Give away your assets as soon as possible to save your beneficiaries inheritance tax!

The longer you delay to gift your assets during your lifetime, the higher the inheritance tax your inheritors will have to pay on your death (because some of the inheritance tax exempt band will go towards the lifetime gifts, thus leaving more of the estate taxable).

Have it your way with inheritance tax where asset values go up or down between gift and death!

If inheritance tax is due on the death of the donor because the gift was made to you within 7 years prior to the death, you can make a claim to ensure that the tax you pay is based on the value of the gift on death as opposed to the value at the date of the gift, provided the asset has fallen in value between the gift date and the donor's death date. This works well with property and cash.

However, extra care needs to be taken with assets which are valued differently for inheritance tax (and hence, the reduction in the value of the donor's estate after the gift is not equal to the value of the gift for the donee (that is very much the case with shares).

So, the inheritance taxman is quite generous (for once!) and allows you to have it both ways, because as the normal rules say, the gift date value is used by default to value gifts on death. Hence, there is protection in-built from increased asset values between gift and death!

Inheritance tax on lifetime gifts that become taxable on death

Inheritance tax works on the cumulation principle. Hence, any lifetime gifts made by the deceased to individuals in the 7 years prior to death will become chargeable to inheritance tax on the donor's death. The amount of tax to be paid on those gifts (by the donees) will depend on the value of other lifetime gifts to certain trusts (as well as on the value of gifts to individuals that become chargeable on death) in the last 7 years prior to the chargeable gift on death.

Lesson: make lifetime gifts first to the persons you love the most and leave the others for later!

How to escape Inheritance tax on lifetime gifts

UK inheritance tax works on the principle that you pay IHT even though the lifetime gift to a trust is  valued less than £325k, if you have made other gifts to certain trusts in the last 7 years.


Lesson: if you often make gifts to individuals and to trusts, make sure that the gifts to trusts chronologically come before the gifts to individuals in each tax year. This will reduce any inheritance tax on the latest gift.

If you make more than one gifts to trusts in the same tax year and on some gifts the trustees pay the tax whilst on others you do, to minimise your own inheritance tax bill, make sure that the gift you pay the tax is made earlier than the gift the trustees pay the tax.

Have you NOT lost your UK-resident status by going abroad?

These words are important to decide in which country a person pays income and capital gains tax: Residency, ordinary residence and domicile. The rules have been laid out by court cases over the years, but no definite legislation exists (statutory residence test comes into effect from April 2012), hence a lot of grey stuff at the moment!

There have been two cases recently, which (although different between them) (Gaines Cooper, Davies & James), seem to have moved the goalposts in the taxman's favour and made it more difficult for taxpayers to benefit from non-residency.

The critical question for many people who emigrate to another country is: When do I lose my UK-residency status? The answer should be straight forward by reading the taxman's guidance as contained in their IR20: From the day of departure if your move abroad is permanent or for at least 3 years or for a settled purpose and in all cases you have been absent for a whole tax year (with any visits to the UK totalling less than 183 days in any tax year and averaging less than 91 days per tax year over a four-year period).

The difficult part is, defining "permanent" . The HMRC seems to interpret the "going abroad" test very strictly, as a distinct break from the UK (incorporating taking up home permanently in a different country and breaking significant links with the UK) as opposed to just a mere change in circumstances (e.g. accommodation) for a number of years.

When it comes to employment taken up abroad, by concession IR20 states that you become non-UK resident if you are employed abroad for a complete tax year (the understanding has been so far that if not a complete tax year of employment in the year of leaving, then reliance could be placed on having full-time employment in the whole of the next tax year). Again, non-residency begins for date of departure if conditions are satisfied. The Supreme Court, however, in the Davies & James case saw that you have to be working full time for the whole of the relevant tax year in which a capital gain arises to qualify for non-residence status for capital gains tax!

I think what these two cases have done is that, unless you fit precisely into the words or examples given by the taxman in IR20 or HMRC6), you cannot expect the courts to extend the HMRC guidance to cover your non-residency claim, especially when there is a lot of tax at stake!

Bottom line is, some taxpayers, who have left the UK to escape UK income tax or capital gains tax, may have never left the UK for those taxes and they don't even know it! For example, those who left the UK for 5 complete tax years to escape capital gains tax on gains that arose in the tax year of their departure and worked as full-time employees abroad, may find to their detriment that the 5-year period never commenced!

Quick and easy protection from inheritance tax for non-UK domiciled persons

If you are of non-UK domicile (or of non-UK deemed domicile as defined for inheritance tax), you will still be liable to inheritance tax on any assets in your estate which are situated (i.e. physically located) in the UK! In layman words, this applies to people who were neither born or live in the UK. Does it sound bizarre?

Anything that can be done to escape the tax? 

