Tax planning ahead of Spring 2021 Budget

As we approach the end of 2020 we can reflect on a tumultuous year as a result of the Covid-19 pandemic. As seen recently in the financial press, there are a number of speculative discussions about possible future tax increases. While tax increases are possible, it is also clear that the Government will need to take steps to encourage investment, to boost the economic recovery.

At this time, we can only speculate about possible tax changes in 2021 however, we do know that changes to taxation will be announced in the Spring Budget, which will take place on 3rd March 2021. Rather than leave the usual year-end tax planning until February next year, it would be prudent to bring forward this process. If you are anticipating a quieter than usual festive period, it could be the perfect time to turn your attention to financial matters.

The Chiene + Tait Tax Team has flagged some areas that may be of interest to you or your business including gifting of assets to members of your family, pension planning if the higher rate tax relief is removed from contributions or what to look out for if you are thinking of selling your business.

Our infographics below highlight further areas for consideration. If you would like to discuss selling your business, please contact Jonathan Griffiths, if you would like to discuss any tax aspects for your family, please contact Michelle Fallon or Moira McMillan. Alternatively, please email us at mail@chiene.co.uk, we would be delighted to discussion the options available to you, your family or your business.

Areas families to consider Spring 2021
Family areas to consider ahead of 2021 Budget
Business areas to consider 2021 Budget
Business areas to consider ahead of 2021 Budget

Self-Assessment Taxpayers get additional help through HMRC Time To Pay

UK taxpayers can now apply online for additional support from HMRC to help spread the cost of their self-assessment tax bill from an annual payment to smaller monthly payments.

In his Winter Economy Plan, Chancellor Rishi Sunak announced that taxpayers could pay amounts due on 31 January 2021 (including any deferred payment on account from July 2020, their balancing payment owed for 2019/20 and the first payment on account for the current tax year) in monthly instalments online through HMRC’s online Time To Pay system.

Interest will still be charged on the tax owed from 1 February 2021.

Taxpayers who wish to set up an arrangement must:

·         Have no outstanding tax returns, other tax debts or existing HMRC payment plans;

·         Have tax due of between £32 and £30,000;

·         Put the payment plan in place no later than 60 days after the due date of 31 January 2021.

Anyone who has larger amounts due or needs more than 12 months to settle their tax affairs will need to contact HMRC separately.

HMRC has also asked taxpayers to be aware of scammers claiming to be from HMRC who offer to help set up Time To Pay.

Tax relief on home working costs during COVID-19 lock down

Given the Coronavirus outbreak, many employers will be considering providing their employees with additional support for working from home. If so, they will need to consider the tax implications of the payments. HMRC guidelines permit employers to pay their workers who regularly work from home under an agreed arrangement, a tax-free payment of up to £312 per year to help cover costs associated with higher household bills such as gas or electricity.

HMRC have confirmed that employers who require their employees to work from home as a result of the temporary closure of their business premises due to the Coronavirus will be able to provide a tax-free payment to workers, in addition to their salary, as a means of offsetting reasonable additional household expenses. HMRC say payments of £6 per week or £26 per month (£4 per week before 6 April 2020) can be made by the employer without keeping any records. Paying a higher amount will need to be supported with evidence that the employee had actually incurred additional costs amounting to more than £6 per week. Only extra costs that relate to working from home can be claimed – those that would still have arisen regardless of the employee working at home, such as council tax, mortgage payments and existing broadband/telephone charges that do not depend on usage, cannot be claimed.

It is up to an employer to decide whether to make the payment. If they don’t, employees may be able to claim tax relief from HMRC on the additional household costs of their home office. Again, HMRC guidance is that amounts of £6 per week (£4 before 6 April 2020) can be claimed without supporting evidence. Larger amounts can be claimed, but will require the employee to keep records of these costs and prove to HMRC that they were incurred ‘wholly, exclusively and necessarily’ in the performance of their work.

The official guidance on claiming tax relief for job expenses associated with working from home can be found on the HMRC website ‘Claim tax relief for your job expenses’. HMRC’s Coronavirus specific guidance can be found at ‘Check which expenses are taxable if your employee works from home due to coronavirus (COVID-19)

Residential Property – 30 Day Capital Gains Tax Returns

New rules requiring taxpayers to submit Capital Gains Tax (CGT) returns to report the sale of residential properties came into force on 6 April 2020.  These rules require taxpayers selling such properties to file a CGT Tax Return with HMRC and pay the tax due within 30 days of completion.  This will particularly affect those selling buy-to-lets, other rental accommodation and second homes.

No CGT return is required where no CGT is payable on the sale – for example where the gain is covered by losses realised in the past or a relief applies in full (in particular main residence relief, which applies to exempt the gain that arises in periods that a property is your main home.)

It may also still be necessary to include the gain on any self-assessment tax return prepared for the year.  This will be essential where circumstances mean that that the 30 day CGT payment made was too high or too low, which can often be the case, not least as the rate of CGT may be uncertain at the time the CGT return is prepared  – this can be 18% or 28% depending on income levels for the tax year.

Please let us know if you have sold or are planning to sell any residential property – we will be happy to provide advice and deal with the relevant tax returns required.  HMRC are able to apply significant penalties for late or incorrect returns and so it is vital to ensure that this is dealt with correctly. Contact us today at mail@chiene.co.uk or call 0131 558 5800.

Key outcomes from the 2020 draft Scottish Budget

Hazel Gough, Tax Partner at Chiene + Tait runs through some of the main headlines from the Scottish Budget.

The Scottish Budget didn’t offer much in the way of headline messages, but as with all budgets, there were some key points in the details delivered by Public Finance Minister Kate Forbes.

