Private Client. In this issue

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1 Private Client November June In this issue Charity Making Tax accounts Digital are changing We page set out 2 the current timetable for the roll-out of Making Tax Digital and what you need to do to prepare page 1 digital The new giving residence nil rate band You page may 4 need to review your will in order to ensure you get the benefit of the new residence nil rate band page 2 VAT ISAs: and what Christmas can be saved mailings tax-free? Our page article 6 considers the different ISAs on the market and what you can now save tax-free page 4

2 Private Client Editor s comment Welcome to the June 2017 issue of Private Client. The fact that we now have a government without a majority means that many proposed changes have been kicked into the long grass. There is little at the time of writing in the way of certainty and, though we now have a Conservative government with DUP support, nothing can be taken for granted. As a Labour government is now unlikely, so it seems is the removal of the new residence nil rate band (RNRB), which was a key Labour manifesto pledge. Our article on page 2 highlights the importance of planning ahead to ensure that your will is updated if you wish to make use of the RNRB. In our December issue, we wrote about Making Tax Digital. Though the timetable for the roll out of this has the potential to change in the coming months, the move to digital reporting will happen. Our article sets out the current position and the action that those affected should take. Our penultimate article is a round-up of the attributes of the various ISAs in the marketplace at present, who can make use of them, and what the various conditions are attached to each. Finally, amongst other issues, our in brief highlights the timing of future Finance Bills and the requirement for financial institutions and tax advisers to write to their clients about offshore tax avoidance. I hope that you find this issue both interesting and informative. Please do contact either me or your usual Saffery Champness partner if you would like more information on any of the topics featured. James Hender Making Tax Digital: where are we now? Page 1 ISAs: what can now be saved tax-free? Page 4 Plan ahead to utilise the new residence nil rate band Page 2 In brief Page 5

3 June 2017 Making Tax Digital: where are we now? The general election result raises some significant questions on the delivery of the government s Making Tax Digital (MTD) programme. The Queen s Speech has confirmed that the government will introduce a Summer Finance Bill, but, at the time of writing, it is unclear whether it will include the MTD clauses dropped from the original Bill in April, and, if so, whether the government still intends to publish more detailed secondary legislation over the summer. A delay in implementing MTD would acknowledge the cross-party concerns raised in both the Commons and the Lords earlier in the year, and allow the new Treasury ministers more time to get to grips with the detail. Fiscally, however, MTD is expected to be a money-raiser, and a delay could contribute to budgetary pressures: with broad agreement that increasing digitalisation is the way forward, the government could choose to press ahead with the existing timetable. Should businesses and landlords adopt a wait and see policy? The danger with a wait and see approach is that if the government decides to press ahead with the existing timetable, this could leave taxpayers with very little time to prepare for MTD. Mandatory quarterly reporting is scheduled to start next April for those businesses and landlords with turnovers over the VAT registration threshold. If you are likely to be in this category, we would recommend that you take time now to consider some of the key issues. Even if the timetable does slip, this is unlikely to be a wasted effort: a move to a more digital tax system is undoubtedly coming, and preparation now will pay dividends in the future. What are the key areas to consider? Firstly, businesses should identify their first potential MTD reporting date. Quarterly digital reporting will start from the beginning of an accounting period so those with accounting dates early in the tax year will need to be ready first. Landlords should remember that unincorporated rental businesses are treated as having a 5 April year end for tax purposes, meaning that they will be amongst the first into the regime. Conversely, if you have a 31 March year end, your first digital reporting quarter will not start until 1 April 2019, giving you nearly a year extra to prepare. Once you have established your potential entry date, you should also review your current record keeping processes. If you already use accounting software, will it support MTD? If not, what is the best digital solution for your business? Do you need to make changes to your processes to enable you to meet the one-month deadline for submission of quarterly reports? Also, think about what you need from your tax agent: do you want them to be involved in preparing and submitting your quarterly reports, or just your year end calculations? You may not be able to answer all of these questions now, but raising them will highlight those areas to focus on once more detail is known. As always, your Saffery Champness partner will be happy to discuss the impact of MTD with you, and we will continue to keep you informed as more information becomes available. 1

