The Budget – Good, Bad or Indifferent?
One of the tax changes which gained a nanosecond in the budget speech was the TCGA 92 s161(1) rule about appropriations to and from stock. Philip Hammond called this “converting capital losses into trading losses”. Why is this relevant or being tackled at this time?
As part of general anti-avoidance the option to convert losses on capital assets into a deduction against trading profits has been removed but what about the wider implications?
From April 2017 many property owners will be hit by changes to the way they receive tax relief on their rental properties and within 5 years higher rate taxpayers will see the tax relief they receive dropping from 40% or 45% tax relief to only the basic rate – 20%.
If the properties they own are in a largely rental property area the expected knock-on effect is that the property values will fall and landlords may then choose to dispose of these.
Say the landlord is also a property developer or in the building trade, the legislation could be used to take the reduced value properties from their letting portfolio into their trading company, moving a capital item (a property) to trading stock (a building to refurbish and sell on) and if that property has declined in value then the capital loss could be brought into the company and used against the profits of the trading company thus reducing the profits and the tax payable.
This option was closed down with effect from 8th March 2017.
A new residential nil rate band for Inheritance Tax (IHT).
From 6th April 2017 a residence passed on death to a direct descendant will attract a new allowance. A direct descendant is a child (including a step-child, adopted child or foster child) of the deceased and their lineal descendants.
The amount of the main residence nil-rate band available will be the lower of the net value of the residential property (after deducting any liabilities e.g. a mortgage) or the maximum amount of the band.
The allowance will be phased in from £100,000 in 2017-18 to £175,000 in 2020-21 and will be limited to one residential property but personal representatives will be able to nominate which residential property should qualify if there is more than one. The property must have been a residence of the deceased and any other properties, such as a buy-to-let property, will not qualify.
If the estate is valued at over £2 million the additional nil rate band will be tapered away by £1 for every £2 that the net value exceeds that amount.
Where part of the main residence nil-rate band might be lost because the deceased had downsized to a less valuable residence or had ceased to own a residence on or after 8 July 2015, the amount which might be lost will still be available provided the deceased left that smaller residence, or assets of equivalent value, to direct descendants.
A claim will have to be made on the death of a person’s surviving spouse or civil partner to transfer any unused proportion of the additional residential nil-rate band unused by the person on their death, in the same way that the existing nil-rate band can be transferred.
Tax Free Childcare Account or Childcare Vouchers
Parents with children in childcare have an important decision to make in 2017. The Government will launch the new Tax Free Childcare Account (Childcare Account) and for the self-employed parents this will mean that they have access to tax incentivised childcare for the first time.
But for employed parents (including company directors) the decision to open a Tax Free Childcare account Is a decision to think carefully about.
Up until April 2018 it will be possible for employers to offer tax incentivised Employer Supported Childcare Voucher Schemes (Voucher Schemes) to employees (including company directors) and in many circumstances the tax incentives of the Voucher Scheme will far outweigh those of the Childcare Account.
The Childcare Account is with NS&I in partnership with HMRC and for every 80p deposited in the account the Government will add 20p to the account, up to a maximum of £2,000 per child (£4,000 if the child is disabled). This appears very generous and in many cases it will be the best option for helping to fund childcare costs however there are a number of downsides.
BOTH parents can benefit from having an employer who has put in place a Voucher Scheme and in the case of two parents both working 35 hours per week and earning a salary of £32,000 gross each then the childcare costs for 2 children would need to be in excess of £18,000 per annum for the parents to be better off using the Childcare Account. Any childcare costs under this amount would gain better tax reliefs by going through a Voucher Scheme.
In the case of parents earning over £50,000 where the child allowance has been withdrawn a salary sacrifice scheme for childcare costs could bring down the salaries to below the £50,000 limit and the child allowance would be reinstated.
The other point to note is that the Childcare Account is only open for children up to the September following their 11th birthday1 whereas the Voucher Scheme is available to help fund the costs of childcare up until the September following the child’s 15th birthday2.
There are many individual aspect to these calculations for example if either of the parents are claiming tax credits with the childcare element and so it would be wise to review individual circumstances. If you would like us to check the best option for you and your family or you are a director or employer who would like to know more about Childcare Voucher Schemes please call us on 01869 222830.
Note 1 – For children who are disabled the support will continue until the September following their 17th birthday.
Note 2 – for children who are disabled the support will continue until the September following their 16th birthday.