Enterprise Investment Schemes: EIS and SEIS

Successive governments have recognised that the spirit of entrepreneurialism, though deeply ingrained in the UK’s culture, is not really very well supported by the financial institutions. In an attempt to provide more ready access to investment capital for entrepreneurs, a variety of schemes have been created – such as the Enterprise Finance Guarantee Scheme, which provides financial guarantees for loans made by lenders to smaller businesses.

One of the less well-known schemes is the Enterprise Investment Scheme (EIS), which allows an investor to subscribe for new shares in a qualifying company and to obtain Income Tax relief on the investment at 20 per cent. If the shares are held for three years after the investment is made, any subsequent gain on them is not subject to Capital Gains Tax (CGT). EIS shares can also be used to ‘roll over’ a prior gain – deferring the resulting CGT liability until the EIS shares are disposed of.

For a company to issue EIS shares, certain conditions must be met:

• the shares cannot be quoted on a recognised stock exchange and arrangements for a flotation cannot be in progress. Note that a flotation on the Alternative Investment Market does not count for this purpose;
• there are limitations on the trades that are allowed for EIS relief. In particular, land-based businesses, professional services and financial activities are excluded;
• the company must have fewer than 250 full-time employees;
• the gross asset value in the company’s balance sheet must be less than £15 million before the issue of the EIS shares; and
• there is also a limitation of £10 million in any twelve-month period on the total amount which can be raised using the EIS or similar schemes, such as Venture Capital Trust investments.

A number of limitations apply regarding who can invest in the EIS shares of a company – investments by ‘connected persons’ and some others do not qualify for EIS treatment.

The EIS can be both a useful investment vehicle for investors not afraid of the risk involved and a source of capital for the smaller company which may find more conventional finance difficult to obtain.

For start-ups and tyro companies, the Seed Investment Enterprise Scheme (SEIS) has been set up to help smaller and higher-risk trading companies to raise finance. SEIS allows investments in the shares of such companies to be made with the benefit of tax reliefs.

SEIS is aimed squarely at start-up businesses and is not available if the company has been carrying out the activity for which finance is sought for more than two years.

 An SEIS company cannot have gross assets of more than £200,000 and must have 25 or fewer full-time employees.

 Any cash raised for an SEIS activity must be used for the purposes for which it was raised within three years, although the trade need not have commenced when the cash is received. It only qualifies for tax relief for the investor after the trade has been ongoing for four months.

 SEIS relief will only apply to a maximum of £150,000 in any three-year period.

 An investor in an SEIS company receives 50 per cent tax relief on the sum invested, up to a maximum of £100,000. It can only reduce the investor's liability to zero. 'Excess relief' can be carried back one year.

IN March 2016, HMRC issued updated guidance on the operation of EIS,

HMRC Guidance on Tax Residence

Following changes in the tax legislation governing the income tax payable by non-domiciliaries, and some relevant tax cases, HM Revenue and Customs (HMRC) have updated their guidance on tax residence and domicile. This replaces the old guidance, which was contained in booklet IR20.

One of the main changes in approach is that HMRC are now taking a harder line on what has to be done to qualify as being non-resident. To cease to have UK residence, not only must you leave the UK, but you must, in effect, reduce your connection to the UK to a minimal level.

The new leaflet should be read carefully by anyone considering moving abroad who wishes to ensure that they become non-UK resident for tax purposes. HMRC’s guidance states that ‘you should always look at the pattern of your lifestyle when deciding whether you are resident in the UK. Things you should consider would include what connections you have to the UK such as family, property, business and social connections. Just because you leave the UK to live or work abroad does not necessarily prove that you are no longer resident here if, for example, you keep connections in the UK such as property, economic interests, available accommodation, and social activities or if you have children in education here. For example, if you are someone who comes to the UK on a regular basis and have a settled lifestyle pattern connecting you to this country, you are likely to be resident here.’ Recently, HMRC were successful in a claim that an airline pilot who lived in South Africa was tax resident in the UK by virtue of his frequent presence here.

One particularly odd feature to note is that HMRC now seem to regard the whole of UK territorial waters and airspace as being in the UK for the physical presence test.

In the spring of 2011, following a number of high-profile cases, the Government announced that major reform of taxpayer residence law was to be undertaken. The new system for determining residence is based mainly on physical presence and, to a lesser extent, on one’s ‘connection’ with the UK. Following the issue of a  consultation document , HM Treasury have now issued statutory guidance on residence.

 Legislation was introduced in the Finance Act 2013. HMRC offer advice on their website on how residence and domicile affect your tax position.

In the Summer Budget of 2015, the inheritance of the foreign domicile of the father for UK-born children was abolished and the concept of domicile was amended (similarly to the way it operates for Inheritance Tax) to remove foreign domicile from long-term UK residents.

IHT Guidance From the Tax Man

HM Revenue and Customs (HMRC) offer useful guidance on the mechanics of the transfer of the unused IHT ‘nil rate band’ between spouses or civil partners and gives several examples of this complex relief.

