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Things to think about before the end of the tax year
Whilst all the usual end of year tax tips still apply (that is, using up tax free allowances and making sure you have taken advantage of all available reliefs), this year there are also some upcoming changes to carefully consider if you want to make the most of the current tax environment and get ready for the new one.
Taking income as dividends
From 6 April 2016, the dividend tax will be replaced with a tax free dividend allowance of £5,000. Dividends exceeding that sum will be taxed at the following rates:
- 7.5% on dividend income within the basic rate band;
- 32.5% within the higher rate band;
- 38.1% within the additional rate band.
If you receive more than £5,000 in dividend income, you may pay more tax under this new regime, so it is important to plan for these changes and to consider if you might be better off bringing forward or deferring your dividend income to make the most of the situation.
New rules on company distributions
Government anti-avoidance proposals aimed at preventing close company owners from structuring transactions so that they pay less tax by receiving capital rather than dividend income will, if enacted, affect the following situations:
- the disposal of shares to a third party where profits are retained in the company that could have been distributed to shareholders as a dividend.
- a purchase of own shares (for unquoted companies) where the seller retains sufficient interest in the company to block a special resolution.
- a capital distribution made in a winding-up, in cases where:
- a company has been used to accumulate surplus cash (money boxing)
- the owner sets up a ‘phoenix’ company to continue the same business in a new entity
- a company is a special purpose vehicle.
- repayment of share capital (including share premium) following a reorganisation.
The outcome of the HMRC consultation on company distributions is still pending, but it is expected that the changes will come into force on 6 April 2016.
For help and advice on company distributions, please contact Anne-Maree Dunn.
Property and landlord changes
There are two significant changes to the taxation of landlords on the horizon that you should be particularly aware of.
From April 2016 the wear and tear relief available to those letting furnished residential property will be replaced with a new relief which allows a deduction based on the “actual costs of replacing furnishings” in the year they are purchased. We expect this relief to apply to furnishings purchased after 6 April 2016.
From 6 April 2017, landlords will be taxed on their rental income before finance costs, such as mortgage interest are deducted and given a tax credit for the interest. The tax credit will gradually reduce over a period of 4 years so that, by 2020/21, the relief will be restricted to the basic rate of income tax.
For advice on how to manage these changes through appropriate tax planning please contact Yogi Dhanak.
Check if your property falls under the Annual Tax on Enveloped Dwellings (ATED)
UK residential properties held within a corporate wrapper and valued at £500,000 to £1,000,000 will fall within the scope of ATED from 1 April 2016 (properties valued at over £1,000,000 in 2012 already fall within the regime). Those whose properties are affected will need to pay the tax due for 2016/17 on 30 April 2016 – almost 11 months before the end of the relevant tax year.
Changes to deduction of tax from savings
Some good news for savers. A personal savings allowance will be introduced on 6 April 2016 that enables basic rate tax payers to take up to £1,000 of interest on bank and building society accounts tax free. Higher rate tax payers can earn up to £500 of interest tax free. This means that about 95% of people won’t pay any tax on their savings so will be up to £200 better off.
HMRC’s factsheet provides more information on the types of savings included in the allowance.
Non residency changes
Stricter rules on domicile will be introduced from 6 April 2017 and non residents would be well advised to consider how these changes will affect them before the end of this tax year as for some, action will need to be taken before 5 April 2016.
Following the changes, those deemed UK-domiciled will no longer be able to claim the remittance basis of taxation on their overseas income and gains and their worldwide assets will become subject to UK inheritance tax.
If you are likely to be deemed to have a UK domicile from 6 April 2017 you may be better off from a tax perspective if you leave the UK before 5 April 2017 or, in some cases, before 5 April 2016. Non-domiciled individuals who had domicile in the UK at the date of their birth should also consider leaving the UK before 5 April 2017 as they will revert to having a UK domicile for tax purposes whenever they are resident in the UK, even if under general law they have acquired a domicile in another country.
For further information on how this may affect you, please contact Claire Slim.