END OF TAX YEAR GUIDE SPRING

Transcription

1 F I N A N C I A L P E R S P E C T I V E S END OF TAX YEAR GUIDE SPRING This newsletter is for general guidance only - action should not be taken without specific advice. Should you require any further information, we shall be pleased to provide the same on hearing from you. C H A R T E R E D A C C O U N TA N T S & C H A R T E R E D T A X A D V I S E R S Originated OFFICES IN BATH, TROWBRIDGE AND CHIPPENHAM Registered Registered to carry to out carry audit on work Audit in Work the UK by and the Ireland Institute and of Chartered regulated for Accountants a range of in investment England and business Wales. activities Registered with by the The Institute Chartered of Chartered Institute of Accountants Taxation as in a England firm of Chartered and Wales. Tax Advisers. Registered Authorised with and The regulated Chartered by the Institute Financial of Taxation Services Authority as a firm of for Chartered investment Tax business. Advisers

2 Introduction 2016 is a special year for Pearson May as we celebrate our origins in the city of Bath dating back 175 years, and between us the six partners have notched up many years with the firm. We are therefore very well placed to share with you our wealth of experience, guiding you through the increasing complexities and red tape of the tax burden in the UK, and helping you pay less tax. As the end of another tax year approaches, it is a good time to review your affairs, and make the most of opportunities to maximise your income and minimise your tax. We also want to make you aware of recent and future changes that may affect you, whether it is as an individual or as a business. Should you require further information or assistance in relation to any of the points raised, as they apply to your particular circumstances, then please contact the person who normally deals with your affairs and they will be pleased to assist. Action may be necessary by 31 March or 5 April as the case may be, and in order to avoid a last minute rush, particularly with Easter falling at the end of March, please seek this further assistance as soon as possible. What s New We don t expect anyone to read this from beginning to end, and we hope that by scanning the Contents you will be able to pick out those items which are relevant to you. There will be a Budget on 16 March, and many commentators are speculating that there will be a crack down on higher rate and additional rate tax relief on pension contributions and if you are planning to make contributions before the end of the tax year you might wish to consider this sooner rather than later. There are fundamental changes to the taxation of dividends and these will particularly affect owner managed businesses/family companies. Buy to let owners are being hit with a number of changes, including the restriction of loan interest relief for higher and additional rate tax payers, the removal of the wear and tear allowance for furnished lettings, and the introduction of a higher rate of stamp duty land tax. Foreign domiciled persons continue to be subject to close scrutiny, and those who live in the UK for a very long time will not be able to benefit from the remittance basis of taxation in the future. For employers, following a review by the Office of Tax Simplification, a system of voluntary payrolling of benefits is being introduced from 2016/17, together with an automatic dispensation from reporting expenses. Employers must register by 5 April 2016.

3 Action Required Our table of contents indicates those items where action may be required by 5 April 2016 (*) (or by 31 March 2016 in the case of a limited company). References in this guide to a spouse should be read as including a civil partner, and any references to he or she should also be read to include the other. Our Website (including free weekly newsletter) Do not forget to visit our fully interactive website. You will be amazed at the useful information you will find there, particularly in the knowledge centre, including online services and calculators. When you register on the site you can also subscribe (free of charge!) to our weekly newsletter which contains business news that is highly relevant to Small and Medium Enterprises (SMEs) and owner-managed businesses. Fee Protection Scheme Clients of this firm are reminded that we offer a fee protection scheme as an insurance against our fees for representing them in the event of a Revenue investigation. Clients who would like further information about this cover should contact the person with whom they normally deal.

4 End of Tax Year Guide Spring 2016 CONTENTS PERSONAL TAX Income Tax 1 * Personal Allowances 2 Marriage Allowance 3 Changes to the Taxation of Investment Income 4 * Changes to Dividend Taxation 5 Repayment Claims 6 * High Earners 7 High Income Child Benefit Charge (HICBC) 8 HMRC Campaigns 9 Tax Returns for the year ended 5 April /17 PAYE Tax Coding Notices 11 * Income from Employment 12 Gift Aid Payments 13 Domicile and Remittances 14 Non-Domicile Status 15 Statutory Residence Test 16 Certificate of Residence 17 * Furnished Holiday Lettings 18 * Residential Property Lettings Removal of the Wear and Tear Allowance 19 Residential Property Lettings Rent-a-Room Relief 20 Residential Property Lettings Restricting Finance Costs for Landlords 21 * Pension Provision - Annual Allowance 22 Pension Reform 23 Protection of Pension Lifetime Allowance 24 * Tax Relief for Pension Contributions under Threat? 25 * Tapered Annual Allowance 26 Pre-owned Assets Tax Capital Taxes 27 * Capital Gains Tax (CGT) - Annual Exemption 28 * CGT Rates of Tax 29 Assets of Negligible Value 30 Disposal of UK Residential Property by Non-Residents 31 Capital Gains Tax on Second Homes 32 Annual tax on Enveloped Dwellings (ATED) 33 * Stamp Duty Land Tax on Let Properties and Second Homes 34 CGT Entrepreneurs Relief 35 Changes to the Tax Treatment of Distributions on Liquidations 36 * Inheritance Tax - Exemptions for Lifetime Gifts 37 Inheritance Tax Planning for Widows and Widowers 38 Residence Nil Rate Band 39 Inheritance Tax Reduced Rate for Estates Leaving 10% or more to Charity Savings and Investments 40 * Individual Savings Accounts (ISAs) 41 Notification of Interest to HMRC by Banks and Building Societies 42 Do you have Bank Accounts in the USA or Elsewhere Offshore? 43 Financial Services Compensation Scheme

