All the information and views given in this Bulletin are presented for general consideration only. Accordingly, Technical Connection Limited can accept no responsibility for any loss occasioned as a result of any action taken or refrained from as a result of the contents hereof. Readers and clients of readers must always seek independent advice before taking or refraining from taking any action. The contents of this Budget Report are based on the proposals put forward by the Chancellor in his Budget speech. These need to be approached with caution as the details may change during the passage of the Finance Bill through Parliament. 2015 Technical Connection Budget Report
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Transcript
All the information and views given in this Bulletin are presented for general consideration
only. Accordingly, Technical Connection Limited can accept no responsibility for
any loss occasioned as a result of any action taken or refrained from as a result of
the contents hereof. Readers and clients of readers must always seek independent
advice before taking or refraining from taking any action.
The contents of this Budget Report are based on the proposals put forward by the
Chancellor in his Budget speech. These need to be approached with caution as the
details may change during the passage of the Finance Bill through Parliament.
2015
Technical Connection
Budget Report
INTRODUCTION AND WELCOME
Welcome to the 2015 Technical Connection Budget Report.
Our aim is to focus on the changes that we believe will be of direct or indirect relevance to
financial planners. In the last Budget before the General Election it was expected that as well
as announcing and confirming changes that would be included in the Finance Bill, the
Chancellor would also take the opportunity to announce what further changes ( most likely
through a second 2015 Budget and Finance Bill) could be expected should the conservatives
win power.
With this in mind, this year we have covered:
the consultation on the development of a secondary annuity market
the reduction in the lifetime allowance to £1 million from 1 April 2016
the new £1,000 personal savings allowance available from 6 April 2016
the Help to Buy ISA
and
more anti-avoidance provisions
to name a few!
The Report is laid out as follows:
First there is an executive summary.
This gives you succinct bullet point summaries for each topic summarising what we believe
to be the key changes proposed in the Budget and pre-announced to take effect from April
this year. We also provide, where appropriate, “top-line” planning points.
The main Report has been split up into what we feel are the most important topics for
financial planners, financial product providers and platforms.
Within each topic you will find:
A section explaining the relevant proposals that were made in the Budget.
A section explaining changes that were been announced before the budget (for
example within the Autumn Statement and often already covered within draft
legislation in the Finance Bill) that will largely take effect from April this year.
and
A section, where relevant, giving in depth planning points to consider when advising
clients.
Finally, we have included an appendix showing all the relevant tax facts and figures.
YOUR GUIDE TO THE BUDGET REPORT
INTRODUCTION AND WELCOME
EXECUTIVE SUMMARY
1. INCOME TAX
2. NATIONAL INSURANCE CONTRIBUTIONS
3. CAPITAL GAINS TAX
4. INHERITANCE TAX
5. CORPORATION TAX
6. CAPITAL ALLOWANCES
7. TAX SIMPLIFICATION
8. TAX AVOIDANCE AND EVASION
9. PROPERTY TAX
10. TRUST TAXATION
11. SAVINGS AND INVESTMENTS
12. PENSIONS
13. TAXATION OF SHAREHOLDING DIRECTORS
14. EMPLOYEE BENEFITS
15. DOMICILE AND RESIDENCE
16. CHARITIES
17. CHILDCARE & CHILD BENEFIT
APPENDIX – TAX FACTS AND FIGURES AND NICs
EXECUTIVE SUMMARY
In the following summary:
Content shown in bold represents changes announced within the Budget
Content shown in normal type represents changes that were announced before the
Budget
Content shown in italics are the most relevant planning points
1. INCOME TAX
From April 2016, the government will introduce a tax-free personal savings
allowance to remove tax on savings income of up to £1,000 for basic rate
taxpayers and £500 for higher rate taxpayers. This will be in addition to the
£5,000 zero starting rate band for savings income.
Budget 2015 confirmed that the personal allowance will be £10,600 for the
2015/16 tax year.
The personal allowance will increase by £200 over the following two tax years to
£10,800 for 2016/17 and £11,000 for 2017/2018.
It was also confirmed that the basic rate limit will be £31,785 for 2015/16.
The basic rate limit will increase to £31,900 for 2016/17 and £32,300 for 2017/18.
As a result the higher rate threshold will be £42,700 and £43,300 respectively.
The zero starting rate band for the first £5,000 of savings income will be held at
that amount for the 2016/17 tax year. This will be in addition to the tax free
personal savings allowance.
From 6 April 2015, a zero starting rate band will apply for the first £5,000 of savings
income, thereby replacing the 10% starting rate band for savings income.
For those born after 5 April 1938 but before 6 April 1948 the personal allowance will
be £10,600, so is therefore aligned with the standard personal allowance.
The age-related higher personal allowance for those born before 6 April 1938 will
remain at £10,660.
The married couple’s allowance increases to £8,355
The total income limit for the purposes of the higher personal allowances increases to
£27,700.
From 6 April 2015, spouses and civil partners will be entitled to transfer £1,060 of
their personal allowance to their spouse or civil partner.
Married couples should plan to minimise their combined taxable income by
independent taxation strategies, making suitable investments or, if appropriate,
making suitable planning through their business.
Age allowance retention through income sharing by a couple and/or the use of tax free
or non-income producing assets should be considered.
Personal allowance reclamation for those with income between £100,000 and
£121,200 can yield worthwhile tax savings.
Further details on income tax changes and planning opportunities can be found in
Section 1 of the main report.
2. NATIONAL INSURANCE CONTRIBUTIONS
Class 2 NICs to be abolished and Class 4 NICs to be reformed.
The main changes are:-
- The Upper Earnings and Upper Profits Limits are £815 per week, £42,375 per
annum.
- Employees pay 12% contributions on earnings between £155 per week and £815
per week and 2% on earnings in excess of £815 per week.
- Employers pay 13.8% contributions on earnings in excess of £156 per week.
Further details on National Insurance Contributions changes and planning
opportunities can be found in Section 2 of the main report.
3. CAPITAL GAINS TAX
A range of measures will be introduced in Finance Bill 2015 to restrict the
availability of Entrepreneurs’ Relief (ER) in certain circumstances. These
measures will have immediate effect (i.e. for disposals on or after 18 March 2015)
and include amendments to TCGA 1992 to:
Ensure that a disposal of a privately owned asset will not qualify for ER,
unless the asset is disposed of in connection with a disposal of at least a 5%
shareholding in the company, or a 5% share in the partnership assets;
Relief is only available to those individuals who have a directly held stake of
at least 5% in a company carrying on a trade;
Deny ER on a disposal of shares in joint venture structures that are not
trading companies in their own right.
Legislation will also be included in Finance Bill 2015 to make it clear that to
qualify for the CGT exemption for gains accruing on the disposal of certain
wasting assets, an asset must have been used in the business of the person
disposing of it.
The Government also announced that they will consult on the CGT treatment of
gains made by academics on disposals of shares in 'spin-out' companies.
From 6 April 2015 the annual exempt amount (AEA) increases to £11,100 (from
£11,000).
The revised annual exempt amounts for trustees will be £5,550 - subject to a reduction
to a minimum of £1,110 where the same settlor has, broadly, created more than one
trust.
Rates remain at 18%/28% for individuals and 28% for trustees and personal
representatives.
From April 2015 capital gains tax on 'future gains' made by non-UK residents
disposing of UK residential property will apply.
The rate of CGT for gains qualifying for entrepreneurs’ relief remains at 10% on
cumulative lifetime capital gains of up to £10 million.
Individual’s will be able to defer gains, which are otherwise eligible for relief, by
investing in an Enterprise Investment Scheme and benefit from entrepreneurs’ relief
when the gain is realised at a later date.
For further details on the capital gains tax changes and planning opportunities to
minimise CGT can be found in Section 3 of the main report.
4. INHERITANCE TAX
The government will review the use of deeds of variation for tax purposes.
