January 2012 Tax Planning
A timely round up of pre-tax year end planning opportunities ahead of the personal tax year end of 6 April 2012.
Family allowance removal from higher rate taxpayers from 2013
Maximise your payments into ISA's
Changes in personal circumstances
Changes to Annual Investment Allowance from April 2012
From 6 April 2012 (for sole traders and partnerships) or 1 April 2012 (for limited companies), the generous "annual investment allowances" of £100,000 p.a. is reduced to just £25,000. This is where a business can claim the full cost of equipment or van purchases up to £100,000 as a deduction of their taxable business profits. This will be reduced to just £25,000 p.a., with any surplus spending on capital assets being allowed at just 18% (or even less) against taxable profits, so there is a significant worsening in relief for those business spending over £25,000 p.a. on capital assets.
This is relatively simple for businesses with year ends that align with the above dates, but for businesses with different year ends, especially those with year ends of 30 April, 31 May or 30 June, the impact of this change can be quite nasty. The rules are too complex to go into here, but basically, if a business spends, say £75,000 in March, 2012, it will get far better allowances than if it spent that same £75,000 at, say, the end of April.
The planning point here is that if you're planning to spend over, say, £2,000 on equipment, or vans, etc., in the near future, then you are far better to spend the money and buy the assets sooner rather than later, and certainly before the end of your usual business year end, or the end of March, whichever is sooner. A delay can be very costly in terms of loss of tax relief!
Family allowance removal from higher rate taxpayers from 2013
As has been extensively reported in the media, it is proposed that family allowance will be removed from higher rate taxpayers in 2013. This is worth a couple of thousand pounds p.a. to the average family, so it's loss will be felt across the board. As they stand, the plan is that any household where any individual has total taxable income over the higher rate threshold (currently £42,475) will lose all their family allowance. The plans are vague, but the idea seems to be that it will continue to be paid to the main carer (usually mother), but taken off the higher rate taxpayer through their PAYE or SA tax return - a classic case of "give with one hand and take away with the other". It's a very bad proposal in that excess income of just a pound will result in loss of family allowance of a thousand or two!
So, the answer has to be that you should do absolutely everything possible to know your taxable income with certainty during each tax year, plan your income wherever possible (i.e. dividend timing etc), and if you find yourself caught by the rules by just a few pounds, or a few hundred, it will almost certainly benefit you to take avoidance action to reduce your taxable income, i.e. by investing a small personal lump sum into a personal pension, or making a small gift aid donation to charity, to bring your income back within the basic rate band, and thus not lose your family allowance. Such avoidance tactics can't be done in arrears and we don't have a time machine - they really have to be done in the same tax year before 5 April so you should be considering your income, and getting your bank interest, dividends, etc., organised in say, January or February each year, to give yourself time to take evasive action if necessary.
IR35 Update - Not Good News!
This isn't the place for a full review of what, why and how about IR35. If you're a limited company or partnership offering mainly your own time, rather than selling goods or selling the services of other staff, you really need to know what IR35 is and how it may affect you. See my IR35 webpage for the full details in gory detail.
Latest news is not good! The coalition government confirmed their commitment to keep IR35 last year, and have promised more guidance in the rules, who it will apply to, etc., which are still awaited. This is bad news because it was a Tory manifesto pledge to scrap it, but clearly their LibDem partners didn't see it the same way. So, we're stuck with it for the foreseeable future.
Worse still, is that after lots of cases where HMRC lost in the tribunals/courts, they seem to have had a recent winning streak, which, combined with the government intention of keeping IR35, and the promised introduction of loads more business record checks, can only mean that HMRC will be energised and ready to get out and take up more IR35 cases.
Our advice, as always, is to make sure you get your contracts & working relationship professionally reviewed by the IR35 specialists, such as QDOS Consulting (other providers include Bouer & Cottrell, Accountax, etc)., and join the PCG (Professional Contractors Group) so that you make yourself aware of the legislation and the risks it brings you, and to put yourself in the best possible position to defend yourself, such as negotiating better contract clauses and ensuring that your actual working practices meet HMRC's definitions of self employment as opposed to employment, i.e. by using HMRC's employment status indicator.
