Skip to main content

Month: October 2023

Farewell to inheritance tax?

Written by admin on . Posted in Inheritance Tax. No Comments on Farewell to inheritance tax?

In July, the government was reported as holding talks on abolishing inheritance tax (IHT). This wasn’t given much credence at the time, but there are now reports that the March 2024 Budget will include a reduction to the 40% IHT rate as a prelude to future abolishment.

IHT is charged at the rate of 40% on estates worth more than £325,000. However, there is also a further allowance of £175,000 that can be set against the value of a main residence if the property is inherited by descendants. Both allowances are shared between spouses or civil partners, so there is a potential family exemption of £1 million.

Although the combination of frozen allowances and higher property values has brought more estates into the IHT net, the tax is only paid on around 4% of estates.

Argument for change

Given that investments are generally paid for out of taxed income, IHT can be seen as a double charge to tax, preventing people passing on their wealth to children and grandchildren.

  • It applies to virtually all assets, without the exemptions given for capital gains tax – such as for a main residence.
  • Although IHT is mainly paid by the wealthy, the very rich typically have far more scope for reducing their overall IHT burden by, for example, making lifetime gifts and using trusts.

The moderately wealthy, where a main residence may account for the majority of wealth, may not be able to afford such tax planning measures.

How likely?

Although a rate reduction of a percentage point or two cannot be ruled out, full abolition is almost certainly going to be too costly in the current economic climate – some £7 billion in lost tax revenue annually – especially as HMRC is on course to have a record-breaking year from IHT receipts.

Then there is the forthcoming general election. A Labour government would be more likely to move in the opposite direction by cutting IHT allowances – in particular, the £175,000 main residence allowance.

In the meantime, if your estate may become liable for IHT, there are measures you can take. HMRC’s basic guide to IHT, including details of various exemptions, can be found here.

Photo by Glenn Carstens-Peters on Unsplash

Mitigating rising corporation tax rates

Written by admin on . Posted in Company Director, Corporation Tax, Pensions, Wealth. No Comments on Mitigating rising corporation tax rates

New HMRC statistics have shed some light on how many companies are affected by the recent hike in corporation tax rates. Just over 1.5 million companies paid corporation tax for the financial year to 31 March 2022, but only 7% fell above the £50,000 small profits threshold.

Although fewer than 100,000 companies are likely to be facing the 26.5% marginal rate of corporation tax where profits fall between £50,000 and £250,000, they will be mainly owner-managed companies with owners keen to mitigate the tax increase.

For a company with a 31 March year end and profits of £200,000, this year’s corporation tax bill is going to be £11,250 higher than last year.

Director’s self-invested personal pension (SIPP)

Even if a director has not previously been in favour of making sizable pension contributions, there can now be a compelling case for doing so.

  • With a marginal tax rate of 26.5%, investing the maximum £60,000 into a SIPP will save corporation tax of £15,900.
  • Once the director reaches 55, 25% of the pension fund can be withdrawn tax free, but virtually immediately if a director is already 55.
  • There will be an overall tax saving if the tax rate eventually paid on pension withdrawals – taking into account the tax-free element – is less than 26.5%.

Even if there is no overall tax advantage as such, there will still be a timing benefit. The current year’s corporation tax bill is cut, but the tax cost does not apply until the director receives their pension income.

Mitigating cost and risk

By choosing a low-cost provider, the annual cost of maintaining a SIPP can be kept to a minimum.

If there are only a few years until retirement, a director might not want to be exposed to stock market volatility. This risk can be avoided by investing in fixed-term cash deposit accounts.

A basic guide to SIPPs can be found here.

Photo by micheile henderson on Unsplash

Deferring your state pension

Written by admin on . Posted in Pensions. No Comments on Deferring your state pension

The current state pension age (SPA) – the earliest age at which you can draw your state pension – is 66. It will be gradually increased to 67 between April 2026 and April 2028. A further rise to 68 is due, probably between 2037 and 2039, but the confirmation of that timing has (conveniently) been delayed until after the next general election.

Most people draw their state pension as soon as it becomes available, which requires a claim to be made. If you do not make that claim, your state pension is automatically deferred until you choose to claim it. Up until then your deferred pension will increase every week you defer, provided you defer for at least nine weeks. The rate of increase is the equivalent of 1% for every nine weeks, which works out at just under 5.8% a year.

