Disclaimer This publication is intended to provide general information and guidance only and is not intended to provide advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action based on the contents of this publication. Tax law is subject to change. This publication represents our understanding of the law and HM Revenue & Customs practice as at January 2016. The FCA does not regulate tax advice.
Contents 1 Introduction 2 2 Private individuals 3 2.1 Income tax planning 3 2.2 Gift Aid 4 2.3 Capital gains tax planning 5 2.4 Inheritance tax planning 6 2.5 Pensions 8 2.6 Self-assessment: key dates 9 3 Business owners 11 3.1 Family businesses 11 3.2 Capital expenditure 13 3.3 Entrepreneurs Relief 14 3.4 Business Property Relief 15 4 Employees 16 4.1 General planning 16 4.2 Cars and fuel 16 4.3 Other benefits in kind 17 5 Property 18 5.1 Letting property 18 5.2 Principal Private Residence relief 20 5.3 Furnished Holiday Letting 21 5.4 Annual Tax on Enveloped Dwellings 22 6 Overseas 23 6.1 Residence 23 6.2 Non-domiciliaries 25 6.3 UK property investment: non-residents 27 7 Tax efficient investments 29 7.1 ISAs 29 7.2 Venture Capital Schemes 30 8 Useful websites 32 1
1 Introduction As the end of the financial year approaches, taxpayers should review their financial and tax arrangements. For both businesses and individuals, control of cash flow is an important discipline. Taxation represents a significant outflow, but there are various reliefs, allowances and exemptions within the UK tax system, designed to promote saving, investment, innovation and entrepreneurship. Action may be required now, in order to take advantage of reliefs, allowances and exemptions before these lapse at the end of the tax year. In other cases, steps may need to be taken to rearrange or restructure the ownership of assets, so as to mitigate tax liabilities or take advantage of beneficial claims and elections. As with all tax planning, you should seek professional advice relevant to your specific personal and financial circumstances, and remember that timing may be critical. We hope you find the planning suggestions set out in this guide useful. Here are some ideas to consider in the run-up to the end of the tax year on 5 April 2016: Use your capital gains tax (CGT) annual exemption, as this cannot be carried forward or transferred. Use your inheritance tax (IHT) annual exemption of 3,000 and consider making additional gifts if the prior year s exemption remains available. Ensure that you have fully utilised your annual ISA allowance of 15,240. Consider whether the ownership of your business or company is structured in such a way as to ensure that Entrepreneurs Relief will be available on a future disposal. Ensure that all claims and elections have been made within the relevant time limits. Consider accelerating dividend payments from owner-managed companies before the new tax regime for dividends comes into force on 6 April 2016. Consider making pension contributions (taking advantage of unused relief from earlier years, if available), thereby reducing your 2015-16 tax liabilities and enabling the funds to grow in a taxfavoured environment. 2
Non-domiciled individuals who have been continuously resident in the UK since 2000-2001 should take action to reduce their exposure to IHT on non-uk assets before they become deemed domiciled for IHT purposes on 6 April 2016. If you are liable to make payments on account through self-assessment, these will be based on your income tax liability for the previous year. If you expect your income for 2015-16 to be lower than in 2014-15, it may be appropriate to apply to reduce the payments on account due on 31 January 2016 and 31 July 2016. 2 Private individuals 2.1 Income tax planning Tax rate Taxable income above your personal allowance Basic rate 20%/10% 0 to 31,785 Higher rate 40%/32.5% 31,786 to 150,000 Additional rate 45%/37.5% Over 150,000 Individuals may wish to take action to reduce their taxable income, particularly where income falls just above one of the thresholds. The higher rate of income tax applies to taxable income over 31,785 and the additional rate of 45% to taxable income over 150,000. A marginal rate of 60% applies to income between 100,000 and 121,200 as a result of the progressive withdrawal of the personal allowance (but a non-domiciled individual claiming the remittance basis will not be entitled to the personal allowance in any event). The standard personal allowance for 2015-16 is 10,600. Taxpayers over the age of 75 qualify for a slightly higher personal allowance of 10,660. 3
Consider making pension contributions on or before 5 April 2016, having regard to existing funding levels and the lifetime allowance for pension savings of 1.25 million ( 1 million after 5 April 2016). Depending on the level of past contributions, it may be possible to make payments to a registered pension scheme of up to 220,000, although for most people a lower cap will apply. If you are under 75, tax relief is available on personal pension contributions up to 2,880 net ( 3,600 gross), regardless of whether you have any earnings. Contributions of up to 2,880 net ( 3,600 gross) can also be made into a stakeholder pension for a family member who has no earnings (such as a spouse or child). Consider gifting income producing assets to a spouse/civil partner, if they pay tax at a lower rate. If you have children, it may be possible to switch income from one spouse to the other, so that both spouses incomes remain below the 50,000 threshold for the High Income Child Benefit Charge. Employees should consider salary sacrifice arrangements, particularly where the income foregone is compensated for by a non-taxable benefit, such as employer contributions to an approved pension arrangement. Make contributions to a Junior ISA for children or grandchildren under the age of 18 who do not have a Child Trust Fund. Up to 4,080 can be saved tax-free in 2015-16. 2.2 Gift Aid This is a valuable relief for gifts to charities, where a Gift Aid declaration has been made and the donor has paid sufficient income tax or CGT in the year to cover the tax reclaimed by the charity. The gift is made out of the donor s taxed income and the charity benefits by claiming back basic rate tax on the value of the gift. Higher rate taxpayers can claim extra tax relief of 20% and additional rate taxpayers 25% of the gross value of the gift. For example, if you are a higher rate taxpayer and you make an 80 donation to a charity, the value of the gift to the charity is 100, since it can claim back the basic rate tax of 20. You can claim an additional 20% tax relief on the gross value of the donation, reducing the net cost to 60. In order for a donation to qualify for tax relief, the charity must be located in an EU member state (plus Iceland, Norway and Liechtenstein) and must be recognised as a qualifying charity by HM Revenue & Customs (HMRC). There is no cap on the amount which can qualify for Gift Aid relief, provided sufficient tax has been paid during the tax year to cover the charity s reclaim from HMRC. 4
