Spring Budget 2017 and End of Year Tax Planning

This year’s budget did not bring a great deal for advisors to get their teeth into.  There are some points that will certainly affect millions of taxpayers though, so we have summarised the key points below.

There are also steps that taxpayers should consider taking before the end of the tax year, when various new rules and rates will come into effect.

  • The tax-free dividend allowance (the band on which dividends could be received free of income tax) is to be reduced from £5,000 to £2,000 from April 2018. Having only been introduced in April 2017 the allowance is already being reduced which will affect all taxpayers receiving dividends, including business owners and investors.

 

  • There will be a 1 year delay for quarterly reporting under the Making Tax Digital (MTD) rules for businesses that have a turnover below the VAT threshold (£85,000 for 2017-18). This will be good news for those businesses but unfortunately there do not appear to be any changes to these controversial proposals for other businesses.  Plus, the so-called pilot scheme will not have run its full course, so there is no chance of everyone learning lessons from the process.

 

End of Year Planning

 

  • Residential property rental. From April 2017 the phasing in of restrictions on relief for interest costs for higher rate taxpayers will begin. Initially 25% of such costs will be affected, however this will rise 25% each tax year until all higher rate relief on finance interest is blocked.

 

  • If pension contributions or pension scheme planning might be desired, setting up and contributing to a pension scheme before the end of the tax year (if one is not already in place) could ‘bank’ allowances for the year under the carry-back rules. Those with existing pension schemes have until the end of this year to use up any unused annual allowance from 2013-14.

 

  • If possible, consider declaring dividends where the tax free allowance of £5,000 has not been used up yet.

 

  • Consider new deemed domicile rules if non-UK domiciled. From April 2017 deemed domicile rules may apply to individuals who have been resident for 17 of the previous 20 years.  Previously these only applied to inheritance tax but the new rules extend to income tax and capital gains tax meaning those affected will have to report their worldwide income and gains on an arising basis.

Loan Loss Relief Claim Allowed in Part – Goldsmith (TC2197)

The recent tribunal case of Goldsmith (TC2197) dealt with availability of loan loss relief for capital gains tax purposes and its subsequent conversion as an Income Tax loss.

Mr Goldsmith was the Director of a property trading company. The company took out loans from a bank in order to purchase two flats, which Mr Goldsmith personally guaranteed.

One flat was sold and the other was let out, however the rent received from the flat was less than the interest payments on the loan. As a result Mr Goldsmith made payments directly to the bank to make up the shortfall.

As a result of the situation the bank demanded full repayment of the loan, with the second flat sold at a loss and the company dissolved.

The taxpayer claimed loan loss relief under TCGA 1992 s.253 (loans to traders) and for the loss to be offset against his other income under ICTA 1998 s.574.

HMRC denied the loan loss relief claim as they argued that the loan was irrecoverable at the outset and therefore did not become irrecoverable. Furthermore HMRC felt that there was no evidence that the repayment was required through the bank guarantee and therefore did not meet the statutory conditions.

The tribunal ruled in favour of the taxpayer in relation to the loan loss relief claim. They said because the bank had decided to lend money to the taxpayer’s company this meant that the loan cannot have been irrecoverable at the outset as a bank would not make such a loan.

It was also found that lack of evidence of a demand to the guarantor was not on its own sufficient to deny the loan loss relief claim.

The borrowed money was used for the purposes of the company’s trade and the money was paid by the taxpayer as interest on the loan. As a result the tribunal ruled he was entitled to claim loan loss relief under s.253 for the difference between the rent received and the interest payments made.

HMRC argued additionally that even if loan capital loss relief was allowed there was no basis for setting the amount against general income. The tribunal agreed and so the taxpayer’s appeal was only allowed in part.