Last Minute Year End Tax Planning Tips!

With the end of the 2014-15 UK tax year (5 April) looming in to view and the UK Budget having just happened last week, it is time to consider various year end UK personal tax planning tips that might make a difference in reducing your tax liabilities.

My top UK tax saving tips are:

Ensure that each spouse (or civil partner) uses their full Personal Allowance (PA) for income tax purposes where possible. Currently this stands at £10,000 for 201/15 and is not liable to tax. Spouses/civil partners should also consider transferring income producing assets to each other in order ensure that PAs are not wasted. If as a self-employed person or though a family company you employ a spouse to assist in the running of the business, the spouse could be remunerated fairly to utilise their tax-free PA.

Minor children are also entitled to Personal Allowances. However, bear in mind that the amount of income a child can derive from a parent is limited to £100 each year. However, Child Trust Funds and Junior Individual Savings Accounts (JISAs) can be funded by parents.

Pension contributions of up to £3,600 gross per year can be made by individuals with no taxable income. The net contribution after tax relief contributed at source by the UK Government would be just £2,880. At the other end of the scale, the Annual Allowance (AA) for making tax-relievable pension contributions is £40,000, so consideration should be made to utilising the full AA for 2014-15 by 5 April 2015. It is also possible to carry forward unused AAs from the previous three tax years, so it may be possible to receive tax relief in the current tax year on contributions well in excess of £40,000 with a little planning.

The pension Life Time Allowance (LTA – the total amount of UK pension savings each individual is allowed to build up in their lifetime) is currently £1.25M although the Budget reduces this to £1m next year. The new “flexible draw down” pension rules from 6 April 2015 onwards will allow individuals the opportunity to plan their affairs to manage the level of the money they take from their pension pot to both minimise annual income tax liabilities and keep within the LTA.

Use of tax-favoured investments such as ISAs, Enterprise Investment Schemes, Seed Enterprise Investment Schemes, and Venture Capital Trusts should also be reviewed. Up to £15,000 per person (so up to £30,000 for a married couple) can be invested in an ISA for the 2014-15 year.

Incomes can fluctuate from year to year as a result of one-off payments or changes in circumstances. Consideration should therefore be given to the benefits of accelerating or deferring the taxation point of investment income, employment bonuses etc., and also to the timing of the payment of dividends paid out by family owned companies. Similarly, the acceleration of expenditure on business expenses/capital assets qualifying for capital allowances could prove beneficial.

Taxable income of between £100,000 and £120,000 is effectively taxed at a rate of 60% due to the loss of the Personal Allowance, which is reduced by £1 for every £2 of income between £100,000 and £120,000. Deferral of income may therefore save tax at the rate of 60% although planning might also include the use of additional pension contributions, charitable donations, etc.

Entitlement to Child Benefit payments could also be protected/reinstated using year end personal tax planning.

Consideration should be given to utilising the tax-free Annual Exemption (currently £11,000) on capital gains. Each spouse/civil partner is entitled to the exemption each year so gifts between spouses prior to sales of assets can be tax-effective. It may be worth crystallising capital losses where gains in excess of the Annual Exemption have been made. The deferral of sales until after 5 April may see tax paid at lower rates and provide significant cash-flow benefits in terms of when tax needs to be paid.

The use/carry forward of the £3,000 Inheritance Tax annual exemption should be reviewed, together with other possible exemptions such as those for small gifts of up to £250 per individual, regular gifts out of normal annual income, and tax-free gifts in consideration of marriage, which can range between £1,000 and £5,000 depending on the relationship with the person getting married.

Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone. I also  recommend that you should seek detailed financial advice from an appropriately qualified advisor if you believe you might benefit from any year end planning that involves investments and/or pensions.

All change for Steven Holden Tax...

At the beginning of this month I joined the team at Haines Watts, working out of their Tamworth office in Staffordshire. I'm almost two weeks in now and having a great time working with a brilliant bunch of like-minded people, and clients who have some very interesting tax issues. Life here is good...

