Inheritance Tax: The Family Home Allowance

The Government has made it clear that the special inheritance tax concession for family homes should not be available to people who have no children, this against a backdrop of significant protests.

The "Family Home Allowance" was introduced in the summer budget earlier this year and comes into effect from 6 April 2017. It is intended to provide a mechanism whereby a married couple's joint £650,000 inheritance tax exemption can be extended up to £1m (although the extra allowance  is applicable only to the family home). The proposed changes provide that each spouse will have a separate £175,000 allowance each, being £350,000 combined, on top of their individual £325,000 nil rate bands. Be warned though, the £175,000 is not immediate from April 2017, it's being phased in between then and 2021 and will start at only £100,000 each. It's also worthy of note that this starts to be clawed back where the property in question exceeds £2m in value!

Now for the next sting in the tail as it will only apply where the family home is bequeathed to children and grandchildren (stepchildren and adopted children are included too). Therefore, a couple with no children effectively face up to a £140,000 bill (40% death tax applied to £350,000) above and beyond that which couples with children would pay.

It is interesting to note the use of the word “bequeath” in David Gauke’s comments too, as it may well imply that where one passes away without leaving a Will that specifically leaves the family home to a direct descendant the new allowance could also be refused. Therefore the possibility of dying intestate (without a Will) could adversely affect one’s inheritance tax liability

Dividends, an update...

Following on from my earlier blog on the changes to the taxation of dividends there has been a further update on how those changes are going to apply to all dividend income. HM Treasury confirmed in August via a HM Revenue & Customs factsheet that the £5,000 dividend allowance is actually a zero rate tax band just for dividend income and that it will still form part of the £31,785 basic rate band for income tax purposes, rather than in addition to it as some of us had hoped. HMRC state:

"The Dividend Allowance will not reduce your total income for tax purposes. However, it will mean that you don’t have any tax to pay on the first £5,000 of dividend income you receive. Dividends within your allowance will still count towards your basic or higher rate bands, and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance."

At present owners of small companies could pay themselves up to £42,385 a year without suffering any income tax (taking into account their personal allowance of £10,500 in 2015/16 as well as the dividend allowance), whereas assuming that the basic rate band and personal allowance remained the same in 2016/17 then the increase in tax would be just over £2,000 as a direct comparison, this is without seeing an increase in their income!

For those extracting in excess of the basic rate band the picture worsens, as currently for every £1,000 extracted as dividend only £250 would have to be paid over to HMRC. From next April with the abolition of the dividend tax credit this will rise to £325. So, for a business owner extracting £100,000 a year from their business the changes to the taxation of dividends will cost a little over £6,300 more in tax than it does currently.

Obviously these are two extremes of looking at how owners of small to medium family companies choose to remunerate themselves, but it is apparent to see that the overall increase in this bracket amounts to a flat 7.5 pence in the pound for any dividends over and above the combined personal and dividend allowances. It is quite easy to see how according to the Government’s estimates, the new dividend tax regime is expected to raise £2.54bn during 2016/17, with smaller, but still significant income flowing to the Treasury in subsequent years!

Dividends? All change...

So, in this month's emergency budget the Chancellor announced the biggest shake up of tax on investment in over a generation. No longer will dividend income for basic rate taxpayers be, in effect, tax free. The 10% notional tax credit that almost all of us have always accepted as a slightly odd anomaly of the tax code is no more, well from next April at least! So, what exactly  does this all mean and how does it affect you, me and all the millions of business owners and investors in the UK?

Well, first of all we have a new £5,000 dividend allowance, which in effect means the first £5,000 of dividend income you receive (be that from your business, or your portfolio) will still be tax free. However, anything over and above that will be subject to 7.5% tax at the basic rate, 32.5% at the higher rate and 37.5% for additional rate taxpayers. As with most changes to the system of taxes in the UK there are various winners and losers as a result.

The is also in addition to the £1,000 savings, or interest allowance that was announced last year. All of which points to government wanting to encourage the small investor in a move away from cash to bolster the financial markets. Well, that is my opinion at least, given that what we are seeing is in effect a tax break for investing in the equities market.


