Current Issues | | 11th March 2016
It may still be possible to choose the tax year in which your income, gains or reliefs fall, which can affect the amount of tax you pay and when. This time around, those affected by the changes to the taxation of dividends may see a significant change in the amount of tax they have to pay for 2016/17. And new, targeted antiavoidance rules from 6 April 2016 could change capital gains into taxable income.
Dividends and savings income
From 6 April 2016 dividends will no longer carry a 10% tax credit. Instead, the first £5,000 of annual dividends will be tax-free, but the tax on dividends in excess of this allowance will be significantly higher. The excess will be charged at 7.5% for those paying tax at the basic rate, 32.5% for those paying the higher rate (individuals with income over £43,000) and 38.1% for those paying at the additional rate (income over £150,000). The corresponding rates in the current year are 0%, 25% and 30.56%. For 2016/17 the first £1,000 in savings income, such as interest, is tax exempt for basic rate taxpayers and the first £500 for higher-rate taxpayers. Banks and building societies will no longer deduct 20% tax at source.
The personal allowance (currently £10,600) is £11,000 for 2016/17. However, this allowance is cut by £1 for every £2 of income over£100,000, so it is lost if your income exceeds £121,200 this year or £122,000 for 2016/17. The effect is a 60% income tax rate on income between £100,000 and that threshold (plus 2% NIC if applicable). The basic rate band, £31,785 for 2015/16, is £32,000 for 2016/17
Unless your marginal tax rate will be higher for 2016/17, it’s better to make any pension contributions by 5 April 2016, subject to the maximum allowance. But note that from 2016/17 if your income exceeds £150,000, the usual £40,000 allowance is reduced by £1 for every £2 of that excess, down to a minimum of £10,000. However, up to £80,000 of pension contributions are potentially tax-deductible in 2015/16, because up to £40,000 may be contributed from 6 April to 8 July 2015 and another £40,000 from 9 July 2015 to 5 April 2016. This is increased by the shortfall between any pension contributions made by you and your employer, and the annual limit, in the previous three years. Only up to £40,000 of 2015/16 unused relief may be carried forward to 2016/17. However, pension ‘inputs’ for those in ‘drawdown’ are limited to £10,000 a year. Anyone who elected not to make pension contributions should beware of being automatically included in a workplace pension scheme.
Unless your marginal tax rate will be higher for 2016/17, it’s better to do any charitable giving by 5 April 2016. This applies not only to gift aid donations but also to gifts of shares or land, where these qualify for income tax relief. You can choose to treat gift aid cash donations made between 5 April 2016 and the date you file your 2016 tax return (but not later than 31 January 2017) as though they were made in 2015/16 for income tax purposes. Changes to the taxation of dividends and interest may result in many people, who were previously taxpayers, no longer having a tax liability for 2016/17. These people may inadvertently create a tax liability by making gifts covered by a gift aid declaration, as they must pay the tax equal to the charities reclaim on their donation. Gift aid declarations can’t be retroactively withdrawn, but can be backdated, so those potentially affected should consider withdrawing them for now.
The high income child benefit charge is equal to any child benefits claimed, if the claimant or their partner has income of £60,000 or more. The charge is scaled down proportionately where income is less but still over £50,000. There are various benefits in deferring a disposal that gives rise to a capital gain in excess ofthe annual capital gains tax (CGT) exemption (£11,100 for 2015/16) and losses brought forward until after 5 April. Firstly, it means CGT is payable a year later. It could also mean that you become eligible for entrepreneurs’ relief, where gains are taxed at 10% rather than 28%, because a condition for the relief is that the asset has been held for at least a year. The ‘lifetime limit’ on gains that qualify for entrepreneurs’ relief is £10m. If any assets have become of negligible value, consider a loss claim for CGT purposes. In some circumstances, income tax relief may be available instead. So called ‘bed and breakfasting’ is caught by anti-avoidance rules if the purchase takes place within 30 days of the sale. However, these rules don’t apply to shares ‘reacquired’ by your spouse or ISA. Disposals of shares that result in a controlling interest in a company being held by an employee ownership trust are exempt from CGT.
Liquidations (of close companies)
Legislation proposed could result in some liquidation distributions received after 5 April 2016 (or perhaps Budget Day on 16 March 2016) being taxed as dividends, rather than capital gains. The latter may enjoy a low 10% tax rate. Where possible, any winding up distributions should be made before the new rules apply.
There are various exemptions for lifetime gifts that don’t depend on surviving at least seven years. You can give up to £3,000 each tax year, together with any unused amount of this allowance from the preceding year. Up to £250 may be given to any number of individuals annually. Regular gifts out of income are exempt from IHT without a limit, provided your remaining after-tax income is sufficient to maintain your usual standard of living.
Income and gains on investments within an ISA aren’t taxed. You can invest up to £15,240 each tax year. A surviving spouse or civil partner may claim an extra ISA allowance equal to the value of ISA holdings of a deceased partner with whom they were living at the time of the death. The new ‘help to buy’ ISAs are now available for those saving to buy their first home. Income tax credit at 30% is available on up to £1m subscribed for shares in qualifying Enterprise Investment Scheme (EIS) companies in each tax year, provided you’re not connected with the company and the shares are held for at least three years.
Relief for up to £500,000 subscribed for shares this year can be claimed in 2014/15 if EIS relief wasn’t fully used that year. Income tax credit at 50% is available on up to £100,000 subscribed for shares issued by smaller companies qualifying for Seed Enterprise Investment Scheme (SEIS) relief each tax year, provided the shares are held for at least three years. CGT on a gain may be deferred by subscribing for shares in qualifying EIS or SEIS companies, even if you’re connected with the company.
Gains on the sale of EIS and SEIS shares that qualify for income tax relief held for at least three years are exempt. Subscriptions for shares in Venture Capital Trusts (VCTs) of up to £200,000 in each tax year attract a 30% tax credit, provided they are held for at least five years. Subject to limits on the size of holdings, dividends and gains on VCT shares are exempt. Investments in social enterprises of up to £1m can also qualify for a 30% tax credit.
Specific advice should be obtained before taking action, or refraining from taking action, on any of the subjects covered above. If you would like advice or further information, please speak to your usual Shipleys contact.