Haines Watts are a Top 15 firm of chartered accountants who specialise in advising and supporting business owners. With more than 60 offices they work with over 35,000 companies and business owners nationwide, giving their clients access to a huge amount of business expertise and knowledge both on a local and national level.

Where the team at Haines Watts and I have found a particular synergy is the approach we take towards dealing with our clients, viewing it as our responsibility (and a matter of best practice) to take a holistic view beyond that of just the numbers. The firm's ethos is to stand beside their clients as partners, helping them manage their businesses and family wealth to ensure they achieve their objectives through good advice. In short, Haines Watts are more than just accountants…

Right, so trusts are dead then?

No, they're not, trusts are very much alive and kicking. The concept and use of trusts in the UK has been around since the times of the crusades, undoubtedly they are one of English law’s most wonderful innovations. However, in recent times we have seen both HMRC and the English family law courts have somewhat crucified them.

As some of you may be aware the Finance Act 2006 made wholesale changes to the wealth planning landscape by introducing the 10 year charge or 6% and exit charges to pretty much all lifetime trusts. Add to this the immediate 20% inheritance tax charge to assets added into trust above the nil rate threshold and you can begin to understand why many think the use of trusts has had its day.

However, nothing could be further from the truth, both for business owners and people holding significant private wealth. Various entities have been put forward as the alternative: family limited partnerships (FLPs), family general partnerships and FICs. There are, however, regulatory downsides to using partnerships and, until recently, there were taxation downsides to using FICs (see my earlier blog on these). However, none of these have fully replicated the usefulness of trusts.

The biggest advantage of a trust over all of its would-be successors is that it allows the donor to retain full control over the assets being gifted, be that shares in the family business as we have discussed here before, or holding a property for another persons benefit. What a trust does is divide the legal and beneficial ownership. Now, whilst the English family law courts have driven a truck through the concept of equity and trusts in recent years, they are still terribly useful in helping to manage a family's finances and exposure to inheritance tax. They are however now only part of the solution, not all of it.

If you'd like to discuss the use of trusts are part of your overall tax and wealth planning please get in touch with us for a free, no obligation consultation.

Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.

Tax and the importance of structure...

When looking at a typical family business (or any business for that matter) what I see most often is that no thought at all has been given to the structure. Whether it be a small partnership, or quite an involved corporate entity, usually we see Mum and Dad being the controlling interest in all things. Now this occurs for obvious reasons, as most family businesses are set up by Mum and/or Dad, they also usually grow from small acorns to (in some cases) mighty oaks, and whilst this is happening all the focus is on making the business (i.e. the products or services being supplied to customers) work.

What is often not looked at, or even considered at all by some, is how the business can be best structured to remunerate all those involved with the minimum of tax. A nice little ruse that I have written about before is that of using a combination of alphabet shares and a family trust to help pay for your children's university fees. 

Now alphabet shares are pretty simple, insofar as you will have several classes of share that each have different dividend rights. Typically these are referred to as A shares, B shares and so on. By creating a different class of share, that means you can pay a different dividend out on the B shares to that paid on the A shares, this is important as otherwise you'd have to pay yourself and the children identical amounts. As the children have their own personal tax allowance (and basic rate tax band) you can pay them gross dividends of up £41,865 (2014/15) if they have no other income. If you were to take out that extra income it would cost you at least a whopping 25% extra in income tax!

Okay, so you understand the alphabet shares, but why the trust, aren't they really complicated and get you into lots of trouble with the tax man? Well, the short answer to all of those questions is no, but let me explain. HMRC don't actually dislike trusts, they just dislike people abusing them. The reason we use trusts for this type of plan is that it lets you keep control of the shares in your business, whilst deferring the dividend to your children, all perfectly legal and above board. After all, you wouldn't want them to physically own part of your company whilst they are still so young (and prone to making financial mistakes) would you? A trust gives you the best of both worlds by benefiting from having the dividend taxed on your child, but you still controlling the shares.

I know this is only a very small piece of planning, but even if you were only covering their tuition fees by using this you would save typically £6,750 on a three year course with tuition fees of £9,000 a year.

