MINIMISING YOUR TAX BILL AHEAD OF THE TAX YEAR END - TIME IS RUNNING OUT!

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1 Issue 38 MORRIS & CO CHARTERED ACCOUNTANTS MO C O Focus On Finance News for Opticians from Morris & Co Specialist Ophthalmic Accountants MINIMISING YOUR TAX BILL AHEAD OF THE TAX YEAR END - TIME IS RUNNING OUT! For many opticians this time of year is when they start to think about the Optical Showcases and want to forget all about tax, other than maybe promising themselves that they will submit their personal tax return earlier next year. But this is exactly the time of year when you should be taking a step back and thinking about your personal tax position. Action taken now can mean future tax payments could be smaller than would otherwise be the case. The impending tax year end provides an opportunity to ensure that your tax liability for the current year is no greater than absolutely necessary. Now is therefore the time to consider if any steps need to be taken to take advantage of current allowances, rates etc that may otherwise be lost or wasted. Set out in this newsletter are a number of planning points that may save tax if action is taken prior to 5 April T E W 1

2 Focus On Finance News for Opticians from Morris & Co Specialist Ophthalmic Accountants ISSUE 38 - TAX SPECIAL Welcome to Issue 38, a special edition of Focus on Finance, MOCO s round up of tax and financial developments for opticians and optometrists. The team... Desirie Lea Director Martin Lanceley Manager Allan Jones Payroll Manager Lisa Simms Qualified Senior Jayne Shone Accounts Assistant Advice for Individuals Tax Efficient Investments: New Individual Savings Accounts (NISA s) are tax efficient investments in that the income and/or capital gains generated are free from tax. Individuals aged 18 or over can invest up to 15,000 in NISAs in 2014/15 in cash and shares. This limit increased in July Individuals can divide their ISA allowance between cash ISA and stocks and shares ISAs in whatever proportion they wish. If you have not used your full allowance you may want to consider investing more to use it up before 5 April 2015, since any unused portion cannot be carried forward. In the 2015/16 tax year the ISA allowances will increase to 15,240. Junior ISAs, for children under 18 who do not have a child trust fund, are also available. The annual subscription limit for 2014/15 is 4,000, split as desired between a stock and shares ISA or a cash only ISA. Withdrawals are restricted until the age of 18. For the more adventurous, there are also Enterprise Investment Schemes and Venture Capital Trusts. The Enterprise Investment Scheme (EIS) The Enterprise Investment Scheme (EIS) - income tax relief at 30% is available on new equity investment (in qualifying unquoted trading companies) of up to 1 million in 2014/15. A Capital Gains Tax exemption is given on shares held for at least three years. Where gains are reinvested in EIS shares, the capital gains realised on the sale of any chargeable asset (including quoted shares, holiday homes etc) can be deferred. Nicola Roberts Accounts Assistant Venture Capital Trusts (VCT) invest in the shares of unquoted trading companies. An investor in the shares of a VCT will be exempt from tax on dividends and on any capital gain arising from disposal of the shares in the VCT. 2 To get in touch with any of the team, please use the details above. Alternatively, contact us on: T E The content of this Newsletter is for information purposes only and should not form the basis of any decision as to a particular course of action. Income tax relief currently at 30% is available on subscriptions for VCT shares, invest up to 200,000 per tax year, so long as the shares are held for at least five years. There is also the Seed Enterprise Investment Scheme (SEIS) which gives income tax relief at 50% in respect of new equity investment (in qualifying, but small, unquoted trading companies) up to an annual maximum investment of 100,000. CGT exemption is given on shares held for more than three years. A CGT exemption may apply to certain gains realised in 2013/14 and 2014/15 and reinvested in SEIS. Both EIS deferral and SEIS exemption cannot be claimed in respect of the same gain.

