David Gauke, the Financial Secretary to the Treasury, said a review of pension taxation would keep savers in mind.
“We need to ensure it is effective in terms of encouraging saving, and it is going in the right place,” he said.
Basically there are 2 changes under review..
The ISA idea
Currently you get tax relief when you pay into pensions and pay tax when you take the money out (after taking 25% tax free), the plan under discussion is to change that so that taxed income goes in and growth in the fund is tax free, like ISA’s.
I think we can all agree the current system is much better, I can’t see that making pensions like ISA’s will encourage investment
Flat Rate Tax Relief
The other plan under discussion is to introduce a flat rate of tax relief on contributions into pension schemes, this would replace the current system where tax relief is based on the actual tax rate you pay.
The BBC explained how this might work
At the moment, basic rate taxpayers receive 20% tax relief, higher rate taxpayers receive 40%, and those with the highest incomes receive 45%.
It is thought that this system could be replaced with a flat rate of anything between 25% and 33%.
Millions of high earners would lose out in such a system, but basic rate taxpayers would stand to gain.
The governments’ plan is to restrict individuals on claiming mortgage interest as a cost against their property investment income, for individuals it will work as follows
2017/18 75% of the interest can be claimed in full and 25% will get relief at 20%
2018/19 50% of the interest can be claimed in full and 50% will get relief at 20%
2019/20 25% of the interest can be claimed in full and 75% will get relief at 20%
2020/21 100% will get only 20% relief
For a 20% tax payer that’s fine but for higher rate taxpayer its a disaster that will lead to them paying a lot more tax
These rules will not apply to Companies, Companies will continue to claim full relief.
What could a Property Investor do to reduce the impact of these changes?
Here are a few ideas….
Pension Contributions – Pension Contributions currently receive tax relief at your rate of tax – 20% to 45% – so if you are a 40% tax payer you would need pay half the value of your 20% restricted interest into your pension to mitigate the extra tax
Change of Use – would your Buy to Let be able to be converted to a Furnished Holiday Let? or anther type of commercial property on which the restriction won’t apply
Increasing the Rent – Could you charge more to cover the extra tax?
Spouse Income Tax Elections – If the property is jointly held HMRC assume a 50/50 split of the income but you can change that using Form 17 this might be useful if one of you is a basic rate taxpayer and the other a higher rate taxpayer
Tax Deductible Expenses – Many landlords overlook expenses at the moment but they could become a lot more important, for example, use of your home, motor expenses, computers, travel and subsistence, phone costs etc
What do you plan to do when the changes take effect?
First lets have a recap on why Pensions are a fantastic investment and a great way to save tax.
IHT only applies if the pension company has to pay the value of your scheme to your estate, in which case it becomes like any other asset, but generally the pension pot is held in a discretionary trust, which means it isn’t taxed on death.
You can now nominate anyone not just dependents to be the beneficiary.
Since 6th April 2015 anyone who inherits a pension fund from a person who dies before the age of 75 is entitled to receive it tax free and the you can take the money as a lump sum or income. Once over 75 a special tax of 45% applies (previously 55%), you could reduce this by taking a regular income. The tax rate should drop again in April 2016.
Your pension can own Commercial Property, including your own business premises.
In many cases it is better for business premises to be owned by the business owners pension fund because:
The object of the business is not to own its own property, the objective should be for the business to make profits from trading
The business could use cash tied up in the premises to invest in trading activities
Pensions are a very tax efficient method of ownership – no capital gains, no tax on rental profits
Company Pension Contributions are Tax Deductible and Individual contributions get income tax refunds
You may be able to use 3 year Carry Forward to get funds into your pension scheme
Commercial Investment Property
Your pension scheme can own commercial investment property – shops, offices, industrial units.
It can borrow up to a third of the value of the pension scheme.
There is no capital gains tax and no tax on the rental income.
In Specie Transfers
In Specie transfers can be used to move assets into your pension scheme this could incur capital gains and SDLT (Stamp Duty), but you will benefit from tax relief as if you had paid in cash. Currently that means at tax relief of between 20% and 45%.
Once the assets are in a pension scheme transfers ‘in specie’ between schemes are tax free (no capital gains) and no SDLT.
In our view the assumption by the transferee fund or by the trustees of the transferee fund, of obligations to provide benefits is not chargeable consideration.
Net Relevant Earnings (NRE)
Many owner managed businesses only pay small salaries and take large dividends, this would normally restrict the level of pension contributions allowed, however, their companies can pay the maximum allowed – currently £40k per year.
If you have a SSAS or a SIPP Pension you will probably want to invest some of your funds in Commercial Property – Shops, Office, Industrial Units. Pension funds can borrow money and with the current interest rates low and yields as high as 10%, you can increase your return and use less cash by borrowing.
But one thing you may not know is that connected parties can lend to the fund…
Trustees of registered pension schemes may sometimes wish to borrow funds, for example to enable them to purchase an asset. There is no objection to a registered pension scheme borrowing funds for any purpose providing that the scheme administrator/trustees are satisfied that the borrowing will benefit the scheme and that the borrowing is within the rules laid down by the Department for Work and Pensions (DWP).
A registered pension scheme is treated as borrowing or having a liability of an amount, if that amount is to be repaid or met from cash or assets held for the purposes of the pension scheme.
A registered pension scheme may borrow funds from any individual, company or financial institution whether or not they are connected to the scheme, but any borrowing from a connected party which is not made on commercial terms will be subject to a tax charge – see RPSM04104020 .
The purpose of private residence relief is to relieve gains arising on the disposal of an individual’s residence so that the whole of the disposal proceeds are available to be used to buy a new residence of a similar standard. It is not intended to relieve speculative gains or gains arising from development.
