Welcome to the October edition of TaxMatters with James Milne. This month we have one eye on the Budget as we speculate on possible changes to capital gains tax, pension tax relief and whether to bring forward asset disposals. If there are matters that you would like to discuss then please contact us as soon as possible. In the meantime, we hope you find this issue informative.

POSSIBLE CAPITAL GAINS TAX CHANGES IN THE OCTOBER BUDGET

Many commentators are suggesting that the rate of Capital Gain Tax (CGT) might be aligned with the rates of income tax, a return to the regime that applied when Gordon Brown was chancellor. Rachel Reeves is known to be a disciple of Gordon, so maybe we will see a return to taper relief as well! One would hope that Business Asset Disposal Relief (BADR), or something similar, is retained to encourage entrepreneurship and growth. She might even reintroduce Business Asset Taper, one of Gordon’s ideas, to reduce the effective CGT rate to 10% after 10 years’ ownership. If some form of CGT relief to encourage entrepreneurs is retained, then maybe the conditions for obtaining the relief will be tightened still further.

Other possible changes to CGT could include further restrictions to private residence relief and changes to hold-over relief for transfers into and out of trust. A more controversial change would be the removal of the CGT free uplift to probate value on death, with beneficiaries inheriting the deceased’s CGT base cost of their assets, as suggested by the now abolished Office of Tax Simplification (OTS).

Should we bring forward asset disposals before budget day?

CGT changes normally take effect from 6 April, but there have been mid-year changes in the past. This possibility has caused many taxpayers to bring forward disposals to take advantage of the current rates. The disposal date for CGT is the date of unconditional exchange of contracts and there is likely to be anti-forestalling legislation to counteract attempts to artificially bring forward the disposal date.

There is still time to sell listed investments before 30 October but other assets such as a business or property typically take a lot longer to sell unless a buyer is already lined up.

Beware “bed and breakfast” anti-avoidance

Many investors may look to realise capital gains on their investments at the current rates, just in case there is an increase with effect from 30 October 2024. They may then wish to repurchase those investments after the change in rates to retain the balance of investments in their portfolio. Where the same shares and securities are bought back within 30 days of the date of disposal, the shares bought back would be matched with those sold, and the desired capital gain and increase in base cost may be negated.

For example, if 1000 shares in A plc were bought for £2 a share several years ago and are sold on 29 October 2024 for £4.50 a share there would be an apparent £2,500 capital gain, potentially tax free if the £3,000 2024/25 CGT annual exemption is unused. However, if the same class of shares in A plc are purchased on say 5 November 2024 for £4.45 a share, there would be a £50 capital loss instead of the desired capital gain and the base cost would remain at £2 a share. This is because the repurchase is within 30 days.

An alternative strategy would be for the taxpayer’s spouse to repurchase the shares (“bed and spousing”) or to repurchase the shares in the taxpayer’s ISA or pension fund.

RUMOURS OF PENSION CHANGES IN THE OCTOBER BUDGET

Changes to pension tax relief seem to be top of the list of possible changes in the Budget and could yield more tax revenues than changes to CGT and IHT combined. As recently as 6 April 2023, we saw the abolition of the lifetime allowance charge and a significant increase in the pension annual allowance to £60,000 a year, which Rachel Reeves commented were too generous, so we may see those changes reversed or curtailed.

Possible changes to pensions could include:

• Limiting pension tax relief for individuals to basic rate or possibly a 30% flat rate;
• Further limiting (or abolishing) the 25% tax free lump sum;
• Freezing or reducing the £1,073,100 lump sum and death benefit allowance;
• Making the undrawn pension fund subject to inheritance tax; and
• Limiting the amount of employer pension contributions that can be paid by way of a salary sacrifice.

Pension changes normally take effect from the start of the tax year on 6 April, however there have been mid-year changes in the past. Taxpayers should therefore consider bringing forward pension planning just in case changes are effective from the date of the announcement.

