Taxation of pension death benefits

A flexible approach

KEY POINTS

  • Generally, death benefits paid under registered pension plans are free of inheritance tax and are an effective tax planning tool.
  • If benefits exceed the lifetime allowance, there could be a 55% lifetime allowance charge on excess lump sum payments.
  • The recipient of death benefits depends on whether the amounts are being paid as a lump sum or by way of a FAD account.
  • Benefits paid to a bypass trust will be tax free if the scheme member dies aged under 75. No inheritance tax or income tax should apply to later capital payments made to a beneficiary.
  • If the pension scheme member dies before 75, death benefits under both routes are free of income tax and inheritance tax.
  • The relevant property rules in IHTA 1984, s 81 operate to roll discretionary trusts together for the purposes of calculating inheritance tax on bypass trusts.

Flexi-access pensions were introduced by the Taxation of Pensions Act 2014 (TOPA 2014) which came into effect on 6 April 2015. As part of the package of reforms, special beneficial rules were introduced for the taxation of death benefits. After a period of uncertainty, we now have relative tax clarity on how these rules will operate. There are several issues to consider, including:

  • how death benefits can be paid under a money purchase or defined contribution (DC) pension scheme;
  • who can benefit from lump sum and income drawdown death benefits;
  • the tax rules that apply to those death benefits; and
  • how DC pension plans can be effective for inheritance tax planning.

It is important to note that the rules on flexible pensions apply only to DC schemes. However, they apply irrespective of whether the pension plan is:

  • uncrystallised (no benefits taken); or
  • crystallised; in other words, with benefits such as the tax-free pension commencement lump sum (PCLS) taken and with the residual funds held in drawdown.

Those in defined benefit schemes who wish to use flexi-access pensions should take financial advice before deciding whether to transfer to a DC scheme.

 

Pension plans and inheritance tax planning

Generally, death benefits paid under registered pension plans are free of inheritance tax and are very effective as a tax planning tool. However, inheritance tax implications can still arise in specific situations involving ‘dispositions’ (payments of contributions, creating trusts of death benefits or making pension transfers) by people who are in serious ill health when they enter the transaction and who die within two years of the disposition.

It should also be borne in mind that if benefits – including death benefits – exceed £1,030,000 (for 2018-19) or the higher lifetime allowance (LTA) that a member has elected to protect, there could be a lifetime allowance charge. This is at 55% on lump sum death benefits that exceed the LTA.

 

How can benefits be paid?

Benefits can be paid in three ways: a lump sum, designation to flexi-access drawdown (FAD), or the purchase of an annuity.

First, the scheme administrator will normally be able to make a lump sum payment to any member of the discretionary class under the scheme rules. This may include the trustees of a pilot trust previously created by the scheme member.

Second, alternatively (or additionally) the scheme administrator can designate the pension plan into FAD for the benefit of one or more beneficiaries (nominees or dependants). The person to benefit will normally have been nominated by the pension scheme member while alive. If not, the administrator may, subject to specified rules, nominate them. Once a plan has been placed into FAD for the benefit of a beneficiary, they can drawdown all or a part of the pension fund at will or leave it invested in the pension fund. See Sheila.

For those who do not want a payment of lump sum death benefit to be made directly to an individual on their death, the choice will be between using a FAD account or using a bypass trust. The use of a FAD account for death benefits is effective, simple and tax-efficient. However, there will be drawbacks if the member wants continuing protection for vulnerable beneficiaries – or when, say, they wish to make a provision later for children from a first marriage (see below). Sometimes a combination of both routes may be appropriate. See Arthur.

Who can receive death benefits?

The recipient of death benefits depends on whether the benefits are being paid as a lump sum or by way of a FAD account. It will also be necessary to consider the scheme rules.

If paid by way of a lump sum, the following points should be considered.

  • Discretionary payment. Lump sum death benefits can normally be paid to anybody who is a member of the discretionary class under the scheme rules. This will include individuals (usually family members) and, frequently, the trustees of ‘pilot’ trusts (bypass trusts) created by the member during his lifetime.
  • Integrated trust. Sometimes the rules state that if the member has declared a trust of the death benefits under the pension plan during his lifetime, the scheme administrator must pay the lump sum death benefits to those trustees. This is known as an integrated trust. A payment to this trust will only be made if the scheme administrator decides to pay lump sum death benefits (as opposed to designating the fund to drawdown) or has to pay a lump sum because the FAD option does not exist for the scheme. The trustees of the integrated trust then decide which of the trust beneficiaries benefit and when.

On flexi-access drawdown, following provisions introduced in TOPA 2014, it is possible for death benefits to be paid to beneficiaries who are ‘dependants’ and ‘nominees’ and, on the death of an existing FAD beneficiary, ‘successors’.

It is important to note that, to retain the inheritance tax freedom on death benefits (more on which later), the scheme administrator must retain discretion over who receives
death benefits.

When deciding how death benefits should be paid, it is worth bearing in mind the following points.

  • The choice of route will normally be made by the scheme administrator exercising their discretion, but the member can guide them by completing an expression of wishes. Having considered any expression of wishes and decided whom to benefit, the administrator may then consult the beneficiary to determine the form in which death benefits will be paid.
  • The member should review the letter of wishes regularly because circumstances can change meaning that it may be appropriate to change the way death benefits are paid. Because of the change in the taxation of benefits that takes place at age 75 (see below), it is particularly important to review the position in the run up to that date.