This is just the beginning of what you can do, just think what we could achieve by looking at and reviewing all of your current business and financial structures. Despite what you've heard in the Daily Mail tax planning isn't bad for your health!

Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.

Someone told me I should invest in property through a company...

Well, if they did that's pretty sound advice. Want me to explain why that's the case? Okay then...

For most property investors its almost a certainty that they will be borrowing some, if not most of the money to fund their fledgling (or in some cases burgeoning) property empire. Also, for most it will be something they're doing in addition to holding down a day job, or running their own business. For this reason, becoming a landlord is for most people an investment choice, rather than their day job (although I would question why it couldn't be both).

The down side of this means that typically, any rents you make end up getting taxed at your highest rate of tax, which for most is 40% and for some even as much as 45%. What this means is that you've got to pay a big chunk of tax before you can start paying down those mortgages.

So, I'm guessing most of the initiated property investors reading this already know that, but may still be wondering how a company can possibly help that situation as companies still pay tax right? Well, yes they do, but from April 2015 all companies in the UK regardless of size and/or activity only pay tax at 20%, which lets face it is a lot better than 40%/45% right.

Now, this is where the real magic happens, because what this means is that you now have 80% net rents (after expenses of course) to pay down those mortgages, which in turns means you can buy more properties faster. Therefore, provided you are looking at property investment as just that, and investment, you're growing your fund a lot quicker by using a company structure!

Well, that's just dandy for tax planning purposes, but what about the banks? I'll admit, some don;t like the idea of lending to a brand new company, but there are those out there that will.  Yes, you might pay slightly more in interest, perhaps as much as a a couple of percent, but you're saving 20%/25% in tax, so its well worth it.

Property investment companies don't work for everyone, it is very much dependant on your own circumstances, goals and objectives, but where those elements align it can be a powerful piece of structuring. Unfortunately most of us look at transactions in their component parts, instead of looking at the bigger picture. That's where really good, focused tax professionals can help you make the difference. We don't just save you tax, but in a lot of cases that tax saving can make an nonviable project viable in terms of cashflow. So, if you're a property investor, or just have what you see as a rather knotty tax problem why not get in touch and see what we can do for you?

Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.

Could a Family Investment Company help your tax position?

For many years trusts have been considered the standard way to pass family wealth on to future generations. The last few years however have seen tax changes which mean that Family Investment Companies (FICs) may be the more tax-efficient option…

Significant changes were introduced in the Finance Act 2006 affecting the UK's tax regime for trusts. Now we see that nearly all new lifetime trusts are dealt with under the relevant property regime, which means:

• An immediate charge to inheritance tax (IHT) at the lifetime rate of 20% for gifts made into trust in excess of the available nil rate band(NRB) - currently £325,000;
• A 10-yearly IHT charge (capped at a maximum rate of 6% over and above the available NRB);
• A further charge to IHT if assets 'exit' the trust (also capped as above).

These changes mean that those wishing to pass down substantial wealth in the protected manner that trusts offer need to look to different solutions, which may be more tax-efficient. All of this means that FICs have become increasingly topical in recent years, primarily owing to the increasingly competitive rates of corporation tax available in the UK (20% from 1 April 2015) that we have enjoyed under the current Government.

So, what is a FIC?

In its simplest sense a FIC is a UK-resident private limited company whose shareholders are family members. Such a vehicle can be extremely tax-efficient where an individual transfers significant sums of cash, property or investments into a company. These assets can then be utilised to generate income for the family.

Three benefits of a FIC

1. Provided that an individual has available cash to transfer into a company, the transfer into the company would be tax-free.
2. There would be no immediate charge to IHT, as a gift of shares from the donor to another member of the family is deemed to be a potentially exempt transfer (PET). Provided the donor survives for seven years following the gift there will be no further IHT implications. Furthermore, the donor could still retain some control of the company providing the articles of association are appropriately drafted.
3. The FIC would only pay tax at a rate of 20% on the profits that it generates. Shareholders then only pay tax to the extent the company distributes dividends. If the profits are retained within the company therefore, no further tax would be payable.

