Welcome to the April 2016 Newsletter for our clients and professional contacts and associates.
Last month of course we had the pleasure of the Budget, which seems to come around with alarming regularity especially as there are in effect two a year! Some points arising from that are highlighted.
Also we are now into a new tax year and with this comes some pre-ordained changes to the tax code.
Finally, as ever, there have been a number of cases, statements or legal changes and a few choice samples are considered more closely.
Please do let us know if you would like a more in depth comment on any issue covered. Your feedback on the form and content will be most appreciated. If you would like a hard copy of this and future letters in addition to or instead of a copy by email, please let us know.
Budget No.1 2016
The income tax personal allowance will be increased to £11,500 and the basic rate limit will be increased to £33,500 for 2017/18. The higher rate threshold will therefore rise to £45,000 for those entitled to the full personal allowance.
National Insurance Contributions
Class 2 NICs for self-employed individuals will cease from April 2018.
Employment termination payments in excess of £30,000 will be subject to NICs from April 2018. This will represent an increased cost to employers of up to 13.8%.
Capital Gains Tax
Rates will be reduced from 28% to 20% for higher rate tax payers and from 18% to 10% for lower rate tax payers. However, the reduction in rates will not apply to capital gains on the disposal of residential property. We now therefore have potentially 4 rates of CGT to consider depending on the asset to be disposed!
Entrepreneursâ€™ Relief is to be extended. Previously ER has only been available in respect of a disposal of shares in a qualifying company when the individual was an employee who had owned at least 5% of the voting shares in the company for at least 12 months. ER will now be available as an investors relief to external investors purchasing newly issued shares in unlisted trading companies on or after 17th March 2016 held for at least 3 years.
The rate will be reduced to 17% from 1st April 2020.
Loans to shareholders
The rate of tax charged on loans to shareholder/directors of close companies will increase from 5% to 32.5% from 6th April 2016.
Stamp Duty Land Tax
From 17th March 2016 the rates of SDLT on non-residential property transactions are as follows:
£0 – £150,0000%
£150,001 – £250,000 2%
Above £250,000 5%
Highlight Budget Planning Point
The reduction in the CGT rates is important for any clients who:
1) Have made a large capital gain and paid tax on it in the last three years
2) Are trustees or beneficiaries of a trust especially considering the change to dividend taxation (mentioned below)as well.
Anyone who has made large capital gains (not on residential propertyor under Entrepreneurs Relief) in the last three years, ought to consider pulling the gainÂ forward into the new CGT rates of 20% and 10% as opposed to 28% and 18%. This will save 8/28th or 8/18th of the tax they already paid.
This can be done by using EIS investments and there are a plethora of different types of EIS available these days, with different risk levels. Your financial adviser can no doubt direct you to an appropriate investment for you.
All trustees should be reviewing the investments held within their trusts in light of the taxation changes to capital gains tax and dividend taxation. It has changed the balance of what type of investment wrapper should be held under many trusts and as a result is a duty of the trustees to, at the very least, consider.
New Tax Year Changes
In addition to the changes announced in the Budget, some changes have been previously announced to apply from the start of the tax year.
Currently, when a dividend is paid to an individual, it is subject to different tax rates compared to other income due to a 10% notional tax credit being added to the dividend. So for an individual who has dividend income which falls into the basic rate band the effective tax rate is nil as the 10% tax credit covers the 10% tax liability. For higher rate and additional rate taxpayers, the effective tax rates on a dividend receipt are 25% and 30.6% respectively.
From 6 April 2016:
- the 10% dividend tax credit is abolished with the result that the cash dividend received will be the gross amount potentially subject to tax;
- a new Dividend Tax Allowance charges the first £5,000 of dividends received in a tax year at 0%
- for dividends above £5,000, new rates of tax on dividend income will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
Trustees, unlike individuals, will not receive a £5,000 tax free dividend allowance but will be taxable, with the rate being dependent on the type of trust, on dividends actually received.
For trusts where a beneficiary has an â€œinterest in possession (i.e. a right to the net trust income), unless dividend income is mandated directly to the beneficiary, income tax at a rate of 7.5% will be charged on dividends received. The beneficiaries will receive a 7.5% recoverable credit for the tax paid by the trustees and will be able to either obtain a refund of the tax paid by the trustees or set the credit against their personal tax liabilities.
