Tax changes taking effect from 6 April 2018
As we approach the end of the current tax year and the start of a new one, we have set out below a few tax year end planning suggestions as well as a reminder of the various tax changes taking effect from 6 April 2018.
As always, please contact us if you require any further help or advice.
Tax year-end planning
As the end of the current tax year is fast approaching, we recommend that individuals review their tax affairs to ensure they are making full use of all available reliefs and that their financial affairs are structured as tax-efficiently as possible.
CGT Annual Exemption
For the current tax year, the annual CGT exemption is £11,300, which means that capital gains up to that amount can be made tax-free.
CGT rates are also the lowest they have ever been, at either 10% or 20% depending on the individual’s taxable income for that year, compared to income tax rates of up to 45%, so some taxpayers may feel it is worth making use of these low rates to release some capital.
Ensure that, where possible, you are making use of your full ISA allowance each year. The annual limit for ISAs is £20,000 and any funds invested in ISAs are exempt from income tax and capital gains tax. Some shares held outside of an ISA may be eligible to be held in one and where the individual has their full CGT annual exemption available (£11,300 for 2017/18) consideration can be given to selling non-ISA shares and buying them back within the ISA wrapper. As always, advice should be taken before carrying out such a transaction.
For those individuals whose children have Junior ISAs (JISAs), up to £4,128 a year can be invested in the ISA on the children’s behalf in the 2017/18 tax year. Any income earned on such investments will not be taxable, even where the parents provide the funds.
For those not yet paying into a pension, or not currently making maximum contributions, it may be worth speaking with a Pensions Adviser to see what contributions can be made. Tax relief is available on contributions of up to £40,000 a year (depending on the individual’s income levels) and in some cases it is possible to make use of unused relief from the previous three tax years.
Pensions advice is a complicated area and we will be happy to recommend Pension Advisers that we work with who will be able to assist.
IHT annual exemptions
Where possible, it is always worth making use of the available IHT annual exemption each year. This is currently £3,000 and, where the exemption has not been used in the previous tax year, this can be carried forward one year before being lost.
In addition to the annual exemption, individuals can also make small gifts of up to £250 each to any number of donees.
Don’t forget that there is also an exemption for gifts made on marriage or civil partnership. Parents can gift £5,000 IHT-free, remoter relatives or one of the parties to the marriage can gift £2,500 IHT-free and anyone else can gift up to £1,000 IHT-free.
For individuals who may have income in excess of their needs, it is possible to make regular gifts out of surplus income IHT-free; however, advice should be sought on this before making such gifts and we will be happy to advise, if required.
As the dividend allowance is reducing to £2,000 from 6 April 2018, business-owners may wish to consider making dividend distributions ahead of the current tax year end, so that the recipient can make use of the higher £5,000 allowance.
For those with investment portfolios who will be impacted by the reduction in the dividend allowance, advice should be sought from their investment advisers as to whether any changes can be made to rebalance their income stream.
Non-UK domiciled individuals
Any non-UK domiciled individuals who will become deemed UK domiciled for all taxes from 6 April 2018 (i.e. they have been resident in the UK for 15 out of 20 tax years) should consider settling funds on to protected trusts to ensure that their worldwide assets do not become subject to UK taxes.
This is a complex area of tax law and we would recommend that anyone who believes they will be affected contacts us for further advice.
Those non-UK domiciled individuals with offshore accounts who have claimed the remittance basis at any point up to 5 April 2017 are able to make use of the cleansing window for offshore accounts that is available until 5 April 2019. This cleansing window allows offshore mixed accounts to be separated out into their different components, i.e. clean capital, income and gains, and put into new, separate accounts. This can help to ring-fence clean capital funds which will then be available for the individual’s use in the UK without UK tax consequences.
We will be happy to assist anyone who has such mixed funds and thinks they may be eligible for funds cleansing.
Ahead of the new legislation coming into effect from 6 April 2018, trustees should consider whether any inherent gains within the trust can be washed out by way of offshore distributions to beneficiaries before 6 April.
This is, again, a complex area and, as always, we will be happy to advise on this further, if required.
Summary of key changes from 6 April 2018
Income Tax: dividend allowance reduced to £2,000
As previously announced, the tax-free dividend allowance will reduce from £5,000 to £2,000 from 6 April 2018. From that date, only the first £2,000 of dividend income will be free of tax, with the remainder taxed at individuals’ marginal rates. This could add another £1,143 to some clients’ tax bills from 2018/19 onwards.
We wait to see if HMRC are able to update their software to deal with this change correctly, as their recent track record does not inspire confidence.
Income Tax: mortgage interest relief down to 50%
The restriction to income tax relief available on mortgage interest payments for rental businesses continues to take effect and, from 6 April 2018, only 50% of eligible interest payments will be available as a deduction from rental profits. The remaining 50% can be taken as a 20% tax reducer, provided there are sufficient rental profits in the business.
Some taxpayers will see their income taxed at higher tax rates than previously because of these new rules.
We can review the position for taxpayers affected by this change and provide estimates of the likely impact on their tax position. Please contact us if we can help.
Income Tax: Scottish tax rate changes
In February 2018, the Scottish parliament exercised its right to vary income tax rates for Scottish taxpayers and has introduced two new rates for those living in Scotland, as summarised below for the 2018/19 tax year:
|Starter Rate||19%||£11,850 - £13,850|
|Basic Rate||20%||£13,851 - £24,000|
|Intermediate Rate||21%||£24,001 - £43,430|
|Higher Rate||41%||£43,431 - £150,000|
|Top Rate||46%||Over £150,000|
Inheritance Tax: Residential Nil Rate Band increase
The additional inheritance tax nil rate band available to homeowners (and some former homeowners) who leave their home to their direct descendants is increasing year on year to reach its stated maximum of £175,000 by 2020/21. From April 2018, the band will increase to £125,000 per person, which in some cases will give married couples up to £900,000 of nil rate band to use against their estates.
Offshore Issues: onward gift rules for offshore trusts
From 6 April 2018, overseas trusts with UK beneficiaries will not be able to make what will be regarded as indirect distributions to such beneficiaries to avoid a tax charge.
There has been much discussion about possible unintended implications of these rules catching innocent situations, but the rules are set to go ahead.
Trustees and beneficiaries should therefore seek advice before undertaking distributions and subsequent onward gifts, as there may be unintended UK tax consequences. Please contact us if you would like advice.
Offshore Issues: information-sharing and disclosure facilities – Requirement To Correct (“RTC”) and 200% penalties
More and more countries are now sharing information. The window to disclose previously undisclosed tax liabilities under the RTC initiative will close on 30 September 2018 and affected individuals should therefore come forward as soon as possible to ensure sufficient time to make a full and accurate disclosure before the deadline. Taxpayers who not disclose by the deadline will be liable to a new Failure to Correct penalty, which can be up to 200% of the tax due.
CHARTER TAX CONSULTING LIMITED
11 ST JAMES'S PLACE
The information provided by Charter Tax Consulting Limited is general in nature and does not constitute specific tax advice. Professional advice should be sought before deciding on a course of action, or refraining from a certain action, arising from the above information. Tax legislation changes regularly and information contained herein is provided based on legislation as at 13 March 2018
Taxation planning concerns the application of complex statute and case law to future events. Accordingly, however expert the opinion given, it is always possible that the Courts will take a different view of the application of the law. We undertake to apply reasonable care and skill in the provision of advice. We do not guarantee that tax planning steps will in all circumstances achieve a certain legal effect.