UK tax year end planning Optimise your affairs before the end of the 2017/18 tax year and prepare for the year ahead
Page 1 Contents UK tax planning: 2017/18 tax year end... 2 Year end tax planning checklist... 2 Personal tax...3 Savings...4 Dividends...6 Property...7 Pension contributions...8 Tax efficient investments...9 Capital gains tax...9 Inheritance tax...11 Residence and domicile...12 Some key deadlines... 13 About Buzzacott...14
Page 2 UK tax planning: 2017/18 tax year end With the end of the 2017/18 tax year in sight (5 April 2018), now is the perfect time to consider whether there is anything you can do to optimise your tax affairs. Our Private Client and Financial Planning teams have pulled together the main points you will need to be aware of, and have given some tips and ideas on how you may be able to optimise your tax affairs and plan for future years. Year end tax planning checklist So what opportunities could you take advantage of in the run-up to the year end? Here, we have summarised a few you might want to consider. 1 Have 2 Where 3 Are 4 Have 5 Have 6 The 7 Have 8 Have 9 Have 10 you taken full advantage of your annual pension contribution allowances? This is particularly beneficial where your income falls between 100,000 and 123,000. possible, have you made use of your Personal Savings Allowance and the dividend tax-free rate band? you considering selling an asset that is subject to Capital Gains Tax? If so, have you considered transferring a share in the asset to your spouse in order to benefit from two annual tax-free allowances, or deferring the disposal until the following tax year? you thought about transferring income-generating assets to your spouse if they earn less than you? Doing so could potentially lower your collective tax liability. you made full use of your annual gift allowances for IHT purposes? This is a great way of helping family members while also lowering your IHT profile. 2017/18 year is the first year the proposed changes to mortgage interest deductions will be in force. Have you explored the tax implications on your rental property? you considered the most tax efficient profit extraction methods where you own and manage your own business? Similarly, have you reviewed your current business ownership model to ensure it the best fit for you? you made sure that HMRC have issued your employer with the correct PAYE coding notice ahead of the new tax year? This may help avoid a surprise tax bill. you made full use of various tax free wrappers offered by the Government, such as ISAs for yourself and your family? Have you considered whether the reliefs that are available on inherently riskier investments, such as EIS, SEIS or VCT, would significantly alter your tax profile?
Page 3 Personal tax Most UK taxpayers will be entitled to receive an annual tax-free Personal Allowance (PA) which for the 2017/18 tax year is 11,500 (increased from 11,000 from the 2016/17 tax year). One of the more common reasons taxpayers will not be entitled to this PA is if their income exceeds 100,000. For those whose income exceeds this amount, the PA will be withdrawn at a rate of 1 for every 2 above 100,000. Once your income exceeds 123,000, your PA will be removed entirely. This results in a marginal rate of tax on this 23,000 of 60%. Those with income over 150,000 will be subject to tax at 45% and will also lose other tax saving advantages like the Personal Savings Allowance (see page 4). FOR ALL Where your income approaches or exceeds either of these tax thresholds, it may be worth considering transferring income generating assets to your lower earning spouse/civil partner (if applicable) as this may reduce your combined overall tax liability. Alternatively, reducing your taxable income may be achievable by making large contributions into a personal pension scheme, or donations to charity. This is particularly beneficial where your income is between 100,000 and 123,000. A gross contribution of 1,000 into your personal pension scheme or a donation to charity would only have a net cost to you of 400. While inherently riskier, investments into Seed Enterprise Investment Schemes (SEIS), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) offer significant Income Tax benefits, along with certain Capital Gains Tax advantages (see page 9). FOR EMPLOYED INDIVIDUALS Where you are employed, it can be difficult to vary the type or timing of income that you receive in order to best maximise allowances. However, it may be possible to take advantage of employer offered salary sacrifice arrangements for payments into pension schemes, childcare vouchers, bicycles and associated safety equipment. While it will not directly reduce your tax liability, you should ensure that the PAYE coding notice being operated by your employer is correct. This will help to avoid any surprise tax liabilities for underpayments when they are least expected. FOR SELF-EMPLOYED INDIVIDUALS Where profits are significantly higher than previous years, the 31 January tax payment can sometimes become a cashflow nightmare for business owners, due to an unusually large balancing payment as well as your first payment on account. In this situation, it is key that you assess whether the first payment on account, in respect of the following tax year, can be reduced.
