With corporation tax rates currently at 19%, the potential advantages of holding income-producing assets in a limited company, rather than as an individual, are greater than ever. There are, however, anti-avoidance rules to consider.
Structuring your assets within a company can also have other benefits such as making it easier to make gifts for the purposes of lifetime inheritance tax planning.
Individual Savings Allowance (ISA) – Have you taken advantage of your ISA investment limit? You can currently invest up to £20,000 a year and the income and capital growth on savings in an ISA is tax free. Unlike with pension contributions, you cannot utilise unused ISA allowances from previous years, and therefore if you do not utilise your allowance during the tax year then it will be lost. There is still time until 5 April 2020 to maximise your ISA subscription for the 2019/20 tax year.
Life assurance bonds – Are you looking to cash in your life assurance bond? We urge you to consider the level of your other taxable income for the current tax year. The proceeds obtained from your life assurance bond will be treated as additional income, and the gains may push your income over the higher or additional rate tax threshold in the year they mature. All gains are taxed as income. Additional tax must be paid on the entire gain, however, keep in mind that withdrawals of up to 5% a year are tax free.
If such bonds are held in a trust, we would strongly suggest speaking to a tax professional first before the bond is surrendered/matures as there are tax traps to navigate.
Buy-to-let properties – Given the tax changes regarding higher-rate tax relief on finance costs introduced from April 2017, it may be worth reviewing again the impact of these new rules. The restriction has increased to 75% (i.e. higher-rate tax relief only being available on 25% of finance costs) on 6 April 2019, and is increasing to 100% from 6 April 2020 – meaning no higher-rate tax relief will be available on finance costs from 2020/21 onwards.
Consider either purchasing your next buy-to-let property in a limited company (whereby the new rules do not apply), or in the joint names of yourself and your spouse/civil partner as tenants in common. The rental income can then be divided between you according to the proportion of the property you each own, e.g. 10%:90%, giving the lower earning partner a more substantial interest, so that the income may be taxed at the lower income tax rates. Other possibilities would be: paying off the debt and incorporation (for the later consider tax planning with CGT and SDLT consequences).
Rent a room relief – Currently the first £7,500 of rental income you receive each year from letting part of your home is free of tax. This treatment may be more beneficial than calculating the profits by deducting actual expenses.
Capital Allowances – Consider capital allowances when purchasing a furnished holiday let or commercial property. This is an often overlooked aspect when investing in new ventures and can result in the loss of a large amount of tax relief.
The Annual Investment Allowance increased from £200,000 to £1million on 1 January 2019. This temporary increase was due to last 2 years and therefore may reduce on 31 December 2020. This means careful planning may be required for the capital allowances to be maximised, particularly if a high level of expenditure is planned. The AIA threshold is apportioned where an accounting period is less than 12 months or straddles the date where the threshold changes.
Structures and Buildings Allowance (SBA) – If you are planning the build of commercial property or the improvement or conversion of existing structures and buildings, including converting existing commercial premises to qualifying use, an annual straight line deduction of 3% of the qualifying costs is available.
Research & Development (R&D) tax relief – Limited companies should regularly assess, and speak to an experienced tax professional, as to whether they are incurring costs on R&D. It is very likely that most businesses are carrying out some form of R&D. It is something that is often misunderstood, and consequently drastically under claimed.
Value Added Tax (VAT) – If your business has a turnover of less than £150,000 per year, you can use the Flat Rate scheme for small businesses. The Flat Rate Scheme uses a simplified single step process, whereby output VAT is paid at a rate determined by your business type.
Beware though, if you are a business providing a service, it is likely that you will meet the definition of a ‘limited cost trader’, and a 16.5% rate will automatically apply. This is something to avoid!
If your annual turnover is below £1,350,000, you can use the VAT cash accounting scheme. The scheme allows you to account for VAT on your sales on the basis of when you get paid, rather than on tax invoices you issue. If you have cash flow concerns, the scheme could be a lifesaver!
‘Making Tax Digital’ for VAT came into effect from 1 April 2019 for VAT registered businesses, whose taxable supplies exceed the VAT registration threshold. It is proposed that all self-employed taxpayers, company owners and property landlords will be required to submit regular online returns rather than one annual tax return, and it is possible that this will commence from April 2021.
UK Tax in Dealing in or Developing UK Land – It’s important to seek advice prior to the acquisition of UK land (or assets deriving their value from UK land) as there could be a surprise income tax charge as opposed to capital gains tax.
This catches out many unsuspecting property developers and land dealers. Advice should be sought from an experienced tax professional.
Capital Gains Tax
Annual exemption – Have you made use of your 2019/20 Capital Gains annual exemption (£12,000 for individuals and £6,000 for trustees)? Additionally, if you have brought forward capital losses, consider making sales to utilise these.
Each spouse or civil partner has their own capital gains tax annual exemption. Assets can be transferred between spouses and civil partners at a value that gives neither a gain nor a loss position to ensure that each spouse utilises their annual exemption.
Capital loss crystalisation – Given the drops in the value of global stock markets in recent weeks, it would be worth considering crystallising losses, especially if you have realised gains earlier in the tax year. Obviously investment advice should be sought.
Negligible value – Review whether any assets have become of negligible value i.e. became worthless since their acquisition. If so, a capital loss (or even loss deductible against your taxable income in the right circumstances) could be claimed.
Additionally, have you made any loans to a trading business that have become irrecoverable? If so, a capital loss could be claimed.
