Radical proposal to change private residence relief

At present, it is possible to make an election, in certain circumstances, allowing owners of more than one residential property to choose which property is their main residence. In this way a measure of Private Residence Relief (PRR) can be achieved for the elected property. This process of swapping properties for tax purposes achieved notoriety during the MPs’ expenses scandal when certain MPs were found to have “flipped” between properties in London and their constituency to achieve capital gains tax advantages when they sold.

HMRC have recently published a consultation document entitled “Implementing a capital gains tax charge on non-residents”. Surprisingly, section 3 of the document proposes that the present PRR election is to be scrapped for UK home owners and replaced by less advantageous rules. Here’s what the report says:

“The government is considering two possible approaches, both of which involve changes to the process by which a person can benefit from PRR. The government may:

  1. Remove the ability for a person to elect which residence is their main residence for PRR. This would mean that PRR would be limited to that property that is demonstrably the person’s main residence. The government envisages that this would build on the existing process that applies where an individual with two or more residences has not made an election. In these cases, the person’s main residence is determined by the balance of all the evidence including factors such as the address where the taxpayer’s spouse or family lives, mail is sent, and that is on the electoral roll.
  2. Replace the ability to elect with a fixed rule that identifies a person’s main residence e.g. that in which the person has been present the most for any given tax year. Depending on the test that is devised this may mean that taxpayers have to keep different or additional records.”

It is likely that any changes to legislation will be effective from April 2015. This does give owners of more than one property a chance to consider their options in the interim period. Please contact us if you would like an update on the present capital gains tax opportunities. 

Office for Budget Responsibility (OBR) issues conflicted information

It would seem that economic indicators confuse economists as well as the rest of us. The first two paragraphs of the recently published Executive Summary of the OBR makes for interesting reading.

 Here’s a bullet point summary:

  • The UK economy has continued to recover.
  • In the final quarter of 2013, GDP growth matched our December forecast, inflation fell back to target and unemployment dropped more quickly than expected.
  • But productivity and wage growth remained disappointing.
  • Revised data published since our last forecast suggest the economy grew slightly faster over 2013 as a whole than we expected in December, with GDP up 1.8 per cent on the previous year.
  • Consumer spending, supported by a falling saving ratio, has been the biggest driver of recent growth.
  • The latest data suggests that business investment is recovering.
  • Housing market indicators have picked up sharply.
  • But export performance remains disappointing.
  • Given the momentum the economy carried into 2014, we have revised our GDP growth forecast up slightly to 2.7 per cent in 2014 and 2.3 per cent in 2015.
  • We expect quarterly growth rates to ease through 2014 as consumer spending growth slows to rates more aligned with household income growth.
  • The outlook for productivity growth, which underpins income growth and the sustainability of the recovery, remains the key uncertainty.

Whilst this is positive news let us hope that we are not led into another “boom and bust” scenario fuelled by unsustainable property prices and consumer expenditure funded by lower savings and increased household debt.

Hopefully, Government will see the sense in stimulating business investment, encouraging productivity growth, and supporting our exporters.

Don\’t forget to claim Employment Allowance

Employers are reminded to claim the £2,000 Employment Allowance which commenced 6 April 2014. Basically, employers can reduce their National Insurance contributions by a maximum £2,000 in the current tax year.

 Here’s the instructions on claiming the allowance as posted on GOV.UK’s website:

 “You can use your own 2014 to 2015 payroll software (see your software provider’s instructions), or HM Revenue and Customs’ (HMRC’s) Basic PAYE Tools for 2014 to 2015 to claim the Employment Allowance.

 When you make your claim (using the software of your choice), you must reduce your employer Class 1 NICs payment by an amount of Employment Allowance equal to your employer Class 1 NICs due, but not more than £2,000 per year.

 For example, if your employer Class 1 NICs are £1,200 each month, in April your Employment Allowance used will be £1,200 and in May £800, as the maximum is capped at £2,000.”

 Naturally, if we look after your payroll we will take care of these formalities for you.

 The following employers cannot claim the allowance, for instance if you:

  • employ someone for personal, household or domestic work, such as a nanny, au pair, chauffeur, gardener, care support worker
  • 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 you have charitable status), for example:

    • NHS services
    • General Practitioner services
    • the managing of housing stock owned by or for a local council
    • providing a meals on wheels service for a local council
    • refuse collection for a local council
    • prison services
    • collecting debt for a government department

If you are unsure if you are entitled to claim we would be happy to discuss your options.

Investing in plant and equipment?