 

Taxation of death benefits

Ignoring the question of the LTA, it is necessary to consider whether income tax or inheritance tax will apply to death benefits.

 

Income tax

The position on the income tax treatment of death benefits depends on whether the member (or FAD beneficiary) dies before they turn 75 or at 75 or over.

If the former, the treatment will be as follows.

  • Flexi-access drawdown. If the death benefits (within the available LTA) are designated into FAD within two years of the member’s death, there will be no tax charge on later withdrawals made by the designated beneficiaries. If an uncrystallised fund is not designated to drawdown (or used to buy a dependant/nominee’s annuity) within two years of a member’s death, subsequent income payments will be taxed on the recipient.
  • Lump sum. There will be no tax charge on lump sum death benefits as long as the scheme administrator pays them within two years of the member’s death. If a lump sum is paid out after that point, or the date the administrator first knew of the death, the amount becomes taxable. If the beneficiary is an individual, the tax is at the recipient’s marginal rate(s). If the individual is acting as a trustee of a trust other than a bare trust (or a personal representative, director of a company, partner in a firm or member of a limited liability partnership), the amount will be subject to the special lump sum death benefit charge (SLSDBC) of 45%.

If a person dies under age 75, the question arises as to whether there is any tax difference in paying death benefits through a bypass trust or flexi-access drawdown.

Benefits paid to a bypass trust will be tax free. However, as with all discretionary trusts, there can be tax implications on later payments made from it to a beneficiary.

If benefits are designated to FAD, no tax should arise on subsequent drawdown payments made by the beneficiary. However, if the current incumbent beneficiary dies aged 75 or above and the fund remains in FAD, future drawdown payments paid to a successor will be taxable on the new beneficiary.

If the individual dies on or after 75, the treatment will be as follows.

  • Flexi-access drawdown. If death benefits are designated to FAD after the death of the member on or after age 75, later drawdown payments made by a beneficiary will be charged to income tax under PAYE at the individual recipients’ rate(s) of tax.
  • Lump sum. If a lump sum death benefit is paid to an individual, it will be taxed as income of that beneficiary. Further, if it is paid to a trust (other than a bare trust) there will be a 45% SLSDBC. This charge will therefore apply to payments to most bypass trusts (see below). However, F(No 2)A 2015, s 206 introduces relief against this 45% tax charge if subsequent payments are made to beneficiaries of the trust.

The current position on payments to trusts after the death of a member aged 75 or over is therefore as follows:

  • If a lump sum payment is made to a trust, the scheme administrator must pay the SLSDBC of 45%. So, if the death benefit is £100,000, £45,000 goes to HMRC and £55,000 to the trust.
  • If the trustees then distribute capital out of the trust to a beneficiary, that sum (plus the appropriate tax credit on it) is taxed as the recipient’s income in that tax year.
  • Any tax credit on the payment that does not ‘frank’ the actual tax liability on the payment out of the trust can be offset against the individual’s other income tax liability in that year – but cannot be carried back or carried forward.

This is illustrated by the example of John’s Trust.

Looking at John’s Trust, it should be noted that it is not possible to carry forward (or back) the tax credit on a payment out of the trust. However, HMRC has recently confirmed that if the overpaid tax on the lump sum exceeds the tax the beneficiary pays on other income, they will be able to recover the overpayment from HMRC.

HMRC has also confirmed that it is up to the trustees to categorise the payment made to a beneficiary in terms of whether it represents the original capital received from the pension scheme or subsequent growth on those funds within the trust.

The option to pay death benefits as a FAD or a lump sum continues to exist on the death of later beneficiaries.

 

Inheritance tax

In general, under the new flexible pension regime, pension death benefits will be free of inheritance tax. However, several aspects require closer examination.

 

Letters of wishes or nominations

For death benefit payments to be free of inheritance tax, the scheme administrator must retain discretion on who should benefit on the member’s death. In this respect, HMRC has confirmed that the nomination of a dependant, nominee, or successor by a pension scheme member or beneficiary will not cause them to be treated as making a transfer of value for inheritance tax purposes as long as:

  • the member/beneficiary does not have power under the scheme’s rules to irrevocably choose the beneficiary who should be entitled to death benefits on their death; and
  • the administrator has a discretionary power to choose who should receive death benefits.

So, for example, even though the pension scheme member may have nominated person A to receive income drawdown death benefits, as long as the scheme administrator could still override this nomination and pay lump sum death benefits to person B, there will be no inheritance tax.

This applies even in cases when the administrator has, in effect, no option but to follow the member’s nomination if it is desired to pay FAD income benefits.

This official view is now embodied in HMRC’s Inheritance Tax Manual at IHTM 17052.

 

IHT exit charges on payments to beneficiaries

HMRC has also confirmed that the naming of a dependant/nominee who is entitled to FAD death payments, followed by the scheme administrator exercising their discretion to designate FAD funds in the beneficiary’s favour, would not give rise to an inheritance tax exit charge from the discretionary trust as regards the whole fund. This is on the basis that a FAD fund is an arrangement under which property continues to be held for the purposes of a registered pension scheme. It is therefore within IHTA 1984, s 58(1)(d) and is not relevant property. Any payment out of a FAD fund is therefore not an exit from a relevant property trust even if it is made more than two years after the member’s death.

Omission to exercise a right

Until 2011, there was a potential inheritance tax problem if a person was old enough to draw pension benefits (aged 55 or more) but chose not to on the basis that he was in ill health and might soon die. In such cases, it might have been better to keep the plan intact and leave it free of inheritance tax as death benefits to a beneficiary. On the other hand, had the benefits been drawn and not spent they would have been added to the deceased member’s estate on death.

