Posted by James Pearson on 16 Mar 2012
Tax Innovations – Spring 2012 Newsletter
The UK Budget, due to be delivered by the Chancellor on 21 March 2012, is eagerly awaited.
Tensions in the Coalition Government have led to rumours that there may be radical alterations to parts of the UK tax system, but of course this is only speculation.
Issues in the media spotlight currently are the possible raising of the Personal Allowance still further to over £10,000, the possible abolition of higher rate tax relief for pension contributions, and a “Mansion Tax” for properties with high capital values to possibly fund the withdrawal of the 50% tax band.
Whether your affairs are complex or fairly straightforward, we hope there will be items of interest for you in this Newsletter, as in particular a year end review of possible tax savings is always worthwhile! More details are included below and we also cover topical issues for “Expatriates”, and the new rates of Research & Development relief available to businesses from April 2012.
Nick Day, Tax Director
In broad terms, for those wishing to maximise the tax relief to be received on pension contributions, they have until 5 April 2012 to make payments that will qualify for tax relief.
However, our strong recommendation would be to effect any further contributions you might wish to consider making before Budget Day on 21 March, owing to the rumours that abound in the media that changes could be made to the UK pension regime. This should ensure that if you are paying tax at 40% or 50% you get tax relief on your pension contributions at these rates.
The Annual Allowance for making UK pension contributions currently is £50,000 but as mentioned in previous newsletters, with careful planning relating to “pension input periods” and the three year carry forward of unused Annual Allowances from previous years, it may be possible to receive tax relief in the current tax year on contributions well in excess of £50,000.
We just want to remind our clients one last time that the UK pension “Lifetime Allowance” (the amount that can be saved tax efficiently during one’s lifetime) is reducing from £1.8million to £1.5 million on 6 April 2012. It is possible to make a “fixed protection” election where your contributions are close to or have already exceeded this limit but this needs to be done before 6 April 2012. If you have not previously made an election and are interested you should contact us or your financial adviser to discuss the position.
The Government’s proposed Statutory Residence Test has been delayed until April 2013 but it if you are considering becoming non-resident for UK tax purposes, one way of doing this is to work full-time abroad for more than one complete UK tax year. Therefore, individuals should bear in mind that it may be worth departing the UK prior to the end of the current 2011-12 tax year to establish a period of non-residence covering the 2012-13 year.
“Expatriate” Tax Planning
Many individuals with “Not Ordinarily Resident” (NOR) UK tax status, that have come to work in the UK temporarily, open offshore bank accounts outside the UK to take advantage of rules which exclude earnings from non-UK duties from being taxable in the UK providing they are not remitted/brought to the UK.
This is a complex area requiring specialist advice, but where such accounts are in place it would be good tax planning to open a new offshore account for each separate UK tax year. Consideration should be given to opening a new offshore account to receive employment earnings paid from 6 April 2012 onwards, but keeping the previous offshore account open that had earnings paid in to it up to 5 April 2012. The reason for doing this is so that it is simpler to analyse the earnings for each UK tax year separately and decide which account to remit from to minimise UK tax liabilities. The way the UK rules relating to offshore accounts work is to deem the current year’s earnings remitted to the UK first where earnings for more than one year are contained in an account, so by opening the fresh offshore account each year, the earnings for the previous year do not become “trapped” behind current year earnings.
It should not be forgotten that it is possible for non-domiciled individuals to remit to the UK on a tax-free basis, earnings/investment income/capital gains that relate to a period before they became UK tax resident. The key is not to mix such funds with income/gains arising after becoming UK tax resident, and prior to remitting them to the UK. Furthermore, if gifts or inheritances are received outside the UK whilst an individual is tax resident here, it should be possible to bring these to the UK on a tax-free basis, although care needs to be taken not to “mix” the funds.
The above comments are subject to reviewing whether it is beneficial to file UK Tax Returns on the “Remittance Basis”, as this may not always be the case.
Research & Development (R&D) Relief
HM Revenue & Customs have already announced three changes to Research & Development Relief which may make it beneficial to delay certain items of expenditure until after 1 April 2012.
From this date the relief available for relevant expenditure is due to increase from 200% to 225%. This will mean that for ever £1 of relevant expenditure on relevant research and development activities a company can claim £2.25 against profits for tax purposes rather than the £2 currently available.
Two other changes have been announced and are expected to be introduced from 1 April 2012. A £10,000 minimum expenditure condition is due to be removed meaning that relief will be available regardless of the level of expenditure. Currently if relevant expenditure totals less than £10,000 in an accounting period no R & D relief is available. This means it may be sensible to hold back on any smaller expenditure until after 31 March 2012.