Superficial matters, such as having a website, having a substitution clause, etc., are now being proved in the courts to be fairly useless in defending against IR35. What really matters is what you actually do for the client and how you do it, regardless of the wording of the contract.
There can easily be differences of £10,000 or more per year in tax between being caught against not being caught, so it's well worth a hundred pounds or so to get a professional contract review, which may help you re-negotiate to escape IR35, or at least, if you know you're caught, then you can mitigate the tax damage by paying into pensions, or maybe having a company car or other benefits in kind, that wouldn't usually be beneficial if IR35 didn't apply!
Whatever you do, please don't ignore IR35 - there are one-person companies being stung for tens and hundreds of thousands of pounds in tax/nic going back over a number of years. Nor can you simply close down your company if caught, because HMRC do have the power to issue a personal liability notice on the director which makes the director personally liable for tax/nic that should have been paid over via PAYE.
Changes in tax credit rules
Until 2011, even relatively well paid workers could claim child tax credits and a contribution towards childcare costs, and lower paid workers could claim working tax credits. Under the new deficit reduction plans, the thresholds have been reduced, meaning that where you could remain eligible with earnings of around £40,000 at the moment, this threshold is being reduced to around £30,000 for 2012/13.
The "income disregard" is also being reduced - this is where previously you could earn upto £25,000 more than declared at the start of the year, without losing your tax credits, which is now reduced to £10,000. There is also a similar change where income is less than initially declared - the reduction now has to be far higher for your award to be increased.
The average number of working hours is also being increased to be eligible for working tax credit from 16 to 24 per week.
For planning purposes, you need to make sure that you work the required number of hours to remain eligible for working tax credit, and also be very careful with your earnings levels to make sure that you don't accidentally "earn" too much and therefore lose child tax credits. Like family allowance above, you can take advantage of charity and pension payments to reduce your declarable income and thus retain your tax credits, but again, you need to do this "in year" as once the tax year end has passed, you can't go back in time to change things!
As we don't generally offer specific tax credits advice, nor do we deal with tax credit claims, please be aware that tax credit planning doesn't fall within our usual range of services, so please don't expect us to highlight any specific tax credit planning issues for you - this is because tax credits are based on household circumstances, whereas our knowledge of clients is restricted to our client only for income tax purposes, so we don't know our clients' circumstances as regards spouse's employment/income, nor number of children and their ages, nor their childcare costs, etc. If you require specific tax planning advice, then you must ask us to provide it and provide us with full details of all relevant facts within your entire household, our charges for such advice will be charged at our normal hourly rates for time spent, and such advice falls outside our usual retainer packages and fixed fee agreements.
Capital gains tax planning
Although more unlikely these days due to falling property prices and the stock market reductions, if you are lucky enough to have any assets that have gained in value since you bought them, there are two ways of reducing capital gains tax upon sale.
Firstly, each individual has an annual CGT allowance (Currently £10,600 p.a.). So, if you have several assets, or can split an asset to be sold in separate lots, it makes sense to sell some assets every year, with a gain of up to £10,600 and thus pay no capital gains tax. For example, if you have a share portfolio with capital gains of £50,000, you'd pay not CGT if you sold it in five parts over five years (i.e. £10,000 gain per year covered by annual exemption). Contrast this with the position where you sell all in the same tax year, when you have a capital gain of £50,000 in a single tax year, of which £40,000 is taxable at a potential CGT rate of 28% - a CGT bill of £11,200!
