Tax Planning for 5 April 2016 Presented by Rebecca … tax planning 2020 Webinar February 2016 Page 1 Tax Planning for 5 April 2016 Presented by Rebecca Bennyworth No responsibility

Year-end tax planning

2020 Webinar February 2016 Page 1

Tax Planning for 5 April 2016

Presented by

Rebecca Bennyworth

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by the author or 2020 Innovation Training Limited

2020 Innovation Training Limited ● 6110 Knights Court ● Solihull Parkway ● Birmingham Business Park ●

Birmingham ● B37 7WY Tel. +44 (0) 121 314 2020 ● Fax +44 (0) 121 314 4718 ● Email: [email protected] ● Website:

www.the2020group.com

http://www.the2020group.com/





1. Corporation and Business income Tax, dividend and salary planning............................. 4

1.1 Use Annual investment allowance wisely ........................................................................... 4 1.2 Rates of National Minimum wage and living wage ............................................................. 4 1.3 Scottish Rate of Income Tax – impact on employers ......................................................... 5 1.4 Shared Parental Leave and Pay ......................................................................................... 7 1.5 Employment allowance ....................................................................................................... 8 1.6 Directors’ salary under Employment Allowance ................................................................. 9 1.7 Other remuneration issues – interest on director loan ...................................................... 11 1.8 Profit extraction in 2015/16 and 2016/17 .......................................................................... 13 1.9 Incorporation advice.......................................................................................................... 15

2. Personal Income Tax and savings ...................................................................................... 19

2.1 Tax rates and thresholds 2016/17 .................................................................................... 19 2.2 National Insurance contributions 2016/17 ........................................................................ 19 2.3 Personal savings allowance ............................................................................................. 20 2.4 Cars – the appropriate percentage ................................................................................... 20 2.5 Increase in rent a room relief ............................................................................................ 21 2.6 Removal of the wear and tear allowance.......................................................................... 21 2.7 Restriction of tax relief on interest in respect of let domestic property ............................. 22 2.8 Remittance basis charge .................................................................................................. 25 2.9 Pensions lifetime allowance .............................................................................................. 26 2.10 Pensions – annual allowance ..................................................................................... 26 2.11 Restriction of annual allowance for high income individuals ...................................... 28 2.12 ISA and JISA limits ..................................................................................................... 30 2.13 The flexible ISA .......................................................................................................... 30

3. Capital and property taxes ................................................................................................... 31

3.1 CGT annual exemption ..................................................................................................... 31 3.2 Capital gains tax – non-resident individuals ..................................................................... 31 3.3 PPR claims – non residents .............................................................................................. 34 3.4 ATED – increased rates and administrative changes ....................................................... 34 3.5 ATED – properties subject to relief ................................................................................... 35 3.6 ATED - Valuation dates .................................................................................................... 35



1. CORPORATION AND BUSINESS INCOME TAX, DIVIDEND AND SALARY PLANNING

1.1 Use Annual investment allowance wisely

The summer budget announcements included confirmation that the AIA limit will reduce on 1 January 2016, but that the new long term limit is to be £200,000. Large businesses and smaller businesses with an accounting date early in the calendar year will still need to plan the date of expenditure carefully in order to maximise the benefit of the allowances, but very small businesses should have no issues with the reduction. 1.1.1 Closing transitional period

This legislation was included in FA 2014 s 10, when the limit was increased to £500,000. It will not need modification to cope with the latest change, as it is not limit-specific. The total AIA for the accounting period is found by time apportioning the relevant limits. There is then a restriction on the part period falling at the end of the AP – that part of the period falling after 31 December 2015. The maximum AIA in this part of the period is the time apportioned amount calculated for the purposes of the total limit. Example For the year ended 31 March 2016, the maximum AIA for the whole period is (9/12 x £500,000) + (3/12 x £200,000) = £375,000 + £50,000 = £425,000 However, the allowance available for expenditure between 1 January 2016 and 31 March 2016 is only 3/12 x £200,000 = £50,000.

Practical tip The closing transitional rules affect businesses with year ends early in the calendar year, irrespective of the end of the tax year. Advise clients to defer expenditure until the next period if it is substantial, thereby increasing the AIA to £200,000.

1.2 Rates of National Minimum wage and living wage

The National Minimum Wage (NMW) rates per hour increased so that NMW applicable to pay reference periods starting on or after 1 October 2015 are as follows;

the main adult rate (for workers aged 21 and over) is £6.70

the rate for workers aged between 18 and 20 is £5.30



the rate for workers aged under 18 (but over school age) is £3.87

the rate for apprentices is £3.30*. *This rate is for apprentices aged 16 to 18 and those aged 19 or over who are in their first year. All other apprentices are entitled to the National Minimum Wage for their age.

National living wage

From April 2016, the national living wage will be £7.20 an hour for workers aged 25 and older. The minimum wage will still apply for workers aged 24 and under. Penalties The Government has increased the penalties imposed on employers that underpay their workers in breach of the National Minimum Wage (NMW legislation. For pay reference periods starting on or after 26 May 2015 the basis for the maximum NMW penalty has changed from £20,000 per notice to £20,000 per worker. 1.3 Scottish Rate of Income Tax – impact on employers

The Scottish Rate of Income Tax (SRIT) is the amount of income tax Scottish taxpayers will have to pay and will come in to force on 6 April 2016. The Scottish Government has proposed that the Scottish rate will be 10% for the tax year 2016 to 2017. The following guidance is available from HMRC. Identifying Scottish taxpayers

It’s where you live, not where you work, that decides whether you’re a Scottish

taxpayer.

If you live in one place during a tax year, and it’s in Scotland, you’ll be a Scottish

taxpayer. If you live anywhere else you won’t be.

If you move to or from Scotland, have more than one home, or don’t have a home,

you’ll need to work out if you’re a Scottish taxpayer. There is an online tool to support

this. You can only be a Scottish taxpayer if you’re resident in the UK for tax purposes.

If the address HMRC holds for you is in Scotland, you’ll be sent a letter to check your

address is correct. These letters started to go out on 2 December 2015.

You’ll be classed as a Scottish taxpayer if the address HMRC holds for you is in

Scotland. It’s your responsibility (not your employers’) to notify HMRC if you change

your address.

Your April 2016 tax code will begin with the letter ‘S’ to show you’re a Scottish

taxpayer.

If you pay your Income Tax through your wages, HMRC will advise your employer to

treat you as a Scottish taxpayer so you don’t need to do anything. If you fill in a Self

Assessment tax return you’ll declare if you’re a Scottish taxpayer on the return.

What Scottish taxpayers will pay



UK Income Tax rates will be reduced by 10 percentage points for people living in

Scotland. You’ll then pay the Scottish rate of 10% on top of your UK rate. For

example, if you pay tax at the basic rate of 20% this will reduced to 10%. You’ll then

pay the Scottish rate of 10% on top of this, giving a total of 20%. There is no overall

change to the Income Tax rate you pay – whether you pay the basic, higher or

additional rates. But some of the Income Tax collected under the Scottish rate will fund

the Scottish government, and the rest will fund the UK government.

The Scottish rate of Income Tax doesn’t apply to income from savings such as building

society interest or income from dividends. This rate will stay the same for all taxpayers

across the UK.

HM Revenue and Customs (HMRC) will collect the Scottish rate of Income Tax on

behalf of the Scottish government.

