chartered accountants & tax advisers Private Client Briefing Spring 2018 Articles in this edition Annual planning opportunites Residential landlords restrictions on mortgage interest Making tax digital Tax investigation service The worldwide disclosure facility
Contents 2 Annual planning opportunities 5 Residential landlords restrictions on mortgage interest 7 Making tax digital 7 Tax investigation service 7 The worldwide disclosure facility Welcome to our Spring 2018 Pre Year End Planning Briefing for private clients. April 2018 will mark the end of another tax year. With a promise of no further tax changes to be announced at the slimmed down Spring Statement on 13 March, we can plan with some certainty. Please see enclosed for a summary of key considerations and actions pre 6 April. Contact us to discuss the opportunities available for you, your family and your business. Katharine Arthur Head of Tax, Partner T 020 7969 5610 E karthur@haysmacintyre.com Follow on Twitter: @katharinearthur
Annual planning opportunities This publication details the standard annual planning opportunities that you should be considering. INCOME TAX Consider transferring income (e.g. interest or dividends) between you and your spouse or civil partner, to ensure use of all personal allowance ( 11,500) and to minimise the income taxed at the higher rates of 40% ( 33,500 and above) or 45% (over 150,000). If your net income for 2017/18 will exceed 123,000 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. The tax free personal savings allowance of 1,000 for basic rate taxpayers ( 500 for 40% taxpayers) and the dividend nil rate band of 5,000 (reduced to 2,000 from April 2018) should be utilised. The Scottish rate of income tax means that in 2017/18 the higher rate tax starts 2,000 lower than in the rest of the UK equating to 400 of additional tax for Scottish higher rate taxpayers. Child benefit Child benefit is taxable where chargeable income exceeds 50,000 and is withdrawn by 1% for every 100 of income earned in excess of 50,000. Where the income is more than 60,000 the benefit is reduced to nil. 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. Capital gains tax (CGT) The CGT annual exemption for 2017/18 is 11,300 and, if not used by 5 April 2018, cannot be carried forward. Gains arising in 2017/18 can be deferred through investment in EIS and seed EIS qualifying companies as well as in qualifying social enterprise (see page 3). CGT is charged at 10% (18% for residential property) where income and gains are less than 33,500 and at 20% (28% for residential property) where income and gains are more than 33,500. TAX-EFFICIENT INVESTMENTS ISAs Income and capital gains in ISAs are tax free. The annual allowance is 20,000, all of which can be put into an investment or cash ISA. Help-to-buy ISA s enable first time buyers to claim a 25% cash bonus on savings made. Inheritance ISA allows a spouse or civil partner to inherit savings in an ISA of a deceased individual without causing an income tax liability. Lifetime ISA allows UK residents aged between 18 39 to save up to 4,000 per tax year and receive a 25% bonus at the end of each tax year. Innovative finance ISA allows investment with peer to peer lenders or through crowd funding websites. 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) Invest up to 1m during 2017/18 and obtain a reduction in your income tax liability of up to 30% of the amount invested. To the extent your limit for 2017/18 has not been fully utilised, you can invest in 2018/19 and elect to carry it back and treat as if invested in 2017/18. Hold the shares for at least three years to avoid claw back of income tax relief. 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 restrictions or limits relevant for income tax relief. Capital gains realised on the disposal of EIS shares are free of CGT. Inheritance Tax (IHT) business property relief is usually available after two years. Dividends on EIS shares remain subject to income tax. SEED EIS 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 exempt capital gains on other disposals up to 50% of the amount invested. IHT business property relief is usually available after two years. VENTURE CAPITAL TRUST (VCT) Invest up to 200,000 during 2017/18 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. CGT realised within a VCT are not taxable. Disposals of VCT shares are free of CGT. Dividends received on qualifying VCT shares are income tax free. SOCIAL INVESTMENT TAX RELIEF Invest up to 1m in 2017/18, and obtain a reduction in your income tax liability of 30% of the amount invested. Hold the investment for a 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. PENSIONS Contributions limit You can contribute up to 40,000 (personal and employer contributions), 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 2015 not utilised by 5 April 2018 will be lost. From April 2017 the annual allowance for pension contributions has been 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. 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 2017/18 to make further payments before 6 April 2018. Lifetime allowance for pension contributions The Lifetime Allowance (LTA) reduced from 1.25m to 1m in April 2016. You can opt for Fixed Protection 2016 in order to preserve the 1.25m allowance. The LTA will be indexed-linked in line with the Consumer Price Index from 6 April 2018. IHT planning If you die before age 75 you can pass your pension fund 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 the beneficiary s marginal rate of tax. If you have more than one home, you have two years to decide which one is your principal private residence and make the appropriate election. 2 2018 haysmacintyre Private Client Spring 2018 Briefing 2018 haysmacintyre Private Client Spring 2018 Briefing 3
