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Personal Perspectiv Name

Sectes

KPMG Private Client Newsletter

Edition 5

kpmg.co.uk

Introduction

Welcome to Edition 5 of Personal Perspectives

The forthcoming reduction in the top rate of personal tax is welcome as is the introduction of Business Investment Relief to attract investment by non-UK domiciled individuals into UK business. These measures should help the UK back to growth by welcoming entrepreneurs and wealth creators to our shores and encouraging high net worth individuals to stay here.

Everyone is searching for growth, particularly in the current economic climate. Our client interview in this edition is with Paul Evans, he shares his journey from being a ‘man with a van’ to being the man with a fleet of trucks, 52 offices in 35 countries and 1,200 employees.

We look at the creation of growth shares for setting up structures into which value can accrue; using general partnerships for family wealth and tax planning and at how a share buy back could return value to a shareholder who wishes to exit the business.

With comment from Knight Frank and Strutt & Parker, we consider the state of the high-end residential property market following the Budget announcement of increased rates of Stamp Duty Land Tax and, from next April, the proposed annual charge and capital gains tax for nonresidents. In addition, with increased evidence

of residential planning consent now being granted across rural areas of the UK, there are a variety of tax issues for landowners to consider when entering into contractual agreements with property developers.

Clients are increasingly finding that the international dimension is critical to their business and personal position. To this end, KPMG have formed an International Private Client network, comprised of private client specialists around the world. The group meets regularly to share latest developments to ensure that our clients have a team of advisers based all over the globe who regularly work together.

With much comment by politicians and in the press about tax planning and the recently issued consultative document on the proposed introduction of a General Anti-Abuse Rule we have included an article about reasonable tax

planning. For taxpayers, determining whether their arrangements are reasonable or not, is likely to be one of the most diffi cult aspects of the proposals to interpret.

As always, if there’s anything you’d like to see covered or if you’ve got any feedback on this latest edition, please do get in touch.

Dermot Callinan Head of Private Client T: +44 (0)113 231 3358 E: [email protected]

© 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

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Personal Perspectives | 2

Contents

Introduction 01

The man with a van: Paul Evans 03

What is reasonable tax planning? 05

The state of the UK property market 07

Planning gains 09

Parting the mists - are you prepared for the future? 11

Gravity v Globalisation 13

Not non dom, not bothered? 15

Share buy backs and getting Entrepreneurs’ Relief 17

Non-Executive Directors - Personal Service Companies and IR35 19

The use of general partnerships for family wealth and tax planning 21

Update: signifi cant changes ahead 23

Cover image: Planet earth with sunrise and moon in space © 2012 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

3 | KPMG Private Client Newsletter

The man with a van Paul Evans Everyone is searching for growth, particularly in the current economic climate. Paul Evans did it the old-fashioned way: by working hard and grasping opportunities.

You don’t hear much about companies in the international removals and relocations space and so the chances are, you’ll not have heard of Paul Evans and his rise from a man with a van to the man with a fleet of trucks and 52 offices in 35 countries and 1,200 employees.

“I have been lucky,” Paul, who had polio as a child and survived a bad car accident as a teenager, says modestly, adding: “But it’s a funny thing how the harder you work the luckier you get.”

In fact, listening to the 65-year-old’s colourful business journey from humble roots, it seems his success stems mainly from a combination of seizing the moment and always keeping a keen eye on margin.

The purchase of his first van was not actually intended for removals at all, but to go travelling around southern Europe and North Africa.

“I was in my early 20s with no sense of what I wanted to do with my life, working as a mini-cab driver and night-time controller in Holland Park and saving up money to go travelling,” Paul, who grew up in south London and left school at 17 with only O Level qualifi cations, says.

“There were a lot of antique dealers in that area who were always asking my employer to move a bed or a chest of drawers or a wardrobe or something. The taxi firm couldn’t do it. But once I bought my van I started using it to take the jobs.”

That early foray into removals gave Paul a sense of direction he had previously lacked.



“success stems mainly from a combination of seizing the moment and always keeping a keen eye on margin”

So was born P&M Removals (P for Paul and M for Mickey, an old school friend who he met again on this way back from travelling in Spain), which started life with two Pantechnicon vans and half a dozen garages the duo rented for furniture storage.

“We paid about £10 a week for a bedsit in South Kensington, and £65 a week for the garages. We took in about £200 a week from clients renting the storage space for their household contents,” says the entrepreneur, who also took advantage of 100% mortgages available at the time to buy a selection of buy-to-lets.

He recalls with amusement his first stab at sales and marketing with a small ad in the Evening Standard: Global Deliveries Anytime, Anything, Any Place.

Four decades and a number of businesses later, with KPMG at his side, his most recent success was with Interdean.

“When I purchased Interdean from a consortium of banks in December 2005 it was a loss making

blue-collar moving company, packing and shipping for companies relocating employees abroad, but there was no profitable future in that,” Paul explains “The trend in the industry was for those sorts of businesses to become global assignment managers, managing the whole relocation process - still including the packing and shipping, but also from sourcing schools and homes to expense tracking, visas and work permits.

