Tax Planning for Businesses and Their Owners (Thorogood Reports) - 2nd edition

A Thorogood Special Briefing

TAX PLANNING FOR BUSINESSES AND THEIR OWNERS 2ND EDITION

Peter Hughes

IFC

A Thorogood Special Briefing

TAX PLANNING FOR BUSINESSES AND THEIR OWNERS 2ND EDITION

Peter Hughes

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Contents The author .................................................................................................viii Foreword .....................................................................................................ix

1

INCOME FROM COMPANIES

2

Dividends or salary?....................................................................................2 Implications of the ‘Arctic Systems’ case..................................................6 Benefits in kind.............................................................................................7 Company cars ..............................................................................................7 Car fuel..........................................................................................................9 Termination payments...............................................................................12 Employee share schemes ..........................................................................13

2

SAVINGS AND INVESTMENT SCHEMES

24

Enterprise Investment Scheme ................................................................24 Venture Capital Trusts ...............................................................................26 Community Investment Tax Relief ...........................................................27 Tax-exempt savings income......................................................................29

3

SOLE TRADERS AND PARTNERSHIP

32

Loss Relief...................................................................................................32 Property income.........................................................................................39

4

INCOME TAX OF INDIVIDUALS

44

Allowances .................................................................................................44 Extension of basic rate band ....................................................................45 Overseas income........................................................................................47

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5

CORPORATION TAX

56

Losses ..........................................................................................................56 Groups ........................................................................................................60 Purchase of a company’s own shares......................................................66 Substantial shareholding relief ................................................................67 Corporate Venturing Scheme...................................................................68

6

CAPITAL ALLOWANCES

72

Plant and machinery – general principles...............................................72 Cars .............................................................................................................74 First-year allowances ................................................................................75 Short-life assets..........................................................................................78 Industrial buildings allowances ...............................................................79 Disclaiming capital allowances ................................................................80

7

CAPITAL GAINS

82

Basic principles ..........................................................................................82 Annual exemptions....................................................................................84 Transfers between spouses.......................................................................85 Capital losses..............................................................................................86 Principal private residences .....................................................................88 Reliefs ..........................................................................................................90 Chattels .......................................................................................................94

8

INHERITANCE TAX

98

General principles .....................................................................................98 Taper relief..................................................................................................99 Exempt transfers......................................................................................101 Reliefs ........................................................................................................106 Domicile ....................................................................................................109 Interaction with Capital Gains Tax ........................................................110

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CONTENTS

9

TRUSTS

112

Interest in possession trusts ...................................................................112 Discretionary trusts .................................................................................114 Accumulation and maintenance trusts..................................................116 Charitable trusts ......................................................................................117 Overseas trusts.........................................................................................118 Business Property Relief and trusts.......................................................118 Comparison of trusts...............................................................................120

10

VALUE ADDED TAX

122

Registration ..............................................................................................122 Land and buildings ..................................................................................124 Special schemes .......................................................................................125

APPENDIX

130

Income Tax – personal and married couple’s allowances ...................130 Income Tax – rates and bands ................................................................131 Gift Aid – limit on benefit received by donor .......................................131 Cash equivalent of company car............................................................132 Corporation Tax – rates and bands........................................................133 Capital Gains Tax – annual exemption ..................................................133 Capital Gains Tax – taper relief ..............................................................134 Inheritance Tax – nil rate band ...............................................................134

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The author Peter Hughes is a Chartered Accountant. Having qualified in a vibrant Liverpool City Centre practice, he worked for a time in property management before setting up his own consultancy in 2003, based initially in Birkenhead and then, since 2008, in York. He writes and presents seminars on taxation and other subjects including International Financial Reporting Standards, Company Law and Employment Law, and he advises private clients in these matters. Details of the seminars can be found at www.uktrainingworldwide.com. He has a wide experience of advising small and medium-sized businesses on the tax implications of their business decisions.

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Foreword This Report is aimed at owners and managers of businesses – businesses of all sizes but with particular emphasis on small and medium-sized entities. It focuses both on the tax implications of business decisions and on opportunities for the reduction of the owners’ personal taxation. Since the first edition of the Report in 2006, there have been some significant changes to taxation. The ten-year experiment with taper relief for Capital Gains Tax of individuals has come to an end, and in its place we have a flat rate of 18% on all gains, which may be good for owners of investment property but not necessarily as good for business owners. Capital allowances have been overhauled; the starting rate of Income Tax for non-savings income has disappeared; and married couples now benefit from a transferable nil rate band for Inheritance Tax. Further changes are planned for 2010/11 and 2011/12 which will adversely affect those with income above £100,000. The information given has been updated following the Budget of 22 April 2009 and of course assumes that the announcements on that date will pass into legislation in the form of Finance Acts. The ten chapters will, I hope, be readable, interesting and informative. They do not pretend to be a comprehensive guide to all aspects of taxation – there are plenty of volumes which already serve that purpose – but they should set the manager or adviser on the right track towards reduction of the tax burden. Peter Hughes York May 2009

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A Thorogood Special Briefing

Chapter 1 Income from companies Dividends or salary? Implications of the ‘Arctic Systems’ case Benefits in kind Company cars Car fuel Termination payments Employee share schemes

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Chapter 1 Income from companies

Dividends or salary? In an owner-managed company, the shareholders are usually the directors. In addition to a monthly salary, they may wish to pay themselves periodic bonuses. Should these sums be paid as an addition to their salaries – in other words, as a bonus – or would a dividend be more advantageous? Bonuses are straightforward in that they are taxed at the director’s marginal Income Tax rate and are subject to employee’s and employer’s National Insurance. Timing may need to be considered: for a director, a bonus is taxed at the earliest of the following dates: •

the payment date;

•

the date on which the director becomes entitled to the bonus;

•

the date on which the bonus is recorded in the company’s books.

Any of the above can be overridden by the company’s year-end if the amount of the director’s earnings for that year has been determined before the yearend. If the financial year has already ended, the earnings are assessable on the date on which they are determined if this falls earlier than the three dates above.

EXAMPLE A bonus in respect of the year ended 31 December 2008 is decided at a board meeting on 15 December 2008 and is paid on 1 August 2009. When is it taxable? •

The date of assessment is 31 December 2008, which falls in 2008/09.

•

The bonus would become taxable in 2009/10 if it were not discussed at the board meeting and were instead determined on 1 May 2009.

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Dividends are taxed on a wholly different basis, being treated as the ‘top slice’ of an individual’s income. The dividend is deemed to have been paid net of Income Tax of 10%. The director must therefore gross the dividend payment up by multiplying it by 100/90 and add the gross dividend to other income. If the director still falls within the basic rate band, no extra Income Tax is payable. A higher rate taxpayer is, however, liable for Income Tax of 32.5% of the gross dividend, of which 10% is deemed to have been paid already. The effect is that tax is paid at 25% of the net dividend. National Insurance is not payable on dividends. The complex rules on timing which often lead a bonus to be taxed before it is received do not apply to dividends, which are simply assessable on the date of payment. There is no Corporation Tax deduction for dividend payments, whereas a company paying a bonus will be able to reduce its taxable profits accordingly. The relative tax advantages of bonuses or dividends depend principally on whether the director falls into the higher rate band; they also depend on the Corporation Tax rate which applies to the company.

EXAMPLE A director, whose taxable income from other sources after the standard personal allowance of £6,475 is £40,000, is to be paid an additional cash sum of £10,000 after settling any tax arising therefrom. The company has taxable profits (before payment of this sum) of £100,000 and therefore pays Corporation Tax at 21%. What are the relative tax advantages of paying the sum as a bonus or a dividend? The key to this calculation is to work out the gross payment which is needed in order to leave the director with a net receipt of £10,000. In order to receive a net payment of £10,000 (after Income Tax at a marginal rate of 40% and National Insurance at a marginal rate of 1%) by way of bonus, the gross amount of the bonus would need to be £16,949 (£10,000 x 100/59). If the director is to be left with £10,000 by way of dividend, the actual amount payable by the company, assuming that the director pays Income Tax at the higher rate, is £13,333 (£10,000 x 100/75).

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Bonus

Dividend

£

£

Other taxable income

40,000

40,000

Bonus

16,949

DIRECTOR

Dividend (£13,333 x 100/90)

–

14,814

56,949

54,814

20% x £37,400

7,480

7,480

40% x £19,549/£2,600

7,820

1,040

–

4,815

15,300

13,335

Taxable income Tax: Non-dividend income

Dividend income 32.5% x £14,814

Less tax deducted at source Tax liability

–

(1,482)

15,300

11,853

Bonus

Dividend

£

£

4,198

4,198

195

26

4,393

4,224

Employee’s NIC: 11% x £38,160* 1% x £19,549/£2,600**

* Upper earnings limit £43,875 less earnings threshold £5,715 ** Taxable earned income plus personal allowance £6,475 less upper earnings limit

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Bonus

Dividend

£

£

Profit before bonus/dividend

100,000

100,000

Bonus

(16,949)

COMPANY

Employer’s NIC (additional): 12.8% x £16,949

(2,169)

Profit chargeable to Corporation Tax

80,882

100,000

16,985

21,000

15,300

11,853

Employee’s NIC

4,393

4,224

Employer’s NIC (additional)

2,169

–

16,985

21,000

38,847

37,077

Corporation Tax at 21%

–

Tax burden: Income Tax

Corporation Tax

The dividend option results in a lower tax burden of £1,770. If the company were paying Corporation Tax at the full rate of 28%, the dividend would still be the better option, although the difference would be less marked. It is necessary to tailor such calculations to each particular situation, and they will not always be straightforward, especially if the additional payment takes the director from the basic rate to the higher rate band or moves the company down from the full Corporation Tax rate to the marginal rate. A final point is that dividends are not ‘earnings’ for pension purposes. From 6 April 2006 the maximum annual contribution to a personal pension scheme is the higher of £3,600 and ‘earnings’ (subject to a maximum of £235,000 in 2008/09, rising to £245,000 in 2009/10 and £255,000 in 2010/11 but then to be frozen for five years). This may be a consideration if the bulk of a director’s earnings arise from dividends and there is an intention to pay more than £3,600 into a pension scheme.

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Implications of the ‘Arctic Systems’ case It is common for directors to pay their spouses a salary and achieve an Income Tax saving, particularly if the director is a higher rate taxpayer and the spouse has no other income. This ensures that the spouse’s personal allowance and lower rate tax band are utilised. The spouse’s salary will be deductible for Corporation Tax purposes provided that it is reasonable in relation to the work actually performed. The facts in Jones v Garnett related not to a salary payment but to a dividend. Mr and Mrs Jones acquired Arctic Systems Ltd and each paid £1 for their shares. Mr Jones, a higher rate taxpayer, was the sole director. The bulk of the company’s profits were paid out as a dividend, shared equally between Mr and Mrs Jones. A small salary was also paid to Mrs Jones, which reflected the work she did for the company as bookkeeper and company secretary. The Inland Revenue (as it was then known) challenged the share arrangement on the grounds of section 660A of the Income and Corporation Taxes Act 1988. The purpose of this legislation is to stop an individual settling his income on another individual who pays tax at a lower rate. This settlement legislation dates back to the 1920s when it was designed to prevent wealthy individuals from diverting income to family members. The High Court found in favour of Revenue & Customs in April 2005, resulting in an additional tax bill for Mr and Mrs Jones of £6,000. However, in December 2005 the Court of Appeal reversed the High Court’s decision. There was no gift of shares: Mrs Jones had subscribed to her share at the time the company was set up, dividends depended on the future trading fortunes of the company and there could be no certainty at that time that the company would be profitable. The settlements legislation could apply, said the Court, only if there was an element of ‘bounty’ – a clear intention by one party to confer some benefit on another. An appeal by Revenue & Customs to the House of Lords again found in favour of the taxpayer. The Lords held that there was a settlement between Mr and Mrs Jones but that this was exempt from the settlements legislation as an interspouse transfer. The Treasury then announced plans to change the law in order to catch couples involved in ‘income shifting’ as this is known, but these plans were shelved following the Pre-Budget Report of November 2008.

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Benefits in kind Employees and directors are most commonly remunerated in the form of monetary payments. Special rules exist for the valuation and taxation of benefits in kind. The tax implications for both employer and employee may need to be considered in deciding whether to pay an employee in the form of cash or benefits, particularly if the employee is a director. The most common benefits are discussed here, with the emphasis on the overall tax burden for employer and employee. Except where stated, benefits are taxable only on employees earning more than £8,500 per annum and on directors.

Company cars VAT on the purchase of cars is irrecoverable if there is to be any private use. In practice, even pool cars are usually deemed to be available for private use because an employee may take them home at night before a business trip the next day, or used for a diversion to a supermarket. The case Elm Milk Ltd 2005 established that, where a company minutes a resolution that a pool car is for business use and that it will be a breach of the employee’s contract of employment to use it privately, the VAT on purchase may be recoverable. An employer will be able to claim capital allowances on the car at 10% or 20% of the written down value (which includes any irrecoverable VAT). This is explained in more detail at Chapter 6. The employee will then be taxed on the cash equivalent of the car, which is its list price multiplied by the relevant percentage. The percentage is dependent on the car’s carbon dioxide emission (see Appendix) and this may therefore influence the choice of car. No employee’s National Insurance is due, though the employer must pay Class 1A National Insurance on the amount of the benefit.

EXAMPLE A company buys a car with CO2 emissions of below 160 for £15,000 for an employee paying higher rate tax. The relevant percentage is 25%, and the company pays Corporation Tax at the small companies rate (21%).

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A second company, which pays Corporation Tax at the full rate, buys a similar car for an employee paying basic rate tax. Would there be an overall tax advantage in the first year in paying the employee the cost of the car in cash over four years? The benefit is £3,750 (£15,000 x 25%).

Company 1

Company 2

£

£

Car option Corporation Tax saving: Capital allowances £3,000 x 21%/28%

(630)

(840)

480

480

(101)

(134)

Employer’s NIC: Benefit £3,750 x 12.8% Less Corporation Tax saving: £480 x 21%/28% Employee’s Income Tax: Benefit £3,750 x 40%/20%

1,500

750

Tax burden

1,249

256

Cash option Corporation Tax saving: £3,750 x 21%/28%

(788)

(1,050)

Employer’s NIC: £3,750 x 12.8%

480

480

(101)

(134)

Less Corporation Tax saving: £480 x 21%/28% Employee’s Income Tax: £3,750 x 40%/20%

1,500

750

38

413

1,129

459

Employee’s NIC: £3,750 x 1%/11% Tax burden

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The overall tax burden for the first company and its employee is lower by £120 as a result of giving the cash option, but the second company would find the car option more beneficial by £203. Other factors would need to be considered, for example the cash flow implications of the purchase of the car now as opposed to paying the same amount over four years, although the latter course may be less attractive to the employee.

Car fuel Fuel provided for an employee’s private use is taxable on the employee, while the employer receives a Corporation Tax deduction. If the fuel relates to an employee’s private car, the benefit is the cost of the fuel. More commonly, private fuel is provided with a company car. Unless all fuel is reimbursed to the employer by the employee, the benefit is a fixed sum (£16,900 since 6 April 2008) multiplied by the relevant percentage, which is the same as the percentage applied in arriving at the car benefit. The employer will be liable for Class 1A National Insurance on the fuel benefit. Input VAT will have been incurred by the employer on the purchase of the fuel. This can be recovered in full, in which case the employer must account for output tax (known as the scale charge – see Appendix) because the employee has been supplied with fuel. Alternatively, the employer can ask the employee to keep detailed mileage records, and only the business proportion of the input tax will be recovered. This dispenses with the need to account for any output tax. The same method must be used for all employees. Which method is more beneficial will depend primarily on the amount of private mileage travelled by employees and also on engine-sizes. The principal tax planning issue here is for the employee to decide whether or not to take the benefit in kind.

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EXAMPLE A higher rate taxpayer drives 10,000 miles per annum and has the option of having all private fuel paid for by the company. The relevant percentage is 25% and the estimated cost of fuel per mile is 10p. The employer pays Corporation Tax at the small companies rate. No input tax is reclaimed on private fuel. £ Cost to employee if fuel paid by employer: Benefit £16,900 x 25% = £4,225 Income Tax £4,225 x 40% Class 1A NIC £4,225 x 12.8% Corporation Tax saving on NIC £541 x 21%

1,690 541 (114)

Corporation Tax saving on fuel 10,000 x 10p x 21%

(210)

Extra tax paid by employer

217

There is an overall tax burden of £1,907 which would be avoided if the employee paid for fuel privately – though of course the employee would then expect to be paid a higher salary in compensation, which itself would carry additional tax, albeit less than that outlined above. It should be noted from the above example that the tax payable by the employee (£1,690) actually exceeds the cost of the fuel (£1,000). This may change if the private mileage increases or the employee is a basic rate taxpayer, but in general the tax burden on private fuel is now quite punitive, which has the effect of discouraging employers from providing private fuel.

Assets used privately or transferred for cash An asset (other than a car or a van) made available to an employee for private use is taxed on an annual value of 20% of the market value when the asset was first made available. All employees, including those paid less than £8,500 per annum, are taxable on assets transferred to them. The benefit to a lower paid employee is the secondhand value of the asset. To directors and to all other employees, the benefit is

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the higher of the market value at the date of transfer and the market value when the asset was first made available, less any amounts already taxed. Company vans made available for private use are taxed as an annual benefit of £3,000. There is no taxable benefit if private use consists largely of commuting and any other private use is insignificant, unlike for company cars. If private fuel is provided, the employee is assessed on a benefit of £500.

EXAMPLE An asset qualifying for the annual investment allowance is made available to an employee in 2008/09 immediately after it is purchased for £2,500. Ownership of the asset is transferred to the employee in 2009/10 when its market value is £1,500. The employee is a higher rate taxpayer and the company pays Corporation Tax at the small companies rate. £ Benefit in 2008/09 £2,500 x 20%

500

Benefit in 2009/10 £2,500 – £500

2,000

Tax burden in 2008/09: Income Tax £500 x 40% Class 1A NIC £500 x 12.8%

200 64

Corporation Tax saving on NIC £64 x 21%

(13)

Corporation Tax saving on capital allowances £2,500 x 100% x 21%

(525) (274)

Tax burden in 2009/10: Income Tax £2,000 x 40%

800

Class 1A NIC £2,000 x 12.8%

256

Corporation Tax saving on NIC £256 x 21%

(54) 1,002

If the employee were simply to buy the asset himself and draw an extra £2,500 as salary, the tax burden would be slightly greater as employee’s National Insurance would be payable.

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There may also be VAT implications. A business which purchases assets and then makes them available for private use normally reclaims only the percentage of input tax on purchase which is attributable to the intended business use. A second option may also be available, namely the immediate full reclaim of input tax followed by the subsequent payment of output tax over the period in which the private use takes place. This is known as the ‘Lennartz’ mechanism after the case Lennartz v Finanzamt München 1991. On transfer of the asset to the employee, there will also be a VAT implication. This is classed as a business gift, and output tax must be accounted for on the value of the gift unless this is below £50.

Termination payments Payments may be made to an employee as compensation for loss of office. While these are almost always deductible expenses for Corporation Tax purposes, they may be exempt from Income Tax, which may be a consideration in deciding how much to pay. Statutory redundancy payments are calculated using the rules in the Employment Rights Act 1996, which broadly give a week and a half’s pay for each year of service from age 41 upwards, and a week’s pay for each year of service below age 41, subject to a maximum of 20 years’ service. They are never taxable as earnings. In addition, an employer may also pay an amount as compensation for loss of office. The first £30,000 of any such payment is exempt from Income Tax and National Insurance, provided it is genuine compensation and not payable under a service agreement or rights conferred by the company’s Articles of Association. Payments in lieu of notice (PILONs) follow the same principle, but only if there is no contractual arrangement nor even an existing understanding that such a payment was to be made. Employers who have an established practice of making PILONs may be construed to have an implied contractual arrangement – this is known as an ‘auto-PILON’. It is recommended that PILONs are made following a genuine critical assessment and on an individual by individual basis, reflecting the likelihood of the employee finding alternative employment within the notice period.

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‘Garden leave’ is, however, always taxable as employment earnings. This term describes a situation in which an employee remains bound by the contract of employment but remains at home having handed in the required notice. Payments made under a non-statutory redundancy scheme are also exempt from Income Tax and National Insurance up to the limit of £30,000. However, Revenue & Customs often view such payments as terminal bonuses, which would bring them within the charge to tax. It is recommended that employers proposing a non-statutory redundancy scheme should write to Revenue & Customs in advance for clearance. The exemption limit of £30,000 applies to the overall total of compensation payments, PILONs and non-statutory redundancy payments and is reduced by any statutory redundancy payment. Any excess over £30,000 is subject to Income Tax (though still not to National Insurance).

EXAMPLE An employee receives statutory redundancy of £5,000, compensation for loss of office of £10,000, a PILON of £7,500 and a non-statutory redundancy payment of £12,000. The total of all four payments is £34,500, and therefore £4,500 is chargeable to Income Tax.

Employee share schemes In addition to cash payments and benefits in kind, an employer may wish to reward an employee by means of shares in the company. The relative tax advantages of each scheme may be an issue in choosing such a scheme and deciding how many shares to grant.

Unapproved share schemes Being free of conditions, unapproved share schemes do not carry the same tax advantages as approved schemes.

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Most commonly, they will result in the acquisition of shares by the employee at a discount to market value. The employee is then taxed as if there were an interest-free loan for the difference between the market value of the shares and the amount actually paid, if any. The official rate of interest (6.1% in 2008/09) is applied to this notional loan, and the result is taxed as a benefit in kind – though it is ignored if all the beneficial loans to the employee in the year do not exceed £5,000. When the employee sells the shares to an unconnected third party, Income Tax will be calculated as if the loan had been written off. The amount written off is taxed as a benefit in kind.

Unapproved share option schemes An option scheme gives the employee the right to buy a specified number of shares at a specified price before an expiry date. There are no tax implications at the date of grant of the option. On exercise of the option, there is a charge to Income Tax and National Insurance on the difference between the market value at the exercise date and the amount actually paid. On disposal of the shares, the employee is subject to Capital Gains Tax on the difference between the sale proceeds and the original cost.

Approved company share option plans There are various conditions which must be met for an approved company share option plan (ACSOP): •

No individual may hold options over shares with an aggregate market value of above £30,000, measured at the time of grant of the option. Holdings of other approved or savings-related share option schemes are included.

•

The acquisition price must not be manifestly less than the market value at the date of grant.

•

Only employees and full-time directors (those working more than 25 hours per week for the company) may participate.

•

Participants may not hold a ‘material interest’ in the company if it is a ‘close company’. A ‘close company’ is one which is controlled by five or fewer shareholders or by its directors. A ‘material interest’ is

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one of 25% in the company or in any company which controls it. The participant must not have held a material interest at any time during the past twelve months, and holdings of associates are taken into account.

EXAMPLE The shareholders of Oakham Ltd are: % A (director)

15

B (director)

13

C (director)

10

D (director)

6

E

5

F (director)

4

G (director)

4

Others

43

A and B are husband and wife. Can either of them participate in an ACSOP? Oakham Ltd is a close company. It is not controlled by five shareholders, as the largest five between them hold only 49%. However, the directors own 52%. A and B are associated persons who together hold 28%. They are therefore not eligible for an ACSOP.

