Gifts

Those thinking about making gifts at Christmas should take advantage of the various inheritance tax (IHT) exemptions and reliefs available to them. Note that certain gifts can also have capital gains tax (CGT) implications.

THE IHT ANNUAL EXEMPTION – USE IT OR LOSE IT!

Although not particularly generous at £3,000 per donor per annum if this annual IHT exemption is not used by 5 April it is lost, although it is possible to carry the allowance forward one year if unused. This means that if the annual allowance for 2017/18 was not used an individual may make gifts of up to £6,000 in 2018/19.

Where the gifts to individuals exceed the annual exemption there may still be no inheritance tax to pay if they survive for 7 years following the gift or the gift falls within the £325,000 nil rate band.

 GIFTS OUT OF INCOME ARE NOT TAKEN INTO ACCOUNT FOR IHT

A more generous inheritance tax exemption applies where the donor can prove that he or she is not transferring capital but is making gifts out of their income. There are detailed conditions for this exemption to apply requiring records to be kept of income and expenditure in order to prove that there is sufficient surplus income each year to make regular gifts to the beneficiaries.

CERTAIN GIFTS CAN HAVE CAPITAL GAINS TAX CONSEQUENCES

Although there will be no CGT on gifts of cash there may be CGT to pay where the gift comprises shares or other assets. This is because the transaction will generally be deemed to take place at market value between connected persons even though no money changes hands.

The amount of the gain would normally be determined by comparing the market value with the original cost of the asset gifted.

Where the amount of this gain is within the annual CGT allowance (currently £11,700) then there would be no CGT payable.

Where the gift comprises shares in a trading company or other business assets it may be possible for donor and recipient to sign an election to hold over the gain so that no CGT is payable by the donor at the time of the gift. The effect of such an election is that the recipient of the asset will take over the donor’s original cost for subsequent disposal. Please get in touch with us if you are considering making gifts of shares or other assets so that we can advise you fully of all the tax implications.

NOT ALL SHARES QUALIFY FOR CGT ENTREPRENEURS’ RELIEF NOW

As the result of changes announced in the Autumn Budget, and now incorporated into the latest Finance Bill, not all ordinary shares necessarily qualify for the 10% CGT entrepreneurs’ relief rate on disposal.

As mentioned in last month’s Budget newsletter the definition of a personal company was tightened up so that from 29 October the shareholder must have entitlement to at least 5% of the company’s ordinary share capital, voting rights, profits available for distribution, and assets available on the winding up of the company.

The shareholder, as before, will also need to be an officer or employee of the company.

This change means that certain “alphabet” and other shares with limited rights may no longer qualify for CGT entrepreneurs’ relief when disposed of. As a consequence of this change we may need to review the rights attaching to the shares that your company has issued and make changes to ensure that the shares qualify.

 GIFTS OF UP TO £50 TO EMPLOYEES

From April 2016 new rules were introduced to allow employers to provide their directors and employees with certain “trivial” benefits in kind tax free.

The new rules were brought in as a simplification measure so that certain benefits in kind do not now need to be reported to HMRC as well as being tax free for the employee. There are of course a number of conditions that need to be satisfied to qualify for the exemption.

Conditions for the exemption to apply

  • the cost of providing the benefit does not exceed £50
  • the benefit is not cash or a cash voucher
  • the employee is not entitled to the benefit as part of any contractual obligation such as a salary sacrifice scheme
  • the benefit is not provided in recognition of particular services performed by the employee as part of their employment duties (or in anticipation of such services)

So this exemption will generally apply to small gifts to staff at Christmas, on their birthday, or other occasions and includes gifts of food, wine, or store vouchers.

Note that where the employer is a “close” company and the benefit is provided to an individual who is a director or other office holder of the company the exemption is capped at a total cost of £300 in the tax year.

GIFTS TO CHARITY

 Where possible higher rate taxpayers should “Gift Aid” any payments to charity to provide additional benefit to the charity and for the individual to obtain additional tax relief on the payment.

For example where an individual makes a £20 cash donation to charity the charity is able to reclaim a further £5 from HMRC making a gross gift of £25. Where the individual is a 40% higher rate taxpayer he or she is able to claim a further £5 tax relief under self-assessment, reducing their net cost to £15.

Note that the donor is required to make a declaration that they are a UK taxpayer and those that have not suffered sufficient UK tax to support the Gift Aid amount will be taxed on the shortfall.

Remember that Gift Aid does not just apply to gifts of cash. Many charity shops will now sell your donated items on your behalf and are able to treat the sale proceeds as Gift Aided donations. It is also possible to gift quoted securities and land and buildings to charity and claim Gift Aid on the market value of those assets.

 

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Extending IR35 rules to Private sector

Very controversially, the Government have decided to extend the rules for personal service companies in the public sector to workers in the private sector from April 2020.

This follows a consultation in Summer 2018 on how to tackle non-compliance with the intermediaries legislation (commonly known as IR35) in the private sector. The legislation which has applied in the public sector since April 2017 seeks to ensure that individuals who effectively work as employees are taxed as employees, even if they choose to structure their work through a company. There will be further consultation on the detailed operation of the rules, and small businesses (yet to be defined) engaging such workers will be excluded.

This will represent a significant administrative burden on large and medium-sized businesses who will be required to decide whether the rules apply to payments to such workers and deduct tax and NICs

No changes to tax rates

The basic rate of income tax and higher rate remain at 20% and 40% respectively, and the 45% additional rate continues to apply to income over £150,000.

