Welcome to Taxbreaks, your regular update on topical developments and opportunities in the world of tax.
The theme of this year’s Budget was “makers, doers and savers” with a significant amount of the good news for savers and pensioners. There were also a number of positive measures announced for business, especially those within the manufacturing sector. With improving growth forecasts, low interest rates and falling unemployment many individuals and businesses may be feeling more positive about the economic future than they were previously.
In this special edition of taxbreaks we have highlighted the announcements and changes that will be of most interest to our clients.
Annual Investment Allowance – AIA
From 1 April 2014 The AIA (which provides 100% tax relief on expenditure incurred on qualifying capital assets) will increase to £500,000 per annum.
This new limit will remain in place until 31 December 2015 following which the allowance will return to £25,000 per annum.
As with previous changes to the level of AIA, there will be transitional rules for accounting periods which span the changes.
In all cases, the maximum rate of allowance will need to be calculated on a time apportionment basis. For periods straddling 1 April 2014, the maximum claim for expenditure prior to the increase will be £250,000. For periods straddling 31 December 2015, the maximum claim will be limited to the time apportioned fraction of the reduced £25,000 allowance.
This change will affect all incorporated and unincorporated businesses.
If you are a business considering significant capital expenditure we recommend you seek our advice in advance in order that you may consider methods to maximise this valuable relief.
Research & Development (R&D) Tax Credits
The rate of the payable tax credit for loss making small and medium sized companies under the R&D tax credits scheme will be increased from 11% to 14.5% with effect from 1 April 2014.
From 1 April 2014, small and medium companies (classified as companies with fewer than 500 employees and annual turnover not exceeding €100m, or a balance sheet not exceeding €86m) that carry out a qualifying R&D activity and incur losses in an accounting period will now be able to make a claim for a tax credit, paid in cash from HMRC, at the rate of 14.5% (up from 11% previously).
This is effectively a payment of £33 to the company for every £100 spent.
The rate will only apply to expenditure incurred after 1 April 2014 and so delaying the expenditure will be beneficial to some companies.
This new rate of tax credit is applied to either the lower of:
- The qualifying R&D spend
- The adjusted company loss for tax purposes for the year.
Corporation Tax rates
As previously announced and now confirmed in the Budget, from 1 April 2015, the main rate of Corporation Tax will be reduced to 20%. This will mean that there is just one rate of Corporation Tax from April 2015.
ATED and Company Ownership of Residential Properties
Previously implemented anti-avoidance rules in relation to high value residential properties owned by non-natural persons have been extended to properties with a market value in excess of £500,000.
The Annual Tax on Enveloped Dwellings (ATED) charges have been extended to include residential properties acquired after 20 March 2014 worth in excess of £500,000. The charges that will apply where such properties are owned by non-natural persons are significant and include:
- 15% Stamp Duty Land Tax
- Capital Gains Tax at 28% (only on capital growth after 6/4/15)
- Annual Tax charges of £3,500 per annum for properties valued between £500,000 and £1m, and £7,000 per annum on properties with a value of £1m- £2m
- The annual tax charge for properties with a value in excess of £2m remains as before and range from £15,000 to £140,000.
Note that whilst rental properties, charities and historic homes are exempt from ATED, the ATED form still needs to be completed and the exemption claimed but the ATED needs to be claimed via a return.
Anti-Avoidance
In an effort to make aggressive tax schemes far less attractive to potential users, the Government has said that they will require payment upfront of any disputed tax associated with any tax avoidance scheme that requires a full disclosure under the DOTAS rules, or is counteracted under the General Anti Abuse Rule (GAAR).
This essentially requires the taxpayer to pay the tax upfront and then enter into likely protracted discussions with HMRC to get it back. This can apply to anyone with an open enquiry into such planning so may have a retroactive effect for some. HMRC believes that they can apply this to c65,000 ongoing cases, and therefore if you have an open enquiry in relation to a tax scheme, advice should be sought as to your current position.
Personal Allowance and Income Tax rates
As of 6 April 2014 the personal allowance for those born after 5 April 1948 will increase to £10,000. The available basic rate band will be £31,865, and therefore taxpayers will start paying higher rate tax when their income exceeds £41,865.