National Insurance contributions are unaffected by the introduction of the Scottish rate

of Income Tax.

Employers and Pension Providers

HM Revenue and Customs (HMRC) will identify who’ll be a Scottish taxpayer.

Employers and pension providers don’t need to decide this and should only use a

Scottish tax code if HMRC tell them to. If your employee or pension scheme member

disagrees with their tax code ask them to read the guidance on the Scottish rate of

Income Tax before contacting HMRC.

You won’t need to change how you report or make payments for Income Tax to HMRC

other than to apply the Scottish rate of Income Tax code to your Scottish taxpayer

employees. You must still apply the Scottish tax code for a Scottish taxpayer even

though, overall, the amount of tax they pay isn’t changing.

PAYE forms and payslips

Forms P6 and P9 will be amended to show the correct tax code for UK and Scottish

taxpayers. You’ll need to adjust your IT systems to collect the correct amount.

If you’re given a P45 with a Scottish tax code follow the current process. If a new

starter doesn’t give you a P45, or you’re unsure which tax code to use, use the rest of

the UK tax code and rate. HMRC will tell you if you need to change the tax code. You

won’t need to show the Scottish rate separately on the P60 or payslips but they should

show a Scottish tax code.

Calculations

The current process for week 1/month 1 won’t change and HMRC will tell you which

tax code to use. Apply the code to their income for the year to date. Any resulting under

or overpayments will usually be corrected in-year. From 6 April 2015, the 50%

overriding limit for PAYE deductions will apply to both UK and to Scottish rate tax

calculations. Scottish tax tables will be provided for Scottish tax codes.

Employee or pension scheme member changes address



If an employee changes their address in year, HMRC will reassess their taxpayer status

and reconcile their tax using the current processes. Make sure your employees or

pension scheme members know they need to tell HMRC if they change their address, to

ensure that they’re given the correct tax code.

PAYE Settlement Agreements (PSA)

From tax year 2016/17 you’ll need to account for both UK and Scottish rates of Income

Tax for a PSA. The relevant forms and guidance will be updated nearer the time. You’ll

need to use the relevant tax rates (UK or Scottish) to work out the correct tax due.

Pension Relief at Source (RAS)

The UK government has agreed that registered pension scheme administrators and

pension providers have until April 2018 to put in place the changes necessary to their

IT systems that will allow them to claim Relief at Source (RAS) at the correct rate.

Until then all RAS claims will be made at the UK basic rate. Any adjustments that

might be needed will be made by HMRC through Self Assessment or through PAYE

coding.

Pension schemes operating net pay

If you’re operating a net pay arrangement pension scheme you’ll deduct pension

contributions from your employee’s gross pay giving them full relief at the appropriate

Income Tax rate.

1.4 Shared Parental Leave and Pay

Shared Parental Leave and Pay is now in force for the parents of babies due and adopters of children placed for adoption on or after 5 April 2015. It gives working parents and adopters greater choice and flexibility over how they care for their child in the first year. The new rights operate in Great Britain and Northern Ireland.

How does it work? – Birth

Shared parental leave and pay is created from the untaken balance of mother’s maternity leave or, where the mother is not eligible for maternity leave, calculated by reference to the untaken balance of the mother’s statutory maternity pay or maternity allowance.

The mother must take at least 2 weeks of maternity leave and pay (if the mother is eligible for pay) after birth (4 weeks if she works in a factory). This means that up to 50 weeks of leave and up to 37 weeks of pay can potentially be shared with the child’s father or the mother’s partner. The leave and pay must be taken in weekly blocks and any leave and pay not taken by the child’s 1st birthday is lost (i.e. it can’t be carried over to the following year).

Shared parental leave and pay can be stopped and started (with the employee returning to work between periods of leave) and employees are entitled to take up to 3 separate blocks of shared parental leave and pay if they wish (more if their employer agrees to this).

Employees are required to give their employer at least 8 weeks’ notice before they are absent from work on shared parental leave. Special rules apply in the event of early births.



Who is eligible for shared parental leave and pay?

Shared parental leave and pay is only available for both parents of a child or for the mother and her partner. It is not available for single parents. The mother must be entitled to maternity leave, pay or allowance and she must have ended (or given notice that she plans to end) those entitlements and opted into the shared parental leave and pay system. Her partner must meet an employment and earnings test. The parent that wants to take the shared parental leave must:

Have the main responsibility for caring for the child (together with the other parent)

Have worked for their employer for 26 weeks at the ‘qualifying week’

Give their employer the required notice (normally at least 8 weeks)

Provide additional information (if their employer request this). To qualify for statutory shared parental pay the employee must have earned, on average, at least the lower earnings limit, in an 8 week test period.

1.5 Employment allowance

The allowance provides relief for up to £2,000 from employer NIC. It is claimed by submitting an EPS showing the employment allowance of £2,000. This can be done at the start of the tax year, whether or not the full amount is used at that time or not. The allowance increases to £3,000 on 6 April 2016. The allowance is not available to employers if they:

employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener. It is, however, available in respect of care support workers employed by their client.

already claim the allowance through a connected company or charity are a public authority, this includes; local, district, town and parish

councils carry out functions either wholly or mainly of a public nature (unless they

have charitable status), for example: o NHS services o General Practitioner services o the managing of housing stock owned by or for a local council o providing a meals on wheels service for a local council o refuse collection for a local council o prison services o collecting debt for a government department

A business does not carry out a function of a public nature, if it does the following:

providing security and cleaning services for a public building, such as government or local council offices

supplying IT services for a government department or local council



HMRC has issued guidance on these issues, and the position is a little more complex when the business makes the majority of its supplies to public bodies. These businesses are not permitted to claim employment allowance. 1.5.1 Restriction – director only companies

The July 2015 Budget announced that from 2016 employers who are director only companies will be excluded from Employment allowance. Final legislation is awaited, but the consultation ended on 3 January 2016. The draft regulations released for comment make the following change: Amendment to the National Insurance Contributions Act 2014 2. In section 2 of the National Insurance Contributions Act 2014 (exceptions), after subsection (4)

insert—

“Excluded companies

(4A) A body corporate (“C”) cannot qualify for an employment allowance for a tax year if—

(a) all the payments of earnings in relation to which C is the secondary contributor in that year are

paid to, or for the benefit of, the same employed earner, and

(b) when each of those payments is made, that employed earner is a director of C.”. 1.6 Directors’ salary under Employment Allowance

There are two issues which affect what level of salary produces the best overall outcome,

Whether the director is over state pension age or not – this would mean that no employee NIC contributions are payable, and

Whether or not the individual has other income or not 1.6.1 HR Taxpayer - Salary at NI threshold, no other income

£ Profit 50,000 Salary (8,060) Taxable profit 41,940 Corporation tax 8,388 Net profit 33,552 Dividend 33,552 Tax liability on dividends Total income £41,612 so no higher rate liability. £5,000 at 0%, £25,612 @ 7.5% £1,921 Total tax liability on £50,000 profit £10,309 (20.6%)



