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Five ways to pay less Capital Gains Tax

November 30, 2015 by Carol Cheesman

Five ways to pay less Capital Gains Tax{{}}A capital gain is the difference between what you paid for something and the amount you sell it for. It's good news, right? But the bad news is, you have to pay tax on this - Capital Gains Tax.

The amount of tax you pay depends on both your capital gain and your income. Here's how it works:

  • First, calculate your gain.
  • Then, subtract your annual tax-free allowance (£11,100 for the 2015-16 tax year and £11,000 for the 2014-15 tax year).
  • Subtract allowable expenses.
  • The remaining figure is then added to your income: if the total is below the higher rate tax, then your gain is taxed at 18%. If your gain pushes your income into the higher rate band, then the amount of your gain above that threshold will be taxed at 28%.

However, there are five ways that you can cut your Capital Gains Tax bill:

1. Use the annual exemption

You could make a transfer to a spouse or civil partner as they are entitled to their own annual exemptions. This is a good way to make the most of this allowance, but do not make any arrangements to effect the sale until the transfer is complete. You should leave a reasonable amount of time between transactions. Also specify that the transfer is absolute and unconditional.

It's important to note that if unused, the annual exemption cannot be carried forward. Plan ahead to make the best use of each year's allowance.

2. Defer disposals

If the annual exemption for the current year has already been used, consider deferring the sale of assets until after the end of the tax year. By doing this you will utilise the 2016-17 annual exemption and defer the payment of any Capital Gains Tax due by 12 months until 31 January 2018.

3. Crystallise your losses

If you have any investments standing at a loss, it can be beneficial to crystallise them - especially if a capital gain has pushed you into the 28% bracket.

A capital loss must be claimed within four years of the end of the tax year in which it occurred for relief to be given. Subsequently, the loss claimed can be carried forward indefinitely.

Capital losses realised in respect of unquoted shares can, in some cases, be relieved against income. Relief must be claimed within 12 months of 31 January following the end of the relevant year of assessment.

4. Try "bed and spousing"

The practice of bed and breakfasting is where stocks or shares are sold and then repurchased shortly afterwards to secure a higher acquisition cost. This practice is negated by the rule requiring a disposal to be matched with any acquisition of securities of the same class in the same company in the next 30 days.

However, this applies only to a repurchase by the same person. Your spouse or civil partner can repurchase the shares without this rule being applied; this is what's known as "bed and spousing".

5. Make a negligible value claim

If an asset becomes worthless, a negligible value claim can be made. Think of the worthless asset as having been sold for its current market value - which is zero - and then reacquired for the same price: zero. This puts your base cost for Capital Gains Tax purposes at nil.

A capital loss arises at the time of the owner's deemed disposal of the asset, therefore your loss can be treated as arising in the tax year in which the negligible value claim is made; or, provided HMRC is satisfied that your asset was of negligible value in the two years immediately preceding your claim, in any of the previous two tax years.

It's essential to plan ahead if you want to minimise any Capital Gain Tax. Consider other aspects of your finances and investments, talk to your accountant and choose a strategy that benefits you most.

Copyright © 2015 Carol Cheesman, principal of Cheesmans Accountants based in Islington, North London.

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Ten ways to stay on top of your taxes

November 26, 2015 by Tax Donut contributor

Ten ways to stay on top of your taxes{{}}There is no doubt that staying on top of your tax obligations can be challenging, especially for small business owners who are already focusing all their time and efforts on running and growing their business.

To help ease your tax liabilities, here are ten useful tips for small businesses:

  1. Make a list of your key accounting dates. Submitting the correct documents on time is key to stopping you from incurring any fines. You may wish to appoint an accountant to handle this, as they will be able to advise you of all relevant deadlines and will help complete any submissions required by HM Revenue and Customs (HMRC).
  2. Be organised. HMRC states that you must keep all your documents, such as invoices and expense receipts, for at least six years - just in case your company is ever investigated (even though this is highly unlikely). As well as retaining the original hard copies, it is advisable to scan them and back them up on a cloud-based application such as Dropbox or Google Drive.
  3. Keep your receipts safe. If your company is VAT-registered, you will need to keep all receipts for any business costs that have been incurred for the company. For example, if you buy some materials for a project, you will be entitled to claim back the VAT. You must have a record of the transaction in order to claim the VAT back.
  4. Cloud accounting. Using an online accountancy platform such as Nixon Williams Vantage, can enable you to have 24-hour access to your business finances, so you can see a snapshot of your financial accounts wherever you are. This is beneficial as you will always know how much money you can withdraw, and how much should kept aside for your annual tax bill.
  5. Salaries and dividends. This can get quite complex depending on your situation. If, for example, you operate through a limited company, you can take out a set salary and then collect dividends from your company’s profit. Once you’ve appointed your accountant, they will give you the best advice on how to pay yourself.
  6. Register for the Flat Rate VAT Scheme. If your VAT turnover is less than £150,000 (this is your turnover excluding VAT) and you don’t have many expenses, it could be beneficial for you to register for the VAT Flat Rate Scheme. This scheme allows registered businesses to charge VAT on their invoices at the standard 20% on the net sale amount, but pay back HMRC a lower rate. For example, if you are working as an IT contractor you would charge 20%, however you would only be expected to pay back 14.5%. This percentage varies depending on the industry you are in.
  7. Working from home allowance. If you complete any work from home, you may be able to recover some of the additional household costs such as utility bills as a business expense, which can be done by utilising the home-office allowance. Your accountant will be able to help you understand what and how much you could claim.
  8. Pensions. You should consider paying into a pension scheme where your business can invest pre-tax income, to set you up for later in life.
  9. Childcare vouchers. This tax-free system has been applied to the self-employed from 2014 and helps people who have registered limited companies pay their childcare through the company and claim tax relief on the amount invoiced, therefore reducing the total amount of corporation tax they pay. You can look into this scheme if you are a self-employed parent with a registered limited company, however be aware that not all parents qualify for this scheme.
  10. Personal allowances. Both married couples and civil partners could be eligible for a personal marriage allowance, whereby if one of you is earning less than £10,600 and the other is paying tax at the basic rate, you could receive up to £212 in a tax-free personal allowance.

Copyright © 2015 Rachel Smith, technical writer at Nixon Williams's Vantage Online Accounting.

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Autumn Statement Spending Review headlines

November 25, 2015 by Fiona Prior

Autumn Statement Spending Review headlines {{}}The UK's business groups and leaders have urged George Osborne, Chancellor of the Exchequer, to minimise the impact of today's Autumn Statement on businesses and to implement changes that will enable businesses to grow.

The ICAEW called on the Chancellor to avoid dropping any more 'bombshells'. The CBI joined in pressing the Government to "act on major infrastructure decisions that need making now" and to "deliver a package on Business Rate reform that makes the regime simpler, fairer and more competitive".

This view was supported by John Allan, National Chairman of the Federation of Small Businesses who said "It is essential we have a reliable transport system fit for the 21st century."

Businesses are already bracing themselves for the next tax year which will see the introduction of the new National Living Wage – which is expected to affect more than half of all employers - the Apprenticeship Levy and the continued roll out of workplace pensions. Measures that will help ease the introduction of these regimes would be welcomed across the board.

However, the Chancellor must find another £20bn of public spending cuts if he is to reach his target of eliminating the deficit by 2019-20. Faced with such sizeable cuts the picture was not looking good. So what did he announce?

  • Tax reform: Tax returns to be replaced by new digital tax accounts which will be created for every small business and tax payer by 2016/17.
  • Business rates: Small business rate relief will be extended for a further year.
  • Business rates: Uniform Business Rates will be abolished and local authorities will be able to keep 100% of business rates raised locally.
  • Income tax: Devolved powers to be transferred to Wales without a referendum.
  • Support for enterprise: There will be 26 new Enterprise Zones including seven new zones in the 'Northern Powerhouse'. The existing, multiple sources of funding will be combined into a new single Local Growth Fund.
  • Innovation: New £165 million fund to provide loans to companies through Innovate UK.
  • Investment funding: New Northern Powerhouse Investment Fund to support small businesses in the North West, Yorkshire and the Humber and Tees Valley.
  • Capital Gains Tax: Gains on residential property to be paid within 30 days of the disposal of the property from April 2019.
  • Corporation tax: There will be new legislation to prevent tax avoidance through the abuse of the capital allowances and leasing arrangements and arrangements that use partnerships to obtain relief.
  • Stamp duty land tax: New 3% surcharge on property transactions for additional properties such as second homes and buy-to-let properties.
  • Environmental taxes: Energy Intensive Industries will be permanently exempted.
  • Company cars: The removal of the diesel supplement for company cars will be postponed until 2021.
  • Infrastructure: 50% increase on transport investment over the course of this parliament to include High Speed 2 and £13.4 billion on the Roads Investment Strategy and new investment in facilities in Kent to alleviate the problems caused by Operation Stack.
  • Apprenticeships: New apprenticeship levy will be set at 0.5% of wage bill from April 2017. There will be an allowance of £15,000 which means all employers with a wage bill below £3 million per year will be exempted from the levy.
  • Free child care: From September 2017 free child care will be doubled to 30 hours per week for three and four year olds. There will be a minimum income level equivalent to working 16 hours per week on the National Minimum Wage.
  • Pensions: State pension will rise to £119.30 per week from April 2016.
  • Pensions: The next two phases of minimum contribution increases for auto-enrolled pensions will be aligned with the tax year. 
  • Council tax: Councils with responsibility for social care will be able to levy a new, 2% social care precept on council tax to be spent on adult social care.

