As the end of another tax year approaches, we are writing with a summary of tax planning ideas which may be of interest to you.
Please call if you would like to discuss anything mentioned in this document, with a view to taking action before 6 April 2018 as we would be delighted to help.
Tax-free allowances on property and trading income
From 6 April 2017, you can get up to £1,000 a year in tax-free allowances for property or trading income. If you have both types of income, you’ll get a £1,000 allowance for each. You can still voluntarily register to pay Class 2 National Insurance.
You must keep a record of this income.
Property allowance
If you own a property jointly with others, you’re each eligible for the £1,000 allowance against your share of the gross rental income. You can’t claim the allowance on income from letting your own home under the Rent a Room Scheme.
Rent a Room Scheme
The Rent a Room Scheme lets you earn up to £7,500 per year tax-free from letting out furnished accommodation in your home. This is halved if you share the income with your partner or someone else.
Trading allowance
The trading allowance is a tax exemption of up to £1,000 a year for individuals with income from self-employment (but not a partnership), casual services (for example, babysitting or gardening), or hiring personal equipment such as power tools.
Personal allowance
The income tax-free personal allowance increased to £11,500 on 6 April 2017 and rises again to £11,850 on 6 April 2018. The basic rate threshold rose to £33,500 on 6 April 2017 and increases to £34,500 on 6 April 2018.
This means that you can earn £45,000 in the tax year ending 5 April 2018, whilst remaining a basic rate taxpayer, with this threshold rising to £46,350 for the year ending 5 April 2019. The £100,000 threshold remains in place with the personal allowance tapering away by £1 for every £2 over the £100,000.
Steps should be taken to reduce taxable income between £100,000 and £123,000 for the year ending 5 April 2018 year (£100,000 and £123,700 for the year ending 5 April 2019) as an effective hybrid rate of tax of 60% will be paid on income falling between these amounts.
Taxable income and tax liabilities can be reduced by using ISA allowances, making contributions to pensions or charities, restructuring investments, for instance between married couples/civil partners, and electing to use capital yielding assets which attract the lower capital gains tax rates.
If you are not domiciled in the UK and choose to use the remittance basis you will not normally qualify for the tax-free personal allowance. The rules are complex and you should seek advice regarding this.
Dividend income
Since 6 April 2016, the dividend allowance means that all taxpayers can receive up to £5,000 of dividends tax-free in addition to their personal income tax allowance. Taxpayers will then pay tax on dividends above this allowance at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers.
This allowance will however fall to £2,000 from 6 April 2018 so business owners should review their dividend payments in this year to see whether or not this can be used to advantage.
Although some dividend is tax free, it does still count in determining whether you breach higher rate thresholds.
Foreign dividends are covered by the dividend allowance if you are filing on the arising basis of taxation but are not covered if they are ‘remitted to the UK’ and being taxed on the remittance basis.
Married couples and civil partners may like to maximise the use of the allowance by sharing investments bearing dividends between them. There may be tax benefits in switching the weight of income and capital investments depending on the level of income.
Personal savings allowance
The personal savings allowance introduced in the 2016 tax year continues. This allows basic rate taxpayers £1,000 of interest tax-free, while for higher rate taxpayers the figure is £500. Additional rate taxpayers cannot benefit from this allowance.
Foreign interest does fall within the personal savings allowance unless the income is being taxed on the remittance basis.
Married couples and civil partners may like to maximise the use of the allowance by sharing investments bearing interest in a beneficial manner.
ISA allowances
The ISA allowance continues at £20,000 per person per year. Junior ISAs and Child Trust Funds have a limit of £4,128 per person per year.
A taxpayer can make full use of the ISA allowance before 5 April 2018 and, if they use the 2019 tax year allowance early in April 2018, can effectively move up to £40,000 each into a tax-efficient savings pot.
Moving investments into an ISA can help taxpayers to offset the recent rises in tax rates on dividends and the imminent fall in the dividend allowance.
It should be noted that ISAs are not generally IHT-free.
If you move abroad and are not resident in the UK you cannot open a new ISA or put money into any existing ISAs. However, you can keep any existing ISAs open and receive UK tax relief on money and investments held in the ISA.
Marriage allowance
From 6 April 2016, married couples and civil partners who are non or basic rate taxpayers are able to transfer 10% of their personal allowance from the lower-earning partner to the higher earner. In the 2018 tax year this equates to £1,150 of allowance, saving up to £230 in tax, rising to £1,185 in the year ending 5 April 2019 which will save £237 in tax.
Pension contributions
Tax relief is available for those making gross pension contributions up to £40,000 each year. However, from 6 April 2016, the allowance is tapered for those whose income exceeds £150,000, being reduced at the rate of £1 for every £2 of excess income, until the allowance reaches £10,000 for those with an income of £210,000 or more.
Unused relief can be carried forward for three years, so those with unused relief from the years ended 5 April 2015, 2016 and 2017 tax years may be able to make use of that before 6 April 2018.
If a pension pot is accessed flexibly then the money purchase annual allowance rules could be triggered, restricting the money purchase annual allowance to £10,000.
Those with taxable income between £100,000 and £123,000 (£123,700 in the 2019 tax year) who are taxed at an effective rate of 60% due to the loss of the personal tax allowance can benefit from enhanced tax relief on their pension contributions. We will be delighted to prepare computations to show you the tax savings you could make.
Since pensions have become significantly more flexible, they can also assist with inheritance tax planning.
If you are non-resident in the UK you may be able to receive tax relief on contributions up to £3,600 or 100% of UK taxable earnings if greater. The rules are complex and it is essential to take specialist pensions advice.