3 Year End Checklist Make the most of year 14/15 NISA allowance Use your CGT annual allowance If your taxable income is greater than 100k minimise your exposure to the 45% tax rate and the loss of your personal allowance Review your pension arrangement Review your estate plan & will Pension Planning: It is, of course, well known that pension planning offers generous tax breaks. But for those whose gross incomes are expected to slightly exceed 41,865, 100,000 or 150,000, a personal pension contribution is well worth considering. For example, a person whose total gross income this year will be 110,000 can reduce his/her tax liability by 6,000 by making a gross contribution of 10,000 to a pension scheme. The annual allowance for the tax year 2014/15 is 40,000 inclusive of your own contributions and any other amounts paid into an approved pension scheme on your behalf. Any unused allowance may be carried forward for three years but anything unused from will be lost after 5 April It is essential that you know your pension input period in order to plan for this it is not usually the same as the tax year, so you will need to check. The lifetime allowance is 1.25million. Where funds in excess of the lifetime allowance are taken as a lump sum the rate of the lifetime allowance charge is 55%. As the rules surrounding pensions are extremely complex, we would recommend that further professional advice is taken if you are considering making a significant pension contribution. Capital Gains Tax: Every individual has an annual Capital Gains Tax (CGT) exemption, which in 2014/15 makes the first 11,000 of gains tax free. Gains above the annual exemption are taxed at 18% where an individual s taxable gains and income are less than the basic rate limit of 41,865, and at 28% where taxable gains and income that exceed this limit. You should normally aim to use your annual exemption by making disposals before 5 April If you have already made gains of 11,000 in this tax year, you might be able to dispose of loss-making investments to create a tax loss to set against the gains. Depending on your level of income, timing further disposals either before or after the end of the tax year could result in potential tax savings if planned appropriately. In general, married couples or civil partners should try to arrange their ownership of income producing assets so as to ensure that personal allowances are fully utilised and any higher/additional rate liabilities minimised. Generally, when husband and wife or civil partners jointly own assets, any income arising is assumed to be shared equally for tax purposes. This applies even where the asset is owned in unequal shares unless an election is made to split the income in proportion to the ownership of the asset. You might be able to save further CGT by transferring assets between married couples or civil partners prior to their subsequent disposal. This could save tax where one partner has an unused annual exemption; has not fully used their basic rate tax band, or has capital losses available. You should generally leave as much time as possible between the transfer of the assets and the subsequent sale. CGT is payable on 31st January after the end of the tax year in which you make the disposal. You could delay a taxable disposal until after 5th April 2015 to give yourself an extra 12 months before you have to pay the tax liability (assuming similar income levels in 2015 and 2016). Marriage Breakdown/ Dissolution of a Civil Partnership: Marriage breakdown or dissolution of a civil partnership often involves the transfer of assets between husbands and wives or civil partner. Unless the timing of any such transfers is carefully planned there can be adverse CGT consequences. If an asset is transferred between a husband and wife or civil partners who are living together, the asset is deemed to be transferred at a price that does not give rise to a gain or a loss. This treatment continues up to the end of the tax year in which the separation takes place. CGT can therefore present a problem where transfers take place after the end of the tax year of separation. IHT, on the other hand, will not cause a problem if transfers take place before the granting of a decree absolute on divorce or dissolution of the civil partnership. Transfers after this date may still not be a problem as often there is no gratuitous intent. 3