Legislation will be introduced to extend the existing inheritance tax exemption for
members of the armed forces to members of the emergency services where death is
caused or hastened by injury while on active service. The exemption will also extend
to humanitarian aid workers responding to emergency circumstances
The exemption for medals and other decorations awarded for valor or gallantry will be
extended to cover all decorations and medals awarded to the armed services or
emergency services personnel and to awards made by the Crown for achievements and
service in public life.
The nil-rate band is frozen at £325,000, and will remain so until 2017/2018.
For changes on inheritance tax and trusts please see section 10.
With the nil rate band frozen for a further two years, individuals should consider the
range of planning opportunities available to them. These can be found in Section 4 of
the main report.
5. CORPORATION TAX AND OTHER BUSINESS CHANGES
Legislation will be introduced giving the UK the power to introduce the OECD
model for county-by-country reporting. This will result in HMRC receiving more
granular and clear information from companies trading in the UK about their
global allocation of profits and indications of economic activity in a country.
This, together with the diverted profits tax (see below) will, it is thought, have a
positive impact on tax receipts from global companies trading in the UK.
Main rate of corporation tax cut from 21% to 20% for financial year 2015. It is
intended that it should remain at 20% for the financial year 2016.
The small profits rate will be unified with the main rate of corporation tax so there will
be only one corporation tax rate for non-ring fence profits – set at 20%. Consequently
there will be no marginal relief or effective marginal rate.
Diverted profits tax (so-called "Google Tax") to be introduced from 6 April 2015 to
apply a 25% tax rate to profits shifted abroad (within the tests in the legislation) by
global companies trading in the UK.
Anti- avoidance provisions to prevent companies from obtaining a tax advantage by
entering contrived arrangements to turn historic tax losses of restricted use into more
versatile “in-year” deductions.
The changing landscape in relation to corporation tax (most relevantly, for SMEs, the
rate of tax) represents a real opportunity for advisers with corporate clients to re-visit
the whole area of profit retention, investment and distribution. This will also represent
an excellent area to work with professional contacts. More explanation can be found
in Section 5 of the main report.
6. CAPITAL ALLOWANCES
There was no announcement that the increased annual investment allowance
(AIA) of £500,000 would extend beyond 31 December 2015.
The government is issuing legislation to clarify the effect of the capital allowances
anti-avoidance rules where there are transactions between connected parties or
sale and lease back transactions.
Further details on capital allowances changes and planning opportunities can be found
in Section 6 of the main report.
7. TAX SIMPLIFICATION
The government will transform the tax system over the lifetime of the next
Parliament by introducing digital accounts to remove the need for individuals
and small businesses to complete annual tax returns.
The government will consult over the summer on a new payment process to
collect tax and National Insurance through digital accounts instead of self-
assessment.
Following technical consultation, an annual cap of £300 for trivial benefits will
be introduced for office holders of close companies and employees who are
family members of those office holders.
Budget 2015 also announced that the automatic deduction of 20% income tax at
source by banks and building societies is intended to cease from April 2016.
The government will simplify the administration of employee benefits and expenses
together with providing a statutory exemption for trivial benefits in kind which cost
less than £50.
From April 2016, the government will remove the £8,500 threshold below which
employees do not pay income tax on certain benefits in kind and replace it with new
exemptions for carers and for ministers of religion.
Further details on tax simplification can be found in Section 7 of the main report.
8. TAX AVOIDANCE
Automatic Exchanging of Tax information with other EU states to be provided
for in post-Budget regulations
The Liechenstein and Crown Dependencies Disclosure Facilities to be closed
“early” – at the end of 2015 instead of 2016
General Anti-Avoidance “tax-geared” penalties to be introduced post Budget
More Accelerated Payment Notices to be issued
The introduction of the diverted profits tax (25%) for the "shifted " ( out of the UK)
profits of global companies
Country-by-country reporting of profits for multi-national companies
Restricting entrepreneurs’ relief in respect of goodwill transferred to a related close
company
Denial of income tax relief on tax losses from miscellaneous transactions
Strengthening the DOTAS provisions - including toughening the IHT scheme
hallmarks and removing "grandfathering"
Further action against promoters and users of high risk tax schemes
Penalties for employment intermediaries seeking to avoid/defer tax
Further details on tax avoidance and evasion changes and planning opportunities can
be found in Section 8 of the main report.
9. PROPERTY TAX
In the Autumn Statement on 3 December 2014, it was announced that SDLT would be
reformed for residential property purchases which complete on or after 4 December
2014. The reform means that rather than a single rate of tax being charged on a
purchase, each new SDLT rate will now only be payable on the portion of the
property value which falls within each band.
It was also announced in the Autumn Statement 2014 that the government would
extend the scope of SDLT multiple dwellings relief so that the purchase from housing
associations of superior leasehold interests in residential property such as shared
ownership leases, can attract relied where the transaction is part of a lease and
leaseback arrangement.
From 1 April 2015 a new ATED band will come into effect for properties with a value
greater than £1 million but not more than £2 million with an annual charge of £7,000.
From 1 April 2016 a further new band will come into effect for properties with a
value greater than £500,000 but not more than £1 million with an annual charge of
£3,500.
An extension to the ATED-related CGT charge will take effect from 6 April 2015 for
properties worth more than £1 million and not more than £2 million and from 6 April
2016 for properties worth between £500,001 and £1 million.
From 6 April 2015, gains made by non-resident individuals, trustees, PRs and
narrowly-controlled companies on the disposal of UK residential property, will be
subject to CGT. New rules will be introduced to restrict the circumstances in which an
overseas residence can benefit from private residence relief. The new rules will apply
to both UK residents disposing of overseas property as well as non-UK tax residents
disposing of UK property.
Further details on the Stamp Duty Land Tax (SDLT), CGT and ATED changes and
planning opportunities can be found in Section 9 of the main report.
10. TRUST TAXATION
As announced in the 2014 Autumn Statement, the government is not to proceed
with the introduction of a single settlement nil rate band as part of its IHT trust
reform. The Government will introduce new “same day addition” rules to target
IHT avoidance through the use of multiple trusts. It will also simplify the rules
on the calculation of IHT on trusts. These provisions will be included in a future
Finance Bill.
The government has announced that, following consultation on the draft
legislation contained in Finance Bill 2015, changes will be made so that the new
"same day addition" rules will only apply where the value added is more than
£5,000. Also the period of grace for not applying the new rules about additions to
existing trusts from wills executed before 10 December 2014 has been extended by
12 months and will now be limited to deaths before 6 April 2017.
The trust rate continues at 45% and the dividend trust rate 37.5%. These are the rates
that trustees of discretionary trusts pay on income they receive above their £1,000
standard rate band.
Trustees will continue to pay 28% on capital gains, subject to their annual exemption
from 6 April 2015 of £5,550.
Non-related (ie different day) trusts will still be eligible for their own IHT nil rate
band. Care needs to be exercised over making later same day additions to more than
one trust.
Trustees should invest so as to maximise the future use of their CGT free annual
exemption.
Trustees of discretionary trusts wishing to avoid the trust rates and annual returns
should consider using single premium bonds to reduce taxable income and if they need
to release funds, utilise the 5% tax deferred allowance.
Further details on the trust taxation changes and planning opportunities can be found
in Section 10 of the main report.
11. SAVINGS AND INVESTMENTS
From Autumn 2015 a ‘Help to Buy ISA’ will become available to boost savings
for first time home buyers. The government will pay £50 for every £200 saved
subject to a maximum of £3,000 which will be paid at the time the property is
bought.
From Autumn 2015, the government will allow ISA savers to withdraw and
replace money from their cash ISA without this counting towards their annual
ISA subscription provided they make a repayment in the same tax year as the
withdrawal.
Following technical consultation, the government will further extend the range of
ISA eligible investments in 2015/16 to include a wider range of investments.
The government confirmed that National Savings and Investment bonds for
pensioners (over 65) would remain on sale until 15 May 2015.
From 1 June 2015 the National Savings and Investment Premium Bond
investment limit will increase to £50,000.
Budget 2015 announced that the government will make amendments to the
Venture Capital Trusts (VCT), Enterprise Investment Scheme (EIS) and the Seed
Enterprise Investment Scheme (SEIS) to ensure that the UK continues to offer
significant and well-targeted support for investment into small and growing
companies, in line with new EU rules.
