To June’s Tax Tips & News, our newsletter designed to bring you tax tips and news to keep you one step ahead of the taxman.
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IHT: main residence nil-rate band
From April 2017, each individual spouse or civil partner will be offered a residence nil rate band (RNRB), which is designed to help pass on a home to ‘direct descendants’, including children or grandchildren, tax-free after their death. The rules governing the inheritance tax (IHT) nil rate band are complex and it is always recommended that prior professional advice is considered. – read more>>
Reform of landlords’ taxation?
The government’s plans to allow landlords to use the cash basis for tax purposes were confirmed in the 2017 Spring Budget, but although the proposed legislation was included in Finance Bill 2017, it did not appear in the much reduced Finance Act 2017, which received Royal Assent on 27 April 2017. It is likely that the proposals have been temporarily shelved, pending the outcome of the General Election, and are expected to reappear in a second Finance Bill later this year. If the provisions are subsequently enacted, they are expected to apply retrospectively from 6 April 2017, i.e. for the current tax year.
Up to and including 2016-17, profits of a property business must be calculated in accordance with generally accepted accounting practice (GAAP), commonly referred to as the accruals basis. Although this remains the case for certain landlords (including companies, LLPs, corporate firms, and trustees of trusts), if the Finance Bill 2017 provisions are enacted, the position for 2017-18 onwards will be more complicated. The general rule is that the cash basis must be used. However, this is subject to some exceptions and there will be scope for the individual to elect to continue using the accruals basis if they so wish. The new property allowance will remove some landlords from income tax, whilst for others, it will provide a deduction from profits of £1,000. – read more>>
CGT annual exemption: use it or lose it!
Capital gains tax (CGT) is normally paid when an item is either sold or given away. It is usually paid on profits made by selling various types of assets including properties (but generally not a main residence), stocks and shares, paintings, and other works of art, but it may also be payable in certain circumstances when a gift is made.
The most common method for minimising a liability to capital gains tax is to ensure that the annual exemption is fully utilised wherever possible. Whilst this is relatively straight-forward where only capital gains are in question, the computation can be slightly more complex where capital losses are also involved.
Where a loss arises on the sale of assets it can be offset against any other gains made in the same year or in the future. However, a strict order applies for setting-off losses. – read more >>
Brexit legislation update
The House of Commons Library has published two research briefing papers entitled Brexit timeline: events leading to the UK’s exit from the European Union and Legislating for Brexit: the Great Repeal Bill.
The Brexit timeline paper provides a timeline of the major events leading up to the referendum and subsequent dates of note, looking ahead to expected events as the UK and EU negotiate Britain’s exit. The Queen’s speech at the State Opening of Parliament, scheduled for 19 June 2017, will include the Great Repeal Bill in the Government’s legislative programme, along with a number of other Brexit-related bills. It is anticipated that the bill will subsequently be passed in late 2017, or early 2018. Broadly, the Great Repeal Bill will repeal the European Communities Act 1972 and, wherever practical and appropriate, convert EU law into UK law from the date Britain leaves. Publication of the bill is expected soon after the Queen’s speech.
The briefing paper Legislating for Brexit addresses each of three main elements of the Great Repeal Bill, namely, the repeal of the European Communities Act (ECA); the transposition of EU law; and the proposed use of delegated powers. In addition, it considers the complex interaction with devolution, including the possibility of consent motions from the Scottish Parliament, the National Assembly for Wales and the Northern Ireland Assembly, the mechanisms for coordination with the devolved administrations, and the replacement of EU framework legislation on matters of devolved competence such as agriculture or fishing. The briefing also covers how the Bill might address the status of EU-derived law post-Brexit, and in particular the judgments of the Court of Justice of the European Union.
The House of Commons Library estimates that 13.2% of UK primary and secondary legislation enacted between 1993 and 2004 was EU related. The review of all EU-related legislation, as well as that which will be transposed by the Great Repeal Bill, makes this potentially one of the largest legislative projects ever undertaken in the UK. The White Paper indicates that the corrections will require between 800 to 1000 statutory instruments!