IHTA 1984, s 3(3) – the ‘omission to exercise a right’ rule – prevented the avoidance of inheritance tax in such cases and could cause the deceased to be treated as making a chargeable lifetime transfer of value which took place immediately before death. However, the application of the rule was complicated, as shown by DM Fryer & Others (Personal Representatives of Ms P Arnold) v HMRC (TC398).

Fortunately, under changes to s 3(3) in 2011 (new IHTA 1984, s 12(2ZA)) and in 2016 (new IHTA 1984, s 12A) an inheritance tax charge cannot now arise on pension funds in such cases. In effect, this change means that the value of a FAD pension fund will not be treated as being in the taxable estate of a member, a nominee or a successor on their death. This applies notwithstanding that the beneficiary, in effect, has complete access to the fund and could have drawn it until the date of death. Therefore, the funds are, in general, free of inheritance tax.

Because there is no tax (income tax or inheritance tax) on pension death benefits if the member dies before 75, from an inheritance tax planning standpoint, it will currently be best for a living pension scheme member to draw down and spend other assets (such as collectives and ISAs) leaving the pension fund intact. Those other investments are liable to inheritance tax, so it makes sense to reduce their value during the member’s lifetime. As age 75 approaches it is important to review the arrangements.

 

Flexi-access drawdown or bypass trust?

The new flexibility to pass pension scheme money through generations has caused people to question whether the use of FAD for death benefits is now preferable to paying a lump sum benefit to a bypass trust.

The prime objective of such a trust is to provide a wealth protection mechanism to the member’s family in the future and perhaps tax efficiency. Does a FAD account, if it permits ongoing flexi-access death benefits, provide the same benefits as a bypass trust with the added advantage of ongoing investments being held in a tax-free environment?

Space does not permit a full analysis, but the following are some of the main issues to consider when comparing the two routes.

  • Ongoing funds.
  • Death benefits.
  • Children from previous marriages.
  • Divorce and bankruptcy
  • Loans to beneficiaries.
  • Ongoing inheritance tax.

 

Taxation of ongoing funds

Money kept in a FAD account will continue to grow free of income tax and capital gains tax.

On the other hand, if lump sum death benefits are paid to a bypass trust, income within that discretionary bypass trust that exceeds £1,000 will be taxed at 38.1% (dividends) and 45% (other income). Capital gains of more than £5,850 will, in general, be taxed at 20%. Of course, the income tax and capital gains tax downsides of a bypass trust can often be reduced by choosing tax-efficient investments, such as collectives geared towards capital growth or single premium investment bonds.

Overall, the retention of funds in a FAD pension arrangement looks more tax efficient.

 

Taxation of death benefits

If the pension scheme member dies before 75, death benefits under both routes are free of income tax and inheritance tax. However, if death occurs on or after 75, any lump sum paid to a bypass trust will be charged to income tax at 45%. Although credit for this tax can be given to beneficiaries when money is paid out of the trust, the 45% SLSDBC is a substantial initial ‘hit’ on the value of the trust.

By contrast, payments from a FAD account will be taxed only when they are drawn by the beneficiary. They can therefore exercise control over when the tax is paid.

 

Benefiting children from previous marriages

For pension scheme members who have remarried, want their new spouse to benefit from the fund throughout the rest of their life, but want children from an earlier marriage to eventually benefit from any residual amounts in it, the bypass trust will be a better route to follow.

 

Divorce and bankruptcy

Irrespective of the tax issues, it is wise to remember that, if the FAD route is chosen, the value within that account is very likely to count as part of the dependant’s, nominee’s or successor’s assets in the event of bankruptcy or divorce proceedings. This is because the beneficiary has become entitled to FAD and they can, in effect, draw down the whole fund, resulting in it being considered as ‘available’ to them.

In this case, the bypass trust will tend to offer more protection over the funds.

 

Payments of loans to beneficiaries

When the bypass trust route is used, the trustees could consider making payments to a beneficiary (say the surviving spouse) in the form of a loan when access to funds is required. As long as the loan is spent, this should improve inheritance tax efficiency on the surviving spouse’s death.

 

Ongoing inheritance tax

Because a bypass trust will be a flexible or discretionary trust, it will be subject to the inheritance tax relevant property rules. The FAD account will not.

So there can be a periodic charge on ten-year anniversaries and an exit charge when property leaves the trust. Because the trustees will normally be entitled to a nil rate band, there should be a charge only on amounts above that threshold and then at a maximum rate of 6% (30% of 20%).

The relevant property rules in IHTA 1984, s 81 operate to roll together discretionary trusts for the purposes of calculating inheritance tax. So, if property moves from trust A to trust B and both are relevant property trusts, trust B will be treated as starting when trust A did.

On the basis that a pension scheme represents a trust of a member’s benefits, this means that if death benefits are paid to a bypass trust, that trust will, in fact, be treated as beginning when the member joined the original pension scheme (assuming it is either trust-based or contract-based and the scheme administrator has a power to appoint benefits).

Therefore, if payments to the bypass trust come from more than one trust-based pension scheme (even if they have moved through one such pension plan to another, say as part of a consolidation process), there may be multiple trusts for inheritance tax purposes within the bypass trust and more than one nil rate band will be available.

