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Tag: Inheritance Tax

Inheritance Tax

  • Tax Changes From April 2026

    1. Dividend Tax Increases – 8.75% to 10.75%, 33.75% to 35.75%, no change to 39.35%

    Another reason for owner-managers to consider higher salaries instead of dividends from April 2026.

    Always check your figures as there are many variables to consider: income tax rates, NI thresholds, NI employer allowance availability, corporation tax rates, other income.

    2. Making Tax Digital – Income Tax Self Assessment (MTD ITSA) – Quarterly reporting 

    Get yourself geared up if your sole trader turnover and landlord gross rents together were over £50k in your 2024/25 tax return.

    The minimum is to have income and costs on a spreadsheet and have filing-only software ready for the first deadline of 7 August There’s no need to spend a lot and beware of free software which rarely remains free and will use up your time.

    Your life will be a lot easier if all income and costs go through one bank account for each sole trader business and your landlord business. 

    3. No Tax Relief For Unremibursed Home Working Costs

    If your employer doesn’t reimburse you for your home working costs, you can no longer claim tax relief against your employment income.

    Check your Tax Codes for the 2026/27 tax year to ensure any historical deductions aren’t included, otherwsie you’ll need to repay this tax relief in your tax return or by an adjusted Tax Code or P800 issued to you in due course. This includes the £6 per week commonly claimed by staff.

    4. Benefit In Kind For Electric Cars – Increase from 3% to 4%

    For a £50,000 electric car, the benefit in kind will increase from £1,500 to £2,000, increasing the tax paid for a higher rate taxpayer from £600 to £800.

    Electric cars remain generally tax efficient particularly when purchased through your company enjoying 100% corporation tax relief.

    5. Non-Residents Voluntary Class 2 National Insurance Payments – No longer available

    Where the full 35 qualifying years hasn’t been achieved, or may not be, sole trader or partnership taxpayers have often topped up their missing years by paying voluntary Class 2 national insurance. This option will no longer be available to non-residents.

    Similarly, the more expensive, but potentially still cost effective, route of making Class 3 contributions, will require qualifying residencies to be for much longer at 10 years rather than 3 years.

    6. Capital Allowances – Reduction in write down rate from 18% to 14%

    Not a main issue for most owner-managed businesses, but where there are some historical pool tax written down values brought forward, the already very slow write down rate of 18% is now an even slower rate of 14%. This increases the number of years for a full write down from over 23 years to over 30 years! 

    The main thing is to ensure you get 100% reliefs wherever they are avaialable such as using the annual £1m AIA allowance.

    7. EMI Share Option Company Thresholds – Large Increases

    EMI share options really should help growth by enabling small-medium companies to attract talent without paying the highest salaries or bonuses, however they aren’t adopted as much as they could be.

    Perhaps increasing the thresholds will help by opening up EMI to larger companies such as those with gross assets of £120 million, but it’s the smaller companies that need help with simplification of the rules to keep their costs down. Thresholds for employees remain unchanged at a maximum of £250,000.

    The increase from 10 to 15 years in which an option can be exercised will be very helpful for options granted on or after 6 April 2026 and perhaps help make these more attractive to some owner-managed businesses.

    8. EIS Company Thresholds – Large Increases

    A lot of thresholds already in the millions are being doubled and should help larger companies obtain more investment, however the smaller SEIS thresholds stay the same again favouring the larger end of the SME market.

    We see the investor side of this too, so we may see more investments being made by higher net worth clients or those with some funds they are keen to use to help a growth company. 

    9. BADR – Entrepreneurs Relief – Tax increase – 14% to 18%

    This compares with 18% or 24% for other assets.

    As 18% applies only if you remain a basic rate taxpayer, you’ll often find yourself paying 24% and therefore the BADR rate of 18% is favourable. As the maximum capital gain covered is a ‘lifetime’ limit of £1m, the maximum tax saved by BADR is £60,000.

    Although it’s called a ‘lifetime’ limit, this in practice really means gains from 2008 when Entrepreneurs Relief first came into existence.

    10. Inheritance Tax – Business and Agricultural Property Reliefs – Reduced from unlimited to £2.5m and 20% above £2.5m

    As widely included in the press, mostly due to farmer protests who suffer from being asset rich-cash poor, eligible trading businesses and farms will start to pay IHT on their estates instead of an unlimited relief.

    With £2.5m per spouse, a total of £5m covers many businesses and farms, but for those exceeding this, you may want to look at family gifting either to individuals or trusts.

    Always take appropriate advice as there are numerous factors to consider. 

    11. Inheritance Tax – Relief for charitable legacies limitations

    To help ensure legacies are directed towards UK charities (or eligible sports bodies), gifts must be made direct to the charity, rather than via trustees who may make some payments outside of the UK.