From 6 April 2015 the ISA limit will increase to £15,240 (from £15,000) and the
revised limit for the Junior ISA and Child Trust Fund will be £4,080.
Where a spouse or member of a civil partnership dies on or after 3 December 2014, the
surviving spouse/partner will inherit an additional ISA allowance equal to the value of
the deceased spouses’ ISA on the date of death. A further investment can be made on
or after 6 April 2015.
The government consultation on options for transferring savings held in Child Trust
Funds into Junior ISAs has now ended and the proposals are being taken forward
under the 2014 Deregulation Bill.
From 6 April 2015, all community energy generation undertaken by qualifying
organisations will be eligible for social investment tax relief (SITR) with effect from
the date of the expansion of SITR at which point it will cease to be eligible for the EIS,
SEIS and VCT.
The government will introduce a new digital process for investors and companies
qualifying for the tax-advantaged venture capital schemes (EIS, SEIS and SITR) in
2016 to make it easier to use the schemes. A new format for VCT returns will also be
developed.
The government will allow gains which are eligible for entrepreneurs’ relief (ER), but
which are instead deferred into investments which qualify for the Enterprise
Investment Scheme or Social Investment Tax Relief, to remain eligible for ER when
the gain is realised. This applies for disposals which take place on or after 3 December
2014.
The increase in the ISA limits will continue to be valuable to higher or additional rate
taxpayers.
Investment in qualifying social enterprises is likely to hold most appeal to those who
might otherwise have considered investing in EISs and VCTs.
Further details on the Savings and Investments changes and planning opportunities
can be found in Section 11 of the main report.
12. PENSIONS
Lifetime allowance to be reduced from £1.25 to £1m from 6 April 2016.
New transitional Fixed and Individual protection will be introduced.
The Lifetime Allowance will be indexed annually in line with CPI from 6 April
2018.
Consultation published on the development of a secondary annuity market
Benefits in kind tax exemption for employees who receives transfer advice as a
part of an employer led transfer exercise.
Guidance Guarantee/Pension Wise to receive an extra £19.5m to support
pensions freedoms.
Pension flexibility for DC schemes permitted from 6 April 2015.
Recipient of DC death benefits expanded to include nominees and successors.
Lump sum drawdown or annuity payments to beneficiaries of individuals who die
under age 75 paid tax free.
Lump sum drawdown or annuity payments where deceased died age 75 or over will
be taxed at the beneficiary’s marginal rate.
For further details on the pension changes and planning opportunities can be found in
Section 12 of the main report.
13. TAXATION OF SHAREHOLDING DIRECTORS
The government intends to abolish Class 2 NICs in the next Parliament and
reform Class 4 NICs.
The lifetime allowance that applies to registered pension schemes will reduce to
£1 million from 6 April 2016. This is clearly relevant for shareholding directors
of close companies who wish to extract profits from the company in a tax
efficient form.
It was announced in the Autumn Statement that no further changes were announced
regarding the tax rules that apply to close companies remunerating shareholders by
way of loans from intermediaries.
Those director/shareholders who have income of more than £150,000 will continue to
suffer a marginal rate of income tax of 45% (earnings) and 37.5% (dividends).
The Upper Earnings Limit for class 1 NICs for 2015/16 will be £42,385. Employer
NICs will be payable on earnings of more than £8,112 per annum. The income tax
personal allowance for 2015/16 is £10,600 and will increase to £10,800 in 2016/17.
Since April 2014, every business is entitled to an annual £2,000 Employment
Allowance towards their employer NIC bill. No change to the threshold of this relief
has been announced.
Drawing income as dividends will still normally save National Insurance but pay
enough remuneration so that employees receiving dividends still qualify for state
benefits.
Directors/shareholders currently paying marginal rate tax of 45% should consider
pension planning before 6 April 2015 – especially those who will be affected by any
future reduction of the annual allowance and the forthcoming announced reduction of
the lifetime allowance to £1 million in 2016/17.
Remuneration strategies should be considered for non-taxpaying spouses who can
work in the business.
An analysis of the most tax-efficient ways of drawing income from a company
(salary/dividend or pension) should be carried out.
Anti-avoidance measures have been introduced in the area of entrepreneurs’ relief –
see Section 3 of this report - Capital Gains Tax.
Further details on Taxation of Shareholding Directors changes and planning
opportunities can be found in Section 13 of the main report.
14. EMPLOYEE BENEFITS
An annual cap on trivial benefits of £300 will be introduced for office holders of
close companies, and employees who are family members of those office holders.
Company car rates will increase by 3 percentage points in 2019/20.
The Finance Bill 2015 legislation on qualifying expenses benefits exemptions has
been revised to ensure that the exemption cannot be used in conjunction with
salary sacrifice or any other arrangements that seek to replace salary with
expenses.
The £8,500 threshold for lower paid employees will be abolished from April 2016.
A trivial benefits exemption will apply to benefits costing less than £50 from April
2015.
From 6 April 2015 the income tax and NIC treatment of share options and awards
held by internationally mobile employees will be more closely aligned with other
forms of employment income.
For further details on the employee benefit changes and planning opportunities can
be found in Section 14 of the main report.
15. DOMICILE AND RESIDENCE
No new announcements were made in the 2015 Budget.
It was announced in the Autumn Statement that the annual remittance basis charge
(RBC) payable by those who have been UK resident for 12 out of the last 14 tax years
will increase from £50,000 to £60,000.
The £30,000 RBC remains for those who have been resident for 7 out of the last 9 tax
years.
In addition, a new charge of £90,000 will apply to those who have been UK resident
for 17 out of the last 20 tax years.
With announced increases to the RBC individuals should take advantage of planning
opportunities available to them.
Further details on the domicile and residence changes and planning opportunities can
be found in Section 15 of the main report.
16. CHARITIES
Legislation will be introduced to increase the maximum annual donation amount
which can be claimed through the Gift Aid Small Donations scheme to £8,000.
The government intends to introduce a new Charity Authorised Investment Fund
structure that will bring new investment funds established for charitable
purposes under FCA regulation, ensuring they receive the same regulatory
protections as funds for retail investors.
Legislation is to be introduced to enable regulations to be issued on Gift Aid digital
which will allow non-charity intermediaries a greater role in processing Gift Aid
claims on behalf of charities.
The government will continue and extend the review of the amount of any benefits a
donor may receive from the recipient charity while still qualifying for Gift Aid relief.
As announced in the Autumn Statement, the government wants to extend the scope of
Social Investment Tax Relief (SITR) by increasing the investment limit to £5m per year
per enterprise up to a maximum of £15m per enterprise. The relief is also to be
extended to small scale community farms and horticultural activities; and for
investments in special purpose vehicles set up to provide social impact bonds. The
government will also consult on introducing a social venture capital trust attracting
investment tax reliefs.
Gift Aid, payroll giving and relief for gifts of land and shares to charity are excluded
from the cap on income tax reliefs introduced in April 2013 and so continue to
facilitate income tax savings by extending the basic rate band.
Further details on the charities changes and planning opportunities can be found in
Section 16 of the main report.
17. CHILDCARE
The Government confirmed that the maximum amount that parents of disabled
children will be able to receive to help to pay for their childcare costs will be
doubled to £4,000 per disabled child per year.
The 2014 Budget confirmed that the tax-free childcare costs cap under the new
childcare scheme, due to take effect from October 2015, will be increased to £10,000
per child (thereby providing basic rate tax relief of up to £2,000 per child). The
scheme will be rolled out to all eligible families with children under 12 within the first
year of operation.
At Autumn Statement it was announced that parents eligible for Universal Credit will
be able to claim back up to 85% of paid out childcare costs up to a monthly limit of
£646 for one child or £1,108 for two or more children from April 2016.
Further details on the Childcare changes can be found in Section 17 of the main
report.