There is usually no Income Tax charge at the date of grant, except where the market value is greater than the subscription price. (This may happen where a company floats.) Share options exercised less than three or more than ten years after the date of grant attract an Income Tax charge and National Insurance in the same way as for unapproved share options. If they are exercised between three and ten years after the date of grant, there is no Income Tax or National Insurance. On sale, the shares are subject to Capital Gains Tax based on the sale proceeds less the acquisition cost. The acquisition price is the actual price paid for the shares, plus any amount already charged to Income Tax on grant or exercise.

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Enterprise management incentives The conditions which must be met for an Enterprise Management Incentive (EMI) are: •

Participating employees must work 25 hours per week or spend 75% of their working time on company business.

•

An employee with a material interest – defined in this case as 30% of the share capital or (in the case of close companies) 30% of the assets – may not participate.

•

There are strict limitations on the type of company which is eligible: –

It cannot be a subsidiary of another company and arrangements must be not in place to allow it to become a subsidiary in the future.

–

Its gross assets (and those of the group of which it is the parent) must not exceed £30 million.

–

From 22 July 2008, there must be no more than 250 employees (part-time employees count pro rata towards this total).

–

It must be a trading company. Numerous activities are excluded from the definition of ‘trading’, most notably property, banking, insurance, leasing, farming, legal and accountancy services and the management of hotels and nursing homes.

–

If it owns any subsidiaries, no arrangements must exist whereby control of any subsidiary will pass to another person.

•

The maximum value of shares over which unexercised options are held is £3 million. No one employee may hold unexercised options over shares with a total value of over £120,000, for which ACSOPs are also taken into account. In both cases, the value is measured at the date of grant.

•

The options must be capable of exercise within ten years of the date of grant.

There is no charge to Income Tax at the date of grant. Likewise, there is none on exercise unless the exercise price is below the market value at the date of grant, in which case Income Tax is charged on the difference between the amount paid and the market value at the date of grant or exercise, whichever is the lower. If a ‘disqualifying event’ occurs and the option is not then exercised within 40 days, Income Tax is charged on the subsequent exercise on the difference

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between the market value on exercise and the market value immediately before the disqualifying event. This is in addition to any Income Tax charged because the exercise price is below the market value at the date of grant. The most common ‘disqualifying events’ are: •

The company becomes a subsidiary of another company.

•

The company ceases to carry on a qualifying activity.

•

The employee breaches the working time conditions.

•

ACSOP options are granted which take the employee beyond the £120,000 limit.

EXAMPLE On 1 January 2008 an employee is granted options over 10,000 shares in an EMI scheme. Market value per share at the date of grant is £3.50, and exercise price is £1.50. On 1 January 2009, the company is taken over by another company when the share price is £6. The employee exercises the option on 1 March 2009 when the share price is £7.50. Income Tax is chargeable because the market value at the date of grant is higher than the exercise price by £2 (£3.50 less £1.50). Additional Income Tax is chargeable because exercise took place more than 40 days after a disqualifying event. This is charged on £1.50 per share (£7.50 less £6). The total taxable amount per share is £3.50, and Income Tax is therefore payable on £35,000.

Capital Gains Tax is charged on the disposal of the shares. The acquisition cost is deemed to be the exercise price. Since the abolition of the taper relief system from 6 April 2008, there is no longer a Capital Gains Tax advantage to this scheme over other schemes.

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Share incentive plans The conditions for a share incentive plan (SIP) are as follows: •

The scheme must be made available to all employees who meet the qualifying criteria and are UK resident, and participation must be on the same terms for all.

•

A qualifying period of employment may be specified, which broadly must be no more than 18 months.

•

If the company is a close company, the employee must not hold a material interest (defined as for ACSOPs).

The purpose is to give employees a continuing stake in the company. Shares fall into one of four categories: free, partnership, matching and dividend. In each case, shares are held in a trust until they are withdrawn. FREE SHARES

The market value of shares allotted to any employee, measured at the date of grant, must not exceed £3,000 in any tax year. The shares are held in trust for between three and five years. If the shares are withdrawn within three years, there is a charge to Income Tax based on the market value of the shares on withdrawal. If the shares are withdrawn between three and five years, there is a charge to Income Tax based on the lower of the market value on the date of grant or the date of withdrawal. There is no tax charge if the shares are withdrawn after more than five years. PARTNERSHIP SHARES

These are paid for by way of a deduction from the employee’s salary. The maximum deduction in a tax year is £1,500 or 10% of an employee’s salary, whichever is lower. The shares are acquired at the lower of market value on the first day of the period specified in the partnership share agreement (which can be no more than twelve months) and the acquisition date. There is no charge to Income Tax when the amount is deducted from salary. The deduction is allowable against Income Tax.

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EXAMPLE Mr Ashley has an annual salary of £40,000 and a deduction of £150 per month is made in respect of partnership shares. Income Tax is charged on £38,200, being the salary of £40,000 less twelve instalments of £150.

Income Tax on withdrawal operates on similar principles to free shares in that there is no tax charge if the shares are held for five years. If they are withdrawn within three years, there is a charge to Income Tax based on the market value at the date of withdrawal; and if they are withdrawn between three and five years the Income Tax charge is based on the lower of the salary deductions and the market value at the date of withdrawal. MATCHING SHARES

These are offered in conjunction with partnership shares: the company provides free shares in proportion to the partnership shares. The maximum is two matching shares to each partnership share. Taxation is on the same basis as for free shares. DIVIDEND SHARES

A company may provide that dividends due on shares held in SIPs may be used to buy further shares if the participant wishes, subject to a maximum reinvestment of £1,500 per participant per annum. Dividend income reinvested is not treated as taxable income in the hands of the employee. Shares withdrawn more than three years after the date of reinvestment are not subject to Income Tax. Otherwise, the employee is taxed in the year of withdrawal on the amount of the related dividend. In all four cases, when the shares are withdrawn from the plan they are deemed to have been disposed of and immediately re-acquired by the employee at market value.

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Savings-related share option schemes The conditions for savings-related share option schemes (SRSOSs) are as follows: •

The scheme must be available to all employees and full-time directors who have been employed throughout the qualifying period. Part-time directors, and employees who have worked for part of the qualifying period, may be included.

•

The company may impose a qualifying period of up to five years.

•

Those with a material interest (defined as for ACSOPs) in a close company may not participate.

•

Shares must be acquired out of savings with a contractual savings (SAYE) scheme approved by Revenue & Customs.

•

Options cannot be exercised before the bonus date or more than six months afterwards. The bonus date may be selected as three, five or seven years after commencement of the scheme.

•

Contributions must fall between £10 and £250 per month.

•

The acquisition price must not be manifestly less than 80% of the market value of the shares at the time of grant.

No Income Tax is charged on grant or exercise. There is a charge to Capital Gains Tax on sale of the shares. This is based on the sale proceeds less the actual price paid. The following table summarises the essential points of the various approved share option schemes.

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Scheme

Conditions

Tax on exercise

Tax on sale

ACSOP

Employees & full-time directors

None if exercised 3-10 years after grant

CGT

CGT

No material interest (30%)

Income Tax if exercise price < MV at date of grant

Gross assets of company < £30 million

Disqualifying events may attract Income Tax

Maximum £30,000 per person Option price = MV at grant date No material interest (25%) in close company EMI

Full-time employees

Must be a trading company with no more than 250 employees Maximum £120,000 per employee (£3 million total) SIP

All employees (subject to qualifying period) No material interest (25%) in close company Free shares up to £3,000 per annum

Free, partnership and matching shares: no tax if withdrawn after > 5 years

CGT

Dividend shares: no tax if withdrawn after > 3 years

Partnership shares up to £1,500 per annum Matching shares (maximum 2 for every partnership share) Dividend shares (maximum reinvestment £1,500 per annum) SRSOS

All employees (subject to qualifying period)

None

CGT

No material interest (25%) in close company Shares acquired from SAYE scheme within 6 months after bonus date (3, 5 or 7 years) Contributions £10 to £250 per month Option price > 80% of MV at grant date

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Chapter 2 Savings and Investment Schemes Enterprise Investment Scheme Venture Capital Trusts Community Investment Tax Relief Tax-exempt savings income

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Chapter 2 Savings and Investment Schemes

The government has set up various schemes to encourage investors to subscribe for shares in certain ventures. Three of these schemes are considered here.

Enterprise Investment Scheme Investors with a portfolio in which they wish to include high-risk companies may find Enterprise Investment Scheme (EIS) shares appropriate. There are strict limitations on the types of company which qualify for EIS relief. The company must be carrying on a qualifying trade, defined as a business operating within the UK on a commercial basis with a view to profit. There are numerous non-qualifying activities which are broadly the same as for Enterprise Management Incentives (see Chapter 1); if these activities comprise more than 20% of a company’s business, it will not qualify for EIS relief. The company must be unquoted and must not be a subsidiary nor itself own any subsidiaries which do not carry on a qualifying trade. Perhaps the most significant qualifying criterion is the ‘relevant assets test’: the company’s gross assets before the share issue must not exceed £7 million nor must they exceed £8 million immediately after the share issue. These figures were £15 million and £16 million respectively before 6 April 2006. Shares listed on the Alternative Investment Market (AIM) are classed as unquoted; it is estimated that the number of AIM shares eligible for the EIS have halved as a result of the change to the relevant assets test. From 22 April 2009, there is a requirement to use all of the money raised by the issue of EIS-qualifying shares within two years of the date of issue. Ordinarily, such investments would be considered too risky for many investors. Under the EIS, generous tax relief is available to encourage investors to back these companies. If at least £500 is invested in new ordinary shares, the investor’s Income Tax liability is reduced by 20% of the investment. There is no maximum investment, but relief will be given on a maximum amount of £500,000. The tax reduction is restricted to the amount of Income Tax payable during the tax year.

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Relief can be carried back to the previous year, which is useful if the potential relief exceeds the investor’s Income Tax liability for the year. For 2009/10 onwards, the total investment can be carried back without restriction. Previously, carryback was available only if the shares were issued before 5 October in the tax year and was restricted to the lowest of: •

half of the amount subscribed for the share issue;

•

£50,000;

•

the unused balance in the previous year.

Relief will normally be withdrawn if the shares are sold within three years of their purchase, or within three years of the commencement of the company’s trade if later. This is calculated as the lower of the relief already given and 20% of the disposal proceeds, unless the disposal is not at arm’s length, in which case all of the relief already given is withdrawn. If the shares are disposed of after this three-year period, any gain is not subject to Capital Gains Tax. However, if the shares are sold at a loss, the loss is allowable for Capital Gains Tax purposes, although the loss is reduced by any EIS relief given.

EXAMPLE Mr Leonard buys EIS shares for £30,000, holds them for four years and sells them for £20,000. What is the allowable loss? £ Proceeds

£ 20,000

Cost

30,000

Less EIS relief given (£30,000 x 20%)

(6,000) (24,000)

Allowable loss

(4,000)

Additionally, the investment will almost certainly qualify for Business Property Relief (see Chapter 8) and, if held for a minimum of two years, will be exempt from Inheritance Tax.

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Venture Capital Trusts Venture Capital Trusts (VCTs) are quoted companies which invest funds in unquoted companies. Individuals who subscribe for new ordinary shares in a VCT may avail themselves of certain tax advantages, though they are not as attractive as they used to be, Income Tax relief having fallen from 40% to 30% in 2006/07, and the minimum holding period having increased from three to five years. The maximum annual subscription is £200,000. Like EIS shares, shares in a VCT must be subscribed for and not purchased from a third party and must be new ordinary shares, otherwise Income Tax relief will not be available. The subscriber must be aged at least 18, and the shares must be acquired for bona fide commercial reasons. The company will be given Revenue & Customs approval to be a VCT only if it meets certain conditions. Broadly, these are that its income must arise mainly from investments, and at least 70% of those investments must be in unquoted companies which carry on a ‘qualifying trade’. Qualifying trades are the same as those defined for the purposes of EIS shares (see above). No more than £1 million can be invested in a single company, no single company can comprise more than 15% of the total investments, and the VCT may not invest in companies with gross assets of £7 million before the share purchase or £8 million immediately afterwards (these limits were £15 million and £16 million respectively before 6 April 2006). From 22 April 2009 a VCT must use all of the money it receives for the relevant trade within two years. Tax relief is given at 30% of the investment (40% before 6 April 2006) but is restricted to the Income Tax liability for the year. Unlike for EIS investments, there is no carry-back available if the potential relief exceeds the Income Tax liability. Dividends received by a private investor from a VCT do not give rise to an Income Tax liability, even if the investor is a higher rate taxpayer, provided that the investor has not subscribed more than the permitted annual maximum of £200,000. VCTs do not incur chargeable gains on the disposal of investments, and consequently these gains can be distributed as tax-free dividends. Likewise, an investor who sells VCT shares will not be liable to Capital Gains Tax provided that the company is still a VCT at the time of disposal. It is not possible to defer Capital Gains Tax on other gains by reinvesting the proceeds in a VCT.

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As stated above, investors who have purchased shares and are not the original shareholder are not eligible for Income Tax relief. However, they do not suffer Capital Gains Tax when they sell their VCT shares. This can be a double-edged sword, as any losses on VCT shares are not available for set-off against chargeable gains. Relief is withdrawn if the investor disposes of the shares within five years of the date of acquisition. The amount of relief withdrawn is calculated in the same way as for EIS shares. VCTs do have certain disadvantages. The combined effect of the initial and annual charges, together with the fact that shares are often illiquid and trade at a discount to net assets, can mean that shareholders will lose about 20% of their money – which eats a long way into the 30% relief. According to one source, the average VCT lost 23% of investors’ money in the five years to December 2005, although there have been some good performers. VCTs do at least offer a diversified portfolio, unlike most EIS shares.

Community Investment Tax Relief The Community Investment Tax Relief (CITR) scheme aims to help investors to attain a return on their investments in the knowledge that the funds invested will be put to good use. The investment is made in an accredited Community Development Finance Institution (CDFI) and is in the form of a loan or a subscription for shares. A loan may not be repayable within two years and thereafter can be repaid by a maximum of 25% per year. Consequently, full repayment can be required no earlier than five years after the date of drawdown. Shares may not carry any right of redemption within five years. CDFIs lend to and invest in deprived areas or underserved sectors which might otherwise struggle to gain access to funds. They may be household names such as high street banks, or smaller organisations like credit unions. Among organisations which have benefited from funds provided by CDFIs is a furniture manufacturer in the West Midlands which struggled to convince its bankers that its business plan was viable; it approached its local CDFI, a Reinvestment Trust, which helped it increase its turnover and staff numbers and broaden its range of products. Another beneficiary is a charity which works to enhance

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the quality of life of older people by using their reminiscences for exhibitions in museums. Income Tax relief is given as a tax reducer at 5% of the amount invested and outstanding for each of the five years and cannot exceed the individual’s Income Tax liability for the year.

EXAMPLE An individual lends £100,000 to a CDFI on 6 April 2009. Repayments are due at £25,000 on 6 April 2011, 6 April 2012, 6 April 2013 and 6 April 2014. Tax relief is available as follows: Balance

Relief

£

£

2009/10

100,000

5,000

2010/11

100,000

5,000

2011/12

75,000

3,750

2012/13

50,000

2,500

2013/14

25,000

1,250

Relief is withdrawn retrospectively if the loan is repaid or the shares disposed of.

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The following table compares the three schemes: EIS

VCT

CITR

Type of company

Qualifying trade

Investment company investing in qualifying trading companies

CITF which in turn finances deserving charities or businesses

Investment limit

£500,000 per annum (minimum £500)

£200,000 per annum (no minimum)

None

Type of investment

New ordinary shares

New ordinary shares

Loan or new ordinary shares

Income Tax relief

20% (can be carried back one year)

30% (no carry-back)

5% per annum for five years

Minimum holding period for Income Tax relief

Three years

Five years

Five years (special rules for repayment of loans)

Capital Gains Tax relief

No CGT if shares held for three years

No CGT

Normal CGT rules apply

Tax-exempt savings income Individual savings accounts The scope for tax savings on Individual Savings Accounts (ISAs) is relatively small – £61 a year for a higher rate taxpayer with £5,100 invested at 3% – yet the scheme is worth a mention, not least because a cash ISA avoids the risk associated with EIS shares and VCTs. Investors can take out cash ISAs or stocks and shares ISAs for each tax year, designated as such at the time of subscription. The total allowable annual investment s £7,200, which can be invested totally in stocks and shares, although up to £3,600 can be held as cash. Any interest earned is exempt from Income Tax. Dividends are not subject to higher rate tax, though the 10% tax credit which they carried when ISAs were introduced has now been abolished.

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ISAs are often said to be less tax-efficient than pension contributions because no Income Tax relief is available on contributions to an ISA. However, they are very flexible and can be cashed in at any time. They have become more popular of late because commercial property funds are now included in the list of permitted investments. The 2009 Budget announced an increase in the overall ISA limit to £10,200 for the tax year 2010/11, of which £5,100 can be held in cash. These limits take effect for people over the age of 50 on 6 October 2009.

National Savings Premium Bond winnings and interest from National Savings Certificates and Children’s Bonus Bonds are exempt from Income Tax.

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Chapter 3 Sole Traders and Partnership Loss Relief Property income

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Chapter 3 Sole Traders and Partnership

Loss Relief Sole traders and partnerships who incur a loss in the course of a trade are eligible for loss relief, provided that the trade was carried on with a view to profit and on a commercial basis. (Income from the rental of property does not qualify as a trade and is dealt with separately below.) Trading losses can be set off against other income, carried forward and set off against future profits from the same trade, or used in reduction of capital gains. Special provisions apply in the opening and closing years of a trade.

Set-off against other income A trader incurring a loss in a tax year may set the loss against other income, which may arise for example from salary, savings, property income or another separate trade. The loss can be set off against other income for the same tax year or the preceding tax year in any order, provided that, whichever year is chosen first, the other income in that year must be exhausted in full before the balance is used against the other year. This may mean that personal allowances will be wasted; in this case it may be more beneficial to carry the loss forward against future trading profits (see below). In the case of a continuing business, the loss for a tax year will be the loss for the accounting period ending in that year. For example, a loss for the year ended 30 April 2009 will be treated as incurred in 2009/10. A claim must be made to relieve a loss in this way. The time limit is twelve months from 31 January following the end of the tax year of the loss.

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EXAMPLE Mrs Newland has the following income: 2008/09

2009/10

£

£

30,000

34,000

Interest

2,000

1,500

Rental income

8,000

4,500

Trading profit

10,000

–

Salary

Trading loss

–

(18,000)

How should the loss be utilised?

Other income

2008/09

2009/10

£

£

50,000

40,000

Loss carried back

(18,000)

Taxable income

32,000

– 40,000

Loss relief is claimed in the year in which a larger slice of income falls within the higher rate band. In 2008/09, assuming that she claims the standard personal allowance, the amount of income before the loss relief claim falling within the higher rate band is £9,165 (£50,000 – £6,035 – £34,800). Having decided to set the loss against the income in 2008/09 first, Mrs Newland cannot restrict this in order to set it partly against the higher rate income in 2009/10.

As a temporary measure, trading losses incurred in the tax years 2008/09 and 2009/10 may be carried back three years. The maximum loss which may be carried back is £50,000 for each of 2008/09 and 2009/10, with the loss being set against later years first.

Carry-forward against profits of same trade Losses not utilised against other income or chargeable gains may be carried forward and set off against profits of the same trade. There is no time limit – the loss is carried forward indefinitely, although an election for carry-forward must be made within five years of 31 January following the tax year of the loss.

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EXAMPLE Taking the previous example further, Mrs Newland has the following income in 2010/11: £ Salary

35,000

Interest

2,500

Rental income

6,000

Trading profit

20,000 63,500

The biggest tax saving would be achieved if she were not to carry the loss back but instead to carry it forward and set it off against the trading profit in 2010/11. In this way, all of the loss would be used in the reduction of income within the higher rate band. However, she would have to wait longer for the relief.

Set-off against capital gains Trading losses may be set off against capital gains for the same or the previous tax year. The time limit for the claim is the same as for a claim to utilise the loss against other income. Set-off against capital gains is allowed only if all other income for the year in question has been exhausted. This may mean that personal allowances will be wasted. The maximum set-off under these provisions is the capital gains for the year less any capital losses for the same year and capital losses brought forward. The annual exempt amount (see Chapter 7) may therefore be wasted.

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EXAMPLE Miss Claypole has the following income and chargeable gains: 2008/09

2009/10

£

£

10,000

11,000

Trading profits

3,000

–

Trading losses

–

Salary

Capital gains

(18,000)

10,000

3,000

She could elect to set the 2009/10 loss against income and capital gains for 2008/09 but would thereby waste personal allowances and part of the annual exemption. Income would be reduced to nil and chargeable gains would be reduced to £5,000, leaving £4,600 of the annual exemption unused. If future trading profits are reasonably certain, a better option would be to carry the loss forward. If capital gains were above £14,600 in 2008/09, a claim might be more worthwhile, although the personal allowance would still be wasted.

Opening year losses Losses arising in any of the first four tax years of a new trade can be carried back and utilised against the trader’s total income for the three years preceding the year of loss. They must be set off against earlier years first. For example, a trade’s first year of assessment is 2009/10. Losses can be set against other income in 2006/07, then – if all of the income of 2006/07 is exhausted – 2007/08, and finally 2008/09. A loss in 2012/13 can be set off against income in 2009/10 and the following two years. The potential advantage over the loss claims previously discussed is that an individual may have been paying Income Tax at the higher rate in earlier years, perhaps while in salaried employment. Tax relief is also available more quickly than if the loss were carried forward. A claim for relief of a loss in this way should be made within twelve months of 31 January following the tax year in which the loss arises. Many traders mistakenly believe that losses can be utilised twice, in the same way that profits can be taxed twice in the early years.

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EXAMPLE A profitable business commences trade on 1 January 2009 and has a yearend of 31 October. It will be assessed as follows: 2008/09

Date of commencement (1 January 2009) to 5 April 2009

2009/10

Twelve months from the date of commencement 1 January to 31 December 2009

2010/11

Twelve months to the accounting date 1 November 2009 to 31 October 2010

(Note that, where an accounting period ends in the second tax year and is less than twelve months as above, the basis period for tax is the first twelve months of the business. If this period is twelve months or more, the basis period is the twelve months to the accounting date. Where there is no accounting period ending in the second tax year, the basis year is the twelve months from 6 April to 5 April.) The profits for the periods from 1 January to 5 April 2009 and from 1 November to 31 December 2009 are taxed twice, though overlap relief is given when the business ceases.

The same does not apply to losses, so any loss made from 1 January to 5 April 2009 can be attributed to 2008/09 only and not to 2009/10.

EXAMPLE A trader commences trading on 1 September 2009 and makes a loss of £24,000 in the year ended 31 August 2010. In the year ended 31 August 2011 he makes a profit of £30,000. He was previously an employee on a salary of £40,000 which did not change from 1 January 2006 until 31 March 2009, when he left to start his own business. After 31 March 2009, he had no other income apart from the business. What is the best way to utilise the loss?

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£ Loss in 2009/10: £24,000 x 7/12

14,000

Loss in 2010/11: 12 months to 31 August 2010

24,000

Less already given

(14,000) 10,000

The loss could be carried forward to 2011/12, but he is then only a basic-rate taxpayer. A better option is to carry the loss back and use it against higher rate income.