 

Third, as another option (or in addition), the scheme administrator may decide to buy an annuity for a dependant or nominee. This will give the recipient a guaranteed income for life but with no access to capital. Annuity rates remain at relatively low levels and therefore returns are limited.

It should be remembered that it is not essential to pay just one form of death benefit – a mixture can be arranged.

Taxation of pension death benefits

By:

Developments on Making Tax Digital for VAT

Where are we now?

KEY POINTS

  • Businesses will not be mandated to use Making Tax Digital until April 2019 and then only for those above the VAT threshold.
  • In April 2018, simple VAT-registered entities were invited to join the pilot programme.
  • Interested parties have time to pause and aim for a more achievable implementation date.
  • HMRC has published a VAT guide, stakeholders’ communication pack and list of software suppliers.
  • Bridging software that will enable data to be taken from spreadsheets and converted into an MTD-friendly format is becoming available.
  • The government will not widen MTD before April 2020 at the earliest.

What? A minister who listens? It’s a little over a year ago since the then recently-appointed Financial Secretary to the Treasury, Mel Stride, published a written statement (tinyurl.com/HMT-7423) responding to disquiet about the proposals for Making Tax Digital (MTD). This said: ‘Having listened carefully to the concerns raised by the Treasury Select Committee, parliamentarians and stakeholders, the government is announcing policy changes that will be reflected in the legislation to be introduced.’

He continued: ‘Businesses will not be mandated to use the Making Tax Digital system until April 2019 and then only to meet VAT obligations. This will apply to businesses with a turnover above the VAT threshold. Businesses with turnover below the VAT threshold will not be required to use the system but can choose to do so. Businesses will also be able opt in for other taxes, benefiting from a streamlined, digital experience.’

Mr Stride’s action was a commonsense move born out of a series of delays that had beset the rollout of MTD. These dated from when George Osborne announced ‘the death of the tax return’ in his March 2015 Budget speech although, I hasten to add, they were not of HMRC’s making.

 

Impact of the announcement

The effect of this about-face was equivalent to a release of pressure from a safety value. All parties could pause, regroup and aim for the more achievable April 2019 target with a much-reduced administrative burden.

Although income tax mandation for the self-employed and unincorporated landlords (hereafter both referred to as the self-employed) might be off the table in the short term, HMRC promised to continue working with software developers along its original delivery roadmap. The aim was to ensure that MTD-compliant products from third parties would be available for those wishing to join the new income tax pilot.

 

What happened next?

In response, almost all software companies redeployed their internal development resources away from attempting to meet the demands of HMRC’s MTD income tax quarterly filing requirement to ensuring delivery of the more straightforward VAT-MTD compliant products well ahead of April 2019 VAT mandation.

At the end of October 2017, HMRC released the application programming interfaces (APIs) required to transmit to HMRC all the data contained in nine boxes of information and the associated declaration that make up a traditional VAT return.

An API is, in effect, the virtual plumbing (programming) required to connect third-party software to HMRC’s platform so that data can be transmitted to and received from it. This is in much the same way as banking apps on a smartphone can send and retrieve data from a bank’s back-end system.

In November, HMRC began to accept the transmission of technical data (test data) from developers as a way of testing that the VAT APIs embedded into their software worked.

Then, in early April 2018 and without a fanfare, HMRC invited VAT-registered entities with the simplest of affairs to sign up to join its MTD-VAT pilot. On 26 April, it released the APIs that developers required to enable their software to transmit live data straight to HMRC’s enterprise tax management platform (ETMP).

Soon afterwards, HMRC received the first MTD-compliant VAT submission.

As MTD is rolled out and more heads of duty are moved on to HMRC’s EMTP, taxpayers will be able see their complete financial picture through their digital account, just as they do in online banking. In the longer term, HMRC’s publication Making Tax Digital for Business: VAT Guide for Vendors states: ‘They will be able to set an over-payment of one tax against the under-payment of another. It will feel like paying a single tax.’ (See here)

 

Private testing

Although it may be accepting live data, VAT-MTD is in a controlled period of testing – known as a private beta testing phase. Only applicants with simple VAT affairs that meet HMRC’s initial tight admission criteria are accepted into this live pilot.

It is likely that the MTD-VAT pilot has significantly fewer than 500 VAT-registered entities taking part now. However, assuming all goes well HMRC will gradually relax its selection criteria, thus permitting a greater range of entities to join.

 

Latest developments

On 13 July, HMRC published:

  • an MTD VAT guide (VAT Notice 700/22: Making Tax Digital for VAT);
  • an HMRC communication pack for stakeholders; and
  • a list of software suppliers supporting Making Tax Digital.

All can be found on the MTD for VAT collection page.

With about eight months to VAT mandation, pressure from commentators to compel HMRC to publish its MTD VAT guide had been ramping up. Not least because guidance was required to clarify what constituted digital record-keeping, what was meant by functionally compatible software and what digital links looked like.

At point 3.2.1.1, the guide covers the post-April 2019 one-year penalty soft landing for those mandated to join next year but who will be unable to establish digital links between one piece of accounting software and another in time.

Many stakeholders, such as trade bodies and software suppliers, had been pressing HMRC to publish the communications pack to provide information and source material so that they in turn could inform their stakeholders.

The publication of the software supplier list allows those advising on or faced with complying with the April 2019 VAT mandation to gain a level of reassurance that large third-party software solution providers such as Intuit have market-ready, VAT-MTD compliant software.

