Showing posts with label CGT. Show all posts
Showing posts with label CGT. Show all posts

Thursday, December 1, 2016

Saving tax with Deferral of Capital Gains

While Capital Gain Taxes have been slashed in the recent budget to 10% and 20% (from the 18% and 28% that it used to be), CGT has remained unchanged for residential property gains. While the tax rate for gains is lower than the one for income, amounts tend to be much bigger and far appart, making it harder to use allowances and low rate bands.

This is where deferral comes in handy. The Enterprise Investment Scheme (EIS) provides one of the mechanisms that allows such a deferral. Most people misunderstand that the general EIS conditions for income tax relief are much more restrictive than the conditions for CGT deferral. In particular the requirement that one owns less than 30% of the company or that one is connected to the business only applies to the income tax relief component of the EIS, not the CGT deferral. Same thing for the requirement that the investment be held 3 years or more: if you sell earlier the deferral just ends then (see HMRC note).

Thursday, March 31, 2016

New clampdown on capital treatment of distributions

Starting April 6th next month, a new targeted anti-avoidance rule (TAAR) will make it more difficult to convert profits generated in a company into a capital receipt in the hands of the shareholders. Indeed, a capital distribution made in the winding-up of a company will be taxed as income if either within two years of the winding-up the shareholder continues to be involved in the same trade as that carried out by the company that has been wound-up or if profits, in excess of those required by the company, were retained in the company so that they could be received as capital on a later liquidation.

These new measures only apply to individual shareholders and close companies (broadly, companies controlled by five or fewer people) but it represents a significant tax increase where the shareholder was able to claim Entrepreneur's Relief on the gain (a jump from 10% to 38.1% if dividends are falling within the additional rate band).

More specifically, the anti-avoidance is targeted after the following behaviours:

Wednesday, October 21, 2015

Five tips to mitigate Inheritance Tax in the UK

Inheritance Tax (IHT) in the UK can be extremely punitive. For spouses or civil partners there is no tax to pay but for anyone else, the IHT rate is 40% for sums above the nil rate band (NRB) of £325,000 per individual.

It does not have to be. There are a number of ways one can significantly reduce this tax with a little bit of estate planning. Here are 5 tips you need to keep in mind when it comes to IHT:

1. Gifts from disposable income

This is actually an HMRC concession that most people are unaware of. It relates to the ability to give away an unlimited amount provided it qualifies as "normal expenditure out of income" and it is arguably one of the most useful IHT exemptions. It is also very flexible, because you don't have to gift the same amount every year or make the gifts to the same person. Many people use the exemption to pass on money on a regular basis to children or grandchildren. It is important to remember however that the exemption is not given automatically and has to be claimed retrospectively by the executors of your estate. For the gifts to qualify, you must be able to show that the payments are made out of surplus income - either earned income or investment income - and that they do not reduce your standard of living and in particular you cannot pass on income and then use your capital to supplement living costs.

2. Gifts of capital survived 7 years

There is a way to give your whole estate away and pay no tax at all. As long as you survive the gift by 7 years or more. This type of transfer is known as a "Potentially Exempt Transfer" or a PET. It is important to bear in mind that when making a large gift it has to be in excess of the nil band rate (NBR) to benefit from any potential reduction in the potential tax due as a result of the taper relief. In addition it is also important to be aware that any gift made essentially uses up the nil rate band and could push the remaining estate into a full rate of tax with no relief at all for the subsequent 7 years.

Keep in mind that if you give your estate away, you don't control it anymore. Something that many people are reluctant to do. But there is another option. Please read on....

Monday, October 6, 2014

When tax treaties don't really help...

Many countries have double taxation tax treaties with one another to allow taxpayers not to pay tax in both countries.

There are more than 3,000 double taxation treaties world-wide and the UK has the largest network of treaties, covering around 120 countries. Some treaties are more exhaustive than others but even when tax treaties cover all aspects of taxation, there can be situations where can still pay tax twice. Here are a few examples of situations that arise in practice, that we come across on a regular basis and for which unfortunately there is no easy answer.