Page 4 Personal tax (continued) (continued) An alternative (applicable only for those on a 31 March/5 April year end) would be to review whether potentially changing your financial year end would provide a benefit. This would take advantage of a number of unique tax rules that arise when trying to align tax year ends with non matching financial year ends. You should always seek advice on this before going ahead with this change. The effect would be that profits in the year to 30 April 2018 would not be subject to tax until 31 January 2020, counter this with a year end of 31 March 2018 where tax on these profits would be payable on 31 January 2019. Where your profits have increased, front loading necessary capital expenditure and making use of the Annual Investment Allowance (AIA) and First Year Allowances (FYA) ( 200,000 for the 2017/18 tax year) will help to reduce taxable profits. Alternatively, you may consider incorporating the business into a limited company. The falling rate of Corporation Tax (currently 19% but the Government has pledged to reduce this to 17%), along with greater options for profit extraction and retention, may make this a favourable option. Advice should be sought before incorporation is considered, because for some, it is not appropriate. FOR TRADING COMPANY OWNERS As with the planning pointers for self-employed individuals, front loading necessary capital expenditure, in order to make full use of the AIA and FYA, may assist in reducing the company s taxable profits. In addition, the scheduled fall in the Corporation Tax rates would mean that incurring this expenditure earlier rather than later will have a greater effect on the company s tax liability as a whole. However, from the shareholder director s perspective, income is only taxed on them personally when they actually extract the cash from the business. This may mean that bonuses or excess dividends can be structured in a way to ensure that both the use of available allowances and the timing of the liability are managed in such a way to give the most favourable result. The paying of pension contributions on behalf of the shareholder director can be an efficient way of providing a benefit to the individual while also allowing the company to obtain a deduction for Corporation Tax and not incur a National Insurance liability. Savings There have been significant changes introduced with the way that savings income is subject to tax in the UK. From 6 April 2016, we saw the introduction of interest being paid gross (without the withholding of basic rate tax at source). To coincide with these changes, the UK Government introduced a number of tax-free allowances that related to savings or interest income, including the aptly named Personal Savings Allowance (PSA). The amount of PSA an individual taxpayer receives depends on the level of their overall income for the tax year.
Page 5 For the 2017/18 tax year, basic rate taxpayers will receive an annual PSA of 1,000. This means that the first 1,000 of interest income earned by a basic rate taxpayer in any given tax year will be free of UK tax. For higher rate taxpayers, their PSA is reduced to 500 with the allowance being unavailable for additional rate taxpayers ( 150,000 and above). The PSA will apply to not only interest from bank accounts, but also savings and credit union accounts, peer-to-peer lending, government and corporate bonds, as well as interest income from unit trusts, investment trusts and open-ended investment companies. The tax-free PSA means that almost everyone can earn some interest without paying tax on this amount. However, where you are a couple (married or civil partnership), you can try to maximise the best use of the available allowances by ensuring the interest generating accounts are in the name of the lower rate taxpayer. While the introduction of the PSA is useful for those earning small amounts of interest, for those saving large sums on an annual basis, you should try to ensure that you fully utilise a more robust tax-free wrapper. These may include your annual ISA allowance, pensions or in some cases insurance bonds.
Page 6 Dividends Along with the changes to the way savings income would be taxed, 6 April 2016 also saw the introduction of changes in the rules surrounding the taxation of dividends. The previous notional tax credit was removed and a tax-free allowance threshold was introduced. With effect from 6 April 2017, this tax-free threshold has been reduced to 2,000 (down from 5,000 in 2016/17). The effective rates of tax on dividends has increased by 7.5% across the board since the introduction of the tax-free threshold. Dividends paid to basic rate taxpayers are now subject to tax at 7.5%, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. Before the end of the 2017/18 tax year, you should review your tax position to see whether it is possible for you to take advantage of the tax-free allowance. The introduction of the new dividend rates has made larger profit extraction through dividends slightly less favourable than under the old regime. It is therefore a good opportunity to review your profit extraction methods as a whole to ensure that you are still making best use of all available options. Where your investments already yield dividends over and above your annual exemption, it may be worth considering making future investments through a taxfree wrapper such as an ISA.
