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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
report.
8. TAX AVOIDANCE
We have seen continued government activity to close the tax gap throughout the 2014/5 tax
year. Unsurprisingly this will continue in the 2015/16 tax year
Action has included:
continued action to prevent evasion
targeted anti-avoidance legislation
"naming and shaming " individual and corporate tax avoiders
the use of Conduct and Monitoring notices issued to high risk promoters of aggressive
tax avoidance schemes
the successful use of accelerated payment notices (APNs) to secure "early" payment
of tax by those with tax avoidance schemes that have a DOTAS (Disclosure of Tax
Avoidance Schemes) reference number and for which an enquiry has been opened on
an assessment or the assessment is under appeal
consultation on expanding and toughening the DOTAS hallmarks and removing
"grandfathering". The proposal to expand the DOTAS hallmarks to cover more
inheritance tax avoidance schemes is a key part of this initiative
continued litigation against aggressive schemes
the launch of the "Fair Tax Mark" to encourage companies to be more open, and
committed to not using aggressive tax avoidance techniques and paying tax at (or
close to) the main rate of corporation tax
the proposed commencement, from April 2015, of a focused "diverted profits tax"
applying a 25% tax rate to profits diverted abroad by global companies trading in the
UK
These facts significantly influence the continued government action to prevent aggressive
avoidance, and with strong political motivation, be seen as doing so.
8.1 PROPOSALS MADE IN THE BUDGET
8.1.1 Overview
The government remains committed to a fair tax system where everyone contributes to
reducing the deficit, and those with the most make the largest contributions. This Budget
announces a number of policies (in addition to the significant raft of new anti-avoidance
provisions already in the Finance Bill) to enhance the actual and perceived fairness of the tax
system further.
Tax Evasion and Fraud
8.1.2 Laying of regulations to implement the Automatic Exchange of Information
Agreements
The government will lay the regulations to implement the UK’s Automatic Exchange of
Information Agreements and adopt the updated EU Directive on Administrative Co-operation
shortly after Budget 2015.
8.1.3 Common Reporting Standard: new disclosure facility
In advance of the receipt of data under the Common Reporting Standard in 2017, the
government will offer a new time limited disclosure facility from 2016 to mid-2017 on less
generous terms than existing facilities.
8.1.4 Closing the Liechtenstein Disclosure Facility early
In advance of a new disclosure opportunity, the existing Liechtenstein Disclosure Facility
will close at the end of 2015, instead of April 2016.
8.1.5 Closing the Crown Dependencies Disclosure Facilities early
In advance of a new disclosure opportunity, the existing Crown Dependencies Disclosure
Facilities will close at the end of 2015, instead of September 2016.
8.1.6 Financial Intermediaries notifying their customers in advance of receipt of data
under the Common Reporting Standard
The government will introduce legislation under which financial intermediaries can be
required to notify their UK resident customers with UK or overseas accounts, to inform them
about the Common Reporting Standard, the penalties for evasion and the opportunities to
disclose.
8.1.7 Maximising the yield from the Common Reporting Standard
The government will invest £4 million in data analytics resource to maximise the yield from
the Common Reporting Standard data.
8.1.8 Implementing the previously announced civil penalty regime
As announced at Autumn Statement 2014, the 2015 Finance Bill will include legislation on
enhanced civil penalties for offshore tax evasion.
8.1.9 New criminal offence for professionals
The Chancellor announced proposals for a new criminal offence for tax evasion and new
penalties for those professionals who assist tax evaders. Details are expected to be published
on 19th March.
Marketed avoidance schemes
8.1.10 Serial avoiders
The government will introduce legislation for tougher measures for those who persistently
enter into tax avoidance schemes which fail (serial avoiders), including a special reporting
requirement and a surcharge on those whose latest tax return is inaccurate as a result of a
further failed avoidance scheme. The government will also look to restrict access to reliefs
for the minority who have a record of trying to abuse them through avoidance schemes that
don’t work and intends to develop further measures to name those who continue to use
schemes that fail. Legislation will be introduced in due course that will widen the current
scope of the Promoters of Tax Avoidance Schemes regime by bringing in promoters whose
schemes regularly fail. These changes will be included in a future Finance Bill.
8.1.11 Promoters of tax avoidance schemes
The government will introduce legislation that will enable HMRC to issue Conduct Notices
to a broader range of connected persons under the Promoters of Tax Avoidance Schemes
regime. It will also legislate to ensure that the 3 year time limit for issuing Conduct Notices to
promoters who have failed to disclose avoidance schemes to HMRC applies from the date
when a failure is established. These changes will be incorporated into the Finance Bill 2015.
8.1.12 General Anti-Abuse Rule penalties
The government will introduce legislation, in a later Finance Bill, that will increase the
deterrent effect of the General Anti-Abuse Rule (GAAR), by introducing a specific, tax-
geared penalty that applies to cases tackled by the GAAR.
8.1.13 Accelerated Payments - additional cases
HMRC has continued to review cases after the Accelerated Payments legislation took effect
and Budget 2015 announces that HMRC will be issuing an additional 21,000 Accelerated
Payment Notices over and above the original estimated number.
8.1.14 Improvements to the Disclosure of Tax Avoidance Schemes (DOTAS) regime
The government will introduce legislation that will ensure that DOTAS remains an effective
information tool. This will include measures to:
require employers to notify employees of their involvement in avoidance schemes
relating to their employment and to provide details of those employees to HMRC
(Finance Bill 2015)
provide HMRC with a power to identify users of undisclosed avoidance schemes
(Finance Bill 2015)
increase the penalty for users who do not comply with their DOTAS reporting
requirements (Finance Bill 2015)
introduce protection for those wishing to voluntarily provide information to HMRC
about potential failures to comply with DOTAS (Finance Bill 2015)
require promoters of tax avoidance schemes to notify HMRC of any relevant changes
to a disclosed scheme (Finance Bill 2015)
enable HMRC to publish information about promoters and schemes (Finance Bill
2015)
strengthen the descriptions of schemes which must be disclosed and to expand the
coverage of inheritance tax (IHT), to include schemes seeking to avoid IHT charges
during a person’s lifetime and following death.
There has been much discussion and a little consternation over the potential impact of
expanded and strengthened DOTAS provisions. This has been especially so in relation to
IHT schemes. Based on the last iteration of the consultation one could have some hope that,
despite the removal of “grandfathering”, most, if not all, of the IHT schemes currently
marketed would not be caught by the new provisions. Currently, though, we are somewhat
“in the dark” as we do not have the detail of any further proposed changes to consider.
8.1.15 Capital gains Tax (CGT) entrepreneurs’ relief
The government will deny entrepreneurs’ Relief (ER) on the disposal of shares made on or
after 18 March 2015 in a company that is a non-trading company in its own right. The
government will also prevent individuals from claiming ER on the disposal of personal assets
used in a business carried on by a company or a partnership unless they are disposed of in
connection with a disposal of at least a 5% shareholding in the company or a 5% share in the
partnership assets. This also affects disposals on or after 18 March 2015.
8.2 CHANGES ALREADY ANNOUNCED
Substantial action against avoidance and evasion had already been announced (and in some
cases actioned) before the Budget. The main aspects of these “already announced” changes
on tax avoidance and evasion are summarised below. Wherever appropriate planning
strategies that could be considered in relation to the change being discussed will be outlined.
8.2.1 Anti-avoidance: Businesses
Diverted profits tax
A 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 (DPT)
will be applied, using a rate of 25%, from 1 April 2015.
Following consultation and representation, the application of DPT has been given greater
focus so that the companies affected by it are more narrowly defined. Further clarification
has also been given in relation to key definitions and conditions. The securing of a low
effective rate of tax on profits generated in the UK 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 it has.
Country-by-country reporting
Legislation will be introduced that gives the UK the power to implement the 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.
Accelerated Payments group relief
As announced at Autumn Statement 2014, the government will introduce legislation to ensure
that the Accelerated Payments legislation works effectively where avoidance arrangements
give rise to losses surrendered as group relief. (Finance Bill 2015).
Employment intermediaries penalties
As announced at Autumn Statement 2014, the government will make a minor amendment to
correct legislation underpinning the penalty regime for the late filling or non-submission of
quarterly returns from employment intermediaries. This will take effect from 6 April 2015
with policies included in the Finance Bill 2015.
Capital Allowances
As announced on 26 February 2015, the government will introduce legislation, with effect
from 26 February 2015, to clarify the effect of capital allowances anti-avoidance rules where
there are transactions between connected parties or sale and leaseback transactions (Finance
Bill 2015).
8.2.2 Anti-Avoidance: Individuals:
Capital gains tax - restricting entrepreneurs’ relief (ER): restricting unfair tax
advantages on incorporation
The government will prevent individuals from claiming ER on disposals of the
reputation and customer relationships associated with a business (‘goodwill’) when
they transfer the business to a related close company. This will affect transfers made
on or after 3 December 2014.
Miscellaneous loss relief
As announced at Autumn Statement 2014, the government will legislate to counter the
avoidance of income tax through miscellaneous loss relief by introducing anti-
avoidance rules from 3 December 2014. From 6 April 2015 it will also limit the
miscellaneous income against which a miscellaneous loss can be claimed. (Finance
Bill 2015).
Special purpose share schemes
As announced at Autumn Statement 2014, the government will legislate to remove the
unfair tax advantage provided by special purpose share schemes, commonly known as
‘B share schemes’. From 6 April 2015 all returns made to shareholders through such a
scheme will be taxed in the same way as dividends. (Finance Bill 2015)
Private equity management fee planning
As announced at Autumn Statement 2014, the government will introduce legislation,
effective from 6 April 2015, to ensure that sums which arise to investment fund
managers for their services are charged to income tax. It will affect sums which arise
to managers who have entered into arrangements involving partnerships or other
transparent vehicles, but not sums linked to performance, often described as ‘carried
interest’, nor returns which are exclusively from investments by partners. (Finance
Bill 2015).
