Author Archives: lee blackshaw

5 April 2020 year end tax planning – in three minutes

A quick checklist before 5 April (and before the 11 March Budget, where lots of things may change!)

  1. Maximise ISA savings
  2. Review pension contributions
  3. Consider pension tax breaks for your children (even minors)?
  4. Use your capital gains tax allowance
  5. Use your £2k dividend 0% tax band
  6. 30% income tax relief, using EIS/VCT investments?
  7. Review and note gift aid tax relief
  8. Pay any outstanding 31 January 2020 tax before the end of February, to avoid a penalty
  9. Check your PAYE coding notice and benefits package
  10. Will your tax on rental income rise, due to the interest restrictions?
  11. Use personal allowances of spouse, children and grandchildren
  12. Are you paying high marginal rates of tax?
  13. Business – extract cash in a tax efficient way (salary, loan, dividend, rent, pension?)
  14. Trusts – create new ones; distributions from existing ones; close down old ones; do you need to complete the trusts register and keep sufficient records?
  15. Inheritance tax – gifts, update will or letter of wishes, create lasting power of attorney
  16. Get a fixed fee quote for your 2020 tax return
  17. Are you a Scottish or Welsh taxpayer?
  18. Are any overseas assets or income taxed correctly in the UK and overseas?
  19. Have you set up your online personal tax account with HMRC?
  20. Do you have a tax payment on account to make on 31 July 2020?

These are prompts rather than fine detail – for further information please contact me.

Tax tips

Here are my top ten tax tips:

  1. Have your tax return completed and submitted to HMRC as soon as possible after 5 April (ideally by 31 August);
  2. If you have substantial dividend income, or are self-employed, budget for your tax payment monthly;
  3. If your non-PAYE income is significant, understand the payments on account system as soon as possible (https://blackshawtax.com/2016/11/18/tax-interim-payments-on-account-a-simple-guide/);
  4. Pensions tax relief and ISA allowances are very generous – save as much as you can as early as you can, to maximise the tax breaks;
  5. Before you worry about inheritance tax, make sure you and your family have wills, powers of attorney and adequate life insurance (and even after that, don’t worry about it too much);
  6. Don’t introduce tax risk into your finances (https://blackshawtax.com/tax-risk-a-few-warnings/);
  7. If you buy a foreign holiday home (or even a helicopter or jet), at some point you will regret doing so (and, if you must buy one, don’t put a complex and costly structure around it that may work today but not tomorrow);
  8. If a slightly artifical structure (eg using a company for assets, paying yourself in dividends or loans) saves you tax today don’t assume that it will do so in a few years’ time (and don’t assume that it will be easy, in practical or tax terms, to collapse);
  9. Take advice before you do something – if the “something” is overseas, take foreign tax and legal advice first;
  10. If you run a business, remember that VAT and PAYE are not your money – don’t “borrow” or spend the taxes – instead keep an eye on your own business net cashflows.

Tax return required within 30 days of residential property disposal?

What has changed?

Tax returns are no longer required just once a year.

If you sell a residential property (eg rental property) after 5 April 2020, you will probably need to file a special tax return and pay the estimated capital gains tax within 30 days.

This is a major change. (At the moment a sale in, for example, May 2019 would not need to be reported and tax paid until 31 January 2021.)

What about my main home?

If you sell your main home and are certain that it is exempt, due to private residence relief, no return is required. But – are you sure it is fully exempt? If not, you are at the risk of penalties. Take advice several months before the sale.

When will your tax adviser know about the sale?

Will your tax adviser know? Often it is the estate agent and lawyer who know about the sale before the tax adviser. This now needs to change.

What action is needed?

Find out the property base cost, improvement costs, your estimated income and likely proceeds. Inform your tax adviser of these, as soon as possible before the sale.

Tax relief and losses

You can take into account losses made before the disposal in computing the 30 day tax estimate but not losses or other reliefs that have not yet crystallised (such as Enterprise Investment Scheme deferral, unless you have the EIS3).

What about the normal tax return?

The disposal still has to be reported on your normal tax return, with the final tax computation taking place and credit given for the capital gains tax already paid.

Key dates

The return is required 30 days after completion, even though the tax disposal date is exchange of contracts (the binding contract).

Why is this change important?

It is likely that, due to not being aware of the change, or making assumptions on tax or relief, that many taxpayers will face penalties for errors or late filing.

 

Inheritance tax & houses – common errors

General election time tends to cause a spike in views being expressed on IHT and houses. By a combination of lack of awareness, the complex tax system, and sometimes political intent, common errors arise.

