1. CAPITAL GAINS TAX PLANNING
FOR THE GENERAL
PRACTITIONER
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“...with a score of nearly nine-out-of-ten for quality of service, the highest marks ever for an audit firm in ten years.”
Francis Clark LLP, National Auditor of the Year – Mid Tier 2011
2. Areas to cover
• Business structuring
• Residences
• Gifting and succession
• Trusts
• Divorce
• Residency in other matters
2
3. Basic planning
• 28% - significant tax rate
• Income related
• Pension contributions/gift aid
• Annual exemption
£10,600 @ 28% = £2,968
£10,600 @ 18% = £1,908
3
4. Capital gains regimes
Post 5 April Companies
Rate of tax 10%, 18% or 28% 20%, 26% or Marginal Rate
Indexation Allowance No Yes
Kink Test No Yes
Halving Relief No Yes
4
5. Inflation - RPI
• September 2011 237.9
• April 2008 214.0
• Inflation over period – 11.2%
• Real CGT rates over period
– 35.6% (higher rate)
– 23.1% (basic rate)
5
7. Business structuring
• Primacy of income tax (s37)
• Partnership
• LLP v LTD
• Availability of entrepreneurs’ relief
• Exclusion of investments/trading status
7
8. Income tax on trading
• Period of ownership
• Frequency of transactions
• Structure of funding
• Motive
8
10. Transactions in securities
• Legislation since 1960 (pt 13 ITA 2007)
• New reforms (simplification)
• Counters converting retained reserves into capital receipt
• Cleary case/Joiner case
• John and Marion Coll (2010)
• Advance clearance procedure
10
11. Partnerships
• Statement of Practice D12
• Revaluation and change in PSR
• Residual indexation
• Calculations required
• Permanent files
11
12. Intangible fixed assets – pt 8 CTA 2009
• Corporation tax only
• Differentiation in roll-over relief rules
– Companies
– Individuals
• Applies on or after 1 April 2002
12
13. Goodwill inherent in properties
• HMRC view
• SDLT issues
• Valuation approach
• Balloon promotions case
13
14. Substantial shareholdings – sch 7AC
• 12 month period within 24 months before transaction –
vendor holds 10% of target
• Vendor and target are traders for 12 month period, any
interim period and immediately thereafter
• Capital gain/loss is exempt
• Anti-avoidance provisions and other complexities
• Dividend stripping
14
15. De-grouping charges – s179
• Anti-avoidance provision to stop envelope trick
• New reforms (simplification)
• SSE can now apply
• Hard to pick up and difficult to deal with
15
16. Roll-over – s152
• Deferral of tax
• Letting restriction
• Non-business use
• Assets owned outside of companies
16
17. Entrepreneurs’ relief – when?
• Sale of whole or part of business
• Sale of shares
• Disposal of partnership interest
• Disposal by trustees
• Associated disposal
17
18. Entrepreneurs’ relief – share sales
IF
• Personal company qualification
– 5% of votes/ordinary shares
– Officer or employer
– 12 months
THEN
• All shares or securities qualify
• Including
– Other shares
– Loan notes, etc
BUT care over earn-outs required
18
19. 5% limit
• Attraction of LLPs
• Check family holdings
• Watch preference and unusual shares
• Planning possible
19
20. Management joint venture arrangements
Mr A Mr B Mr C Mr D Mr E Mr F
20% 4%
35%
4%
35% 2%
TradeCo
20
21. Management joint venture arrangements
Mr A Mr B Mr C Mr D Mr E Mr F
35% 4%
4%
35% 20% 2%
Mgmt Co
10%
TradeCo
21
22. Entrepreneurs’ relief not available if:
• No cessation of a business at disposal
• No disposal at cessation of a business (within
permitted period)
• Planning options
– Trust or
– Incorporation
22
23. Associated disposals
• Not available for sole traders – accounts issues
• Not just land and buildings
• Payment of rent and transitional relief (para 6 Sch 3
FA 2008)
• Other restrictions
• Careful planning required
23
24. Properties outside
companies/partnerships
• Review and advise clients
• Farms, hotels and shops
• Lifetime limit now £10m
• Easy to overlook
24
25. Loan notes
• QCBs – deferred gain is pre-taper
• Non-QCBs
• Clearance issues
• Entrepreneurs’ relief entitlement
25
26. Deferred consideration – loan notes
• Transitional relief
• Paras 7 and 8, Sch 3 FA 2008
• Applies to EIS shares and QCBs
• Careful review required
26
27. Earn-outs
• Application of entrepreneurs’ relief
• Personal company qualification
• Transactions in securities
• Cash or securities?
