Category: Taxation


Inheritance Tax reporting for excepted estates

HM Courts & Tribunals Service (HMCTS) has recently changed the Inheritance Tax (IHT) reporting requirements for excepted estates. An estate is referred to as an ‘excepted estate’ when no IHT is payable.

The changes apply to all deaths on or after 1 January 2022. If the date of death is on or after this date, an estate is usually an excepted estate if any of the following apply:

  • Its value is below the Inheritance Tax threshold, which is currently £325,000
  • The estate is worth £650,000 or less and any unused threshold is being transferred from a spouse or civil partner who died first
  • The deceased left everything to a spouse or civil partner living in the UK or to a qualifying charity and the estate is worth less than £3 million (search the charity register for registered UK charities)
  • The deceased was living permanently outside the UK (a ‘foreign domiciliary’) when they died and the value of their UK assets is under £150,000

These changes are expected to reduce the number of submissions that require a completed IHT form to obtain a Grant of Representation.

To summarise, the changes should not be considered a major simplification of the process, as the work to obtain these figures is still mostly required, but it may not need to be submitted on an IHT form.

Kings Court Trust

Is Rishi Sunak set to slash taxes?

In the first week of the New Year there was a story that was widely reported in many of the papers. ‘More and more people pushed into higher rate tax bracket’ ran the headline with – according to which paper you read – either 1m or 1.2m more people are set to pay the 40% rate of tax by 2026. 

The story was based on research carried out by the House of Commons library, with the article published in the Daily Telegraph saying that ‘1.2m additional workers’ would find themselves paying the higher rate of tax as a result of the Government’s decision to freeze the personal allowance and the higher rate threshold. In addition, almost 1.5m people would be brought into paying the basic level of income tax. 

The research was commissioned by the Liberal Democrats, who claimed that ‘the stealth tax raid’ would ‘clobber families who are already feeling the pinch.’ 

Coming on top of stories about likely increases in food, fuel and energy prices this was hardly the start to the year hard-pressed families needed. 

But perhaps there was some light at the end of the tunnel – because there was another story running over New Year. ‘Sunak gears up to slash taxes’ was the headline in City AM. 

‘No surprise there,’ the cynical among you might mutter. ‘One eye on the leadership and one eye on the next Election.’ 

It’s undoubtedly true that should the PM fall under the proverbial bus the Chancellor – along with Foreign Secretary Liz Truss – would be a leading candidate to replace him. And yes, the next UK General Election will be held in December 2024 or earlier. 

Rishi Sunak has always been a politician who has made a virtue of taking difficult – and painful – decisions. Yet, according to City AM, he has told the Treasury to draw up plans to cut income tax by 2p in the pound and/or cut the rate of VAT. Other plans apparently being considered include scrapping the 45p rate of tax (payable on earnings over £150,000), reducing inheritance tax and households that use green energy potentially paying lower rates. 

Rishi Sunak says he does not want to be seen as a ‘high tax, high spending’ Chancellor. At which point the cynical will add, ‘Ah well, you can’t trust politicians anyway.’ 

Maybe we can…

Surprisingly, trust in politicians actually increased in 2021 with the annual Ipsos MORI veracity poll for the year showing that 19% of the public now say they trust politicians, up from 15% in 2019. That said, politicians are still well down the ‘trust league table,’ which is headed by nurses and librarians with 94% and 93% respectively. Who is below politicians? Advertising executives get the wooden spoon in the trust stakes. 

Will Amazon finally pay it’s fair share?

“Only two things in life are certain,” as the old saying goes: “Death and taxes.” 

But of late it seems that taxes could be replaced by something else: headlines about Amazon (and other tech giants) not paying enough tax. Every year it seems to be the same: the companies make millions – if not billions – in profits, but pay less tax than a reasonably successful small business. In 2020, for example, Amazon had a sales income of €44bn (£37.7bn) in Europe but declared a loss of €1.2bn (£1.03bn) and therefore paid no corporation tax. 

Could all that be about to change? There has long been talk of an international tax agreement to tackle abuse by the tech companies, and – while months and possibly years of talks are still needed – it moved a significant step closer after the recent G7 summit in Cornwall. 

