Build up your funds for future generations

Barnett & Turner partner Jonathan Wilson considers how life insurance can become an investment. For a number of years, we have had the option of using what are called “Whole of Life” insurance policies to help to fund potential inheritance tax (IHT) liabilities.

Put simply, these policies are a form of insurance where annual premiums are paid in return for a guaranteed payment on death. They are structured in such a way that the proceeds do not form part of the deceased’s estate and therefore escape IHT.

In reality, this means the IHT liability is potentially reduced to the total cost of the premiums.

Traditionally, clients have taken out life insurance for peace of mind, so they know their beneficiaries’ inheritance tax bill will be met. They haven’t necessarily considered whether the policy proceeds represent a good return on the premiums paid. With interest rates falling to record lows, it is now more appropriate than ever to view life policies as investments.

At the time of writing, the post-tax return for a 45% taxpayer, on a very long-dated UK government gilt (49 years to redemption), is only 0.8% per annum.

A couple aged 60 can obtain £1m of second-death, last-survivor, whole-of-life cover for an annual premium of £11,700, assuming standard health terms apply.  If we were to assume that one of the policyholders lives to age 109 (a very cautious assumption to match a 49 year old gilt), the return on the total annual premiums of £573,300 is just under 2.2% per annum net of tax.

To continue with this example, we could assume, more realistically, that the life expectancy of the last survivor is 95.  In our scenario above, the effective return on the total annual premiums is £409,500 – a relatively attractive 4.73% per annum net.

However, these figures also ignore the fact that the proceeds will generally fall outside of the estate, due to the policies being held in trust.  The actual return on the policy payer is effectively enhanced further by 40% (representing the IHT that would have had to be paid had the proceeds remained within the estate) in most cases.

Therefore, life policies not only provide a lump sum for your beneficiaries, but they also provide a comparatively excellent return over the period until the beneficiaries receive the money.  Life policies can be a good-value option for building up funds for the next generation. You may benefit from advice from your IFA or Accountant tailored around your own personal circumstances.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Could your generosity end up costing you? - Make sure you don’t lose out writes Jono Wilson of Barnett & Turner.

If you’ve given some money or household items to a charity recently, the chances are you’ve been asked whether you’d like to ‘Gift Aid’ your donation. The representative of the charity will have told you that this claim increases your gift by 25%.  So, for every £80 donated, the charity receives £100 – made up of your own donation of £80 and £20 of tax reclaimed from HMRC.

On the face of it, the Gift Aid option may seem like an obvious choice, but there is a potential downside.  If you have not paid sufficient income tax or capital gains tax during the year to cover the reclaimed tax, HMRC will require you to make up the difference, which may result in an unexpected tax bill due to your generosity!

It’s an issue which is likely to take on a greater prominence, as recent changes to the way in which investment income is taxed will result in many individuals ceasing to be taxpayers:

• Prior to 6 April 2016, dividends were received with a notional credit which was included when calculating tax paid for Gift Aid purposes, but the notional credit has now been abolished and the first £5,000 of dividend income (decreasing to the first £2,000 from 6 April 2018) is taxed at a rate of 0%; and

• The savings rate of income tax offers another 0% tax band available to individuals with interest income falling within the first £5,000 in excess of their personal allowance.

These changes will disproportionately affect pensioners with modest incomes and owners of companies who remunerate themselves in the most tax-efficient way.

Many of the individuals that will be impacted by this change are not required prepare tax returns each year. It does seem likely, however, that because of HMRC’s digital and information gathering powers, they will soon be able to identify non-taxpayers who have made Gift Aid donations and pass on an unexpected bill to the donor.

It’s therefore worth considering your own position, as well as that of those close to you. You may have some options to ensure that neither you nor the charity lose out.

If you feel that you might be caught out, but your spouse would not, it’s worth considering getting them to make the donation instead.

If you are the owner of a small company, it may be possible to make the charitable donations through the business, rather than on an individual level.  Although a company cannot make donations through the Gift Aid scheme, it should receive corporation tax relief on the donations and there may be scope to increase the amount you give to reflect this.

If you believe that you may be adversely affected by these changes, it’s worth having a chat with your accountant.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

TEN TIPS TO SAVE YOU TAX

Whatever the level of your tax liability, there are some simple ways you can minimise the pain. Here are 10 suggestions from Jonathan Wilson of Barnett & Turner, Chartered Accountants & Chartered Tax Advisers, for making your next bill slightly more manageable.

1. Check your tax code each year. Your tax code is used by your employer or pension provider to work out how much income tax to deduct from your pay.  If your code is wrong, you may be paying too much (or too little) tax.  Your tax code can be found on your payslip and a breakdown of how it has been calculated will have been sent to you by HMRC.

