Lawpack

A series of changes to the way in which non-domiciles are taxed in the UK have been put forward by HM Treasury and will now be subject to public consultation.

The government hopes that by implementing the tax changes, the system will become fairer, while also encouraging more people to make investments in the UK.

David Gauke, exchequer secretary to the Treasury, said: “It is important that skilled individuals and investors are encouraged to come to the UK from abroad and we recognise the fact that non-domiciles can make a valuable contribution to the UK economy.”

Another proposed alteration is that the tax charge for some long-term resident non-domiciles should be increased to £50,000.

Meanwhile, HM Revenue and Customs has warned people of a phishing email that is currently in circulation, which encourages them to submit their credit and debit card details on an external website.

• Money and Tax News from Lawpack: tax-savings and personal finance advice.

 

Published on: June 20, 2011

by Malcolm Finney of www.taxinsider.co.uk

Care is required to ensure that an individual’s annual exempt amount for capital gains tax (CGT) purposes is not wasted; in particular, where capital losses are also available for offset.

Annual exempt amount

The annual exempt amount refers to the amount of capital gains (after offset of capital losses) that is exempt from CGT for a tax year. For the tax year 2019-20 the annual exempt amount is £12,000; for 2020-21 it is £12,300.

Rates of capital gains tax

For the tax years 2011-12 and 2012-13 CGT is levied at 18 per cent and/or 28 per cent, depending upon the marginal rate of income tax of the individual.

Capital losses

Where an individual makes a capital loss in order for it to be utilised (i.e. offset against any capital gains) it must be claimed by the individual (in the tax return). The manner in which an individual’s capital losses are to be offset against capital gains is set out in legislation.

Thus, any capital losses that arise in a tax year must be offset against any capital gains for that tax year; this is compulsory. Unfortunately, this may mean that an individual’s annual exempt amount for that tax year is wasted.

Example 1

In the tax year 2011-12 Terry sold a number of his assets and made capital gains of £15,000 and capital losses of £6,000. The annual exempt amount is £10,600. Net capital gains = [£15,000 – £6,000] = £9,000. Capital gains subject to CGT = £9,000 – £10,600 = Nil.

As up to £10,600 of net capital gains is exempt from CGT, the surplus £1,600 (i.e. £10,600 less £9,000) is lost, i.e. cannot be used (by carrying it backwards or forwards).

Capital losses of previous tax years which are unutilised may be carried forward indefinitely for offset against subsequent tax year capital gains; where this occurs, current tax year capital losses are offset before any capital losses brought forward from earlier tax years may be used.

However, some control of the usage of capital losses brought forward is possible. Any such losses may be offset against the net gains of the tax year but only to the extent necessary so as not to waste any of the annual exempt amounts for that tax year.

Any remaining unused capital losses may then be carried forward to the next and succeeding tax years until fully utilised.

Example 2

In the tax year 2011-12 Terry sold a number of his assets and made capital gains of £25,000 and capital losses of £5,000. He has unused capital losses brought forward from earlier tax years of £13,000. The annual exempt amount is £10,600.

Net capital gains = [£25,000 – £5,000] – [£13,000] = £7,000. Capital gains subject to CGT = £7,000 – £10,600 = Nil.

However, Terry is allowed to utilise only so much of the capital losses brought forward, which prevents any loss of the annual exempt amount.

Thus: Net capital gains = [£25,000 – £5,000] – [£9,400] = £10,600. Capital gains subject to CGT = £10,600 – £10,600 = Nil.

In this case Terry pays no CGT and has only used £9,400 of his capital losses brought forward, thus leaving £3,600 of capital losses brought forward to be carried forward to tax year 2012-13 and later tax years.

It may also be sensible to defer sales of assets precipitating capital gains into the following tax year if the individual’s rate of income tax is likely to be lower next tax year and/or bring forward to the current tax year sales of assets likely to precipitate capital losses in order to contain any CGT charge to the 18 per cent, instead of the 28 per cent, rate whilst also not wasting the annual exempt amount.