What did the G7 agree? 

There was agreement on two principal points. First, that countries can tax the companies on revenue generated in that country rather than where the firm is located for tax purposes. So the UK Government could in theory tax Amazon on its UK revenue, despite the company being based in Luxembourg. 

Secondly, the G7 committed to a global minimum tax rate of 15%. This was lower than the 21% suggested by President Biden, but the inclusion of “at least” in the G7 deal means the rate could be negotiated higher. 

Which companies would it apply to? 

The obvious targets are the tech giants but the plans for a global corporation tax rate could capture up to 8,000 multinationals, including oil giants like BP and Shell, and banks such as HSBC, Barclays and Santander. 

How much would the tax raise? 

The OECD estimated last October that tax revenues of $81bn (£58bn) could be raised by the proposals, with the Institute for Public Policy Research suggesting that the UK’s share (albeit from the 21% tax rate favoured by President Biden) could be up to £14.7bn annually. 

Could the tax be avoided? 

The simple answer is ‘yes.’ Countries such as Ireland, Hungary and Cyprus all have corporation taxes lower than 15% – but the G7 are hoping that their combined economic might will bring such countries into line, especially if the minimum rate is agreed with the G20, which includes China, Russia and India. 

In theory, therefore, the deal appears both doable and likely to raise significant revenues. But like all international agreements, there will be a lot of talking and it won’t be done quickly. It will also need to gain regulatory approval in the relevant countries, giving ample time for delay and lobbying. Most experts believe that ultimately there will be some form of agreement – but don’t expect it to happen in the next 12 months. 


Does an increase to capital gains tax look likely?

While Rishi Sunak’s spring budget introduced a variety of new initiatives and updates to multiple taxes, one suspected change was missing from the big red book. Analysts had posited that a capital gains tax hike would be a likely inclusion in Sunak’s budget, expecting it to be brought more in line with income tax and sitting at around 25%.

While, for now, capital gains tax remains at its pre-covid rate of 20%, we cannot assume that’s where it will remain. Government debt is at an all-time high, and there is speculation that an increase to CGT is one technique that may be used to address this debt. In 2020 the government’s tax adviser recommended that CGT be overhauled. This proposal suggested that a significantly higher number of people would be liable to pay the duty than currently do.

Capital gains tax is a tax on the profit made when an asset is sold or ‘disposed of’ after increasing in value. Disposing of an asset includes sale, gift giving or a transfer to somebody else, swapping it or receiving compensation for it – an insurance payout for a lost or destroyed asset for example. The tax is on the gain received, not the total value received. For example, a painting purchased for £5,000 and sold for £25,000 demonstrates a gain of £20,000. It is on that £20,000 that the tax would be payable. You do, however, only have to pay CGT on overall gains above the tax-free allowance which currently sits at £12,300 or £6,150 for trusts.

In February of 2021, HMRC’s published tax receipts data showed that CGT receipts were the highest they had ever been at £10.4bn, which may be an indicator that people were attempting to solidify their capital gains ahead of a predicted CGT increase. Whether that increase is to be expected in the near future is uncertain; we may find out at the chancellor’s next budget.

If you’re interested in how a change to the capital gains tax rate could affect you and your assets, it’s advisable to seek professional advice. If you have any questions surrounding the potential impact on your personal finances or the topic in general, don’t hesitate to get in touch. 


6 important tax deductible purchases for small businesses

As a business owner, it’s important not to miss any opportunities to streamline your business and make the most of your revenue. A well managed cash flow is a crucial aspect of every business, and managing a cash flow requires attention to your expenses.

It can be difficult to determine what you can and can’t consider tax deductible purchases, especially for the uninitiated. When you’re running a business, you’re busy enough dealing with your other responsibilities and it can be hard to keep yourself clued up when it comes to making the most of the books. It is, however, an integral part of keeping the business running efficiently, so let’s take a look at some things for you to keep in mind.

What to claim as expenses

Staff Costs
Salaries, bonuses, commissions, pensions and nearly all compensation for employees. Whether they’re full time, part time or contracted you can likely claim for it.