It is possible that investors who have built up sizeable portfolios could be subject to the higher rate. For example, a share portfolio of £125,000 with a yield of 4 per cent will generate £5,000 income a year and use up the dividend allowance. So, we are not talking about something that will affect only the "super-rich" here.

Similarly, for owners of small businesses who have for many a year sought to save tax my taking their remuneration out of their companies as dividend we will see a huge change. Whilst large companies will still be more tax efficient under the new system (although not as efficient as they once were), smaller family businesses may find themselves facing larger tax bills as a corporate entity and the prospect of dis-incorporation looms as a partnership may once again mean paying tax.


So, enough of the doom and gloom, what are the advantages and what can you do to iron out some of the knottier problems:

Maximise your annual tax-free dividend allowance
Each person will be entitled to a new tax-free Dividend Allowance of £5,000 per annum. Married couples (and registered civil partners) should spread their taxable portfolios between them to make full use of each person's allowance.

Make the most of each spouse's income tax allowance and tax bands
It sounds obvious, but married couples should still seek to make full use of their personal allowances and basic rate tax bands, where applicable, so that taxable dividends are paid in the name of the spouse who pays the lowest tax rates.

Defer taxation using an investment bond
Dividend income within an investment bond grows almost free of taxation. Investors only pay tax when profits are withdrawn from the bond, and even then withdrawals of up to 5 per cent of the original capital per year (cumulative) can be taken without an immediate tax charge.

Don't forget your ISA
Taxpayers will see a tax increase of 7.5 per cent on dividend income received above £5,000 a year. This makes sheltering taxable investments in an ISA all the more important as unlimited dividends can be withdrawn from an ISA tax-free.  There is also no capital gains tax to pay in an ISA. Up to £15,240 worth of existing investments can be sheltered in the current tax year.

So what about business owners?
Well, at present the picture is far from rosy, and although the "tax scheme industry" has already rolled up its sleeves to come up with a cunning plan I fear it will end as most of Baldrick's did in disaster for the participants. That said, this is not all bad news, the current system of taxation on dividends has always seemed a bit odd when compared to the rest of the tax code, and for the vast majority will still be preferential to taking a salary. Unfortunately, it really is only those on the fringes of this argument who will see a genuine negative effect and as I've already said dis-incorporation might be attractive, there is after all a £100,000 relief available after all!

Budget 2015: Tax Credits Changes

As was predicted ahead of yesterday's speech by the Chancellor, we will be seeing big changes to the current system of tax credits.

Going forward, only the very  lowest-income families will be able to claim tax credits. Along with the changes to entitlement to under the new Universal Credit, this is heralded to cut around £2.9bn from the welfare bill over the course of the next financial year and then an additional £3.4bn a year by 2020-21 with the income threshold for tax credits is to be reduced from £6,420 to £3,850.

Larger families in particular will be hit by the proposed tax credit changes if they have more children from April 2017 onwards with the possible restriction of only receiving benefit for the first two children. Claimants will see child tax credits and Universal Credit limited to the first two children, although mention was made of extenuating circumstance which we can only assume will ocver multiple birth situations.

To put this into context: at present around 870,000 families claiming tax credits have three or more children - this is representative  of about one in five families who receiving tax credit. However, it will only be those larger families making a claim, or having more children, from April 2017 that will be affected. If families of three or more children already have a claim in place prior to April 2017 it will continue to be honoured. So for those currently in that position it is increasingly important to make that claim now rather than delay it!

In addition to this we are also seeing changes to many working age benefits, with some being frozen for four years, such as tax credits and local housing allowance, but excluding maternity pay and disability benefits. This is a further cut to the welfare bill of £4bn a year by 2020-21. The benefits cap - the maximum amount a household can receive in benefits - will also be reduced as a result of yesterday's announcements. For those living outside of London it will drop down to £20,000. For those living in London, where housing costs are higher, the cap will be set at  £23,000.