Three disadvantages of a FIC

1. If non-cash assets are transferred into the company, the donor may be incur a capital gains tax (CGT) charge at a rate of 18% or 28% based on the market value of assets that are transferred into the company at the date of transfer.
2. It is possible for there to be an element of double taxation in using the FIC structure. The profits are first subject to corporation tax at a rate of 20% and then are subject to income tax when they are subsequently distributed to the shareholders, albeit accessing capital through a purchase of own shares can be highly tax-efficient in some circumstances.
3. As the company has to comply with company filing regulations there are costs to consider, but this is equally true when setting up and running a trust.

The attractive corporation tax rates mean that a FIC is something that should be seriously considered as an alternative to a trust. It will still allow the donor to retain some control over their investments while avoiding an immediate charge to IHT. As with all planning of this kind though, proper care does need to be taken and professional advice should always be sought. It is certainly not something one should enter light-heartedly.

Disclaimer - The above blog does not constitute advice and not should be taken as such. The author accepts no responsibility for losses arising from taking action based on the contents of this blog alone.

Do I need to complete a Self-Assessment Tax Return?

You can file your tax return online or in paper form (although if you haven't filed your 2013/14 Tax Return yet, online is your only option),  but either way you must be registered for Self-Assessment in order to do so. If you haven't registered before you’ll get a Unique Taxpayer Reference (UTR) number. If you’re re-registering you'll need to use the same UTR as last time.

You should have registered by 5 October following the end of the tax year you need to send a tax return for (so if you haven't yet, you're already late). This is so that you should have enough time to complete registration before the tax return and any tax is due. Full details of how to register can be found here https://www.gov.uk/register-for-self-assessment.

As to whether you need to file a Tax Return, you must always send one if you’re either a self-employed sole trader, a partner in a business partnership, or a company director (unless it’s for a non-profit organisation, eg a charity, and you don’t get any pay or benefits, like travel expenses or a company car).

That said, it’s always wise to check whether you need to file a Self-Assessment Tax Return or not, helpfully HMRC provide a handy little walk through that you can find here https://www.gov.uk/check-if-you-need-a-tax-return.

So, you've discovered that you do need to file a Tax Return, but there’s only ten working days until the filing deadline! If you are filing for the first time and have not registered your details with HMRC, you need to do so by 21 January. This is because it takes seven to ten days for the online account to be set up. An activation code needs to be posted and can take ten days to arrive.

Fortunately, if you’re using a qualified tax professional, or even just a normal accountant, they should have their own software package that means you do not have to wait for the HMRC activation code. However, even they will have to wait for HMRC to issue you with a UTR before they can submit your Tax Return, which could still take several days for HMRC to send to you.

Missing the tax return deadline results in an immediate penalty of £100. As the deadline for paper Tax Returns (31 October 14) has already passed, you'll need to file a tax return online by midnight, Friday, January 31, 2015. This can be further compounded by penalties for late payment of tax that result from late filing.

If in doubt, speak to a specialist, as if your tax affairs are complex it will be well worth your money to hire a tax professional to complete your self-assessment tax return rather than risking it yourself.

Non-Residents & Capital Gains Tax: All Change

Last week the Government issued its response to the consultation document “Implementing a capital gains tax charge on non-residents” issued in March. This had set out the basis on which tax would be charged on gains realised by offshore investors in UK residential property. After the Autumn Statement today we can now see how the law reflects those intentions.

Property companies

The property industry will welcome clarification that the Government does not intend to broaden the scope of the charge and apply CGT to disposals of non-residential property. There was concern that taxing gains of offshore investors in residential property could be the beginning of a change of policy but it seems that offshore investors’ holdings of commercial, leisure, student accommodation and care homes will not suffer tax on gains.

Individuals and their homes

The proposal to abolish the 'main residence election' in favour of highly complex fact-based tests to decide which property would benefit from private residence relief – PRR - (where a person is not subject to tax on gains when they sell their  home) - has been scrapped. Instead, non-residents investing in UK residential property and UK residents investing in non-UK property have to meet an occupation test.

