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Year-end tax planning

2020 Webinar February 2016

1. Corporation and Business income Tax, dividend and salary planning 3

1.1 Rates of National Minimum wage and living wage ............................................................. 3 1.2 Scottish Rate of Income Tax ............................................................................................... 4 1.3 Employment allowance ....................................................................................................... 5 1.4 EA restriction – director only companies ............................................................................ 6 1.5 Directors’ salary under Employment Allowance ................................................................. 6 1.6 Other remuneration issues – interest on director loan ........................................................ 8 1.1 Trivial benefits provided by an employer .......................................................................... 10 1.2 Travel expenses – workers working through intermediaries ............................................ 10 1.7 IR35 developments ........................................................................................................... 11 1.8 Incorporation advice.......................................................................................................... 12

2. Personal Income Tax and savings ...................................................................................... 13

2.1 Tax rates and thresholds 2016/17 .................................................................................... 13 2.2 National Insurance contributions 2017/18 ........................................................................ 13 2.3 Cars – the appropriate percentage ................................................................................... 14 2.4 Restriction of tax relief on interest in respect of let domestic property ............................. 14 2.5 Pensions lifetime allowance .............................................................................................. 18 2.6 Pensions – annual allowance ........................................................................................... 18 2.7 Restriction of annual allowance for high income individuals ............................................ 21 2.8 Company distributions – transactions in securities ........................................................... 22 2.9 ISA and JISA limits ........................................................................................................... 24

3. Capital and property taxes ................................................................................................... 25

3.1 CGT annual exemption ..................................................................................................... 25 3.2 ATED – increased rates and administrative changes ....................................................... 25 3.3 ATED – properties subject to relief ................................................................................... 25 3.4 ATED - Valuation dates .................................................................................................... 26



1. CORPORATION AND BUSINESS INCOME TAX, DIVIDEND AND SALARY PLANNING

1.1 Rates of National Minimum wage and living wage

The National Minimum Wage (NMW) rates per hour increased on 1 October 2016 and will increase again on 1 April 2017 so that NMW applicable to pay reference periods starting on or after 1 April 2017 are as follows:

the main adult rate (for workers aged 25 and over – also known as the National Living Wage) is £7.50

the rate for workers aged between 21 and 25 is £7.05

the rate for workers aged between 18 and 20 is £5.60

the rate for workers aged under 18 (but over school age) is £4.05

the rate for apprentices is £3.50*.

*This rate is for apprentices aged 16 to 18 and those aged 19 or over who are in their first year. All other apprentices are entitled to the National Minimum Wage for their age.

1.1.1 Penalties

The Government has increased the penalties imposed on employers that underpay their workers in breach of the National Minimum Wage (NMW legislation. For pay reference periods starting on or after 26 May 2015 the basis for the maximum NMW penalty has changed from £20,000 per notice to £20,000 per worker. Further legislation is proposed to prescribe a prison term under certain circumstances. 1.1.2 Minimum wage – common errors

Employer Bulletin December 2016 included a useful “Top 5 errors” article, explaining the most common NMW errors. Rates Are you paying the right rate? If not, you run the risk of underpaying workers. This can happen when employers fail to implement the annual rate increases, miss workers’ key birthdays as they move from one age band to another, or fail to apply the apprentice rates correctly. Deductions Are you making deductions from pay that take a worker’s pay below NMW/NLW rates? This can happen when you make deductions for items connected with the job such as uniforms, deductions for services provided by the employer such as meals or transport, or deductions for accommodation beyond the permitted accommodation off-set amount.



Additional pay Are you including top ups to pay that do not count as pay for NMW/NLW purposes? This can happen when you include payments such as shift allowances under certain circumstances or customer tips or bonuses when calculating a worker’s pay for NMW/NLW purposes. Status of the worker Are you engaging people who should be classed as workers? This can happen when employers mistakenly treat workers as volunteers, interns or self-employed. Please see – Who gets the minimum wage – to help you decide if an employee should be classed as a worker and therefore is entitled to the National Minimum Wage. Working time Are you including all the time a worker is working? If not you run the risk of unpaid working time, additional hours worked but not paid. These could be short but regular periods of time, for example time spent helping to shut up shop or clear security after a worker’s shift has ended, or could be longer periods of time spent training or ‘down time’ waiting. Other working time errors can occur with travelling time if it’s in connection with the worker’s job, such as between assignments, and sleeping time. 1.2 Scottish Rate of Income Tax

The Scottish Rate of Income Tax (SRIT) is the amount of income tax Scottish taxpayers pay and came in to force on 6 April 2016. In February 2016, the Scottish Parliament set a rate of 10%, which meant, for the tax year beginning 6 April 2016, Scottish taxpayers have paid tax at the same rates as taxpayers elsewhere in the UK. However, further income tax powers have now been devolved which allow the Scottish Parliament full flexibility to set the income tax rates and limits applicable to the earnings of Scottish taxpayers. This means any structure of rates/limits (including a 0% band) can be introduced – i.e. the Scottish Parliament do not have to follow basic/higher/additional rate structure applicable elsewhere in the UK. These further powers will take effect from April 2017, and from that point all receipts from Scottish income taxes will from April 2017 go to the Scottish Government. 1.2.1 Identifying Scottish taxpayers

Scottish taxpayers have a prefix ‘S’ on their PAYE code. The determining factor is where the taxpayer lives (rather than works). There was a significant number of errors in April 2016 in the codes issued by HMRC to Scottish taxpayers, but it is understood that this has now been rectified. However, it is most important that employees keep their address details up to date. If they have enrolled for a personal tax account, they can change their details online through this.