Secondly, married couples (and members of legal civil partnerships) can transfer assets between them free of CGT consequences, so it makes sense to utilise each spouse's annual exemption and each spouses lower tax rates. Using the same example above, half the share portfolio could be transferred to the spouse, and it could then be sold off in just three years with no tax, or maybe over 1 or 2 years to benefit from two lots of annual exemptions and maybe the lower CGT rate for lower income spouse, meaning halving or less of the £11,200 CGT bill.
The same applies with other assets chargeable to CGT, such as property, but you have to take care - it's not something to do on a whim, or without professional help as there are some pitfalls to watch out for and some tax-traps for the amateur!
Maximise your payments into ISAs
Every individual has an annual ISA allowance. This is a classic "use it or lose it". If you don't invest in an ISA this tax year, you can't carry forward your allowance to next year, so you lose out permantly. You don't have to invest in stocks & shares if you don't want to take any risks with your money. Most High Street and internet banks offer simple mini cash ISA accounts subject to investment limits and of course the usual interest rate and withdrawal/deposit rules which are set by each bank and contained within their T&Cs for each account. For even those who can't make long term savings, I often recommend using a mini Cash ISA to save towards their personal tax bills, i.e. pay in weekly or monthly and then draw out in January and/or July when the tax is due, the benefit being a little interest on their tax savings, with the added feel good factor of not having tax deducted from their interest.
For longer term savers, you can quickly build up tens of thousands of pounds in tax free savings by using your annual investment allowance every year for several years. For married couples (and civil partnerships), because there is no law against transfers between spouses, an earning spouse can pay money into their non-earning spouse's ISA, thus getting twice the annual allowance to build up tax free savings even quicker.
For investors with larger amounts and who are prepared to take more risk, there is a wide range of stocks/shares and similar ISAs and we'd be happy to recommend an Independent Financial Adviser who could help you plan your investment strategy to take full advantage of the ISA opportunities.
Divorce and Separation
Whilst it's not usually the most important thing people think about during a divorce or separation, you really shouldn't forget about the tax implications.
One example, many people leave their marital home but retain joint ownership of it - often for many years until the children leave home or beyond. Whilst the marital home is exempt from capital gains tax whilst you live in it, once you leave it and live elsewhere, you lose a proportion of your "private residence relief" and so you could find youself with an unexpected capital gains tax liability when it is eventually sold many years later and the proceeds shared between you!
Another example, transfers between spouses are only tax-free whilst you are married, and during the year of separation, once you are divorced, or after the end of the tax year of separation, the exemption no longer applies and transfers are "deemed" to be at market value for capital gains tax purposes, potentially creating a tax liability that could have been avoided if the assets had been transferred earlier!
If you are separating or heading towards divorce, please take professional tax advice from an accountant or solicitor specialising in tax planning. Tax must be part of the overall divorce strategy and agreement as it may be possible to avoid it with a bit of pre-planning, but like most things with tax, once it's happened you're too late to change it!
Changes in Personal Circumstances
Neither ourselves nor HMRC are mind readers. Far too often I see clients who've lost out because they havn't planned properly or havn't realised how a change in circumstances creates potential benefits or detriments to their tax and/or benefits position.
If your personal circumstances change, please tell us. This can be marriage, separation/divorce, changing address, changing name, having children, retirement, starting/ceasing a business, buying/selling an asset, or experience any other significant change in income, assets or investments, then please tell us. If you change name or address, you need to tell HMRC. If you are claiming any benefits then any changes in your household must be reported to the benefit providers without delay.
A common criticism of accountants and solicitors is a lack of pro-active advice. However, we can't offer advice if you don't tell us about your circumstances or your future plans or don't actually ask us for advice. All too often, for example, we only become aware of the sale of a property or share portfolio, after it's happened, more often than not, several months after the tax year end - at such as late stage, there's usually nothing we can suggest to reduce or mitigate the tax consequences!
Please bear us in mind when anything changes in your personal/household life, your income, investments, etc or you start to make plans to make such changes. A quick and simple email to use will take just a minute or two and will give us the opportunity to flag up any tax-traps or highlight any potential tax reducing opportunities. |