Inheritance tax – don’t pay what you don’t have to

We have all heard the saying before ‘the only two certainties in life are death and taxes’, so when it comes to inheritance tax (IHT) this means they can turn up together.
Almost £4.9 billion was paid in inheritance tax in 2016/17, which is a record high. No wonder the Chancellor Philip Hammond has asked for a review of ‘simplification’.
SO, HOW MUCH WILL YOU PAY?
The first step is to try and work out if you will be affected by IHT. Under normal circumstances, IHT is paid at 40% of the value of your entire estate, which is your property, money, assets and possessions over £325,000 (the normal nil rate band). There’s also an additional allowance if you pass on your family home to a direct descendant, which is currently set at £125,000. The simplest way to check if you might be affected is by using an online calculator, this will work it out for you. Although they won’t take into account all of your personal circumstances.
HOW TO REDUCE YOUR IHT TAX BILL
Making gifts
There are plenty of ways to reduce or remove IHT altogether and, the sooner you do this the better. One way is to make gifts.
Money towards house deposits or university fees, are great ways to give your loved ones that helping hand towards their future. Gifts like this can also reduce the size of your estate and your potential IHT bill, though there are rules to follow and to adhere to.
WHAT TYPES OF GIFTS ARE AVAILABLE?
1. Exempt gifts – these are IHT free immediately.
2. Potentially exempt gifts – these may become IHT free over time.
3. Chargeable gifts – these might mean an immediate IHT charge.
You should however be aware that once you make your gift you can’t take them back, so it is worth considering if the recipient will be responsible with it.
The gift becomes the property of whoever you’re giving it to. Therefore, you will no longer benefit from any income and you won’t be able to access the capital in the future if you needed it.
You should always consider taking professional financial advice when planning life changing financial situations. Your tax advisor at McPhersons will show you the steps to take when planning for IHT.
Tax rules and benefits are constantly changing and depend on personal circumstances. Your tax advisor can check that you are up-to-date and are making the most of your personal allowances.
Contact us or give us a call and we’ll help you understand whether IHT is likely to affect you, and whether you could take action to reduce it.
Ainsley Gill
McPhersons Chartered Accountants
info@mcphersons.co.uk

What are the alternatives to buy to let?

HMRC seems determined to make things less attractive for buy to let landlords by increasing stamp duty as well as phasing out the ability to claim your mortgage interest as an expense. The latter means that some landlords will be paying tax on income that they don’t actually receive due to mortgages. So what are the alternatives?

Rent a Room
Under the Rent a Room scheme, you are allowed to claim rental receipts of up to £7,500 per annum tax free for renting a furnished room in your home. You can rent out as much of your home as you like. This scheme can’t be used for homes converted into separate flats.
In addition, you can also provide services to these guests such as cleaning and laundry, possibly even providing meals. This residence has to be your main or only residence.
Furnished Holiday Let (FHL)
A Furnished Holiday Let is a type of rental property classification in the UK and Ireland. It provides some tax advantages as long as it meets requirements relating to availability, actual bookings and level of furnishings.
Contrary to longer term lets, capital allowances can be claimed to kit out your holiday let (making it higher spec would obviously attract higher income). Other expenses that can be claimed are similar to a buy-to-let property; interest on loans, bills, letting fees, cleaning products, cleaning costs, general maintenance costs. Beware of personal use – if you use the property for half the year, only 50% will be considered commercial expenses.
Earnings are classed as ‘relevant earnings’ so can be used to make pension contributions.
When you sell the property you may be able to claim Capital Gains Tax reliefs which are also not available for normal buy-to-let property owners.
To top it off, council tax is not applicable if you rent the property out for more than 140 days per annum. However, business rate property tax is payable (although you may be eligible for small business rate relief on this.
You may wish to consider whether these benefits outweigh the risk of not filling the property for sufficient days of the year. To qualify for the above, the property must be available to the public to let for at least 210 days as well as actually let for 105 days.
In addition, if your income exceeds the current VAT threshold which is £85,000, you will have to become VAT registered and hence charge VAT on rental incomes. This only becomes an issue with multiple properties (or indeed expensive ones).

Contact our tax department for advice on Rent a Room, holiday lets or buy to let properties
Ainsley Gill
McPhersons Chartered Accountants
info@mcphersons.co.uk

Landlords – How to beat new tax changes

The chancellor’s plan to remove mortgage interest tax relief, announced in the Budget and effective from 2017, will hit hundreds of thousands of property investors.
George Osborne at a stroke wiped almost 11% off the gross returns from buy-to-let properties, leaving many landlords facing the prospect of a future with increasing year on year losses, when he slashed higher-rate relief on mortgages in the Budget.

These losses could compound further should interest rates rise. This tax change, which begins in 2017, will see landlords lose a quarter of their higher-rate relief each year until 2020, when it will be restricted to 20% on all mortgage interest.

How to beat the tax changes

If landlords remortgage now, they will protect themselves against rising borrowing costs and they may be able to claw back the shortfalls from the new tax changes. With tax relief available to higher-rate taxpayers being phased out, it will become more important for landlords to reduce their borrowing costs.