TrainingIf training of employees incurs a cost then you can generally claim it as tax deductible. This covers courses relevant to the business, and is a great opportunity and encouragement to keep your staff engaged, motivated and up to date with relevant training.

Childcare costs
Tax relief for childcare costs can be extremely generous. For example, for payments to registered childminders and nurseries, also out of hours clubs run on school premises or by local authorities.

Marketing and Advertising
Costs incurred through the promotion of your business can often be considered tax deductible expenses. Brochures, flyers, web hosting charges, domain registration fees and much more.

Office Costs
You can find tax relief for a variety of costs relating to your office. That includes rent, supplies and utilities. Software subscriptions, postage, ink cartridges and more all fall under this category.

Your Home
If you’re working full time from a home office, as many of us now are, or you work from home on occasion, you may find significant costs that can be considered expenses. You may be surprised how much of your monthly bills could be tax deductible, including lighting, heating and council tax.

This is not an exhaustive list, and there are plenty of other areas and purchases which can be utilised to minimise your tax liabilities. There may also be areas which you believe to be deductible but which,  in fact, are not. For this reason, you should always seek professional advice before making any final decisions. 


3 tax considerations for a post-Brexit UK

With the time to prepare for Brexit rapidly reducing, businesses are up against the clock to get themselves ready for the changes taking place at the end of the transition period. When the UK left the EU on 31st January 2020, the transition period began and it continues until the end of the year. 

The EU and the UK, have been undergoing Free Trade Agreement (FTA) discussions, and while the precise outcome of these discussions remains uncertain, we can be sure that as the UK is no longer in the single market and customs union, there will be tax changes regardless. 

Understandably, most businesses have been generally preoccupied by adapting to the changing landscape that Covid-19 has introduced. This doesn’t change the fact, however, that there are a host of Brexit related tax considerations to be made by businesses. Let’s take a look at some key examples.

Customs Compliance

If your business processes involve transporting goods between the EU and the UK, you will find yourself facing more advanced customs compliance obligations. Even with a Free Trade Agreement in place, this transport of goods will now be considered as imports and exports. The EU will be implementing full border control from 1st January 2021, so any goods being exported from the UK will need to meet all the requirements from the start of the year. You will, however, be able to defer import declarations and associated duty payments, on a range of goods, until 1st July 2021. 

Changes in VAT law

There will be a range of VAT law changes that are sector specific, for example, the treatment of VAT on certain financial services will be impacted; EU businesses supplying those in the UK will be eligible for increased VAT recovery. For travel businesses, the tour operators’ margin scheme is expected to be amended so that VAT is only paid on the margin on UK holidays, and not on EU holidays. More generally, import VAT will be payable on the transfer of goods between the UK and the EU. 

Tax Systems and Data changes

With the changes coming to customs compliance and VAT, there will likely be a secondary impact and indirect changes to the reporting systems and processes that businesses have in place. It will be important for these businesses to identify which systems and processes will need updating, and to make sure that they have the time and resources to get those changes made. Systems such as tax determination software, cash-flow systems and even HR processes considering expenses and mobile employees may be affected.

Each business will have a unique set of challenges surrounding Brexit, and it is recommended to seek professional advice directly before deciding to act.


Capital gains tax: What could the review mean?

Rishi Sunak recently announced a surprise review of capital gains tax (CGT), following a report by the Office for Budget Responsibility (OBR) that highlighted how the growing deficit in government spending was likely to exceed £350bn in 2020. The Chancellor asked the Office for Tax Simplification to report on how CGT rates compare with other taxes and how present rules may distort taxpayer behaviour.

There could be widespread tax rises as the government attempts to claw back the cost of extra spending during the coronavirus pandemic. The OBR said the Treasury was likely to suffer steep falls in capital gains tax receipts over the next two years as property and other assets fall in value. A tax rise could fill this gap.

What is CGT?

CGT is a tax on the profit when you sell something that has increased in value. You are only taxed on the amount it has gained in value. Most often it applies to gains made on property and shares, but may also apply to assets like art works. The OBR previously forecast that the tax would raise £9.1bn in the 2019/20 tax year, accounting for 1.1% of all tax paid in the UK.

