Sweeter tax planning ideas

Transcription

1 Sweeter tax planning ideas Helping to ensure you have made full use of the reliefs and allowances available

2 Contents Sweeter tax planning ideas To ensure that you optimise your tax position and make use of your reliefs and allowances, Baker Tilly has a range of Sweeter tax planning ideas.

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4 Income tax With periodic changes to income tax rates and allowances for individuals, it is important to review asset ownership and the resulting income split between couples to help minimise their overall tax liability. The changes to claw back child benefit also may impact on planning income levels between couples with children. An individual with taxable income in excess of 100,000 will have his/her personal allowance tapered away. The rate of taper is a loss of 1 of personal allowance for every 2 of income over 100,000, giving a 60% effective rate of tax up until the point at which no personal allowance remains. Couples should review the ownership of income producing assets, such as portfolio investments, rental property, bank accounts or private company shares and seek advice on how ownership can be varied so that income can be shared to best post tax effect. Personal allowances 2013/14 9, /15 10,000

5 Capital gains tax A review of asset ownership between couples, or splitting disposals over two tax years can help reduce capital gains tax (CGT) liabilities. Effective use of the annual exemption, such as in this way, could save up to 12,208 in tax. Do also consider whether one party to the couple has any capital losses from earlier years which could further increase the tax saving. Those considering the disposal of a chargeable asset should seek advice on what the potential CGT liability may be. As well as effective use of the annual exemptions, other reliefs may be available and, if carried out on a timely basis, planning can be considered to mitigate a future liability. Capital gains exemption 2013/14 10, /15 11,000

6 Inheritance tax Inheritance tax (IHT) can significantly reduce the value of assets passed to the next generation. It is never too early make an IHT plan and individuals are caught out far too often because IHT planning is not considered early enough. It is almost impossible to undertake IHT planning shortly before a charge on death occurs but taking action early, and having a plan for the distribution of assets or maximising the very generous reliefs (some of which give a full exemption from IHT), could mean that IHT is fully mitigated and the next generation benefit from the full value of an estate. It is never too early to make an IHT plan and individuals are caught out far too often because IHT planning is not considered early enough. Generally those who are retired with wealth in excess of the nil rate band (or double the nil rate band for couples) should put in place a plan to deal with IHT. Often, children in their 40s and 50s will instigate an IHT plan together with parents so that with straightforward actions IHT can be mitigated. Inheritance tax Nil rate band 2013/14 325, /15 325,000

7 Pension contributions Tax relief is obtained at your marginal income tax rate on contributions up to the annual allowance, plus any unused relief available from the three previous tax years. Additional rate taxpayers will receive total tax relief at 45%. If contributions exceed the maximum available, a tax charge will arise at your marginal rate. If benefits are withdrawn in excess of the lifetime allowance, significant tax charges may arise. Tax relief on pension contributions and the tax free status of asset growth within pension funds remains very generous. However, the rules can be complex if you are a member of a number of pension schemes, some of which may be linked to specific employments and have defined benefits. A regular review of contributions and total value, should be undertaken. Other planning may include extraction from private companies or sales of assets to a pension fund. Pension tax relief Annual allowance Lifetime allowance 2013/14 50, million 2014/15 40, million

8 Loss relief From 6 April 2013, sideways loss relief (including trading losses and loan interest relief) is limited to the greater of either 50,000 or 25% of an individual s total income. Trading loss relief claims made in 2013/14, for carry back to 2012/13, will save tax for additional rate taxpayers at 50% rather than the 45% for 2013/14, but will still be subject to these limits. Those with losses arising from business interests or investments should undertake a review to ensure that these losses are claimed in the most tax efficient way.

9 Gift Aid donations Gift Aid remains a valuable tax relief, on unlimited amounts donated to qualifying charities, at the donor s marginal rate of tax. Donations made in 2013/14 will save tax for additional rate taxpayers at 45% rather than the 50% rate that was applicable for 2012/13. An election can be made to carry back donations to the previous year, if the carry back rules are met, so that relief can still be obtained at 50%. For those who make charitable donations, it is of benefit, both individually and to the charity, to ensure that tax relief is maximised. This may mean the donor making contributions to a holding account or charitable trust in years when their tax rate is high.

10 Tax efficient investments If an investment into a private company is being considered, make sure to review whether it qualifies for either Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) and, if so, whether an application can be made. Reinvestment of 2013/14 gains on any disposed asset into SEIS shares can benefit from a 50% CGT exemption on the original disposal. There is also an opportunity to carry back relief against gains realised in 2012/13 to obtain 100% CGT exemption. EIS and SEIS shares are free of CGT on disposal if held for three years and can be used to defer capital gains realised in the last three years. Up to 11,520 can be invested free of income tax and CGT in 2013/14 in Individual Savings Accounts (ISAs), of which up to 5,760 may be in cash. ISAs are available to individuals aged 18 or over who are resident in the UK. Cash ISAs are also available to 16 and 17 year olds as well as Junior ISAs for minor children. Tax efficient investments Maximum investment SEIS EIS VCT 100,000 1,000, ,000 Income tax relief CGT exempt CGT deferral 50% Yes* Yes 30% Yes* Yes 30% Yes No * If qualifying for income tax relief