It is much simpler.  If you are in your home for 90 midnights in a tax year you can nominate that property to benefit from the private residence relief. Importantly, there will be no change from the current rules for individuals who are UK resident and own only UK properties.

HMRC backtrack on Pilot Trusts

HMRC have announced their decision not to introduce a single settlement nil rate band for trusts created on or after 6 April 2014. This means that Advisers, like me, can breathe a sigh of relief that the state of limbo they have been in ever since the anti-forestalling measures were announced on 6 June this year should now be coming to an end and we will all be keen to review the anti-avoidance legislation once it has been released.

The current Association of Taxation President, Natalie Miller, said:

"This decision will be most welcomed by trustees and professional advisers. Many who responded to the consultation on the ‘Simplification of Trusts’, including the ATT, pointed out that the proposals being put forward did not represent a simplification at all but rather a ‘knee-jerk’ reaction to putting a stop to the use of pilot trusts."

As for my own views, most of you will know that I have been a great advocate of trusts for many years, not because of the tax benefits (of which there are actually startlingly few), but in the main because of the protection and control they can offer my clients over their families assets.  Therefore, it will come as no surprise that I am pleased that HMRC appear to have listened to the concerns of the professional bodies and their members and have instead decided to tackle the issue with specific anti-avoidance legislation aimed at the use of multiple trusts, rather than impose a system that would cause widespread complexity and confusion across the board. It will be interesting to see the content of the new anti-avoidance legislation once it has been released, as although we have won this battle on the ware is far from over!

Inheritance Tax, the great debate...

None of us like Inheritance Tax, even me who has carved a career out of helping people manage their exposure to it. It is one of the most unjust taxes on the statute book, which is one of the main reasons I have never had too much of a moral dilemma when it comes to helping people arrange their affairs so that they pay only as much as they need to. It was Roy Jenkins who famously said “Inheritance Tax, is broadly speaking a voluntary levy paid by those who distrust their Heirs more than they dislike the Inland Revenue.”

So, enter the news today our incumbent Prime Minister at a Q&A session with Age UK states that only the very wealthy should pay Inheritance Tax. A noble statement, but how does one define "the very wealthy", after all we have seen child benefit removed from households with one person earning over £50,000, but households with two people earning £49,999 each get to keep it. The prime minister said he would like to ease pressure on people who do not regard themselves as “in any way the mega-rich” but whose estates are subject to the tax. Again, a very nice political soundbite, but no real substance there I am afraid Mr Prime Minister.

Let us not forget that George Osborne transformed Tory fortunes at the party’s conference in 2007 – and spooked Gordon Brown into abandoning plans to call an early general election – with a proposal to raise the inheritance tax threshold to £1,000,000. This would have been doubled to £2,000,000 for couples. However, the pledge was quietly dropped after the 2010 general election in the coalition negotiations and tax is still due on estates worth more than £325,000, or £650,000 for couples. We do know that the nil rate band will not be raised before the next general election, as the Lib Dems would veto it, so where does Cameron's declaration leave us? Let us not also forget thatThe Tories ran into trouble during last month's conference unveiling their plans for tax cuts without initially explaining how they would be funded.

Well, I for one think it gives us the strongest indication yet that the Conservative Party, should they get re-elected will start to look at increasing the nil rate threshold. However, I very much doubt that we will see the dizzy heights of the £1,000,000 each mooted by Osborne in 2007. The reason for this is simple, earlier this week the Treasury declared that it's income tax take was significantly down on what it had forecast despite employment being up. The Government has already borrowed £3bn more than it had budgeted for this financial year. Inheritance Tax is one of the easiest taxes for our state to collect given the way the probate system works, as basically you cannot access the deceased assets without notifying HM Revenue & Customs of their value, it is a very simple system when compared to self-assessment for example. All of this against the backdrop of our national deficit means that we are unlikely to see any meaningful tax cuts for Middle England in the near future, although we may get a perfunctory gesture of goodwill from a new Tory Government in 2015.