    These are the main ones affecting owner-manager businesses, but always look out for others such as EIS threshold increases which may help more investment in the growth sectors generally.

    12. Penalties For Late Filing – Corporation Tax Returns – Doubled

    This is probably a good idea as these are very out-of-date.

    As soon as a corporation tax return misses the 12 month deadline, the penalty for late filing will increase from £100 to £200. If the return still isn’t filed within the next 3 months, a further penalty is due, currently £200, which will increase to £400.

    Often, directors forget about dormant companies, which are also subject to these penalties, unless HMRC has agreed in advance and hasn’t sent the company a notice to file a return.

    There are many more changes coming in later years, so continue to look out for these.

  • Autumn Budget 2024 – Are you spooked?

    The small business will see out several halloweens throughout its lifetime, but will this be encouraging or just a bit too scary?

    Employer’s National Insurance 15%, Starting Salary £5,000, Employment Allowance £10,500 – April 2025

    When a small company is underway, you’ll probably take a mixture of salary and dividends. The balance has recently shifted in favour of salary where, broadly, there are higher profits and more than one director-employee. 

    As long as you remain entitled to the Employment Allowance the national insurance on your salary will be the same or lower. For one higher paid owner-director there will be no employer national insurance on salary up to £75,000 (15% of £75,000 – £5,000 = £10,500). For a salary of £100,000 the employer national insurance reduces from £7,544 to £3,750 before corporation tax relief.

    However, for sole shareholder-directors not entitled to the Employment Allowance, the 15% due above £5,000 increases your national insurance bill on a small salary of £12,570 from £479 to £1,136, an annual increase of £657 before corporation tax relief.

    Therefore, sole shareholder-directors should be spooked! And consider whether they might add one low-paid family member to their payroll. HMRC says the annual pay required is over £9,100 (or the new £5,000 presumably) but this is disputed and may now be tested in a future case. Or re-consider your viability as a limited company and become a sole trader!

    If you were thinking of taking on more employees and the new £10,500 Employment Allowance is likely to be already used up, check the employer national insurance due to see whether this expansion remains viable. 

    Vehicle Capital Allowances and Benefits In Kind – April 2025 onwards

    Your electric vehicle’s benefit in kind will be gradually increasing over the next few years, but so will the Class 1A national insurance due by your company which can’t be reduced by the Employment Allowance. Overall EVs remain pretty tax efficient, particularly if you can remain in the basic rate tax band.

    Unlike double cab pick ups (DCPUs) which from April 2025 will be treated as cars for capital allowances and benefit in kind purposes. This will be expensive, particularly as the car benefit in kind percentages will be increasing. Therefore, if you were thinking of buying one make sure it’s before April 2025.

    Business Rates Increase – April 2025

    If you are in retail, hospitality and leisure, the business rates relief will be reduced from 75% to 40%, which may spook you because it will increase your costs. Therefore, you’ll need to revisit your budgets to see how you will fund this.

    Income Tax Thresholds Increase – April 2028

    You can look forward to an inflationary increase after three more halloweens which will help a bit but the real value much lower from where the allowances were first frozen.

    Stamp Duty on Second Homes Surcharge 2% to 5% Increase – 31 October 2024

    Actually increasing on Halloween so this must be spooky. If you build up some capital or interested in owning a buy-to-let or holiday home, this may well put you off. The stamp duty is already pretty high and this likely will discourage future investments.

    Capital Gains Tax Increases – Entrepreneurs Relief (BADR) – 30 October 2024, April 2025 and April 2026

    Capital gains tax will increase on all assets such as share portfolios to the same as that for residential property from 10%/20% to 18%/24% from today.

    Once you get to a point of possibly selling (or liquidating) your business the rate you pay up to your lifetime limit of £1m will increase from 10% to 14% next April maintaining the 10% differential but to 18% from April 2026 to match the lower rate on other assets.

    Perhaps a bit less spooky than it might have been, but BADR is going to be reviewed…

    Inheritance Tax Increases – Pension Pots – April 2027 – Business Property and Agricultural Property Reliefs Curtailed – April 2026

    Where affordable you may have put money into a pension scheme. Ensure you plan when and how to take your pension, as it will be part of your estate chargeable to inheritance tax should you die with any left! 

    Your trading business or company or farm currently benefit from 100% inheritance tax reliefs. From April 2026, there’ll be a combined BPR/APR cap of £1m for 100% relief, with 50% relief applying above £1m.

    If you grow your business to have a higher value than £1m and hoped to pass it on to your family, you may want to look at giving it away sooner than otherwise in the hope you survive 7 years instead.  Or look at other planning options…

    Increased Debt and Focus on the Public Sector

    It is pretty spooky how much the country’s debt will increase, affecting interest rates throughout the life of your business to help fund the public sector, but the government hopes you remain encouraged to grow the economy. 

