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· Practical implications of the dividend tax allowance
· Personal savings allowance update
· Landlords' replacement wear and tear allowance
· Employee bonus schemes in the spotlight
· March Questions and Answers
· March Key Tax Dates
Practical implications of the dividend tax allowance
The new rules governing the taxation of dividends are set to take effect in relation to dividends received after 5 April 2016. The changes include:
- a £5,000 dividend nil rate (also known as the 'dividend tax allowance' (DTA)), which will effectively tax at the nil rate, the first £5,000 of taxable dividend income (i.e. after deducting the personal allowance, but treating dividends as the top slice of income, so the personal allowance is used last against dividends). Any dividends above the first £5,000 will be taxed as if the £5,000 used up either the basic rate band or the higher rate band;
- dividends exceeding the dividend nil rate will be taxed at:
- 7.5% in the basic rate band (the ordinary rate);
- 32.5% in the higher rate band (the upper rate); and
- 38.1% in the additional rate band (the additional rate);
- the tax credit, which currently attaches to dividends paid by UK companies, will be abolished from 5 April 2016, which means that the dividend paid will no longer be grossed up by one-tenth when calculating the shareholder's taxable income; and
- dividends will not be set off by either:
- the personal savings allowance (PSA) (from 2016/17); or
- the £5,000 savings allowance (from 2015-16),
which are both used only against savings income (generally interest).
The PSA is £1,000 for any saver whose highest rate of income tax in the year is the basic rate (20%), but only £500 for any saver whose highest rate of income tax in the year is the higher rate (40%). If any of an individual's income is liable to tax at the higher rate, then the higher rate PSA will apply. The PSA and the DTA do not reduce total income for tax purposes and still count towards basic or higher rate bands.
Over recent years, since the 10% tax credit has covered all their income tax liability, some basic rate taxpayers have had no assessable income and have therefore had no reporting obligations to HMRC. However, some dividends received after 5 April 2016 may not be fully covered, e.g. by the personal allowance and DTA, so taxpayers in this position will now have to notify a liability to pay tax to HMRC for the first time for 2016-17. There has been speculation within the tax and accountancy professions that this change can be regarded as a new form of 'stealth' tax.
It is also worth noting that the withdrawal of the tax credit for dividends may create a liability to pay the income tax relating to donations under the Gift Aid Scheme. There is no income tax liability on dividends taxed at the nil rate, so such dividends cannot frank the income tax on a Gift Aid donation made after 5 April 2016.
Assuming the provisions in the Finance Bill 2016 are enacted, practitioners should advise certain clients promptly, so they can plan to transfer shareholdings if appropriate, and, where possible, time dividends to best effect.
Personal savings allowance update
From 6 April 2016, the personal savings allowance (PSA) will allow basic rate taxpayers to receive up to £1,000 of savings income tax-free. For higher rate taxpayers, this limit will be £500. HMRC have published guidance setting out details of what counts as savings income and how the allowance will be calculated, including some useful examples.
Savings income includes account interest from:
- bank and building society accounts;
- accounts with providers like credit unions or National Savings and Investments.
It also includes:
- interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts;
- income from government or company bonds; and
- most types of purchased life annuity payments.
Interest from Individual Savings Accounts (ISAs) does not count towards the PSA as it is already tax-free.
For further information on the PSA, see the GOV.UK website.
Landlords' replacement wear and tear allowance
Capital allowances are not available for expenditure on furniture and furnishings for use in dwelling houses. However, until 5 April 2016 (1 April 2016 for corporation tax) a deduction for wear and tear may be claimed (known as a 'wear and tear allowance election'), equal to 10% of the 'net rents' from furnished lettings (ie after deducting payments that would normally be borne by the tenant, such as water rates). In addition, a deduction may be claimed for replacing fixtures that are an integral part of a building (eg central heating systems), but excluding additional expenditure on 'improved' versions of those items. However, replacing single glazed windows with double glazed units is treated as allowable repairs and not disallowable improvements.
Many flats are let unfurnished due to the difficulties of complying with fire safety legislation.
In relation to expenditure incurred on or after 1 April 2016 (for corporation tax) and 6 April 2016 (for income tax), the former wear and tear allowance for fully furnished properties will be replaced with a relief enabling all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.
The new relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.
The amount of the deduction is:
- the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent); plus
- the incidental costs of disposing of the old item or acquiring the replacement; less
- any amounts received on disposal of the old item.
This deduction will not be available for furnished holiday lettings as capital allowances continue to be available for them.
Note also that the renewals allowance for tools (under ITTOIA 2005, s 68) will no longer be available for property businesses from the same date.
Employee bonus schemes in the spotlight
HMRC have recently published the latest addition to their tax avoidance guidance series, entitled Employee Bonus Schemes: Growth Securities Ownership Plan and other avoidance schemes based on contracts for difference (Spotlight 28). The Spotlight guidance confirms that, in HMRC's opinion, growth securities ownership plan schemes do not work and any payment made by an employer to an employee on the maturity of the contract for difference should be taxed as employment income and subject to PAYE income tax and National Insurance contributions (NICs).
