The View from No 50





September 2015

K P Bonney & Co

Chartered Accountants and

Chartered Tax Advisers

50 Cleasby Road  Menston

Ilkley  LS29 6JA

Tel:  01943 870933

Fax:  01943 870925







We are all reasonably familiar with the inheritance tax nil rate band.  It is that part of an estate which is chargeable to inheritance tax at the rate of nil per cent.  The band has been fixed at £325,000 since 2009/10.  In the July 2015 budget speech the chancellor announced it will remain fixed at this level until 2020/21.


What he also announced in the speech was a new additional nil rate band which will be available when a residence is passed on death to a direct descendant.  The new additional nil rate band will be phased in as follows:


2017/18                                      £100,000

2018/19                                      £125,000

2019/20                                      £150,000

2020/21                                      £175,000


So we are still the best part of two years away from this new nil rate band coming into effect.


Like the original nil rate band, the additional nil rate band will be transferable where the second spouse or civil partner of a couple dies on or after 6 April 2017 irrespective of when the first of the couple died.


The qualifying residential interest will be limited to one residential property but personal representatives will be able to nominate which residential property qualifies if there is more than one in the estate.  Only those properties occupied as a residence by the owner qualify.  Buy to let property does not qualify.


Direct descendants include children, grandchildren and adopted and foster children.


If the value of the estate of the deceased exceeds £2 million the additional nil rate band is tapered away by £1 for every £2 by which the net estate exceeds that amount.


There is no loss of additional rate band if the deceased down-sizes on or after 8 July 2015.  The original entitlement is preserved provided the deceased leaves the smaller residence, or assets of equivalent value, to direct descendants.  Quite how this is going to work has still to be decided.


This additional nil rate band is a relief targeted closely at the increasing number of families who find themselves caught in the inheritance tax net as a result of increasing house prices and the frozen basic nil rate band.


It is a shame the full £175,000 is not introduced straight away.


It is a shame we have all this extra complication.  Why not just increase the basic nil rate band?






In order for a business expense to be deductible for income tax purposes it must be incurred wholly and exclusively for the purposes of the trade.


Tim Healy is an actor, known for parts in Benidorm and Auf Wiedersehen, Pet.  He was engaged to play a part in the West End production of Billy Elliot.  Mr Healy lives in Cheshire.  During rehearsals he lived in hotel accommodation.  Later, when it was clear the production was going to run for a while, he rented a flat.


He claimed the costs of the hotel accommodation and the rental of the flat as business expenses.  HMRC allowed the former but disallowed the latter.  Mr Healy appealed.


All was set for an interesting exploration of the wholly and exclusively rule.  There is a certain nervousness on this side of the fence about whether the cost of longer term accommodation meets the wholly and exclusively test.   After all, the longer a lease or rental commitment, the more likely it is that the lessee has purposes beyond business ones.


In the skirmish before the Upper Tier Tribunal the judges set down nine principles to help determine whether expenditure meets the wholly and exclusively test.  Importantly, the judges there expressed the opinion that an extended lease or rental commitment need not necessarily prevent the rent from being deductible.  What matters is the purpose of the taxpayer in incurring the expenditure.  If there is any purpose, other than a business purpose, the expenditure is not deductible.


Having laid down the ground rules the Upper Tier Tribunal referred the case back to the First Tier Tribunal to re-consider the facts and its decision.


So all looked good for Mr Healy, particularly as the period of notice he had to give on his flat matched the period of notice he had to be given by the company putting on the production of Billy Elliot.


Back at the First Tier Tribunal it was noted that under cross-examination Mr Healy said he had rented this particular three-bedroom flat because he knew the production was going to succeed and he would need extra space to receive visiting friends and family.


Cue the tumbleweed. 


We have a second purpose; a non-business purpose.  That was enough to deny Mr Healy’s claim.  The case was lost.


Not so much a case of an actor forgetting his lines as ‘the truth will out’ - Merchant of Venice 1596.






In the run up to the election the chancellor promised a conservative government would not raise income tax, VAT or national insurance.  In the July budget statement the same chancellor announced a new tax on dividends. 


7.5% for basic rate taxpayers

32.5% for higher rate taxpayers and

38.1% for additional rate taxpayers


Before these changes the effective rate of tax on dividends was


0% for basic rate taxpayers

25% for higher rate taxpayers and

30.6% for additional rate taxpayers


If that isn’t a rise in income tax what is it?


Maybe his counter-argument is that for some this is a tax increase and for others it is a tax decrease.


How so?


From 6 April 2016 we each have a dividend allowance of £5,000.  That is new.  That will mean that those with dividend income of no more than £5,000 will be no worse off under the new rules and could be better off.


Those with dividend income of more than £5,000 will mostly be worse off but some could be better off.


On simplification this government talks the talk but certainly doesn’t walk the walk.


Your dividend income is always treated as the top slice of your income.  Your £5,000 dividend allowance is not an exemption.  It is more like a moving nil rate band.  So whether you are a basic rate taxpayer (income < £42,700), a higher rate taxpayer (income < £150,000) or an additional rate taxpayer (income > £150,000) you slot your total dividend income on top of all your other income.  The first £5,000 of your dividend income is charged at 0% and the remainder is taxed according to where it falls. 


So if your income excluding dividends amounts to £40,000 (i.e. £2,700 of basic rate band remaining) and your dividend income is £7,500, your dividend income is taxed as follows:


First £5,000 at 0% - £0.00

Next £2,500 at 32.5% - £812.50


It is important to understand, as illustrated in this example, the £5,000 allowance is a moving nil rate band, not an exemption.


Some will be caught out by this.






Every ten years the monks in the monastery are allowed to break their vow of silence and speak two words. Ten years go by and it’s one monk’s first chance. He says, “Food bad.”


Ten years later and he gets another chance.  This time he says, “Bed hard.”


On the next ten year anniversary he gives the abbot a long hard stare and says, “I quit.”


“I’m not surprised,” says the abbot.   “You have done nothing but complain since you got here.”




Copyright:  K P Bonney & Co LLP 2015.  All rights reserved.  No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers.  Disclaimer:  The publishers have taken all due care in the preparation of this publication.  No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.


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