Taxing Times – July 2015

Taxing TimesWelcome to the July edition of Taxing Times. In this edition we’ll look at: 

  • Pensions flexibility – the good, the bad and the ugly
  • Summer Budget
  • Happy Birthday Capital Gains Tax!
  • What’s new in the world of tax?

Free seminar: Due to the popularity of our previous auto enrolment seminars we ran earlier in the year we will now be running some more after the Summer. There will be one at the George Hotel in Penrith on Wednesday 16 September followed by one at the Cairndale Hotel, Dumfries on 30 September. For further information or to book your place please contact Debs Hirst on 01768 864466 or email debs@doddaccountants.co.uk

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Pensions flexibility – the good, the bad and the ugly

Before we start, always remember that if you need pensions advice, rather than tax advice, that you need to speak to an appropriately qualified Independent Financial Adviser.  As your accountants, Dodd and Co can’t give you this advice, but we’re delighted to announce that our new in-house IFA, Nathan Glaister, can!Wealthcare logo

Nathan is part of the new team at Dodd Wealthcare Limited  which is an appointed representative of InvestAcc Limited which is authorised and regulated by the Financial Conduct Authority.

If you would like to speak to Nathan about pensions or indeed any financial advice matters you can contact him on 01228 530913 or by emailing Nathan@doddwealthcare.co.uk

Mention the word “pensions” to someone in the past and the refrain was very often “I hate pensions!”  The new rules in place from 6 April 2015 are in principle a great idea and have put pensions “back on the map” as a good investment opportunity and useful planning tool for many people who previously disregarded them.  Having said that, it is still a complex area and there are pitfalls to be wary of and practical issues coming out of the woodwork as the new rules bed in.  This article will briefly summarise the new rules and think about some considerations from a tax perspective.

The good

Changes to pension rules enable you to withdraw as much as you like, when you like, from your pension pot from the age of 55, without any need to buy an annuity.  Theoretically, if you wanted to access the whole lot in one go, the new rules allow you to do so (although whether or not you should is quite another matter!)14895276_s

This new  “pensions flexibility” applies to defined contribution or money purchase pensions – those where you have saved up a “pot” of cash or investments and have to choose what you do with it.

(There will be changes to what you can do with existing annuities but these do not come into force until 6 April 2016 so are not included here).

The “bad” – watch out for the tax impacts!

It is important that those over the age of 55 who are thinking about withdrawing their pensions should consider a) the tax, and also b) the tax credit consequences (if they claim tax credits).

22801064_s1. You are allowed to take some money (usually 25%) out of your pension tax free.  But three-quarters (75%) of your pension savings are taxable as income. Amounts drawn down will therefore be added to your other income and charged to tax according to whatever band it falls into (0% if your total income is below your personal allowance, 20% within the basic rate band up to £42,385, 40% up to £150,000 and 45% thereafter).  This therefore could lead to a significant tax bill, depending on how much you access in one tax year and the level of your other income in each tax year.  It is therefore important to plan ahead – from a tax perspective you might pay less tax on money from pensions if you take it in stages, spread it out over a number of tax years, or wait until after you have stopped work.  But of course you have to weigh up the tax against other financial, investment and personal considerations.

2. The Low Incomes Tax Reform Group (LITRG) cautions that amounts withdrawn from pensions saving become not only taxable income but also income for tax credits purposes.  So prospective pensioners should also check carefully the impact of their decisions on means-tested state benefits, such as Universal Credit and Pension Credit, and on ‘local’ benefits like Council Tax Support, before any decisions are made.

NB Bands refer to 2015/16 tax year.

The “ugly” – will pension providers play ball?

A few weeks ago it came to light that some pension providers were not allowing over-55s to withdraw money from their pots as and when they wish as part of changes to pension freedoms.  Some savers were being charged huge fees to withdraw funds, while others were being denied access to any of their cash. The Government has begun talks with regulators to “ensure that people have the flexibility they deserve”.  The Financial Conduct Authority will also be monitoring the reforms’ progress, and has already spoken to “firms where issues have arisen as the reforms bed in”. George Osborne said that the Treasury would investigate fees as part of a consultation starting in July, which will look into the speed and ease of transferring to a new provider by those wishing to make use of new pension rules. So…all good news and a very welcome change but is there a bit of “pension provider lottery” going on until providers get a handle on being as flexible as the Government want? Watch this space to see how it gets resolved…

14343647_sAnd let’s not forget the ubiquitous pensions auto enrolment.