All in all a wide ranging shake-up of the welfare system, and one that will see those in the "middle" lose out most, more noticeable of course where they have been reliant on those monies generated by  tax credits claims historically. What the Chancellor gives with one hand on the "Living Wage" and personal allowance, he takes away with another...

Budget 2015: Key Points

George Osborne has delivered his seventh Budget as chancellor, the first for a majority Conservative government since November 1996.

The main tax announcements are summarised as follows:

Personal taxation

• A new national living wage will be introduced for all workers aged over 25, starting at £7.20 an hour from April 2016 and set to reach £9 by 2020 - giving an estimated 2.5 million people an average £5,000 rise over five years.
• The inheritance tax threshold will increase to £1m, phased in from 2017 and underpinned by a new family home allowance.
• The personal allowance, at which people start paying tax, rises to £11,000 next year. The government says the personal allowance will rise to £12,500 by 2020, so that people working 30 hours a week on the minimum wage do not pay income tax. Also, the point at which people start paying income tax at the 40p rate to rise from £42,385 to £43,000 next year, going up to £50,000 by the end of this parliament.
• However, on the downside, mortgage interest relief is to be restricted to basic rate of income tax for property investors.

Business taxation

• Corporation tax is to be cut again to 19% in 2017 and 18% in 2020.
• Permanent non-dom status is to be abolished. This means that with effect from April 2017, anyone who has lived in the UK for 15 of the past 20 years will pay same level of tax as other UK citizens, raising an estimated £1.5bn.
• A further £7.2bn is to be raised from a clampdown on tax avoidance and tax evasion with HMRC's budget for this being increased by £750m.
• The bank levy rate is to be gradually reduced over the next six years and a new surcharge on bank profits will be introduced from 2016.
• National Insurance employment allowance for small firms will be increased by 50% to £3,000 from 2016.
• Dividend tax credit is to be replaced with a new tax-free allowance of £5,000 on dividend income. Rates of dividend tax will then be set at 7.5%, 32.5% and 38.1%.

Opinion

All in all not a bad budget from the chancellor, with many more "giveaways" than had been mooted in the media ahead of his speech. Certainly the further cut to the rates of corporation tax came as a shock to many, although it will be welcomed. Another interesting change was the restriction of mortgage interest rate relief for buy-to-let investors. Surely these two changes will see investors seeking to undertake their property activities through a corporate structure now rather than personally?

As ever, the devil is in the detail and over the coming days I will be very interested to pore over the draft legislation coming out of HM Treasury, as you can always guarantee that there will be more than a few provisions, especially anti-avoidance measures, hidden in the small print. Watch this space...

What's ATED all about then?

Annual Tax on Enveloped Dwellings (ATED) is payable by companies that own UK residential property (a dwelling) valued above a certain amount. This tax is payable each year. Most residential properties are owned directly by individuals. But in some cases a dwelling may be owned by a company, a partnership with a corporate member or other collective investment vehicle. In these circumstances the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.

You’ll be affect by ATED and need to complete a return if your property:

• is a dwelling (a dwelling may be all or part of a residential or mixed commercial/residential property and includes properties ‘capable of being a dwelling’);
• is in the UK;
• was valued at more than £2 million on 1 April 2012 or at acquisition if later for returns from 2013 to 2014 onwards;
• was valued at more than £1 million on 1 April 2012 or at acquisition if later for returns from 2015 to 2016 onwards;
• is owned completely or partly by a company, a partnership where one of the partners is a company, or a ‘collective investment vehicle’ - for example, a unit trust or an open ended investment company 

There are reliefs that could reduce the tax completely but you can only claim them if you complete and send in a return. There are also a number of exemptions from the tax, most significantly, charitable companies using the dwelling for charitable purposes, which mean you may not have to file a return.

The amount of ATED due is worked out using a banding system based on the value of your property. You need to find out which value band your property is in. For full details of ATED  I recommend that you read HM Revenue & Customs full guidance here:

https://www.gov.uk/annual-tax-on-enveloped-dwellings-the-basics#what-a-dwelling-is

and consult a professional adviser for advice.