5 TRUSTS AND ESTATES 44 Discretionary Trusts General 45 Discretionary Trusts Making Use of Normal Expenditure out of Income 46 Discretionary Trusts Pilot Trusts 47 Discretionary Trusts Accumulations of Income 48 * Capital Gains of Trusts and Estates Rates of Tax and Annual Exemption 49 * Deceased Persons Estates - Income Distributions BUSINESSES Employers 50 * Payroll End of Year Tasks (Including Voluntary Payrolling of Benefits) 51 New Personal Tax Accounts 52 Employment Allowance up to 2,000 off your Class 1 National Insurance Contributions 53 Employees Aged Under 21 or Apprentices Aged under National Minimum Wage/ National Living Wage 55 Professional Bureau Payroll Service 56 Future Changes Already Announced GENERAL 57 Reduction in Corporation Tax Rates 58 Don t Leave It Too Late to Prepare for Auto-Enrolment 59 National Insurance Contributions (NIC) from 6 April Class 3A Voluntary National Insurance Contributions 61 National Insurance Credits Towards Additional State Pension 62 Capital Allowances 63 Construction Industry Scheme Mandatory Online Filing 64 Sole Proprietors and Partnerships Having a Bad Year? 65 Money Laundering Regulations ACTION POINTS

6 PERSONAL TAX Income Tax 1 Personal Allowances Most individuals are entitled to receive a certain level of income that is free of tax. Generally the available personal allowance is 10,600 for the current tax year, with a maximum entitlement of 10,660 for those born before 6 April Conditions and restrictions apply to the entitlement over 10,600. The personal allowance increases to 11,000 from 6 April There are restrictions on high earners and these are set out in Section 6. Basic rate tax (20%) is payable on the band of taxable income from 0 to 31,785 for 2015/16, and this band is increased ( 0 to 32,000) for 2016/17. to 150,000, and an additional rate of 45% will apply to income over 150,000. You should consider whether everyone in your family is taking full advantage of the personal allowance, or whether there might be opportunities to utilise any unused allowances. Are you doing what you can to take advantage of the basic rate band (e.g. owners of companies may wish to consider paying a dividend before the end of the tax year see Section 4), or to reduce the slice of income taxable at higher rate (e.g. payment of pension premiums or Gift Aid donations)? The higher rate of tax of 40% will apply on the band of income over and above this up 2 Marriage Allowance The marriage allowance was introduced with effect from 6 April Where neither spouse is liable to tax above the basic rate, individuals are able to transfer part of their tax free personal allowances to their spouse or civil partner. To benefit as a couple the lower earner will need to have an income of 11,000 or less in the 2016/17 tax year. The transferrable amount in the 2016/17 tax year will be 1,100 representing a potential saving of up to 220. A claim can be made online at within 4 years of the end of the relevant tax year. 3 Changes to the Taxation of Investment Income Consideration should also be given to recent changes and forthcoming changes to the taxation of investment income. A 0% starting rate for savings means that the first 5,000 of savings income will be taxed at 0% as long as the individual doesn t have other taxable income which exceeds that amount. A new Personal Savings Allowance is being introduced with effect from 6 April 2016 for basic and higher rate tax payers. Additional rate taxpayers will not benefit.

7 The Treasury announced that from 6 April 2016, 95% of people will no longer pay tax on savings interest. If you re a basic rate taxpayer you ll be able to earn up to 1,000 in interest you earn on your savings income tax free. Higher rate taxpayers will be able to earn up to 500 income tax free. Banks and Buildings societies will stop deducting tax from savings interest with effect from 6 April If you receive interest in excess of the above thresholds and fill in a Self Assessment Tax Return, you should carry on doing this as normal. If you don t complete a Self Assessment Tax Return, HM Revenue & Customs will normally collect any tax due by changing your tax code. They will be provided with the information that they need in order to do this by the banks and buildings societies. However, see Section 9 for circumstances which require you to complete a Tax Return. 4 Changes to Dividend Taxation From 6 April 2016, the 1/9th dividend tax credit will be replaced by a new dividend allowance in the form of a 0% tax rate on the first 5,000 of dividend income per tax year. UK residents will pay tax on any dividends received over the 5,000 allowance at the following rates: 7.5% on dividend income within the basic rate band; 32.5% on dividend income within the higher rate band; 38.1% on dividend income within the additional rate band. Dividends received on shares held in an ISA will continue to be tax free. Individuals who receive between 5,001 and 10,000 of dividends and who need to pay tax on those dividends at the basic rate will need to notify HMRC. Individuals with more than 10,000 of dividend income are likely to be already completing Self Assessment Tax Returns. The changes to the taxation of dividends brings into debate the tax and National Insurance benefit of operating as a limited company as opposed to a sole trader or partnership. Generally speaking for those businesses where there was a tax advantage in operating as a limited company before, there is still likely to be a benefit in tax terms by continuing to trade as a limited company. Consideration should however be given to: - Bringing forward the payment of dividends into 2015/16. However, one will have to weigh up the benefit of a lower liability versus earlier payment. - Utilising the 5,000 dividend allowance each year. - Extracting profits by way of directors loan account (and possibly undrawn dividends credited thereto). - Maximising tax efficient profit extraction e.g. pension contributions and other tax free benefits. On the positive side, some individuals may benefit from the new regime because dividend income will no longer be grossed up by the tax credit. This will reduce the impact of the abatement of personal allowances for those earning over 100,000 and the high income child benefit charge.

