- Make the most of my 2015/16 ISA allowance
- Talk to my accountant about ways to extract profits from my business at the smallest tax cost
- Find out how the timing of dividends and bonuses could reduce my tax bill
- Carry out a review of my pension arrangements
- Put in place a tax-efficient gifting strategy
- Find out the impact of accelerating disposals into the current financial year or deferring them into the next
- Review my estate plan and my Will
- Discuss ways of improving cash flow
- Make sure I am offering tax-efficient staff remuneration packages
- Send my business and personal records to my accountant in plenty of time
- Contact my accountant regarding these and any other issues relating to my business, tax and personal financial situation.
2015/16 Year End Strategies - My Year End ChecklistWritten by Clive Myers
It's that time of year again
Its that time of year where you need to start thinking about your investments and particularly your stock ISA, if you haven't already. Remember if you don't use it you lose it!
It’s that ISA time of year again
Last week I had a client come in to my office with over half a million pounds worth of share certificates that had been accumulated for over 30 years. What a logistical mess. It took my team over 7 hours to work through all of the papers and this is only the first part of the job done.
Now the fun bit starts where we have to contact the various Share Registrars and raise indemnities to sort out missing or invalid certificates. I don’t know if you have ever tried calling a Share Registrar but you are typically on hold for around 10-15 minutes and because it’s a premium rate telephone number it can get expensive. The hold music is pretty bad too but that’s another story.
However, it should really come as no surprise to me. This time of season is especially worse because we are fast approaching the end of the tax year. It’s the time that everybody seems to have awoken from their long winter hibernation. To describe it as a frenzy is not an understatement. It really is with everybody scrambling to get their paperwork in order to avoid paying HMRC huge tax bills.
That’s why I am writing this article to share how a bit of forward planning can save you lots of time and money. Here are a few tips to consider.
- £20,000 ISA Allowance – if you don’t use your allowance you lose it and so you should always make sure that you take advantage of it if you can. Even if you don’t have the cash to put into an ISA, you should be considering moving shares that you hold in certificated or non-ISA form into your ISA.
- The ‘dividend allowance’ falls from £5,000 to £2,000 from April 2018 which means that if you are holding income paying shares outside of a tax wrapper you could get stung. The trick is put money into a SIPP and stock ISA. Or if you want to be really clever you can change income into capital! – watch today’s short video I show you exactly how to do this (link below).
- Don’t hold share certificates. Part of the problem of poor tax planning is not knowing which shares are doing well or badly and how much profit you are making. That’s why to hold your investments in a nominee (electronic) form (which is how 99% of the UK population prefers to hold their shares) makes sense. And don’t worry about attending AGMs, you can still do so just by letting your broker know.
- Change of strategy – with income being taxed much more aggressively than capital growth then it pays to move out of income paying stocks and into capital growth stocks. However, many investors don’t like the idea of this because they believe that capital growth stocks are higher risk than income. Watch today’s video of how to get around this.
- Lifetime ISA (LISA) – this is a great product which I’m surprised so few people know about. If you are aged between 18 and 40 you can invest up to £4,000 into a LISA and the Government will give you £1,000 for free which is a whopping 25%. There are some terms attached but nothing insurmountable.
- Cash ISA – there is still some confusion about cash ISAs so allow me to dispel them. Since 2014 Cash ISAs and Stocks and Shares ISAs are one and the same thing. That means that you can shift from cash to share investments and vice-versa relatively easily. With cash ISAs paying less than inflation it does make me wonder why investors may want to hold cash ISAs at all, but that’s another article for another time.
- SIPP is a great way to shield from IHT. If you have a normal pension you should consider getting tax advice on whether it makes sense to convert it into a SIPP. All pensions are exempt from Inheritance Tax but SIPPs give you greater control. If you are working then making pension contributions and earning higher rate tax relief on the way in and only paying basic rate tax on your drawdowns is one way that many savvy investors are really utilising this tax vehicle. However, like all products that prove popular with the public, don’t be surprised if the Government takes it away or changes the tax breaks before too long. (The Government has already reduced the life time allowance on more than one occasion so they could do it again.
- SIPP Lifetime Allowance – one big problem that investors sometimes face is being TOO successful. If they invest wisely and their SIPP value exceeds the lifetime allowance which currently stands at £1m, then they will get charged a whopping 55% on any withdrawals. Well the good news there is something that you can do about that. If you want to know more call our offices.
Just so that you know I am not a tax advisor and I’m not giving tax advice. However, I do work very closely with a number of tax specialists who help my clients to achieve their objectives. Over the years I have picked up the tricks of the trade and found it to be easier than you might normally imagine. Understanding basic tax is essential to being successful in the long term and whilst it’s not a topic of great excitement it’s necessary so don’t hold it off until next year.
