HMRC Plant Four Explosive New Mines in the Tax Minefield
There are about 40 days to go until 6th April 2016 and many taxpayers will want to use those available days wisely from a tax perspective. There are four major tax changes being introduced from the beginning of the next tax year, and many taxpayers will be adversely affected by these changes and need to make decisions now that will potentially save them considerable amounts of tax.
The tax rate on dividends will increase by 7.5% for all dividends in excess of £5,000 per annum. This change will particularly affect owner managers who trade through a limited company and who reward themselves principally by way of regular dividend payments. It is still better from a tax perspective to follow this dividend strategy after 6th April compared to the alternative of paying large salary payments; but the benefit will be materially reduced. Many owner managers will want to look at accelerating their dividend payments from 2016/17 by declaring a substantial dividend before 6th April, and therefore avoiding the 7.5% increased tax liability. However, there are a number of issues to consider, such as whether such acceleration would push them into a higher rate tax bracket in 2015/16 and thereby negate a large part or even all of the potential tax saving. Additionally, such a strategy will accelerate any higher rate tax due on the dividend by 12 months to 31st January 2017. So plenty to think about!
There are two major changes to pensions effective from 6th April. Firstly, the lifetime allowance will reduce from £1.25mn to £1mn and secondly, the maximum annual contribution for persons with annual income in excess of £150,000 will reduce from the current £40,000 limit. The limit will reduce by £1 for every £2 of income over £150,000 so that taxpayers with an income over £210,000 will have a maximum annual allowance of only £10,000. There have been so many changes to the pensions regime in recent years that it is easy to glaze over and ignore these latest changes. However, there are two key points that need to be considered as follows: firstly, if you are a high earner with income over £150,000, you should look seriously at making as large a pension contribution as possible before 6th April before the limits in the annual contributions are reduced. Secondly, if you have a reasonably substantial pension pot (for example anything over £500,000 should probably be looked at) then you should consider protecting your lifetime allowance at the current rate of £1.25mn. If you want to do that, then you must NOT make any further pension contributions after 5th April, because if you do so then your higher protection level will automatically be lost. So make sure you have considered your position carefully before you make any pension contributions after 5th April.
3. Capital distributions
The government sneaked in a consultation under the radar last December at the same time as the autumn statement which will radically change the tax treatment of distributions received from a company in the course of being wound up after 6th April. If you are considering winding up your company in the near future, then these changes need to be carefully considered as potentially the distribution may be taxed on you as income rather than capital; with a tax rate potentially as high as 38.1% of the distribution received rather than the 10% (if it qualified for entrepreneur’s relief) that you might have been expecting. The company will need to be put into liquidation AND the distribution will need to be made by 6th April, so anyone affected will need to act fast.
4. SDLT on buy-to-lets
Anyone in the process of buying a second property needs to be aware of the proposed 3% Stamp Duty Land Tax surcharge that will apply from 6th April in most cases where the buyer already owns a house, and the new house is not a replacement of that person’s principal private residence. The detailed legislation is yet to be published, but it is likely to affect all sorts of situations, and not just someone buying a property in the UK to let out. For example it will affect individuals buying a second home which they want to use as a holiday home, property developers buying a property to refurbish and then sell, and persons coming to the UK who already has a house overseas. Solicitors are going to have a busy time leading up to 5th April making sure that affected sales currently in progress are completed in time.
Of course WSM is here to help you navigate your way through the tax minefield, so please contact your usual adviser if you need to discuss any of the above issues further.