Pre-April tax planning opportunities

Pre-April tax planning opportunities

As the tax year end approaches, Calvin Healy from Richardson Swift provides a summary of the current topical tax planning areas requiring attention in the next few months.

Owner managed incorporated businesses

Major changes to the taxation of dividend income were introduced from 6th April 2016. The changes were directed primarily at the owners of small companies and designed to bring the tax cost of operating as a limited company more into line with the charge on a similar business run as a sole trader.

The changes were:

• Abolition of the tax credit;
• A dividend tax-free allowance of £5,000;
• Dividends in excess of the allowance taxed at flat rates of 7.5% in the basic rate band, 32.5% in the higher rate band and 38.1% in the additional rate band.

Measures were also introduced from 6th April 2016 which changed the taxation of savings income, notably interest. The changes introduced a tax-free allowance of either £1,000 or £500, depending on whether the individual is a basic or higher rate taxpayer. Therefore, interest received on funds lent to a company may fall within the allowance.

If you are affected by the changes, it is highly recommended that you obtain appropriate tax planning advice to ascertain the cost benefit of dividend extraction between now and 5th April.

As we have experienced, there is no ‘one size fits all’ recommendation as there are many different factors which need to be considered.

Buy-to-let investors

From 6th April 2016, the 10% wear and tear allowance was abolished for fully furnished buy-to-lets. Since that date landlords have only been able to claim an element of deduction against rental profits for actual amounts spent on replacement furnishings during the year.

Changes are also being introduced to restrict tax relief on loan interest. Currently, full tax relief is available for interest on a loan used in a buy-to-let rental venture. The funds may have been used to purchase the property, to make repairs or improvements, or just fund working capital.

From 6th April 2017, tax relief on interest will be restricted so that by 2020 interest will no longer be an allowable expense, but will instead attract relief at 20% as a reduction to your tax bill.

This change will have a major impact on the owners of buy-to-let property. Therefore, advice will be required to assess the tax impact in order for tax planning opportunities to be explored.

In addition to all of this, landlords are amongst those who will be required to report buy-to-let income and expenses quarterly to H M Revenue and Customs under the Making Tax Digital project, which is being phased in from April 2018.

Finally, if you have a company which owns a residential property classed as a “dwelling” on 1st April 2017, then be aware that the Annual Tax on Enveloped Dwellings (ATED) charge could apply, and a return may need to be filed if the property is worth more than £500,000. The annual charge starts at £3,500 and increases depending on the property’s value.

For further information and guidance, please contact either Calvin Healy or Jon Miles on 01225 325580, or email