Although we are now into a new calendar year, the tax year does not end for nearly another three months.

The next tax year sees some significant tax changes, perhaps the most important one being that anyone with income in excess of £150,000 will pay income tax at 50% on the excess. The question most often asked is “can anything be done to reduce the amount of tax I am paying?” The simple answer is that there are lots of things that taxpayers can do.

If you are the owner-manager of a business you may want to look at accelerating income, either by way of bonus or dividend, so that it falls to be assessed in the current tax year rather than next. This would obviously also accelerate the date on which the income tax is paid, however at least this tax will be at the current higher rate (40% for bonuses and 25% for dividends) rather than the new 50% rate (36.1% for dividends) which comes into force from 6th April. In many cases the company may not have the cash-flow ability to pay the bonus or dividend, in which case the bonus or dividend can be lent back to the company and withdrawn as and when the company can afford it.

Shareholders could also look at gifting some of their shares to their spouse if the spouse’s income is likely to be significantly less than £150,000 so as to ensure that both spouses make full use of their £150,000 taxed at 40%. HMRC will no doubt look at such transfers carefully and there may be other implications of making the transfer and therefore shareholders should seek professional advice before making any such transfer.

For the self-employed, where any income is taxed as it arises, it is obviously not possible to manage the amount assessable to income tax in the same way as it is in a company. However the self-employed can still look at making sure that they utilise all allowances fully and if family members work within the business, ensuring that they are paid a commercial salary for their work.
There is also the possibility of undertaking more esoteric planning which would seek to shelter all of the tax payable on the income.

For example taxpayers could look at making investments into structures whereby the profit realised is taxed as capital rather than income. By doing this the taxpayer has the advantage of their annual capital gains tax allowance which is currently £10,100 and thereafter paying tax at 18% on any profit realised. There is now a structure available which enables clients to simply transfer their current investments into the structure and withdraw the profit as capital rather than income as described.

Company owner-managers could also look at the way in which they extract their income from the company. By structuring their income through an unregulated pension scheme they are able to access the fund tax-free whilst still being able claim relief for the payment in the company. Such planning has been around for about 18 months and is becoming increasingly popular as we move towards the 2010/11 tax year. It is therefore inevitable that HMRC will look to amend the tax legislation shortly (possibly as soon as the Budget due in March) and therefore any company looking to make use of this opportunity would be advised to move quickly.
Self-employed individuals, or employees not able to structure their income using the above structure, could look at undertaking planning which reduces their personal income tax on their income. There are a number of ways in which this can be achieved depending on the taxpayer’s circumstances.

The above is just a quick run-through of a few tax-saving ideas. They are all completely legal and are based on ideas developed by leading tax barristers.

Although the date for this year’s Pre-Budget Report has yet to be announced, we know that it is imminent and therefore the usual speculation as to what may be included has started in earnest.

The state of the public finances means that no-one is expecting the Statement to include any generous tax breaks and therefore the main focus from those looking to second guess Alistair Darling is how far he will go in raising taxes.  With a General Election around the corner expect more revenue raising measures aimed at the banks, “the rich” and measures to increase taxes “environmental” taxes which may or may not include the following.

There seems to be a consensus amongst the tax profession that the current rate of capital gains tax of 18% is not going to be around for much longer. The new 50% tax rate for earnings over £150,000 which will come into effect next April will mean that, for some taxpayers, their income will be taxed at a rate nearly three times greater than their capital gains! It is unlikely that such a discrepancy will be allowed to continue as it provides a massive incentive for taxpayers to try and convert income into capital gains. It also provides the Chancellor with an opportunity to raise additional tax revenue whilst at the same time claiming to be taking necessary steps to prevent the rich exploiting the tax system (a system he introduced he should, but won’t add!).

Measures targeted at the Banks are also thought to be on the agenda. These banks have, of course incurred massive losses over the past couple of years resulting in almost unimaginable amounts of taxpayers’ money having to be pumped into them to prevent them from going under. However, whilst it might have been thought that the taxpayers would start to recoup some of their investment by way of corporation tax receipts when the banks return to profit, the fact is that these banks have huge amounts of trading losses available to set against future profits which means that it might be a generation before these losses have been exhausted and the banks start paying corporation tax again.

