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.

Business Property Relief (BPR) on Holiday Rental Property

Important Update: See details of Upper-tier Tribunal ruling here

The taxpayers, challenged an HMRC decision to deny business property relief (BPR) on their late mother’s share of a property. The property was let fully furnished as a holiday home.

The case (N V Pawson (deceased) (TC1748)) was heard by the First-tier Tribunal, who accepted the property had been run as a business for the requisite two years before the taxpayer’s death.   It had been profitable for two of the three years before the mother died and the tribunal was therefore satisfied that the business was being run with a view to gain.

It was then necessary for the tribunal to decide whether the business was one that consisted wholly or mainly of the holding of an investment, with the judge concluding that, “an intelligent businessman would not regard the ownership of a holiday letting property as an investment as such and would regard it as involving far too active an operation for it to come under that heading”.

The property was a business asset being used to provide a service and was not equivalent to holding an investment; the taxpayer’s appeal was therefore allowed.

The case will be of interest to taxpayers operating holiday rentals where the activities can be shown to constitute a business.