1.6.2 HR Taxpayer - Salary equal to 2016/17 personal allowance, no other income

£ Profit 50,000 Salary (11,000) Taxable profit 39,000 Corporation tax 7,800 Net profit 31,200 Dividend 31,200 Total income £42,200 so no higher rate liability. £5,000 at 0%, £26,200 @ 7.5% £1,965 Employee NIC on salary £305 Total tax liability on £50,000 profit £10,070 (20.1%) The saving of £239 is only available where the individual concerned has no other income. If the individual is above state pension age, no employee NIC is payable, providing a further saving of £305 per annum. 1.6.3 HR taxpayer - Salary at NI threshold, other income of £4,000

£ Profit 50,000 Salary (8,060) Taxable profit 41,940 Corporation tax 8,388 Net profit 33,552 Dividend 33,552 Tax liability on dividends Total income £45,612 Higher rate on dividends of £2,612 849 Basic rate on dividends of £25,940 1,945 2,794 Tax on non savings income £212 Total tax liability on £50,000 profit £11,394 (22.8%)



1.6.4 HR taxpayer - Salary equal to 2016/17 personal allowance, other income of £4,000

£ Profit 50,000 Salary (11,000) Taxable profit 39,000 Corporation tax 7,800 Net profit 31,200 Dividend 31,200 Tax liability on dividends Total income £46,200 Higher rate on dividends of £3,200 1,040 Basic rate on dividends of £23,000 1,725 2,765 Tax on non savings income £800 Employee NIC on salary £305 Total tax liability on £50,000 profit £11,670 (23.3%) In this case, the director is £276 worse off by paying a salary of £11,000. 1.7 Other remuneration issues – interest on director loan

Where a director takes a low salary – say £10,000 and the remainder of his profits by way of dividend, the starting rate for savings is still available to him. From April 2015, when the starting rate band is £5,000 and the rate reduces to NIL, it is worth considering paying interest on loans made by directors to their companies. If interest is paid it will need to be subject to basic rate tax deduction, and the income tax accounted for to HMRC on form CT61, in a quarterly basis ( calendar quarters, plus year end period if this does not co-incide). Obviously, you will wish to consider whether the interest will be an allowable expense in the company before committing to this course of action. If the dividends distributed fall into the basic rate band, then the tax saving will be £1,300. Where the dividends already fall partly into the higher rate band, the saving is £1,050. In both cases, the lower amount of dividend available contributes to the overall tax saving. The following comparisons ignore any NIC implications as that is static. 1.7.1 Low profits : Salary £11,000 no interest

£ Profit 40,000 Salary (11,000) Taxable profit 29,000 Corporation tax 5,800 Net profit 23,200



Dividend income 23,200 Total Income 34,200 Tax liability on dividends £1,365 Total tax liability on £50,000 profit £7,165 1.7.2 Low profits : Salary £11,000, £5,000 interest

£ Profit 40,000 Interest charge (5,000) Salary (11,000) Taxable profit 24,000 Corporation tax 4,800 Net profit 19,200 Dividend income 19,200 Total income 35,200 Tax liability on dividends £1,065 Total tax liability on £50,000 profit £5,865 Tax saved £1,300 1.7.3 High profits : Salary £11,000, no interest

£ Profit 60,000 Salary (11,000) Taxable profit 49,000 Corporation tax 9,800 Net profit 39,200 Dividend income 39,200 Total Income 50,200 Higher rate liability on 7,200 Tax liability on dividends £4,365 £5,000 @ 0% £27,000 @ 7.5% £7,200 @ 32.5% Total tax liability on £50,000 profit £14,165



1.7.4 High profits: Salary £11,000 £5,000 interest

£ Profit 60,000 Interest charge (5,000) Salary (11,000) Taxable profit 44,000 Corporation tax 8,800 Net profit 35,200 Dividend income 35,200 Total income 51,200 Higher rate liability on 8,200 Tax liability on dividends £4,315 £5,000 @ 0% £22,000 @ 7.5% £8,200 @ 32.5% Total tax liability on £50,000 profit £13,115 Tax saved £1,050 1.8 Profit extraction in 2015/16 and 2016/17

Given that most OMB owners will see an increase in their tax burden from 2015/16 to 2016/17, advisers may wish to consider what is the most appropriate distribution strategy for their client business owners. This strategy will depend very much on the client’s personal circumstances and what levels of income he will be drawing from the company in future years, but some basic ground rules are fairly simple to develop. These rules look at basic and higher rate taxpayers, but the principles are the same in relation to additional rate taxpayers. The easiest way to consider the issue is by comparing effective marginal rates of tax on dividends, which are now set out for simplicity.

2015/16 2016/17 Basic

Rate Higher Rate

Add’l Rate

Basic Rate

Higher Rate

Add’l Rate

Dividend paid 1,000 1,000 1,000 1,000 1,000 1,000 Tax credit 111 111 111 Total 1,111 1,111 1,111 Dividend tax 111 361 417 75 325 381 Less tax credit (111) (111) (111) Net tax 0 250 306 Effective rate on net dividend

0% 25% 30.6% 7.5% 32.5% 38.1%



1. 0% < 7.5% This rule indicates that taxpayers currently receiving basic rate dividends this year should pay additional dividends in 2015/16 if they would be liable to basic rate in 2016/17, reducing the tax charge from 7.5% to zero. 2. 7.5% < 25% This formula identifies that dividends drawn by the basic rate taxpayer in 2015/16 should be restricted to the upper limit of the basic rate band, if they are to be liable to the basic rate in 2016/17. With a salary of £8,000 and no other income, this would restrict the total dividends in 2015/16 to £30,946. 3. 25% < 32.5% This similarly indicates that if a taxpayer bearing higher rate on dividends were to draw additional dividends in 2015/16, he would save tax if the dividends are chargeable at higher rate in 2016/17. 4. 32.5% < 37.5% Once again, this puts an upper limit on the additional dividends drawn in 2015/16, as if they result in the total income in 2015/16 exceeding £100,000, the personal allowance will be abated, resulting in a 50% increase in the tax charge suffered. Hence 25% x 1.5 = 37.5%. In this case, if the taxpayer has a salary of £8,000 and no other income, the maximum total dividend in 2015/16 is £82,800. 5. 0% < 25% and 30.6% This looks at a slightly different scenario – a taxpayer who can draw dividends from his limited company, but for whom other income forms the main part of his taxable income. He is thus either a higher rate (25%) or additional rate (30.6%) taxpayer in relation to dividends in 2015/16. If his dividend needs are modest, he would be better to draw dividends in 2016/17 within the dividend allowance of £5,000 rather than drawing additional dividends in 2015/16. Taking this further, if the total dividends drawn in the future exceed £5,000, the taxpayer is still better off than drawing the dividends in 2016/17 until the dividends forgone in 2015/16 reach the following sums:

Higher rate taxpayer Additional rate taxpayer 2015/16 2016/17 2015/16 2016/17

Dividend 21,667 21,667 25,250 25,250 Tax credit 2,407 2,806 Taxable amount 24,074 21,667 28,056 25,250 Dividend tax 7,824 5,417 10,521 7,715 Tax credit (2,407) (2,806) Net tax 5,417 5,417 7,715 7,715



So a higher rate taxpayer could forgo dividends of up to £21,667 in 2015/16 in favour of 2016/17 (and subsequent years) and pay the same or less tax on the distribution. The equivalent amount for additional rate taxpayers is £25,250. Some clients may therefore wish to retain a debit balance on the director’s loan account rather than clearing it with dividends before 6 April 2016. 6. Distributable profits will restrict availability In all of the situations considered above, the client company must have sufficient distributable profits to pay the dividends suggested in 2015/16, otherwise there is no possibility of using these ideas to reduce future tax on dividends. Given that the dividends must be paid by 5 April 2016, it might be appropriate to invite clients to prepare their records up to date in February or March 2016 to allow the available profits for the period to date to be distributed. Some clients may not be able to take advantage of this because their record keeping is poor, but without a reasonable assessment of distributable profits there is a risk that illegal dividends will be paid. 1.9 Incorporation advice

The changes will also impact significantly on advice about incorporation. Although the tax increases on the dividends paid do not in most situations take the tax on an incorporated business above the tax burden on the unincorporated business, the tax saving offered by simple incorporation (without involving another party such as the spouse) is certainly lower. The following examples consider the position at various levels of profit. In each case, the profits distributed are 100% of the company net profit, so that the comparison of disposable income with the sole trader is similar. It is assumed that the director of the company draws a salary of £8,000 to exclude payment of National Insurance contributions.