“If we hadn’t gone upmarket, Interdean would have effectively become a sub-contractor to its white-collar institutional rivals and would have been squeezed out of business.”

Paul’s strategy was so successful that he sold the company to a Danish public company last August for many times what he had paid for it.

Having signed a two-year non-compete agreement, Paul (who thought about retiring for at least 5 minutes) is now embarking on a new venture, a chain of UK-wide nightclubs that he has purchased from an administrator, which

includes Oceana, Lava, Ignite, and Liquid amongst others. He now owns the controlling share, with three other long standing business friends taking significant stakes, and joining the main board. He is excited about this new challenge.

“I know nothing about nightclubs,” he confesses. “But I think all businesses are a bit like cars. There are different makes, speeds and functionality and quality, but one thing in common: they all need petrol, which is sales and marketing…they all need belief in the product; and the main ingredient, which is building a team and working with fantastic people to keep enhancing the engine and make sure it’s running at peak perfection!”

The views expressed in this article are those of the interviewee and do not necessarily represent the views and opinions of KPMG LLP (UK)



What is reasonable tax planning? Where will the Government draw the line? Whilst there is a clear technical distinction between legal tax avoidance and illegal tax evasion, for some commentators this distinction has become irrelevant when viewed from a purely “moral” perspective. George Osborne in his Budget speech in March continued this theme saying “I regard tax evasion and indeed aggressive tax avoidance, as morally repugnant.”

It is also the case that in recent years the Courts have been applying a more “purposive” interpretation of the tax legislation, creating a further obstacle for tax avoidance schemes to overcome, by considering whether the result of a particular situation is what Parliament intended.

Following an independent study lead by Graham Aaronson QC on whether a General Anti-Abuse Rule (“GAAR”) should be introduced into the UK tax system (which was considered in Edition 4 of Personal Perspectives), the Government is pressing ahead with a GAAR and a consultation document was issued on 12 June with a view to introducing legislation in the Finance Bill 2013.

The purpose of the GAAR is to counteract tax advantages arising from abusive arrangements whilst allowing “reasonable tax planning”.

What is reasonable? But just what is reasonable? It seems clear that the Treasury has the tax avoidance industry in their sight. The requirement to disclose tax avoidance schemes has made inroads, but there are still many “off the shelf” schemes which are very likely to be caught by the GAAR.

Two common examples of tax planning which have been in the press in recent years are:

• A partnership or sole trader transferring their business to a company, attracted by lower rates of corporation tax; and

• A taxpayer claiming business trading losses to be offset against his other income in a tax year.

Would these cases be deemed as reasonable tax planning? To consider this further, we must look at the position in relation to the proposed GAAR.

In summary, the proposals advise that we should consider the following in respect of an arrangement:

• whether it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements; and

• if the arrangements are “abusive”. To consider this one has to decide whether an arrangement is reasonable i.e. if an arrangement can be “reasonably be regarded as a reasonable course of action” and what is regarded as a reasonable course of action must take into account factors such as the relevant legislation, the results of the arrangement and if the arrangement forms part of other arrangements. This is also known as the “double reasonableness test”.



“ For taxpayers, determining whether their arrangements are reasonable or not, is likely to be one of the most dif ficult aspects of the proposals ”

So how does the GAAR apply to our examples? Our initial view would be that a choice of business vehicle should fall within what is considered as reasonable tax planning. Similarly, claiming reliefs or making elections specifi cally provided for in the legislation should be reasonable. However, these reliefs have been used in a number of different ways ranging from genuine commercial transactions to pre-packaged manufactured schemes which makes these arrangements abusive. The introduction of a cap on unlimited income tax reliefs is a response to the manufactured loss relief schemes available.

The Government states that the proposed double reasonableness test is intended to provide some context for deciding whether it is reasonable to regard entering into or carrying out an avoidance arrangement as reasonable. However, for taxpayers, determining whether their arrangements are reasonable or not, is likely to be one of the most diffi cult aspects of the proposals as they currently stand and different stakeholders will have different views on what is reasonable or not.

Given the uncertainty as to whether the GAAR will block the intended abusive arrangements it is important that appropriate tax advice is sought prior to entering into any tax planning.

KPMG in the UK are actively participating in the process and will respond fully to the consultation document. Please do contact us if you have any concerns regarding the above.

Nick Pheasey Director, Private Client T: +44 (0) 161 838 8327 E: [email protected]

Karen Fan Manager, Private Client T: +44 (0) 161 246 4776 E: [email protected]


mailto:[email protected]:[email protected]


The state of the UK property market

Ahead of this year’s Budget, George Osborne made an emotive pledge to ‘come down like a ton of bricks’ on wealthy property buyers, promising an ‘aggressive attack’ on those who avoid paying stamp duty land tax (‘SDLT’) on their houses.

