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Measures announced in the Pre-Budget report regarding changes to the capital gains tax legislation will apply to individuals, trustees and personal representatives. They will not affect companies liable to corporation tax on any chargeable gains.
The changes to be introduced from 6 April 2008 are as follows:
· Taper relief will be scrapped.
· The indexation allowance will be withdrawn.
· For assets held at 31 March 1982 the value at that date will be used in calculating the gain regardless of the original acquisition cost prior to that date.
· For 2008/09 there will be a single rate of capital gains tax set at 18%.
· The Annual Exemption (currently £9,200) will remain in place.
Example
For a higher rate tax payer with a gain of £100,000 which would fully qualify for business asset taper relief under the current rules and no other chargeable gains, the difference in tax would be as follows:
|
Pre 6 April 2008 |
From 6 April 2008 |
|
|
Gain |
100,000 |
100,000 |
|
Less: Business taper relief at 75% |
75,000 |
- |
|
Annual Exemption |
9,200 |
9,200 |
|
Taxable gain |
15,800 |
90,800 |
|
Capital gains tax payable at 40%/18% |
£6,320 |
£16,344 |
|
ADDITIONAL TAX PAYABLE IF SOLD AFTER 5 APRIL 2008 - £10,024 |
With the likely additional tax payable on the disposal of assets after 5 April 2008 the affairs of all clients will need to be reviewed to assess whether it would be prudent to realise locked in gains on any assets they hold including winding up companies with rolled up profits.
10/10/07
Disclaimer:
The contents of this factsheet are intended to inform, not offer specific advice on your individual circumstances. If you think the points covered may be to your benefit, please contact us for further advice. We cannot accept any responsibility for any financial loss incurred as a result of reading and acting on this factsheet without receiving individual advice and our written endorsement.
SUMMARY OF BUDGET 2007 – KEY TAX MEASURES
Income Tax
Corporation Tax
Capital Allowances
There will be a consultation in respect of expenditure on plant and machinery. Proposals include:
Capital Gains Tax
The annual exemption raised to £9,200 for 2007/08.
Inheritance Tax
The threshold for 2010/11 to be increased to £350,000. (Already announced thresholds: 2007/08 - £300,000; 2008/09 - £312,000; 2009/10 - £325,000).
Child and Working Tax Credit Rates
Other
Full corporation tax rate cut from 30% to 28% from 1 April 2008.
Following changes announced in the Pre Budget Report a transfer of any unused nil rate band from a deceased spouse or civil partner (irrespective of the date of their death) may be made to the estate of the surviving spouse or civil partner who dies on or after 9 October 2007. This is a significant change from the legislation prior to 9 October 2007 whereby any nil rate band not utilised on first death would be wasted.
It was already possible to combine the Inheritance Tax (IHT) thresholds by use of appropriate Will and trust planning but the new rules will simplify matters and couples with homes worth more than £300,000 (the nil rate band for 2007/08) should be able to pass them on tax efficiently without any planning.
Transfers between spouses or civil partners are exempt for IHT purposes and where someone dies leaving all of their property to their spouse or civil partner the nil rate band would have been wasted under the old rules but any unused nil rate band on first death can now be used when the surviving spouse or civil partner dies.
The amount of the nil rate band that can be transferred will be based on the proportion of the nil rate band that was unused on first death rather than the actual amount. So, for example, if when the first spouse died the nil rate band was £300,000 and they only utilised £150,000 of this, then 50% of the nil rate band would be unused. If the nil rate band when the surviving spouse dies has increased to £350,000 the total nil rate band available on second death would be £525,000 (350,000 + 350,000 x 50%).
The unused nil rate band will be claimed by the personal representatives of the estate of the surviving spouse on their death when making the IHT return.
Our initial interpretation of the new legislation changes is that this will completely change the way we look at Will planning and Deeds of Variation will no longer be necessary to ensure the nil rate band is utilised on first death. We will also need to review existing clients who are widows or widowers to check if any spare nil rate band is available to them. We should also check with clients that have Discretionary Will Trusts in their Wills whether they wish to remove these. For many clients it may still be appropriate to utilise the nil rate band on first death.
10/10/07
Disclaimer:
The contents of this factsheet are intended to inform, not offer specific advice on your individual circumstances. If you think the points covered may be to your benefit, please contact us for further advice. We cannot accept any responsibility for any financial loss incurred as a result of reading and acting on this factsheet without receiving individual advice and our written endorsement.
Corporation Tax
From 1 April 2006 the starting rate and non-corporate distribution rates are replaced by a single rate of 19% for companies with taxable profits under £300,000. For companies with profits in excess of £1.5 million the rate will be 30% with marginal rate where the profits fall between £300,000 and £1.5 million
Inheritance Tax regarding Trusts
One of the most significant changes announced in the Budget was that the Inheritance Tax treatment of Interest in Possession (IIP) and Accumulation and Maintenance (A&M) Trusts were to be brought into line with Discretionary Trusts.
