Happy New Year! As this is the first newsletter of
a new year, we have concentrated this month on positive issues,
particularly the sections which set out tax planning pointers
and opportunities for individuals, the self-employed and property
owners prior to 5 April 2006. We have also included a brief
report on the recent court case Arctic Systems v Revenue.
This is the case involving husband and wife owned companies
- the good news is that the Revenue lost!
Don't forget that the 31 January 2006 is the last
date for submitting your 2005 Self Assessment Tax Return -
penalties will apply for late filing! It is also the date
that you will need to settle any self assessment balancing
payments for 2005, and if applicable, make the first payment
on account for 2005-2006.
Arctic Systems - Revenue lose appeal!
This is the case that the Revenue started which contended
that:
-
when a husband and wife company was set up, with equal
shareholdings,
-
the main fee earner took a lower than market value salary,
and
-
dividends were drawn equally by the spouses
then the dividend income of the non-fee earning spouse, in
this case a Mrs Jones, should be assessed as if it were the
income of the main fee-earning spouse, Mr Jones. This of course
increased the overall tax of the married couple as Mr Jones
was taxed on his wife's dividend income at higher rates.
The Court of Appeal have now judged that there was no settlement
of income by Mr Jones on his wife, and therefore the Revenue
cannot assess the dividend income of Mrs Jones as if it were
her husbands.
This is great news for husband and wife run companies that
operate similar dividend policies.
However, although the Court of Appeal have denied the Revenue
a right to appeal to the House of Lords, they can apply for
permission to appeal.
The decision may encourage the Government to re-write this
area of the law - we shall have to wait and see.
Tax Planning opportunities for individuals - prior
to tax year end 5 April 2006.
Marital/Partner status
If you are considering a change in your legal status, getting
married or formalising a relationship under the new Civil
Partnership Act, then consideration of the following matters
may be productive.
-
Tax treatment of properties held prior to the change
in status.
-
Effect on claims, or subsequent payback, of tax credits.
-
Review and change your wills - for high value estates
this is essential to plan for inheritance tax liabilities.
-
Effect on company tax payments if both partners manage
and control their own, separate, businesses.
Pension Planning
Although the Chancellor reversed his position on the purchase
of residential property by pension funds, there are still
significant changes approaching when the new pension legislation
applies from 6 April 2006.
For contributors to existing pension schemes it may pay to
calculate any unused relief that may be available for the
current tax year to 5 April 2006.
If you have significant pension funds, or would like to know
more about the new arrangements a review before 6 April may
be useful.
ISA's and other tax effective investments
Have you utilised your entitlement for the year? For the
more adventurous there are also Venture Capital Trusts and
Enterprise Investment Schemes.
Capital Gains Tax
Can you utilise your annual exemption of £8,500? Although
it is not possible to sell and buy back your own investments
(Bed & Breakfast arrangements) to create a tax free gain
up to £8,500, the same effect can be achieved by transferring
shares to an ISA or indeed your spouse.
Negligible Value Claim.
The Revenue recognise that:
-
shares in quoted companies, and
-
subscribed shares in unquoted companies,
-
that have no value, can be written off for capital gains
tax purposes. This is a further useful way to reduce
your taxable gains this year.
In the second category, subscribed shares in unquoted companies,
there is also the possibility to claim the loss against income
rather than set off against other capital gains.
Inheritance Tax.
If appropriate, make sure that you take advantage of the
annual exception, £3000 gifts are exempt from inheritance
tax. (£6000 if you made no gifts in the previous tax year
to 5 April 2005).
Tax Planning opportunities for the self-employed
- prior to tax year end 5 April 2006.
This section applies particularly to sole traders and partnerships
that have a year end date on or before 5 April 2006. These
year ends will form the basis of your self assessment for
2005-2006.
Capital Expenditure.
If your financial year is between now and 5 April 2006 and
you are planning the purchase of plant or other equipment
in the summer of 2006, consider bringing the purchase forward
to a date prior to your year end.
You will then be able to claim a capital allowance based
on the cost in the current tax year - leave expenditure until
after the business year end and you will have to wait another
year to obtain the equivalent deduction.
Revenue Expenditure.
