Sorry we’re late. You were probably expecting this Square Circular at the end of January. But January being the silly season in the tax world became February and February, being a short month, became March.
Whatever, we hope you find this Square Circular both informative and interesting. It covers, as usual, a variety of topics.
If you want more details about any of the matters we’ve mentioned in this issue, or indeed, about any of the matters we haven’t mentioned please do contact us on 0161 832 4841.
It was Valentine’s Day a few weeks ago. You know, that’s the day you get soppy pictures of cupids and arrows all over the place.
Our not so soppy professional body, ICAEW, celebrated the day by mentioning the advantages of marriage or civil partnership. It highlighted:
- Inheritance Tax exemptions for parents and grandparents making wedding gifts.
- Transferrable tax allowances for married couples.
- The ability to pass ownership of assets free of tax for Capital Gains Tax and Inheritance Tax purposes.
Bet you never knew we accountants were so romantic.
Staying seasonal but looking forward a few weeks, not back, we’ll soon be at that famous day in April. No, not 1 April, it’s 5 April we’re talking about. End of the tax year. Planning starts now if indeed you haven’t already started.
The Square Circular isn’t a detailed tax year end planning schedule. If you want details appropriate to your personal situation we suggest you speak to one of our tax team. But here are just a few things to think about.
- Income Tax personal allowance. Are you and your spouse making best use of both personal allowances. Are any inter-spouse transfers of assets required?
- Income Tax personal allowance. Yes, again. If your income hovers above the £100,000 mark are you ensuring that you don’t lose personal allowances by, for example, making pension contributions or charitable gift aid contributions to bring your income down?
- Pension contributions. Are you using your annual pension allowance?
- ISAs. Are you investing anything up to the 2017/18 overall limit of £20k?
- Capital Gains Tax. Are you and your spouse making best use of the annual exempt amount? Are disposals being made by a basic rate taxpayer spouse rather than a higher rate tax paying spouse?
- Inheritance Tax. Are you making use of the annual exemption and, if unused, last year’s annual exemption.
The half dozen points above are not detailed. They’re not meant to be. Neither are they exhaustive. We’ve not mentioned things like EIS/VCT investments or charitable donations whether in cash, quoted shares or land. Your regular contact partner or one of our tax department would be please to share further information with you.
Talking about the end of the tax year, that is usually a popular time for private company directors to think about the payment of dividends.
The reason for that is because the differential between basic rate and higher rate of income tax on dividends is greater than that for earned income and savings interest. The dividend income is the top slice of income and you don’t want the other income to push the dividend income into higher rates. The differential between the ordinary basic rate of 20% and the higher rate of 40% is, of course, 20%. The differential between the 7.5% basic rate of tax on dividends and the 32.5% higher rate is 25%.
It’s useful to have a fairly reliable estimate of your income for the year before deciding on the level of dividend. And paying dividends just once or maybe twice in a year is far preferable than paying regular dividends throughout the year as some seem to like doing. Apart from anything else it appears less like a substitution for salary. But also it reduces the chances of overpaying dividends and subsequently having to compensate and also cuts down on the paperwork associated with dividend payments.
Acronyms! We know you love ‘em. If you’ve read all 57 Square Circular issues (this is 58) and you’ve learnt nothing about tax at least you’ll have learnt loads and loads of HMRC (sorry, Her Majesty’s Revenue and Customs) acronyms. But come on, admit it. We bet RTC has you stumped.
Actually, it stands for Requirement to Correct. Why can’t they just call it that? But leaving that aside, what is it, anyway?
The RTC requires taxpayers to resolve by September 2018 any offshore tax irregularities that arose prior to 5 April 2017. Particularly, since that date HMRC will have huge amounts of data sent to them about the offshore accounts of UK taxpayers and this will enable them to target UK residents who have, for example, not disclosed offshore investment income, offshore rental income or offshore gains on their UK tax returns. The RTC doesn’t only refer to offshore assets which haven’t been disclosed but also to UK undisclosed income which has been moved abroad. So it might apply to undisclosed business takings or the undisclosed sale of a property where the proceeds have been sent abroad.
And if you say nothing, or don’t come forward until after September 2018 you get a FTC penalty. Failure to Correct; add that to your list of acronyms. It’s similar but different from ordinary penalties. There’s a maximum penalty of 30% or 70% or 100% of the potential tax lost depending on how naughty a tax payer has been but can be mitigated down to 15% or 35% or 50% for co-operative behaviour. The FTC penalty is similar in that it can be mitigated. What’s different is that the maximum is 200% and can be mitigated down to 100%.
We’ve spoken before about the growing amount of data HMRC is able to accumulate. Make no mistake, they’ll have the data about these accounts whether in the Channel Islands, Luxembourg, Switzerland or Panama or wherever. Anybody who has an RTC would be well advised to spring into action within the next few months.
What we’re really thinking about is FIC. But if we said that, first, you’d mix it up with FTC (Failure to Correct) that we’ve just been talking about and, secondly, when the penny dropped and you realise that we’re talking Family Investment Company you’d say “Oh no, not that again.” So what’s SSE got to do with it?
SSE stands for Substantial Shareholdings Exemption and it’s a comparatively obscure bit of legislation tucked away in a Schedule (7AC if you must know) of the Taxation of Chargeable Gains Act 1992. What it says, and this is a breathtaking simplification, is that if an investing company holds a certain minimum % of shares in an investee company if it sells that investment, making a gain, in certain circumstances that gain can be exempt from tax. Until recently both the investing and investee company had to be trading companies before and after the sale. Now only the investee company has to trade.
You can probably see the significance of this. The proceeds of the sale of an investee trading company can be re-invested gross in non-trading assets. And that’s a good start for a Family Investment Company.
As a reminder of what a FIC is, let’s take an imaginary family. Mum and dad are Ruth and David. They have three kids. Pip is the eldest, next is Josh, a budding entrepreneur, while Ben, the youngest is still at school. They form a company, let’s call it Ambridge Investments Ltd. Or maybe they’d make it unlimited so they don’t have to file accounts at Companies House. Ambridge Investments would typically be funded by loans from David and Ruth. They’d have a class of shares which gave them the voting rights to control Ambridge Investments, rights to dividends but not a share in a winding up. Pip, Josh and Ben have a class or classes of shares which gives them no say in how the company is run but they do have rights to dividends and rights on a winding up.
Although there may be distinct advantages in operating through a Family Investment Company, they aren’t for everyone. As is often the case, it’s horses for courses. If you’re thinking about what the best investment vehicles would be not just for yourself but how you could benefit the whole family have a chat about it with your usual contact partners or one of our tax team.
A letter from a tax payer to a tax officer read:
“I have to inform you that my mother-in-law passed away after receiving your form on 22 November. Thank you.”