Date posted: 14th Aug 2020
As the UK officially enters a recession, we take a look at what tax planning opportunities may be available for individuals and businesses.
A few potential ideas are suggested below. There may be further opportunities, depending upon your personal circumstances, which should be explored with a tax professional.
Income tax, is of course, the tax payable by individuals on their income – for example, on employment income, profits from a sole trade or partnership, rental income or investment income.
For those with employment income, that is perhaps under their own control (as the income comes from a limited company that they control), then they could consider how they draw their income from the company. For example, many director-shareholders of owner managed businesses draw their income via a small PAYE salary, and take any other income via dividends. There are a few issues for those individuals to consider such as:
- A switch in remuneration strategy – remember that the company needs reserves (after tax profits) before it pays dividends. Any dividends paid in excess of the company reserves will be regarded as “illegal” and classified as a loan, which means that if the company subsequently fails, the liquidators could look to recoup the monies from the individual shareholders. In addition, as the monies will be regarded as a loan, this could bring additional tax liabilities into the equation. Whilst paying a higher salary (rather than dividends) means higher tax and national insurance charges, any salary paid will be difficult for any liquidators to recoup, as long as the salary is a justifiable market rate salary.
- A drop in income will mean a reduction in taxes, in the short term. Therefore could any advance payments on account be reduced, to aid cashflow?
- If your company is doing well and you do not envisage any problems with future profits, then is now the right time to consider taking a further dividend from the company whilst income tax rates are low? Given that the government need to recoup monies, following the various grants handed out during the COVID crisis, it is anticipated that income tax rates will rise.
- Many commentators believe that the tax relief associated with pension contributions is likely to be reduced, as the government looks for ways to boost the coffers. Is now the right time to make a pension contribution, whilst the tax relief (and opportunity to use earlier years allowances) is still available?
- You may have disclaimed child benefit on the basis that your income was in excess of £60,000 as historically a claim would have resulted in the repayment of the benefit through your tax return. If your income is set to drop below this amount, it may be a consideration to begin claiming the child benefit again. This could equally apply to PAYE employees who are facing a pay cut due to either reduced hours or redundancy or those that have a base salary which is topped up with bonuses that are much reduced going forward.
- If your employment income is expected to drop significantly, then perhaps you should consider making a claim for universal credit.
Business income – sole trade or partnership
For those individuals that operate a business in their own name (sole trader) or with others (via a partnership or LLP), then they should be considering:
- Whether a change in the business year end may reduce your tax liabilities. For instance, if you have an April 2020 year end which shows relatively good profits but you anticipate that you will be loss making in the year to 30 April 2021, then a change of the year end to 31 March 2021 will help you mitigate any taxes arising on the April 2020 year end profits. Similarly, if you have overlap profits from the commencement of your trade, then a change of year end may result in a reduction of your tax liabilities.
- Whether to make a pension contribution now, whilst tax relief is still available. Many commentators believe that the tax relief associated with pension contributions is likely to be cut, as the government looks for ways to boost the coffers.
- An in-depth review of bad debts. Given that many businesses are likely to fail, it is possible that some customers may fail to pay any invoices that you have raised. If you have a specific doubt over whether a debt will be paid, it may be worthwhile considering a review of your debtors ledger to obtain relief for any bad debts now, rather than when it becomes clearer that the debt will not be paid.
For those individuals with rental income, from either residential or commercial properties, then the following may be appropriate ideas:
- If your property is empty or you have reduced the rental income charges, then it may be possible to reduce any 2020/21 payments on account that are normally based on your 2019/20 tax liabilities when perhaps you had a full year of rental income.
- If you had considered transferring properties into a limited company (perhaps due to the cuts to tax relief for interest paid) but were put off due to the tax charges, then perhaps it is time to reconsider this, particularly if the property value has fallen (which will reduce any capital gains tax charge) and the recent cut to SDLT for residential properties, sold before 31 March 2021.
- If you or your spouse face a significant fall in income, then perhaps it is time to consider reducing the “family tax charges” by making use of a tax free allowances and lower rate tax bands, by ensuring that the lower earner, is solely taxed on the rental income.
Capital gains tax
Capital gains tax (CGT) is the tax payable on the sale of assets such as shares (plc or your own limited company), businesses, land and property. Some of the opportunities are outlined below:
- If you own, say, a share portfolio, then you may have shares in a company that would produce a healthy profit (over cost) if sold today. That could trigger a CGT liability. However, there may be shares within the portfolio that are standing at a loss, and which may be unlikely to recover in value (compared to cost). You could potentially look to crystallise those losses (either by selling the shares or making a negligible value claim) to use against gains; you can make a capital gain of £12,300 in the 2020/21 tax year, without paying tax. You could potentially re-acquire the shares sold at a profit (as long as more than 30 days have passed between sale and re-acquisition) and have uplifted the base cost of the shares, tax free.
