Author Archives: Nigel Wilkinson

About Nigel Wilkinson

Nigel has over 20 years of experience dealing with the tax affairs of business entrepreneurs and their businesses.

tax planning is an area where many want to see the Government take greater control. Perception from recent high-profile cases of larger multinationals, such as Google and Starbucks, is that these organisations need to pay ‘their fair share’.

2016 Budget Options: Pensions, CGT and Income Tax allowance

Nigel Wilkinson - nwilkinson@goodmanjones.com

Posted on 15th March 2016

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George Osborne stands up tomorrow to deliver his latest Budget with twin targets of raising taxes and cost savings. So what can we expect this time?

Pensions

It appears his main focus is on pensions.

Despite major changes already last year, many experts foresaw potential for structural change this time around. George Osborne has favoured either a move towards a Pensions-ISA removing all pension tax relief on entry, or a fixed-rate pension tax relief making tax savings from higher earners who currently enjoy tax relief on contributions at rates up to 45%. Both would bring the economic benefits of tax savings for the Treasury and both seen as electorate-friendly in the lower earnings levels, affecting those higher earners hardest as they would.

However, amid recent and growing concerns over the EU Referendum the desire for such widespread reforms has weakened Regardless, I believe the Chancellor will consult further so any reprieve will prove only temporary.

And we should still expect some changes in pensions.

Firstly, and most likely option, is a further reduction of the Lifetime Allowance, currently standing at £1.25 million and already to be reduced to £1 million from April 2016. A further drop to £750,000 is strongly favoured – it would provide tax savings and appeal to the public as it hits higher earners hardest.

Secondly, the Annual Allowance on making tax-relievable pension contributions would be a reasonable target. Currently capped at £40,000 pa and from April 2016 to be reduced by £1 in every £2 of taxable income over £150,000 down to £10,000 it would be no surprise to see a reduction to, say £25,000 maximum. Again, this cuts tax relief on higher earners whilst still encouraging lower earners to save more – part of this Government’s mantra.

He could also push through a restriction of the rates of pension tax relief, alone or combined with a reduced maximum. Such a measure would again benefit lower earners over their wealthier counterparts. A maximum tax relief at point of entry of 25% would prove popular, whilst more expensive for higher earners.

Hence, planning for your retirement will be even more important than it already is!

Capital Gains Tax (CGT)

Away from pensions the Chancellor might look at Capital Gains Tax.

Current CGT rates of 18% or 28% can be seen as generous; most attractive compared to their income tax equivalents. Increasing these rates, therefore, towards income tax levels, or to a fixed CGT rate of, say, 33% would satisfy both tests. Now even non-UK residents would be caught by this measure in regards to their residential properties under the non-resident CGT regime.

And the added bonus is an impact on tax planning, regarded by many as tax avoidance and immoral, though not unlawful. Succession planning and business exit strategies, for example, become more difficult and less attractive due to reducing tax differentials. Tax planning becomes more challenging but even more crucial than before.

Indeed, tax planning is an area where many want to see the Government take greater control. Perception from recent high-profile cases of larger multinationals, such as Google and Starbucks, is that these organisations need to pay ‘their fair share’. Certainly, expect greater emphasis and resources to be allocated here.

Income Tax allowance

On income tax, we might expect an increased Personal Allowance and perhaps upward changes to the higher rate tax band, reducing or removing more lower earners from tax liability. On the other hand, he can balance such generosity by reducing the current level of the Termination Payments Exemption, very generous at £30,000, or at least bring such payments within the charge to National Insurance Contributions.

Yes, the Budget is nearly here, and very interesting it will be…..

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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The days of such ‘middle class perks’, it seems, are most definitely numbered.

Rising Damp? An Attack on Buy-to-Let Properties

Nigel Wilkinson - nwilkinson@goodmanjones.com

Posted on 2nd November 2015

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Growing up in the 1970’s one of many good memories was the marvellous Leonard Rossiter starring as miserable, disgruntled landlord Rigsby in TV sitcom Rising Damp, my first exposure to the UK rental property market! The series, now a cult classic, reflected a growing attraction in the UK for private property ownership, the popularity of which grew continually throughout 1970’s, 1980’s and beyond to become what is today very big business indeed!

