My Blog

Tag: Summer Budget 2015

Summer Budget 2015

  • (Residential) Property Is Dead! Long Live (Commercial) Property!

    If you are a basic rate taxpayer, be prepared to be taken into a higher rate tax bracket or child benefit to be taken away, effectively another tax charge.

    If we assume you’re an employee, with two children, earning a £47k salary and property profits of £3k, your gross income is £50k. Assuming your spouse isn’t earning more than £50k, you get to keep all your child benefit.

    Your £3k property rent is calculated as follows:

    Rental income  £7,000

    Interest            (£3,000)

    Agent fees          (£400)

    Insurance           (£100)

    Other eg repairs (£500)

    Profit                  £3,000

    On which you’re paying 40% tax of £1,200. If your property is worth £120k, you’re receiving a modest after-tax return of 1.5%. 

    However, this picture changes when the new rules, starting next April 2017, are fully in place in 2020. The interest of £3k above is no longer deductible and your taxable property profit doubles to £6,000.

    Your gross taxable income is now £53k. So what?

    1. More of your income is now taxed at 40%, rather than 20%.

    2. Your child benefit now starts to be withdrawn.

    On these figures the additional tax due on top of the £1,200 is:

    Child benefit withdrawn           £536

    Additional higher rate tax      £1,200

    Less 20% interest tax relief    (£600)

    Additional tax                         £1,136

    Your modest after-tax return is now reduced to £664 (£3,000 profit – £1,136 new tax – £1,200 current tax) of £120k which is 0.5%!

    Similar considerations apply for taxpayers near to the £100k gross income level as you’ll start to see your tax free personal allowance allowance withdrawn at income above £100k. 

    If you rent out a furnished property you’re currently enjoying an additional tax deduction of 10% of £7,000 saving you £280 of tax. This will be withdrawn from this April 2016, reducing your net of tax returns even further.

    You may ask yourself whether it’s worth the hassle! 

    If you do still benefit from capital growth, remember that when you sell the property HMRC will require the capital gains tax within 30 days of exchange, so make sure the gap between exchange and completion isn’t longer than 30 days so you have the funds available. Please remember to include your accountant before exchange!

    You may want to look at transferring or putting new purchases into a limited company which doesn’t suffer all these changes. However, currently, banks seem reluctant to lend to these companies. 

    Commerical Property

    Comparatively speaking, commercial property is now looking very attractive. It isn’t going to suffer from any changes and also enjoys lower stamp duty rates. It can be held within a pension wrapper and benefit from those tax advantages. This may be enough to entice you to look at something different and compare the returns. After taking appropriate advice of course.

     

     

     

     

     

     

     

     

  • New Dividend Tax – How Will You React?

    £5,000 For Free?

    Everyone will receive £5k of dividend income at a zero rate. Your basic rate band or tax free personal allowance still gets used, but you pay £Nil tax on dividends up to £5k. Your final tax bill varies after this with the introduction of a 7.5% tax charge for a basic rate taxpayer, and a 32.5% tax charge for a higher rate taxpayer.

    Assuming a tax free personal allowance of £11k and a higher rate tax band of £43k for comparisons:

    • If you earn a salary of £43k and receive £6k of grossed up dividends (net cash received of £5.4k), your tax bill this year would be £1,350.
    • Happily, in the next tax year, £5k of the net cash dividends of £5.4k will be tax free and your tax bill will only be 32.5% of £400, or £130.
    • A fall of over £1.2k.
    • However, if you are an owner director taking a small £11k salary and grossed up dividends of £32k (net cash received of £29K), a total £43k of taxable income, your personal income tax bill this year would be £Nil.
    • Unhappily, in the next tax year your income tax bill based on the net cash dividend of £29k, after taking off £5k of tax free dividend, will be 7.5% of £24k, or £1.8k.
    • An increase of £1.8k. 

    On a £43k salary, employees are paying high national insurance, of course, which shareholders don’t pay, and this helps close that difference.

    It’s interesting to note that pensioners may also receive taxable pensions at this level, but as they don’t pay national insurance either, they receive a benefit without the national insurance downside of being an employee. 

    High Income Child Benefit Charge – £50k to £60k Taxable Income

    As the HICBC will now only refer to the net cash received without any ‘grossing up’ of dividends, those near to £50k of gross income may find their child benefit increased.

    Shareholder-directors taking a salary of £11k and net cash dividends of £40k receive a reduced child benefit in this tax year based on gross income of over £55k. Fortunately, in the next tax year, their gross income for this purpose will only be £51k. 

    Loss of Personal Allowances – £100k to £122k Taxable Income

    Similarly, the Taxable Income where the tax free personal allowance is taken away will also be based on the net cash dividend received and not the grossed up version, saving some tax for people near to these thresholds.

    How Might Shareholder-Directors Respond to this New Dividend Tax?

    Having seen how shareholder-directors are adversely affected, how might you react to this new tax?

    1. Sell your business sooner? You’re likely to pay only 10% capital gains on a lump sum, rather than be burdened with 7.5% and 32.5% on your dividends every year.
    2. Pay employer pension contributions? These save 20% corporation tax and aren’t taxed on you. Beware the limits, but they may have a place in your financial strategy.
    3. Give some shares to your spouse to at least use the £5k tax free amount, if it’s not used elsewhere.
    4. Pay more dividends in this tax year, even some higher rate ones, if you’re likely to need that level of cash for the foreseeable future, and if your company has sufficient profits after tax.
    5. Invest in more ISAs if their returns and charges warrant it, keeping as much of the £5k tax free dividends available for your own company dividends.
    6. Disincorporate and revert to a sole trader or partnership? You may find at profits of £30k to £40k the additional administration isn’t worth the reduced tax savings. The current Class 4 national insurance is 9%, but you might want to wait to see what the new Class 4 rate will be when Class 2 national insurance is abolished. And remember that at least with a company you can choose when you pay your personal income tax whereas sole traders and partners are taxed at higher tax levels in the year the profits are earnt.
    7. Revisit any home office rent charge to see whether you may still have a net £Nil profit after a rent increase. Or use up your tax free personal allowance fully, if it’s not used by salary or other income such as buy to let profits.
    8. Use your directors loans account more often? Despite both temporary and permanent tax charges, these may be a cost effective tool if you need some cash temporarily so you don’t suffer a permanent dividend tax charge.

    Conclusion

    Odd that the Office for Tax Simplification was made permanent in the same Summer Budget, when the need for accountants to work through this complexity and advise on the specific response for each client, has never been stronger.

     

     

     

     

     

     

     

     

     

     

  • #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.