 

Bridging software

From an MTD perspective, bridging software is a third-party, API-enabled software product capable of drawing data digitally from a spreadsheet, turning it into a format compatible with MTD for VAT and then validating it before submitting the information to HMRC at the touch of a button.

Until recently, this long-promised piece of software had been assuming the mythical status accorded to the likes of the Loch Ness Monster – in other words, everyone has heard of it, everyone has a view of what it would look like but … no one had actually seen it.

All that is changing. BTC Software and PwC have recently announced they have market-ready bridging products. What’s more, PwC plans to make its product free to charities that might otherwise struggle to meet the cost of complying with HMRC’s VAT-MTD requirements.

 

Expect others to follow…

The great thing about bridging software is that it promises an affordable way for VAT-registered entities, such as spreadsheet users, to comply with HMRC’s MTD digital end-to-end requirement. It also affords businesses of significant size, often with disparate systems that do not speak to one another or groups with non-integrated accounting, the same opportunity.

What bridging software does not do is provide the level of added-value functionality, such as near limitless management reports, built in as standard to third-party, cloud-based accounting packages.

 

So where are we now?

There are just over 20 developers with VAT-MTD-ready products. Further, HMRC has stated that more than 150 software suppliers have registered an interest in providing software for VAT-MTD. Of those, more than 40 have said they will have software ready during the private beta phase of the VAT-MTD pilot. (See here.)

All this, combined with the filing of MTD-compliant VAT returns during the private beta period puts the department in a much better place to deliver VAT-MTD than it was immediately before Mr Stride’s announcement. That said, I see the position as finely balanced. We are less than eight months away from mandation and it does not look like VAT-MTD will emerge from its private beta phase anytime soon.

At the end of June, the British Chamber of Commerce called for a postponement to ‘allow the Revenue to focus its immediate attention on supporting businesses through the Brexit process, which must be a key priority’. Others, like myself, remain more optimistic.

However, a limited number and type of VAT-registered entities are engaged in private beta testing and there is no clear indication of when the public beta phase will start. Consequently, there will come a point soon – and certainly before the end of the summer (before the middle of October in Civil Service speak) – when HMRC will need to give serious consideration to extending the pilot testing phase by deferring the mandation start date.

 

A glance into the future

Further into his July 17 written statement Mr Stride wrote: ‘The government will not widen the scope of MTD beyond VAT before the system has been shown to work well, and not before April 2020 at the earliest. This will ensure that there is time to test the system fully and for digital record-keeping to become more widespread.’

Given the limited scope of the VAT-pilot and that VAT mandation is just over eight months away, I believe there is insufficient time, using the minister’s own words, ‘to test the system fully and for digital record-keeping to become widespread’ to garner the evidence required to support an earlier extension to mandation.

As well as this, and for the reasons stated earlier, there is not the income tax MTD-compliant third-party software products available (HMRC has a list of four). This situation looks unlikely to change until VAT-MTD is successfully delivered and the software industry is reassured that ministers have an appetite for mandation. Experience suggests that, once an announcement about mandation is made, it will change quickly as developers move quickly to capitalise on the opportunity.

Despite being a passionate believer in what MTD has to offer, and that the future of the accountancy profession is in the cloud, I cannot see further mandation returning to the table before 2021 at the very earliest. In the meantime, ministers and HMRC must contend with that other small cloud on the political horizon … the travails of Brexit.

Developments on MTD for VAT

Software suppliers supporting Making Tax Digital for VAT

More than 130 software suppliers have told HMRC that they’re interested in providing software for Making Tax Digital for VAT. Over 35 of these have said they’ll have software ready during the first phase of the pilot in which HMRC is testing the service with small numbers of invited businesses and agents. The pilot will be opened up to allow more businesses and agents to join later this year.

Software suppliers

The following software suppliers have both:

  • tested their products in HMRC’s test environment
  • already demonstrated a prototype of their software to HMRC

HMRC will update this list as testing progresses. Check with your existing software supplier to see if they will be supplying suitable software for the pilot or contact one listed below:

 

HMRC – Software suppliers supporting MTD for VAT

 

Entrepreneurs’ Relief

Entrepreneurs’ relief explained (ER)

There are many entrepreneurs who wish to sell or give away their business due to several reasons. Some simply do not have time to manage their well-established business while others are not satisfied with their company or business. Irrespective of what the reason may be, entrepreneurs may gain benefits by selling or giving away their business at a reduced tax rate. This benefit is called entrepreneurs’ relief.

Entrepreneurs may sell or give away their business and claim entrepreneurs’ relief. Entrepreneurs’ relief is available for up to £10,000,000 lifetime gains. This certain amount of money is called entrepreneurs’ relief for a reason. Entrepreneurs gain tax relief at a reduced rate of 10%.

ER is available to:

Entrepreneurs’ relief is available to sole traders or partners selling or giving away whole or a certain part of their business. It is also available to company directors and employees having 5% or more shareholding.

Formulation of Entrepreneurs’ Relief

The need of entrepreneurs’ relief was felt long before when many entrepreneurs started to feel the need to sell their business or give away their business. There are many entrepreneurs who wish to sell whole or a part of their company and gain maximum benefit from it.

Increase in Entrepreneurs’ Relief since 2008

Entrepreneurs’ relief reduced the amount of Capital Gains Tax paid on business assets on or after April 2008. So the entrepreneurs’ relief began in the year 2008. Today, in the United Kingdom entrepreneurs selling or giving away their business can obtain entrepreneurs’ relief which is an allowance of £10,000,000. However, this is the modern day amount. During and after the year 2008 there have been several changes in the amount.