Normally, the Scottish Government will have prepared their Budget, following the UK Chancellor’s plans delivered in the UK Budget before setting out any tax changes or spending plans. This means that this draft Scottish Budget could well be revised following Sajid Javid’s announcement on 11th March.

  • The point at which a Scottish taxpayer pays more income tax than the rest of the UK is £27,243, the personal allowance is set by Westminster and assumes this amount will remain at £12,500*. The Scottish rate of income tax applies to earned income, pension income and rental income. Tax on savings and dividends is not affected by the Scottish Budget.
  • Forthcoming planned increases to National Insurance thresholds by the UK Government will have an impact on all income tax payers across the UK.
  • A new Land and Buildings Transaction Tax (LBTT) rate of 2% will be payable where the net present value (NPV) of the rent under a commercial lease is above £2 million.**
  • Business rates will change and 95% of properties in Scotland will be subjected to a lower poundage than other parts of the UK in order to “maintain the most generous non-domestic rates regime in the UK”***

Let’s wait and see what will happen after 11th March. This draft Budget could be amended radically, or set in stone. With Brexit looming, large scale changes to the UK tax landscape may be an unwelcome, additional burden.

To view the draft Scottish Budget in full, visit the Scottish Government website here.

 

*Chartered Institute Of Taxation’s Scottish Income Tax Liabilities for the 2020/21 Tax Year

2020/212020/21
EarningsUKScottish BudgetDifference
££££
10,000000
15,00050047921
20,0001,5001,47921
25,0002,5002,47921
27,2432,948.602,948.600.00
35,0004,5004,578-78
40,0005,5005,628-128
45,0006,5006,992-492
50,0007,5009,042-1,542
55,0009,50011,092-1,592
60,00011,50013,142-1,642
65,00013,50015,192-1,692
70,00015,50017,242-1,742
75,00017,50019,292-1,792
80,00019,50021,342-1,842
85,00021,50023,392-1,892
90,00023,50025,442-1,942
95,00025,50027,492-1,992
100,00027,50029,542-2,042
130,00044,50046,967-2,467
150,00052,50055,167-2,667
175,00063,75066,667-2,917
200,00075,00078,167-3,167
250,00097,500101,167-3,667
300,000120,000124,167-4,167
500,000210,000216,167-6,167
1,000,000435,000446,167-11,167

 

**Land and Buildings Transaction Tax Rates

NPV of rent payableRate of tax
Up to 150,0000%
£150,001 to £2 million1%
Above £2 million2%

 

***Scottish Levels of Business Rates

Basic Property Rate (Poundage)49.8p
Intermediate Property Rate (rateable values between £51,000 – £95,000)51.1p (poundage +1.3p)
Higher Property Rate (rateable value above £95,000)52.4p (poundage +2.6p)

 

EIS: The Current Landscape and Future Trends

The Enterprise Investment Scheme (EIS) has seen a lot of changes in recent years with the main focus of concentrating the scheme on high-growth companies, thereby re-positioning the market towards greater risk. The move from capital preservation to more organic high-growth companies has been driven by the new risk to capital condition. This has seen investment lean heavily towards the technology sector, whereas previously more investments were made in the infrastructure sector, which is traditionally more asset-backed, and the media and entertainment industry, using special purpose vehicles.

Although these changes may be realigning EIS with that of its intended purpose (focused on high-growth companies), their overall impact and therefore the number of businesses supported may be difficult to realise with the ever-looming issue of Brexit. Furthermore, it is expected that the changes will result in a drop in the number EIS investments made, however, we will need to wait until Spring 2020 when HMRC publishes its annual statistics for these effects to be quantified.

In summary, the volume of EIS investments completed has been steadily increasing for several years, and the figures published for the 2017/18 tax year show no divergence from this trend. As mentioned previously, these results are expected to drop significantly in response to the introduction of the risk to capital condition introduced last year.

EIS Investments HMRC 2019
Source: Alternative Investment Report 19/20: Enterprise Investment Scheme – Industry Report (Intelligent Partnership)

 

Although EIS is a hugely lucrative and popular scheme, there still seems to be an abnormally low level of utilisation in Scotland. Of the 3,920 EIS investments made in 2017/18, only 185 (5%) of them were made in Scottish companies, and a large number of the investments were in London based companies (1,860).[1]

The knowledge-intensive companies rules have seen several changes since their introduction in the 2015 Finance Act, the most recent of which sees the annual investment limits doubled to £2m and

10m for individuals and companies, respectively. HMRC have also been granted powers to approve knowledge-intensive funds, which should increase their use in the industry.[1]

HMRC’s Advance Assurance application process has also seen significant changes recently with the rejection of speculative applications and the introduction of a compulsory checklist. The change in HMRC’s position towards speculative applications (i.e. now refusing to consider them) has seen a reduction in the number of applications submitted, this is thought to have been done to ease the load on HMRC. However, it has caused some frustration in the industry, as investment opportunities were previously assessed by investors after Advance Assurance had been acquired. The figures also show that the percentage of submitted applications being accepted has dropped significantly, this may be in response to the new risk to capital condition that gives HMRC inspectors added discretion when it comes to accepting or rejecting applications.

ASA requests
Source: Alternative Investment Report 19/20: Enterprise Investment Scheme – Industry Report (Intelligent Partnership)

It seems as though the Government is attempting to direct EIS investment back towards high-growth, entrepreneurial companies and that can only be good for the economy. Although the investors in the market may be frustrated by these changes, it is unlikely that the level of investment made using EIS will change substantially due to how rewarding the scheme is in terms of tax breaks. With Brexit looming on the horizon, EIS may be subject to further changes as the EU state aid rules will no longer be enforced.[1] This may free the UK Governments hand to determine how they wish the tax relief to be structured.