8 However, as each individual s needs will differ, please contact us for further advice. Please ask for a copy of our Frequently Asked Questions on the New Tax Regime for Dividends for more guidance if you have an owner managed company. 5 Repayment Claims Repayment claims can be prepared and submitted for anyone who thinks they might have overpaid tax, but are not within the self assessment system. This can include minor children who receive money from a Trust and pensioners who are paying too much tax. Please let us know if you think any member of your family may be able to benefit from a repayment of tax. The time limit for outstanding repayment claims is four years, so if you think that you may have overpaid tax in the year ended 5 April 2012 then a claim must be made by 5 April 2016, and a claim for the year ended 5 April 2016 by 5 April However, the changes referred to in Sections 3 and 4 above may have an effect on whether a claim is needed in the future. 6 High Earners Personal allowances are lost by high earners. Those with a net adjusted income in excess of 100,000 for 2015/16 will lose the whole or part of their personal allowance of 10,600. For every 2 of income in excess of 100,000 the allowance is reduced by 1. Once income reaches 121,200 the allowance is completely eliminated. A measure of relief may be available by paying pension premiums or gift aid donations during the year to mitigate the effect of this. If advantageous, it is possible to backdate gift aid contributions from the 2016/17 tax year via your 2016 Tax Return. 7 High Income Child Benefit Charge (HICBC) The HICBC affects taxpayers whose income exceeds 50,000 and where either they or their partner is in receipt of child benefit. If you are affected and continue to receive child benefit then you will need to declare the amount received by making an entry on your Self Assessment Tax Return. If you don t currently complete a Tax Return, you will need to register for Self Assessment. You can elect not to receive child benefit in the future, particularly if your income is in excess of 60,000 and is unlikely to fluctuate. If your adjusted net income is only marginally above 50,000 you may wish to consider salary sacrifice for pension contributions or childcare vouchers for example, or simply increasing your pension contributions to reduce your net adjusted income below 50,000.

9 8 HMRC Campaigns Campaigns are offered by HM Revenue and Customs to selected groups of individuals, traders and professionals, who wish to make a voluntary declaration of understated income and overstated expenses. As an incentive, favourable penalty terms are offered on the additional tax payable. At present, three campaigns are in existence: The Credit Card Sales Campaign - which offers individuals or businesses that accept credit or debit cards an opportunity to bring their tax affairs up to date The Second Incomes Campaign - which offers employees an opportunity to declare any additional untaxed income from another activity The Let Property Campaign - which offers landlords the opportunity to bring their tax affairs up to date or put right any errors they may have made. You may wish to seek professional advice before making a disclosure under any of these campaigns. 9 Tax Returns for the year ended 5 April 2016 Self Assessment Tax Returns for the year ended 5 April 2016 must be submitted: by 31 October 2016, if a paper Return is to be filed by 31 January 2017, if the Return is filed on-line at the latest, if automatic penalties and interest on tax paid late are to be avoided. Please let us have details of your income and relevant outgoings as well as acquisitions and disposals of assets for Capital Gains Tax purposes at the earliest possible moment so that the deadline may be met. In practical terms it becomes very difficult for us to meet the deadline if information is not submitted in good time. Registering for Self Assessment and to Complete a Tax Return You need to register for self assessment and complete Tax Returns if: You are self employed. Your untaxed income was 2,500 or more e.g. from rents or investments. Your work expenses were 2,500 or more. Your savings or investment income was 10,000 or more before tax. You made profits from the sale of shares, a second property etc. You were a company director. Your income was over 50,000 and you or your partner continued to receive child benefit. You had income from abroad that you need to pay tax on. You lived abroad and had a UK income. Your income was over 100,000. Registration for self assessment must be made by 5 October following the end of the tax year for which you need to submit a Return.