4 Personal Tax Planning: INCOME SPLITTING: A useful starting point is to look at allowances and tax bands. THE PERSONAL ALLOWANCE: This is the amount of gross income an individual can receive before paying tax, for the 2014/15 tax year it is 10,000. THE BASIC RATE TAX BAND: This is the amount of taxable income over and above the personal allowance, which is taxed at the basic rate (20%). For the 2014/15 tax year it is 31,865 which means that an individual can earn 41,865 of gross income before paying higher rate income tax. THE HIGHER AND ADDITIONAL TAX RATES: Income over 41,865 and up to 150,000 is taxed at 40% (higher rate) and taxable income above 150,000 is taxed at 45% (additional rate). LOSING THE PERSONAL ALLOWANCE: If your gross income is in the range 100, ,000 the personal allowance is tapered away at 1 for every 2 of additional income between 100,000 and 120,000, the restriction in your personal allowance is the equivalent of a tax cost of 60%. You may want to consider ways to reduce the income level to below 100,000. This can be done by making or increasing certain payments which are tax deductible to minimise this tax cost. Examples include pension contributions (which may be subject to restrictions) and charitable donations. A review of the split of income between married couples or civil partners may yield tax savings such as reducing or eliminating higher rate tax liabilities. It may be possible to save significant amounts of tax where assets on which investment income arise are transferred from a higher tax rate paying spouse to a lower tax paying rate, spouse or to one with no income. Generally individuals are now only able to claim reliefs worth up to 50,000 or 25% of their income, whichever is the greater. The cap only applies to reliefs that are offset against general income and which are not already capped. Charitable donations such as Gift Aid, Payroll Giving and relief for gifts of land and shares to charity are excluded from the cap. Children: Children are independent people for tax purposes and are therefore entitled to their own allowances and tax bands. It may be possible to save tax by transferring assets generating income or capital gains into the children s hands. This cannot be done by the parent if the annual income arising is above 100 (gross). The income will still be taxed on the parent. However, transfers of income producing assets by others (eg grandparents) may still be effective. Parents and guardians can make contributions of up to 3,600 gross i.e 2,880 net a year into a pension for their children. In addition, up to 4,000 a year may be paid into the new Junior ISA for the benefit of their children building up a virtually tax free fund for the child. Both pensions and junior ISAs may also fall outside of the parent s estate for Inheritance Tax purposes. High Income Child Benefit Charge (HICBC) For a redistribution of income to be effective there must be an unconditional and outright transfer of the underlying asset which gives rise to the income. A charge arises on a taxpayer who has adjusted net income over 50,000 in a tax year where either they or their partner are in receipt of Child Benefit for the year. This means that tax savings may not immediately arise following an asset transfer between spouses until new income arises. Nevertheless, some examples of the tax saving which can be achieved are: Where both partners have adjusted net income in excess of 50,000 the charge applies to the partner with the higher income. Moving 10,000 of investment income from a 40% tax paying spouse to one with no income, can generate a saving of up to 4,000 in 2014/15. This is increased to 6,000 where a spouse s income is expected to be between 100,000 and 120,000 due to the recovery of the personal allowance as well as the higher rate tax savings. 4...these high levels of tax savings are unlikely to be possible for many but savings can still be made by small transfers of income. Moving just 500 of savings income from a 45% tax paying spouse to one with income below the personal allowance ( 10,000) may save 225 in tax. If your income lies between 50,000 and 60,000, HICBC will be equivalent to 1% of the child benefit for every 100 of income over 50,000. The tax charge will apply to the higher earner of the couple, irrespective of who claims the benefit. To avoid the tax charge you can stop claiming child benefit, or reduce your income below 50,000. Consider pension contributions or donations under gift aid to reduce income levels below 50,000.

5 Gifts to Charity You can get tax relief for any donations to charity if you make a gift aid declaration. Higher and additional tax rate taxpayers can claim an extra 20% or 25% in relief. For example, if you donate 800 to charity you will be entitled to additional tax relief of 200 for a higher rate taxpayer or 300 of tax credit for an additional rate taxpayer. For a basic rate taxpayer there is no further tax relief. By and large, once 5th April has passed, there is little that can be done to reduce a liability for the 2014/15 tax year. One exception is Gift Aid. A person who makes a gift aid donation between 6th April 2015 and 31 January 2016 can carry that contribution back to the 2014/2015 tax year. To do so, ypu must include the contributions on your 2014/2015 tax return and file by 31st January In some situations, the tax saving can be substantial. Inheritance tax (iht): Why should the taxman take some of your assets when you die - especially since you have probably already paid income tax on the money earned to buy them. If you plan in advance, you can significantly reduce the impact of IHT. If you have not done anything about a potential IHT bill, now is the time to take action. Currently IHT is charged at 40% on anything you leave over 325,000 when you die. Make sure that you take advantage of the annual exemption on gifts of 3,000 ( 6,000 if you made no gifts in the previous tax year to 5 April 2014). Consider lifetime gifts to start the seven year clock and mitigate IHT on death. This can be done by way of outright gifts or gifts into trust, but advice on the CGT and IHT implications is essential. Make a will and review it regularly. If you die without a will your assets will be divided amongst your relatives according to the intestacy rules. This will be after IHT is paid at 40% on any value above 325,000, except for those assets going to your spouse or civil partner. Anything left to charity is free of IHT. The rate of IHT falls from 40% to 36% if at least 10% of your estate is left to charity. Take advantage of relief for regular gifts out of income which are free from IHT even if a death occurs within seven years. This requires a regular pattern of gifts that leaves the donor with sufficient income to maintain his/her usual standard of living. These outright gifts out of income need to be properly structured and recorded. ELECTION YEAR - There is likely to be an emergency budget following the election in May. It is possible that measures could be introduced to reduce or restrict certain tax reliefs. If you are intending making use of any reliefs, and in particular, entrepreneurs relief or higher rate tax relief on pension contributions, it would be sensible to use these in advance of the election wherever possible. Please note that the tax treatment depends on individual circumstances and may be subject to change in the future. Bear in mind that the tax effect of a decision is only one element to consider. The commercial, practical and financial implications of the decision should always be taken into account. Tax planning forms part of the overall personal financial planning process. For a more tailored strategy review please do not hesitate to contact Desirie Lea on:

6 SELF-EMPLOYED INDIVIDUALS OR PARTNERSHIPS WITH 31 MARCH 2015/6 APRIL 2015 YEAR ENDS This section applies particularly to self employed individuals or partnerships that have a year end date of 31 March 2015 or 5 April These year ends will form the basis of your self assessment for CAPITAL EXPENDITURE: If your financial year is between now and 5 April 2015 and you are planning the purchase of optical or other equipment in the summer of 2015, consider bringing the purchase forward to a date prior to your year end. All optical businesses are able to deduct against taxable profits the full cost of the first 5000,000 spent on plant and machinery (other than cars), but only for the period 1 April 2014 to 31 December Where more than 500,000 is spent, the excess will attract writing down allowances at 18% or 8% depending on the type of asset. On 1 April 2014 the annual investment allowance increased from 250,000 to 500,000. Transitional rules apply for periods prior to 31 March 2014 and after 31 December Due to VAT and the de-minimis rules the tax implications can vary considerably depending on the individual circumstances of your business. Please review this carefully. REVENUE EXPENDITURE: Getting tax relief as early as possible can also hold true for other business expenses as well as capital equipment. Any anticipated or planned expenditure should be brought forward prior to the year end to maximise tax savings. It can be tempting to put off spending money on items such as repainting your practice or repairing equipment. Bringing forward such expenditure by even a few weeks can accelerate tax relief by 12 months. STOCK AND WORK IN PROGRESS: For optical practices it is important to accurately review stock and jobs on order (work in progress) valuations. The higher the closing stock or work in progress value, then the higher your profit and consequently your tax bill. If you anticipate that your tax bill for the year is looking decidedly on the high side, review your stock valuation at the year end. Stocks should be valued at cost, but can be valued at net realisable value if it is now worth less than cost. You should also consider slow or obsolete items and perhaps give them no value. Jobs on order should be valued at selling price under current accounting standards but once again you should review your valuations for work in progress which will not be collected. BAD DEBTS: Jobs on order should be reviewed in detail so that provisions can be made for bad debts. HM Revenue and Customs (HMRC) will only allow the write-off of debt for tax purposes where specific debts have been identified. INVOLVING THE FAMILY: If your spouse or civil partner (or any other family member) is not using their annual personal allowance and works in your business, perhaps performing admin duties, you can pay them a salary. A payment of up to 153 per week will not create an income tax liability or national insurance charge. At this level of salary the recipient will also receive a credit towards entitlement to certain state benefits. The individual will need to be included on your payroll. Consideration should always be given as to whether the overall salary is reasonable; is in accordance with National Minimum Wage requirements, and is a commercial rate for the work undertaken. Please contact us for advice as to the best level of salary to pay your spouse or family member in your particular circumstances. 6