There had been rumours that the dividend rate might be increased, but dividends continue to be taxed at 7.5%, 32.5% and then 38.1% depending upon whether the dividends fall into the basic rate band, higher rate band or the additional rate. Note that only the first £2,000 of dividend income is now tax free.

The annual ISA investment limit increased to £20,000 from 6 April 2017 and remains at that level for 2019/20. Dividends on shares held within an ISA continue to be tax free.

The much rumoured further restriction in pension tax relief failed to materialise.

 

Annual Investment Allowance increase

The Annual Investment Allowance (AIA) which provides businesses with a 100% write off against profits when they acquire plant and machinery has been temporarily increased from £200,000 to £1 million for two years from 1 January 2019. This will again mean that the timing of expenditure will be critical. It may be advantageous to delay expenditure until after 1 January 2019 to get full benefit in certain circumstances.

However, the current enhanced capital allowance for energy efficient plant will be abolished from April 2020. A further change is that the writing down allowance for special rate pool equipment, broadly long-life assets and fixtures in buildings, is being reduced from 8% to 6% from April 2019.

Being busy versus being productive

In today’s hyper connected business environment, it seems we are all busier than ever. Whether we are responding to emails outside of office hours or taking a call while on the way to a meeting, there is so much going on in our work lives that it’s easy to lose focus on getting the most important work done.

 Focus on being effective

Busy people tend to have a good work ethic. That is why they are always busy. The problem is not that they don’t work hard, but that they don’t work smart. Productive people focus on being effective. They are constantly looking for better ways to achieve the same outcome.

Don’t sweat the small stuff

Busy people tend to get lost in the minor details whereas productive people tend to focus on the macro issues. Once you get from A to B in the most efficient way possible, it doesn’t really matter which route you took to get there or what else you did along the way. Focus on hitting each milestone along the way to achieving your business objectives and don’t sweat the small stuff.

Set your own direction

Busy people tend to be reactive and let others set their direction. Productive people tend to set their own direction and they are proactive in moving forward with each of their business objectives. Industry norms can try to set your direction of travel. However, if you want to move forward in a way that embraces new and innovative ways of doing things, it’s best to choose your own path to achieving each of your objectives.

The power of why?

Busy people tend to say yes and don’t really challenge why others are asking them to do things. Productive people tend to ask “why”? They challenge others with questions like “Why are we doing this” and “how does investing time in this particular activity help us to achieve the objectives of our business?”

Don’t try to do everything yourself

Busy people tend to do everything themselves. More productive people tend to use the tools and resources available to them in order to get things done in the most efficient manner. If a particular task has a high rate of recurrence or isn’t a particularly good use of your time, either hire someone cheaper to do it or outsource it.

Tax Efficient Child Care Schemes

Earlier this year the government announced that no new childcare voucher schemes could be set up after 5 October 2018. This was a six month extension from the previous 5 April 2018 end date. If those employers offering such schemes at 5 October are prepared to keep administering their scheme then they will continue to be available but will eventually be phased out.

The current scheme allows employers to provide vouchers to employees to pay for care of their children up age 16. Vouchers to the value of £55 a week can be provided tax free to basic rate taxpayers with differing tax free amounts for higher rate and additional rate taxpayers.

The replacement scheme is the government’s “tax free” childcare account which started this year for children up to age 12. Under this scheme the government tops up the savings in the childcare account by 25% up to £2,000 per child per year (£4,000 for a disabled child).

Thus, savings of £8,000 would be topped up by the government to £10,000 and the £10, 000 could then be used to pay Ofsted registered childcare providers such as nursery fees, childminders, after school clubs and summer camps.

Unlike childcare vouchers, the new childcare accounts will be available to both employees and the self-employed.

 

Sick pay for elective surgeries

As elective surgeries such as plastic or cosmetic procedures continue to grow in popularity it is important to apply a consistent approach to this issue but remember that it may also need to be flexible. It can be frustrating for employers when their employees take prolonged periods of time off work due to illness but you should ensure they are fully aware of the obligations placed upon them during this time.

It is highly likely that the effects of surgery will leave an employee unable to work for a period of time, meaning they will require time away from work to recover. You are required to provide Statutory Sick Pay (SSP), currently £92.05 per week, to all employees who meet the qualifying conditions. All employees who meet eligibility requirements should receive this regardless of their condition, including if the employee chooses to have surgery that is otherwise not necessary for their current health requirements.

This changes slightly when employers provide contractual sick pay, which is an enhanced form of payment for sickness that is set independently by the employer. Whilst the employer must still follow the basic statutory requirements of SSP they can reserve the right to not provide contractual sick pay for the time off if the reason is for elective surgery and this is clearly outlined in their contract of employment. If the contract states that sick pay will be provided for all sickness absence, there is little argument for withholding it and your client would be obliged to provide payment.

It may be advisable to implement and maintain a policy where an employer is able to withhold contractual sick pay depending upon the specific circumstances. However, bear in mind that a decision to undergo surgery may be highly important to the employee and related to a disability in which case it may breach anti-disability discrimination laws to deny the employee full payment. Some elective surgeries may be undertaken as a method to combat mental health problems and, again, if the mental health condition to taken to be a disability, could require payment during the absence as a reasonable adjustment regardless of a policy to withhold contractual sick pay for elective surgeries.