As the EIS legislation becomes increasingly complex, and HMRC flex their muscles regarding the risk to capital condition, the need for experienced EIS advisors continues to grow. If you have a query about EIS investment or generally investing in a company, please contact Ryan today at ryan.lewis@chiene.co.uk.

Money and death: the essentials of succession planning

Succession planning is crucial if a family’s business and personal wealth is to continue to grow from one generation to the next. Finding the right time to bring up the subject of money and death can be hard; there are often hurdles to be overcome and difficult decisions to be made. The main issues that arise are when to pass on assets, the structure to provide flexibility over who ultimately benefits and how to retain control over the gifted assets.

HM Revenue & Customs recently commissioned a research report to understand gifting behaviours. Individuals with wealth of more than £500,000 were more likely to make lifetime gifts than the less wealthy, and not surprisingly nearly a quarter of those aged over 70 had made gifts in the previous two years. Having considered a number of factors including marital status and children, the analysis found that only age and wealth were significantly associated with the making of lifetime gifts. Interestingly, the primary reason for gifting was a wish to help the next generation rather than to save Inheritance Tax (IHT).

Even if your motive is to minimise tax on death, no planning can be undertaken without considering financial independence and other taxes. Parents will not want to pass on their business or personal wealth if they cannot afford to. For many this means putting in place sound remuneration, pension and investment strategies long before gifting is contemplated.

Many business owners may not understand the tax implications of extracting profit from their business. Taking a relatively small salary could still provide a qualifying year for the state pension, but without the need to pay national insurance contributions, which can be over 20% of salary. Income can be topped up with dividends, which attract a lower tax rate for the owner / director, and the retirement fund can be boosted by contributions to a pension.

For those wishing to invest long-term, selecting a tax-efficient corporate structure may allow for income to be reinvested tax-free, and for investment income or capital gains to be used for pension contributions. Such structures can also provide a bespoke vehicle for passing wealth to the next generation and, if required, tax-free access to the capital contributed.

Recently, the Government asked the Office of Tax Simplification (OTS), an independent adviser to come up with a list of options for simplifying IHT. Suggestions included:

  • Replacing the gift exemptions and the relief for gifts out of income with a single lifetime and personal gift allowance;
  • Reducing the period after which gifts are exempt from IHT from 7 years to 5 years;
  • Abolishing the reduced rate of IHT where a person dies within 7 years of the gift but survives more than 3 years;
  • Removing the tax-free uplift for capital gains tax if there is an IHT relief on death. This would largely affect the transfer of businesses and agricultural property.
  • Bringing furnished holiday lets in line with income tax and capital gains tax so that they qualify for IHT exemption.

Currently there are no definite plans to implement any of the proposals.

If succession planning isn’t on your radar, I would encourage you to think about it as soon as possible. Setting clear objectives, holding discussions with your family and timely implementation are key. Feel free to contact me at hazel.gough@chiene.co.uk or call 0131 558 5800.

A blog from the dog at the Scottish Game Fair

Here Alison Lawton in our Personal Tax team gives a pup’s point of view of this year’s Scottish Game Fair, Scone.

What does a gundog do on his/her day off? A visit to the Scottish Game Fair at Scone would fit the bill as a guest of pawfessional advisers “Chien + Tait”.  As the rest of the United Kingdom basked in sizzling temperatures, we (my owner and I) arrived at Scone in Perthshire under a veil of cloud.  Rather than worry about the weather and replacing my hound-dog expression with a gleeful tail wag, I trotted eagerly to the entrance.

The first highlight of the day was the Chiene + Tait debate “The Ethical Commercial Shoot” with panellists from the RSPB, the British Game Alliance and the British Association for Shooting and Conservation, but not a game bird in sight. The topic could have turned out to be juicy bone of contention but the contributors were obviously well trained, informative, good natured and expertly controlled by their handler, our own Rory Kennedy. The debate was well attended but in the heat of the marquee, I did take the opportunity of a quick forty winks. Luckily, I would not miss any juicy morsel as I would be able to listen to the discussion by downloading the podcast from “Into the Wilderness”, at my leisure.

Chiene + Tait’s residence for the weekend was situated at the corner of the main arena which had marvellous views of the main events for the humans. Unfortunately, the advertising hoardings blocked the four-legged visitors view so I consoled myself with the sound of ducks being herded, fox hounds baying and chain-saws growling in anger (not at the same time, I hasten to add). The youngsters of the pipe band played tunefully and, although tempted, I did not howl along.

The clouds cleared by mid-day, the temperature soared and the crowds gathered. Dogs of all shapes and sizes, from wolf hounds to jack russells, sauntered obediently around the show ground, whilst their owners engaged in some re-tail therapy.  Rather than getting hot under the collar, I retreated to the Chiene + Tait stand where afternoon tea was served in the early afternoon.  A gentle stream of visitors gathered to chat to the staff in attendance and, as it should be on a gloriously sunny afternoon, the chat was not all about accountancy, business and tax – that would be too much for a hot dog to stand.

It was certainly a doggy day out with a difference. So next year drag your owners out to the Scottish Game Fair and visit Chiene + Tait for a warm welcome, refreshments and a bowl of water.

Now, where was that nice gentleman in tweed with the biscuits in his pocket………

Non-Resident CGT regime continues to cause a headache for taxpayers (and HMRC!)

Stephen Baker in our Personal Tax team outlines that the lack of publicity for the Non-Resident Capital Gains Tax return has seen a huge rise in individuals falling foul of the filing requirement.

Since 6 April 2015, non-resident individuals are liable to UK Capital Gains Tax on the disposal of UK residential property. Such disposals must be reported to HM Revenue & Customs (HMRC) within 30 days by way of a Non-Resident Capital Gains Tax (NRCGT) return. Penalties arise if the return is submitted late.

