Everything You Need To Know About Business Tax Scilly Business Week - PowerPoint PPT Presentation

Everything You Need To Know About Business Tax Scilly Business Week – 6 th March 2017

Income Tax Rates – 2017/18 v 2016/17 2016/17 (Current year) 2017/18 Income Tax Income Tax Personal Allowance - £11,000 Personal Allowance - £11,500 Higher-rate threshold - £43,000 Higher-rate thresholds - £45,000 Additional-rate threshold - £150,000 Additional-rate threshold - £150,000 Highest-rate band - £100,000 to Highest-rate band - £100,000 to £122,000 £123,000 Dividend allowance - £5,000 Dividend allowance - £5,000 Personal Savings allowance - Personal Savings allowance - £1,000/£500 £1,000/£500 • Honouring Osborne commitment to increase personal allowance to £12,500 and higher-rate threshold to £50,000 by the end of this Parliament. • Biggest increase in the higher-rate threshold since 1989.

2017/18 Tax Rates Income Tax • Personal allowance - £11,500 • Basic rate band - £11,501 to £45,000 (non-dividend income taxed @ 20% - dividend income in excess of £5k taxed @ 7.5%) • Higher rate band - £45,000 to £100,000 and £123,001 to £150,000 (non-dividend income taxed @ 40% - dividend income taxed at 32.5%) • 60% band - £100,001 - £123,000 (non-dividend income taxed @ 60% - dividend income taxed at 40%) • Additional rate band - £150,001 + (non-dividend income taxed @ 45% - dividend income taxed @ 38.1%)

Current Tax Rates (cont) National Insurance Contributions (NIC) Class 1 NIC Class 2 NIC Class 4 NIC 0% - £0 to £2.85 per 0% - £0 to £8,164 week £8,164 12%/13.8% - 9% - £8,164 £8,164 to to £45,000 £45,000 2% - 2% - £45,001 £45,001 + +

Current Tax Rates (cont) Corporation Tax • Currently 20% • Under current proposals set to decrease to 19% with effect from 1 April 2017 and 17% from 1 April 2020 • Should we expect further reductions?

Ltd Co v Sole Trader/Partnership – Overview of Tax Position Sole Trader/Partnership Limited Company Subject to income tax and class 2 and 4 Company pays corporation tax NIC on profits/share of profits (if a (currently 20%) on profits. partner). Can withdraw cash with no associated Income tax on withdrawal of net tax liability. profits – referred to as ‘double layer of tax’. Can borrow from the business with no Dividends subject to income tax if in associated tax liability. excess of £5k pa – not recent changes. Tax charges arise on borrowing from the company.

Tax - Which structure? Limited Company • Higher-rate and Additional-rate shareholders • Entirety of profits net of corporation tax do not need to be extracted • Facilitates sharing of income around different members of a family • Enable pension saving through a company • Outside investment is required • Open to staff equity incentivisation • Access tax reliefs only available to companies • Easier for succession • Non-tax considerations – limited liability (can be achieved through an LLP), perceived kudos, facilitates protection of capital assets from commercial risk of the trade

Tax - Which structure? Sole trader/Partnership • Basic-rate taxpayers • Outside investment is not required • Non-tax considerations ⁻ Require reduced administration ⁻ Don’t wish information to be public

Changing structures • Structures can be changed relatively easily • Specific tax reliefs exists to aid both incorporation and disincorporation • Important to regularly review structures – especially re incorporation given announced focus. • Corporate groups (moving from one company to a group) – Risk management – separating valuable assets from the inherent liabilities of a trade – Inheritance tax and capital gains tax – separating investment from trade

Corporate restructuring HoldCo TradeCo PropCo/InvestCo

Company – Tax efficient extraction Small salary (to ensure qualification for state benefits) and dividends still the efficient • Reduced efficiency due to dividend tax changes effective from 6 April 2016 • Make use of £5k pa dividend allowances • Remember employment allowance Pension contributions • Deductible for corporation tax purposes and not taxable on individual • Even more desirable given changes to IHT treatment and pension freedoms Loans from company • Corporation tax charge (32.5%) that is repayable when loan is repaid • Taxed on any interest benefit – low tax charge given low interest rates (3%) Beware changes re liquidations