The exclusion of speculative or development gains is achieved by TCGA92/S224 (3). It is important to understand the scope and limitations of this subsection so that you can apply it in suitable cases.
The subsection applies
where a dwelling house is acquired wholly or partly for the purpose of realising a gain from its disposal, or
where there is subsequent expenditure on the dwelling house wholly or partly for the purpose of realising a gain from its disposal.
Where the first part of the subsection applies no relief is due on any gain accruing from the disposal of the dwelling house. Where the second part of the subsection applies no relief is due on any part of the gain attributable to the expenditure.
If you plan to develop your property prior to sale it could be worth transferring it to company before any work is carried out, this could help to ensure that any gain to the date of transfer will be exempt from tax.
There is a further potential risk that HMRC may view the property development as a trading activity.
When you carryout out a refurbishment or Fit Out of your business premises you will be entitled to Capital Allowances.
Here is quick summary of the main types of allowance.
Business Premises Renovation Allowances
BPRA gives incentives to bring back into business use derelict or business properties that have been unused for at least one year. It gives an allowance of 100% for certain expenditure you incur when converting or renovating unused business premises in a disadvantaged area.
BPRA started on 11 April 2007 and ends on:
• 31 March 2017 for Corporation Tax
• 5 April 2017 for Income Tax
To qualify for BPRA, you must incur qualifying expenditure.
Qualifying expenditure is capital expenditure you incurred when you:
• convert a qualifying building into qualifying business premises
• renovate a qualifying building that is, or will be, a qualifying business premises
• repair qualifying business premises
Integral features are:
• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading
You can claim for fixtures, eg:
• fitted kitchens
• bathroom suites
• fire alarm and CCTV systems
You can claim if you rent or own the building, but only the person who bought the item can claim.
Annual Investment Allowance
The Allowance is set at up to £200,000 from January 2016
You can only claim AIA in the period you bought the item.
The date you bought it is:
• when you signed the contract, if payment is due within less than 4 months
• when payment’s due, if it’s due more than 4 months later
If you buy something under a hire purchase contract you can claim for the payments you haven’t made yet when you start using the item. You can’t claim on the interest payments.
If you don’t want to claim the full cost, eg you have low profits, you can claim part of the cost as AIA and part using writing down allowances. You can do this at any time as long as you still own the item.
If your business closes, you can’t claim AIA for items bought in the final accounting period.
Enhanced Capital Allowance
100% capital allowances can be obtained for expenditure on environmentally beneficial technology. This enables businesses to write off the whole capital cost against their profits in the year in which the expenditure is incurred and therefore to obtain valuable tax relief which can improve cashflow.
What doesn’t count as plant and machinery
You can’t claim capital allowances on:
• things you lease – you must own them
• buildings, including doors, gates, shutters, mains water and gas systems
• land and structures, eg bridges, roads, docks
• items used only for business entertainment, eg a yacht or karaoke machine
New Tenant – Lease Incentives
New Tenants may get incentives such as rent free periods or reverse premiums. The new accounting rules (FRS102) mean that these incentives are spread over the life of the lease not taken over the period to the first rent review. Spreading these savings out will mean that tenants get a tax advantage as the gain will be less at the beginning of their lease.
Fit Out Finance
Generally funding fit outs is an issue due to the nature of the security.
As the name suggests, Fit-Out Finance is dedicated to funding fit-outs of business premises, including:
• Head Office.
• Fast food outlets.
• Restaurants/retail premises.
Using a blend of hire purchase, lease, unsecured loan and other facilities where appropriate, we are able to fund not just the tangibles, but all manner of tertiary work, from survey through to painting and plumbing.
As previously noted HP and Loans are suitable for tax relief through Capital Allowances.
Here are a couple of examples of how funding can work.
Start Up Fast Food Outlet
Well researched & professional, our client was buying into a well-respected fast food franchise.
Their bank had supported the franchise purchase, but there was a further £75,000 required to fit the premises to franchisor specification.
With the customer’s background and a solid franchise, arranging leasing on equipment was fairly straight forward.
That left a £30,000 shortfall on less tangible works – as there were 2 owners in the business, we were able to secure Start-Up loans to fund the shortfall
The client was a well established, profitable hirer of electrical equipment. Despite being profitable, the business was highly seasonal and therefore cashflow fluctuated wildly.
Most of their funding was done under their roof, being shared between the bank, and the bank’s own finance company, who handled their hire stock.
However, when they approached the finance company, they were confidently informed that racking and mezzanine floors couldn’t be financed; hence they ploughed on, pouring valuable cash into fixed assets.
They had spent over £100,000 on racking etc and were struggling with cashflow to complete the project.
The Funder was able to:
• Release the full value of the assets they had paid for.
• Provide ongoing further funding for a mixed bundle of assets, ranging from a mezzanine floor to bikes used to move around the facility efficiently.
• Provide a £35K term loan to cover intangible costs.
A record 85.5% of these were sent online, with the busiest days for filing coming on 30 and 31 January, when HMRC received 980,000 returns. The busiest hour was between 1pm and 2pm on 30 January, when almost 50,000 returns were received – 830 per minute.
The busiest hour on deadline day was between 11 am and midday, when almost 32,000 returns were received – 530 per minute. HMRC also answered 95% of calls first time on deadline day.
Around 4.3 million customers (42%) left it until January to file their returns, which HMRC issued in April 2014.
By the end of January, more than a million Self Assessment-only customers (self-employed, with no other source of income, no employees and not VAT-registered) opted to receive electronic messages from HMRC, rather than paper communications. If you are eligible, you can sign up by logging into your Self Assessment online account and following the prompts.
There are three different types of penalties that can be charged if a return is outstanding after the return due date or is filed late. These are