- Look at loans that you have made to businesses. Perhaps your limited company has gone bust and you’ve written off monies that the company owed to you. Any such loans could result in a capital loss, which can be used against capital gains.
- If your limited company has gone bust and you had originally subscribed for a large amount of share capital, then you could potentially be able to claim the loss of these monies against your income tax liabilities. This could also be the case, where you have invested in a company via EIS or SEIS.
- Perhaps you have sold a business in the past but with payment in instalments (depending upon future profits) on which you have paid tax. If any of those instalments are unlikely to be paid, then you may be able to reclaim some of the CGT paid, previously.
- Any recession is likely to lead to a flatlining (at best) or decrease in property prices. If due to the changes to the tax relief for interest, you were considering operating your rental business via a limited company, but were perhaps put off by large CGT bills, then it may be worth considering this again, particularly if property prices decrease.
Inheritance tax (IHT) is a tax payable, as a result of the transfer of value from your estate to another person, company or trust. IHT could be payable whilst you are alive, if a transfer of value is made to a trust or company but is usually a tax payable after the death of an individual, where their estate exceeds the value of their available nil rate bands or “allowances”.
IHT is also payable by trusts when they appoint/distribute assets from the trust to a beneficiary.
IHT is a very complicated tax but in simple terms, once the value of their estate, exceeds the “allowances”, tax at 40% is payable on the excess. Due to the complexities of IHT, there are a number of reliefs or allowances to consider. In respect of tax planning in a recession, these are just some of the considerations:
- If IHT has already been paid based on the probate value of an asset, and that asset is subsequently sold for less than the probate value, then there may be IHT relief to claim, under the fall in value provisions. Given that property and share prices are anticipated to fall during a recession, this may be something to consider sooner rather than later.
- If you are considering trying to reduce IHT and perhaps have an investment to gift to your beneficiaries but are concerned about the IHT payable, then again, falling values may help mitigate that issue. For instance, you may wish to gift a rental property or investment shares to a trust (to hold for beneficiaries) which would give an immediate IHT charge (subject to the available “allowance”) but if the value of those assets has reduced, due to the recession, then the tax charge is likely to reduce too. Perhaps the value of the asset may have diminished so much, that it is now below your “allowance”, meaning that now no IHT is payable.
- Perhaps you are a trustee of a trust and are considering appointing assets to beneficiaries. Any reduced value of the assets, can reduce any potential tax charges that the trust would face.
- You may have been considering creating a family investment company (FIC). It may now be the ideal time to reconsider a FIC to potentially take advantage of the diminished value of property and shares, which the FIC could invest in. A FIC can also help reduce any IHT exposure, if this is a concern.
- Perhaps to reduce IHT, you have been making “gifts out of excess income” which fall outside of the IHT net. However, if you are faced with falling personal income, there is a risk that any gifts may face exposure to IHT, if you do not have enough “excess” income to justify the gift.
Corporation tax is the tax payable by companies on their profits. A company’s profits include profits from trade, rental income or investment income. Some of the considerations for companies are:
- If the company is anticipating making losses in future years, then the company may take advantage of these “anticipated” losses now. For instance, the company could look to reduce tax liabilities by relieving these losses, now, rather than waiting for the losses to be established and then making a claim for tax already paid, to be refunded.
- If the company has been particularly successful and was paying quarterly instalments of tax, due to anticipated high profits, but is now forecasting much reduced profits or losses, then there may be an opportunity to reclaim some of the quarterly instalment taxes paid, now, which could help the company’s cashflow.
- If the company is making new products or enhancing processes that involve overcoming scientific or technological problems, then the company may qualify for R&D tax relief. If the company has been innovative in the past then it can still make a claim for R&D tax relief, as long as this is made within two years of the year end. For instance, a company with a September 2018 year end, could make a claim for R&D tax relief for costs incurred between October 2017 and September 2018, as long as the claim is made by 30 September 2020. This tax refund could prove to be an invaluable cashflow boost to the company, particularly in these turbulent times.
Tax planning is unique to particular circumstances. There may be opportunities not described above, that may be applicable to your circumstances. If you would like to discuss any of these ideas or any other tax planning opportunities, please call our tax experts.
Should you have any queries on the above or need further support, please contact our tax team here, who will be happy to assist.
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Read more September 2020 tax news below:
- Accountants Warn of Further Changes to Digital Tax Reporting
- Recession tax planning
- Vans are cars?
- Offshore Income Reporting
- HMRC systems are behind: Have you received any unexpected correspondence or penalty notices?
- R&D claims – evidence required
- Numerous Fraudlent CJRS Claims Identified
- Certain Property Business Owners are Liable to Class 2 NICs