Growth in property ownership has also of course always been strongly supported by Government of all persuasions – to a greater or lesser degree – from Mortgage Interest Relief At Source (MIRAS) on home ownership, introduced by Roy Jenkins as Chancellor of the Exchequer in 1969, to Thatcherite Britain & the Right to Buy policies of the early and mid-1980’s and so on; its popularity can still very clearly be seen every day merely with a quick glance at Daytime TV schedules.

MIRAS has of course long since perished, abolished by Chancellor Gordon Brown in 2000 and dismissed as a ‘middle class perk’, but throughout the following years full tax relief continued to be enjoyed by owners of rental properties and proved most attractive to both new and existing private landlords. Despite faint rumours, therefore, it was still somewhat surprising in his July budget for Chancellor Osborne to announce the effective removal of this favourable tax relief from private landlords!! Though perhaps by way of concession the relief will not go all at once; rather, it will dwindle away bit by bit over a four year period commencing in tax year 2017/18, each successive year losing a further 25% slice of tax relief thus:

2017/18 75% loan interest qualifies as expense; 25% basic rate tax credit
2018/19 50% loan interest qualifies as expense; 50% basic rate tax credit
2019/20 25% loan interest qualifies as expense; 75% basic rate tax credit
2020/21 NO loan interest qualifies as expense; 100% basic rate tax credit

Hence, as from tax year 2020/21 tax relief on loan interest for private landlords will be restricted to basic rate only.

Following publication of the Finance Bill the manner of its demise has now been confirmed with basic rate relief on loan interest to be given only as a tax credit going forward, rather than being allowed to be offset against rental income as an expense. This difference might at first glance appear cosmetic but will come at some cost to private landlords up and down the country and it will inevitably increase their tax liabilities, and in more ways than one!

If we take by example our typical landlord, Joseph, whose income from earnings and other non-property investments total £40,000 and who also owns a buy-to-let property producing annual rental income of £19,000 after expenses, but before deduction of loan interest in the sum of £10,000. For tax year 2016/17, his net taxable income amounts to £49,000 (£40,000 plus £19,000 minus £10,000). At this point, he qualifies fully for Child Benefit (unless of course his spouse or civil partner earns in excess of £50,000!).

With effect from tax year 2017/18, where only 75% of loan interest is fully relievable Joseph, without doing anything, will see his tax liabilities increase even if his (rental) income does not. His net taxable income for the year – on the same income figures – now rises to £51,500 (£40,000 plus £19,000 minus 75% of £10,000). As a result, if Joseph (or his partner) receives Child Benefit then as the higher income earner for the year Joseph (or his partner) will now suffer Child Benefit Tax Charge, losing 15% of any Child Benefit payments received in the year by claw-back. That in addition, of course, to higher tax payable on his ‘enlarged’ rental income.

If Joseph’s income – rental or otherwise – were also to increase in tax year 2017/18 and beyond, Joseph would face even higher tax increases and Child Benefit Tax Charge clawbacks.

And it is not just Child Benefit!

Let’s suppose Joseph’s income, other than rental receipts, were not £40,000 but, say, £90,000. For tax year 2016/17 his net taxable income totals £99,000 (£90,000 plus £19,000 minus £10,000) and he qualifies for full Personal Allowances. In tax year 2017/18 though with no change in income his net taxable income increases to £101,500 (£90,000 plus £19,000 minus 75% of £10,000); Joseph now loses £750 of Personal allowances this year! and so on …….The effects of this phased reduction in the maximum amount of tax relief on finance costs would see Joseph lose his Personal Allowances as his net taxable income hits and then exceeds the annual threshold of £100,000.

Property rentals and Buy-to-Lets are, and have for some time been, very popular investments for a considerable number of taxpayers, not all of them ‘middle class’. The tax consequences of these proposed changes, however, can only damage its popularity going forward and will no doubt affect the attitudes and priorities of many private landlords up and down the country, with knock-on effects also being felt on social housing requirements and obligations. The days of such ‘middle class perks’, it seems, are most definitely numbered.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Overall, and in conclusion, it is fair to say that being a UK Non-Domiciled employee is far from being the ‘free holiday’ that it is often popularly reported and the pitfalls and minefields are there for employers and professional advisors alike, as well as the individuals themselves.