Remortgage

As an example, if a buy-to-let landlord is paying 5% on a typical £120,000 mortgage, which has a rental income of £750 per month or £9,000 annually. After allowing for expenses, agents’ fees and mortgage interest he could be left with a £612 annual profit after tax.
However, when tax relief is reduced to 20% this £612 profit turns into an annual loss of £588. By remortgaging typically at, 3.79% with a five-year fixed-rate loan, he could save £1,452 annually on his interest bill, turning that annual loss back into a profit of £574.
By taking no action and if interest rates rise to say 7% by the time that higher rate tax relief has completely disappeared in 2020, you could be looking at an annual loss of £2,784.

Utilise your spouse’s personal allowance

When a profit is made, if your spouse is not working, you may be able to assign part or all of the rental income to them, allowing them to exploit their personal tax allowance, due to rise to £12,500 by 2020, or 20% tax band.

Form a company

The Government is cutting corporation tax to 19% in 2017 and 18% in 2020. One way for higher-rate taxpayers to cut their tax bills might be to invest via a company, but proceed with caution, as there can be complications. By being a business, all costs can be offset against rental income, so in theory profits may be further improved.
Within a business, income can only be paid out to the directors as a dividend. From next April they can each receive £5,000 annually tax free. After that, dividends paid to higher rate taxpayers are reduced by 32.5%, while basic-rate taxpayers pay a 7.5% dividend tax.

Reduce borrowings by selling

Some landlords, as a consequence of this new tax law, may review selling up or paying off some of the loan, while others will wish to reorganise their arrangements.
Where a landlord has a portfolio, it may make sense to sell one property and reduce the borrowings on the others.

Rent increases

Many professionals believe rents will have to rise, due to the chancellors’ tax change. There has been a substantial shift, with rents climbing faster than property prices, but now there is still further to go, particularly given that landlords have been targeted in the Budget
How buy-to-let mortgages work
The crucial difference with a buy-to-let mortgage is that the lender takes rent as the primary source of income, unlike with a residential mortgage where it is your salary that counts. Some may also take landlord’s personal income into account. Most buy-to-let mortgages are also interest-only. This means lower monthly payments and tax efficiency, but the debt is not being paid off. Typically lenders will want prospective rental income, verified by independent sources, to meet at least 125 per cent of the monthly interest payment on the loan. This will either be based on the pay rate for fixed and tracker deals (i.e. the initial rate before the deal ends) or the lender’s standard variable rate (potentially plus an extra 1 per cent or more). They may stress test you against higher rates arriving once a deal period ends. The rental cover test is to ensure landlords can handle periods when their property may not manage to be let, reassure the lender that they will not default and make sure they are lending against a reasonable asset. Lenders will generally lend only to those with larger deposits, with most deals asking for at least 25 per cent put down by borrowers. The best deals are at the lowest loan-to-values of 60 per cent and below. Any mortgage you have on your own home can potentially cut the amount you can borrow under the buy-to-let scheme if you are relying on personal income to shore up the deal.
The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Levels, bases and reliefs from taxation are subject to change and their value depends on the individual circumstances of the investor. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

McPhersons Financial Solutions 50 Havelock Road, Hastings, East Sussex TN34 1BE T: 01424 730000 F: 01424 457080 E: info@mcphersonfs.co.uk
Registered Address: Suite 1, 4th Floor, International House, Dover Place, Ashford, Kent TN23 1HU Registered in England No 5027747
Mcphersons Financial Solutions is a trading style of Absolute Financial Management Ltd which is authorised and regulated by the Financial Conduct Authority

Need more help?

This feature aims to give some informal hints and tips. McPhersons Financial Solutions are offering businesses free advice so get in touch now to arrange your meeting. Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at McPhersons’ London, Bexhill or Hastings offices. www.mcphersonsfs.co.uk

Is there nowhere to hide from the Taxman?

Every month, Peter Watters, FCA, shares some useful financial tips. This month, the focus is on HMRC Tax Investigations. HMRC’s determination is to get its pound of flesh from the middle class. How can you stay on the right side of the law but still keep your tax bills to a minimum?
The taxman is now going after the middle classes, no longer targeting just the super-rich, but everyday professionals are now feeling the pressure of this greater scrutiny with an increased likelihood that their tax returns will be challenged.

HM Revenue & Customs (HMRC) has doubled the number of inquiries into taxpayers it feels are not paying enough tax over the past two years. When such inquiries become in depth investigations they can take years to conclude.

New powers have been proposed to allow HMRC to take money directly from taxpayers’ bank accounts, including joint accounts, without first obtaining a court order. If the proposals, which are subject to a consultation, are approved, there are concerns that HMRC will withdraw
incorrect sums from accounts before giving taxpayers a chance to argue their case.

HMRC says that they do not plan to empty bank accounts completely as rules are in place to ensure that, after the tax owed is taken, a sum of £5,000 must remain in the individual’s bank accounts. The money can only be taken after four requests for the tax owed have been ignored.

Other existing measures, such as the creation of special “task forces” to target certain job sectors such as freelancers and buy-to-let landlords, have also helped
boost the Revenue’s total tax take.
HMRC has beefed itself up by doubling its use of bailiffs and debt collection agencies over the last two years. Its focus on evasion and non-payment looks set to gather force.