Sole trader Limited company 2015/16 2015/16 2016/17

£ £ £ Profit 30,000 30,000 30,000 Salary 8,000 8,000 Personal allowance (10,600) Taxable profit 19,400 22,000 22,000 Corporation tax 4,400 4,400 Net profit = dividend 17,600 17,600 No additional tax on dividend - Dividend taxation – 7.5% on £9,600 720 Income tax at 20% 3,880 Class 2 NIC 146 Class 4 NIC 1,975



Total tax and NIC £6,001 £4,400 £5,120 Saving through incorporation £1,601 £881 In fact the saving in 2016/17 is slightly lower than shown, as the personal allowance increase of £400 will reduce the unincorporated tax burden by £80. The future of Class 2 NIC is uncertain, but it is likely that Class 4 would have to at least match the cost of Class 2 when it is abolished. Although 2016/17 figures show a saving through incorporation, this saving is modest and would be eroded somewhat by the additional administrative costs of running a company. When the profits rise so that the sole trader is paying higher rate income tax the savings rise, as the corporate structure keeps the taxpayer out of higher rates for longer. This is even more noticeable in 2016/17 when the dividends are no longer grossed up.

Sole trader Limited company 2015/16 2015/16 2016/17

£ £ £ Profit 50,000 50,000 50,000 Salary 8,000 8,000 Personal allowance (10,600) Taxable profit 39,400 42,000 42,000 Corporation tax 8,400 8,400 Net profit = dividend 33,600 33,600 Dividend tax at 10% 3,178 Dividend tax at 32.5% 958 Tax credit on taxable dividends (3,473) Dividend taxation – 7.5% on £25,600 1,920 Income tax at 20% 6,357 Income tax at 40% 3,046 Class 2 NIC 146 Class 4 NIC at 9% 3,089 Class 4 NIC at 2% 152 Total tax and NIC £12,790 £9,063 £10,320 Saving through incorporation £3,727 £2,470 Once again, although there is a marked increase in the tax burden in 2016/17, there is still quite a saving against the tax paid as a sole trader in 2015/16. With profits in this region, incorporation still shows a significant advantage even after extra administrative costs. The equivalent sole trader tax and NIC in 2016/17 after the proposed rises in thresholds is £12,631, showing a saving of £2,311 on incorporation.



1.9.1 Marginal rates on income

The combined marginal rate on income which is subject to corporation tax and then distributed as dividends in each rate band are as follows:

Basic Higher Additional

Profit 100 100 100

Corporation tax 20 20 20

Net profit 80 80 80

Dividend tax 6 26 30.48

Net retained 74 54 49.52

Tax rate % 26.0% 46% 50.48%

When compared to the rates applying to self-employed profits in each marginal band, the profit ranges where savings on incorporation can be made become apparent. For the sole trader the effective rates are 29% in the basic rate band, 42% in the higher rate band and 47% in the additional rate band, although there is a band of income which suffers 62% between £100,000 and £121,200 in 2015/16 (£122,000 in 2016/17). Once the profits are sufficient that dividends are taxed at the higher rate in 2016/17, any tax savings accumulated through the basic rate band are eroded at a rate of 4%, until profits reach £100,000, when the sole trader starts to bear 62% on additional profits. The full table of marginal rates in 2016/17, comparing the tax and Class 4 NIC borne by a sole trader with the burden on the same profit which is fully distributed as a salary of £8,060 and the remainder by dividend is set out below. It shows that despite the new dividend tax rates, the company overall tax burden is not actually worse until the profits reach £257,945.

Income slice

Cum Income

Sole trader Limited company Cum

saving

£ £

Rate %

Tax on slice

Cum Tax Rate % Tax on slice

Cum tax £

NIC threshold 8,060 8,060 0 0 0 0 0 0 0 Pers Allow 2,940 11,000 9 265 265 20 588 588 (323) Div to £5,000 6,985 17,985 29 2,025 2,290 20 1,397 1,985 308

To HR thresh 25,015 43,000 29 7,255 9,545 26 6,504 8,489 1,056

Div to HR 8,735 51,735 42 3,668 13,214 26 2,271 10,760 2,453

To £100,000 48,265 100,000 42 20,271 33,485 46 22,202 32,962 523

PA Taper 22,000 122,000 62 13,640 47,125 46 10,120 43,082 4,043

Div: £100,000 985 122,985 42 414 47,539 46 453 43,535 4,003

To AR thresh 27,015 150,000 42 11,346 58,885 48.75 13,170 56,705 2,180

Div: PA taper 485 150,485 47 228 59,113 48.75 236 56,941 2,171

Div to AR 35,000 185,485 47 16,450 75,563 46 16,100 73,041 2,521

To equality 72,460 257,945 47 34,056 109,619 50.48 36,578 109,619 0

Thereafter 47 50.48



The equivalent total marginal rates on income in 2017/18 and 2020/21 are

2017/18 – 2019/20 2020/21

Basic Higher Additional Basic Higher Additional

Profit 100 100 100 100 100 100

Corporation tax 19 19 19 18 18 18

Net profit 81 81 81 82 82 82

Dividend tax 6.07 26.32 30.86 6.15 26.65 31.24

Net retained 74.93 54.68 50.14 75.85 55.35 50.76

Tax rate % 25.07% 45.32% 49.86% 24.15% 44.65% 49.24%



2. PERSONAL INCOME TAX AND SAVINGS

2.1 Tax rates and thresholds 2016/17

The level of allowances and tax rates were confirmed in November 2015 autumn statement. However, it is possible that further changes will be made in the March 2016 budget. The following rates are relevant to employers: Table : rates and limits for tax 2016/17 and 2015/16

2016/17 2015/16

Personal allowance 11,000 10,600

Age related allowance : higher amount N/A 10,660

Married allowance (transferrable) £1,100 £1,060

Income limit for personal allowance 100,000 100,000

Income limit for age related allowances N/A 27,700

Basic rate band (20%) 32,000 31,785

Higher rate limit (40%) 150,000 150,000

Additional rate 45% 45%

Practical Tip Check whether transfer of allowance to spouse is appropriate in either 2015/16 or 2016/17. Election can be made up to two years after the end of the appropriate tax year and relates only to the year elected if done retrospectively. In year elections are effective until the year after the date of withdrawal. You should also monitor whether clients have made the election and it cannot be used because one of them has a higher rate liability.