Example 3

In the tax year 2012-13 Harry is a 40 per cent taxpayer. In the tax year 2013-14 Harry expects to be a 20 per cent taxpayer. He has sold assets in 2012-13 making capital gains of £20,600, which after the annual exempt amount of £10,600 produces capital gains subject to CGT of £10,000. CGT is thus 28 per cent of £10,000, i.e. £2,800.

If Harry had made the sales in 2013-14 instead, his CGT would have been 18 per cent of £10,000, i.e. £1,800.

Example 4

In the tax year 2012-13 Harry is a 20 per cent taxpayer as his taxable income is £30,000 (above £34,370 income tax is levied at 40 per cent). He wants to sell assets in 2012-13 which would make capital gains of £20,600, which after the annual exempt amount of £10,600 produces capital gains subject to CGT of £10,000. CGT would then equal [[£4,370 x 18%] + [£5,630 x 28%]] = £2,363.

He also owns an asset on which, if he sold it, he would make a capital loss of £5,630. It would make sense to sell it in 2012-13 as then his net capital gains would be: [£20,600 – £5,630] = £14,970.

After deducting the £10,600 produces £4,370 of capital gains subject to CGT. CGT would then be [18% x £4,370] = £787.

Harry has avoided paying CGT at the rate of 28 per cent.

Practical tip:

Before the end of a tax year check whether the 28 per cent rate of CGT can be avoided by possibly deferring sales on which gains would arise and/or by bringing forward sales on which capital losses would arise.

Related articles

• CGT tax planning – timing is everything!
• How to avoid paying CGT on buy-to-let sales
• More than one home; which one is your main residence?

 

Published on: August 1, 2012

by Sarah Bradford of www.taxinsider.co.uk

HMRC has launched a crackdown on those who trade through an e-market place (such as eBay or Amazon Marketplace) and omit to declare and pay tax on their profits.

To encourage those with undeclared income to come forward, they are offering an e-Markets Disclosure Facility (e-MDF) under which preferential terms are available to those who come forward under the terms of the e-MDF by 14 June 2012.

Details of the terms of the e-MDF are available on HMRC’s website. Those who choose not to take advantage of the disclosure facility may live to regret it. HMRC is contacting various sites requiring them to provide details on members’ online trading.

What is an ‘e-market place’?

An e-market place is an online market or online shop that brings together buyers and sellers. They are often run by a separate company which allows the users to advertise goods and services on their site and may charge a fee for doing so.

Use of sites, such as eBay, may vary from occasional use to sell personal items (e.g. furniture) that are no longer required to the regular selling of goods and services.

A tax bill is unlikely to arise where a person sells personal possessions online, other than a rare case where a capital gain may result. However, where a person is trading, HMRC will want to know as any profit is taxable and, conversely, tax relief is given for any losses that are incurred.

Are you trading?

To ascertain whether you need to tell HMRC about your online selling, it is first necessary to determine whether you are trading. The same rules apply in an e-market situation and it is necessary to have recourse to the `badges of trade’ – a series of indicators the presence of which suggests trading.

To help people work out if they are trading online, HMRC has published the following multiple choice questions on its website.

Question 1

How and why did you get the things you are selling?

A: You bought them so you could sell them again and try and make a profit.

B: You’re selling personal possessions you don’t want anymore, or things that have been given to you.

Question 2

How often do you sell things?

A: You make regular sales.

B: You have only made one sale and don’t think that you will sell anymore.

Question 3

How do you sell?

A: By registering as a business seller or as an online shop with an internet auction site.

B: When you have something to sell you advertise it, but you don’t sell enough to make it worthwhile setting up as a business user or shop.

Question 4

Do you change or improve the things that you sell?

A: You mend or change the things that you buy (that might include splitting them into smaller quantities), so you can make more profit on them.

B: You sell things as they are because you want to sell them quickly.

Question 5

How quickly do you sell things?

