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Gifts and Inheritance Tax reliefs and exemptions

Thursday, January 26th, 2017

There’s usually no Inheritance Tax to pay on small gifts you make out of your normal income, such as Christmas or birthday presents. These are known as ‘exempted gifts’.

There’s also no Inheritance Tax to pay on gifts between spouses or civil partners. You can give them as much as you like during your lifetime – as long as they live in the UK permanently.

Other gifts count towards the value of your estate. There may be Inheritance Tax to pay if you’ve given away more than £325,000, but only if you die within 7 years.

Inheritance Tax on gifts is paid by the person who received the gift (the ‘beneficiary’) – not the estate.

What counts as a gift?

A gift can be:

  • anything that has a value, such as money, property, possessions
  • a loss in value when something’s transferred, for example if you sell your house to your child for less than its worth, the difference in value counts as a gift

Exempted gifts

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – you must still be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

The 7-year rule

If there’s Inheritance Tax to pay, it’s charged at 40% on gifts given in the 3 years before you die.

Gifts made 3 to 7 years before your death are taxed on a sliding scale known as ‘taper relief’, however, gifts are not counted towards the value of your estate after 7 years.

New Lifetime ISA available from April 2017

Tuesday, January 24th, 2017

The Lifetime ISA will be available for young adults from April 2017 as the Savings (Government Contributions) Bill receives Royal Assent. The Help to Save scheme to help people on low incomes will be available from 2018.

The Lifetime ISA, available from 6 April 2017, can be accessed to put towards a first home or once the account holder turns 60. Under this savings scheme, adults under 40 years of age will be able to save up to £4,000 a year, with the government giving them a 25% top up on their savings.

Help to Save, which will follow the Lifetime ISA in 2018, is aimed at supporting people on low incomes to build up their savings. It carries a 50% government bonus on savings up to £50 a month for up to four years. Help to Save will be available through NS&I to any adult who is receiving working tax credit, or Universal Credit with minimum household earnings equivalent to 16 hours a week at the National Living Wage.

To encourage people to save as much as they can, the bonus will be based on the highest balance achieved in the account, not the standing balance. Roughly four million people could benefit from this new scheme.

  • Help to Save example – Saving the full £50 a month for two years would mean a bonus of £600 on £1,200 of savings – and continuing to save the maximum amount for a further two years would mean another £600 bonus.
  • Lifetime ISA example – Savers will be able to contribute up to £4,000 every year and receive a bonus of up to £1,000 – they can withdraw the savings including the bonus to put towards a first home, or leave them in the account, getting tax-free investment growth, until they reach 60.
  • for 2017-18 only, savers will be able to transfer Help to Buy: ISA savings into a Lifetime ISA without them counting towards the £4,000 contribution limit

Reminders of significant tax changes from April 2017

Thursday, January 19th, 2017

The first thing you can count on, is that taxation is here to stay. The second thing you can count on is that the tax rules will continue to change to meet the changing needs of our government to recover funds from the economy and restart the cycle of public expenditure that maintain services and oil the wheels of government.

Apart from increases in the basic personal tax allowance – from £11,000 to £11,500 – there are a number of key changes in tax legislation that it may be prudent to revisit before the start of the new tax year, from 6 April 2017. The following list is not exhaustive, but it does include a few of the significant changes:

  • Employees that want to reimburse their employers for the value of certain benefits, will need to make good their payments by the 6 July following the end of the relevant tax year.
  • From 6 April 2017, non-UK domiciled individuals resident in the UK in at least 15 of the past 20 years will be considered UK domiciled for income tax, capital gains tax and inheritance tax purposes. As part of the introduction of this change, non-doms will be able to revalue assets held outside the UK, for CGT purposes, as if they had been acquired on 6 April 2017.
  • The VAT Flat Rate Scheme is undergoing a significant change from 6 April 2017. Essentially, traders registered under the scheme, who have low levels of cost on which they have paid VAT, may be required to use a fixed Flat Rate Scheme rate of 16.5%. For many traders this may make continued registration under the scheme less attractive. Readers who already use this scheme should take professional advice to see if they are affected.
  • From 6 April 2017, landlords who are paying significant loan or mortgage interest payments will start to lose higher rate tax relief on these payments. The full impact of this change will not be completed for four years, but all landlords who have borrowed heavily to expand their rental portfolio should take advice; firstly, to see how they will be affected, and secondly, to see what strategies can be employed to offset the effects of higher taxation and reductions in available cash flow from their property businesses.