From the 6 April 2015, the personal allowance for those under 65 will increase by a further £500 to £10,500 with the basic rate band being £31,785. Subsequently tax payers will therefore start paying higher rate tax when their income exceeds £42,285.
Income Tax on Savings
With effect from 6 April 2015 the level of eligible savings that qualify for the starting rate of Income Tax increases to £5,000, whilst the actual rate of tax applying to such savings reduces from 10% to nil.
The impact of this change will be that individuals who rely on savings income will retain a greater share of it and their tax affairs will be further simplified.
In effect the addition of the personal allowance of £10,500 to the starting rate band of £5,000 will mean that individuals who have gross income below £15,500 should pay no tax.
To ascertain if there are any eligible savings first take the individual’s other income. If this is below £15,500 then the balance of savings income, to a maximum of £5,000, is liable to tax at the starting rate, which is 0%.
If an individual considers that they qualify for this then they should speak to their bank and complete form R85 to ensure that interest payments will be made gross. In the absence of a completed form, interest will continue to be paid under deduction of Income Tax and the individual will have to complete a tax repayment claim.
Individual Savings Accounts – ISAs
From 1 July 2014 all existing ISAs will be replaced by “New ISAs” (known as NISAs) which can be used for up to £15k of savings pa.
The objective of this proposal is make existing ISAs a simpler and more attractive savings vehicle than at present.
From 2014/2015 the annual limit is to be increased to £15,000, with the rule that half of this can be invested in cash being abolished.
Existing cash and stocks & shares ISAs will automatically become NISAs with the range of investments that are able to be held being extended to include retail bonds with less than 5 years to run until maturity
Core Capital Deferred Shares (issued from building societies) can be held in NISAs, Junior ISAs and Child Trust Funds.
Pension Changes
The Government has announced a significant number of reforms to give greater flexibility and opportunity for accessing pension savings.
With effect from 27 March 2014:
- The minimum income level from flexible drawdown will be reduced from £20,000 to £12,000.
- The maximum income that a drawdown pensioner with a capped fund can choose to receive will be increased from 120% to 150%.
- The size of a single pension pot that can be taken as a lump sum will be increased from £2,000 to £10,000.
- The number of pension pots that can be taken as a lump sum will be increased from two to three, providing they are below £10,000.
- The overall size of pension savings that can be taken as a lump sum will be increased from £18,000 to £30,000.
Currently, if individuals withdraw the entirety of their defined contributions pension savings at the point of retirement they are liable to a tax charge of 55%. Under the new system the proposed reforms will mean that an individual can withdraw their savings at a time of their choosing and be subject to tax at their marginal rate.
Further measures proposed in the reforms include:
- Removal of the 55% tax charge on pensions not drawn when you die.
- Reducing the age at which you can take your pension as a lump sum, if £18,000 or less, to age 55, rising to age 57 in 2028.
Social investment tax relief
Individuals making qualifying investments into qualifying Social Enterprises can benefit from Income Tax relief of up to 30% of the amount invested.
This is effective for investments made from 6 April 2014 and initially for a period of five years. It will also be possible to defer capital gains arising post 6 April 2014 against the qualifying investment.
Tax free childcare
From Autumn 2015 the Government will introduce an account assisting working parents with 20% of their childcare costs.
For every £80 the parent deposits the Government will top it up with £20, subject to a maximum top up of £2,000 per annum. It will be available for children up to the age of 12. To qualify both parents will need to be in work earning over £50 a week, but not more than £150,000 per annum.
Transferable personal allowance for married couples and civil partners
From the 6 April 2015 it will be possible for a spouse or civil partner who is not liable to higher rate tax (40%) to transfer up to £1,050 of their personal allowance to their spouse or civil partner so long as the recipient of the transfer is not liable to higher rate tax.
This will provide a financial benefit where one spouse or civil partner has an income less than their personal allowance. However, married couples or civil partnerships who are entitled to claim the married couple’s allowance will not be able to make a transfer of part of their personal allowance. From the 6 April 2016 the transferable amount will be 10% of the basic personal allowance.
HMRC is currently looking at how this process will work and the lead option is currently that one party will make the application online and HMRC will notify the recipient about the change to their tax code.