Therefore it would not be unexpected for the Chancellor to introduce new measures which prevent trading losses being carried forward for more than six years. Whilst this may play well with the electorate as it is seen to be making sure that the banks start paying back into the system much more quickly than they would have done, this change would impact on every trading company which has incurred substantial losses over the past couple of years and who expect not to make sufficient profits to absorb these losses over the next six years.

Another prediction doing the rounds is that the new 50% top rate of income tax referred to above, will actually apply to all earnings over £100,000, a move that result in many more taxpayers having to pay half of all their income over to the Taxman.

Such a move would undoubtedly lead to more people looking at ways in which they can shelter their income so we can therefore expect there to be a raft of anti-avoidance provisions aimed at closing down tax planning ideas currently being enjoyed by many businesses and individuals. Expect there to be a rush of taxpayers looking to complete planning ideas before the PBR!

EXCLUDED PROPERTY TRUSTS

5 Meaning of estate
(1)For the purposes of this Act a person’s estate is the aggregate of all the property to which he is beneficially entitled, except that...
(b) the estate of a person immediately before his death does not include excluded property.

The exemption from Inheritance Tax afforded by s5(1)(b) IHTA as quoted above is obviously an extremely attractive and valuable one.

 For a period in the early part of this decade planning was widely used whereby the taxpayer would acquire an interest in an Excluded Property Trust and the value of that interest would immediately fall outside the charge to Inheritance Tax.  The planning was particularly popular in so-called “deathbed” scenarios where the taxpayer had a limited life expectancy such that more conventional Inheritance Tax planning ideas were not considered viable.

Whilst HMRC would not necessarily agree with the analysis that simply acquiring an interest in an Excluded Property Trust resulted in a decrease in the chargeable estate of the purchaser, they were sufficiently concerned by the wide use of the planning to change the legislation in Finance Act 2006. The changes were contained at subsections (3B) and (3C) of section 48 IHTA 1984 and the relevant subsections of section 48 now state:

48 Excluded property
(1)A reversionary interest is excluded property unless—
(a)it has at any time been acquired (whether by the person entitled to it or by a person previously entitled to it) for a consideration in money or money’s worth, or
(b)it is one to which either the settlor or his spouse is or has been beneficially entitled, or
(c)it is the interest expectant on the determination of a lease treated as a settlement by virtue of section 43(3) above...

 (3)Where property comprised in a settlement is situated outside the United Kingdom—
(a)the property (but not a reversionary interest in the property) is excluded property unless the settlor was domiciled in the United Kingdom at the time the settlement was made, and
(b)section 6(1) above applies to a reversionary interest in the property but does not otherwise apply in relation to the property.
but this subsection is subject to subsection (3B) below...

(3B) Property is not excluded property by virtue of subsection (3) or (3A) above if— (a) a person is, or has been, beneficially entitled to an interest in possession in the property at any time, (b) the person is, or was, at that time an individual domiciled in the United Kingdom, and (c) the entitlement arose directly or indirectly as a result of a disposition made on or after 5th December 2005 for a consideration in money or money’s worth. (3C) For the purposes of subsection (3B) above— (a) it is immaterial whether the consideration was given by the person or by anyone else, and (b) the cases in which an entitlement arose indirectly as a result of a disposition include any case where the entitlement arose under a will or the law relating to intestacy.

The result of the changes introduced by subsections (3B) and (3C) meant that the planning idea of simply acquiring an interest in an Excluded Property Trust would no longer result in that interest being treated as Excluded Property for calculating their chargeable estate. Therefore it appeared that this planning idea was no longer possible.
However, that does not mean that Excluded Property Trust planning is no longer viable. It is still possible for a taxpayer to become the holder of an interest in an Excluded Property Trust and for this interest to still qualify as Excluded Property.
By becoming the holder of an interest in an Excluded Property Trust but not falling foul of subsections (3B) and (3C) it is still possible to reduce the value of a person’s chargeable estate.