10 Collection of Debts via PAYE Code If your income is subject to PAYE it is possible to have any amounts which you owe to HMRC collected via your PAYE code provided various conditions are met. This can include amounts for underpaid income tax and overpayments of tax credits, of up to 3,000 if you have PAYE income of up to 29, Higher amounts can be collected on a graduated scale for annual PAYE earnings of 30,000 or more. Collecting an underpayment of income tax via the PAYE code can also have the consequential effect of reducing payments on account due for the following tax year, thereby improving cashflow. Tax Return Reminders and Payslips HMRC no longer issue reminders regarding filing deadlines for Tax Returns or blank payslips to enable you to pay your tax bill. The onus is falling increasingly on the individual. Details of how to make payment to HMRC can be obtained from /17 PAYE Tax Coding Notices We can only emphasise how important it is to ensure that the PAYE codes being operated against your income from your employment or pensions are reasonable. This is particularly important where you have multiple sources of employment or pension income. 11 Income from Employment Clients who are anticipating fees, bonuses or other remuneration for past or current years should consider whether steps should be taken to pay part or all of such bonuses to them on or before 5 April 2016 in order to fully utilise their personal allowances and basic (20%) rate tax band for 2015/16. If you are in any doubt about your position in this respect please advise us immediately. For those earners with total income in the region of 100,000 there is the question of whether pension premiums or gift aid payments should be paid in order to avoid the effective 60% rate of income tax (income between 100,000 and 121,200). 12 Gift Aid Payments Any clients who are higher or additional rate taxpayers should keep a detailed schedule of all payments they make, which are covered by the gift aid regulations. A further 20% of the grossed up donation can be claimed as tax relief for higher rate taxpayers, and 25% for additional rate tax payers. If a gift of 80 is made to a charity (net) the higher rate tax relief will be 20% of 100, i.e. an additional 20. For additional rate taxpayers this relief is currently 25. Most of us find ourselves sponsoring family members and friends for various walks, swims, half marathons etc., and almost always the sponsorship money may be gift aided if we tick the appropriate box on the form. Furthermore, many donations made in lieu of flowers at funerals etc., can also be gift aided, together with membership subscriptions paid to charity

11 e.g. National Trust, although bizarrely life membership does not qualify. With gift aid, single payments as well as regular payments can attract the additional tax relief. If a schedule is not kept as each tax year passes, it is going to be very difficult to remember at the end of the year what donations have been made so that these can be included in the Self Assessment Tax Return. Backdating payments may be considered where this may be advantageous, as already mentioned above. For couples, where one member of a couple is a basic rate taxpayer and the other is a higher rate taxpayer, payments under gift aid should be made by the higher rate taxpayer as they will be able to claim higher rate relief for the payments. A note of caution, however, for clients with lower income, is that one must pay sufficient income or capital gains tax to cover the tax the charity is reclaiming on your donation. If you haven t then you may be required to pay any shortfall in tax to HMRC. If you don t think that you have paid enough tax this year, you may be able to carry back your donation to the previous tax year if this helps. Please ask us for advice. In this scenario future donations may be made, but the gift aid box should not be completed. Individuals should also be mindful of the new Personal Savings Allowance being introduced with effect from 6 April From that date, no tax will be deducted from bank and building society interest meaning that this source of tax will no longer be available to cover the tax being reclaimed by the charity. Along the same vein individuals who hold the majority of their investments in ISAs should also be mindful of the fact that as these are tax free, this source of income cannot cover any tax a charity may be reclaiming on your donation, and you may end up with an unexpected tax bill. Donations of Land, Property or Shares If an individual donates land, property or shares to charity, they may not have to pay tax. Income tax relief is given by deducting the value of the donation from the individual s total taxable income for the tax year in which the gift or sale was made. No capital gains tax is payable on land, property or shares gifted to charity. Individuals may also sell the assets at less than market value. Capital gains tax may be payable if assets are sold for more than their cost price but less than their market value. Records must be kept of the gift and the charity s acceptance. If you are contemplating such a gift please seek our advice, as there may be a significant tax difference in donating the asset to charity rather than selling the property and gifting the proceeds. 13 Domicile and Remittances If you know or suspect that you may not be domiciled in the UK then please ensure that we are aware of your position, even if you think that you may have mentioned it previously. A claim is not required where the individual s unremitted foreign income and gains are less than 2,000 for the tax year.