Salary Loss relief

2006/07

2007/08

2008/09

£

£

£

40,000

40,000

40,000

(14,000)

(10,000)

26,000

30,000

– 40,000

The loss in 2009/10 could of course be set against the income in 2008/09 under the usual rules of set-off against other income, but the loss in 2010/11 could not be used in this way because there is no taxable income either in 2009/10 or in 2010/11.

Terminal losses When a trade ceases, the losses in the last twelve months of trading can be relieved against profits for the last tax year and the preceding three tax years. The loss is utilised against profits of later years first. The final twelve months of trading are split into two periods: the period to 5 April and the period from 6 April. The loss available for relief is the total of the losses in the two periods (note that, if either period produces a profit, it is ignored and netted off the loss).

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EXAMPLE Mr Bishop’s trading results prior to cessation of trade on 31 August 2010 are as follows: £ Year ended

Period ended

31 December 2006

Profit 50,000

31 December 2007

Profit 20,000

31 December 2008

Profit 5,000

31 December 2009

Profit 5,000

31 August 2010

Loss 25,000

Under normal rules, the loss of £25,000 is treated as incurred in 2010/11 and may be carried back to 2009/10. However, it could not then be relieved in full. Mr Bishop will benefit from a terminal loss relief claim as follows: £ 1 September 2009 to 5 April 2010 £25,000 x 3/8 less £5,000 x 4/12

(7,708)

6 April 2010 to 31 August 2010 £25,000 x 5/8

(15,625)

Total loss

(23,333)

The loss is relieved as follows:

Profit Loss relief

2007/08

2008/09

2009/10

£

£

£

20,000

5,000

5,000

(13,333)

(5,000)

(5,000)

6,667

–

–

A claim for relief of a terminal loss should be made within five years from 31 January following the tax year of discontinuance.

Partnerships Profits of a partnership are distributed between the partners in accordance with the partnership sharing agreement, and losses are treated similarly. Each individual partner can therefore decide how best to utilise losses.

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EXAMPLE Mr Stanton and Miss Berkeley are in partnership. They make a profit of £60,000 in the year to 31 December 2008, and a loss of £15,000 in the year to 31 December 2009. The partnership sharing agreement states that profits and losses are shared between Mr Stanton and Miss Berkeley in the ratio 80:20. Miss Berkeley has income from another source in the form of salary of £50,000 from 1 April 2009 onwards. Mr Stanton’s share of the profit is £48,000 and his share of the loss is £12,000. He is therefore a higher rate taxpayer in 2008/09 and should elect to carry the loss back. Miss Berkeley’s share of the profit is £12,000 and her share of the loss is £3,000. She is a higher rate taxpayer in 2009/10 because of her salary, and she should therefore elect to set the loss against income in 2009/10.

Property income Income from property is not treated as trading income and any profits or losses are taxed separately. It is not possible to treat it as earned income for pension purposes. Rental income is always treated as property income. However, property dealing, which involves the purchase of properties with a view to generating profits by reselling them, is considered to be a trade. Profits from hotels, market gardening and mining are also taxed as trading income.

Revenue or capital? Taxable profits from property consist of rental income from all UK properties less allowable expenditure. There is a wealth of case law on what constitutes revenue and capital expenditure. Work is normally of a capital nature (and therefore disallowable) if it improves the building, whereas if it simply restores the building to its original state, it is usually considered to be revenue expenditure (and therefore allowable).

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Some capital expenditure nevertheless qualifies for capital allowances (see Chapter 6) as it falls under the definition of ‘plant’. This will be the case if it is part of the apparatus for carrying on the business within the property. Alarm systems, cookers, lifts and electrical systems have been held to be plant, though the last of these depends on the nature of the business being carried on. It can sometimes be more tax-efficient for the tenant to carry out repairs instead of the landlord and for the landlord to offer a rent-free period in return. This is because the test of whether an item qualifies as ‘plant’ – and is therefore eligible for capital allowances – revolves around whether it performs a business function. A landlord may have difficulty in arguing that a refurbishment qualifies as plant, whereas tenants may be judged to be carrying out the work for the specific needs of their business.

Loss relief Losses from a property business can normally only be carried forward and used against future profits from property. If works are to be carried out during a tenancy, the tenant may have more flexibility than the landlord for the relief of the expenditure. The tenant may be able to carry losses back or claim group relief, whereas the landlord’s options are far more restrictive. In these circumstances it may be more tax-efficient for the tenant to carry out the repairs in return for a reduction in rent. Losses may be set against total income of the same or the following tax year if they include capital allowances. The loss which can be utilised in this way is restricted to the capital allowances for the year net of balancing charges.

Other situations FURNISHED LETTINGS

Capital allowances are available only on property let commercially. If residential property is let furnished, there are two options: •

Claim expenditure on replacement furniture as it occurs (but not on the initial purchase of furniture).

•

Claim an annual allowance for wear and tear, which is 10% of the rental income net of council taxes and water rates paid by the landlord.

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The landlord will need to consider the likely amount of future renewals of furniture before deciding which treatment to adopt, as the treatment must usually be adopted consistently from one year to the next. Faster relief is normally given by claiming the annual 10% allowance. FURNISHED HOLIDAY LETTINGS

Until 5 April 2010, furnished holiday lettings are taxed as trading income and therefore a more generous treatment is available for losses. Additionally, they can be treated as earnings for pension purposes and they qualify for certain Capital Gains Tax reliefs when sold (see Chapter 7). This special treatment will be withdrawn from 6 April 2010. The criteria for furnished holiday lettings are very detailed, but the most important are that, during a tax year, the property must be available for letting for 140 days and actually let for 70 days, and no one person should occupy it continuously for more than 31 days in a five-month period. RENT A ROOM RELIEF

The rent a room relief provisions give scope for tax savings. They allow an individual to let furnished residential accommodation within his own residence for up to £4,250 per annum free of tax. Note that the accommodation must be let for residential purposes, and a director cannot therefore let an office to his company within his home. If the annual gross rental income exceeds £4,250, there is a choice of treatments. Either the excess over £4,250 can be taxed (the taxpayer must make a written election to do this within twelve months of 31 January following the tax year), or the net rent after allowable expenditure is taxed (this will apply if no election is made).

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EXAMPLE Mr Walden lets a room in his house. The income and expenditure are as follows:

Rental income Expenditure Profit

2008/09

2009/10

2010/11

£

£

£

4,000

4,500

5,000

(1,000)

(3,000)

(4,500)

3,000

1,500

500

There is no tax in 2008/09 as the rental income falls below £4,250. In 2009/10 he should elect to tax the excess over £4,250 (£250). In 2010/11 he should withdraw the election and will be taxed on the net rents of £500.

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Chapter 4 Chapter – Income Tax of Individuals Allowances Extension of basic rate band Overseas income

TA X P L A N N I N G F O R B U S I N E S S E S A N D T H E I R O W N E R S

Chapter 4 Income Tax of Individuals

Allowances Most Income Tax allowances are a matter of fact and there is no scope for tax planning. They include the personal allowance, which may be increased beyond the age of 65 if income is below certain levels (see Appendix). The personal allowance is gradually reduced to nil from 6 April 2010 for those earning over £100,000. For every £2 of income above £100,000, the personal allowance is reduced by £1. Based on the 2009/10 personal allowance of £6,475, a person with income of above £112,950 will have no personal allowance. The marginal Income Tax rate for those earning just above £100,000 will therefore be 60%. The married couple’s allowance may be transferred between spouses, but it has been eroded in recent years and is now available only where one spouse was born before 6 April 1935. A husband may claim a married couple’s allowance of £2,670 if he lives with his wife at any point in the tax year 2009/10. This is given as a tax reducer and attracts tax relief at 10% – a tax reduction of £267. This £2,670 is, however, a minimum, and it can be increased to a maximum of £6,965 if the husband is 75 or over at the end of the tax year and has an income of £22,900 or less. The allowance is given on a sliding scale depending on the age of both spouses and the level of the husband’s income. Details are given in the Appendix. The opportunity for tax planning arises because the allowance can be transferred between spouses. Because it is simply given as a tax reducer, however, it makes no difference if the wife pays Income Tax at the higher rate and the husband does not. The wife may claim half of the minimum allowance (£1,335) unilaterally. If both parties make a claim before the start of the tax year, the full minimum amount may be transferred.

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If the husband’s (or wife’s, if the joint election has been made) tax liability is insufficient to take advantage of the married couple’s allowance, the unused amount can be transferred to the wife (or husband). A notice must be given by five years after 31 January following the tax year.

EXAMPLE Mr Hatfield has annual income of £12,000 and Mrs Hatfield £20,000. Mr Hatfield is 71 at 5 April 2010 and Mrs Hatfield 76. What is the most beneficial use of the married couple’s allowance? Mr Hatfield Mrs Hatfield £

£

Income

12,000

20,000

Personal allowance (age-related)

(9,490)

(9,640)

Taxable income

2,510

10,360

502

2,072

Tax liability at 20% Married couple’s allowance £6,965 x 10% Excess to Mrs Hatfield

(502) –

(194) 1,878

There has been an extension to the married couple’s allowance for marriages and civil partnerships entered into from 5 December 2005: the allowance is given to whichever individual has the higher total income for the year. The right to transfer all or half of the allowance remains. A couple who married before 5 December 2005 may make a joint election to be brought within these rules.

Extension of basic rate band Taxpayers who are in the higher rate band may bring some or all of their income back into the basic rate band by making payments either to charities or to personal pension schemes. In both cases, the payment is deemed to have been made net of basic rate tax. The grossed-up payment is then added to the basic rate band.

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Gift Aid Individuals who wish to make donations to a charity while reducing their tax liabilities can do so by making a donation (which must be in the form of cash, as opposed to goods and services) and signing a declaration that they have paid sufficient Income and Capital Gains Tax in the year to cover the tax reclaimed by the charity. Gift Aid donations, as these are known, can be made to UKregistered charities only.

EXAMPLE Mr Hitchin has income of £46,000. How much should he donate by way of Gift Aid in order to bring his income below the higher rate band? £ Income

46,000

Personal allowance

(6,475)

Taxable income

39,525

Excess over higher rate band £39,525 less £37,400 = £2,125. Net payment needed £2,125 x 80% = £1,700. Mr Hitchin will pay £1,700 and the charity will reclaim tax of £425 (20/80). His higher rate band will rise to £39,525. The effect of this is that his Income Tax is reduced by 20% of the gross gift. For the three years 2008/09 to 2010/11, the charity can reclaim a transitional Gift Aid supplement to bring it up to the amount it would have been able to claim at the old 22/78 rate which applied up to 2007/08.

A pitfall of Gift Aid is that there are restrictions on benefits which can be received by the donor from the charity. In principle, if any benefit is received in return for the payment, it is not a bona fide donation. This does not apply to newsletters or to reduced or free entry to properties managed by the charity for public benefit (which is why subscriptions to the National Trust qualify for Gift Aid). There are limits on other benefits (see Appendix). It is possible to carry back a Gift Aid donation to the previous year – for example, a payment made in 2009/10 can be treated as made in 2008/09 if a claim is made

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by 31 January 2010. This would be beneficial if the taxpayer were in the higher rate band in 2008/09 but not in 2009/10.

Personal pension contributions A payment to a personal pension scheme is grossed up and increases the higher rate band in exactly the same way as a Gift Aid donation. Individuals who pay tax at the higher rate can make a pension payment to reduce their Income Tax. A new regime for personal pensions came into force on 6 April 2006. The maximum gross contribution is now the higher of £3,600 and 100% of ‘earnings’ (subject to a maximum of £245,000). ‘Earnings’ arise from employment or trading income, but not from savings, dividends or rental income. Until 5 April 2006, contributions were restricted to an age-related percentage of ‘net relevant earnings’, and earnings from pensionable employment (where the employer operated an occupational pension scheme) did not count towards net relevant earnings. Under the new regime, an individual can be a member of both occupational and personal schemes. The 2009 Budget announced a number of measures which adversely affect high earners. The withdrawal of the personal allowance for those earning over £100,000 was mentioned earlier in this chapter. Taxpayers with income of over £150,000 will be subject to a new top rate of Income Tax of 50%. For these taxpayers, higher rate pension relief will be restricted. Those earning above £180,000 will obtain relief at only 20% on pension contributions. Between £150,000 and £180,000, a taper relief will apply. The detailed rules have yet to be published at the time of writing.

Overseas income There is scope for very large tax savings by ceasing to be resident in the UK. Of course, drastic action is required in order to bring about non-residence, but some individuals consider this worthwhile. An individual may be resident, ordinarily resident or domiciled in the UK. These terms are considered in turn.

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Residence An individual who is physically in the UK for at least 183 days in a tax year (usually ignoring days of arrival and departure) is UK-resident. If an individual is physically in the UK for an average of 91 days per year over four successive tax years, residence begins on the first day of the fifth year. Individuals are non-resident if they do not visit the UK at all in a tax year, even if their average over the last four tax years has been 91 days or more.

Ordinary residence Ordinary residence is more difficult to define than residence, and it implies greater permanence. Normally individuals who have lived in the UK throughout their lives are ordinarily resident, even if they are not resident as a result of being absent for an entire tax year. If an individual regularly visits the UK and has accommodation which is available to him for at least three years, that individual is ordinarily resident. The 91-day test for residence also applies to ordinary residence.

Domicile An individual can have only one domicile, which up to age 16 is normally the parents’ domicile (the ‘domicile of origin’). After the age of 16, the individual may acquire a ‘domicile of choice’ which involves physically moving to another country and severing ties with the former domicile. Strong evidence is needed before Revenue & Customs will accept this – for example, the sale of all UK property and the purchase of property in the new country of domicile; marriage to an individual already domiciled in the new country, or the movement of family to that country; the statement of a desire to be buried in the new country, such as the purchase of a burial plot there.

Foreign income Foreign income is usually taxed on an arising basis. This means that, regardless of whether the income is remitted to the UK, it is taxable in the UK, though any expenses outside the UK which are directly related to the collection of the income (for example, bank charges) are deductible.

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Individuals who are not ordinarily resident or non-domiciled in the UK can, however, claim to have foreign income (except income arising in Eire) taxed on a remittance basis. This means that the income is not taxed in the UK until it is received there, probably to a UK bank account. Consequently if the funds are never remitted, they are never taxable. It is possible to use the foreign income to buy an asset abroad and then bring this asset into the UK, thus avoiding the taxation of the income on the remittance basis.

Employment income Many employees carry out part or all of their duties abroad or for an employer who is not resident in the UK. An individual who is non-domiciled in the UK – even if resident or ordinarily resident – is not liable to UK Income Tax on earnings from employment with a foreign employer carried out wholly outside the UK unless those earnings are remitted to the UK. However, if any part of the duties is performed in the UK, there is a liability to UK Income Tax on the whole. Many foreigners working in London as city bankers take advantage of this by persuading their employers to give them two contracts of employment – one for their work in London and one for their work elsewhere. The latter contract is with an overseas subsidiary and the income is remitted to an offshore bank account. If, for example, 70% of their work is in London, they will pay tax on only 70% of their income – an effective rate of 28%. There was a change to the taxation of non-domiciles from 6 April 2008. Those with more than £2,000 of unremitted income and gains and who have been UKresident for seven of the previous nine tax years have to pay a £30,000 ‘remittance basis charge’ each tax year. Alternatively, they may choose to be taxed on all income arising, irrespective of whether it is remitted to the UK. Irrespective of domicile or residence, an individual not ordinarily resident in the UK is able to have salary apportioned between income earned from working days within the UK and working days abroad. There does not in this case need to be a separate contract for time abroad, unlike for those who are resident and ordinarily resident but non-domiciled. The proportion of salary which relates to work abroad is taxed only if it is remitted to the UK.

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EXAMPLE Mrs Romney, domiciled in the US, has a contract with a London bank, working 65% of the time in the UK and 35% in the US. For the years 2006/07 to 2009/10, she spends an average of 85 days in the UK and rents property on one-year leases. Her income is £100,000, paid direct to a US bank. She is not ordinarily resident as she neither has accommodation available to her for a three-year period nor spends an average of 91 days or more in the UK. Her income is therefore apportioned. She is taxed in the UK on £65,000 but the remaining £35,000 is free of tax unless it is remitted to the UK. She is not required to pay the remittance basis charge as she is not UK resident. If in future years she spends an average of at least 91 days in the UK and becomes UK-resident for seven out of nine years, she will have to pay the £30,000 charge. It will then be more tax-efficient if she elects to be taxed on the arising basis. Trading income Any trade carried on at least in part in the UK is taxed as UK income except in the case of an individual who is non-resident, when the profits are apportioned between the UK part and the overseas part. A trade carried on wholly outside the UK is still wholly taxable in the UK if carried on by an individual who is resident and ordinarily resident. For a non-resident, it is not taxable in the UK. For an individual who is resident but not ordinarily resident, or resident but non-domiciled, it is taxed on a remittance basis.

EXAMPLE Mr Wade carries on a trade which makes 40% of its sales in the UK and 60% in Germany. He is not ordinarily resident in the UK, but in 2009/10 he spends 200 days in the UK. He is resident and therefore the whole of the profits are taxable in the UK. If he were to restrict his time in the UK to 180 days, he would be non-resident and then only 40% of the profits would be taxable in the UK.

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Dividends and interest Individuals who are non-resident can avoid the higher rate on dividends and interest. Broadly, their tax liability cannot exceed the total of tax charged on non-savings income (ignoring the personal allowance) and tax deducted at source on interest and dividends. Individuals who make a declaration that they are not ordinarily resident can receive interest from UK banks gross.

EXAMPLE Miss Stone has employment income of £10,000 in the UK. She also has net interest income of £12,000 and net dividend income of £90,000. Her income is summarised thus: £ Employment income

10,000

Interest £12,000 x 100/80

15,000

Dividends £90,000 x 100/90

100,000 125,000

Personal allowance Taxable income

(6,475) 118,525

If she is resident, her tax liability is calculated as follows: Tax on non-savings income: 20% x £3,525 Tax on interest income: 20% x £15,000

705 3,000

Tax on dividend income: 10% x £18,875 32.5% x £81,125

1,888 26,366 31,959

Less deducted at source Tax liability

(13,000) 18,959

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If she is non-resident, her tax liability is calculated as follows: Tax on non-savings income: £10,000 x 20%

2,000

Tax on interest income: 20% x £15,000

3,000

Tax on dividend income: 10% x £100,000

10,000 15,000

Less deducted at source

(13,000)

Tax liability

2,000

By being non-resident, it is possible to achieve significant tax reductions – in this case £16,959. Monaco, a well-known tax haven, houses many wealthy British business people who fly to the UK on a Monday and return on a Thursday for most weeks of the year. Because days of travel to and from the UK do not count towards the 91-day threshold, it is easy to remain non-resident and therefore only suffer tax deduction at source on dividends. According to one report, there are 650 directors of UK companies who give their address as Monaco.

Tax in more than one country If individuals become non-resident, their income will generally be taxable in the country of residence, though it is possible to be resident in no country. A detailed analysis of the tax rates and rules in other countries is beyond the scope of this work, although for individuals with a mid-range retirement income there is no significant difference between the tax burden in the UK and that in popular retirement destinations such as France, Italy, Spain and Portugal. Certain countries do impose a wealth tax, such as France (starting at 0.55% per annum on assets of more than €750,000) and Spain. Income may in theory be taxable in two countries. An example would be foreign income which is taxed in the country of origin and also on the remittance basis in the UK. Double tax agreements exist between the UK and many other countries so that income is not taxed twice. If a non-resident owns and lets property in the UK, the income will be taxed in the UK and maybe also the country of residence, but it is usually possible to obtain a credit for the UK tax paid so that the tax in the country of residence is correspondingly reduced. A further point to note here is that the letting agent acting

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for a non-resident landlord must deduct 20% of the rent and send it to Revenue & Customs. If there is no letting agent, the tenant must make the deduction. In some cases, tax relief may not be available under a double tax agreement. UK residents in this position may set the foreign tax against their UK tax, provided that this arises from the same type of income as the foreign tax. This is known as unilateral relief. The 2009 Budget announced that from 6 April 2010 the personal allowance would be withdrawn from individuals who are not resident in the UK but who claim UK personal allowances and reliefs as Commonwealth citizens.

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A Thorogood Special Briefing

Chapter 5 Corporation Tax Losses Groups Purchase of a company’s own shares Substantial shareholding relief Corporate Venturing Scheme

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Chapter 5 Corporation Tax

Losses This section focuses chiefly on losses incurred by a company in its trading activities. Apart from the carry-forward of trading losses, which happens automatically, a claim must be made to utilise trading losses against other income of the same or a different accounting period. In order to aid an understanding of the relative advantages of the various options for utilisation of losses, it is necessary to outline the rules for computation of Corporation Tax. The thresholds and rates are in the Appendix.

Basic computation Trading income, income from other sources (such as property income and interest) and chargeable gains are added together. Charges on income are then deducted. Charges on income comprise only payments to charity. The result is the profit chargeable to Corporation Tax (PCTCT). The relevant Corporation Tax rate is applied to this. Note that dividends receivable do not form part of PCTCT, in the same way as dividends payable are not a deduction. There are three Corporation Tax rates for the year commencing 1 April 2009: companies with PCTCT of up to £300,000 pay tax at 21%, and companies with PCTCT of £1,500,000 pay tax at 28%. Between £300,000 and £1,500,000, a marginal rate applies. If a company has received no dividend income in the period, the marginal rate is 29.75%. The method of calculation is first to apply the main rate of 28% to PCTCT and then to apply the following fraction by way of marginal relief: (U – P) x I/P x 7/400 U = the upper limit (£1,500,000) P = PCTCT plus franked investment income I = PCTCT

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Franked investment income consists of dividends received from another UK company, grossed up by 100/90.

EXAMPLE Tenterden Ltd has PCTCT of £1,000,000 and has received net dividends of £90,000. The Corporation Tax is computed as follows: £ Tax at full rate: £1,000,000 x 28%

280,000

Marginal relief: (£1,500,000 – £1,100,000) x £1,000,000/£1,100,000 x 7/400

(6,364) 273,636

Tenterden Ltd’s marginal rate is 30.09%: Tax

273,636

Less tax at small companies rate: £300,000 x 21%

(63,000)

Tax at marginal rate

210,636

Marginal rate £210,636/ (£1,000,000 – £300,000) = 30.09% The marginal rate will always be 29.75% if there is no franked investment income.

Note that the upper and lower limits are reduced accordingly if the accounting period is less than twelve months. The limits are also reduced if the company has any associated companies. Companies are associated if one controls another or both are under common control. The size limits are divided by the number of associated companies – for example, if Tenterden Ltd has two subsidiaries and is owned by another company, the upper limit will be £375,000 and the lower limit £75,000. The purpose of this is to stop companies with, say, a profit of £2,000,000 from splitting into seven companies and thus taking advantage of the small companies rate.

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Set-off of losses against other income A company may set a trading loss off against other income from any source, which includes chargeable gains. A claim for set-off in this manner must be made within two years of the end of the accounting period in which the loss arises.