Try to make any planned Gift Aid donations before the end of the tax year. Ensure that you provide the charity with a Gift Aid declaration, so that both parties can claim the relevant tax relief. You can elect for donations made in one tax year to be treated for tax purposes as made in the prior year. This will be of benefit if you are a higher or additional rate taxpayer in 2015-16, but not in 2016-17. In other cases it will merely accelerate the higher/additional rate relief. The election can only be made when submitting your tax return, which must be filed on time. Certain assets donated to charity (eg shares, land and property) attract tax relief and this is given as a deduction from total income. Additionally, any gain arising on the disposal of such assets is exempt from CGT, and the gift itself is not chargeable to IHT. 2.3 Capital gains tax planning Capital gains above the annual CGT exemption of 11,100 (2015-16) are subject to three different tax rates: 10% if the gains qualify for Entrepreneurs Relief, up to a lifetime limit of 10 million; 18% if the gains fall within the unused basic rate band; and 28% for gains above the basic rate band. Assets transferred between married couples or civil partners do not normally give rise to a CGT charge. Non-domiciled individuals claiming the remittance basis of taxation should take professional advice, as the rules relating to remitted capital gains are complex. The annual exemption will not be available and it may not be possible to claim relief for overseas capital losses. From 6 April 2015, CGT may be payable by non-residents owning UK residential property. If you are a non-domiciled remittance basis taxpayer, you can make a charitable donation from untaxed foreign income, either to a qualifying overseas charity or to the non-uk bank account of a UK charity, and qualify for Gift Aid relief against your UK taxable income. Professional advice should be sought, as this is a complex area. 5
Aim to utilise any unused CGT exemption for 2015-16 by making disposals before 6 April 2016. The annual exemption cannot be carried forward or transferred. Consider transferring assets to your spouse or civil partner, if they have any unused annual exemption or capital losses. Such transfers must be made outright and without preconditions which could limit their efficacy for tax purposes. If you have separated from your spouse or civil partner, assets transferred to them before the end of the tax year of separation (but not thereafter) will be treated as passing on a no gain, no loss basis for tax purposes. Bed and breakfasting shares, by selling and repurchasing them shortly afterwards in order to crystallise gains within the annual exemption, will be ineffective for tax purposes if the repurchase takes place within 30 days. However, bed and spousing, where the sale is made by one spouse or civil partner and the repurchase by the other, is not subject to the 30-day rule. Losses on assets or shares that have become of negligible value can be claimed against gains, without any need for an actual disposal of the loss-producing asset. The timing of a disposal may affect the amount of CGT payable. For example, if you are a basic rate taxpayer in 2015-16 but expect to be a higher rate taxpayer in 2016-17, realising a disposal in 2015-16 so that part or all of any gain falls within the basic rate band will reduce the amount of CGT payable (albeit with a one year acceleration of the tax). Investing in assets which produce capital gains rather than income will result in the profits being taxed at a maximum rate of 28%, as against income tax rates of up to 45%. 2.4 Inheritance tax planning Individuals who are domiciled (or deemed domiciled) in the UK are subject to IHT on their worldwide assets. Non-domiciled individuals are normally subject to IHT on their UK situated assets only. For IHT purposes only, an individual is deemed to be domiciled in the UK if resident here in at least 17 out of the past 20 tax years. These rules can catch individuals who have been in the UK for just over 15 actual years, since split-year residence counts as a full year for the purposes of the 17 out of 20 rule. For example, an individual who became UK resident in March 2001, and who has remained continuously resident since then, will be regarded as deemed domiciled from 6 April 2016. IHT is payable at 40% if a person s assets on death, together with any gifts made during the seven preceding years, total more than the 6
nil rate band (NRB). The NRB is 325,000 for 2015-16 and will be frozen at this level for all years up to and including 2020-21. The NRB can be transferred to a spouse or civil partner, so couples can enjoy a combined NRB of up 650,000 on the second death. The amount transferable is the percentage of the deceased s unused NRB at the time of their death, as applied to the NRB in force at the date of the second death. A new additional NRB will be available in respect of a property which at some point has been the deceased s main residence. The additional NRB will be 100,000 for deaths after 5 April 2017, rising to 175,000 after 5 April 2020. If unused, this relief will also be transferable to the deceased s spouse or civil partner, making the total additional IHT exemption 350,000 for a couple from 6 April 2020. The relief will be tapered where estates are over 2 million in size. Estates over 2.7 million will receive no benefit from the new rules. Consider gifting assets during your lifetime to minimise the IHT payable on your death. Such gifts will fall outside the IHT net after seven years, provided you do not reserve a benefit in the asset transferred. By making a gift now, you can start the seven year IHT clock, and after three years the amount of IHT potentially payable on the gift is tapered. The gifting of assets can give rise to CGT, and may impact upon the donor s