A: You sell things that you’ve only just bought and you’re hoping for a profit.

B: You’ve had the things for quite a while.

Question 6

Are you running a business selling similar things?

A: The things you sell are related to your business.

B: The things you sell are not things you see in your trade or business.

Question 7

How did you pay for the things you’re selling?

A: You had to borrow money to pay for the things you are selling.

B: You were given them or paid for them out of your normal living expenses.

Question 8

If you make things you sell, do you charge more than they cost you to make?

A: You try and sell them at a price that covers your costs and brings in a profit.

B: You sell things that you make as a hobby and only want to cover costs.

Mostly A

You’re probably trading and should declare your income and use the e-MDF to tell HMRC about any undeclared income by 14 June 2012.

Mostly B

You’re probably not trading, but be aware of what constitutes trading if your circumstances change and tell HMRC as soon as you start trading.

Practical tip:

Don’t forget about NIC and register as self-employed with HMRC as soon as you start trading.

Published on: June 1, 2012

by Tony Granger of www.taxinsider.co.uk

Both ISAs and pensions are tax-efficient investment vehicles. Both can be invested into broadly similar investment funds. However, each has unique characteristics which, depending on your personal circumstances, will determine which one you opt for – or both.

Over 12 million people save into ISAs each year (HMRC statistics: 2011).

ISAs

ISA means Individual Savings Account. In this tax year 2012-13, an individual can invest up to £11,280 into an investment ISA in stocks and shares, or £5,640 into a cash ISA and the same into a stocks and shares ISA.

You can have a cash ISA from age 16 and an investment ISA from age 18. There is also the new ‘Junior ISA’ available from birth, with a maximum of £3,600 per annum that can be invested by parents for a child.

The ISA investment grows completely tax free, incurs no capital gains or income tax, and is accessible at any time – apart from a Junior ISA which is only accessible from age 18.

Tax on interest and capital growth is, therefore, legally avoided. There is no tax relief on the ISA investment being made.

Pensions

Pension contributions generally get tax relief up front. If you are a basic rate taxpayer, you make a net contribution of £800 and £1,000 is invested, with HMRC contributing £200 or 20 per cent.

Higher rate taxpayers receive an additional 20 per cent (£200 in this example) and additional rate taxpayers 30 per cent (£300).

If you have no income, the maximum you can contribute is £3,600.

With taxable income, you can contribute a maximum of 100 per cent of your salary capped at £50,000 in this tax year.

The pension investment grows tax free; no income tax or capital gains tax is payable on investment income. The 10 per cent tax credit on dividends is not reclaimable (the same with ISAs).

Access

You can access 100 per cent of your ISA investment at any time (unless you have invested into a fixed-term deposit account). Your pension investment can only be accessed if you are age 55 and over.

You are limited to a maximum of 25 per cent in tax-free cash with your pension plan – the balance of your fund buys you a pension or annuity, which is taxable.

The table below sums up the ‘pros’ and ‘cons’ of investing into ISAs or pension funds.

	ISA	Pension Fund
Tax-free growth	Yes	Yes
Contribution limits – maximum	Up to £11,280 per annum	Up to £50,000 per annum
Tax relief on contributions	No	Yes
Income taxable	No	Yes
Children investing	Yes – up to £3,600	Yes – up to £3,600 if no income
Tax-free lump sum	100 per cent at any time	25 per cent from age 55
Access	Any time	From age 55
Investment range	Broad	More flexible choices
Inheritance tax	Not sheltered	Sheltered
Maximum age to contribute	None	Age 75
Insolvency	Not protected	Protected
HMRC contribution	None	At least 20 per cent of the gross contribution
Short-term savings	Yes	No
Invest ISA into pension	Yes	N/A
Invest pension into ISA	N/A	Tax-free cash portion only
Flexibility	Yes	Yes
Retirement savings	Yes	Yes

Both ISAs and pension funds can be good investment choices depending on your objectives for the investments. ISAs are more flexible, with less complicated restrictions and paperwork when it comes to investing.