Carry-back of losses If the trading loss is set off against other income for the same year and this other income is insufficient to relieve the loss in its entirety, the remaining loss may be carried back and used against the income of the previous twelve months. A separate claim must be made within the same time limit as for set-off against other income of the same year. As a temporary measure, losses in periods ending between 24 November 2008 and 23 November 2010 may be carried back three years, being relieved against later years first. The amount of the loss which can be carried back in this manner is restricted to £50,000 for each the accounting periods in which a loss is made.

Carry-forward of losses If no claim is made to utilise trading losses against income of the same year or to carry them back, they are carried forward and utilised against profits of the same trade only.

EXAMPLE Hampstead Ltd has the following results: Year ended

31.3.09

31.3.10

31.3.11 (Budget)

Trading profit Trading loss Chargeable gain

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£

£

£

2,100,000

–

500,000

–

(100,000)

–

100,000

20,000

70,000

5 C O R P O R AT I O N TA X

How is the loss best utilised? The tax rate in the year to March 2009 is 28%. In the following year it is 21%. In the year to March 2011 the loss, if carried forward, will reduce the PCTCT from £570,000 to £470,000, still within the marginal rate band. The tax saving will therefore be at 29.75%. This is the best option, proving that losses should not necessarily be set off against the year with the largest PCTCT. Cash flow might be an issue, however, as Hampstead Ltd will have to wait until 2011 to gain relief if the loss is carried forward, whereas immediate relief could be claimed for carry-back.

Terminal losses Losses incurred in the final twelve months of a company’s trading may be set off against the other income for the previous three years. Complications arise when the final period is shorter than twelve months: part of the loss for the penultimate period can then also be carried back. This will usually mean that they can be carried back three years to a date which is midway through an accounting period; in this case, the profit for that period must be apportioned.

EXAMPLE Harrow Ltd has the following results prior to ceasing to trade on 31 December 2009. All the periods are of twelve months except for the final period. Period ended

30.6.06

30.6.07

30.6.08

30.6.09

31.12.09

£

£

£

£

£

Result

20,000

3,000

5,000

(20,000)

(10,000)

Profit

20,000

3,000

5,000

(10,000)

(3,000)

(5,000)

10,000

–

–

Loss utilised

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Loss memorandum: Terminal loss

20,000 (last period and 6/12 x y/e 30.6.09)

30.6.08

(5,000)

30.6.07

(3,000)

30.6.06

(10,000) (6/12 – carried back to 1.1.06)

Unrelieved

2,000

The remaining £10,000 of the loss in the year ended 30 June 2009 is also unrelieved.

Schedule A (property) losses Property losses are automatically set off against other income of the same accounting period. No claim is required. Any loss remaining is carried forward and utilised against total income of subsequent periods.

Groups Companies associated by various means can form a group, which gives opportunities for the saving of tax by setting the losses of one company off against the profits of another, or by reducing tax on chargeable gains.

Group loss relief Companies which are members of a 75% group can utilise losses by setting the loss of one company against the profits of another. This is a very flexible way of gaining immediate Corporation Tax relief for losses, rather than having to carry them forward for set-off against future profits. Taking a simple example, A Ltd owns 75% of B Ltd. This 75% interest must meet three conditions: 1.

It owns 75% of B Ltd’s ordinary share capital.

2.

It is entitled to 75% of B Ltd’s distributable profits.

3.

It is entitled to 75% of B Ltd’s assets on winding up.

If these conditions are met, A Ltd and B Ltd are in a 75% group.

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An interest may be indirect. Take the following more complex example:

A 30%

90%

B 90%

70%

E

C 90%

D A has an indirect interest of 81% in C, and therefore A, B and C form a 75% group. A’s interest in D is only 72.9%, but B’s interest in D is 81%. Therefore B, C and D form a 75% group. E can be added to the first group. This is because A’s effective interest in E is 93% (an actual holding of 30% and a 90% share of B’s 70%). Losses may be surrendered between any companies in a group. Most commonly, the losses in question will be trading losses. The surrendering company need not first set the losses against its other income for the year. Schedule A (property) losses can also be surrendered, but they must first be set against the company’s other income for the year. When deciding how or whether to apply group relief, the group should always consider setting losses off against the company with the highest marginal tax rate.

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EXAMPLE Cromer Ltd and Salthouse Ltd have the following results: Year ended 31 December

2007

2008

2009

£

£

£

Cromer Ltd: Trading result

170,000

(30,000)

100,000

700,000

75,000

Salthouse Ltd: Trading result Chargeable gain

–

160,000

(12,000) –

What is the most beneficial way of claiming group relief? Cromer Ltd could carry its loss back to 2007. In that year it paid tax at the small companies rate on the first £150,000 (remember that the small companies threshold is halved because there are two associated companies) and at the marginal rate on the next £20,000. It could carry the loss forward to 2009 and save tax at the small companies rate. It could set the loss against Salthouse Ltd’s profits for 2008. Salthouse Ltd is a large company paying tax at the full rate The best option for Cromer Ltd is to carry £20,000 back and save tax at the marginal rate and apply group relief to the remaining £10,000. Salthouse Ltd can carry its loss back and save tax at the full rate. It can alternatively carry it forward but future results are uncertain. Salthouse Ltd could set its loss against Cromer Ltd’s profits for 2006, saving tax at the small companies rate. The best option for Salthouse Ltd is to carry its loss back.

Group relief is simplest to operate when all companies have the same accounting period. If the companies have different accounting periods, the loss can only be surrendered within the overlapping period.

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EXAMPLE Brixworth Ltd and Stanford Ltd have the following results: Profit

Loss

£

£

Brixworth Ltd – year ended 31 December 2008

30,000

2009 2010

20,000 10,000

Stanford Ltd – year ended 30 September 2009

25,000

2010

10,000

Brixworth Ltd made a loss in the year ended 31 December 2009, of which 9/12 fell in Stanford Ltd’s year ended 30 September 2009. Therefore only 9/12 of the loss (£15,000) is available for group relief. The same principle will apply to Stanford Ltd’s loss in the year ended 30 September 2010, of which 9/12 fell in Brixworth’s year ended 31 December 2010. Therefore only 9/12 of the loss (£7,500) is available for group relief.

Consortia For a consortium to be in place, 20 or fewer companies (the consortium members) must each own 5% of another company (the consortium company). Additionally, the consortium members must in total hold at least 75% of the ordinary share capital. Consortium companies must be trading companies. Consortium relief operates on broadly similar lines to group loss relief, except that losses may be surrendered only between the consortium company and the members (and not between members), and that when losses are surrendered from the consortium company to the members, the relief is restricted in proportion to the member’s interest in the consortium company.

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EXAMPLE Addlethorpe Ltd is owned as follows: Bibury Ltd 30% Crediton Ltd 30% Dorney Ltd 37% Evesham Ltd 3% Addlethorpe Ltd makes a loss of £200,000. The profits of the consortium members are: Bibury Ltd £50,000 Crediton Ltd £80,000 Dorney Ltd £90,000 Addlethorpe Ltd’s loss is surrendered as follows: Bibury Ltd

Crediton Ltd

Dorney Ltd

£

£

£

Profit Less surrendered

50,000

80,000

90,000

(50,000)

(60,000)

(74,000)

20,000

16,000

–

The loss not surrendered is £16,000 (Evesham Ltd’s share and excess not claimable against Bibury Ltd).

Gains groups For a gains group to exist, the parent must own 75% of the subsidiary and must have an indirect interest of at least 51% in each of the subsidiary’s subsidiaries. As for group loss relief, ownership of share capital and entitlement to profits and assets are all taken into account.

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EXAMPLE Albury Ltd owns 75% of Birtles Ltd, which owns 75% of Chewton Ltd, which in turn owns 75% of Dunsfold Ltd. Albury Ltd, Birtles Ltd and Chewton Ltd are in a gains group, as Albury Ltd’s effective interest in Chewton Ltd is 56.25%, but Dunsfold Ltd is not in the group. Note that a company cannot be a member of more than one gains group, and a company which is itself a 75% subsidiary cannot stand at the head of a gains group. Hence Birtles Ltd cannot head a group which includes Chewton Ltd and Dunsfold Ltd.

Gains groups provide an opportunity to save tax on chargeable gains. If a capital asset is transferred from one group company to another, the transfer is deemed to have been made at ‘no gain no loss’ – in other words, the transferor is deemed to have sold it for its original cost plus indexation, and the transferee is deemed to have acquired it for the same value. A company wishing to dispose of a capital asset may therefore wish to transfer the asset to a group company which has a lower Corporation Tax rate. The transferee company then sells the asset with a consequent tax saving. Capital losses of one group company cannot be relieved against chargeable gains of another. In theory, if one company is about to sell an asset which generates a capital loss and another company has chargeable gains, it is necessary to transfer the asset from one to the other and sell it to relieve the capital loss. However, if both companies make a joint claim to do so, they can treat the asset as if it had been transferred immediately before sale, which removes the necessity to effect a physical transfer of the asset. Companies sometimes buy other companies which own assets on which there is a potential loss. They then transfer those assets on a ‘no gain no loss’ basis and sell the assets outside the group, using the ensuing capital loss against existing chargeable gains. Special provisions exist to prevent this from happening. The pre-entry loss cannot be set against chargeable gains. This preentry loss is normally computed by time-apportioning the loss between the periods before and after the company joined the group.

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Purchase of a company’s own shares Usually when a company repurchases its shares from shareholders, the transaction is treated in the hands of the shareholder in the same way as a distribution (in other words, as a dividend). If certain conditions are met, however, it is taxed as a capital gain. More often than not – but not always – this latter treatment is more favourable for the shareholder, because higher rate taxpayers are liable for additional Income Tax on distributions, whereas there is an annual exemption of £10,100 available before Capital Gains Tax becomes payable. The capital treatment applies only to unquoted trading companies, and the purchase must be for the benefit of the trade. Generally this second condition will be satisfied if a shareholder has retired, died or simply wishes to withdraw equity finance. Perhaps most commonly, there is a dissenting shareholder. For example Ashton, Barton and Chester are equal shareholders in Zennor Ltd but Ashton increasingly disagrees with Barton and Chester, which leads to difficulties in the management of the group. Barton and Chester do not have the funds to buy out Ashton, but Zennor Ltd has surplus funds. Zennor Ltd therefore repurchases the shares from Ashton. The capital treatment also applies if the purpose of the transaction is to enable Inheritance Tax to be paid on the death of a shareholder. The vendor must also be UK-resident and ordinarily resident, must have held the shares for five years (or three if they were inherited), and must not be connected with the company immediately after the sale. Broadly, a shareholder with more than 30% of the ordinary share capital of a company is connected with it. Occasionally it will be more beneficial for the shareholder to have the transaction treated as a distribution – if there are already gains above the annual exemption, for example.

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EXAMPLE Mr Leigh has taxable income after personal allowances of £10,000 and chargeable gains of £10,000 in the current year. He has a shareholding in Martock Ltd which the company wishes to repurchase for £20,000. The shares were purchased five years ago for £5,000. Would it be more beneficial for Mr Leigh to have this treated as a distribution or as a capital payment? £ Tax on distribution No additional tax – basic-rate taxpayer. Tax on capital payment Proceeds

20,000

Cost

(5,000)

Gain

15,000

Capital Gains Tax at 18%

2,700

In the above example, there is a tax saving of £2,700 by treating the transaction as a distribution. It will therefore be necessary for the company to ensure that it breaches one of the conditions for a capital payment, perhaps by manipulating the transaction so that the shareholder retains a holding of at least 30%. Note that, if the conditions are met, the transaction must be treated as a capital payment. Advance clearance for one treatment or the other may be obtained from Revenue & Customs.

Substantial shareholding relief Substantial shareholding relief was introduced with effect from 1 April 2002. The principal feature is that there is no chargeable gain when a company disposes of a shareholding in another company, provided that certain conditions are met. A substantial shareholding is one of at least 10%, taking into account the interest in ordinary share capital and the entitlement to profits and to assets on winding up. The shares must have been held in any continuous twelve-month period in the two years prior to disposal. So if a company buys 20% of another company on 1 January 2007 and sells it on 1 January 2008, this is an exempt disposal. If it then buys another 5% on 1 July 2008 and sells it by 31 December 2008, this

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is also an exempt disposal because a 10% shareholding was held for a twelvemonth period in the previous two years. However, if it delays the sale of the 5% holding beyond 1 January 2009, it will not be an exempt disposal. Both investor and investee must be trading companies both for the twelve-month period and immediately after the sale.

EXAMPLE Lullington Ltd owns 100% of Shepton Ltd, which owns chargeable assets. Lullington Ltd has an opportunity to sell Shepton Ltd’s trade to Taunton Ltd. Should Shepton Ltd sell its assets and goodwill, or should Lullington Ltd sell Shepton Ltd in its entirety? If Shepton Ltd sells the assets and goodwill, there will be a chargeable gain on the goodwill. There may also be a chargeable gain on any plant and machinery if it is sold for more than its written-down value. However, if Lullington Ltd sells Shepton Ltd, there is no chargeable gain provided that the twelve-month criterion is met and both are trading companies. Taunton Ltd may not be as enthusiastic, however. If it purchases goodwill, it can amortise this in its own profit and loss account and claim the amortisation as a Corporation Tax deduction under the new regime for intangible assets which was introduced on 1 April 2002. However, if it purchases Shepton Ltd, there will be no tax allowance – though, if it in turn holds Shepton Ltd for twelve months, it will benefit from substantial shareholding relief. In such a situation, the seller may have to consider the buyer’s wishes.

Corporate Venturing Scheme The Corporate Venturing Scheme operates in a broadly similar way to the Enterprise Investment Scheme (see Chapter 2). If a company subscribes for new ordinary share capital in a company which meets the conditions, the investing company may gain tax relief at 20% on the amount invested. There are numerous conditions. The investor company, which must be a trading company, must not hold an interest of more than 30% of the investee company.

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The investee company must be unquoted, must not be controlled by another company, must be at least 20% owned by individuals who are not directors nor employees nor their relatives, and must be a trading company (broadly defined in the same way as for the Enterprise Investment Scheme). Immediately before the purchase of the shares, the investee company must have had gross assets of no more than £7 million, and immediately afterwards no more than £8 million. It must not have subsidiaries for which there are arrangements in force which would pass control to a third party. When the investee company has traded for at least four months following the date of the investment, the relief is given, subject to a claim on the Corporation Tax Return. Relief will, however, be withdrawn if the shares are sold within three years of their purchase.

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Chapter 6 Capital Allowances Plant and machinery – general principles Cars First-year allowances Short-life assets Industrial buildings allowances Disclaiming capital allowances

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Chapter 6 Capital Allowances

A business, whether it is a sole trader, partnership or company, will be able to treat most of its expenditure as revenue items and will therefore be able to claim a deduction against Income or Corporation Tax as appropriate. Certain items, however, do not qualify as revenue items and are therefore capital in nature. Consequently they do not qualify for a full tax deduction in the year in which the expenditure is incurred. The question of what is capital and what is revenue has formed the subject of many a case. There is no simple test, and a balanced judgement will often be necessary. Broadly, the day-to-day running costs of a business, such as wages and salaries, heat and light, stationery and raw materials are classed as revenue expenditure. Capital items are those with which the business does not part but which belong to the capital structure, such as property, plant and machinery and goodwill. These items provide the opportunity to make profits or losses. A rule of thumb is that capital items tend to be used over more than one year. Relief for capital items can be given in two ways. First, the cost can be taken into account when computing a chargeable gain (see Chapter 7). Second, certain items qualify for capital allowances, so the cost is allowable as a deduction from profit, but this is spread over the life of the asset. It is capital allowances, and the opportunities for increasing the amount of the allowance and claiming it as early as possible, which form the subject of this chapter.

Plant and machinery – general principles There is no statutory definition of plant and machinery, but it forms by far the largest part of assets eligible for capital allowances. Broadly, it covers machinery in its widely understood sense, and plant. The meaning of ‘plant’ has been considered by the courts in many cases. The essential features are that it is kept for permanent use in the trade and performs a function in the business operations. Items which merely provide the place or setting in which the business operations are performed are not considered to be plant and are therefore ineligible for capital allowances on plant and machinery.

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Items held by the courts to be plant include movable office partitions, swimming pools on a caravan site, Building Society window screens and a barrister’s books. Items held not to be plant include a canopy over a filling-station, false ceilings, shop fronts and stairs. As can be seen, the distinction is a fine one. If an item qualifies as plant and machinery, a writing-down allowance of 20% of the cost is given in the accounting year of purchase (unless first-year allowances are available – see below). It does not matter when in the year the purchase is made: a business with a year-end of 30 September would gain faster tax relief by purchasing an asset on 29 September than it would if the same purchase were made on 2 October. Most plant and machinery goes into a ‘pool’, and the annual allowance given is 20% of the written-down value of the pool, which is the amount carried forward at the end of the previous year, plus any additions in the year, less the disposal proceeds of any assets sold in the year. However, since 6 April 2008 for Income Tax purposes (1 April 2008 for companies) an annual investment allowance of 100% is available on the first £50,000 spent on plant and machinery. Additionally, the 2009 Budget announced that a first-year allowance of 40% is available for 2009/10 (see below).

EXAMPLE Fryerning Ltd has a pool of plant and machinery of £200,000 at 1 July 2009. It wishes to sell an asset from the pool for £20,000 on or about 30 June 2010. What are the consequences of delaying the sale to 1 July 2010, assuming a Corporation Tax rate of 28%? Before 30 June £

After 30 June £

Year ended 30 June 2010: WDV* at 1 July 2009

200,000

Disposal proceeds

(20,000)

200,000 –

180,000

200,000

WDA* at 20%

(36,000)

(40,000)

WDV* at 30 June 2010

144,000

160,000

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WDV at 30 June 2010

144,000

Year ended 30 June 2011: Disposals

160,000 (20,000) 140,000

WDA at 20% WDV at 30 June 2011

(28,800)

(28,000)

115,200

112,000

The tax saving in the first year achieved by delaying the disposal is £1,120 (£4,000 x 28%). This is partially offset in the second and subsequent years. * WDA: writing-down allowance WDV: written-down value The writing-down allowance is increased or reduced accordingly for long or short accounting periods. If the written down value of the pool after deducting disposal proceeds but before making the 20% writing down allowance is less than £1,000, the business may claim the entire value of the pool as a writingdown allowance.

Cars For cars purchased for more than £12,000 before the tax year 2009/10, there is a special treatment (those costing £12,000 or less are simply treated as part of the general pool – there is no longer a separate pool for them). They are treated individually and given a maximum annual writing-down allowance of £3,000. When the car is sold, a balancing allowance or charge arises by comparing the sale proceeds with the written-down value at the start of the year. From the tax year 2009/10, this treatment changes, though expensive cars already purchased continue to be treated under the old rules for a transitional period of five years. If a car purchased from 1 April 2009 for a company (6 April 2009 for Income Tax purposes) has CO2 emissions of up to 160, it is added to the general pool. Otherwise, it is added to a special rate pool and is subject to an annual writing-down allowance of 10%. A sole trader with a turnover not exceeding the VAT registration threshold (currently £68,000) has a choice of two treatments for the use of a car. The private use element of all of the expenses – including capital allowances, petrol, insurance, road tax and other running costs – can be claimed. Alternatively, the Revenue & Customs approved mileage rates can be used (40p per mile up to

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10,000 miles per annum, 25p per mile thereafter). The basis can be changed only when the car is changed.

EXAMPLE Miss Lawford, a sole trader with a turnover of £50,000, buys a car with CO2 emissions of 145 for £15,000 on 1 April 2009. The running costs including petrol in the year ended 31 March 2010 are £2,000. Her total mileage is 15,000 of which half is estimated to be business mileage. Should she claim actual costs or the mileage rate? £ Actual costs (50% private use) Capital allowances – WDA £15,000 x 20% x 50%

1,500

Running costs £2,000 x 50%

1,000

Amount claimable

2,500

Mileage 7,500 x 40p

3,000

There is a clear advantage here in claiming the mileage rate. The position in future years is less clear – capital allowances will reduce after the second year, but running costs tend to increase with the age of the car.

First-year allowances First-year allowances are designed to allow faster tax relief for purchases of assets. The temporary first-year allowance of 40% in the tax year 2009/10 announced in the 2009 Budget is available to businesses of all sizes, unlike previous first-year allowances which were available only to small and mediumsized businesses. First-year allowances are available on all plant and machinery except cars or assets used for leasing. It is anticipated that there will be no first-year allowance for the tax year 2010/11, which may be a consideration in timing the purchase of an asset. Unlike standard writing-down allowances, these

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percentages do not change if the accounting period is longer or shorter than twelve months. The advantage of bringing a purchase forward so that it happens just before a year-end was highlighted earlier. This advantage is even greater if a first-year allowance is available. However, it is not always the best course of action to claim first-year allowances in full. If an asset is disposed of and the proceeds exceed the balance in the general pool, there will be a balancing charge. This can be avoided by not claiming the full amount of the first-year allowance and instead adding part of the cost of the asset to the general pool. The part added to the general pool is computed using the following fraction: First-year allowance unclaimed/Full first-year allowance x Cost of asset

EXAMPLE Maldon Ltd has a general pool brought forward of £10,000 and has exhausted its annual investment allowance for the year ended 31 March 2010. An asset is sold in the year ended 31 March 2010 for £12,000 and one is bought for £15,000. How much of the first-year allowance should not be claimed, and how much Corporation Tax will thereby be saved in the year of purchase (assuming a rate of 21%)?

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£

FYA*

General pool

Allowances

£

£

£

FYA claimed in full WDV brought forward

10,000

Disposal

(12,000) (2,000)

Balancing charge

2,000

(2,000)

– Addition

15,000

FYA at 40%

(6,000)

6,000 9,000

WDV carried forward

9,000 4,000

FYA restricted WDV brought forward

10,000

Addition FYA FYA not claimed

15,000 (6,000) 800 (5,200)

5,200

9,800 Added to general pool £800/£6,000 x £15,000

(2,000)

Disposal Transfer from FYA WDV carried forward

2,000 (12,000) –

9,800

9,800 9,800 5,200

* FYA: First-year allowance There is a tax saving of £252 (£1,200 x 21%) in the year by restricting the firstyear allowance claimed.

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Short-life assets Not all plant and machinery goes into the general pool. Amongst other assets, long-life assets – those with an expected life of more than 25 years where the business spends more than £100,000 in a year on such assets – are another. Long-life assets enter the special rate pool (like cars with high fuel emissions) and attract a writing-down allowance of 10%. By contrast, faster capital allowances can be claimed on assets which the taxpayer elects to treat as short-life assets. These are generally assets with an expected useful life of four years or less. There is no practical benefit where the item remains in use for five years or more. Cars, assets used for leasing and those used partly for non-business purposes cannot be treated as short-life assets. Every short-life asset is placed in a pool on its own and a writing-down allowance is given in the usual way. The consequence is that, when it is sold or otherwise disposed of, a balancing allowance is given, being the difference between the written-down value and the sale proceeds (if any). If the proceeds exceed the written-down value, there will be a balancing charge; if this is expected to happen, there is a tax disadvantage and the asset should simply be placed in the general pool at the outset. If the short-life asset has not been disposed of by the end of the fourth year after its acquisition, its written-down value is transferred to the general pool.