4 Private Client Plan ahead to utilise the new residence nil rate band On 6 April 2017 a new inheritance tax (IHT) relief was introduced to reduce the tax charged on death estates in respect of family homes. This is likely to affect those with estates greater than the current nil rate band (NRB) of 325,000, but a restriction will apply for those with estates worth more than 2 million. The relief was introduced to counter the effect of decades of rising house prices, pushing many more families into the scope of IHT than previously. Despite the fact that still relatively few people pay IHT, it remains a very emotive tax and has become seen as a political vote-winner with an ageing population. It was against this backdrop that the Conservative Party committed to a 1 million IHT threshold in its 2010 election manifesto. Taxpayers and advisers alike were hoping for a straightforward extension to the existing IHT nil rate band (which has been set at 325,000 since 6 April 2009 and will now remain at that level at least until 5 April 2021). What we have instead is a complex bolt-on to the existing legislation, applying only in respect of a taxpayer s residence, which is likely to mean that many will not benefit from the new relief in the way they hoped. The good news is that the introduction of the residence nil rate band (RNRB) (or family home allowance) means that a married couple or civil partners could benefit from an additional 350,000 of IHT allowances, saving up to 140,000 in tax. As a result, in many cases married couples with total assets of less than 1 million should pay no IHT on their combined estates after 5 April However, the intricacies of the new legislation are apparent right from the start. The relief will be phased in from the current tax year, starting at 100,000 and increasing by 25,000 each year to 175,000 by The new RNRB will be transferable between spouses, like the existing nil rate band regime, meaning that if a RNRB is not used on the first death, it should automatically be available in full for use on the second death (subject to the effect of tapering, as set out below). The measure will only benefit those whose property passes to their direct descendants, ie children, grandchildren and other lineal descendants by law or marriage (including the spouse or civil partner of a lineal descendant). Other relatives, such as nephews, nieces and siblings, will not benefit. Properties passing in their entirety to a discretionary trust will also not qualify for the relief, even if the beneficiaries of the trust are lineal descendants of the deceased. Tapering Like many other allowances and reliefs, the RNRB is restricted above a certain limit. For those with estates worth more than 2 million at death, the allowance is reduced by 1 for every 2 in excess of the threshold. This means that when a couple s estate reaches 2.7 million there will be no RNRB available (assuming two RNRBs on death). The value of the death estate for these purposes is calculated by reference to the total assets chargeable to IHT, less allowable debts and liabilities, but before taking into account other reliefs such as Agricultural Property Relief or Business Property Relief. As outlined above, for couples, any RNRB allowance unused on the first death will automatically transfer to the surviving spouse, for use on their death. However, the effect of tapering can restrict the amount of relief available for the surviving spouse, even if no RNRB is utilised on the first death. If the value of the estate on the first death exceeds 2 million, it will be necessary to calculate the amount of RNRB that would have been available; that same restricted percentage will then be available for use by the second spouse on their death, even if at that time the estate is worth less than 2 million. 2

5 June 2017 The introduction of the residence nil rate band (RNRB) (or family home allowance) means that a married couple or civil partners could benefit from an additional 350,000 of inheritance tax allowances, saving up to 140,000 in tax. Downsizing The legislation also provides for taxpayers who dispose of a residence on or after 8 July 2015, either entirely or in the process of downsizing, and pass on the proceeds of the sale to their direct descendants via their death estate. In such cases, the RNRB will still be available on the death of the taxpayer provided: y The property disposed of would have qualified for the relief, if it had been retained until death; and y At least some of the estate of the deceased is passed to direct descendants. The mechanism for calculating the amount of available RNRB allowance involves a complicated five-step process that takes into account the value of the property sold, the value of the allowance that would have been available at that time and the value of assets left to direct descendants in the death estate. In the case of downsizing, the calculations also take into account the value of the replacement property. Possible planning opportunities Generally, only properties passing directly to individuals will qualify for the RNRB, although certain trusts may also benefit (for example those benefitting a disabled beneficiaries or orphaned minors). However, the whole home does not have to be left to direct descendants to benefit from the relief. It should therefore be possible to leave a proportion of a home to direct descendants, making use of the RNRB, and the remainder of the property to other nonqualifying beneficiaries (such as a trust). It is always a good idea to keep wills under regular review and it would certainly be prudent to review existing wills now, to ensure that previous IHT planning does not preclude utilisation of the RNRB, as well making full use of the new allowance where possible. The property does not have to be in the UK to qualify for relief, but must be within the scope of UK IHT (ie owned by a UK domiciled or deemed domiciled taxpayer). If more than one property is owned at death, each of which has at some time been the taxpayer s residence, it will be possible for the executors of the estate to elect which property should benefit, so that the relief can be maximised. The use of a deed of variation may be helpful in some cases, to vary the terms of an existing will that does not make use of the relief; although there may well be practical limitations that will render such retrospective planning ineffective. In reality, most situations are unlikely to be as straightforward as implied above. The legislation is complex and professionals have commented on the need for a degree in algebra to get through the numerous formulae that are included. As ever, what could have been a straightforward extension to existing legislation has turned out to be complicated, although the new allowance should go some way to taking the family home out of tax for many families. 3