Main Report
1. INCOME TAX
1.1 PROPOSALS MADE IN THE BUDGET
From April 2016, the government will introduce a tax-free personal savings allowance to
remove tax on savings income of up to £1,000 for basic rate taxpayers and £500 for higher
rate taxpayers. This means that for a basic rate taxpayer to be eligible for the allowance their
total income has to be below £42,700 for the 2016/17 tax year and a higher rate taxpayer has
to have income between £42,701 and £150,000. Additional rate taxpayers will not benefit
from this new allowance.
The 2015 Budget confirmed that the personal allowance will be £10,600 for the 2015/16 tax
year. For the following two tax years the personal allowance will increase by £200 to £10,800
for 2016/17 and £11,000 for 2017/2018 respectively. This means that the amount available
for transfer under the marriage allowance will increase by £20 and £40 respectively.
The increase in the personal allowance will also mean that from 2016/17 everyone will be
entitled to the same personal allowance regardless of when they were born.
It was also confirmed that the basic rate limit will be £31,785 for 2015/16. The basic rate
limit will increase to £31,900 for 2016/17 and £32,300 for 2017/18. As a result the higher
rate threshold will be £42,700 and £43,300 respectively.
The zero starting rate band for the first £5,000 of savings income will be held at that amount
for the 2016/17 tax year.
1.2 CHANGES ALREADY ANNOUNCED
1.2.1 Changes to the income tax bands
From 6 April 2015, the basic rate limit reduces to £31,785 from £31,865.
In addition, a zero starting rate band will apply for the first £5,000 of savings income, thereby
replacing the 10% starting rate band for savings income. This means that if an individual’s
taxable non-savings income exceeds £5,000 then the zero rate will not apply. This is because
non-savings income is taxed before savings income.
Under the old rules to be able to register for savings income to be paid gross an individual’s
total income must not have exceeded their personal allowance – i.e £10,000 in 2014/15.
However, with the introduction of a zero starting rate band of £5,000 for savings income
from 6 April 2015 these rules are changing to ensure that any saver who is unlikely to be
liable to tax on any of their savings income in the tax year can complete a Form R85 and
register to receive interest without tax being deducted – even if they pay tax on other (non-
savings) income.
In practice this means that if a saver's total taxable income will be below the total of their tax-
free personal allowance plus the £5,000 starting rate limit for savings then, from 6 April
2015, they can register to have interest paid on their accounts, without tax deducted, using
form R85. A separate Form R85 must be sent to each institution with which an account is
held.
1.2.2 Increase in the income tax personal allowance for 2015/16
From 6 April 2015 the income tax personal allowance for those born after 5 April 1948 will
increase to £10,600. This is an increase of £600 over the personal allowance for 2014/15.
As the basic rate limit reduces to £31,785, taxpayers who are entitled to the full standard
personal allowance will pay 40% tax on income above £42,385 (the higher rate tax threshold,
which is the sum of the basic rate limit and standard personal allowance).
1.2.3 Changes to the higher personal allowance for 2015/16 (those born before 5
April 1938)
For the 2015/16 tax year people born before 6 April 1938 will be entitled to a personal
allowance of £10,660.
Those born after 5 April 1938 but before 6 April 1948 will be entitled to a personal allowance
of £10,600 which is therefore now aligned with the standard personal allowance.
The higher personal allowance is subject to an income limit. Where an individual's total
income exceeds the income limit (£27,700 in 2015/16), their personal allowance is reduced
by £1 for every £2 above the income limit.
However, the higher personal allowance is not reduced below the amount of the standard
personal allowance (£10,600 for 2015/16).
From 2016/17 the age-related personal allowance will be phased out as everyone will be
entitled to the same personal allowance regardless of when they were born.
1.2.4 The married couple’s allowance for 2015/16
The married couple’s allowance is £8,355 provided at least one of the couple was born before
6 April 1935.
1.2.5 The total income limit
This is increased to £27,700 as mentioned in 1.2.3 above.
1.2.6 Loss of the personal allowance
Those with an adjusted net income exceeding £100,000 will lose their personal allowance at
the rate of £1 for every £2 above the income limit. For 2015/16 this means that those with an
adjusted net income of £121,200 or more will lose their entire personal allowance.
1.2.7 Introduction of transferable tax allowance (marriage allowance)
From April 2015, spouses and civil partners will be entitled to transfer £1,060 of their
personal allowance to their spouse or civil partner provided that neither of them is subject to
income tax at the higher or additional rate. The transferable amount is 10% of the standard
personal allowance so the amount available for transfer will increase to £1,080 for 2016/17
and to £1,100 for 2017/18.
1.3 PLANNING
1.3.1 General
The fact that each individual has their own personal allowance and their own starting and
basic rate tax bands means that worthwhile overall income tax saving opportunities are
available for 2015/16. This is especially so in regard to income that falls between £100,000 -
£121,200 which causes the removal of some or all of the personal allowance and an effective
tax rate of 60% for non-dividend income.
1.3.1 Introduction of a tax-free personal savings allowance
From 6 April 2016, a tax-free personal savings allowance of £1,000 for basic rate taxpayers
and £500 for higher rate taxpayers will be introduced. The zero starting rate band of £5,000 is
set to remain at this amount for the 2016/17 tax year. This means that individuals whose only
income is savings income which is at or below £16,800 will not be liable to tax on that
income. Another “tax free” variation would be where an individual had, say, £10,800 of non-
savings income (say from a pension) and £6,000 of savings income. In that case the pension
would be tax free under the personal allowance and the savings income tax free by virtue of
the £5,000 nil “starting rate” and the £1,000 tax free personal savings allowance.
Where an offshore investment bond has been used, say for funding the cost of higher
education, assigning segments to a non-taxpaying child/grandchildren could prove to be tax
attractive as provided the gain is not in excess of £16,800 they would have no further tax
liability on the gain.
As a reminder, “savings income” includes most interest from savings accounts, interest
distributions from OEICS and unit trusts, income from purchased life annuities and gains
under life assurance contracts.
1.3.2 Married couples
For all couples, as a bare minimum, both personal allowances and starting/basic rate tax
bands should be used to the full. This is particularly beneficial where income can be
legitimately shifted from a higher or additional rate taxpaying spouse to a non, starting or
basic rate taxpaying spouse. For those with cash and investments this will usually be
facilitated by a transfer of income-producing assets from the higher tax paying spouse to the
other.
Any such transfers would usually be CGT and IHT neutral as transfers between spouses
living together are treated as transfers on a no gain/ no loss basis for CGT purposes and
transfers between UK domiciled spouses (living together or not) are exempt from IHT
without limit.
1.3.3 Business owners
Business owners with greater control over “income flow” might consider, in relation to their
spouses who are non/lower taxpayers:
employing them (although deductibility of the amount paid would be subject to
showing that the expense was incurred wholly and exclusively for the purposes of the
trade); or
bringing them fully into partnership (sharing in capital and profits); or
transferring or issuing fully participating shares (ie. shares with rights to capital,
voting and income) to them which would carry the right to dividends
as a means of tax effectively ensuring that income distributed from the business bears as low
a personal tax rate as possible.
They should ensure that, taking account of other income in retirement, eg state pension, each
spouse has sufficient income to fully utilise their personal allowance.
1.3.4 Those in the age allowance trap
Age allowance applies separately to a husband and wife as does the total income limit of
£27,700 above which the allowance reduces. By careful planning both spouses can possibly
each qualify for a full age allowance. When investment income falls within the “age
allowance trap” it can suffer an effective rate of tax of 30% so reinvestment in non-income
producing assets should be considered.
Capital investment bonds, capital growth oriented collectives and ISAs may be attractive as,
(subject to guarding against “capital erosion”), “income” can be taken without loss of age
allowance. With the insurance-based investment bond (“capital investment bond”), this will
commonly be by use of the 5% annual withdrawal facility. In some cases, more than 5% can
be taken (without an addition to total income which may impact on the age allowance)
provided the first withdrawal is made in the second policy year.
