TAX PLANNING IN THE CURRENT CLIMATE

Tax planning for individuals

Pre 5 April planning and beyond

by Laura Hutchinson CTA

Tax mitigation strategies for individuals and corporates

by Gary Greer FCA FCCA

In the current climate

Simple steps – pre 5 April

Lower earners £255k max contribution pre 5 April 2011

Pension contribution carry forward from 5 April 2011 (£50k x 3 c/f)

Beware pension input periods

Simple steps – pre 5 April

Protective claim child tax credit

Pension contributions for grandchildren £3,600 (£2,880 net)

Gifts out of income/annual £3,000

Simple steps – pre 5 April

Employ/shares for spouse/partner in family company

Pay for private fuel in company car?

Take advice on tax efficient employment benefits

Simple steps – pre 5 April

ISAs

Charitable donations

Children’s investments (max £100 income)

Equalise income

Incorporation of business

Dividend v salary

Simple steps for 2011/12

Salary Dividend Notes

Taxable profits 0 18,525 Profits £25k less £6,475 salary

Corporation tax 0 3,890 £18,525 x 21%

Employer’s NI on salary

2,188 0

Available gross salary 22,812 6,475

£25K less £2,188 employer’s NI

Available dividend 0 14,635 £18,525 less £3,890

Less PAYE (3,267) 0

Less employees’ NI (1,880) 0

Higher rates on dividend 0 0

Total 17,665 14,635 £3,475 more disposable income by dividend

The current climate

Low values for IHT

Low capital gains/losses

High income tax rates

Reduce the estateIn the current climateMake gifts Absolute gifts – low PETS

Gifts into trust – CLTs but nil rate band effectively worth more

Take advantage of existing reliefs (BPR, APR) where assets/shares may be sold prior to death

Beware – use of capital losses restricted

Hold over reliefs (s260/s165 TCGA 1992)

Reduce the estate - exampleH & W (aged 70) owned farm land that was farmed under a FBT bytheir 3 children. Planning permission was obtained in 2008 and thevalue increased from £400k to £1.5m. No sale took place but thefamily intend/hope to sell the land within the next three years forthis value.

The land cannot be sold due to the depressed market and a revisedvaluation of £1m has been put forward by the valuer.

H & W will attract 100% Agricultural Property Relief (APR) on theland as it is still used in the farming business and they have right tovacant possession.

Reduce the estate - exampleH & W could hold onto the land. If they sold the land in 2013 for £1.5m the gainarising would be £900k, split equally. They decide to gift 2/3 of theproceeds(£500,000 each) to their 3 children in 2013 to use for theirgrandchildren’s benefit.

H dies in November 2018 and W lives until 2021. H leaves his estate to W.

Tax effect for H & W: CGT – 28% on the capital gain - £252,000 (£900k x 28%) IHT – on W’s death in estate - £200,000 inheritance tax (£500k x

40%)– on H’s gift made - £120,000 inheritance tax (£500k x 40% x

60% (tapering relief)) IT - income arising to the children is assessable on them regardless of it

being used for the grandchildren – higher rates of IT

Reduce the estate - exampleInstead H & W transferred 2/3 of the land into trust in April 2011(£333,333 each) before any sale, for their children and grandchildren’sbenefit.

In April 2013 after a 2 year holding period (BPR) the trustees transfer 1/3of the land out to their two children (1/9 each).

The sale of the land takes place in 2013 and the gain is split between thefollowing people:

trustees - £300,000 (1/3 of gain) children - £100,000 x 3 totalling £300,000 (1/3 of gain in total) H & W - £150,000 x 2 totalling £300,000 (1/3 of gain in total)

Reduce the estate - exampleThe tax effect is as follows:

CGT

On trustees - £84,000 (£300,000 x 28%)

On children - £84,000 (£100,000 x 28% x 3)

On H & W - £84,000 in total (£150,000 x 28% x 2)

Total - £222,000 (no CGT saving due to levels of gains)

Reduce the estate - exampleThe tax effect on H & W’ death is as follows:

IHT

On trustees – approximately 2% on the inflated £500,000 in April 2021 – approximately £10,400

On children – nil unless they were to die

On H & W - £200,000 in total (£500,000 x 40%) on W’s death.