One important point for executors is that a claim to transfer the unused IHT nil rate band must be made by personal representatives within the permitted period. That period is 24 months after the end of the month in which the second deceased died or, if it is later, the end of the period of 3 months beginning with the date on which the personal representatives first acted as such. HMRC do have the ability to extend the period for a claim, but it should never be relied upon that they will use their discretion to benefit a taxpayer. HMRC will accept a late claim ‘if the claimant can show that an event beyond their control prevented them from making their claim within the permitted period’, but warn that ‘if the claimant was able to manage the rest of their private or business affairs during the period in question, we are unlikely to accept that they were genuinely prevented from making the claim on time’.

Examples of situations HMRC may consider as events beyond the claimant’s control include those where:

• the claim was posted in good time but an unforeseen event disrupted the normal postal service and led to the loss or delay of the claim;
• the records necessary to make the claim were lost through fire, flood or theft and the records required to make the claim could not be replaced in time for it to be made within the permitted period; or
• the claimant was so seriously ill that they were prevented from dealing with the claim within the permitted period and from that date until the claim was made. If an illness involves a lengthy stay in hospital or convalescence, the claimant is expected to have made arrangements for completing and making the claim on time.

HMRC accept that there may be other circumstances where it is not possible to meet the time limit and may accept the following as a valid reason for a delayed claim to transfer the unused IHT nil rate band:

• the serious illness of a close relative or partner, but only if the situation took up a great deal of the claimant’s time and attention during the period from the end of the permitted period to the date the claim was made and steps had already been taken to have the claim made on time; or
• the death of a close relative or partner before the end of the permitted period where the necessary steps had already been taken to make the claim on time.

Are You a Sophisticated Investor?

In March 2005, the rules relating to approaching people regarding financial promotions were relaxed so that so called ‘sophisticated investors’ and high net worth individuals (HNWIs) could be more easily approached with a view to making investments in unlisted securities. The purpose of the relaxation is to remove impediments to business angels and others seeking finance for small- to medium-sized businesses and to aid the seeking of informal venture capital generally.

It is possible to ‘self-certify’ yourself as a HNWI or a sophisticated investor. To self-certify as a HNWI you have to earn at least £100,000 per year or have net assets (excluding your property, pension rights and so on) of at least £250,000.

To self-certify as a sophisticated investor you must:

• have been a member of a business angels network for at least six months; or
• have made at least one investment in an unlisted security in the previous two years; or
• have worked in a professional capacity in the provision of finance to small- or medium-sized businesses in the last two years or in the provision of private equity; or
• be or have been within the last two years a director of a company with a turnover of at least £1m.

A promoter will need to have a ‘reasonable belief’ that the self-certification has occurred. The self-certification has to be in writing, but a promoter will be able to rely on a verbal assurance that a person has self-certified as a sophisticated investor or HNWI. When accepted as a HNWI or sophisticated investor, the protections available for investors as regards the promotion of securities by a person authorised under the Financial Services Act are removed. Appropriate ‘risk warnings’ must still be included in all promotional material given to potential investors. Whether this will prove to be sufficient protection for ‘self-certifiers’, or whether it will open the floodgates to the marketing of low-quality high-risk investments to them, remains to be seen.

Fiscal Help for your Student Children

If you have children going away to university there are money saving options worth considering, if you are in a position to take advantage of them.

The cost of accommodation is a financial burden for any student. If you can provide funds to buy a home near the university, you could spend less on annual maintenance for your child and the investment could show a tax-free profit by the time they graduate.

The home can be purchased using a loan secured on your own home, or with capital provided directly by yourself or other relatives. In either case the property must be transferred to the adult student to allow him to take advantage of the capital gains tax exemption for his own home. This gift will not be subject to inheritance tax unless you die within seven years of the transfer.

However, the acquisition of a second property shjould not be undertaken lightly. Not only are transaction costs relatively high where the property is owned for a short period, but higher rates of Stamp Duty Land Tax (SDLT) are charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes. The additional rate is be 3 per cent more than the 'basic' SDLT rate, and the tax regime for landlords has generally been becoming less favourable for some time.


All tax rates below refer to 2016/7

Once in residence the student can generate some tax-free income by letting rooms to friends, as long as the total rent in any tax year is no more than the rent-a-room limit of £7,500 ( from April 2016). If the rent does exceed this limit the student can ask HM Revenue and Customs to tax the excess only. This may be covered by the student’s own personal allowance of £11,000 Alternatively they can deduct valid expenses and report the net profit on their tax return.

During the course the student does not pay any council tax on the property, even if there are several students sharing the house. One non-student lodger living with other students will receive the 25 per cent discount on the council tax for lone occupation.

Rather than supplying regular handouts to keep the student in books and beer during term time, consider investing capital in your child’s name at the beginning of the course. Such a gift will transfer income normally taxed at your marginal rate of income tax to your child and any capital gain arising will be benefit from their CGT exemption of £11,100. The potential disadvantages of gifting assets in this way are, however, obvious.

