YEAR END TAX PLANNING

Transcription

1 2015/16 YEAR END TAX PLANNING 2015/16 Introduction Income Tax Tax-efficient Investments Social Investment Tax Relief Residential Landlords Restrictions on Mortgage Interest Dividend Tax Credit Pensions Inheritance Tax Capital Gains Tax Non-domiciled Taxpayers and Remittance Basis

2 INTRODUCTION The 5 April 2016 will mark the end of another tax year. Unusually 2015 saw two Budgets and an Autumn Statement. This is a reminder to review your tax affairs: reduce your tax bill by ensuring that you have taken advantage of all available reliefs and exemptions and that you have considered appropriate planning opportunities. Please see below for a summary of key actions and considerations. Contact us to discuss the opportunities available for you, your family and your business. Katharine Arthur, Head of Tax E: karthur@haysmacintyre.com T: Follow on INCOME TAX Consider transferring income (e.g. interest or dividends) between you and your spouse or civil partner, to ensure use of all personal allowances and to minimise the income taxed at the higher rates of 40% ( 31,865 and above) or 45% (over 150,000). If your net income for 2014/15 will exceed 121,200, you will not receive a personal allowance, so consider mitigating this by making a pension contribution or Gift Aid payment. A full personal allowance is available to those with taxable income of less than 100,000. CHILD BENEFIT Child benefit is taxable where chargeable income exceeds 50,000. The tax rate increases in line with income and reaches 100% where income is more than 60,000. If you are close to these thresholds, pensions and Gift Aid can be used to reduce income and retain the entitlement to taxfree child benefit. Alternatively you can ask HMRC not to pay child benefit in the first place to avoid having to declare it on your tax return haysmacintyre

3 TAX-EFFICIENT INVESTMENTS ISAS Income and capital gains in ISAs are tax free. The annual allowance is 15,240, all of which can be put into an investment or cash ISA. Shares in newer, less established companies which are ineligible to join the main stock markets (FTSE100 or FTSE250) are allowed to be held within an ISA. Now that they are, they become one of the most tax efficient investment vehicles as they also benefit from IHT relief after two years. ENTERPRISE INVESTMENT SCHEME (EIS) For suitably experienced investors Invest up to 1m during 2015/16 and obtain a reduction in your income tax liability of up to 30% of the amount invested. To the extent your limit for 2015/16 has not been fully utilised, you can invest in 2016/17 and elect to carry it back and treat as if invested in 2015/16. Hold the shares for at least three years to avoid claw back of income tax relief. Capital gains realised within a VCT are not taxable. Disposals of VCT shares by the original investor are free of CGT. Dividends received on qualifying VCT shares are income tax free. SOCIAL INVESTMENT TAX RELIEF For suitably experienced investors Invest up to 1m in 2015/16, and obtain a reduction in your income tax liability of 30% of the amount invested. Hold the investment for at least three years to avoid clawback of income tax relief. Can elect to carry back the investment as though made in that year. Can defer capital gains on other disposals up to the value of the investments under SITR. Capital gains realised on the disposal or redemption of the investment will be tax free provided held for at least three years. If shares are sold at a loss, income tax relief is usually available on the net loss (after allowing for initial EIS income tax relief). Can defer capital gains on other disposals up to amount invested under EIS but without the restrictions or limits relevant for income tax relief. Capital gains realised on the disposal of EIS shares are free of CGT. IHT business property relief is usually available after two years. Dividends on EIS shares remain subject to income tax. SEED EIS For suitably experienced investors An extended form of EIS for very small businesses. Due to the higher risk involved with smaller companies, income tax relief is available at 50% for investments up to 100,000. Can defer capital gains on other disposals up to 50% of the amount invested. VENTURE CAPITAL TRUST (VCT) For suitably experienced investors Invest up to 200,000 during 2015/16 and obtain a reduction in your income tax liability of up to 30% of the amount invested. Hold the shares for at least five years to avoid claw back of income tax relief haysmacintyre 3