8.3 PLANNING
The existence of the GAAR and the other anti-avoidance measures referred to above have
substantially operated to remove the public and financial planner appetite for aggressive tax
avoidance. Planning should, as a result, focus on tried and tested planning centred on
financial strategies, and products permitted and contemplated by the legislation and those
accepted by HMRC.
9. PROPERTY TAX
9.1 PROPOSALS MADE IN THE BUDGET
There were no new proposals made in the Budget.
9.2 CHANGES ALREADY ANNOUNCED
9.2.1 Stamp Duty Land Tax (SDLT)
Since 4 December 2014 SDLT on purchases of residential property has been payable at each
rate on the portion of the purchase price which falls within each band, rather than at a single
rate on the whole transaction value as was previously the case.
The current rates and thresholds are as follows:
0% on the first £125,000 of the property price;
2% on the next £125,000 (i.e. on the portion between £125,001 and £250,000)
5% on the next £675,000 (i.e. on the portion between £250,001 and £925,000);
10% on the next £575,000 (i.e. on the portion between £925,001 and £1,500,000); and
12% on the rest (i.e. on the portion above £1,500,000).
From April 2015, SDLT will no longer apply to land transactions in Scotland. These will
instead be subject to Land and Buildings Transaction Tax (LBTT). LBTT operates in the
same way as the reformed SDLT with the exception that the 0% rate applies on purchases up
to £145,000, the 10% rate applies to the portion of the purchase price between £325,001 and
£750,000 and the 12% rate will apply to the slice over £750,000. Guidance on the new LBTT
regime has now been published by HMRC.
Application of SDLT on certain authorised property funds.
As announced at Autumn Statement 2014, the government intends to introduce a seeding
relief for property authorised investment funds and co-ownership authorised contractual
schemes (CoACSs) and intends to make changes to the SDLT treatment of CoACSs investing
in property so that SDLT does not arise on the transactions in units, subject to the resolution
of potential avoidance issues. Any changes will be legislated for in a future Finance Bill.
Treatment of shared ownership properties
As announced in the Autumn Statement 2014, the government will extend the SDLT multiple
dwellings relief to include superior interests in residential property, such as shared ownership.
This will apply where the transaction is part of a lease and leaseback arrangement, if acquired
from a qualifying body such as a housing association. The change will take effect from the
date on which Finance Bill 2015 receives Royal Assent.
9.2.2 Annual tax on enveloped dwellings (ATED)
Annual Tax on Enveloped Dwellings (ATED) is payable by companies and other corporate
entities that own UK residential property which is valued above a certain amount. The
annual chargeable amounts for ATED are increased each year in line with the Consumer
Prices Index.
ATED is currently only payable on properties valued at over £2m at the later of 1 April 2012
and the date of acquisition and a return is only required where ATED is payable.
However, from 1 April 2015, the government proposes to increase the ATED charges by 50%
above inflation on properties valued at more than £2 million so that the new charges are:-
Property value Annual Charge in 2015-16
£2m - £5m £23,350
£5m - £10m £54,450
£10m - £20m £109,050
£20m + £218,200
Also, a new band will also 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 April 2016 there will also be an ATED charge of £3,500 on properties valued at
between £500,000 and £1 million.
Filing requirements will change in line with the increased charges so that with effect from 1
April 2015, an ATED return will be required in respect of properties that is within a corporate
wrapper of envelope and that were valued at more than £1 million on 1 April 2012 or at
acquisition if later.
There will be a transitional rule for persons falling into this new threshold where returns will
be due by 1 October 2015 and payment by 31 October 2015, instead of the normal filing date
of 30 April 2015. The ATED annual charges for this period will be published before 1 April
2015.
From 1 April 2016 a further 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.
9.2.3 Capital Gains Tax (CGT)
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.
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’.
Private residence relief 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.
9.3 PLANNING
Due to the tightening of the rules on PPR, non-residents who own a UK property or UK
residents who own an overseas property may now find that they are liable to pay some CGT
on eventual disposal. The new ’90-day rule’ will be crucial in determining the tax position
and anyone on the cusp will need to keep detailed records.
The broad intention of the new restriction on PPR is to prevent non-residents from being able
to benefit from PPR. Nonetheless in practice there may still be some limited circumstances in
which a person can simultaneously accrue PPR and be non-resident on an ongoing basis.
Likewise, in appropriate circumstances, it may still be possible to acquire and hold a UK
residential property within a corporate structure without incurring either the 15% SDLT rate
or the ATED if the structure falls within one of the exemptions available.
If a high value property is likely to qualify for PPR under the new rules, this may make it
preferable for an individual (or trustees) to hold it directly rather than via a company. On an
acquisition of a property directly by an individual or trustees, SDLT will be at standard
residential rates (although the changes to the SDLT rates from 4 December 2014 may mean
that the overall SDLT charge is higher than it would have been previously for higher value
properties) and ATED will not be an issue. However the property will be within the IHT net
unless other forms of IHT mitigation are put into place.
It is, however, important to recognise that these are complex areas of tax planning and
professional, bespoke advice is essential.
10. TRUST TAXATION
10.1 PROPOSALS MADE IN THE BUDGET
The Autumn Statement 2014 announced that legislation would be introduced to provide new
rules about adding property to trusts on the same day, to target inheritance tax (IHT)
avoidance through the use of multiple trusts. Legislation was published in draft on 10
December 2014. The Budget announced that, following consultation on the draft legislation,
the government has made changes to the legislation so that the new rules apply only when
property is added to more than one relevant property trust on the same day.
Concerns were also expressed that small same day additions by the settlor to a number of
trusts for say, trustee fees, would result in the property in those other trusts being aggregated
and brought into the 10 year charge calculation. The government has announced that the
revised legislation will provide that where the value of the addition is £5000 or less there will
not be a same day addition.
Also, the period of grace for not applying the new rules to additions to existing trusts from a
will executed before 10 December 2014 have been extended by 12 months. The exclusion
will now be limited to deaths before 6 April 2017.
As stated before, the calculation of trust charges will be simplified by removing the
requirement to include non-relevant property in the computation. Changes are also to be
made in certain areas of the relevant property trust legislation to close a loophole and ease the
effects of the legislation elsewhere, but no details of these have yet been announced.
10.2 CHANGES ALREADY ANNOUNCED
10.2.1 Trust rates and annual exemption
The CGT annual exemption for trustees will be £5,550 in 2015/16 (subject to dilution
where the same settlor has created more than one trust).
The trust rate remains unchanged at 45% and the dividend trust rate at 37.5%. These
are the income tax rates that trustees of discretionary trusts pay on income they receive
above their standard rate band which is normally £1,000 (and remains at this level in
2015/16).
10.2.2 Trust taxation simplification
As announced last December the Government is not proceeding with the introduction of a
single settlement nil rate band. Instead new rules will be put in place to target avoidance
through the use of multiple trusts and deal with some areas of the legislation where anomalies
exist with a view to simplification. These measures were included in the draft Finance Bill
2015 but following consultation further changes are to be made and so this legislation will
now be included in a future Finance Bill.
(a) Removing anomalies in the IHT regime on non-relevant property
Inheritance tax on discretionary trusts is levied on the value of relevant property. Currently
whilst non-relevant property is not subject to IHT, if a trust holds relevant and non-relevant
property, (ie property on interest in possession trusts), the whole value of the trust property is
taken into account in determining the rate of IHT that should apply. In future, this will no
longer be the case and property that is not relevant property will be ignored for these
purposes.
Provisions will also be included in a future Finance Bill to prevent an exit charge arising
where property is transferred out of a discretionary trust created on death within 3 months
from its creation. This previously represented a trap for people who sought to redirect
property in a discretionary trust created on a person's death within the 24 months permitted
by section 144 IHT Act 1984. In such circumstances the IHT rules will then ignore the
discretionary trust for IHT purposes and the legacy will be treated as taking place on that
person's death.
(b) The new anti-avoidance rules for multiple settlements.
The ‘new’ new rules in the form of a targeted anti-avoidance provision will be inserted into
IHTA 1984 by Finance Bill 2015 to counter IHT avoidance in certain circumstances using
multiple trusts. A new section 62A will ensure that where property is added to two or more
settlements on the same-day and after the commencement of those settlements, the value of
the added property to the other trusts will be brought into account in calculating the rate of
tax for the purposes of ten-year (periodic) charges and exit charges of a particular trust. Those
other trusts will also be regarded as related settlements and so the property put into them at
outset will also be brought to account when calculating IHT on a particular trust.
This provision, which will only apply if the addition is more than £5,000, is specifically
aimed at a common will planning technique that involves the establishment (during lifetime)
of a series of pilot trusts, usually created on separate consecutive days each for a nominal
amount. Following the creation of the trusts, a will is executed which provides for a larger
gift (typically in excess of the nil rate band) to be applied across all the trusts following the
testator’s death. No IHT advantage arises at the point of death of the settlor but, because
there are several lower value trusts - rather than just one high value one - the likelihood of
ongoing relevant property charges on those trusts is significantly reduced.
The planning exploits the technicalities of the existing ‘added property’ rules which provide
that transfers made on the same-day can be ignored for the purposes of calculating the
settlor’s cumulative total in the seven year period prior to making the addition (which in turn
is relevant for the purposes of calculating the amount of the nil rate band available to the trust
when working out relevant property charges for that trust). The broad effect of this technical
‘loophole’ is that where property is settled on a series of low value trusts on the same-day
(e.g. on the settlor's death), each trust can still benefit from its own nil rate band even after
the additions have been made. Of course, if the settlor had made other chargeable transfers in
the seven years before he makes the addition to the trusts (ie. on death) those additions will
reduce the nil rate band available to each trust.
Clause 62A of the IHT Act 1984 will, in broad terms, make this long-established will
planning technique redundant.
The practical implications of the changes are covered in detail in the Techlink bulletin dated
13 January 2015
The new rules on same-day additions will apply to all relevant property charges arising on or
after the proposed commencement date of 6 April 2017 in respect of relevant property trusts
created on or after 10 December 2014. To prevent forestalling, they will also apply to
relevant property trusts created before 10 December 2014 where additions are made after that
date.
Transitional provisions apply to provide an exception for wills executed before 10 December
2014 where the death of the testator occurs before 6 April 2017. This provides time for those
affected to change their will and avoid unwanted tax consequences.