Funding Care in Later Life

Under the changes proposed in the Care Act 2014, which received the Royal Assent in May 2014 and which came into effect in April 2016, the funding of elderly care has changed significantly. There is a factsheet available from the government website.

One of the perceived benefits under the new system is that care costs are to be subject to a 'lifetime cap', initially to be set at £72,000. This is not as beneficial as it may seem, however, because the cap does not include the 'board and lodging' element of the care costs, which currently normally exceeds £1,000 per month. Furthermore, the legislation provides that these costs may be varied in line with average earnings.

Provisional figures (based on estimated values as at April 2016) suggest that care costs will be fully met by the elderly person where assets (which will include the value of any property owned) exceed £118,000, or £23,250 if no property is owned.

Where the person being cared for has assets with a value of less than £14,250, their care costs will be fully met by the state unless they have sufficient income to pay them. Care costs for medical, as opposed to 'social' needs are met by the NHS. However, in practice what is regarded as 'medical' is quite limited.

Where a property is owned but cannot be sold, the council will, if necessary, take a legal charge over it, so that when it is eventually sold, the council's costs will be recouped. It is a common misconception that gifting away a property will mean it cannot be taken into account as an 'asset' for assessing care costs if the time between the gift and the need to go into care is significant. This is not strictly the case. However, a property occupied by a dependant over the age of 60 cannot be counted as an 'asset' for this purpose.

The Government has launched a consultation seeking views on draft regulations and guidance on the care and support reforms. The consultation period closed on 31 March 2015. A series of factsheets have been published by the Government to assist care providers and thos with relatives needing care to understand the new provisions.

Age UK also has a useful series of factsheets, including one on funding residential care.

Should I Buy To Let?

With property values recovering and market returns for many investments quite modest, the buy to let market may seem an attractive proposition.

In this article we look at some of the more practical, but less often mentioned, aspects of buy to let which clients should consider.

Investment Management and Transaction Costs

Letting usually has fairly high investment management costs. The transaction costs are relatively high, particularly the Stamp Duty Land Tax (SDLT) payable on purchase and the agent’s fee on sale. Preparation of leases for each set of tenants and other costs add up to make property a relatively expensive investment asset to hold in terms of management costs. The cost of preparing a Home Information Pack when the property is resold should also be borne in mind. Landlords also need to be licensed if they rent for multiple occupancy and such licences can be expensive. The cost implications of safety legislation can also be substantial.

From April 2016, buy-to-let properites and second homes carry an additional three per cent SDLT charge, adding significantly to the acquisition cost.

Tenants

Good tenants, of course, make being a landlord easier, but the other kind exist, too. Every tenant represents a potential problem. They may fail to take care of, or even damage, your property, necessitating significant expenditure before it is fit to be let again. They may stop paying their rent. They may refuse to vacate the property or wreck it. Dealing with problem tenants can be both expensive and can cause gaps in the flow of rental income. Having a well thought out lease agreement is an essential protection.

Buying Badly

Before buying any property, you should research the area. Rises and falls in value are not uniform in individual areas, let alone across the country. Also, make sure you have the property carefully surveyed.

Agents

The quality and effectiveness of letting agents varies a great deal. Make enquiries of other landlords before making your choice. Recently, a scheme called The National Approved Letting Scheme was set up in order to improve the service to landlords and tenants. To belong to the scheme, members must:

• agree service standards set out in writing;
• set a clear charging structure;
• maintain professional indemnity cover and client money protection cover;
• establish an internal complaints procedure; and
• offer mediation and binding arbitration in the case of disputes.

Tax

Profits from rental income are taxable in the normal way, but do not attract National Insurance Contributions – a significant saving compared with earned income. You can deduct repairs, letting agent’s fees, interest on a loan applied to buy the property and so on. The tax position varies somewhat, depending on whether you let the property furnished or unfurnished, so take advice about which is the better choice. If you live abroad and rent out a house owned in the UK, you will find that tax is deducted by your letting agent. Lastly, when a property is sold, there is the possibility that any gain may be subject to Capital Gains Tax.

Changes announced in the Summer Budget of 2015 have restricted the tax relief available to buy to let landlords for mortgage interest to the basic rate of tax by 2020 and from April 2016 the 'wear and tear' allowance  is being replaced by a system providing tax relief on replacement items only.

In addition, higher rates of Stamp Duty Land Tax (SDLT) are charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes. The additional rate is be 3 per cent more than the 'basic' SDLT rate.

Exposure

One of the less frequently mentioned potential downsides to an investment strategy which includes a buy to let is that it does often leave the owner‘s investment portfolio heavily weighted in property. This may or may not be a good strategy, but it does raise the level of ‘portfolio risk’. If there is a downward move in property prices, or there is an increase in interest rates, an investment portfolio with a large proportion in property can look quite unattractive. The other risk for many landlords is that of Inheritance Tax. Properties come in ‘big lumps’ and if it is necessary to sell a let property quickly, in order to realise sufficient cash to pay Inheritance Tax, this can lead to having to sell an investment property at an inopportune time.