1.2.2 Scottish income tax

For 2017/18, the Scottish Government is proposing to freeze the rates of income tax applying to income chargeable at the Scottish rate. The Scottish Government is also proposing to freeze the higher rate of income tax threshold at £43,000 in 2017/18. These proposals are currently being considered by the Scottish Parliament as part of its Draft Budget process. 1.2.3 1.5.3 Proposed rates and bands 2017/18

Scottish income tax rates Scottish Bands Scottish Basic rate 20% Over £11,500* - £43,430 Scottish Higher rate 40% Over £43,430 - £150,000 Scottish Additional Rate 45% Over £150,000 and above** * Assumes you are in receipt of the Standard UK Personal Allowance ** Personal Allowance reduced by £1 for every £2 earned over £100,000 1.3 Employment allowance

The allowance provides relief for up to £3,000 from employer NIC. It is claimed by submitting an EPS showing the employment allowance of £3,000. This can be done at the start of the tax year, whether or not the full amount is used at that time or not. Existing claims are carried over from year to year, but you will need to confirm that your client remains eligible for the allowance. The EPS effectively sets the allowance off against NIC’s due by the employer. The allowance is not available to employers if they:

employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener. It is, however, available in respect of care support workers employed by their client.

already claim the allowance through a connected company or charity are a public authority, this includes; local, district, town and parish

councils carry out functions either wholly or mainly of a public nature (unless they

have charitable status), for example: o NHS services o General Practitioner services o the managing of housing stock owned by or for a local council o providing a meals on wheels service for a local council o refuse collection for a local council o prison services o collecting debt for a government department

A business does not carry out a function of a public nature, if it does the following:

providing security and cleaning services for a public building, such as government or local council offices

supplying IT services for a government department or local council



HMRC has issued guidance on these issues, and the position is a little more complex when the business makes the majority of its supplies to public bodies. These businesses are not permitted to claim employment allowance. 1.4 EA restriction – director only companies

The July 2015 Budget announced that from 2016 employers who are director only companies will be excluded from Employment allowance. The test is that for a tax year, a company employer has only a single paid employee and that person is a director. If a second employee is taken on at any time in the year, employment allowance will apply, as it will if there are two paid directors. However, HMRC’s guidance indicates that the second employee must be paid sufficient to trigger a secondary liability to bring the employer within the scope of Employment Allowance. Although many commentators disagree with this, it is unlikely that any employers will take a case to Tribunal based on the amount of allowance available. Note that if the “second” employee is a director, they must exceed the relevant secondary threshold on an annual or pro rata (if appointed during the year) basis. 1.5 Directors’ salary under Employment Allowance

There are two issues which affect what level of salary produces the best overall outcome,

Whether the director is over state pension age or not – this would mean that no employee NIC contributions are payable, and

Whether or not the individual has other income or not 1.5.1 Salary at NI threshold, no other income, 100% distribution

£ Profit 50,000 Salary (8,164) Taxable profit 41,836 Corporation tax 7,949 Net profit 33,887 Dividend 33,887 Tax liability on dividends Total income £42,051 so no higher rate liability. £5,000 at 0%, £25,551 @ 7.5% £1,916 Total tax liability on £50,000 profit £9,865 (19.7%)



1.5.2 As above but salary £11,500

£ Profit 50,000 Salary (11,500) Taxable profit 38,500 Corporation tax 7,315 Net profit 31,185 Dividend 31,185 Total income £42,658 so no higher rate liability. £5,000 at 0%, £26,185 @ 7.5% £1,964 Employee NIC on salary £400 Total tax liability on £50,000 profit £9,679 (19.4%) The saving of £186 is only available where the individual concerned has no other income. If the individual is above state pension age, no employee NIC is payable, providing a further saving of £400 per annum. 1.5.3 Salary at NI threshold, other income of £5,000, 100% distribution

£ Profit 40,000 Salary (8,164) Taxable profit 31,836 Corporation tax 6,049 Net profit 25,787 Dividend 25,787 Tax liability on dividends Total income £37,612 Basic rate on dividends of £20,552 1,559 Tax on non savings income £333 Total tax liability on £40,000 profit £7,941 (19.9%) 1.5.4 As above but salary of £11,500

£ Profit 40,000 Salary (11,500) Taxable profit 28,500 Corporation tax 5,415 Net profit 23,085 Dividend 23,085



