HMRC have published a technical note covering the proposals, announced in the Summer Budget 2015, to phase in a new residence nil-rate band (RNRB) from 6 April 2017 when a residence is passed on death to a direct descendant.

The proposed rate bands are:
  • £100,000 in 2017-18
  • £125,000 in 2018-19
  • £150,000 in 2019-20
  • £175,000 in 2020-21

It is proposed that from 2021-22 the band will rise in line with the consumer price index (CPI).

Broadly, the proposals mean that where part or all of the RNRB might be lost because the deceased has downsized to a less valuable residence, or has ceased to own a residence, the lost RNRB will still be available, providing certain qualifying conditions are met (see below). The intention is that an estate will be eligible for the proportion of the RNRB that is foregone as a result of downsizing or disposal of the property as an addition to the RNRB that can be used on death.

If the proposals are enacted, the qualifying conditions for the additional RNRB will be broadly the same as those for the RNRB, that is the:
  • individual dies on or after 6 April 2017;
  • property disposed of must have been owned by the individual and it would have qualified for the RNRB had the individual retained it;
  • less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased's estate (this includes assets which are deemed to be part of a person's estate);
  • less valuable property, and any other assets of an equivalent value, are inherited by the individual's direct descendants on that person's death.

In addition, under current proposals, the following conditions will also apply:
  • the downsizing or the disposal of the property occurs after 8 July 2015;
  • subject to the condition above, there will be no time limit on the period in which the downsizing or the disposals take place before death;
  • there can be any number of downsizing moves between 8 July 2015 and the date of death of the individual;
  • downsizing will also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it;
  • where a property is given away, assets of an equivalent value to the value of the property when the gift was made must be left to direct descendants;
  • the value of the property will be the net value i.e. after deducting any mortgage or other debts charged on the property;
  • the additional RNRB will be tapered away in the same way as the RNRB if the value of the estate at death is above £2m;
  • the additional RNRB will be applied together with the available RNRB, but the total for the two will still be capped so that they do not exceed the limit of the total available RNRB for a particular year; and
  • a claim will need to be made for the additional RNRB in a similar way that a claim is made to transfer any unused RNRB to the estate of a surviving spouse or civil partner.

The technical note, entitled Inheritance Tax on main residence nil-rate band and downsizing proposals provides further details of the proposals and gives some useful examples to illustrate how they will apply. Responses to the note, which are requested by 16 October 2016, will inform the draft legislation to be included in the Finance Bill 2016.

The technical note can be found here. https://www.gov.uk/government/publications/inheritance-tax-on-main-residence-nil-rate-band-and-downsizing-proposals-technical-note/inheritance-tax-on-main-residence-nil-rate-band-and-downsizing-proposals-technical-note
From 2015-16 onwards, the collection of Class 2 contributions will be through the self-assessment system. This means that Class 2 NICs can now be paid together with income tax and Class 4 NICs in one chunk on the 31 January following the end of the relevant tax year. In the past, most people have paid Class 2 contributions monthly by direct debit. Following the final payment in July 2015, HMRC have cancelled such direct debit payments, ready for the switch over to the new system of payment under self-assessment. However, those who wish to continue paying their contributions more regularly can set up a Budget Payment Plan (assuming they are up to date with their self-assessment payments) and make payments weekly or monthly by direct debit in advance of the payment deadlines. Further information on Budget Payment Plans can be found on the Gov.uk website here https://www.gov.uk/pay-self-assessment-tax-bill/budget-payment-plan.

At the spring Budget 2015, the government announced its intention to abolish Class 2 NICs. Although few details have been announced to date, it appears that after the abolition of Class 2 NICs, the self-employed will continue to pay Class 4 NIC, but this will be subsequently reformed to include a contributory benefit test. The proposed changes raise a few issues - in particular, whilst abolishing Class 2 NIC will be a welcome simplification to the current system, it is essential that a self-employed individual's contributory benefits entitlement is not eroded by the change. For example, for 2015-16, it is not possible for a sole-trader to pay Class 4 NIC unless their profits exceed £8,060; however, they can still make Class 2 NIC payments, even if their profits are below the small earnings exception threshold (£5,965 for 2015-16), and this, in turn, will retain entitlement to various contributory state benefits. For those who do not opt to use a Budget Payment Plan, the payment date for the 2015-16 liability (£145.60) will be due on 31 January 2017. Self-employed traders will need to budget for this lump sum payment accordingly.
One of the most fundamental changes announced in the Summer Budget was to the taxation of dividends. HMRC has clarified the way in which it expects this to operate and so we wanted to share an update as we believe that many people will be affected.