12 A claim may be made for the remittance basis of taxation to apply, by an individual who is not UK domiciled. Non-UK domiciled resident adults who claim the remittance basis and who have been resident in the UK for 7 of the 9 tax years preceding the relevant tax year, have to pay a Remittance Basis Charge (RBC) of 30,000 in respect of the foreign income and gains they leave outside the UK. The RBC for non-domicilliaries who have been UK resident in at least 12 of the last 14 years is 60,000, and 90,000 for those who have been resident for 17 out of 20 years. The RBC is in addition to any tax due on UK income and gains or foreign income and gains remitted to the UK, if the individual wishes to continue to benefit from the remittance basis. Individuals who claim the remittance basis are not entitled to personal income tax allowances, nor can they claim the capital gains tax annual exemption. Major changes to the taxation treatment of non-uk domiciled individuals were announced in the Summer 2015 Budget and are due to be implemented with effect from April Please see 14 below. If you are not domiciled in the UK and have unremitted foreign income and gains then please ensure that we are made aware of this. If a non-domiciliary brings funds into the UK for the commercial investment in the UK businesses then these funds may not be taxed in the UK. The investment has to be a qualifying investment. If you require more details then please contact the person who normally deals with your affairs. 14 Non-Domicile Status From 2017/18, an individual will be deemed to be UK domiciled from the start of his sixteenth year of UK residence if he has been resident for at least 15 out of the last 20 tax years. An individual will only lose his deemed domicile status if he then becomes nonresident for six tax years, as at that point he will no longer meet the 15 out of the last 20 tax years condition. He will lose his deemed domicile status from the start of his seventh year of non-residence. Although in the past the concept of deemed domicile has only applied for inheritance tax purposes, this will now apply for all tax purposes including income tax and capital gains tax. Another change from 2017/18 will affect individuals who are born in the UK and had a UK domicile of origin (normally father s domicile). From April 2017 they will no longer be able to claim nondomicile status whilst they are resident in the UK. If you think that your domicile status may be affected by these changes you will need to seek advice regarding your potential exposure to UK tax. The remittance basis will no longer be available to you, and tax will need to be paid on your worldwide income and gains as they arise.

13 15 Statutory Residence Test UK tax liability may depend on a person s domicile and whether or not he is resident. An individual s UK residence status is now decided by using the Statutory Residence Test (SRT). The SRT comprises three tests: automatic overseas test automatic residence test sufficient ties test It must be noted that the SRT is not a oneoff test but must be carried out every year. The test applies for income tax, capital gains tax and inheritance tax purposes, and if you would like our assistance with considering your residence status then please contact the person who normally deals with your affairs. 16 Certificate of Residence If you are resident in the UK and have income and/or gains in another country you may be able to claim double tax relief or exemption so that you do not pay tax twice on the same income/gains. In order to do this some countries require you to complete a certificate of residence to confirm that you were resident in the UK for a particular period. There is now the facility to apply online via HMRC s website for a certificate. If you require our assistance then please let us know. 17 Furnished Holiday Lettings A furnished holiday lettings (FHL) business is taxed following the rental business (property income) calculation rules but is treated as a trade for some tax purposes and therefore has some tax advantages over other lettings. A property will qualify as an FHL if it meets the necessary criteria: The property must be in the UK or European Economic Area (EEA). The property will have to be available for letting to the public for 210 days in the tax year, and actually let for 105 days. For further guidance on whether your property meets the criteria, please contact us. If you have not yet met the 105 days of actual lettings, you may wish to think about special offers between now and 5 April. You should also bear in mind that because of how Easter has fallen, we have effectively had two lots of Easter holidays in 2015/16. In 2016/17 Easter isn t until mid April, so this may affect your day counts. The tax advantages are: The favoured capital gains tax treatment, including roll-over relief, hold-over of gains on gifts and Entrepreneurs Relief all still apply; In a furnished holiday letting business capital allowances may be claimed on plant and machinery, including furniture and furnishings, etc. The annual investment allowance (AIA), where expenditure qualifies for a 100% allowance, was reduced from 500,000 to 200,000 p.a. with effect from 1 January Please refer to Section 62 for more information regarding problems that this may pose; Profits count as earnings for pension purposes.

14 18 Residential Property Lettings Removal of the Wear and Tear allowance Most landlords of fully furnished property will be aware of the above allowance which enables landlords of such property to elect to claim an annual tax deduction from their rental income equal to 10% of the rental income received. Since April 2013, where a dwelling is let partly furnished, there have been no allowances available to the taxpayer unless costs incurred on equipment can be classified as a repair. In some cases, a repair will include the replacement of that item if that item can be regarded as a fixture in the building. From April 2016 the government is proposing to remove the wear and tear allowance. A new relief will allow all residential landlords, regardless of whether the property is let fully or only partly furnished, to deduct the actual costs of replacing furnishings etc. provided for the tenant s use in the residential property. It will continue to be the case that no tax relief will be available for the initial cost of furnishing a property. Different rules will continue to apply for landlords of furnished holiday lettings where Capital Allowances should still be available on such expenditure (see Section 17). The current wear and tear allowance is available to landlords of fully furnished properties, whether or not they have replaced any furnishings. From 6 April 2016 specific relief will be given for these costs, so it makes sense, if possible, to defer replacement expenditure until after that date. A similar point applies if you let out a property which is only partly furnished. No relief is currently given for replacing furnishings etc. but relief will be given for such expenditure incurred from 6 April Residential Property Lettings Rent-a-Room Relief Under the current scheme, rental income of up to 4,250 per annum is exempt from income tax where an individual receives rent from a lodger sharing the individual s home in the UK. If another person who lives in the property as his only or main residence is entitled to receive rent, the exemption is halved, irrespective of the actual split of the rents. With effect from 6 April 2016, the exempt amount is being increased to 7,500. It is also worth noting that rent-a-room relief is available if an individual rents out rooms in a guest house, Bed & Breakfast or similar, providing that it is their main residence. However, it should be borne in mind that your entitlement to the capital gains tax Principal Private Residence exemption may be affected if you have more than one lodger in your home. Please contact us if you require more information.