lifestyle, so professional advice should always be obtained. Make use of other IHT reliefs and exemptions, such as the annual gifts exemption of 3,000 ( 6,000 if no gifts were made during 2014-15), the small gifts allowance of 250 per donee, and gifts made in consideration of marriage ( 5,000 to children, 2,500 to grandchildren, and 1,000 to anyone else). If you have income surplus to your normal living expenses, consider making use of the IHT exemption for gifts out of income. Such gifts are tax-free, even where death occurs within seven years. Appropriate documentation should be retained to show that the gift is regular, and made from income not required by the donor to cover his or her own living expenses. If a family member has died within the last two years, check whether a deed of variation could reduce any IHT liability arising in respect of their estate, or be used to redirect the assets to where they are most needed. All beneficiaries of the estate must agree to the variation. If you are non-domiciled and will become deemed domiciled for IHT purposes with effect from 6 April 2016, take action now in order to keep your overseas assets outside the IHT net. This may involve setting up an offshore trust to hold non-uk assets. You will become deemed domiciled in the UK 7
on 6 April 2016 if you first became resident here in the 2000-01 tax year and have been continuously resident ever since. A non-domiciled spouse or civil partner can elect to be treated as UK domiciled for IHT purposes. The effect of the election is to allow unlimited IHT-free transfers between spouses/civil partners, both during lifetime and on death. Otherwise, the tax-free amount is limited to 325,000 as regards assets transferred to the party who is non-domiciled. Specific advice should be taken before an election is made, as it will bring within the IHT net any foreign assets owned by the non-domiciled spouse/civil partner. Consider taking out life insurance written under trust to fund any contingent exposure to IHT. Consider increasing bequests to charities to 10% or more of your net estate, which will mean that a reduced IHT rate of 36% applies to the remainder of your estate. A carefully drafted will is essential to ensure that the desired result is achieved. 2.5 Pensions The combination of tax relief on contributions, tax- free growth within the fund, and the ability to take a tax-free lump sum on retirement makes a pension plan an attractive savings vehicle. Saving for retirement should always be considered as part of the year- end tax planning process. This is particularly important for those with annual earnings in excess of 150,000, since from April 2016 the annual pension contributions limit of 40,000 will be reduced by 1 for every 2 of earnings in excess of 150,000. This is subject to a maximum contributions limit of 10,000 for those earning more than 210,000. No tax relief will be available for contributions in excess of this figure. For the current 2015-16 year, contributions to pension funds continue to attract relief at your marginal rate of tax. The lifetime limit for pension savings of 1.25 million will be reduced to 1 million with effect from 6 April 2016. The annual allowance can be carried forward for three tax years. Any unused annual allowance for the three previous years ( 50,000 for 2012-13 and 2013-14 and 40,000 for 2014-15) can be added to your allowance for 2015-16 and will attract full relief. This is subject to the level of pensionable income and your pension input period. If you are 55 or over, new rules were introduced on 6 April 2015 which allow access to your pension fund with no restrictions on the amount you can withdraw. You can draw down the entire pension fund if you choose, although there are tax consequences and you should seek professional advice. Under the new rules, you can take a 25% taxfree lump sum as before. Alternatively you can take 25% of every payment tax-free, with the remainder being taxed at your marginal rate. 8
The 55% tax charge arising on certain lump sum payments out of pension funds as a result of a member s death has been abolished, provided that the payment is made within two years of death and is within the lifetime allowance. This means that pension funds are now normally completely tax-free on death before the age of 75. Beneficiaries can withdraw money from the pension tax-free and there is usually no IHT charge either. For death after age 75, there is still usually no IHT, but beneficiaries inherit the pension and are charged their marginal rate of income tax on any withdrawals they make. Consider making additional contributions to your pension scheme before the end of the tax year to obtain relief at 40% or 45%, depending on whether you are a higher rate or additional rate taxpayer, taking care not to breach your available annual allowance or the lifetime allowance. If you earn between 100,000 and 121,200, tax relief is available at 60% on income falling within this bracket. If you earn over 150,000, consider making additional contributions before new restrictions are introduced on 6 April 2016. Review the availability of any unused allowance for the 2012-13 tax year, as this will expire on 5 April 2016. a spouse, civil partner or child if they have no earnings of their own, to obtain basic rate tax relief on the contributions. For example, if you contribute 2,880, HMRC will pay in 720, giving a gross contribution of 3,600. If you are approaching retirement and are considering drawing benefits from your pension fund, take advice to ensure that you understand the tax implications of accessing your pension fund. If you have sufficient income, consider not drawing your pension and treating it instead as an IHT wrapper. 2.6 Self-assessment: key dates Failure to notify chargeability to tax, to file your tax return and pay any tax due on time, or to file a correct return, may result in penalties. 31 January 2016 Filing deadline for 2014-15 electronic returns. A 100 penalty will arise if your return is not filed by this date, regardless of whether any tax is due. A 100 penalty per partner applies for a late partnership return. Paper returns for 2014-15 not filed by this date will be three months late and may attract a daily penalty of 10 a day for up to 90 days going forward. Consider making contributions of up to 3,600 into a pension scheme for 9