Example
The taxpayer (a widow) has a chargeable estate, after taking into account the Nil Rate Band and any other reliefs, of £2million made up of her main home and investments. If she were to re-arrange her estate such that £2million were held via an interest in an Excluded Property Trust and the value of the estate were matched by an equal debt owed to the Excluded Property Trust, the taxpayer’s Inheritance Tax Position would be as follows:

TOTAL CHARGEABLE ESTATE

£2,000,000

LESS: DEBT OWED TO EXCLUDED PROPERTY TRUST
    £(2,000,000)

   
ESTATE CHARGEABLE TO IHT

£0

In most cases the taxpayer’s chargeable estate will be made up of assets that the client cannot dispose of in order to obtain the interest in the Excluded Property Trust, however it is still possible to undertake the planning via the use of short-term borrowings.

That seems to have been the message of the latest Budget with the new 50 per cent income tax rate and a number of proposed changes to pension payment relief aimed at individuals with income over £150,000.

In addition anyone earning over £100,000 will see their personal allowances tapered away by £1 for every £2 over £100,000 earned, such that persons receiving income over £112,950 will have no personal allowances at all.

The new 50% income tax rate, the highest of any major economy in the developed world, will apply from 6 April 2010 as will the reduction in personal allowances meaning that the effective rate of income tax on income between £100,000 and £112,950 will be an eye-watering 60 per cent!

However, how much will the new 50 per cent tax rate actually generate for the Government coffers? Astonishingly, even the Government seems to think that the amount of tax it will raise will be negligible with Treasury figures revealing that they expect 69 per cent of those liable to pay the tax will find some ways of avoiding it.

The Institute for Fiscal Studies went even further and stated that the rises may not result any increase in tax takings as those individuals affected may decide to leave the country or retire early.
It said that those who stayed in the system would look for ways to reduce their taxable income by working less, contributing to a tax-free pension or converting it into other types of earnings which are taxed at lower rates.
Our own experience since the announcement of the 50 per cent tax rate and the restrictions on pension contribution reliefs certainly bears out the Institute for Fiscal Studies’ view as there has been a marked increase in interest from clients at looking at ways of reducing their taxable income below the thresholds that the new measures will apply from.

We have been able to advise them of a number of methods in which income can be sheltered from tax completely or how pension contributions can be made without falling foul of the new rules saving the clients significant amounts of tax immediately and also moving forward.

European Law Can Save You Tax

In the run up to the recent European Parliament elections there was much discussion on the so-called devolution of law-making powers to unelected European officials.

I am not going to get into the rights or wrongs of this debate but one thing is for sure when it comes to tax – the European Courts have the final say in determining whether UK tax legislation meets with European law.

A recent example of this involved Marks and Spencer. M&S set up subsidiary companies in France, Germany and Belgium to trade in those respective countries. After a number of years of poor trading, during which significant losses were made by the subsidiaries, the French company was sold and the German and Belgian companies closed down.

M&S submitted claims to surrender the losses from the subsidiaries to the UK parent company to set against the UK company’s profits. Not surprisingly the claim was swiftly rejected by the Revenue as the UK tax legislation clearly stated that only UK losses could be surrendered in such a manner. M&S appealed this decision on the basis that the UK legislation contravened European law and the High Court referred the matter to the European Court of Justice (ECJ).

The ECJ’s judgement was that domestic legislation was not allowed to prevent losses incurred in an overseas subsidiary being set against the parent company’s profits, providing that the overseas subsidiary had exhausted all possibilities of using these losses in its state of residence. The matter was then referred back to the UK Courts to determine whether the subsidiaries had indeed exhausted all possibilities of using the losses in their own countries and it was found that, as there was no realistic possibility of the German or Belgian subsidiaries re-starting trading, they had indeed fulfilled this criteria.

The result was that M&S has been able to utilise the losses incurred by the German and Belgian subsidiaries in a manner that is completely at odds with the UK tax legislation in force at the time therefore proving that, on matters concerning transactions between European member states, European law rules. The M&S case along with a number of others along similar lines has opened up many planning opportunities for UK resident individuals and companies. For example it is possible for a company about t commence a property development in the UK and which would normally suffer significant tax costs on the profit generated can structure their business in such a way that the profits are taxed in another European state where the tax cost would be minimal. Another example is companies holding land as trading stock which can be transferred offshore with the profit on the subsequent sale being taxed in a low-tax jurisdiction rather than the high-tax jurisdiction that is the UK.