One Less Thing to Worry About: Advance Assurance For R&D Tax Relief
By Norma ThomasYou might've heard rumblings across the Research and Development landscape about the UK government's new Advance Assurance scheme for R&D claims. So, what's all the fuss about? Is the system going to have a real impact, or is it just another hoop to jump through? Let's take a look and see what it's all about.
The idea itself is pretty solid, on the face of it. The government has finally noticed what we at RIFT have been saying for ages - that far too few businesses with big ideas are getting the R&D Tax Credits they're entitled to. With that in mind, they're trying to remove at least one of the obstacles keeping those businesses out: the worry about whether or not they'll be rejected, having put the time in to make a claim.
Here's how it will work: if you're a smaller business looking to make your first R&D Tax Relief claim, you’ll be able to send some details about your business and projects to HMRC and they'll let you know if you qualify. If you do qualify, as long as you stick to the plan you outlined, they'll automatically approve your claims for the first three accounting periods, without asking any further questions. Honestly, it sounds pretty good, in principle.
Of course, you still have to fit the profile they're targeting with the scheme. To qualify for Advance Assurance, your business can't:
- Have claimed R&D Tax Relief before.
- Have an annual turnover of more than £2 million.
- Have 50 or more employees.
There are a few other technical restrictions as well, but basically they've got their sights set firmly on newer and smaller businesses, or those who are flexing their R&D muscles for the first time. For the time being, at least, though, it seems you'll hit a few inevitable teething problems when you apply for Advance Assurance. For instance, you can only reply by post so far, as they don't have an online version of the form yet. RIFT work closely with HMRC, though, and we’ll be giving them lots of feedback on how they can improve the initial proposal to make it more supportive of small businesses.
Once you've had your application accepted, you ought to get an answer within about three months. It's worth noting that a rejection at this point won’t mean you can't claim R&D Tax Credits at all for your projects. You can still make a claim through the normal channels. Also, those size restrictions listed above only apply at the point when you make your application. If your fledgling hits its growth spurt while you're still in the scheme, the change in your size won't affect your Advance Assurance.
Overall, it's good to see the government making steps in the right direction, and anything that encourages businesses to consider R&D Tax Relief is good news in our books.
2015/16 Year End Strategies - How to keep more of your profit
There are a multitude of ways to extract profits from your company. However, it is important to pick the best option to suit you as each method has implications – not just for tax, but for your business as a whole.
Here we outline some of the key areas to consider.
Corporation tax is the tax due on a company’s profits, while personal income tax generally applies to what is drawn out of the company by means of a salary, bonus or other form of remuneration.
Dividend versus salary/bonus
The question of whether it is better to take a salary/bonus or a dividend requires careful consideration, particularly as sweeping changes to the dividend taxation rules are planned for 2016.
A dividend is paid free of NICs, whilst a salary or bonus can carry up to 25.8% in combined employer and employee contributions. However, a salary or bonus is generally tax deductible for the company, whereas dividends are not. 5 April 2016 is the last date for paying a 2015/16 dividend, and any higher or additional rate tax on that dividend will not be due until 31 January 2017.
Note that the Government has announced its intention to abolish dividend tax credit from 6 April 2016 and introduce a new Dividend Tax Allowance of £5,000 a year. The new rates of tax on dividend income above the allowance will be 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers and 38.1% for additional rate taxpayers. These rates replace the current effective tax rates of 0%, 25% and 30.6%. While there will still be benefits for a director-shareholder taking a dividend over a salary, the amount of tax saved will be reduced. It may therefore be worth increasing your dividends before 6 April 2016, although there may be other tax issues to consider, such as loss of the personal tax allowance if your total ‘adjusted net income’ exceeds £100,000.
More ways to extract profit
You may also want to consider alternative means of extracting profit, which might include the following:
For those expecting to liquidate their company in the next few years, profits might be left in the company to be eventually drawn as capital.
Current rules allow retained profits distributed on liquidation to be subject to capital gains tax, with a potential tax rate as low as 10% if Entrepreneurs’ Relief is available. However, caution is advised as high cash reserves held without a clear business purpose or substantial investments can potentially jeopardise Entrepreneurs’ Relief or IHT Business Property Relief.
As the above points suggest, incorporation may give some scope for saving or deferring tax than operating as a self‑employed person or partner.
Of course, incorporation may not suit all circumstances, and the ‘IR35’ rules specifically counter the use of ‘personal service companies’ to reduce tax, but we will be pleased to discuss how incorporation might apply to you and your business.