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EXAMPLE Thaxted Ltd purchases an asset for £100,000 in the year ended 31 December 2009. It has exhausted its annual investment allowance for the year, and first-year allowances are available. What is the advantage of treating it as a short-life asset if it is to be sold for £10,000 in 2011? Short-life

General pool

£

£

Addition

100,000

100,000

WDA at 40%

(40,000)

(40,000)

60,000

60,000

(12,000)

(12,000)

48,000

48,000

(10,000)

(10,000)

38,000

38,000

Year ended 31 December 2009:

WDV carried forward Year ended 31 December 2010: WDA at 20% WDV carried forward Year ended 31 December 2011: Disposal

Balancing allowance

(38,000)

WDA at 20% WDV carried forward

(7,600) –

30,400

There is an additional allowance of £30,400 in year 3 which at the full rate of Corporation Tax translates into a saving of £8,512. Of course, correspondingly more tax will be paid in future years.

Industrial buildings allowances Other than the timing of purchases to ensure that they fall shortly before the year-end (and disposals to fall shortly afterwards), there is little scope for planning in the claim of industrial buildings allowances, so the basic rules are included here purely for completeness.

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Broadly, industrial buildings allowances are available only on buildings used for manufacture, storage or processing and are restricted to the costs of construction. The purchase of land is not eligible, and the only tax allowance claimable on land will usually be in reduction of a chargeable gain when the land is ultimately sold. Industrial buildings have a tax life of 25 years from the date they are first brought into industrial use. This means that an allowance of 4% of the cost is given in the year of first use and every year as long as the building remains in industrial use. There is no balancing adjustment for disposals on or after 21 March 2007.

Disclaiming capital allowances It may sometimes be desirable not to claim full capital allowances on plant and machinery. If a sole trader’s profit before capital allowances is only £8,000, for example, the personal allowance of £6,475 will be wasted if capital allowances of more than £1,525 are claimed. An election can be made to reduce capital allowances to this amount, and consequently greater allowances can be claimed in subsequent years. The same may apply if the business has losses brought forward which it wishes to utilise against the profit for the year. In these circumstances it may wish to maximise the taxable profit in order to relieve the losses, and the deferral of capital allowances might be a way of achieving this.

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Chapter 7 Capital Gains Basic principles Annual exemptions Transfers between spouses Capital losses Principal private residences Reliefs Chattels

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Chapter 7 Capital Gains

Basic principles If a chargeable asset is sold, whether by an individual, partnership or company, a chargeable gain or capital loss may arise. Most assets are chargeable assets, but items sold as part of trading activities are taxed under the provisions for Income and Corporation Tax. Commonly, a business may find itself with chargeable gains on land and buildings, goodwill and other intangible assets, and investments in other companies (but see substantial shareholding relief at Chapter 5). An individual may find himself with chargeable gains on a second property (see principal private residence below), shares, antiques and paintings. This chapter explains how to minimise tax on chargeable gains but starts with a brief explanation of how Capital Gains Tax for individuals and Corporation Tax on chargeable gains for companies work.

Computation – companies The pro forma computation for companies is: £ Disposal proceeds

x

Original cost

(x)

Enhancement expenditure

(x)

Unindexed gain Indexation allowance Chargeable gain

x (x) x

There is no annual exempt amount for companies.

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The indexation allowance is computed by reference to the retail price index on the date of acquisition and the date of sale. Indexation can never be used to create or increase a loss – for example, if the gain before indexation is £10,000 and indexation is computed at £15,000, there will be no gain and no loss. If there is a loss before indexation, this is the allowable loss and no indexation is added.

Computation – individuals The pro forma computation for an individual is: £ Disposal proceeds

x

Original cost

(x)

Enhancement expenditure

(x)

Chargeable gain

x

Indexation ceased to apply for individuals, partnerships and trusts from April 1998 following a major review of the Capital Gains Tax regime. For disposals before 6 April 2008, assets held at 5 April 1998 were indexed up to that date. Taper relief was then applied and varied depending on whether the asset is a business or non-business asset and on the period of ownership. Broadly, a business asset was one used by the taxpayer in carrying on a trade or profession. Much faster taper relief was given for business assets – 75% after two years’ ownership, compared to 40% after ten years for a non-business asset. Taper relief was abolished for disposals on or after 6 April 2008, and indexation no longer applies to assets disposed of by individuals, even if those assets were owned before 6 April 1998. A flat Capital Gains Tax rate of 18% now applies to all chargeable gains by individuals, though the annual exempt amount is first deducted (see below). With the abolition of taper relief, many of the opportunities for tax planning in relation to chargeable gains have been removed. Tables showing how taper relief operated up to 5 April 2008 are in the Appendix. For assets held before 1 April 1982, cost is ignored and the market value at 31 March 1982 substituted. For disposals by individuals prior to 6 April 2008, two calculations were prepared: one using the actual cost and the other using the market value at 31 March 1982. The lower of the two gains was taxed. If one produced a gain and one a loss, there was deemed to be no gain and no loss. If both produced a loss, the lower loss was allowable. This still applies to disposals by companies of assets held at 31 March 1982.

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Companies may still make a global rebasing election. This is irrevocable once made. The result is that, for all assets held before 1 April 1982, cost is ignored and the market value at 31 March 1982 substituted. This is likely to be of benefit if all or most of the pre-1982 assets which the taxpayer intends to sell in the future rose in value between the date of their acquisition and 31 March 1982, and some of them are likely to be sold with a capital loss.

EXAMPLE Hale Ltd wishes to dispose of shares bought on 1 January 1974 for £20,000. By 31 March 1982 their market value had risen to £80,000 but the likely sale proceeds are only £50,000. Should it make a rebasing election? (Ignore indexation.) Computation based on:

Proceeds Cost/1982 value Chargeable gain/Capital loss

Cost

Value in 1982

£

£

50,000

50,000

(20,000)

(80,000)

30,000

(30,000)

In the absence of a rebasing election, the disposal will be treated as no gain and no loss. If the election is made, a loss of £30,000 can be claimed. Hale Ltd would need to be aware that if it later sold any assets whose value had fallen between the date of the acquisition and March 1982, a higher gain could result from having made this election.

Annual exemptions Although companies are not entitled to an annual exemption, individuals are. This is set at £10,100 for 2009/10. The result is that the first £10,100 of gains are free of Capital Gains Tax, which is payable only if chargeable gains less capital losses (see later) exceed this figure. The annual exemption cannot be carried forward and used in future years. If an individual wishes to dispose of shares with an estimated gain of £15,000, for example, it may make sense to sell half in one tax year and half in the next,

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thus ensuring that both gains are covered by annual exemptions. The tax saving should outweigh any additional dealing costs. Before 1998, there was a practice known as ‘bed and breakfasting’. An individual would sell shares, realising a gain just below the annual exemption, and buy them back the next day, thus reducing any future gain. This is no longer possible, because an individual selling shares and then buying the same class of shares back within the next 30 days is deemed to have sold the shares which were bought subsequently.

EXAMPLE Mrs Lyndhurst buys 2,000 shares in Portchester plc for £3,000 on 1 January 1999. She sells the shares on 1 June 2009 for £10,000 and buys them back on 2 June 2009 for £10,100. She sells them for £13,000 on 1 March 2011. The disposal on 1 June 2009 is deemed to relate to the shares bought on 2 June 2009 and there is a capital loss of £100. The disposal on 1 March 2011 is deemed to relate to the purchase on 1 January 1999 and there is a gain of £10,000.

Anyone wishing to sell and buy back shares since 1998 must wait more than 30 days before repurchase if the above rule is not to apply. This of course runs the risk of a rise in the share price in the meantime. It is possible for the taxpayer’s spouse or even an ISA (Individual Savings Account) to repurchase the shares. However, for acquisitions since 22 March 2006, the 30-day rule does not apply to individuals who are non-resident and not ordinarily resident. Any gain or loss on disposal will be calculated on the basis that the shares were acquired before the disposal rather than within 30 days afterwards.

Transfers between spouses Since 5 December 2005, the following applies also to civil partners. The annual exemption cannot be transferred between spouses, but nevertheless there is a tax planning opportunity here. A transfer between spouses living together is deemed to be at no gain and no loss, so that the receiving spouse takes over the asset at its original cost. The annual exemption of both can be utilised.

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EXAMPLE Mr Kenton has gains of £4,000 and Mrs Kenton £12,000 in 2009/10. What would have been the best way to reduce their tax liabilities? Mrs Kenton should have transferred assets to Mr Kenton. The assets transferred should have been those which would produce gains of £1,900 when sold to a third party. Her gains would then have totalled only £10,100. The inter-spouse transfer must be made before the assets are sold.

Alternatively, if one spouse is a higher rate taxpayer but the other is not, it may be beneficial to transfer an asset to the spouse and then sell it.

Capital losses A capital loss arises when the original cost exceeds the disposal proceeds. Capital losses on assets disposed of before 6 April 2008 are set against chargeable gains before taper relief is given. An individual with numerous gains and losses on pre-April 2008 disposals should therefore allocate the losses against the gains with the lowest taper relief first.

EXAMPLE Mr Hartland disposes of three non-business assets in 2007/08 as follows:

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Gain/(loss)

Years

£

owned

Asset 1

20,000

8

Asset 2

10,000

2

Asset 3

(5,000)

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If the loss is set against asset 1, the gains for the year will be: £ Gain on asset 1

20,000

Loss on asset 3

(5,000)

Gain before taper relief

15,000

Taper relief at 30%

(4,500)

Net chargeable gain

10,500

Gain on asset 2

10,000

Total gains

20,500

If the loss is set against asset 2, the gains for the year will be: £ Gain on asset 1

20,000

Taper relief at 30%

(6,000)

Chargeable gain

14,000

Gain on asset 2

10,000

Loss on asset 3

(5,000)

Net chargeable gain Total gains

5,000 19,000

The difference is the 30% taper relief on the amount of the loss. The loss should be set against asset 2, which attracts no taper relief.

Losses unused in the tax year are carried forward and set against chargeable gains in future years. This is more beneficial than using the losses in the year in which they are incurred, because carried forward losses are used only to the extent that they reduce the gains to the annual exempt amount. Losses set against gains in the same year are used even if they bring the gains below the annual exempt amount.

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Principal private residences There is no chargeable gain when an individual sells a house which has been the principal private residence throughout the period of ownership. In principle, a property which at some time has not been the principal residence of the individual is subject to Capital Gains Tax. There are numerous relaxations of this rule, and large tax savings can result from careful forward planning. If the property has never been the principal residence, there will be a chargeable gain calculated in the normal way. But if it has been the principal residence at some stage during the period of ownership, there will be an exemption for the last three years of ownership whether or not it was occupied during that period. It will also be exempt for the period of actual occupation. Hence the chargeable gain is time-apportioned over the period of ownership (ignoring periods before 1 April 1982). The stumbling block is that, if an individual acquires a second residence and wishes to claim exemptions on this, he must nominate it as the principal residence within two years of the date of acquisition. Many taxpayers fail to do this and in this case Revenue & Customs will decide which was the principal residence based on the facts. Taxpayers often assume that there is a disadvantage in nominating the holiday home as the principal residence because it limits relief on the main residence. In fact there is nothing to prevent the taxpayer nominating the holiday home as the principal residence and then re-nominating the main residence after a very short period, perhaps as little as one week. This enables exemption to be claimed for the last three years of ownership of the holiday home. Even if the two-year deadline is missed, there can be another window of opportunity if a third residence is acquired. A nomination of any of the three properties can be made within two years of the date of acquisition of the third. Note, though, that a property never occupied by the taxpayer as a residence – for example, one acquired and simply let to a third party – can never be nominated as a principal residence. There are further exemptions available. If the owner was employed abroad for any of the period of ownership, no chargeable gain accrues in respect of that period, provided that the house was actually occupied as the principal residence at some stage both before and after (not necessarily immediately before and after) the period of absence. The same applies if the owner was required to live elsewhere in the UK by reason of his employment, but in this case the exemption is limited to four years.

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Additionally, any other period of absence of up to three years will be exempt, subject to the same provisions regarding occupation both before and afterwards.

EXAMPLE Miss Melbourne owns a property from 1 January 1990 to 31 December 2009. She occupies it as her main residence except for the following periods: 1 January 1991 to 31 December 1993

Working elsewhere in the UK

1 January 1995 to 31 December 1999

Working abroad

1 January 2001 to 31 December 2009

Moved to a larger property

The exemptions total eleven years – the three years working elsewhere, the five years working abroad and the last three years. There is no three-year exemption for any of the period from 1 January 2001 to 31 December 2006 as this was not followed by a period of actual occupation. The gain is calculated in the normal way but only nine-twentieths of it will be chargeable.

There is also a letting exemption. If the property has been let at any time and has at some stage been the principal residence, letting relief is given at the lower of £40,000 and the relief attributable to owner occupation.

EXAMPLE Miss Bakewell owns and occupies a property for 20 years. For the last eight years she lets out 80% of the property. There is a gain on sale of £200,000 before time-apportionment. £ Gain

£ 200,000

Attributable to owner-occupation: £200,000 x 12/20 £200,000 x 8/20 x 20%

120,000 16,000 (136,000)

Gain before letting relief

64,000

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Gain before letting relief

64,000

Letting relief – lower of: £40,000 Principal residence relief £136,000 Chargeable gain

(40,000) 24,000

Note that a couple jointly owning and letting a property will be able to claim relief of £40,000 each. If a couple is divorcing or separating and one party moves out of the marital home, he or she should ensure that the house is sold within three years in order to ensure that the sale is free of Capital Gains Tax. If the party moves to a house which was previously let, this will become the principal private residence (although it is wise to make an election to this effect) and the usual reliefs will then apply, including letting relief.

Reliefs Rollover relief A business which sells an asset with a chargeable gain may opt to claim rollover relief if it reinvests the proceeds in another asset. This means that the chargeable gain will be deferred; no tax will be payable straightaway, but the base cost of the replacement asset will be reduced, with the effect that any chargeable gain on the eventual sale of the replacement asset will be correspondingly increased. Both the asset disposed of and the replacement asset must be ‘qualifying assets’, which includes land and buildings, fixed plant and machinery and goodwill. The replacement asset must be acquired within the period starting one year before and ending three years after the disposal.

EXAMPLE Morley Ltd sells an unincorporated business for £1,000,000, of which £400,000 relates to goodwill, on 1 July 2009. A chargeable gain of £300,000 ensues on the goodwill. On 1 January 2011 the company buys land and buildings for £600,000.

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The base cost of the new land and buildings is: £ Actual cost Gain rolled over Deemed cost

600,000 (300,000) 300,000

Note that if only part of the proceeds were reinvested, the relief would be restricted. The gain would be limited to the proceeds not reinvested. For example, if Morley Ltd reinvested only £300,000, the gain chargeable now would be as follows: £ Gain before relief

300,000

Gain rolled over

(200,000)

Chargeable gain

100,000

Actual cost

300,000

Gain rolled over Deemed cost

(200,000) 100,000

It was at one time possible to gain rollover relief by reinvesting in the shares of an ordinary trading company. This relief became unavailable in 1998. A similar relief is, however, still available via the Enterprise Investment Scheme (see below).

Holdover relief Owners of businesses may wish to gift certain business assets, or more especially shares in their companies, to third parties. These third parties will generally, but not always, be family members. Gifts are usually treated as if the asset had been sold for its market value. This also applies to any transfers to connected persons, whether for value or as a gift. The definition of ‘connected persons’ includes the spouse, relatives (siblings and direct ancestors and descendants) and the relatives of the spouse. Since 2005, civil partners have been treated in the same way as spouses. Holdover relief, often also known as gift relief, is given by deferring any chargeable gain and deducting the whole gain from the deemed cost of the new asset

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to the donee. This deemed cost will be the market value. Holdover relief is available whether the transfer is made as a gift or at an undervalue. A claim for holdover relief may result in extra Capital Gains Tax being payable by the donee at a later date, so the claim, which is irrevocable, must be signed both by the donor and by the donee. Broadly, the only assets qualifying for holdover relief are business assets and unlisted shares in trading companies (though transfers into a trust also qualify if Inheritance Tax is payable – see Chapter 9). Business assets are those used in the taxpayer’s trade or in a company in which the taxpayer holds at least 5% of the voting rights. Gifts of shares qualify for holdover relief if the shares are in an unquoted trading company. If the company has investments which form more than 20% of its net worth, no relief is available. (Until April 2003, partial relief was available in these circumstances.)

EXAMPLE Mrs Appleby gifts shares in an unquoted trading company to her daughter. The market value of the shares is £200,000. She acquired the shares in April 2000 for £80,000. Both parties sign a claim for holdover relief. £ Chargeable gain: Market value

200,000

Cost

(80,000)

Gain held over

120,000

Allowable cost: Market value Gain held over Deemed cost

200,000 (120,000) 80,000

Relief will be clawed back if the donee emigrates within six years of the end of the tax year of the gift. The held-over gain will become chargeable in the year of emigration.

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Gifts to charities A gift to a charity is an exempt disposal for Capital Gains Tax purposes.

Incorporation relief Often the owner of an unincorporated business will make the decision to transfer the business to a company. This entails the disposal of the assets of the business and a consequent chargeable gain on assets such as land and buildings and goodwill. The gain will be computed by taking the disposal proceeds to be their market value at the date of transfer. The deemed cost of the shares issued to the shareholder of the new company will be the lower of the market value of the shares and the value of the assets transferred. Incorporation relief works by rolling the chargeable gain over into this deemed cost of the shares.

EXAMPLE Mr Swaffham has run a business as a sole trader for many years. He incorporates the business, realising chargeable gains of £50,000 on the assets. The market value of the shares received is £150,000. The acquisition cost will be: £ Market value

150,000

Gain rolled over

(50,000)

Deemed cost

100,000

If any other consideration is received in return for the assets, the gain is proportionately reduced. For example, if Mr Swaffham received shares of £100,000 and cash of £50,000, the gain held over would be £33,333 (£100,000/£150,000 x £50,000) and the cost of the shares would be £66,667 (£100,000 less £33,333).

Negligible value claims If an investment has gone badly wrong and the taxpayer paid an amount for the shares but they have fallen to a very small value, it may be difficult to find a purchaser and thus realise a capital loss. The investment can, on a claim to

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Revenue & Customs, be treated as if it had been sold and immediately re-acquired at market value, thus allowing the loss to crystallise and be used to reduce chargeable gains. Revenue & Customs maintain a list of quoted shares which have fallen to negligible value and on which claims will automatically be allowed.

Enterprise Investment Scheme The Income Tax benefits of investing in companies under the Enterprise Investment Scheme (EIS) were highlighted in Chapter 2, where it was also explained that EIS shares sold after more than three years are not treated as chargeable gains, although a capital loss can be claimed if appropriate. There is a further Capital Gains Tax relief under the EIS, which is known as EIS deferral relief. If an individual who is resident and ordinarily resident incurs a chargeable gain on any asset and, during a period starting one year before and ending three years after the disposal, acquires ordinary shares in an unquoted trading company, the gain can be deferred and rolled over into the base cost of the shares. There are restrictions on the type of company eligible for this investment and they are broadly the same as for Enterprise Management Incentive companies (see Chapter 1). Unlike for EIS Income Tax relief, there is no maximum limit on the investment, and it can be claimed even by investors who hold more than 30% of the ordinary share capital. There is no need for EIS Income Tax relief to have been claimed.

Chattels Chattels are defined as tangible movable property and often consist of paintings, antiques and jewellery. Chattels with a predicted useful life of 50 years or less which have not been used for business purposes are exempt from Capital Gains Tax. Other chattels may attract Capital Gains Tax when sold, but not if the proceeds fall below £6,000. In the case of an asset owned jointly, the exemption limit of £6,000 is multiplied by the number of joint owners. This can create a tax planning opportunity.

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EXAMPLE Mr and Mrs Langley wish to raise funds to build an extension to their house. Mr Langley owns a painting worth £10,000 on which the chargeable gain is £8,000. Provided that he has no other gains, he will be covered by the annual exemption; but if he does have other gains, how could the Capital Gains Tax have been avoided? Mr Langley should have transferred a 50% share of the painting to Mrs Langley well before the sale. The chattels exemption would then have applied as the proceeds fall below the limit of £12,000.

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Chapter 8 Inheritance Tax General principles Taper relief Exempt transfers Reliefs Domicile Interaction with Capital Gains Tax

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Chapter 8 Inheritance Tax

Capital Transfer Tax was introduced in 1975 and was replaced by Inheritance Tax in 1986. The difference between the two taxes is that, under Inheritance Tax, most gifts are exempt except for gifts made in the last seven years of a individual’s life – which are potentially taxable on death – and a small number of other gifts, notably gifts to trusts, which may be taxable during an individual’s lifetime. Inheritance Tax has become a political issue. Originally designed to catch only the very wealthy in its net, its tentacles have now spread to a very large number of home-owners, especially in London and the South-East, where house prices tend to be higher than the average. Between 1998 and 2007, the average house price nationwide rose from £72,000 to £182,000 while the Inheritance Tax threshold rose from £223,000 to only £300,000. So a house alone will in many cases be sufficient to ensure an Inheritance Tax liability. In the five years to 2004, the number of estates paying Inheritance Tax rose by 72%. Owners of businesses will generally own other assets in addition to their houses, and careful planning is necessary to maximise the wealth which can be passed on to the next generation.

General principles Lifetime transfers Most transfers made during an individual’s lifetime are exempt from Inheritance Tax at the time of the transfer. They may, however, fall within the scope of Inheritance Tax on the individual’s death if they are ‘transfers of value’ – in other words, a gift or a sale made at an undervalue. In this case, they become potentially exempt transfers. If the transferor survives more than seven years after the date of the gift, there is no Inheritance Tax. Death within seven years of the transfer will mean that it will form part of the transferor’s estate for Inheritance Tax purposes, although taper relief (see below) will apply to transfers made between three and seven years before death.

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The most common example of a chargeable lifetime transfer is one into a trust. As explained at Chapter 9, since 22 March 2006 transfers to interest in possession trusts and accumulation and maintenance trusts are brought into the charge, which previously applied only to discretionary trusts. When a chargeable lifetime transfer is made, it is aggregated with the total of all the chargeable lifetime transfers in the previous seven years. If the total exceeds the nil rate band for the year of the transfer (£325,000 in 2009/10), Inheritance Tax is payable on the excess at 20%.

Death estate The estate on death includes all property owned by the individual less liabilities. To this are added potentially exempt transfers and chargeable lifetime transfers made in the seven years before death, and the excess over the nil rate band is charged at 40%. Any tax paid on chargeable lifetime transfers within the last seven years is deducted from the Inheritance Tax bill. There are several means of reducing the death estate and therefore the Inheritance Tax liability, and the remainder of this chapter explains how to achieve this.

Taper relief If death occurs within three years of a potentially exempt transfer, the full amount of the transfer is added to the estate. If, however, death occurs between three and seven years, taper relief is applied, reducing the Inheritance Tax payable as follows: Death between

Reduction

3 and 4 years

20%

4 and 5 years

40%

5 and 6 years

60%

6 and 7 years

80%

Although precise planning is by nature impossible, prudent individuals will plan ahead and distribute gifts during their lifetimes in the hope that they will survive long enough for Inheritance Tax to be reduced or even not to apply at all.

