Everything You Need To Know About Business Tax. Scilly Business Week 6 th March 2017

Transcription

1 Everything You Need To Know About Business Tax Scilly Business Week 6 th March 2017

2 Income Tax Rates 2017/18 v 2016/ /17 (Current year) Income Tax Personal Allowance - 11,000 Higher-rate threshold - 43,000 Additional-rate threshold - 150,000 Highest-rate band - 100,000 to 122,000 Dividend allowance - 5,000 Personal Savings allowance - 1,000/ /18 Income Tax Personal Allowance - 11,500 Higher-rate thresholds - 45,000 Additional-rate threshold - 150,000 Highest-rate band - 100,000 to 123,000 Dividend allowance - 5,000 Personal Savings allowance - 1,000/ 500 Honouring Osborne commitment to increase personal allowance to 12,500 and higher-rate threshold to 50,000 by the end of this Parliament. Biggest increase in the higher-rate threshold since 1989.

3 Income Tax Personal allowance - 11, /18 Tax Rates Basic rate band - 11,501 to 45,000 (non-dividend income 20% - dividend income in excess of 5k 7.5%) Higher rate band - 45,000 to 100,000 and 123,001 to 150,000 (non-dividend income 40% - dividend income taxed at 32.5%) 60% band - 100, ,000 (non-dividend income 60% - dividend income taxed at 40%) Additional rate band - 150,001 + (non-dividend income 45% - dividend income 38.1%)

4 Current Tax Rates (cont) National Insurance Contributions (NIC) Class 1 NIC 0% - 0 to 8,164 12%/13.8% - 8,164 to 45,000 2% - 45,001 + Class 2 NIC 2.85 per week Class 4 NIC 0% - 0 to 8,164 9% - 8,164 to 45,000 2% - 45,001 +

5 Current Tax Rates (cont) Corporation Tax Currently 20% Under current proposals set to decrease to 19% with effect from 1 April 2017 and 17% from 1 April 2020 Should we expect further reductions?

6 Ltd Co v Sole Trader/Partnership Overview of Tax Position Sole Trader/Partnership Subject to income tax and class 2 and 4 NIC on profits/share of profits (if a partner). Can withdraw cash with no associated tax liability. Can borrow from the business with no associated tax liability. Limited Company Company pays corporation tax (currently 20%) on profits. Income tax on withdrawal of net profits referred to as double layer of tax. Dividends subject to income tax if in excess of 5k pa not recent changes. Tax charges arise on borrowing from the company.

7 Tax - Which structure? Limited Company Higher-rate and Additional-rate shareholders Entirety of profits net of corporation tax do not need to be extracted Facilitates sharing of income around different members of a family Enable pension saving through a company Outside investment is required Open to staff equity incentivisation Access tax reliefs only available to companies Easier for succession Non-tax considerations limited liability (can be achieved through an LLP), perceived kudos, facilitates protection of capital assets from commercial risk of the trade

8 Tax - Which structure? Sole trader/partnership Basic-rate taxpayers Outside investment is not required Non-tax considerations Require reduced administration Don t wish information to be public

9 Changing structures Structures can be changed relatively easily Specific tax reliefs exists to aid both incorporation and disincorporation Important to regularly review structures especially re incorporation given announced focus. Corporate groups (moving from one company to a group) Risk management separating valuable assets from the inherent liabilities of a trade Inheritance tax and capital gains tax separating investment from trade

10 Corporate restructuring HoldCo TradeCo PropCo/InvestCo

11 Company Tax efficient extraction Small salary (to ensure qualification for state benefits) and dividends still the efficient Reduced efficiency due to dividend tax changes effective from 6 April 2016 Make use of 5k pa dividend allowances Remember employment allowance Pension contributions Deductible for corporation tax purposes and not taxable on individual Even more desirable given changes to IHT treatment and pension freedoms Loans from company Corporation tax charge (32.5%) that is repayable when loan is repaid Taxed on any interest benefit low tax charge given low interest rates (3%) Beware changes re liquidations

