November 2007 Newsletter

FOREWORD

Dear all, I hope you find our November e-brief informative. As you are all aware the Fireworks started in October this year when Chancellor Alistair Darling announced his Pre-Budget speech. This months e-brief deals largely with the positive and negative impacts of the proposed changes that businesses should be aware of.

I would also like to thank you for your interest in our new offering, MAMUT business software following last months e-brief. The interest has been phenomenal and I’m delighted that many of you are considering the benefits of this powerful business tool.

Regards

Laurence Moore (Chairman, Prime Chartered Accountants)

Back To Top

Have You Done Your Tax Return Yet?

If you haven’t done your tax return for January it would probably indicate that either you are confident doing all the calculations yourself or you’ve made life easier and used Prime’s Tax specialists to do it for you!

You might also be the sort who hides away from anything to do with tax and have just not yet got round to opening any of those HMRC envelopes! The first step in doing the tax return is the same whether you are going to do it yourself or use an accountant and unless you are going to do it online you are going to have to do the calculations.

If you want to do it online and haven't done so before, the first thing you must do is register and this can take a couple of weeks, so get started now. You need details of your income and tax deductible expenses for the year ended April 5, 2007 and if you are in business as a sole trader or partner the details from the business accounts which ended in that year (presuming it is not a new business).

On the income side, ignoring your business profits part, you will need to ensure that you have collected together all your sources of income such as building society interest, dividends received, income from property, etc. If you are employed anywhere you will need to ensure that you have all the returns provided by your employer and in particular the form P60 and P11D. If you have share options or anything similar check the paperwork and see if anything needs reporting.

Things that often get missed are interest on bank current accounts and sometimes taxable benefits provided by third parties. Be careful with building society statements and check that the annual statements they provide are for the income tax year, not some other period. Many people have failed to report income from property, especially with buy-to-let mortgages, where the income is less than the mortgage repayments, but forgetting that the repayments may include a capital element.

Address whether you have any capital gains to report - usually on stocks and shares or large assets but do not forget possible gains on life policies, etc.

One of the usual reasons for the tax return not yet being done is that the business accounts have not yet been finalised (or even started!) and the figures from this can be the single most significant item. You need to get these together sooner rather than later, as if you've had a bad year you may be able to get some tax back now. If you've had a good year, you need to have as much notice as possible about the inevitable tax bill which will follow. Clearly if you’ve been working with Prime Chartered Accountants you would avoid these issues.

Ensure you have all your tax deductible expenses available some will be included in your business profit assessment but others may need collecting. Have you included all your pension contributions and business loans? Often forgotten are all the odd gift aid payments we make over the year - particularly those entry fees to charity-owned attractions such as the National Trust.

If you are doing your tax return on-line there are limitations to what can be done. Some of the report pages are not available - just because you can not do it on line does not absolve you from the responsibility. If you have not previously submitted a return it is your responsibility to do so if your circumstances have changed, which would mean you may owe additional tax. It may be that you have previously been employed and had everything reported under PAYE and are now receiving a state pension -remember this is taxable income.

The single most important thing about completing your tax return - after producing business accounts - is to keep a record of all your bits and pieces of income and expense so when you do your return items are readily to hand.

If you need any advice or support with Tax Returns do not hesitate to contact Sarah Nickols in Prime Coventry on 024 7655 4310 or Jan Hornby in Prime Solihull on 0121 711 2468.

Back To Top

Inheritance tax change welcomed

Chancellor Alistair Darling announced in his Pre-Budget speech a change to the way in which the inheritance tax (IHT) nil rate band of £300,000 can be used for married couples and civil partners.

In order to understand the implications of the change it is important to have an understanding of the principles of IHT. Transfers of property between spouses or civil partners are generally exempt from IHT. This means that if an individual dies and leaves some or all of their property to their spouse or civil partner, then this is not chargeable to IHT. If they do not have sufficient assets which they are willing or able to leave elsewhere then they may not fully use their nil rate band.