2.2 National Insurance contributions 2016/17

Rates and limits for Class 1 contributions were announced in the November 2015 Autumn Statement. The following rates and limits will apply from 6 April 2016. Table : rates and limits for NIC 2016/17 and 2015/16

2016/17 2015/16

Lower earnings limit £112 £112

Primary threshold (employee) £155 £155

Secondary threshold (employer) £156 £156

Upper Accruals point £770 £770

Upper Earnings Limit £827 £815

Primary main rate 12% 12%

Primary residual rate 2% 2%

Secondary rate 13.8% 13.8%

Secondary rate – workers under 21 0% 0%

Secondary rate – Apprentices under 25 0% N/A



Upper secondary threshold (under 21’s) £827 £815

Upper secondary threshold (Apprentice rate)

£827 N/A

2.3 Personal savings allowance

A new allowance will be introduced from April 2016 which exempts some savings income from tax for most taxpayers. The allowance will be:

£1,000 for basic rate taxpayers

£500 for higher rate taxpayers, and

Nil for additional rate taxpayers This will allow the Government to abolish the deduction at source mechanism. The Red Book indicates that HMRC will introduce automated coding out of taxable savings income from 2017/18, with pilots starting in the Autumn of 2015. 2.4 Cars – the appropriate percentage

The benefit in kind rate applying to company cars with various emissions ratings will be further increased by Finance Bill 2015, broadly in line with previous indications.

Increasing the rates for cars without an emissions rating, and for those registered before 1 January 1998 in both 2017 and 2018, by 2% on each occasion, although these changes had not previously been announced

Capping the maximum percentage for diesel cars registered after 1 January 1998 at 37%

Changing the minimum benefit on the main table to 17% in 2017 and 19% in 2018, and

Increasing the favourable rates for very low emission cars by 2% each in 2017 and 4% each in 2018.

Budget 2015 further announced that the minimum rate on the main table in 2019-20 would be 22%, and that very low emission cars would see a slightly slower rise in that year.

So the following rate of benefit in kind will apply: Table : Main table of benefit in kind rates

Emissions (g/km)

2014/15 2015/16 2016/17 2017/18 2018/19* 2019/20*

Zero 0% 5% 7% 9% 13% 16%

1 - 50 5%

51 - 75 5% 9% 11% 13% 16% 19%

76 - 79 11% 13% 15% 17% 19% 22%

80 11% 13% 15% 17% 19% 22%

85 11% 13% 15% 17% 19% 22%



Emissions (g/km)

2014/15 2015/16 2016/17 2017/18 2018/19* 2019/20*

90 11% 13% 15% 17% 19% 22%

95 12% 14% 16% 18% 20% 23%

100 13% 15% 17% 19% 21% 24%

105 14% 16% 18% 20% 22% 25%

110 15% 17% 19% 21% 23% 26%

115 16% 18% 20% 22% 24% 27%

120 17% 19% 21% 23% 25% 28%

125 18% 20% 22% 24% 26% 29%

And then in increments of 5g = 1% until

160 25% 27% 29% 31% 33% 36%

165 26% 28% 30% 32% 34% 37%

170 27% 29% 31% 33% 35% 37%

175 28% 30% 32% 34% 36% 37%

180 29% 31% 33% 35% 37% 37%

185 30% 32% 34% 36% 37% 37%

190 31% 33% 35% 37% 37% 37%

195 32% 34% 36% 37% 37% 37%

200 33% 35% 37% 37% 37% 37%

205 34% 36% 37% 37% 37% 37%

210 and above

35% 37% 37% 37% 37% 37%

* Not yet legislated for 2.5 Increase in rent a room relief

The amount of rent a room relief will rise from £4,250 to £7,500 from April 2016; the change will be made by statutory instrument. The exempt amount is halved if the property is jointly owned (irrespective of the number of joint owners) so that each owner can claim only his share of the relief against his income. Small B&B establishments will also benefit as they can claim the relief too, provided the owners live on the premises.

Practical point This is a very welcome source of tax free income. Clients may be interested in letting a spare room to a friend, given the amount of the allowance available.

2.6 Removal of the wear and tear allowance

From April 2016 the wear and tear allowance will end, to be replaced by a deduction for landlords when they actually spend the money. The change will be included in Finance Act 2016.



It remains to be seen whether the deduction for money spent will apply to all expenditure, including that on kitchen appliances such as ovens, and whether it will be subject to a “cap”. Landlords of partly furnished properties were stopped from claiming for the replacement cost of white goods in 2013 – a move that has been very unpopular.

Practical point As the new replacement allowance will be available to all landlords, delaying replacement expenditure until after 5 April 2016 would seem like sensible advice.

2.7 Restriction of tax relief on interest in respect of let domestic

property

At present, full tax relief is available for interest on a loan used in a property business. The funds may have been used to purchase the let property, to make major repairs, or just to fund the working capital of the property business. From April 2017, tax relief on interest in property businesses (including single buy to lets) will be restricted so that by 2020, interest will not be an allowable expense in computing the profits of the business, but will attract tax relief at 20%. The legislation is in the second Finance Bill at clause 24, and introduces new ss 272A, 272B and 274A into ITTOIA 2005, plus similar restrictions for partnerships at 399A and 399B. The change does not affect furnished holiday lettings. The change will be phased in as follows:

2017/18 2018/19 2019/20 2020/21

% of interest allowed as a deduction (by new s 272A)

75 50 25 0

% of interest given as a relief at 20% (by new s 274A)

25 50 75 100

The effective interest deduction will therefore be:

2016/17 – 100%

2017/18 – 80%

2018/19 – 60%

2019/20 – 40%

2020/21 – 20% A similar restriction applies to the cost of raising loan finance. There is also a restriction to limit the relief to the individual’s adjusted total income (as defined) where this is less than the total finance costs for relief. The adjusted total income for this purpose is the individual’s total income less savings and dividend income, less any personal allowances available to him. (new s 274A).



Illustration Tom has income for the tax year 2019/20 as follows: Loss from a trade £20,000, rental profits (before interest deduction) £20,000. The interest on his borrowings related to his rental properties is £12,000. Tom’s adjusted total income for the year is: Rental profit 20,000 Less allowable interest (25%) (3,000) Total income 17,000 Less personal allowance (say) (12,000) Adjusted total income 5,000 Gross finance costs for relief (the balance) £9,000. The relief would always be restricted to ensure that the gross finance costs for this purpose do not exceed the net property income – here £17,000. However in the absence of other income the relief is further restricted as follows: Adjusted total income x Basic rate x Finance costs limited to rental profit Gross finance costs So : £5,000 x 20% x £9,000 = £1,000 £9,000

Commentary A letting activity that has a low level of interest in relation to the borrowings will not be too badly affected, but larger property businesses using debt to expand the portfolio will find that their business model has been severely undermined. Some examples follow. The primary solutions (where appropriate) include:

Full incorporation – move properties and loans

Partial incorporation – personal borrowing to invest in shares in a property letting company (but this may well be closed as a “loophole)

Pay down borrowings

Sell up Example 1 – single buy to let Jo is a teacher and is 49 years old; he is a 40% taxpayer. He has purchased a buy to let property as an investment. As he has owned the property for some time, the outstanding debt on the property is relatively low. Here is the effect of the change:

2016-17 2020-21 Gross rents 7,200 7,200 Repairs and other tax deductible costs 1,000 1,000



Interest on mortgage 2,500 - Net rental profit 3,700 6,200 Tax at 40% £1,480 £2,480 Less interest relief at 20% on £2,500 500 Net tax liability on rental income £1,480 £1,980 Tax Increase £500 Effective rate on “real” rental profit 40% 53.5% If Jo decided to increase his borrowings to allow him to buy a second buy to let, he would see his tax rate rise still further, as his interest costs will be higher initially, and his net return lower. Example 2 – substantial property portfolio John and Julie are married and together run a sizeable rental property business. They have not run this through a limited company due to the difficulty in obtaining finance for purchases with limited company status.