12 Corporation tax reliefs Research & Development (R&D) tax relief Patent box Creative industry tax reliefs Land Remediation Relief

13 Raising Funds HMRC approved schemes to facilitate third party investment Enterprise Investment Scheme Investors receive 30% income tax relief on qualifying investment Capital gains exemption on any gains realised on the shares after a 3 year holding period Capital gains deferral relief Seed Enterprise Investment Scheme Investors receive 50% income tax relief on qualifying investment Capital gains exemption on any gains realised on the shares after a 3 year holding period Capital gains reinvestment relief gains up to 50% of investment are exempt (effective tax saving on investment of 64%)

14 Raising Funds (cont) Employee share ownership Beware! Onerous employment tax rules Approved HMRC schemes Enterprise Management Incentive (EMI) scheme option based incentivisation Company Share Option Plan (CSOP) for larger entities Grant funding

15 Always reassess! Regularly review the business structure Objectives Legislation change Business performance Seek experienced advice RRL pride ourselves on adding value through experienced advice

16 Property/Real Estate

17 Income tax Overview Net rental profits subject to income tax Calculation = rental income less tax allowable expenditure Accruals basis income is recorded when it is earned (not received) and expenses recorded when they are incurred (not when they are paid)

18 Income tax Allowable expenditure Wholly and exclusively Examples letting agent fees, accountancy fees, insurance costs, repairs and maintenance costs, ground rent, service charges, utility costs, advertising costs, loan interest etc. Specific tax deductions 10% wear and tear allowance for furnished lets (abolished from 6 April 2016 i.e. 2016/17 onwards), peculiar rules for furnished holiday lets. Non-deductible private use elements, capital expenditure (improvements, costs associated with buying and selling the property), loan repayments etc.

19 Capital gains tax Overview Tax on value uplift realised on disposals (sales and gifts). Capital gain/loss calculated Sale proceeds; less Acquisition cost; Associated costs of disposal (legal fees, estate agents fees etc); Associated costs of acquisition (legal fees, stamp duty etc); and Capital improvement expenditure. Gains above annual exemption taxable in year of disposal (exchange), losses realised against gains realised in the year or carried forward to gains realised in future tax years.

20 Capital gains tax Tax rates Tax free capital gains annual exemption - 11,300 in 2017/18 18% on gains within basic rate band 28% on gains within other tax bands Entrepreneurs Relief (10% on lifetime gains up to 10m) Unlikely to be available unless a Furnished Holiday Let (FHL). Principal Private Residence (PPR) Relief Potentially available if you have used the property as a residence during the period of ownership.

21 Inheritance tax Overview Properties held at death valued at subject to 40% inheritance tax where value of estate exceeds available nil-rate band (currently 325,000). Spousal exemption and transferrable nil-rate band. No beneficial reliefs available (unlike for property development businesses). Lifetime gifts but capital gains tax problem. Ways of gifting rental properties during lifetime and avoiding a capital gains tax charge involves using trusts. New Residence Nil-Rate Band.

22 Residence Nil-Rate Band Inheritance tax Gradually introduced from 6 April , /18 125, /19 150, /20 175, /21 Residential property (used as a residence) needs to pass to direct descendants Beware passing to discretionary trusts Generally not advisable to use on 1 st spouse s death Restricted if estate value exceeds 2m Planning opportunity

23 Structuring Overview Company v personal Rental income realised in a company subject to corporation tax 20% small companies rate (reducing to 19% on 1 April 2017 and to 18% on 1 April 2020). Double tax charge on extracting net profits Options salary, dividend income (subject to income tax) note dividend tax changes. Unlikely to be beneficial for basic-rate tax payers Beneficial to higher-rate tax payers who don t need to extract all of net profits i.e. can roll-up income in the company. Likely Capital Gains Tax and Stamp Duty Land Tax implications on transferring let properties into a company.