Many over 55’s can withdraw 25% of their pension fund tax-free

Under current pension rules, many pension funds allow pension scheme members to withdraw up to 25% of their pension savings tax-free. The Finance Act 2023 limited the tax-free amount to £268,275 unless the individual had applied for protection at a higher amount. There are rumours that the tax-free amount may be further limited, with an amount of £100,000 suggested, and this has resulted in significant withdrawals from pension funds in recent weeks. It should be noted that there are anti-avoidance rules that limit the amount that can be reinvested in the pension fund within a 12-month period.

Pension lump sum “recycling” is countered by anti-avoidance rules where the lump sum withdrawn is more than £7,500 during a one-year period and subsequent pension contributions are increased by more than 30% of the lump sum. A breach of this rule will mean that the lump sum is an unauthorised payment and will be taxed at 40%.

Check your state pension entitlement

The current State Pension is £11,502 and is due to rise to around £12,000 a year for 2025/26. At current annuity rates it would cost over £300,000 to receive an index-linked annuity starting at £12,000 a year, so it’s important to maximise your entitlement.

In order to receive the full State Pension, you need 35 qualifying years, but is it worth topping up voluntary Class 3 National Insurance contributions in respect of missing years? This is a financial decision but there is a short breakeven period. It is around 3 years for employees and even shorter for the self-employed who can pay Class 2 contributions for missing years. You can also get credit for missing years if you were not working because of bringing up children.

Employees need to make Class 3 contributions of £824.20 or £907.40 a year for extra years which yields £302.86 a year in additional annual state pension.  Self-employed individuals can pay Class 2 contributions at the rate of £179.40 for each missing year to yield £302.86 per annum.

Normally you can only go back six years to make up missing contributions but there is currently an opportunity to fill up missing years going back to 2006/07 – note that the deadline for the extended carry back is 5 April 2025.

“NUDGE” LETTERS BEING SENT BY HMRC TO TAXPAYERS

HMRC has recently increased their use of “one-to-many” or “nudge” letters to taxpayers which suggests there may be errors or omissions in tax returns or accounts information. HMRC argues that these letters are a key tool in their compliance strategy, but this is essentially a “fishing” expedition more akin to direct mailing and this may alarm many taxpayers who are completely innocent.

Please get in touch with us if you receive such a letter and we can deal with the matter on your behalf.

Beware “scam” letters claiming to be from HMRC

We have also become aware of scam letters and emails purporting to be from HMRC being sent to taxpayers. These letters request important personal information which would be needed by fraudsters to access your data. If you have doubts about whether a communication from HMRC is genuine, please contact us and we will check its authenticity.

DIARY OF MAIN TAX EVENTS

OCTOBER/ NOVEMBER 2024

Welcome to the September edition of TaxMatters. This month we discuss passing on wealth to avoid inheritance tax and what you need to know about setting up a tax-free childcare account. We hope that you find this informative and, as always, please contact us if you wish to discuss any matters in more detail.

SHOULD YOU PASS ON WEALTH NOW TO AVOID INHERITANCE TAX?

Many wealthy individuals are passing on substantial amounts of their wealth in anticipation of possible changes to inheritance tax (IHT) in Labour’s first Budget on 30 October. This allegedly includes a number of high-profile individuals such as TV presenter Anne Robinson who confirmed that she had passed on £50 million to her children and grandchildren. Should you consider doing the same?

Firstly, you need to check with us the value of your estate and potential IHT exposure under the current rules. Currently each individual receives a nil rate band of £325,000 and potentially up to a further £175,000 against the value of the family home, provided it, or assets to its value, is left to direct descendants on death. This additional £175,000 allowance is referred to as the residence nil rate band (RNRB).

There is currently an unlimited exemption where assets are transferred during lifetime or on death to the surviving spouse or civil partner. If the deceased spouse’s nil rate bands are unused then they are available to the survivor, potentially increasing the tax-free amount on the death of the second spouse to £1 million. Unfortunately, it is not quite that simple as where the estate exceeds £2 million the RNRB is reduced by £1 for every £2 that the estate exceeds £2 million. Consequently, for wealthy couples the RNRB reduces to nil where the value of the estate exceeds £2.7 million leaving just the combined nil rate bands of £650,000. Note that the current rate of IHT on the death estate is 40% once the nil rate band has been used.