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Is your year-end threatening the sustainability of your business?

September 22, 2015 by Tax Donut contributor

Is your year-end threatening the sustainability of your business? {{}}Whether trading as a sole trader, partnership or limited company, every business needs a period up to which it makes its accounts and other returns. You may think that, as with your personal tax self-assessment returns, the year-end for your business must be 5 April, but that is not so.

There are some quite complex rules about the period of accounts that are reported in a tax return, but basically you can choose a year-end that is convenient to you, one that makes sense commercially and fiscally.

The two most popular dates for a year-end are 31 March (as close as possible to 5 April) and 31 December 31 (the end of the calendar year). But these dates don't suit everyone.

Seasonal demand

For example, let's imagine your business is selling Christmas trees. You need to assess the level of stock that you are holding as at the year-end. This means counting it, valuing it, considering whether it is of a fair value, etc, so it would be madness to choose a year-end when your stock is at its maximum.

A Christmas tree seller would hope to have sold all of their stock by 31 December, but there's all the accounting work to do to complete all the transactions that took place in the run-up to Christmas, and there could well be a lot of items that straddle the Christmas period, such as the receipt of final sales invoices and receipt of final purchase invoices.

If not 31 December, how about 31 March? Stocks of Christmas trees would be low then. But if you're a limited company, 31 March as a year-end may not be wise. This is because tax must be paid within nine months and one day of the year-end, which means, with a 31 March year-end, corporation tax must be paid by 1 January the following year. Any personal tax bills (if you are not totally under PAYE) have to be paid by 31 January. That could squeeze your cash flow.

Three questions

Around February/March (having collected any debtors from November/December tree sales), cash reserves should be at their peak. Therefore it may be appropriate to choose a year-end requiring tax to be paid on 1 April, which would make the year-end 30 June. To check if this works as a date for a year-end, we need to answer yes to three questions:

  • After this date, would stock levels be low? Yes.
  • Would the period when accounts would be prepared (August/September) be relatively quiet? Yes.
  • Would the tax payment date be good for cash flow? Yes.

You can see that by asking these questions about dates before and after 30 June, securing three yeses becomes more difficult. For example, a later date could drop year-end-related accounting work into a busy trading period, and an earlier date may mean tax bills becoming due when new stock has to be purchased.

Sector focus

You need to ask the above three questions in relation to your business, but of course there are other considerations. One factor that could override all others is whether everyone else in your industry uses the year-end date – do you want to be out of sync when your competitors are comparing results?

Choosing a year-end that suits your particular business and/or industry is incredibly important. Get it wrong and it could merely create more work and stress, but, if you get it really wrong, it could also mean game over. What anyone about to embark on a new business or anyone already in business needs to do is seek sound advice tailored to their business. Just think about those Christmas trees – they're all different.

Copyright © 2015 Carol Cheesman, principal of London-based Cheesmans Accountants.

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Posted in Tax self-assessment | Tagged Year-end | 0 comments

Tax saving and business contingency plans

September 08, 2015 by Tax Donut contributor

Tax saving and business contingency plans{{}}Small businesses tend to be reliant on one or two key people. These individuals are the reason that these businesses turn a profit. Should something unforeseen happen to these people, it has huge implications for the business such as making less profit, increased staff costs or lost valuable knowledge and experience.

To protect against this, there is an insurance called keyman cover. It protects the business from the death or critical illness of a key individual. It acts as a business contingency plan, providing valuable funds directly to the business when it needs them most. An added plus for this insurance is that in some cases it can be tax deductible.

HMRC guidelines state that the insurance must: "Meet a loss of trading income arising from the loss of the service of the key person insured" and that: "Premiums are incurred wholly and exclusively" for the purpose of that business. Basically, if the insurance is taken out specifically to cover the loss of business profits and is paid for solely for the use of the business, it is a deductible business expense and is then an allowable expense for tax. 

Obviously, there are limitations, if the insurance the employee is protected by owns more than a 10% share capital, then HMRC's tax stance changes.

However, there is a completely tax-deductible insurance, which has no tax implications on payout and has been created especially for directors of small businesses. This is known as relevant life insurance. 

Relevant life cover is a singular death-in-service plan, otherwise known as life insurance. The company takes it out for the director or employee, as an employee benefit. The insurance pays out on the death or critical illness of the insured. To guarantee there are no tax implications on the payout, the cover is written into trust, bypassing inheritance tax and arriving directly with the director or employee's loved ones.

If the employee is over the age of 75, this policy will no longer be applicable.

The information in regards to tax treatment and basis reliefs are dependent on current legislation. Individual circumstances are not guaranteed and may be subject to change.

Copyright © 2015 Michael Hubbard, Keyman Insurance adviser at Business Protection Expert.

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