If expenditure on plant and equipment qualifies for the Annual Investment Allowance (AIA) 100% of the cost can be written off against taxable profits.

The amount that can be written off as AIA expenditure has changed a number of times in the past few years.

  • Immediately before 31 December 2012 the (AIA) was set at a maximum spend of £25,000.
  • From 1 January 2013 the £25,000 limit was increased to £250,000 for a temporary period of two years to 31 December 2014.
  • The Budget 2014 has increased the limit again, to £500,000 from 6 April 2014 (for unincorporated businesses) and 1 April 2014 (for companies). This further, temporary increase will end 31 December 2015 when it is assumed the limit will return to £25,000.

According to the Office for Budget Responsibility the increase to £500,000 will bring forward business investment decisions amounting to £1bn, from 2016 and 2017 to 2014 and 2015.

Readers who are contemplating significant business investment in plant and machinery should seek tax advice before making any buy decisions. Depending on your accounts year end date, the amount of tax relief you may qualify for may be reduced if the date straddles the 1st or 6th April 2014.

Lifestyle victory for taxi driver and his family

Glen Whittle must be feeling pleased with the outcome of his recent appeal against assessments issued by HMRC.

An enquiry instigated by HMRC resulted in the issue of assessments on the basis that the income of Mr & Mrs Whittle was insufficient to meet their outgoings. HMRCs argument centred on the level of household and holiday costs.

Fortunately, Mr & Mrs Whittle were able to prove that their actual expenditures, rather than those estimated by HMRC, were much lower. For example they were able to demonstrate that:

  • Only one of two daughters was at school, the other worked and had made a contribution to the household budget.
  • Mrs Whittle was employed by a travel agent and had secured unusual terms and conditions. She was absent from home for lengthy periods and received an allowance and discounted flights.
  • The family home was eco-friendly with consequent savings in running costs.
  • HMRC had also failed to adjust their figures to account for Mrs Whittle’s significant absences.

 The tribunal accepted the accounts of personal income and expenditure presented by the Whittle family and their appeal was allowed.

 Readers who are thrifty, or whose personal circumstances mean that their outgoing are below the norm, should keep records to justify their position. In Glen Whittle’s case this has paid dividends.

Tax Diary April/May 2014

 

  • 1 April 2014 – Due date for Corporation Tax due for the year ended 30 June 2013. 
  • 19 April 2014 – PAYE and NIC deductions due for month ended 5 April 2014. (If you pay your tax electronically the due date is 22 April 2014.)
  • 19 April 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 April 2014. 
  • 19 April 2014 – CIS tax deducted for the month ended 5 April 2014 is payable by today.
  • 19 May 2014 – PAYE and NIC deductions due for month ended 5 May 2014. (If you pay your tax electronically the due date is 22 May 2014)
  • 19 May 2014 – Filing deadline for the CIS300 monthly return for the month ended 5 May 2014.
  • 19 May 2014 – CIS tax deducted for the month ended 5 May 2014 is payable by today.
  • 19 May 2014 – The payroll forms P35 and P14s must be filed by this date – employers late in filing these forms may receive a penalty.
  • 31 May 2014 – Ensure all employees have been given their P60s for the 2013-14 tax year.

State Pension and tax

If you have recently started to receive your State Pension, you may, or may not, have noticed that it is paid without deduction of tax. This can have a number of unforeseen tax consequences:

  • If your total income including your State Pension is less than your personal tax allowance then there is no tax to pay and you can spend your pension, no problem.
  • If you are still in business and self-employed, and if your self-employed earnings exceed your personal allowance, then you will need to save part of your State Pension to cover tax due. The amount you will need to put by depends on your marginal rate of tax.
  • If you are employed, or if you receive private pension payments, HMRC may adjust your code number(s) to recover tax due on your State Pension. However, this process does not always recover the correct amount and you may receive a bill after the end of the tax year for any arrears. And occasionally, you may have overpaid and you will receive a rebate.

 If you are concerned that you may be overpaying tax, or should be reserving for future tax and are unsure how much to put by, please contact us.    

HMRC is changing the way they charge interest on late paid PAYE

Employers should note that HMRC is changing the way they charge interest on unpaid PAYE from 6 April 2014. We have reproduced below HMRC’s recent Helpsheet:

 For the tax year 2014-15 onwards:

 HMRC will charge in-year, rather than annual, interest on all unpaid:

  • PAYE tax and Class 1 National Insurance, including specified charges (estimates HMRC makes in the absence of a PAYE submission)
  • Construction Industry Scheme charges
  • In-year late filing penalties, which start from October 2014
  • In-year late payment penalties, which will be charged automatically from April 2015

HMRC may also charge interest on underpayments that arise because of adjustments reported on Earlier Year Updates submitted in respect of tax year 2014-15 onwards.

