Claiming Marriage Allowance

Source: HM Revenue & Customs

Marriage Allowance opened to the public in September this year, allowing eligible couples to save up to £212 in the tax they pay each year. An application can be submitted within your Self Assessment tax return or made online.

Marriage Allowance lets you transfer £1,060 of your Personal Allowance to your husband, wife or civil partner. Your Personal Allowance is the income you don’t have to pay tax on - for most people it’s £10,600. Adding £1,060 to your partner’s Personal Allowance means they’ll pay £212 less tax in the tax year (6 April to 5 April the next year). You can get Marriage Allowance if both:

• your partner’s income is between £10,601 and £42,385
• you and your partner were born on or after 6 April 1935

By claiming Marriage Allowance:

• your partner’s Personal Allowance increases to £11,660 - they’ll pay £212 less tax
• your Personal Allowance goes down to £9,540 - you won’t pay any tax if your income’s less than this

You can apply for Marriage Allowance online. If your application is successful, changes to your Personal Allowances will be backdated to the start of the tax year (6 April).

If your circumstances change, then you may need to cancel your Marriage Allowance, for example if your partner dies, or you get divorced. More details of this can be found here

.

Osborne Attack on Property Investors

Announced in yesterday's Autumn Statement, the chancellor continues his attack on property investors. Not only will tax relief on interest payments now be greatly curtailed, but from 1 April 2016 higher rates of SDLT will be charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes.

The higher rates will be 3 percentage points above the current SDLT rates. These higher rates will not apply to purchases of caravans, mobile homes or houseboats, or to corporates or funds making significant investments in residential property given the role of this investment in supporting the government’s housing agenda.

The government will consult on the policy detail, including on whether an exemption for corporates and funds owning more than 15 residential properties is appropriate. This would seem to imply that smaller corporates, such as family investment companies may be affected by the proposed changes.

Also, from April 2019, a payment on account of any CGT due on the disposal of residential property will be required to be made within 30 days of the completion of the disposal. This will not affect gains on properties which are not liable for CGT due to Private Residence Relief. The government will publish draft legislation for consultation in 2016.

One has to ask if this is genuine tax policy, or merely using tax as the tool with which to discourage small individual property investors in order to open up the property market for first time buyers. If that is the case, then Mr Osborne has far more to do as the current crisis is far more complex than simple supply and demand...

Let me tell you a little about the history of tax, and tax avoidance...

Many people wonder why tax is used by government, and how it influences the masses (that’s us). Well, rather than launching into a semi-political, tax based rant I thought I’d share with you some of the more unusual taxes in British history and a little of the effects that they had on society. Some even demonstrate the very earliest attempts at that most dreaded of past times “Tax Avoidance”...

1. King Henry I allowed knights to opt out of their duties fight in wars by paying a tax called “scutage”. At first the tax wasn't high, but then King John came to power and raised it to a rate of 300%. Some claim that the excessive tax rate was one of the things that contributed to the creation of the Magna Carta, which limited the king’s power.
2. Oliver Cromwell placed a tax on Royalists, who were his political opponents, taking one tenth of their property. He then used that money to fund his activities that were aimed against the Royalists.
3. Playing cards were taxed as early as the 16th century, but in 1710, the English government dramatically raised taxes on playing cards and dice. This led to widespread forgeries of playing cards to avoid paying taxes. The tax was not removed until 1960.
4. In 1660, England placed a tax on fireplaces. The tax led to people covering their fireplaces with bricks to conceal them and avoid paying the tax. It was repealed in 1689.
5. In 1696, England implemented a window tax, taxing houses based on the number of windows they had. That led to many houses having very few windows in order to avoid paying the tax. Eventually this became a health problem and ultimately led to the tax’s repeal in 1851.
6. In the 1700’s, England placed a tax on bricks. Builders soon realized that they could use bigger bricks (and thus fewer bricks) to pay less tax. Soon after, the government caught on and placed a larger tax on bigger bricks. Brick taxes were finally repealed in 1850. Also a tax was imposed on printed wallpaper. Builders avoided the tax by hanging plain wallpaper and then painting patterns on the walls.
7. England introduced a tax on hats in 1784. To avoid the tax, hat-makers stopped calling their creations "hats", leading to a tax on any headgear by 1804. The tax was repealed in 1811.
8. In 1789, England introduced a tax on candles. People were forbidden from making their own candles unless they obtained a license and then paid taxes on the candles they produced. The tax was repealed in 1831, leading to a more widespread popularity of candles.
9. In 1795, England put a tax on the aromatic powders that men and women put on their wigs. This led to a dramatic decline in the popularity of wigs.
10. Salt was a very popular thing to tax because consuming it is necessary to humans. The British placed a tax on salt, and the salt tax gained worldwide attention when Ghandi staged nonviolent protests against it. I wonder if Jamie Oliver’s “Sugar Tax” would garner the same reaction.

As you can see, taxation has been a tool used by government to either control the actions of its populace, or benefit from the popularity of a particular product or activity. Similarly, there have always been those prepared to take the best advantage of the situation to reduce their exposure to tax. Really, very little has changed in attitudes to tax over the last 900 years…

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.