Compliance Costs

Landlords offering shorthold tenancies are required to insure or lodge the tenant's deposit with a an approved under the Tenancy Deposit Scheme (TDS). Failure to do so can lead to substantial penalties.

See the HMRC website for more details on tax aspects and DirectGov for information about landlord's responsibilities.

Tax Issues for Owners of Two Homes

Ownership of two homes in the UK is becoming more commonplace as couples who both own houses marry, houses are inherited, parents buy houses for their children to live in, or people just buy a place in the country, either to let or to escape to at weekends.

Owning two houses does have significant Capital Gains Tax (CGT) implications. When house prices are rising fast, many owners face CGT liabilities. CGT on property is very complex. Here are some of the main planning points, but this is just an outline guide. Always take professional advice before going ahead with any significant transaction.

Once you have two houses, you have two years to make an election regarding which is to be your 'principal private residence' (PPR). This is important since PPRs are exempt from CGT. In general, it is sensible to elect for the property that is expected to rise most in value to be the PPR. A married couple can have only one PPR.

If a house is sold which has been the PPR and was actually lived in at any time, the last three years of ownership are treated as private residence (this period is being reduced to 18 months for sales after April 2015), so if a house has been owned for ten years, lived in for six years and then rented out for four years, only one tenth of the gain will be chargeable. There are a number of other exemptions which apply for periods of non-residence for various reasons.

If your residence has extensive grounds (over 0.5 hectares), a chargeable gain may arise on the land. There is an exemption, where the grounds are ‘required for the reasonable enjoyment of the property’. Where a large landholding is being divided into lots and sold for development, beware of selling the house first and retaining the land, since CGT may then arise when the land is sold.

If you rent out part of your private residence, or use it for commercial purposes, it will normally become chargeable, although (at least) the first £40,000 of the gain will be exempt if the letting was for residential purposes.

Since transfers between spouses are exempt from CGT, where a chargeable gain is expected it can, in some circumstances, make sense to transfer an interest to your spouse before sale. This will make use of both CGT exemptions.

HMRC are likely to challenge a 'principal private residence' election for a second property where it is sold reasonably soon after acquisition and there is a gain chargeable to CGT. In such cases, a demonstration of actual residence will be critical for a claim to succeed.

One common circumstance in which this occurs is when a home is inherited and subsequently sold.

In the 2015 Budget, measures were introduced which will adversely affect the owners of homes in the UK and abroad who are resident outside the UK and who sell their UK home at a profit.

From 2017, the allowable interest on mortgages on 'buy to let' properties is to be restricted to the basic rate of tax.

In addition, higher rates of Stamp Duty Land Tax (SDLT) are charged on purchases of additional residential properties (above £40,000), such as buy to let properties and second homes. The additional rate is be 3 per cent more than the 'basic' SDLT rate.

The Government has published guidance on tax on selling property. Such decisions should always be undertaken with the benefit of professional advice.

Putting Cash into a Family Business

When younger members of a family start a business, they often ask other family members to provide part of the necessary capital. If you are approached to do this and are willing to provide funding, it is often difficult to know how best to provide the cash. The situation is complicated by the fact that what is and what is not agreed is often determined by family dynamics, rather than commercial considerations. There are significantly different effects depending on how the funds are provided. Here are the pros and cons of the most common methods.

Gifts
A gift of money is (if above the annual allowance) a potentially exempt transfer for Inheritance Tax purposes. It may therefore create a tax liability if you die within seven years of making the gift. Secondly, a gift creates no requirement for the recipient to do anything at all in return and certainly not a requirement to refund the gift at any time. If the business goes bust, there will be no tax relief available for the lost investment. If it succeeds, there will be no income stream arising.

Loans
A loan can be provided which carries interest at an agreed rate. If interest is payable, you will normally have to pay tax on the interest received. If the loan is repayable and the repayment terms are not met, you can sue for the money. You may also be able to get security for the loan, by way of guarantee from the borrower or by securing it on some asset or assets. What is important is to make sure that the paperwork recording the terms of the loan is done correctly. Relying on a verbal agreement is very unwise. If the loan is lost, relief for Capital Gains Tax (CGT) purposes is normally available as regards the capital sum. There is no real scope for a capital gain with a loan – your return will normally be limited to your investment plus interest. However, some loans may be convertible into shares, which may prove an attractive option if the business is successful. If the business fails, however, taking action to obtain repayment may prove to be especially unpopular if the debtor is a family member or friend.

Shares
If the business is a company, you may be offered shares in the company. This can be attractive if you expect the value of the shares to rise. If the business fails, a loss for CGT purposes normally arises and this can be carried forward to set against future chargeable gains. Also, in some circumstances a loss for Income Tax purposes may be available. For this to be the case, the shares must have been ‘new’ shares issued by the company, not shares bought from an existing shareholder. Other restrictions also apply for Income Tax relief to be granted in such cases.