    As always only take action after taking appropriate advice 

  • #Budget2015 – Game, Set and Match

    Aces

    There were a few aces served up on behalf of small businesses during the ‘game’. These include:

    • The reduction in corporation tax to 18% always welcome by all businesses.
    • Permanency of 100% capital allowances for spend of up to £200k each year provides certainty in investment decisions and supports the recurring poor UK productivity conversations taking place recently.
    • The widely touted IHT (inheritance tax) saving when passing on the family home to direct descendants helps business owners who invest their profits into their family home.

    Double Fault

    However, small businesses may not be impressed with the double fault:

    • Increasing dividend tax from 0% to 7.5% on dividends over £5k within the 20% basic rate income tax band is a classic example of extending the reach without increasing the rate.
    • Add on the 32.5% rate on dividends within the higher rate band which looks the same as it is today, but is an increase from a net 25%, and you have a disincentive to incorporate, at least until the lower corporation tax rate kicks in.
    • This looks like a way to recover more tax from consultancy/freelance companies who are genuinely self employed and can arrange their remuneration tax efficiently in the same way as any other owner-director.

    Deuces

    A further disadvantage for consultancy/freelance companies but bringing some advantage to small businesses with staff:

    • Increasing the Employment Allowance from £2k to £3k saving more employer’s national insurance could encourage a small business to employ a person on a £30k salary or 3 people on a £15k salary. With part timers, under the £8k threshold, it’s not unusual for small business to have quite a few employees but no employer NI bill.
    • On the other hand the Employment Allowance will not be available at all to 100% owner-director companies who have been able to save about £200 by increasing their salary slightly. This simply revises their salary back to pre Employment Allowance levels, currently about £8k.
    • With the dividend rate changes, owner-directors will use their remaining tax free personal allowance, currently about £2k, to save some of the new 7.5% or 32.5% income tax rate on dividends above £5k.
    • They may also tip the balance to taking more dividends out this year, perhaps with employer pension contributions while you can.

    Five Setter

    It was a long game going to five sets covering other important areas such as:

    • Buy-2-let property owners by their sheer numbers are a relatively easy target to help raise more tax by restricting interest relief on buy-2-let loans to to basic rate tax and taking away the 10% wear and tear allowance.
    • Encouraging more rent-a room use of your own property by increasing the tax free income from £4,250 to £7,500, a 76% increase! Coupled with the IHT improvement is telling us to live in bigger homes and rent a room out rather than invest in a buy-to-let!
    • Bringing in non-Doms to the ‘normal’ tax net when they have either been borne to UK parents or have lived in the UK for 15 out of 20 years. Another example of extending the reach without increasing the rate.
    • Withdrawal of corporation tax relief on goodwill on acquisition of a business but allowing a lesser, non trading loss, relief on ultimate sale. An interesting way to provide a net relief, and will keep tax advisers and commercial lawyers very busy in future business sales.
    • Ensuring that when stock is sold it’s sold at market value and not a more tax efficient value agreed between both parties has clearly been identified as an area with some tax leakage.

    Winners and Losers

    Losers continue to be higher and additional rate taxpayers including consultants/freelancers. This means any future increase in the higher rate income tax threshold is very welcome providing a whole host of knock-on effects such as for dividend tax, capital gains tax, and pension reliefs. Winners continue to be trading businesses employing staff, low paid earners and many basic rate taxpayers. 

    Whether the Chancellor can continue to serve at this pace into the next Budget in March 2016, we will soon find out.

     

     

     

     

     

     

     

     

  • The Good, The Bad & The Ugly – Autumn Statement 2014

    Public opinion has played a strong role in the Chancellor’s statement today and perhaps his announcements made at the Commons film set today can be summarised into the Good, the Bad and the Ugly.

    The Good – Property Owners, Savers

    At last the stamp duty system has been modernised, so it doesn’t distort the property market with a more logical % being charged in each band rather than on the whole property price.

    Savers can enjoy passing on their ISAs on death to their spouse who can continue to receive interest and dividends free of tax. With the higher cash threshold introduced recently, and previous years’ build up of balances, the tax potentially saved will be very welcome.

    Low and middle income earners enjoying a further £100 tax free personal allowance than previously announced or was that an excuse to repeat the Good news?

    The Bad – Non-Doms, Google/Amazon etc.

    These groups continue to be on the hit list. The charge a Non-Domiciled resident pays for the privilege of living here without paying tax on income kept abroad eg footballers will increase.

    If Google/Amazon etc are found to have moved profits abroad, tax at 25%, higher than the normal 20% charge, will apply. This doesn’t mean the UK will get 25% of what it thinks these profits are. It seems there’s a lot to discuss before that happens.

    The Ugly – Taking ‘Too Much’ Tax Relief

    This isn’t just about aggressive schemes, but now includes routine tax planning and use of reliefs when the government sees them becoming too successful or it’s a good soundbite in an election year.