The balance of your 2014-15 tax liability is due for payment on this date, together with the first payment on account of your 2015-16 tax liability. 2 March 2016 The first automatic 5% late payment penalty will apply to any outstanding 2014-15 tax. 5 April 2016 The four-year time limit for certain claims and elections in respect of the 2011-12 tax year expires on this date. 30 April 2016 Paper returns for 2014-15 not received by this date will now be six months late and a further penalty may be charged of 5% of any tax due, or 300 if greater. Electronic returns for 2014-15 not filed by this date will be three months late and so exposed to daily penalties of 10 a day for up to 90 days. 31 July 2016 Due date for the second payment on account for 2015-16. Electronic returns for 2014-15 not filed by this date will now be six months late and a further penalty may be charged of 5% of the tax due, or 300 if greater. 1 August 2016 The second automatic 5% late payment penalty will apply to any outstanding 2014-15 tax. 5 October 2016 If you have not been issued with a return (or a notice to file a return) and you have an income tax or CGT liability for 2015-16, you are required to notify HMRC of your chargeability to tax by 5 October 2016. 31 October 2016 Deadline for submitting 2015-16 paper returns, unless there is no facility available from HMRC to file an electronic tax return, in which case the deadline for a paper return is 31 January 2017. For paper returns filed by this date, HMRC should be able to: Calculate your tax for you; Tell you what you owe by the following 31 January; and Collect tax through your tax code where you owe less than 3,000. If the paper return, which can be submitted electronically, is submitted after this deadline you will charged an automatic 100 penalty. Paper returns for 2014-15 not submitted by this date will now be 12 months late and subject to a further penalty of 5% of the tax due, or 300 if greater. 10
30 December 2016 If you file your tax return online, you must do so by this date if you want HMRC to collect tax through your tax code where you owe less than 3,000. Otherwise, you can file up to 31 January 2017. 31 January 2017 Filing deadline for 2015-16 electronic returns and payment date for balancing tax payment due in respect of 2015-16 and first payment on account due for 2016-17. 1 February 2017 The third automatic 5% late payment penalty will apply to any outstanding 2014-15 tax. 3 Business owners 3.1 Family businesses With the personal allowance now standing at 10,600, it is more beneficial than ever to ensure that family members utilise their allowances to the fullest possible extent. With effect from 6 April 2016, a new tax-free allowance of 5,000 for dividend income will be introduced, but the rate of income tax on dividend income in excess of this allowance will rise. See the table on page 12. Where there is a family company, dividends may represent a tax-efficient form of extracting profits by adult family members. Dividends are taxed at lower rates than employment income and do not attract National Insurance contributions (NICs). However, neither are they tax deductible for corporation tax purposes. If you are a shareholder director, excess profits may be paid out as a dividend or a bonus. Bonuses are taxed at your marginal rate of tax, and will attract both employee and employer NICs. However, these will be deductible for corporation tax purposes. Sole traders Losses made by an unincorporated business in the accounting period ending in the 2015-16 tax year can be offset against your other income of that year and/or the previous year (2014-15), subject to a maximum of 50,000 or 25% of your total income for the 11
Dividends falling within Effective tax rate on dividend received before 5 April 2015 Effective tax rate on dividend received on or after 6 April 2016 Dividend allowance n/a 0% Basic rate 0% 7.5% Higher rate 25% 32.5% Additional rate 30.5% 38.1% year, whichever is greater. Unused losses can be carried forward against future profits of the same trade with no limit. Further options may be available to obtain relief for losses in the early years of a business, or on its cessation. Dividends are only taxed when paid, and as a director you will have some control over payment dates, allowing you to manage both the timing and the size of your personal tax liabilities. Given the forthcoming increase in income tax rates for those receiving dividends in excess of 5000 a year, consider bringing forward the payment of dividends to before 6 April 2016. Extracting profits by way of dividend may result in a lower overall tax and NIC liability than paying a salary or bonus. Consider gifting shares in your family company to your spouse or civil partner, to enable dividends to be paid to them. For 2015-16, dividends falling within the basic rate income tax band will not attract any further tax in the hands of the recipient, and are free of NICs. There could also be CGT advantages in the event of a sale of the company, particularly if the spouse or civil partner will qualify for Entrepreneurs Relief. Any gift must be outright and not just an entitlement to income only. Shares can be gifted to children, but dividends in excess of 100 paid to minor children will be taxed on the donor parent. You may wish to manage the level of your taxable income, and keep it below the 100,000 level at which your personal allowance starts to be withdrawn and an effective marginal tax rate of 60% comes into play. Consider employing a spouse or children, to utilise their personal allowances and provide an NIC record for state pension purposes. The level of salary paid must be commensurate with the duties performed. 12
