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Cohabitation law reforms rejected

Written by admin on . Posted in Income Tax, Inheritance Tax. No Comments on Cohabitation law reforms rejected

The government has rejected proposals to modernise cohabitation laws in England and Wales, leaving it up to individuals to arrange their financial affairs for partners and dependents.

In August, the House of Commons Women and Equalities Committee published The rights of cohabiting partners for England and Wales (Scotland and Northern Ireland have their own laws). Amidst all the other political excitement of that month, the report received little coverage.

The lack of media attention was a pity, as the Committee made some important recommendations about a significant proportion of the population – the one in five couples who have chosen cohabitation rather than marriage or civil partnership. The report noted that “Whereas married couples and civil partners have certain legal rights and responsibilities upon divorce or death, cohabitants receive, in general, inferior protections”. This fact is compounded by what the report called the “common law marriage myth” – the erroneous belief that after a certain amount of time of living together, the law treats cohabitants as if they were married.

The report made six recommendations for action, only one of which was accepted in full by the government. The following three proposals were rejected outright:

  • Family Law should be reformed to better protect cohabiting couples and their children from financial hardship in the event of separation. A potential structure for such reform was proposed by the Law Commission in 2007, which having ignored for so long the government now says is too old to be implemented without a review or fresh consultation.
  • The intestacy rules should be immediately redrawn to recognise cohabitation. The Committee again supported ideas put forward by the Law Commission (this time from 2011). The government’s rejection of any intestacy reform was largely predicated on the notion that cohabiting couples could make wills to deal with their estates.
  • The inheritance tax regime should be the same for cohabiting partners as it currently is for married couples and civil partners. This was rejected by the Treasury – the responsible government department – which said it “has no plans at present to extend the longstanding treatment of spouses and civil partners to cohabiting partners.”

If you are cohabiting, the government’s message is clear: make your own legal and financial arrangements – and don’t believe that common law marriage myth.

Photo by Alvin Mahmudov on Unsplash

Tackling rising employment costs

Written by admin on . Posted in Budget, Employment Tax, Income Tax, National Insurance Contributions, PAYE. No Comments on Tackling rising employment costs

The 9.7% uplift to the National Living Wage from April 2023 should be welcome news for lower-paid workers, but could present problems if their employer simply cannot afford the increased cost of employing them.

The cost of living crisis is impacting many businesses, especially those in the hospitality sector. Some will cope with rising employment costs by reducing their headcount, but others may have no choice but to close up shop. Small businesses owned by self-employed people are likely to be hit particularly hard.

On top of this, the freezing of the employer national insurance contribution (NIC) threshold until April 2028 will also mean an increased NIC cost for many businesses.

Wage increase

The National Living Wage is paid to employees aged 23 and over, with similar percentage increases to the rates payable to younger employees. The percentage increase for 21- to 22-year-olds at 10.9% is even higher.

  • For each full-time worker aged 23 and over, the increase will see employers having to pay nearly £2,000 more a year in gross salary, with pension, holiday pay and NIC costs on top.
  • There will probably be a knock-on effect higher up the pay scale, with other employees looking for an equivalent salary boost.

Some employers might be tempted to try and cut their wage bill by turning to ‘self-employed’ workers. However, employment status is not simply a matter of choice, and incorrect categorisation can have serious implications.

NIC threshold

The employer threshold is to be frozen at its current level of £9,100, although the annual employment allowance of £5,000 will shield smaller employers (with just two or three employees) from the impact of this decision.

Larger employers will see a stealthy increase to their NIC cost as wages increase, but the starting threshold for NIC remains unchanged.

The minimum wage rates from April 2023 can be found here.

Photo by Alex Kotliarskyi on Unsplash

Business rates revaluation in 2023

Written by admin on . Posted in Business Rates. No Comments on Business rates revaluation in 2023

From 1 April 2023, business rates in England and Wales will be updated to reflect changes in property values since the last revaluation in 2017. Although many businesses will see increased bills, others will see reductions. A package of targeted support will help with the transition.

The revaluation is based on April 2021 rental values, a time when the property market was seeing significant turbulence. Not surprisingly, there will be considerable fluctuation between areas. For example, in London, the estimated change in rates bills payable across sub-markets range from a decrease of 11% in Victoria, to an increase of 34% in Clerkenwell and Farringdon.