Sure enough, the Budget contained a raft of new legislation and proposals which sought to increase the rate of SDLT on such properties and also introduce punitive charges where individuals acquire residential property through companies. This was part of the Chancellor’s drive to ensure that ‘all sections of society are paying their fair share.’

The legislation will potentially impact on owner occupiers and investors in residential property alike. There is a carve out for property developers but, at the moment, not for investors. This does not appear to be consistent with the Government’s stated policy intention of growing the private property rental sector. KPMG in the UK will be making representations about this during the consultation period which closes on 23 August 2012.

The measures introduced, effective from Budget day were: • A new 7% rate of SDLT on the acquisition of

residential property costing more than £2m;

• A new 15% rate on the acquisition of residential property costing more than £2m by “non-natural persons”;



“The legislation will potentially impact on owner occupiers and investors in residential property“

• Furthermore, from 6 April 2013, following a period of consultation, the introduction of an annual charge on “non-natural persons” that own residential property with a value of more than £2m and the introduction of capital gains tax on the disposal of residential property by non-resident, “non natural” persons.

More details of the changes can be found in our UK Residential Property Update

Clearly how UK residential property is acquired needs careful consideration going forward. Taxpayers with existing structures holding UK residential property may also wish to consider whether these can be unwound or restructured. In both cases it should be noted that the Chancellor did not rule out the possibility of further retrospective legislation to counter attempts to defeat the rules.

From a commercial perspective, the obvious question is whether these new rules will impact on the residential property market and infl uence prices and liquidity. This could also have a knock on effect on the wider economy and investment

in the UK if the housing market slows and the rules impact on the traditional view of London as a prime destination for wealthy investors and entrepreneurs.

Will domestic and international demand in the London property market be able to absorb a new stamp duty rate of 7%?

Miles Meacock of Strutt & Parker comments: “We are seeing the usual hiatus surrounding this daunting new tax bracket, but I think it will be highly unlikely our market will take a hammering because of its introduction. London is resilient. Prices have increased significantly over the past few years so there is some room for a small adjustment.”

Inward investment and internationally mobile individuals are an important part of this market. It is not too difficult to imagine a scenario where very wealthy individuals could be put off buying property in London if they have to buy in their own names (where privacy is often as important a factor as tax) or face an SDLT rate of 15% and ongoing charges.

Liam Bailey of Knight Frank believes that, “It seems pretty clear that the 15% rate and the threat of an annual charge will dissuade a large number of buyers from buying through a company structure, whether they will buy at all will depend on their ability to use trust, nominee or other alternatives to provide the privacy they were initially looking to achieve through the company structure.”

It is early days in terms of quantifying the commercial impact of these rules on the UK property market and the wider economy generally. But it is clear the Chancellor was as good as his word. Owners of residential property in such structures need to consider the way forward as a matter of urgency.

David Kilshaw Partner, Private Client T: +44 (0) 207 311 2841 E: [email protected]

Pete Saunders Director, Private Client T: +44 (0) 115 936 3661 E: [email protected]




Planning gains The requirement for additional housing in the UK together with proposed changes to the planning process, has led to speculation around residential planning consent being granted across rural areas of the UK.

There are a variety of tax issues for landowners to consider when entering into contractual agreements with property developers. In addition, where agricultural land is involved, there may be scope to restructure landholdings and farming businesses to maximise the benefits of capital gains tax (‘CGT’) Entrepreneurs’ Relief and inheritance tax (‘IHT’) Business Property Relief.

Farming business If an individual realises a capital gain on the sale of land which is let to a tenant farmer (say under a Farm Business Tenancy), this should be subject to CGT at 28%. It may be possible for the landowner to improve their tax position if they are prepared to take a more active role in the farming business.

For instance, if land is farmed in-hand, a future sale of land may qualify for Entrepreneurs’ Relief and be subject to CGT at 10% rather than 28%. If it is necessary for the landowner to involve another farmer to assist with the

farming process, this could be done via a Share Farming or Contract Farming Arrangement. With the current Entrepreneurs’ Relief lifetime limit at £10m, this could result in a potential CGT saving of £1.8m per individual on a future disposal. However, if Entrepreneurs’ Relief is to be secured, it is important to ensure that the necessary conditions are met throughout the 12 months prior to sale.

Widen business participation If appropriate, the ownership of the farming business could be widened to include other family members who could potentially access additional Entrepreneurs’ Relief lifetime allowances. Where the business is carried on by several parties, a partnership may provide a suitable operating structure.

From a tax perspective a partnership is transparent so each of the partners is taxed on their share of the capital and income profi ts as determined by the partnership agreement. It is possible to have individual and corporate

partnership members and to split income and capital profit shares. Therefore, a partnership offers considerable flexibility from a tax perspective.

Separate businesses To benefit from Entrepreneurs’ Relief, it may be necessary to cease the farming business prior to a land sale. Where larger estates or diverse businesses are involved, it may be appropriate to separate the business into discrete parts in order to facilitate an effective cessation. Where this is relevant, it may be sensible to do this sooner rather than later given the 12 month holding period requirement for Entrepreneurs’ Relief purposes.