2016-17 2020-21 Gross rents 600,000 600,000 Repairs and other tax deductible costs 200,000 200,000 Interest on mortgage 350,000 - Net rental profit 50,000 400,000 Personal allowances (x2) 22,000 - Taxable income 28,000 400,000 Basic rate tax (2 taxpayers) 5,600 12,800 Tax at 40% - 94,400 Tax at 45% - 45,000 152,200 Less interest relief at 20% on £350,000 - 70,000 Net tax liability on rental income £5,600 £82,200 Tax Increase £76,600 Effective rate on “real” rental profit 11.2% 164.4% Although John and Julie spend at least 35 hours a week on the business (and their cash return is modest) that is because they have ploughed most of their profits back into building up the portfolio, and taken risks to allow them to grow their business. Their current business structure is now unsustainable. Example 3 – increase in interest rates Finally we return to Jo, who has presently got borrowings of £50,000 on his property which has a current market value of £160,000. His interest rate is 5%. If his debt was £100,000 he would see the following change:



2016-17 2020-21 Gross rents 7,200 7,200 Repairs and other tax deductible costs 1,000 1,000 Interest on mortgage 5,000 - Net rental profit 1,200 6,200 Tax at 40% £480 £2,480 Less interest relief at 20% on £5,000 1,000 Net tax liability on rental income £480 £1,480 Tax Increase £1,000 Effective rate on “real” rental profit 40% 123.3% Advice point Many buy to let owners happily complete their own tax returns, but there is a market for advice to these potential clients to help them decide what they should do regarding the changes. 2.8 Remittance basis charge

The remittance basis charge which is payable for UK resident non domiciled individuals to continue to be taxed on a remittance basis will change from 6 April 2015. Advice may be appropriate. Table : Remittance basis charge

UK resident 2014-15 2015-16

in at least seven of the nine tax years immediately preceding the tax year

£30,000 £30,000

in at least 12 of the 14 tax years immediately preceding the tax year

£50,000 £60,000

in at least 17 of the 20 tax years immediately prior to the tax year

N/A £90,000

2.8.1 Proposed changes to non-domicile status

Several changes will be made to the domicile rules form April 2017 which will together make claiming non-domicile status much more difficult for those who are either UK resident and born in the UK to UK domiciled parents, or who are long term (15 out of 20 years) residents of the UK. There is already a “deemed domicile” rules for IHT (17 out of 20 years) but the new rule will apply to income and capital gains tax in addition to inheritance tax to prevent long term residents being able to claim the remittance basis. The likely upshot is that affected individuals will spend periods of time resident abroad to break up their periods of residence in the UK – although for those already resident here on a long term basis, this will not prevent them falling into the new regime in 2017 – although they may be able to restrict its impact to four years.



2.9 Pensions lifetime allowance

Once again, in the desire to reduce the cost of pensions tax relief, the lifetime allowance is to be further reduced. The current limit of £1.25 million will reduce to £1 million in April 2016. Clients may wish to elect for protection from the reduction, which for fixed protection 2016 must be made by 5 April 2016. 2.10 Pensions – annual allowance

The second Finance Bill intends to enact proposals to restrict the annual allowance for individuals with income (as defined) in excess of £150,000. The allowance will be tapered to a minimum of £10,000. In order to achieve this a number of changes are also necessary. 2.10.1 Pension input periods (PIPs) changes

Legislation came into force on 8 July 2015 to align pension input periods (PIPs) for all contributors to tax approved scheme with the tax year. This is necessary to make the changes described above (restricting annual allowance for high earners) possible. The change is made by clause 23 and Part 1 of the proposed Schedule 4 of the second Finance Bill. All PIPs came to an end on 8 July. New PIPs started for all contributors on 9 July and will run to 5 April 2016. All future PIPs will be aligned to the tax year, and there will be no possibility of electing for a change in PIP. So contributors will have either two or three PIPs falling in the tax year 2015-16, depending on when their previous PIP end date was. This is best illustrated by some examples. In all cases, unused relief brought forward is ignored.

Example 1 Lewis has a single pension arrangement with a PIP end date of 30 June. His contribution of £40,000 made in March 2015 is a pension input for the 2015/16 tax year as regards the annual allowance charge. Lewis would expect to be able to make a further contribution of £40,000 in March 2016, this falling into the 2016/17 year for annual allowance purposes. However, the PIP starting on 1 July was brought to an end on 8 July, and a new PIP started on 9 July, which will run until 5 April 2016. This means that Lewis’ contribution in March 2016 will also fall into the 2015/16 year for annual allowance purposes. Lewis has three PIPs in the tax year 2015/16.

2.10.2 Annual allowance for 2015-16

To protect people in Lewis’ position there will be an annual allowance of £80,000 for all pension savings made in PIPs ending in 2015/16. So Lewis will be able to save a further £40,000 in March 2016 without incurring an annual allowance charge.



Part 2 of the proposed Schedule 4 to the second Finance Bill 2015 sets out the rules as follows.

The tax year 2015-16 is to be regarded as two separate tax years, the first beginning on 6 April 2015 and ending on 8 July 2015 (pre-alignment tax year), and the second running from 9 July 2015 to 5 April 2016 (post alignment tax year).

Separate annual allowances charges cannot arise for 2015-16. Amounts calculated by reference to the two notional tax years will be aggregated and taxed as the annual allowance charge for the whole year.

The annual allowance limit for the pre alignment tax year is £80,000

The annual allowance limit for the post alignment tax year is nil, but the balance of allowances in the pre alignment tax year may be carried forward to the post alignment tax year (subject to a maximum of £40,000). This provision only applies to a person who was a member of a scheme in the pre alignment tax year. Otherwise the normal annual allowance of £40,000 applies.

This will allow Lewis to make his full £40,000 contribution in March 2016 and obtain full relief for it. His contribution of £40,000 in March 2015 falls into the pre-alignment tax year, and he has £40,000 to carry forward to the post alignment tax year. 2.10.3 Carry forward of unused allowance from 2015-16

For the purposes of the carry forward of unused relief provisions the annual allowance for the pre alignment tax year is deemed to be £40,000, and carry forward is only possible if this amount was unused in the post alignment tax year. The pre alignment surplus must be used up in the post alignment tax year before older brought forward amounts can be used.

Example 2 Lily’s pension arrangement also has a PIP end date of 30 June. Lily contributed £40,000 to this arrangement in March 2015, and a further £20,000 on 4 July 2015 which would otherwise have been used within her 2016/17 annual allowance. Both are covered by her enhanced allowance of £80,000, of which there is £20,000 to carry forward. The periods ending 30 June and 8 July are known as the pre-alignment periods. Lily has a further allowance for the post alignment period – the period from 9 July to 5 April 2016. This is the balance of the £80,000 allowance unused (£20,000), subject to an overall maximum of £40,000. So Lily can contribute a further £20,000 by 5 April 2016.