There is currently 100% relief from IHT where business and farming assets are transferred during lifetime and on death and it is hoped that these reliefs will continue so that survivors do not need to sell off assets to pay the tax. However, those generous reliefs may not continue under the new government.

Transfers during lifetime

Under the current rules there is no IHT payable where the donor survives for at least 7 years following the date that assets are transferred. Such transfers are referred to as potentially exempt transfers (PETs) and IHT is payable should the donor die within 7 years. Note that the transfer needs to be an outright gift with no continued use or enjoyment of the asset by the donor. Hence giving away the family home but continuing to live there will be ineffective unless other conditions, such as paying market rent, are satisfied.

There may also be capital gains tax (CGT) consequences of a lifetime gift, although it may be possible to hold over the gain so that no CGT is payable on the increase in value from when the asset was acquired. Holdover relief is currently available in the case of business assets and on transfers of assets into trust.

Please contact us if you have concerns about IHT and want to consider taking action before Budget Day.

BACK TO SCHOOL – SET UP A TAX-FREE CHILDCARE ACCOUNT?

The Government’s Tax-Free Childcare Accounts provide a 25% subsidy towards the cost of childcare. The account can be used to pay nursery fees, breakfast clubs, after school clubs and registered childminders.

The scheme operates by topping up savings of up to £8,000 per child by 25%, potentially an extra £2,000 a year from the Government to spend on qualifying childcare. The scheme applies to children under twelve. In the case of disabled children, the age limit is sixteen and the amount that can be saved is £16,000 a year, topped up by the Government by a further 25% to potentially £20,000.

Unlike childcare vouchers, still provided by some employers, tax free childcare accounts are available to both employees and the self-employed. To be eligible, the parent needs to be working and earning at least the National Minimum Wage or National Living Wage for at least 16 hours a week on average. However, parents are not eligible if either of the parents’ adjusted net income is more than £100,000 a year.

Note that where an employer provides Childcare Vouchers then the parents are not allowed to set up a Tax-Free Childcare Account as well. Please contact us for advice on whether it would be beneficial to leave your employer’s Childcare Voucher Scheme, noting that the voucher scheme applies to children up to age sixteen, rather than age twelve.

HOURS WORKED REPORTING DELAYED TO 2026

It was originally proposed that from 2025/26, employers would be required to provide more detailed information on employee hours worked via real time information (RTI) PAYE reporting. It has now been announced that this additional information will not now need to be reported until 2026/27 at the earliest.

ADVISORY FUEL RATE FOR COMPANY CARS

• Where there has been a change the previous rate is shown in brackets.
• You can also continue to use the previous rates for up to 1 month from the date the new rates apply.
• Note that for hybrid cars you must use the petrol or diesel rate.
• For fully electric vehicles the rate is 7p (9p) per mile.

Where the employer does not pay for any fuel for the company car these are the amounts that can be reimbursed in respect of business journeys without the amount being taxable on the employee.

Input VAT

Within the 45p/25p payments the amounts in the above table represent the fuel element. The employer can reclaim 20/120 of the amount as input VAT provided the claim is supported by a VAT invoice from the filling station. For a 2000cc diesel-engine car, three pence per mile can be reclaimed as input VAT (18p x 1/6).

Employees using their own cars

For employees using their own cars for business purposes the Advisory Mileage Allowance Payment (AMAP) tax-free reimbursement rate continues to be forty-five pence per mile (plus 5p per passenger) for the first 10,000 business miles, reducing to twenty-five pence a mile thereafter. Note that for National Insurance contribution purposes the employer can continue to reimburse at the 45p rate as the 10,000 threshold does not apply.

DIARY OF MAIN TAX EVENTS

SEPTEMBER/ OCTOBER 2024

Welcome to the August edition of TaxMatters with James Milne. In this edition, we discuss the 60% income tax trap and, on a lighter note, give some tax advice on planning a staff barbecue. We hope that you find this informative. Please contact us if you wish to discuss any of these matters in more detail.