Pension contributions can also be made on behalf of a spouse or child who you employ. This will save tax and NICs. Contributions should be commercially reasonable. Benefits in kind may also be provided to the employee spouse or child, again provided that they are not excessive in relation to the duties performed. If your business is making losses, consider the implications of the restrictions on setting off such losses against other income. Consider whether a change of accounting date for your unincorporated business will enable you to use any overlap relief arising from the double taxation of your profits in the opening years, before inflation erodes its value. 3.2 Capital expenditure Capital allowances can be claimed on expenditure on certain types of assets used in your business. The Annual Investment Allowance (AIA) is a particularly valuable relief for businesses. Currently, 100% relief is given for expenditure of up to 200,000 per year on most types of plant and machinery and many fixtures in buildings. Be aware that the AIA reduced from 500,000 to 200,000 from 1 January 2016 and there are restrictions on allowances that can be claimed in accounting periods straddling that date. Expenditure above the limit, or not qualifying for the AIA, will generally attract an annual capital allowance of 18% or 8% (depending on the nature of the expenditure) on a reducing balance basis. Certain energy-saving, environmentally beneficial or water-efficient equipment and installations may attract immediate tax relief at 100%. In addition, there are reliefs available for expenditure on qualifying research and development. Seek advice before making any major capital investment, to ensure that you claim the maximum allowances. If you are planning to acquire or refurbish a business property, or to purchase plant or equipment such as heating or ventilation systems, check with the contractor or supplier whether the items you are installing qualify for the increased energy saving allowance. Carefully time the disposal of cars and other equipment. Whether a disposal is made before or after the end of your accounting period may affect the taxable profit for the year. If you are intending to purchase commercial property (including Furnished Holiday Lettings) containing fixtures, seek advice to ensure that the maximum capital allowances are claimed. On purchase, any value attributed to the fixtures must be agreed by a joint election between the seller and the purchaser. 13
3.3 Entrepreneurs Relief Entrepreneurs Relief reduces the rate of CGT from 28%/18% to 10% on qualifying business gains, up to a lifetime limit of 10 million per person. The relief applies to a disposal of shares in a trading company provided that, during the period of one year immediately prior to the disposal, you own at least 5% of the ordinary share capital, are able to exercise at least 5% of the voting rights, and are an officer or employee of the company. The relief can also apply to the disposal of a business or part of a business, and certain assets used in a business, although restrictions may apply if: There is personal use of a business asset; The asset was used in the business for only part of its ownership period; You are not involved in the business throughout the ownership period; or The asset has been rented to the business. Early planning is essential to avoid potential pitfalls, which could result in the loss of this valuable relief. To ensure that the one year ownership requirement is satisfied prior to disposal, planning needs to be carried out well in advance of any sale. Pre-sale restructuring may help to maximise the relief available to a couple who work for and own shares in a family business. For example, transferring shares between spouses or civil partners may create opportunities to increase the relief where one spouse/civil partner owns at least 5% of the shares but the other owns less than 5%. Where shareholders do not meet the qualifying conditions for Entrepreneurs Relief, consider employing non-qualifying shareholders within the company (provided there is a genuine role). If an individual has already used all available relief, it may be possible to give shares to children, perhaps using a trust structure if the donor wishes to retain some control and avoid outright sums being given to the children. The children and trustees will need to meet the conditions to qualify for relief and specialist advice should be sought. Where assets are held jointly by a couple but used in a trade carried out by one spouse only, restructuring may need to be carried out to ensure that the whole asset can qualify for Entrepreneurs Relief. If the property used by the business is owned jointly, but the business is not a joint concern between the same owners, problems can arise in claiming Entrepreneurs Relief on a sale of the property. Specialist advice should be sought. 14
3.4 Business Property Relief Business Property Relief (BPR) can reduce or completely remove the value of a business from the charge to IHT. It applies to both lifetime gifts and on death. Relief is currently available at 100% for a business or shares in an unquoted trading company. Relief at 50% applies to a controlling holding of quoted shares; and to land, buildings, plant and machinery used in a business carried on by the transferor, a partnership of which they are a member, or a company they control. Review whether your business, the assets used in your business, or the shares in your family company, qualify for BPR. Ensure that BPR is not inadvertently lost by leaving assets eligible for the relief to an exempt person, such as a spouse or civil partner. If you own a property that qualifies as a Furnished Holiday Letting, seek advice, as the conditions for BPR are generally more difficult to satisfy. The property must have been owned for at least two years prior to the transfer in order to qualify for relief. If a lifetime gift of property qualifying for BPR was made and the donor dies within seven years of the gift, BPR will only be given on death if the original property is still owned by the donee at the date of the donor s death and still qualifies as relevant business property. Specialist advice should be sought. Shareholders agreements and partnership agreements should be reviewed to ensure that their terms do not preclude BPR. 15
4 Employees 4.1 General planning The amount of tax deducted from your salary depends on your Pay As You Earn (PAYE) code. This code is issued by HMRC and is based on your personal allowances, with appropriate adjustments for any benefits and deductible amounts such as pension contributions. It will be beneficial to advise HMRC of additional reliefs available for the 2015-16 tax year, so that the PAYE code can be amended prior to the year end, thereby accelerating any tax relief due. If you are both employed and self-employed, or have more than one employment, you may be paying excess NICs. You can defer the excess NICs, and should normally apply by 5 April 2016 for deferment in 2016-17. Check your PAYE code to avoid an over or underpayment of tax at the end of the year. Consider taking advantage of any benefits offered by your employer. In many cases, the tax charge will be less than the cost of paying for the item or service out of taxed income. If you hold share options under an approved or