4 RESIDENTIAL LANDLORDS RESTRICTIONS ON MORTGAGE INTEREST Commencing in April 2017 residential landlords will have tax relief restricted on the mortgage interest they claim in connection with their let property. Rather than receiving tax relief at their marginal rate, all landlords, regardless of their tax position, will in effect receive a maximum of 20% tax relief once the proposals take full effect in April Marginal rate tax relief will be phased out over a four year period with a reducing proportion of loan interest being deducted against rental income. Tax Year % of interest deductible against profits 2017/18 75% 2018/19 50% 2019/20 25% 2020/21 - Subject to certain criteria, any interest not already deducted against profits can be deducted from the taxpayer s basic rate tax liability. DIVIDEND TAX CREDIT The 10% notional tax credit will be abolished from April 2016 and will be replaced with a tax free dividend allowance of 5,000. The Treasury has now indicated that the 5,000 allowance will form part of the basic rate band instead of being a separate additional allowance. The dividend tax rates for basic rate taxpayers are 7.5%, for higher rate taxpayers it is 32.5% and for additional rate taxpayers it is 38.1%. The 2015 Budget introduced the Savings Rate of Tax of 0% on savings income of up to 1,000 for basic rate tax payers and 5,000 for higher rate taxpayers. It seems that this will not apply to 45% rate taxpayers. The combination of this and the new dividend allowance means that it is even more valuable for couples to ensure that their incomes are equalised and that consideration is given to paying a dividend before 5 April 2016 rather than after. Where possible, it may be advantageous to consider the receipt of dividends in 2015/16 rather than 2016/ haysmacintyre

5 PENSIONS CONTRIBUTIONS LIMIT You can contribute up to 40,000, inclusive (where applicable) of the 20% tax relief recoverable from HMRC by the pension scheme, and obtain full tax relief at your marginal income tax rate(s). The 40,000 limit is increased by (broadly) the extent to which contributions (as grossed up) for each of the three previous tax years have fallen below the 40,000/ 50,000 mark as appropriate. Unused pension relief can be carried forward three years so any relief from the year ended 5 April 2013, not utilised by the 5th April 2016 will be lost. From April 2016, the annual allowance for pension contributions will be reduced for those with adjusted incomes in excess of 150,000. Definition of adjusted income includes pension contributions, so salary sacrifice in exchange for employer contributions will not succeed in avoiding the tapered annual allowance. Annual allowance of 40,000 will be tapered away by 1 for every 2 of income down to 10,000. Maximum allowance for anyone earning more than 210,000 will therefore be 10,000. Pension input periods will be aligned with the income tax year for all schemes. Carry forward of unused allowance is still available, but where applicable based on the tapered allowance. Planning opportunities may be available for those who have already contributed the maximum allowance for 2015/16 to make further payments before 6 April There will be a consultation on wider reform of pension tax relief. LIFETIME ALLOWANCE FOR PENSION CONTRIBUTIONS The Lifetime Allowance (LTA) will be reduced from 1.25m to 1m, from April As with previous reductions to the LTA, transitional protection for pension rights already over 1m will be introduced. The LTA will be indexed-linked in line with the Consumer Price Index from IHT PLANNING Previously when your defined contribution pension was passed on following your death, before 75, it was subject to tax at 55%. You can, since April 2015, pass this on to anyone you choose, including non-dependents, free of tax. For people who die over the age of 75 benefits can be passed on to anyone but will be subject to tax at 45%. From April 2016 the rate of tax charged will be linked to the beneficiary s marginal rate of tax haysmacintyre 5

6 INHERITANCE TAX (IHT) Make sure that you have a will and review it periodically to ensure that it still leaves your estate to those you intend, and that it remains tax efficient. The IHT annual exemption of 3,000, in aggregate on gifts to individuals, is 6,000 for 2015/16 where you did not use this exemption in 2014/15 and can reduce your estate. Separately, gifts of up to 250 to any individual during 2015/16 are also exempt. Increased relief for gifts is available if made in consideration of marriage/civil partnership. With appropriate review of investment risks, shares in unquoted trading companies, including those listed on AIM, can qualify for business property relief once held for two years thereby effectively removing their value from your estate. If you have been resident for 17 out of the last 20 tax years (15 out of the last 20 from April 2017) you will be deemed domiciled for inheritance tax (IHT) purposes and therefore subject to IHT on your worldwide assets. If this applies to you, action can be taken to mitigate the impact. Other gifts to individuals made during your lifetime which are potentially exempt transfers (PETs) will be disregarded when calculating any IHT due on your death once you have survived seven years from the making of the gift. Gifts into trust can be considered up to your (unused) nil rate band of 325,000 without creating an IHT charge at lifetime rates, there have been published draft measures which prevent multiple use of the nil rate band. The existing nil-rate band of 325,000 will remain fixed until 2020/21. An additional nil-rate band will apply where a residence is passed on to descendants on death. It will start in April 2017 at 100,000 and rise to 175,000 by 2020/21. Any unused nil-rate band can be transferred to a surviving spouse for use on their death. The new rate only applies to properties used by the deceased as their own residence, so buy-to-let properties will not be covered. The additional band will be tapered away for estates worth more than 2m. Measures will be introduced to allow those who downsize or sell their homes before death to benefit from the increased inheritance tax bands. Regular gifts out of income which do not impinge on that needed to support your usual standard of living can be IHT exempt, even if made within seven years before death, and should be carefully recorded. CAPITAL GAINS TAX (CGT) The CGT annual exemption for 2015/16 is 11,100 and, if not used by 5 April 2016, cannot be carried forward. Gains arising in 2015/16 can be deferred through investment in EIS and seed EIS qualifying companies as well as in qualifying social enterprises (see page 4) haysmacintyre