Despite rules being in existence for over 3 years, there continues to be a large number of individuals falling foul of this filing requirement. Recent published tribunal cases on the issue suggest that the reason for late filing is largely due to the short 30-day timescale for reporting and a general lack of awareness of this deadline.

In most cases where penalties have been levied, by the time the taxpayer realises that a return is required, it is likely that multiple late filing penalties are already accrued (even in cases where the CGT due is zero). For example, if a return is filed 12 months late on a disposal on which no tax is due, a total potential penalty of £700 may arise, comprising of a £100 late filing penalty and two £300 tax geared penalties.

A number of taxpayers have appealed against these penalties by bringing a case to the tax tribunal. From these appeals, a number of interesting outcomes have emerged. As would be expected, ignorance of the rules is not a reasonable excuse and the tribunal has stated this in several cases, although initial tribunal rulings were somewhat critical of HMRC’s lack of sufficient promotion of the new regime and found in favour of taxpayers in a couple of appeals on this basis. More recent tribunal decisions however, have found in favour of HMRC and concluded that lack of awareness of the change in law was not a reasonable excuse.

Despite the trend of cases in favour of HMRC, there were several smaller wins for taxpayers:

  • In cases where there were multiple disposals and subsequent multiple penalties, the tribunal has reduced or eliminated some of these penalties. It was found that there had been no chance for the taxpayer to learn from their first mistake (i.e. filing the return for the first disposal late) and therefore charging penalties for additional disposals would be unfair.
  • The tribunal analysed the penalty legislation in great detail and held that any tax-geared penalties should not exceed 100% of the actual tax due. Therefore, if no NRCGT is actually payable, penalties should be restricted to the initial £100 late filing penalty. It will be interesting to see how this point develops as the legislation applies to other taxes also.

Going forward it appears that there will need to be an increased awareness of the requirement to file a NRCGT return within 30 days. Although this is a requirement that tax advisers should be aware of, clients tend to notify advisers of transactions after the tax yearend (when a NRCGT return is likely to be already long overdue). This problem has the potential to become more prominent; currently there is a proposal to extend the 30-day reporting limit to both Non-resident commercial property disposals and to residential property disposals by UK residents.

It will be interesting to see how HMRC deal with any further appeals on this matter, but in the meantime, if you have any queries regarding NRCGT, please do not hesitate to contact me or one of the Personal Tax Team at Chiene + Tait on 0131 558 5800 or email mail@chiene.co.uk.

Do drivers dream of electric cars?

(This article on electric cars first appeared in the Winter 2017/18 edition of our Connect newsletter.)

It will now cost you £21.50 to drive into central London if your car is more than 10 years old. If it’s a diesel, by next April it could cost you £24. Edinburgh and Glasgow councils are considering their own congestion charges with additional charges for diesels – £20 a day is proposed in Edinburgh – which could be in effect by 2020. And certain councils have already introduced additional parking charges for cars with diesel engines.

The UK Budget also sought to discourage diesels: new diesel cars face being put in a higher VED band, and drivers of diesel company cars will face a 1% increase in company car tax.

Benefits for company electric cars

Meanwhile, electric vehicles are being encouraged through benefits in kind taxation on company cars. A taxable benefit in kind is due for employees who are provided with a company car, with a corresponding National Insurance charge for the employer. The taxable benefit is the list price of the vehicle multiplied by a percentage tax rate HMRC created based on the car’s carbon dioxide (CO2) emissions.

This means that electric cars and Ultra Low Emission Vehicles (ULEVs) incur reduced benefit in kind percentages, with vehicles omitting 0-50 CO2 g/km benefitting from rates as low as 9% (13% from 6 April 2018). Typical petrol vehicles will be subject to rates of 17% – 37% this tax year, with the lower rate increasing to 19% from 6 April 2018. Diesels incur an extra 3% surcharge.

A subtle but advantageous provision from this Autumn’s budget is that no benefit in kind will arise where an employer allows an employee to charge a company car at work. For petrol vehicles, the provision of company fuel can often lead to increased income tax and National Insurance charges which can, at times, be higher than the actual cost of the fuel provided due to a fixed rate fuel amount being multiplied by the car tax percentage. Electric cars and ULEVs can also benefit from salary sacrifice, following changes in April 2017 that restrict new schemes to cars with emissions of 75 CO2 g/km or less.

The head-to-head: electric vs petrol

The i3, BMW’s flagship electric vehicle, retails at around £30,000. The i3 would give rise to a taxable benefit in kind of £2,700 for this tax year, while a corresponding petrol 3 Series saloon, with the same list price and CO2 emissions of 102 g/km, would incur £5,700. Choosing the i3 would save the employee £3,000 per year at their marginal rate of income tax and mean a reduced National Insurance charge to the employer.

The future

This year, Volvo announced that it will make no new cars with petrol or diesel engines from 2019: everything it manufactures from then will have a hybrid or solely electric engine. The UK Government said that all new petrol and diesel engines will be banned from 2040, mirroring France (but 10 years later than Paris, which will ban these engines by 2030). Tesla announced an electric lorry that, they say, will be 20% cheaper to run than a diesel equivalent. Elon Musk predicted that running a diesel truck would soon be “economic suicide”.

There remain issues with widespread electric car take-up – not least the need to charge millions of cars in millions of locations – but problems with the technology and infrastructure are being solved at a rapid pace. The current direction of travel seems to be firmly set: it may be wise to consider an electric future.

HMRC’s behind you (if you are planning to claim inheritance tax reliefs)!

Paul Houston in our Personal and Business Tax Department reviews the long-awaited HMRC commissioned research into whether Inheritance Tax is being abused.