The changes target the ‘bricks vs. clicks’ tax imbalance between physical and online businesses by substantially raising the business rates bills for big warehouse operators, but limiting rises for many high street retailers, restaurants and pubs.

Business support package

A support package has been announced to help business rate payers affected by the revaluation.

  • Business rates multipliers will be frozen for a further year, keeping them at 49.9p (small business) and 51.2p (standard) for 2023/24.
  • For 2023/24, retail, hospitality and leisure properties not qualifying for small business rates relief will receive a 75% business rates discount, subject to a cash cap of £110,000 per business. Relief is only 50% for the current year.
  • The downwards transitional relief caps will be abolished so that a business with a decreased rates valuation for 2023/24 immediately benefits from the full reduction on their bills.
  • For businesses with higher rates bills for 2023/24 as a result of the revaluation, upwards transition caps will limit the increase – these are set at 5%, 15% and 30% for small, medium and large premises respectively.
  • There will be protection for small businesses who lose eligibility (or see reductions) for either small business or rural rate relief due to the updated valuations. Bill increases will
    be capped at £600 for 2023/24.

The government’s business rates valuation service, which shows a business’s updated rateable value for 2023/24, can be found here. Any revisions for Scottish businesses are expected in the Scottish Budget on 15 December.

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The effects of fiscal drag on your tax position

Written by admin on . Posted in High Income Child Benefit Charge, Income Tax, Inheritance Tax, self-assessment. No Comments on The effects of fiscal drag on your tax position

Fiscal drag is the stealthy way in which governments pull more and more taxpayers into higher tax brackets without the backlash that comes with increased tax rates. This is something taxpayers can probably live with when inflation is negligible, but it’s another matter entirely with inflation at over 11%.

Inheritance tax

One of the starkest examples of fiscal drag is the freezing of the inheritance tax (IHT) nil rate band that has been set at £325,000 since April 2009. Combined with soaring property prices, it is no surprise the government’s IHT receipts have nearly doubled in the ten years to 2021/22, with current year receipts set to see a further significant increase.

The nil rate band had previously been frozen at £325,000 until 2026, but the Autumn Statement has now extended the freeze until 2028.

IHT bills can sometimes be mitigated with careful lifetime planning, although people should be careful not to leave themselves short of funds later in life.

Income tax thresholds

The personal allowance (£12,570) and the basic rate tax threshold (£37,700) are unchanged since 2021/22, and, like the IHT nil rate band, are now set to remain frozen until 2028. Other thresholds are subject to fiscal drag because the government simply ignores them from year to year.

  • The £100,000 income limit at which the personal allowance starts to be withdrawn is unchanged since withdrawal was introduced in 2010. Personal allowance withdrawal leads to a 60% marginal tax rate, and an estimated one million more taxpayers could be caught if nothing changes over the next five years.
  • The High Income Child Benefit Charge income limit of £50,000 is unchanged since the charge was introduced in 2013. Around one in five families are now affected by the limit, compared to one in eight when the charge was first introduced.

To mitigate the impact of these frozen thresholds, some income tax planning may be possible for spouses and civil partners. Pension contributions can also reduce the amount of income counting towards the various income limits.

Details of income tax rates and personal allowances for the current tax year can be found here.

Photo by Kyle Glenn on Unsplash

Meandering thoughts on Capital gains chop in Autumn Statement

Written by admin on . Posted in Capital Gains Tax, MTD, self-assessment. No Comments on Meandering thoughts on Capital gains chop in Autumn Statement

It should have come as no real surprise that the Chancellor took the axe to relief on capital gains tax (CGT) in the government’s Autumn Statement. The changes are expected to raise some £1.6 billion over the next five years by cutting the annual exempt amount (AEA) to £6,000 for 2023/24, and following this by a further, drop down to £3,000 from 2024/25.

The AEA is currently £12,300, so someone with, for example, gains of £20,000 to £25,000 from the sale of shares will have been advised to spread the disposals over two tax years to benefit from two AEAs. With an AEA of just £3,000 from 2024/25 onwards, a disposal would need to be spread over seven or eight years to fully eliminate the gain.

