With the end of the tax year fast approaching, many will be looking to ensure they have made best use of the current allowances. If you aren’t aware of the changes taking place as of 6 April 2018, here’s a brief summary of the areas that are affected, so you can take action in good time.
Increased inheritance tax benefits
Let’s start with the good news. An additional inheritance tax benefit was introduced to enable homeowners to pass on more of their estate without being subject to inheritance tax. In April 2018, the so-called Residential Nil Rate Band increases from £100,000 to £125,000, giving married couples a potential total of £900,000 of nil rate band to use.
Decreased dividend allowance
The news is less positive for business owners and investors. As of 6 April 2018, the dividend allowance is reducing from £5000 to £2000 per year, meaning there’s a significant drop in tax-free dividend payments. This could add £1,143 to some companies’ tax bills.
It’s recommended that businesses therefore make use of the current year’s allowance by distributing dividends before 6 April. Investors, meanwhile, can look to rebalance their income streams with the help of their investment advisors.
Reduced mortgage interest relief
For rental businesses, restrictions on income tax relief available on mortgage interest payments are also continuing through 2018/19. Only 50% of eligible interest payments can be deducted from rental profits as of April 2018. The other 50% is available as a 20% tax reducer, providing the business’ rental profits are sufficient. Consequently, some taxpayers will be facing higher tax rates on their income.
Changes for offshore trusts
Those with offshore trusts are being advised to be aware of changes regarding indirect distributions from April 2018. Although much debated, the new legislation eliminating indirect distributions is going ahead, meaning this particular method of avoiding tax consequences is no longer available.
It’s a complex set of rules that mean trustees could unintentionally fall foul of the law, so anybody with an offshore trust and UK beneficiaries should seek professional advice before making distributions and subsequent onward gifts.
Non-UK Domiciled People
Finally, those non-domiciled individuals who are set to become UK domiciled in the new tax year are being advised to settle their affairs so that worldwide assets can be protected from UK tax implications. Anyone who has been resident in the UK for 15 of the past 20 tax years will automatically become UK domiciled on 6 April, so if you think your personal tax account will be affected, contact your accountant.
There’s also a window of opportunity for non-UK domiciled individuals to separate their offshore mixed accounts and reduce tax liability. Those who have claimed the remittance basis on offshore accounts up to 5 April 2017 have until 5 April 2019 to separate them into their different components and set aside clean capital funds. These can then be used in the UK without UK tax implications. Again, we advise employing a specialist tax accountant to assist with this.