What is changing?

We are all used to seeing dividend vouchers showing the net dividend that we receive together with a tax credit, and we understand that tax will be charged on the gross figure, with relief for the tax credit. From April 2016 this system is being fundamentally changed in a way that is likely to mean higher taxes for anyone with significant dividend income outside the shelter of an ISA or pension fund.

From April 2016:
  • The tax credit attaching to dividends will be abolished so you will be taxed on what you receive, with no grossing up.
  • There will be a £5,000 dividend tax allowance so that dividends below this level will be tax free, regardless of your other income.
  • Tax rates on dividends will be changed to 7.5%, 32.5% and 38.1% for basic, higher and additional rate taxpayers respectively, a rise at each tax level of 7.5% in the effective rate.

Who will be affected?

For investors with modest dividend income the changes will be limited in their impact. Basic rate taxpayers, used to having their tax liability covered by the tax credit, will be worse off if their dividends exceed £5,000 as they will pay 7.5% on the excess. Higher rate taxpayers will be better off under the new rules until their dividend income exceeds £21,667 as the availability of the £5,000 dividend allowance outweighs the loss of tax credit until this point. The break even point for additional rate taxpayers is £25,400.

However, those most likely to feel the impact of the new regime are director / shareholders of small companies. For them, it has been tax efficient to extract funds from a company using a combination of modest salary and the balance in dividends; the effective rate on dividends extracted is currently 0%/25%/30.56% for basic, higher and additional rate taxpayers respectively. Each of these income bandings is likely to experience higher levels of tax on their business income.


HMRC has provided clarification about the operation of the dividend allowance; in particular, rather than reducing taxable income (as an additional personal allowance would, for example), it will form a nil tax band for dividend. Crucially it will also reduce the value of any basic rate band that would otherwise be available for dividend income. By way of illustration:

Mr Smith runs a business through a small company, taking a salary of £8,000 and dividends of £40,000.

For 2015/16 the aggregate of his gross dividend and salary is £52,444. The first £10,600 of his income (which will include his salary) is covered by the personal allowance.  The next £31,785 is within the basic rate band; for dividend income in this level the tax credit covers the tax liability. The top slice of Mr Smith's dividend income, the excess over the personal allowance and nil rate band, is £10,059. Tax is levied at 32.5% = £3,269 and is then reduced by the 10% tax credit, making a final tax liability on his personal income of £2,263.

For 2016/17 the new regime applies so that:
  • Mr Smith's salary of £8,000 will still be within the personal allowance
  • The dividend income will no longer be grossed up, and so will go into his tax return at £40,000 rather than the £44,444 which included the tax credit in 2015/16
  • The first £3,000 of dividend income will be within the 2016/17 personal allowance of £11,000
  • The next £5,000 of dividend income will be taxed at 0%
  • The next £27,000 of dividend income (the rest of the basic rate band) will be taxed at 7.5%
  • The final slice of £5,000 dividend will be taxed at 32.5%.

The calculations contrast as follows:

The result is a 2016/17 tax liability of £3,650, £1,387 more than he will pay for 2015/16. On the plus side, however, Mr Smith's taxable income no longer exceeds £50,000 which means that his family will be able to claim child benefit in full.

How can we plan for this?

There is no ‘one size fits all’ planning technique. Salary payments still carry employers' national insurance contributions at 13.8% and so, for many, the appropriate way forward may well still be to use the sort of dividend and salary combination illustrated above. Much will depend on the level of other income of the proprietor. For companies with significant reserves it may be sensible to extract dividends in the current tax year, before the new rules take effect. This may be neither possible nor appropriate for some.