Providing for future generations As well as involving younger generations in the business it may be appropriate to make provision for them, say via a family trust. Provided relevant business assets are settled into trust there should be no immediate IHT or CGT charges.



“there may be scope to restructure … to maximise the benefits of capital gains tax Entrepreneurs’ Relief and

inheritance tax Business Property Relief”

Options over land There are a variety of alternative agreements (i.e. options, conditional sales and overages) that are used to try and achieve the commercial objectives of the developer and landowner. Depending how the agreement is drafted, there is a risk HM Revenue & Customs could try to subject the sale proceeds to income tax rather than CGT. However, provided the agreement is structured correctly from a tax perspective, the proceeds should be subject to CGT at 28% (or potentially 10% if Entrepreneurs’ Relief is available), rather than income tax at 50%.

Dermot Callinan Partner, Private Client T: +44 (0) 113 231 3358 E: [email protected]

Jonathan Turne r Senior Manager, Private Client T: +44 (0) 113 231 3385 E: [email protected]




Parting the mists - are you prepared for the future? No, we aren’t blessed with a crystal ball or the ability to read tea leaves, but business owners do well to keep an eye to the future. Do you have suitable arrangements in place for potential eventualities?

Funding the next generation This is a common problem – the successful business owner providing financial support to his daughter at university or assisting his son to buy his fi rst home.

In the absence of other arrangements, the business owner uses taxed monies to support his children. This is inefficient where the children are not personally paying tax at the higher rate.

A straightforward, but sometimes unsatisfactory, solution is for the children to hold shares in the business.

More sophisticated, and often preferable, alternatives are the use of family trusts, partnerships or investment companies, making provision for the children and generations beyond them.

Planning for the inevitable The old adage is that only two things are certain in life – death and taxes. A family trust can help deal with some difficulties that the former presents to the family, while in some cases minimising the latter.



“If implemented say 2 to 5 years from a sale there may be little or no tax cost on transferring growth shares into an offshore structure”

A tool to reduce family diffi culties? On the death of the original owner, the business may become divided amongst family members, effectively fracturing the holding into small pieces. This can give rise to disagreements amongst family members and also cause uncertainty as regards the business.

If a family trust holds shares in the business, that rump of the shares are kept in a single ownership which can remove some of these tensions. The trust’s shares are held for the benefit of a number of family members.

Whilst the trust could be established on death, experience suggests that this can cause its own difficulties within the family, compared to the position if the trust is already in existence.

A tool to minimise tax on death? Where the business owner dies after the time of a sale, the post tax proceeds would be subject to inheritance tax. This, together with capital gains tax on sale, can mean that the family are left with only 43% of the total value of the business.

If value had been held by a family trust, there would be no inheritance tax charge on the death of the individual, increasing the funds available to be invested for the benefit of the family.

Planning for the sale of the business On an exit, capital gains tax will be due at 28% (possibly reduced by Entrepreneurs’ Relief). With planning, a capital gains tax deferral may be achieved. This could involve the creation of a ‘growth share’ held in an offshore structure to which value accrues.

There is a tax deferral until funds are drawn out of the offshore structure in the future. In certain circumstances it may be possible to draw funds in a tax free manner.

Funds could remain in the structure, invested gross in a tax free environment, providing a legacy for future generations.

Managing the ticking clock Whilst family trusts or alternative structures can be established at any point in time, often the costs in doing so are significantly lower if established

at an earlier stage. For example, if implemented say 2 to 5 years from a sale there may be little or no tax costs on transferring growth shares into an offshore structure. These costs are likely to increase as a sale becomes closer.

However, whatever the value and stage of the business, it is recommended you review your affairs to make sure that you have fl exible plans in place to deal with potential eventualities. These plans may range from reviewing wills and discussing future plans with family members to establishing family trusts to hold value for generations to come.

Emma Baylis Partner, Private Client T: +44 (0) 121 609 5843 E: [email protected]

Jill Cornforth Senior Manager, Private Client T: +44 (0) 115 936 3642

E: [email protected]




Gravity v Globalisation

“It has been said that arguing against globalisation is like arguing against the laws of gravity” – so said Kofi Annan. And so it is proving in the world of private client.

Clients are increasingly finding that the international dimension is critical to their business and personal position. Recent examples include advising UK based clients investing in China and Italy and an Egyptian family looking to structure their business interests in London. Family offices are another example of the increasing cross border nature of our work – whether it is family members buying homes across the globe or investment offi ces

ensuring their systems are as secure in London as New York and Monaco. The UK/Swiss Agreement and the Liechtenstein Disclosure Facility are further examples of private tax and wealth management becoming an increasingly global practice.

The UK has a major role to play – not only through our non-dom rules which despite everything still remain relatively attractive – but because our trust law and project management skills are still in great demand across the world.