Instead, many investors may prefer to take the full tax hit from an early disposal, especially if they have concerns that CGT rates could be the next target. For a higher or additional rate taxpayer disposing of a buy-to-let property, for example, the reduction of the AEA to £3,000 will mean an additional £2,604 in CGT.

The AEA available to trustees is half the normal level, so for 2023/24 they will have an AEA of £3,000, with £1,500 available from 2024/25.

Reporting requirements

With a lower AEA, more individuals and trusts will find themselves having to report gains to HMRC. The estimate is that by 2024/25, an additional 260,000 people will be brought into the scope of CGT for the first time.

This will mean filing a self-assessment tax return or making use of HMRC’s real-time CGT service. Dealing with CGT can be a challenge given the complex computational rules and reliefs, plus the one-off nature of the tax.

CGT planning

The reductions to the AEA make planning around capital gains more important than ever.

  • Consider utilising the current, more generous, AEA by 5 April 2023.
  • Make use of ISAs to shelter gains from CGT.
  • Ensure the best use is made of any capital losses – these can be wasted if crystalised in a later tax year to gains.
  • Spouses and civil partners can transfer assets between themselves to make the best use of exemptions and capital losses.
  • Look at whether holding buy-to-let property in a company structure is beneficial.

HMRC’s guide to reporting and paying CGT can be found here. For detailed guidance on your options, please get in touch.

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Dissecting inflation: what a difference a year makes

Written by admin on . Posted in Uncategorized. No Comments on Dissecting inflation: what a difference a year makes

Annual CPI inflation hit 10.1% in September, but that does not mean every price is showing a double-digit increase.

The September Consumer Prices Index (CPI) inflation reading is probably the most important inflation metric in a given year. Traditionally, this number is the one used by the Government as the basis for increasing tax allowances and bands, as well as benefits – including the state pension.

In recent years the significance of September’s CPI reading has waned, as the Government has chosen to freeze or restrict increases to limit the cost to the Exchequer of these benefits. The most obvious recent example is the freeze to the personal allowance (£12,570) and higher rate threshold (£50,270 outside Scotland), which would be £14,270 and £57,170 from April 2023 had the first two years of a four-year freeze not happened.

This year, the September 2022 annual inflation rate of 10.1% is more significant and not all it seems. The graph above shows the annual inflation rate in the 12 categories that make up the CPI ‘shopping basket’ of goods and services.

Variable effects

Only a third of those categories registered inflation above 10%. And another third recorded rises of no more than 5%. All the categories experienced higher inflation in September 2022 than September 2021, when the annual inflation rate was a more modest 3.0%, but the changes brought about over the intervening twelve months have had significantly varied effects across the different categories:

  • Housing, water, electricity, gas and other fuels inflation has increased from 1.9% to 20.2%, due to the war in Ukraine, resulting in soaring energy bills.. This category is shortly expected to see another jump, as the Government’s new energy price guarantee took effect from 1 October.
  • Food inflation jumped from 0.8% in 2021 to 14.5% in 2022. This can also be largely attributed to war in Ukraine. Not only has the war affected the production of grain and sunflower oil, directly increasing their prices, but the higher cost of fossil fuels – used in transportation and in fertiliser manufacture – has exacerbated the price increase.
  • At the other end of the scale, however, the communications category, primarily telecoms, is experiencing only 2.4% inflation (albeit in 2021 the corresponding figure was 1.5%). Health (medical, hospital and outpatient services) has also seen a modest rise, from 1.3% to 3.5%.

These large variations help explain why your experience of inflation may seem, at different times, better or worse than the headline figure.

The Office for National Statistics (ONS) recognises this fact and has recently introduced an online personal inflation calculator which is worth exploring.

It is important to build  the impact of inflation into your planning, and wise to seek professional advice to better understand how these figures affect you personally

Source: ONS

The marshmallow paradox – VAT or no VAT?

Written by admin on . Posted in Marshmallow, Tax, VAT. No Comments on The marshmallow paradox – VAT or no VAT?

The biggest marshmallows are in fact VAT free.