1.3.5 Those with income in excess of £100,000
Where an individual has adjusted net income in the band between £100,000 and £121,200 (or
just above £121,200) a part of any non-dividend income in that band will effectively be taxed
at 60% because of the cut back in the personal allowance. A contribution to a registered
pension scheme could, in effect, provide tax relief at the same effective 60% rate. As part of
their planning, such people may also wish to consider independent taxation strategies and
reinvestment into tax-efficient investments such as ISAs or capital investment bonds.
However, it needs to be borne in mind that no top-slicing relief applies for the purposes of
adjusted net income when a capital investment bond is encashed.
2. NATIONAL INSURANCE CONTRIBUTIONS
2.1 PROPOSALS MADE IN THE BUDGET
Class 2 NICs will be abolished in the next Parliament and Class 4 NICs will be reformed to
introduce a new contributory benefit test. These changes will be consulted on this year.
2.2 CHANGES ALREADY ANNOUNCED
The Upper Earnings and Upper Profits Limits, beyond which NICs are charged at 2%,
increase to £42,385.
The rates for 2015/16 are as follows:-
The Employee’s Primary Class 1 National Insurance rate is 12% on earnings between
the Primary Threshold (£155 per week - £8,060 pa) and Upper Earnings Limit (£815
per week - £42,385 pa).
Employees, in addition, pay 2% Primary Class 1 National Insurance on all earnings
above the Upper Earnings Limit (£42,385 per annum).
The Employer’s Secondary Class 1 contribution rate on earnings above the Secondary
Threshold (£156 per week - £8,112 pa) is 13.8%. This rate applies also to Class 1A
and Class 1B contributions.
The self-employed Class 4 rate on profits between the Lower (£8,060 pa) and Upper
Profits Limit (£42,385 pa) is 9%.
The self-employed Class 2 flat rate contribution is £2.80 per week.
The self-employed, in addition, pay Class 4 contributions at a rate of 2% on all profits
above the Upper Profits Limit (£42,385).
The Class 3 voluntary contribution rate is £14.10 per week.
The Married women’s reduced rate is 5.85%.
It is understood that from April 2015 the £2,000 annual Employment Allowance for
employer NICs will be extended to care and support workers. This means that a
family will be able to employ a care worker on a salary of around £22,600 and pay no
employer NICs.
From April 2016 employer NICs up to the Upper Earnings Limit for apprentices aged
under 25 will be abolished.
From 6 April 2015 employers will no longer be required to pay Class 1 NICs on
earnings paid up to the Upper Earnings Limit to any employee under the age of 21.
To cater for this change, a new Upper Secondary Threshold has been introduced
which is £815 per week - £42,385 p.a.
From October 2015 a new Class 3A voluntary NI contribution will be introduced.
2.3 PLANNING
As ever, the changes for 2015/16 should give advisers an incentive to visit their business
clients to discuss effective methods of remuneration.
If a salary is to be taken which avoids both employee’s and employer’s NICs then it should
not exceed £8,060 per annum ie. the threshold above which employees pay NICs.
A highly effective form of NIC planning for genuine (non-shareholding) employees would be
to consider a salary sacrifice arrangement in conjunction with employer contributions to a
registered pension plan. Contributions could be boosted by payment of the saved NIC costs
as additional pension payments.
There are, of course, a number of other important implications to consider with a salary
sacrifice scheme.
Those running their business through a company are likely to seriously consider paying
themselves dividends as opposed to salary. The main reason for this will, of course, be that
dividends are not subject to NICs. The pros and cons of dividends and salary have been well
rehearsed many times in the past and these should be revisited before any meetings are
arranged with clients. An analysis of dividends vs salary is available in the further
information section 13 on the Taxation of Shareholding Directors. In addition, a review of
the opportunities for payment of salary to working spouses could be beneficial. In any
remuneration planning for a spouse it is important that payments, in order to be fully tax
deductible, can be justified on the basis of work carried out.
Any planning carried out with a view to taking a spouse into partnership (where appropriate),
or issuing shares to a spouse in order to pay dividends, must be carefully discussed with
professional advisers.
There may be an additional benefit to incorporation in the shape of the avoidance of the
“unlimited” 2% Class 4 NICs on earnings over £42,385 that could be avoided on profits that
accrue to a company. NICs could continue to be legitimately avoided, even if the money
leaves the company, provided it is paid to the shareholders by way of dividend. Naturally,
before taking this important step (incorporating an unincorporated business), there are many
other factors to be taken into account and professional advice is essential.
3. CAPITAL GAINS TAX 3.1 PROPOSALS MADE IN THE BUDGET
3.1.1 Entrepreneurs’ relief and associated disposals
Legislation will be introduced in Finance Bill 2015 to prevent claims to entrepreneurs’ relief
in respect of gains on disposals of privately-held assets used in a business unless they are
associated with a significant material disposal, that is to say a disposal of at least a 5%
shareholding in the company or of at least a 5% share in the assets of the partnership carrying
on the business. These changes have effect for disposals on or after 18 March 2015.
3.1.2 Entrepreneurs’ relief, joint ventures and partnerships
Legislation will also be introduced in Finance Bill 2015 to prevent claims to entrepreneurs’
relief in respect of gains on shares in certain companies which invest in joint venture
companies, or which are members of partnerships. The new rule will deny relief where the
investing company has no trade (or no relevant trade) of its own. This change also has
immediate effect (i.e. for disposals made on or after 18 March 2015).
3.1.3 Wasting assets exemption
Legislation will be introduced in Finance Bill 2015 clarifying that the CGT exemption for
certain wasting assets is only available where qualifying assets have been used in the seller’s
own business. These changes will have effect from 1 April 2015 for corporation tax and 6
April 2015 for CGT.
3.1.4 Entrepreneurs’ relief on goodwill.
Following consultation, legislation included in Finance Bill 2015 to prevent claims to
entrepreneurs’ relief in respect of gains on business goodwill in certain circumstances, has
been revised to allow entrepreneurs’ relief to be claimed by partners in a firm who do not
hold or acquire any stake in the successor company.
3.1.5 Entrepreneurs' relief and academics
The Government announced that they will consult on the CGT treatment of gains made by
academics on disposals of shares in 'spin-out' companies. Any necessary legislation will be
introduced in a future Finance Bill.
3.2 CHANGES ALREADY ANNOUNCED
From 6 April 2015 the annual exempt amount (AEA) increases to £11,100 (from
£11,000). The exemption for most trustees will be £5,550.
For individuals, the rate of capital gains tax (CGT) remains at 18% where total
taxable gains and income are less than the income tax basic rate limit (£31,785). The
28% rate applies to gains (or any parts of gains) above that limit. For trustees and
personal representatives of deceased persons, the rate of CGT remains at 28%.
The rate of CGT for gains qualifying for entrepreneurs’ relief remains at 10% on
cumulative lifetime capital gains of up to £10 million. It will be possible for
individuals to defer gains, which are otherwise eligible for relief, by investing in an
Enterprise Investment Scheme and benefit from entrepreneurs’ relief when the gain is
realised at a later date.
3.2.1 Non-residents and UK residential property
Following consultation the government has confirmed that from 6 April 2015 non-UK
resident individuals, trusts, personal representatives and narrowly controlled companies will
be subject to CGT on gains accruing on the disposal of UK residential property on or after
that date. Non-resident individuals will be subject to tax at the same rates as UK taxpayers
(28% or 18% on gains above the annual exempt amount). Non-resident companies will be
subject to tax at the same rates as UK companies (20%) and can benefit from indexation
allowance.
For more on this see Section 9 – Property Tax.
3.2.2 Capital gains tax and entrepreneurs’ relief
The Government will allow gains which are eligible for ER, but which are instead deferred
into investments which qualify for the Enterprise Investment Scheme (EIS) or Social
Investment Tax Relief (SITR), to remain eligible for ER when the gain is realised. This will
benefit qualifying gains on disposals that would be eligible for ER but are deferred into EIS
or SITR on or after 3 December 2014.
Entrepreneurs' relief, delivering a 10% CGT rate on cumulative “lifetime” gains of up to £10
million, is incredibly valuable. Advisers will probably not advise directly on it but having an
awareness of how it works and any constraints will be valuable in advising business-owning
clients.