If you would like to discuss how these changes affect your own situation please do get in touch by writing to advice@rdhaccountants.co.uk
In the Summer Budget 2015, the government announced that the level of rent-a-room relief will be increased from the current level of £4,250 to £7,500 from April 2016. This means that from 6 April 2016, an individual will be able to receive up to £7,500 tax-free income from renting out a room or rooms in their only or main residential property. The relief also covers bed and breakfast receipts as long as the rooms are in the landlord's main residence.

To qualify under the rent-a-room scheme, the accommodation has to be furnished and a lodger can occupy a single room or an entire floor of the house. However, the scheme doesn't apply if the house is converted into separate flats that are rented out. Nor does the scheme apply to let unfurnished accommodation in the individual's home.

The rent-a-room tax break does not apply where part of a home is let as an office or other business premises. The relief only covers the circumstance where payments are made for the use of living accommodation.

If additional services are provided (cleaning and laundry etc.), the payments must be added to the rent to work out the total receipts. If income exceeds £4,250 a year in total, a liability to tax will arise, even if the rent is less than that.

There are two options if the individual is receiving more than the annual limit a year:
  • The first £4,250 is counted as the tax-free allowance and income tax is paid on the remaining income.
  • Renting the room is treated as a normal rental business, working out a profit and loss account using the normal income and expenditure rules.

In most cases, the first option will be more advantageous.

The principal point to bear in mind is that those using the rent-a-room scheme cannot claim any expenses relating to the letting (e.g. insurance, repairs, heating).

To work out whether it is preferable to join the scheme or declare all of the letting income and claiming expenses via self-assessment, the following methods of calculation need to be compared:
  • Method A: paying tax on the profit they make from letting worked out in the normal way for a rental business (i.e. rents received less expenses).
  • Method B: paying tax on the gross amount of their receipts (including receipts for any related services they provide) less the £4,250 exemption limit.

Method A applies automatically unless the taxpayer tells their tax office within the time limit that they want method B.

Once a taxpayer has elected for method B, it continues to apply in the future until they tell HMRC they want method A. The taxpayer may want to switch methods where the taxable profit is less under method A, or where expenses are more than the rents (so there is a loss).

The individual has up to one year after the end of the tax year when their income from lodgers went over £4,250 to decide the best option to take, so it is worth taking a bit of time to work out which route produces the lowest tax bill, we can help you with this.
Few people give consideration to how they will exit their business when the time comes. While it may not be on the priority list for those just starting out, it is an essential part of your financial planning strategy and will help to maximise your financial gains. In addition, it will also help ensure a smooth transition for your business, once you are no longer involved. Developing appropriate strategies at each stage of your business's lifecycle is crucial if you wish to obtain the maximum rewards for your efforts.

Every business owner should develop a personal exit strategy, and some important issues to consider include:
  • passing on your business to your children or other family members, or a family trust
  • selling your share in the business to your co-owners or partners
  • selling your business to some or all of the workforce
  • selling the business to a third party
  • public flotation or sale to a public company
  • winding up
  • minimising your tax liability
  • what you will do when you no longer own the business.

Selling the business on

If you consider your business has a market value, or if you are looking to your business to provide you with a lump sum on sale, it is important to start planning in advance how you will realise that value.

This is especially important if you envisage realising the value of your business in the next 20 years.

Selling your business is a major personal decision and it is vital to plan now in order to maximise the net pro-ceeds from its sale.
You will need to consider:
  • the timing of the sale
  • the prospective purchasers
  • the opportunities for reducing the tax due following a sale.

Let us help you maximise the net proceeds arising from your 'ultimate sale'.

Getting the best price

Anyone who is considering buying your business will want to be clear about the underlying profitability trends. Are profits on the increase or declining?

Up-to-date management accounts and forecasts for the next 12 months and beyond will be close to the top of the list of the information which you will need to make available to prospective purchasers.

Historical profits drive the value attributable to many businesses, and therefore a rising trend in profitability should result in an increase in the business's value.

This means that profitability planning is particularly important in the years leading up to the sale. So, what is the range of values for your business?

A professional valuation will put you on more solid ground than educated guesswork. We can work with you to determine how you can add value to your business.