11 Residential property The changes to main residence relief rules and the introduction of the Annual Tax on Enveloped Dwellings are two areas where property owners may need to take action. If a property ceases to be used as a main home, from 6 April 2014 only the last 18 months of ownership will continue to qualify as a period of deemed residence (as opposed to the last 36 months up to 5 April 2014). Other periods of non-occupation (such as for working away from home) or periods of rental can still qualify as periods of deemed residence. If more than one residence is owned (in the UK or abroad) consider main residence relief and how this can be maximised between the properties. If a residential property is worth more than 2 million (gross value) and owned by a company (or structures which include a company) this may be subject to the Annual Tax on Enveloped Dwellings (ATED). While an exemption may be available so that no tax is ultimately due, if this is relevant to you, consider the annual ATED return filing and tax payment requirements due on 30 April.

12 UK tax residence The statutory residence test came into force with effect from 6 April Without a thorough understanding of what the test means, there is a danger that some of the rules can be easily misinterpreted or overlooked. This can have devastating results if an individual who thinks they are non-uk tax resident turns out at the end of the year to have been UK tax resident, and is therefore potentially taxable on their worldwide income. Those who are in any way uncertain of their residence status under the new rules should not wait until the year end before seeking advice, especially as there are now new statutory split year provisions. Also, individuals should not simply rely on being in the UK for fewer than 90 days a year. In some cases, spending as few as 16 days in the UK can lead to a UK tax resident status. On the other hand, with careful planning, it is possible in exceptional circumstances to spend well over 200 days in the UK without becoming UK tax resident.

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14 Business profits There are plenty of anti-avoidance measures that prevent unincorporated business from altering the timing of profits, such as the manipulation of revenue accounting. However, it is still possible to review the timing of business expenses in order to achieve tax cash flow advantages. The annual investment allowance provides a 100% deduction on capital expenditure in the relevant accounting period. If this allowance has not been fully utilised for 2013/14, businesses should consider advancing expenditure to maximise the relief, but they should not forget the marginal rate of tax applicable for the year in which the relief is given. Businesses should also consider options other than buying assets outright. It may be possible to acquire assets under a hire purchase contract (which has similar tax treatment to an outright purchase) or otherwise through a lease, although the tax treatment will differ. In evaluating whether to buy or lease, account should be taken of the time value of money. For example, purchasing an asset outright may require borrowing. The cost of that, net of tax relief, should be compared with the cost of leasing rentals or hire purchase charges. Annual investment allowance 1 January 2013 to 31 December ,000 pa 1 January 2015 onwards 25,000 pa

15 Cash extraction Where individuals are able to control dividend payments made from their own companies, consideration should be given to delaying distributions until after 5 April 2014, if they are higher/additional rate taxpayers, as this will defer payment of the related tax from 31 January 2015 for one year. Bonus payments could also be deferred so that they are paid in a later tax year, when circumstances may be different, so that tax rates are lower or further reliefs are available. However, it is important to be aware that the date that bonuses are taxable differs for Directors when compared with other employees. Review the timing of extraction of cash from companies via dividends and bonuses to ensure that they are paid at the most effective time. Dividends could also be directed to the spouse or family member paying the lowest rate of tax. Exemptions for inter-spouse transfers, or the ability to holdover gains on business assets, could help in the transfer of shareholdings to others to facilitate such savings.

16 Entrepreneurs relief This incredibly valuable relief reduces the rate of capital gains tax (CGT) from 18%/28% to 10% on a qualifying disposal of all or part of a business (e.g. by way of sale, gift or liquidation). It can apply to the disposal of shares in personal companies and interests in unincorporated businesses as well as assets used in such a business if their disposal is associated with the disposal of all or part of that business. To qualify for relief, the individual must meet certain personal conditions and the business must qualify as a trading business. Owners often assume that the relief will apply to them and are unaware of the various pitfalls which can catch them out in the absence of forward planning. With a lifetime limit of 10 million of gains which can qualify for the relief, this can be a costly mistake with potentially up to 1.8 million in extra tax at stake. Many of the conditions need to be met for one year prior to sale, so advance planning is essential. We can help to establish whether entrepreneurs relief is available and, if there are issues impeding the relief, we can advise on what steps could be taken to rectify the position prior to the disposal to minimise the tax due.