2. Claim the marriage allowance. The marriage allowance lets you transfer 10% of your tax- free personal allowance, or £1,150 in 2017/18, to your spouse, if they earn more than you.  To benefit as a couple, the lower earner must have income of £11,000 or less in the tax year.

3. Make the most of each personal allowance and basic rate band. The personal allowance is £11,500 and the basic rate tax limit is £33,500 in 2017/18. If you are married, it may be possible to transfer income-generating assets (e.g. rental properties) to a spouse to take advantage of their lower tax brackets.

4. Take advantage of the CGT annual exemption. Capital gains under the annual exemption (£11,300 in 2017/18) are tax-free.  Where you have already used up your annual exemption, you may wish to consider deferring any further disposals until the following tax year if practically possible.  If you are married, owning assets jointly also ensures that each spouse’s annual exemption is used (assets can be transferred tax free between spouses).

5. Claim tax-deductible expenses. If you are self-employed, you can claim a tax deduction for expenses which are incurred “wholly and exclusively” for the purposes of your business.  This includes office running costs and the salaries of any employees, including your spouse.

6. Use the annual investment allowance. If you are self-employed, the annual investment allowance currently provides a 100% tax deduction on the first £200,000 spent on eligible plant and machinery.

7. Consider incorporation. The corporation tax rate, of 19% from 1 April 2017, (previously 20%), is significantly lower than income tax rates, which are currently up to 45%.  You will of course need to pay income tax when you take money out of the company, in the form of salary and/or dividends.  However, if you don’t require the income, you have the opportunity to accumulate profits within the lower corporate tax environment.

8. Take advantage of the dividend allowance. The recent changes to the taxation of dividends saw the introduction of a £5,000 tax-free dividend allowance, which reduces to £2,000 in April 2018.  Whilst there will be winners and losers from the new dividend regime, this allowance should not be overlooked.

9. Maximise pension contributions. If you contribute to a workplace pension scheme, any pension contributions you make will be deducted from your salary before income tax is calculated.  If you contribute to a personal pension scheme, your pension provider will claim tax relief at 20% on your behalf and add it to your pension pot.  If you are a higher or additional rate taxpayer, you can then claim tax relief on the extra 20% or 25% in your self-assessment tax return.

You currently pay tax if savings in your pension pot go above the annual allowance of £40,000 a year.  However, this limit has recently been reduced for those with income (excluding any pension contributions) over £110,000, and there is doubt over the future of pension tax reliefs, so they should not be taken for granted.

10. Use your tax-free ISA allowance. From 1 April 2017 you can save up to £20,000 (previously £15,240) a year tax-free in an Individual Savings Account (“ISA”).  This can be saved as cash, shares, or a combination of the two. 

If you’re interested in investigating any of these suggestions and how they could fit in with your own personal circumstances, make sure to speak to your accountant.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

When is a van not a benefit?

Many employers provide company vans to their employees for work purposes, but whether a van benefit in kind charge arises depends on the private use element says Tracy Henson of Barnett & Turner, Chartered Accountants & Chartered Tax Advisers.  Where no van benefit is declared on a Form P11D or processed via payrolling of benefits, HMRC’s 2016 guidance includes a new paragraph, not included in previous versions of the same guidance, which states that employers must be able to demonstrate that there has been no significant private use in theory and in practice.

It has always been difficult to get HMRC to accept “in theory” only anyway, but in light of the changes above, employers may want to rethink their current record keeping as HMRC continue to crackdown on companies with vans in their accounts but no corresponding P11D reporting. This blog will outline good record keeping which will satisfy HMRC’s requirements.

If we start by looking at the requirements to be met in order for no van benefit in kind charge to apply, these are:

1. The van must only be available to the employee for business travel and commuting and must not be used for private purposes except to an insignificant extent
2. The van must be available to the employee mainly for use for the employee’s business travel

The term insignificant is not specifically defined, so takes the New Oxford English Dictionary meaning of ‘too small or unimportant to be worth consideration.’  HMRC’s guidance states that private use is considered insignificant in the following instances:

• If it is insignificant in quantity in the tax year as a whole (that is, a few days at most)
• If it is insignificant in quality (for example, a week’s exclusive private use is clearly not insignificant)
• If it is intermittent and irregular (the weekly supermarket shop is not insignificant, an annual trip to the rubbish tip would be)
• If it is very much the exception in terms of the pattern of use of that van by that employee (or their family or household) in that tax year

If an employer does not report a company van benefit but cannot prove that the above requirements are met, HMRC will insist that the van is a chargeable benefit, and this can result in a significant tax bill and hefty penalties.