For example, if you defer the current state pension of £203.85 a week for 52 weeks you would receive an extra £11.82 a week once it started before adding the normal inflation related uplift. The increase is not compounded, so for two years’ deferral the extra would be £23.64, and so on.

5.8% a year does not sound bad, but don’t forget, your higher pension will be paid for a shorter period, as it started later. It can take a long time for the extra payments to overtake the loss of the full pension in the deferred period. For example, for a one-year deferral you will need to wait until you are about 81 before the total pension payments you have received are higher because of deferral, assuming 2.5% CPI inflation.

Nevertheless, there can be good reasons to defer. For example, if you are still working, your state pension would attract tax at your highest rate(s) which could be lower once you fully retire. There are other tax planning situations where being able to minimise income in a tax year can be useful, for example when cashing in an investment bond. Before you claim your state pension, make sure you take all your circumstances into consideration.

Government guidance on deferring your state pension can be found here.

Photo by Tim Hüfner on Unsplash

Don’t get caught in the VAT penalties net

Written by admin on . Posted in VAT. No Comments on Don’t get caught in the VAT penalties net

The 50th anniversary of the UK’s introduction of VAT was earlier this year, but despite being around for a while, many VAT-registered businesses still find VAT too complex and confusing. No surprise then that more businesses than ever are getting hit with penalties for inaccuracies.

Inflation and frozen thresholds

Two things that are not helping are the high rate of inflation combined with a freeze on various VAT thresholds.

Since 2017, the registration threshold has been £85,000, so with increased prices it is easy for a business to become liable for VAT despite staying the same size.

Meanwhile the thresholds for remaining within the flat rate, cash accounting and annual accounting schemes, have remained virtually unchanged for around 15 years, so, again, it is easy to mistakenly continue with a scheme when no longer eligible to do so.

Beware penalties

With HMRC aiming to close the tax gap for VAT, the risk of penalties for inaccuracies will only increase; for 2021/22, the number of penalties issued was already substantially higher than for the previous year, a trend which is sure to continue.

HMRC is able to charge a penalty of up to 30% of the extra VAT due if an error arises due to lack of reasonable care.

In HMRC’s view, it is reasonable to expect a business to find out about the correct VAT treatment or to seek appropriate advice when encountering a transaction with which they are not familiar.

A get out of jail card?

Incurring such a penalty is somewhat careless. However, there may be a get out of jail option if this arises.

HMRC have the discretion to suspend a penalty, for period of up to two years, during which time a business must comply with certain conditions. The aim is to prevent further penalties in the future, so a business could, for example, be asked to improve its record keeping.

If this is done, the penalty will be cancelled at the end of the suspension period, but best to avoid such a scenario in the first place.

HMRC’s guidance on VAT errors can be found here.

Photo by Oxana Melis on Unsplash

Fraud countermeasure drives R&D tax relief changes

Written by admin on . Posted in Corporation Tax, R&D, Tax. No Comments on Fraud countermeasure drives R&D tax relief changes

The level of fraudulent claims being made for research and development (R&D) tax relief has prompted HMRC to introduce a new procedure: companies must provide detailed information ahead of making their claim.

HMRC figures show that nearly 20% of claims for R&D tax relief are fraudulent, so it is no surprise they are tightening up on the claim process. Non-compliance is a particular problem when it comes to small value claims, with nearly 80% of claims for less than £10,000 being suspect.

The new requirement will mean having to submit an additional information form to HMRC to support a claim for R&D tax relief or for expenditure credit.

This new form is a separate requirement to the claim notification form a company must submit to HMRC in advance of a claim for R&D tax relief. Notification applies for accounting periods beginning on or after 1 April 2023.

Submitting the new form

The additional information form must be sent to HMRC before the company’s corporation tax return is filed. If the tax return is filed without the additional information being provided, HMRC will simply remove the claim for R&D tax relief from the company’s tax return.

  • HMRC has set up an online portal for submitting the additional information form.
  • The new process will allow HMRC quickly to assess the validity of a claim, especially the level of expertise of those involved in preparing the claim.
  • The form requires detailed information on the R&D project, including a breakdown of the costs involved. For SMEs with just one to three projects, a full description of each project is required.

HMRC now require a considerable amount of additional information to be submitted, and this will be a challenge for SMEs. Companies should therefore start preparing for their R&D tax relief claims as far in advance as possible to avoid any last minute surprises.

HMRC guidance about the new requirements can be found here.

Photo by Growtika on Unsplash