Readers who have concerns about any of the issues raised are welcome to call for further advice.

Affected by severe weather or flooding

Tuesday, January 17th, 2017

It is unfortunate that HMRC have designated the 31 January as the filing deadline for self-assessment purposes as we are more likely to be adversely affected by extreme weather events at this time of the year.

There are not many businesses that can continue to trade if their premises, equipment or stock have been affected by severe weather, particularly flooding.

How do you manage your cash flow if your business records are destroyed or if you are unable to use stock or equipment ruined by water damage?

Readers affected will take some comfort from a recent announcement by HMRC. They have set up a helpline where you can get practical advice and help on tax issues you may be experiencing as a direct or indirect result of severe weather. HMRC will also:

  • agree instalment arrangements where taxpayers are unable to pay as a result of severe weather or flooding
  • agree a practical approach when individuals and businesses have lost vital records as a result of severe weather or flooding
  • suspend debt collection proceedings for those affected by severe weather or flooding
  • cancel penalties when the taxpayer has missed statutory deadlines

The helpline is 0800 904 7900. The line is open seven days a week: Monday to Friday 8am to 8pm, and weekends 8am to 4pm. The line will not be open bank holidays.

When do you need to register for self-assessment

Thursday, January 12th, 2017

We are fast approaching the end of the 2015-16 tax return filing period – returns for this year should be filed electronically by 31 January 2017.

If you are not registered for self-assessment you may be wondering if you should consider registering for 2016-17. We have listed below HMRC’s list of who should be submitting a tax return:

  • you were self-employed – you can deduct allowable expenses
  • you got £2,500 or more in untaxed income, for example from renting out a property or savings and investments – contact the helpline if it was less than £2,500
  • your savings or investment income was £10,000 or more before tax
  • you made profits from selling things like shares, a second home or other chargeable assets and need to pay Capital Gains Tax
  • you were a company director – unless it was for a non-profit organisation (such as a charity) and you didn’t get any pay or benefits, like a company car
  • your income (or your partner’s) was over £50,000 and one of you claimed Child Benefit
  • you had income from abroad that you needed to pay tax on
  • you lived abroad and had a UK income
  • you got dividends from shares and you’re a higher or additional rate taxpayer – but if you don’t need to send a return for any other reason, contact the helpline instead
  • your income was over £100,000
  • you were a trustee of a trust or registered pension scheme
  • you had a P800 from HMRC saying you didn’t pay enough tax last year – and you didn’t pay what you owe through your tax code or with a voluntary payment

Certain other people may need to send a return (for example religious ministers or Lloyd’s underwriters) – you can check whether you need to. You usually won’t need to send a return if your only income is from your wages or pension.

Once registered, you must file your return even if you have no tax to pay. There are penalties payable if you are required to file a return and do not do so by the required filing deadline. The deadline to file a 2016-17 tax return will be 31 January 2018.

More funding available to rural businesses

Tuesday, January 10th, 2017

£120 million of funding is to be made available to support farmers, grow businesses, and generate thousands of jobs in rural communities. This announcement was made by the Environment Secretary, Andrea Leadsom, earlier this month at the Oxford Farming Conference. Funding to be released will include further support for the following types of project:

  • Rural and farm businesses will soon be able to apply for the next round of the Rural Development Programme for England (RDPE) Growth Programme, which will help new businesses get off the ground and support existing companies to grow, develop new products and access new export markets.
  • Funding has already benefited dozens of businesses across England, including the Biddenden fruit handling company in Kent, which received £70,000 to install new equipment – leading to two new products and three new jobs – and Carvannel Free Range Dairy Ltd in Cornwall, which received over £80,000 to diversify their business and develop a new milk processing factory.