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EXAMPLE Mr Shere dies on 1 January 2010 leaving an estate of £100,000. He made potentially exempt transfers (net of the annual exemption) of £150,000 on 1 February 2004 and £200,000 on 1 March 2006. Calculate his Inheritance Tax liability on death. £ Potentially exempt transfer 1 February 2004 Nil rate band

–

Potentially exempt transfer 1 March 2006 Less transfers in previous seven years

150,000 (325,000)

Chargeable to Inheritance Tax

Nil rate band

£

200,000 325,000 (150,000) (175,000)

Chargeable to Inheritance Tax

25,000

Inheritance Tax at 40%

10,000

Taper relief at 20%

(2,000)

Inheritance Tax payable Death estate

8,000 100,000

Inheritance Tax at 40% (nil rate band fully utilised by potentially exempt transfers) Total Inheritance Tax

40,000 48,000

Gifts with reservation A word of warning – a potentially exempt transfer may be seen as a ‘gift with reservation’ if the transferee does not genuinely take possession of it. Parents may give an antique to their children but continue to have it in their home. They are still enjoying and benefiting from it, and therefore the transfer is treated as if it had never been made. It will not be a potentially exempt transfer and instead will form part of the death estate.

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Likewise, parents often transfer their home into the name of their children but continue to live in it. Again, this is seen as a gift with reservation. The only way to avoid this is by paying the children a market rent for occupation. Gifts made before 18 March 1986 can never be treated as gifts with reservation. There is an important let-out from the gifts with reservation rule. An individual transferring a half share in a property to another individual is not seen as having made a gift with reservation if the transferor continues to meet the relevant share of the expenses. This is often used by parents who wish to give a share of the family home to their children who live with them, but professional advice is recommended before relying on this. A gift of more than a 50% share may well fail. Some individuals use equity release schemes to generate a potentially exempt transfer. The cash from the equity release is used to buy a life policy paying out a lump sum on death. The cash paid to buy the policy is a potentially exempt transfer, while the payout on death is exempt from Inheritance Tax. However, on death there will be a chargeable gain which is calculated as the increase in value from the premium to the surrender value on the day before death.

Exempt transfers Annual exemption The wise individual will make lifetime gifts with sufficient regularity to utilise the annual exemption of £3,000. Potentially, Inheritance Tax of £8,400 could be saved (seven years’ annual exemptions of £3,000 at 40%). Note that the annual exemption does not apply to death transfers. The annual exemption can be carried forward for one year only if unused.

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EXAMPLE Mrs Harting makes potentially exempt transfers of £2,000 in year one, £2,500 in year two and £4,000 in year three. £ Year one Transfer Annual exemption

2,000 (2,000) –

Annual exemption carried forward

1,000

Year two Transfer Annual exemption Annual exemption brought forward

3,500 (3,000) (500) –

No annual exemption carried forward – the remaining £500 from year one is lost. £ Year three Transfer Annual exemption

4,000 (3,000) 1,000

Small gifts exemption Individuals may make unlimited gifts during their lifetimes (though not on death) of up to £250 per person per tax year. Note that this is a maximum – a gift of £250 will be exempt from Inheritance Tax but a gift of £300 will be a potentially exempt transfer in full.

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Gifts of assets which rise in value If the individual owns an asset – such as a property or a stamp collection – which is expected to rise sharply in value over the coming years, it is more tax-effective to give it away now, as the increase in value will be outside the estate.

Normal expenditure out of income Gifts made during an individual’s lifetime which can be shown to be normal expenditure paid out of after-tax income (as opposed to capital) are exempt from Inheritance Tax. The pattern of these gifts must have left the individual with enough income to live on without having to draw on capital. Usually, birthday and Christmas presents, life policy premiums on behalf of another person and payments under deeds of covenant qualify for this exemption. Until a landmark case (Bennett) in 1995, the Inland Revenue (as it was then known) was more likely to allow this exemption if payments were made over at least three years, but this is no longer the case. All that is now sought is evidence of a commitment to continue making the payments.

Marriage gifts Lifetime gifts to either party to a marriage, provided that they are made before the wedding or there is a binding promise, are exempt from Inheritance Tax up to the following amounts: Gift made by

Exemption £

Either parent

5,000

Grandparent or great grandparent

2,500

Bride or groom

2,500

Any other person

1,000

If a gift exceeds the maximum amount, the excess is subject to Inheritance Tax. Gifts should be conditional on the marriage taking place.

Gifts to spouse Transfers to a spouse are exempt whether made during the lifetime or as part of the death estate. Prudent individuals will draw up their wills accordingly, ensuring that, if they so desire, an amount up to the Inheritance Tax threshold is bequeathed to other parties and the remainder to the spouse.

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Since 9 October 2007 there has been a transferable nil rate band. Where one spouse or civil partner dies and leaves a survivor who dies on or after 9 October 2007, the unused nil rate band of the pre-deceased is transferred to the survivor. (This cannot be claimed by co-habitees.) It is immaterial that the pre-deceased may have died many years before 9 October 2007. The amount of the nil rate band transferred is the percentage of the pre-deceased nil rate band unused on death multiplied by the survivor’s nil rate band. Given that transfers to spouses are exempt, if the pre-deceased estate is left entirely to the survivor, the survivor has two nil rate bands on death (£650,000 in the tax year 2009/10).

EXAMPLE Mr Hampton owns assets of £600,000 and Mrs Hampton owns assets of £200,000. They have two children. How should Mr Hampton draw up his will? If Mr Hampton leaves his entire estate to his wife in the event of his pre-deceasing her, it will be exempt from Inheritance Tax. On her subsequent death, her estate will be £800,000. She will have benefited from the transfer of his nil rate band. Assuming that the nil rate band has risen to £380,000 by the time of her death, her total nil rate band will be £760,000 and Inheritance Tax will be due on £40,000. If instead he leaves £162,500 to his children and the remainder to his wife, half of his nil rate band in 2009/10 of £325,000 will have been unused. On her subsequent death, and again assuming a nil rate band at that time of £380,000, an extra £190,000 (50% of his nil rate band was unused and this 50% is applied to the nil rate band in the year of her death) will be transferred to her, giving her a total of £570,000. Her estate will be her own £200,000 plus the amount left to her by her husband (£437,500), giving a total of £637,500. Inheritance Tax is therefore due on £67,500. The better option would therefore have been for Mr Hampton to transfer his entire estate to his wife. She would therefore benefit from the entire nil rate band at the date of her death. (Note that if the nil rate band did not change between the date of his death and the date of her death, the amount of Inheritance Tax would be the same using either option.)

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The exemption is limited to £55,000 where a UK-domiciled spouse makes transfers to a non-domiciled spouse. Domicile rules are discussed later. The intestacy rules treat surviving spouses harshly. If there are no children, the surviving spouse receives all the personal chattels – such as cars, furniture and jewellery – plus a legacy of £200,000 and half of the balance. The remainder passes to various relatives. If there are children, the surviving spouse again receives all the personal chattels, plus £125,000. The remainder of the estate is divided into two halves. One half passes to the children as they reach the age of majority; the surviving spouse has a life interest in the other half and receives interest from it, but it passes to the children when he or she dies. Problems may arise if the matrimonial home is in the deceased spouse’s sole name, as this may have to be sold to meet the share attributable to the children. The surviving spouse does, however, have the right to apply to the courts under the Provision for Family and Dependants Act 1975. The Civil Partnership Act 2004 came into effect on 5 December 2005 and gives civil partners the same rights as spouses. The biggest tax advantage is the right to leave assets to a surviving partner without an Inheritance Tax liability. Cousins may become civil partners, but not parents, grandparents, siblings, aunts or uncles. Civil partners need not live together, be of any particular sexual orientation or be in a sexual relationship. Civil partnerships do also carry pitfalls: if one partner wanted to leave his or her estate to children or anyone else, the surviving partner might try to thwart that; pre-existing wills are revoked on registration of a civil partnership (as indeed they are on marriage); and if each partner has a minority shareholding in an unquoted company but the two added together form a majority holding, the valuation – and potential Inheritance Tax liability – may increase considerably.

Other gifts exempt both as lifetime transfers and on death Given that the following are exempt from Inheritance Tax on death, there is no tax benefit to be gained from making them during an individual’s lifetime. If Inheritance Tax is the only consideration, it is wiser to make gifts which are exempt during one’s lifetime only – the small gifts exemption, for example – and leave the following in the will. Gifts to charities which either are registered or operate within the UK are exempt from Inheritance Tax.

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Gifts to political parties are exempt if the party had two Members of Parliament elected at the last General Election, or one Member of Parliament and a total of 150,000 votes polled. Gifts to numerous national bodies are exempt. They include the National Trust, the National Gallery, the British Museum, a health service body and any government department.

Reliefs So far in this chapter we have looked at various ways of reducing Inheritance Tax by making gifts largely of personal assets. There are two reliefs which relate specifically to businesses and provide significant opportunities for tax planning: business property relief and agricultural property relief.

Business property relief Business property relief (BPR) reduces the value of business property in the death estate and in lifetime transfers. In most cases, provided that certain conditions are met, the value is reduced by 100% – in other words, no Inheritance Tax is payable. The principal classes of business property are: •

A sole trader’s business, or a partner’s share in a partnership (100% relief).

•

Shares in an unquoted company (100% relief).

•

Shares in a quoted company controlled by the transferor (50% relief).

•

Land and buildings or plant and machinery owned by the transferor and used in the transferor’s business or in a company which the transferor controls (50% relief).

It is important that businesses must be trading. The definition of a trading company is more relaxed than in other areas (for example, holdover relief from Capital Gains Tax, which requires that less than 20% of the net worth of a company be made up of investments – see Chapter 7). As long as a business is predominantly trading and does not hold investments which are worth more than half its value, it will qualify for BPR. It is important to take this into account when planning for Inheritance Tax, as the tax saving can be significant.

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Although furnished holiday lettings qualify as a trade for Income Tax and Capital Gains Tax purposes – for example, they are a business asset for Capital Gains Tax taper relief – they do not qualify for BPR. There is a minimum ownership period of two years. Shares must have been owned for two years, and other assets must have been used in the business for two years. There is a relaxation of the two-year rule. If the shares or assets have been owned for less than two years but they replaced other property which would have met the criteria for BPR, they will qualify provided that the combined ownership period is at least two out of the last five years before the transfer.

EXAMPLE Mrs Warwick owns a building which she uses in a company controlled by her between 1 January 2007 and 31 December 2007. She sells the building and buys a replacement on 1 June 2008. In order to claim BPR on the replacement building, she must own it at least until 1 June 2009 before transferring it. BPR is given automatically on property which forms part of an individual’s estate. If the property is transferred during an individual’s lifetime, it will be a potentially exempt transfer and will be exempt from Inheritance Tax if the transferor survives for seven years. If the transferor dies within seven years, there will potentially be a charge to Inheritance Tax, and BPR can then apply. There is, however, an important condition: the transferee must still own the property at the transferor’s death. If the property has been sold on in the meantime, or even if it is the subject of a binding contract for sale, BPR will not apply. It is important to make the transferee aware of this condition, as the potential Inheritance Tax bill could be significant.

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EXAMPLE Mr Alton has an estate of £450,000 which includes shares in an unquoted company valued at £150,000. He dies on 1 January 2010 having made a potentially exempt transfer of £50,000 on 1 January 2008. £

£

Cumulative total brought forward (after annual exemptions) Estate Less BPR

44,000 450,000 (150,000) 300,000 344,000

Inheritance Tax: £325,000 at nil £19,000 at 40%

7,600

Agricultural property relief Less common than business property relief, agricultural property relief (APR) nevertheless deserves a mention. In principle it operates in the same way as business property relief, but it applies to agricultural land or pasture, including buildings used in connection with the rearing of livestock or fish, farm buildings, stud farms and shares in a farming company. From 22 April 2009 it applies to such land anywhere within the European Economic Area. Relief is usually given at 100% of the agricultural value, provided that the transferor occupied the property for the two years prior to the transfer, or owned it for seven years while it was in agricultural use. The agricultural value is not necessarily the value of the land, but the value it would carry if there were a covenant restricting it to agricultural use. Taxpayers frequently confuse Capital Gains Tax and Inheritance Tax and assume that private residences are exempt from Inheritance Tax. This is not usually the case. However, the APR provisions often result in a farmhouse becoming exempt. Farmers who wish to retire from farming should plan carefully if they wish to

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minimise Inheritance Tax. If they sell the land but continue to live in the house, APR will be lost because it is no longer being used for agricultural purposes. The same will apply if they rent the farm out and continue to live in the house. It may be more beneficial to continue farming but enter into an arrangement with a subcontractor.

Domicile Domicile was defined for Income Tax purposes in Chapter 4. Individuals domiciled in the UK are liable to Inheritance Tax on lifetime and death transfers of property situated anywhere in the world. The definition of domicile for Inheritance Tax purposes, however, goes further than for Income Tax. Individuals who have been domiciled in the UK at any time during the last three years before a transfer are treated for Inheritance Tax purposes as if they were domiciled at the time of transfer. Additionally, an individual who has been UK-resident for at least 17 of the last 20 tax years ending with the year of transfer is also treated as UK-domiciled for Inheritance Tax purposes. An individual who is not UK-domiciled is liable to Inheritance Tax only on UK property. This includes bank accounts in the UK, shares registered in the UK and life policies payable in the UK. Becoming non-domiciled will therefore not affect the Inheritance Tax treatment of these assets. An individual becoming non-domiciled who wishes to transfer non-UK property, however, should wait until at least three tax years have passed since becoming non-resident. The transfers will then fall outside the scope of UK Inheritance Tax – although they may be taxed in the new country of domicile. In certain circumstances, Inheritance Tax may be payable in two countries – for example, if an individual is domiciled elsewhere but has property in the UK. In most cases, double taxation agreements exist, and even if they do not in a particular case, a credit for the foreign tax may be allowed against the UK Inheritance Tax liability. The £55,000 limit on transfers to a non-domiciled spouse could create problems and opportunities. A couple retiring abroad will find that any transfers between them – even of UK property – will be exempt from Inheritance Tax but only to the extent of £55,000. To avoid this situation, transfers of property should be made either before they leave the UK or in the first three years after

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they leave, when they will still both be treated as UK-domiciled for Inheritance Tax purposes. Transferred assets are not only exempt from Inheritance Tax but may also be exempt from Capital Gains Tax if only one spouse is non-domiciled. The asset can be gifted from a UK-domiciled spouse to a non-domiciled spouse, transferred out of the UK and then sold. This is because individuals who are not domiciled in the UK are taxed only on gains on assets situated in the UK. Gains on assets situated overseas are taxed only if the proceeds are remitted to the UK.

Interaction with Capital Gains Tax The death estate is not subject to Capital Gains Tax. This is just as well, as legatees would otherwise be hit with both Capital Gains Tax and Inheritance Tax. This rule is extended so that transfers made donatio mortis causa – in contemplation of death, usually when the transferor is on the death-bed – are treated in the same way as death transfers. Legatees are deemed to have acquired the asset at its market value at the date of death, which is important for the future computation of Capital Gains Tax. Unfortunately, lifetime transfers may be subject to both Capital Gains Tax (the disposal proceeds of a gift being treated as market value) and Inheritance Tax. If the resultant chargeable gains fall below the annual exemption of £10,100 for Capital Gains Tax, this should not be a problem. By using the annual exemption and making only small gifts, both taxes can be avoided. As outlined at Chapter 7, gifts of certain assets can qualify for holdover relief, whereby the chargeable gain at the time of the gift is deferred and rolled into the deemed cost to the donee. If the transferor subsequently dies within seven years, this may create an Inheritance Tax charge. The donee may reduce any chargeable gain on the subsequent sale of the asset by any Inheritance Tax attributable to the asset.

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Chapter 9 Trusts Interest in possession trusts Discretionary trusts Accumulation and maintenance trusts Charitable trusts Overseas trusts Business Property Relief and trusts Comparison of trusts

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Chapter 9 Trusts

An individual who wishes to give away ownership of assets, including money, but still control how those assets are used will often place them into a trust. If handled properly, a trust can be an effective means of reducing Inheritance Tax. Apart from certain tax advantages, trusts are attractive to wealthy families wishing to protect assets from large divorce settlements which deplete assets. It was reported in July 2006 that a family which has occupied an estate in North Wales over twenty generations since the fifteenth century will be forced to sell the property following a £1.5 million divorce settlement. Alternatively, the individual to whom the family wishes to make gifts may not be good at handling money, and so the family wishes to retain control over that individual’s access to the money. Three conditions must be met when a trust is set up: there must be an intention to create a trust; the trust must own clearly-defined property; and the beneficiaries must be clearly identified. The settlor is the person who gives the assets to the trust, the trustees are the legal owners of the trust’s assets, and the beneficiaries are those who may share the property and any income arising from it. This chapter focuses on the different types of trust available and the tax advantages and disadvantages of each.

Interest in possession trusts Interest in possession trusts are also known as life interest or fixed interest trusts. Property remains in the trust and the beneficiaries have the right to receive the income earned or to use the assets. At a future date, or once a future event has occurred, the assets are distributed to the persons who hold a reversionary interest. These are the remaindermen. For example, a man wishing to ensure that his wife is provided for if he predeceases her but wanting his assets to pass to his children on her subsequent death (which they might not if she were to re-marry) should set up an interest in possession trust.

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Interest in possession trusts are less flexible than discretionary trusts and accumulation and maintenance trusts, and individuals wishing to give assets to children may find an accumulation and maintenance trust more suitable. The popularity of interest in possession trusts has waned because the favourable Capital Gains Tax treatment was removed in 1998.

Tax treatment Before 22 March 2006, a gift to an interest in possession trust was a potentially exempt transfer and there was therefore no Inheritance Tax if the settlor survived for seven years (see Chapter 8). From 22 March 2006, gifts to an interest in possession trust are treated as chargeable lifetime transfers in the same way as transfers to a discretionary trust (see below). The ten-year charge which previously applied only to discretionary trusts (see below) will now apply also to interest in possession trusts. Trusts set up for children under 18 or for disabled persons are not affected, and transfers to such trusts will continue to be potentially exempt transfers, nor will there be a ten-year charge. For Capital Gains Tax purposes, the usual rules for gifts apply: broadly, gifts are subject to Capital Gains Tax as if they were a transfer at market value, but holdover relief may be available (see Chapter 7). Gifts of money are never subject to Capital Gains Tax, nor are transfers of property which has been the principal private residence throughout its ownership, nor transfers on death. Any income is due to the beneficiaries, either being paid to them direct or to the trust first. Income earned by the trust is taxed in the same way as Income Tax on an individual, except that there is no higher rate. So there is no extra tax on dividends and interest (which are received net of Income Tax), and any other income such as property rental income is taxed at the basic rate of 20%. Income paid out of the trust to beneficiaries is taxed on the beneficiaries at their normal rates. So dividends and interest are paid net and other income is paid with basic rate tax at 20% already deducted. Higher rate taxpayers will have an additional liability of 22.5% on the grossed-up dividends, and 20% on the grossed-up interest and grossed-up other income. There is a refund for nontaxpayers on interest and on other income, but not on dividends. When trust property is disposed of, a chargeable gain may arise. Until 1998, Capital Gains Tax was payable by interest in possession trusts at the basic rate, but this provided a useful loophole for higher rate taxpayers and the loophole was closed. Now, interest in possession trusts are liable to Capital Gains Tax in exactly the same way as other trusts.

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An annual exemption is available for Capital Gains Tax purposes and this is usually at half the amount applicable to an individual. So in 2009/10 it is £5,050. The annual exemption is reduced if the same settlor puts assets into more than one trust, in which case the annual exemption of £5,050 is divided by the number of such trusts subject to a maximum of five. Thus, if the settlor has made eight settlements, the annual exemption will still be £631. Any gains above the annual exemption are taxed at 18%. All of this is the same as for other types of trust. The question often arises as to whether assets should be transferred to the beneficiaries and holdover relief claimed. The beneficiaries may have unused annual exemptions or capital losses which would lead to more favourable Capital Gains Tax treatment. When the beneficiary dies or that beneficiary’s interest in possession comes to an end, the relevant share of the property will pass either to other beneficiaries or to the remainderman. The beneficiary thus makes a transfer which will be part of the death estate. If the event happens in the beneficiary’s lifetime, there is a potentially exempt transfer and also a disposal for Capital Gains Tax purposes, depending on the type of property involved. Occasionally the remainderman comes into possession of trust property but does not need it and wishes to pay it to another party – most commonly children. This disposal is exempt from Inheritance Tax and Capital Gains Tax.

Discretionary trusts Discretionary trusts are very flexible. Income can be accumulated within the trust to be paid out at a later date, or it can be paid out at the discretion of the trustees. Usually there is more than one beneficiary, and beneficiaries need not have been born when the trust is set up – for example, the beneficiaries may simply be stated as children or grandchildren. The advantage of a discretionary trust is that the beneficiaries or their entitlements can be altered. For example, individuals wishing to provide for their children, who themselves currently have varying financial circumstances, may want to give the trustees discretion to make payments to the children as they see fit. The individual may specify that, on a certain date, the assets will pass to the beneficiaries, and the trust will then cease to exist.

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Tax treatment A transfer into a discretionary trust is a chargeable lifetime transfer as explained in Chapter 8, and Inheritance Tax at 20% is payable if the total of such transfers in the past seven years exceeds the nil rate band (currently £325,000). The annual exemption of £3,000 may also apply. There may be a Capital Gains Tax liability, though holdover relief may apply (see Chapter 7). The assets transferred need not be business assets in order to qualify for holdover relief. Discretionary trusts attract a ten-year charge, which is in many ways similar to the wealth tax imposed in some countries on individuals. This is charged on the tenth anniversary of the setting up of the trust and is repeated every ten years. Tax is charged on the value of the trust at a maximum of 6%. In practice the rate will usually be the maximum only if the settlor at the date of settlement had already used the nil rate band in full by making other chargeable transfers in the previous seven years (the nil rate band used is the one which applies in the year of charge, not the year of settlement). Distributions out of the trust in the last ten years are added to the total of other chargeable transfers in deciding whether the nil rate band has been breached. If it has not, the rate will be lower and is calculated at 30% of the ‘effective Inheritance Tax rate’. There is also an exit charge on distributions out of a discretionary trust, or when the trust ends. Broadly, the tax rate is the appropriate rate for the ten-year charge multiplied by 1/40 for each period of three months which has elapsed since the previous charge. If the distributions occur in the first ten years, the calculation is broadly similar to that for the first ten-year charge, with the tax rate again based on 1/40 for each complete quarter. If distributions are planned around the ten-year mark, advice should be taken as to whether to make the distributions before or after the ten-year charge falls due. This will vary according to circumstances. Income Tax rates on income received by the trust are punitive compared to interest in possession trusts and have become even more so since April 2004. All income is liable to Income Tax at the higher rate (32.5% for gross dividends, 40% for all other income). Previously it was taxed at 34%. However, since 6 April 2005 there has been a basic rate band, which has been £1,000 since 2006/07. All income falling within this band is taxed at the same rate as for interest in possession trusts, and the band is used against income taxed at 20% first, then against interest and finally against dividends.

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From 2010/11, the Income Tax rate will rise to 50% on income other than dividends, and 42.5% on dividend income. This is in line with income for individuals with earnings above £150,000. The Capital Gains Tax position of discretionary trusts is exactly the same as for interest in possession trusts. Distributions out of a discretionary trust are paid net of Income Tax at 40%, which has the beauty of simplicity. A beneficiary receiving £600 is issued with a tax certificate for a gross amount of £1,000, and taxpayers below the higher rate bracket can reclaim the excess Income Tax.