Friday, August 15, 2014

Using goodwill to save tax on incorporation

Incorporating a sole trader may happen for a number of reasons. For example you started a business on the side not sure whether it would work out and you wanted to reduce overhead costs initially. After a while the success is here and you want to make use of the lower taxes enjoyed by limited companies. Another reason could be that you had paid significant taxes prior to starting your business and because, as a sole trader you can offset trading losses against salaries in previous years, it makes sense to not incorporate right away if you know that your business will incur losses initially. Once the business starts to make a profit however, it makes sense to incorporate.

Incorporating means creating a company and having this new company of which you are the shareholder buy the existing unincorporated business from yourself. If the value of your business is say £100,000 you will make a capital gain of £100,000 and your company will have a goodwill of £100,000 on its balance sheet (assuming there are no fixed assets). Either the company pays you right away or most probably it credits the director's loan account allowing you to draw funds as they become available in the business. But why is it a good thing?

Thursday, December 5, 2013

Non-Residents to be subject to Capital Gains Tax

One of the announcements made today in the Autumn Statement is that capital gains tax will be extended to non-residents who own residential property. This extends the previous measure to bring non-resident companies within the scope of capital gains tax on 'high value' residential property, measure that was introduced alongside the infamous ATED (Annual Tax on Enveloped Dwellings). So now both high value and low value residential property gains will be taxed, regardless of whether the property is owned by a company or not. The change is to take effect in April 2015.

This move was expected but still, it could reduce confidence going forward. Non residents were strongly encouraged by the Government to take their properties out of companies so that a future sale of bricks and mortar (rather than shares) is subject to stamp duty. In exchange they would not be subject to the annual charge (ATED) nor to the capital gains tax. Having de-enveloped as they were asked to do, they will in fact be subject to capital gains tax after all.

Tuesday, September 17, 2013

How about the CSG and the CRDS?

If you have some French property investments, you might have noticed in 2012 the apparition of new taxes called CSG, CRDS, Financement du RSA or Solidarité Autonomie. All those are actually social charges and even though they been in existence for a while, in the past non-residents were exempt (since they don't use any of the French social infrastructure).

With the arrival of François Hollande and his socialist team, those deductions have been extended to all types of income (rental income, capital gains and dividends) and for residents and non-residents alike. What it means is if you sell a house in France you will have to pay the 19% capital gain plus the 15.5% social charges on the gain. And in some cases (if your capital gain is above €50,000) yet another exceptional tax that can reach 6% of the capital gain (if your gain is above €260,000). That's a total of more than 50%.

But unfortunately as far as the HMRC is concerned the 15.5% social charges are not considered a tax and therefore cannot be offset against UK tax. You will therefore have to top up the French tax by at least an additional 9% UK tax (assuming you are in the 28% CGT tax bracket).

Friday, September 13, 2013

Annual Tax on Enveloped Dwellings due soon

Announced in the March 2012 Budget, the Annual Tax on Enveloped Dwellings (ATED) return -- called at the time the Annual Residential Property Tax (ARPT) -- is due by October 1st 2013. The corresponding tax liability has to be paid by October 31st 2013.

If all of the following criteria are met, an ATED return is required by 1 October 2013:
  • a company (other than a company acting as trustee of a settlement or as nominee), a partnership with corporate partners or a collective investment scheme which holds UK residential property, and
  • at least one single-dwelling interest was worth more than £2m on 1 April 2012 or at the date of acquisition if later, and
  • the single-dwelling interest was still owned on 1 April 2013

Thursday, December 20, 2012

Owning UK property in an offshore company

Until recently UK resident and non-domiciled individuals investing in UK property would have been advised to use an offshore company to hold the title. This not only allowed the owner to avoid the 40% UK inheritance Tax (IHT) but also offered the potential for future buyers to avoid stamp duty (SDLT) by acquiring the company shares rather than property title to the UK property. Perhaps not surprisingly the UK government decided to legislate in this year's Budget to prevent this loss of revenue from residential properties (commercial properties are unaffected).

The draft legislation published on 11th December 2012 outlines the new taxes and charges which will have to be paid by Non Natural Persons (NNP) owning property in the UK. There is already a new punitive rate of Stamp Duty (SDLT) where a NNP acquires a UK residential property for more than f2m (15% instead of 7%). And from April 2013, NNPs owning properties valued in excess of £2m will also be subject to an annual charge (called the Annual Residential Property Tax or ARPT). The charge will be £15,000 for properties valued between £2m and £5m, £35,000 for properties valued between £5m and £20m and £140,000 thereafter.