7 NON-DOMICILED TAXPAYERS AND REMITTANCE BASIS At present an individual is deemed UK domiciled for inheritance tax when they have been resident for 17 out of the last 20 tax years. Income tax and capital gains tax do not currently have a deemed domicile rule. From April 2017, non-domiciled taxpayers who have been UK resident for more than 15 of the last 20 tax years will be deemed UK domiciled for all tax purposes. Anyone treated as deemed domiciled will not be able to access the remittance basis charge and will be taxable on worldwide income and gains. Worldwide assets will be subject to inheritance tax. It will now take five years to lose your deemed domicile for inheritance tax purposes when you leave the UK rather than three years. The remittance basis charges of 30,000 and 60,000 for those resident for seven out of nine years and 12 out of 14 years respectively remain unchanged. The 90,000 remittance basis charge for those resident for 17 out of 20 years will be abolished as it is no longer relevant. Taxpayers with a UK domicile of origin who move abroad and take up an overseas domicile will be taxed as UK domiciled if they return and become UK resident again. Legislation will be included in Finance Bill 2016 and effective from April NON-DOMICILED TAXPAYERS AND INHERITANCE TAX ON UK RESIDENTIAL PROPERTY From April 2017, all UK residential property held directly or indirectly (i.e. through a company, trust or partnership) by a foreign domiciled taxpayer will be subject to inheritance tax. There will be no exemption for let or occupied properties, nor will any de minimis limit apply as currently with properties subject to the Annual Tax on Enveloped Dwellings (ATED). Inheritance tax will be due when a specifically defined chargeable event occurs, including the death of the individual shareholder or the tenth anniversary of the trust. The definition of excluded property will be amended so that it no longer includes shares in companies which derive their value from UK residential property. Only the value of the UK residential property will be chargeable to inheritance tax if the company has diverse assets. A consultation will take place over the summer and legislation will be included in Finance Bill AND FINALLY... SCOTTISH TAX UK income tax rates are reduced by 10% for people living in Scotland to allow for the charge to tax at the Scottish rate of tax. The Scottish Government has proposed a Scottish rate of tax for 2016/17 of 10% so there is no overall change to the tax and National Insurance that you will pay. Some of the tax collected under the Scottish rate will fund the Scottish Government. HMRC will identify who will be a Scottish taxpayer so employers and pensions providers should only use a Scottish code (one with a S prefix) if told to do so. DIGITAL TAX ACCOUNTS In the March 2015 Budget the Chancellor announced the creation of digital tax accounts for individuals and small businesses. Announced as the end of the tax return the digital account will bring together all taxpayers details in one place, similar to an online bank account. The first accounts have been opened and the vision is that during the early part of this year, 5m small businesses and 10m individuals will have access to their account. Businesses, the self employed and landlords will be required to submit their tax details on a quarterly basis. This will not apply to pensioners or employees unless they have secondary income of more than 10,000 p.a haysmacintyre 7

8 Team Mark Allwood, Tax Partner T E mallwood@haysmacintyre.com Katharine Arthur, Head of Tax T E karthur@haysmacintyre.com Nick Jordan, Tax Partner T E njordan@haysmacintyre.com Nigel Landsman, Head of Private Clients T E nlandsman@haysmacintyre.com Phil Salmon, VAT Partner T E psalmon@haysmacintyre.com Neil Simpson, Tax Partner T E nsimpson@haysmacintyre.com Should you wish to receive an electronic version of our briefing in the future please our Editorial team on marketing@haysmacintyre.com Copyright 2016 haysmacintyre. All rights reserved. haysmacintyre is registered to carry on audit work and regulated for a range of investment business by the Institute of Chartered Accountants in England and Wales. A list of partners names is available for inspection at 26 Red Lion Square, London WC1R 4AG. haysmacintyre 26 Red Lion Square London WC1R 4AG T F E marketing@haysmacintyre.com Disclaimer: This datasheet has been produced by the partners of haysmacintyre and is for private circulation only. Whilst every care has been taken in preparation of this document, it may contain errors for which we cannot be held responsible. In the case of a specific problem, it is recommended that professional advice be sought. The material contained in this datasheet may not be reproduced in whole or in part by any means, without prior permission from haysmacintyre. If you would like to be removed from our mailing list please us at marketing@haysmacintyre.com