Tax traps: Beware

Lighthouse 3rd May 2023

With the UK tax system as complicated as ever, there are certain rules which we come across that can very easily give a particularly unexpected (and unpleasant) consequence.

Income Tax

When either parent has taxable earnings over £50k (after personal pension contributions), entitlement to child benefit is reduced. As higher rate income tax starts at around the same income threshold, for those who have received child benefit, and now have to repay all or part of it, this can result in the tranche of income between £50k and £60k being taxed at the following marginal tax rates:

If Salary (normally at 40%)          If Dividends (normally at 34%)

  • One eligible child                                        53%                                           46%
  • Two eligible children                                    61%                                           55%
  • Three eligible children                                 69%                                           63%
Inheritance Tax

Most business owners will be aware that if they die holding shares in the family trading company, they will probably pay nil inheritance tax (IHT) on this value in their estate, as their executors will claim business property relief (BPR). However, if the business is sold, exchanging these shares for cash and/or deferred consideration, this value is now no longer covered by BPR, so the full amount will potentially be exposed to 40% IHT.

Corporation Tax

Instead of paying their corporation tax 9 months after the year end, limited companies with taxable profits over £1.5m pay this tax in quarterly instalments; 2 during the year and 2 after. However, this size threshold is divided by the number of associated companies (ie under common control). So a company in a simple group which has a particularly good year can easily find itself within this unfamiliar regime.

ATED Return Late Filing Penalties

Where a company purchases or builds a residential property to occupy, let out or sell and it costs over £500k, an ATED return needs to be submitted to HMRC within 30 days, for purchases, or 90 days for newbuilds/conversions. If this deadline is missed, perhaps because you wrongly assume that this is a year-end process, a combination of disproportionately harsh fixed and daily penalties are automatically levied (even if no ATED tax is due because letting out or onward selling the property makes it a nil return).

 

As with all tax matters, speak to us before straying into unknown territory, so that we can explain the tax consequences and advise you of any mitigation steps that you might wish to consider.

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