National living wage increased to £8.21 per hour from april 2019
Keith Witchell
While not referred to in the speech itself, the Budget document confirmed that the National Living Wage for workers aged 25 and over is set to increase from the current level of £7.83 per hour to £8.21 per hour from April 2019, an increase of almost 5%. It is set to reach £9 per hour by 2020.
For further advice on this matter, please contact me.
Annual investment allowance increased to £1m from January 2019
Keith Witchell
The Annual Investment Allowance allows businesses tax relief on 100% of qualifying expenditure on plant and equipment, and is currently set at £200,000 per annum. However, in a welcome measure, this will be extended to £1m per annum for a 2 year period from January 2019 to December 2020.
For further advice on this matter, please contact me.
IR35 reform to hit private sector in 2020, but small organisations exempt
Keith Witchell
Following changes to the operation of the off-payroll working rules (aka IR35) in the public sector, The Chancellor announced that similar changes will be introduced in the private sector from April 2020, shifting the onus for applying the rules from individual contractors to the end user engaging the worker. However, he confirmed that there will be an exemption for smaller organisations.
For further advice on this matter, please contact me.
Personal allowance & higher rate threshold to rise from April 2019
Keith Witchell
The Chancellor confirmed that the government’s target of reaching a tax-free Personal Allowance of £12,500 and a higher rate tax threshold of £50,000 by 2020 will be met one year early, with those amounts being introduced from April 2019. This is a welcome boost to the current Personal Allowance of £11,850 and higher rate tax threshold of £46,350.
For further advice on this matter, please contact me.
Maximise CGT private residence relief with careful planning
Keith Witchell
Rental property owners that live in the property for a period of time may be able to mitigate their potential Capital Gains Tax liabilities on an eventual sale through careful planning.
If you own a buy-to-let property and live in the property as your only or main home for a period of time you will be entitled to some private residence (PR) relief from Capital Gains Tax when you come to sell it.
In such cases, when calculating the Capital Gain on the sale of the property the period that you lived in the property, plus your final 3 years of ownership are exempt from Capital Gains Tax. In addition, you will be entitled to a letting relief which exempts (up to) a further £40,000.
However, in some cases it can be possible to achieve an even better result by a carefully timed transfer of the property between spouses.
This is best explained with an example:
Harry purchases a buy-to-let property in London for £115,000 in 1990, and rents it out. In 2018 he decides to downsize and puts his country house on the market, with the plan being to move into the London property with his wife. They then intend to live there for around 5 years before retiring and emigrating to Australia.
Assuming everything goes to plan, Harry will end up selling the London property in 2023 when it should fetch £1 million. He will have owned the property for 33 years by then so only the final 5 years of ownership (in which he will have lived in the property as his only or main residence) will attract the PR exemption, plus a further £40,000 of letting relief.
He would therefore be taxed on 28/33rds of the gain of £885,000, less £40,000 of letting relief which gives a potential Chargeable gain of £710,909. After offsetting his annual exemption he will be left with a taxable gain of c.£700,000 which will be taxed at 28%, giving him a liability of £196,000.
However, if Harry had transferred the property to his wife (inter-spouse transfers of assets are exempt from Capital Gains Tax) before they moved into the London property in 2018 he could have wiped out the tax liability completely!
The reason for this is that when a private residence is transferred between spouses, the acquiring spouse takes over the donor spouse’s base cost and usually also their ownership period so that they effectively stand in the shoes of the donor spouse for Capital Gains Tax purposes.
A little known quirk to these rules is that for the ownership period to be transferred, the following must apply at the time of the transfer:
(a) the couple must be married and living together; AND
(b) the property in which the interest is being transferred must be their sole or main residence.
As a result, condition (b) can be broken by Harry transferring the property into his wife’s sole name BEFORE they move into it. As a result, Harry’s wife would take over Harry’s base cost of £115,000 but not his ownership period. She would therefore only own it from 2018 onwards and providing the couple live in it as their only or main residence from 2018 to 2023 then all 5 years of her ownership will attract the PR exemption, making the entire gain exempt from Capital Gains Tax.
For further advice on this matter, please contact me.
How does inheritance tax taper relief work in practice?
Keith Witchell
Taper relief reduces the Inheritance Tax payable on gifts made during a taxpayer’s lifetime, providing they survive at least 3 years from making the gift.