HMRC can charge a £3,000 penalty for poor record keeping and a penalty of up to 100% of the tax due as well as collecting the tax and national insurance due on the benefit on a grossed up basis.

Furthermore, HMRC can backdate tax, with interest, and penalties for up to six years.  If HMRC cannot be convinced that the requirements are met, the amount at stake can quickly become detrimental to a business therefore it is vitally important that sufficient records are kept.

HMRC suggest that useful information/records for demonstrating that the necessary criteria have been met include the terms and conditions on which the van is made available to the employee and mileage records showing actual use.

The terms and conditions should state that the van is to be used by the employee for business purposes only and should not be used for private purposes. Such terms and conditions could be included within the employee’s employment contract, a separate agreement could be signed or it could even be that these are included within a staff handbook and employees sign to confirm they have read and understood this.  Any of these would prove that there is no private use in theory.

In terms of proving no private use in practice, HMRC will insist that driving records will be required.  This could be from a GPS logging system or manually entered mileage records.  This is not necessary per the legislation, although the guidance detailed above would suggest it is. We have won many cases on behalf of clients who have not had van mileage records, however it is always easier if these are available and we would suggest detailing the dates, start and finish locations, mileage and reasons for all trips as a minimum.

Other procedures that can help to further evidence no significant private use would include the keys being kept at the business premises and access being restricted. If the van insurance documentation also states that only business use is insured then HMRC will accept this as meaning no significant private use, and therefore no van benefit in kind charge, applies.

If you would like further guidance on record keeping for company vans, or if you think it would be beneficial for a review of your current procedures to be carried out to identify any improvements, please telephone or email your usual HPH contact.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Have you DONE enough to get a full state pension?

Tracy Henson of accountancy firm Barnett & Turner does the sums. We all joke that by the time we reach retirement age, the state pension won’t be worth having. But let’s not give up on it just yet.  I’m still looking forward to getting my own pension and I know what I should get, but do you?  And do you know how to make your position better if you find that you haven’t already done enough to qualify for the full amount?

Whether, and to what extent, you qualify for a state pension is determined by reference to your work history or, more accurately, your National Insurance record.

It’s relatively easy for me, as an employee with a regular income, to say that my National Insurance record is building up nicely, but for the self-employed and especially those in the struggling agricultural sector, it’s not so clear-cut. National Insurance reliefs claimed in the past could have a nasty sting in the tail when it comes to accruing qualifying years.

To get any state pension, you need to accrue a minimum of 10 qualifying years.  Reach this and you'll be paid 10/35ths of the full £155-pw state pension, or about £44.  If you don't manage to meet this minimum, you won't get a penny.  To get the full £155 pension you’ll need to have accrued 35 qualifying years.  Doing the maths, each additional qualifying year increases the pension by £4 per week or £208 per year.

So what is a qualifying year and what’s the issue?

• For the self-employed, a qualifying year is one during which they have continuously paid Class 2 National Insurance.
• Those with low earnings could (and can still) be exempted from paying Class 2 National Insurance, which is not at all uncommon in the agricultural sector, bearing in mind low profitability in recent years. Even in a good year, capital investment may have resulted in much lower taxable profits and therefore low earnings for this purpose.  Claiming exemption because of low earnings may have been sensible at the time but, not having paid the Class 2 will result in gaps in your National Insurance record and, quite possibly, a reduced state pension.

How do you know if you have a problem and, is there a fix?

If you have any concerns regarding your entitlement to a state pension – or a full state pension – we would recommend that you request a state pension statement and/or a National Insurance statement.  These statements will highlight whether there are any gaps in your National Insurance record and to what extent your state pension suffers as a result.

As regards filling any gaps, the solution is simple. At least for me it is!  I won’t reach retirement age until 30 June 2048, so I’ve got another 32 years to work and accrue qualifying years.  If you are closer to retirement age however, you can make voluntary National Insurance contributions.  It can cost as little as £145 to fill a gap year, which seems like a reasonable figure, bearing in mind the annual increase in state pension as a result will be £208.

If you would like to know how to request a state pension statement or a National Insurance statement, just ask your accountant for advice.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Prepare to go public: the gender pay gap under scrutiny

From April 2017, the Government expected companies to be open about the pay gap that exists between male and female workers says Jonathan Wilson of Barnett & Turner. The move is a response to a large body of evidence, collected over many years, which shows men tend to get the better deal when it comes to salary. And that’s despite the fact that the Equal Pay Act (now largely superseded by the Equality Act) was introduced as far back as 1970.