Some examples from the December 2019 election campaign are:

  • Not realising that only around 5% of death estates suffer IHT each year – see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf
  • Not being aware that the residence nil rate band can increase the normal £325k nil rate band by £150k* – see https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
  • Thinking IHT is double tax, rather than often being partly or mainly the result of otherwise tax free growth (or not much worse “double tax” than VAT)
  • Hoping that giving away all or part of the house saves IHT – in many cases it makes things worse, due to reservation of benefit, pre-owned asset tax and loss of capital gains tax free uplift
  • Forgetting the instalment option – see https://www.gov.uk/paying-inheritance-tax/yearly-instalments
  • Worrying, when young and healthy enough that life cover can cheaply cover the IHT risk
  • Forgetting the transferable nil rate band – see https://www.gov.uk/guidance/inheritance-tax-transfer-of-threshold
  • Focusing on “40%”, rather than what actual blended tax rate might apply – eg the estate of a married couple (or widow/widower) with £1.2m house might suffer 8.3% IHT on that asset
  • Not realising that a reduction in the IHT rate, or its abolishment, might be balanced by the removal of the tax free uplift on death or private residence relief
  • In hoping for IHT to be replaced with something else, that an annual wealth tax might cause more hardship than IHT on an elderly low income and valuable house owning taxpayer
  • Worrying about IHT but not taking advice

If any others are spotted, I am happy to add to the above list.

Some additions:

  • Even if IHT is payable on the house, there may be other resources to draw upon, such as the deceased’s pension fund
  • In some circumstances, where more than one generation live in the family home, it is possible to gift and share part of the property with the younger generation without it being a reservation of benefit – see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14360

*it is this residence nil rate band that Labour’s 2019 manifesto suggests should be removed, leaving just £325k (but not £125k as some suggest, which is from an earlier report commissioned, but not written, by Labour).

More record keeping for trusts in 2020?

Guidance on record keeping obligations as at 2019 can be found here: https://blackshawtax.com/2018/07/30/hmrc-guidance-on-trust-record-keeping/

The change

This is likely to change and become more onerous once the UK adopts the 5th EU anti-money laundering directive (“5thAML”). The number of trusts affected by this may increase tenfold to 2 million. It will include many dormant trusts simply holding land or other non-income producing assets that currently do not need to formally register. In many cases the trusts will not have cash resources to pay for professional help to complete the database requirements and trustees could face personal penalties for non-compliance.

One hope is that the HMRC trust register will be improved. The current version appears to have been programmed by someone who does not understand the concept of either a trust or a database!

Transparency

It may also lead to more transparency and information being available on trust asset ownership (which may be a good or bad thing, depending on ones views on privacy).

The use of trusts

As ever, it is worth remembering that trusts are a useful vehicle to protect assets, for example minors, vulnerable persons, plus inheritance tax and wills planning encouraged by the tax legislation.

Resources

The consultation can be found here: https://www.gov.uk/government/consultations/transposition-of-the-fifth-money-laundering-directive

The EU directive can be found here: https://eur-lex.europa.eu/eli/dir/2018/843/oj

The ICAEW response to the consultation can be found here: https://www.icaew.com/-/media/corporate/files/technical/icaew-representations/2020/icaew-rep-04-20-fifth-money-laundering-directive-and-trust-registration-service.ashx

HMRC guidance on trust record keeping

In July 2018, HMRC updated its guidance on trust record keeping. This is a mix of tax and anti-money laundering requirements.

Dormant trusts may not have to complete a tax return or trusts register but there are still record keeping obligations, such as under para 44 and 45 of the The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

I recommend that all trusts have an annual trust meeting, asset review and simple accounts (even if just one page). Whenever I am asked to advise on a historic trust problems (eg missed IHT charge) a common theme is lack of annual meetings and accounts.

Here is the HMRC website link https://www.gov.uk/guidance/trust-record-keeping-for-tax-purposes

And a PDF version safari-30-jul-2018-at-1021.pdf

Don’t believe what you read in the press

This Telegraph article caught my eye. It explains a useful inheritance tax relief that can apply to larger gifts, after three years, in reducing the 40% rate. The original text made a common mistake in not noting that the gift needs to be in excess of the available nil rate band (otherwise it is tapering an already 0% tax rate).

It’s the type of article that can lead to a client saying “…but I read somewhere that…”.

(I sent a tweet to the writer, who corrected the original.)

IMG_0853