Private homes are exempt from this tax, but you still need to pay it when selling a second home or investment property. You pay CGT when you sell something that has made gains of more than £12,300 for the current tax year. So a £10,000 investment profit would not incur CGT.

At the moment, the CGT levy is 18% on second homes and buy-to-let properties, and 10% on other assets. For higher rate taxpayers, these rates rise to 28% and 20% respectively.

Why is it being reviewed?

The Conservative Party vowed not to raise income tax, National Insurance or VAT in their last election manifesto, so there are few places left for Sunak to find desperately needed income. 

There are also concerns that CGT is less than income tax, meaning that those who possess a large portfolio of assets are taxed at a rate that is lower than working people pay.

How could it change? 

Essentially the Chancellor has three choices: reduce the allowance (for example, abolish the current £12,300 annual CGT allowance), levy it against other assets (such as classic cars), or raise the rates.

While it’s highly unlikely that Sunak will abolish the CGT exemption for primary residences, he could target second homes and buy-to-lets. It’s possible that the CGT rate could be aligned with other income tax rates, at 20%, 40% and 45%, meaning those with a property portfolio could be hit hard.

Other changes could include a reduction to Business Asset Disposal relief, which currently means that business owners and significant shareholders (over 5%) effectively pay a CGT rate of 10% on lifetime gains up to £1 million. Elsewhere, the treasury could overhaul the various mechanisms accountants use to defer CGT or offset gains, with losses made elsewhere.


To defer or not to defer your tax bill

As part of their response to the Covid-19 pandemic, HMRC are letting businesses defer VAT payments due between 20th March and 30th June this year. 

Businesses will only be able to defer payments made quarterly and monthly for the period ending in February, March and April. Deferral is automatic, so you need not apply if you think that your business would benefit. 

In addition, HMRC are letting taxpayers who owe a self-assessment payment on account from the 2019-2020 tax year defer until 31st January, 2021. The original payment date would have been 31st July this year. It’s worth noting that 31st January is the same due date as your January self-assessment tax liability, so you could end up making a rather large payment on this day. 

Businesses and self employed workers can also apply for a ‘Time to Pay’ arrangement. This entails a pre-agreed debt repayment plan over a period of 6-12 months.

The VAT deferral scheme is designed to keep some businesses alive in the short term. However, there could be financial implications for delaying a payment which could become more significant in an uncertain business environment, especially if there is a second outbreak of Covid-19.

 With the risk of a second outbreak of the pandemic remaining a possibility, it’s worth getting a grasp of the impacts of delaying your payment before you defer. It could be a wise idea to speak to an accountant if you’re unsure.

If you defer, you will have to pay by 31st March 2021. It’s worth noting that this could leave you with a larger bill than usual and there is a chance that it could see you facing cash flow challenges in the new year, during what could be a period of fragile recovery.

To avoid increased costs next year, you can choose to pay your tax bill as you normally would. HMRC are actively encouraging businesses and the self-employed to behave as ‘good citizens’ and pay any tax they owe on time, helping the government at a time where it is busy taking on emergency loans to fund its response to the crisis.

Some businesses are opting for monthly VAT repayments, due to fears of not being able to cover a single colossal tax bill in January. By repaying in instalments over the next few months, these businesses will avoid the catch-up payment hitting in one go.


5 key takeaways from the new chancellor’s Budget

As Europe faces its greatest public health challenge in recent history, Chancellor Rishi Sunak released his first Budget. 

As you would expect, much of the Budget focused on mitigating the effects of the coronavirus outbreak. However, there were several important measures released alongside the headline grabbing coronavirus controls. Of £30 billion in extra spending, £12 billion will be specifically targeted at the outbreak. 

Coronavirus and public services

All those advised to self-isolate are to receive statutory sick pay if eligible. This will be paid from the first day off work, not the fourth. This sick pay is paid by the employer but businesses with fewer than 250 employees can reclaim the cost of paying sick pay for the isolation period.

Self-employed workers who do not get sick pay will be able to claim Employment and Support Allowance from day one of a period taken off work rather than day eight. 

