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Blog posts tagged Inheritance Tax
Capital gains tax planning for the emergency budget
June 18, 2010
Although capital gains tax (CGT) is set to rise, we do not know when. The start date may be deferred to 6 April 2011, but the changes could also take effect from 22 June this year.
Property owners and investors can expect to bear the brunt of the increases. Trading businesses and shares in trading companies may continue to benefit from Entrepreneur’s relief, although that relief is fairly restricted compared to the old “taper” relief it replaced.
While it may be possible to sell assets by the end of the tax year, it might not be feasible to sell to a third party by 22 June. For this reason, it could be worth locking in the gain at the current 18 per cent using a family trust.
CGT on trust transfer
A transfer into most types of trust is treated as made at market value for CGT purposes. It should therefore crystallize CGT at the current rate on the accrued gain to date. Similarly, the trustees will be deemed to have acquired the asset at current market value, which is then their base cost used for a future sale taxed at the new higher rates.
There is, of course, a risk that if values fall, the trustees actually make a loss that cannot be offset against their gain going into the trust. However, this may be outweighed by the tax rate saving achieved.
The tax on the trust transfer will fall due on 31/1/2012, by which time the asset may have been sold to a third party. Alternatively, there may be scope to pay the tax in installments.
Stamp taxes
A gift of property into trust should not attract Stamp Duty Land Tax (SDLT), although SDLT would arise on any transfer of mortgage to the trustees (this representing consideration). Similarly, there should be no stamp duty on a gift of shares into trust. Stamp taxes will be incurred where there is actual consideration.
Inheritance tax
It is important to note that for inheritance tax purposes, gifts to trust are generally taxable at a 20 per cent lifetime rate once the nil rate band (£325,000) has been exceeded. The tax does not need to be incurred on larger transfers, but the process needs to be carefully managed.
Avoiding unnecessary CGT
Obviously there is a concern that if the asset is not eventually sold to a third party, a CGT liability has been triggered unnecessarily. There are strategies to mitigate the CGT charge on a transfer, if the asset is to be retained.
Those with property or shares likely to be sold in the not too distant future should think carefully about a transfer before 22 June. The position is uncertain, but if the CGT rate goes up to 40 per cent or even 50 per cent, individuals are going to lose a substantial part of their capital appreciation. This, in my view, is akin to retrospective tax.
The points raised above are only intended to provide general information. Professional advice should always be sought in specific situations before taking any action.
Justin is a partner at London-based chartered accountants and tax advisers Jeffreys Henry LLP.
Pre-Budget Report 2009
December 15, 2009
In his last Pre-Budget Report before the general election, Chancellor Alistair Darling unveiled a number of measures aimed at bringing about economic recovery in the UK economy.
For individuals, the allowances will remain frozen at 2009/10 levels, although the pledged increase in income tax for those earning over £150,000 will be introduced on 6 April 2010.
There will be a rise in National Insurance of 0.5% from 6 April 2011, affecting all those with earnings over £20,000. The temporary VAT rate cut will cease on 31 December 2009 and at the same time the stamp duty holiday will end. Due to a lack of rise in property prices the inheritance tax allowance will be frozen at £325,000 until 2011.
For businesses there will be a deferral of the increase in corporation tax and an extension of the empty property relief and of the Enterprise Finance Guarantee for a further year.
Income tax rates and allowances
Income tax rates and thresholds for 2010/11 will be unchanged from 2009/10, with the notable exception of a new 50% rate that will apply to income above £150,000. With the tax thresholds static, the effect of any inflation will cause a real terms reduction on net income.
Pension contributions
The proposals to restrict the pension relief on contributions for those earning over £150,000 were confirmed for 6 April 2011. The Chancellor also announced an immediate measure to prevent high earners from avoiding the restriction by receiving pension payments instead of salary before the new rules take effect. This anti-avoidance move applies to those with income over £130,000.
National Insurance
The increase of 0.5% in National Insurance planned for 6 April 2011 has increased to 1%; double the amount announced in the 2008 Pre-Budget Report. The higher rates apply to employees, employers and the self-employed from 6 April 2011. The limit at which an individual starts to pay national insurance will also increase by £570 on the same date. As an overall effect, those with earnings below £20,000 will not be any worse off.
Corporation tax
At last – some good news. The 1% rise in corporation tax for small companies, which was due to take effect on 1 April 2010, has been postponed until 1 April 2011.
VAT
The VAT rate will revert to 17.5% from 1 January 2010, but no other VAT changes are proposed. For businesses using the flat rate scheme, the percentages are also changing on 1 January 2010. Most flat rates will go back to being the same as they were before 1 December 2008. For certain businesses it may be beneficial to leave the scheme in the new year, which can be done voluntarily. We can help you to decide whether it will stay worthwhile to use the flat rate.
Business rates
The exemption from business rates will be extended one year to 31 March 2011 for all empty properties with a rateable value below £18,000. The increase in the threshold from £15,000 to £18,000 reflects the rise in rateable values from 1 April 2010.
Furnished Holiday Lettings
The tax benefits available to furnished holiday lettings will be removed from 1 April 2010 for companies and 6 April for unincorporated businesses. The changes will not affect hotels or bed and breakfasts. The withdrawal of the treatment will mean that with respect to furnished holiday lettings:
- Losses will only be available to reduce profits from other property income.
- Profits will not count towards income on which pension relief can be obtained.
- Special treatment for capital gains tax purposes will no longer continue.
Stamp duty
The increase in the limit on which an individual starts to pay stamp duty, announced in September 2008, will finish at the end of the year. From 1 January 2010, stamp duty will be payable at 1% on residential properties over £125,000.
Stamp duty is normally charged at the completion date or the date on which an individual takes possession of the property. To avoid stamp duty of 1%, transactions on properties between £125,000 and £175,000 will usually need to be completed before 31 December 2009.
Inheritance Tax
The threshold on which an estate is exempt from inheritance tax was due to rise to £350,000 on 6 April 2010, but it will now be left at £325,000 for a further year. The government has sited a lack of improvement in the property market as a reason for the change.
Other tax changes
Backing from the government for loans to small businesses through the Enterprise Guarantee Scheme will be extended by another year to 31 March 2011.
Banks will pay tax on all discretionary bonus over £25,000 at 50%. The 'super-tax' will be payable by banks in addition to income tax and will take immediate effect.
An employee's use of an electric car will be a tax-free benefit in kind for five years from 6 April 2010. In addition, where a company acquires a new electric van from 1 April 2010, it will be able to deduct the full cost from its profits for tax purposes. Meanwhile, the tax cost of providing non-electric cars and vans as a benefit will increase from the same date.
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