Welcome to the February 2020 newsletter from Chamberlains
Is there anything you should be doing before 5th April, the tax year end, or perhaps before 11 March, the Budget? It’s a while since I’ve sent out a newsletter, but now’s a good time for one.
I’ve written many times about the benefits of putting money aside into a pension scheme – especially for higher rate taxpayers. As a reminder, if you’re paying tax at 40% on part of your income, it only costs £600 to get £1,000 into your pension pot. You put in £800, the government tops it up to £1,000, and you get back £200 via your tax return – so the £1,000 in your pot has only cost you £600.
Some people think that this isn’t fair – it benefits high earners more than low earners, and we ought to encourage low earners to save for a pension just as much as their wealthy neighbours. One suggestion is that all pension contributions should get tax relief of a flat rate – perhaps 30%. On this basis, the £1,000 would cost everyone £700, no matter whether they were a higher or lower earner – and supposedly it wouldn’t cost the Treasury any more.
The argument makes sense, and it would certainly simplify things and “level the playing field” a bit – which isn’t to say it will happen! But it might be worse. The new government has ambitious spending plans but it’s promised not to raise the major taxes. There’s certainly scope for it to borrow more – interest rates are cheap – but ultimately that builds up problems for the future. So how can it get the money it needs?
Recently, there’s less talk about the 30% flat rate and more about the threat to keep it at 20%. If they do that, we’re told that the Treasury would gain more than £10bn – very useful, and probably even more convincing than the idea of fairness!
On that basis, you might like to consider extra contributions now if you’re a higher-rate taxpayer. And when I say “now” I mean before 11 March.
How much can you put in? The rules are a bit complicated, but the general rule is that you can put in as much as your earnings, up to £40,000 plus extra if you didn’t use the full £40,000 in any of the last three years. However, you actually pay £32,000 rather than £40,000 – this is the £32,000 with the basic tax allowance added in.
Talk to your IFA if you’d like more details, or come back to me. But there’s not much time…
CAPITAL GAINS TAX
This is another time-critical tax. You can make a gain of up to £12,000 this tax year without paying any tax. (In broad terms, the gain is the profit when you sell it over what you paid for it.) The key date is when the sale is agreed, not when you’re paid, and this applies to any sort of asset. Residential property gains, (not on your home) are taxed at 28%, or at 18% to the extent that there’s space left in your basic rate band. Your home is normally exempt, but there are complicated rules if you’ve only lived there for part of the time you’ve owned it. Other assets, for example investments or commercial properties, are taxed at 20% or 10%. So it’s a comparatively cheap tax and good to use if you can.
The Conservatives promised not to increase Income Tax, Corporation Tax or VAT, but they didn’t mention CGT, so this may be more expensive after the Budget. Unsurprisingly, some people may try to sell things before then.
Unless the system changes, residential properties will work differently in the new tax year. The date of the “gain” is still the date of exchange of contracts, but provisional tax is payable within 30 days of the date of completion, and a special tax return for the sale will also need to be completed, a “UK land return”. We’ve had to do a version of these for non-UK owners since April 2017, but now they’ll apply to everyone.
Until now, gains on residential properties have simply been reported on an individual’s normal tax return, following the end of the tax year, so this is quite a change. It is expected that solicitors or conveyancers will need to deal with it as part of the completion process. However, care will need to be taken, because they may not be fully aware of the position. If, for example, you’re living in the house when it’s sold, they may assume that nothing needs to be done because it’s covered by the exemption for homes. However, there could well be a gain if you’d lived away for some time, perhaps renting it out. As I said the rules are complicated, and your accountant may need to help…
This is another thing that may change. At the moment, there’s a generous allowance for business owners when they sell their business. If they’ve built it up from nothing and they sell it for £10m, they just pay CGT at 10%, provided they haven’t already used their £10m allowance. Maybe this is too generous. The original idea was to encourage serial entrepreneurs – you build up a business, sell it on when it’s established, and do the same again. Good for the economy, etc. However, it was perhaps more commonly used for people to retire – lazy so-and-so’s!
There are thoughts that the £10m may be reduced, or perhaps that the 10% rate could be increased. Something to watch out for, but there’s probably little anyone can do about it, this late in the day.
INHERITANCE TAX PROPOSALS
Last year the Office of Tax Simplification made a number of suggestions. IHT is a complex area, with all sorts of exceptions and allowances. Not much point in going into them now, when things may well be changed. However, maybe a couple of reminders are worthwhile.
When the executors fill in the forms after a death, they need to mention gifts from the deceased in the last few years. If the gifts were over seven years ago, they can be ignored, as can “trivial” gifts of less than £250. There’s also a £3,000 annual exemption each tax year that can be carried forward if not used one year.
Larger gifts are “potentially exempt transfers”, PETs, and these become exempt after seven years. Part may be exempt before then, but it’s a complicated system. The OTS suggested that the annual £3,000 could increase, to include various other exemptions, and that the seven years could reduce to five years. Given the uncertainly I won’t say any more at the moment, but the £3,000 should be considered.