Please do not get caught out by these proposed tax changes!

The Impact of Upcoming Tax Changes

Here at TAG Accountants Group, we help our clients keep their tax bills down with expert tax planning.

This time, we look at changes to the basis of assessment for the self-employed which could lead to extra tax in 2023-24 as well as those of soon-to-be divorcees. Finally, we include a timely reminder regarding lifetime gifts and associated inheritance tax issues.

Self-employed – potential tax pain in 2023-24

The changes to the basis of assessment of self-employed profits are scheduled to change from 6 April 2024 as part of Making Tax Digital for Income Tax. Under the new rules, profits/losses will be assessed based on the amounts arising between 6 April and 5 April instead of the profit/loss of an accounting period ending in the tax year. This means that in future where your business accounts do not coincide with the tax year, profits or losses will need to be apportioned.

The proposed transitional rules mean there could be large tax bills for sole traders and partners, particularly those with a 30 April year-end. So, under the current rules, the profits of the year ended 30 April 2022 would be taxed in 2022/23 and under the new rules, tax for 2024/25 would be based on the actual profits arising between 6 April 2024 and 5 April 2025.

It follows that profits taxed in 2023/24 would be all those for the year ended 30 April 2023 plus those for the period 1 May 2023 to 5 April 2024 – in other words, in this example, 23 months of profits would be liable to tax!

Whilst there would be up to 11 months deduction for “overlap relief” (which typically arises when profits are taxed twice at the start of the business), unfortunately, these overlap profits will often be much lower than the extra 11 months being taxed (in this example) in 2023/24. That said, transitional provisions allow “excess” profits to be spread over the next five tax years to help lessen the impact on cash flow.

If you have concerns about the potential impact of these changes may have on your tax bill, then please book an appointment to come and discuss them with us.

Changes to tax rules on separation/divorce

Draft legislation included in Finance Bill 2023 extends the no gain/no loss rule when a couple separates.

The current no gain/no loss rule means that there is no capital gains tax (“CGT”) on transfers of assets between spouses or civil partners before the end of the tax year in which they separate. The divorce settlement or court order that transfers assets between the couple can take a substantial time to be agreed upon after the separation and this can lead to CGT being payable.

Under the draft legislation, separating spouses or civil partners will now be given up to three years after the year they cease to live together to make no gain/no loss transfers. In practice, most divorces are concluded within this period.

This no gain/no loss treatment will also apply to assets transferred as part of a formal divorce agreement.

Beware of the gift trap

Most gifts made during a person’s lifetime are not subject to tax at the time of the gift.

These gifts, or lifetime transfers as they are known, are potentially exempt transfers (“PETs”) becoming exempt from Inheritance Tax (“IHT”) if the taxpayer then survives for more than seven years.

Note that should the donor die between three and seven years after the gift, tapered relief is available, with the effective rates of tax on the excess over the IHT nil rate band for PETs being:

• 0 to 3 years before death 40%
• 3 to 4 years before death 32%
• 4 to 5 years before death 24%
• 5 to 6 years before death 16%
• 6 to 7 years before death 8%

It is well worth noting that the rules are different if the person making the gift retains some ‘enjoyment’ of the gift made, usually where the donor does not want to give up control over the assets concerned. Such gifts fall under the heading of ‘Gifts with Reservation of Benefits rules’ or ‘GWROBs’.

A common example we come across is a person seeking to give their house away to their children but continuing to live in it rent-free, in the meantime. Under these circumstances, HMRC could contend that the basic position of the donor remained unchanged and that this is a GWROB.

If this is the case, HMRC will not accept that a true gift has been made and the ‘gift’ would remain subject to IHT even if the taxpayer dies more than 7 years after the transfer. A GWROB can usually be avoided in this situation if the donor pays full market rent for the use of the asset gifted.

We would be happy to help you understand what options are available to reduce your liability to IHT whilst at the same time protecting your assets, as there are alternative options available; IHT can be avoided with advanced tax planning.

The team at TAG Accountants Group is here to help

We believe that tax planning can result in real savings, so if any of the above issues are causing you concern, call us here at TAG Accountants Group, Wolverhampton on 01902 783172 and book a confidential appointment with one of our friendly experts.

Alternatively, just click HERE to contact us via our website and one of our team will be in touch.

We very much look forward to hearing from you