To support the globalisation challenge, KPMG have formed an International Private Client (IPC) network, comprised of private client specialists around the world. The group meets regularly

to share latest developments to ensure clients across the globe have a team of advisers who regularly work together. The KPMG Directory 2012 contains a list of contact details and a complimentary copy is available on request from [email protected] or [email protected]

The network has proved very successful at solving advisory problems across the globe. For example, KPMG in Lisbon wished to create an overseas trust for a Portuguese client who was looking for an asset protection vehicle. The UK was not appropriate, we have a relatively harsh fiscal regime for offshore trusts. The answer lay close at hand, close in advisory terms if not physical ones, in New Zealand.

“KPMG International Private Client network … comprised of private client specialists around the world … meets regularly to share latest

developments … a team of advisers who regularly work together.”



h s on the


The partner in Auckland, Murray Sare lius, explained that foreign nationals can e stablisa New Zealand based trust with no ta x cost- problem solved. The message to al ll c ientand advisers is that there is always a s olutiout there. The key is knowing just wh ere inworld it is!

David Kilshaw Partner, Private Client T: +44 (0) 207 311 2841 E: [email protected]

Mike Walker Partner, Private Client T: +44 (0) 207 311 8620





Not non dom, not bothered?

In the 2012 Budget the Government introduced an investment relief from April 2012 designed to encourage Non-Doms to invest in UK companies. This would usually be the point where UK domiciled individuals turn to the next article but, on this occasion, they should perhaps read on!

The Government’s hope is that the relief will provide a new source of private equity to enable the growth of existing businesses or the creation of new businesses in the UK. The relief could therefore benefit any business owner looking to raise monies and has been widely welcomed.

In order to take advantage of this opportunity, businesses will need to understand the relief and, therefore, how to make themselves attractive to investors who might seek to use it.

The basics The relief applies to monies that are brought to the UK to invest in new or existing businesses that satisfy relatively broad investment criteria as follows:

• The investment must either be a new loan or a subscription for new shares. Existing loans or shares cannot be acquired.

• The company in which the investment is made must be carrying on a qualifying trading activity. Trading activity in this context is far wider in its meaning than is normally the case for tax purposes and even includes the letting of property.

• The company is not quoted on a recognised stock exchange. Shares listed on the AIM and OFEX markets are not treated as quoted for the purposes of the relief.

There are some broadly drawn anti-avoidance rules which deny the relief where it is being claimed for tax avoidance purposes or where benefits are derived from the investment which are not commercial. These should not affect genuine investments in businesses.

There are also various rules on expatriating funds after a future sale. The basic requirement

is that some of the proceeds (equal to the untaxed monies invested) must be expatriated from the UK or reinvested in another qualifying investment within 45 days of receipt. Giving some thought to an exit strategy at the time funding is raised might help to demonstrate to a Non-Dom investor that he will be able to satisfy this requirement.

The income (i.e. dividends or interest) and gains arising on the investment are taxed in the UK in the usual way.

It should be noted that the relief does not currently apply to partnerships but an extension of the relief is being considered for 2013.

Other Reliefs The relief is in addition to other existing tax reliefs. So, for example, it may be particularly tax efficient for Non-Doms who make investments under the Seed Enterprise Investment Scheme



“the relief will provide a new source of private equity to enable the growth of existing businesses or the creation of new businesses in the UK.”

or the “normal” Enterprise Investment Scheme (EIS) to use untaxed offshore income or gains to make the investment.

For example, a Non-Dom with UK income of £1m could invest £1m of untaxed foreign income in a qualifying EIS company. He would obtain a £300,000 refund which could be offset against other UK tax liabilities or be spent in the UK tax free. After three years he could realise his investment and expatriate the monies without any further tax charge. Even if no capital growth was achieved, simply breaking even would have provided a 30% net return. Those looking to raise monies under the EIS rules should, therefore, bear Non-Dom investors in mind.

The new investment relief is undoubtedly good news for Non-Doms, but maybe it could benefi t your business as well.

Daniel CrowtherDirector, Private ClientT: +44 (0) 207 694 5971E: [email protected]

Rob LutySenior Manager, Private ClientT: +44(0) 161 246 4608E: [email protected]


Share buy backs - a tax ef ficient way to return value to a shareholder who wishes to exit the business


Company share buy backs have been with us for many years and most companies now have provisions in their Articles of Association to allow the company to have first call on shares if a shareholder wishes to sell. There are many reasons why a company might wish to buy its shares back, the most common being that it allows the company to control who owns its shares.

In these challenging times, when a full transaction may not be attractive for various reasons, it is often worth exploring from both the company and shareholder perspective, how a share buy back could return value to a shareholder who wishes to exit the business in a tax effi cient manner.

In most cases, a key requirement for the shareholder is that the return of value is treated as a capital receipt for tax purposes. If the conditions are met and the cumulative lifetime allowance of £10m is not used up, Entrepreneurs’



“a staggered exit could be possible where future generated reserves and cash are used to settle the buy back with the result that the existing levels are not impacted”

Relief should mean an effective rate of tax of 10% on the proceeds.