Corporation tax reliefs • Research & Development (R&D) tax relief • Patent box • Creative industry tax reliefs • Land Remediation Relief

Raising Funds • HMRC approved schemes to facilitate third party investment – Enterprise Investment Scheme • Investors receive 30% income tax relief on qualifying investment • Capital gains exemption on any gains realised on the shares after a 3 year holding period • Capital gains deferral relief – Seed Enterprise Investment Scheme • Investors receive 50% income tax relief on qualifying investment • Capital gains exemption on any gains realised on the shares after a 3 year holding period • Capital gains reinvestment relief – gains up to 50% of investment are exempt (effective tax saving on investment of 64%)

Raising Funds (cont) • Employee share ownership – Beware! Onerous employment tax rules – Approved HMRC schemes • Enterprise Management Incentive (EMI) scheme – option based incentivisation • Company Share Option Plan (CSOP) for larger entities • Grant funding

Always reassess! • Regularly review the business structure – Objectives – Legislation change – Business performance • Seek experienced advice – RRL pride ourselves on adding value through experienced advice

Property/Real Estate

Income tax – Overview • Net rental profits subject to income tax • Calculation = rental income less tax allowable expenditure • Accruals basis – income is recorded when it is earned (not received) and expenses recorded when they are incurred (not when they are paid)

Income tax – Allowable expenditure • ‘Wholly and exclusively’ • Examples – letting agent fees, accountancy fees, insurance costs, repairs and maintenance costs, ground rent, service charges, utility costs, advertising costs, loan interest etc. • Specific tax deductions – 10% wear and tear allowance for ‘furnished lets’ (abolished from 6 April 2016 i.e. 2016/17 onwards), peculiar rules for ‘furnished holiday lets’. • Non-deductible – private use elements, capital expenditure (improvements, costs associated with buying and selling the property), loan repayments etc.

Capital gains tax – Overview • Tax on value uplift realised on disposals (sales and gifts). • Capital gain/loss calculated – Sale proceeds; less – Acquisition cost; – Associated costs of disposal (legal fees, estate agents fees etc); – Associated costs of acquisition (legal fees, stamp duty etc); and – Capital improvement expenditure. • Gains above annual exemption taxable in year of disposal (exchange), losses realised against gains realised in the year or carried forward to gains realised in future tax years.

Capital gains tax – Tax rates • Tax free – capital gains annual exemption - £11,300 in 2017/18 • 18% on gains within basic rate band • 28% on gains within other tax bands • Entrepreneurs’ Relief (10% on lifetime gains up to £10m) – Unlikely to be available unless a Furnished Holiday Let (FHL). • Principal Private Residence (PPR) Relief – Potentially available if you have used the property as a residence during the period of ownership.

Inheritance tax – Overview • Properties held at death valued at subject to 40% inheritance tax where value of estate exceeds available nil-rate band (currently £325,000). • Spousal exemption and transferrable nil-rate band. • No beneficial reliefs available (unlike for property development businesses). • Lifetime gifts – but capital gains tax problem. – Ways of gifting rental properties during lifetime and avoiding a capital gains tax charge – involves using trusts. • New ‘Residence’ Nil -Rate Band.

Inheritance tax • Residence Nil-Rate Band – Gradually introduced from 6 April 2017 • £100,000 – 2017/18 • £125,000 – 2018/19 • £150,000 – 2019/20 • £175,000 – 2020/21 – Residential property (used as a residence) needs to pass to direct descendants • Beware passing to discretionary trusts – Generally not advisable to use on 1 st spouse’s death – Restricted if estate value exceeds £2m • Planning opportunity

Structuring – Overview • Company v personal • Rental income realised in a company subject to corporation tax – 20% small companies rate (reducing to 19% on 1 April 2017 and to 18% on 1 April 2020). • Double tax charge on extracting net profits – Options – salary, dividend income (subject to income tax) – note dividend tax changes. • Unlikely to be beneficial for basic-rate tax payers • Beneficial to higher- rate tax payers who don’t need to extract all of net profits i.e. can roll-up income in the company. • Likely Capital Gains Tax and Stamp Duty Land Tax implications on transferring let properties into a company.