One of the most controversial snooping powers the taxman uses to spy on individuals is obtaining information from third parties, including banks, credit card providers, employers and other government agencies such as the Land Registry.

The Revenue will also snoop on the websites that taxpayers use and check up on an individual’s mobile phone usage. They can use bugging or telephone
tapping, but in practice they are rarely used.

This policy is seen as hitting the ‘easy’ target, using all its powers to crack down on individuals, rather than companies or other better resourced institutions. The
sums involved may not be huge when compared to going after a major corporate, but individuals are a much easier target to squeeze and collectively they are now paying out a huge amount of extra tax. They are more likely to have made tax return mistakes but they are also more likely to capitulate without arguing, making HMRC confident of success.

Another aggressive tool used by HMRC is by threatening taxpayers with higher penalties as part of its tougher stance, which has helped increase tax returns for the Revenue because individuals are paying automatically to avoid receiving higher fines rather than looking at the
amount owed and challenging the taxman if they think it is incorrect.

Need more help?
This feature aims to give some informal hints and tips. Mcphersons are offering businesses free advice so get in touch now to arrange your meeting – we can help you protect your money! Simply email Peter Watters p.watters@mcphersons.co.uk or call our Head Office on 01424 730000 for a free consultation at mcphersons’ London, Bexhill or Hastings offices. www.mcphersons.co.uk

Staff Suggestion Awards

A lot of our clients ask if they can give tax free bonus’s to their clients, and of course generally the answer is no.
However, there is this scheme ‘Staff suggestion Award’. Please see an extract from HMRC below: If you have any questions, please call Steve Cooper on 01424 422038.
EIM06610 – Employment income: exemption for suggestion scheme awards: conditions for exemption
Section 321 ITEPA 2003
The conditions that must be satisfied for a suggestion scheme award to qualify for exemption under Section 321 ITEPA 2003 are as follows:
• the employer’s scheme must be open on the same terms to
• all the employees of the employer, or
• a particular description of them. For example, a scheme which is open to all the employees in a particular building, or in a particular geographical area, will satisfy this condition.
• the suggestion must relate to the activities carried on by the employer
• the suggestion was made by an employee who could not reasonably have been expected to make it in the course of the duties of their employment, having regard to the employee’s experience
• the suggestion was not made at a meeting held for the purpose of proposing suggestions
• the award is an encouragement award (see EIM06620) or a financial benefit award (seeEIM06630).
If all the above conditions are satisfied, the award will be exempt from tax if, or to the extent that, it does not exceed the permitted maximum for the award. If an award that satisfies the conditions exceeds the permitted maximum, only the excess will be taxed.

The amount of the permitted maximum depends on whether the award is
• an encouragement award (see EIM06620), or
• a financial benefit award (see EIM06630).

Posted in Tax

2013/14 Personal Tax Tips

Need help with personal tax in Bexhill, Hastings and Vauxhall? Look no further!
Here are some recent personal tax changes that you may be interested in.

CHILD BENEFIT
From January 2013, when an individual is earning more than £50,000, their entitlement to Child Benefit is reduced by 1% for every £100 over this limit. At £60,000 and above, it is completely withdrawn. However, it is not always the best action to stop the benefit, as the non-working partner could lose many years of state pension contributions as a result. Do NOT just stop it! Speak to a tax advisor first!

PERSONAL ALLOWANCE
The personal allowance was increased in the budget this year to £9,440. This is the amount you can earn before you have to pay income tax and applies whether you are employed or self employed. The increase means that each basic rate taxpayer will pay £267 less tax each year. If you are employed, it is advisable to check your tax code on your payslip to ensure you are receiving this increased allowance. Your tax code should be 944L (unless there are any other deductions or additional allowances you know of).
If you are a higher rate tax payer, it is important to note that married couples/civil partners can utilise both allowances by transferring income-producing assets to your spouse to benefit from their lower taxable income.

ISA ALLOWANCE
Every year, everyone in the UK receives an ISA allowance. For this year, the allowance is £11,520 (£5,760 in cash). To reap the greatest rewards from this, you should take advantage of it as soon as possible in the tax year to earn tax free interest on your savings.

LATE TAX RETURN PENALTIES
HMRC are now issuing automatic penalties for late self-assessment returns. The deadline is 31st January for online returns. The penalty is £100 plus further daily penalties. This can amount to a significant penalty of at least £1300 for a return that is 6 months late!

CAPITAL GAINS TAX
The annual tax-free allowance allows you to make a certain amount of gains each year before you have to pay tax. For individuals, personal representatives and trustees for disabled people, this amount is £10,900 for 2013/14. See our October issue for more on Capital Gains Tax.

DON’T GET STRESSED, GET ADVICE FROM AN ACCOUNTANT/TAX ADVISOR! – This is the most effective way of finding the best solution for you.

DISCLAIMER This feature aims to give some informal hints and tips. McPhersons Chartered Accountants will not be held responsible for any inaccuracies. For detailed advice, please contact McPhersons to arrange a consultation.

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