Two common obstacles that are normally real problems for a company’s fi nances are:

• The legal requirement that the company has the distributable reserves to make the repurchase; and

• The requirement to make a full single payment in settlement of the consideration.

However, our experience in practice is that these issues can be overcome. This indicates that a staggered exit could be possible where future generated reserves and cash are used to settle the buy back with the result that the existing levels are not impacted. There are both legal and tax consequences if such a share buy back is not structured correctly. For example, the buy back could be legally ineffective if it is in breach of the Companies Act 2006 since the legislation is clear that the shares being bought back must be paid for in full at the time of the buy back.

A payment by instalments could also mean that the share purchase fails one or more of the tests for capital treatment and the transaction is treated as an income distribution. A 50% taxpaying shareholder would suffer an effective rate of tax of 36.1%. Whilst there are a number of conditions for capital treatment, the following tests are of particular relevance where payment is to be staged:

• The individual’s shareholding must be substantially reduced; and

• Following the sale, the individual must not be connected with the company which means that he must not have more than 30% of the ordinary shares, voting power or loan capital and ordinary shares.

One possible solution could be for the shareholder to enter into an unconditional contract to transfer his beneficial interest in his shares to the company but only a percentage of the shares are cancelled immediately, with the balance being cancelled in tranches over subsequent anniversaries. Since the shareholder is substantially reducing his shareholding at the

contract date, this test would be satisfi ed. Until the time that the uncompleted tranches are cancelled, the shares are commonly converted into non-voting and non-dividend participating shares from the date of the agreement, to ensure that the individual does not remain connected with the company.

In conclusion, if correctly structured a staggered exit may make a share buy back commercially feasible, but for capital treatment to apply, there are a number of conditions that need to be met and it is important that the legal documentation is correctly drafted. The existence of a pre-completion clearance procedure can ensure that HMRC are comfortable that the conditions have been satisfied and help both the company and shareholder secure more certainty as to the tax treatment before completion.

David Furness Director, Private Client T: +44 (0) 118 964 2192 E: [email protected]

Liz Henderson Manager, Private Client T: +44 (0) 118 964 4962 E: [email protected]




Non-Executive Directors - Personal Service

Companies and IR35 Personal service companies (“PSC”) are once again headline news as recent reports focus on their widespread use in the public sector. Whilst the spotlight so far has been on the public sector cases that appear to have avoided the IR35 rules, any changes brought about by the Treasury’s investigations are likely to impact the private sector also. If you are a non-executive director (“NED”), perhaps operating via a PSC, please read on for our update on how the IR35 rules and recent proposals could affect you.

What is IR35? The so-called “IR35” rules were introduced in April 2000 and seek to prevent individuals using intermediaries to pay less tax than they would have if they were directly employed.

The rules apply where an individual, Person A, provides their own services via an intermediary company (Company B), to a client (Company Z) without being paid as an employee. If the contract between Company B and Company Z indicates that Person A would have been an employee had they provided their services directly to Company Z then IR35 generally applies, meaning Company B has a Pay as you Earn (PAYE) and National Insurance Contribution (NIC) liability.

How does this apply to NEDs? For NEDs the starting point is that HMRC regard you as an office holder of Company Z. NEDs are not employees, but as office holders, their fees are subject to PAYE/NIC, which must be deducted by Company Z.

So what about IR35? HMRC state in their guidance notes that if Person A’s only relationship with Company Z is as a NED then the IR35 tax rules will not apply. But, they indicate that IR35 rules may apply to other services, such as consultancy services, which may also be performed for Company Z by Company B.

What does this mean? There are limited circumstances when a NED may not be subject to PAYE/NIC on director’s fees, most commonly where he/she acts as nominee of an investor, bank etc. In addition, if a NED also provides consultancy services that are clearly identifi able and distinct from director’s duties, HMRC will consider all the factors relating to the consultancy to determine whether IR35 applies.

If your PSC (Company B) enters into contracts with clients (Company Z) you will need to closely consider which of those ”clients” you personally are a director of (and therefore subject to PAYE on your fees) and which include consultancy roles (and are therefore potentially within IR35).



“There are limited circumstances when a non-executive director may not be subject to PAYE/NIC on director’s fees”

What are HMRC doing about IR35? HMRC have recently set about improving their guidance and monitoring of the existing IR35 rules, starting with a set of “business entity” tests - you can find the full guidance document containing these tests on HMRC’s website. They indicate they may contact businesses to which they think IR35 could apply and ask to see evidence of the consideration given by these businesses to IR35.