More and more UK taxpayers are now taking advantages of the opportunities afforded by the ECJ rulings and, if you are about to start an enterprise where significant profits are expected, or have land held as trading stock in a company it is probably something you would like to consider.

If you would like further information, or discuss your own circumstances, please do not hesitate to contact us.

Attention all overseas property holders - Government extends tax relief shocker!

A little-known and little-used relief available to individuals is the ability to set losses incurred on furnished holiday lettings against general income. This is probably because there are a great number of restrictions on the circumstances under which the loss can be used in this way. However, the good news is that one of the main restrictions has been relaxed - the bad news is that the relief will be abolished completely in less than a year!

Up until this year's Budget, the property being let had to be situated in the UK, however this has now been extended to any property situated in the European Economic Area. The reason for this sudden and generous extension is that the Government was concerned that the restriction of relief to UK situated properties contravened European Union law.

The result is that any owner of property situated in the European Economic Area can now claim for losses incurred on that property to be set against income providing they meet the following conditions:

• the property must be situated in the EEA;
• the business must be carried on commercially, and with a view to a profit;
• The property must be available for commercial letting as holiday accommodation to the public for at least 140 days during the relevant 12 month period;
• The property must be commercially let as holiday accommodation to members of the public for at least 70 days during the relevant 12 month period. A letting for a period of longer term occupation is not a letting as holiday accommodation for the purposes of the letting condition; and
• Not more than 155 days must fall during periods of longer term occupation.

A period of longer term occupation is a continuous period of more than 31 days during which the accommodation is let to the same person.

However, anybody looking to take advantage of this generous extension to the rules needs to act quickly as the Government, no doubt mindful of the potential tax cost of the new rules, intends to abolish all furnished holiday lettings relief in April 2010.

As well as claiming for the current year, property owners can also make a claim for loss relief for previous years by amending their personal tax return for earlier years providing this is completed within one year from 31 January following the date the return was submitted. In most cases therefore it will be possible to amend your return and claim losses for overseas holiday lets for 2006/2007 onwards.

In addition to being able to set losses against general income, the extension of the definition of furnished holiday letting also provides for generous capital gains tax reliefs which could also prove extremely valuable.

Therefore, if you do have an overseas property which meets the criteria set out above, don't look this unexpected gift horse in the mouth and act now to take advantage of this generous new relief before it is taken away again!

I came across this interesting piece in the Daily Mail on the Chancellor avoiding SDLT...

If you are interested in SDLT give us a call.

Read Article Here

There is no doubt which story has gripped the nation over the past fortnight – MPs’ expenses and how many have seemed to get away with expense claims that us mere mortals could never dream of.

One of the most high-profile politicians to fall under the media spotlight is Hazel Blears. She was found to have designated her London home as her main residence so as to claim second home allowances on her constituency home. However she told HMRC that the constituency house was her main home and therefore exempt from capital gains tax when it was subsequently sold at a profit.

Ms Blears insisted that she had fully complied with the tax system and that no capital gains tax was due on the house profit. This begs the question “what are the tax rules when you have more than one home and you sell one of them?”

Sections 222(5) and 223(1) of The Taxation of Chargeable Gains Act 1992 cover this area and state:
222(5) So far as it is necessary for the purposes of this section to determine which of 2 or more residences is an individual’s main residence for any period— (a) the individual may conclude that question by notice to the inspector given within 2 years from the beginning of that period but subject to a right to vary that notice by a further notice to the inspector as respects any period beginning not earlier than 2 years before the giving of the further notice.

223(1) No part of a gain to which section 222 applies shall be a chargeable gain if the dwelling-house or part of a dwelling-house has been the individual’s only or main residence throughout the period of ownership, or throughout the period of ownership except for all or any part of the last 36 months of that period.

Therefore it would appear that, providing Ms Blears (or any other MP) notified HMRC that their constituency home was their main residence for tax purposes and that this remained the case throughout the ownership of that property (except the last 36 months when it will be deemed to have been their main home) then any gain on the property should be exempt from capital gains tax.

The rules on the sale of second homes do seem to be very generous compared to most other parts of the tax legislation. I will let the cynics amongst you speculate as to why there seems to have been little appetite to tighten up these rules!