Tax‑free allowances, such as mileage payments, apply when you drive your own car or van on business journeys. The statutory rates are 45p per mile for the first 10,000 miles and 25p per mile above this. If you use your motorbike the rate is 24p per mile, and you can even claim 20p per mile for using your bicycle!
Employer pension contributions can be a tax‑efficient means of extracting profit from a company, as long as the overall remuneration package remains commercially justifiable. The costs are usually deductible to the employer and free of tax and NICs for the employee.
Where property which is owned by you is used by the company for business purposes, such as an office building or car park, you are entitled to receive rent, which can be anything up to the market value, if you wish.
The rent is usually deductible for the employer. You must declare this on your Tax Return and pay income tax, but a range of costs connected with the property can be offset. On the other hand, receiving rent may mean a bigger capital gains tax bill if or when you decide to sell the property, so care needs to be taken to weigh up the pros and cons.
2015/16 Year End Strategies - Your estate – lifetime planning for big tax saving
Formulating an estate plan that minimises your tax liability is essential. The more you have, the less you should leave to chance.
If your estate is large it could be subject to inheritance tax (IHT), which is currently payable where a person’s taxable estate is in excess of £325,000 (the ‘nil-rate band’). The Government has announced an additional nil-rate band is to be introduced where a residence is passed on death to descendants such as a child or a grandchild. This will initially be £100,000 in 2017/18, rising each year thereafter to reach £175,000 in 2020/21.
IHT is currently payable at 40% on the value of taxable assets exceeding £325,000, and in some cases the value of assets given away up to seven years before your death can be brought back into account. So if you own your own home and have some savings and other assets such as shares and securities, your estate could be liable.
It is essential to start planning early if you want to minimise your exposure to IHT. We can help you, but here are some of the key areas to consider…
Take advantage of reliefs of up to 100%
There are a number of IHT reliefs available, perhaps most importantly relief on business and agricultural property, which effectively takes most of such property outside the IHT net. As always, there are detailed conditions, including a two-year minimum holding period, but business and agricultural property will generally attract 100% or 50% relief.
IHT exempt transfers between spouses
Transfers of assets between spouses or civil partners are generally exempt from IHT, regardless of whether they are made during a person’s lifetime or on their death. In addition, the nil-rate band may be transferable between spouses and civil partners. This means that if the bulk of one spouse’s estate passes, on their death, to the survivor, the proportion of the nil-rate band unused on the first death goes to increase the total nil-rate band on the second death.
David and Jane were married. David died in May 2008, leaving £50,000 to his more distant family but the bulk of his estate to Jane. If Jane dies in 2015/16 her estate will qualify for a nil-rate band of:
- Nil-rate band on David’s death £312,000
- Used on David’s death £50,000
- Unused band £262,000
- Unused percentage 83.97%
- Nil-rate band at the time of Jane’s death £325,000
- Entitlement 183.97%
- Nil-rate band for Jane’s estate £597,902
Other exempt transfers include:
• small gifts (not exceeding £250 per tax year, per person) to any number of individuals
• annual transfers not exceeding £3,000 (any unused amount may be carried forward to enhance the following year’s exemption)
• certain gifts in consideration of marriage or civil partnership
• normal expenditure out of income
• gifts to charities.
A programme of lifetime gifts can also significantly reduce the IHT liability on your estate. As long as you survive the gift by seven years and no longer continue to benefit from the gift yourself, it will escape IHT. Gifts also have the advantage of allowing you to witness your family members benefitting during your lifetime.
A discount can also apply where lifetime gifts were made between three and seven years before death (note that the discount applies to the tax on the gift rather than the gift itself, so, as above, these ‘old’ gifts can significantly increase the final bill unless we have been able to cover them for you with an exemption or relief).
Trusts can be used to help maintain a degree of control over the assets being gifted, especially useful in the case of younger recipients. Life assurance policies can be written into trust in order that the proceeds will not form part of the estate on your death. Talk to us about using trusts to meet your planning needs.
Your Will is your ultimate opportunity to get money matters right. You should review your Will at regular intervals to ensure that it reflects changes in your family and finances, is tax-efficient, and includes any specific legacies you would like to give, including tax-free donations to charity.
2015/16 Year End Strategies - Business motoring – drive down your tax bill
The company car can be an important part of the remuneration package for many employees – and a crucial business tool for employers. However, tax and national insurance costs could mean that the company car is not the most tax-efficient option for either employer or employee.
The car benefit and car fuel benefit (where fuel for private use is provided with the car), on which you pay income tax at up to 45%, is calculated at up to 37% of the list price (car) and the same percentage on a notional £22,100 (fuel).
It may well be worth conducting a complete review of your company car policy, as it could prove more beneficial to pay employees for business mileage in their own vehicles at the statutory mileage rates, especially if their business mileage is high.