BEWARE THE 60% INCOME TAX TRAP

It has recently been reported over half a million taxpayers paid a marginal income tax rate of 60% in 2022/23, up by 23% from the number in 2021/22. This marginal rate applies where an individual’s adjusted net income falls between £100,000 and £125,140, where every £2 income over £100,000 reduces the £12,570 personal allowance by £1, such that it is fully eroded at £125,140.

Planning to mitigate the problem

The definition of “adjusted net income” is the individual’s total taxable income less personal pension payments and charitable payments under Gift Aid. Such payments can effectively save income tax at 60%. For example, an £80 payment to charity under gift aid is grossed up to £100 and the taxpayer’s income is reduced by £100, thus saving £60 tax where the individual’s income is between £100,000 and £125,140. If an individual’s total income is projected to be £105,000 for 2024/25 they could consider making an additional pension contribution of £4,000 before 5 April 2025 as that would reduce their income to £100,000, thereby restoring their £12,570 personal allowance.

Such planning is also effective for those caught by the high income child benefit claw back charge (HICBC). That charge claws back child benefit by 1% for every £200 adjusted net income between £60,000 and £80,000.

Salary sacrifice arrangements can also be effective

Another way to mitigate the effects of the personal allowance restriction and the HICBC would be to agree with your employer to forgo some of your salary, pay rise, or bonus for an additional employer pension contribution or an electric company car. For example, an employee on £96,000 a year might be entitled to a £10,000 bonus. They could agree with their employer to have £6,000 of the bonus paid into their pension (tax-free, provided the £60,000 pension annual allowance isn’t exceeded) with the remainder of the bonus just keeping them at £100,000 and retaining their personal allowance.

Sacrificing salary for an electric company car isn’t quite as tax efficient, as the employee would currently be taxed on 2% of the list price instead of the salary foregone. On a £50,000 electric car that would just be a £1,000 taxable benefit in kind, which for a 40% taxpayer would mean £400 income tax.

The employing company would obtain a tax deduction for the cost of providing the benefit and would also save on employers national insurance. So, it’s win, win.

USE TAX-FREE CHILDCARE ACCOUNT TO PAY FOR SUMMER HOLIDAY CLUBS

Tax-Free Childcare accounts can be used to pay for approved childcare for children aged 11 or under, or 16 if the child has a disability. This can include paying for a summer holiday club or childminder.

The account can also be used to pay nursery fees, to pay for breakfast or after school clubs in term-time, as well as out of school activities.
Opening a Tax-Free Childcare account is quick and easy and can be done at any time of the year. Families who have not yet signed up should check their eligibility and apply online today.

For every £8 paid into an online account they will receive an additional £2 from the government. This means parents and carers can receive up to £500 every 3 months (£2,000 a year for each child), or £1,000 (£4,000 a year for each child) if their child is disabled.

Money can be deposited at any time to be used straight away, or whenever it is needed. Unused money in the account can be withdrawn at any time.

Eligibility
Families could be eligible for Tax-Free Childcare if they:

• have a child or children aged 11 or under. They stop being eligible on 1 September after their 11th birthday. If their child has a disability, they can receive support until 1 September after their 16th birthday;
• earn, or expect to earn, at least the National Minimum Wage or Living Wage for 16 hours a week, on average;
• each earn no more than £100,000 per annum; and
• do not receive tax credits, Universal Credit or childcare vouchers.

PLANNING A STAFF SUMMER BARBEQUE?

Employers may meet the cost of certain social events for staff without creating a tax liability. This used to be a concession but is now a statutory exemption provided certain conditions apply.

The exemption applies to an “annual party or similar function” provided it is available to all employees or available generally to those at a particular location. During the Covid-19 pandemic HMRC confirmed that a ‘function’ could include a virtual party, where employers were unable to host a traditional party at which employees would have been physically present.