6 Private Client ISAs: what can now be saved tax-free? Traditionally, we think about investing in ISAs at the end of the tax year. However, there is no reason you can t get the tax benefits sooner, by investing earlier in the tax year. Since 2015, the rules surrounding ISAs have been relaxed, but with the introduction of various new ISA products, it is important to consider the distinct differences between each type of ISA, so you can select the best one for your circumstances. What are the benefits of investing in an ISA? Individuals with large amounts of savings will have to pay tax on interest in regular savings accounts where the level of interest exceeds the personal savings allowance ( 1,000 allowance for basic rate taxpayers, 500 for higher rate taxpayers and nil for additional rate taxpayers). From 6 April 2017, each adult resident in the UK can now invest up to 20,000 in ISA products, generating returns which are free from income tax and capital gains tax. Any interest you earn doesn t count towards your personal savings allowance, so if you earn a lot of interest, you can protect more of it in an ISA. The following ISAs are currently available on the market and the 20,000 limit can be invested in a single product, or a mixture of all of them, so long as the limit is not exceeded: y Cash ISA y Stocks & shares ISA y Lifetime ISA y Help to Buy ISA There is also a Junior ISA available to those under 18 which allows you to save 4,128 tax free on behalf of a child. What are the differences between the types of ISA? Whilst all ISAs provide tax free returns, some come with restrictions on the level of investment or requirements of what the funds must be used for. Below we capture some of the main features of each type of ISA. Cash ISA These are simple savings accounts for those aged 16 and over where all the interest is tax free. Children aged 16 or 17 are allowed to have a full adult cash ISA as well as a junior ISA, which means this age group has a larger allowance than anyone else. Stocks & shares ISA Available to those 18 and over, in a stocks & shares ISA all profits from share disposals are tax free, even if they are above the capital gains tax annual exemption. You will also pay no tax on interest or dividend income. Lifetime ISA (LISA) The LISA was launched on 6 April 2017 and allows you to save 4,000 a year with a 25% bonus on top, before interest and growth. It can be opened by anyone aged between 18 and 40, and contributions can be made until the age of 50. In order to protect the 25% bonus, the funds can only be used for two specific purposes. The first is for first time buyers to use towards a deposit for a residential property and the second is for retirement savings once you reach 60. There are penalties for withdrawing the funds for a non-qualifying purpose, which can result in losing the 25% bonus in addition to an administration charge. Help to Buy ISA Unlike the LISA, this is available to those aged 16 and over and can be opened anytime until December You can save 1,200 in the first month of opening, with a further 200 a month thereafter. It is only available to first time buyers and must be used to purchase a residential property, at which point all the money contributed to the ISA will have 25% added to it, up to a maximum bonus of 3,000. Those making use of the LISA or the Help to Buy ISA can use the remaining allowance to top up another ISA to the 20,000 limit. For example, you can only put 4,000 in to the LISA every year, which means you could put the remaining 16,000 into any of the other options. There are many complexities to the various types of ISA, so it is advisable to speak to a financial adviser before making any final decisions. 4

7 June 2017 In brief Summer Finance Bill Ahead of the general election, the government stated that, if re-elected, it would reintroduce those measures dropped from the Finance Bill in a further Bill early in the new Parliament. The Queen s Speech has now confirmed that there will indeed be a Summer Finance Bill, which will include a range of tax measures, including those to tackle avoidance. It remains to be seen, however, whether any new Bill includes all the dropped measures. The government has also confirmed that there will be two further Finance Bills in this (two year) Parliament, the first of which will (presumably) follow an Autumn Budget later this year. Restriction on finance costs for residential property businesses 6 April 2017 saw the introduction of a restriction on tax relief for finance costs for unincorporated property businesses holding residential property. Ultimately, relief will only be available in the form of a basic rate tax credit, but the restriction is being phased in over the next four years. For , 75% of finance costs will be deductible as usual, with relief for the remaining 25% coming as a basic rate credit. Those landlords with high levels of debt on their portfolios will be most affected by the change, but the restriction could have impacts elsewhere too. Replacing an above the line deduction with a credit against tax will increase taxable profits potentially pulling individuals into higher tax rates, or over the thresholds for the withdrawal of the personal allowance or the reduction in the pensions annual allowance. Offshore avoidance and evasion: client notification letters Part of the government s strategy to tackle offshore tax avoidance and evasion is to raise awareness of the Common Reporting Standard and the increased access this will give HM Revenue & Customs (HMRC) to data from overseas jurisdictions (an issue which we have previously covered in Private Client). One strand of this awareness campaign is to require financial institutions and tax advisers, including Saffery Champness, to write to their clients enclosing an HMRC factsheet. It is important to be aware that receiving such a letter does not mean that your adviser or bank, or HMRC, has discovered any irregularities in your tax affairs. If you are upto-date with your UK tax obligations and have properly declared all your taxable income, you do not need to take any action. If you do have any questions or concerns about your UK tax position, please get in touch with your usual Saffery Champness partner. Changes to the PSC register Last year it became a requirement for companies to file a People of Significant Control (PSC) Register which detailed its controlling parties with Companies House. Initially this took the form of an annual confirmation statement, which replaced the old Annual Return. Legislation is coming in to tighten up these rules even further and it has been announced that, from 26 June, companies will have 14 days to record any changes to PSCs and a further 14 days to file the change at Companies House. This means that there will be a maximum of 28 days to register any change in controlling person. A change in control could be caused in a number of ways, the most obvious being a change in shareholding. However, any person having significant influence over a company gets caught in this rule. The changes also extend the scope of the Register. With effect from 24 July, Scottish Limited Partnerships, and Scottish general partnerships where all partners are corporate partners, will be required to file a PSC register with Companies House. AIM listed companies may also need to comply with these rules. This creates an unwelcome additional burden of administration for such entities, and will also make information available over the control of these entities public for the first time. 5

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