17 Business property relief Business property relief (BPR) is one of the most valuable tax reliefs available, potentially removing the full value of a business (whether that is a sole trade, partnership or shares in a private company) from the charge to inheritance tax (IHT), either on lifetime gifts or on death. The relief is available against an interest in a business, whether this constitutes the assets used in a qualifying business such as a sole trade, the value of a partnership share or shares in qualifying companies. There are a number of conditions that must be met in order to qualify, and the BPR position should be kept under continual review, as businesses change and evolve over time. A business which qualified several years ago will not necessarily still qualify now or in years to come. We can help establish whether a business qualifies, and if it doesn t, we can advise on what steps could be taken to rectify the position, before the IHT event. Business property relief Private company shares Direct ownership of business assets Relief 100% Controlled quoted companies Property used in a qualifying business 50%

18 Partners employment status HMRC has introduced draft legislation to ensure that, if partners fall within three conditions, they will be deemed to be employees for tax purposes (referred to as salaried members ) overriding their current self-employed status. This will result in a an extra 13.8% national insurance cost for the business as well as potential cash flow issues because of the need for tax and national insurance to be settled monthly under Pay As You Earn. Additionally: each of the salaried members personal national insurance contributions will increase; all benefits in kind will be taxed; any HMRC agreements on out of pocket expenses or travel arrangements will be withdrawn or taxed on the partners accordingly; and there will be an impact on the firm s short term working capital in respect of the release of the salaried members tax reserves. Consideration must be given to the tax status of all partners and, in particular, those entitled to a fixed share even where there are performance bonuses given. This review should be undertaken before 6 April 2014 for all existing partners and reviewed on the appointment of future partners.

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20 Remittance basis charge Non-UK domiciliaries can choose to pay tax on the remittance basis, meaning that they are only taxable on UK source income and gains, and foreign income and gains brought into the UK. The cost for this is the loss of income tax personal allowances and capital gains tax exemption, plus: a 30,000 charge for those resident for more than seven of the last nine years; or a 50,000 charge for those resident for more than twelve of the last fourteen years. The rules and administration surrounding the remittance basis are complex. Some planning is possible. For example, couples who are both potentially subject to the charge may be able to arrange their affairs so that they only pay one charge between them. There may also be scope to time the realisation of income or gains to avoid having to pay the charge every year.

21 Remitting to the UK The rules surrounding the taxation of remittances are not straightforward. Non-UK domiciliaries need to be clear on exactly what it is they are remitting to avoid being taxed unnecessarily. Where an account contains a mixture of income, gains and capital, the legislation applies a specific ordering to determine what is being removed from the account and what is being remitted. Advice should be taken when dealing with such mixed funds to review planning options. Payment of the remittance basis charge and payments for certain UK services can be made out of untaxed income or gains without triggering a tax charge. An exemption is also now available where overseas monies are remitted for investment in qualifying businesses.

22 Deemed domicile Once a non-uk domiciled individual has been resident in the UK for 17 out of the last 20 years, they are treated as deemed domiciled here for inheritance tax (IHT) purposes and, as a result, their assets situated outside the UK will fall within the scope of UK IHT. Because of the inability to split years for IHT purposes, deemed domicile can apply from as soon as 15 years and two days after arriving in the UK. During this time, it may be possible to settle assets (UK and foreign) into a trust and protect them from IHT, even beyond the point at which the individual has become deemed domiciled. Since 2013, it is now also possible for those who are not domiciled in the UK to elect to be treated as such for IHT purposes where they have a UK domiciled spouse or civil partner.

23 Offshore trusts The transfer of funds from an offshore trust could give rise to a tax charge where there is a UK resident settlor or beneficiary. Missing the deadlines for elections such as the rebasing election (RBE1) could also cause untold issues for offshore trustees. Trustees should keep up to date financial statements, segregate bank accounts, and assess and minute the types of distributions being made, so that UK connected individuals can determine whether distributions are subject to income tax or capital gains tax. UK tax advice may be required in advance to establish levels of income or capital gains for matching to distributions (or indeed the matching of income or gains to benefits, such as loans to beneficiaries). Whether or not a motive defence (i.e. where there is no tax avoidance purpose or there is a genuine commercial reason for the transaction) is in place for the transaction/transfer can have an impact on whether settlors are taxable on income within underlying companies, or whether capital payments are matched to the trustees relevant income. It is also important to know whether the structure itself has a motive defence and to ensure that filings / elections such as the rebasing election and forms 50(FS) are not overlooked.

24 Businessowners owners Business How we can help If you find a sweeter tax planning idea that interests you, our specialist private client advisors can help. Our national team are experienced and committed experts who understand the particular demands and challenges faced by private individuals and their broader circumstances, whether that includes your business, investments, trusts or estate. Based across the UK, our advisers provide personalised and practical solutions on all aspects of taxation. We offer tailored advice to meet your needs and hence these sweeter tax planning ideas are just some of the options available to you. We would be pleased to talk to you about other ideas that can help optimise your tax position. For further information on how we can help you to take advantage of the sweeter tax planning ideas, please contact your usual Baker Tilly adviser or complete the contact form to be put in touch with an adviser local to you. UK UKnon-domiciliaries non-domiciliaries

25 Baker Tilly UK Audit LLP, Baker Tilly Tax and Advisory Services LLP, Baker Tilly Corporate Finance LLP, Baker Tilly Restructuring and Recovery LLP and Baker Tilly Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly & Co Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. The term Partner refers to the title of senior employees, none of whom provide services on their own behalf Baker Tilly UK Group LLP, all rights reserved. 0122