Broadly, under this type of arrangement, each employee acquires a contract for difference which entitles the employee to receive a cash payment at a pre-determined date provided a pre-determined hurdle is achieved (often referred to as the 'upside'). A feature of these avoidance schemes is that on entering the scheme, the employee usually agrees to reimburse the employer for the tax and NIC that HMRC recover from the employer.
HMRC have confirmed that any employer who has used a contract for difference scheme and wishes to avoid litigation can pay the outstanding tax and employer and employee NIC together with the interest which has arisen upon it.
For further information, see Spotlight 28 at here.
March Questions and Answers
Q. What are the implications of selling my Scottish home? I own and live in a property in Scotland. What are the implications of me selling the house to a relative, who will buy it using a buy-to-let mortgage, and allow me to stay in it and pay rent to her as a tenant?
A. If the house has always been your main residence, there should be no capital gains tax implications for you. Depending on the purchase price, your relative may have to pay the Scottish land and buildings transaction tax (LBTT), which replaced the previous stamp duty land tax (SDLT) in Scotland from April 2015. With regards to the new lease allowing you to remain in the property as a tenant, there may be relief from LBTT under the sale and leaseback provisions. For further information on LBTT, see the Revenue Scotland website at here. And of course, your relative will have to declare and pay tax if applicable, on any rental income she receives from you.
Q. Should we register for VAT to reclaim input tax on the costs of conversion? My brother owns a commercial business unit, and we have decided to convert it into residential units. Although I will be project managing the conversion, I will not be charging my brother. As you can imagine, there will be a lot of expenditure on building materials, which are subject to VAT and potentially contractors who are VAT registered. Will it be advantageous to set up a VAT-registered business for the development so that we can claim back the VAT incurred?
A. Broadly, where an individual converts non-residential property into residential property they can zero rate the sale of the completed residential units. Where this is the case, it will be worthwhile registering for VAT as much of the input VAT incurred can be reclaimed. However, there are many rules and conditions that can apply in such circumstances. VAT Notice 708: buildings and construction should provide a useful reference tool. I would recommend that you read it in detail as it will help you satisfy yourself as to the correct liability of the supplies of goods and services being made by suppliers and contractors to you. The Notice can be found on the GOV.UK website at here.
Q. Is inheritance tax due on a gift? I have an elderly friend who has said he would like to give me a gift of £10,000 to help with my planned kitchen extension. Will there be any tax to pay on this very generous gift?
A If you make a gift during your lifetime, there will not usually be any inheritance tax (IHT) to pay. Lifetime gifts are usually treated as potentially exempt transfers (PETs) and will only become chargeable to IHT if you die within seven years of making the gift.
However, if you make a gift to a company or to some types of trust, the gift is immediately chargeable and you may have to pay some tax in your lifetime - if the total value of those gifts exceeds the IHT threshold (currently £325,000).
Any money you give away during your lifetime that doesn't fall under the exempt transfer rules may escape IHT as a potentially exempt transfer (PET). There are no limits on the amount of PETs you can make during your lifetime. Basically, for a PET to escape IHT completely you need to make sure that you survive for seven years after making the gift.
If you die within the seven year period, the PET will be partially chargeable depending on the number of years that have elapsed. The reduction is given in the form of taper relief. This is a sliding scale used to determine tax liabilities on gifts between three and seven years before death. The rates of taper relief are as follows:
- Between 0 to 3 years, the reduction is 0% and the actual tax rate is 40%
- 3 to 4 years, the reduction is 20% and the actual tax rate is 32%
- 4 to 5 years, the reduction is 40% and the actual tax rate is 24%
- 5 to 6 years, the reduction is 60% and the actual tax rate is 16%
- 6 to 7 years, the reduction is 80% and the actual tax rate is 8%
- More than 7 years, the reduction is 0% and the actual tax rate is 0%
Taper relief is only of real benefit if you can also fully use the nil rate band for other transfers. Taper amounts are set against the free slice first.
If you give £100,000 away during your lifetime and die four years later, leaving a further £350,000 in your will, the first £100,000 lifetime gift counts against your nil rate band first. So your estate will only have £225,000 (in 2015/16) left in nil rate band to set off against the remaining £350,000. This means that your executors will end up paying as much tax as if you had not made the gift at all.
Taper relief is worthwhile for those with large estates. Giving away £1 million and living for seven years takes the money right out of the IHT net. But if you only live for six years, the £1 million less the nil rate band is charged at only 8% tax instead of 40%. Obviously, anything that is transferred at death will be chargeable at the full 40% rate as the nil rate band will have been used up.
Many people use special life insurance policies to make sure that a potential liability to IHT is covered if they don't live for the full seven years after making a PET. These types of policy are designed to fit in with the tax taper. The proceeds are usually written into trust so they are outside your estate when you die.
March Key Tax Dates
19/22 - PAYE/NIC, student loan and CIS deductions due for month to 5/3/2016
31 - Last minute tax planning for the 2015/16 tax year. Ensure you use up all exemptions to which you are entitled