The other change affects the tax credits available to a company that is loss making, either before or after claiming R & D relief. The loss relating to the R & D relief can be converted into a tax credit and paid to the company, allowing a cash flow advantage to R & D expenditure even for a loss making company. Currently, the cash payment is limited to the PAYE and NIC paid by the loss making company, but this limit is expected to be removed from 1 April 2012. This means that relevant expenditure should probably be delayed until 1 April if it is likely to generate a loss for the company after R & D relief has been claimed and the size of that loss means that the payable tax credits will exceed the company’s PAYE and NI payments.
Year End Tax Planning
With the end of the UK tax year (5 April) looming in to view; it is time to consider various year end planning that might make a difference in reducing your tax liabilities. Issues to consider include but are not limited to:
1. Ensuring each spouse uses their full Personal Allowance for income tax purposes where possible. Income of less than currently £7,475 is not liable to tax. Spouses/civil partners should consider the possible transfer of income producing assets to ensure that Personal Allowances are not wasted.
2. If a self-employed person or family company employs a spouse to assist in the running of the business, the spouse could be remunerated fairly to utilise the tax-free Personal Allowance. It is possible to set the earnings at a level whereby no tax or National Insurance Contributions will be due but entitlement to State Retirement Pension and other benefits is protected.
3. Minor children are entitled to Personal Allowances. There are restrictions on the amount of income that a child can derive from a parent but gifts from other relatives can be considered. Junior Individual Savings Accounts (JISAs) can be funded by parents. Teenaged children can be employed in family businesses providing legal restrictions/national minimum wage issues are taken into account.
4. Pension contributions of up to £3,600 gross per year can be made by individuals with no taxable income. The net contribution after tax relief contributed at source by the UK Government would be just £2,880.
5. The use of tax-favourable investments such as Individual Savings Accounts (ISAs), Enterprise Investment Schemes (EIS) and Venture Capital Trusts (VCT) should be reviewed.
6. Timing of income – taxable incomes may fluctuate from year to year as a result of one-off payments or changes in circumstances. Consideration should be given to the benefits of accelerating or deferring the taxation point of investment income, employment bonuses etc., and also to the timing of the payment of dividends paid out by family owned companies. Similarly, the acceleration of expenditure on business expenses/capital assets qualifying for capital allowances could prove beneficial.
7. Taxable income of between £100,000 and £114,950 is effectively taxed at a rate of 60% due to the loss of the Personal Allowance, which is reduced by £1 for every £2 of income between £100,000 and £114,950. Deferral of income may therefore save tax at the rate of 60% although planning might also include the use of additional pension contributions, charitable donations, etc.
8. Employers should review benefits provided to employees to ensure they are delivered in a tax-effective manner. Cars are taxed by reference to their retail list prices and carbon dioxide emission levels, and a review of the way cars/private petrol are provided could produce tax and National Insurance savings. HM Revenue & Customs has recently confirmed that “smartphones” qualify as “mobile phones” and can be provided tax-free. Refunds for previous years may be due.
9. Businesses should review whether a change of accounting date might prove beneficial. Early profits of a business may be taxed twice, with “overlap relief” not due to be claimed until the business ceases. If an accounting date is chosen that is later in the tax year, this can reduce the overlap period and release relief that is not otherwise index-linked. Benefits may be significant if the trend is towards a decline in profits.
10. Capital gains tax – consideration should be given to utilising the tax-free Annual Exemption (currently £10,600). Each spouse/civil partner is entitled to the exemption each year so gifts between spouses prior to sales of assets may be tax-effective. It may be worth crystallising capital losses where gains in excess of the Annual Exemption have been made. The deferral of sales until after 5 April may see tax paid at lower rates and provide significant cash-flow benefits in terms of when tax needs to be paid. “Bed and breakfasting” to increase the base acquisition costs of shares is no longer tax-effective where shares are sold and re-purchased shortly afterwards, but planning with spouses/civil partners buying back the shares may still be tax-effective.
11. Inheritance Tax – the use/carry forward of the £3,000 annual exemption should be reviewed, together with other possible exemptions such as those for small gifts of up to £250 per individual, regular gifts out of normal annual income, and tax-free gifts in consideration of marriage, which can range between £1000 and £5,000 depending on the relationship with the person getting married.
If you are interested in any of the issues included in this newsletter, please do not hesitate to contact us for a consultation. You should not rely on the contents of the newsletter without receiving qualified tax advice first.
Tax Innovations, March 2012.
- Companies House and HMRC Scam Alert
- Tax Relief For Residential Mortgages
- Top 10 Expat Tax Tips for Individuals Moving to the UK
- Property Partnership Incorporation and SDLT
- Overseas Pension Changes 6 April 2017