Four extra-special year-end action points
The end of the tax year on 5 April is always a significant tax planning deadline. But this year it is particularly important, because of four major changes in particular.
At the moment, dividend income is taxed at 0%, 25% or 30.55%, depending on whether your total income (including the dividend itself) puts you into the basic rate, higher rate or top rate bracket. From 6 April the rules change so that, although the first £5,000 of dividend income is tax-free, the tax rates increase by 7.5% across the board and become 7.5%, 32.5% and 38.1%. This will primarily affect the owners of private companies, who in the past have typically extracted profits in the form of dividend rather than remuneration in order to save National Insurance Contributions. The question arises – should you draw out extra dividends before 6 April in order to avoid the new tax rates? The answer depends very much on your personal circumstances. For more help on investigating the effect of the changes on your particular circumstances and on the various options open to you, please get in touch with us.
One way of extracting value from a company is to liquidate it: under current law any gain on liquidation is normally subject to Capital Gains Tax. In particular, in appropriate cases Entrepreneurs’ Relief may apply giving a tax rate of 10%. From 6 April 2016 new rules are to be brought in which will have the effect that in some cases gains on liquidation will instead be taxed as if they were dividends, which at the new dividend rates may lead to a tax charge of up to 38.1%. This means that in some cases you may want to consider the possibility of liquidating before 6 April in order to avoid the effects of the new rules. Again, whether this is a good idea will depend on the precise circumstances; but if you think it may be for you don’t hesitate to get in touch.
Stamp Duty Land Tax changes
From 1 April 2016 a 3% SLDT “surcharge” applies on the transfer of residential property other than purchases by an individual who at the end of the day of the transaction owns only one residential property. In particular the new rate will normally apply to property acquisitions by companies.
We can readily envisage two completely different and unrelated circumstances where you might want to transfer a privately-owned property to a company, and might want to consider doing it before 1 April to avoid the new SDLT rate. The first is where you are using the transfer of a property as a means by which you can extract cash from your company to avoid the new dividend tax rate. The second is where you are holding a portfolio of residential investment properties which are subject to borrowings. From April 2017 tax relief for interest on “buy-to-let” loans starts to be phased out for individuals and partnerships. One possible response would be to transfer some or the entire portfolio to a company (companies are not affected by the new rules). Although the new rules do not start to bite until April 2017, you may wish to consider making any transfer before 1 April to avoid the new SDLT rate. Again, to discuss the pros and cons (and indeed to see if there are ways in which SDLT might be avoided altogether) please get in touch.
Recent and imminent changes create some “last chance” opportunities for the current tax year. First, from 6 April 2016, the pension “annual allowance” for high earners (that is, with taxable income in excess of £150,000) reduces on a sliding scale down to as little as £10,000. So it may well be worth considering making the maximum possible contribution before 5 April 2016 while the old rules still apply: in some cases (where pension contributions have not been made in recent years) as much as £180,000 can be contributed – which after tax relief at up to 45% may mean a net after-tax cost of as little as £99,000. Second, the abolition of the complex rules on “pension input periods” in the 2015 Summer Budget created for some people an extra £40,000 of annual allowance for 2015-16. Specifically, even if you “maxed out” on pension contributions between 6 April 2015 and 8 July 2015, you may now be able to make further contributions of up to £40,000 before 5 April 2016. Third, the “lifetime allowance” (broadly, the total value of the assets you are permitted to have in your pension pot – currently £1.25m) is reduced from 6 April 2016 to £1m. If you think that your pension pot may in future breach the new limit, action can be taken before 6 April to preserve the old limit. But it’s not a straightforward decision so don’t hesitate to ask for professional advice.
For further information on any of these points and how they affect you, contact either Jackie or Andrew