10.3 PLANNING
10.3.1 Impact of the new rules on common trust planning strategies
As long as there is no "same-day addition to the trusts", the new rules will have no impact on
the situation where multiple trusts are used to ensure that a series of lower or no value
transfers can be made into trusts created on separate days with each having their own nil rate
band (only diminished by any chargeable transfers made by the settlor in the seven
immediately preceding years). This can be particularly effective where the only transfers
made by the settlor in the seven year period immediately preceding the establishment of
each trust were the low/nil value transfers made in creating the other low/no value trusts as
this would mean that each trust would then have its own nil rate band – or very close to it.
This means that multiple “separate days” trusts of:-
Life assurance protection plans
Loan trusts
Discounted gift trusts
could all continue to deliver the potential for reduced nil periodic and exit charges.
Indeed, provided the trusts are created on different days and the settlor has made no previous
chargeable lifetime transfers, it will still be possible:
for a settlor to create two discretionary trusts on different days without IHT provided
the combined chargeable transfer doesn’t exceed the settlor’s available nil rate band;
or
for a client to create a combination of IHT planning arrangements – for example a
discounted gift trust and a loan trust, or one straightforward gift trust and one
discounted gift trust
In such a case, provided the loan trust was established first and the settlor hadn’t previously
used any of their nil rate band, each trust would retain the benefit of a full nil rate band
regardless of whether the trusts are created before or after the rule change.
Spousal by-pass trusts set up to receive payments of pension death benefits from trust based
pension schemes would also be unaffected as there will be no "same day addition".
10.3.2 Additions to existing trusts of financial products
Additions made to pre 10 December trusts will only invoke the application of the new
provisions if, when the addition is made (i.e. on the same-day), additions are made to other
trusts created by the same settlor at the same time. An addition to one trust, say by waiving a
loan under a Loan trust will not come within the new rules.
The concept of a same-day transfer needs a simultaneous addition to more than one existing
settlement. However, it would seem that there is no requirement for all of those settlements
to be relevant property (ie discretionary) trusts. So it could apply if an addition is made on
the same day to an existing discretionary and interest in possession trust.
For examples of how this works with loan trusts and DGTs see the above mentioned Bulletin.
A specific exemption in s62A(3)(d) applies where the same-day addition ‘results from the
payment of a premium under a contract of life insurance the terms of which provide for
premiums to be due at regular intervals of one year or less throughout the contract term.’ This
exemption prevents the new rule having any application to regular premiums paid under a
contract of life insurance and ensures that if, for example, the settlor has more than one trust
policy with direct debits set up to go out to each on the same-day, the regular premiums will
not be treated as ‘same-day additions’. It is important to note that the tight wording of the
exemption ensures that top-ups to single premium policies – even if contractually allowed for
under the policy conditions - will not fall within the scope of the exemption.
In conclusion, advisers can continue to confidently recommend the use of multiple trusts in a
lifetime estate planning strategy in appropriate circumstances, provided, of course, that
reliance on future "same-day additions" is not an inherent part of the strategy.
Clients who have already set up pilot trust arrangements in conjunction with legacies to be
made under their wills have a clear opportunity and responsibility to review and reorganise
their affairs to avoid unwanted tax and possibly unnecessary commercial consequences.
10.3.3 Discretionary trusts
The high rates of income tax payable by trustees of discretionary trusts (see above) and the
relatively higher rate of CGT (now at 28%) have continued to have a serious impact on the
returns available for trust beneficiaries.
As a result, trustees need to be even more careful to incorporate tax efficiency into any
investment decisions they make.
In this respect trustees of a discretionary trust could consider:-
Distributing income out of the trust to a “low-tax” beneficiary with a view to
recovering the high rates of income tax the trustees have already paid.
Subject to the terms of the trust allowing them to do so, appointing a life interest to a
low taxpaying beneficiary with a view to ensuring that trust income is taxed on that
beneficiary – and without the trustees having to pay high up-front rates of income tax.
Investing for capital growth with a view to, in future, using the trustees’ annual CGT
exemption of £5,550. (This exemption will be diluted by the number of non-bare
trusts created by the same settlor since 7 June 1978 but the exemption will never be
less than £1,110 – 10% of the full individual annual exemption).
An investment in a single premium life assurance investment bond can be tax efficient
for trustees because:-
- it does not generate taxable income;
- it is not subject to CGT in the hands of the investor;
- it enables the trustees to draw 5% of the initial investment, for 20 years, with no
tax charge at that time;
- it permits switching within the bond wrapper without a tax charge at that time; and
- assignment to a beneficiary (or an absolute appointment) will not give rise to a tax
charge.
Don’t forget that bonds are taxed under the chargeable events legislation. This means any
chargeable event gains are taxed on the settlor of the trust if the settlor is alive and UK
resident in the relevant tax year. Otherwise, they are taxed on UK resident trustees at a rate
of 45% (less a 20% tax credit for a UK bond), subject to the standard rate band of £1,000.
These rules do not apply to bare trusts. Here, subject to the parental settlor anti-avoidance
rule – see below, the person assessed to tax is the beneficiary (regardless of the age of the
beneficiary).
On the other hand, if a bond is held in a flexible/discretionary trust and the trustees intend to
distribute the encashment proceeds of the bond to a minor beneficiary (or to a parent of a
minor beneficiary for the beneficiary’s benefit), it may be better for the trustees to first
appoint an absolute right in the trust fund (and the bond) in favour of the intended
beneficiary. This would not trigger a chargeable event so that on a subsequent encashment
any chargeable event gains of the bond would be taxed on the beneficiary at his/her lower
rate of tax.
Care needs to be exercised if the beneficiary is a minor unmarried child of the settlor because
in these cases, if chargeable event gains exceed £100 in a tax year, they will be assessed on
the parental settlor.
Alternatively, if the intended beneficiary is an adult, the trustees will usually just assign
individual segment policies to the beneficiary prior to encashment to achieve the same result.
With all of the above planning ideas, one eye needs to be kept on the relevant anti-avoidance
rules, particularly those that apply to settlor-interested trusts. These, of course, do not apply
where a single premium bond is the trustee investment.
10.3.4 Setting up a new trust
When setting up a new trust, the prospective settlor needs to carefully consider all the tax
implications. Whilst discretionary trusts have become more popular following the changes to
the inheritance tax treatment of trusts, the higher income tax rates paid by the trustees of
discretionary trusts can be avoided if the trust is an interest in possession trust.
Another possibility, if a discretionary trust still appeals, is to create a settlor-interested trust,
by including the settlor’s spouse (but not the settlor) as a potential beneficiary. This will give
useful flexibility yet the trust will still be effective for IHT purposes. Historically such trusts
have been avoided as income will then be taxed on the settlor and in the past settlors have
been taxed more harshly than trustees. However, the position is now reversed. If the settlor is
not a 45% taxpayer, then some tax refund can be secured, although the trustees still have the
initial liability at the trust rates.
Finally, remember that the trust rates of income tax do not apply to bare trusts and the
parental settlement anti-avoidance rules only apply to such trusts for income tax purposes.
For CGT, regardless of who the donor is, the gains of a bare trust are assessed on the
beneficiary with a full annual exemption – which is £11,100 for tax year 2015/16.
11. SAVINGS AND INVESTMENTS
11.1 OVERVIEW
Managing investments (incorporating appropriate asset allocation) to produce acceptable
returns, whilst managing risk, takes absolute priority in portfolio planning. However,
maximising the tax efficiency to minimise tax on investments can substantially improve the
“bottom line” – especially for those who will suffer the 45% additional rate of tax (or the
effective 60% rate of tax for those who lose their personal allowance).
Income tax and capital gains tax changes are covered in sections 1 and 3 of this Bulletin
respectively.
In addition we also cover pensions in section 12.
In this section we look at:
ISAs
National Savings
Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs)
Seed Enterprise Investment Scheme (SEIS)
Social Investment Relief
11.2 INDIVIDUAL SAVINGS ACCOUNTS (ISAs)
11.2.1 PROPOSALS MADE IN THE BUDGET
More radical changes were announced in relation to ISAs – all bringing a welcome change
and even more product flexibility.
11.2.1.1 Help to Buy: ISA
It was announced in Budget 2015 that a ‘Help to Buy ISA’ would become available from
Autumn 2015 under which the government would boost a first-time home buyer’s savings by
25% - which is £50 for every £200 saved subject to a maximum of £3,000 per person (rather
than one per home). This means that someone who saves £12,000, will have their savings
boosted to £15,000 – which will be paid at the time the property is bought. The bonus will be
available on home purchases of up to £450,000 in London and £250,000 outside London.
New accounts will be available for 4 years and must be opened with a minimum of £1,000.
There will be no limit on how long someone can save for once the account has been opened
and no minimum monthly savings amount. The account holder has to be 16 or over and must
be a first-time buyer who is purchasing a UK property.
Saving in a ‘Help to Buy ISA’ will no doubt be welcomed for those who wish to climb the
property ladder and given that the account will be made available to each person (as opposed
to one per home) the overall boost in savings could amount to £6,000 – which at the very
least could help with the general costs of moving or help to cover part/all of the stamp duty
payable.
11.2.1.2 Ability to withdraw ISA savings
From Autumn 2015, the government will allow ISA savers to withdraw and replace money
from their cash ISA without it counting towards their annual ISA subscription provided they
make a repayment in the same tax year as the withdrawal. This means the account will
benefit from more flexibility as it will be possible to access funds during the tax year without
impacting the ability to maximise the subscription amount.
11.2.1.3 Extending the range of ISA eligible investments
Following technical consultation, the government will further extend the range of ISA
eligible investments in 2015/16 to include listed bonds issued by a co-operative society and
community benefit society and SMEs securities issued by companies trading on a recognised
stock exchange.
The government will also explore extending the range of investments to include debt and
equity securities offered via crowd funding platforms and consult in the summer on how to
include peer-to-peer loans.