Put your money on authorised unit trusts or shares in open ended investment companies or hold your cash in UK banks in overseas currency.

For those on the other side of the fence: 

What about those persons who, though born abroad by a non-UK father (and hence non-UK domiciled), are about to become UK-domiciled for inheritance tax because they have lived long enough in the UK? Is there anything they can do to protect their foreign assets from UK inheritance tax? The trick is to create a so called  "excluded property trust", into which to put all their foreign assets, before they acquire UK domicile. 

Chancellor's help for small businesses: Is this enough?

The Chancellor announced some measures to help small businesses during the November Statement. Among those are:

• The small businesses rates relief holiday is extended to April 2013.
• Businesses will be able to defer 60% of the increase in their 2012/13 business rates as result of RPI updating, and pay the increase equally in the following two years.
• The National Loan Guarantee Scheme is introduced for businesses with turnover less than £50m. The scheme will make banks' lending to small businesses easier by offering low interest rates loans underwritten by the Government.
• The corporation tax rate will fall in April to 25% (that will not have an effect on small companies though!)

The question is: Is this enough? How many small businesses will benefit and will actually those measures help the economy back into growth given that small businesses are the backbone of the economy? What is your take on this?

Crafty taxman!

Taxman is crafty! When your company makes a profit, you pay the tax on it after 9 months. But, if your company makes a loss, you will have to wait until 9 months after the end of the following year to get loss relief  and that's provided there are enough profits in the future and from the same trade to absorb the loss -  so, it could take ages! To get  loss relief earlier, you need to make a claim in writing within 2 years of the end of the accounting period which produced the loss. They certainly make it difficult for business, don't they?

Budget 2011

Income tax:

1. Personal allowance (i.e annual tax-free income for individuals): The allowance for under-65s will rise by £1,000 from £6,475 to £7,475 for 2011/12. However, from 2012/13 it will rise in accordance with CPI (consumer price inflation) and not RPI (retail price index), and hence personal allowance for 2012/13 to be £8,105.
   
2. The higher rate of income tax threshold kicks in at £42,475 from April 2011 (as opposed to £43,875 in 2010/11).
   
   (Comment: this cannot be welcome news as CPI is less generous than RPI, meaning less tax-free income allowances and more people drawn into the higher tax bands. In addition, the increase to £8,105 next April is counterbalanced by the freeze in the higher rate threshold in 2012 and by the decision to raise NI thresholds in line with CPI rather than the higher RPI. It is estimated that 750k more people will become higher rate taxpayers).
   
3. The 50% income tax rate: announcement made that it is a "temporary measure".
   
4. Benefits in kind:
1. Company cars: the multiplier for cars emitting over 95 grams of CO2 per km is increased by 1%.
2. Company car fuel benefit (taxable amount for private use) goes up by £800 to £18,800 from 6 April 2011. 

National Insurance:

1. One per cent increase in all national insurance rates from 6 April 2011. This is partly mitigated by increases to the earnings threshold (point after which NIC kicks in).
   
2. NIC Class 2 contributions (payable by self-employed) to be collected on 31 January and 31 July in the future instead of monthly payments.

Business taxes:

1. The approved mileage allowance rate (where employees use own car for the employer's business and the cost is claimed from the employer) will be increased by 5p per mile from April (i.e. the first 10,000 miles claim is at 45p with 25p thereafter.
   
   (Comment: although this may have an impact on the high mileage drivers of up to £500 saving, for the vast majority of drivers there is only one phrase: "Big deal!")
   
   
2. Capital allowances:
1. The rate of capital allowances for expenditure allocated on the main pool is reduced to 18% from 20% per annum from April 2012.
2. The rate of capital allowances  for expenditure allocated on the special rate pools is reduced to 8% from 10% per annum.
3. The Annual Investment Allowance is reduced from £100,000 to £25,000 from April 2012.
4. The length of of short life asset pools is increased to 8 years from 4 from April 2011.  
   
   
3. Furnished holiday lettings: 
1. Availability and occupancy thresholds to qualify as FHL are revised from April 2012. Properties will need to be available for letting for 210 days (currently 140) and actually let for 105 (currently 70) in the year. 
2. From 6 April 2011, FHL losses cannot be offset against other income; losses can only be offset against income from same FHL business.

Companies taxes:

1. Corporation tax  for the year to 31 March 2011 is reduced for larger companies to 26% (and by 1% every year until it reaches 23% from 2014) and for smaller companies to 20% from April 2011.
   
   (Comment: Some good news that will certainly help small and medium sized businesses, encourage the incorporation of more businesses and send signals to investors that Britain is open for business).

Capital gains:

1. The lifetime limit for  Entrepreneurs Relief on capital gains from business disposals that qualifies for the 10% CGT rate (rather than the normal CGT rates of 18%/or 28%) is increased from £5 million to £10 million from 6 April 2011.
   