Business valuation: some key points to consider
  • Are sales declining, flat, growing only at the rate of inflation, or exceeding it?
  • Are stock and equipment a large part of your company's value, or is yours a service business with limited fixed assets?
  • To what extent does your business depend on the health of other industries?
  • To what extent does your business depend on the health of the economy in general?
  • What is the outlook for your line of business as a whole?
  • Are your company's products and services diversified?
  • How up-to-date is your technology?
  • Do you have an effective research and development programme?
  • How competitive is the market for your company's goods or services?
  • Does your company have to contend with extensive regulation?
  • What are your competitors doing that you should be doing, or could do better?
  • How strong is the company's staff base that would remain after the sale?
  • Have you conducted a thorough review of your overheads, to identify areas where costs can be reduced?
  • Have contracts with your suppliers and customers been formalised?

Timing is everything

It is important to consider a number of factors when deciding on the best time to sell your business. These could be factors that may influence potential buyers as well as your own personal circumstances.

Personal factors to take into account might include:
  • When are you planning to retire?
  • Do you have any health issues?
  • Do you still relish the challenges of running your business?
  • Does your business have an heir apparent?
  • Will your income stream and wealth be adequate, post-sale?

You will also need to consider business-related issues including:
  • What are the current trends in the stock market?
  • To what extent is your business 'trendy' or at the leading edge?
  • Is your business forecasting increases to the top and bottom lines?
  • How well is your business performing when compared to other, similar businesses?
  • Is your business running at, or near, its full potential?

CGT - minimising the impact

Taxes are one of the less welcome, but inevitable, aspects of a business person's life. When you raise that final sales invoice and realise the proceeds from the sale of your business, you should be completing one of the last steps in a strategy aimed at maximising the net return by minimising the capital gains tax (CGT) on sale.

CGT basics
As a basic rule, CGT is charged on the difference between what you paid for an asset and what you receive when you sell it, less your annual CGT exemption if this has not been set against other gains. There are several other provisions, which may also need to be factored into the calculation of any CGT liability.

The governing rules for CGT

The taxable gain is measured simply by comparing net proceeds with total cost (including costs of acquisition and enhancement expenditure). The rate of tax depends on your overall income and gains position for 2014/15. Gains will be taxed at 18% to the extent that your taxable income and gains fall within the upper limit of the income tax basic rate band and 28% thereafter.

A special tax relief, Entrepreneurs' Relief, is available for those in business, which may reduce the tax rate on the first £10m of qualifying lifetime gains to 10%. Generally, the relief will be available to individuals on the disposal (after at least one complete qualifying year) of:
  • all or part of a trading business carried on alone or in partnership
  • the assets of a trading business after cessation
  • shares in the individual's 'personal' trading company
  • assets owned by the individual used by the individual's personal trading company or trading partnership where the disposal is associated with a main qualifying disposal of shares or partnership interest.

All planned transactions require careful scrutiny to ensure that the available Entrepreneurs' Relief is maximised. Remember to keep us in the picture - we are best placed to help and advise if you involve us at an early stage.

CGT and non-residents

CGT is normally only chargeable where the taxpayer is resident in the UK in the tax year the gain arose, though the provisions of any double taxation treaty need to be checked. CGT may be avoided, provided the taxpayer becomes non-UK resident before the disposal and remains non-resident for tax purposes for five complete tax years.

CGT and death - There is no liability to CGT on any asset appreciation at your death.

The legacy of inheritance tax (IHT)

Lifetime transfer(s)
For the business owner, the vital elements in the IHT regime are the reliefs on business and agricultural property (up to 100%), which continue to afford exemption on the transfer of qualifying property, or a qualifying shareholding.

Transfers on your death
Remember to take into account your business interests when you draw up your Will. While reliefs may mean that there is little or no IHT to pay on your death, your Will is your route to directing the value of your business to your chosen heir(s) unless the disposition of your business interest on your death is covered by your partnership or shareholders' agreement.

Reliefs may be available for CGT
It is possible that reliefs can reduce a 28% CGT bill to zero. To maximise your net proceeds it is vital that you consult with us about the timing of a sale, and the CGT reliefs and exemptions which you might be entitled to.
Real time information (RTI) was supposed to make the reporting of PAYE easier for employers, but it has introduced more filing deadlines, and new penalties for missing those deadlines.