The new rules mean transfers into new trusts will become taxable at 20% above the nil rate band (£285000 for 2006/07) and there will be 10 year anniversary charges and exit charges. These rules will apply to new trusts created on or after 22 April 2006 and to existing trusts from 6 April 2008. The existing rules for IIP trusts will run until the interest in the trust property at 22 March 2006 comes to an end and for A&M trusts that provide the asset will go to a beneficiary absolutely at 18 the current treatment will continue. The terms of existing A&M Trusts can be modified before 6 April 2008 to ensure the assets will pass to a beneficiary at 18 so they will not be affected by the new rules.
Carter Review
It was also announced that following a review of electronic filing by Lord Carter it is proposed that from 2008 filing deadlines for Tax Returns should be brought forward from 31 January to 30 September for paper returns and to 30 November for returns filed online. If the proposals go ahead this will put considerable time pressure on taxpayers and their agents to get their Tax Returns in on time. However this proposal is likely to be challenged by the professional bodies and there may well be a climb down at some stage before the plans are put into effect.
Other Budget points in brief
Personal allowance increases from £4895 to £5035
Capital Gains Annual Exemption increased from £8500 to £8800
Inheritance tax threshold to rise gradually from £285000 in 2006/07 to £325000 in 2009/10
VAT registration limit increased from £60000 to £61000
Capital allowances for small businesses - 50% First Year Allowance for one year from 1 April 2006 for companies (and from 6 April 2006 for unincorporated businesses)
With the current levels of property prices, inheritance tax is still very much an issue that needs to be considered by a large number of people as the Chancellors proposed increases the inheritance tax threshold over the next couple of years has done little to alleviate the problem.
There are various steps that can be taken to reduce the impact of Inheritance tax most of which are fairly straight forward.
Gift Exemptions
You can make an outright gift that will fall out of your estate after seven years. There are also small annual gifts exemptions which fall out of your estate immediately. You can gift £3000 out of capital each year plus £250 to any number of individuals. It is also possible to gift any spare income each year not used for living expenses. The exemption of £3000 has remained at this level for a long period of time and may not seem much but over a number of years the gifts can accumulate to a considerable sum and if the £3000 is not used in any tax year it can be carried forward into the following tax year.
Discretionary Will Trusts
Another simple measure is to include discretionary trusts into the wills of spouses where it is not desired to make any significant outright gifts. This utilises the nil band on the first death and reduces inheritance tax payable on the second death whilst giving the remaining spouse effective control and flexibility on the first death.
Gifting Property
Giving away a share of property can greatly reduce its value in the estate, for example gifting a 10% share of a property worth £100,000 would reduce its estate value to £76,500 as follows:
|
Value of property |
£100,000 |
|
Less: gift of 10% share |
£10,000 |
|
|
£90,000 |
|
Less: 15% discount for joint ownership |
£13,500 |
|
Value for inheritance tax purposes |
£76,50 |
When considering such gifts care should be taken if retaining enjoyment of the property and it may be necessary to pay a market rent regarding the share gifted to avoid falling foul of the pre-owned asset and gifts with reservation rules. The property can either be gifted directly or through a trust.
You should look to secure inheritance tax relief’s on property wherever possible. For example land will qualify for 100% Agricultural Property Relief where it is let on a grass keep arrangement or under a farm business tenancy and any properties used to generate a letting income should qualify for 100% Business property relief if they are used to fund holiday letting subject to ensuring you actively run the letting business rather than leave it all to an agency.
Failing to take any action to reduce the value of your estate or if after doing so you still have an exposure to inheritance tax you can always consider taking out life cover to provide towards the likely liability. These days it is possible for relatively young couples to obtain large amounts of cover at fairly cheap premiums.
Where:
We suggest
- Both husband and wife are made directors to indicate they each have a say in the running of the company, although this would also mean they would both be wrapped up in the liabilities of the company if it went into liquidation.
- Both spouses should play an active part in the business and records should be kept of everything each spouse does to support this argument.
- If the company has spare funds it could look to buy investments to put on the company balance sheet for a period to demonstrate that the company is not just a service company. Care should be taken regarding the amounts involved and the period the investments are held for so as not to jeopardise any future business assets taper relief.
If you have any queries regarding the above then please contact our Tax Manager, Ian Smale on 01769 572404.
Disclaimer
The contents of this newsletter are intended to inform, not offer specific advice on your individual circumstances. If you think any of the points we have featured may be to your benefit, please contact us for further advice. We cannot accept any responsibility for any financial loss incurred as a result of reading and acting on this newsletter without receiving individual advice and our written endorsement.
From 6 April 2005 employees can use a company van to travel to and from work without a benefit in kind arising provided they do not use it for any other private use such as the weekly shopping.
However, you should ensure your employees are familiar with these rules as from 6 April 2007 the taxable benefit for a company van will increase to £3,000 per year together with £500 for private petrol. If you or your employees should therefore give the Revenue cause to believe that private use of the van extends beyond home to work travel, a considerable tax liability will arise. It is important to note that only one such extra private journey would trigger the tax charge.
If you have any queries regarding the above then please contact our Tax Manager, Ian Smale on 01769 572404.
Disclaimer
The contents of this newsletter are intended to inform, not offer specific advice on your individual circumstances. If you think any of the points we have featured may be to your benefit, please contact us for further advice. We cannot accept any responsibility for any financial loss incurred as a result of reading and acting on this newsletter without receiving individual advice and our written endorsement.
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South Molton Office
01769 572404
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info@davisons-uk.com
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Devon
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