Private Client Year - End Briefing

With the 2017/18 tax year coming to a close on 5th April 2018, we wanted to take the opportunity in these last few weeks to update you on some remaining planning points and highlight some of the significant changes shortly coming into effect in the 2018/19 tax year.

The Personal Allowance (Income Tax) and Annual Exemption (Capital Gains Tax)

• There will be a modest increase to both (to £11,850 and £11,700 respectively) from 6th April, however the personal allowance remains subject to tapered reduction where income exceeds £100,000.
• For non-domiciled taxpayers, neither the personal allowances nor the annual exemption is available where the remittance basis is claimed and offshore income exceeds £2,000.
• The nil rate band for dividends will be reduced from £5,000 to £2,000, so where a dividend could be paid in the last few weeks of the current tax year a saving of up to £1,143 could be achieved.
• A transfer of income-bearing assets to a spouse with little or no income continues to be an effective tax planning measure as the growth in these allowances has outpaced inflation over the past few years.  Appropriate notification must be made to HMRC where the beneficial interest in an asset is at variance with its legal ownership.
• Where a household has a non-working spouse but its overall income is such that Child Benefit is unavailable/repayable, a claim should still be made to ensure a qualifying year is earned for National Insurance purposes.

Pension and Enterprise Investment Scheme (EIS) Allowances

• While unused pension allowances can be carried forward for three years, many clients in receipt of a performance-related bonus toward the end of the tax year have been caught by the introduction in 2016/17 of the tapered annual allowance, which is gradually reduced from £40,000 to £10,000 (gross) for adjusted incomes between £150k and £210k.
• The lifetime allowance for 2018/19 is £1,030,000.  It is possible to protect a fund of up to £1.25m with an appropriate claim.
• EIS investments made at the tail end of the 2017/18 tax year can still be carried back to 2016/17, thereby providing immediate tax relief in respect of any tax liability due on 31st January 2018.
• For 2016/17 and 2017/18, the EIS annual investment limit is £1m, with any carry backs restricted to this overall limit for relief in a single year.
• As EIS relief operates as a ‘tax reducer’, care should be taken not to claim relief which exceeds the tax liability for a given year.
• The government is expected to tighten the rules for both EIS and Venture Capital Trust schemes with retrospective effect from 15th March 2018 to ensure that an appropriate degree of investment risk is still present to justify the generous tax relief available.  Investments made before this date will be assessed under the previous criteria.
• From 2018/19, an additional £1m EIS allowance will be available where the investee company qualifies as ‘knowledge intensive’.  Broadly, this where the company spends a minimum amount on R&D and has 20% of its employees carrying out such work at a highly qualified level.

Inheritance Tax (IHT)

• An often-neglected relief from IHT is the ‘annual allowance’ of £3,000, potentially saving IHT of £1,200 per year.  Any unused allowance can only be carried forward one year, so this is worth factoring into any ongoing estate planning with a view to considering a gift in these last few weeks.
• Also overlooked as a planning measure is the ability to make ‘gifts out of income’ which are exempt from IHT.  It is necessary to establish a pattern of giving over a number of years and to ensure that the gifts are made from disposal income.
• The first phase of the Residential Nil Rate Band (RNRB) of £100,000 was introduced at the beginning of the current tax year and will rise to £125,000 on 6th April 2018.  This is only available where a residential property is bequeathed to a ‘lineal descendant’ (children, grandchildren et seq.), however tapering applies where the total estate exceeds £2m.  A valuable planning point is that Potentially Exempt Transfers (PETs) made less than seven years before death reduce the value of the estate for RNRB purposes even though they are otherwise brought back into charge for IHT.
• The RNRB is transferrable between spouses in much the same way as the ‘regular’ nil rate band except that, crucially, it is deemed to have been inherited from a spouse who died before 6th April 2017.

Second Stage of the Mortgage Interest Restriction for Let Properties

2017/18 saw the first of a four-stage restriction of mortgage interest relief for private ‘buy-to-let’ landlords, whereby 25% of the allowable interest is limited to 20% relief.  2018/19 will see this increased to 50%.

Moreover, the mechanism of restriction is such that interest relief is removed entirely for purposes of calculating income for the personal allowance and pension allowance tapering.  Highly leveraged taxpayers may therefore find that the overall impact is greater than 20/25% difference suggested by the headlines.

Some taxpayers may therefore wish to reconsider deleveraging where possible.  While the interest restriction does not apply to companies, cost of incorporating the letting business in terms of capital gains tax and SDLT is likely to be prohibitive in most cases.

Requirement to Correct (RTC)

The government has introduced a new penalty regime, with both civil and criminal aspects, in respect of undeclared overseas income which will come into effect on 1st October 2018.

Of most concern to taxpayers and their advisors is the ‘strict liability’ criminal offence, carrying a maximum penalty of six months’ imprisonment, which is now available to HMRC where evaded tax from offshore assets exceeds £25,000. ‘Evaded’ in this case means failing to notify HMRC, omitting the income/gains from the relevant return, or simply failing to submit a return.

As with any strict liability offence, HMRC will not have to prove an intention to evade tax or indeed any degree on culpability on the part of the taxpayer. The only defence is one of ‘reasonable excuse’ for failing to notify or having taken ‘reasonable care’ in the submission of the return which is nonetheless inaccurate, both of which are borrowed from the existing civil penalty regime and are narrowly defined.

One can imagine certain taxpayers who rely entirely on family members to manage their finances and tax reporting falling foul of this legislation and relying on HMRC to take a reasonable and proportionate approach to their new powers.

The civil dimension of the RTC legislation involves the Failure to Correct (FTC) penalty regime.  This displaces the existing regime where the non-compliance relates to offshore assets during the relevant period.

The FTC regime provides for penalties of up to:

• 200% of the undeclared tax;
• An additional 50% of the above where the taxpayer has deliberately moved assets to a jurisdiction which does not partake of information sharing arrangements with the UK government;
• 10% of the value of an asset connected to the non-compliance (e.g. a cash holding in the case of undeclared interest), in addition to the penalties above, where the tax involved exceeds £25,000.

We therefore encourage all taxpayers with offshore assets to ensure their tax affairs are fully compliant before 30th September 2018, even if professional advice has previously been taken.

The above comments are general in nature and should not be relied upon in making decisions.

Should you wish to discuss any of the above points in further detail, please speak to one of the contacts below:

Stephen Smith   +44 (0) 118 921 1 352 /

20 March 2018

To download a pdf version of this publication click HERE

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The information in this notice is intended for general guidance only.
Throgmorton does not accept any responsibility for losses incurred to any person acting or refraining to act as a result of the information in this notice. Advice should be taken in the context of specific circumstances.