Pensions can allow for greater contributions annually than ISAs, and have a guaranteed return on each contribution made of 20 per cent from HMRC – whether a taxpayer or not.

However, if you are saving in the short term and require access to funds at any time, then ISAs are more flexible for you (you have to wait until age 55 to access your pension fund and then only 25 per cent is available to you as tax-free cash).

Both ISA investments and pension funds are treated in the same way for tax purposes, with no income tax or capital gains tax payable on fund income or growth, and both can be used for retirement planning.

Practical tip:

1. Utilise your annual ISA allowance of £11,280 in the 2012-13 tax year, or lose it.
2. For long-term savings, consider pension contributions, as the investment returns could be higher with tax reliefs.
3. The tax rules for pensions, in particular, can be complicated. As always, seek advice from a suitably qualified and experienced professional adviser, if necessary.

 

Related articles

• High earners: how to avoid the loss of the personal allowance and save tax at 60%
• Child Benefit – the changes explained

 

Published on: June 1, 2012

by Malcolm Gunn of www.taxinsider.co.uk

On the merger of the Inland Revenue with Customs & Excise to form HMRC, the decision was taken to harmonise the tax penalty regime across all taxes.

The net result is that in the fullness of time inheritance tax (IHT) penalties will, for the first time, follow the same pattern as the penalties applied to other direct taxes.

Failure to make a return

At present, late IHT returns do not incur any significant penalties until more than a year has elapsed from the due date and, even then, the maximum penalty is £3,000. This is set to change.

Although not yet implemented, the legislation has been passed to enable penalties of the greater of £300 or five per cent of the tax due to be charged for an IHT return which is six months late.

After one year, the penalty will be the greater of £300 or 70 per cent of the tax due on the return in cases where there has been deliberate delay but no concealment.

The 70 per cent figure can be reduced to 20 per cent if the return is duly made without prompting from HMRC.

These percentages are subject to a reduction for special circumstances, which HMRC says will only be given in rare cases, and there is also a reasonable excuse provision.

However, the basic message is that late IHT returns will quickly collect substantial penalties once this legislation is brought into effect for inheritance tax purposes.

Errors in IHT accounts

More penalties can be raised by HMRC where there are inaccuracies in IHT returns. These apply where the IHT liability arises on or after 1 April 2010, and given the sums which are commonly involved with inheritance tax, may amount to substantial figures.

The error must be due to careless or deliberate conduct. If HMRC discovers the inaccuracy first, and writes to prompt a disclosure about it, the minimum penalty will be 15 per cent of the tax involved.

The best way to ensure that this penalty is not incurred is to make any disclosure of errors as quickly as possible before HMRC discovers the inaccuracy. In that case, so long as the initial disclosure was not deliberately inaccurate, HMRC is permitted to reduce the penalty to zero.

HMRC has recently put out a statement to allay fears that this means that every correction to an IHT return should be disclosed individually as soon as it is identified.

Provided the corrections to a return do not: total more than £50,000, nor involve land or unquoted shares, and the case is not subject to a check by HMRC, notification to HMRC need only be made 18 months from the date of death or at the point when the estate is finalised.

Problem areas

Inheritance tax is full of all sorts of grey areas as to what constitutes a chargeable transfer and what does not. For example, HMRC is on record as stating that with transfers to employee benefit trusts, there can be an IHT charge, but this is disputed by experts in the field.

So one might take a decision not to make an IHT return in such circumstances contrary to HMRC’s published statement.

If it turns out that the expert opinion on the matter is wrong, and HMRC is right, it is possible that HMRC would then seek substantial penalties under the new provisions for failure to make a return. Obviously, one would vigorously resist penalties in such a situation, but it will be source of further dispute.

Practical tip

Clearly IHT returns must be made more promptly in the future and errors should be corrected before HMRC has the chance to point them out themselves.

