Top Tax Tips January 2019
NEW YEAR RESOLUTIONS TO SAVE TAX
At this time of year we think about New Year’s resolutions. It is also a good time to start planning your tax affairs before the end of the tax year on 5th April.
An obvious tax planning point would be to maximise your ISA allowances for the 2018/19 tax year (currently £20,000 each).
You might also want to consider increasing your pension savings before 5 April 2019 as the unused annual pension allowance is lost after three years, and tax relief can only be claimed in the year of payment – so payments made on 6 April 2019 would have to wait until 31 January 2021 to reduce your tax bill. Payments on or before 5 April 2019 receive relief a whole year earlier.
For those looking to do some inheritance tax planning it would be a good time to review (or make) your Will, consider setting up Lasting Powers of Attorney and talking to us about how much IHT your estate will pay and how this can be reduced.
For most taxpayers the maximum pension contribution is £40,000 each tax year, although this depends on their earnings. This limit covers contributions by both the individual and their employer.
Note that the unused allowance for a particular tax year may be carried forward for three years and can be added to the relief for the current year, but then lapses if unused. Hence any unused pension allowance for 2015/16 will lapse on 5 April 2019 if unutilised. Note that under the current rules the net cost after tax of saving £10,000 into a personal pension for a higher rate taxpayer is only £6,000, but there are rumours that this generous relief may be reduced in future.
Please take care however before making any sizeable pension contributions. There are strict rules and if your earnings are very high there can be penal tax charges on excessive pension contributions. If there is any uncertainty please contact Jan Friend.
INCREASED CAPITAL ALLOWANCES START 1 JANUARY 2019
The Chancellor announced a temporary increase in the Annual Investment Allowance (AIA) for expenditure on plant and machinery to £1 million from 1 January 2019 for a 2 year period. However transitional rules mean that the full amount will not necessarily apply to your business straight away.
For example, if your business year end is 30 June 2019 the maximum AIA in that year would be £600,000, being 6/12 x the old £200,000 limit plus 6/12 x the new £1 million limit. The following year to 30 June 2020 would be entitled to the full £1 million.
If you are looking to make significant purchases of plant and equipment then please give us a call to check the timing of your expenditure or email Jan Friend.
NEW CAPITAL ALLOWANCE FOR COMMERCIAL BUILDINGS
The Autumn 2018 Budget announced a new 2% straight line tax deduction for the cost of construction or renovation of commercial buildings and structures. HMRC have now issued a technical note setting out the details for the operation of the new relief.
Unlike the old Industrial Buildings Allowance the new relief is available for the construction of shops and offices as well as factories and warehouses.
The new tax break is available where the contract is entered into and construction costs are incurred on or after 29 October 2019. The allowance is available to commercial property landlords as well as trading businesses. There are special rules for leasehold buildings which determine whether the landlord or tenant is entitled to the allowance.
This is good news for all our commercial property owner clients who will now be able to claim tax relief for renovation expenditure on their buildings where previously no tax relief would be due.
Note that for purchases of new commercial buildings there are more generous plant and machinery allowances available for fixtures and fittings within the building and we can work with you to help you maximise tax relief. The AIA referred above means that there may be 100% capital allowances for equipment such as central heating and air conditioning.
If you are looking to spend on new or existing business premises we would strongly recommend you talk to our tax manager, Jan Friend, who can advise you on what elements of your spend will qualify for tax relief and what won’t.
CAPITAL ALLOWANCE ON HIGH CO2 CARS AND ASSETS IN SPECIAL RATE POOL REDUCES TO 6%
One of the other capital allowance changes announced in the Autumn Budget was the reduction of the writing down allowance on assets in the special rate pool from 8% to just 6% per annum reducing balance from April 2019.
The assets included in this pool include long life assets, such as aircraft, integral features within buildings and cars emitting more than 110g CO2 per kilometre.
A claim for the 100% AIA referred to above can be made for expenditure on these assets, (with the exception of motor cars) and this will result in faster tax relief.
This means that where a company buys a motor car that emits more than 110g CO2 per km it will take many years to get relief for the expenditure, as even when the car is sold the proceeds are deducted from the special rate pool and continue to be written down at 6% reducing balance.
For example Global Ltd which makes up accounts to 31 March each year buys a new Mercedes E220d AMG line for the managing director Mr Global for £40,000. As the CO2 emissions are 127g per km the WDA would be 8% for year ended 31 March 2019 = £3,200 leaving a tax written down value of £36,800. The 6% WDA would then apply for year ended 31 March 2020 = £2,208 leaving £34,592.
If the car was sold for £25,000 in the following year then the remaining balance of £9,592 would continue to be written down at 6% per annum, hence a very long write off period.
It may be more tax efficient to lease such a vehicle as, although 15% of the lease rentals are disallowed for tax purposes for such high CO2 vehicles, this may nevertheless be more beneficial.
Note that the above rules operate differently where the motor car is acquired by a sole trader or a partner for his business as the car is not included in the pool and a balancing adjustment occurs when the car is sold.
If you are looking to get a new vehicle please talk your client manager about the pros and cons of buying or leasing plus if you do change your company vehicle don’t forget to let us know so that we notify HMRC about changes in benefits in kind.
PASSING ON THE FAMILY HOME
New inheritance tax rules for passing on the family home started on 6 April 2017. This additional relief should be taken into consideration when drafting your Will and we can work with your solicitor to make sure your Will is tax efficient.
From 6 April 2017 an additional nil rate band is available on death where your residence is left to direct descendants. This is in addition to the normal £325,000 nil rate band. The current residence nil rate band is £125,000, rising to £150,000 on 6 April 2019 and £175,000 on 6 April 2020.
This additional relief is however restricted If your assets exceed £2 million. The rules are fairly complicated but we can review your personal circumstances to ensure that you take advantage of this valuable relief.
This additional inheritance tax relief is available even when you downsize to a smaller property.
For example if a married couple currently live in a large house worth £500,000 and downsize to a flat worth £250,000 they could give away some of the proceeds during their lifetime and yet still benefit from inheritance tax relief based on the higher valued property. They could even sell up completely and move into a rental property and still get the inheritance tax relief!