H gift dropped out as > 7 years)

Total - £210,400 (saving of £109,600 IHT)

Reduce the estate - exampleThe total tax saving over the first ten years compared to H & W waiting to make PETs after the sale is as follows:

IHT - £109,600

CGT - £0

IT - £16,700 *

Total - £126,300

* The gift to each child was reduced by £167k due to the trust being set up. £167k generates, say, £8,350 income per year. This could have pushed the parents into 40% rates of tax resulting in £1,670 more tax per annum than the grandchildren will pay in an interest in possession trust. This is multiplied out over 10 years.

Summary of gifts

Make use of existing reliefs

Care over APR, BPR – 7 year period still relevant if asset/shares not held

No downside for IHT unless values reduce

Capital gains

Uplift on death so consider retaining BPR, APR assets if no sale is intended. Compare IHT (40%/0%) with CGT (28%/18%)

ER – importance of ensuring the company qualifies and 5% shareholding retained and work in the business

Entrepreneurs’ Relief

Individuals and trustees, not companies, or personal representatives. Individual’s relief in priority to trustees’

Effective rate on up to £5m lifetime limit of gains is 10%

Available on trading company shares (with conditions), assets used in the trade of a partnership or sole trader business, including investments retained, but not shares. Also on associated disposals.

Must have held the asset or shares for 12 months

Entrepreneurs’ ReliefCompany

Company must be trading – passively holding investments could upset the ‘substantial’ (20%) test and could be treated as non-trading. If so no relief.

Must hold at least 5% of shares with voting rights

Must be an officer or director – part time is OK

Can elect for share for share exchange to not apply on a reorganisation to allow ER to apply

Entrepreneurs’ ReliefAssociated disposals

ER is available if the asset held personally but used in:

a trading partnership of which you are a partner , or

in your personal trading company

is disposed of ‘in association’ with the withdrawal from the business

Restriction where rent charged

Ownership of business premises

Typically held outside the company due to ability to receive rents (no NI) and obtain CT deduction

BPR only available if hold > 50% of ordinary share capital in the trading company in which it us used or used in partnership

ER restricted on rents received after 5 April 2008

No ER if held through a property investment company

Ownership of business property

Consider whether rent is as high as it can be

If not maybe reduce salary to increase rents to save NI

If don’t need the income, consider giving part or all of the property to family members (in trust only as need hold over relief for CGT, or absolutely by mopping up capital losses)

IHT planning with ER

Individual, 55 years of age, owns unquoted trading company shares in children’s nursery business. Very successful. Shares stand at a capital gain of £2m. Has children aged 21 and 22.

BPR currently available

ER available on sale

IHT planning with ER

Exit strategy - intends to sell the company within 18 months.

ER available on gain of £2m– tax at 10% -£200,000

No BPR going forward – cash of, say, £1.8m after CGT. IHT if dies would be £720,000

IHT planning with ER

Option 1 – give children shares absolutely now

Save IHT of £720,000 if survives 7 years but cannot access any cash

No ER available on gain as children don’t work in the company. CGT lost, just under £360,000 (28% - 10% x £2m)

IHT planning with ER

Option 2 – put shares into trust on 7 April 2011 with interest in possession for the individual. She is a trustee.

IHT chargeable transfer but BPR applies, so no IHT (remains in estate at this point)

NO holdover for CGT (settlor interest trust) so ‘dry’ tax charge of £200,000 CGT payable 31/01/13

IHT planning with ER

On sale of the business in November 2012

No IHT effect except no longer attract BPR

ER on shares as life tenant works in the company, shares held by trustees for the required one year. Small gain.

IHT planning with ER

Removal of value from estate

Trustees transfer an agreed percentage of the proceeds out of trust to the individual to pay CGT and to live off

The individual is then removed as beneficiary from the trust

IHT planning with ER

IHT effects

Transfer of cash out of trust - a small IHT charge of up to 6% on the amount transferred

Removal of beneficiary – PET (removal of reservation of benefit) – 7 years

IHT planning with ER

Benefits

Large value of at least £2m out of her estate, in trust to be controlled by her, without large IHT liability, and

Still attracts ER on sale (10%)

Specialist tax consultants

• Planning using trusts

• Interaction of UK and foreign tax advice on holiday homes

• Administration of estates

• Non-UK domiciliary planning

We are pleased to offer advice in the following areas:

• Any tax issues affecting the individual

• Inheritance tax and estate planning

• Succession planning