Autumn Statement 2016The Full Impact

Economic Context – In Summary

Economic Context – In Summary

• All based on OBR forecasts!

“What do you call an economist with a prediction?”

“WRONG” – Robert Kuttner

Economic Context

• Weaker GDP growth than previously predicted

• Outlook for public finances have deteriorated

– Lower than expected tax take in 1st half of 2016, higher spending requirements, lower tax take due to economic outlook

– Deficit no-longer targeted to be dealt with by 2019/20

• Borrowing forecasts up

• Debt forecasts up

“We have to maintain our credibility - we have eye-wateringly large debt, we still have a significant deficit in this country and we have to prepare the economy for the

period that lies ahead”Philip Hammond, Andrew Marr Show (Sunday 20 November)

Economic Context – In Summary

Tax announcements

3,000,000/1

Tax announcements

“The fiscal policies that George Osborne set out were the right ones for that time. But when

times change, we must change with them.”

Philip Hammond speaking at the Conservative Party Conference, 3 October 2016

Income Tax Rates – 2017/18 v 2016/17

2016/17 (Current year)Income Tax

2017/18Income Tax

Personal Allowance - £11,000Higher-rate threshold - £43,000Additional-rate threshold - £150,000

Personal Allowance - £11,500Higher-rate thresholds - £45,000Additional-rate threshold - £150,000

Highest-rate band - £100,000 to £122,000

Highest-rate band - £100,000 to £123,000

Dividend allowance - £5,000Personal Savings allowance -£1,000/£500

Dividend allowance - £5,000Personal Savings allowance -£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%)

2017/18 NIC Rates

National Insurance Contributions (NIC)

0% - £0 to £8,164

12%/13.8% -£8,164 to £45,000

2% - £45,001 +

Class 1 NIC£2.85 per week

Class 2 NIC0% - £0 to £8,164

9% - £8,164 to £45,000

2% -£45,001 +

Class 4 NIC

Corporation Tax Rates

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 NIC on profits/share of profits (if a partner).

Company pays corporation tax (currently 20%) on profits.

Can withdraw cash with no associated tax liability.

Income tax on withdrawal of net profits – referred to as ‘double layer of tax’.

Can borrow from the business with no associated tax liability.

Dividends subject to income tax if in 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

alison.elvey@rrlcornwall.co.uk

@AlisonElvey

Income Tax

• Chargeable event gains – Life policies– Onerous taxation of partial surrenders

– Consultation

– Legislation change proposed in FB 2017

• Property and trading income allowance– Previously announced £1k allowance

– Not subject to income tax and no reporting requirement

• Statutory Residence Test

Property/Real Estate

Restriction on higher-rate tax relief for finance costs

• Commences 6 April 2017

– 25% reduction in each tax year until 6 April 2020

• Beware change of calculation method

Example:

2016/17 2017/18

Rental income £10,000 £10,000

Less: Finance costs (£5,000)

Net rental profit £5,000 £10,000

Higher-rate tax £2,000 £4,000

Less: Tax relief on finance costs (£1,750)

Associated tax liability £2,000 £2,250

Property/Real Estate

Capital allowances

• Be sure to make all available claims

• Usually not adequate advice on transactions involving commercial property – Beware!

Business Property Renovation Allowance (BPRA)

• some urgency required – 1/6 April 2017 deadline for claims

ATED

• Applies to companies owning residential property with a market value at 1 April 2012 or date of acquisition

• Exemptions

• Returns due by 30 April 2017 for 2017/18 tax year

Transactions in Land

• “main purpose, or one of the main purposes”

Property/Real Estate

Inheritance tax

• Main-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 1st spouse’s death

– Restricted if estate value exceeds £2m

• Planning opportunity

Employers

• National Minimum Wage increases

• Apprenticeship Levy– Employer’s with an annual pay bill of over £3m

– 0.5% of pay bill

Age group Current rates From 1 April 2017

25 and over £7.20 £7.50

21 - 24 £6.95 £7.05

18 -20 £5.55 £5.60

Under 18 £4.00 £4.05

Apprentice £3.40 £3.50

Employers

• Salary sacrifice income tax and NIC advantages removed– Exceptions for child care, pension contributions, pensions

advice, Cycle to Work, and ultra-low emission cars

– All arrangements in place before 6 April 2017 protected for 1 year

– Arrangements in place before 6 April 2017 relating to cars, accommodation and school fees protected for up to 4 years

Corporation Tax

• Use of losses made more flexible from 1 April 2017– New rules will apply to all losses carried forward

– Change 1: Restriction on use • losses restricted to 50% of profits where company’s/group’s profits

exceed £5m

– Change 2: Increased flexibility of use of cfwd losses

• Rules around use of cfwd losses is onerous and illogical

• Post 31 March 2017, any losses can be used against any profit in the company or in the group

• Pre – 1 April 2017 losses are relieved under the current rules

Making Tax Digital

• No more news!

• 6 (!) consultations closed for responses on 7 November– Always unlikely we were going to hear anything further

– Responses to be published in January 2017

• Is it really Making Tax Digital?– Much more a management accounting/book

keeping/recording issue

• HMRC’s responses to scepticism so far

Non-UK domiciliaries

• Massive changes from 6 April 2017

• UK property held within an offshore company will no-longer be sheltered from UK inheritance tax– Prudent to consider unwinding due to ATED etc

• Non-UK domicilciliaries will be deemed to be UK domiciled after being UK tax resident for at least 15 out of the previous 20 UK tax years– Rebasing option

• Returning non-dom rules– Where UK domicile of origin and born in the UK, UK

domiciled for income tax and CGT from date re-acquire UK tax residence

– Period of grace for 2 years for IHT purposes

Miscellaneous

• Fuel Duty freeze until April 2018– A real saving? Merely a political tool?

• Insurance Premium Tax rate increase to 12%

• Letting agents unable to charge fees to tenants

• Rural Rate Relief increase from 50% to 100%

• ISA contribution limit increasing to £20k from 6 April 2017

• Money Purchase Annual Allowance restricted to £4,000

Contact details

Steve Maggs LLB CTATax Partner

Robinson Reed Layton Truro and Penzance

01872 276116 (Truro)01736 339322 (Penzance)@TaxCornwall

steve.maggs@rrlcornwall.co.uk