However, shareholdings, especially minority shareholdings, have significant disadvantages. Firstly, a minority shareholder often has no control over the company nor, in particular, over the dividend stream arising. Secondly, there is no right of repayment and in many cases a minority shareholding may be difficult or impossible to sell. It is always sensible to try to protect a significant investment in the shares of a private company by having a shareholders’ agreement drawn up.

How Inheritance Tax Works

Inheritance Tax (IHT) is paid on your estate when you die and also when money is transferred into some trust funds. Some other transfers during one’s lifetime may also be subject to IHT. The first £325,000 (2016/7 rates) of the estate is exempt from IHT. This is called the nil rate band. The assets in the estate are valued on death, the nil rate band subtracted and the remainder of the estate is taxed at 40 per cent. Chargeable lifetime transfers are taxed at 20 per cent. Transfers made within seven years of death which are brought back into the value of the estate for IHT purposes are charged at 40 per cent.

From 2017, a further nil-band is being added as a 'top up' where the assets include a residential property. The aim of this change is to ensure that transfers of family homes are shielded from the full impact of IHT. Thuis will rise to £175,000 by 2020.

Where one spouse transfers part of their estate to the surviving spouse or civil partner, the percentage of the 'tax free' transfer is calculated and the ramaining percentage is then used to uplift the tax free amount on the second spouse or civil partner's death. How this works is not straightforward, but potentially allows a 'double IHT free limit' to be enjoyed. The value of the transfer is based on the percentage of the then nil-band on the date of the first death multiplied by the current nil band. So, for example, if the IHT limit on the first death was £200,000 and the estate of the first deceased £150,000, then 75% of the nil-band was used. So, on a death in 2016/7, the transferrable value would be 25% of t£325,000 - the current nil band. 

IHT used to concern only the wealthy. Nowadays, however, more and more people find themselves within its ambit.

There are exemptions from IHT for the following:

• property transfers between spouses or civil partners (not between unmarried partners);
• gifts to institutions such as the National Trust, charities and political parties; and
• gifts in consideration of marriage or civil partnership (within permitted limits), annual gifts to the value of £250 to anyone and gifts which are part of normal household expenditure (such as birthdays).

You are also allowed to give away up to £3,000 per annum. This allowance can be carried forward to the next year, if not used in a tax year. The carry forward is for one year only.

Gifts made ‘out of income’ are also excluded. These must be of a scale that does not affect the lifestyle of the donor and must normally be regular – an example might be school fees paid by a grandparent. These must be justifiable. There is evidence that HM Revenue and Customs are looking more carefully at these and seeking to disallow them when possible, so, for example, setting up a standing order to transfer regular smaller sumsmay be preferable to less frequent, larger transfers.

What Can be Done to Reduce IHT Liability?

• Potentially Exempt Transfers (PETs). The general rule is that a gift will normally cease to be part of a person’s estate if they survive seven years after making it. If they die within seven years, then the IHT to be paid will be reduced on a sliding scale depending on the time interval between the making of the gift and the death of the donor. (Note: the reality is more complex than this, and in some circumstances a gift may be caught if made longer then seven years previously).
• Equity Release. An Equity Release Scheme (of which there are several types) allows money locked in freeholds to be released. This can be given away as a PET and if the donor survives more than seven years then it will not normally attract an IHT liability.
• Life Assurance. Policies are available which may pay all or some of your IHT liability. These can be written in such a way that they pass directly to your family and do not become part of your taxable estate. Lump-sums payable on the death of a pension policy holder can also normally be arranged to fall outside your estate.
• Holding Exempt Assets. Certain assets (such as shares in AIM-listed companies and in family businesses) are wholly or partially exempt from IHT if certain conditions are met.
• Trust Funds. Setting up a trust fund used to be a common way to leave money. This can be an effective way of minimizing the impact of IHT. However, changes made in the Finance Act 2006 have made some of these less attractive. If you have established such a trust or are thinking of doing so, it is sensible to seek professional advice. The first '10 year' anniversary charges will arsie in 2016 and trustees of trusts are reminded that they should file a tax return, even if no IHT is payable, if the trust assets are 80% or more of the nil band.
• Following changes to the pensions regime which took effect in  April 2015, pension pots can now be considered to be useful as an IHT planning tool. Specialist advice should always be sought.

What is Taxable?

With the Government seeing fit to make HM Revenue and Customs a payer of benefits (pension credit etc.) as well as a collector of taxes, it is no wonder that people are becoming confused as to which sources of income are taxable and which are not. It is particularly confusing for pensioners, who receive pensions, annuity income and various sorts of investment income.

Here is a short guide on what income is taxable and what income is not. Whilst it covers the most usual sources of income, it is not a complete list.

