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Pension Tax relief

If you are earning over £150,000 and make pension contributions you maybe in for a shock.

There are proposals by the current Government to restrict pension relief by tapering income tax relief by taking away £1 of pension relief for every £2 earned above £150,000 up to £210,000, so for someone earning over £210,000 per annum they would only receive pension relief on £10,000 as opposed to currently£40,000 for any body below £150,000.

Whilst some people may be unsympathetic to anyone in this position, it does give rise to a position where if somebody who continues to put money into pensions after the reforms come into effect and they are an additional rate tax payer, they will be facing a marginal tax rate of 67.5% something much higher than the headline 45% rate of tax.

How do parents save for private school fees?

One way is to use Investment Bonds, which are popular with wealthy investors who use them as tax efficient wrappers for holding assets.

The bonds are life insurance policies and are typically used to generate a long term capital growth, with the flexibility for the bond holder to withdraw up to 5% of the capital invested when needed and to defer any tax charge until the bond is fully cashed in.

The issuer of the bond pays the equivalent of basic rate tax currently 20% on the income and gains of the bond, and when the bond matures the taxpayer has no tax liability unless they are a higher rate tax payer at the time, thus the attraction of investment bonds.

The bonds whilst being attractive for tax purposes should only be used once you have used your ISA allowance, where the gains and income are free of tax.

Are HMRC are getting touch in their approach to tax avoidance?

HMRC have been talking tough with regard to tax avoidance for a number of years but do the numbers backup the hard talk?

Thomson Reuters data seems to back this up with an increase in the number of people being pursued through the courts for tax evasion being up almost a third in 2013/14 to 795 compared with the tax year before and is expected to rise to well over a 1000 for 2014/2015.

HMRC seem to be targeting tax evaders who fail to declare offshore income or gains. HMRC now need only to be able to show the money held offshore was taxable and undeclared as opposed to the old rules where the person holding the offshore income had intended to avoid tax.

HMRC are now also using criminal prosecutions which may have a deterrent effect on tax evaders.

IR35 enquiries

Interesting figures have just been released from HM Revenue and Customs which show how many IR35 enquiries were raised for 2013/14 tax year and the corresponding amount of revenue they raised.

In total for 2013/14 tax year, there were 192 IR35 enquiries which yielded £430,000 compare this to the high point in IR35 enquires in 2002/2003 which yielded £946,275 from 1016 enquiries.

With such relatively small figures in comparison to the amount of taxes HMRC raise, you could ask why IR35 still continues to be in place?

Why does IR35 remain in place?

As your IR35 status is essentially self assessed, HMRC receive around £500,000,000 through people who voluntary assess themselves as being inside of IR35. Thus is IR35 was removed any Government would be about £500 million worse off, I feel IR35 might be around for a little while yet.

Does HMRC have the capacity to increase the amount of IR35 investigations?

There are currently four specialist teams of around 40 staff which can cope with running around 250 IR35 enquiries. It is estimated to properly police IR35 compliance by HMRC, HMRC would need around 3000 staff which is extremely unlikely to happen.

The end of the tax return?

Tax return completion and submission for people with simple tax affairs, most people would agree is overtly complex, and not something most people would look forward to doing.

Over the next parliament, there should be some big improvements in tax return information submission, with HMRC’s Digital Strategy now taking shape and the pieces beginning to link together.

HMRC are intending to give tax payers digital accounts which are pre-filled with information from employment (via RTI), pensions and banks accounts (which are all now available electronically) which should lead to a much better experience for the tax payer and cut down on errors of missing items or incorrect figures.

There will still be additional information required for tax payers with more complex affairs such as properties and investments, but it should improve the service to taxpayers, and it is expected to dramatically cut costs to HMRC.

The end of the tax return is upon us for people with simple affairs,  and tax accounts is expected to start for taxpayers by 2017. For people with more complex affairs, it is probably just a renaming exercise and a simpler, but more real time, process.

Tax saving schemes

The personal tax year for 2014/15 is due to end shortly on the 5th April 15. If you have maxed out on your pension contributions and used your full ISA allowance, what options are available to a higher earner who wants to get some tax relief via an approved Government scheme?

There are two government approved tax breaks, the enterprise investment scheme and venture capital trusts, both aimed at attracting investment into smaller UK companies.

Both schemes are worth considering if you are a higher rate tax payer, and offer significant tax saving for higher rate tax payers. It is not all one way through, as these schemes often have higher investment risks being in smaller companies. Income tax relief is available on the cost of the investment of up to 30% of any investment, and any gains are exempt from CGT.

VCT investments tend to be more liquid as there is a secondary market in these shares, so you do have an exit route. Both investments require minimum holding periods to qualify for the tax relief of between three to five years, also there are annual limits for investments into these schemes of £200,000 for VCT schemes and £1,000,000 in EIS schemes.

Accelerated payment notices go to Judicial review

There has been an interesting recent development around HMRC Accelerated Payment Notices.

Accelerated payment notices, which were introduced by last years finance bill, and are controversial because they require the taxpayer to make immediate payment of taxes requested and deny the tax payer a right to appeal the notice.

HMRC have recently been using these new powers as part of their crackdown on tax avoidance by people using alleged tax avoidance schemes.

These powers are so radical, it was expected they would be challenged, and this has finally arrived. The High Court has given permission for a judicial review which will rule whether the accelerated payment notices are legal.

The judicial review has being brought on behalf of film partnerships by Ingenious Media and will consider the lawfulness of accelerated payment notices. People involved in such partnerships will await the reviews finding, these include some prominent sport stars and entertainers.

 

HRMC withdraws controversial proposal

Previously we wrote about a controversial proposal by HRMC to make it an automatic criminal offence to hold any undeclared taxable income offshore.

It seems as though HMRC are backing away from this proposal, which many commentators have welcomed, as it has been omitted from the draft Finance bill which was published earlier this month.

The worry by some tax experts was that these potential powers could be used to prosecute taxpayers who had made oversights and mistakes as opposed to fraudulent behaviours, which could have resulted in up to six month in prison.

Whilst this may not be the end for this proposal, it is definitely on HMRC’s back burner.

London suffers highest annual tax on enveloped dwellings

London suffers highest annual tax enveloped dwellings (ATED).

London is suffering the highest burden on a recently introduced tax on high value, over £2m in value, which targets properties owned by non natural persons.

This tax has raised a substantial amount of money since it was introduced in April 2013. In this tax year it has raised £100m of which 89% of it related to London properties.

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