Page 7 Property Rental properties have been in the spotlight over the past few years. With the additional 3% Stamp Duty Land Tax (SDLT) now due on the purchase of second homes, it is clear that this is a subject that the UK Government along with HMRC are seeking to challenge. From 6 April 2017, we saw a raft of changes that will affect the way that the rental profits from a letting will be calculated. The most notable change was the restriction to the allowable tax deduction for finance costs such as mortgage interest payments. The changes introduced by HMRC sought to ensure that buy-to-let property owners only receive a basic rate tax credit for the finance costs that they are required to pay, rather than the far more generous full deduction for the costs. This is being phased in until it fully bites in 2020/21. The 2017/18 tax year will see a deduction of 75% of the finance costs with a tax credit for the remaining 25%. From 6 April 2018, the ratio will change once again to a deduction of 50% of the costs along with a basic rate tax credit for the remaining 50%. This change will have a notable impact on all higher rate and additional rate taxpayers with rental properties. Where property is owned jointly with your spouse/civil partner who is a basic rate taxpayer, consider transferring your share of the property to your partner. The restriction to basic rate relief on the payments should not affect the overall tax position. Please note that in order to undertake such planning, a Deed of Transfer will be required and depending on the outstanding loan on the property, there may be an associated SDLT on the transfer. As such, advice should be sought when considering a transfer of this nature. Alternatively, the restrictions to interest deductions only applies to properties owned by individuals. If a UK company owns the property, full tax relief would be available on the deduction of the interest charges. Please note that there are other tax implications to consider, so advice should be sought when either purchasing or transferring a property to a company. A rule change from 6 April 2016 saw the removal of the Wear and Tear allowance, which provided a flat rate relief for the replacement and repair of household items and furniture. HMRC have now changed to a system whereby relief will only be granted for items replaced by the property owner. This relief is known as Replacement of Domestic Items relief. Where you have previously provided domestic items to tenants including moveable furniture, furnishings, household appliances and kitchenware, ensure that you retain all of your receipts when you are required to replace these items so that you are able to obtain maximum relief on these costs.
Page 8 Pension contributions The rules regarding tax relief on pension contributions have been constantly tweaked over the years, leaving a system that offers greater flexibility for pension contributions and withdrawals but which has also added greater complexity to the tax rules. ANNUAL ALLOWANCE Tax relief is available on pension contributions that do not exceed your relevant earnings (generally speaking, employment and trading profits) or 3,600 (gross) if higher in each tax year. However, the tax relief will be clawed back if pension contributions exceed the Annual Allowance, which for 2017/18 and 2018/19 is set at 40,000. It may be possible to make additional contributions in respect of unused allowances from the three previous tax years (provided that you were a member of a registered pension scheme in those years). TAPERED ALLOWANCE With effect from the 2016/17 tax year, one s annual allowance is reduced when total annual income exceeds a certain level. While there are complications to the limits, it will generally be the case that the reduction will apply to individuals with annual income over 150,000. For every 2 of income over the limit, the annual allowance is reduced by 1, down to a minimum of 10,000 once your annual income exceeds 210,000. When reviewing the annual contribution, the unused reliefs for the three earlier years should be considered particularly the earliest of those where the relief will be lost if not utilised. You can receive 20% tax relief even if you are a low or non-earner. The annual pension contribution limit is 3,600 gross (a net payment of 2,880 to which a tax credit of 720 is added). The 20% tax credit will not be clawed back even for people who don t pay tax, e.g. non-earning spouses.