Tax liability on dividends Total income £39,585 Basic rate on dividends of £18,085 1,356 Tax on non savings income £1,000 Employee NIC on salary £400 Total tax liability on £40,000 profit £8,171 (20.4%) 1.6 Other remuneration issues – interest on director loan

Where a director takes a low salary – say £10,000 and the remainder of his profits by way of dividend, the starting rate for savings is still available to him. From April 2015, when the starting rate band is £5,000 and the rate reduces to NIL, it is worth considering paying interest on loans made by directors to their companies. If interest is paid it will need to be subject to basic rate tax deduction, and the income tax accounted for to HMRC on form CT61, in a quarterly basis ( calendar quarters, plus year end period if this does not co-incide). Obviously, you will wish to consider whether the interest will be an allowable expense in the company before committing to this course of action. If the dividends distributed fall into the basic rate band, then the tax saving will be £1,300. Where the dividends already fall partly into the higher rate band, the saving is £1,050. In both cases, the lower amount of dividend available contributes to the overall tax saving. The following comparisons ignore any NIC implications as that is static. 1.6.1 Low profits : Salary £11,000 no interest

£ Profit 40,000 Salary (11,000) Taxable profit 29,000 Corporation tax 5,800 Net profit 23,200 Dividend income 23,200 Total Income 34,200 Tax liability on dividends £1,365 Total tax liability on £50,000 profit £7,165



1.6.2 Low profits : Salary £11,000, £5,000 interest

£ Profit 40,000 Interest charge (5,000) Salary (11,000) Taxable profit 24,000 Corporation tax 4,800 Net profit 19,200 Dividend income 19,200 Total income 35,200 Tax liability on dividends £1,065 Total tax liability on £50,000 profit £5,865 Tax saved £1,300 1.6.3 High profits : Salary £11,000, no interest

£ Profit 60,000 Salary (11,000) Taxable profit 49,000 Corporation tax 9,800 Net profit 39,200 Dividend income 39,200 Total Income 50,200 Higher rate liability on 7,200 Tax liability on dividends £4,365 £5,000 @ 0% £27,000 @ 7.5% £7,200 @ 32.5% Total tax liability on £50,000 profit £14,165 1.6.4 High profits: Salary £11,000 £5,000 interest

£ Profit 60,000 Interest charge (5,000) Salary (11,000) Taxable profit 44,000 Corporation tax 8,800 Net profit 35,200 Dividend income 35,200



Total income 51,200 Higher rate liability on 8,200 Tax liability on dividends £4,315 £5,000 @ 0% £22,000 @ 7.5% £8,200 @ 32.5% Total tax liability on £50,000 profit £13,115 Tax saved £1,050 1.1 Trivial benefits provided by an employer

Section 13 sets out the exemption from tax as a benefit in kind which applies to trivial benefits provided from 6 April 2016. This was originally intended to apply from 2015 but was delayed. No tax is due on a benefit provided to an employee or a member of his household if certain conditions are met. There are four basic conditions (A to D) with a fifth condition, E applying if the employer is a close company and the employee is a director or officeholder of the company or a member of the family or household of such a person. 1.1.1 Conditions

Condition A – the benefit is not cash or a cash voucher (as defined by s 75, ITEPA 2003)

Condition B – the benefit cost (either the cost of providing the benefit, or the average cost where provided to multiple recipients and it is impractical to calculate the individual cost) does not exceed £50

Condition C – the benefit is not provided pursuant to relevant salary sacrifice arrangements or any other contractual obligation

Condition D – The benefit is not provided in recognition of particular services performed by the employee as part of his duties, nor in anticipation of such.

Condition E – the benefit cost does not exceed the recipient’s available exempt amount – the annual amount being £300, and the available exempt amount is the amount so far unused.

1.2 Travel expenses – workers working through intermediaries

Section 14 implements changes to the allowable travelling expenses rules to limit the application of the temporary workplace rules where an individual provides his services through an employment intermediary (usually an umbrella company).



The desired result is achieved by terming each engagement with an end user client as a separate employment for the purposes of the travelling expenses rules: this prevents the temporary workplace rules from applying as the workplace becomes the permanent workplace for each of these separate employments. However, the provision is not triggered if the manner in which the worker provides his services is not subject to (or to the right of) supervision, direction or control by any person, unless the intermediary is subject to the IR35 rules, in which case the amended provisions always apply, whether or not there is a right of supervision, direction or control. If services are provided through an intermediary on terms under which the IR35 legislation is not triggered because the IR35 conditions are not met, then the amended rules set out above do not apply and the worker can benefit from the temporary workplace rules as before. There are anti avoidance provisions to deal with false information in this connection, placing liability on the intermediary and potentially also personally on directors of the company. 1.7 IR35 developments