unapproved scheme, make sure you understand the tax implications of the scheme and consider carefully the timing of the exercise of the options and the disposal of the shares, to minimise exposure to CGT and/or income tax. 4.2 Cars and fuel The taxable benefit of a company car is calculated by multiplying the list price by a percentage (up to a maximum of 37%) based on the car s CO 2 emissions levels. Making a capital contribution towards the cost of the car will reduce the taxable benefit. Contributions up to 5,000 qualify for relief, so the maximum contribution of 5,000 would save tax of 788 if you are a 45% taxpayer during 2015-16. If your employer also provides you with free fuel for your company car, the tax charge is based on the car s CO 2 emissions. This will be the same percentage used to calculate the taxable car benefit and is applied to a fixed amount of 22,100 in 2015-16, making the tax cost 3,271 if you are a higher rate (40%) taxpayer driving a company car attracting the maximum percentage. If you are a 45% taxpayer in 2015-16, the maximum fuel benefit will result in a tax cost of 3,680. If you are provided with a company van and use it for private journeys, the basic benefit on which tax is charged is 3,150 for 2015-16, plus 594 if free fuel is provided for private journeys. 16
If you use your own car for business purposes, you can be paid a tax-free mileage allowance provided it does not exceed the following limits: 45p per mile for up to 10,000 business miles. 25p per mile for each additional mile over 10,000. Extra 5p for each work passenger making the same trip. If you use your own bicycle or motorcycle for business journeys, you can receive a tax-free mileage allowance of 20p per mile (bicycles) and 24p per mile (motorcycles). Consider switching to a company car with low CO 2 emissions for significant tax savings. Consider making a capital contribution towards the cost of the car to reduce your taxable benefit. Consider whether you are better off owning your car personally and claiming an allowance for your business mileage. If you receive fuel benefit, work out the amount you would spend on private fuel and compare this to the tax cost of the benefit to ensure it is worth receiving the benefit. If you reimburse your employer the full cost of all fuel used for private journeys, there will be no benefit in kind tax charge for the fuel. If you use your own car for business purposes and the rates at which your employer reimburses you are lower than the authorised rates, you can claim the difference as a deduction in your tax return. 4.3 Other benefits in kind Some benefits have no tax or National Insurance cost, including work-related training, health screening, interest-free loans of up to 10,000 and small weekly contributions by your employer towards the cost of working from home. Childcare Places in employer-provided workplace nurseries are fully exempt from tax and NICs. Alternatively, the employer can provide childcare support, either by making payments directly to the childcare provider or by providing vouchers. If you joined the scheme after 6 April 2011, the current level of tax relief is restricted to the basic rate of 20%. If you are a 40% taxpayer you will be able to receive 28 of vouchers tax-free per week. A 45% taxpayer can receive up to 25 per week tax-free. The government had planned to replace the existing scheme with a new scheme from October 2015, but its introduction has been delayed until early 2017. The new scheme will give tax-free top-ups on payments made by parents towards childcare costs, up to a maximum of 2,000 per year per child. More information was provided in the 2015 Autumn Statement, which confirmed that parents 17
earning over 100,000 per annum would not qualify for childcare vouchers under the new scheme. In addition, both parents must be working the equivalent of 16 hours a week or more. If you are already within a voucher scheme, you will have the choice of remaining in it or switching to the new scheme. Parents earning between 100,000 and 150,000 will be better off under the existing scheme and should therefore ensure they are registered ahead of the introduction of tax-free childcare. Tax-free loans Employers can provide employees with interest-free loans of up to 10,000 without a taxable benefit arising. If the loan balance exceeds 10,000 at any point in a tax year, tax is chargeable on the difference between the interest paid and the interest due at an official rate (3% for 2015-16). Consider taking advantage of any benefits offered by your employer. In many cases, the tax charge will be less than the cost of paying for the item or service out of taxed income. Review the balance of any employerprovided loans to ensure that the 10,000 limit has not been breached at any time during the year. 5 Property 5.1 Letting property Profits from a rental business are subject to income tax at your marginal rate of tax. Expenses incurred wholly and exclusively in connection with the rental business are deductible when calculating net taxable profits, provided they are not capital in nature. This currently includes interest on loans used to acquire property. However, from 6 April 2017 deductions for finance costs will be restricted, ultimately to the basic rate only. The new rule will not apply to companies, Furnished Holiday Letting businesses and commercial properties. The rules for determining whether an expense is capital or revenue in nature for tax purposes are not always straightforward, particularly in relation to expenditure incurred on repairs and maintenance. Capital expenditure is usually deductible against the capital gain on an eventual disposal of the property. For fully furnished properties, an annual wear and tear allowance is currently available to cover the costs of depreciation of the furniture and furnishings provided. This is calculated as 10% of the gross rental income, less any costs borne by the landlord (eg buildings insurance and ground rents). 18