The intricacies of VAT continue to delight or inflame, with marshmallows the latest food product to come under the spotlight. The outcome of a recent First-Tier Tribunal case means that VAT classification can now differ between miniature, regular and mega-sized marshmallows, highlighting again the importance of accurate understanding of the rules.

The tribunal case dealt with the VAT liability of mega-sized marshmallows and whether, unlike regular-sized marshmallows (of around half the size), they should be zero-rated for VAT purposes.

A recipe for confusion

The mega-sized marshmallows had been sold between 2015 and 2019, and were treated as zero-rated. HMRC raised VAT assessments on a wholesale company for £473,000 on the basis that marshmallows are confectionery and should therefore have been standard rated.

However, although the packaging of the product said the mega-sized marshmallows could be either roasted or eaten as they were, the marshmallows were actually intended to be roasted, and the packaging contained specific instructions for roasting over a campfire or barbecue. Therefore, most retailers displayed the mega-sized marshmallows in their barbecue sections.

Outcome

Even though the mega-sized marshmallows didn’t need to be cooked in order to be consumed, the tribunal decided that, on balance, they were not within the definition of confectionery as they were being sold and purchased specifically for roasting.

This case continues a trend which places increasing importance on the way a product is marketed or sold for its VAT treatment.

The correct VAT treatment of marshmallows would now appear to be:

* Miniature marshmallows Zero-rated if marketed as being for baking use;
*Regular-sized marshmallows Standard rated as confectionery;
*Mega-sized marshmallows Zero-rated if marketed for roasting;

Of course, this could all change should HMRC appeal the decision.

The case highlights just how important it is to make sure products and services are correctly rated for VAT. An investigation from HMRC can prove to be very expensive and also time consuming for the parties involved. HMRC’s guidance on the VAT treatment of food products can be found here.

Photo by Richard Bell on Unsplash

Finding the right mix in mixed use properties

Written by admin on . Posted in SDLT, Stamp Duty, Tax. No Comments on Finding the right mix in mixed use properties

A recent tribunal found in HMRC’s favour when a residential property was questionably deemed mixed use.

On the purchase of a mixed use property, stamp duty land tax (SDLT) is paid at non-residential rates rather than residential rates. This is the case regardless of the relative size of the residential and non-residential areas of the property.

Currently, it is beneficial to pay residential rates on a property purchase in England or Northern Ireland costing up to £965,000. However, mixed use treatment is advantageous on more expensive properties, or if the 3% surcharge on additional residential properties would otherwise be payable.

What is mixed use?

It can be quite complicated deciding on the appropriate SDLT treatment when a building is used partly as a dwelling and partly for other purposes, but HMRC does make a clear distinction.

A building where certain rooms, which could otherwise be used as part of the residential area, are used for work purposes – is not mixed use. (For example, where someone has an office at home).

A building that is divided into separate residential and non-residential areas, with the non-residential part adapted for use as commercial or business premises – can be mixed use. (For example, where part of a building is converted into a surgery).

The actual use is irrelevant. The key factor is the degree of conversion required and the degree of separation from the residential area.

A cautionary tale

A recent First-Tier Tribunal case on the meaning of ‘mixed use’ went in HMRC’s favour.

A couple had purchased a property for £2.9 million. They wanted to classify it as mixed use on the basis that the land encompassed a public footpath, arguing that the footpath was used for a separate commercial purpose – namely access to a neighbouring farm. The couple were responsible for ensuring ditches and drains on their side of the path remained clear, but the house itself was entirely residential.

The tribunal held that the shared path was like any other public right of way, and simply formed part of the grounds of the property. It was not a separate non-residential area.

This case involved a tax refund company, and HMRC has said the decision should serve as a warning to those considering getting involved with such agents.

HMRC has consulted on changes to the way SDLT applies to mixed use property, for the future, but no proposals have yet been forthcoming. In the meantime, HMRC’s guidance on how the tax can be found here.

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First time buyers: time to act?

Written by admin on . Posted in Budget, Wealth. No Comments on First time buyers: time to act?

The increased stamp duty relief for first time buyers has not been reversed by the new Chancellor, but it may not survive beyond the tax year.