Separately from IR35, HMRC are also considering additional legislation which would require PAYE/NIC to be withheld at source from payments made by Company Z in respect of services provided by “controlling persons” irrespective of whether they operate via a PSC. A consultation was launched on 23 May which among other points seeks to clarify who a “controlling person” is – essentially one who influences the direction of the organisation and has managerial control over signifi cant numbers of employees or budgets. The consultation process is ongoing, but it seems the intention is

for the tax burden to fall more often than not on Company Z rather than Company B, particularly for very senior, high profi le appointments.

Clearly there are implications for all NEDs who operate via a PSC and you should thoroughly review your existing contractual arrangements. If you are in any doubt about the status of any of your appointments please contact us.

Nick Pheasey Director, Private Client T: +44 (0) 161 838 8327 E: [email protected]

Kim Degnan Manager, Private Client T: +44 (0) 161 246 419 8 E: [email protected]




The use of general partnerships for family wealth and tax planning Historically, individuals wishing to pass wealth to their children or grandchildren yet retain control over the assets would often use trusts. Although trusts still have their place (discussed in Edition 3 of Personal Perspectives), the fact that there can now be an immediate Inheritance Tax (IHT) charge when assets are passed into trust, has led to alternative structures being considered for family wealth and tax planning. This includes the use of a general partnership.

What is a general partnership? A general partnership is a partnership in its simplest form. The term ‘general partnership’ distinguishes this structure from other types of partnership e.g. Family Limited Partnership (“FLP”) - discussed in Edition 2 of Personal Perspectives.

For a partnership to exist there must be sufficient commercial activity to ensure that the partnership is carrying on a business and operating with a view to profit. This can be an investment business.

In a family situation where parents wish to pass on wealth, then typically the parents and children will all become partners. Wider family members could also be introduced as partners. The relationship between the partners is governed

by the partnership agreement. This agreement can be very flexible and will outline profi t sharing ratios, voting rights etc.

Partners receive their entitlement to income and capital going forward based on their agreed profit sharing ratios. These ratios can be tailored to meet the needs of each partner. There is no requirement for everyone to have the same share or for the profit and capital sharing ratios to be the same.

Typically, parents contribute assets by way of a capital contribution to the partnership. This might include cash, property or stocks and shares for example.

What is the tax position? A partnership, as an entity, is not liable to tax. Tax is levied on the individual partners.

Gift of partnership interests If structured correctly, the initial contribution of assets to the partnership should not trigger a tax charge, regardless of the amount contributed. However, the gift of partnership interests to the children/other family members may incur an immediate capital gains tax charge to the extent that there is a gain based on the market value of the proportion of the asset gifted. For example, a property owned by one parent contributed to a partnership with four partners sharing capital equally going forward.

For IHT purposes, the gift of the partnership interests to the children would be regarded as a Potentially Exempt Transfer (PET) and therefore IHT would only become payable if the donor(s) did not survive for seven years from the date of the gift.


Tax treatment of income and gains Partners are taxed on a ‘look-through’ basis on their share of the partnership’s annual income and capital gains. Further consideration of the tax position would be required if minor children were to be involved.

Advantages of a general partnership General partnerships can be very useful for IHT planning as there is no immediate tax charge on gifts of partnership interests. Through the partnership agreement, parents can retain an element of control over the assets e.g. by using unanimous voting on key fundamental decisions or by nominating a senior partner who has the right of veto.

They can allow income and gains to be spread across family members who perhaps may not otherwise use their personal allowance or basic rate band thereby reducing the family’s overall tax burden. In addition they are relatively simple to establish and offer privacy as, unlike FLPs, there is no requirement to file annual accounts with Companies House.


“an alternative means of passing wealth to future generations tax efficiently whilst retaining an element of control over the assets”

Conclusion A general partnership can provide an alternative means of passing wealth to future generations tax efficiently whilst retaining an element of control over the assets.

Beatrice Friar Director, Private Client T: +44 (0) 141 300 5768 E: [email protected] k

Julie Corbett Senior Manager, Private Client T: +44 (0) 131 527 6741 E: julie.corbett.kpmg.co.uk


http:julie.corbett.kpmg.co.ukmailto:[email protected]


Update: significant changes ahead

Highlighted below is a snapshot of progress on some of the more signifi cant areas that are currently “work in progress” within the Government’s new consultative approach to tax policy making. Further information and comments are available via the links to information on kpmg.co.uk.

• From April 2013 the additional rate of income tax will decrease from 50% to 45% and the main rate of corporation tax from 24% to 23%

• The proposed statutory rule on residence is expected broadly to take the form of the draft legislation set out in the consultation document released on 21 June 2012 with a start date of 6 April 2013 (kpmg.co.uk)

• In February 2011, the EU Commission challenged the validity under EU law of the main UK income tax (transfer of assets abroad) and capital gains tax (apportionment of gains of non-resident companies) offshore anti-avoidance


http://www.kpmg.co.ukhttp://www.kpmg.co.uk


legislation for individuals (kpmg.co.uk). We await draft legislation for inclusion in Finance Bill 2013 which is due to be published for consultation in the summer - new rules are to take effect from 6 April 2013