Inheritance tax (IHT) is an important source of revenue for the Treasury, with total income for the 2016/2017 tax year reaching close to £5bn*. Faced with the prospect of this golden goose laying more jewelled eggs, HMRC commissioned research earlier this year into the current use of inheritance tax reliefs, primarily Business Property Relief (BPR) and Agricultural Property Relief (APR). Both of these are meant to help individuals pass on their businesses to the next generation without requiring a sale of assets to meet the associated inheritance tax liability.

Although the catchily-titled ‘The influence of Inheritance Tax reliefs and exemptions on estate planning and inheritances’ report was completed in May 2017, it wasn’t publicly released until the Autumn Budget on 22nd November. Originally commissioning the research led to speculation that HMRC suspected that the reliefs were potentially being abused, with the delay in publication perhaps signalling that HMRC had identified instances of misuse, and would announce them with a dramatic Christmas pantomime-style pulling back of the curtain on budget day.

However, in a true theatrical moment, HMRC (our Dame of this piece), after a number of dramatic scenes in the build up to the finale, found…. nothing. APR and BPR are generally being used for the purposes for which they are intended** and are not being misused. This means that the Treasury (the Sheriff in our panto) has not recommended to restrict the future use of the reliefs to generate more golden eggs. However, Buttons in our panto (played by the Office of Tax Simplification) recently announced that it intends to commence work on a review of inheritance tax in general, so this issue is still front and centre stage.

So, what does this mean? Anyone who plans to use BPR or APR should ‘look behind you’? In reality, individuals and family businesses will face increasing resistance when making claims for IHT relief and it’s more important than ever to seek professional advice at the earliest opportunity. HMRC’s findings provide reassurance that there is unlikely to be any immediate, radical changes to how IHT works but there are more reviews and consultations planned for the future and the conclusion to this fairy-tale may not have a happy ever after ending.

* An increase of around £3bn in five years largely due to the increase in property prices and the freezing of the IHT nil-rate band (currently £325,000)

**HMRC conducted 80 interviews with individuals, most of whom did not hold assets in excess of £325,000.

 

If you have a question about Inheritance Tax, please contact Paul Houston on 0131 558 5800 or email paul.houston@chiene.co.uk.

How to plan for the future in turbulent times

Moira McMillan, Chiene + Tait Tax Director, writes about how to plan for the future in turbulent times.

When the news is dominated by turbulent events, it becomes harder to plan for the future.

I remember writing an article for Connect newsletter just before the Scottish independence referendum in September 2014 which mentioned the famous Donald Rumsfeld quote about the known knowns, the known unknowns and the unknown unknowns. With the ongoing political uncertainties, I could have called on this again but I have turned instead to a quote that is said to be an ancient Chinese curse. ‘May you live in interesting times’ somehow seems appropriate.

Brexit remains the key issue tripping off many a tongue. The snap General Election has failed to provide clarity on anything much, so we know that it will be some time before the Brexit process is complete – and, indeed, whether the UK will remain in the single market, the Customs Union, the European Court of Justice or myriad other Europe-wide institutions. This provides uncertainty for many: for businesses, which will find themselves in a different situation once the UK has left the Single Market, and for individuals, who may find themselves affected by new, harder borders.

Meanwhile, the possibility of another independence referendum seems to have diminished for now but it remains the policy of Scotland’s largest political party and we cannot rule anything out in these days of interest: who would have thought a year ago that Donald Trump would be President of the USA?

There are interesting times ahead too for the accountancy profession with the Government’s ‘Making Tax Digital’ (MTD) programme looming on the horizon (see pg 10 of our Summer 2017 Connect newsletter). This will radically and permanently change the way tax submissions are made to HMRC and will be the biggest change to the tax system since the introduction of Self-Assessment. Certain elements of MTD have been delayed but VAT compliance in 2018 is still necessary, and HMRC is pressing ahead with a bigger roll-out in subsequent years. This is despite ‘glitches’ in the HMRC software for the 2016/17 tax returns which will mean that some individuals will be forced to file paper returns this year. A cynic might wonder if the HMRC systems will be robust enough to cope with MTD.

Technological developments are an unavoidable feature of this interesting age. New systems and processes bring amazing benefits but also new challenges. The NHS, in common with many other organisations worldwide, recently suffered a phishing attack – basically, a criminal implanting a virus on their computers in an attempt to extort money or gather sellable data (see pg 5 of our Summer 2017 Connect newsletter). This sort of attack is ever more common, and will become increasingly difficult for organisations to prevent. Meanwhile, British Airways had a catastrophic collapse of its IT systems over one weekend that cost the company tens of millions of pounds. The new EU data protection legislation, the General Data Protection Regulations, or GDPR – to which the UK will still be subject when it is launched in May 2018 (see pg 8 of our Summer 2017 Connect newsletter) – is doubtless intended to add a layer of protection but it also adds a burden to businesses to ensure that they comply.

The way we shop and the way we travel has already been changed thanks to technology. What will be next? Driverless cars could threaten professional drivers – of taxis, lorries, delivery vans, buses – within 10 years. Even human interaction can be replaced by technology, so we can’t rely on the common fall-back defence that customers prefer face-to face service: Amazon’s size and growth shows that this isn’t always the case. It’s a big question: in 10, 20, 30 years, what jobs will have been automated?

 

What can you do?

The framework of the world will continue to be shaped by politicians and tech entrepreneurs. There will continue to be unpredictable events, uncertainties, debates, annoyances and hold-ups. The world will also continue to turn. The only battle you can’t win is the one against change. Fighting against change is a waste of energy: the best you can do is to understand change, help make it better, and have a plan.

The sensible course of action is to take control of your own destiny, as far as possible. It’s impossible to mitigate every risk but it’s sensible to take care. Making sure you have IT protection to ward off fraudsters is a good practical example; other problems might require more careful, thoughtful and tailored planning to address – ensuring flexibility in your skills as job roles are re-defined, for instance, is a longer and trickier project.