Interest in possession trust or discretionary trust? If there are elderly beneficiaries, a discretionary trust may be the more suitable vehicle. This is because trust property will not be deemed part of their death estate. Beneficiaries of an interest in possession trust, by contrast, will have trust property added to their estate when they die. The settlor of a trust can obtain holdover relief when he makes a transfer into the trust. However, the higher Income Tax rates need also to be taken into account, The Inheritance Tax advantage on transfers to an interest in possession trust has been removed in most cases since 22 March 2006 (see above).

Accumulation and maintenance trusts Accumulation and maintenance trusts have the same characteristics as discretionary trusts but with the following restrictions: •

At least one beneficiary must become entitled to the property, or to an income from it, on reaching the age of 25.

•

Income must be accumulated, except that it can be paid out for maintenance, education or another benefit of the beneficiaries.

•

There is a maximum trust life of 25 years unless all the beneficiaries are grandchildren of a common grandparent.

•

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There must be at least one living beneficiary when the trust is created.

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Tax position Accumulation and maintenance trusts are, strictly speaking, discretionary trusts. The more favourable Inheritance Tax treatment was largely negated from 22 March 2006, and transfers to accumulation and maintenance trusts are now in most cases chargeable lifetime transfers in the same way as transfers to discretionary trusts (see above). There is also a ten-year charge, as for discretionary trusts. As for interest in possession trusts, trusts set up for children under 18 or for disabled persons are not affected, and transfers to such trusts will continue to be potentially exempt transfers, nor will there be a ten-year charge. As with interest in possession trusts, the new rules catch trusts set up on or after 22 March 2006 from the outset. It follows that the only way to avoid a transfer being a chargeable lifetime transfer is to allow children control of assets at the age of 18, which could be seen as irresponsible. Many families will be forced, in order to avoid Inheritance Tax, to make outright gifts when young persons are not of sufficient maturity to handle the money, and they could consequently be deflected from their studies. Income Tax and Capital Gains Tax on accumulation and maintenance trusts are broadly the same as for discretionary trusts, except that if a beneficiary becomes entitled to income, that share of the trust’s income is taxed as if it were an interest in possession trust. The settlor may therefore be tempted to put money into an accumulation and maintenance trust for the benefit of children and have interest paid out to them; however, any income of the trust exceeding £100 a year paid out to an unmarried child under the age of 18 is treated as if it were the settlor’s own income. It is therefore better to leave it in the trust to accumulate. The tax advantage of paying a sum of money into an accumulation and maintenance trust rather than leaving it in one’s own bank account is not as great as it was since the trust rate was increased from 34% to 40%, but the £1,000 basic rate band is now available, which potentially saves up to £225 a year.

Charitable trusts Trusts which exist for charitable purposes only, which include poverty, religion, education and other community purposes, can register with the Charity Commission as charitable trusts. There is a ready-made scheme offered by the Charities Aid Foundation. As would be expected, trust monies must not be used for private benefit.

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The settlor is able to make payments into the Trust via the Gift Aid scheme (see Chapter 4). Income, including most trading income (the exception being a trade which is not exercised in the course of carrying out a primary purpose of the charity) is exempt from Income Tax, and gains are not subject to Capital Gains Tax if they are applied for charitable purposes. However, the trustees will be liable to immediate Capital Gains Tax if the trust ceases to be a charitable trust.

Overseas trusts If a trust is UK-resident, it is liable to Income Tax on its worldwide income. There is an advantage in having an overseas trust because the trustees are then liable to Income Tax only on their UK income. Residence status depends on the residence of the trustees. If all of the trustees are either resident or non-resident, the residence status of the trust follows this. If some are resident and some are not, the residence status of the trust depends on the status of the settlor. If the settlor was resident, ordinarily resident or domiciled in the UK at the time the settlement was made (or, if the settlement was created on the settlor’s death, the settlor was resident, ordinarily resident or UK-domiciled immediately before death), the trust is treated as resident for both Income Tax and Capital Gains Tax purposes; otherwise it is not resident. A word of warning – if a trust becomes non-resident, a Capital Gains Tax charge may arise, as the trustees are then deemed to have disposed of the trust’s assets and immediately re-acquired them at market value.

Business Property Relief and trusts As outlined above, the changes introduced from 22 March 2006 have the effect that transfers to most trusts are now chargeable lifetime transfers, which means that to the extent that they exceed £325,000, they will attract Inheritance Tax at 20%. The ten-year charge now applies to most trusts. Business Property Relief (see Chapter 8) can, if applied with foresight, significantly reduce chargeable lifetime transfers and the ten-year charge. Many advisors are recommending that transfers into the trust are made in the form of shares listed on the Alternative Investment Market (AIM). AIM shares are unquoted for the purposes of Inheritance Tax, provided that they are not quoted

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on a recognised Stock Exchange elsewhere in the world, and they therefore attract Business Property Relief at 100%. Once the trusts have been set up, the shares can be sold and the converted into cash, which is of course much less volatile. The shares must have been owned for two years prior to the transfer in order to qualify for the relief, which may be a drawback in the case of volatile shares. There is little point in saving tax at 20% if the value of the shares has fallen by more than that amount. Likewise, if AIM shares are held for at least two years prior to the ten-year charge, Business Property Relief will be available and will reduce the amount of trust property subject to the charge. Agricultural Property Relief (see Chapter 8) can also be used to reduce the chargeable transfer and ten-year charge.

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Comparison of trusts The following table compares the salient features of the three principal types of trust and their tax treatments.

Beneficiaries’ right to receive income

Interest in possession

Discretionary

Accumulation & maintenance

Yes

At trustees’ discretion

At least one beneficiary must receive property or income at age 25 Income must be accumulated except that it can be paid out for education and maintenance

Inheritance Tax on settlement into trust

Chargeable lifetime transfer with limited exceptions

Chargeable lifetime transfer

Chargeable lifetime transfer with limited exceptions

Income Tax rates on trust income

10% dividends

First £1,000 as for interest in possession

First £1,000 as for interest in possession

Otherwise 40% (32.5% for dividends)

If a beneficiary is entitled to income, that part is as for interest in possession

20% savings 20% other income

Otherwise 40% (32.5% for dividends)

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Income Tax rates –status of payments to beneficiaries

Paid net of tax at 10% or 20%

Paid net of tax at 40%

Paid net of tax at 40%

Capital Gains Tax on disposals of trust assets

Annual exemption applies

Annual exemption applies

Annual exemption applies

Rate 40%

Rate 40%

Rate 40%

Taper relief

Taper relief

Taper relief

Death of beneficiary

Property forms part of death estate for Inheritance Tax

No Inheritance Tax

No Inheritance Tax

Ten-year charge

Yes with limited exceptions

Yes

Yes with limited exceptions

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Chapter 10 Value Added Tax Registration Land and buildings Special schemes

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Chapter 10 Value Added Tax

Registration Businesses with an annual taxable turnover of over £68,000, or an expected turnover of £68,000 in the next 30 days, must register for VAT. Businesses below this threshold have the option of registering voluntarily, provided that they make at least some taxable supplies. Taxable supplies include zero-rated supplies such as books, most food, passenger transport, children’s clothing and construction of new residential or charitable buildings. Exempt supplies are not taxable supplies, and a business making only exempt supplies cannot usually register for VAT. Exempt supplies include insurance, education, finance, postal services and many transactions in land (but see below).

Voluntary registration – for and against A business which is VAT-registered is able to recover its input tax to the extent that it makes taxable supplies. A bookshop makes zero-rated supplies, for example, but may incur input tax on some of its costs, such as stationery, computer equipment and maybe the rent it pays to its landlord. It would normally be in the interests of such a business to register for VAT in order to obtain a repayment of this input tax. Another advantage is the image of the business, which will often be enhanced by the existence of a VAT registration. Suppliers and customers may be less reticent in dealing with a business which is VAT-registered. A final advantage is the discipline which registration imposes on the business, forcing it to keep its books up to date at least once a quarter. Businesses with customers who are not VAT-registered – whether these customers are individuals or small businesses – should think carefully before registering voluntarily. In the case of the bookshop mentioned above, it would make no difference because the supplies are zero-rated. But a plumber might predominantly be carrying out work for private individuals, and his prices would effectively rise by 15%. If all of his customers were themselves VAT-registered, they would be in a position to reclaim the VAT which he charged, and in this case there would be a good argument for voluntary registration.

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Paperwork and penalties are also arguments against voluntary registration. A business which submits late Returns or does not make timely VAT payments is liable to penalties whether it registered voluntarily or compulsorily.

Deregistration In many cases a business has no choice but to deregister, for example when it has ceased to make taxable supplies. Businesses who can satisfy Revenue & Customs that they will fall below the deregistration threshold (currently £66,000) in the next twelve months have the option of deregistering. The same considerations apply as for voluntary registration. Timing may be an issue, because the business will be liable for VAT on any tangible assets on hand at the date of deregistration, including stock, machinery and fixtures. Assets on which the business incurred no input tax on purchase can be excluded. The relevant assets are valued at market value and the business must account for output tax at 15%. If the output tax thus calculated falls below £1,000, the whole amount can be ignored.

EXAMPLE Garway Ltd is a VAT-registered retail outlet with an expected turnover in the next twelve months of £55,000. It wishes to deregister and has assets on hand with the following VAT-inclusive market values: £ Stock

6,000

Computers

2,000

Machinery bought from a non-registered supplier

1,000

It estimates that in a week’s time, its stock will have fallen to £3,000. Should it delay its deregistration? The machinery is ignored because no VAT was reclaimed on purchase. The total of the stock and computers is £8,000, on which the VAT would be £1,043 (using the VAT fraction of 3/23). However, in a week’s time, the total will be £5,000, on which the VAT would be £652. The VAT could therefore be ignored.

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Land and buildings A business which owns property for use in a trade will be able to reclaim all of the input tax it incurs on upkeep, provided that its trade consists of making exclusively taxable supplies. Businesses which own property and rent it out as a landlord face a different situation. Rental – and, in most cases, sale – of land and buildings is exempt from VAT. So a landlord will not charge VAT on the rent to the tenant. The consequence of this is that any input tax incurred on upkeep, such as painting, re-roofing, re-wiring and plumbing, will be irrecoverable. There is a solution to this. The landlord may opt to tax the property, which is done on a property by property basis. Once this has been done, the landlord must charge VAT on all future supplies from this property, be they rental or sales. The landlord is then able to recover any input tax on upkeep. Options to tax are usually made internally and simply notified to Revenue & Customs, though in the case of property from which exempt supplies have previously been made, permission may be required. The downside is that, once an option to tax has been made, it is not possible to revoke it for 20 years, even by selling and repurchasing the property. So the landlord needs to consider not only who the current tenant is, but also who may wish to rent the property in the future. A property with an option to tax will make no difference to a VAT-registered tenant, but for one who is not registered, the rent will increase by 15%. A landlord renting a property to a VAT-registered tenant but considering changing the use of the property to residential use in the future can safely opt to tax. This is because the option to tax is disapplied if the building is used for residential purposes. Opting to tax can also have a beneficial effect on the recovery of input tax on general overheads. A business making a mixture of taxable and exempt supplies is known as ‘partially exempt’ and its input tax recovery on general overheads is restricted to the percentage of its supplies which are taxable – for example, a landlord with taxable supplies of £600,000 and exempt supplies of £400,000, and input tax on general overheads of £10,000, could reclaim 60% of its input tax on general overheads, which would be £6,000. If the landlord were to opt to tax more and more properties, this percentage would rise and its input tax recovery would be greater.

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Special schemes Cash accounting A business with an expected taxable turnover below £1,350,000 per annum may join the cash accounting scheme. Although in the long run this does not save any VAT, it will for most businesses help with their cash flow. Output tax is paid over only when cash has been received. Likewise, input tax can be recovered only when the invoice has been settled. The great advantage is that, with standard VAT accounting, it is necessary to wait six months from the due date of payment before claiming bad debt relief. With cash accounting, bad debt relief is automatic because the output tax is never paid over. Businesses which usually receive VAT repayments when submitting their VAT Return – for example those making mainly zero-rated supplies including exports and sales of goods to other European Union countries, and those making a loss – will find that cash accounting actually produces a cash flow disadvantage. They should therefore not opt for it.

Second-hand goods scheme By using the second-hand goods scheme, a business may opt to charge VAT only on its profit margin if the sales meet certain criteria. This significantly reduces the VAT and is an attractive scheme for motor traders, whose customers cannot generally reclaim the VAT they pay at the point of sale. A sale of goods qualifies only if no VAT was charged when the goods were purchased. Motor dealers will invariably have purchased second-hand vehicles from private individuals, in which case there will have been no VAT. No VAT invoice must be produced on sale. However, when the dealer purchases the goods from a private individual or unregistered trader, he must make out and retain a purchase invoice with certain details specified by Revenue & Customs. The scheme is not compulsory, and even goods which are eligible may be treated normally and VAT charged on the full sale price.

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TA X P L A N N I N G F O R B U S I N E S S E S A N D T H E I R O W N E R S

Flat rate scheme Businesses with an annual taxable turnover of up to £150,000 are eligible to join the flat rate scheme. The aim is to simplify VAT accounting, but businesses may find that the scheme leaves them with cash in hand. The business charges VAT to its customers in the normal way. However, when it comes to complete its VAT Return, it does not reclaim any input tax except on the purchase of capital items costing over £2,000. It simply applies a given percentage to its gross sales, including exempt supplies, and pays this over to Revenue & Customs. The given percentage varies according to the type of business. For example, it is 11.5% for computer consultancy, 8.5% for photography and 5.5% for farming. Note that these are temporary rates which will apply until 31 December 2009. When the standard rate of VAT reverts to 17.5% on 1 January 2010, the flat rates will increase.

EXAMPLE Miss Newland estimates that she will make standard-rated supplies of £50,000 plus VAT and exempt supplies of £10,000 in the year ended 30 June 2010. She will incur input tax of £4,000, of which £3,000 will be recoverable under the normal rules. She is considering changing to the flat-rate scheme and the relevant percentage would be 6.5%. Would this be of benefit to her? £

£

Normal rules Output tax £50,000 x 15%

7,500

Input tax

(3,000)

Payable to Revenue & Customs

4,500

Flat rate scheme Standard-rated supplies (gross)

57,500

Exempt supplies

10,000 67,500

Payable to Revenue & Customs: £67,500 x 6.5% The flat rate scheme would save VAT of £112 in the year.

126

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4,388

1 0 VA L U E A D D E D TA X

The scheme cannot be used alongside the cash accounting or second-hand goods schemes. Not all small businesses would benefit from the scheme. Whether it will be worthwhile will depend on the relevant percentage for this type of business and the relative values of outputs and inputs. As in all areas covered in these ten chapters, advice should be taken before making the decision.

A THOROGOOD SPECIAL BRIEFING

127

Blank

A Thorogood Special Briefing

Appendix Income Tax – personal and married couple’s allowances Income Tax – rates and bands Gift Aid – limit on benefit received by donor Cash equivalent of company car Corporation Tax – rates and bands Capital Gains Tax – annual exemption Capital Gains Tax – taper relief Inheritance Tax – nil rate band

TA X P L A N N I N G F O R B U S I N E S S E S A N D T H E I R O W N E R S

Appendix

Income Tax – personal and married couple’s allowances 2008/09 £

2009/10 £

Personal allowance

6,035

6,475

Personal allowance for people aged 65-74 (1)

9,030

9,490

Personal allowance for people aged 75 and over (1)

9,180

9,640

Married couple’s allowance (born before 6th April 1935 but aged under 75) (1) (2) (3)

6,535

Not applicable

Married couple’s allowance where one spouse is 75 or over (1) (2)

6,625

6,965

Income limit for age-related allowances

21,800

22,900

Minimum married couple’s allowance

2,540

2,670

1)

These allowances reduce where the income is above the income limit by £1 for every £2 of income above the limit. They will never be less than the basic personal allowance or minimum amount of married couple’s allowance.

2)

Tax relief for the married couple’s allowance is given at the rate of 10%.

3)

In the 2009/10 tax year all married couple’s allowance claimants in this category will become 75 or over at some point during the year and will therefore be entitled to claim the higher amount of the allowance – for those aged 75 or over.

130

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APPENDIX

Income Tax – rates and bands 2008/09 £

2009/10 £

Starting rate for savings 10%

0 – 2,320

0 – 2,440

Basic rate 20%

0 – 34,800

0 – 37,400

Higher rate 40%

Over 34,800

Over 37,400

There is a 10% starting rate for savings income only. If non-savings income is above this limit then the 10% starting rate for savings will not apply.

Gift Aid – limit on benefit received by donor Amount of gift £

Limit on benefit £

Up to £100

25% of gift

£100 to £1,000

£25

Over £1,000

2.5% of gift, maximum £250

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TA X P L A N N I N G F O R B U S I N E S S E S A N D T H E I R O W N E R S

Cash equivalent of company car 2008/09 and 2009/10 CO2 emissions (g/km) (rounded down)

Petrol

Diesel % of list price

132

Up to 120

10

13

121 to 135

15

18

140

16

19

145

17

20

150

18

21

155

19

22

160

20

23

165

21

24

170

22

25

175

23

26

180

24

27

185

25

28

190

26

29

195

27

30

200

28

31

205

29

32

210

30

33

215

31

34

220

32

35

225

33

35

230

34

35

235 and over

35

35

A THOROGOOD SPECIAL BRIEFING

APPENDIX

Corporation Tax – rates and bands Rate

Year starting 1 April 2008

Year starting 1 April 2009

Small companies rate 21%

£0 – £300,000

£0 – £300,000

Marginal relief

£300,001 – £1,500,000

£300,001 – £1,500,000

Marginal relief fraction

7/400

7/400

Full rate 28%

£1,500,001 or more

£1,500,001 or more

Capital Gains Tax – annual exemption 2008/09 £

2009/10 £

Individuals

9,600

10,100

Trustees

4,800

9,600

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TA X P L A N N I N G F O R B U S I N E S S E S A N D T H E I R O W N E R S

Capital Gains Tax – taper relief Number of complete years

Business assets % of gain chargeable

Non-business assets % of gain chargeable

Disposal from 5 April 2002

Disposal from 5 April 1998

1

50

100

2

25

100

3

25

95

4

25

90

5

25

85

6

25

80

7

25

75

8

25

70

9

25

65

10

25

60

For non-business assets owned on 17 March 1998, the period of ownership is increased by one year (the ‘bonus year’). Taper relief applies to disposals by individuals and trusts from 6 April 1998 to 5 April 2008.

Inheritance Tax – nil rate band

134

2008/09

£312,000

2009/10

£325,000

A THOROGOOD SPECIAL BRIEFING

Other specially commissioned reports from Thorogood BUSINESS AND COMMERCIAL LAW Commercial Contracts: Drafting techniques and precedents Ribeiro, Robert

Email: Legal issues 2008 Singleton, Susan £169

ISBN: 978-185418271-5

This report takes you through the drafting process giving practical guidance from start to finish. With up-to-the-minute information on key cases and materials and in-depth analysis of the important drafting issues, it is a must for all those who need to draft commercial contracts.

Commercial Litigation: Damages and other remedies for breach of contract Ribeiro, Robert

£169

ISBN: 978-185418397-2

A great deal has changed in the last few years... a new emphasis on claims for damages such as loss of business, opportunity, chance, use and data and recent landmark cases have altered the ground-rules. Completely updated, this report includes accounts of all the most recent important cases and highlights significant changes in the way that the courts now assess damages.

Corporate Governance Martin, David

NEW EDITION

£125

ISBN: 978-185418630-0

What are the chances of either you or your employees breaking the law? This report explains clearly: • How to establish a sensible policy and whether or not you are entitled to insist on it as binding • The degree to which you may lawfully monitor your employees’ e-mail and Internet use • The implications of the Regulation of Investigatory Powers Act 2000 and the Electronic Communications Act 2000 • How the Data Protection Act 1998 affects the degree to which you can monitor your staff • What you need to watch for in the Human Rights Act 1998 and TUC guidelines.

Freedom of Information Act in Practice 2008 Singleton, Susan

NEW EDITION

£125

ISBN: 978-185418632-4

The FOI Act gives companies and individuals important powers to request information from public bodies. Are you equipped to take advantage and to protect yourself?

£85

ISBN: 978-185418354-5

This report is a clear, accessible and jargon-free analysis of the practical application of Corporate Governance. With short case studies to illustrate legal requirements, the author guides the reader through all aspects of the Corporate Governance programme, concentrating specifically on its use by organisations who are not required to adopt it, such as listed PLCs.

For full details of any title, and to view sample extracts, please visit:

www.thorogoodpublishing.co.uk

International Commercial Agreements Attree, Rebecca

£95

ISBN: 978-185418286-9

A major report on recent changes to the law and their commercial implications and possibilities. The report explains the principles and techniques of successful international negotiation and provides a valuable insight into the commercial points to be considered as a result of the laws relating to: pre-contract, private international law, resolving disputes (including alternative methods, such as mediation), competition law, drafting common clauses and contracting electronically. It also examines in more detail certain specific international commercial agreements, namely agency and distribution and licensing.

Insights into Successfully Managing the In-house Legal Function O’Meara, Barry

Intellectual Property Protection and Enforcement £95

Brazell, Lorna

£159

ISBN: 978-185418174-9

ISBN: 978-185418054-4

Negotiating the fault-line between private practice and in-house employment can be tricky, as the scope for conflicts of interests is greatly increased. Insights into successfully managing the in-house legal function discusses these and other issues.

Incorporating the latest developments in IP law, this report reviews each of the principal forms of intellectual property right available in the United Kingdom, describing the nature of the right itself and explaining: How rights arise or can be obtained, How rights can be exploited, What is necessary to protect rights from erosion or loss, What actions will constitute infringement of a right, under either civil (enforced by the owner) or criminal (enforced by public authorities) law, What remedies are available to the owner of the right, once infringement has been proved.

Software Contract Agreements Bond, Robert

£80

ISBN: 978-185418146-6

Fully up-to-date with all changes to the law, this report is a thorough explanation of the law combined with expert guidance on negotiating and drafting the best contract for your client.

Achieving Business Excellence, Quality and Performance Improvement Chapman, Colin & Hopper, Dennis

£95

ISBN: 978-185418018-6

Each chapter can be read on its own for convenient reference, and the introduction to each chapter also makes it clear where awareness of another section may be useful.

Waste Management: The changing legislative climate Hand, Caroline

This valuable report identifies all the areas critical to developing an effective performance improvement process. It is a practical guide to the use of business excellence models and frameworks, quality standards, benchmarking tools, self-assessment programmes and the latest performance improvement initiatives.

ISBN: 978-185418367-5

This valuable report explains what all the new legislation, directives and regulations mean in practice and what you need to do to stay within the law. Recent far-reaching changes to the law and practice affect everyone – commerce and industry, central and local government and householders.

The Commercial Exploitation of Intellectual Property Rights by Licensing

Websites and the Law

DesForges, Charles

Singleton, Susan

£95

£80

£95

ISBN: 978-185418285-2

ISBN: 978-185418331-6

This report will show you – whether as licensor or licensee – how to identify and secure profitable opportunities, strategies and techniques for negotiating the best agreement, and finally the techniques of successfully managing a license operation.

