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.

Highlights from the Autumn Statement 2012 & Draft Finance Bill 2013

A summary of the key changes affecting businesses, individuals and estates from the Autumn Statement 2012 and the Draft Finance Bill 2013

Businesses

Annual Investment Allowance

The Annual Investment Allowance (AIA) for capital allowances will increase from £25,000 per annum to £250,000 per annum.

The increase will take effect from 1 January 2013 and will last for 2 years.

The increased relief should be of benefit to those businesses that intend to invest in capital assets/expansion during the next few years.

Businesses whose accounting periods do not end on 31 December 2012 will need to take care when apportioning the amount of the AIA available to them in accounting periods that straddle the change.  This is an area that has caused confusion following numerous changes to the amount of the AIA in recent years.

Cash Basis for Small Businesses—Income Tax

A new simpler scheme is to be introduced so that ‘eligible sole    traders and partnerships’ will be able to calculate their taxable profits on a cash basis if they wish.

Eligible sole traders and partnerships will include those whose receipts for the year are below the VAT registration limit (currently £77,000) or twice the VAT registration limit (currently £154,000) for recipients of the Universal Credit.  Businesses must leave the scheme where their receipts exceed twice the VAT registration limit.

There are particular rules for determining the ‘receipts’ and ‘allowable payments’ of the business and any losses may only be carried forward against future profits.

The scheme is likely to be of use to smaller traders; however care will need to be taken to ensure that the intricacies of the scheme are adhered to.

Corporation Tax Rates

The main rate of corporation tax for FY 2014 has been reduced by an additional 1% from the rates previously announced.

The rates will therefore be:

FY 2013

Small Companies Rate      20%

Main Rate                              23%

FY 2014

Small Companies Rate      20%

Main Rate                              21%

The latest reduction means that the gap between the small company’s rate and the main rate of corporation tax is becoming ever smaller, thus reducing the potential impact of having associated/group company structures.

 

Individuals & Estates

Personal Allowance

The personal allowance will be increased to £9,440 in 2013/14.  This will save basic-rate taxpayers up to £267, although changes to the basic rate band mean that higher-rate taxpayers are unlikely to benefit

Income Tax Rates

The additional rate of tax is set to be reduced from 50% to 45% with effect from 6 April 2013.

Pension Annual Allowance

The annual allowance for tax relieved pension savings is to be reduced to £40,000 with effect from the tax year 2014/15.

Where a taxpayer’s gross pension contributions (including employer contributions) exceed the annual allowance a tax charge will apply.  The amount of the charge is calculated so as to eliminate tax relief on the excess contribution.

Inheritance Tax—Nil Rate Band

The nil rate band will be increased to £329,000 with effect from 2015/16.

Don’t forget—the unused portion of the nil rate band may be transferred to the estate of the surviving spouse.

 

Finance Bill 2013

The Finance Bill 2013 has been released in draft and includes legislation in respect of:

  •  Income tax reliefs that will be limited to the higher of £50,000 and 25% of adjusted net income.  This does not apply to gift aid on charitable giving.
  •  Entrepreneurs Relief and Shares Acquired under EMI Share Options—subject to the trading/employment conditions being met, entrepreneur’s relief will be available where the EMI options were granted at least 1 year prior to the disposal of the shares.  It is not necessary for the EMI options to have been exercised 1 year prior to the disposal nor for the employee to hold at least 5% of the share capital.
  •  Statutory Residence Test—the draft rules set out a legislative test to determine whether a person is UK resident in a given tax year.  This should give more certainty to taxpayers, however given that the rules are more prescriptive than the current case law based guidance taxpayers should consider their position before the new rules come into force on 6 April 2013.

Please note that our offices will be closed for the Christmas period from Saturday 22 December 2012, reopening on Wednesday 2 January 2013.

 

Wishing you a Merry Christmas & a Happy New Year from all the team at Eaves & Co.