At Chiene + Tait we believe that our clients see us as their trusted advisers who can be relied upon to provide the right advice in turbulent times. We believe that we have the expertise across our various sectors to ensure that we can continue in this role during the interesting times ahead.

The Common Reporting Standard (CRS)

The Common Reporting Standard (CRS) is a new initiative designed to increase tax transparency. Though primarily aimed at financial institutions such as banks, it has ramifications for many types of organisations.

The regulations imposed by CRS are onerous and complex. We have produced Comment On factsheets showing the impact CRS will have on:

Additional Common Reporting Standard resources

You can also see Euan Morrison, our Head of Charities, present a webinar about the implications for Charities from CRS. Euan has also published a piece on why charities need to think about CRS in Third Force News.

The Importance of Communication with Your Adviser (part 1)

Professionals in the legal, accounting, financial and many other industries always say that you should listen to them, or consult them before you make any decisions.

But they would say that, wouldn’t they? That’s how they make their money.  The more time you spend talking with them and listening to them, the higher the fees they raise and the more it will cost you.

The above view is surprisingly popular and likely to be heard any time someone suggests that you visit a professional for advice. Usually, it is teamed with a statement along the lines of “and it’s all just common sense anyway”.

But professionals have a good reason for wanting to get in front of you and to talk to you. In the case of a tax adviser, it’s usually to help save you money, or to ensure your affairs are in order to minimise the risk of HM Revenue and Customs (HMRC) imposing penalties for non-compliance. In the case of a lawyer, it’s often to protect you or your assets and in the case of a financial adviser, it’s to protect your wealth and manage your income stream.

A number of people, therefore, hire advisers for guidance and to help with the nuances of their position whether it’s complicated or not.  However, even where people do engage advisers they can still run into trouble.

Recently Johnny Depp received a large amount of press as news leaked that his finances weren’t in as good shape as you might expect of an actor who is very well paid. It turned out that he had made a number of luxury purchases:

  • $30,000 (£23,800) a month on buying and importing wine.
  • $18m (£14.3m) on a 150 foot (45 metre) yacht.
  • $200,000 (£159,000) a month on private planes.

Before Johnny Depp, Nicolas Cage also spent his way into financial difficulties by purchasing:

  • $300,000 on a dinosaur skull (outbidding Leonardo DiCaprio in the process).
  • Four yachts (one for each of the Caribbean, the Mediterranean, California and Rhode Island).
  • $8,000,000 on a castle in Bath (as well as a castle in Bavaria, Germany).

Yet both of these actors had advisers – so what went wrong?

Well, it turns out that both actors ignored the (presumably very expensive) advice they had been given. Both were accused of purchasing items against specific advice, and not heeding the guidance they were given: the problem, essentially, was the communication between adviser and client, which seems to have been ineffective and something of a one-way street.

This type of problem can often be seen, even when we aren’t dealing with Hollywood aristocracy. Making decisions which impact upon a tax position without seeking advice can result in transactions that are not tax-efficient, which can end up costing clients money. Often the reason is that there has not been proper communication between client and adviser because the client did not want to incur fees to discuss the position.  This approach might be seen as penny-wise, but it’s frequently the case that advisory fees are less than the savings they generate.

The role of an adviser is to be proactive and to help structure the affairs of a client properly and as efficiently as possible. It is only possible for this to happen, however, if there are open and honest lines of communication between the two parties.

The opposite can also be true, of course. Sometimes listening to your adviser can also cause problems that were difficult to foresee…

Non-Resident Capital Gains Tax Returns

With effect from 6 April 2015, the UK capital gains tax (CGT) regime was extended to bring into charge non-residents disposing of UK residential property. Before this date, CGT did not apply to non-residents, other than those carrying on a trade in the UK, and since 6 April 2013, companies subject to the annual tax on enveloped dwellings (ATED) charge.

The charge applies to non-resident individuals who hold property directly or through a partnership, non-UK resident trusts and certain companies.

Where a property was acquired before 6 April 2015, it is only the gain accruing from that date which is charged to tax. The charge is normally the excess over market value at 5 April 2015 although it is possible to elect for an alternative method.

HMRC must be notified of any chargeable disposal within 30 days of the conveyance of the property (not the date of the exchange). The disposal is notified by means of an online form, found on HMRC’s website, and failure to notify HMRC within the required timeframe will attract a fixed penalty of £100 and the potential for further penalties, including daily penalties and tax geared penalties.

Payment of any CGT calculated is due at the same time as filing the CGT return unless the individual is already in the self-assessment regime, in which case CGT is payable by 31 January following the tax year in which the disposal is made (although note that a CGT return is still required within 30 days of completion).

Certain high-value residential properties owned by companies may already be subject to UK tax under the ATED regime. The threshold property value for ATED purposes is currently £500,000. Should a disposal fall within both the ATED and non-resident CGT regimes, the former takes precedence (although a non-resident CGT return will still be required).

It is important that non-residents are aware of their UK tax filing requirements when disposing of UK residential property. Differences of opinion have arisen between the accounting and legal professions as to who should be notifying an individual of their responsibility to notify HMRC within 30 days of completion. Ultimately, however, the responsibility rests with the individual to ensure that returns are submitted, and associated tax paid, on time.

If you have a query about non-resident CGT, contact our specialist Property Group today at property@chiene.co.uk.

Tax Changes to Buy To Let Property Rules for Landlords

Recent changes to the taxation of buy to let properties will have a substantial impact on landlords.

Land and Buildings Transaction Tax (LBTT)

From 1 April 2016, the Additional Dwelling Supplement imposes an additional 3% ‘slab tax’ on the acquisition of residential property which is not the purchaser’s main residence.

