How will the new financial year affect YOUR business finances?
With the start of a new financial year, it makes sense to consider the financial and tax changes that are due to come into effect, and how they could be used to improve your financial security.
Assessing any potential pitfalls can help you lessen the impact or maximise the value of the new rules. Here we list some of the key changes that could affect your finances.
ISAs
From April 2017, savers will be able to contribute £20,000 a year into standard ISAs, while £4,128 is the new limit for junior ISAs; and the choice of different ISAs available is set to expand further.
The much talked about lifetime ISA, launched 6th April, will be available to savers aged 18-40 who will be able to save up to £4,000 per tax year, to which the Government will add a 25% bonus. The funds can be accessed at age 60 or for a first property purchase. The Government plans to impose a 5% penalty, alongside returning the bonus and any interest or growth on this, if funds are withdrawn for any reason other than these or because of serious ill health.
Saving this way, as opposed to a pension, fails to appreciate the cumulative effect over time of employer contributions into a pension. Remember, if all goes well, salaries increase over time and allowances for saving into pensions are much higher.
Innovative Finance ISAs, investing in peer-to-peer loans, launched in the market last year, but more are
expected to come on the market this financial year as firms gain authorisation for their products. Such products sound attractive with 6 to 8% annual income offered – however, peer-to-peer is a new sector, which has seen massive growth due to the hunger for income, and has experienced some troubles already.
Most providers offering the Innovative Finance ISA are focused specifically on P2P loans and are new to the ISA market. Caution is therefore advisable.
£500 PENSION ADVICE ALLOWANCE
This will allow people below the age of 55 to take up to £500 out of their pension pots tax-free and put towards the cost of regulated financial advice. This could be advice on multiple pension pots and other savings products such as ISAs, rather than restricted to a single product.
BUY-TO-LET
From April, landlords will begin to lose the ability to claim tax relief back on their mortgage interest at the rate they pay income tax – particularly affecting those who have borrowed heavily.
Holding properties within a company, whereby the rules do not apply, can circumvent this problem. Therefore, landlords can use limited companies to buy the property from themselves and paying corporation tax on profits can still be more tax-efficient. Of course, this has its own disadvantages, such as stamp duty payable on the repurchase.
In most cases mortgage lenders will require the company to be purposefully set-up for this, and insist that the SIC be for Lettings Business only, Although called an SPV (Special Purpose Vehicle) it does not have the SPV criteria usually referred to.
RESIDENTIAL NIL RATE BAND
Introduction of the first tranche of the new residential nil rate band (RNRB), dubbed the “family home allowance” in April adds an extra £100,000 worth of Inheritance Tax IHT)-free allowance.
The threshold will increase until 2020, when it will be a total of £175,000 of extra allowance per individual. The rules will not apply if the estate is too large, the house too small, or if the property passes to anyone other than children and grandchildren of the deceased, or their spouses / civil partners.
Assets passed via a discretionary trust do not therefore qualify, because
assets do not pass directly to direct descendants. The limit is also tapered for estates over £2 million.
This doesn’t mean that trusts should be avoided or that leaving everything to your partner to benefit from the new rules is necessarily the best route. If after your death, your partner needs care, the local authority will take into account everything they own in order to determine whether they can pay for this; including your
family home. By changing the legalities around property ownership and using a trust, your partner can use your share of assets during their life and you can choose who will inherit this following your death.
Seeking Independent financial advice can help you use the rules to suit your own particular circumstances.
OTHER NEW TAX YEAR CHANGES
Alignment of National Insurance Contributions (NIC) for employers and employees:
Both employers and employees will start paying NIC on weekly earnings above £157.
Changes to benefits applicable under salary sacrifice schemes:
This restriction on non-taxable lifestyle perks, such as gym contracts, mobile phones and company cars (that are not low emission vehicles), that can be exchanged for taxable salary has been mooted for a while. The more practical benefits such as childcare and pension contributions won’t be affected. The benefits from salary sacrifice, if they are in place
before April 2017, are protected for up to one year and up to 4 years for cars, accommodation and school fees.
Non-domicile taxation:
Income Tax, Capital Gains and Inheritance Tax: The permanent ‘non-dom’ status for tax purposes is to come to an end. Individuals not domiciled in the UK will be deemed to be UK domiciled for tax purposes if they are either resident in the UK for 15 of the past 20 tax years, or if they are born in the UK with a UK domicile of origin. Inheritance tax will apply to UK residential properties which are held by non-domiciled individuals through overseas vehicles.
Roll out of the removal of tax deduction at source for savings income:
Previously, income tax was deducted at source for interest payments, but this changed for banks and building societies last year. This April’s changes will see the distributions from open-ended investment companies, authorised unit trusts and investment trust companies, and peer-to-peer loans also affected by the change. Now savings income will need to declared via a tax return.
The General Election 2017
Due to the General Election, a shortened version of the original 2017 Finance Bill was enacted by parliament on 27 April, containing only 148 pages, compared to 762 pages in the original Finance Bill published on 20 March 2017.
Measures that have not been included in the Finance Act 2017 which may be of particular interest to farmers and landowners include:
- Primary legislation for the Making Tax Digital regime – see below
- Cash basis for property businesses was to apply from 6 April 2017
- Trading income allowance of £1,000,
- Property income allowance of £1,000
If a Conservative government is re-elected then it is likely that all of these items will be included in a second 2017 Finance Bill. It is to be hoped that deferring the legislation for the Making Tax Digital regime will allow time for HMRC to provide clarification on areas of concern arising from the proposed implementation (including the time limits for returns being incorporated into primary legislation) and proper scrutiny of the proposed measures by parliament.
Making Tax Digital
The significant change for most businesses will be the requirement to submit quarterly income and expense details to HMRC electronically from April 2018 (although this may be delayed until later in 2018/19, depending upon the year end of the trading business).
You may be aware of this from last year’s annual update which noted that HMRC had published “Making Tax Digital” setting out their vision that by 2020 most businesses, including those letting out property, would be
required to keep track of their tax affairs digitally and report their results using integrated software to HMRC quarterly.
Following consultations issued in August 2016 and HMRC’s responses at the end of January to the feedback provided by professionals (including ourselves), it was thought that all unincorporated businesses with a turnover in excess of £10,000 would be required to start using the new Making Tax Digital (MTD) service from April 2018.
However, for one year from April 2018, the Chancellor has announced that businesses (including landlords) will only be required to start using the MTD service if their turnover exceeds the VAT registration threshold (£85,000 for 2017/18, but will increase slightly for 2018/19). This increase in the MTD threshold will benefit those who receive rental income personally, although they will still need to report the income and expenses quarterly from April 2019, when the MTD threshold reduces to £10,000.
This one year relaxation will not affect most trading businesses (sole traders and partnerships), as their
turnovers will exceed the VAT registration threshold.
The £10,000 MTD threshold is a low turnover figure (note that this is turnover, not profits), which has already been criticised for being far too low by many respondents to HMRC’s consultation and remains subject to amendment as the Finance Bill is debated and made law (usually in early July).
HMRC optimistically anticipate that these changes will reduce errors by around 10% on an ongoing basis and give businesses “a clearer view of their tax position in-year, enabling them to plan to meet their tax obligations at minimum cost and minimum disruption”. As most farming is a seasonable business, I suspect that the in-year position will be little clearer for farmers, although it may benefit landlords, but that there will be administrative costs associated with supplying HMRC with the information required.
If you need advice or clarification on any of the above points, we would be happy to help! Call us on 01473 558866 or contact us via the website.
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