11.2.2 CHANGES ALREADY ANNOUNCED
In the Autumn Statement, it was announced that for tax year 2015/16 the maximum
contribution for all qualifying investors would be raised to £15,240. Savers now have
complete flexibility to save how they wish within a cash ISA or stocks and shares ISA
provided they don’t exceed the overall limit. The Junior ISA subscription limit is similarly
increased to £4,080 for 2015/2016 with the same limit applying to the Child Trust Fund
(CTF).
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.
In the Autumn Statement, which was delivered on 3 December 2014, it was announced that
the ISA rules would be amended to provide for the spouse or civil partner of a deceased ISA
saver to receive an additional ISA allowance up to the value of the deceased saver's ISA at
the time of their death. In addition, the additional ISA allowance would not count against the
surviving spouse's/civil partner's annual ISA allowance.
11.2.3 PLANNING
The increase in the investment limit combined with the increased flexibility of the ISA, while
valuable to all who qualify, will be particularly welcome for those who are:
higher rate taxpayers
additional rate taxpayers and/or
restricted on relievable pension contributions or increased benefits because of existing
provision.
The value of an ISA as a means of investing tax effectively for higher and additional rate
taxpayers is well known. Those affected by the reduced annual allowance and restriction of
tax relief will appreciate that there is little financial appeal in either making a contribution to
a pension arrangement that attracts no tax relief or benefiting from an employer contribution
or scheme accrual that triggers a tax charge while paying tax on the emerging pension income
at (possibly) 40%/45%. This is especially so where the investor can secure tax free growth
and income within the ISA.
Since 5 August 2013, it has been possible to invest in AIM shares through ISAs. This gives
the investor the opportunity to benefit from a double tax break - firstly on the tax-free status
of ISAs and then again on death by virtue of inheritance tax business property relief which is
available on certain AIM/ISDX stock.
The increased upper limit of £15,240 (which will apply from 6April 2015) equates to £30,480
for a married couple each year and over 10 years, with no increases, equates to £304,800!
And it will soon be possible to put a further £4,080 per annum into a Junior ISA for a child
who qualifies. Parents and grandparents who require more control over when the child gets
access to the investment may prefer to mirror a JISA investment pattern by investing
regularly into ordinary (non-ISA) collectives subject to a trust or, for those with capital, into
an offshore bond. Both types of investment could be held in a suitable trust.
11.3 NATIONAL SAVINGS
11.3.1 PROPOSALS MADE IN THE BUDGET
11.3.1.1. Pensioners bonds
The government confirmed that National Savings and Investment bonds for pensioners (over
65) would remain on sale until 15 May 2015. The bonds have been extremely popular – being
the biggest opening sale of any retail financial product in Britain’s modern history – and the
government wish to ensure eligible investors do not miss out.
11.3.1.2 Premium bonds
Budget 2015 announced that the planned increase to the National Savings and Investment
Premium Bond investment limit to £50,000 will take place on 1 June 2015, providing further
support for savers.
11.3.2 CHANGES ALREADY ANNOUNCED
The government announced last month that National Savings and Investment bonds for
pensioners (over 65) would remain on sale for longer than originally planned.
11.3.3 PLANNING
National Savings and Investment products are government-backed and therefore appeal to
many cautious investors. With the opportunity still available to invest in Pensioner Bonds
with their high guaranteed returns (paid on maturity) clients falling in this category may wish
to take advantage of this opportunity while it is still available.
11.4 VENTURE CAPITAL TRUST/ ENTERPRISE INVESTMENT
SCHEME/ SEED ENTERPRISE INVESTMENT SCHEME AND
SOCIAL INVESTMENT RELIEF
11.4.1 PROPOSALS MADE IN THE BUDGET
Budget 2015 announced that the government will make amendments to the Venture Capital
Trust (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.
Subject to state aid approval The government will:
require that companies must be less than 12 years old when receiving their first EIS or
VCT investment, except where the investment will lead to a substantial change in the
company’s activity
introduce a cap on total investment received under the tax-advantaged venture capital
schemes of £15 million, increasing to £20 million for knowledge-intensive companies
increase the employee limit for knowledge-intensive companies to 499 employees, from
the current limit of 249 employees
The government will also smooth the interactions between the schemes by removing the
requirement that 70% of the funds raised under the SEIS must have been spent before EIS or
VCT funding can be raised.
11.4.2 CHANGES ALREADY ANNOUNCED
11.4.2.1 Venture capital schemes: changes to scheme rules
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 (likely
to be from 6 April 2015), at which point it will cease to be eligible for the EIS, SEIS and
VCT. All other companies benefiting substantially from subsidies for the generation of
renewable energy will be excluded from also benefiting from EIS, SEIS and VCTs with
effect from 6 April 2015. These measures will be included in the Finance Bill 2015.
11.4.2.2 Venture capital schemes – digital process
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, making it
easier to use the schemes. A new format for VCT returns will also be developed.
11.4.2.3 Entrepreneurs’ relief and EIS/SITR
The government will allow gains which are eligible for entrepreneurs’ relief (ER), but which
are instead deferred into investments which qualify for the EIS or SITR, to remain eligible for
ER when the gain is realised. This benefits qualifying gains on disposals that would be
eligible for ER but are deferred into EIS or SITR on or after 3 December 2014.
11.4.3 PLANNING
11.4.3.1 Venture capital trusts (VCTs)
VCTs have a number of tax advantages:-
Up to 30% income tax relief is available on an investment of up to £200,000 per annum
into a VCT (subject to claw-back if the investment is sold within 5 years)
Dividend income is tax free, which is a considerable advantage for the higher/additional
rate taxpaying investor – especially where the ISA contribution limit has been reached
Capital gains on sale of shares are tax free – very important in an era of high taxation.
Remember, though, VCTs usually carry more investment risk – particularly now that VCTs
are able to invest in a wider range of companies.
11.4.3.2 Enterprise investment schemes (EISs)
The amount that can be effectively invested in a pension each year has reduced in recent
years. However, three successive governments have improved the EIS regime and it is now
arguably the most generous tax-efficient investment vehicle available to the UK taxpayer.
The tax benefits of an EIS are as follows:
Income tax relief at 30% on investments of up to £1m for the tax year in which the
underlying investment is made (subject to claw-back if the investment is sold within 3
years)
No capital gains tax on profits on the sale of shares after a three year holding period
100% inheritance tax relief after two years if the underlying investments qualify
CGT deferral relief
An EIS is an investment into shares of an unlisted company and so, by its nature, is a
relatively high risk investment. However, certain EIS funds exist that can limit the investment
risk.
11.4.3.3 The seed enterprise investment scheme (SEIS)
The SEIS became operational in April 2012. The scheme offers 50% income tax relief on
investments of up to a maximum of £150,000, into small start-up companies. For one year
only the amount invested in qualifying shares could be offset against capital gains, meaning
investors could reduce their capital gains tax bill.
Last year, HMRC confirmed that where an election is made to have some or all of an issue of
shares to be treated as though acquired in the tax year immediately preceding that in which
they were actually acquired, the shares will also be treated as having been acquired in the
earlier tax year.
With the SEIS and its 50 per cent capital gains tax reinvestment relief to be made permanent,
business angels will be able to continue to benefit from the tax advantages offered by the
scheme for the foreseeable future.
11.4.3.4 Social Investment tax relief
Following the announcement of the rate at which relief is to be given, investment in
qualifying social enterprises looks set to provide an attractive alternative to those who have
historically invested in the EISs and VCTs. The 30% rate is higher than the 25% for 40% rate
taxpayers reclaiming when they donate to charity and lower than 31.25% for 45% rate payers
using gift aid.
12. PENSIONS
12.1 PROPOSALS MADE IN THE BUDGET
After last years’ changes there were very few pension related surprises in this year’s Budget.
The exception was the future reduction in the Lifetime Allowance although a number of
commentators had included this change in their pre-Budget predictions.
The consultation on the development of a secondary market in annuities was, possibly, the
biggest Budget “story” (especially for financial planners and financial institutions). However,
this was heavily trailed so its appearance on Budget Day was no surprise.
12.1.1 Reduction of the Lifetime Allowance
The reduction of the Lifetime Allowance from £1.25m to £1m from 6 April 2016 has been
proposed. This comes with a new Fixed Protection 2016 and new Individual Protection
provision. According to HMRC over 96% of individuals currently approaching retirement
have a pension pot worth less than £1m, so this change will only affect the wealthiest of
pension savers. Given this and that pension tax relief costs the Government over £34bn per
annum some change was thought to be inevitable. Many believe that we may see more
change further limiting or reattributing relief after the election.
12.1.2 Inflation proofing the Lifetime Allowance from 6 April 2018
The Lifetime Allowance will be indexed to increase annually by CPI from 6 April 2018.
12.1.3 Creation of an annuity secondary market
A consultation document has been published detailing and seeking views on how the
operation of a secondary annuity market could work. This could potentially be relevant to
over 5 million annuitants.
The consultation proposes that annuities will be capable of assignment (for consideration) to
a third party.
Only sales to institutions – not individuals – are proposed. And sales back to the original
provider are not being considered. Despite this though, healthy demand is hoped for.
On the “supply” side of the equation, 75% of those reaching retirement with DC pension
benefits have bought an annuity so there could be a reasonable number of would-be “sellers”.
A key requirement to making this market work is the removal of the penal unauthorised
payment charge of 55% (or 70%) applicable to an assignment under the law as it stands.
It is proposed that any lump sum received would be subject to tax at the seller’s marginal
rate(s). An alternative choice for a seller would be for the consideration to be transferred to
another retirement income product such as flexi access drawdown or a flexible annuity and
tax paid when the income is drawn.
Any assignment of an annuity will trigger the Money Purchase Annual Allowance (£10,000)
to prevent the seller diverting material levels of future income into registered pensions and
generating more tax relief.
Taking the lump sum directly will mean that any funds remaining on death would form part
of the selling “ex-annuitants” estate for IHT purposes. If there is a transfer of the funds to
flexi access drawdown or the purchase of a new flexible annuity this will mean that the funds
are not subject to IHT and only taxable when drawn if the death of the previous owner occurs
on or after age 75.
