It is that time of the year again in which you need consider whether any opportunities remain to mitigate your 2017/18 tax liabilities. Our letter sets out the potential opportunities still available to you, then considers the changes that have already happened that could affect your 2017/18 tax position. We then talk through the tax impact of the recently announced spring statement.
These notes are written in general terms in order to be of the widest possible use, and it is important therefore that specific advice is sought in relation to your own individual circumstances.
Please approach one of the tax team at Butler & Co should you require any further information. For investment advice, we always recommend that your particular circumstances are examined by an Independent Financial Adviser, and we will be happy to provide a recommendation should you require assistance of this nature.
Saving Tax For The Year Ending 5 April 2018
Individual Savings Accounts (“ISAs”)
Utilise your 2017/18 allowance - individuals can now invest a maximum of £20,000, up from the £15,240 limit for the 2016/17 year. Income and gains are free of UK income tax and CGT.
This £20,000 limit remains for 2018/19, although the limit for Junior ISAs and Child Trust Funds will increase to £4,260.
Pension contributions made by individuals continue to attract tax relief subject to the following limits:-
- £3,600 for individuals with no earnings or earnings up to £3,600 per annum;
- The individual’s relevant earnings up to a maximum of £40,000 per annum.
The overall lifetime allowance for an individual’s pension fund remains at £1 million, though this will increase to £1,030,000 for 2018/19.
Tax relief is available at an individual’s marginal rate of tax, and there is the availability to carry forward unused allowances for three earlier years (subject to limits and conditions). There are significant implications for high earners due to the legislation currently in place, and in the event that you have not already done so, we recommend that you review your 2017/18 position at the earliest opportunity, and certainly before 5 April 2018.
Pension planning can be particularly effective where total income is expected to exceed £100,000, leading to a loss of all or part of the 2017/18 personal allowance. Effective planning can reduce income and preserve the personal allowance, and where you are aged 55 or over, it may be worth considering taking a tax free lump sum from your pension scheme at an early stage.
With the reduction in tax deductible pension contributions for high earners introduced last year, it is important to consider the options available to you prior to 6 April 2018. Advice should be sought from your Independent Financial Adviser as a matter of urgency.
Higher rate tax relief can be obtained on Gift Aid donations and charitable Deeds of Covenant. Where total income is expected to exceed £100,000, charitable giving can be used to preserve the personal allowance.
The transfer of income producing assets from one family member to another can result in family income being spread between those members, so that as few as possible face a reduction or withdrawal of their personal allowance. In addition to preserving personal allowances, income producing assets can be transferred in order to maximise the tax rate bands.
For example, if one spouse faces a 40% or 45% marginal tax rate and the other is a basic rate taxpayer, there is potential for a 20% or 25% tax saving to be made once the asset has been transferred.
Care needs to be taken in passing business assets between family members, and capital gains tax and inheritance tax also needs to be considered. It may be appropriate to combine this exercise with additional Inheritance Tax planning.
Salaries & Bonuses
Consideration should be given to utilising unused personal allowances by means of taking a salary, bonus or dividend from your limited company. Salaries and bonuses will need to be paid before 5 April 2018 in order to be effective for the purposes of claiming Corporation Tax relief.
Please also note that for payroll purposes, the Real Time Information (RTI) regulations have removed the flexibility that could sometimes be employed when dealing with salary issues. It is therefore now essential that any wages/bonuses that have been accrued for or are due to be paid, are processed through payroll and recognised by 5 April 2018 at the latest.
Enterprise Investment Scheme (“EIS”)
Income tax relief at 30% is available where an investor subscribes for shares in a company, and both the investor and the company meet several qualifying conditions. The maximum investment qualifying for relief is £1 million, though in the Autumn Budget 2017, the Chancellor announced an additional £1 million annual limit from 6 April 2018, so long as at least £1 million is invested in “knowledge intensive” companies. Capital gains on the realisation of the EIS investment are tax free providing that the shares are held for a minimum of three years.
It is also possible to defer capital gains tax by making an investment in EIS shares. The investment must be made within a period of one year immediately preceding or three years immediately following the date on which the capital gain is realised.
EIS shares held for more than two years usually qualify for Business Property Relief (BPR), for Inheritance Tax purposes. Advice is however critical, as there are numerous conditions that need to be satisfied in order to secure the relief.
Seed Enterprise Investment Scheme (“SEIS”)
This is a tax advantaged venture capital scheme, similar to EIS in many of its scheme rules. It focuses on smaller early stage companies carrying on or preparing for a new business in a qualifying trade.
