One week to go

Next week sees the end of the 2016-17 tax year. On the 6 April 2017, any action you take to minimise your tax liabilities for 2016-17 will be largely ineffective. So what, if anything, can you still action this week?

Capital gains tax (CGT)

The amount of tax free gains you can make during 2016-17 is £11,100. This exempt allowance is available to all UK resident tax payers, accordingly, married couples and civil partners both qualify.

If you have no gains chargeable to CGT thus far during 2016-17, there is still an opportunity to crystallise gains during this coming week, up to the annual exemption limit, and no tax will be payable. For example, if you have a shareholding that you have been considering for disposal, and you could sell a sufficient quantity of shares before 6 April 2017, the disposal would utilise your allowance without creating a tax liability.

The important matter to note is that this annual exemption is lost if you don’t use it; it cannot be carried forward and used in later years.

Inheritance tax (IHT)

There are a number of annual reliefs that you can use without creating a chargeable event for IHT purposes. For example, the exempted annual gifts you can make are:

You can give away £3,000 worth of gifts each tax year (6 April to 5 April) without them being added to the value of your estate. This is known as your ‘annual exemption’.

You can carry any unused annual exemption forward to the next year – but only for one year.

Each tax year, you can also give away:

  • wedding or civil ceremony gifts of up to £1,000 per person (£2,500 for a grandchild or great-grandchild, £5,000 for a child)
  • normal gifts out of your income, for example Christmas or birthday presents – you must be able to maintain your standard of living after making the gift
  • payments to help with another person’s living costs, such as an elderly relative or a child under 18
  • gifts to charities and political parties

You can use more than one of these exemptions on the same person – for example, you could give your grandchild gifts for her birthday and wedding in the same tax year.

Small gifts up to £250

You can give as many gifts of up to £250 per person as you want during the tax year as long as you haven’t used another exemption on the same person.

Company car users

If your employer pays for your private fuel this will create a fairly significant income tax charge for 2016-17. You may save money if you calculate the cost of the fuel provided and reimburse your employer. For 2016-17, you need to do this before 6 April 2017. (For 2017-18, the rules are being relaxed slightly and you will have until 6 July 2018 to make an equivalent reimbursement for 2017-18).

To make the calculation you will need your private mileage for 2016-17 and multiply this by the advisory fuel rate for your vehicle. These range from 7p to 22p per mile. See the published list at https://www.gov.uk/government/publications/advisory-fuel-rates/advisory-fuel-rates-from-1-march-2016

These are just a few of the actions you could take to minimise your tax payments during what’s left of 2016-17. If you are unsure what your options may be, please call, we would be delighted to help.

New childcare funding choices

The government have launched a new website aimed at parents who may be able to claim for support with childcare costs.

The web address is https://www.childcarechoices.gov.uk/.

How Tax-Free Childcare works

Working parents will be able to apply, through the childcare service, to open an online childcare account. For every £8 that families or friends pay in, the Government will make a top-up payment of an additional £2, up to a maximum of £2,000 per child per year (or £4,000 for disabled children). This top up is added instantly and parents can then send electronic payments directly to their childcare providers.

All registered childcare providers – whether nannies, nurseries or after school clubs – can sign up online now to receive parents’ payments through Tax-Free Childcare. Once childcare providers have signed up they will appear on the Childcare Provider Checker. This allows parents to check whether childcare providers have already signed up for Tax-Free Childcare.

How 30 hours’ free childcare works

Eligible parents will be able to apply online through the childcare service. They will receive a code – this will allow parents to arrange their childcare place ahead of September 2017. Parents can take their code to their provider or council, along with their National Insurance Number and child’s date of birth. Their provider or council will check the code is authentic and allocate them a free childcare place.

Parents can quantify the amount that they may be able to claim using the Gov.uk childcare calculator at https://www.gov.uk/childcare-calculator

Lifetime ISAs

A reminder that from 6 April 2017 Lifetime ISAs are available as an alternative tax-free investment.

The lifetime Individual Savings Account (ISA) is a longer term tax-free account that receives a government bonus.

Details published 17 February 2017 are:

You can open a lifetime ISA if you are aged 18 or over but under 40. You must be either:

  • resident in the UK
  • a Crown Servant (for example a diplomat or civil servant)
  • the spouse or civil partner of a Crown Servant

As with other ISAs, you won’t pay tax on any interest, income or capital gains from cash or investments held within your lifetime ISA.

Saving in a lifetime ISA

You can save up to £4,000 each year in a lifetime ISA. There is no maximum monthly savings contribution, and you can continue to save in it until you reach 50. The account can stay open after then but you can’t make any more payments into it.

The £4,000 limit, if used, will form part of your overall annual ISA limit. From the tax year 2017 to 2018, the overall annual tax limit will be £20,000.

For example, you could save:

  • £11,000 in a cash ISA
  • £2,000 in a stocks and shares ISA
  • £3,000 in an innovative finance ISA
  • £4,000 in a lifetime ISA in one tax year

Your lifetime ISA won’t close when the tax year finishes. You’ll keep your savings on a tax-free basis for as long as you keep the money in your lifetime ISA.

Lifetime ISAs can hold cash, stocks and shares qualifying investments, or a combination of both.

Government bonus

When you save into your lifetime ISA, you will receive a government bonus of 25% of the money you put in, up to a maximum of £1,000 a year.