Every employer must now send a full payment submission (FPS) report every time they pay employees, on or before the payment date. There is some relaxation for certain employers who have fewer than ten employees.

If no payment has been made to employees in the tax month the employer should submit an employer payment summary (EPS) by 19th of the following tax month. Alternatively where the employees will be paid in only one month of the year, the employer can register the PAYE scheme as an "annual scheme", and submit RTI reports just once a year.

From 6 October 2014, large employers (50 or more employees) have been charged a penalty for every RTI reporting deadline they have missed, although they are permitted one late filing per tax year. Those penalty notices will start to arrive with employers this month, but HMRC are not sending copies to us as your tax agent. If you receive an RTI penalty notice please let us know immediately.

Smaller employers (up to 50 employees) will be charged penalties for missing RTI filing deadlines from 6 March 2015. Those smaller employers are not permitted to have one penalty free month in 2014/15.

The good news for all employers is that the end-of-year questions which used to be included on the form P35 have been dropped from the final FPS or EPS to be submitted for 2014/15.

If you submit a final FPS or EPS for the 2014/15 tax year after 6 March 2015 in theory you shouldn't have to answer those annoying questions. However, this change in practice was announced too late to be included in most payroll software for 2014/15. Even HMRC's free Basic PAYE Tools software will not be updated for the change to the end of year procedures until July 2015. So it looks like you will have to answer those pointless questions for 2014/15 although HMRC do nothing with the information.
As the 31 January deadline for submitting the 2014 self assessment tax return passed, HM Revenue & Customs (HMRC) revealed that the number of taxpayers failing to file their tax returns on time had increased on last year.

Up to 890,000 taxpayers will now face an automatic �100 penalty for failing to submit their returns on time.

However, the number of individuals who managed to submit their returns on time also increased by 210,000.

HMRC received 10.24 million tax returns by midnight on 31 January, with the number of online submissions reaching record levels. Many individuals chose to leave their tax matters until the last minute, with the peak time for submissions falling between 1pm and 2pm on 30 January.

Following the initial automatic penalty, a series of additional penalties will apply for continued failure to complete the return, after three, six and 12 months.

Ruth Owen, director general of personal tax at HMRC commented, ‘If you're one of the minority who missed the deadline, you still need to get your tax return to us as soon as possible, to avoid further penalties and interest mounting up’.

We can help with all of your tax planning needs, including dealing with self assessment on your behalf. Please contact us for further information.
Filing your self assessment tax returns

Paper tax returns covering income for the year ending 5 April 2014 had to be submitted to HM Revenue & Customs (HMRC) by 31 October 2014. Online tax returns must be received by HMRC on 31 January 2015.

Assessment of your liability to income tax and capital gains tax can be a confusing time for the self employed, and with automatic penalties for late filing, this is something every entrepreneur needs to get right.

Should you fail to submit your self assessment for a single day you are liable to a fee of �100, with �10 for each additional day you wait, which can combine to a maximum of �1000. At six months and twelve months, in addition to the above charges, you will be charged either �300 of 5% of the tax due � whichever is the higher figure. In some cases you may be asked to pay 100% or more of the total due, on top of the additional penalties.

If you haven’t done so yet, preparing these documents ready will help you when filling out the online form:

Your employment income (plus P45s/P60s/P11Ds)
Your self employed income
Your qualifying expenses (check what qualifies at https://www.gov.uk/tax-relief-for-employees)
Any taxable benefits you have received (Jobseeker’s Allowance, Incapacity Benefit, etc.)
Your pension income
Your investment income
Your property income
Details of any tax reliefs (pension contributions, Gift Aid donations, etc.)

Estimates of these figures may be acceptable in the short term, providing you inform HMRC they are estimates, but you must submit the actual figures at a later date and reimburse for any underpayments you may have made.
Welcome to a special edition of our tax newsletter highlighting key tax announcements in the Chancellor's Autumn Statement on 3 December 2014.
We hope you enjoy reading the newsletter; remember, we are here to help you so please contact us if you need further information on any of the topics covered.

