These requirements have been removed w.e.f. 6 April 2016. - PDF document

FINANCE ACT 2016 – PRACTICAL ASPECTS Robert Jamieson MA FCA CTA (Fellow) TEP 4 October 2016 PERSONAL SAVINGS ALLOWANCE • Hitherto banks, building societies and other financial institutions have had to deduct 20% tax from interest which they pay. • Similar rules for NS&I. • These requirements have been removed w.e.f. 6 April 2016. • Introduction of new personal savings allowance from same date. PERSONAL SAVINGS ALLOWANCE (CONT) • Operates in conjunction with 0% starting rate for first £5,000 of savings income. • 0% starting rate is only in point for those whose non-savings income does not exceed personal allowance plus £5,000. • Personal savings allowance = £1,000 for basic rate taxpayers. • Limited to £500 for higher rate taxpayers (and nothing for top rate taxpayers). 1

PERSONAL SAVINGS ALLOWANCE (CONT) • Interest within ISA will continue to be tax- free – it does not need to be covered by personal savings allowance. • director’s Interest credited to loan account = savings income (but company must still pay this under deduction of tax). • Dividend income falling under £5,000 nil rate band has to be taken into account in determining marginal rate of tax. PERSONAL SAVINGS ALLOWANCE (CONT) • Personal savings allowance operates like dividend nil rate band – savings income covered by allowance attracts zero rate of tax. • Unfortunate cliff-edge effect. DIVIDENDS – END OF ERA • Imputation system to end on 5 April 2016. • W.e.f. 6 April 2016: • dividend received = gross amount; • no 1/9th tax credit; and • £5,000 dividend allowance. • This new dividend allowance is separate from £1,000 allowance for savings income referred to earlier. 2

DIVIDENDS – END OF ERA (CONT) • Table of rates for 2016/17: • BR – 7.5% (Nil for 2015/16); • HR – 32.5% (25.0% for 2015/16); and • AR – 38.1% (30.6% for 2015/16). • Important to make inter-spouse transfers to ensure full use of £5,000 allowance. • Breakeven points for higher and additional rate taxpayers. DIVIDENDS – END OF ERA (CONT) • Problem for owner managers following “low salary high dividend” regime – overall tax rate is 6% higher in 2016/17. • Dividends to non-working spouses are still advantageous. • With fall in corporation tax rates to 19% in 2017 and to 17% in 2020, will some owner managers seek to retain profits rather than pay them out? DIVIDENDS – END OF ERA (CONT) • More own share purchases on retirement. • Bonus v dividend for 2016/17. • HMRC factsheet dated 17 August 2015. • This confirmed that £5,000 dividend allowance was not exemption. • Dividends within £5,000 allowance still use up relevant part of BR or HR band (even though they are taxed at 0%). 3

DIVIDENDS – END OF ERA (CONT) • Impact on restriction of personal allowances. • Impact on incorporations – tax-motivated incorporations are being targeted. CLOSE COMPANY LOAN WRITE-OFFS • Income tax charge under S416 ITTOIA 2005 on amount written off. • Still classified as “dividend income” . • Therefore, use dividend rates (including £5,000 nil rate band). • S416 ITTOIA 2005 takes precedence over S188 ITEPA 2003. DIVIDENDS AND GIFT AID IN 2016/17 • Revised dividend regime took effect on 6 April 2016. • Trap for individuals who have previously used tax credits to frank basic rate tax deducted from Gift Aid payments. • But tax credits have been abolished for 2016/17 onwards. • Problem is for donors whose main source of taxable income is from dividends. 4

DIVIDENDS AND GIFT AID IN 2016/17 (CONT) • If BR tax which is deemed to be deducted from Gift Aid payments cannot be covered by dividend tax credits, it must be paid over to HMRC. • Illustration of wealthy benefactor. • For 2016/17, problem may be able to be resolved by carry-back election under S426 ITA 2007. • Important caveat. DIVIDENDS AND GIFT AID IN 2016/17 (CONT) • This election can only be made on or before filing of individual’s 2015/16 tax return. • See Cameron v HMRC (2010). • Therefore, it may make sense to delay filing affected donors’ tax returns until January 2017. TRUST DIVIDEND INCOME • For IIP trusts, trustees pay BR tax on all trust income. • Thus, in respect of their share of trust income, beneficiaries may: • obtain refund; • suffer no further tax; or • be liable for higher and additional rates. 5

