Presentation on Tax Planning in the Current Climate

1. TAX PLANNING IN THE CURRENT
CLIMATE
Tax planning for individuals Tax mitigation strategies for
Pre 5 April planning and individuals and corporates
beyond
by Laura Hutchinson CTA by Gary Greer FCA FCCA

2. In the current climate

3. 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

4. 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

5. 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

6. Simple steps – pre 5 April
 ISAs
 Charitable donations
 Children’s investments (max £100 income)

7. Simple steps for 2011/12
 Equalise income
 Incorporation of business
 Dividend v salary

8. 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 2,188 0
salary
Available gross £25K less £2,188
salary 22,812 6,475 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

9. The current climate
 Low values for IHT
 Low capital gains/losses
 High income tax rates

10. Reduce the estate
In the current climate
 Make 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)

11. Reduce the estate - example
H & W (aged 70) owned farm land that was farmed under a FBT by
their 3 children. Planning permission was obtained in 2008 and the
value increased from £400k to £1.5m. No sale took place but the
family intend/hope to sell the land within the next three years for
this value.
The land cannot be sold due to the depressed market and a revised
valuation of £1m has been put forward by the valuer.
H & W will attract 100% Agricultural Property Relief (APR) on the
land as it is still used in the farming business and they have right to
vacant possession.

12. Reduce the estate - example
H & W could hold onto the land. If they sold the land in 2013 for £1.5m the gain
arising would be £900k, split equally. They decide to gift 2/3 of the
proceeds(£500,000 each) to their 3 children in 2013 to use for their
grandchildren’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

13. Reduce the estate - example
Instead H & W transferred 2/3 of the land into trust in April 2011
(£333,333 each) before any sale, for their children and grandchildren’s
benefit.
In April 2013 after a 2 year holding period (BPR) the trustees transfer 1/3
of 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 the
following 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)

14. Reduce the estate - example
The 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)

15. Reduce the estate - example
The 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)

16. Reduce the estate - example
The 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.

17. 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

18. 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

19. 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

20. Entrepreneurs’ Relief
Company
 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

21. Entrepreneurs’ Relief
Associated 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

22. 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

23. 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)

24. 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

25. 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

26. 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)

27. 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

28. 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.

29. 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

30. 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

31. 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%)

32. Specialist tax
consultants
We are pleased to offer advice in the
following areas:
• Any tax issues affecting the • Planning using trusts
individual • Interaction of UK and foreign
• Inheritance tax and estate tax advice on holiday homes
planning • Administration of estates
• Succession planning • Non-UK domiciliary planning