This problem with ‘wasting’ the nil rate band, combined with large increases in the value of many family homes, has meant than many families had been inadvertently drawn into the IHT net.

The Pre-Budget change means that any nil rate band unused on the first death may be used when the surviving spouse or civil partner dies.

This change is effectively backdated for widows or widowers whose spouse died before the announcement of the change, as long as the ‘surviving’ spouse or civil partner dies on or after 9 October 2007. The amount of the nil rate band available for transfer will be based on the proportion of the nil rate band which was unused when the first spouse or civil partner died.

The following gives an example of how the rules will work:

Mr Smith’s Will states that on his death he will leave his estate including his share of the family home to his wife. At the date of his death the nil rate band is £300,000.

On Mrs Smith’s death she will be able to make use of her own nil rate band of say £350,000 (which is the band proposed for 20010/11) together with the unused percentage of her late husband’s nil rate band being a further £350,000. Her total nil rate band will be £700,000.

This is a significant change that will affect many families. If you want more detaled help as to how this will affect you do not hesitate to contact Sarah Nickols in Prime Coventry on 024 7655 4310 or Jan Hornby in Prime Solihull on 0121 711 2468.

Internet Link: HMRC notice.

Back To Top

Capital gains tax taper relief to be abolished

The Pre-Budget speech also included the shock announcement that taper relief for capital gains tax (CGT) will be abolished from 6 April 2008. This announcement took everyone by surprise and it is still unclear in some circumstances how these rules will be applied. There is also much speculation that the proposed changes may not be implemented or may be deferred.

HMRC have however issued several examples of how they envisage the rules working. At the same time as abolishing taper relief the government proposed to change rate of CGT to a flat rate of 18%. Higher rate taxpayers currently pay CGT at 40%.

Taper relief

Taper relief was introduced in 1998 and can significantly reduce the “amount of the amount” of any gain chargeable to CGT by as much as 75%. The percentage of the relief available depends on whether the asset is classed as a ‘business’ or ‘non-business’ asset and, also, the period of ownership of the asset since 1998 (when the rules were introduced).

To give a straightforward example, if you sold some shares that you have owned for two years that have always been a business asset then you would pay tax on the chargeable gain (proceeds, less cost, less 75% taper relief). The remaining gain would be taxed at your top rate of tax of say 40%.

If you sell the same shares on or after 6 April 2008 taper relief will no longer be available to reduce the amount of the taxable gain. The rate of tax applicable to taxable gains will be changed from 6 April 2008 to 18%.

The Chancellor confirmed that the annual exemption, which for the current tax year is £9,200, will continue to be available in the next tax year. The amount of the exemption has not yet been announced.

Inflation allowance

Another complication in current capital gains computations is that if you have assets which you acquired before April 1998 you are currently allowed to include an element of inflation in your capital gains tax computation. This inflation allowance, known as indexation, increases the cost of your asset and therefore reduces the amount of the taxable gain. This relief will also no longer be available in computations from 6 April 2008.

Will I have more tax to pay?

These rules will generally increase the amount of tax payable by individuals who own assets that currently qualify for full business asset taper relief. There are many conditions that have to apply for assets to qualify, and the definition of a business asset has changed since the introduction of the rules in 1998.

On 31 October 2007 The Times published an article suggesting that the Government was considering the introduction of a limited form of retirement relief. This would allow persons retiring from business to make a tax free gain on the sale of their chargeable business assets. The amount of tax free gain mentioned in the Times article was £100,000. We are still awaiting confirmation of the detail from Government sources.

If you are planning to sell assets in the near future please contact Sarah Nickols in Prime Coventry on 024 7655 4310 or Jan Hornby in Prime Solihull on 0121 711 2468 so we can advise on the different taxation consequences of selling before or after 5 April 2008.

Internet Links: HMRC notice.

Back To Top

Additional Maternity and Paternity Pay and leave

The government had previously announced their intention to extend Statutory Maternity Pay (SMP), Maternity Allowance and Statutory Adoption Pay from the current 39 weeks entitlement to 52 weeks.