3.2.3 ATED related CGT charge
All corporate and other ‘envelopes’ affected by the new ATED band will also be subject to
CGT on disposal of the properties held, at a rate of 28%. The extension to the ATED-related
CGT charge will take effect from 6 April 2015 for properties worth more than £1 million and
not more than £2 million. For properties worth more than £500,000 and not more than £1
million, the extension to the ATED-related CGT charge will take effect from 6 April 2016. In
both cases, the charge will apply only to that part of the gain that is accrued on or after the
effective date. The balance of any gain will continue to be treated as at present which means
the gain will be apportioned between the two periods and charged accordingly. Legislation on
the CGT elements of this measure is included in Finance Bill 2015.
3.2.4 Disposals of UK residential property by non-UK residents
Following consultation the government has confirmed that from 6 April 2015 non-UK
resident individuals, trusts, personal representatives and narrowly controlled companies will
be subject to CGT on gains accruing on the disposal of UK residential property on or after
that date. Non-resident individuals will be subject to tax at the same rates as UK taxpayers
(28% or 18% on gains above the annual exempt amount). Non-resident companies will be
subject to tax at the same rates as UK corporates (20%) and will have access to an indexation
allowance. Full details were set out in the response document ‘Implementing a capital gains
tax charge on non-residents – summary of responses’, published on 27 November 2014 and
further guidance on the changes was published by HMRC on Budget Day in the form of
‘frequently asked questions’.
3.2.5 Private residence relief (PPR) on properties located in other jurisdictions
The government will restrict access to PPR in circumstances where a property is located in a
jurisdiction in which a taxpayer is not tax resident. In those circumstances, the property will
only be capable of being regarded as the person’s only or main residence for PPR purposes
for a tax year where the person meets a 90-day test for time spent in the property over the
year. The new rules will apply to both UK residents disposing of overseas property as well as
non-UK tax residents disposing of UK property.
3.3 PLANNING
3.3.1 Planning for investors:
3.3.1.1. Minimising tax on realised gains
There is an appreciable difference in the rate of CGT paid by higher rate and additional rate
taxpayers on the one hand and non/basic rate taxpayers on the other. For married clients, it
can therefore be beneficial to ensure that taxable gains are made by the lower taxed spouse
where this is possible. Even if both spouses are taxed at the same rate, there may still be the
opportunity to use two annual exemptions rather than one.
Transfers between spouses or civil partners living together are made on a ‘no gain/no loss’
basis and are, of course, exempt from inheritance tax. Such transfers should be made on an
outright basis with ‘no strings attached.’
The rate of CGT on non-exempt gains is dependent on the level of total taxable income.
Action to reduce it could therefore result in a CGT rate that is reduced by 35% (28% to 18%).
Higher rate tax relief on a pension contribution continues to be given by the extension of the
basic rate band by the gross contribution and so, for some investors will be effective for the
purposes of determining whether the 28% or 18% rate of CGT is applicable. Payment of an
allowable pension contribution would represent an effective way of providing an indirect
CGT benefit for a basic rate taxpayer who realises a chargeable gain which would otherwise
take them into higher rate tax. This is because it would result in an equivalent amount of a
capital gain that would otherwise be subject to CGT at the higher rate of 28% now being
taxed at 18%.
3.3.1.2 Making use of the annual exemption
This may seem like an obvious planning point but one which can sometimes be missed. The
annual exemption is given on a ‘use it or lose it’ basis. So if individuals are relying on certain
investments for additional income, re-balancing asset allocation within their investment
portfolio could provide the opportunity to use their annual exemption.
In some cases considering a phased sale of shares over two tax years can prove to be
beneficial as it is possible to benefit from use of two annual exemptions.
3.3.1.3 Maximising the use of losses
Despite the recovery in some asset values, some longer-term holdings could still be standing
at a loss. Combine this fact, with the higher rates of tax on gains made by higher rate
taxpayers and the often-forgotten rules on the tax treatment of capital losses might assume
increased importance.
If a taxpayer realised a gain and a loss in the same tax year:
The loss will be set off against the gain, even if the gain is within the taxpayer’s
annual exemption. Some or all of the exemption may therefore be wasted.
However, if the taxpayer carried forward a loss from a previous tax year:
The carried forward loss is only used up to the extent that it reduces their overall gains
to the level of the annual exemption.
The loss is therefore only partly used when necessary with the balance carried
forward to set off against later gains.
Care should always be taken before realising gains and the losses together in a single tax
year. In particular, care should be taken not to waste the annual CGT exemption.
3.3.2 Planning for business owners
The entrepreneurs’ relief limit stands at £10m, which on the face of it, continues to increase
the appeal of building up the value of a business with a view to realising a low-taxed gain.
Of course, reliance on an individual’s business as the sole or main means of providing
financial security in the future may represent an excessively undiversified and, thus, high risk
strategy. Business owners contemplating or adopting this route should be encouraged to
consider some alternative means of providing for the future including, as appropriate,
pensions and other suitable investments so as to diminish risk through diversification.
It is one thing having a hugely beneficial tax regime for gains made on business sale but quite
another achieving and realising the gain in the first place!
Careful consideration will also need to be given to the rule changes that have effect for
disposals on or after Budget Day that restrict the availability of entrepreneur’s relief in certain
circumstances.
3.3.3 Non-residents and UK residential property
As non UK residents will be subject to UK capital gains tax on future disposals of UK
residential property, those falling into this category should consider seeking advice on viable
options for example, potentially transferring the property to a company – provided of course,
that is it not caught by the annual tax on enveloped dwellings and stamp duty land tax – see
our section on property tax for more information.
When the property is later sold however, there could be a liability to corporation tax on any
gain at that point unless other planning is carried out to prevent this.
4. INHERITANCE TAX
4.1 PROPOSALS MADE IN THE BUDGET
In an interview with the Sunday Times last January Chancellor George Osborne said that
inheritance tax (IHT) should only be paid 'by the rich' and the Conservatives will set out
proposals to introduce further relaxations (which could incorporate an increase to the nil rate
band) before the general election. Immediately before the Budget, speculation abounded
about the possible rising of the NRB to £1 million and possible abolition of the IHT on main
residences of up to a certain figure. None of these predictions materialised. Instead, the only
surprise announcement related to the review of the use of deeds of variation.
4.1.1 Deeds of variation
The Chancellor announced a government review of what he described as attempts to avoid
IHT through the use of deeds of variation. The review will report by autumn and will look at
cases where individuals use deeds of variation to alter a will in order to pass bequests on to
their children, thereby removing sums from their estate for IHT.
4.1.2 Inheritance tax online.
As part of the introduction of the new IHT digital service HMRC will publish draft
regulations to facilitate the use of electronic communications.
4.1.3 IHT and trusts
Some amendments have been proposed to the draft legislation first published on 10
December 2014. For full details please see section 10.
4.2 CHANGES ALREADY ANNOUNCED
4.2.1 Nil rate band
The nil rate band will remain frozen at £325,000 until 2017/2018.
4.2.2 IHT and trusts
Most of these changes were announced last December. For details on the changes in respect
of inheritance tax and trusts please see section 10.
4.2.3 Extension of death on active service exemption and medals exemption
The government has announced that it is to extend the exemption for death on active service
to people who die as a result of their activities whilst on active service to the emergency
services (this will include firefighters, ambulance crews, coastguards and the police) and
humanitarian aid workers responding to emergency circumstances. The changes will be
effective from 6 April 2015 and will apply to deaths which occur on or after 19 March 2014.
No IHT is payable on the death of a person from wound, accident or disease contracted whilst
on active service against an enemy (or on service of a similar nature) during that time or from
aggravation during that time of a previously contracted disease. This exemption applies when
HMRC Inheritance Tax receives a valid certificate issued by the Ministry of Defence.
The following information should be provided:
the deceased's service number;
a copy of the death certificate; and
any relevant supporting medical evidence, such as a post-mortem report.