Example 3 Luke also has a pension input end date of 30 June. He contributed £15,000 to his pension in March 2015. He has made no further contributions. His allowance of £80,000 is used in part by the £15,000 contributions, and he has £65,000 of it available to carry forward. However, the maximum he can carry forward is £40,000. This will give him £55,000 of contributions in the tax year for annual allowance purposes, but no annual allowance charge.

Example 4 Leonora has a PIP end date of 30 September, and usually makes a contribution to her PIP in August. She has not yet made a contribution in 2015. She can make a contribution of up to £40,000, which will fall into her PIP running from 9 July 2015 to 5 April 2016. However, as Leonora’s income in 2015/16 is extremely high, she was planning to make a further contribution of £40,000 in March 2016 which would otherwise have been set against her 2016/17 annual allowance. This would give her tax relief on £80,000 in the tax year without breaching the annual allowance in either year. However, her PIP now comes to an end on 5 April, and she only has the post alignment allowance of up to £40,000 to use, so her plan cannot be carried out unless she has available brought forward relief.

2.10.4 Calculation of pension inputs – defined benefit arrangements

Part 3 of proposed Schedule 4 to the second Finance Bill includes instructions for computing the defined benefit pension inputs for the 2015-16 tax year. This requires the calculation of a single increase in benefit value from 6 April 2015 to 5 April 2016, which is then time apportioned to the pre and post alignment periods. The uprating of the opening benefits is to be done at 2.5% rather than CPI. (New s 237ZA FA 2004 introduced by para 8 of the proposed Schedule). 2.11 Restriction of annual allowance for high income individuals

The pensions annual allowance will be restricted for high income individuals from April 2016. New s 228ZA in introduced into FA 2004. 2.11.1 High income individuals

An individual is a high income individual if

The individual’s adjusted income for the year is more than £150,000, and

The individual’s threshold income for the year is more than £150,000 minus the annual allowance amount before taper

Adjusted income is the net income at Step 2 in section 23 of ITA 2007, plus:



Relief under s 193(4) or 194(1) FA 2004 deducted in arriving at Step 2 (relating to pension arrangements)

Any deductions made from employment income for that year in respect of pension contributions made under net pay arrangements

The total pension input amount for the tax year less any contributions made by the individual as a member of any scheme

Taxable lump sums received under pension schemes Threshold income is the Step 2 net income as before, plus

Salary sacrifice amounts in relation to pension contributions where the agreement was entered into on or after 9 July 2015

The amount of contribution paid in the year in respect of which the individual is entitled to be given relief under s 192 FA 2004 (relief at source), and

Taxable lump sums as above. The annual allowance of £40,000 will be tapered by £1 for every £2 that the adjusted income exceeds £150,000, up to a maximum of £30,000 taper, which will arise at income of £210,000, leaving the taxpayer with an annual allowance of £10,000. There are anti avoidance measures associated with this measure in new s 228ZB which is part of para 10 of the proposed Schedule.

Example Roger is the chief executive of the local authority, on a salary of £140,000 per annum. His employer also contributes to a 2/3 (40/60) final salary pension arrangement on his behalf (lump sum element ignored for simplicity). His pension contribution for 2016/17 tax year is calculated as follows: (assuming that his salary is unchanged) 1/60 x £140,000 = £2,333 x valuation factor of 16 = £37,328 So Roger’s income for the purpose of this change is £177,328, and his net income is over £110,000, so the restriction on his annual allowance applies. Note that Roger is not in fact an additional rate taxpayer. Roger’s annual allowance is £40,000 – (£177,328-£150,000)/2 = £26,336 So Roger is facing an annual allowance charge on his excess contributions of £10,992, which will be taxed at Roger’s marginal rates. The tax charge is therefore (assuming that Roger has no other income) £4,446. Roger will be able to elect that his fund bears the additional tax charge.



2.12 ISA and JISA limits

From 6 April 2016 the limits for annual subscriptions will be:

ISA limit £15,240

Junior ISA £4,080 (limit also applies to Child Trust Funds)

Practical point You should exercise care when advising in this area if you are not authorised to give investment advice. However, the availability of ISA’s, the nil rate band for savings income and the new personal savings allowance and the interaction between these, and with the spousal income for married couple and civil partners should all be considered.

2.13 The flexible ISA

From Autumn 2015 individuals will be able to withdraw money temporarily from their ISA and replace it in the same tax year without affecting their overall ISA investment limit for that year. The change will take place once HMRC has consulted with ISA providers.

Practical point Check that where clients have made a drawdown on their ISA this year, that the funds are replaced by the end of the tax year, otherwise it will be regarded as a “new” investment.



3. CAPITAL AND PROPERTY TAXES

3.1 CGT annual exemption

The annual exempt amount has been increased by CPI from £11,000 to £11,100 fort 2015/16. The amount for most trustees is therefore £5,550

Practical point Where appropriate, remind clients about using their annual exempt amount effectively by timing the disposals of assets and sharing with spouse. Bed and breakfasting is no longer possible, but where disposals are intended, advice can be given about the most tax effective approach.

3.2 Capital gains tax – non-resident individuals

Non-residents are liable to Capital Gains Tax on the disposal of a UK residential property from 6 April 2015. The charge applies to gains from 6 April 2015, and apply to individuals, partners in partnerships, trustees of trusts and close companies (controlled by 5 or fewer persons). HMRC published an FAQ document alongside the Budget material. The legislation is in Finance Act 2015, s 37 and Sch 7. In total the new rules run to around 72 pages of legislation. The bulk of Sch 7 deals with amendments to TCGA 1992. 3.2.1 Basis of charge

Non-resident capital gains tax (NRCGT) applies to a disposal of UK residential property in a period when the disposer is not UK resident for tax purposes (including an overseas part of a year for those subject to split year treatment). Where an individual is subject to the temporary non-resident CGT charge in Finance Act 2013 or its predecessor legislative provisions, the NRCGT imposed during the period of non-residence is excluded from the charge arising on return, so NRCGT takes precedence over the temporary non residence rules. New s 14F allow diversely held companies (the opposite of closely held companies), unit trusts and open ended investment companies to be exempt from charge, based on a claim by the disposer. 3.2.2 Disposal of a UK residential property interest

New Sch B1 to TCGA sets out the necessary definitions to trigger and support the legislation. In simple terms a disposal of a UK residential property interest is a disposal of either :

Land that has at any time in the relevant ownership period consisted of or included a dwelling, or the interest subsists for the benefit of land that at any time in the relevant period consisted of or included a dwelling, or

A contract for an off-plan purchase



The relevant ownership period is the period from the later of the date of purchase and 6 April 2015 up to the day before the disposal. Grants of options over UK residential property are included in the definition. The term dwelling is defined at length in para 4 of the new Schedule, which excludes purpose built student accommodation with at least 15 bedrooms and relevant residential property as defined for VAT purposes. Dwellings that are unsuitable for use as such for a period of 90 consecutive days as a result of accidental damage or other damage outside the control of the owner can be disregarded for the period for which they were unsuitable (up to 90 days) provided this came to an end before the date of disposal. Damage arising from works to alter the building that would have made it unsuitable for use as a dwelling for 30 days or more is excluded. An apportionment in days is prescribed by para 6 of new Sch 4ZZB, which sets out the computation rules in full. 3.2.3 Computation

The calculation of the gain can be done in one of three ways. The default position is for the value at 6 April 2015 to form the cost of the property for the purposes of the gain calculation. There are, however, two alternative elections available:

An election to be taxed on a proportion of the entire gain apportioned on a straight line basis between the period before 6 April 2015 and that after that date, or

An election to be taxed on the gain or loss over the entire period of ownership of the asset (rather than the time apportioned element). This is only likely to be of benefit if the property is sold at a loss.