Residential landlords restrictions on mortgage interest Inheritance tax 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 2017/18 where you did not use this exemption in 2016/17 and can reduce your estate. Separately, gifts of up to 250 to any individual during 2017/18 are also exempt. Increased relief for gifts is available if made in consideration of marriage/civil partnership. 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. This was introduced in April 2017 at 100,000 and wil 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 nil-rate band 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. 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 15 out of the last 20 tax years you will be deemed domiciled for inheritance tax (IHT) purposes and therefore subject to IHT on your worldwide assets. Residential landlords now 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 2021. 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. There may be some circumstances in which incorporating your property rental business may be worthwhile in order to obtain tax relief on mortgage interest. Non-domiciled taxpayers and remittance basis From April 2017, non-domiciled taxpayers who have been UK residents for more than 15 of the last 20 tax years are 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. Taxpayers with a UK domicile of origin who move aboard and take up an overseas domicile will be taxed as UK domiciled if they return and become UK resident again. 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 is subject to IHT. There is no exemption for let or occupied properties, nor is there any de minimis limit. IHT 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. Non-domiciled individuals should consider the following planning opportunities Check when you are likely to become deemed domiciled to ensure that you make the most of any planning opportunities before becoming deemed domiciled. For individuals who became deemed domiciled on 6 April 2017 (and no later) the proportion of any gain that accrued prior to 6 April 2017 will not be taxable. That proportion of gain could be brought to the UK with no further tax charge if it has remained clean. Assets held personally outside the UK will be revalued for capital gains tax purposes as if they were acquired on 6 April 2017 (effectively exempting the earlier gain). This will not however apply to assets held within overseas structures. If the assets were originally acquired with unremitted overseas income or gains there would still be tax on a remittance of proceeds representing the original cost of the asset. The asset must not have been situated in the UK at any time between 16 March 2016 and 6 April 2017. The individual must have paid the remittance basis charge in any year before April 2017 and be deemed domiciled throughout the period from 6 April 2017 to disposal. An irrevocable election can be made to dis-apply rebasing on an asset by asset basis. 4 2018 haysmacintyre Private Client Spring 2018 Briefing 2018 haysmacintyre Private Client Spring 2018 Briefing 5
As part of the reforms, the Government introduced a temporary window of two tax years from 6 April 2017 during which individuals can rearrange their mixed funds overseas to separate them into tax-free capital, income, gains by moving them into separate offshore accounts. This will enable individuals to bring clean capital into the UK without suffering a tax charge. Income and gains remitted will be taxed at the appropriate rates for the year in which they are remitted. IHT on UK residential property held indirectly by nondomiciled individuals through an offshore company, partnership or trust. Shares in offshore companies or a partnership interest since 6 April 2017 have fallen within the UK estate of nondomiciled individuals to the extent that its value is derived from UK residential property. They are no longer be treated as excluded property for IHT purposes. Debts secured on the property are deductible from the value charged to IHT in the normal way. Gains and foreign income arising within a trust structure set up by a non-uk domiciled settlor will not be assessed on the settlor as they arise provided no property has been added to the trust. Such foreign interest and gains will only be taxable when matched to a benefit received. UK income of offshore trusts or their underlying entities will still be taxed on the settlor. From 6 April 2017 payments made to a non-resident beneficiary will no longer reduce the capital gains tax pool for matching purposes. HMRC will be able to make a charge in circumstances where the current rate of IHT in the other country is zero or where there is no equivalent tax regime such as with India or Pakistan. Making tax digital HMRC have deferred the start of the scheme until April 2019. We are participating in HMRC s pilot scheme in order to prepare as best we can for what will be a significant change to the current system. If you are happy for us to use your data to participate in the pilot please speak with your usual haysmacintyre contact. There will be no charge or effect on your tax position and your data will be secure. Unincorporated businesses and landlords will start reporting for their first accounting period starting after 5 April 2019 if their turnover is in excess of the VAT threshold ( 85k for 2017/18). Unincorporated businesses and landlords with turnover below the VAT threshold will start reporting after 5 April 2020. The worldwide disclosure facility (WDF) You should always disclose to HMRC any undeclared income rather than wait for HMRC to contact you. There have been a number of disclosure facilities over the years which offer a better and known cost of settlement as opposed to a standard HMRC investigation. The WDF is the final version of these facilities which give the opportunity to come forward and disclose a UK tax liability that relates to an offshore issue. The WDF is available until 30 September 2018 and is something that haysmacintyre have experience of dealing with on clients behalf. After 30 September 2018 HMRC will make use of the information they are collating under new sanctions reflecting HMRC s toughening approach to offshore non-compliance. Anyone with an annual turnover from self-employment or rentals of less than 10,000 will not have to participate. Individuals will be required to update HMRC at least quarterly on their tax information. There is no suggestion at the moment of paying tax quarterly. Year-end adjustments will be made once a year. From a planning perspective it will reduce your compliance burden if your VAT returns match with your year-end for accounting purposes. Please let us know if you require assistance with this. Tax investigation service (TIS) We offer a TIS to clients which will cover our costs of dealing with an enquiry from HMRC. The service covers enquiries into entries on the UK tax return, but would not cover the additional work required to make a disclosure under the WDF. 6 2018 haysmacintyre Private Client Spring 2018 Briefing 2018 haysmacintyre Private Client Spring 2018 Briefing 7
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