A study by NOW: Pensions has found one in four small businesses have yet to address auto-enrolment legislation.  More than 500,000 employers have only until the end of next year, and firms that fail to do so could face escalating fines of up to £500 a day. The Pensions Regulator has recommended that employers allow up to 12 months for auto-enrolment, but the research from NOW: Pensions found that 350,000 companies were completely unprepared. (Source: press release from NOW:Pensions 01/06/2015)

If you are a regular Taxing Times reader you’ll know that Dodd & Co has run a number of free, practical, informative sessions on auto enrolment, to demystify the whole thing and help employers “get on with it”.  As mentioned above the good news is that we are holding another two free Auto Enrolment sessions – one in Penrith on 16th September and another in Dumfries on 30th September which we hope employers can attend…and remember, whether or not you can make the seminars, we are here to help!  Let our head of payroll Julie Campbell know if you need any assistance or advice.  And please contact Debs Hirst if you would like to book a place on either session.

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Summer Budget

Summer Budget cropNext Wednesday 8 July is when George Osborne will deliver his Summer Budget (and first of this new Parliament). But what will this mean for you?

Our tax partner Dean Johnston has outlined a few predictions for what we may expect to see announced which you can find here.

As usual we will be analysing the announcements as soon as they happen and will be providing commentary on what the changes will actually mean in real terms shortly afterwards!

We will be sending an email out that afternoon with a summary of the changes and some further in-depth evaluation as soon as the tax team (and of course our new Dodd Wealthcare team) have finished scouring through the Government documentation.

So don’t forget to look out for it in your inbox and as always please let us know if you are unsure about any of the announcements or how you think they may affect you.

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Happy 50th Birthday to Capital Gains Tax!

Happy birthday bannerWould you believe it, Capital Gains Tax (CGT) turned 50 this year. Let’s have a quick look at its history to date – and of course by 8th July there might be some new changes to take note of!

The History

1965 – James Callaghan, then Chancellor, introduced Capital Gains tax of 30% to stop people avoiding Income tax by switching their income into capital (which until this 1965 was tax-free).

1982 – With inflation at a high of 21% during the early 1980s, chancellor Geoffrey Howe introduced indexation. This allowed people to strip out the benefit of inflation when calculating how much tax to pay on gains.

1988 – Income tax for high-rate taxpayers was lowered from 60% to 40%, and for basic rate payers from 30% to 25%. (see, rates aren’t so bad now after all!) CGT rates followed suit.

1998 –Gordon Brown first replaced indexation with taper relief in his first Budget. The longer you held the asset, the lower the rate of tax you paid on it. If you owned an asset for 10 years, the rate fell from 40% to 24%.

2008 –Alistair Darling introduces a new lower rate of 18% (the 28% for higher rate taxpayers didn’t come in until June 2010) for CGT. But he also scraps taper relief!  The death of taper relief came about, in part at least, because the Government felt that private equity firms were making excessive profits by benefiting from overly generous taper relief on business assets.  Remember the city trader who boasted that he paid less tax than his cleaner?  Blame him for the loss of taper relief and the introduction of the surprisingly more complicated Entrepreneur’s Relief (ER)!  ER is introduced after outcry from the business community but only applies to the first £1m of lifetime gains.

2010  – ER is more generous – applying to lifetime gains of £2m, then revised again to apply to lifetime gains of £5m.

2011 – ER is revised again to apply to lifetime gains of £10m.

2014 – Surprise changes to ER available on certain transfers of goodwill.

2015 – Capital Gains tax is introduced for the first time for non-UK tax residents on certain UK property. And yet more tinkering with ER.

Some planning

17905074_lThere are a number of CGT reliefs which individuals can avail themselves of; the key is planning in advance and steering clear of pitfalls.