The elections are irrevocable, and must be made either on the relevant tax return or on the NRCGT return relating to that disposal. Where the property has not been suitable as a dwelling for the entire period after 6 April 2015, the relevant gain is time apportioned in days. 3.2.4 Losses

Losses on residential property owned by non-residents can only be set against gains on the same type of property. However, as non-residents are not subject to CGT on any other assets while they remain non-resident, this is not, in essence a restriction. The only losses that can be set against NRCGT gains are losses on UK residential property, but new s 14D allows losses incurred in any previous years back to 1965-66 to be deducted, to the extent that they have not already been relieved for capital gains tax purposes.



If a person with NRCGT losses carried forward subsequently becomes UK resident then any losses are then available to set against gains on disposals of any assets. NRCGT losses incurred by an individual in the year of death can be carried back up to three years (as for normal capital losses) but are restricted to set off against NRCGT gains. (amended s 62). 3.2.5 Business reliefs

Rollover relief (s 152) is amended to allow rollover relief where NRCGT gains are reinvested in UK dwellings used in the trade – most probably when letting furnished holiday accommodation. Section 165 – relief for gifts of business assets is extended to permit the relief to be claimed on the gift of a UK residential property to a non-resident. (New s 167A); there is a parallel in s 260 relief (gifts chargeable to IHT). Where the donee becomes non-resident, a deemed disposal occurs, with the resultant held over gain being available for holdover relief. When it resurfaces it will be a NRCGT gain. (new s168A). 3.2.6 Groups of companies

New sections 188A onwards cover the position for groups of companies, although notes that only “closely held companies” are liable to the charge. The legislation sets out the requirements for a NRCGT group and various other measures, allowing for tax free transfers between members of a NRCGT group of companies. 3.2.7 Administration

The gain must be reported on a new NRCGT return and the tax paid within 30 days of the disposal, which does present some practical problems, particularly if the taxpayer wishes to confirm an April 2015 valuation using CG34. TMA 1970 s 7 (requirement to notify chargeability) does not apply where the NRCGT return including (where required) an advance self-assessment has been submitted by the due date. The tax so calculated is based on assumption that no further disposals will take place in the tax year, and uses any available losses or other reliefs. A reasonable estimate is required of the individual’s taxable income to arrive at the appropriate tax charge; provided the estimate is reasonable, no penalty can arise under Sch 24 FA 2007 (penalties for inaccuracies). Those non-residents already within self-assessment need not include an advance self-assessment in their NRCGT return, and can pay their tax with their self-assessment liability, but MUST report the sale within 30 days of completion on NRCGT. Note also that the NRCGT process must be used to report a disposal even if there is no tax to pay, or there is a loss on the disposal. The reporting process will be electronic.



3.2.8 Rate of tax

Tax is due by individuals at 18% and 28% depending on their UK taxable income, but the CGT annual exempt amount will also be available. Trusts and personal representatives of deceased persons will be liable at 28% with the trust annual exempt amount being available, or the full AE for personal representatives in the year of death or subsequent 2 years. Companies within the scope of this tax will be liable at 20% with an allowance for indexation. Companies bearing ATED related CGT face a complex series of computations to determine how much of the gain is ATED related and chargeable at 28% and how much is NRCGT taxable at 20%. You are referred to Part 4 of new Sch 4ZZB. 3.3 PPR claims – non residents

In order to limit that application of private residence relief to disposals by non-residents, from 6 April 2015, an individual will only be able to claim private residence relief on a property situated in a territory in which they are not resident if they have spent at least 90 days (midnights) in the property during the tax year concerned. This change is known as the occupancy test, and will affect UK residents who claim PPR against a foreign property, as well as non residents disposing of UK residential property. The occupancy test will not apply to any year in which the disposer’s spouse or civil partner is UK resident, and the normal rules will apply. If the property qualifies as PPR then letting relief, absence and job-related accommodation reliefs would also apply as normal. Where the property has previously been PPR for the individual living in the UK before moving abroad, it will remain tax exempt provided disposed of (exchange) by 5 October 2016, as the last 18 months ownership will be available. Note that as the disposer is non resident the property only came on charge to CGT on 6 April 2015, so periods of absence before that date will be irrelevant.

Practical point You may need to review the position for clients who are currently non resident and still own a home in the UK. If the property has ever been their PPR, the exempt period expires on 5 October 2016. Letting relief may also be available in addition to PPR exemption, but only in relation to the post 2015 gain (as previous gains are not chargeable).

3.4 ATED – increased rates and administrative changes

The rates of ATED on properties valued at more than £2 million have been further increased for 2015-16. Although previous legislation stated that the charges would be keeping pace with CPI inflation, the increases for 2015-16 are very substantial indeed, at 51.7% increase. The following rates will apply in 2015-16:



Property value range £ million

2014-15 ATED charge

2015-16 ATED charge

> 1.0 – 2.0 N/A £7,000*

> 2.0 – 5.0 £15,400 £23,350

> 5.0 – 10.0 £35,900 £54,450

> 10.0 – 20.0 £71,850 £109,050

> 20.0 £143,750 £218,200

* - unchanged from announcement in March 2014. 3.5 ATED – properties subject to relief

Finance Act 2015 introduces a new type of ATED return called a relief declaration return (s 73, inserting new s 159A into FA 2013). This permits the owner of a number of properties which are subject to relief (such as a corporate landlord) to submit a single return claiming relief on all of the properties, rather than a return for each property. The single return must only be used for a single category of relief, so owners with more than one type of relief available will have to submit a relief declaration return for each category of relief. As a reminder, the legislation lists the types of relief which may be claimed together.

Provision FA 2013 Type of relief

Property rental business Ss 133 or 134 1

Dwelling open to the public S 137 2

Property developers Ss 138 or 139 3

Property traders S 141 4

Financial institutions S 143 5

Dwelling occupied by employees of a trade

S 145

6

Farmhouses S 148 7

Providers of social housing S150 8

Having made the return, the declaration will also cover any further properties acquired in the year which are subject to the same relief, as the properties will not be specified in the relief declaration. This represents a considerable administrative saving for affected companies. Where a return is late, any penalty chargeable is calculated by reference to a single relief declaration if this applies, rather than individual returns for each property. 3.6 ATED - Valuation dates

The next revaluation of all property subject to ATED is due on 1 April 2017, at which all enveloped properties should be revalued to check whether they now come within the rules, and which valuation band applies to them.



Finance Act 2015, s 71 changes to rules to make 1 April 2017 a valuation date only for periods from 1 April 2018 – otherwise there would have been practical difficulties in making returns by 30 April 2017 with a new valuation. The same change applies to each subsequent 5 year valuation date.

Practical point Ensure that clients affected by the reduction in the threshold for ATED are ready to complete their ATED returns. These are due by 30 April 2016 for the year ended 31 March 2017.

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