Crossflow Payments survey finds late payments are still causing serious problems for the UK SME community
What’s the biggest issue facing SMEs in the UK today? Well, as accountants we have found that the principal problem SMEs face is that of late payments. Bigger, more established businesses and companies may be able to survive if suppliers fail to pay on time, but that simply isn’t the case for smaller enterprises. In fact, in some cases late payments can not only stifle growth, but they can determine whether SMEs succeed or survive. – read more >>
PAYE Refresh: HMRC plans to introduce changes to how employees pay their tax
Just because there’s an election on the cards doesn’t mean normal life grinds to a halt. Business carries on as usual, and so do changes at HM Revenues & Customs. What’s the latest change in the pipeline from HMRC? Well, from 31st May, HM Revenue & Customs is about to make changes to the way employers deduct tax from employees’ pay, all under the umbrella of its Making Tax Digital project. – read more>>
June Question and Answer
Q. Before I became registered for VAT, I bought a capital item from a friend, which cost £1,000. As it was a private purchase, I did not pay any VAT. I have now joined the flat rate scheme (FRS) for VAT and have just sold the same item for £500. Should I have charged VAT on the sale and included the gross total in my calculation for flat-rate VAT?
A. HMRCs VAT Notice 733 at paragraph 15.9 confirms that where input tax is reclaimed on capital expenditure goods then, when the goods are eventually sold out of the business, you must account for output tax at the appropriate VAT rate for the sale (not at the flat rate). The guidance goes on to say that if you have not claimed input tax on capital items, either by choice or because it was not allowed, you must include the sale of those items in your flat rate turnover.
Q. I was made redundant from my job on 1 March 2016 and I received a termination package of £25,000. I was then re-employed by the same company on 1 November 2016, but was made redundant from that job too on 1 March 2017. I was paid a further redundancy payment of £10,000 when I left in March 2017. Does the £30,000 redundancy exemption apply to each payment I received?
A. I’m afraid not! Since your employer remained unchanged you are only entitled to one £30,000 exemption. The whole of the first payment of £25,000 is exempt, but only £5,000 of the second payment. You will be taxed on the remaining £5,000 in 2016/1.
Q. I reached state retirement age in March 2016 but deferred receiving my state pension for 12 months. I have been informed that I can now take a lump sum in addition to my regular state pension. Is the lump sum taxable?
A. The lump sum is taxed as income. In simple terms, the rate of tax that applies to the lump sum will be the highest rate that applies to your other income for that tax year. This means that:
– if you are not liable to tax for that tax year on your other income, ignoring any deductions from that income for the marriage allowance or married couple’s allowance, no tax should be deducted from any state pension lump sum you receive;
– if you are liable to income tax, you will pay tax at one of the following rates: – 20% – where taxable income does not exceed the basic rate limit (£33,500 for 2017/18);
– 40% – where taxable income exceeds the basic rate limit but does not exceed the additional rate limit of £150,000; or
– 45% – where taxable income is over £150,000.
When working out what rate of tax you should pay on any state pension lump sum, the special rates that are used to tax savings income and dividend income falling within the basic rate band – the 0% starting rate for savings, savings and dividend nil rates (personal savings and dividend allowances), are ignored. So if all your other income falls within the basic rate band of tax, you will pay tax at 20% on your state pension lump sum.
Similarly if you are a higher rate taxpayer, you will pay tax at the rate of 40% on your state pension lump sum. This will also be the case if you have dividend income that is chargeable to tax at the rate of 32.5%.
If you are an additional rate taxpayer, that is, you pay income tax at the rate of 45% (or 38.1% on dividends), you will pay tax at the rate of 45% on your state pension lump sum.
Note that different income tax rates and bands apply to non-savings and non-dividend income for taxpayers who live in Scotland and Scottish taxpayers. You will need to check the amount of tax deducted from the lump sum at the end of the tax year in which it is paid – it may not be correct. If the wrong tax rate has been used, an overpayment of tax may arise or you may have to pay more tax to make up the difference. HMRC will make the adjustment after the year end.
June Key Tax Dates
19/22 – PAYE/NIC, student loan and CIS deductions due for month to 5/6/2017