Many readers will be familiar with the 7 year rule in relation to making lifetime gifts to mitigate Inheritance Tax: gifts made during a taxpayers lifetime are known as potentially exempt transfers, and will usually be outside the scope of Inheritance Tax after 7 years have elapsed.
For this reason many people gift assets to the next generation/s during their lifetimes in the hope of escaping a 40% Inheritance Tax charge for their beneficiaries to pay when they die. Providing the donor doesn’t continue to derive a benefit from the asset gifted then this usually represents simple and effective Inheritance Tax planning.
But what if you don’t live for 7 years after making the gift? There is a measure called taper relief which reduces the tax payable on gifts once 3 years have elapsed from making the gift. It works on a sliding scale with the tax on gifts reducing by 20% where the donor survives 3 to 4 years, by 40% where they survive 4 to 5 years, 60% where they survive 5 to 6 years, and 80% where they survive 6 to 7 years after making the gifts. This means that an Inheritance Tax saving is achieved after just 3 years.
But does it? A common misconception with taper relief is that it reduces the value of the lifetime gifts to be taken into account when drawing up the Inheritance Tax account on death. In actual fact, taper relief reduces the tax on the lifetime gifts, but not the value of those gifts. Same thing right? Unfortunately not, as when the estate calculation is made, the Inheritance Tax nil rate band (currently £325,000 per taxpayer, and with unused nil rate bands transferring to surviving spouses) is first applied to the lifetime gifts, and then the remainder to the estate upon death.
This means that any lifetime gifts valued below the nil rate band will not get the benefit of taper relief at all, and only the remainder of the nil rate band is available to use against the remaining estate upon death.
However, while the way in which taper relief works is often misunderstood, it is still a very valuable relief, particularly for higher value estates, and making lifetime gifts continues to be an effective planning tool for most families.
Key Facts
- Taper relief reduces the tax on lifetime gifts if the donor survives at least 3 years
- It works on a sliding scale from years 3 to 7
- There is usually no Inheritance Tax on lifetime gifts after 7 years have elapsed
- But the relief only applies to the value of gifts over the Inheritance Tax nil rate band
For further advice on this matter, or for help with Inheritance Tax planning, please contact me.
KRW team news: Callum celebrates ACCA exam success
Keith Witchell
We are pleased to report that Callum Andrews passed his final ACCA exams last month, and is now fully ACCA qualified.
Callum is pleased to finally put his studies behind him, after receiving his ACCA results and finding out that he had passed his final exams with flying colours! He also passed all of his ACCA exams at first attempt, which is a fantastic achievement.
Callum joins Kirsten, Vicci, Anna, Stacey, Keith and Alex as the firm’s qualified accountants.
Congratulations Callum!
Key Facts
- Callum passed his final ACCA exams last month
- He passed all of his ACCA exams at first attempt which is a fantastic achievement
- He joins Kirsten, Vicci, Anna, Stacey, Keith and Alex as the firm’s qualified accountants
Avoid additional 3% stamp duty by buying a second property in a trust
Keith Witchell
The additional 3% surcharge rate of stamp duty land tax that applies on the purchase of a second property is notoriously hard to avoid.
Since the arrival of the 3% surcharge rate of stamp duty land tax in April 2016, we’ve been on the lookout for ways around this extra property tax for our clients. But with the surcharge applying to all limited company residential property purchases, and also catching properties owned by spouses, it seems impossible to avoid.
However, we have found a possible solution, which might be used by clients wishing to engage in family tax planning arrangements to benefit their adult children.
If an interest in possession trust is formed for the benefit of your adult children (i.e., those aged 18 and over) and the settled funds are used to buy a residential property which will be let out, then the 3% stamp duty surcharge refers to properties already owned by those adult children. If they don’t yet own their own properties then the 3% surcharge will not apply to the property purchase.
Similarly, the purchase of a property by a discretional trust will also usually avoid the surcharge.
The downside of the interest in possession trust is that when your adult children later come to buy their own properties they will then face the 3% surcharge on those properties, since the trust property will be classed as their first residential property for these purposes. However, the trust can be converted to a discretionary trust prior to this and this situation can then be avoided.
