There’s been an increasing criticism of TAX AVOIDANCE – largely by people who don’t understand the difference from evasion. Avoidance is legal and simply uses the tax legislation to reduce the amount of tax due. Evasion is illegal and can be considered a form of fraud.

An example of avoidance might be the transfer of shares from a high earning taxpayer to his or her lower earning spouse so that the dividends are taxed at a lower rate. Other examples are the use of the tax-free capital gains allowance or simple inheritance tax planning as seen in the case of David Cameron – see below. Examples of evasion might be working for cash-in-hand, or more complicated schemes such as creating artificial trading losses to offset against other income.

In case you’re in any doubt, I don’t get involved in complicated, potentially evasive tax-saving schemes, but I’m always keen to help you save tax in more straight forward ways.

Other things to cover this month are tax on savings income, peer-to-peer lending, changes to ISAs, and an update on Chamberlains.
 
DAVID CAMERON’S TAX TIPS

I’m not going to venture into politics, but, as I’ve implied above, the furore about our Prime Minister’s tax affairs seems to me to be rather excessive. OK, he could have explained things better, but the two main tax-saving ideas are commonplace, and I’ve often mentioned them in these newsletters and to my clients.
 
Tax-free profit on investments

Our PM and his wife bought some shares in unit trust, sold them at a profit, and didn’t pay tax on the profit. So what? The only abnormal thing was that the trust was one that his father had set up in Panama – but any investor could have bought the same shares if they’d researched around and decided that the investment met their notions of risk. Investment managers – even under the umbrella of banks – often use foreign funds as part of an investment portfolio. (They’re not the ones that have to complete the tax returns! – separate entries need to be made for each country, and the tax return spreads over a few more pages, as we often see here.)

If you sell an investment and you make a profit over what you paid, a capital gain, you pay tax at the appropriate rate – but inly on the amount of gain over your annual exemption. This tax year this exemption is £11,100, the same as last year. This is absolutely normal and you may remember that I generally suggest that, if they’re able, people should use their annual exemption to get this tax-free amount. This is what Mr and Mrs Cameron sensibly did.
 
Life-time gifts from parents to children

The other Shock-Horror tax saving tactic used in the Cameron family was for his mother to give him a gift of £200,000. This has the effect of avoiding Inheritance Tax (IHT) on this amount when she dies, provided she lives for another seven years. It was suggested in some of the press that this was some sort of complicated tax strategy but no, it’s completely normal and people have been able to do this for many years – since long before David Cameron had any influence on tax policy. Unfortunately, not many people’s elderly mothers have sufficient spare funds to be able to do so – but it’s a simple idea for those who have.

As a reminder, IHT is paid out of the assets left when someone dies, but only on the amount above the first £325,000, the “nil rate band”. Above this, tax is charged at 40%, so it’s natural that people should wish to minimise this amount. There are a few allowances to extend the amount beyond £325,000. – perfectly legitimate and normal. The main ones are:
• Any assets left to one’s husband or wife (or civil partner) are tax free
• If this has happened on the death of the first spouse, the second will normally have two lots of £325,000
• Any assets left to a charity are tax free
• If over 10% of an estate is left to charity, tax is only charged at 36% on the rest, not 40%
• If the family home is left to direct descendants, there’s up to another £350,000 available tax-free on estates of up to £2,000,000 (This is being phased in over the next few years.)
• Life-time gifts of £3,000 each year are tax-free
• Larger gifts may also be tax-free, provided the donor survives seven years. These are affectionately know as PETs – “potentially exempt transfers”

This last point is what Mrs Cameron senior took advantage of when she gave the £200,000 to David Cameron. Perfectly normal; no problem (although many may feel envious at his good fortune.)
 