15 20 Residential Property Lettings Restricting Finance Costs for Landlords Under the current rules, in calculating taxable profit from residential lettings, landlords can deduct the full amount of any mortgage interest and finance costs they pay on borrowings taken out for the purpose of the property letting business. There is, of course, no relief for the capital repayments of a mortgage or loan. Changes announced will restrict the amount of tax relief available on mortgage interest and finance costs to the basic rate of income tax only. Landlords who are higher rate taxpayers are currently able to obtain 40% tax relief on their finance costs (additional rate taxpayers currently receive tax relief at 45%) but under the new rules this will be restricted to 20% only. To give landlords time to adjust, and plan for these changes, the Government will introduce this change gradually from April 2017, over a four year period. Therefore from the tax year ended 5 April 2021 onwards these new rules will apply in full. Please note that the restriction relates to finance costs not just interest so relief for expenses such as application fees charged by the lender would also be restricted. Higher rate and additional rate taxpayers will be adversely affected, particularly those with substantial borrowings. In addition, some basic rate taxpayers may also be affected if the change pushes them into the higher rate bracket. As you may have seen in the press Cherie Blair is mounting a legal challenge on the basis that the policy breaches article one of the European Convention of Human Rights and therefore watch this space. The restriction will not apply to landlords of furnished holiday lettings or commercial properties. 21 Pension Provision - Annual Allowance The Annual Allowance for pension contributions is currently capped at 40,000. However, if you are drawing down pension benefits using flexible drawdown or you exceed the income limit for capped drawdowns you will receive a lower Annual Allowance of 10,000. Tax relief is given at your marginal rate of tax. You are allowed to carry forward unused relief for up to three tax years. The Annual Allowances for 2011/ /14 inclusive was 50,000, and 40,000 for 2014/15 onwards. The current year s relief is always used first, and then any unused relief from the previous three years can be used, with the earliest year s allowance used first. If the Annual Allowance is exceeded there is a tax charge on the member. A pension input period has previously been specific to a member and a scheme. A scheme may have had different input periods for different members, and a member may have had different input periods under different schemes, and this dictated the annual allowance available. However, from 6 April 2016, the pension input period will be aligned with the tax year. The alignment of pension input periods necessitates transitional provisions for 2015/16. Accordingly 2015/16 has been split into two mini tax years for annual allowance purposes. An annual allowance of 80,000 (plus any carry forward) was available for the period from 6 April 2015 to 8 July The period from 9 July 2015 to 5 April 2016

16 has a nil annual allowance but a maximum of 40,000 unused allowance can be carried forward from the period from 6 April 2015 to 8 July If you paid contributions during the period to 8 July, you may still be able to pay additional contributions prior to 5 April This provides an opportunity for additional pension planning in the 2015/16 tax year. It certainly makes sense for individuals affected by the annual allowance tapering (see Section 25) in 2016/17 to maximise their pension contributions in 2015/16, as long as they do not end up exceeding their lifetime allowance. With regard to bringing forward the unused relief from earlier years, you must have been a member of a scheme during the year concerned. If you would like our assistance in calculating the relief available, please let us know as the calculations involve a consideration of pension input periods and are not straightforward. We would recommend that great care is taken if your contributions are approaching the limit and that advice is sought from ourselves in conjunction with your pension advisers. 22 Pension Reform Major changes to the way that members of defined contribution (DC) pension schemes could access their pension savings were announced in the 2014 budget, with the majority of changes coming into effect from 6 April 2015 as follows: if you are of normal minimum pension age (currently 55) you will be able to access your pension fund in full without needing to purchase an annuity. the first 25% of your fund will be payable tax free and the balance will be taxed as income at your marginal rate of tax. Please be aware that depending on your other income and the size of your pension fund, tax could be payable at the higher rates of 40% and 45%. instead of paying the 55% rate of tax when passing on their pension, people who die under 75 with DC pensions can pass on their unused pension as a lump sum tax free. people in the private sector or in a funded public sector scheme will also be able to benefit from the changes by transferring from a defined benefit/final salary scheme to a defined contribution one. Those in unfunded public sector schemes will not be able to transfer. income draw down restrictions are to be relaxed. The maximum draw down limit will increase from 120% to 150%. The new regime offers some opportunities for retirement planning including saving for a future expense, use of small pension funds, managing withdrawals and planning in relation to other income and wealth.