UK Non-Domiciles – a Very Taxing Problem

Nigel Wilkinson - nwilkinson@goodmanjones.com

Posted on 24th June 2015

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One of the major debating points during the recent General Election campaign revolved around Non-Domiciles and their treatment in the UK, especially for tax. In my experience over many years Non-Domiciles face many issues and difficulties on arrival in the UK, not least the taxation effects on their secondments into the UK business world. As we know, the world is a small place – and getting smaller, particularly from a tax perspective.

The populist, tabloid view of UK Non-Domiciles – enhanced over this latter period – suggests that they get a favouritist deal from our friendly UK tax authorities. But how true is that view in reality?

Of course, firstly, if your Non-Domiciled Secondee is only in the UK on a temporary basis, performing duties partly in the UK and partly overseas, then large tax refunds can be claimed using Overseas Workdays Relief (OWR). OWR is available to all UK resident but Non-Domiciled individuals arriving in the UK who have not been resident in any of the previous three tax years in respect of:

overseas earnings assessed on the Remittance Basis for their non-UK earnings,
provided the full amount of such ‘foreign earnings’ are paid directly into a bank account held outside the UK and are not remitted to the UK.
on this basis, such earnings will only be taxed in the UK if and when remitted.

OWR, having previously been given by concession, is now statutory but is only available for the first three years, or part-years, of UK residence. However, the devil is in the detail when dealing with these claims and care must therefore be taken.

Rapidly increasing globalisation and the relaxation of national borders, together with the introduction in the UK of the Statutory Residence Test (SRT) from April 2013 makes the issue of seconding employees internationally a cause for much greater concern amongst employers and professional tax advisers alike, even those not here for the long term.

Secondly, let us consider the economic environment into which they arrive. According to the most recent Government figures almost 5 million UK taxpayers (19% overall) will be either higher or additional rate taxpayers in tax year 2015/16. Nevertheless, this proportion is expected to account for almost 68% of the UK’s total income tax receipts. UK Non-Domiciles traditionally constitute a significant portion of this group and a large section of these remain in the UK for the longer term, helping to generate business, employment and wealth in our Nation.

With this in mind, therefore, how will these Non-Domiciles be affected by the move to and presence in the UK for tax purposes?

Having only newly arrived or indeed being only in the UK for some temporary purpose will not in itself automatically relieve the individual, or his employers, of UK tax liabilities or compliance obligations. Hence, OWR might not be available.

UK tax liability is broadly based on residence, which is a question of fact, now based on the UK’s new SRT; this comprises several tests on an employee’s length and purpose of visits, plus any connections held with UK. Again, the detail involved in determining these tests is complex and makes it far easier for someone moving to the UK, even for a short term stay, to become UK resident. Just like UK Residents, they are then therefore taxable on worldwide income & gains (the Arising basis) and can only NOT be so taxable if they are non-UK Domiciled. Even so, they must choose ‘not to be taxable on non-UK income and gains unless remitted’ (the Remittance basis) and, for longer-term visitors, pay for the privilege!!

To make this choice, a Remittance Basis Charge (RBC) must be paid and this is – from April 2015 onwards – a beast that has very large teeth indeed, with a ‘membership fee’ charged annually ranging from £30,000 for those non-domiciles having been UK resident for more than 7 of the previous 9 tax years, to £90,000 for those with more than 17 of 20 years residence status.

Furthermore, consultations are currently ongoing to consider whether application for RBC ‘membership’ should now only be on a minimum three years’ basis, potentially increasing these costs yet further to a maximum of £270,000. These charges are permanent and are in addition to the tax charges on relevant UK sourced income!

Additionally, RBC claimants will incur further ‘costs’, losing eligibility to both UK Personal Tax Allowances (£10,600 – 2015/16) and UK Capital Gains Tax Exempt Amount (£11,100 – 2015/16). Hence, the cost of being sent to the UK by your overseas employer is no longer something that should be taken lightly or regarded as something of a perk, certainly not without some serious pre-planning and a generous employment package!

Overall, and in conclusion, it is fair to say that being a UK Non-Domiciled employee is far from being the ‘free holiday’ that it is often popularly reported and the pitfalls and minefields are there for employers and professional advisors alike, as well as the individuals themselves.

This is a highly complex area and the risks involved in getting it wrong are as significant as are the costs, with HMRC taking a far greater interest in this high-risk area. Errors made are potentially very damaging and costly to all parties, invariably leading to tax enquiries, penalties and interest from HMRC.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...