They had also announced that to coincide with the increases mentioned above they would introduce Additional Paternity Leave and Pay (APL and APP). They had stated their intention to make all of these changes by the end of this Parliament.

The government has announced that it is still their intention to introduce these changes by the end of this Parliament. However the proposed implementation date of April 2009 has been deferred until at least April 2010. This means that the rules may be implemented at the earliest for babies due from April 2010.

What is the current entitlement?

The current entitlement to SMP generally gives mothers the right to 90% of their average weekly pay for the first six weeks reducing to £112.75 for the remaining 33 weeks. There is no intention to increase the amount of weeks paid at the earnings related rate.

What would be the entitlement to APL and APP?

The introduction of APL and APP would give employed fathers a right to take up to an additional 26 weeks off work with pay to care for their child in its first year. The 26 week period would in effect be transferred from the mother’s entitlement to SMP so would be conditional on her returning to work.

SMP and leave is a complex area. If you would like any help in this area please get in touch with Monima Das in our Prime Paysolve payroll bureau on 02476 554321. Why not ask her how much it would cost to outsource your payroll worries to Prime - you will be pleasantly surprised!

Internet Links: HMRC guidance and HMRC guidance on SMP SPP and SAP.

Back To Top

Company car drivers and fuel

The Pre-Budget report also contained an announcement which will affect some company car drivers.

The current rules for employees state that if a car is made available for an employee’s private use, a benefit in kind charge arises. This charge is calculated using the list price of the car and a percentage linked to its CO2 emissions. The percentages range from 15% to 35% for most cars. Discounts are available for certain environmentally friendly cars.

If the employee is also provided with free fuel for private motoring then a fuel benefit charge arises based on the percentage used for the car benefit and a ‘multiplier’, which is currently £14,400. For 2008/09 this figure will increase to £16,900.

The fuel scale charge figure has not changed since it was introduced in 2003. This rise, when combined with an increase in the car benefit percentages for 2008/09, will mean that many employees will see a substantial increase in their tax bills from next April. This change will initially make itself felt in the form of an increase in the benefits in kind included in their coding notices for the year, meaning that more tax will be deducted from their pay.

There will also be an additional cost to employers as the related Class 1A NI charge will also increase.

If you want to discuss this article in more detail please contact Sarah Nickols in Prime Coventry on 024 7655 4310 or Jan Hornby in Prime Solihull on 0121 711 2468.

Internet Link: HMRC notice and HMRC CO2 percentage table

Back To Top

Maximising buy to let loan interest relief

Problem:
Bill bought his main residence in 1997 for £100,000, and currently has a mortgage outstanding of £40,000. He has just bought a new property in which he intends to live for £500,000, with the aid of a mortgage of £350,000. He intends renting out his former residence, which is now worth £300,000. He has asked how he can maximise the amount of loan interest on which he can claim income tax relief.

Solution:
If Bill left matters as they are he would be able to claim loan interest relief against his rental income in respect of the outstanding mortgage of £40,000. However, because the former residence is being brought into the rental business for the first time when he buys his new house, a notional balance sheet for that business would show capital introduced of £300,000, less the outstanding mortgage of £40,000.

This means that there is £260,000 that is notionally available for Bill to draw down from the balance sheet. He is, therefore, able to borrow up to a further £260,000 against the rental property, so as to draw down his interest in the rental business. He could use those funds to repay part of the borrowings on his new house.

As a result he would be able to claim income tax relief against his rental income in respect of borrowings of £300,000, which is likely to eliminate his rental profit for tax purposes.

This sounds complicated but can result in more tax relief so if you think this might be relevant to you please contact Sarah Nickols in Prime Coventry on 024 7655 4310 or Jan Hornby in Prime Solihull on 0121 711 2468 to discuss these issues further.

Back To Top

Disclaimer
This newsletter is published for the information of clients and other recipients of our email newsletters. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material contained in this newsletter can be accepted by the firm.