One of the few tax cuts to survive from Chancellor Kwarteng’s September’s Growth Plan is the uplift to stamp duty land tax (SDLT) relief for first time buyers. This has gone up from £300,000 to £425,000, potentially saving qualifying first-time buyers up to £8,750.

The current SDLT nil-rate threshold for property purchases in England and Northern Ireland is £250,000, but first-time buyers now benefit from an enhanced threshold of £425,000. The additional £175,000 of nil-rate threshold saves SDLT at the rate of 5%.

In Wales the starting threshold for main residential Land Transaction Tax was lifted from £180,000 to £225,00 from 10 October, which should also help first time buyers. Scotland has not yet made any changes to land taxes.

Eligible properties – mind the gap

The maximum eligible property value in England and Northern Ireland has also been increased from £500,000 to £625,000.

  • If a property costs between £425,000 and £625,000, SDLT (at the rate of 5%) is paid only on the excess over £425,000.
  • However, where the cost of a property exceeds £625,000, normal rates of SDLT are paid on the full purchase price
  • This means there will be quite a jump in the amount of SDLT if a first-time buyer just exceeds the £625,000 limit. For example, SDLT on a property purchased for £625,000 is £10,000, but goes up to £18,800 if the purchase price is merely £1,000 higher.

Eligible buyers

To qualify as a first time buyer, the individual must never have owned a freehold or leasehold interest in a residential property in the UK or anywhere else in the world. They must also intend to occupy the property as their main residence.

This can be problematic for joint purchasers, since all purchasers have to meet the qualifying conditions. First time buyer relief therefore does not generally apply if a parent helps their son or daughter get a foot on the property ladder by taking out a joint mortgage with them, if this also means joint ownership.

It would be no surprise if these SDLT relief increases are partly or fully reversed in April 2023. First time buyers planning to purchase a home in the near future might be advised to do so sooner rather than later to take advantage of this relief before it disappears – the relevant date is the point of completion.

To work out how much you could pay or save, see the Government’s online SDLT calculator, which will work for most types of property purchase.

Photo by Tierra Mallorca on Unsplash

 

Dividends vs remuneration: the corporation tax quandary

Written by admin on . Posted in Income Tax, IR35, National Insurance Contributions, PAYE, self-assessment. No Comments on Dividends vs remuneration: the corporation tax quandary

For owner-managed companies, bonuses, dividends and remuneration will become yet more complex in the new tax year.

With the corporation tax increase and dividend rates now confirmed by the Government, the dividend vs remuneration decision for owner-managed companies is likely to become more complicated in 2023/24, particularly when it comes to bonuses.

Historically, it was preferable to extract company profits through dividends rather than through director’s remuneration. This is because of the national insurance contribution (NIC) cost attached to remuneration.

However, from 1 April 2023, there will be a substantial increase to the rate of corporation tax once profits hit £50,000. On profits between £50,000 and £250,000 the rate will be 26.5%, with the 19% rate only available for the first £50,000 of profits.

The bonus decision

The tax position will differ in each case, but let’s take a situation where a higher rate taxpayer wants to take a bonus of £40,000 from their company, which is in the 26.5% corporation tax bracket. The director has already used their tax free dividend allowance.

Dividend
After allowing for corporation tax, a dividend of £29,400 can be taken. Income tax on this will be £9,923, so the net income is £19,477.

Remuneration
After allowing for employer NICs (assuming the rate does not increase next year), the gross remuneration would be £35,149. After income tax and employee NICs are applied, the net income is £20,386.

In this case, remuneration is the beneficial option (and would be better still if some or all of the employment allowance was available). Without the corporation tax increase, the situation would have been reversed.

Of course, the situation could change if the Government decides to reinstate the additional 1.25% percentage points to NIC rates (albeit, in this particular example, the remuneration option would still be marginally better).

Other factors to consider

There are several other advantages to paying remuneration rather than dividends to consider too:

  • Dividends must be paid to all shareholders.
  • A dividend has to be covered by a company’s profits.
  • Dividends do not always count as income when applying for a mortgage.

As these examples illustrate, the corporation tax landscape has become more complicated. Although a Government guide clarifies things somewhat, it’s always best to seek professional advice rather than risk losing valuable income.

Photo by Austin Distel on Unsplash