Taxable

• Occupational Pensions (Normally tax will be deducted under PAYE for this unless you are resident abroad);
• The State Retirement Pension (Tax is never deducted from this). The earnings-related element of the state pension is also taxable;
• Interest earned on bank, building society etc. accounts (the first £1,000 is not taxable from 6 April 2016 for taxpayers wich non-savings income above £5,000. Where this income is less, £5,000 of savings income is taxed at 0%);
• Income from employment;
• Personal pension income (excluding the capital element);
• Debenture interest and interest received on government stocks or bonds;
• Dividends (from 6 April 2016 the first £5,000 of dividend income is not taxable)
• Profits on any trade or profession; and
• Rental income, net of allowable expenses.

Not taxable

• The capital element of an annuity or pension. Annuities have two elements. The capital element is, in effect, a return of part of the sum invested. The income element is, in effect, interest on the sum invested. Only the latter is taxable. The insurance company administering the annuity should issue a tax certificate showing the taxable amount annually;
• Attendance Allowance;
• Premium Bond winnings;
• Interest and dividends received within ISAs;
• Pension credits;
• Profits from gambling;
• Income from renting a room covered by 'rent a room' relief;
• Interest earned on National Savings Certificates; and
• Child Allowance and Child Tax Credit.

There are many other benefits, both means-tested and not means-tested. Some are taxable and some are not. If you receive a benefit and are not sure whether it is taxable or not, consult your local HM Revenue and Customs office.

There are also quite complex rules in some cases (especially as relates to rental income) as to how the taxable amount is calculated, so just knowing that something is or is not taxable is often of little use in knowing what figure to put on the tax return.

Following chnages to the pensions regime which came in in 2015, the taxation of pensions has become considerably more complex, althoguh the takign of 25% of the pension fund as a lump-sum is tax-free.

If you were an employee before you retired, the tax office dealing with your affairs will often be that which dealt with you as an employee. There is an exception that some pensions schemes (especially those of large employers) are dealt with by specialist units at different tax offices. if you have any doubt as to which tax office you should deal with, your local tax office should be able to advise you if you can supply your full name, date of birth and National insurance number.

Many pensioners do not receive tax returns and therefore have no way of knowing whether they are paying too much or too little in income tax. However, the responsibility for making sure that the tax paid is correct lies completely with the taxpayer under the self-assessment system. If you have any doubts as to whether your tax affairs are correct or not, contact us.

Pension Flexibility - Basics

There has been a great deal of publicity about the forthcoming changes in the law relating to pensions and their uses. The changes are comprehensive and change the tax position significantly and also the uses which can be made of pension funds.

With continuing low historical interest rate yield, annuity rates have remained low for years, leaving pension fund owners in difficulties because their expected annuities when they took out the policies are much greater than the actual annuities being quoted now. This has been compounded by a long period of lacklustre returns on the stock market.

Accordingly, the Government has decided to introduce flexibility in the pension market and introduced a services of changes designed to do this. The changes will mainly apply when a person 'becomes entitled' to a pension on or after 6 April 2015 or a lump-sum payment is made after that date.

The Government had already announced changes introduced from 27 March 2014 that increased the amount of pension fund that can be treated as trivial and taken as a lump sum, from £18,000 to £30,000, where the total of all pension schemes held is less than that sum.

The changes do not apply to pensions which have been used to buy an annuity. Where an annuity has been purchased with the fund, the remaining value of the fund belongs to the provider of the annuity.

There are a variety of detailed provisions designed to prevent the use of pensions to prevent use of the arrangements for tax avoidance. What follows, though relevant for most pension pot owners, will not apply in every instance and professional advice should always be taken.

There are different rules which apply to drawdown pension funds created before 6 April 2015 and those created afterwards, which are termed 'flexi-access' drawdown funds. Where a fund has been created before this but not accessed, an uncrystallised funds pension lump sum' (UFPLS) of 25 per cent may normally be taken. Taking a UFPLS will lead to the annual allowance for contributions being set at £10,000 for money-purchase schemes.


Changes in taking funds

The new system allows the whole of a fund to be taken by way of 'draw down', with 25 per cent of the pension pot able to be taken free of tax.

It is important to understand that if (say) £10,000 is required from a pension pot of (say) £200,000, there is no need to take it all as part of the 25 per cent tax free lump sum. If, for example, you could have additional taxable income of £6,000, you could opt to take £4,000 as part of the tax-free lump sum and the rest as taxable income. It will thus be possible for many pensioners to use their pension funds tax-efficiently. Once 25 per cent of the fund has been taken as tax-free cash, then any sum taken will be taxable. However, 25 per cent of the income earned in the fund during the period in which it is being drawn down can also normally be taken tax free.

The rules also allow some changes to the benefits that can be offered by insurers to pension fund holders.

For example, the current 10-year cap on a 'guarantee period' (where the pension is guaranteed for a period of years if the pensioner dies during the guarantee period) is to be removed.

