The Pulse - Spring 2017

In this issue:


Key tax changes for 2017/18

Many individuals and businesses will be affected by tax changes which come into effect from April 2017. Here we look at some of the key developments to be aware of.p_spring_2017_key-tax-changes-for-2017.jpg

The Main Residence Nil Rate Band
A new additional nil rate band for Inheritance Tax (IHT), intended to apply where an individual passes their main residence to a direct descendant on death, commenced on 6 April 2017. The Main Residence Nil Rate Band will generate significant IHT savings, as long as qualifying criteria are met, and will need to be fully incorporated into wider IHT planning. Full details of the changes were outlined in the last edition of The Pulse and can also be found on our website. There is a cap of £2 million entire estate value (before reliefs) after which the relief tapers away. There are some interesting opportunities for people above this level to arrange their affairs to take advantage.

Tax relief on interest and finance for buy-to-let landlords Tax relief for interest and finance costs for residential landlords will be restricted from 2017, with tax relief only being available at the basic rate of Income Tax on a phased basis through to April 2020. The last edition of Pulse looked at whether incorporation could be the answer for buy-to-let landlords. This article is also available on our website.

Salary Sacrifice Schemes The tax and NIC advantages of salary sacrifice arrangements will be removed from April 2017 with the exception of pension contributions, childcare, cycle to work and ultra-low emission cars. More details on these changes can be found inside on page 2.

Reform of IR35 for public sector workers Reforms to IR35 in respect of individuals who provide personal services to bodies within the public sector via intermediaries such as personal service companies, went ahead in April 2017. Fundamentally, the responsibility for reviewing whether IR35 applies and paying the correct tax and NIC, will be moved to the public sector body. Furthermore, as these changes remove the administrative burden of deciding whether IR35 applies, the 5% tax-free allowance will be removed.

Reform of Corporation Tax Loss Relief The current streaming rules will be made more flexible so that losses arising on or after 1 April 2017 will be useable, when carried forward, against profits from other income streams or the profits of other companies within a group. Companies will only be able to use losses carried forward against up to 50% of their profits if group profits exceed £5 million for the relevant year.

Increase in ISA limits and the new LISA On 6 April 2017, the annual ISA allowance increased from £15,240 to £20,000. The increase comes alongside the new Lifetime ISA (LISA), introduced on 6 April 2017 for the under-40s saving to buy their first home or for retirement. Savers can put up to £4,000 a year into a LISA and the Government will add 25% on top of the annual contributions, meaning a potential bonus of £1,000 a year.

If you would like to discuss how the changes will affect you or your business, please contact us.


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Losing entitlement to State Pension?

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The claw-back of Child Benefit has unintended consequences, including the possible loss of state pension entitlement for some parents.

The High Income Child Benefit Charge (HICBC) was introduced in 2013, to claw-back Child Benefit paid to higher earning families. The charge applies where either parent has annual income of £50,000 or more. The full amount of Child Benefit is clawed-back if the higher earner’s income is £60,000 or more.

Many parents decided not to claim Child Benefit, in order to avoid the HICBC. This could be the wrong approach, as it may disadvantage both the parent and child. The reason is that a non-working parent who is in receipt of Child Benefit gets a free National Insurance (NI) credit, which counts towards their state pension entitlement.

If a non-working parent (usually the mother) doesn’t claim Child Benefit, she won’t receive NI credits for the period during which she doesn’t pay NI, and the child is aged under 12 years. This will leave a gap in her NI record, and on reaching state retirement age, she could receive a smaller state pension. Note that a working mother won’t have this problem, if her earnings are always above the NI lower earnings threshold.

Unlike the old form of state retirement pension paid to people who reached state pension age before 6 April 2016, the new flat rate state pension doesn’t allow an individual to receive a pension based on their spouse’s NI contributions.

Implication for the child Where Child Benefit is never claimed, the young person won’t automatically be issued with a NI number. The individual will have to apply to the DWP for a NI number in order to work, open an ISA account, or receive a student loan. So no financial loss, but still an inconvenience.

The solution To avoid these difficulties, the parent should apply for Child Benefit as normal, and tick the box to receive a nil payment. This is referred to as opting out of receiving the payment. The result is still the same as not claiming Child Benefit in the first place, but can have a fundamentally different effect on the parent’s NI record. The claimant can reverse this opt-out at any time. It is essential that the initial Child Benefit claim is made as soon as possible after the birth of the child, as it can only be back-dated for up to three months.


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Salary Sacrifice Changes

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Employers should familiarise themselves with changes to the tax treatment of salary sacrifice schemes which came into force on 6 April 2017. On this date, the tax and National Insurance Contributions (NIC) advantages of salary sacrifice arrangements were removed with the exception of those relating to pension contributions, childcare, cycle to work and ultra-low emission cars.

Arrangements in place before April 2017 will be protected until the next trigger point e.g. salary sacrifice contract renewal or review, at which point the new rules must be applied. If not triggered before, the new rules will automatically be triggered on 6 April 2018. Contracts relating to cars, accommodation and school fees will be protected until April 2021. The new rules will immediately apply to employees who started work from 6 April 2017.

Employers should act soon to assess the impact of the new rules on their existing salary sacrifice schemes. If changes need to be made, employers will need to communicate with employees and make the necessary amendments to employment contracts. Please contact us for further information.