The wear and tear allowance is to be removed with effect from April 2016 and thereafter you will be permitted to deduct the actual cost of renewing furnishings instead. From 6 April 2016 there will also be changes to the taxation of income received from renting out a room or rooms in an individual s only or main residence. The level of Rent a Room relief will increase from 4,250 to 7,500 per year, leading to an additional tax saving of 1,300 for higher rate taxpayers. Where the landlord is not resident in the UK, see page 27 for more information on UK property investment for non-residents. From April 2016, an incremental Stamp Duty Land Tax (SDLT) charge will apply to the purchase of additional properties for more than 40,000. This will include second homes and buy-to-let properties, taking the maximum marginal rate for a high value property to 15% and possibly 18% if the property is held within a company and none of the exemptions apply. The government will consult on the policy details, but the Treasury has confirmed that the new tax charge will not apply to developers or funds making significant investments in residential property. Ensure you keep a record of all relevant expenses, so that they can be claimed against your rental income or offset when the property is sold. For fully furnished property, consider deferring expenditure on replacing furnishings until after 5 April 2016, so that you can obtain tax relief on a renewals basis once the wear and tear allowance is abolished. Ensure that any losses are claimed, so that they can be carried forward and offset against future profits from the same rental business. If you let a furnished room in your home to a lodger and your gross rental income exceeds 4,250 for the year ( 7,500 from 6 April 2016), calculate whether it is more tax efficient for the excess to be charged to tax, or for you to pay tax on your rental profits after deduction of expenses in the usual way. You can elect for whichever method produces the lowest tax liability. If you are planning to purchase a buy-tolet or a second property, consider bringing forward the purchase to ensure that contracts are exchanged prior to 6 April 2016. 19
5.2 Principal Private Residence relief Principal Private Residence (PPR) relief reduces the gain on the sale of your main home, usually to nil, thus avoiding a charge to CGT. The relief applies for the period of time that the property is occupied as your main home. The whole of the property should qualify, including land up to half a hectare, or potentially more if it is appropriate for the reasonable enjoyment of the property. If you own more than one home, whether solely or jointly with your spouse or civil partner, you may be able to make a PPR election stating which property should be treated as your main home for CGT purposes. The election must be submitted to HMRC within two years of another property being available for occupation as a residence. If a property qualifies for PPR relief, any period during which it was let will qualify for a letting exemption, up to a maximum of 40,000. The last 18 months of ownership will qualify as a period of deemed owner occupation. This is increased to 36 months for disabled persons or individuals moving into a care home for more than three months, and for the spouses or civil partners of such persons. From 6 April 2015, a second home overseas will only be capable of being nominated as a main residence for the purposes of PPR relief for any given year where the individual is either resident in the same jurisdiction as the property or the individual (or their spouse/civil partner) resided in the property for at least 90 midnights in that tax year. Ensure that any claim for PPR relief will stand up to scrutiny, particularly if you have owned or occupied the property for a relatively short period of time. If you acquired a second property in the UK within the last two years, and it is available for your use as a residence, ensure that you make an election to nominate which of the two properties is to be regarded as your main residence for CGT purposes. Once the election has been made, it can be varied at any time (but only back-dated by two years). Couples should consider jointly owning property for which no PPR election can be made, to benefit from two annual exemptions and/or lower rates of CGT when the property is sold. If you have sold a property that was once your main home and has also been let out for a period of time, ensure that a claim for lettings relief is made. If a property has been sold by trustees and it was occupied by a beneficiary as their home, check whether PPR relief is available. If you own a second home overseas, check whether it will continue to qualify for PPR relief under the new rules introduced from 6 April 2015. 20
5.3 Furnished Holiday Lettings A property that qualifies as a Furnished Holiday Letting (FHL) can benefit from various tax reliefs. To qualify as an FHL, the property must be furnished, located in the UK or another EEA country, and let on a commercial basis with a view to realising profits. It must also satisfy the following tests: Availability test The property must be available for letting to the public (not family or friends) for at least 210 days per tax year. Occupation by the owner or family and friends is ignored for these purposes. Letting test The property must actually be let to the public for 105 days or more per tax year, excluding periods of continuous occupation by the same person for more than 31 days. Pattern of occupation test The property must not normally be let for periods of long-term occupation totalling more than 155 days per tax year. A period of long-term occupation is one where the property is let to the same person for more than 31 days. Provided the total periods of long-term occupation do not exceed the 155 day limit, the property will still qualify. Capital allowances can be claimed for expenditure on furniture, fittings and equipment, including immediate relief on qualifying expenditure of up to 200,000 (from 1 January 2016) under the Annual Investment Allowance (AIA). Certain allowable expenses can be offset against the rental income in calculating the net taxable profits. See the letting property section on page 18 for more information. Losses must be claimed and can only be carried forward against FHL profits in future years. UK FHLs are treated as separate businesses from FHLs in EEA countries. If your FHL property was not let for the requisite 105 days in 2015-16, but satisfies the other conditions, you may still be able to secure the tax reliefs available if you elect for a grace period to apply and provided certain other conditions are satisfied. Alternatively, if you have more than one qualifying property and one property does not meet the occupancy test of 105 days on its own, but the average occupancy of all the FHL properties is above 105 days, all properties will qualify. An averaging election must be made within the relevant time frame. Check whether any capital expenditure qualifies for the AIA. 21