24 Property dealing & development Gains realised on property acquired with the intention of making a profit are subject to income tax. Gains realised on property developed with the intention of making a profit are subject to income tax. If deemed to be trading, the deemed income could also be subject to Class 4 National Insurance Contributions (and weekly Class 2 National Insurance Contributions payable). Common misconception that such gains are subject to capital gains tax. Use of company may be way of mitigating such exposure.

25 What s new? Stamp Duty Land Tax 3% surcharge for additional properties from 1 April 2016 Restriction on income tax relief for finance costs for higher-rate income tax payers Phased implementation over 4 years commencing on 6 April % in 2017/18, 50% in 2018/19, 75% in 2019/20 and 100% in 2020/21 onwards Abolishment of wear and tear allowance from 6 April 2016 Increase in rent-a-room exemption from 4,250 to 7,500 on 6 April 2016.

26 Finance Costs Restriction Restriction on higher-rate tax relief for finance costs Commences 6 April % reduction in each tax year until 6 April 2020 Beware change of calculation method Example: 2016/ /2021 Rental income 10,000 10,000 Less: Finance costs ( 5,000) Net rental profit 5,000 10,000 Higher-rate tax 2,000 4,000 Less: Tax relief on finance costs ( 1,000) Associated tax liability 2,000 3,000

27 Capital allowances Other Important Points Be sure to make all available claims Usually not adequate advice on transactions involving commercial property Beware! Business Property Renovation Allowance (BPRA) some urgency required 1/6 April 2017 deadline for claims ATED Applies to companies owning residential property with a market value at 1 April 2012 or date of acquisition Exemptions Returns due by 30 April 2017 for 2017/18 tax year Transactions in Land main purpose, or one of the main purposes

28 Employers National Minimum Wage increases Age group Current rates From 1 April and over Under Apprentice Apprenticeship Levy Employer s with an annual pay bill of over 3m 0.5% of pay bill

29 Employers Salary sacrifice income tax and NIC advantages removed Exceptions for child care, pension contributions, pensions advice, Cycle to Work, and ultra-low emission cars All arrangements in place before 6 April 2017 protected for 1 year Arrangements in place before 6 April 2017 relating to cars, accommodation and school fees protected for up to 4 years

30 Corporation Tax Use of losses made more flexible from 1 April 2017 New rules will apply to all losses carried forward Change 1: Restriction on use of cfwd losses Use of cfwd losses restricted to 50% of profits where company s/group s profits exceed 5m Change 2: Increased flexibility of use of cfwd losses Rules around use of cfwd losses is onerous and illogical Post 31 March 2017, any losses can be used against any profit in the company or in the group Pre 1 April 2017 losses are relieved under the current rules

31 Making Tax Digital 6 (!) consultations closed for responses on 7 November Responses published on 31 January 2017 Is it really Making Tax Digital? Much more a management accounting/book keeping/recording issue Driven by misconception that tax take is significantly reduced by careless tax payer errors Only focuses on one half of the story MTD imposes new quarterly filing and potentially payment obligations for businesses and landlords. 1 st phase affects small unincorporated businesses and landlords 6 April nd phase is for VAT 3 rd phase will affect companies, although not until 2020

32 Making Tax Digital (cont) End of the tax return? Requirement to prepare year end accounts in order to reconcile quarterly payments and claim various reliefs and make accounting adjustments. Requirement to file a year end declaration, instead of a Self Assessment (SA) return/ Corporation Tax (CT) return. HMRC will populate some figures Taxpayers will need to check that pre-populated data is correct. Digital record keeping HMRC to provide free software Reality is that MTD will be expensive for the vast majority of businesses Limited exemptions 10k turnover

33 Wills & Powers of Attorney Important for business owners to have a Will in place Ensures assets are distributed as per wishes Enables inheritance tax planning Sole-traders/one director companies - enables executors to continue trading Lasting Power of Attorney Important to manage the event of incapacity Health & Welfare, Property and Financial Affairs Particularly for sole-traders and one director companies

34 Contact details Steve Maggs LLB CTA Tax Partner Robinson Reed Layton Truro and Penzance T: (Truro) T: (Penzance)