Exemption applies to a person certified by the Defence Council or the Secretary of State as
dying from the above causes inflicted or incurred whilst in the armed forces or, if not a
member of those forces, whilst subject to the law governing any of those forces by reason of
association with or accompanying them. The wound does not have to be the only or direct
cause of death, provided it is a cause.
This means that, soldiers who die in the line of duty, or whose death is "hastened by injury
incurred in the line of duty", will be able to pass on all their estate - including their homes,
shares and other assets - to their relatives and other beneficiaries without having to pay IHT.
The death may occur sometime after the injury. For example, a veteran who dies in 2015
from an injury suffered in the Gulf War in 1991 would qualify for the exemption.
This exemption will also now apply to people who die as a result of their service in the fire
brigade, ambulance crew, the police force, being a coastguard and because they were a
humanitarian aid worker responding to emergency circumstances.
The exemption for medals and other decorations awarded for valor or gallantry will also be
extended to cover all decorations and medals awarded to the armed services or emergency
services personnel and to awards made by the Crown for achievements and service in public
life. This will apply to transfers of value made or treated as made on or after 3 December
2014.
4.3 PLANNING
4.3.1 People affected by IHT
With the nil rate band frozen until the 2017/18 tax year, stock markets flourishing and house
prices increasing more and more people will find that there will be a potential liability on
their death. It therefore makes sense for such people to take early planning action.
4.3.2 Making use of exemptions
This is a fundamental IHT planning point and one which can often be missed. The key is to
remember that there are a number of IHT exemptions which individuals can take advantage
of. The most common ones are:
Annual exemption – each individual can give £3,000 per annum and also use the
previous year’s exemption if not already used.
Small gift exemption – up to £250 can be given to any number of individuals (note the
small gifts exemption cannot be combined with the annual exemption).
Normal expenditure out of income – gift can be made from surplus taxable income on
a regular basis provided it doesn’t affect the donors standard of living.
Exemptions are also available on the occasion of a marriage and where gifts are made to a
UK registered charity and community amateur sports clubs. Planning in this area can
sometimes be overlooked with few people using such exemptions to the full potential.
Using the normal expenditure and annual exemptions through the payment of premiums
under life assurance policies held in trust to meet the liability to IHT can be particularly
effective.
4.3.3 Other lifetime planning
In some cases it may be possible for individuals to make gifts in their lifetime whether
outright or by executing a trust.
The current regime for outright gifts is indeed very favourable especially where the person
making the gift is in good health. Outright gifts (whether to another individual/absolute trust)
are potentially exempt transfers (PETs) for inheritance tax purposes which means that no IHT
is payable at the time the gift is made. Further provided the donor survives for 7 years the
whole amount is free of an IHT on the donors’ estate. Also there is no limit on the amount
which can be gifted.
Alternatively, where someone wishes to maintain an element of control, consideration could
be given to executing a lifetime trust. Most trusts with any element of flexibility are taxable
under the relevant property regime, i.e. as a discretionary trust. This means that the trust can
be subject to IHT on creation, when capital appointments are made and at each tenth year
anniversary. For this reason it is advisable to execute these trusts within the individual’s
available nil rate band. And where the settlor is in good health, a cycle of nil rate band use
every seven years might represent a very effective means of planning - through appropriate
trusts where a degree of retained control is to be retained.
And for those requiring a degree of access as well as control (but without triggering a
reservation of benefit) then a form of Loan Trust or Discounted Gift Trust (or a combination)
may prove suitable.
When determining the type of trust to use (especially where the trust assets could produce
income and capital gains) all aspects of taxation need to be considered in determining
suitability.
Note that there are a range of trusts available to cater for each individuals specific needs and
proper advice is essential when making any gift to a trust.
4.3.4 Will Planning
4.3.4.1 Using the Nil rate band
For a person with assets of £325,000 or more, effective use of the nil rate band can result in
an IHT saving of £130,000.
Under the transferable nil rate band (TNRB) rules, where a spouse/civil partner dies leaving
assets to the survivor, it is possible for the personal representatives to make a claim in respect
of the percentage any unused nil rate band within two years from the date of the death of the
survivor.
These provisions, apply to anyone who dies on or after 9 October 2007, regardless of when
their spouse died (including deaths before 1986 when IHT was introduced).
For a married couple or registered civil partners, this can mean that up to £650,000 (i.e. twice
the current NRB threshold) of the combined estate could pass free of IHT. Assets that exceed
this value on death will be taxed at 40%.
While it may be reasonable to conclude that couples with combined assets of up to twice the
nil rate band, especially those whose main asset is their home, may not need or be interested
in IHT planning, others may still be interested in ‘first death nil rate band planning,’
especially given the fact that the nil rate band has been frozen since 2009 and is set to remain
so until April 2018. Examples of this may be where it is thought that the value of the assets
to be left on first death will increase in value at a rate faster than the expected increase in the
nil rate band or where the surviving spouse has already inherited (from an earlier marriage) a
100% multiplier of the nil rate band. Some of the planning solutions for using the nil rate
band will involve a discretionary will trust which will absorb some of the TNRB.
4.3.4.2 Business or Agricultural Property Relief
It is important that reliefs are not wasted on death. And with nothing announced in the
Budget to directly affect such reliefs, individuals should be reminded that they exist and the
IHT savings that they deliver. Assets which qualify for relief at 100% should if possible be
left to children or to a trust on their behalf as opposed to the surviving spouse where the relief
would be wasted. Where a business succession plan is in place (resulting in the sale of a
business interest by a deceased's personal representatives and a purchase by the remaining
business owners) then estate planning for the deceased's family receiving the cash proceeds
of sale will be beneficial. Any purchase should be made under an option agreement – in order
to maintain business property relief. Also, a form of by-pass trust for the deceased's share in
the business may be appropriate to avoid the cash proceeds of sale attracting IHT on
subsequent death of the spouse of the business owner.
4.3.4.3 Leaving assets to Charity
Gifts to UK registered charities are exempt from IHT. Further where someone leaves 10% or
more of their chargeable estate to charity, the IHT payable on the remainder of the estate will
be at 36% instead of 40%.
4.3.5 Deeds of variation
Where property is inherited, it is possible to redirect the inheritance by deed of variation to
achieve immediate IHT savings. Ordinarily the inherited assets accumulate with the taxable
estate of the receiving beneficiary who may be wealthy in their own right. Instead of
choosing to make a gift of such assets, which could give rise to IHT, the receiving beneficiary
could execute a deed of variation to make an immediate IHT saving on their own estate. This
can be done within 2 years of death. As mentioned above, this area has been picked for
review as part of the Government’s drive to counter tax avoidance. So, those contemplating
using this device should bear the possible changes in mind and may want to consider taking
action sooner rather than relying on the 2 year limit currently available.
5. CORPORATION TAX AND OTHER BUSINESS TAX
CHANGES
5.1 PROPOSALS MADE IN THE BUDGET
5.1.1 R & D tax credits: access
Following a consultation on improving access to R&D tax credits for smaller companies, the
government will introduce voluntary advanced assurances lasting 3 years for smaller
businesses making a first claim from autumn 2015 and reduce the time taken to process a
claim for 2016. The government will produce new standalone guidance aimed specifically at
small companies backed by a 2 year publicity strategy to raise awareness of R&D tax credits.
HMRC will publish a document in the summer setting out a roadmap for further
improvements to the scheme over the next 2 years.
5.1.2 Country-by-country reporting
The government will introduce legislation that gives the UK the power to implement the
Organisation for Economic Co-Operation and Development (OECD) model for country-by
country reporting. The new rules will require multinational enterprises to provide high level
information to HMRC on their global allocation of profits and taxes paid, as well as
indicators of economic activity in a country. This together with the diverted profits tax (see
5.2.2 below) will, it is hoped, operate to substantially increase the tax yield in relation to
profits substantially generated from trading activities in the UK.
5.2 CHANGES ALREADY ANNOUNCED
5.2.1 Corporation tax rates
The main rate of corporation tax will be cut by 1% from 21% to 20% for Financial Year 2015
- the year commencing 1st April 2015.
