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The Autumn Statement in 60 seconds
In case you missed the extensive media coverage of George Osborne’s Autumn Statement, here is a very quick summary of the main tax changes.
1. Enforced digitalisation
It has been decided that HRMC will give most taxpayers a digital tax account. The benefit of this is that you will be able to view your tax position online, but the disadvantage is that you will have to keep the account up to date. If you are self-employed or a landlord, you will be expected to input your income and expenses every quarter, instead of waiting until after the end of the year to inform HMRC about your profits. Some experts believe you may also be expected to pay your tax sooner. Pensioners and employees will not be given digital tax accounts unless they have an additional source of income in excess of £10,000 per year.
2. Automatic tax bills
HMRC is going to replace self-assessment with an automatic tax bill based on the information it already holds about your finances. This, it is claimed, will only be used when HMRC believes you have simple tax affairs. If you do receive an automatic tax bill, you would be well advised to check it immediately. If you do not challenge the bill within a very limited period, it may well become final and HMRC will then collect the tax.
3. Salary sacrifice schemes
Many employees forego salary in order to receive a benefit in kind, such as childcare, savings or a higher pension. When this happens, tax and/or National Insurance contributions may be reduced or even removed completely. George Osborne has warned that he is concerned about salary sacrifice and is considering change.
4. Capital gains tax
As it currently stands, capital gains tax (CGT) on property is paid after the end of the tax year as part of your normal tax return. However, the timescales are to be tightened so that CGT falls due 30 days after a property is sold.
5. Pensions
The Government has announced that it is giving serious consideration to scrapping the existing pension tax regime. It would be replaced, if its proposals end up being adopted, by a system similar to that of an individual savings account (ISA). At the moment, anyone who pays money into a pension scheme gets tax relief but pays income tax on benefits. The plan is to switch the system so that money you pay into your pension/ISA would come out of your taxed income. The Government may well then add a bonus to your savings, but when you took your pension out it would be tax-free. If the change goes ahead, it will be the most major shake-up of pensions seen for many years.
6. Annuities
If you are aged 55 or over, you are now permitted to take money out of your pension savings on a fully flexible basis. Many retired people have already used their pension savings to buy an annuity. These annuities give you a regular monthly pension usually for the rest of your life. George Osborne has now announced that it will be possible to sell your annuity in the marketplace. So if you have an annuity of, say, £500 a month, you should be able to sell it and get a lump sum instead. In effect, therefore, you are swapping future income for an immediate cash sum.
7. Travel and subsistence
New, stringent rules are to be put in place to stop contractors from obtaining tax relief on the costs of their travel to work. The cost of meals and accommodation related to that travel are also likely to be severely limited. Further crackdowns are planned on personal service companies.
8. Windings-up
One of the most beneficial tax loopholes for those who own shares in private companies is to be closed. As it currently stands, when companies are wound up, the money inside the company can usually be paid out as capital. Under these circumstances, the more generous CGT regime applies. This method of reducing one’s income tax bill is likely to be blocked in the near future.
Relief for entrepreneurs…
Prior to the Autumn Statement, rumours were rife that entrepreneurs’ relief would be restricted or even abolished. Thankfully, this did not occur. However, George Osborne did say: “To reduce opportunities for income to be converted to capital to gain a tax advantage, the Government will shortly publish a consultation on the company distributions rules, and will amend the transactions and securities rules and introduce a targeted anti-avoidance rule.” Clearly, this statement does not really offer much of a clue as to what the Government plans. However, if you are intending to take advantage of entrepreneurs’ relief at some distant point in the future you may like to consider acting sooner rather than later.
When entrepreneurs’ relief is used, the CGT rate drops to just 10%. Even if new legislation isn’t introduced, my guess is that the Treasury will increase its effort to restrict taxpayers from benefitting. For example, I expect more challenges where an entrepreneur has disposed of only part of his business. It could, in particular, affect those with furnished holiday lettings. Imagine, for example, that a landlord sells just one of his furnished letting properties. If he sells it to another investor, he should be able to take advantage of the entrepreneurs’ relief. But if he sells it to someone who uses the property as a primary residence, such relief may be denied. Incidentally, another area where HMRC has become vigilant is where a shareholder director or shareholder employee has resigned from his position prior to selling his shares. You must be working as a director or employee of a company in order to claim entrepreneurs’ relief.
VAT dodge
Here’s a reminder to readers that there may be situations where it is beneficial to first register for VAT and then, at a later stage, to deregister. Take, for example, someone planning to convert a property into holiday lettings. Before you start the work you could register for VAT and claim back all the input tax on the conversion costs on the basis that holiday lettings are taxable. Then, as soon as your building work is completed but before any guests rent the flats, you could deregister because your expected sales are likely to be less than £80,000 in the forthcoming year.
The benefit of not being a GROB
Elsewhere in this issue of TSTR Alan Pink writes about different ways to avoid inheritance tax (IHT). As he points out, it is now very difficult to pass one’s home to a child as a way of avoiding IHT. In the past, of course, this was possible, providing one lived seven years, the gift being referred to as a potentially exempt transfer, or PET. However, as he hints, there is a way of passing your home to a child and saving IHT. In order to do so you have to avoid making something called a ‘gift with reservation of benefit’, or a GROB. A GROB is when you continue to receive a benefit from the gifted property, and HMRC will treat it as if it still is in your estate. To give you an example of a fairly common GROB, living rent-free in a house that you had supposedly given away would qualify. Happily, however, there is an exception to the rule that may suit you. When half of a property is given away, but both the giver and the recipient live in the property and divide the bills proportionally, this will not be a GROB and IHT won’t be due, providing you survive the requisite seven years. The one caveat I would offer in this regard is if you and the child live separate lives in separate parts of the house HMRC may say that you are not sharing accommodation within the meaning of the legislation. Moreover, if your child were to move out of the house within the seven-year period then the gift would, once again, become a GROB and then the whole house would be subject to IHT once more. One way around this, however, would be to pay market rent to your child for their share after they have moved out. What else should you know? It is important that the property you are gifting has been your main residence and that your child does not have another property that could be treated as their main residence.
Take advantage of termination payments
I don’t imagine there is a single employee in the UK who isn’t aware of the fact that if their employment is terminated they could be entitled to a payment of up to £30,000 tax-free. This, in my opinion, has always been one of those nice little perks that a creative entrepreneur can easily take advantage of. Over the years, there must have been tens of thousands of owner/directors making themselves redundant and claiming the relief. Anyway, it is likely that the rules surrounding termination payments are going to change. HMRC has issued a consultation document which implies that there will be strict limits placed on the £30,000 exemption. If you want to take advantage of this useful benefit then my advice would be to consider doing so sooner rather than later.
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