Is your company/client website legal? Do you know what information you are required by law to put on it? What can you do with people’s personal data sent to your website? This report deals with all the practical legal issues which arise with websites – both those sites which sell goods or services and those which advertise.

HOW TO ORDER

Please see order form at the back of this report

Telephone: +44 (0)1235 465 500

Post: Marston Book Services, PO Box 269 Abingdon, Oxon OX14 4YN

Fax: +44 (0)1235 465 556

Web: www.thorogoodpublishing.co.uk

Email: [email protected]

BUSINESS STRATEGY AND MANAGEMENT A Practical Guide to Knowledge Management Brelade, Sue & Harman, Chris

Understanding SMART Procurement in the MOD £99

Boyce, Tim

£69

ISBN: 978-185418230-2

ISBN: 978-185418164-0

An expert but jargon-free guide to enable you to manage the knowledge in your organisation successfully and to identify, gather and use that knowledge to maximum advantage.

The main thrust of this report is on issues to do with strategy, organisation and processes. The single most encouraging and exciting feature of the SMART procurement initiative is that it embraces the need to change the culture. There is a commitment within the high political echelon of the MoD to make this change happen. Probably the greatest single challenge is to ensure that this commitment is maintained through the inevitable changes of personality at the political and senior management level.

Analyse your Business – A performance health check O’Connor, Carol

£89

ISBN: 978-185418170-1

This briefing offers the tools and techniques for company-wide analysis and is essential reading for business leaders responsible for corporate performance. Its purpose is to put minor issues into perspective and discourage the use of quick fix solutions for bigger problems.

Tendering & Negotiating MoD Contracts Boyce, Tim

£95

ISBN: 978-185418276-0

This report aims to draw out the main principles, processes and procedures involved in tendering and negotiating MoD contracts. As Tim Boyce writes in the Introduction, ‘it is important to realise that the SPI embraces a conceptual shift in the role of the MoD procurers’. What does this ‘huge shift in thinking’ mean for contractors? How exactly has the role of MoD purchasing changed? This report covers every aspect of competitive tendering, negotiation and contractual negotiations in this new era. There can be few people who combine Tim Boyce’s experience and expertise with a gift for explaining issues and procedures with such clarity.

IT Governance Norfolk, David

£95

ISBN: 978-185418371-2

This specially commissioned report sets out what the latest legislation says and what it means, its impact on the organisation as a whole and on the IT group specifically, and how to implement an effective IT governance initiative in your company.

Practical Techniques for Effective Project Investment Appraisal Tiffin, Ralph

£99

ISBN: 978-185418099-5

How to ensure you have a reliable system in place. Spending money on projects automatically necessitates an effective appraisal system – a way of deciding whether the correct decisions on investment have been made.

Project Risk Management: The commercial dimension Boyce, Tim

£95

ISBN: 978-185418257-9

For full details of any title, and to view sample extracts, please visit:

www.thorogoodpublishing.co.uk

This report will show you how to fully appreciate all the commercial dimensions of important projects and understand how to identify all the risks during the pre-contract bidding phase.

Strategy Implementation Through Project Management

Surviving a Corporate Crisis: 100 things you need to know

Grundy, Tony

£99

Batchelor, Paul

£80

ISBN: 978-185418250-0

ISBN: 978-185418208-1

The gap: Far too few managers know how to apply project management techniques to their strategic planning. The result is often strategy that is poorly thought out and executed.

Seven out of ten organisations that experience a corporate crisis go out of business within 18 months. This report not only covers remedial action after the event but offers expert advice on preparing every department and every key player of the organisation so that, should a crisis occur, damage of every kind is limited as far as possible.

The answer: Strategic project management is a new and powerful process designed to manage complex projects by combining traditional business analysis with project management techniques.

Technical Aspects of Business Leases: Overcoming the practical difficulties Dowden, Malcolm

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£95

ISBN: 978-185418194-7

If you are not totally satisfied and you return a publication in mint condition within 14 days of receipt, we will refund the cost of the publication, no questions asked.

The purpose of this report is to highlight areas where technical issues might lead to practical difficulties, and to give clear guidance to help those involved in property management avoid the pitfalls.

FINANCE Tax Planning for Businesses and their Owners Hughes, Peter

Trade Secrets of Business Acquisitons Pearson, Barrie £95

ISBN: 978-185418334-7

Written for business owners and managers, this special briefing offers expert advice on the tax implications of your business decisions – guiding you in making the right business and personal choices for tax reduction.

Trade Secrets of Business Disposals Pearson, Barrie

£145

ISBN: 978-185418321-7

If you’re like most people, you’ll only get one chance to sell your business and to capitalise on years of hard work and planning. You can either fluff it, or make sure you get the best possible advisor and become financially secure for life, and possibly very rich. This report shows you how to make your business ‘investor-ready’ for maximum capital return.

£145

ISBN: 978-185418366-8

In this invaluable new briefing one of the City’s most successful deal-makers distils 40 years’ experience as both principal and advisor. “Losing a deal by adopting the wrong tactics is unforgiveable” he writes, but it happens all too often. This briefing offers both professional advisors and principals the opportunity to transform their rate of success, clarifying hard truths and highlighting avoidable mistakes. It is laced throughout with proven tactical advice to ensure that both deals and post-acquisition management are carried out with maximum success.

VAT Liability and the Implications of Commercial Property Transactions Buss, Tim

£149

ISBN: 978-185418307-1

The option to tax is a major VAT planning tool but you have got to get the detail right to take full advantage – and getting it wrong can be very costly. This report shows you how to plan for maximum advantage and avoid costly mistakes.

EMPLOYMENT LAW Data Protection Law for Employers 2008 Singleton, Susan

NEW EDITION

£125

ISBN: 978-185418626-3

The four-part Code of Practice under the Data Protection Act 1998 on employment and data protection places a further burden of responsibility on employers and their advisers. The Data Protection Act also applies to manual data, not just computer data, and a tough enforcement policy was announced in October 2002.

THE THOROGOOD PROMISE If you are not totally satisfied and you return a publication in mint condition within 14 days of receipt, we will refund the cost of the publication, no questions asked.

Employee Sickness and Fitness for Work: Successfully dealing with the legal system Howard, Gillian

Discrimination Law and Employment Issues Martin, David

ISBN: 978-185418281-4

£55

ISBN: 978-185418339-2

The Age Discrimination Act is billed by lawyers as the most significant change in employment law since the 1970’s. In addition to sex and race discrimination laws, in the last two years employers have also had to cope with sexual orientation discrimination and religious discrimination. David Martin, an expert on employment law and practice, analyses the practical aspects of dealing with each of the anti-discrimination laws. He demonstrates how to ensure that paperwork and systems comply totally with the law, and he provides a range of helpful case studies to illustrate the key issues and bring them to life.

Effective Recruitment: A practical guide to staying within the law Leighton, Patricia & Proctor, Giles

£95

Many executives see employment law as an obstacle course or, even worse, an opponent – but it can contribute positively to keeping employees fit and productive. This report will show you how to get the best out of your employees, from recruitment to retirement, while protecting yourself and your firm to the full.

Employment Law Aspects of Mergers and Acquisitions: A practical guide Ryley, Michael

£95

ISBN: 978-185418363-7

This Report will help you to understand the key practical and legal issues, achieve consensus and involvement at all levels, understand and implement TUPE regulations and identify the documentation that needs to be drafted or reviewed within the context of a merger, acquisition or disposal.

£85

ISBN: 978-185418303-3

The ways to undertake the task continue to grow, making the decision as to how best to recruit for a given employment situation more complex. This specialist text is responding to a number of imperatives, including legal ones. There have been, and are, anticipated changes that make it essential that recruitment practitioners act both effectively and within the law.

For full details of any title, and to view sample extracts, please visit:

www.thorogoodpublishing.co.uk

Need it now? Download a PDF of the report at: www.thorogoodpublishing.co.uk

Navigating Health and Safety Law: Ensuring compliance and minimising risk

Successfully Defending Employment Tribunal Cases

Pope, Chris

Hunt, Dennis

£95

£95

ISBN: 978-185418353-8

ISBN: 978-185418267-8

If you have already been challenged by the insurer, inspector, or one of your workforce about the status of your health and safety this report will give you a workable answer to questions like Is my health and safety policy legally compliant? How do I avoid being liable for an employees ill health arising from previous employment? Who should carry out safety inspections – is it my responsibility?

Sweeping changes to the way employment tribunal claims are dealt with have increased the risk of higher costs and more expensive claims. This indispensable report covers all the changes and their implications for HR professionals.

HR, RECRUITMENT AND TRAINING Applying the Employment Act 2002: Crucial developments for employers and employees

Enabling Beyond Empowerment Williams, Michael

£95

ISBN: 978-185418084-1 Williams, Audrey

£95

ISBN: 978-185418253-1

The Act represents a major shift in the commercial environment, with far-reaching changes for employers and employees. The consequences of getting it wrong, for both employer and employee, will be considerable – financial and otherwise. The Act affects nearly every aspect of the workplace.

By applying the range of practical management techniques detailed in this report, you can provide the authority and means to empower in a way that substantially reduces the dangers.

Flexible Working Williams, Audrey

£95

ISBN: 978-185418306-4

Dismissal and Grievance Procedures Hunt, Dennis

£95

ISBN: 978-185418376-7

This report explains what all the regulations say and what steps you need to take to operate effective dismissal, disciplinary and grievance procedures. It covers all the requirements of the Disputes Resolution Procedures that came into effect in October 2004. It tells you where and when the regulations apply – and what you need to do.

Recent research shows that far too many individuals, as well as firms, are unaware of flexible working rights. How employers and employees deal with them is of crucial – and increasing – importance to both. This report clarifies the law, sets out the rights of employer and employee, and offers valuable practical advice on best practice.

For full details of any title, and to view sample extracts, please visit:

www.thorogoodpublishing.co.uk

HOW TO ORDER

Please see order form at the back of this report

Telephone: +44 (0)1235 465 500

Post: Marston Book Services, PO Box 269 Abingdon, Oxon OX14 4YN

Fax: +44 (0)1235 465 556

Web: www.thorogoodpublishing.co.uk

Email: [email protected]

New Ways of Working

THE THOROGOOD PROMISE

Jupp, Stephen

If you are not totally satisfied and you return a publication in mint condition within 14 days of receipt, we will refund the cost of the publication, no questions asked.

ISBN: 978-185418169-5

How to Turn your HR Strategy into Reality Grundy, Tony

£85

ISBN: 978-185418183-1

From a diagnosis of HR issues to an analysis of the external and internal future environment of your company and the effect on your human resources – this is practical information aimed at HR and senior line managers.

Internal Communications Farrant, James

£99

£95

ISBN: 978-185418149-7

There is growing evidence that the organisations that ‘get it right’ reap dividends in corporate energy and enhanced performance. In these organisations, internal communications have equal status with the external communications functions. This practical report will show you how internal communications, taken in their widest sense, can improve the performance of organisations.

New ways of working examines the nature of the work done in an organisation and seeks to optimise the working practices and the whole context in which the work takes place. It is more about promoting the best ways of doing things than simple cost driven change. Although it emphasises the importance of business and organisation, it spans the concerns of people, property, technology, community and environment.

Power Over Stress at Work Araoz, Daniel

£99

ISBN: 978-185418176-3

The HR manager can learn how to deal creatively with stress from the information in this briefing and pass on their knowledge down the ranks. He or she will then halt the downward spiral of diffusing stress and produce a more positive knock-on effect – namely to increase the productivity of the entire workforce and reduce absenteeism resulting from this terrible illness.

Reviewing and Changing Contracts of Employment Phillips, Annelise; Player, Tom & Rome, Paula £95 ISBN: 978-185418296-8

Mergers and Acquisitions: Confronting the organisation and people issues Thomas, Mark

£95

ISBN: 978-185418008-7

Why do so many mergers and acquisitions end in tears and reduced shareholder value? This report will help you to understand the key practical and legal issues, achieve consensus and involvement at all levels, understand and implement TUPE regulations and identify the documentation that needs to be drafted or reviewed.

The Employment Act 2002 has raised the stakes. Imperfect understanding of the law and poor drafting will now be very costly. This report will: • Ensure that you have a total grip on what should be in a contract and what should not • Explain step by step how to achieve changes in the contract of employment without causing problems • Enable you to protect clients’ sensitive business information • Enhance your understanding of potential conflict areas and your ability to manage disputes effectively.

For full details of any title, and to view sample extracts, please visit:

www.thorogoodpublishing.co.uk

Trade Secrets of Using e-Learning in Training Bray, Tony

Transforming HR Hunter, Ian and Saunders, Jane £95

ISBN: 978-185418326-2

Definitely not for ‘techies’, this report is practical and jargon-free – giving you step-by-step skills and processes to enable you to design effective e-learning products with confidence.

£95

ISBN: 978-185418361-3

The blue-print for the future of HR – how to deliver proven value to your Board, business and colleagues. The report is based on interviews with 60 HR leaders from across industry and public and not for profit sectors. The report covers HR outsourcing and shared services.

MARKETING, PR AND SALES Corporate Community Investment Genasi, Chris

£99

Scott, Simon

ISBN: 978-185418192-3

Supporting good causes is big business – and good business. Corporate community investment (CCI) is the general term for companies’ support of good causes, and is a very fast growing area of PR and marketing.

Defending your Reputation Taylor, Simon

£99

ISBN: 978-185418251-7

‘Buildings can be rebuilt, IT systems replaced, people can be recruited, but a reputation lost can never be regained…The media will publish a story – you may as well ensure it is your story’ Simon Taylor. ‘News is whatever someone, somewhere, does not want published’ William Randolph Hearst When a major crisis does suddenly break, how ready will you be to defend your reputation?

Implementing an Integrated Marketing Communications Strategy Hart, Norman

Insights into Understanding the Financial Media: An insider’s view

£99

£99

ISBN: 978-185418083-4

This briefing will help you understand the way the financial print and broadcast media works in the UK. It will also provide you with techniques and guidelines on how to communicate with the financial media in the most effective way, to help you achieve accurate and positive coverage of your organisation and its operations.

Lobbying and the Media: Working with politicians and journalists Burrell, Michael

£99

ISBN: 978-185418240-1

Lobbying is an art form rather than a science, so there is inevitably an element of judgement in what line to take. The best lobbying is always based on accurate, up-to-date information and on a wellargued case, founded on credible evidence, and delivered to the right audiences in the right tone of voice at the right time. Sounds simple, but it isn’t. This expert report explains the knowledge and techniques required.

ISBN: 978-185418120-6

Get ahead and stay ahead of your competition through better integration of your marketing communications. Norman Hart was an international consultant, lecturer and author on marketing, advertising and public relations. His books included The CIM Marketing Dictionary, Strategic Public Relations, The Practice of Advertising and Industrial Marketing Communications.

THE THOROGOOD PROMISE If you are not totally satisfied and you return a publication in mint condition within 14 days of receipt, we will refund the cost of the publication, no questions asked.

Managing Corporate Reputation: The new currency Dalton, John & Croft, Susan

Strategic Customer Planning Melkman, Alan & Simmonds, Ken £95

ISBN: 978-185418272-2

ENRON, WORLDCOM… who next? At a time when trust in corporations has plummeted to new depths, knowing how to manage corporate reputation professionally and effectively has never been more crucial. This report shows you how to:

£95

ISBN: 978-185418388-0

This is very much a ‘how to’ report. After reading those parts that are relevant to your business, you will be able to compile a powerful customer plan that will work within your particular organisation for you. Charts, checklists and diagrams throughout.

• Develop PR, brands and relationship management as the vanguards of your corporate reputation

Strategic Planning in Public Relations

• Strengthen your internal as well as external communications

ISBN: 978-185418225-8

• Improve the effective management of your stakeholders

Practical Techniques for Effective Lobbying Miller, Charles

£95

Knights, Kieran

£99

Tips and techniques to aid you in a new approach to campaign planning. Strategic planning is a fresh approach to PR. An approach that is fact-based and scientific, clearly presenting the arguments for a campaign proposal backed with evidence. This report provides valuable tips and techniques to improve your PR and campaign planning.

ISBN: 978-185418089-6

Understanding the system and the process in which it works is essential to lobbying effectively. Uncoordinated, uncontrolled and badly planned approaches will do more harm than good, and risk antagonising the people you most want to influence. This report provides the techniques required for effective lobbying.

Successful Competitive Tendering

Public Affairs Techniques for Business

Techniques for Ensuring PR Coverage in the Regional Media: An insider’s view

Wynne-Davies, Peter

£95

Woodhams, Jeff ISBN: 978-185418235-7

To win business, you must make a convincing case. This report will help you become more skillful, and more successful in your tendering.

Imeson, Mike

ISBN: 978-185418175-6

This report shows in practical terms how you can counter potential threats through a professionally structured and implemented public affairs campaign. Today’s successful companies recognise that in order to survive and prosper a comprehensive and disciplined approach to public affairs is no longer just a useful asset, it is now a necessity.

£95

£99

ISBN: 978-185418019-3

This in-depth briefing will give you the tools and techniques you need to enjoy the opportunities offered by the regional and local media. It offers you practical guidance and advice on how to apply them with maximum effect for your next PR campaign.

Selling Skills for Professionals Tasso, Kim

£99

ISBN: 978-185418179-4

Many professionals still feel awkward about really selling their professional services. They are not usually trained in selling. This is a much-needed report which addresses the unique concerns of professionals who wish to sell their services successfully and to feel comfortable doing so.

For full details of any title, and to view sample extracts, please visit:

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Title

ISBN

Price Authors

Commercial Contracts: Drafting techniques and precedents

978-185418271-5 £169

Ribeiro, Robert

Commercial Litigation: Damages and other remedies for breach of contract

978-185418397-2 £169

Ribeiro, Robert

Corporate Governance

978-185418354-5 £85

Martin, David

Email: Legal issues

978-185418256-0 £80

Singleton, Susan

Freedom of Information Act

978-185418347-7 £95

Singleton, Susan

International Commercial Agreements

978-185418286-9 £95

Attree, Rebecca

Insights into Successfully Managing the In-house Legal Function

978-185418174-9 £95

O’Meara, Barry

Software Contract Agreements

978-185418146-6 £80

Bond, Robert

Achieving Business Excellence, Quality and Performance Improvement

978-185418018-6 £95

Chapman, Colin & Hopper, Dennis

The Commercial Exploitation of Intellectual Property Rights by Licensing

978-185418285-2 £95

DesForges, Charles

Intellectual Property Protection and Enforcement

978-185418054-4 £159

Brazell, Lorna

Waste Management: The changing legislative climate

978-185418367-5 £80

Hand, Caroline

Websites and the Law

978-185418331-6 £80

Singleton, Susan

A Practical Guide to Knowledge Management

978-185418230-2 £99

Brelade, Sue & Harman, Chris

Analyse your Business – A performance health check

978-185418170-1 £89

O’Connor, Carol

Tendering & Negotiating MoD Contracts

978-185418276-0 £95

Boyce, Tim

Understanding SMART Procurement in the MOD

978-185418164-0 £69

Boyce, Tim

IT Governance

978-185418371-2 £169

Norfolk, David

Practical Techniques for Effective Project Investment Appraisal

978-185418099-5 £99

Tiffin, Ralph

Project Risk Management: The commercial dimension

978-185418257-9 £95

Boyce, Tim

Strategy Implementation Through Project Management

978-185418250-0 £99

Grundy, Tony

Surviving a Corporate Crisis: 100 things you need to know

978-185418208-1 £80

Batchelor, Paul

Technical Aspects of Business Leases: Overcoming the practical difficulties

978-185418194-7 £95

Dowden, Malcolm

Tax Planning for Businesses and their Owners

978-185418334-7 £95

Hughes, Peter

Trade Secrets of Business Disposals

978-185418321-7 £145

Pearson, Barrie

Qty

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Title

ISBN

Price Authors

Trade Secrets of Successfully Acquiring Unquoted Companies

978-185418366-8 £145

Pearson, Barrie

VAT Liability and the Implications of Commercial Property Transactions

978-185418307-1 £149

Buss, Tim

Data Protection Law for Employers

978-185418283-8 £80

Singleton, Susan

Discrimination Law and Employment Issues

978-185418339-2 £55

Martin, David

Effective Recruitment: A practical guide to staying within the law

978-185418303-3 £85

Leighton, Patricia & Proctor, Giles

Employee Sickness and Fitness for Work: Successfully dealing with the legal system

978-185418281-4 £95

Howard, Gillian

Employment Law Aspects of Mergers and Acquisitions: A practical guide

978-185418363-7 £95

Ryley, Michael

Navigating Health and Safety Law: Ensuring compliance and minimising risk

978-185418353-8 £95

Pope, Chris

Successfully Defending Employment Tribunal Cases

978-185418267-8 £95

Hunt, Dennis

Applying the Employment Act 2002: Crucial developments for employers and employees

978-185418253-1 £95

Williams, Audrey

Dismissal and Grievance Procedures

978-185418376-7 £95

Hunt, Dennis

Enabling Beyond Empowerment

978-185418084-1 £95

Williams, Michael

Flexible Working

978-185418306-4 £95

Williams, Audrey

How to Turn your HR Strategy into Reality

978-185418183-1 £85

Grundy, Tony

Internal Communications

978-185418149-7 £95

Farrant, James

Mergers and Acquisitions: Confronting the organisation and people issues

978-185418008-7 £95

Thomas, Mark

New Ways of Working

978-185418169-5 £99

Jupp, Stephen

Power Over Stress at Work

978-185418176-3 £99

Araoz, Daniel

Reviewing and Changing Contracts of Employment

978-185418296-8 £95

Phillips, Annelise; Player, Tom & Rome, Paula

Trade Secrets of Using e-Learning in Training

978-185418326-2 £95

Bray, Tony

Transforming HR

978-185418361-3 £95

Hunter, Ian and Saunders, Jane

Corporate Community Investment

978-185418192-3 £99

Genasi, Chris

Defending your Reputation

978-185418251-7 £99

Taylor, Simon

Implementing an Integrated Marketing Communications Strategy

978-185418120-6 £99

Hart, Norman

Insights into Understanding the Financial Media: An insider’s view

978-185418083-4 £99

Scott, Simon

Lobbying and the Media: Working with politicians and journalists

978-185418240-1 £99

Burrell, Michael

Managing Corporate Reputation: The new currency

978-185418272-2 £95

Dalton, John & Croft, Susan

Qty

For full details of any title, and to view sample extracts, please visit:

www.thorogoodpublishing.co.uk

Title

ISBN

Price Authors

Practical Techniques for Effective Lobbying

978-185418089-6 £95

Miller, Charles

Public Affairs Techniques for Business

978-185418175-6 £95

Wynne-Davies, Peter

Selling Skills for Professionals

978-185418179-4 £99

Tasso, Kim

Strategic Customer Planning

978-185418388-0 £95

Melkman, Alan & Simmonds, Ken

Strategic Planning in Public Relations

978-185418225-8 £99

Knights, Kieran

Successful Competitive Tendering

978-185418235-7 £95

Woodhams, Jeff

Techniques for Ensuring PR Coverage in the Regional Media: An insider’s view

978-185418019-3 £99

Imeson, Mike

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