Trivial and 'small pot' pension will be able to be taken at 55 (or earlier, where there is ill-health), not 60 as at present.



Changes relating to death

Pension savings in drawdown or in defined benefits schemes can be passed on on death to the beneficiaries of the fund owner without being taxed from 6 April 2015.

The transfer will be tax free if they die before age 75. Income taken from the fund will be taxed at the recipient's marginal rate of Income Tax (IT). However, to qualify for a tax-free withdrawal, the lump-sum must be paid within two years of notifying the scheme administrator of the death.

Where the owner of the fund is over 75 on death, the beneficiaries can either continue to take the drawdown, in which case the income will be taxed at their marginal rate of IT, or take the entire fund, which will be taxed at 45 per cent. This is only marginally above the current rate of Inheritance Tax.

Currently, where the owner of a pension is 75 or more, or the pension is in drawdown, a 55 per cent tax rate applies. An untouched pension pot of less than £1.25 million will currently be passed on tax free.


Further details can be found on the HMRC leaflet 'Pension Flexibility 2016'.

For more details in the Inheritance Tax implications, see the HM Treasury announcement of 29 September 2014.

In the 2015 Budget, the lifetime allowance for pension contributions was reduced from £1.25 million to £1 milion.

It is extremely important to take advice when considering what is best to do with your pension funds.

There are still older pension policies with guaranteed annuity rates (GARs), some of which provide pensions annuities greatly in excess of current market rates.

In addition, some policies have guaranteed rates of return build into the funds.

IHT Planning and the AIM

In recent years, Inheritance Tax (IHT) has affected more and more families, largely due to rising house prices. IHT is payable at 40 per cent on the net assets of an estate where these exceed £325,000 – the current 2016/7 nil-rate band. Investing in Alternative Investment Market (AIM) shares is one way of reducing the IHT liability on an estate.

The AIM was launched in 1995 as a flotation market for small companies. Over 1,300 companies are currently listed – generally smaller, youthful enterprises with potential for rapid growth. Putting money into these companies is generally regarded as a somewhat riskier undertaking than investing in more established companies.

Qualifying AIM shares offer much more generous IHT relief than some other assets as they are considered to be business property. If property is held as AIM shares in certain trading companies, for a period of at least two years, it becomes eligible for IHT ‘Business Relief' (BR) at 100 per cent and will fall out of the estate for IHT purposes. This relief is a relief by value – in other words, the shares are treated as having no value for IHT purposes. The HM Revenue and Customs website contains information on investments qualifying for BR and their tax treatment.

Some stockbrokers and asset managers now offer their clients investment portfolios based on AIM shares. These invest in a wide range of shares (typically around 60), which offers the investor the possibility of having an IHT-efficient portfolio and a spread of risk.

Not all AIM companies are eligible for BPR however. To qualify, a company must be a trading company carrying out the majority of its business in the UK. Businesses trading in land or securities, or receiving a substantial amount of income from letting property or land, are excluded. Also, it must not be listed on another recognised stock exchange. If a company qualified for IHT relief when the shares were bought, but was subsequently disqualified under these criteria, investors must reinvest their holdings into new qualifying shares within six months to retain the BR exemption.

AIM shares can be unpredictable. AIM companies are smaller, less established companies and the AIM has fewer investors than other stock markets so share prices can be volatile, rising or falling rapidly. Shares can sometimes lose more than 40 per cent of their value, thereby nullifying any IHT saving.

AIM investment is particularly attractive for older people since AIM assets are exempt from IHT after two years, compared with the seven years required before gifts that are ‘Potentially Exempt Transfers’ cease to carry an IHT liability. Investing in the AIM will suit financially secure people with other liquid capital who can invest widely enough to bear the risks involved. However, any investment decision should always be made with the benefit of professional advice.

Warning for Holders of US Assets

If you hold assets in the USA, you should be aware of an issue that has started to arise in estates in which there are US shareholdings, especially where these are managed by brokers in the US.

The US Internal Revenue Service (IRS) requires that any estate with US assets files an Estate Tax return, following which it will issue a certificate to give clearance for the estate assets to be released. Normally, this procedure, although often lengthy, is straightforward.

Recently, however, instances have been reported where brokers holding shares have demanded that estates register with the IRS as if they were financial institutions, in order to comply with the US Foreign Account Tax Compliance Act. This is a much more onerous administrative burden.

If your estate includes foreign assets (including properties), this can add to the complexity of its administration, the tax issues involved and, where there is a compulsory inheritance regime in force, inheritance issues.

Unlocking Your Equity - the Choices

There is a bewildering variety of equity release schemes on the market and, judging by the letters pages of the financial press, they are not well understood. Releasing equity in a house can be an effective way of supplementing your income or releasing spare capital that will not be needed for your children. Each type of scheme has its advantages and disadvantages and choosing the most appropriate one (or indeed, deciding whether to set up such an arrangement in the first place) should only be done after considering the options carefully and taking professional advice.