Restriction to Income Tax Relief for Interest Paid

Restrictions to income tax relief for financing costs for residential property apply from 6 April 2017. Under the new rules, rental profits and taxable income will be determined without taking account of interest payments.

The new rules are to be phased in and will apply to 25% of the interest in 2017/18, 50% in 2018/19 and 75% in 2019/20 with 100% of the interest being subject to the new rules from 6 April 2020.

The changes to the tax relief will not just result in a higher rate taxpayer paying additional tax equal to 20% of the interest paid (or 25% if an additional rate taxpayer). The changes may also lead to:

  • Tax being paid on rental income when there is a loss, after deducting interest.
  • The landlord moving from the basic rate to the higher rate of tax.
  • Tax on child benefit if taxable income exceeds £50,000.
  • Loss of personal allowance where taxable income exceeds £100,000.

Incorporation

The restriction to tax relief does not apply to companies. For some landlords moving the properties to a company of which the landlord is a director and shareholder may result in substantial tax savings. The transfer may be done legitimately without a charge to capital gains tax or LBTT but only if certain conditions are met. There is a need to act quickly and take advice early to check that incorporation may be achieved without a tax charge, and if, depending on the circumstances of the individual, incorporation is beneficial.

If you have a question about property tax changes, please email our specialist Property Group at property@chiene.co.uk.

Mortgage Interest Relief for Residential Landlords

Measures announced in the April 2015 Budget which impact on residential landlords took effect from 6 April 2017.  Previously, relief for finance costs, primarily mortgage interest, was deducted in full from property income to arrive at the level of taxable rental profit. Under the new rules, a basic rate reduction, equal to 20% of the interest paid, will be applied to an individual’s tax liability for any finance costs incurred.

This change is being phased in over four years, commencing 2017/18, with the amount of deductible finance costs reducing by 25% each year, and the amount that may be claimed as a reduction to tax increasing by 25% each year as follows:

Year% of Interest Deducted from Rent% of Interest with Relief at 20%
2016/ 17100%Nil
2017/ 1875%25%
2018/ 1950%50%
2019/ 2025%75%
2020/ 21Nil100%

For Example

The landlord in this example has a portfolio of residential properties which is his only source of income.  His net rental income after deducting expenses such as repairs is £110,000 and from this he pays loan interest of £70,000.

2016/ 172017/ 182018/ 192019/ 202020/ 21
Net rental income110,000110,000110,000110,000110,000
Less: interest(70,000)(52,500)(35,000)(17,500)            
40,00057,50075,00092,500110,000
Less: personal allowance(11,000)(11,500)(11,500)(11,500)(6,500)
29,00046,00063,50081,000103,500
Tax @ 20%5,8006,3006,3006,3006,300
Tax @ 40%5,80012,80019,80028,800
Less: basic rate reduction             (3,500)(7,000)(10,500)(14,000)
Tax payable5,8008,60012,10015,60021,100

 

This landlord was a basic rate taxpayer in 2016/17. The restriction to the relief for loan interest, results in him paying tax at the higher rate from 2017/18. By 2020/21, the landlord’s tax liability has increased by more than £15,000. In 2020/21, when no deduction can be taken for the loan interest, the landlord’s income is £110,000. The personal allowance is reduced by £1 for every £2 over £100,000, meaning that with an income of £110,000, the landlord’s personal allowance is reduced by £5,000 to £6,500.

Note: for the purpose of the above example, the personal allowance for later years is assumed to be the same as for 2017/18 and the basic rate band of 20% is assumed to be £31,500 for 2017/18 onwards. The landlord is assumed to be a Scottish taxpayer.

Giving your bonus to charity – the tax benefits of philanthropy

The philanthropy of high profile sporting and business people often hits the press, most recently with Real Madrid superstar Cristiano Ronaldo donating his Champions League win bonus to charity.  Now hailed as “the most charitable athlete in the world”, Ronaldo’s donation of £456,000 is undoubtedly philanthropic, but pales in comparison to the annual earnings of the highest paid athlete in the world.  With an annual income of $50 million, one could argue that he can afford to be generous with both his winnings and his celebrity endorsement to a charity.

Others in the business world have also made headlines for donating their bonuses to charity including the head of telecom giant Talk Talk. Baroness Dido Harding gave her £220,000 bonus to an autism charity, and the Chief Executive of the 73% publicly-owned Royal Bank of Scotland, Ross McEwan has reportedly set up a charitable trust that would receive half of his £1m role-based allowance every year, over the next five years.

So why do wealthy individuals give to charity? Apart from philanthropy, giving to charity can help reduce a tax bill from both an income tax and Inheritance Tax (IHT) perspectives.

 

Personal Tax

When an individual donates to a charity, the net amount is “grossed up” by HM Revenue and Customs (HMRC).  Therefore if an individual gifts a donation of £80 after tax income to a charity, the charity can claim a further £20 from HMRC making the total amount received by the charity £100.  Higher rate and additional rate taxpayers will also benefit as the gross donation (i.e. £100) is then used to increase their basic rate band e.g. the amount at which 20% tax is paid. In this example, a further £100 would be taxed at 20% instead of 40% giving a saving of £20.  Therefore, the net cost for a £100 donation to a charity for a higher rate taxpayer is only £60.  (£80 donation less £20 of tax saving).

In addition to the above, where the donor has a yearly income over £100,000 their personal allowance will either be restricted or removed altogether.  Depending on the level of the income, gift aid donations can be used to reinstate part or all of the personal allowance. Although the benefits that arise from making charitable donations depend on the individual’s circumstances making gift aid donations can lead to a welcome reduction of income tax, whilst also supporting a favoured charity.