  • In March 2010, the entrepreneurs’ relief was up to £2 million.
  • Three months later, it was raised to £5 million.
  • In March 2011, the budget was then raised to £10 million.

Conditions and requirements for Entrepreneurs’ Relief

Entrepreneur’s relief may be considered as one of the most attractive tax benefits any entrepreneur may obtain. By taking appropriate steps, entrepreneurs may gain maximum benefit from entrepreneurs’ relief. There are some measures that need to be taken care of to gain maximum benefit from entrepreneurs’ relief. If the requirements for availing entrepreneurs’ relief are fulfilled appropriately, then any entrepreneur selling or giving away their business may gain a lot of benefits and the entrepreneurs’ relief may prove to be quite useful.

  • The first and the most important thing to keep in mind is that all the conditions for entrepreneur’s relief must be met for at least 12 months. This means that any entrepreneur claiming entrepreneurs’’ relief must keep the business appropriate for the relief at all times.
  • Today, the limit of entrepreneurs’ relief is £10 million per person. It is a considerable sum and any entrepreneur selling or giving away their business can be entitled to have this money.
  • Any start-up business that is unhappy or unsatisfied with the outcome can gain benefit from the entrepreneurs’ relief. By earning this amount of money, any entrepreneur may gain insight and acquire resources to start from scratch.

Since 2008, when entrepreneurs’ relief was first introduced several entrepreneurs have gained benefit from entrepreneurs’ relief.

Recent changes in Entrepreneurs’ Relief

In the past couple of years, laws and policies concerning entrepreneurs’ relief have been significantly modified, as a consequence of the UK Government’s initiative and attempts to rectify the loopholes in the system. These changes are mainly related to capital gains tax.

One of the major concerns that the UK Government has been trying to resolve is the establishment of a workable policy and machinery to provide greater tax relief on an individual’s business assets than that on his personal or investment assets. The introduction of the policy that led to the reduction and elimination of tax payments in direct proportion to the period for which the assets are being held is one of the government’s attempts to extend increased support towards entrepreneurs’ relief.

Capital gains tax

In addition to the previously stated initiative, the government also introduced a policy of reduced capital gains tax rate on all gains. Under this policy, the capital gains tax, as an attempt to facilitate entrepreneurs’ relief, was decreased to a rate of 18%, on all gains acquired through the sale of a business entity.

However, capital gains tax, as an integral part of entrepreneurs’ relief policy, by the government has been subjected to further alteration. The government has applied changes to the payment of capital gains tax, mainly on the basis of higher rate threshold defined for capital gains and standard rate band. Entrepreneurs whose capital gains exceeded the higher rate thresholds were required to pay a capital gains tax at a rate of 28%, while those whose capital gains were within the stated limits of standard rate band were liable to make a capital gains tax payment at a rate of 18%.

These initiative, concerning the reduction and tapering of capital gains tax are primarily focused on encouraging entrepreneurial initiative and ensuring the prospective entrepreneurs do not feel reluctant to lay down the foundation of a new business setup, as a result of their concerns surrounding the payment of a considerable amount on account of capital gains tax, if ever in the future a business needs to be sold. It is believed that through facilitating entrepreneurs, entrepreneurial culture is to be given a boost which will eventually contribute towards the creation of more job opportunities and acceleration of economic growth.

As the significance of entrepreneurs’ relief for supporting economic growth has been widely acknowledged, the government has taken the initiative to provide further support to entrepreneurs under this policy. The rate of capital gains tax has been reduced to 10%, for lifetime capital gains that are within the limit of £5 million. This modification in the policy has particularly benefitted established entrepreneurs, who now wish to explore new pastures or are thinking about retiring.

Challenges faced while availing Entrepreneurs’ Relief

The recent changes concerning entrepreneurs’ relief though have largely benefitted the majority, but there are some sections which may suffer as a consequence of newly introduced changes.

Sale of loan notes

The first major impact of these changes concerns the eventual CGT position of loan note holders. Those entrepreneurs, who might have exchanged their shares that qualified for entrepreneurs’ relief, for business loans, are advised to re-examine their CGT positions at the eventual sale of their loan notes. There are chances that if the loan note holders proceed to sell these possessions, they may be liable to pay CGT at an increased rate, rather than the expected rate of 10%.

Qualification criteria

Also, with the recent development concerning the entrepreneurs’ relief policy and its increasing popularity, it is expected that HMRC might introduce some modifications in the policy. It is believed that these changed are mainly to be concerned with the qualification criteria for entrepreneurs’ relief. Hence, under the changing circumstances, entrepreneurs need to be wary and aware of their statuses for qualifying for entrepreneurs ‘relief.

Impact on shareholders

Since entrepreneurs’ relief policy has also been subjected to changes concerning the qualification of shareholders, shareholders may find themselves surrounded in ambiguity, with respect to their qualification for availing the facilities offered through entrepreneurs’ relief. To be sure of their current position, shareholders today need to study and understand all the recent changes incorporated into the entrepreneurs’ relief policy.

Partnerships

Perhaps, the impacts of the recent changes in the entrepreneurs’ relief policy are to be most deeply felt by sole traders and those entrepreneurs who are working in partnerships. The recent changes are to render significant negative impacts on the sale of shared business assets, which may be proposed to be sold separately.