2. Annual exempt amount will  from now on increase using CPI and not RPI. 

Tax simplification:

1. Chancellor announced intention to merge the operation and administration of income tax with National insurance in order to cut the employers' admin costs and also bring savings for HMRC. Chancellor insisted this is not a move to increase taxes but to simplify them by merging the two admin systems.
   
   (Comment: tax simplification is welcome but how are they going to deal with some obvious barriers, e.g. the NIC threshold is about £2,000 below the income tax threshold?)

Inheritance tax:

1. Rate of inheritance tax to be reduced if 10% of net estates are left to charity from April 2012. The IHT rate in those cases will be reduced from 40% to 36% for deaths occurring on or after 6 April 2012. 

Consumers' taxes: 

1. Petrol duty rate down by 1 penny per litre from 23 March 2011.
   
   (Very short comment: this represents one of the biggest jokes ever heard!)

Benefits:

1. Tax credits:
1. If income goes up by more than £10k from the last tax year, tax credits for the current tax year will be reduced.
2. Families with gross income above £41,300 lose their Tax Credits from 6 April 2011.
3. Reduced CTC from April 2011 for families earning more than £40,000 per year.
4. Baby element of child tax credit (CTC) is removed from 6 April 2011.
   
2. Benefit payments from 6 April 2011 to rise in accordance with CPI instead of the higher RPI.

Pension plans:

1. Annual allowance for tax relief on contributions to pension funds reduces from £255,000 to £50,000 from 6 April 2011 .
   
2. The lifetime allowance (the value of private pension fund on retirement that can be drawn before extra tax is due) is reduced from £1.8 million to £1.5 millions from 6 April 2012.

Stamp duty land tax:

1. New 5% rate for residential properties over £1 million from 6 April 2011 (at present the highest rate of SDLT is 4% and applies to purchases where the consideration is over £500k).
   
2. Zero per cent "holiday" rate for residential properties valued up to £250,000 available to first time buyers to go from 25 March 2012.

Non-UK domiciled persons

1. UK residents who are non-UK domiciled for tax purposes, will have to pay a new £50,000 charge after living in Britain for 12 years if they use the remittance basis for taxing overseas income. Th£30,000 charge is kept for those who have been resident for 7 years but less than 12.
2. Exemption from tax where non-domiciled individuals remit overseas income/gains which are then commercially invested in UK businesses.

Enterprise incentives:

1. The income tax relief rate for shares subscribed into the Enterprise Investment Scheme goes up to 30% (currently 20%) from April 2011.
   
2. Also, the annual maximum amounts that can be invested into EIS and VCT investments goes up from April 2012 from £500k to £1m and it will be open to larger companies.
   
   (Comment: the incentives could potentially go a long way to help businesses to access finance).

Savers:

1. ISA's for children under 18 will be introduced from autumn 2011. No further details announced.

Charities:

1. Charities will be able to claim gift aid on small gifts (£10 or less) without gift aid declarations up to £5,000 donation limit from April 2013.

IR35 update:

1. The office of tax simplification has suggested that it should be abolished or revised. HMRC have decided that IR35 is staying for now until ...

About Tax Penalties

The regime
New tax penalties rules were introduced by FA 2007 and apply to incorrect Returns and documents for all taxes (direct and indirect). The difference with the previous regime is that, the percentage of tax penalties on tax lost depends on taxpayer's behaviour:

Were they careless - did people exercise "reasonable care" before making the error? Although "reasonable care" depends on the circumstances and the capabilities if each person, HMRC thinks that reasonable care has been exercised when people keep records. If they made an error after taking reasonable care, no penalty is levied. Or, were they careless (if so, penalty is up to 30%).

Did they do it on purpose-and if yes, did they try to hide it? If they didn't attempt to hide it, then 70% penalty applies, but if they manufacture evidence to conceal the evasion, the penalty can reach 100% of tax lost.

Taxman's generosity
The taxman can be quite generous and reduce the penalties when people come out clean - normally the reduction is higher if they come out clean before the taxman discovers it (e.g. before a taxman notice to enquire is served). In addition, if the taxpayer has just been careless, the penalty can be suspended if the taxman thinks that doing so will help the taxpayer to improve his record keeping.

Isn't a rebasing for capital gains tax long overdue?

Isn't a rebasing (i.e. using market value instead of original cost to deduct from proceeds of sale) for capital gains tax purposes long overdue? Last rebasing was in March 1982 (some almost 30 years back!). Surely, the fact that market values at March 1982 are used, adds up to another stealth tax, especially since property prices have made such a big difference since March 1982 and since indexation allowance was abolished some years ago (i.e. the increase to cost to take account of inflation).