The consultation also identifies (among many others) the following issues to be considered,
discussed and resolved:
How to assess the mortality risk and thus the value of the income stream that the
annuity provides. It is thought that risk mitigation could be secured through rigorous
underwriting, bulk purchase or matching against longevity risk.
Who will buy? Insurers and pension funds are given as examples. Especially given
the recent problems with “life settlements” (based on sales of life assurance policies),
the retail market is not being considered for annuity schemes.
Brokers/middlemen/intermediaries could emerge as the means of packaging sufficient
numbers of annuities so as to facilitate an appropriate “bulk purchase” market.
Knowing when to stop annuity payments (eg. by reason of notification of death) will
be critically important.
Costs are also a key factor in the “pros and cons” of the sale.
Only annuities held outside of an occupational scheme should be capable of sale
within these new rules.
Provisions will be included in the legislation to prevent annuity sale being used in any
form of tax avoidance. As a result we can expect to see a widely drawn provision
making this clear and what the consequences will be if the “anti-avoidance” provision
is triggered.
Consumer protection will be at the heart of the proposals with the FCA deeply
involved. The requirement to take financial advice, an offer of guidance and
regulatory interventions will all be in evidence. Special care will be required for those
suffering from ill health.
Special care will be needed for the (estimated) 13% of annuitants in receipt of means-
tested benefits. Full understanding of the impact of exchanging an income right for
capital will be essential. The deliberate deprivation rules may come into play –
depending on the circumstances of the case. The consultation makes it clear that the
government does not intend to compensate sellers through welfare for any economic
loss suffered. The consultation put forward for discussion the possibility of a
complete prohibition of annuity sale for those on means-tested benefits.
12.1.4 Tax exemption for DB transfer advice
The provision of pension transfer advice as a consequence of an employer led transfer
exercise will not result in a tax liability on the employee as a taxable benefit in kind.
12.1.5 Extra funding for Pension Wise
The Guidance Guarantee and Pension Wise service to receive an extra £19.5m in 2015/16 to
support pensions freedom.
12.2 CHANGES ALREADY ANNOUNCED
12.2.1 Death benefits taxation and recipients
From April 2015, beneficiaries of individuals who die under the age of 75 with a joint life or
guaranteed term annuity will be able to receive any future payments from such policies tax
free where no payments have been made to the beneficiary before 6 April 2015. The tax rules
will also be changed to allow joint life annuities to be paid to any beneficiary. Where the
individual was 75 or over when they died, the beneficiary will pay the marginal rate of
Income Tax.
12.2.2 Pensions Flexibility
The Taxation of Pensions Act 2014 (which introduces pension flexibility for DC pensions)
and The Pension Schemes Act 2015 (which introduces the requirements for DB to DC
transfers, public sector scheme transfers and introduces the framework for the Guidance
Guarantee programme) both take effect on 6th April 2015. More information on this can be
found here.
12.3 PLANNING
12.3.1 Lifetime Allowance
The reduction in the lifetime allowance from 2016/17 may be inevitable even with a change
in government and means that individuals who may be affected by this will need:
To consider whether to elect for Fixed or Individual Protection. This should include
individuals aged under 75 in receipt of drawdown benefits, if they feel a future
BCE5A or BCE5B test at age 75 may result in their exceeding the reduced £1 million
lifetime allowance.
To consider the implications of an election for fixed protection as fixed protection can
only be retained where contributions cease and DB benefit accrual is severely
restricted, after (probably) 6 April 2016, any individuals looking to make such an
election will need to ensure that contributions/benefit accrual occurring before then
are appropriately maximised and the impact of triggering the MPAA considered.
To consider how best to minimise the value of benefits being tested against the
lifetime allowance. For instance, someone aged 55 or over looking to crystallise
benefits in the next few years could consider drawing some or all of their benefits in
2015/16 when these will be set against the current £1.25 million lifetime allowance.
For example, if an individual crystallised benefits with a value of £500,000 in
2015/16 this would only use up 40% of his lifetime allowance whereas if he left this
until 2016/17 it would use up 50% of his allowance.
To consider how the benefits are taken. For example, if a member had money
purchase benefits, using his fund to purchase a scheme pension rather than a lifetime
annuity may reduce the percentage of the lifetime allowance he has used up.
Although, of course, the purchase of a scheme pension may have the impact of
passing pension funds via the nominee/successor route. A member of a DB scheme
should consider the difference in the lifetime allowance assessed where he draws his
benefits solely as a pension or as a tax free cash sum with a reduced pension.
12.3.2 Annual Allowance
Although the annual allowance is unchanged in this Budget, it is still important to remember
that carry forward of unused annual allowance is still available and the allowance for the tax
years 2011/12, 2012/13 and 2013/14 remains at £50,000.
The current limit of £40,000 can have a serious impact on members of DB schemes with long
past service. For the time being the problem may not be that great because many people have
experienced sub-CPI inflation (or zero) pay rises, leaving some carry forward headroom.
However, a concerted period of real earnings growth would quickly erode this safety margin.
Obviously each case would need to be considered on its own facts.
In view of the complex pension input period rules, great care needs to be taken where a
contribution is paid to ensure that it falls in a pension input period in the desired tax year. For
example, a contribution paid on 1 April 2015 to a pension arrangement with a pension input
period end date of 30 June would fall in the input period ending 30 June 2015 and therefore
be assessed against the individual's annual allowance of £40,000 in tax year 2015/16.
The impact of the money purchase annual allowance (MPAA) should also be factored into
any planning exercise. The MPAA can be triggered by a payment of income (in excess of any
PCLS) from flexi access drawdown, any payment of a uncrystallised funds pension lump sum
(UFPLS), purchase of a scheme pension or flexible annuity or drawing more income from
capped drawdown than the GAD max pension annual limit. Triggering the MPAA mid PIP
year will need careful planning to avoid triggering an annual allowance charge.
13. TAXATION OF SHAREHOLDING DIRECTORS
13.1 PROPOSALS MADE IN THE BUDGET
The government has announced its intention to abolish Class 2 NICs in the next
Parliament and reform Class 4 NICs to introduce a new benefit test. The government
will consult on the details and timing of these reforms later in 2015.
13.2 CHANGES ALREADY ANNOUNCED
The small profits rate of corporation tax remains at 20% but the main rate reduces to
20% with effect from 1 April 2015.
The additional rate of income tax (which applies to individuals with income of more
than £150,000) remains at 45% (earnings) and 37.5% (dividends). The highest
National Insurance contribution rates for 2015/16 are 13.8% (employers) and 14% -
12% plus 2% - for employees.
For 2015/16, there are no changes to the percentage rates of contribution for Class 1,
Class 1A, Class 1B and Class 4 NICs but there are changes to all of the thresholds and
limits.
The Class 1 Upper Earnings Limit and the Class 4 Upper Profits Limit will be aligned
for 2015/16 with the higher rate tax threshold of £42,385.
Since April 2014 every business and charity have been entitled to an annual £2,000
Employment Allowance towards their employer NICs bill. From April 2015, it is
understood the £2,000 annual 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.
The government has announced that it has completed its review into the tax charge on
loans from close companies to individuals, trusts and partnerships that have a share or
interest in them. The government does not intend to make any changes to the
structure or operation of the tax charge following this review.
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.
13.2.1 Drawing cash from an owner-managed business
(i) Payments to a director shareholder
The Employment Allowance (EA) came into effect from the beginning of 2014/15 and this
gives an employer a credit of up to £2,000 a year against their Class 1 Secondary National
Insurance Contributions (NICs).
The EA is claimable via Real Time Information (RTI) and once a claim is made, it will be
carried forward to future years. For 2015/16, the £2,000 EA will equate to the employer’s
NIC liability on one employee with annual earnings of about £22,600 ([£22,600 - £8,112 @
13.8% = £1,999.34).
The EA does not alter the arguments for dividend v salary for a one-person company outside
the grasp of IR35. There may be no employer’s NICs, but there will still be employee’s NICs
of 12%. Take, for example, someone who draws salary up to the primary NICs threshold of
£155 a week in 2015/16, with the rest drawn as dividends, who wants to pass out an extra
£10,000 of profit from the company into the individual's own hands. In most cases a
dividend would still be preferable.
Bonus
£
Dividend
£
Marginal tax rate 20% 40% 20% 40%
Marginal gross profit 10,000 10,000 10,000 10,000
Corporation tax @ 20% N/A N/A ( 2,000) ( 2,000)
Dividend N/A N/A 8,000 8,000
Employer’s National Insurance
contributions with EA
NIL
NIL N/A N/A
Gross bonus 10,000 10,000 N/A N/A
Employee’s NICs @ 12% (1,200) (1,200) N/A N/A
Income tax * (2,000) (4,000) ( NIL) ( 2,000)
Net benefit 6,800 4,800 8,000 6,000
*after allowing for 10% dividend tax credit
The only person who could in theory benefit from a bonus is a non-taxpayer, for whom 12%
NICs is a better deal than 20% corporation tax and a non-reclaimable tax credit. However, in
practice such circumstances will be rare and only cover a narrow band.
For those owner-run businesses where the director/shareholder already has a sizeable income
and there is a desire to draw more from the business, the changes to National Insurance
contributions and tax rates will once again alter the mathematics of the choice between
dividends and salary, as does the introduction of the NICs Employment Allowance of £2,000
in 2014/15. For shareholder/directors able to choose between the two, and not caught by the
IR35 personal company rules, a dividend remains the more efficient choice, as the example
below shows. However, a pension (within the annual allowance provisions) could avoid all
immediate tax and NIC costs.
Or nothing at all?
For some business owners, the ultimate way to limit their tax bill is to choose to leave profits
in the company rather than draw either a dividend or salary. With the top rate of income tax
currently at 45%, there is an obvious argument for allowing profits to stay within the
company, where the maximum tax rate (for the financial year beginning 1 April 2015) is
20%.
This strategy has post-election tax risks in terms of eligibility for CGT entrepreneurs’ relief,
income tax rates and inheritance tax business property relief. Money left in the company is
also money exposed to creditors, so professional advice should be sought before turning a
business into a money box.