Withdrawals

You can withdraw the funds held in your lifetime ISA before you’re 60, but you’ll have to pay a withdrawal charge of 25% of the amount you withdraw.

A withdrawal charge will not apply if you are:

  • using it towards a first home
  • aged 60
  • terminally ill with less than 12 months to live

If you die, your lifetime ISA will end on the date of your death and there won’t be a withdrawal charge for withdrawing funds or assets from your account.

Transferring a lifetime ISA

You can transfer your lifetime ISA to another lifetime ISA with a different provider without incurring a withdrawal charge. If you transfer it to a different type of ISA, you will have to pay a withdrawal charge.

Saving for your first home

Your lifetime ISA savings and the bonus can be used towards buying your first home, worth up to £450,000, without incurring a withdrawal charge. You must be buying your home with a mortgage.

You must use a conveyancer or solicitor to act for you in the purchase, and the funds must be paid direct to them by your lifetime ISA provider.

If you are buying with another first time buyer, and you each have a lifetime ISA, you can both use your government bonus. You can also buy a house with someone who isn’t a first time buyer but they will not be able to use their lifetime ISA without incurring a withdrawal charge.

Your lifetime ISA must have been opened for at least 12 months before you can withdraw funds from it to buy your first home.

If you have a Help to Buy ISA, you can transfer those savings into your lifetime ISA or you can continue to save into both – but you will only be able to use the government bonus from one to buy your first home.

Buy-to-let and the changing tax landscape

Buy-to-let property owners have been singled out in recent budgets for some quite draconian tax changes.

One of the most pervasive starts 6 April 2017. From this date, tax relief for the cost of borrowing – predominately interest charges – will be progressively withdrawn and replaced with a basic rate tax credit.

Between now and the 6 April 2020 relief will be tapered as follows:

 

2017-18 The deduction of allowable finance costs will be restricted to 75%, with 25% being available as a basic rate income tax deduction.
2018-19 The deduction of allowable finance costs will be restricted to 50%, with 50% being available as a basic rate income tax deduction.
2019-20 The deduction of allowable finance costs will be restricted to 25%, with 75% being available as a basic rate income tax deduction.

 

A worked example: consider the case of Linda, who has a buy to let with an annual mortgage interest charge of £10,000. Up to April 2017 she will be able to deduct the full amount, £10,000, from her property income before she pays tax. Obviously, the higher her rate of income tax the more tax relief she will currently receive.

 

The table below sets out the effective loss of tax relief if Linda is a higher rate or additional rate taxpayer. If Linda only pays tax at the basic rate there is no change in her income tax position.

 

  2016-17 2017-18 2018-19 2019-20 2020-21
Finance cost allowed 10,000 7,500 5,000 2,500 0
If additional rate taxpayer:
Additional rate 45% relief 4,500 3,375 2,250 1,125 0
Basic rate deduction 0 500 1,000 1,500 2,000
Total tax relief 4,500 3,875 3,250 2,625 2,000
Net finance costs paid 5,500 6,125 6,750 7,375 8,000
If higher rate taxpayer:
Additional rate 40% relief 4,000 3,000 2,000 1,000 0
Basic rate deduction 0 500 1,000 1,500 2,000
Total tax relief 4,000 3,500 3,000 2,500 2,000
Net finance costs paid 6,000 6,500 7,000 7,500 8,000

 

Because the amount of tax relief is gradually reduced, from April 2017 to April 2020, the cash flow impact is progressively negative for higher rate or additional rate tax payers. In our example, if Linda is a higher rate taxpayer her net finance costs (after deduction of tax relief) increase from £6,000 in 2016-17, to £8,000 in 2020-21.

A further consequence of this change is that the rental income for tax purposes increases with no increase in rents: the finance costs are added back. In some circumstances this may mean that basic rate taxpayers become higher rate tax payers.

Buy-to-let property owners who have not yet considered how this change will affect their property business should set aside some time with their advisors as soon as possible. We would be delighted to help.

Tax Free Pension Advice

People planning their retirement will be able to withdraw up to £1,500 from their pension pots tax-free to pay for financial advice, under recent plans unveiled by the government.

 

The new Pension Advice Allowance, first announced at Autumn Statement 2016, will enable people to withdraw £500 up to three occasions from their pension pots tax-free to put towards the cost of pensions and retirement advice from April 2017.

 

Following an 8-week consultation, the Economic Secretary to the Treasury, Simon Kirby, has today confirmed that the £500 allowance:

  • can be used a total of three times, only once in a tax year, allowing people to access retirement advice at different stages of their lives, for example when first choosing pension or just prior to retirement
  • will be available at any age, allowing people of all ages to engage with retirement planning
  • can be redeemed against the cost of regulated financial advice, including ‘robo advice’ as well as traditional face-to-face advice
  • will be available to holders of “defined contribution” pensions and hybrid pensions with a defined contribution element, not “defined benefit” or final salary type schemes

 

Pension providers will be able to offer the allowance to their members from April 2017.

 

Research has found that when approaching retirement only 22% of people know the value of their pension pot and only 14% of people would be confident planning their retirement goals without financial advice.

 

According to Unbiased, UK savers with a pension pot of £100,000 save an average of £98 more every month and receive an additional income of £3,654 every year of their retirement if they take financial advice.