EJBC Chartered Accountants

With the budget less than a week away, our future tax regime, although not certain, is highly likely to impact individuals, particularly those fortunate enough to be higher earners.

This has made me think about getting back to basics when looking at tax planning advice.

When was the last time you reviewed your income streams to ensure that they are spread as evenly as possible between you and your spouse or civil partner?  Even if you are not a higher rate tax payer, there could be some benefits for you.
 

To give some examples:-

Investment income such as bank interest and dividends should ideally be held in the name of the lower tax earner.  If you currently pay tax at 50%, why pay higher rate tax on your investment income if your spouse or civil partner pays tax at a lower rate!
I appreciate that interest rates are low at the moment, however, even if your investment income is as little as £2000, paying tax at the 50% tax rate will mean your additional tax bill is £600, whereas a taxpayer who is not in the higher rate tax band, has nothing further to pay. 

Reallocating investment income can also be important for those taxpayers eligible for the aged related allowance.  For taxpayers 65 and over, your personal allowance is increased from £6,475 to £9,490 assuming that your income levels are below £22,000.
If you receive income above this level, the personal allowance is reduced on a sliding scale.  If you are on the borderline for receiving this allowance, you should consider carefully if any income streams can be paid to your spouse to keep your higher personal allowance intact.

If you are self-employed and your spouse / civil partner has no earnings, you should consider employing them in your business and paying them enough salary to cover their personal allowance at the very least.  If this income is recorded correctly, it won’t only save you tax, but will also give them a National Insurance record for the year, free of charge, which will count in the future when they come to apply for a state pension. 
You could take the above example one step further and bring your spouse or civil partner into your business as a partner. 

The partnership does not have to be 50:50 and may be set up as any percentage split to reflect their involvement in the business.  The idea of this type of tax planning would be to reallocate some of the business profits being taxed at 40% or 50%, to a partner who would pay tax at 20%.
 

A similar scenario would apply to those who trade through a Limited Company.  In this case, we would look to transfer ownership of shares to the lower rate tax payer. 
These are just a few examples of where reallocating income streams can prove useful from a tax perspective. 
 

A note of caution

Please remember that if you do reallocate investment income, you are giving away some control over that income stream, so if your spouse or civil partner decides to use their new found income to treat themselves, you may have little recourse!

Now that my top rate of income tax is a whopping 50%, will I get tax relief at that rate if I make charitable donations in this tax year? 

Yes. If you make donations to charities under the gift aid scheme you will get tax relief at the 50% rate. Your gift is treated as being made after 20% tax has been deducted. When you give £80 the gross amount of the gift is £100. Your personal thresholds for 40% tax and 50% tax are both extended by the gross amount of your donation. For your £80 gift you have an extra £100 of your income taxed at 20% rather than 40%, and an extra £100 of income taxed at 40% rather than 50%. In total you have gained tax relief of 50% (20% +20% +10%) on the £100 gross gift.        

My company has recently taken on an industrial unit that needs extensive fitting-out before it can be used by the business. How can I ensure that all the fittings I use will qualify for the maximum amount of capital allowances?
 

The cost of fittings that qualify as plant or integral features can be set against your company’s Annual Investment Allowance (AIA), which will give 100% capital allowance in the year of acquisition. The AIA cap has been increased to £100,000 per year for expenditure incurred on and after 1 April 2010. Plant is broadly stuff that is not fixed permanently to the building, such as shelves or display units. Integral features are fixed to the building and fall into these five categories:

• Cold water systems (not hot)
• Electrical systems (including lighting)
• Space or water heating systems, including a powered system of ventilation, air cooling or air purification
• Lifts, escalators or moving walkways
• External solar shading
   If the fitment does not qualify as plant or integral features it can qualify for 100% enhanced capital allowance (ECA) if it has energy or water saving qualities, and it has been included on the approved ECA list at:  http://www.eca.gov.uk/  

Normally a loss arising from letting of commercial or residential property, can only be carried forward to set against profits from that same property business. However, where part of the loss has been generated by the deduction of capital allowances, that part of the loss is available to set against the owner’s other income in the same tax year. 

A capital allowance generated loss is very unlikely to arise in connection with letting residential property as capital allowances cannot be claimed for equipment used in residential properties, but such allowances can be claimed for equipment or integral features used in or attached to commercial properties.

Improvements to commercial properties made since 6 April 2008, such as new lighting or air-conditioning systems are classified as integral features, and thus qualify for capital allowances.  All integral features and other plant and equipment that qualify for capital allowances can fall within the Annual Investment Allowance (AIA), which gives a 100% deduction in the year the cost is incurred. The AIA is capped at £50,000 per year for expenditure incurred before 6 April 2010, but that cap is doubled for expenditure incurred on or after that date.

The capital allowance generated loss from a let commercial property could be considerable where there has been high expenditure on items that qualify as plant, machinery or integral features.  Do be aware that losses made after 24 March 2010 may be barred from being set-off against other income if there was a plan in place to deliberately avoid tax by generating those losses. For further information or help, get in touch with Emma at emma@ejbc.co.uk  

With the impending changes to capital gains on the horizon, lots of clients are asking for advice on whether they should look to sell their buy to let properties.  Such a decision may be taken out of their hands if the proposed changes come in on budget day, but if they are delayed until the new tax year, what should you do?
 

Things to consider:
 

What would you do with the proceeds of a property sale?  Putting the proceeds in a building society will not yield a high return, so what other savings options are available? 

What return are you currently getting, could it be improved?  If you plan to reinvest in say another property, think about the buying costs such as legal fees and stamp duty.
 

Also consider that many other people are also considering selling at the moment. This could lead to the market being flooded with similar properties, if so, how much could this affect the selling price of your property?
 

Before making a decision, explore all the CGT reliefs that maybe available to you.  Although the tax rate maybe on the increase, there are still some CGT reliefs available such the principal private residents relief and letting relief.
 

Tax has a huge influence over decisions we make, as we all want to pay as little as possible.  If you are currently facing the dilemma of sell or not to sell, please come and talk to us so we can run through all of your options. 

Emma Thomas ACA FCCA CTA

emma@ejbc.co.uk