For discretionary trusts (where the payment of trust income is at the discretion of the trustees) dividends will be taxed at a rate of 38.1% of the dividend received. This is a significantly higher rate of tax than the current effective rate of 30.55% on the net dividend received by trustees (37.5% on the gross equivalent) and will have an immediate cash flow impact.
However, all of the tax paid by the trustees will be added to the tax pool and be available to frank discretionary distributions of income paid to beneficiaries.
Rental Properties – From 6 April 2016 the wear and tear allowance will be repealed in favour of a new replacement furniture relief. The new relief is intended to create a more consistent way of calculating the taxable profits of property businesses.
This new relief will allow you to take a deduction from rental income for expenditure on replacing domestic capital items incurred wholly and exclusively for the purpose of the property business. A domestic item is an item for domestic use, including furniture, furnishings such as carpets and curtains, household appliances and kitchenware. The replacement of fixtures is not covered by the new relief because it is deductible as a revenue expense under normal principles. The new relief will not cover the cost of initial furnishing, but replacement costs only.
Stamp Duty Land Tax
The Budget has confirmed that an additional 3% will be added to existing SDLT rates for purchases of certain residential properties on or after 1 April 2016. This rate will also apply to most trustees (unless they are acquiring as bare trustee). If you are planning on purchasing a UK residential property, the additional rate may apply and you may therefore wish to discuss this with us before completing on the purchase.
Legal and Tax Update
Several recent cases on Entrepreneurs Relief show how important it is to understand in this area. It was highlighted by ex-hoteliers who lost a court case. The business excluding premises was transferred to their new company, without any written terms. Money was paid to them as the hotel could no longer operate from the premises. Entrepreneurs Relief in simple terms applies to gains on the disposal of a business or shares in a business of up to and reduces the CGT rate on those gains to 10%.
Draft Deemed Domicile Clauses
There will be changes to deem certain non-UK domiciled individuals who are long term UK resident to be UK domiciled for the purposes of income and capital gains tax. They should be born in the UK and resident in the UK for at least 15 out of the previous 20 tax years. The changes will have effect from 6 April 2017.
The Government says it wants, to reform the tax treatment of non-doms so that the UK can continue to benefit from the presence of talented foreigners while also addressing unfair tax outcomes.”
Executors “ the dangers of not taking advice!
In a recent case executors under declared income for 8 months prior to death and so HMRC imposed a penalty. The executors proceeded to undertake their work as executors without professional assistance. The executors appealed against the penalty. The First Tier Tribunal observed it was not HMRCs obligation to relieve them of their choice in not taking professional advice.
Bits & Pieces
Regularly services or products or investments come to our attention. Occasionally we think some of these might be of interest!
Recently an EIS opportunity presented itself. In summary this is as follows:
This is a freehold pub in Clerkenwell. The snap shot is that the pub was sold by Punch Taverns to an investment firm as part of a distressed portfolio. The investment firm strategy is purely planning uplift. As such, the site does have residential planningÂ permission for three two bedroom apartments in the uppers, so the fall-back position would be to convert the uppers and sell post year 3 (after the EIS window). When you couple this with the EIS relief it makes quite a compelling story.
However we believe the site will make more money as an entire entity. The initial thoughts are to do a small members club in the uppers “ a really nice lounge space, some work space and private dining capability on the first floor and rooms in the two floors above. The floor plate works nicely to carve out three hotel rooms per floor. The ground floor and garden room would offer a good quality food proposition with a potential match up with a named chef, subject to costs and whether it is worth it. We are currently exploring this at the moment.
Single EIS investments like this come along periodically and if anyone is interested in this which is of course London property backed or anything similar, please let us know.
Court and Social
Mills Keep now have a base in Buckinghamshire! Jeremy tends to spend 2/3 days a week in the area to service clients in London and the Thames Valley. This base means that home visits should be even easier to arrange and if you are in that area do please let us know if you would like Jeremy to pop in.
With kind regards
O845 680 3481, Dorset House, 5 Church St, Wimborne BH21 1JH