• The Government is to consult on the proposal to introduce a cap on some unlimited reliefs from Income Tax. Tax reliefs to be capped will include, but are not restricted to, loss reliefs that can be claimed against total income and qualifying loan interest relief (although we understand that this should not restrict tax relief for interest on buy to let properties). The Exchequer Secretary to the Treasury, Mr Gauke has confirmed in parliamentary discussions that the Government will exclude reliefs relating to charitable giving from these proposals. We await the consultation document which is due to be published in the summer – new rules to take effect from 6 April 2013

• The Government is to consult on legislation to increase the IHT exempt amount that a UK

domiciled individual can transfer to their non-UK domiciled spouse or civil partner. Currently the amount is £55,000, which has not been increased since 1983. It is also proposed to allow such a non-UK domiciled spouse to elect to be treated as deemed domiciled in the UK for IHT and so have an unlimited spouse exemption. We await the consultation document which is due to be published in the summer – new rules to take effect from 6 April 2013

• In the March 2012 Budget the Government announced that it would consult on simplifying the calculation of Inheritance Tax periodic and exit charges for trusts. We await the consultation document which is due to be published in the summer

• The Government is consulting on the proposal to restrict the tax relief available for qualifying life insurance policies (including Maximum Investment Plans). For policies taken out on or after 6 April 2013, premiums will be restricted to £3,600 in any 12 month period.

This limit will apply across all policies that are beneficially owned by an individual

• From 1 October 2012, the removal of the Zero Rate of VAT for alterations to protected buildings, mostly listed residential dwellings, but also listed buildings used for charitable purposes will come into effect. After this point, all alterations to protected buildings will become subject to the Standard Rate of VAT (being 20%). Transitional protection will apply where signed contracts were in place prior to 21 March 2012 for “Approved Alterations”, ensuring that such works will continue to benefit from the Zero Rate if performed up to 20 March 2013.

Dermot Callinan Partner, Private Client T: +44 (0) 113 231 3358 E: [email protected]

Sally Morgan-Owen Senior Manager, Private Client T: +44 (0) 129 365 2759



mailto:[email protected]:[email protected]:kpmg.co.uk


For more infor mation, speak to one of the KPMG Private Client Advisers listed opposite, or your usual KPMG contact.

LONDON Jo Bateson Director – London T: +44 (0)207 694 5445 E: [email protected] k

Daniel Crowther Director – London T: +44 (0)207 694 5971 E: [email protected]

David Kilshaw Partner – London T: +44 (0)207 311 2841 E: [email protected]

Greg Limb Partner – London T: +44 (0)207 694 5401 E: [email protected]

Mike Walker Partner – London T: +44 (0)207 311 8620 E: [email protected]

SOUTH Jane Crotty Director – Bristol T: +44 (0)117 905 4143 E: [email protected]

David Furness Director – Reading T: +44 (0)118 964 2192 E: [email protected]

Roger Gadd Director – Bristol T: +44 (0)117 905 4636 E: [email protected]

Paul Spicer Partner – Bristol T: +44 (0)117 905 4040 E: [email protected]


mailto:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]:[email protected]


MIDLANDS Emma Baylis Partner – Birmingham T: +44 (0)121 609 584 3 E: [email protected]

Mark Patterson Partner – Midlands T: +44 (0)115 935 3441 E: [email protected]

Narinder Paul Partner – Birmingham T: +44 (0)121 232 3357 E: [email protected]

Pete Saunders Director – Nottingham T: +44 (0)115 936 3661 E: [email protected]

NORTH Dermot Callinan Partner – Leeds T: +44 (0)113 231 3358 E: [email protected]

Nick Pheasey Director – Manchester T: +44 (0)161 838 8327 E: [email protected]

SCOTLAND Beatrice Friar Director – Glasgow T: +44 (0)141 300 5768 E: [email protected]

Aberdeen

Edinburgh

Newcastle Glasgow

Preston Leeds

Manchester

Nottingham

Cambridge

Liverpool

Leicester

Birmingham

Milton Keynes

Cardiff

Plymouth

Southampton

Reading Gatwick

London

London North

Bristol


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The views and opinions expressed herein are those of the authors and do not necessarily represent the views and opinions of KPMG LLP (UK). The information contained in this newsletter is of a general nature and is not intended to address the circumstances of any particular individual or entity. It is based upon current UK tax legislation and HMRC practice, both of which may be subject to change at any time, possibly with retrospective effect. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as at the date it is received or that it will continue to be accurate in the future. No one should act on such information except with appropriate professional advice and after a thorough examination of the particular situation. Nothing in this publication should be considered to be investment advice. July 2012.


The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

RR Donnelley I RRD-270561 I July 2012

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ContentsPersonalPerspectives_Accessible1.pdfpage16.pdfPersonalPerspectives_Accessible

Documents

Personal Perspectiveskpmg.co.uk/email/07Jul12/270561/v6/image/Personal... · the press about tax planning and the recently issued consultative document on the proposed introduction