There are downsides to the trust structure, not least the fact that they face the highest 45% tax rate on their rental profits, although this can be mitigated by distributing the trust income to the adult children so that they can recover some of the 45% tax through their own tax returns.
There is also the need for annual trust accounts and a trust tax return to consider, which brings administrative costs, plus the legal fees associated with the creation of the trust.
In summary then, the use of a trust structure to buy a buy to let property for the benefit of your adult children is well worth considering for the stamp duty land tax saving, but it won’t be for everyone.
Key Facts
- The 3% second property stamp duty land tax surcharge rate is notoriously hard to avoid
- It also applies to all residential properties bought in a limited company (even the first)
- Using an interest in possession trust can avoid the charge if for the benefit of adult children
- A discretionary trust will also usually escape the 3% surcharge
- There are many other tax and administrative implications to consider for a trust
For further advice on this matter, please contact me.
Will Entrepreneurs' Relief apply if I sell a property used in my business?
Keith Witchell
Entrepreneurs’ Relief applies to the sale of business assets or shares in a trading company, reducing the Capital Gains Tax rate to 10% for qualifying disposals.
The main rates of Capital Gains Tax that apply to the sale of assets, are 10% for basic rate taxpayers (see note below) and 20% for higher rate taxpayers, with higher rates of 18% and 28% respectively for the sale of residential properties.
The applicable rates depend on your taxable income for the tax year in which the capital gain arises. If your taxable income is below the higher rate tax threshold (£46,350 for 2018/19) then at least part of your gain will be at the lower rates, with the balance that takes your income plus gains over the higher rate threshold taxed at the higher Capital Gains Tax rate.
However, for the sale of many business assets Entrepreneurs’ Relief is available which gives a Capital Gains Tax rate of 10%, regardless of the level of your income.
This month’s question looks at whether Entrepreneurs’ Relief is available on the sale of a commercial property used by our client’s trading company.
The answer depends on two main factors. Firstly, has any rent been charged to the company for its use of the property. If the answer is yes then the property is considered to be an investment and Entrepreneurs’ Relief will not be available. But if no rent is charged then it is classed as a business asset and Entrepreneurs might be available.
The second factor is that Entrepreneurs’ Relief will only be given where the disposal of the property is associated with the taxpayer’s sale of the business that the property is used in, or its shares. In the case of a limited company, the taxpayer would need to be selling at least 5% of the shares in the business for this to qualify.
In summary then, where a taxpayer owns a property personally that is used in their business, they will only get Entrepreneurs’ Relief on its sale if they have not been charging rent, and if they are also selling the business (or part of it).
Key Facts
- Entrepreneurs’ Relief reduces the Capital Gains Tax on the sale of business assets to 10%
- Where a property is used in your business with no rent charged Entrepreneurs’ Relief may apply
- But only if the sale of the property is associated with the sale of all/part of the business
For further advice on this matter please contact me.
KRW team news: Introducing Sarah Dymond & Sylvia Brookbanks
Keith Witchell
Due to our continued growth, and also to enable some role changes with existing staff, we’ve been on the lookout for another accountant and a Payroll Manager to join our team.
First up, we are pleased to introduce Sarah Dymond, who joined us last month as a Client Manager. Sarah is part ACA qualified with just her case study left to sit before she becomes a fully qualified Chartered Accountant. She joins us from a larger firm in Milton Keynes where her role was focused on preparing year end accounts, and she is looking forward to putting her tax studies into practice in her new role, which will see her assisting clients with their accounts and their tax returns.
Sarah is very bright and she shares our ethos about going above and beyond for clients. Outside of the office Sarah enjoys walking and she also sings in a rock choir and a covers band.
Next up, we are pleased to introduce Sylvia Brookbanks, who joined us this month as our Payroll Manager, following Laura’s move into an Accounts Trainee role. Sylvia will head up our payroll function, and she joins us from a similar role in a local accountancy firm, bringing many years of valuable of experience with her.
Sylvia is exceptionally organised (essential for her role) and has a strong work ethic. Outside of work, Sylvia enjoys going to the theatre, bell ringing, and she is also a keen motorcyclist.
Key Facts
- Sarah joined us last month as a Client Manager
- She will prepare year end accounts and tax returns
- Sylvia joined us this month as our Payroll Manager
- She will be looking after all our clients’ payroll needs
For further advice on this matter, please contact me.