TRUST DIVIDEND INCOME (CONT) • Position to date has been that, with dividend income, tax credit covered trustees’ BR income tax liability. • W.e.f. 6 April 2016, trustees have to pay 7.5% on all dividend income – they are not entitled to £5,000 dividend allowance. • “transparent” – But IIP trusts are therefore, 7.5% dividend tax charge will be credited to life tenant. TRUST DIVIDEND INCOME (CONT) • Life tenant may be entitled to tax refund if payment falls within his £5,000 dividend nil rate band. • Possibility of mandating such income to beneficiary. • Rules for discretionary and accumulation trusts are rather different. • W.e.f. 6 April 2016, such trusts are also unable to utilise £5,000 allowance. TRUST DIVIDEND INCOME (CONT) • Discretionary and accumulation trusts will suffer tax of 38.1% (7.5% where standard rate band applies) on dividend income. • This is credited to trust’s tax pool and will be available to frank income distributions. • But discretionary and accumulation trusts are not “transparent” – trust distribution counts as annual payment in hands of beneficiary. 6

TRUST DIVIDEND INCOME (CONT) • This will not attract £5,000 allowance – it does not represent dividend income. • When making income payment to beneficiary, trustees will have to deduct 45% tax and so they are likely to end up having to pay further tax to HMRC. • Will it now be preferable to appoint IIPs to many discretionary beneficiaries, given that there should be no CGT or IHT? IS IT “FAIR BARGAIN”? • Normally, where employee reimburses his employer for any benefit in kind, cash equivalent is reduced on £-for-£ basis. • However, if employee receives goods or services at same cost and on same terms as member of public, he will have struck “fair bargain” with employer. • No benefit will have arisen – this follows from decision in Mairs v Haughey (1993). IS IT “FAIR BARGAIN”? (CONT) • But employers have been using these rules to override standard benefit tax charges – see Apollo Fuels case in 2016. • Therefore, for 2016/17 onwards, no “fair bargain” let-out for: • living accommodation; • cars (but note exception); and • loans. 7

DIESEL CAR BENEFITS • 3% diesel supplement was not after all abolished on 6 April 2016. • Retained for further 5 years. • But what about employers who have already ordered cars (on assumption that there would be no diesel supplement)? ZERO-EMISSION VANS • Nil rate charge for zero-emission vans came to end on 5 April 2015. • For 2015/16, benefit in kind charge was 20% of normal van benefit (£3,150). • Planned that rate would then rise on tapered basis. • This will now take place more slowly, with 20% remaining in place for 2016/17 and 2017/18. ZERO-EMISSION VANS (CONT) • Standard van benefit charge for 2016/17 = £3,170. • But any van driver who meets restricted private use condition in S155(4) ITEPA 2003 will still have van benefit of nil. 8

TRIVIAL BENEFITS • – OTS recommendation statutory exemption for “trivial” benefits in kind provided for employees. • Replace previous concessionary practice. • New S323A ITEPA 2003 to apply w.e.f. 6 April 2016. • No income tax or NIC charge where 4 conditions are satisfied – they are: TRIVIAL BENEFITS (CONT) • benefit must not be cash or cash voucher; • cost of providing benefit must not exceed £50 per person (if necessary, simple average can be used); • benefit must not be provided as part of salary sacrifice arrangement (or similar); and TRIVIAL BENEFITS (CONT) • benefit must not be provided in recognition of services performed (or to be performed). • No limit to number of “trivial” benefits for most employees in any 1 tax year. • However, if company is close and if recipient is director, there is annual cap of £300. 9

PENSIONS – LIFETIME ALLOWANCE • Lifetime allowance reduced from £1,250,000 to £1,000,000 for 2016/17 and 2017/18. • Thereafter, index-linked by reference to CPI for 12 months to previous September. • Problem where pension pot is greater than lifetime allowance. • Is there already protection? PENSIONS – LIFETIME ALLOWANCE (CONT) • If not, what about FP16 and/or IP16? • FP16 allows taxpayer to retain old limit, but no further contributions can be made. • Under IP16, taxpayer has limit equal to value of pension savings on 5 April 2016 (up to £1,250,000), but can continue to make payments. • Both forms of protection can be held, but FP16 has precedence. PENSIONS – LIFETIME ALLOWANCE (CONT) • In order to obtain protection, taxpayer must apply for reference number from HMRC before he takes his benefits. 10