The same comment as in the previous paragraph applies to
revenue expenditure. Whereas capital expenditure may qualify
for a 100% tax deduction (certain energy saving/efficient
plant and cars), most plant and equipment will only generate
a 40% tax write off in the first year for established trades.
(From the 6 April 2006 this is increasing to 50%) Revenue
expenditure incurred for the benefit of trade will normally
qualify for an immediate 100% deduction.
So if you are considering repainting the office, or repairing
equipment, bring forward the expenditure prior to your business
year end and obtain tax relief a year earlier.
Stock write off's
If you have significant stocks of trading goods and materials,
some of which are slow moving or may never be sold, consider
writing down the value in your year end stock calculations.
The Revenue will accept the write off as long as you apply
the "value stock at the lower of cost or net realisable value"
rules.
Any reduction in stock will reduce your taxable profits.
Tax Planning opportunities for property owners -
prior to tax year end 5 April 2006.
Disposals
Any property disposal by individuals - other than a principal
private residence - before 5 April 2006 will be taxed as a
capital gain in the current tax year. Tax will become due
in most cases on 31 January 2007.
Delay the disposal until after 5 April 2006 and the relevant
tax will not be due until 31 January 2008.
Stamp duty considerations (e.g. will it be increased in the
March 2006 budget?), and commercial considerations, (e.g.
will you lose the sale if you delay?), must of course be taken
into account.
Acquisitions
If you are buying a property that qualifies as a business
asset, and therefore the higher rates of taper relief, there
is no advantage in delaying purchase until after 5 April 2006.
In fact the opposite position probably applies, that the sooner
you buy the sooner you will be able to claim the maximum rate
of taper relief.
Properties that do qualify for the higher rates include Furnished
Holiday Lets and certain commercial property let to trading
businesses and unquoted trading companies.
Your own home.
Described by the Revenue as your principal private residence,
this will not be taxed when you sell as long as you have used
the property for the entire period of ownership as your own
home.
But what to do if you either have, or are considering the
purchase of, a second home?
If the acquisition will take place, or has taken place, before
5 April 2006 then this may open up the possibility of making
an election to determine which property is to be considered
your principal private residence for tax purposes. It may
also be prudent to plan for a future change in this election
that would possibly enable both properties to be sold at a
lower tax cost!
Repairs
As all property income is taxed on a fiscal year basis (to
5 April each year) consider dealing with outstanding repairs
before 5 April 2006,
Rents receivable and costs payable
Don't forget that property income is calculated for tax purposes
on the accruals basis - in jargon free text this means rents
must include rents due but not necessarily received, and costs
incurred and/or invoiced but not actually paid.
If you have tenants who owe rent but are unlikely to pay,
then evidence of the bad debt (copies of solicitors correspondence
etc) should be available to justify leaving the income out
of your property income on your tax return.
Review
Property is an area of your tax affairs that deserves an
annual review. For our clients we need to be aware of your
intended acquisitions and disposals, and the uses to which
the property(ies) will be applied.
Tax Diary January/February 20061 January 2006 -
Due date for corporation tax for the year ending 31 March
2005.
19 January 2006 - PAYE and NIC deductions
due for month ending 5 January 2006. (If you pay your tax
electronically the due date is 22 January 2006)
31 January 2006 - Last day to file your
tax return for 2005, and to pay any balance of Self Assessment
tax for that year, to 5 April 2005. You may also need to make
a payment on account for the tax year ending 5 April 2006.
1 February 2006 - Due date for corporation
tax for the year ending 30 April 2005.
19 February 2006 - PAYE and NIC deductions
due for month ending 5 February 2006. (If you pay your tax
electronically the due date is 22 February 2006)
28 February 2006 - Last day to pay your
balance of self assessed tax for the year ending 5 April 2005.
Payment made after this date will be subject to a 5% surcharge
on tax outstanding, and interest will apply from 1 February
2006!
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DISCLAIMER - PLEASE NOTE: The ideas shared with you in this
email are intended to inform rather than advise. Taxpayers'
circumstances do vary and if you feel that tax strategies
we have outlined may be beneficial it is important that you
contact us before implementation. If you do or do not take
action as a result of reading this newsletter, before receiving
our written endorsement, we will accept no responsibility
for any financial loss incurred