    Sole traders when incorporating their business into a limited company have often enjoyed a good result all round from little capital gains tax on the sale to their company and the company getting tax relief on the amount paid to the owner. HMRC have presumably pointed out this is wrong and the Chancellor has agreed for all transactions effective from today.

    Banks can’t escape their past wrong doings and although restricting their losses to 50% when offsetting them against future profits sounds good now, I wonder what sort of precedent this sets for an arguably retrospective change because all companies have this expectation at the time they make the loss. Perhaps none of us, if the country’s finances don’t improve sufficiently, can rely on losses being offsettable in the future.

  • Autumn Statement – AKA The Pre-Budget Budget

    Today’s Autumn Statement was more of a mini Budget than usual. Presumably due to the recent pressure being applied by the opposition.

    The good news for businesses is that taking on an under 21 year old won’t cost you any national insurance, but only from April 2015. In the meantime, if you can’t wait, you can employ anyone on up about £22k (or more than one person on lower salaries) from April 2014, and, under a previously announced measure, this won’t cost you any national insurance either. Both rules will continue into April 2015, so you could arrange your workforce to cost you no national insurance at all.

    It has at last been recognised that small retailers need help in competing against the Internet. Potentially, the most valuable relief is a 50% reduction in rates when re-occupying an empty property. Being able to pay rates in monthly instalments may also be helpful for some.

    Despite the stated aim to simplify tax, we now have another class of national insurance: Class 3A. This is nothing to do with employment or business, but it’s worth knowing that there’s another route to topping up your additional state pension, if necessary.

    A surprise change to the capital gains rules on homes means that the 3 year rule helping to exempt many homes from some/all of its capital gains tax, is being reduced to 18 months. This means that if you no longer live in your residence and you let it out before selling it, you can only have the last 18 months of the letting period tax free, together with the actual period of your residence. This indicates a certain amount of impatience with second home owners and the reduced tax they pay.

    It’s also worth noting there are now plans to make inheritance tax returns online. This will save executors a lot of time and hopefully speed up the whole process with HMRC.

    HMRC might need this help too, seeing as they are under a lot of pressure to continually find more tax from new anti avoidance measures. Identifying, challenging, and retrieving this tax due isn’t easy, particularly within these time frames. Expect a more aggressive attitude in certain areas.

  • #Tax Myth 11 – The Tax System Doesn’t Support Marriage

    Marriage and civil partnerships are provided with many reliefs within the tax system and I’m surprised why people claim otherwise.

    Business Partnerships

    Where one spouse is a partner, it’s very often the case that their spouse gets involved in the business later on, for example, a wife decides to stay at home when the children are young and instead of working for a third party, helps out in her husband’s business.

    If the other partners agree, his wife could be admitted to the partnership by taking half of her husband’s share.

    As each spouse enjoys two tax free personal allowances, for a higher rate taxpayer this saves £3,776 of income tax within the personal allowance, and 20% of tax on income above £9,440 and less than £32,010, a maximum of £8,290. Plus a maximum saving of Class 4 National Insurance @ 9% of £3,730.

    Ordinarily, the disposal of the husband’s partnership share would create a capital gain.

    However, where this asset is gifted to his wife, there is no capital gain, so there is no tax downside to the change in partnership share.

    Limited Companies

    A not dissimilar arrangement might be suitable for your limited company. In this case, the sale of some or all of your shares to your spouse will not trigger a tax charge on you.

    Whereas, if you’d given your shares to your non-married partner, a capital gain might arise. You could both defer this capital gain if you sign a ‘holdover’ election, but you’d need to understand it and complete it within the deadline.

    Similarly giving shares to a spouse for no tax effect, enables you both to own the minimum 5% required to receive entrepreneurs relief on the sale of your unquoted company,  doubling up the maximum relief on lifetime gains from £10m to gains of £20m, potentially saving capital gains tax of £1.8m being £10m @ (28% – 10%)!

    Other Assets eg Quoted Shares

    Where you have built up a portfolio of shares which, we hope!, eventually make a profit, this is subject to capital gains tax. If your gain is more than the tax free annual exemption of £10,900, you’ll pay either 18% or 28% of capital gains tax.

    Before you sell these shares, you can give some to your spouse who can sell them later on and use a second tax free annual exemption, saving up to £3,052 of capital gains tax. And if your spouse is a basic rate taxpayer, you may save an additional 10% (28% – 18%) capital gains tax worth up to £3,201.

    Inheritance Tax

    I suspect this affects more people than any other measure. If you own a home as a single person or within an unmarried couple worth £650,000, your estate may suffer £130,000 of inheritance tax on your death. If, however, you are married, there is no inheritance tax due when either, or both, of you die.

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