Structural shortcomings

Furthermore, questions are being raised ion the structural development of entrepreneurs’ relief policy by various experts. Many have pointed towards the need to modify the structure of the policy to ensure that the extension of entrepreneurs’ relief support is extended to individuals who have owned considerable shares in business but fail to qualify for entrepreneurs’ relief due to unfulfilled technical requirements. The major issue in this area is associated with the requirement for entrepreneurs to own business assets for a prescribed period of time in order to qualify to be facilitated through entrepreneurs’ relief.

Record-keeping requirements under GDPR

GDPR is now in full effect and it contains explicit rules about how you process and secure data. Diana Bruce of the CIPP explains the ins-and-outs.

On 23 May 2018 the General Data Protection Regulation (GDPR) was effectively integrated into the new Data Protection Act (DPA) 2018. There were significant changes within GDPR which moved the emphasis away from the “best practice” approach of DPA 1988 to a “requirements” approach under GDPR. The documentation of processing activities is a new requirement under GDPR.

GDPR contains explicit provisions about documenting your processing activities. You must maintain records on several things such as processing purposes, data sharing and retention. You may be required to make the records available on request to the Information Commissioner’s Office (ICO) or other appropriate authority for the purposes of an investigation.

The record-keeping obligation applies to both controllers and processors employing 250 people or more. Processing activities of internal records must be maintained and the following information as a minimum must be recorded:

  • Name and details of the organisation (and where applicable, of other controllers and the data protection officer)

  • Purpose(s) of the processing

  • Description of the categories of individuals

  • Description of the categories of personal data

  • Categories of recipients of personal data

  • Details of transfers to third countries or international organisations including documentation of the transfer mechanism safeguards in place

  • Retention schedules

  • Description of technical and organisational security measures

There is a limited exemption for small and medium-sized organisations so if you have fewer than 250 employees, you only need to document processing activities that:

  • Are not occasional

  • Could result in a risk to the rights and freedoms of individuals

  • Involve the processing of special categories of data or criminal conviction and offence data

Even if you are not obliged to keep records, doing so can only increase the effectiveness of your GDPR compliance processes.

All organisations have to provide comprehensive, clear and transparent data privacy policies.

As part of your record of processing activities, it can be useful to document (or link to documentation of) other aspects of your compliance with GDPR and the UK’s Data Protection Bill. Such documentation may include information required for privacy notices, such as:

  • The lawful basis for the processing

  • The legitimate interests for the processing

  • Individuals’ rights

  • The existence of automated decision-making, including profiling

  • The source of the personal data

  • Records of consent

  • Controller-processor contracts

  • The location of personal data

  • Data Protection Impact Assessment reports

  • Records of personal data breaches

  • Information required for processing special category data or criminal conviction and offence data under the Data Protection Bill, covering: the condition for processing in the Data Protection Bill, the lawful basis for the processing in GDPR and your retention and erasure policy document.

Doing an information audit or data-mapping exercise can help you find out what personal data your organisation holds and where it is. You can find out why personal data is used, who it is shared with and how long it is kept by distributing questionnaires to relevant areas of your organisation, meeting directly with key business functions, and reviewing policies, procedures, contracts and agreements.

Records of your processing activities must be kept in writing and this can include an electronic format – the information must be documented in a granular and meaningful way. It may well depend on the size of your business and the volume of processing activities as to whether a spreadsheet format would suffice or whether you need to consider a bespoke package to be tailored to your specific business needs.

The ICO has developed some basic templates to help you document your processing activities.

Written by: 

HMRC Update – Making Tax Digital (MTD)

What is MTD?
MTD is a key part of the government’s plans to make it easier for businesses to get
their tax right and keep on top of their tax affairs. HMRC’s ambition is to be one of
the most digitally-advanced tax administrations in the world, modernising the tax
system to make it more effective, more efficient and easier for customers to comply.
Keeping digital records and providing updates to HMRC directly through
MTD-compatible software will help reduce errors, cost, uncertainty and worry.
This streamlined digital experience will integrate tax into day-to-day business
record-keeping, so that businesses can view their tax position in-year and be confident
that they have got their taxes right.

When is this due to happen?

You can sign up a client to MTD for Income Tax now, although the service will
remain voluntary until 2020 at the earliest.

From April 2019, MTD for VAT will be mandatory for businesses whose turnover
is above the VAT registration threshold (currently £85,000). This means that those
businesses will have to keep records digitally and use MTD-compatible software
to submit their VAT Returns to HMRC.
It will remain voluntary for VAT-registered businesses below the VAT threshold
until 2020, at the earliest.

 

Company cars What’s new for 2018/19?

Despite year-on-year tax rises, company cars remain a popular benefit. While the tax cost of expensive high-emission cars can be eye-watering, by choosing carefully it’s possible to enjoy the convenience that comes with a company car for a relatively low tax cost. So, as the new tax year gathers steam, what’s changed for 2018/19?

The tax charge
Company cars are taxed as a percentage of the list price, which is essentially the  manufacturer’s valuation of the car when new. It doesn’t matter how much was actually paid for the car, or whether it was bought second-hand.
It’s the list price that is used to work out the taxable amount and,
where optional accessories are added, the list price is adjusted to
reflect these.
The percentage charged to tax (the appropriate percentage) depends on the level of the car’s carbon dioxide (CO2) emissions. This increases each year, and 2018/19 is no exception. For 2018/19, the appropriate percentage for a car with CO2 emissions of 50g/km or less is 13% (up from 9% for 2017/18), whereas for cars with CO2 emissions in the range of 51 to 75g/km it is 16% – up from 13% – for 2018/19.