(ii) Employing the spouse
The Employment Allowance (EA) may be useful for very small businesses where, for
example, a sole trader employs just one person – their spouse. For 2015/16 it makes little
sense for the spouse to be paid more than the primary threshold (£155 a week) because above
this level employee’s NIC is payable. Any gain in net income has to be considered against
the hassle of paying (and deducting) NICs.
In 2015/16 the employee will still be liable for NICs once their earnings exceed £155 a week,
but the employer’s NIC liability will be removed by the EA until their sole employee earns
more than about £22,600 a year.
For example, consider a higher rate taxpaying sole trader who employs their spouse with pay
up to the level of the primary (employee) threshold. If the sole trader generates £1,000 extra
Make Mine a Dividend A director/shareholder has £25,000 of gross profits in his company which he wishes to
draw, either as bonus or dividend. Assuming the company pays corporation tax at the
rate of 20% and the director already has annual income in excess of £42,385, the choice
can be summarised thus:
Bonus
£
Dividend
£
40% tax 45% tax 40% tax 45% tax
Marginal gross profit 25,000 25,000 25,000 25,000
Corporation tax @ 20% N/A N/A (5,000) (5,000)
Dividend N/A N/A 20,000 20,000
Employer’s National Insurance
Contributions £21,968 @ 13.8%
(3,032)
(3,032) N/A N/A
Gross bonus 21,968 21,968 N/A N/A
Director’s NICs £21,968@ 2% (439) (439) N/A N/A
Income tax * (8,787) ( 9,886) (5,000) (6,111)
Net benefit to director 12,742 11,643 15,000 13, 889
*After allowing for 10% tax credit on dividends
profit, in the sole trader’s hands it will be worth £580 net after £400 income tax and £20
Class 4 NICs. On the other hand, if the spouse’s pay is increased instead, the situation is as
shown below.
Nil Taxpayer Spouse Basic Rate Taxpayer Spouse
2015/16 2015/16
Total Outlay 1,000.00 1,000.00
Employer NIC NIL NIL
Salary 1,000.00 1,000.00
Employee NIC -120.00 -120.00
Employee tax NIL -200.00
Net salary 880.00 680.00
Such tax planning must always ensure that the spouse’s level of pay is justifiable. An increase
from, say, £7,500 a year to £22,000 a year just to utilise the EA could well invite HMRC
scrutiny. Where the employed spouse has little other income, an increase to make full use of
their personal allowance is clearly now much more attractive.
13.2.2 Close company loans to participators
The Finance Act 2013 introduced provisions to address perceived areas of abuse with regard
to the tax rules that apply to loans to shareholder directors of close companies. It also
announced a consultation process to determine whether this system of tax should be
amended.
As well as introducing these changes in the Finance Act 2013, the Government announced a
general review into the way the “tax on loans to participators” operates.
The Government announced in the Autumn Statement that following consultation there
will be no further changes to toughen up these rules. This received a good response from
directors of close companies and their tax advisers.
13.3 PLANNING
Pension contributions remain an effective means of reducing tax for the small business even
though the annual allowance has reduced to £40,000 for pension input periods ending after 5
April 2014.
In this respect, the carry forward rules allow any unused annual allowance to be carried
forward for a maximum of three years. Thus 5 April 2015 is the last opportunity to rescue
unused relief from 2011/12. With the election in mind, director/shareholders might also want
to consider using the carry forward rules again shortly after 5 April 2015. There is a definite
possibility that higher/additional rate tax relief on pension contributions will eventually be
cut, regardless of the colour(s) of the next government. The annual allowance could also be
reduced. The government has announced that the lifetime allowance will be reduced to £1
million with effect from 6 April 2016.
Any dividend payment from a company will not suffer NICs and so dividends are an
attractive means of extracting funds from the company for shareholding directors. This is
especially so as the Upper Earnings Limit is reducing to the higher rate tax threshold of
£42,385. By taking dividends, the directors “take-home” amount could be increased.
However, it is important that a director draws sufficient remuneration to retain entitlement to
state benefits.
The variables that have an impact on the relative attraction of dividends and salary as a means
of extracting benefits from a company for a shareholding director continue to be:
(i) the NIC rates (personal and corporate)
(ii) personal tax rates
(iii) the corporate tax rates
For the “one-person” company, at the lower end of remuneration planning, the NIC
Employment Allowance that was introduced last year may make dividend payment slightly
less attractive (see above).
Determining the so-called “remuneration strategy” for shareholding directors is an area where
a financial adviser can add significant value - especially when working together with the
client’s accountant.
For sole traders or a partner in a partnership, thought could be given to incorporation in order
to take advantage of the lower corporation tax rates. Alternatively, for those with falling
profits, there may be a benefit from changing the accounting date to 31 March or 5 April, but
beware - restrictions apply if this date has recently changed.
Where a non-taxpaying spouse can be legitimately employed in a business, income of up to
£10,600 can be paid in 2015/16 without income tax liability. This will increase to £10,800 in
2016/17. The payment of remuneration should be deductible for the employer provided
reasonable services are provided by the employee – deduction being based on the “wholly
and exclusively” principle. Earnings would need to be restricted to £8,060 to avoid employer
and employee NICs. Where the employer is self-employed, employment of the spouse may
well benefit from the NIC Employment Allowance (see above).
Those planning to sell their trading business, should make sure that any of the company’s
non-qualifying (ie non-trading) income or assets do not exceed 20% of the total income or
assets of the businesses respectively. This should ensure shares qualify for CGT
entrepreneurs’ relief on an eventual sale. Where entrepreneurs’ relief is available the CGT
rate is reduced to 10% on lifetime gains of up to £10 million (cumulatively) rather than
suffering the top 28% CGT rate. Business owners could consider having at least 5% of
ordinary shares and voting rights held by their spouse (or children if they work for the
company) so that they too each qualify for up to £10 million entrepreneurs’ relief.
Those considering crystallising their entrepreneurs' relief should do so sooner rather than
later as, because of the significant cost to the Treasury of this relief, it is expected that the
maximum amount of relief will be scaled back in the future. Indeed the 2015 Budget
announces the introduction of anti-avoidance rules aimed at entrepreneurs’ relief.
14. EMPLOYEE BENEFITS
14.1 PROPOSALS MADE IN THE BUDGET
14.1.1 Annual cap on trivial benefits for office holders of close companies
As announced in the Autumn Statement 2014, a statutory exemption from tax for qualifying
trivial benefits in kind costing £50 or less will apply from April 2015 (see also below). It was
announced in this Budget that following technical consultation on the draft legislation, an
annual cap of £300 will be introduced for office holders of close companies, and employees
who are family members of those office holders. Those affected by this cap will be able to
receive a maximum of £300 worth of trivial benefits in kind each year exempt from tax.
Corresponding legislation will also be introduced for National Insurance contributions
purposes. The changes will have effect from 6 April 2015.
14.1.2 Company cars
It was announced in this Budget that in 2019/20 rates for Ultra Low Emission Vehicles will
increase more slowly than previously announced, and that rates for other cars will increase by
three percentage points. Legislation will be introduced in a future Finance Bill.
14.1.3 Qualifying expense payments – exemptions
Budget 2015 announced that following consultation, the legislation included in Finance Bill
2015 that exempts from tax certain expenses payments and benefits in kind provided to
employees, has been revised to ensure that the exemption cannot be used in conjunction with
any arrangements that seek to replace salary with expenses. These changes will have effect
from 6 April 2016.
14.2 CHANGES ALREADY ANNOUNCED
14.2.1 Abolition of the £8,500 threshold for lower paid employment
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.
14.2.2 Trivial benefits exemption
As announced in the Autumn Statement, from April 2015 the government will provide a
statutory exemption for trivial benefits in kind costing less than £50.
14.2.3 Company cars
The benefit arising on a company car is calculated by applying the appropriate percentage to
the list price of the car. From 6 April 2016:
the maximum percentage that can be applied, is to increase from 35% to 37%;
all other appropriate percentages will be increased by 2 points; and
the diesel supplement of 3% will be removed, in line with European emissions
standards, so that petrol and diesel cars will be taxed equally.
14.2.4 Employee share plan consultation
It was confirmed at Autumn Statement that the Government would not proceed with the
introduction of either a new employee shareholding vehicle (a ‘safe harbour trust’) as an
alternative to a typical EBT or the concept of a ‘marketable security’ whereby income tax
would not become payable on shares or securities awarded to employees until they could be
sold for cash.
14.2.5 Qualifying expense payments – exemptions
As announced at Autumn Statement 2014, legislation will be introduced in Finance Bill 2015
to exempt from tax certain expenses payments and benefits in kind provided to employees.
The legislation will apply where employees would have been eligible for tax relief if they had
incurred and met the cost of the expenses or benefits themselves. This exemption replaces the
rules that require employers to either apply to HMRC for an agreement known as a
‘dispensation’ so that they can provide expenses and benefits free of tax and National
Insurance contributions, or to report such expenses and benefits to HMRC. However the
exemption will not apply where expenses are paid as part of a salary sacrifice arrangement.
Note that it was announced in the Budget that following consultation, the legislation has been
revised to ensure that the exemption cannot be used in conjunction with other arrangements
that seek to replace salary with expenses. These changes will have effect from 6 April 2016.
14.2.6 Internationally mobile employees
Under new rules, which take effect from 6 April 2015, the taxation of share options and
awards held by internationally mobile employees (IMEs) will be more closely aligned with
other forms of employment income. This will involve new rules around relevant periods and
provisions for apportionment within these periods between amounts chargeable to tax in the
UK and other income.
The new rules will apply to all share options exercised/share awards vesting after 6 April
2015, whenever they were granted. Regulations to align the NIC treatment of IMEs to the
new income tax treatment will also come into force from 6 April 2015. Broadly, under the
current rules, where a share option is granted to a non-UK resident employee, subject to
certain conditions being met, they could exercise the option free of income tax.
14.3 PLANNING
In addition to the new trivial benefits exemption, there remain opportunities for employers to
provide tax efficient benefits in kind which are either specifically tax exempt (whether due to
legislation or concession) or benefits, which although taxable, can still be efficient because
the employer can use its purchasing power to obtain favourable rates.