Speaking after the Oxford Farming Conference, Environment Secretary Andrea Leadsom said:

A quarter of England’s businesses are based in the countryside and this funding will give rural start-ups, family-run businesses and farmers looking to diversify the boost they need.

The RDPE has already supported a range of projects, from installing cutting-edge equipment to restoring flood plains, and the next round will help create more jobs, sell more products and help us access new markets.

As well as boosting businesses and creating jobs, past RDPE projects have benefited the natural environment – with money granted to Dovecote Farm in Northants helping restore flood-plain meadows and grassland along the Nene Valley, while supporting species like otters.

Confirmation of next steps for the RDPE follows the Chancellor’s recent guarantee on supporting projects signed before we leave the EU, providing they are good value for money and are in line with domestic strategic priorities.

The £120 million fund will sit alongside recently announced funding for other RDPE projects, including woodland creation and a flood action facilitation fund.

Tax return deadline at the end of this month

Thursday, January 5th, 2017

If you are required to file a tax return for 2015-16, and have not yet done so, you have until 31 January 2017 to complete the online filing process before automatic fines and possible penalties will be applied.

Readers may be amused by the following excuses made by tax payers who have previously filed late returns.

These included:

  1. “My tax return was on my yacht…which caught fire”
  2. “A wasp in my car caused me to have an accident and my tax return, which was inside, was destroyed”
  3. “My wife helps me with my tax return, but she had a headache for ten days”
  4. “My dog ate my tax return…and all of the reminders”
  5. “I couldn’t complete my tax return, because my husband left me and took our accountant with him. I am currently trying to find a new accountant”
  6. “My child scribbled all over the tax return, so I wasn’t able to send it back”
  7. “I work for myself, but a colleague borrowed my tax return to photocopy it and lost it”
  8. “My husband told me the deadline was the 31 March”
  9. “My internet connection failed”
  10. “The postman doesn’t deliver to my house”

The reasons above were all used in unsuccessful appeals against HMRC penalties for late returns.

HMRC will treat those with genuine excuses leniently, as they focus penalties on those who persistently fail to complete their tax returns and are deliberate tax evaders. This remains the case, although the excuse must be genuine and HMRC might ask for evidence. The ten excuses listed above were all declined on the basis that they were either untrue or not good enough reasons for late filing.

Two items on our watch list for 2017

Wednesday, January 4th, 2017

Whilst it is never easy to double guess future changes in our tax system there are already changes afoot, some included in past legislation, and some promised by prior announcement.

Two items are worthy of a new year’s underline.

Firstly, buy to let landlords that have borrowed heavily to build their rental property portfolio should consider the effects of the gradual reduction in higher rate tax relief, applied to finance charges, that starts April 2017. The tax change will progressively disallow any deduction of finance charges from your rental profits and replace it with a 20% basic rate tax credit. This change, as intimated, will tend to affect those who have leveraged any equity in their properties to increase borrowing in order to buy more properties.

There is no simple border line beyond which more tax will be payable. Each landlord’s affairs will need to be examined in detail. An in-depth review before April 2017 is probably advisable.

Secondly, HMRC have indicated that they are going to introduce the next stage in their attempt to “Make tax digital” from April 2018. From this date, self-employed businesses (including property rental businesses), with profits in excess of lower limit – at present this is mooted to be £10,000 – will be required to keep their accounting records in an electronic format and upload summarised data to HMRC each quarter.

It is intended that this will replace the necessity to file an annual tax return as all your income will be pushed to your online digital tax account at HMRC.

This is a wide ranging change in the taxation of the self-employed and its scope will be rolled out to include VAT accounting and limited companies in following years.

Whilst there is no absolute certainty that HMRC’s Making Tax Digital aspirations will proceed as announced, business owners would be wise to consider their options during the coming year as the i’s and t’s are dotted and crossed. In particular, business owners who have not, as yet, computerised their accounting, should start to try out one or two of the more, well-established software packages. Businesses who have computerised their accounts should ask their software providers if their systems will be compliant with the Making Tax Digital requirements from April 2018.