Page 9 Tax efficient investments For most people, tax efficient investments are likely to consist of: Contributions to personal pension plans tax relief is obtained when money goes into the investment, but is taxable when withdrawals are made. ISA investments there is no tax relief when the money is paid into the scheme, but no tax on income or gains made by the scheme and no tax when withdrawals are made. There are also a range of investments available to investors who traditionally have a higher risk profile. These primarily involve investment in small, unquoted companies where, due to the inherent risk involved, the Government offers attractive income tax and capital gains tax incentives for would-be investors. The reliefs have complex rules imposing limits on the amounts and types of enterprises that can be invested in, and impose qualifying requirements on both the investor and the enterprise. The available schemes/reliefs are listed below, please contact us if you require detailed advice on the tax savings that can be made. Enterprise Investment Scheme (EIS) Seed Enterprise Investment Scheme (SEIS) Venture Capital Trusts (VCT) Business Investment Relief (BIR) Investors Relief Social Investment Tax Relief The range of tax reliefs available make these investments a valuable part of tax planning in the right circumstances, but the risks inherent in making some of the investments referred to above must always be kept in mind. It is important to consider the level of risk when considering the tax benefits of any type of investments. Capital Gains Tax Capital Gains Tax (CGT) is charged on the profit made when an asset is disposed of. It will normally be calculated by reference to sale proceeds, but this can be replaced by market value when the disposal is a gift rather than a sale. Most individuals are entitled to an annual exemption ( 11,300 in 2017/18, 11,700 in 2018/19), which means that no CGT is payable on gains up to that amount each year. The annual exemption cannot be carried forward or transferred. Where gains exceed the annual exemption, CGT is charged at 10% if the chargeable gain falls into the taxpayer s basic rate tax band, and at 20% thereafter. (Rates of 18% and 28% apply to gains arising on the disposal of residential properties and Carried Interest).
Page 10 Capital Gains Tax (continued) EXEMPTIONS Certain disposals and categories of asset are exempt from CGT, in particular: There is no requirement to pay CGT on assets transferred between spouses/civil partners. Care has to be taken when looking at such transfers when partners are separated or divorced. Profits on the sale of your main home are usually exempt. Complications can arise where individuals or married couples own more than one residence. Wherever possible, individuals should plan to utilise their tax free annual exemption either selling assets at a profit to bring gains for the year up to the value of the allowance, or selling assets at a loss to bring net annual gains down to the value of the allowance. For married couples the allowances of both spouses should be utilised where possible, which can be achieved by transferring assets between themselves, but care needs to be exercised. When buying a second home, an election can be sent to HMRC within two years to determine which of your homes should be treated as your main home. This is an important election that can have significant tax planning benefits. ENTREPRENEURS RELIEF Individuals who sell all or part of their business assets used in their business or shares in unquoted trading companies, may qualify for the 10% Entrepreneurs Relief CGT rate on profits up to 10m. This is a complex area that needs to be planned for in advance, many of the conditions required to qualify for the relief need to be adhered to for at least 12 months prior to the sale. BUSINESS RELIEFS Individuals may be able to claim holdover reliefs when gifting business assets and shares in trading companies. Roll-over reliefs can be claimed where the proceeds of the sale of business assets are reinvested into new assets used by the business. Incorporation relief may be available when a sole trade or partnership (including Limited Liability Partnerships) is transferred to a company in return for shares. INVESTMENT RELIEFS As mentioned elsewhere in this guide, CGT liabilities can be deferred or reduced by investing in approved tax efficient investments such as EIS, SEIS or the Social Investment Tax Relief scheme.
Page 11 Inheritance Tax Inheritance Tax (IHT) can be a difficult subject to discuss and one that many people would rather not think about. However, it is an area where planning can produce some very significant tax savings. IHT is charged at 40% on the value of a person s estate at the date of death that exceeds the available nil rate band. A 20% IHT charge can be imposed on certain lifetime transfers. NIL RATE BAND The current Nil Rate Band (NRB) for an individual is 325,000. The NRB can be transferred to a spouse or civil partner, so couples can have a combined NRB of 650,000 on the second death. The NRB can be increased if a home is left to direct descendants. The rules are new, complicated and are being introduced gradually. By 2020/21 the additional relief could increase the NRB for an individual to 500,000 ( 1million for a couple). GIFTS Up to 3,000 can be given away each year. Any unused allowance can be carried forward for a maximum of one year and utilised in that subsequent year. Small gifts of up to 250 can be made to as many people as you wish each year. Regular gifts out of surplus income can be made, but such gifts should first be discussed and planned for. Gifts on marriage of up to 5,000 by parents, 2,500 by grandparents, and 1,000 by others are exempt from IHT. Many other gifts will qualify as potentially exempt transfers and will be exempt from IHT if the donor survives for at least seven years (with a taper relief available if the donor dies within three to seven years of making the gift). Gifts to charity made during lifetime or at death will be exempt from IHT. A significant charitable gift at death can also reduce the IHT rate by up to 10%. If you are considering passing money down a generation, making regular gifts out of income can be a valuable planning tool that is often overlooked and misunderstood. Perceived excess capital should be gifted as early as possible so that the gift can potentially become exempt. This includes gifts into trusts, even though there will be an immediate 20% charge, as this is half of the rate if not successfully transferred. EXEMPTIONS Assets which qualify for Business Property Relief (BPR) or Agricultural Property Relief (APR) can be exempt, or partially exempt, from IHT if held for two full years prior to death.