17 23 Protection of Pension Lifetime Allowance The lifetime allowance for pension contributions, currently set at 1.25 million, will be further reduced to 1 million with effect from 6 April If the lifetime allowance is exceeded a tax charge of up to 55% will arise when the benefits are taken. From 6 April 2016, there will be two protection regimes available: Individual Protection 2016 (IP2016) and Fixed Protection 2016 (FP2016). There will be no application deadline for these protections. However, individuals must apply for protection before they take any benefits. A new online self-service will be available from July 2016 to apply for a protection reference number. Individual Protection allows individuals to continue pension savings whereas Fixed Protection does not. For IP2016 the value of the individual s pension funds must be at least 1m in aggregate as at 5 April FP2016 protects the lifetime allowance at 1.25m and IP2016 protects the lifetime allowance at the value of the pension fund as at 5 April 2016, up to a maximum of 1.25m. Applications for individual protection for 2014 (IP2014) may be made up to 5 April 2017 for a pension fund of at least 1.25m as at 5 April 2014 and gives protection up to a limit of 1.5m. 24 Tax Relief for Pension Contributions under Threat? No announcement was made in the 2015 autumn statement but it is being widely speculated that tax relief on pension contributions could be subject to change. It is thought that higher rate and additional rate tax relief could be scrapped and a new flat rate of tax relief introduced. To maximise the tax relief available you could make use of unused pension allowance for the three tax years preceding 2015/16 and qualify for tax relief at your highest rate. However, an individual can only contribute as much as he actually earned in the year in which the contributions were actually made. Consideration could be given to salary sacrificing bonus payments to fund pension contributions in the current tax year or to using earnings to fund a spouse s pension. Further announcements could be made in the Budget on 16 March and you may prefer to take action before that date. 25 Tapered Annual Allowance From 6 April 2016, there will be a tapered reduction in the amount of the annual allowance. This will apply to individuals whose threshold income (all income i.e. investment as well as earned) is more than 110,000. If threshold income exceeds 110,000, they must calculate their adjusted income (which includes the value of all pension contributions regardless of source) and the annual allowance will be tapered. For every complete 2 that an individual s adjusted income exceeds 150,000 the annual allowance will be reduced by 1, up to a maximum reduction of 30,000 for

18 individuals whose income is over 210,000 (meaning those individuals would have an annual allowance of 10,000). 26 Pre-owned Assets Tax If you are living in or have occasional use of a property which you previously owned, or which was purchased or constructed with the use of money provided by you, a pre-owned assets tax (POAT) could apply to you unless you are paying a full market rent. Are you continuing to enjoy some use or benefit of a property or chattel which you once owned, but no longer own, or which was purchased out of money given away by you? If so then we can help you to consider what alternative steps might be taken to minimise the damage either from inheritance tax or POAT. If it applies to you an entry may be required on your Tax Return for the year ended 5 April Capital Taxes 27 Capital Gains Tax (CGT) - Annual Exemption For 2015/16, each individual can realise chargeable gains of up to 11,100, net of losses, in aggregate, without incurring any liability to CGT. This relief cannot be carried forward if it is unused. In the absence of losses brought forward any balance of chargeable gains is subject to CGT at a rate of either 10%, 18% or 28% (see Section 28 below). Please note that these rates do not apply to companies. See Section 48 below for executors and trustees. Some clients with large share portfolios and shares showing substantial gains may consider selling shares and purchasing shares in another company in order to make use of the 11,100 annual exemption, if it would otherwise be unused. The costs of the transaction may prohibit this where a large quantity of shares needs to be sold in order to realise a sufficient gain, but in the case of shares which have gone up markedly in value it could be worth considering. Remember that the purchase must not be in shares in the same company within 30 days, following the abolition of bed and breakfasting. Purchase of the same company s shares within an ISA is not disqualified however. A more or less simultaneous purchase by one s spouse is best avoided as HMRC may seek to attack this using anti-avoidance legislation. Should an asset that is going to be sold in the future be transferred into joint names? Specific advice should always be sought as the decision will depend on the circumstances. Where gains in excess of 11,100 have been made in the current year, consideration should be given to the realisation of losses to offset such gains, e.g. by disposing of loss making shares. Remember that gains on property and other assets can be offset by losses on shares and vice versa. The 2016/17 CGT annual exemption has not yet been announced. However, draft legislation suggests it will remain at 11,100.

19 28 CGT Rates of Tax Basic rate taxpayers continue to pay tax on their capital gains at 18%, but only to the extent that total taxable income and gains are within the basic rate band. Thereafter they will pay at a rate of 28%. Taxpayers who pay higher and additional rates of tax will pay CGT at a rate of 28%. In 2015/16 for taxpayers who pay income tax at the basic rate only, if total taxable income and gains are above 31,785 then a rate of 18% will apply to that part of the gain below 31,785 assuming that the gains form the top band of the income, and 28% on the amount in excess of 31,785. This is probably clearer by way of an example. Angela s taxable income for 2015/16 is 12,785 and she makes a gain of 41,100. After deducting the annual exemption of 11,100 the gain is 30,000. The first 19,000 of the gain is taxed at 18% (taking income plus gain to 31,785, being the basic rate tax band limit) and the remaining 11,000 is taxed at 28%. Business owners may be able to claim Entrepreneurs Relief thereby reducing their effective rate of capital gains tax to 10% (see Section 34). 29 Assets of Negligible Value Generally, an individual can only claim a capital loss in respect of an asset where that asset has been disposed of, or has been destroyed completely. However a negligible value claim can be made for an asset, which is owned at the time of the claim, to be treated as being sold and immediately reacquired, thereby creating a capital loss at the deemed disposal date. The onus is on the individual to prove that the asset became of negligible value during the individual s period of ownership. 30 Disposal of UK Residential Property by Non-Residents Non UK residents, at the time of a disposal of UK residential property, became liable to Capital Gains Tax on conveyances after 6 April Tax rates of 18% and 28% apply to individuals, trusts and unincorporated persons, and 20% to limited companies. All persons making a Non-Resident capital gains tax (NRCGT) disposal have 30 days following the conveyance of the property (not the date of exchange) to submit a NRCGT return to HM Revenue and Customs. The Return must be submitted even if : There is no tax to pay A loss has been made The non-resident is registered for Self Assessment or Corporation Tax Annual Tax on Enveloped Dwellings Tax Returns are completed (see Section 32) Payment of any tax due can be made either when you submit your return or can be deferred until the date when you would normally pay any tax owing. Changes have also been made to the main residence election rules following concerns that non-residents would use main residence relief as a means of escaping UK tax. See Section 31 below.