According to the Office for National Statistics, the gender pay gap for full-time employees in 2016 was 9.4%. The gap for all employees, both full and part-time, was 18.1%. Although both figures are down since the 1990s, they are falling fairly slowly.

In the hope that public scrutiny will force private-sector employers to act, large businesses are now required to publish data on the pay gap every year. The rules apply to any company employing at least 250 employees as of 5^th April each year. By 4^th April 2018, businesses are expected to publish their data on their websites.

The Equality Act 2010 (Gender Pay Gap Information) Regulations of 2017 says they will have to let the public know:

▪ the organisation’s overall gender pay gap (expressed as a percentage), using both the mean and median hourly rate of pay for female and male employees;

▪ the proportion of male and female employees in each of the organisation’s four pay quartiles;

▪ the organisation’s overall bonus gender pay gap (expressed as a percentage), using both the mean and median bonus payments received by female and male employees over the preceding 12-month period;

▪ the proportion of female and male employees who received a bonus in that period.

For the purposes of this exercise, a ‘relevant employee’ is defined as being anyone working ‘under a contract personally to do work’. This means that casual staff and self-employed contractors need to be considered – both in terms of headcount and also the financial rewards they receive.  There is, however, a recognition that if you don’t have the relevant data about an individual – or it’s not reasonably practicable to obtain it – you don’t have to include it in your calculations.

So, what should your business be doing to ensure you’re complying with the law? First of all, establish if you are a ‘relevant employer’ under the terms of the regulations. If you believe you are, then start the process of analysing your employees’ remuneration packages and assembling the necessary information to make your calculations.

Remember, if there is a significant pay gap within your organisation, it may have PR implications for you. So now is the time to start thinking of the narrative you may choose to publish alongside the figures – explaining why there’s a discrepancy and informing the wider world of what you’re doing to address it.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Do all the government’s noughts and ones add up?

PETER WILKINSON of Barnett & Turner’s Associate firm, Langtons has been closely involved in discussions of the government’s plans to digitise the tax reporting system. Here he gives his own perspective on a number of the questions accountants and their clients are asking. Is the whole ‘Making Tax Digital’ project actually going ahead?

Yes. A number of related consultations were launched in November last year, but it’s pretty clear the plans will proceed, albeit with a few fairly minor concessions. We were hoping to get the final shape of it in the Finance Bill. However, this is light on detail and it is clear that a lot of the rules are going to be made by regulations, which will minimise parliamentary scrutiny.

The plans are controversial, aren’t they?

Again, yes. The Treasury Select Committee, chaired by Andrew Tyrie MP, supports the principle of digitisation. At the same time, they’ve gone through the proposals in forensic detail, taken evidence from a variety of people including the Federation of Small Businesses, and concluded that a year’s lead time for the project just isn’t enough. At the moment, their feeling is the supposed benefits just aren’t proven. They recommend pilot schemes to see how the idea works in practice.

What will the new regime actually mean for businesses?

Effectively, you’ll be making five tax returns a year. HMRC doesn’t see it that way, but you’re going to be expected to report quarterly on your income, expenditure and taxable profit. If that’s not a tax return, then what is? You can paint stripes on a horse, but that doesn’t make it a zebra!

You’ll then have to put in a further return at the end of the year, making corrections as appropriate to your earlier submissions. You will need software to upload the relevant data to the Revenue.

Will smaller businesses be able to cope?

That’s a good question. HMRC assumes that everyone will use business software and it will be a straightforward data dump. But a lot of small businesses don’t have the correct level of sophistication. Can their software deal with debtors and creditors, for instance? With stock and work in progress? We’ve been told that it will be possible for very small companies to submit three-line accounts – their turnover, expenses and profit.  But if that’s it, there does really seem little point to the whole exercise.

Are there any exemptions?

Practically none. Your turnover would have to be lower than £10,000 per annum to stay outside the new digital system.

Could it be that we’ll have to pay tax quarterly?

For the moment, the answer is no, although many people have speculated that this may be the long-term goal of the government.

What are the cost implications for business?

It seems very likely that larger accountancy bills will become the norm. And although there’s some suggestion that companies may be able to continue using Excel spreadsheets with some kind of technological bolt-on, the chances are you’ll need some new software. The government is trying to persuade developers to offer this for free, but whether that comes to fruition remains to be seen. There is bound to be expense in setting the new system up, training people in its use and so on.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Connecting the farmhouse: the challenges of technology in rural areas

When you live in a rural community, it’s not always possible to access the services city-dwellers take for granted, writes Jonathan Wilson of Barnett & Turner, Chartered Accountants. If you’re based in a big town or city, you tend to take access to the internet for granted. It’s one of those services that you expect to find alongside water, gas, electricity and other utilities.