The personal allowance for 2015/16 was originally scheduled to increase to £10,500 but it was announced that this will now be £10,600, so the tax free amount will now be £883 per month. If re-elected the Chancellor stated that this would be increased to £12,500 by 2020.

The point at which higher rate tax (40%) becomes payable will be £42,385 for 2015/16, meaning that the basic rate band will be £31,785. The Chancellor "promised" that this threshold would increase to £50,000 by 2020. The 45% rate will continue to apply to taxable income over £150,000.

Remember that the personal allowance is reduced where the taxpayer's adjusted net income exceeds £100,000. The reduction is £1 of allowance for every £2 of excess income, resulting in a marginal tax rate of 60%. For 2015/16 this restriction is even wider than before with the increase in personal allowance to £10,600

The annual ISA allowance will increase from £15,000 to £15,240 from April 2015. With their longevity and ever increasing allowances, ISAs now represent a substantial portion of the savings of older people. It often comes as a shock to executors and beneficiaries that they lose their tax free status on death. In addition to the inheritance tax charge on the death value, tax is deducted from the income, and capital gains tax may become payable on the sale of the investments.

There were some rather confusing comments about the Chancellor's proposed changes to the 'death taxes' on ISAs, perhaps suggesting a radical overhaul of the rules and abolition of the inheritance tax charge. This is not the case.

As far as we can see from the limited information provided, the proposed changes are fairly minimal but nevertheless a welcome addition to estate planning tools. The changes relate solely to the tax consequences when a spouse or civil partner dies leaving a surviving partner.

Currently, if a spouse or civil partner inherits the ISA account of the first to die, it is exempt from inheritance tax under the general spouse exemption, so there has been no change in this regard. However, because ISAs can belong only to individuals and the amount invested is restricted annually, a spouse may find on inheriting the ISA savings on the death of their partner that they must now be kept in an ordinary taxable account. From 6 April 2015, a surviving spouse or civil partner will be granted an additional ISA allowance equivalent to the value of their partner's ISAs so that the (income and capital gains) tax free status of the savings may be preserved.

In Budget 2011, when he announced the introduction of the two tier remittance basis charge (RBC), the chancellor promised not to make any further changes to the taxation of non-domiciliaries in this Parliament.
True to his word, today he announced changes to the RBC, payable by those who are resident but not domiciled in the UK, which will take effect in the next Parliament:
  • the RBC payable by those who have been resident in the UK for 12 out of the last 14 years will increase from £50,000 per tax year to £60,000 per tax year.
  • a third level of RBC will be introduced for non-domiciliaries who have been resident in the UK for 17 out of the last 20 years, set at £90,000 per tax year.
  • there will be a consultation on having the remittance basis charge apply for a minimum of three tax years to prevent non-domiciliaries from arranging their affairs to pay the charge only occasionally.
The RBC for those who have been resident in the UK for at least seven out of the last nine tax years will remain unchanged at £30,000 per tax year.

The chancellor reiterated the Government's commitment to the pension reforms outlined in the Budget 2014 and recent draft legislation.

He also confirmed the recent announcement to abolish the 55% charge which currently applies on death to all pension funds held by a person who dies over the age of 75, and on crystallised funds held by those who die under the age of 75.

The new proposals announced in the Autumn Statement are that:
  • When an individual dies before age 75, the pension fund, whether crystallised or not, may pass tax free to a nominated beneficiary.
  • When an individual dies over the age of 75, the pension fund, when withdrawn, will be taxed at the beneficiary's marginal rate of income tax.
This relaxation of the pension tax rules on death are extended to include a concession for annuities. Some pensioners, instead of holding a defined contribution pension fund, will have purchased joint life or guaranteed term holder. The proposal now is that the income will be tax free for the beneficiary of the annuity, and that these annuities may be passed to any beneficiary and not just spouses and dependants.

The Chancellor has already announced that the main rate and small profits rate of corporation tax will unite from 1 April 2015. From that date there will be a single rate of corporation tax of 20% and no marginal rate relief.

Great news for all our RDH Accountants Ltd fans, we have a new website. You can now read up on our latest news, see what previous customers have had to say, view our gallery and contact us with just the click of a button.