20 31 Capital Gains Tax on Second Homes To avoid non-residents side stepping the capital gains tax charge on the disposal of UK residential property by designating their UK property as a tax exempt main residence, the principal private residence (PPR) election has been modified. A nonresident will be unable to designate a UK property as his PPR in a tax year unless he spends at least 90 days in it during the year. By doing this, his non-resident status could be affected. The new rules also apply to UK residents disposing of residential property located outside the UK. UK residents owning property only in the UK are unaffected. 32 Annual tax on Enveloped Dwellings (ATED) ATED was introduced as an annual tax payable by non-natural persons (e.g. companies, partnerships, etc.) that own UK residential property. Originally, it applied to properties valued at more than 2 million on 1 April This threshold was reduced to 1 million for returns from 2015/16 onwards and is being further reduced to 500,000 from 1 April 2016 onwards; and is therefore expected to affect many more people With effect from 1 April 2016, if your property was valued at more than 500,000 on 1 April 2012, or at acquisition if later, you will be subject to the ATED and will be required to complete a Return. This must normally be filed by 30 April 2016 and can be submitted either online or in paper form. Payment of the tax due must also be made by 30 April Different dates apply depending on when your property came within the scope of ATED. 33 Stamp Duty Land Tax on Let Properties and Second Homes Higher rates of Stamp Duty Land Tax (SDLT) will be charged on purchases of additional residential properties, such as buy to let properties and second homes from 1 April The higher rates will be 3% above the current SDLT rates, but will not apply if at the end of the date when the purchase is completed, an individual owns only one residential property. This need not necessarily be your home. One complication is the scenario where the property being purchased is intended to replace your current main residence which has not yet been sold. The transaction would be subject to the higher rates of SDLT but a refund could be claimed if the previous main residence is sold within 18 months. If you are currently buying a property which will be affected by this you should aim to complete, if possible, prior to 1 April Final details of how these changes will operate are due to be announced in the Budget on 16 March, but that doesn t leave much time between then and 1 April.

21 34 CGT Entrepreneurs Relief Entrepreneur s Relief reduces the amount of Capital Gains Tax on a disposal of qualifying business assets to a flat rate of 10% as long as the relevant conditions have been met. The relief is subject to a lifetime limit of 10 million. If you are contemplating the sale of an interest in a business in the fairly near future and wish us to consider the availability of Entrepreneurs Relief, then please contact us as soon as possible. or part of a business, and the sale of an asset used in the business. For example, a farmer who farms 250 acres and sells 5 acres for development will not obtain the relief if he carries on farming the 245 acres. He has merely disposed of an asset used in the business, not a part of the business itself. With careful planning, it may be possible to structure transfers in some instances so that relief is obtained. We say this because it is very important to distinguish between the sale of a business 35 Changes to the Tax Treatment of Distributions on Liquidations In the Autumn Statement, the Chancellor included a reference to changes to entrepreneurs relief to target contrived schemes whilst ensuring that the relief remained available for genuine commercial transactions. These changes are expected to be effective from 6 April 2016 applying to distributions on or after that date, regardless of when the liquidation commences. The motivation for the proposals appear to be to target phoenix operations being the tax effective extraction of profits of one company by liquidation, without paying a revenue dividend, followed by recommencing the same trade in a new company. Currently distributions made in the course of winding up are treated as capital distributions and taxed as capital gains. This means that where the conditions for entrepreneurs relief are met the gains are subject to tax at a 10% rate of capital gains tax but in any event a maximum rate of 28%. Under the new proposal the distribution will be subject to income tax as dividend income at rates as high as 38.1%. The new rules will apply where three conditions are met Applies to all close companies or companies that were close at any time in the two years prior to the start of the winding up (most private companies), Catches individuals who receive the distribution and, within two years after the date of the distribution, carry on any trade or other similar activity previously carried on by the company (either as a sole trader, in partnership or in a new company), It is reasonable to assume in all the circumstances that one of the main purposes of the liquidation is the avoidance of an income tax liability. The new rules have the potential to impact on many commonly encountered situations and we will need to wait for the final details to be published following the 2016 Budget.