The intermediaries’ legislation (IR 35) requires individuals working through an intermediary (usually a person’s own company) to pay broadly the same tax and National Insurance contributions (NICs) as employees, where they would have been an employee if they had provided their services directly. In the Autumn Statement in November 2016 the Chancellor confirmed that the reforms to off-payroll working in the public sector will be going ahead, and will be implemented from April 2017. This follows a consultation period which started in August 2016. Preparations should be made now to make sure payroll systems can handle this change and can report the relevant PAYE information from the beginning of the 2017 to 2018 tax year. HMRC will provide help for public sector employers and agencies and will introduce clear, objective tests for employers to use to decide at the point of hire whether or not they need to even consider the new rules and then to quickly and decisively identify those engagements that are clearly caught by the rules. For cases that are less clear cut, HMRC will develop a simple and straightforward digital tool to provide employers engaging an incorporated worker with a real-time HMRC view on whether or not the intermediaries’ rules need to be applied. The changes do not introduce a new liability, but are designed to increase compliance with the existing rules. From April 2017 individuals working through their intermediary in the public sector will no longer be responsible for deciding whether the intermediaries’ legislation applies and then paying the relevant tax and NICs.



This responsibility will instead move to the public-sector employer, agency, or third party that pays the worker’s intermediary. The employer, agency or third party will decide if the rules apply to a contract and if so, make sure the relevant income tax and NICs are deducted and reported through PAYE in real time. For those who would like to register for updates as they are issued, Employer Bulletin provides this address: [email protected] 1.8 Incorporation advice

1.8.1 Marginal rates on income

The combined marginal rate on income which is subject to corporation tax and then distributed as dividends in each rate band are as follows:

Basic Higher Additional

Profit 100 100 100

Corporation tax 20 20 20

Net profit 80 80 80

Dividend tax 6 26 30.48

Net retained 74 54 49.52

Tax rate % 26.0% 46% 50.48%

When compared to the rates applying to self-employed profits in each marginal band, the profit ranges where savings on incorporation can be made become apparent. For the sole trader the effective rates are 29% in the basic rate band, 42% in the higher rate band and 47% in the additional rate band, although there is a band of income which suffers 62% between £100,000 and £121,200 in 2015/16 (£122,000 in 2016/17). Once the profits are sufficient that dividends are taxed at the higher rate in 2016/17, any tax savings accumulated through the basic rate band are eroded at a rate of 4%, until profits reach £100,000, when the sole trader starts to bear 62% on additional profits. The equivalent total marginal rates on income in 2017/18 and 2020/21 are

2017/18 – 2019/20 2020/21

Basic Higher Additional Basic Higher Additional

Profit 100 100 100 100 100 100

Corporation tax 19 19 19 17 17 17

Net profit 81 81 81 83 83 83

Dividend tax 6.07 26.32 30.86 6.23 26.98 29.96

Net retained 74.93 54.68 50.14 76.77 56.02 53.04

Tax rate % 25.07% 45.32% 49.86% 23.23% 43.98% 46.96%

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2. PERSONAL INCOME TAX AND SAVINGS

2.1 Tax rates and thresholds 2016/17

The level of allowances and tax rates were confirmed in November 2016 autumn statement. Table : rates and limits for tax 2016/17 and 2017/18

2016/17 2017/18

Personal allowance 11,000 11,500

Income limit for personal allowance 100,000 100,000

Income limit for age related MCA 27,700 28,000

Basic rate band (20%) 32,000 33,500

Higher rate limit (40%) 150,000 150,000

Additional rate 45% 45%

Practical Tip Check whether transfer of allowance to spouse is appropriate in either 2016/17 or 2017/18. Election can be made up to two years after the end of the appropriate tax year and relates only to the year elected if done retrospectively. In year elections are effective until the year after the date of withdrawal. You should also monitor whether clients have made the election and it cannot be used because one of them has a higher rate liability.

2.2 National Insurance contributions 2017/18

Rates and limits for Class 1 contributions were announced in the November 2016 Autumn Statement. The following rates and limits will apply from 6 April 2017. Table : rates and limits for NIC 2016/17 and 2017/18

2016/17 2017/18

Lower earnings limit £112 £113

Primary threshold (employee) £155 £157

Secondary threshold (employer) £156 £157

Upper Earnings Limit £827 £866

Primary main rate 12% 12%

Primary residual rate 2% 2%

Secondary rate 13.8% 13.8%

Secondary rate – workers under 21 0% 0%

Secondary rate – Apprentices under 25 0% 0%

Upper secondary threshold (under 21’s) £827 £866

Upper secondary threshold (Apprentice rate) £827 £866



2.3 Cars – the appropriate percentage

Table : Main table of benefit in kind rates

Emissions (g/km)

2016/17 2017/18 2018/19 2019/20

Zero 7% 9% 13% 16%

1 - 50

51 - 75 11% 13% 16% 19%

76 - 79 15% 17% 19% 22%

80 15% 17% 19% 22%

85 15% 17% 19% 22%

90 15% 17% 19% 22%

95 16% 18% 20% 23%

100 17% 19% 21% 24%

105 18% 20% 22% 25%

110 19% 21% 23% 26%

115 20% 22% 24% 27%

120 21% 23% 25% 28%

125 22% 24% 26% 29%

And then in increments of 5g = 1% until

160 29% 31% 33% 36%

165 30% 32% 34% 37%

170 31% 33% 35% 37%

175 32% 34% 36% 37%

180 33% 35% 37% 37%

185 34% 36% 37% 37%

190 35% 37% 37% 37%

195 36% 37% 37% 37%

200 37% 37% 37% 37%

205 37% 37% 37% 37%

210 and above

37% 37% 37% 37%

2.4 Restriction of tax relief on interest in respect of let domestic

property

At present, full tax relief is available for interest on a loan used in a property business. The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business.