For annual payments such as Class 1A and Class 1B National Insurance Contributions (NICs), HMRC will continue to charge interest on any amount which remains unpaid after the due date.

 Will HMRC also pay interest on overpayments in-year?

Yes. HMRC will apply repayment interest where an employer makes a payment and the charge is then reduced, and this results in an overpayment which is:

  • reallocated to a later charge
  • repaid

 How will interest be calculated?

 HMRC will charge interest from the date a payment is due and payable to the date it is paid in full.

 For 2013-14 HMRC will charge interest on any amount outstanding for month 12 starting from 19/22 April 2014. Interest will only be charged on any month 12 late payment amounts and not all outstanding late payment amounts for 2013-14.

 For 2014-15 HMRC will charge in-year interest each month on any late payment, starting from 19 May 2014.

What has not changed since the Budget?

  

  • Entrepreneurs’ Relief 

As long as the ownership of your business is structured correctly, and for a minimum time period, then lifetime disposals not exceeding £10m will only be taxed at 10% for Capital Gains Tax purposes.

 

  • Cap on tax reliefs 

Don’t forget that certain tax reliefs are capped at £50,000 or 25% of your income. The reliefs affected are predominantly tax losses. There is no cap on charitable donations.

 

  • Loss of personal allowance 

Care should be taken if your taxable income is likely to exceed £100,000 in the current tax year. For every £2 your income exceeds £100,000 your Personal Allowance (PA) will be reduced by £1. For 2014-15, this means that your PA will be withdrawn completely if your income exceeds £120,000.

 

  • Carry back charitable donations 

It is possible to carry back charitable donations made in the tax year 2014-15 to the previous year, 2013-14. The claim to carry back must be made before or at the same time as you complete your tax return for the earlier year. The latest date you can make a claim is the statutory filing deadline. For the 2013-14 return this is 31 October 2014 if you file a paper return, or 31 January 2015 if you file your return electronically.

 

  • Inheritance Tax (IHT) lifetime gifts

It is still possible to make lifetime gifts of any amount to an individual as long as there are no strings attached. The amount of the gift that will be included in your estate for IHT purposes may gradually reduce over time. If you live for more than seven years after the gift was made, then it will be excluded completely from IHT. If the gift becomes taxable on your death, then any tax payable on it is reduced if you survive it by at least 3 years.

 

These are just a few of the existing planning matters that you could or should consider. However, everyone’s circumstances are different and if your financial affairs are complex you should consider a formal tax planning consultation, which we would be delighted to undertake for you.

What has changed since the Budget?

  • For those born after 5 April 1948 the personal tax allowance is £10,000. It was also announced that from 6 April 2015 this would increase to £10,500.
  • The much publicised change to the taxation of salaried members of Limited Liability Partnerships is confirmed. Ongoing vigilance is required to ensure that salaried members’ tax status does not change from self-employed to PAYE by default.
  • All partnerships will be affected by new rules that will allow HMRC, in certain circumstances, to reverse profit or loss sharing between partners if one or more of the partners is a “non-individual” – for example a limited company.
  • From April 2014 employers can claim the new £2,000 Employment Allowance that can be used to set off against their employers’ secondary National Insurance Contributions.
  • From 27 March 2014 and ongoing throughout the 2014-15 tax year, a number of relaxations are being introduced to make the withdrawal of benefits from pension funds more flexible. Any person who is eligible to draw from their pension funds should now take advice as a matter of urgency to determine their best course of action.
  • The Annual Investment Allowance is increased from 6 April 2014 (1 April if a company) to £500,000 (previously £250,000). The new ceiling will apply until 31 December 2015 when the limit could reduce to £25,000. Careful planning is required as, clearly, this measure is intended to encourage businesses to bring forward capital investment during this generous tax relief window. Again planning is required as transitional measures may reduce your entitlement to relief if your business year end date straddles the 6 April 2014 (1 April if a company).
  • Loans provided by an employer to an employee, that are interest free or low cost, did not generate taxable benefits if they were below £5,000. From April 2014 this limit is increased to £10,000.
  • Child care support is increased to 20% of costs capped at a maximum total cost per child of £10,000. All age groups will be brought into this scheme by autumn 2015.
  • From 6 April 2014 the Private Residence Relief final period exemption for Capital Gains Tax purposes is reduced to 18 months, previously it was three years.