Related articles

• 7 steps to saving inheritance tax
• Using business relief to reduce inheritance tax
• How does Inheritance Tax work when someone dies?

 

Published on: June 1, 2012

by Tony Granger of www.taxinsider.co.uk

The personal allowance is a valuable benefit as it reduces your taxable income. However, if you earn in excess of £100,000, then the personal allowance reduces as follows:

If your adjusted net income is over £100,000, you lose £1 for every £2 above the limit. At £114,950 earnings you are left with no personal allowance.

As you are losing your personal allowance on income above £100,000, combined with a tax rate of 40 per cent, your effective rate of tax on earnings between £100,001 and £149,950 is 60 per cent.

There is plenty of motivation to reduce your net adjusted income to below £100,000 to retain your personal allowance, and reduce your tax burden.

The current personal allowances for 2012-13 are:

• Basic personal allowance: £8,105
• Age 65-74: £10,500
• Age 75+: £10,660

Tax rates for 2012-13 are as follows:

• Savings rates 10%: £0 – £2,710
• Basic rate 20%: £0 – £34,370
• Higher rate 40%: £34,371 – £150,000
• Additional rate: 50% over £150,000

Strategy 1: If you are married or in a civil partnership

If you have a lower taxed or earnings spouse, then consider transferring income-producing assets to them. You could save your personal allowance and use theirs more effectively.

The transfer must be outright and unconditional, and there is no capital gains tax (CGT) or inheritance tax (IHT) if you are UK domiciled and living together.

If a 40 per cent taxpayer and you transfer the income-producing asset to a non-taxpaying spouse, you save 40 per cent on interest income and 22.5 per cent on dividend income.

Strategy 2: If you have investments

Redistribute investment capital so that you can reinvest in tax-free investments, or reinvest in tax-efficient investments that produce no income – such as unit trusts and Oeics for growth, or investment bonds. Either try to produce less taxable income or invest for growth.

Strategy 3: Reduce your taxable income through pension contributions

Making a pension contribution (you can make gross contributions of up to £50,000 per annum unless you use carry forward of unused allowances from the past three years, where the total contribution in the current year could be up to £200,000) can save your personal allowance and give you tax back.

The following example shows how this works.

Assume taxable earnings of £120,000 per annum. Male age under 65.

What are the savings in terms of tax should you make a lump sum pension contribution?

Lump sum contribution of £21,000 gross, net £16,800.

Brings taxable earnings to £99,000.

Saves personal allowance of £8,105 (so tax saved on this at £3,242 at 40 per cent, but increased to £4,863 as actually saves 60 per cent, which is the effective tax rate between £100,000 and £114,950).

HMRC also pays back 20% x £21,000 = £4,200, as you are a 40 per cent taxpayer making a pension contribution. In addition, HMRC uplifts your net contribution of £16,800 by £4,200, so that the gross contribution is £21,000.

Total savings in tax: £4,863 + 4,200 = £9,063 for a net pension contribution of £16,800.

This strategy has saved your personal allowance and reduced your tax payable.

Strategy 4: Make charitable donations

Similar to pension contributions above, making charitable donations (gift aid payments) is currently unlimited (although there are steps being made by the government to cap this).

Charitable donations reduce net adjusted income, therefore allowing you to save your personal allowance if you are reducing taxable income to below £100,000. Tax relief is claimed by the charity – the payment is treated as being paid ‘net’.

A higher rate taxpayer may claim additional relief against income tax or CGT (the income tax claim is for the difference between the higher rate and basic rate (40 – 20 = 20%) on the total value of the donation. If you donate £100, the total gift to the charity is £125 as a gross donation. You get tax relief back of 20% x £125 = £25.

Some additional tax tips are that:

1. you can elect for the donation to apply to the previous tax year;
2. you can gift shares, securities, land and buildings. These all reduce your taxable income.

Related articles

• Using capital losses and the annual CGT exemption
• Which is the best – pensions or ISAs?
• Child Benefit – the Changes Explained

 

Published on: May 1, 2012