From April 2017, tax relief on interest in property businesses (including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profits of the business, but will attract tax relief at 20%. The legislation is in the second Finance Bill at clause 24, and introduces new ss 272A, 272B and 274A into ITTOIA 2005, plus similar restrictions for partnerships at 399A and 399B. The change does not affect furnished holiday lettings. The change will be phased in as follows:

2017/18 2018/19 2019/20 2020/21

% of interest allowed as a deduction (by new s 272A)

75 50 25 0

% of interest given as a relief at 20% (by new s 274A)

25 50 75 100

The effective interest deduction will therefore be:

2016/17 – 100%

2017/18 – 80%

2018/19 – 60%

2019/20 – 40%

2020/21 – 20% A similar restriction applies to the cost of raising loan finance. 2.4.1 Finance Act 2016 changes

Section 26 makes further changes to the relief for interest incurred in relation to let residential property. Multiple property businesses, including estate income

New section 274A of ITTOIA 2005 recognises that an individual’s “relievable amount” (the amount of interest for which basic rate relief is sought) might have more than one component. The individual may have more than one property business – including an overseas property business – and may also be in receipt of estate property income. Accordingly, the legislation already included in Finance Act 2015 is revisited to reflect this, allowing for current year amounts and brought forward amounts. The current year estate amount is kept separate from the relievable amounts for the current year in respect of one or more property businesses. The structure is therefore:

Current year amount, comprising o A relievable amount in respect of a property business, or o Two or more relievable amounts each in respect of a different

property business (note that furnished holiday lettings are not subject to this restriction and so will not be a separate business producing a relievable amount)

Current year estate amount

Brought forward amount



The relievable amount is the total of these three elements. There is a finer definition of the amounts where the individual is taxed on only part of the property business or estate income. Relief is available on L, the lower of the amount for which relief is sought and the total profits of the property businesses (or share of those profits) plus the relievable amount of the current year estate amounts. Where part of the property business profits fall within the personal allowance, the relief is further restricted to taxable property business profits; for this purpose, personal allowances must be set against income other than savings and dividend income. The balance of the relief not given is carried forward and becomes the brought forward amount in the following year. This restriction relies on the definition of adjusted total income, which is the total net income excluding savings income and dividends less any personal allowances. Trustees

New section 274B sets out the detail of the rules as they apply to trustees. These rules follow the protocol set out above in relation to individuals. Commentary A letting activity that has a low level of interest in relation to the borrowings will not be too badly affected, but larger property businesses using debt to expand the portfolio will find that their business model has been severely undermined. Some examples follow. The primary solutions (where appropriate) include:

Full incorporation – move properties and loans

Partial incorporation – personal borrowing to invest in shares in a property letting company (but this may well be closed as a “loophole)

Pay down borrowings

Sell up Example 1 – single buy to let Jo is a teacher and is 49 years old; he is a 40% taxpayer. He has purchased a buy to let property as an investment. As he has owned the property for some time, the outstanding debt on the property is relatively low. Here is the effect of the change:

2016-17 2020-21 Gross rents 7,200 7,200 Repairs and other tax deductible costs 1,000 1,000 Interest on mortgage 2,500 - Net rental profit 3,700 6,200 Tax at 40% £1,480 £2,480



Less interest relief at 20% on £2,500 500 Net tax liability on rental income £1,480 £1,980 Tax Increase £500 Effective rate on “real” rental profit 40% 53.5% If Jo decided to increase his borrowings to allow him to buy a second buy to let, he would see his tax rate rise still further, as his interest costs will be higher initially, and his net return lower. Example 2 – substantial property portfolio John and Julie are married and together run a sizeable rental property business. They have not run this through a limited company due to the difficulty in obtaining finance for purchases with limited company status.