Income tax relief at 50% is available to an investor on the amount he subscribes for shares, subject to an overall investment limit of £100,000. Capital gains tax reliefs operate on broadly the same principles as those for EIS. Shares must be held for a minimum of three years to avoid the withdrawal of reliefs obtained.
Venture Capital Trusts (“VCTs”)
A VCT is basically a close ended quoted investment vehicle which looks to invest in small unquoted trading companies. 30% income tax relief can be claimed up to a maximum investment of £200,000 when you subscribe for shares in a VCT.
Dividends and capital gains from the VCT are tax free provided that the VCT is held for five years.
Capital Gains Tax
Consider the disposal of assets in order to make use of the annual capital gains tax exemption of £11,300.
This cannot be carried forward and will be wasted where it is not utilised by 5 April 2018. Spouses should also consider transferring ownership of assets in order to make use of the annual exemption. Intra-spouse transfers carry no capital gains tax implications. The exemption increases to £11,700 for the 2018/19 tax year.
There have been no movements in the Capital Gains Tax rates. The sale of non-residential assets will still be charged at 10% for basic rate tax payers and 20% for higher rate tax payers.
Capital Gains Tax on the sale of residential property still remains at 18% for basic rate tax payers and 28% for higher rate tax payers. Entrepreneur’s relief is still at 10%.
Please refer to us for further advice if you are contemplating the disposal of an asset before 5 April 2018.
Lifetime gifts to any one person during 2017/18 are exempt from Inheritance Tax where the total gifts to that person do not exceed £250.
The first £3,000 of lifetime transfers made during 2017/18 are exempt from Inheritance Tax, together with a further £3,000 where the exempt amount from 2016/17 remains unused.
Further gifts may also be made in consideration of marriage or civil partnership - £5,000 by a parent, £2,500 by a grandparent, £2,500 by one party to the marriage/civil partnership to the other and £1,000 in any other case.
In addition, unlimited regular gifts by an individual out of income can be made free of inheritance tax, provided that the income is surplus to meeting normal living expenses. In this scenario, gifts are tax free (even in the event of death within seven years). It is important to record gifts of this nature as they are made, in the event that you are called upon to demonstrate that they qualify for this relief.
Planning Ahead – Incorporation
Consideration can be given to restructuring your business as a corporate vehicle, in order that personal tax liabilities can be limited to the extent that income is withdrawn by way of salary or dividend. While business profits will be subject to Corporation Tax, planning of this nature gives scope for personal allowances to be maximised and higher rate tax exposure to be mitigated.
There are other tax consequences and commercial reasons that need to be considered before the decision to operate as a limited company can be taken, but with potentially significant tax savings on offer, this is an area of planning that can prove to be extremely beneficial.
Changes For The Year Ending 5 April 2018
The tax free personal allowance increased from April 2017 to £11,500 (£11,000 in 2016/17). A further increase to £11,850 will come in from April 2018.
Personal Savings Allowance
As of 6 April 2016, savings income has been paid gross and is no longer subject to a 20% deduction of tax like previous years. Instead, HMRC have now brought in what is known as the personal savings allowance, which will give you the following:
- If your total taxable income is less that £17,500 in a given year, you will not pay tax on your savings income.
- If your total taxable income is between £17,501 to £45,000, the first £1,000 savings income is tax-free.
- If your total taxable income is between £45,001 to £150,000, the first £500 of savings income is tax-free.
- The allowance is not available for those with total taxable income exceeding £150,000
The Marriage Allowance allows for up to 10% of your personal allowance (£1,150 for standard coding in 2017/18, increasing to £1,185 in 2018/19) to be transferred to a spouse or civil partner. The recipient’s tax liability is reduced by 20% of the amount transferred, giving a potential saving of £230 for 2017/18 and £237 for 2018/19.
This is available to couples, provided that neither spouse or civil partner is a higher or additional rate taxpayer. However, married couples who are eligible to claim the Married Couples Allowance (MCA) will not be able to make a transfer.
Following the Autumn 2017 Budget, claims are now allowed where a partner has died before the claim was made and claims will be able to be backdated by up to 4 years. This change came into force on 29 November 2017.
Higher Rate Threshold
The amount of income you can earn before paying the 40% higher rate of tax increases from £43,000 in 2016/17 to £45,000 in 2017/18. It is also then increased further to £46,350 in the 2018/19 tax year.