Changes affecting residential landlords
April 2016 saw the introduction of Replacement Furniture Relief, which allows a deduction based on the actual costs of replacing furnishings (the cost to buy the original item is not allowable). The relief is available to all residential landlords whether the property is furnished, partly furnished or unfurnished.
From 6 April 2017, the tax relief available on finance costs for landlords who are higher/additional rate taxpayers has been restricted. Landlords are no longer able to claim all of their mortgage interest as a deduction against property income. This is being phased in over a number of years at the rate of 25% per year. By 2020 higher rate taxpayers will only be entitled to tax relief up to the basic rate of tax on the interest they incur against buy-to-let income. Married couples and civil partners may like to maximise the use of the allowance by sharing property investments in a beneficial manner.
For many, careful planning will be needed because the rule change results in an increase in taxable income for individuals renting property, with some who are used to being basic rate taxpayers becoming higher rate taxpayers because of the rule change. The rule change can also have a knock-on effect on child benefit and personal allowance entitlements, as well as claims for state benefits.
Stamp duty land tax on residential property
Landlords and second-home owners continue to be charged an additional 3% in stamp duty land tax (SDLT) for second properties. Companies and some trusts are also affected by the additional rate.
In certain circumstances it is necessary to aggregate more than one person’s interests in residential properties to determine whether or not the additional rate applies (e.g. husbands and wives) as well as taking account of interests held by the same person in different capacities.
Where more than one residential property is being acquired or where the property being acquired is a mixture of residential and non-residential it is possible that a lower rate of SDLT is payable. Given the complexity of the rules these days it is important to seek SDLT advice in relation to transactions that previously would have been a matter of a simple and SDLT calculation and return.
Careful advance consideration of the SDLT position is therefore required, whereas previously it was not.
Enterprise investment scheme
Enterprise investment scheme (EIS) and seed-EIS (SEIS) investments offer income tax relief at 30% and 50%, respectively. They also provide the opportunity to defer capital gains tax in the case of EIS, and in the case of SEIS partially exempt the tax on capital gains.
Non-domiciled individuals
Individuals living in the UK who are not UK domiciled have had to deal with significant changes in the tax rules applying to them from April 2017. If you are not UK domiciled, or if you have acquired a domicile choice outside the UK and have returned or are thinking of returning to the UK, please let us know so that we may discuss this with you. There could be considerable income tax, capital gains tax and inheritance tax issues to think through.
Capital gains tax
The capital gains tax rates payable on the sales of assets (except for residential property) stand at 10% for basic rate taxpayers and 20% for higher rate taxpayers from 6 April 2016. Capital gains on the sale of residential property remain chargeable at 18% for basic rate taxpayers and 28% for higher rate taxpayers.
Hybrid rates apply where part of the gain is taxed at the lower rate and part at the higher rate. These rates are to stay fixed until at least 5 April 2019.
The capital gains tax annual exemption increased to £11,300 for the current tax year ending 5 April 2018, and rises to £11,700 from 6 April 2018.
If you are not domiciled in the UK and choose to use the remittance basis you will not normally qualify for the capital gains tax annual exemption. The rules are complex and you should seek advice regarding this.
It can be worth couples considering transferring shares in assets between them to save tax.
Inheritance tax
IHT is now a complex tax and advice is essential.
From April 2017, the new inheritance tax (IHT) residence nil rate band (RNRB) became available for the first time when calculating the IHT liability when someone dies. The primary purpose of this is to allow more parents to pass on their home or some of its value, to their direct descendants, without paying inheritance tax. The RNRB can also be utilised when downsizing or if a house sold on a move into care.
Over time, the estates of couples who are able to benefit fully from the new RNRB will have a total IHT-free allowance of £1 million, however, there are a number of traps which can prevent the RNRB from applying. For instance, where an individual’s estate exceeds £2 million in value there is a tapered withdrawal of the RNRB at a rate of £1 for every £2 over this threshold.
The amount of the RNRB available in the 2018 tax year is £100,000, rising by £25,000 per year until it reaches £175,000. The nil rate band is frozen at £325,000 during this period.
Any unused RNRB can be transferred from the first married/civil partner to die to be used by the surviving married/civil partner’s estate, subject to the necessary conditions and estate valuation.
Careful planning and record keeping will be required and wills will need to be reviewed, to ensure that this relief can be claimed. Please make sure you contact us if you would like to create a plan to reduce or reorganise your estate to a more IHT-friendly position.
Offshore assets: requirement to correct
HMRC has recently introduced new legislation called the Requirement to Correct. This requires UK taxpayers to make sure that all income tax, capital gains tax and inheritance tax due on foreign assets have been declared to HMRC before the 30th September 2018. From the 1st October 2018, substantially higher penalties will apply for those who have failed to pay all the tax due on their foreign income and assets. These penalties will start at 200% of the tax due. If you are concerned that you haven’t told HMRC about foreign income or assets, or that you have transferred UK income abroad without paying the UK tax on it, you should contact us as soon as possible.
National Insurance Contributions
We encourage our clients to activate their digital tax accounts with HMRC, so that they can review their National Insurance Contribution (NIC) record, and decide if they wish to make a voluntary payment. To qualify at all for the state pension, it is necessary to have made 10 years of NI payments. If you have worked in the EU then contributions made in other EU countries may count towards the 10 years needed.
If you are short of qualifying contributions then you may be able to top up certain years before the end of March 2018, which could ensure that you receive a higher state pension upon retirement.