2016-17 2020-21 Gross rents 600,000 600,000 Repairs and other tax deductible costs 200,000 200,000 Interest on mortgage 350,000 - Net rental profit 50,000 400,000 Personal allowances (x2) 22,000 - Taxable income 28,000 400,000 Basic rate tax (2 taxpayers) 5,600 12,800 Tax at 40% - 94,400 Tax at 45% - 45,000 152,200 Less interest relief at 20% on £350,000 - 70,000 Net tax liability on rental income £5,600 £82,200 Tax Increase £76,600 Effective rate on “real” rental profit 11.2% 164.4% Although John and Julie spend at least 35 hours a week on the business (and their cash return is modest) that is because they have ploughed most of their profits back into building up the portfolio, and taken risks to allow them to grow their business. Their current business structure is now unsustainable. Example 3 – increase in interest rates Finally we return to Jo, who has presently got borrowings of £50,000 on his property which has a current market value of £160,000. His interest rate is 5%. If his debt was £100,000 he would see the following change:

2016-17 2020-21 Gross rents 7,200 7,200 Repairs and other tax deductible costs 1,000 1,000 Interest on mortgage 5,000 -



Net rental profit 1,200 6,200 Tax at 40% £480 £2,480 Less interest relief at 20% on £5,000 1,000 Net tax liability on rental income £480 £1,480 Tax Increase £1,000 Effective rate on “real” rental profit 40% 123.3% Advice point Many buy to let owners happily complete their own tax returns, but there is a market for advice to these potential clients to help them decide what they should do regarding the changes. 2.5 Pensions lifetime allowance

Once again, in the desire to reduce the cost of pensions tax relief, the lifetime allowance is to be further reduced. The current limit of £1.25 million will reduce to £1 million in April 2016. Clients may wish to elect for protection from the reduction, which for fixed protection 2016 must be made by 5 April 2016. 2.6 Pensions – annual allowance

The Finance (No 2) Act 2015 enacts proposals to restrict the annual allowance for individuals with income (as defined) in excess of £150,000. The allowance will be tapered to a minimum of £10,000. In order to achieve this a number of changes are also necessary. 2.6.1 Pension input periods (PIPs) changes

Legislation came into force on 8 July 2015 to align pension input periods (PIPs) for all contributors to tax approved scheme with the tax year. This is necessary to make the changes described above (restricting annual allowance for high earners) possible. The change is made by clause 23 and Part 1 of the proposed Schedule 4 of the second Finance Bill. All PIPs came to an end on 8 July. New PIPs started for all contributors on 9 July and will run to 5 April 2016. All future PIPs will be aligned to the tax year, and there will be no possibility of electing for a change in PIP. So contributors will have either two or three PIPs falling in the tax year 2015-16, depending on when their previous PIP end date was. This is best illustrated by some examples. In all cases, unused relief brought forward is ignored.



Example 1 Lewis has a single pension arrangement with a PIP end date of 30 June. His contribution of £40,000 made in March 2015 is a pension input for the 2015/16 tax year as regards the annual allowance charge. Lewis would expect to be able to make a further contribution of £40,000 in March 2016, this falling into the 2016/17 year for annual allowance purposes. However, the PIP starting on 1 July was brought to an end on 8 July, and a new PIP started on 9 July, which will run until 5 April 2016. This means that Lewis’ contribution in March 2016 will also fall into the 2015/16 year for annual allowance purposes. Lewis has three PIPs in the tax year 2015/16.

2.6.2 Annual allowance for 2015-16

To protect people in Lewis’ position there will be an annual allowance of £80,000 for all pension savings made in PIPs ending in 2015/16. So Lewis will be able to save a further £40,000 in March 2016 without incurring an annual allowance charge. Part 2 of the proposed Schedule 4 to the second Finance Bill 2015 sets out the rules as follows.

The tax year 2015-16 is to be regarded as two separate tax years, the first beginning on 6 April 2015 and ending on 8 July 2015 (pre-alignment tax year), and the second running from 9 July 2015 to 5 April 2016 (post alignment tax year).

Separate annual allowances charges cannot arise for 2015-16. Amounts calculated by reference to the two notional tax years will be aggregated and taxed as the annual allowance charge for the whole year.

The annual allowance limit for the pre alignment tax year is £80,000

The annual allowance limit for the post alignment tax year is nil, but the balance of allowances in the pre alignment tax year may be carried forward to the post alignment tax year (subject to a maximum of £40,000). This provision only applies to a person who was a member of a scheme in the pre alignment tax year. Otherwise the normal annual allowance of £40,000 applies.

This will allow Lewis to make his full £40,000 contribution in March 2016 and obtain full relief for it. His contribution of £40,000 in March 2015 falls into the pre-alignment tax year, and he has £40,000 to carry forward to the post alignment tax year.



2.6.3 Carry forward of unused allowance from 2015-16

For the purposes of the carry forward of unused relief provisions the annual allowance for the pre alignment tax year is deemed to be £40,000, and carry forward is only possible if this amount was unused in the post alignment tax year. The pre alignment surplus must be used up in the post alignment tax year before older brought forward amounts can be used.

Example 2 Lily’s pension arrangement also has a PIP end date of 30 June. Lily contributed £40,000 to this arrangement in March 2015, and a further £20,000 on 4 July 2015 which would otherwise have been used within her 2016/17 annual allowance. Both are covered by her enhanced allowance of £80,000, of which there is £20,000 to carry forward. The periods ending 30 June and 8 July are known as the pre-alignment periods. Lily has a further allowance for the post alignment period – the period from 9 July to 5 April 2016. This is the balance of the £80,000 allowance unused (£20,000), subject to an overall maximum of £40,000. So Lily can contribute a further £20,000 by 5 April 2016.