The changes in relation to employee benefits give corporate advisers an opportunity to
demonstrate awareness of change and, for practitioners, to advise and work with other
professionals advising mutual clients.
15. DOMICILE AND RESIDENCE
15.1 PROPOSALS MADE IN THE BUDGET
No new announcements were made in the 2015 Budget.
15.2 CHANGES ALREADY ANNOUNCED
At the Autumn Statement it was announced that the annual remittance basis charge payable
by a non-domiciled individual who is UK resident and who wishes to retain access to the
remittance basis of taxation will be increased in some circumstances.
The charge paid by those who have been UK resident for 7 out of the last 9 tax years
will remain at £30,000.
The charge paid by those who have been UK resident for 12 out of the last 14 tax
years will increase from £50,000 to £60,000.
A new charge of £90,000 will be introduced for those who have been UK resident for
17 of the last 20 tax years.
15.3 PLANNING
Whilst no major changes to the domicile and residence rules were announced this year, due to
the immense number of changes made over the last few years those affected should be taking
action to reduce their tax exposure. This particularly applies to those who
have been resident in the UK for some years and so may, subject to a remittance basis
charge election, find that their overseas income and gains will be taxed the arising
year basis (rather than the remittance basis), or
have been UK tax resident for a period of years approaching seventeen and so may
soon be deemed domiciled for IHT purposes.
For those non-UK domiciliaries who wish to reduce their exposure to income tax and capital
gains tax on overseas investments, they should give thought to the merits of offshore bonds as
a legitimate means of avoiding income and capital gains being subject to the arising basis of
assessment or causing a non-domiciled individual to consider paying the remittance basis
charge to avoid it. Remember though that the normal remittance basis rules apply if a non-
UK domiciliary invests mixed funds into an offshore bond and then remits a withdrawal to
the UK. This could cause previously unpaid income tax and/or CGT included in the
underlying mixed fund to become payable, even if the withdrawal itself falls within the 5%
tax-deferred withdrawal allowance.
For those with long-term UK residence who are keen to avoid the full impact of IHT on their
worldwide assets because they become UK deemed domiciled, they should consider
establishing an excluded property trust before such a status is achieved. This can be achieved
by creating a discretionary trust and investing in overseas investments (such as offshore
bonds and offshore collectives) and certain UK collective investments. The investor can be a
beneficiary under the trust which can be a UK trust or an offshore trust.
16. CHARITIES
16.1 PROPOSALS MADE IN THE BUDGET
The Budget confirmed a number of measures announced in the Autumn Statement and
announced a few new ones
16.1.1 Gift Aid Small Donations Scheme.
Secondary legislation will be introduced to increase the maximum annual donation amount
which can be claimed through the scheme from £5,000 to £8,000 allowing charities and
Community Amateur Sports Clubs to claim Gift Aid style top-up payment of up to £2,000 a
year with effect from 6 April 2016.
16.1.2 Charity Authorised Investment Funds
The government is working with the Financial Conduct Authority (FCA), the Charity
Investors’ Group and the Charity Commission 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 oversight and
protections as funds for retail investors. No further details have yet been released but this is a
welcome development.
16.2 CHANGES ALREADY ANNOUNCED
16.2.1 Gift Aid claims by intermediaries
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.
Intermediaries will no longer need to receive a Gift Aid declaration for each individual
charity a donor gives through them. This will ease the process for donors of giving to
multiple charities via a single intermediary.
The government hopes this will also encourage the development of new platforms that allow
people to donate in new ways.
The government wants to maximise the take up of Gift Aid on eligible donations.
This measure will make it easier for donors to claim Gift Aid on donations to multiple
charities, particularly those made through non-charity intermediaries via digital channels,
thereby potentially leading to Gift Aid being claimed on a greater proportion of eligible
donations and more relief going to charities.
This measure was first announced in Budget 2013. A consultation entitled ‘Gift Aid and
digital giving’ ran from July to September 2013 this was followed by confirmation in Budget
2014 that the government would legislate, in Finance Bill 2015, to allow a greater role for
intermediaries.
The primary legislation will have effect on the date that Finance Bill 2015 receives Royal
Assent, with regulations setting out the detailed operating model(s) for non-charity
intermediaries to be consulted upon and made thereafter.
16.2.2 Social Investment Tax Relief
As announced in the Autumn Statement, the Government wants to extend the scope of Social
Investment Tax Relief (SITR) but must first seek EU approval. The aim is to increase 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.
SITR was first announced in the 2013 Budget and became law in the Finance Act 2014. SITR
is intended to support "social enterprises" (which includes community interest companies and
community benefit societies as well as charities) looking for external investment finance by
giving tax relief to donors who invest in shares or debt instruments.
One of the perceived limitations of SITR is that there are restrictions on the amount of funds
any enterprise can raise pursuant to the relief – this must be no more than €200,000 in any
three year period. The restriction stems from the EU prohibition on state aid; in its current
form SITR falls under the "de minimis" exemption to the general rule.
16.2.3 Gift Aid - charity donor benefits
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. A review was
launched after the 2014 Budget and this will include consideration of the rules for claiming
Gift Aid on membership and entrance fees.
16.3 PLANNING
Charitable donations enable the taxpayer to make substantial savings whether in lifetime or
on death. Income tax savings can be made by extending the basic rate band by the gross
amount gifted to charity and it is welcome that this tax relief will continue without limit.
The introduction of a reduced rate of inheritance tax (from April 2012) where 10% or more of
the deceased’s net estate is left to charity now also means that it is possible to make further
IHT savings through charitable donations.
The proposed improvements to the Social Investment Tax Relief will be of particular interest
to social enterprises looking to raise funds and to individuals looking to invest in them.
The simplification of Gift Aid claims by intermediaries and the increase in the Gift Aid Small
Donations Scheme will also be beneficial to the charities sector.
The proposed introduction of the new Charity Authorised Investment Fund structure will be
of particular interest to financial advisers.
17 CHILDCARE
17.1 PROPOSALS MADE IN THE BUDGET
No new proposals were made in the Budget, although the government confirmed that the
maximum amount that parents of disabled children will be able to receive has doubled to
£4,000 (see below).
17.2 CHANGES ALREADY ANNOUNCED
17.2.1 Childcare Scheme
From Autumn 2015, a new childcare scheme will be introduced to support working families
with their childcare costs. The scheme will provide parents with savings worth up to £2,000
per year - compared with the original proposal of £1,200 - by giving basic rate tax relief on
the first £10,000 they spend on childcare (i.e. £10,000 x 20% = £2,000).
In HMRC’s response to the technical consultation on draft secondary legislation for the
Childcare Payments Act (published on 9 February 2015) it was confirmed that the maximum
amount that parents of disabled children will be able to receive to help to pay for their
childcare costs, would be doubled to £4,000 per disabled child per year.
To be eligible under the new scheme, both parents, or a single parent in work, must be each
earning less than £150,000 a year and must not already receive support through tax credits or
the new universal credit. Support will be provided through a childcare account redeemable at
any registered childcare provider.
The existing workplace childcare vouchers scheme, which is currently subsidised by the
taxpayer, will be closed to new claimants from 2015 and phased out. Employers will be able
to continue to set up a childcare voucher scheme until tax-free childcare is launched, meaning
there is still an opportunity for employers to enjoy the National Insurance savings which
childcare vouchers provide. Parents will be able to sign up for childcare vouchers until
August 2015 and they can then continue to order vouchers beyond Autumn 2015, for as long
as their employer continues to run the scheme. Some existing scheme members will choose to
switch to the new scheme from 2015, as in some cases this will provide higher savings.
17.2.2 Additional support for Universal Credit claimants
It was confirmed at Autumn Statement 2015 that, from April 2016, the government will
increase childcare support within Universal Credit to 85% of eligible costs for all families. In
addition, if a claimant leaves Universal Credit and returns within a 6-month period, they will
be able to keep their existing assessment period. To offset the cost of these policies, the
Universal Credit work allowances will be maintained at their current level for a period of 1
year from April 2017. Surplus earnings that are in excess of £100 above a household’s
Universal Credit award threshold will be accounted for in award calculations over a 6-month
period.
APPENDIX - TAX FACTS AND FIGURES AND NICs
MAIN INCOME TAX ALLOWANCES AND RELIEFS
2014/15 2015/16
£ £
Personal allowance – standard 10,000 10,600
- Born between 6 April 1938 and 5 April 1948 10,500 N/A
- Born before 6 April 1938 10,660 10,660
Personal allowance reduced if total income exceeds 100,000 100,000
Transferable tax allowance (marriage allowance)§ N/A 1,060
Married couple’s allowance* – minimum amount 3,140 3,220
– maximum amount 8,165 8,355
Maintenance to former spouse * 3,140 3,220
Age-related allowances reduced if total income exceeds ¶ 27,000 27,700
Employment termination lump sum limit 30,000 30,000
For 2014/15 and 2015/16 the reduction is £1 for every £2 additional income over
£100,000. As a result there is no personal allowance if total income exceeds £121,200
(£120,000 for 2014/15).
§ Available to spouses and civil partners born after 5 April 1935, provided neither party
pays tax at above basic rate.
* Relief at 10%. Available only if at least one of the couple was born before 6 April
1935.
¶ For 2014/15 and 2015/16 the reduction is £1 for every £2 additional income over the
total income threshold. Standard allowance(s) only are available if total income
exceeds:-
2014/15 2015/16
£ £
Taxpayer born between 6 April 1938 and 5 April 1948 [personal
allowance]
28,000 N/A
Taxpayer born before 6 April 1938[personal allowance] 28,320 27,820
Taxpayer born before 6 April 1935 [married couple’s allowance] 38,370 38,090
INCOME TAX RATES
2014/15 2015/16
£ £
Starting rate 10% 0%
Starting rate on savings income 1 – 2,880 1-5,000
Basic rate 20% 20%
Maximum tax at basic rate 6,373 6,357
Higher rate - 40% 31,866-150,000 31,786-150,000
Tax on first £150,000 53,627 53,643
Additional rate on income over £150,000 45% 45%
Discretionary and accumulation trusts (except dividends) ° 45% 45%
Discretionary and accumulation trusts (dividends) ° 37.5% 37.5%
Ordinary rate on dividends 10% 10%
Higher rate on dividends 32.5% 32.5%
Additional rate on dividends 37.5% 37.5%
High income child benefit charge 1% of benefit per £100 income
between £50,000 and £60,000
Assumes starting rate band not available. £5,357 on first £31,785 (£6,085 on first
£31,865 in 2014/15) and £52,643 (£53,339 in 2014/15) on first £150,000 if full
starting rate band is available.