Entrepreneurs' Relief for Management Teams

Tax changes announced in Budget 2015 may well cause many management teams to lose tax relief on their existing shareholdings. Management teams who club together to hold their equity via a separate management 'feeder' company will be affected by this change. This approach is popular with many private equity investors because it pools management in a single vehicle and reduces the number of minority shareholders.

It also means that UK management can hold shares in a UK company, as opposed to having shares in overseas holding companies, which many managers will prefer, and is usually simpler. In recent years, such structures have had the benefit of enabling managers who hold 5% of the shares in the feeder company to claim entrepreneurs' relief on sale giving a 10% tax rate on an eventual exit. 

This is because the current 'joint venture' rules treat the feeder company as trading, on the basis that it has a qualifying stake in the underlying trading company. This treatment is removed with immediate effect. The shareholding will no longer be treated as being in a trading company so no entrepreneurs' relief will be available.

Management teams who have invested via such structures will now pay tax at 28% on any gains, rather than the expected 10%. The usual rule which provides a grace period for entrepreneurs' relief for three years after a company has ceased trading has been removed in these circumstances. Companies that have been affected by these changes will need to urgently review their shareholding structures and incentive arrangements.

5 Tax Planning Projects you should be thinking about...

So, we're at the beginning of a new tax year again, and we get the delight of possibly having a second budget this year depending on the outcome of next month's general election. Couple this with an increasingly darkening mood in the media towards the issue of tax and you could be forgiven for thinking that all thoughts of saving tax are moot, yet nothing could be further from the truth...

Tax Efficient Savings

Of course we can talk about the use of ISAs and the increased allowances that were announced in the budget, or even the new home-buyer ISAs. However, of more interest are the recent changes to the tax legislation surrounding pensions, and the fact that under the right circumstances they are now effectively a completely tax-free vehicle (even on the event of your death). Okay you say, but I'm limited to placing £40,000 a year into pension (of course you could carry forward if you've not been making the most of pensions, but that's a blog all on it's own). Well, then we can move on to look at EISs and VCTs, both of which offer the advantage of reducing your income (and possibly capital gains) tax bill.

Off to University?

Very often overlooked is the ability to use your personal company to fund your children's university fees in the most tax efficient manner. I did write a whole blog post on this a little while ago, see here for more details http://stevenholdentax.blogspot.co.uk/2014/09/university-fees-and-tax.html

Family Investment Company

Again, this is the resurrection of some well tried and tested planning, the only reason they fell out of favour was due to the higher rate of corporation tax being applied to close investment companies. However, with the higher rate of corporation tax falling down to 20% now there is no longer a penalty for operating your investments through a company structure. The advantages are manifold, although there can be some disadvantages too, full details can be found here http://stevenholdentax.blogspot.co.uk/2015/01/could-family-investment-company-help.html 

Review your investments

This particular bit of advice has two prongs, the first of which is to ensure that you are using up all of your available allowances for income tax, capital gains tax, inheritance tax and maxing out your contributions to tax favoured investments. That's the easy one. The less straightforward option is to look at the more unusal investment wrappers that come with a built in tax advantage such as bonds (which offer a 5% tax deferred income for 20 years), and others like discounted gift trusts and loan trusts that not only offer income tax benefits, but capital gains and inheritance tax benefits too.

Avoid Tax Schemes

Whilst the promises of mass marketed tax schemes can appear attractive, their success is often short lived. Furthermore, given the current Government's and the media's appetite for naming and shaming those involved in aggressive avoidance is another deterrent. There have been several high profile cases in recent year's and the "tax scheme" industry as a whole has been painted in a very bad light indeed. I would also expect it not to be too long before we see HMRC flexing the new muscles it gained when the GAAR was introduced. The day of the mass marketed tax scheme is all but over, unfortunately certain parts of the profession have failed to recognise this and are still peddling such schemes, BEWARE!

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…