Example 3 Luke also has a pension input end date of 30 June. He contributed £15,000 to his pension in March 2015. He has made no further contributions. His allowance of £80,000 is used in part by the £15,000 contributions, and he has £65,000 of it available to carry forward. However, the maximum he can carry forward is £40,000. This will give him £55,000 of contributions in the tax year for annual allowance purposes, but no annual allowance charge.

Example 4 Leonora has a PIP end date of 30 September, and usually makes a contribution to her PIP in August. She has not yet made a contribution in 2015. She can make a contribution of up to £40,000, which will fall into her PIP running from 9 July 2015 to 5 April 2016. However, as Leonora’s income in 2015/16 is extremely high, she was planning to make a further contribution of £40,000 in March 2016 which would otherwise have been set against her 2016/17 annual allowance. This would give her tax relief on £80,000 in the tax year without breaching the annual allowance in either year. However, her PIP now comes to an end on 5 April, and she only has the post alignment allowance of up to £40,000 to use, so her plan cannot be carried out unless she has available brought forward relief.



2.6.4 Calculation of pension inputs – defined benefit arrangements

Part 3 of proposed Schedule 4 to the second Finance Bill includes instructions for computing the defined benefit pension inputs for the 2015-16 tax year. This requires the calculation of a single increase in benefit value from 6 April 2015 to 5 April 2016, which is then time apportioned to the pre and post alignment periods. The uprating of the opening benefits is to be done at 2.5% rather than CPI. (New s 237ZA FA 2004 introduced by para 8 of the proposed Schedule). 2.7 Restriction of annual allowance for high income individuals

The pensions annual allowance will be restricted for high income individuals from April 2016. New s 228ZA in introduced into FA 2004. 2.7.1 High income individuals

An individual is a high income individual if

The individual’s adjusted income for the year is more than £150,000, and

The individual’s threshold income for the year is more than £150,000 minus the annual allowance amount before taper

Adjusted income is the net income at Step 2 in section 23 of ITA 2007, plus:

Relief under s 193(4) or 194(1) FA 2004 deducted in arriving at Step 2 (relating to pension arrangements)

Any deductions made from employment income for that year in respect of pension contributions made under net pay arrangements

The total pension input amount for the tax year less any contributions made by the individual as a member of any scheme

Taxable lump sums received under pension schemes Threshold income is the Step 2 net income as before, plus

Salary sacrifice amounts in relation to pension contributions where the agreement was entered into on or after 9 July 2015

The amount of contribution paid in the year in respect of which the individual is entitled to be given relief under s 192 FA 2004 (relief at source), and

Taxable lump sums as above. The annual allowance of £40,000 will be tapered by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum of £30,000 taper, which will arise at income of £210,000, leaving the taxpayer with an annual allowance of £10,000. There are anti avoidance measures associated with this measure in new s 228ZB which is part of para 10 of the proposed Schedule.



Example Roger is the chief executive of the local authority, on a salary of £140,000 per annum. His employer also contributes to a 2/3 (40/60) final salary pension arrangement on his behalf (lump sum element ignored for simplicity). His pension contribution for 2016/17 tax year is calculated as follows: (assuming that his salary is unchanged) 1/60 x £140,000 = £2,333 x valuation factor of 16 = £37,328 So Roger’s income for the purpose of this change is £177,328, and his net income is over £110,000, so the restriction on his annual allowance applies. Note that Roger is not in fact an additional rate taxpayer. Roger’s annual allowance is £40,000 – (£177,328-£150,000)/2 = £26,336 So Roger is facing an annual allowance charge on his excess contributions of £10,992, which will be taxed at Roger’s marginal rates. The tax charge is therefore (assuming that Roger has no other income) £4,446. Roger will be able to elect that his fund bears the additional tax charge.

2.8 Company distributions – transactions in securities

Section 33 applies the transactions in securities legislation (in Chapter 1 Part 13 of ITA 2007) to new types of transaction, namely:

The repayment of share capital or share premium, and

A distribution in respect of securities on a winding up The net effect of this is that if these sections are in point, both types of payment would be regarded as a payment of income, liable to tax as a distribution (dividend rates) rather than a capital receipt which would otherwise be subject to capital gains tax (and against which Entrepreneurs’ relief might be available). 2.8.1 Exclusion – fundamental change of ownership

The new rules also provide for the counteraction to be excluded where there is a fundamental change of ownership of a close company. This will happen where, as a result of a transaction in securities: The original shareholder(s) and their associates:

Do not directly or indirectly hold more than 25% of the ordinary share capital of the close company

Do not directly or indirectly hold shares which entitle them to more than 25% of the distributions which may be made by the close company, and

Do not directly or indirectly hold shares in the close company carrying more than 25% of the voting rights