7 DIVIDENDS: Dividends are only taxed when they are paid to you personally. Shareholders with the power to determine dividend payments might consider deferring the payment to the 2015/16 tax year if it is likely to take you over the higher rate threshold. Should cash flow issues arise due to personal circumstances, considerations might be given to making loans from the company which will be repaid by way of dividend in the 2015/16 tax year. Care should be taken in this regard, as this may give rise to a taxable benefit in kind in respect of the loan. Further, it must be ensured that the loan is repaid within 9 months of the end of the accounting period as otherwise a further charge to tax of 25% will arise on the company. Rules prevent the avoidance of the charge by repaying the loan before the 9 month date and then effectively withdrawing the same money shortly afterwards. A 30 day rule applies if at least 5,000 is repaid to the company and within 30 days new loans or advances of at least 5,000 are made to the shareholder. There may also be Companies Act formalities to be complied with in relation to distributable revenues/dividends and loans. This is a complex area so please get in touch if this is an issue for you. ENTREPRENEURS RELIEF: If you are likely to sell a business interest or business asset in the next 12 to 24 months you should speak to us to ensure you qualify for Entrepreneurs Relief. This relief can save you up to 18% on capital gains tax. The rules are stringent so they must be considered well in advance of a sale. Property Owners We find that many of our ophthalmic clients own second properties for investment purposes. With this in mind we have dedicated a section to any such individuals. DISPOSALS: Any property disposal by individuals - other than a principal private residence - before 5 April 2015 will be taxed as a capital gain in the current tax year. Tax will become due in most cases on 31 January If you are currently a higher rate tax payer and likely to be higher rate taxpayer in 2015/16 then consider delaying the disposal until after 5 April 2015 and the relevant tax will not be due until 31 January Commercial considerations (e.g. will you lose the sale if you delay?) must, of course, be taken into account. YOUR OWN HOME/HOLIDAY HOMES/ INVESTMENT PROPERTIES: Make sure that you elect which of your properties should be treated as your main home for tax purposes with HMRC when you buy a second home. The disposal of property that has always been your main home, described by the Revenue as your principal private residence, is free of CGT. This election is time limited so it is important to consider it at the end of the tax year. Remembering to make an election can make a very significant difference to the tax you pay on the sale of your holiday home or investment property. Do not forget that, as a general rule, only one property can be exempt from capital gains tax at any one time. Any other property where you have lived for part of the time will attract tax exemptions for the periods you have lived there and have elected for it to be your main home. If a property has been your nominated main home at any time, the gain for the last 18 months of ownership is free of CGT, even if you do not live there during the final period. If your business premises are owned personally but used in your company or partnership you might need to review any rent charged for their use during the tax year as this can impact on the entrepreneurs relief available on the disposal of the premises. There are a wide range of tax implications to consider so please contact us for advice if you need it. REPAIRS: As all property income is taxed on a fiscal year basis (to 5 April each year) consider dealing with outstanding repairs before 5 April From 6 April 2013, the renewals allowance for landlords of unfurnished rental properties was abolished. Previously, landlords of unfurnished properties could claim tax relief for the cost of replacing furniture and fittings in a rental property. This is provided that the replacement is of the same standard as the original item. Now landlords of unfurnished property lets cannot claim a deduction for the cost of replacing cookers, televisions, and other furnishings such as curtains, carpets, tables, beds etc. A claim for tax relief on the cost of repairing or maintaining the furniture and fittings in the property is still available. Landlords of furnished properties are largely unaffected by the withdrawal of the renewals allowance as the 10% Wear & Tear (W&T) allowance is allowed as a deduction for the replacement cost of furniture and furnishings. Owners of unfurnished properties may consider furnishing their properties in order to meet the furnished property rule and so claim the wear and tear allowance in the future. RENTS RECEIVABLE AND COSTS PAYABLE: Don t forget that property income is calculated for tax purposes on the accruals basis (unless income is less than 15,000) - in jargon free text this means rents must include rents due but not necessarily received, and costs incurred and/or invoiced but not actually paid. If you have tenants who owe rent but are unlikely to pay, then evidence of the bad debt (copies of solicitors correspondence etc) should be available to justify leaving the income out of your property income on your tax return. 7

8 FURNISHED HOLIDAY LETS (FHL) The rules for property to qualify as a FHL are as follows: 1.Accommodation must be available to let as holiday accommodation for at least 210 days. 2. Accommodation must actually be let as holiday accommodation to the general public for at least 105 days. 3. The accommodation must not be let for periods of longer term occupation (greater than 30 days) for more than 155 days. Need more information? If you would like to discuss any aspects of tax planning in greater detail please do not hesitate to contact Desirie Lea on Desirie and the MOCO team will be visiting OPTRAFAIR on 20th April. Do let us know if you would like to meet for a coffee and a chat. It s always good to see clients and contacts! Morris & Co has wide ranging experience in all aspects of accounting and business advice to the ophthalmic profession. Our in-depth knowledge and experience of this sector allows us to fully understand our clients issues and advise accordingly. The services that we offer include advising on the following: Full cost apportionment calculations VAT and partial exemption Accounting Profit improvement Goodwill valuation Sage training Taxation compliance and planning Incorporation Setting up a practice Arranging finance Buying a practice Practice sales Payroll Business and financial plans Retirement planning Management accounts Bookkeeping improvements Xero For further information please contact Desirie Lea on or MORRIS & CO CHARTERED ACCOUNTANTS MO C O MORRIS & CO (2015) LIMITED. This Newsletter does not constitute legal, accountancy or regulatory advice. Specialist advice should be sought in relation to your own Tel: Fax: Web: 8 fb.com/mocoaccountants Chester House, Lloyd Drive, Cheshire Oaks Business Park, Ellesmere Port, CH65 9HQ

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