The Chancellor also set aside £500 million as a hardship fund to help local councils support vulnerable people during the outbreak.

Cuts to entrepreneurs’ relief

Tax breaks available to those selling their businesses have been capped to £1 million over a lifetime. This relief, which formerly stood at £10 million, allows business owners of two years or more to pay less capital gains tax when they sell – 10% rather than 20%. The move is expected to save the Treasury £6 billion over the next five years. 

The Chancellor said that these extra earnings will be channelled into raising the R&D expenditure credit from 12% to 13% and a rise of employment allowance by a third to £4,000.

A freeze in income tax thresholds

The Budget confirmed that, from April, the amount earned before paying 20% tax will be frozen at £12,500, and £50,000 will remain the threshold at which people start to pay the higher 40% rate of tax. This means that anyone who gets a pay rise in the coming year is likely to pay more tax as extra wages push them over these thresholds. 

Of course, if you are a Scottish taxpayer, you have different rates to the rest of the UK. These were announced in the recent Scottish Budget.

Increase in tax-free savings for children

The Chancellor announced an increase in the allowances for Junior ISAs and Child Trust Funds. Both will rise from £4,368 to £9,000 in April. Money locked away in these tax-free savings accounts is kept until a child’s 18th birthday when it is converted into a standard ISA which the child can spend as they want.

Changes to pension taxes for higher earners

The notoriously complicated system for higher earners’ pension taxes is set to change.

Two key thresholds at which tax thresholds kick in for higher earners are set to change. The level at which a saver’s annual allowance starts ‘tapering’ down from £40,000 to £10,000 will rise from £110,000 to £200,000. However, under the new rules, the minimum annual allowance (formerly £10,000) will continue to fall for those who earn more than £300,000. In short, the new rules are less favourable to extremely high earners but more favourable for those who earn between £110,000 and £200,000.


Sole trader vs limited company?

When people are setting up a business, one of the first questions they have to grapple with is what legal structure they are going to trade under – sole trader, limited company or partnership.

If you’re one of our clients, you will already have made this decision but we thought it would be useful to give a quick outline of the differences.  

Sole trader

Being a sole trader is the most popular legal structure. Approximately 3.4 million sole proprietorships were created in 2017 and they accounted for 60% of small businesses in the UK. 

On the plus side, there are no set up costs and it’s very simple to get up and running. The only requirement is to inform HMRC by 5th Oct of your business’ second tax year. There is very little paperwork and you don’t have to have any dealings with Companies House. None of your information is held on the public record.    

As a sole trader, however, you are completely responsible for your business and its finances. You need to be aware that if your business goes bust or you have any business debts, your personal finances and assets could be in danger. Legally, your liability is unlimited.

It’s advisable, therefore, to take out small business insurance policies. This way you can avoid getting sued personally should there be any legal disputes. Remember, the buck stops with you! 

You and your business are treated as a single entity, which is also significant for tax purposes. You will have to pay tax on the profits that are above your personal tax allowance (£12,500 for the 2019/20 tax year). This is calculated through the self-assessment system and you will also pay Class 2 and Class 4 NICs.

Being a sole trader is thought to be less tax efficient than being a limited company as there is less opportunity for tax planning via the self-assessment system. 

Limited company

The second most popular legal structure is a limited company of which there were 1.9 million in 2017. There is a certain amount of paperwork required and you need to deal with Companies House but it is relatively straightforward. Note that your company details will be on public record.   

The main advantage of having a limited company is that you have limited personal liability should something go wrong. The business is treated as a separate entity from its owners so your own assets are protected.    

Despite the higher dividend taxes that were introduced in 2016, a limited company is still  considered to be more tax efficient. The company will pay corporation tax and dividend tax and employer’s Class 1 NICs on salaries, while staff pay employees’ Class 1 NICs on salaries. Under the limited company structure, there are more possibilities for tax planning by delaying dividends, for example, until a future tax year to minimise the tax liability. 

One of the disadvantages, though, is that you are obliged to prepare annual accounts which need to be filed with Companies House. You also need to file a full set of corporate tax accounts for HMRC. As a limited company, it’s advisable to use an accountant to make sure the accounts are done thoroughly.