 

Inheritance Tax

Leaving part or all of an estate to charity can reduce or completely eliminate an IHT liability.  If you leave something to charity in your will, it will not count towards the value of your estate and instead will be deemed as leaving a “charitable legacy”.  Individuals can also cut their Inheritance Tax rate on the rest of an estate by 10% (from 40% to 36%), if they leave at least 10% of their “net estate” to a charity.  However, one word of caution, the rules on how to work out what can be given to charity to lower the IHT rate are not straightforward and speaking to your adviser is recommended.

Given the tax advantages of donating to charity, it is obvious that being philanthropic can not only make a difference in the lives of other but can be key to significantly reducing a tax liability.

C+T Partnership aims to boost business angel investment

Accountancy firm Chiene + Tait has announced a partnership with Scotland’s business angel association, LINC Scotland, aimed at supporting its members and enhancing the level of investment into Scottish SMEs with strong growth potential.

Chiene + Tait will service a dedicated Business Angel Helpline, providing advice to Scottish angel syndicates on how they can best structure any potential investments and maximise available tax reliefs. For the last year, the accountancy firm ran an initial helpline trial where they assisted LINC’s members on a range of matters including pre-deal structuring questions, advice on EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Scheme) and assistance on other HMRC matters relating to potential angel investments.

Going forward the Helpline will remain focused on ‘de-mystifying’ the whole process of becoming a business angel by promoting the tax advantages that come through this form of investment. Angel investment syndicates will be able to contact the service where they will get direct advice from Chiene + Tait tax experts.

The aim of this approach is to promote wider economic growth in Scotland by supporting and encouraging more high net worth individuals to invest in SMEs with strong growth potential.

Chiene + Tait Entrepreneurial Partner Neil Norman said: “We are delighted to formally launch the Business Angel Helpline to support LINC’s members and help demystify the process of maximising tax efficiency around business angel investing. In the initial trial of the Helpline, we were contacted by over 50 per cent of Scottish-based angel syndicates who successfully accessed valuable tax advice and other important information to enable them to maximise their investment.

“This support vehicle is helpful to business angels and is also beneficial in encouraging more investment into Scotland’s SMEs.  A UK Business Angels Association highlighted that 90 per cent of angel investors utilise EIS or SEIS tax relief schemes. By offering a service which draws on our experience to help investment deals complete smoothly with maximum tax reliefs, we can support the existing business angel community in Scotland and also promote this form of investment to other high net worth individuals.

“This is a positive development which has real scope to benefit the growth of Scottish SMEs and help entrepreneurs punch above their weight by encouraging more activity within the business angel investment community.”

David Grahame, Executive Director of LINC Scotland said: “The Business Angel Helpline has provided a valuable resource for our membership. We are therefore delighted to have Chiene + Tait’s support in extending the service in the longer term where members will continue to have access to their tax expertise when considering investments into Scottish SMEs. The firm has been extremely supportive towards our members over last year’s helpline trial and their on-going involvement will help enhance the work of our current members and help promote both the financial and economic benefits of angel investing.”

Child Benefit: Is Yours Safe?

I have to admit that my heart sinks every time I have to look at the rules for entitlement to tax credits such as child tax credit or working tax credit. Why? The answer is that these are really social security benefits and having “tax” in the title is a bit of a red herring. The UK social security system is notoriously complicated and there can be nothing worse for a family on a tight budget than to receive regular money only to be told at a later date that they are not, in fact, entitled to it and must pay it back. Many tax credits debacles have been reported over the years and the problem is that claims have to be made in advance when actual income figures are unknown. This will not cause difficulties for people with income levels that do not fluctuate from year to year, but what about the self-employed or those with their own companies who want to see how well the business does before setting salary/dividend levels?

The tax credit system is old news now and despite its complications and uncertainties, it seems to be here to stay. Now, however, I cannot help but think “here we go again” with the introduction of a new tax charge to withdraw child benefit (worth £20.30 a week for the first child and £13.40 a week for every sibling – all tax-free) from families where one member of the household has adjusted net income of more than £50,000. Each of these terms warrants further explanation. First of all, child benefit will not actually be withdrawn. It will continue to be paid, usually to the mother, unless the claimant opts out. Opting out could, however, have an impact on future state pension entitlement as Home Responsibilities Protection is currently available to claimants of child benefit while the child is under 12 years old.

Household is defined as married couples, civil partners or couples living together as if they were married or civil partners. If a member of the household breaches the £50,000 income threshold, the tax system will be used to claw-back the benefit with a new tax charge. This will be collected initially through PAYE (another complication to the already complicated PAYE coding system) but with final adjustments through the annual self assessment tax return. It is estimated that this will mean that around 500,000 tax-payers who are not currently within the self assessment system will now be required to file returns.

The tax charge will be 1% of the child benefit received for every £100 of income in excess of the £50,000 threshold. Once income reaches £60,000, therefore, the tax charge will be 100% and the full child benefit received will be clawed-back. The new charge will take effect from 7 January 2013 i.e. during the current tax year. There will be planning points to consider as adjusted net income will take account of pension contributions and Gift Aid donations, making the tax relief on these even more attractive. It will pay to do the sums when income is around the claw-back threshold.

As far as practicalities are concerned, aside from the obvious unfairness (a couple each earning £49,000 will suffer no claw-back whereas a couple with only one earning £51,000 will be affected), there is the mismatch that the tax system has, for many years now, been based on the fundamental principle of Independent Taxation for spouses. This new tax charge can result in a claw-back from one individual in respect of a benefit paid to another. It is not unusual for couples to want to keep their finances separate and accountants will now have to ask for personal and financial details that have not in the past been relevant to the tax return completion process.

If you have a query about any tax matter, please contact Moira McMillan on 0131 558 5800 or email moira.mcmillan@chiene.co.uk