RESIDENTIAL PROPERTY AND DIVIDEND CHANGES. Robert Jamieson MA FCA CTA (Fellow) TEP 22 September 2016

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1 RESIDENTIAL PROPERTY AND DIVIDEND CHANGES Robert Jamieson MA FCA CTA (Fellow) TEP 22 September 2016

2 BUY-TO-LET TAX CHANGES At present, full income tax relief is normally available for interest on loan taken out in connection with individual s property letting business. W.e.f. 6 April 2017, tax relief for such interest will be progressively restricted so that, by 2020/21, there will only be 20% income tax reduction. S24 F(No2)A 2015 does not apply to FHLs.

3 BUY-TO-LET TAX CHANGES Nor does it apply to landlords of rented commercial property. Worst affected will be individuals with substantial property portfolio and large borrowings. And what about property letting losses? Alternative restructuring. What about incorporation of business?

4 BUY-TO-LET TAX CHANGES Can CGT and SDLT charges be avoided? Take advantage of Upper Tribunal decision in Ramsay v HMRC (2013). HMRC s non-statutory clearance service can be used in order to decide whether or not business is being carried on. SDLT MV rule in S53 FA main ways of mitigating SDLT charge:

5 BUY-TO-LET TAX CHANGES multiple dwellings relief in S116(7) FA 2003; and use of partnership SDLT provisions see Para 18 Sch 15 FA Partnership tests. Anti-avoidance legislation: S75A FA Case study illustrating tax benefit of incorporation.

6 DIVIDENDS END OF ERA Imputation system to end on 5 April W.e.f. 6 April 2016: dividend received = gross amount; no 1/9th tax credit; and 5,000 dividend allowance. This new dividend allowance is separate from 1,000 allowance for savings income.

7 DIVIDENDS END OF ERA Table of rates for 2016/17: BR 7.5% (Nil for 2015/16); HR 32.5% (25.0% for 2015/16); and AR 38.1% (30.6% for 2015/16). Important to make inter-spouse transfers to ensure full use of 5,000 allowance. Breakeven points for higher and additional rate taxpayers.

8 DIVIDENDS END OF ERA Problem for owner managers following low salary high dividend regime overall tax rate is 6% higher in 2016/17. Dividends to non-working spouses are still advantageous. With fall in corporation tax rates to 19% in 2017 and to 17% in 2020, will some owner managers seek to retain profits rather than pay them out?

9 DIVIDENDS END OF ERA More own share purchases on retirement. Bonus v dividend for 2016/17. HMRC factsheet dated 17 August This confirmed that 5,000 dividend allowance was not exemption. Dividends within 5,000 allowance still use up relevant part of BR or HR band (even though they are taxed at 0%).

10 DIVIDENDS END OF ERA Impact on restriction of personal allowances. Impact on incorporations tax-motivated incorporations are being targeted.

11 CLOSE COMPANY LOAN WRITE-OFFS Income tax charge under S416 ITTOIA 2005 on amount written off. Still classified as dividend income. Therefore, use dividend rates (including 5,000 nil rate band). S416 ITTOIA 2005 takes precedence over S188 ITEPA 2003.

12 DIVIDENDS AND GIFT AID IN 2016/17 Revised dividend regime takes effect on 6 April Trap for individuals who have previously used tax credits to frank basic rate tax deducted from Gift Aid payments. But tax credits are being abolished for 2016/17 onwards. Problem is for donors whose main source of taxable income is from dividends.

13 DIVIDENDS AND GIFT AID IN 2016/17 If basic rate tax which is deemed to be deducted from Gift Aid payments cannot be covered by dividend tax credits, it must be paid over to HMRC. Illustration of wealthy benefactor. For 2016/17, problem may be able to be resolved by carry-back election under S426 ITA Important caveat.

14 DIVIDENDS AND GIFT AID IN 2016/17 This election can only be made on or before filing of individual s 2015/16 tax return. See Cameron v HMRC (2010). Therefore, it may make sense to delay filing affected donors tax returns until January 2017.

15 TRUST DIVIDEND INCOME For IIP trusts, trustees pay basic rate tax on all trust income. Thus, in respect of their share of trust income, beneficiaries may: obtain refund; suffer no further tax; or be liable for higher and additional rates.

16 TRUST DIVIDEND INCOME Position to date has been that, with dividend income, tax credit covers trustees basic rate income tax liability. W.e.f. 6 April 2016, trustees have to pay 7.5% on all dividend income they are not entitled to 5,000 dividend allowance. But IIP trusts are transparent therefore, 7.5% dividend tax charge will be credited to life tenant.

17 TRUST DIVIDEND INCOME Life tenant may be entitled to tax refund if payment falls within his 5,000 dividend nil rate band. Possibility of mandating such income to beneficiary. Rules for discretionary and accumulation trusts are rather different. W.e.f. 6 April 2016, such trusts are also unable to utilise 5,000 allowance.

18 TRUST DIVIDEND INCOME Discretionary and accumulation trusts will suffer 38.1% tax on their dividend income (apart from any dividends which fall into 1,000 standard rate band, in which case rate is 7.5%). This is credited to trust s tax pool and will be available to frank income distributions see Committee Stage amendment to FB 2016.

19 TRUST DIVIDEND INCOME But discretionary and accumulation trusts are not transparent trust distribution counts as annual payment in hands of beneficiary. This will not attract 5,000 allowance it does not represent dividend income.

20 TRUST DIVIDEND INCOME When making income payment to beneficiary, trustees will have to deduct 45% tax and so they are likely to end up having to pay further tax to HMRC. Will it now be preferable to appoint IIPs to many discretionary beneficiaries, given that there should be no CGT or IHT?