  • Incorporation relief is a useful statutory relief. Available on the incorporation of a business, latent gains on assets transferred are rolled into the cost of the shares, rather than crystallised on incorporation. On transfer to the company, the base cost of the assets will be uplifted to market value. This means they could be sold onwards from the company with no or little corporation tax. The proceeds in the company can then be used for future reinvestment with little tax leakage.  Given the changes to ER available on goodwill to connected parties, which restricts the availability of the magic 10% CGT rate, incorporation relief may prove popular once again.
  • Holdover relief is available when making gifts to individuals or to certain types of Trusts, which means that any inherent gain in the asset being deferred does not crystallise on the transfer.  Instead the person/Trust receiving the gift inherits the original base cost of the asset and the latent gain remains just that – latent until some future sale out of which there are proceeds to pay the tax.
  • Rollover relief should not be forgotten.  This offers the opportunity for gains made on the disposal of business assets to be “rolled over” against the cost of replacement business assets which are acquired  within the 12 months before the gain or within 36 months after the gain.  Only certain types of assets count for rollover relief claims.
  • The Enterprise Investment Scheme (EIS) allows capital gains to be deferred. If the proceeds of any sale are used for investment in an EIS qualifying business within 36 months following the gain, or for gains expected in the twelve months following investment, the capital gains can be deferred until the EIS investment is itself sold. The relief is particularly useful, as any type of gains can be “rolled over” in this way, unlike the more restrictive Rollover relief. And the CGT deferral relief is available even if the investor is connected with the EIS qualifying company .
  • ER is a valuable relief allowing gains to be taxed at 10% in certain circumstances, rather than the usual 18% or 28%.  But as indicated above it is surprisingly tricky with some technical nuances, including the recent 2014 and 2015 “tightening up” of the rules. Add to that a 12 month holding period within which all the criteria have to be met and ER is an area you should take advice on in good time before you get anywhere near to making a disposal.
  • As is well known, Principal private Residence Relief (PPR) is available to exempt a gain on the sale of your main home.  And as is also well know, this brings opportunities for CGT planning for those who own more than one property.  PPR is another surprisingly complex relief with a variety of nuances.  And the last few years have seen HMRC take on – and win – a high number of PPR cases.   So PPR is another area that is definitely not as straightforward as it looks and timely advice would be well advised.

Summary

CGT “planning” is an important part of looking after your tax affairs.  And “planning” is in inverted commas because we are not talking about fancy schemes here, we are talking about a sensible and timely review of your position to make sure you do get the reliefs you are entitled to! Please speak to us if you require further information on Capital Gains Tax issues that might affect you.

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What’s new in the world of tax?

Tax PenaltyArchaeologists uncovered “one of the earliest tax exiles in history”

Archaeologists who examined the remains of bodies around Hereford Cathedral found many of the males were foreigners while all the women were locals. They also uncovered a statute from the era which said that any man moving to the area who married a local woman did not have to pay taxes. Andy Boucher, project manager from Headland Archaeology, said they may have uncovered “the earliest tax exiles in history.”

Some people will do anything to avoid paying tax!

HMRC’s customer service standards under fire

Critics of HMRC’s telephone-based customer service system say it has been harmed by digital reforms that hurt those with limited computer access and the widespread closure of local offices. Federation of Small Businesses chairman John Allan voiced concerns over how swingeing cuts at HMRC were affecting the level of help available to individuals and small businesses.

Well, quite…. anyone who has tried to contact HMRC by phone will say the critics have a point.

You gotta fight…for your rights

In a previous taxing Times we urged readers to look carefully at their position when faced with penalties by HMRC, to ensure that they appealed where appropriate and didn’t just accept what might be an incorrect decision by HMRC.  The following real life story illustrates how important this is!

  • A company was found to have a very small undeclared liability under the CIS scheme.
  • The liability was agreed and a penalty was imposed.
  • We asked HMRC to “suspend” the penalty so that payment would not become due, pending the client’s future good behaviour (after all this was a small issue and the company’s first tax problem).
  • The chap at HMRC said that he couldn’t suspend the penalty because he wasn’t allowed, the penalty was “mandatory” – a new take on the classic line “the computer says no”!
  • We pointed out that HMRC’s own manuals said that its officers should suspend the penalty
  • Some delay…..more delay…
  • Finally a reply to say the penalty could be suspended – D’oh!

Goes to show…not only do shy bairns get nowt but you have to be prepared to push back, as unfortunately not everyone at HMRC knows the correct position.

Let property campaign

House to letHMRC’s “let property campaign”, launched in September 2013, is aimed at residential property landlords – from those that have multiple properties, to single rentals, and from specialist landlords such as student or workforce rentals, to holiday lettings – who may owe tax, whether through misunderstanding the rules or deliberate evasion. These landlords are invited to tell HMRC about any unpaid tax on rents, and pay what they owe, including any penalties and interest due. Penalties will be lower than if HMRC comes to them first.  Unlike previous campaigns, there is no disclosure ‘window’ requiring you to disclose what you owe by a specific date. This campaign will be on-going for some time.

HMRC have updated their disclosure guidance for the tax year 2014-15 in anticipation of disclosures to be made this year.

If you are a landlord and have any issues, concerns or worries, feel that the let property campaign may be applicable to you, or just generally want tax advice we would be happy to help – please get in touch.

And finally….

New research indicates bankers are the people most likely to have an affair. Of the people signed up with the extra-marital affairs website IllicitEncounters.com, 18% said that they worked in the financial sector, compared with 12% in management or human resources. Accountants made up 5% of the client list of would-be adulterers.

That’s because most of us get our kicks from wrangling with HMRC and getting those pesky spreadsheets to add up properly!

 

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