Three months to go

Wednesday, January 4th, 2017

All UK taxpayers may benefit from pausing, taking a deep breath, and considering their planning options as we approach the run-up to yet another tax year end.

Individuals

The prime areas for consideration are where income levels are threatening to break through into the higher rates of income tax. For 2016-17, these are:

  • If your taxable income exceeds £32,000 (after deducting your £11,000 personal allowance) you will pay income tax on any excess at 40%.
  • If your taxable income exceeds £150,000 you will pay income tax on any excess at 45%.
  • And if your income is between £100,000 and £122,000 you will pay income tax at a marginal rate of up to 60%. This is due to the gradual loss of your personal allowance in this income band.

These tax rates are for general income – for dividends see Businesses below.

You could, for instance, consider:

  • Increasing pension contributions
  • Salary sacrifice opportunities before the rules change from April 2017
  • Gift Aid donations
  • Transferring income producing assets into joint ownership with your spouse
  • Deferring bonus payments until after 5 April 2017, especially if your income for 2017-18 is planned to drop as compared to 2016-17.

Apart from these strategies, there are other legitimate planning opportunities you may be able to employ in order to minimise your exposure to the higher rates. The key is to take a hard look at the numbers before 5 April 2017.

Businesses

For businesses with March 2017 year ends, it’s all about timing and an in-depth look at trading results for the first three quarters BEFORE the end of the tax year.

Items that could be considered are:

  • The timing of capital acquisitions to maximise use and impact of tax allowances. For example, would it be more beneficial to delay the purchase of new plant until after March 2017, and claim against profits for 2017-18, when planned profitability is expected to increase, as compared to 2016-17? Or advance the purchase and thus tax relief?
  • Deferring or bringing forward expenditure – this could include tax allowable refurbishments, maintenance to equipment and similar costs.
  • If your business is a company, consider retaining profits within it rather than extracting them as dividends in excess of the annual tax free allowance of £5,000. In this way you could retain cash in your business after paying 20% corporation tax, rather than creating an additional dividend tax charge (for dividends drawn in excess of £5,000) of between 7.5% (basic rate), 32.5% (higher rate), and 38.1% (additional rate).

Is your employer still paying for your private fuel

Wednesday, January 4th, 2017

It is worth repeating an article we first published March 2016 that highlighted the cash benefit to company car drivers and their employers, of reimbursing the cost of fuel provided for private motoring. The rates have been updated for 2016-17.

Since the tax on private fuel provided with company cars is so high, many employers now have an arrangement whereby they no longer pay for private fuel. In this case, the employee must reimburse the employer for private fuel included in petrol bills paid by the employer. Otherwise, the employee may face a tax charge.

Consider the following example:

If your private mileage is currently 560 miles a month, and you drive a 1900cc diesel engine car, the rate per mile to cover fuel charges, as quoted in the latest rates published by HMRC, is 11p per mile. Accordingly, you should repay £61.60 a month to your employer.

 

Based on the above example, if the vehicle’s list price when new was £25,000, and the car benefit charge rate was 26% (based on a 130g/km CO2 rating) the benefit in kind charge for the year would be £6,500. With no repayment of private fuel, there would also be a £5,772 car fuel charge. Both these amounts would be added to your taxable income for the year. If you were a higher rate tax payer the car fuel charge would cost you £2,308.80 a year in additional tax (£5,772 x 40%). This amounts to £192.40 per month.

If your actual private mileage proved, on average, to be 560 miles a month, you would therefore save £130.80 per month (£192.40 – £61.60).

Employers will also benefit as they will no longer be subject to a National Insurance charge on the amount of the car fuel benefit. In the above example, it would reduce NIC costs by £796.54 (£5,772 x 13.8%).

It is worth crunching the numbers. Obviously, the lower your private mileage, the more likely a repayment system will save you money, but you will need to take action before the 5 April 2017.