2.8.2 Counteraction

Counteraction will commence with an enquiry notice under these provisions, which must be issued no later than six years after the tax year in which the income tax advantage was secured. Once the enquiry has concluded the officer may issue a counteraction notice if that is appropriate. This is then followed by an assessment to tax (ignoring the usual time limits for assessment). If the officer believes that no counteraction is necessary, he must issue a no-counteraction notice. The taxpayer can appeal to the Tribunal, once an enquiry is started, to require the issue of a notice (one way or the other) within a specified time. 2.8.3 Distributions in a winding up

Section 35 sets up the application of the legislation in respect of a distribution in a winding up made on or after 6 April 2016. The legislation can apply to a distribution made to an individual in respect of the share capital in the winding up of a UK resident company if:

Conditions A to D are met: o A - Immediately before the winding up the individual had at least a

5% interest in the company o B – the company was a close company at the date of winding up

or at any time within the previous two years o C – at any time within the two years after the date of the

distribution: The individual carries on a trade or activity which is the

same as or similar to that carried on by the company or a 51% subsidiary of the company

The individual is a partner in a partnership which carries on such a trade or activity

The individual or a person connected with them as a participator in a company in which they have at least a 5% interest and which at that time carries on such a trade or activity or is connected with a company that carries on such a trade or activity, or

The individual is involved with the carrying on of such a trade or activity by a person connected with the individual

o D – it is reasonable to assume, having regard to all the circumstances that

The main purpose, or one of the main purposes of the winding up is the avoidance or reduction of a charge to income tax, or

The winding up forms part of arrangements the main purpose or one of the main purposes of which is the avoidance or reduction of a charge to income tax, and



The distribution is not excluded. Excluded distributions are very tightly defined; they are a distribution that is too small to trigger a CGT liability, and a distribution of irredeemable shares. 2.9 ISA and JISA limits

From 6 April 2016 the limits for annual subscriptions will be:

ISA limit £15,240

Junior ISA £4,080 (limit also applies to Child Trust Funds)

Practical point You should exercise care when advising in this area if you are not authorised to give investment advice. However, the availability of ISA’s, the nil rate band for savings income and the new personal savings allowance and the interaction between these, and with the spousal income for married couple and civil partners should all be considered.



3. CAPITAL AND PROPERTY TAXES

3.1 CGT annual exemption

The annual exempt amount has been increased by CPI from £11,000 to £11,100 fort 2015/16. The amount for most trustees is therefore £5,550

Practical point Where appropriate, remind clients about using their annual exempt amount effectively by timing the disposals of assets and sharing with spouse. Bed and breakfasting is no longer possible, but where disposals are intended, advice can be given about the most tax effective approach.

3.2 ATED – increased rates and administrative changes

The rates of ATED on properties valued at more than £2 million have been further increased for 2015-16. Although previous legislation stated that the charges would be keeping pace with CPI inflation, the increases for 2015-16 are very substantial indeed, at 51.7% increase. The following rates will apply in 2015-16:

Property value range £ million

2014-15 ATED charge

2015-16 ATED charge

> 1.0 – 2.0 N/A £7,000*

> 2.0 – 5.0 £15,400 £23,350

> 5.0 – 10.0 £35,900 £54,450

> 10.0 – 20.0 £71,850 £109,050

> 20.0 £143,750 £218,200

* - unchanged from announcement in March 2014. 3.3 ATED – properties subject to relief



Finance Act 2015 introduces a new type of ATED return called a relief declaration return (s 73, inserting new s 159A into FA 2013). This permits the owner of a number of properties which are subject to relief (such as a corporate landlord) to submit a single return claiming relief on all of the properties, rather than a return for each property. The single return must only be used for a single category of relief, so owners with more than one type of relief available will have to submit a relief declaration return for each category of relief. As a reminder, the legislation lists the types of relief which may be claimed together.

Provision FA 2013 Type of relief

Property rental business Ss 133 or 134 1

Dwelling open to the public S 137 2

Property developers Ss 138 or 139 3

Property traders S 141 4

Financial institutions S 143 5

Dwelling occupied by employees of a trade

S 145

6

Farmhouses S 148 7

Providers of social housing S150 8

Having made the return, the declaration will also cover any further properties acquired in the year which are subject to the same relief, as the properties will not be specified in the relief declaration. This represents a considerable administrative saving for affected companies. Where a return is late, any penalty chargeable is calculated by reference to a single relief declaration if this applies, rather than individual returns for each property. 3.4 ATED - Valuation dates

The next revaluation of all property subject to ATED is due on 1 April 2017, at which all enveloped properties should be revalued to check whether they now come within the rules, and which valuation band applies to them. Finance Act 2015, s 71 changes to rules to make 1 April 2017 a valuation date only for periods from 1 April 2018 – otherwise there would have been practical difficulties in making returns by 30 April 2017 with a new valuation. The same change applies to each subsequent 5 year valuation date.

Practical point Ensure that clients affected by the reduction in the threshold for ATED are ready to complete their ATED returns. These are due by 30 April 2016 for the year ended 31 March 2017.

No responsibility for loss occasioned to any person acting … tax planning 2020 Webinar February...

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