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The Annual Tax on Enveloped Dwellings

The Budget announcement that a new Investors Relief (IR) would sit alongside, and be in addition to, Entrepreneurs’ Relief (ER) came as a welcome surprise to corporate investors.p_spring_2017_annual-tax-on-enveloped-dwellings.jpg

Properties valued at more than £500,000 and physically located in the UK fall under the Annual Tax on Enveloped Dwellings (ATED) regime when the property is owned completely or partly by a company or a partnership where one of the partners is a company or other collective investment vehicle.

Certain types of living accommodation are specifically excluded from the definition of a dwelling, e.g. Hotels, Guest Houses, Care homes, Boarding schools. Where properties are not exempt, reliefs may be available which can reduce or extinguish the tax liability. Reliefs are generally available for trading activities with residential properties, such as third party commercial letting, or property development. However, it is important to note that these reliefs are not automatic and an annual return is required to claim relief.

A company with property within the scope of ATED on 1 April 2017 will have a filing requirement and tax payment date of 30 April 2017, i.e. in advance of the relevant chargeable period. Penalties and interest apply where payment and/or filing dates are missed. When the property is acquired during the year, the charge must be paid within 30 days of the acquisition date. For a new build, the company has 90 days to pay from the date the local council issues a completion notice.

Those required to pay ATED, or their advisors, can now register for H M Revenue & Customs’ new ATED online service to complete their return digitally for the April 2017 filing period.

A property revaluation is required every 5 years and any properties within ATED from 1 April 2012 (the valuation date) will require a statutory valuation as at 1 April 2017. HMRC will require at least one professional valuation per dwelling. The 2017 property valuation will determine the level of tax charge for the five years from 1 April 2018.

As the ATED valuation threshold was recently reduced to £500,000, companies may not be aware of their compliance obligations in relation to enveloped dwellings.

Should you need advice or require assistance with filing an ATED return please contact us.


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Levies & Charges for Employers

The property sector has endured more than its fair share of legislative, economic and political blows in recent years. Buy to Let landlords in particular may be starting to feel victimised.p_spring_2017_Levies-charges.jpg

April brings the new Apprenticeship Levy and a new Immigration Skills Charge. Both are potentially payable annually and are designed to encourage employers to train the staff they need, rather than to recruit skilled workers from abroad.

From 2017/18 onwards, employers will be required to pay an Apprenticeship Levy if their annual “pay bill” (including bonuses but not benefits-in-kind) exceeds £3 million, even if they do not employ apprentices.

The Levy is charged initially at 0.5% of the annual pay bill, but with a £15,000 Levy Allowance available to reduce the liability, e.g. an employer with a pay bill of £5 million pays £10,000. From April 2017, employers will need to tell HMRC monthly whether any Levy is due and pay amounts over in the following month with the PAYE liability.

An employer’s contributions through the Levy will go into a ‘Digital Apprenticeship Service Account’ and, along with an additional 10% ‘top up’ bonus from the Government, will be available to fund its apprenticeship training with approved suppliers.

The Immigration Skills Charge only applies where permanent skilled workers are recruited from outside the European Economic Area. It is set at £1,000 per year per worker, with exemptions for graduate trainees. This charge is payable to the Home Office, not to HMRC.


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Property development tax and transaction rules

The property sector has endured more than its fair share of legislative, economic and political blows in recent years. Buy to Let landlords in particular may be starting to feel victimised.p_spring_2017_property-development-tax.jpg

HMRC has recently published guidance in relation to property development tax and the new transactions in land legislation that was introduced in Finance Act 2016. The new legislation can potentially apply where any taxpayer undertakes development of UK land. In particular, these rules extend the scope of UK taxation in relation to profits arising from the trade of dealing in or developing UK land to tax the profits, regardless of whether the taxpayer is UK resident or has created a Permanent Establishment in the UK.

Two of the most important clarifications that are outlined in the guidance are how these rules will be applied to investment transactions, and how debt from a related party will be considered for the purposes of the anti-fragmentation rules.

Investments – Are they caught? The new Property Development tax applies where a person realises a profit or gain from a disposal of any land in the UK, and any of the following conditions are met:-

  1. The main purpose, or one of the main purposes, of acquiring the land was to realise a profit or gain from disposing of the land.
  2. The main purpose, or one of the main purposes of acquiring any property deriving its value from the land was to realise a profit or gain from disposing of the land.
  3. The land was held as trading stock.
  4. In the case where the land has been developed, the main purpose, or one of the main purposes, of developing the land was to realise a profit or gain from disposal of the land when developed.

Where the above conditions are met, the profit/gain realised is treated as income and subject to either Income Tax or Corporation Tax, depending on the taxpayer’s identity.

There were concerns, particularly with the first condition, that these rules would catch property investment transactions where an investor was looking for capital appreciation as well as a rental yield. Within the guidance, HMRC have clarified that the legislation is only intended to be applied to activities which, when looked at “in the round”, amount to (i) a trade in land or (ii) a trade of developing land and ensuring that these are taxed as trading profits.

The rules should “not alter the treatment or re-characterise investment activities, except where they are part of such a wider trading activity. In particular, they do not apply to transactions such as buying or repairing a property for the purpose of earning rental income, or as an investment to generate rental income and enjoy capital appreciation”.

HMRC have made it clear that the facts of each case will determine whether or not one of the main purposes was to making a trading profit from development or disposal. It will therefore be important for clients who have an investment intention at the time of acquisition, that they retain appropriate contemporaneous evidence (such as business plans, board minutes) supporting this intention as, too often, external factors mean that original intentions subsequently change.

Please contact us for more information.


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Disclaimer
These materials are intended as a guide only and professional advice should always be taken before any action is taken. Davies Mayers Barnett accepts no responsibility for any loss to any person resulting from acting on the contents of this publication.