Tax on Dividends
The first £5,000 of dividends are free of tax due to the Dividend Allowance. The rates thereafter are:
- 7.5% for basic rate taxpayers
- 32.5% for higher rate taxpayers
- 38.1% for additional rate taxpayers
Please note that from 6 April 2018 the Dividend Allowance is being reduced from £5,000 to £2,000. Whilst the government expects this reduction to mean 80% of ‘general investors’ will still pay no tax on their dividend income, family company shareholders who take dividends in excess of the £2,000 limit will be affected. The reduction in the limit from £5,000 to £2,000 will cost basic rate taxpayers an additional £225, higher rate taxpayers £975 and additional rate taxpayers £1,143. If you are concerned how this will affect you, please contact one of the tax team at Butler & Co. However, limited companies are still a very tax efficient route of managing your business, given that you are still only liable to 7.5% tax on your dividends (should you choose to remunerate yourself this way) rather than you being liable to 20% tax and 9% class 4 national insurance on profits through self-employment.
Replacement of domestic items relief
This relief was introduced from 6 April 2016 (replacing the wear and tear allowance) and enables all landlords (unfurnished or furnished properties) to deduct the capital costs they actually incur on replacing domestic items such as furnishings, appliances (including white goods) and kitchenware in the property. The relief given will be:
- the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent), plus
- the incidental costs of disposing of the old item or acquiring the replacement, less
- any amounts received on disposal of the old item.
The key point to remember is that the initial cost of the item purchased is not a deductible expense, however relief is available for replacement costs provided the above criteria is met.
It is imperative that landlords keep good records of expenditure incurred on the initial purchase and replacement to ensure that they can evidence this to HMRC, should questions be raised.
This deduction however will not be available for those who claim rent a room or furnished holiday lettings because capital allowances will continue to be available for them.
Mortgage Interest on Residential Lets
For the 2017/18 tax year onwards, the way in which landlords of residential properties claim mortgage interest has changed. Up to the 2016/17 tax year, mortgage interest for residential lets could be claimed as a deduction against the rental income in the same way that any other Revenue expense could be claimed. This is now being phased out over 4 tax years so that eventually there will be no deduction for mortgage interest against the rental income but tax relief at 20% on the amount of mortgage interest for the year can be claimed.
2017/18: 75% of the mortgage interest can be claimed against rent, with 20% tax relief on the remaining 25% of the interest.
2018/19: 50% of the mortgage interest can be claimed against rent, with 20% tax relief on the remaining 50% of the interest.
2019/20: 25% of the mortgage interest can be claimed against rent, with 20% tax relief on the remaining 75% of the interest.
2020/21: 0% of the mortgage interest can be claimed against rent, with 20% tax relief on full amount of the interest.
For some basic rate tax payers with rental income, this will not have much (if any) impact on the amount of tax that they pay on their rental profits. However, this is not the case for everyone and we can always review the impact of this for any client who would like more details of how these changes will affect them.
Mileage rates for landlords
In order to reduce the administrative burden on individuals operating property businesses, the option to use approved mileage rates for business travel has been extended to landlords as of April 2017.
Stamp Duty Land Tax: First-time buyers
From 22 November 2017, first-time buyers paying £300,000 or less will pay no SDLT and on properties costing between £300,000 and £500,000, SDLT will be charged at 5% on the excess over £300,000. SDLT on properties costing in excess of £500,000 will be charged at the normal rates.
IHT residence nil rate band
From 6 April 2017, a new nil rate band, called the ‘residence nil rate band’ (RNRB), has been introduced, meaning that the family home can be passed more easily to direct descendants on death. The RNRB is being phased in and is as follows:
- For deaths in 2017/18: £100,000
- For deaths in 2018/19: £125,000
- For deaths in 2019/20: £150,000.
- For deaths in 2020/21: £175,000
These figures are per person, so a couple may benefit from double the allowance. There are a number of conditions that must be met in order to obtain the RNRB, which may involve redrafting an existing will. Please approach a member of our tax team should you wish to discuss how this may affect your inheritance tax planning.
Autumn Budget and Spring Statement Announcements
A summary of the announcements from the Autumn 2017 Budget and Spring 2018 Statement that are applicable to the world of tax are as follows:
Class 2 and 4 National Insurance contributions (NICs)
From April 2019, class 2 NICs will be abolished. The Chancellor also confirmed in March 2017 that there will be no increases to Class 4 NICs rates in this Parliament.
Capital Gains Tax: Payment date
The introduction of the proposed 30-day window for paying tax on gains from a disposal of residential property is to be deferred until April 2020.