Abbey

Chartered Tax Advisers
Old Bishops' College
Churchgate
Cheshunt
Hertfordshire
EN8 9XP

T: 01992 642024

E: abbey@abbeyaccountants.com

Smiling businessmen and women

  TAX E-NEWS - November 2015


Welcome to our monthly tax newsletter designed to keep you informed of the latest tax issues.

We hope you enjoy reading the newsletter; remember, we are here to help you so please contact us if you need further information on any of the topics covered.

Peter McDaid CTA ATT TEP
Director


NEW RULES FOR DIVIDENDS FROM 2016/2017

In our July Newsletter we outlined the new rules for the taxation of dividends that will apply from 6 April 2016. Further guidance has now been published by HMRC setting out how the new rules will operate and it seems the rules don’t work quite as expected. As previously reported, there will be no 10% tax credit on dividends which will result in a 7½% increase in the rate of tax on dividends once the £5,000 dividend exempt allowance has been utilised.

It has now been stated that even through the first £5,000 of dividends escape tax it still counts towards your income when calculating what tax rate is applicable on any excess dividends which are taxable.

For example, say you have a salary of £37,700 next year and £9,000 in dividends. The 2016/2017 personal allowance is £10,800 and the basic rate band is £31,900. So in theory you can have total annual income of £42,700 before becoming a higher rate tax payer. The expectation was that the dividends over the £5,000 exempt allowance, i.e. £4,000 would be added to the £37,700 salary meaning that the total income would fall within the £42,700 figure and the dividends would be taxable at just 7.5%. Apparently this is not the case as the full £9,000 is added to the salary pushing the £4000 of taxable dividends into the higher rate band and they will suffer tax of 32.5%. Bit of a difference!!

If you own your own company, it may be beneficial to bring forward dividend payments from next year to save the additional 7½%. However, it would be important to consider all of the tax implications of such actions so come and talk to us to discuss your options.

RESTRICTION OF BUY TO LET INTEREST

In the Summer Budget it was announced that mortgage interest tax relief for buy to let landlords would start to be phased out from 2017/18 onwards and restricted to basic rate tax relief of 20% only from 2020/21. Now that the Finance Bill has been published the full impact of this change is starting to emerge and for some landlords this will result in a significant increase in the tax payable as their rental profits will now be taxed at higher rates. This is because mortgage interest will no longer be an allowable deduction in arriving at rental profits.

For example, a landlord with a salary of £50,000 and a let property giving rise to rental income of £60,000, of which there are relevant expenses of £14,000 and £40,000 of interest. This would result in £6,000 of net rental profits being subject to tax at 40% giving rise to a tax liability of £2,400.

If we have the same situation and figures for 2020/21 year there will be no deduction for interest, which would mean that, the net rental profit subject to tax will then be £46,000. The tax liability would be at 40% £18,400. From this would be deducted the interest of £40,000 restricted to a figure at 20% i.e. £8,000. So an overall resulting tax liability for the year of £10,400. A fairly substantial increase indeed and I wonder what impact this will have on the rental property market!

MORTGAGE APPLICATIONS

Many mortgage lenders ask for a HMRC form SA302 (a personal tax calculation) as proof of an individual's taxable income for the year. Most accountants use software to prepare SA tax returns and the software also produces the related tax calculation. In these circumstances HMRC does not normally produce a form SA302. This has meant that when a mortgage lender makes a request, we have to contact HMRC and ask that they produce one. It is now possible for tax payers to use HMRC's online services to request the form SA302 and to print these forms out.

Please note if a paper tax return is still being submitted on contacting HMRC it will take up to 2 weeks for the forms SA302 to be issued.


DOWNSIZE (OR UPSIZE) TO SAVE INHERITANCE TAX?

From 6 April 2017 an additional Inheritance Tax (IHT) Residence Nil Rate Band (RNRB) starts being phased in to enable individuals to pass on their family home to direct descendants. The additional nil rate band starts at £100,000 and rises to £175,000 for deaths after 6 April 2020. When fully phased in the additional nil band will enable a married couple to pass on a family home valued up to £1 million free of IHT, although the additional relief is restricted if they have assets worth more than £2 million. The proposed new legislation, if enacted, will provide relief even if the individual downsizes to a smaller property where the downsizing takes place after 8 July 2015. Like the £325,000 IHT nil rate band, the unused residence nil band can be transferred to the surviving spouse and used on the second death.

Example:
A widow sells a home worth £400,000 in August 2020 for cash and moves to a home worth £210,000. At the time of the sale the available RNRB is £350,000 as, had she died at that time, her executors would be able to make a claim to transfer all the unused RNRB from her late husband. The new downsizing relief will entitle her to an additional £140,000 (£350,000 - £210,000) nil rate band. This would be added to her nil rate band (up to £650,000 (2 x £325,000) and can be set against any of her assets including cash and investments.

If the replacement property was worth £225,000 on her death then the additional nil band would be reduced to £125,000 if the allowance remains at £350,000. The new inheritance rules are complicated so please get in touch if the changes impact on your family’s tax position. It may even be worth considering upsizing before you downsize to maximise this new relief!

HMRC OFFICE REORGANISATION

HMRC currently has approximately 58,000 staff spread over 170 offices up and down the country. Over the next 5 to 10 years HMRC plan to close 137 of these offices and have 13 brand new large regional centres. This will obviously result in some redundancies

HMRC are already under fire for lengthy delays in dealing with post, unanswered telephone calls and abysmal customer service. The disruption of this reorganisation being implemented could well result in stretching HMRC to a breaking point.

NON TAX – INSURANCE

What insurance does a business need?
Buildings and Contents Insurance - this protects the premises and stock. If you are running a business from home you should upgrade your policies to a business policy.

Public Liability Insurance - This protects the business from any claims from members of the public coming to the business premises.

Employee Liability Insurance - If there are employees the business needs to cover them against injury whilst at work.

Product Liability Insurance - a business needs this type of insurance if it is selling products via the internet.

Professional Indemnity Insurance - If a business is offering a service or advice this will cover against claims of negligence, poor advice, errors etc.

Time and time again we come across businesses who either have no insurance or are not correctly insured. Insurance is absolutely vital to safeguard the business.


TAX DIARY OF MAIN EVENTS FOR December 2015

Date What's Due
01 December Corporation tax for year to 28/02/2015
19 Decembert PAYE & NIC deductions, and CIS return and tax for month to 05/12/2015 (due 22 December if you pay electronically)
30 December Deadline to file 14/15 self assessment tax return online if unpaid tax up to £3,000 is to be collected via 15/16 PAYE code.