A key condition is that the cost per head of the party or function must not exceed £150, inclusive of VAT. If an event costs more than £150 then it is taxable in full, not just on the excess over £150.

If you have already held a Christmas Party for staff it may be possible to have another event, and for that to also be exempt from tax, provided the combined cost per head is no more than £150 a year. If the combined cost exceeds £150 for the year the employer can designate which ones should be taken into account to make best use of the exemption. If, for example, the cost per head of the Christmas party was £100, and the Summer event was £70, the employer can nominate the Christmas party to be covered by the exemption, but the £70 Summer Event would be taxable (not just the excess £20).

Rather than the employee being taxed on the £70 the employer can deal with the tax and national insurance on the employees’ behalf by way of a PAYE settlement agreement.

BUDGET DATE ANNOUNCED

The State Opening of Parliament took place on 17 July and the King’s Speech set out the measures that the government intends to introduce during the next session of parliament. Other than a mention of the proposal to remove the VAT exemption for private school fees, very little was said about measures that will affect tax for businesses and individuals. Instead, we must wait for the Labour government’s first budget in order to learn about their tax plans. The budget is set to take place on 30 October 2024.

PROPOSED REPEAL OF THE SPECIAL TAX TREATMENT OF FURNISHED HOLIDAY LETTINGS

The government has now issued the draft legislation to abolish the special tax treatment of furnished holiday lettings (FHL) with effect from 6 April 2025 for individuals (1 April 2025 for corporation tax). This change will remove the tax advantages that current FHL landlords have received over other property businesses in 4 key areas by:

• applying the finance cost restriction rules so that loan interest will be restricted to the basic rate of Income Tax;
• removing capital allowances rules for new expenditure and allowing relief when domestic items are replaced;
• withdrawing access to reliefs from taxes on chargeable gains for trading business assets; and
• no longer including this income within relevant UK earnings when calculating maximum pension relief.

After repeal, former furnished holiday let properties will form part of the person’s UK or overseas property business and be subject to the same rules as residential property businesses.

Transitional rules

Where an existing FHL business has an ongoing capital allowances pool of expenditure, they can continue to claim writing-down allowances on that pool — any new expenditure incurred on or after the operative date must be considered under the property business rules.

After the changes, former FHL properties will be part of the person’s UK or overseas property business as appropriate. That property business will then include the amalgamated profits and losses of all the properties in that business.

Losses generated from a person’s FHL business will be permitted to be carried forward and be available for set off against future years’ profits of either the UK or overseas property business as appropriate.

Eligibility for CGT roll-over relief, business asset disposal relief, gift relief, relief for loans to traders, and exemptions for disposals by companies with substantial shareholdings will cease with effect from 6 (1) April 2025.

In relation to CGT business asset disposal relief, where the FHL conditions are satisfied in relation to a business that ceased prior to 6 April 2025, relief may continue to apply to a disposal that occurs within the normal 3-year period following cessation.

There is also an anti-forestalling rule which is intended to prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules, effective from 6 March 2024.

CHANGES TO VAT ON INDEPENDENT SCHOOL FEES

On 29 July 2024, the Chancellor announced that as of 1 January 2025, all education services and vocational training supplied by a private school, or a connected person, for a charge will be subject to VAT at the standard rate of 20%. Boarding services provided by a private school, or a connected person, will also be subject to VAT at 20%.

Draft legislation issued on 29 July 2024 also provides that fees invoiced or paid on or after 29 July 2024 and before 30 October 2024 are to be treated for the purposes of the charge to VAT as a supply taking place on the later of—
(a) 1 January 2025, and
(b) the first day of that term.

School fees paid before 29 July 2024 will follow the VAT treatment in force at the time of the normal tax point for these supplies, where the fee rate for the relevant term has been set and was known at the time of payment.

If any of the above issues affect you, please speak to us – we may be able to help you plan for some of the potential changes. Of course, more detail will be available after the budget, and we will keep you informed then.

DIARY OF MAIN TAX EVENTS
AUGUST/ SEPTEMBER 2024