TAX-FREE SAVINGS INCOME

You may have received a letter from your bank to say that they’re starting to pay your interest gross. Previously they’ve deducted tax and there’s been no more to pay unless you’re a higher rate taxpayer. However, as from 6 April 2016 you can receive up to £1,000 interest (£500 if you’re a higher rate taxpayer) tax-free. So that HMRC avoids myriads of tax reclaims, banks and building societies are stopping charging tax. £1,000 is a lot of interest at current rates and presupposes more savings than most of us enjoy, but it can also be used for the higher rates of interest received from peer-to-peer lending (see below).

All jolly useful so far. But there was a potential problem with trusts. At present many small trusts do not have to file a tax return because they only receive income that has had tax deducted at source. When interest is paid gross, this would result in many small trusts having a tax liability and so having to do a tax return. This would increase the administration for the trustees – but also for HMRC.

Fortunately the ICAEW’s Tax Faculty (I’m a member but I can claim no credit for it)
liaised with HMRC and got them to agree that no notification will be required for 2016/17 from trustees or personal representatives dealing with estates in administration where the only source of income is savings interest and the tax liability is below £100.
 
PEER-TO-PEER LENDING REVISITED

You may remember me talking about this before (“P2P”). As a quick recap, it’s a form of crowd-funding where business people who want a loan use a special website, a platform, to explain what they want and why, how they’ll repay it etc. A crowd of investors then decide whether they’d like to help with this loan and how much interest they want. Businesses may be willing to pay a higher rate of interest – perhaps between 8% and 14% depending on the riskiness of the venture – because they may not reach the strict criteria of banks or because they want the loan more quickly than loan committees would allow..

There’s a bidding process – the borrower will give an idea of the interest range they’re expecting to pay, and the lenders will offer loans at varying rates of interest, reflecting on the perceived risk. Risk will be assessed by considering the business proposition, the past history of the borrower and what security is being offered. When time runs out on the “auction”, the platform’s IT system will select the offers at lower rates of interest. A growing number of investors include P2P loans as part of their investment portfolios, aiming to obtain income at a time of low bank interest offerings. They generally diversify their investments over a range of these loans to spread the risk.

Inevitably, some businesses fail and loans are not repaid – which would create a capital loss, to be offset against capital gains. However, this has now been extended to recognise the portfolio aspect of this sort of investment, which makes it more like a sort of trade. As such, the loss can now be offset against interest that they receive from other P2P loans.

HMRC has recently published a note, “Income Tax relief for irrecoverable peer to peer loans”, which contains final guidance on how to apply the new income tax relief. The guidance explains exactly which lenders will be eligible and the relief they can claim.
 
CHANGES TO ISAs

After last month’s Budget, I reminded you about some ISA basics, and I said that as from April 2015 the ISA continues to exist even after the death of the person in who’s name it was taken out. An ISA expert suggested that I should clarify that this is only for ISA’s inherited from spouses (plus civil partners).

As so often in tax, it’s put in a more complicated way: a new super-ISA (an “Additional Permitted Subscription”) is created to contain all the inherited ISA investments for the surviving spouse in one pot, and the old ISAs expire in the way we’d got used to. A separate APS transfer form would be needed for each Plan Manager so that they could be bundled together into one new plan – probably well worth the extra admin.
 
WHAT’S HAPPENING AT CHAMBERLAINS?

Congratulations to Vikki, one of our key people, who recently gained the coveted FCA (fellowship) qualification from the Institute of Chartered Accountants. As she remarked to Keith and me, “ I don’t want to be left behind by you boys!” (I love her – it’s so long since anyone’s called me a boy!) And clients love her too – an unsolicited email received just today said, “We really appreciate the excellent work done by Vikki and her colleagues for us”. [OK Keith, you’ll get some praise too next month!]

The other big excitement these last few weeks has been the creation of extra car-parking spaces on our business park – who was it that said that there are few things more enjoyable than watching other people work?! Anyway, it’s a reminder that Chamberlains has ample parking for meetings, and that our office is easily accessible from the A3. If you’d like to come and talk to us about anything in these newsletters, just get in touch.