If you are considering buying an FHL property containing fixtures, it may be appropriate to make a joint election with the vendor to agree the value attributable to the fixtures, so that capital allowances can be claimed going forward. For CGT purposes, the disposal of an FHL is treated as the disposal of a business asset, and can be rolled over against the acquisition of replacement assets, or benefit from Entrepreneurs Relief. See the letting property top tips on page 19 for more information. 5.4 Annual Tax on Enveloped Dwellings The Annual Tax on Enveloped Dwellings (ATED) is a tax on residential property worth more than 1 million (as at 1 April 2012) and owned by a non-natural person. The threshold at which the ATED charge applies is set to reduce to 500,000 from 1 April 2016. A non-natural person is defined as a company, a partnership that has a corporate partner or member, or a collective investment scheme. It does not include trusts. Valuable reliefs from the ATED regime can be claimed in certain circumstances, including for property development, rentals to unconnected persons, and trading businesses. The first valuation date was 1 April 2012 (unless acquired after this date) and the value of the property at this date is retained for five years (ie it determines the charge from 2013 to 2017). The next ATED valuation date will be 1 April 2017, and will determine the tax payable for the years 2018 to 2022. Gains realised on the disposal of a property within the charge to ATED are liable to ATEDrelated CGT at a rate of 28%. The ATED charges for 2015-16 are shown in the table below: Property value ATED charge 2015-16 Less than 500,000 More than 500,000 but not more than 1 million Nil Nil More than 1 million but not more than 2 million 7,000 More than 2 million but not more than 5 million 23,350 More than 5 million but not more than 10 million 54,450 More than 10 million but not more than 20 million 109,050 More than 20 million 218,200 22
ATED returns are filed annually, but the first ATED return, where there is an acquisition of property, is due within 30 days of the acquisition. Reliefs from ATED must be claimed by submitting an ATED return. Penalties will be charged for late filing of the return, even if there is no ATED liability. More properties will come within the ATED charge as a result of the reduced thresholds, so you should consider whether it is appropriate to carry out any restructuring. Care should be taken, as this could lead to other tax liabilities, either at the time of restructuring or in the future. If you are considering purchasing UK residential property worth more than 500,000 through a holding structure, check whether the new rules will apply and whether any reliefs are available. It may be necessary to file amended ATED returns if there has been a change of use of the property. Again, penalties will be charged for late filing. 6 Overseas 6.1 Residence The Statutory Residence Test (SRT) was introduced with effect from 6 April 2013. Whilst it provides individuals with some certainty in relation to their UK residence status, the rules are complex and you will need to consider very carefully how each aspect of the test might apply to your personal circumstances. There are many aspects where further guidance will undoubtedly be required. There are three main parts to the test, which need to be applied in the following order: 1. Automatic overseas tests (ie the automatic tests for non- residence). 2. Automatic UK tests (ie the automatic tests for UK residence). 3. Sufficient ties tests (ie ongoing ties to the UK). The first two tests are based on day count, employment status (abroad or in the UK) and where you have your only or main home. The third test (the sufficient ties test) determines your residence status by looking at a combination of physical presence and the number of connections (ties) you have with the UK, such as whether your family lives in the UK or whether you have accommodation in the UK. You are considered to have spent a day in the UK if present at the end of the day. This is subject to special rules for individuals who may 23
be deemed to be in the UK, are in transit, or whose presence is due to certain exceptional circumstances. You should seek professional advice on your residency position, as the rules are complex. If you were non-resident for 2014-15, or if you left the UK during 2014-15, you will need to ensure that you satisfy the tests to remain non-resident under the SRT. You should review your visits to the UK and the number of ties you have with the UK, to ensure that you are not treated as UK resident in 2015-16. If you intend to leave the UK during 2016-17, start planning now. Ensure that you take appropriate steps to be regarded as non-resident under the SRT. This may involve minimising the number of ties you have with the UK or reducing your planned return visits. Ensure that you are aware of the maximum number of days you can spend in the UK without triggering residence. If you are leaving the UK, it may be appropriate to delay realising capital gains until after your departure date. You may qualify for split-year treatment, and any gains made during your period of non-residence will be outside the CGT net, provided you do not return to the UK within five years. The timing of any such disposals should be planned carefully, because if the CGT rate in your new country of residence is higher than the rate of CGT payable in the UK, you may wish to realise any capital gains before your move overseas. Similarly, if you are planning to move to the UK, ensure that you allow sufficient time for pre-arrival tax planning to be carried out well in advance of acquiring UK residence. If you have come to work in the UK, you are non-domiciled, and you were nonresident in the three years prior to taking up employment here, earnings relating to non-uk workdays may be exempted from UK tax under the overseas workdays provisions. If you are planning to work full-time abroad for a period of at least one year, you may be able to establish nonresidence in the UK for the duration of your employment overseas. When leaving or arriving in the UK, consideration should also be given to the tax regime in the other country. If you are non-resident with UK source income, UK tax may be due. This will depend on the nature and amount of the income. 24