For cars with CO2 emissions of more than 76g/km, the charge for 2018/19 is two percentage points higher than in 2017/18 at 19% for cars in the 76 to 94g/km band.
This increases thereafter by 1% for each 5g/km rise in CO2 emission, although there is a maximum charge of 37% which applies to cars with CO2 emissions of more than 180g/km in 2018/19.

The increase in the appropriate percentage means a company car driver will pay more tax on the same company car in 2018/19. When calculating the charge, the list price is reduced for any capital contributions made by the employee (capped at £5,000), while the benefit is reduced to reflect any payments for the private use of the car. If the car is unavailable for part of the tax year, the benefit is proportionately reduced.

Example 1
Tony has a company car worth £30,000 with CO2 emissions of 150g/km, which was available throughout 2017/18. He isn’t due to change his car until July 2019 and pays tax at 40%.
For 2017/18, the appropriate percentage is 29% and the cash equivalent value of the car, on which Tony is taxed, is £8,700. As a higher rate taxpayer, the associated tax bill is £3,480 (£8,700 @ 40%).
For 2018/19, the appropriate percentage has increased to 31%. The taxable amount rises to £9,300 (31% of £30,000) and the associated tax to £3,720 (40% of £9,300).
Although he has the same car, even if it is a year older, Tony pays £240 more in tax as a result of the increase in the appropriate percentage.

 

Diesel cars
Diesel cars attract a supplement but the nature of that supplement has changed for 2018/19 and beyond.
For 2017/18 and earlier tax years, the supplement was 3%. This increased the appropriate percentage by 3%, compared to that for a petrol car with the same emissions level.

The diesel supplement cannot take the charge above the maximum of 37%. For 2018/19, the diesel supplement increased from 3% to 4% for all cars that aren’t certified to the Real Driving Emissions 2 (RDE2) standard.
The supplement applies to cars registered on or after 1 January 1998, which don’t have a registered nitrogen oxide (NOx) emissions value, and also to cars registered on or after that date which have a registered NOx emissions value that exceeds the RDE2 standard.
While the appropriate percentage is set by reference to CO2 emissions, the new-look diesel supplement is dependent on NOx emissions level.
Under the new rules, diesel cars certified to the RDE2 standard are not subject to the diesel supplement.
In practice, it is unlikely cars on the market before 6 April 2018 will meet the RDE2 standard, with the effect that most diesel cars will be subject to the higher supplement.
Taking into account the increases in appropriate percentages as well, diesel car drivers will suffer a higher tax hike in 2018/19.

 

Example 2
Maria has a diesel-fuelled company car with a list price of £30,000 and CO2 emissions of 150g/km. Her car doesn’t meet the RDE2 standard but it’s available throughout 2017/18 and 2018/19, and like Tony, Maria is a higher rate taxpayer.
In 2017/18, the appropriate percentage is 32% (normal 29% plus diesel supplement of  3%). This makes the taxable value £9,600 (32% of £30,000) and the tax owed is £3,840 (40% of £9,600).
In 2018/19, the appropriate percentage has increased to 31% and the diesel supplement to 4% – a total of 35%. As a result, the taxable value is £10,500 (35% of £30,000) and the tax bill is £4,200.
The combined effect of the rise in the appropriate percentage and the increase in the diesel supplement means Maria’s taxed £360 more in 2018/19 than in 2017/18 – £120 more than the tax rise suffered by Tony on his petrol car.

Going green
Drivers choosing lower-emission cars are rewarded with lower tax bills.
In the earlier example, Tony paid tax of £3,720 on his company car based on a CO2  emission of 150g/km.
If he had chosen a car of the same value but with CO2 emissions of 40g/km, he would’ve paid tax of £1,560 in 2018/19 (40% (£30,000 @ 13%)) – saving £2,160 a year and £180 a month.
Going electric
Electric cars with zero emissions are charged at the same percentage as cars with CO2 emissions of 50g/km and below – 13% for 2018/19.

However, from 2020/21 new emission bands will apply to cars with CO2 emissions of 50g/km or less based on the electric range of the car.
This is the maximum distance the car can travel without recharging the battery or using the combustion engine of the plug-in vehicle.  Under the new bands, the cars with the greatest range have the lowest appropriate percentage.
The rates for the new bands, which will apply for 2020/21, are shown in the table below. The appropriate percentage is set at 2% for zero-emission cars.

electricpercent

It will pay to go electric, and the opportunity to benefit from a lower tax bill for an  electric car should be taken into account when choosing a new company car.

Fuel
A separate fuel scale charge applies where fuel is provided for private mileage in a company car.
This is found by applying the appropriate percentage (as used in working out the taxable benefit of the car) to a set amount. For 2018/19, this is £23,400 – up from £22,600 in 2017/18.
This means that for a car with CO2 emissions of 150g/km, the fuel charge is £7,006 for 2018/19, costing a higher rate taxpayer £2,802.40 in tax – or £233 a month.
Unless private mileage is very high, private fuel is rarely a tax-efficient benefit and where the cost of the car is below the appropriate amount (£23,400 for 2018/19), more tax will be payable on the fuel than on the car.
By contrast, no fuel charge arises if the employer provides electricity for an electric car.

Choosing wisely
The company car tax rules reward those who choose greener cars.
The tax charge on a cheaper, low-emission car is considerably less than an expensive car with high CO2 emissions.

Looking ahead, choosing an electric car will lower the bills still further with a taxable amount as low as 2% of the list price.