Travel out into the rural heartlands and you’ll see a rather different picture though.

In farming country, some of the properties are just too remote for BT (which has a near monopoly on the installation of fibre connections around the UK) to view as financially viable. Taking a cable to a farmhouse a mile or more from the nearest road seems to be a step too far. In fact, communications regulator OFCOM noted in December 2016 that nearly a million rural properties didn’t have decent broadband connections.

There are a number of proposed solutions to this problem, including opening up the market to small providers and offering vouchers to residents, who may ‘club together’ to select the service which is most cost effective.

In the meantime though, there is a real issue for farmers, in that HMRC assumes that everyone will be filing returns online as part of the government’s imminent Making Tax Digital strategy.

The days of an old-style paper-and-pen VAT return and a paper cashbook are now numbered. We live in a world of cloud-based accounting, but it presupposes access to the web. A flaky 3G signal on a mobile isn’t really a practical or reliable option and dongle-based access is highly expensive.

As farms pass between the generations, more and more of our clients are committed to the idea of online accounting, but are frustrated by the broadband service available to them.

In the short term, the best option may be a quarterly meeting with your accountant. Inevitably, there would be a cost implication, but your professional adviser is likely to be based in a town and have high-speed web access. There may, of course, be an advantage to these more regular get-togethers. You can use them as an opportunity to ask questions and seek advice, while your accountant can keep a closer eye on the state of your finances in real time.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

How an Association can work for you

Jono Wilson of Barnett & Turner in Mansfield, Notts, explains the benefits of choosing an accountancy partner that is well connected. If you’re a business owner, selecting the right accountancy firm can often be a daunting prospect. Is there any real way of distinguishing one from another? What criteria can you use to make an informed choice?

And if you’re running an SME, your instincts might well be to go with a small, independent partner. They will, after all, have an intuitive understanding of some of the issues you face, while also offering a level of personal service you might assume a bigger firm can’t provide.

But at the back of your mind, there’s an understandable question mark. Will they have the depth of knowledge, resources or training of the ‘big boys’?

That’s where a Associated firm can be the perfect compromise.

Ask if the practice is a member of HCWA. If the answer is yes, that should give you a lot of reassurance. It’s an association that has grown steadily in recent years and provides individual member firms with a wide range of resources.

First of all, the association helps to organise audits, which are conducted by peers and specialists. These ensure that each member firm is performing to the correct standard and embracing the latest thinking on best practice.

It helps develop the partners, accountants and support staff within a business – ensuring they have the training to keep right up to date with changes in regulation and the provision of professional services.

Members of the association will have access to survey information, technical support and online tools. They’ll get to meet regularly with their peers in forums and conferences to discuss the latest issues impacting clients.

One further advantage is that different firms will, of course, have expertise in particular areas of accountancy or operate in specific jurisdictions. So if your own professional adviser doesn’t have the necessary expertise to help you with a particular issue, they are likely to be able to refer you to someone who does.

The message is that you can still think small in terms of personal service, while drawing on a support network that is many times bigger.  So that HCWA question really can be all-important.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk

Are you active or passive?

Jonathan Wilson of Barnett & Turner explains two fundamentally different approaches to fund management The world of investment funds can often seem confusing, but a few simple pointers can give you a head start. Perhaps the most important issue you need to take into account is whether any fund is ‘active’ or ‘passive’.

An actively managed fund is run by a fund manager or investment team. These professionals are responsible for all of the fund’s investment decisions, including when to buy or sell assets.

Passive funds are often run by computer software, which tracks or replicates a market or index and includes tracker funds or Exchange Traded Funds (EFTs). The fund management fees tend to be far lower than those of an actively managed fund, reflecting the fact that there is no market analysis involved. These passive funds select all of the assets in a specific market, providing a return that reflects the performance of that market as a whole.

Active fund managers aim to deliver a superior return over the longer term, through extensive research and analysis of markets, sectors and companies. Charges are inevitably higher for active management, because of the amount of work and expertise involved before investment decisions are made.

The higher returns that are expected from an actively managed fund rely on the skills of the investment team. It is important that fund managers can demonstrate a successful track record and that means you should do some careful vetting before making an investment in an actively managed fund.

Find out more by speaking to your professional advisers.

If you would like to discuss anything related to this article please do not hesitate to call Barnett & Turner on 01623 659659 or email Jonathan at jwilson@barnettandturner.co.uk