Page 12 Inheritance Tax (continued) Investing in company shares which qualify for BPR may be advantageous from an IHT point of view, but should only be considered as part of a wider investment strategy. An up to date Will is always invaluable, both for IHT planning and for dealing with the administration of an estate. Residence and domicile Issues of residence and domicile have a fundamental impact on an individual s UK tax position. Residence is a fact-based test to determine whether or not an individual is resident in the UK for each separate tax year. The individual s personal circumstances in the light of criteria set out by HMRC will determine the maximum number of days that can be spent in the UK without becoming tax resident here. Domicile has no statutory definition, but it is designed to ensure that ultimately each person is attached to a jurisdiction to whose laws they are accountable. It can be seen as a question of where an individual s true home is, and it is not a thing that can be changed easily. An individual could come to the UK and live here for many years without the UK becoming their domicile. The fundamental and far reaching impact that residence and domicile issues have on all UK tax planning make it impossible to provide neat summaries of the issues involved. But getting it wrong can have very costly implications and getting it right can result in a very UK tax efficient existence. The UK remains a very attractive destination for foreign individuals who plan appropriately. Individuals who are considering either leaving the UK or coming here to live and work should carefully consider the tax consequences. Our team will be happy to meet with you and have particular expertise in residence and domicile tax planning including the use of offshore trusts. A particular difficulty of planning for residence and domicile tax issues is the everchanging legislation. A recent change has introduced a set of deemed domicile rules applicable to long-term UK residents who would not otherwise be considered as domiciled in the UK. These changes can have a fundamental impact on the tax situation for these individuals. Individuals whose tax planning depends on their residence and/or domicile status need to be kept updated and advised of the constantly evolving legislation and HMRC practice.
Page 13 Some key deadlines There are other upcoming deadlines that you may need to be aware of. Here is a reminder of some of the key UK tax deadlines to consider over the next few months. 5 5 April 2018 Last day of the 2017/18 tax year (deadline to utilise any 2017/18 rate bands or allowances, such as pension contributions) 6 6 April 2018 First day of the 2018/19 tax year 31 31 July 2018 Second payment on account of income tax for 2017/18 due 31 31 October 2018 Paper Tax Return filing deadline 31 31 January 2019 Online filing Tax Return deadline/ tax balancing payment for 2017/18 and first payment on account due of income tax for 2018/19
Page 14 About Buzzacott Private Client Team We will support you with some of the biggest financial decisions you and your family will face over the coming years. We take care of all your financial concerns from investment portfolios, property ownership, businesses and employment to preparing for changes in circumstance, inheritance tax planning and making provision for dependents. We are also able to offer complex remittance planning for those not originally from the UK. Our clients include individuals, estates and trusts. No matter what your requirements, we provide you with the reassurance that your tax affairs have been taken care of, leaving you to focus on other things that are important to you. For further guidance and advice tailored to your situation, please reach out to your usual Buzzacott contact or: Akin Coker Partner +44 (0)20 7556 1332 CokerA@buzzacott.co.uk James Walker Partner +44 (0)20 7556 1322 walkerj@buzzacott.co.uk Gregory Wheatley Partner +44 (0)20 7556 1278 WheatleyG@buzzacott.co.uk About Buzzacott Financial Planning Team We offer guidance on and create financial plans for private individuals seeking solutions for wealth accumulation or preservation. Whether you re saving for retirement or managing disposals, building an investment portfolio or preparing for life abroad, we take a strategic approach to financial planning that puts you in control. For further guidance and advice tailored to your situation, please reach out to your usual Buzzacott contact or: Rachel O Donoghue Partner +44 (0)20 7556 1256 odonoghuer@buzzacott.co.uk