This means that for the first time for many years (and with the exception of oil and gas ring
fence profits) we have a single rate of corporation tax at 20%. There will no longer be the
need to consider the impact of the "marginal rate of tax" brought about by the application of
"marginal relief" in relation to profits between £300,000 and £1.5m.
The introduction of a single rate of corporation tax also removes the need for the “associated
companies rules”, which are used to determine whether a company is small and therefore
taxed at a rate different from the main rate.
However, those rules cannot be entirely repealed, as they are also used for other purposes
within the corporation tax regime. It is proposed that they will be replaced with a simpler
51% group test to be used to determine:
the rate at which oil and gas ring fence profits are taxed;
whether a company is entitled to use a simplified method for calculating patent box
profits;
how much has been spent by a company on long-life assets for capital allowances
purposes; and
a company’s requirement to pay corporation tax by quarterly instalments
5.2.2 Diverted profits tax
Despite strong representations made as to why the implementation of this tax should be
deferred and aligned with the implementation of EU/OECD action, this new tax to counter
the use of aggressive tax planning techniques by multinational enterprises to divert profits
from the UK will be introduced. The diverted profits tax will be applied, using a rate of 25%,
from 1 April 2015.
However, the consultation and resulting representations have not been entirely without effect.
The original draft legislation has now been revised to narrow the notification requirement
together with other changes to clarify how the rules will operate and, effectively, limit their
scope.
Diverted profits is a subject that has grabbed the headlines with “big names”, such as
Starbucks and Google, attracting much negative attention. There was an overwhelming
feeling that “something had to be done” and now it has been. As referenced above, country-
by-country reporting will also help in this fight against “profit shifting”. All of this, of
course, is within the context of the OECD/G20 commitment to ensure that profits are taxed in
the country that the trade giving rise to the revenue in question is carried out in.
5.3 PLANNING
Corporate investment of cash on deposit has always been a relatively challenging area of
business. Before even thinking about tax it is essential to consider liquidity needs, appetite
for risk and other uses for available funds eg. debt repayment and pension contributions.
If it is decided that an equity based investment is suitable then it is worth remembering that
dividends from collectives, are likely to be tax free if received or reinvested on behalf of a
UK company and only capital gains over inflation (based on the RPI) will be subject to
corporation tax when the gain is actually realised.
Investment bonds are sometimes considered as an alternative. However, the expected impact
of the new EU accounting directive (and the introduction of the new FRS 102 to replace
FRSSE) effectively prevents, in most cases, any hoped for tax deferment.
It is, however, reiterated that before any investment is made (in whatever vehicle),
professional advice should be taken in relation to the impact that investment (taking funds off
deposit) might have on the availability of entrepreneurs’ relief and, for investment in
deposit/cash-based investments and life policies (bonds), the impact that the loan relationship
rules might have on the annual corporation tax liability of the company.
The rate of corporation tax payable is also likely to have a strong influence on the choice of
trading entity for those in business or those considering starting a business. Especially where
profits earned from the business exceed (or are expected to exceed) the amounts required by
the business owners for personal expenditure, retaining profits inside a company will mean
that significantly less tax will need to be paid than if the profits had been earned by the owner
as a higher or additional rate tax paying sole trader, partner or member of a LLP.
5.3.1 General business planning
With the retention of an additional rate of tax (at 45%) and a higher rate of tax (40%) that is
double the main corporation tax rate, the balance seems to be firmly in favour of
incorporation once profits exceed the higher rate threshold.
However, for the increasing numbers of individuals “starting their own business”, self-
employment remains an easy and natural, low-cost choice. For these, the cash accounting
option may prove attractive as will other measures targeted to reduce red tape and help to
make business life easier.
6. CAPITAL ALLOWANCES
6.1 PROPOSALS MADE IN THE BUDGET
The government has announced that it intends to introduce legislation which will, with effect
from 26 February 2015, clarify the effect of the capital allowances anti-avoidance rules where
there are transactions between connected parties or sale and leaseback transactions.
This measure can affect businesses that enter into connected party transactions and sale and
leaseback transactions, where the expenditure is incurred on plant and machinery that has
previously been acquired by the business or a connected party without incurring capital
expenditure.
The measure clarifies the effect of the capital allowances anti-avoidance rules where there are
transactions between connected parties or sale and leaseback transactions.
For example, where a person acquires an item of plant and machinery without incurring
capital expenditure, the expenditure qualifying for capital allowances following certain types
of transaction will now be restricted to nil unless the plant or machinery was acquired for
revenue expenditure or on its manufacture, at an arm’s length price. The types of transaction
affected are connected party transactions, sale and leaseback transactions, transfer and
subsequent hire-purchase or transfer and long funding leaseback transactions where the
transaction takes effect on or after 26 February 2015.
The reason for this change is that proposed sale and leaseback transactions in respect of plant
and machinery could create substantial capital allowances on assets that previously entitled
the owner to no allowances. The Government announced on 26 February 2015 its intention to
remove the opportunity for avoidance in this area.
The Chancellor announced the intention to maintain a higher level of annual investment
allowance (currently £500,000) beyond 31 December 2015 but with no specific sum
mentioned and with further details promised for Autumn.
6.2 CHANGES ALREADY ANNOUNCED
From 1 April 2015 the research and development expenditure credit will increase from 10%
to 11% and the SME scheme super deduction from 225% to 230%. Also from 1 April 2015
qualifying expenditure for R & D tax credits will be restricted so that the costs of materials
incorporated in products that are sold are not eligible and will launch a package of measures
to streamline the application process for smaller companies investing in R&D.
See also: Section 8 Tax Avoidance.
6.3 PLANNING
Whilst there has been an expression of intent to maintain a higher level of investment
allowance, no definitive extension to the entitlement date or indication of the amount has
been given. As of now the increased AIA of £500,000 for expenditure incurred between
April 2014 and 31 December 2015 can be obtained. This may mean that the timing of
planned business investment ought to be reviewed.
Where relevant, advantage should be taken of the AIA, particularly as (subject to what is
announced in the Autumn) the rate of the AIA is scheduled to reduce to £25,000 from 1
January 2016.
Capital allowances will continue to be an important feature of tax life for businesses. Of
course, as for any expenditure, businesses should consider carefully the commercial
appropriateness of any investment. Especially in the light of the latest proposals, advisers
must be fully aware of the capital allowance system so that they can properly advise their
business clients on the tax impact of various items of expenditure. Closer to home they may
be interested in how capital allowances work for their own business.
In the right circumstances, it may be appropriate to consider an investment in order to obtain
a Business Property Renovation Allowance.
7. TAX SIMPLIFICATION
7.1 PROPOSALS MADE IN THE BUDGET
A major change to the way in which people manage and pay their taxes was announced in the
2015 Budget.
It was proposed that the government will transform the tax system over the lifetime of the
next Parliament by introducing digital accounts to remove the need for individuals and small
businesses to complete annual tax returns. This is an intrinsic part of the government’s vision
to modernise the tax system as it hopes to bring together each taxpayer’s details in one place
– similar to that of online banking.
It is anticipated that by 2016 5 million small businesses and 10 million individuals will have
access to their own digital tax account.
The government will consult over the summer on a new payment process to collect tax and
National Insurance through digital accounts instead of self-assessment. For more information
on this announcement, please see here.
Following technical consultation, an annual cap of £300 for trivial benefits will be introduced
for office holders of close companies and employees who are family members of those office
holders.
Budget 2015 also announced that the automatic deduction of 20% income tax at source by
banks and building societies is intended to cease from April 2016 which represent a major tax
simplification.
7.2 CHANGES ALREADY ANNOUNCED
The government will simplify the administration of employee benefits and expenses together
with providing a statutory exemption for trivial benefits in kind which cost less than £50.
From April 2016, the government will remove the £8,500 threshold below which employees
do not pay income tax on certain benefits in kind and replace it with new exemptions for
carers and for ministers of religion.
Further details can be found in our Employee Benefits section which is section 14 of the main