° Up to the first £1,000 of gross income is generally taxed at the standard rate, ie. 20%
or 10% as appropriate.
CAR BENEFITS
The charge is based on a percentage of the car’s “price”. “Price” for this purpose is the list
price at the time the car was first registered plus the price of extras.
For cars first registered after 31 December 1997 the charge, based on the car’s “price”,
is graduated according to the level of the car’s approved CO2 emissions.
For petrol cars with an approved CO2 emission figure.
CO2
g/km1
% of price
subject to tax2
CO2
g/km
% of price
subject to tax2
CO2
g/km
% of price
subject to tax2
14-15 15-16 14-15 15-16 14-15 15-16
50 or less 53 5 125–9 18 20 170–4 27 29
51–75 5 9 130–4 19 21 175–9 28 30
76–94 11 13 135–9 20 22 180–4 29 31
95–99 12 14 140–4 21 23 185–9 30 32
100–4 13 15 145–9 22 24 190–4 31 33
105–9 14 16 150–4 23 25 195–9 32 34
110–4 15 17 155–9 24 26 200–4 33 35
115–9 16 18 160–4 25 27 205–9 34 36
120–4 17 19 165–9 26 28 210 and
over
35 37
Notes
1. The exact CO2 emissions figure should be rounded down to the nearest 5 g/km for
levels of 95g/km or more.
2. For all diesels add 3%, subject to maximum charge of 35% in 2014/15 and 37% in
2015/16.
3. There is no charge for any car which cannot produce CO2 in 2014/15 only.
CAR FUEL BENEFITS
For cars with an approved CO2 emission figure, the benefit is based on a flat amount of
£22,100 (£21,700 for 2014/15). To calculate the amount of the benefit the percentage figure
in the above car benefits table (that is from 5% to 37%) is multiplied by £22,100. The
percentage figures allow for a diesel fuel surcharge. For example, in 2015/16 a petrol car
emitting 142 g/km would give rise to a fuel benefit of 23% of £22,100 = £5,083.
VAT
From 1 April 2014 1 April 2015
Standard rate 20.0% 20.0%
Annual turnover
limit for registration
£81,000 £82,000
De-registration
threshold
£79,000 £80,000
INHERITANCE TAX
Cumulative chargeable transfers [gross] tax rate
on death
%
tax rate in
lifetime*
% 2014/15
£
2015/16
£
Nil rate band 325,000 325,000 0 0
Excess No limit No limit 40 20
* Chargeable lifetime transfers only.
On the death of a surviving spouse on or after 9 October 2007, their personal
representatives may claim up to 100% of any unused proportion of the nil rate band of
the first spouse to die (regardless of their date of death). 36% where at least 10% of net estate before deducting the charitable legacy is left to
charity.
CAPITAL GAINS TAX
Main exemptions and reliefs
2014/15
£
2015/16
£
Annual exemption 11,000* 11,100*
Principal private residence
exemption
No limit No limit
Chattels exemption 6,000 6,000
Entrepreneurs’ relief Lifetime cumulative
limit £10,000,000.
Gains taxed at 10%
Lifetime cumulative
limit £10,000,000.
Gains taxed at 10%
* Reduced by at least 50% for most trusts.
Rates of tax
Individuals: 18% on gains within basic rate band, 28%
for gains in higher and additional rate
bands
Trustees and personal representatives: 28%
STAMP DUTY LAND TAX, LAND AND BUILDING TRANSACTION
TAX AND STAMP DUTY
UK excluding Scotland: SDLT
Residential (on slice of value) Rate Commercial (on total value) Rate
£125,000 or less Nil £150,000 or less Nil
£125,001 to £250,000 2% £150,001 to £250,000 1%
£250,001 to £925,000 * 5% £250,001 to £500,000 3%
£925,001 to £1,500,000 * 10% Over £500,000 4%
Over £1,500,000 * 12%
* 15% on entire value of properties worth over £500,000 purchased by certain non-
natural persons
Scotland: LBTT
Residential (on slice of value) Rate Commercial (on slice of
value)
Rate
£145,000 or less Nil £150,000 or less Nil
£145,001 to £250,000 2% £150,001 to £350,000 3%
£250,001 to £325,000 5% Over £350, 000 4.5%
£325,001 to £750,000 10%
Over £750,000 12%
UK Stamp Duty (including SDRT)
Stocks and marketable securities: 0.5%
No stamp duty charge unless the duty exceeds £5
CORPORATION TAX
Year Ending 31 March
2015 2016
Main rate 21% 20%
Small profits rate * 20% N/A
Small profits limit * £300,000 N/A
Upper marginal level £1,500,000 N/A
Effective marginal rate 21.25% N/A
* Formerly the small companies’ rate/limit
TAX-PRIVILEGED INVESTMENTS [MAXIMUM INVESTMENT]
2014/15
£
2015/16
£
ISA
Overall per tax year: 15,000 15,240
Maximum in cash for 16 and 17 year olds 15,000 15,240
Junior ISA 4,000 4,080
ENTERPRISE INVESTMENT SCHEME
(30% income tax relief)
1,000,000* 1,000,000*
Maximum carry back to previous tax year for income tax
relief
1,000,000
1,000,000
SEED ENTERPRISE INVESTEMENT SCHEME
(50% income tax relief)
100,000¶ 100,000¶
VENTURE CAPITAL TRUST
(30% income tax relief)
200,000
200,000
* No limit for CGT reinvestment relief.
¶ 50% CGT reinvestment exemption in 2014/15 and 2015/16
PENSIONS
* May be increased under 2006, 2012 or 2014 transitional protection provisions
WORKING AND CHILD TAX CREDITS
Working and Child Tax Credits is gradually being replaced by Universal Credit, which began
to be phased in in 2014/15. For the time being the main features of the tax credits are:
1. Child tax credit
Eligibility is assessed on household income.
The claimant must be responsible for one or more children aged 16 or under, or at
least one child under age 20 and in full-time non-advanced education.
The family element of the tax credit is £545 per annum.
The child element is £2,780 per annum for each child.
The disabled child element is £3,140 per annum (where relevant).
HMRC will pay the CTC to the main carer for the child.
2. Working tax credit
The claimant, or one of the joint claimants, must be in qualifying remunerative work.
The amount of WTC will be based on circumstances which are primarily the number
of hours worked and the income of the claimant (or joint income for a couple).
The age and working hours conditions are not straightforward. Generally, the
minimum weekly working requirement will be:
2014/15 2015/16
Lifetime allowance* £1,250,000 £1,250,000
Lifetime allowance charge:
Excess drawn as cash
Excess drawn as income
55% of excess
25% of excess
Annual allowance £40,000 £40,000
Money purchase annual allowance N/A £10,000
Annual allowance charge 20%-45% of excess
Max. relievable personal contribution 100% relevant UK earnings or £3,600 gross if
greater
a) 24 hours for families with children and workers with a disability. The
claimant can be aged 16 or over. One of the couple must work at least 16
hours.
b) 30 hours for workers with no children and no disability. The claimant has to
be aged 25 or over.
The basic element of the tax credit is £1,960 per annum.
The couple or lone parent element is £2,010 per annum.
A 30 hour element of £810 per annum is payable where the claimant or one of the
claimants works at least 30 hours a week (couples with children may aggregate their
hours for this purpose).
A disabled worker element of £2,970 per annum or more is available where the
claimant, or his or her partner, has a disability.
For employees, payment will normally be made by their employer with their wages
(except the childcare element which is paid direct to the main carer). For the self-
employed, payment is made directly by HMRC.
3. Calculating the credits
It is necessary first to total the various elements available to arrive at the maximum available
amount of tax credits before any reduction on account of income. All elements can be
reduced at the rate of 41% (ie. 41p per £1 of income).
NATIONAL INSURANCE CONTRIBUTIONS
Class 1 Employee Not Contracted Out of State Second Pension (S2P)
2014/15 2015/16
Employee Employer Employee Employer
Main NIC rate 12% 13.8% 12% 13.8%
No NICs on first:
Under 21
21 & over
£153 pw
£153 pw
£153 pw
£153 pw
£155 pw
£155 pw
£815 pw
£156 pw
Main NIC charged up to £805 pw No limit £815 pw No limit
Additional NIC rate
on earnings over 2%
£805 pw N/A
2%
£815 pw N/A
Certain married women 5.85% 13.8% 5.85% 13.8%
Contracted Out Rebates 2014/15 2015/16
Rebate on £111.01 – £770 pw £112.01 – £770 pw
Salary-related scheme only 1.4.% 3.4% 1.4% 3.4%
Limits and Thresholds 2014/15 2015/16
Weekly
£
Yearly
£
Weekly
£
Yearly
£
Lower earnings limit 111 5,772 112 5,824
Primary earnings threshold 153 7,956 155 8,060
Secondary earnings threshold 153 7,956 156 8,112
Upper secondary threshold – U21s N/A N/A 815 42,385
Upper accrual point 770 40,040 770 40,040
Upper earnings limit 805 41,865 815 42,385
Self-employed and non-
employed
2014/15 2015/16
Class 2
Flat rate
Small earnings exception
£2.75 pw
£5,885 pa
£2.80 pw
£5,965 pa
Class 4 (Unless over state pension age on 6 April)
On profits £7,956 – £41,865 pa: 9%
Over £41,865 pa: 2%
£8,060 – £42,385 pa: 9%
Over £42,385 pa: 2%
Class 3 (Voluntary)
Flat rate £13.90 pw £14.10 pw
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