As we approach the Budget on the 16 March 2016 and the end of the tax year, it is important to review personal tax planning. Whether we trade as a sole trader or as a partner in a partnership there are a number of taxes planning opportunities.
Firstly, if there is a difference of at least 30 per cent in taxable farm profits in any two years, averaging is allowed. Currently legislation allows only two years to be averaged; however it is proposed that averaging over five years will be introduced.
Secondly, if the farm business makes a trading loss after capital allowances the loss may either be carried back for one year, and if tax was paid in that year, a tax refund may be obtained, or the loss may be carried forward and set-off against future trading profits. A trading loss in the year in which son/daughter becomes head of holding may be carried back for up to three years to the extent that the loss is allocated to the young person and set-off against his/her other income, if any, thereby getting a tax refund.
Thirdly a review of pensions is now timely. Individuals can make contributions to a pension plan tax free up to the following limits: 100 per cent of the earnings for the tax year; annual allowance of £40,000 and £1.25 million during an individual’s life time. Contributions can be paid this year to utilize unused annual allowance of previous three years.
Fourthly, new tax free allowances are to be given to individuals from 6 April 2016. The new personal saving allowance is a maximum of £1,000 for basic rate tax payers and £500 for higher rate taxpayers. The new divided Nil rate band is £5,000 for all taxpayers. Each of these new allowances is separate and available at the same time to individuals. The introduction of the personal savings allowance has implications for the strategy in relation to personal investments, particularly ISA’s. This is because you can receive up to £1,000 bank or building society interest annually tax free without using an ISA.
From 6 April 2016 the taxation of individuals of dividends received by individuals will change. Under the new rules, the first of £5,000 of dividends received by an individual will be tax free but those in excess of £5000 will be taxed at 7.5 per cent and 32.5 per cent depending on whether the individual is a higher rate taxpayer. Consideration should be given to paying additional dividends before 5 April 2016 assuming there are sufficient distributable reserves in the company.
If the business is currently trading as a limited company and you are considering disincorporation, that is, changing to a sole trader or partnership, then it is advisable to consider doing so before 5 April 2016. If you do not want to lose your limited liability status, consider forming a limited liability partnership.
From 6 April 2016 the rent-a-room tax allowance increases from £4250 to £7500 per year. This means that you can let out part of your home or an annex in your home and obtain up to £7,500 annually tax free from April 2016.
There are many exciting changes happening in taxation with both positive and negative consequences. It is now timely to review the performance of the business and your personal tax position with your accountant.