Here is a brief summary of the main types of scheme being offered:

Home Income Plans
This is really a fancy title for a mortgage-based annuity. The principle is that a mortgage is taken on the property and the lump sum is used to buy an annuity or invested to provide an income which is used in part to pay the interest on the mortgage. The mortgage reduces the value of your estate for Inheritance Tax purposes. However, for most purchasers of these schemes the net increase in income is rather low, as most of the income generated goes to paying the additional mortgage interest.

Roll-up Plans
With these plans, a lump sum is withdrawn and the interest payable on it 'rolls up' during the rest of your lifetime. The amount to be repaid will be an unpredictable proportion of the total value of the house and will depend on both the future movement in house prices and the prevailing interest rates (unless fixed at the outset). Because of the risk involved, Roll-up Plans are seldom used to advance more than half of the equity value in a house. Some schemes permit the maximum liability under the roll-up to be limited by reference to a percentage of the ultimate value of the house. The big plus point is that there are no repayments during your lifetime.

Home Reversion Plans
Under these schemes, your house is sold to the lender at a discount to current market value and you are then given the right to remain in the house for life. These schemes can be set up so that a fixed proportion of the value of the house is sold, not 100 per cent. There are no capital or interest payments.

How Drawdown Lifetime Mortgages Work

For people who have money tied up in their homes who wish to release capital for expenditure, or possibly to give to family members, the drawdown lifetime mortgage (DLM) is a possible vehicle.

A DLM is simply a mortgage, but one which is drawn down over time. For example, a person whose home is valued at £500,000 may get agreement that a drawdown of £125,000 will be supplied. There is no need to take the sum at once and interest is only payable on the amount actually drawn down. In practice, sums are taken piecemeal. The advantage of such a scheme is that the savings in interest payable can be considerable compared with taking the whole sum ‘up front’. Also, it is not uncommon for people who release a large sum all at once to spend it more quickly than they had anticipated.

One other advantage of DLMs is that the property remains yours so any future growth in value belongs entirely to you. This can be very useful, particularly if you intend to ‘downsize’ at a later date. In such circumstances the loan can usually be readily transferred to the new property. Also, most drawdown plans carry a guarantee that should the value of your property fall to the extent that the loan plus interest and charges exceeds the value of your house, your right to remain in your home is preserved.

If you wish to take out a DLM and someone else lives with you in your property, it will be necessary to get them to sign a waiver confirming that they have no right to remain in the property if you die or move into a long-term care home. Should it become necessary for you to have care provided in your own home, the way contributions to the cost of the care are calculated means that the value of your home and mortgage are ignored. Where care at home is necessary, if you have a large lump sum, then that money will be taken into account when assessing your contribution to the care costs. This may in effect mean that the capital is lost over time. However, with a DLM the authorities cannot require you to draw down the rest of the available drawdown facility, which can assist in the preservation of family capital.

Stamp Duty Land Tax and Second Homes - The Basics

Stamp Duty Land Tax (SDLT) was brought in to replace the old ‘stamp duty’ and has been complex since its inception.

Among the transactions subject to SDLT are property sales. Levied at a rate of 2 per cent on purchases between £125,000 and £250,000 (higher rates apply above that), it adds significantly to the acquisition cost of many properties.

The UK currently has a buoyant residential property market and the values of residential properties are such that it is becoming extremely difficult indeed for first-time buyers to get on the housing ladder, as the deposits required are often substantial and saving towards them is made more difficult as rents follow property prices upward.

In addition, housing starts have been at a level below that which is needed to cater for the rise in demand for many years.

The situation has been exacerbated by the strength of the ‘buy to let’ market, as the combination of decent income yields and rising capital values has led to a great deal of the available housing stock being used for rental properties. Also, in some rural areas, the prevalence of second homes which are unoccupied for much of the time has eroded the local economies and put property well out of the reach of local people.

One of the ways in which the Government has decided to try to ameliorate this situation is to put in place measures that make second home ownership and owning ‘buy to let’ property less attractive. The hope is that this will cause some of these properties to be released back onto the market or at least act as a curb on demand.

Accordingly, a higher rate of SDLT has applied for such properties since 1 April 2016. The additional SDLT levied is 3 per cent on top of the existing rate and applies to the whole of the purchase price.

The higher rate of SDLT applies where the consideration paid for a second property or buy-to-let property is £40,000 or more, but does not apply if the property is a ‘mixed-use’ property, such as a shop with a flat above it.

In essence, the higher rate of SDLT will apply where, at the end of the day of purchase, you own more than one property, provided that the property being purchased is not replacing your current main residence.  Where the existing main residence has not been sold, the higher rate of SDLT is payable, but is then refundable if that property is sold within three years of the completion on the second property. This test does not apply to purchases before November 2018. This is a transitional provision so as not to disadvantage those who disposed of their main residence before these measures were announced on 25 November 2015.

There are a number of complexities not dealt with above. A calculator can be found on the Government's website.