Timing – If you are looking at disposing of more than one asset at a gain, it may be worth splitting the disposals either side of 6 April, so you benefit from two annual allowances.
However, it is worth noting that from 6 April 2020 there is a new reporting regime being introduced whereby a Capital Gains tax return is required to be submitted within 30 days of completion and any Capital gains tax liabilities must be paid by the same date. It will be important to seek advice promptly to ensure that sufficient information is available in order to prepare a Capital Gains Tax computation and submit the return within the tight 30 day deadline.
Although there is not much that can be done to bring forward a commercial sale, if you are thinking of gifting an investment property it may be worth considering doing so before 6 April 2020 when these new rules are introduced, particularly if the property qualifies for PPR relief/Letting relief given the changes outlined below.
Principal Private Residence (PPR) relief – If you sell a property that has been your main residence for the entire period of ownership, any gain would qualify for PPR relief and therefore will not be taxable. The relief is also available if you have lived in a property for a proportion of the ownership period. In addition to PPR relief applying to the actual period of ownership, it is also available for the final 18 months, however, this period of deemed occupation is reducing to 9 months for disposals made from 6 April 2020.
You should review whether a PPR relief election should be made where you use more than one property as a residence. If an election has been made, consider whether the election is still made on the most appropriate property. If you have purchased a new property in the last two years, this opens up the window in which you can re-elect a new PPR.
Letting relief – If you are selling a property that qualifies for PPR relief which has also been let out at some point during ownership, there is a further relief available. Letting relief is capped at the lower of: the apportioned gain for the period the property was let; the amount of PPR relief available; or £40,000. From 6 April 2020, letting relief is only available where the owner is sharing occupancy of the home with the tenants under the same roof. For a married couple the removal of lettings relief could result in a further £80,000 being liable to capital gains tax, which at 28%, results in a £22,400 tax increase!
If you are considering a gift of a property that currently qualifies for letting relief, it may not be too late to utilise the relief either through a direct gift or by using a trust/limited company to crystallise the capital gain.
Impact of separation – If you have permanently separated from your spouse in the 2019/20 tax year, you should consider transferring assets between each other before 5 April 2020. The capital gains tax position for these type of transfers is ‘no gain/ no loss’ meaning no CGT for the year of separation up to 5 April. After that, CGT applies.
Entrepreneurs’ Relief (ER) – When considering disposal of a qualifying business asset, it is practical to consider ER availability well in advance as the ownership period condition increased to 24 months from 6 April 2019.
The relief results in a 10% rate of capital gains tax and could make a significant difference for a potential sale to the business owners. Businesses should be looking to understand the relief when planning ahead and prepare themselves for the future.
The reduction in the lifetime limit to £1m announced in the recent Budget should be considered.
Investors’ Relief (IR) – If you are an investor who is neither an officer or an employee in an unlisted trading company and you are considering a sale of the shares in the future you could be allowed to access the 10% rate by virtue of this often over-looked relief. The IR will apply in addition to the Entrepreneurs’ Relief (ER) allowance subject to qualifying conditions. It is important to consider IR when looking to invest in unquoted, trading companies where you will not have involvement as an employee/director.
This will almost certainly become more attractive given the recent change to the Entrepreneurs’ Relief lifetime limit.
Non-UK residents – Non-UK tax residents have been subject to UK capital gains tax on residential property since 6 April 2015 and from 6 April 2019, the scope of the charge widened to include all immovable property situated in the UK, creating a single regime covering all UK properties held by non-UK residents.
Rebasing of assets will apply at the relevant dates on the sale of UK property by non-UK residents and we urge you to discuss the ramifications with an experienced tax advisor.
Business Property Relief/Agricultural Property Relief – A regular review of the availability of these valuable reliefs is essential given that both circumstances and interpretation of the conditions can change.
In particular, corporate structures and partnership structures should be reviewed as this is a common area for issues to arise.
We are anticipating sizeable changes to both reliefs in the near future, making a review extremely important.
Lifetime planning – We recommend that you regularly review your current exposure to inheritance tax and whether any lifetime planning should be undertaken. If able to do so, you should ensure that you are utilising the various lifetime gift reliefs and exemptions.
Will – Is your will up to date? Review the terms of your will and consider whether it needs updating. Consider making a will if you have not made one and additionally consider setting up Powers of Attorney where you have not already done so. It is often forgotten that marriage, invalidates a will.
Residence Nil Rate Band (RNRB) – The RNRB was introduced from 6 April 2017. From 6 April 2020, the additional inheritance tax free band per married couple will rise to £350,000 where applicable. The result is that a couple’s first £1,000,000 suffer no inheritance tax.
The conditions that an estate has to meet to qualify for the use of the additional tax free band are complex. There are many circumstances where the full RNRB may not be available. It is, therefore, essential to review the terms of wills and for the property owner to ensure that this valuable additional band is available.
Pensions – The taxation of pension funds on death have significantly changed. Consequently, it is important for pension holders to review what happens on their death and revisit the position (ensuring relevant nominations have been made and are up-to-date etc.). As before, it is important to consider leaving pension funds undrawn and realising income from other sources given the beneficial position on death.
If you would like to discuss any of the matters raised in this document and how we at RRL can assist, please contact Tax Partner Steve Maggs on firstname.lastname@example.org. For regular tax updates please see Steve Maggs’ Tax Blog here.