• “Clawback” arrangement (s48)
27
28. Entrepreneurs’ relief – planning points
• Review shareholdings
• Officer or employee status
• Share ownership type
• Review ownership of assets outside of company
• Trading status
• Parallel ownership vs group structure
28
29. Entrepreneurs’ relief – business structuring
• Partnership structuring
– Husband and wife v sole trader
– No 5% ownership requirement for LLP (unlike LTD)
• BUT
– Partnership – exclusion of investments
– LTD – trading status
• Properties
– How owned?
– Rent charged?
• Is the SSE an answer?
29
30. EIS possibilities
• Full relief or CGT deferral
• Restrictions on trades
– Hotels
– Farming
• Financial limits
• Employee numbers
30
31. EIS structuring for OMBS
• Careful structuring of set-up
– Optos plc
– Blackburn
– R J Taylor
• On-going restrictions
– Receipt of value
– Overdrawn loan accounts
• Fee levels!
31
32. EIS planning
Investments made can defer gains made up to three
years before and one year after the investment.
Income tax relief also available.
Gains exempt if shares held for three years.
32
34. Loans to companies
• Loans to traders (s253)
• s131 ITA 2007 relief – capital loss on shares offset
against income
• Share capital reduction rules
• Capitalise loans?
34
35. Planning for the worst
• Income tax relief available if:
– Subsciprtion for shares
– Unquoted trading company (including AIM)
– Adjust for tax relief (EIS)
BUT – watch value of shares subscribed (warning)
• Capital loss on loan if:
– UK trading company
– Includes guarantees
– Who’s making gains?
35
36. Non-cash remuneration
• Share incentive schemes – EMI
• Entrepreneurs’ relief
– 5%/one year qualification criteria
– If not met, then 18% or 28%
– But better than 42%/52% (or more)
36
37. Properties owned outside of
companies/partnerships
• Lease terms
• Insolvency arrangements
• Entrepreneurs’ relief
• Business property relief
37
39. BPR on properties – planning issues
• Disincorporation?
• Parallel and non-group structures
• Future tax changes
– Restriction of APR
– Rates of BPR
• No restriction if rent paid
BUT need to review previous planning approaches
39
40. Pension schemes - overview
• Asset protection
• Use of existing funds
• Options
– SSAS
– SIPP
• New pension rules
40
41. Planning possibilities
• Tax free extraction of profits
• IHT exemption
• Property asset succession/protection
• Low gearing strategy
• No CGT
• Life cover etc for dependents
41
42. Ownership for SMES
• Unincorporated – family partnership
• Limited liability partnerships (LLP)
• Limited company - singleton
- parallel
- Group
• Combination of above
42
43. LTD vs LLP
• Nature of exit route
• Nature of participators
• Source of financing – debt/equity
• ITEPA issues
• Profit expectations and use of funds
• Use of SSAS/EMI/EIS
43
44. Group v Parallel?
• Exit – CGT vs SSE
• Likelihood of trading losses
• Asset protection
• Debt/equity proportion planning
• Commonly used property - BPR
44
46. Corporate partner benefits
• Deferral of income tax
• Refinancing existing capital (income tax holiday)
• Mitigation of income tax
– Taxation of profits at a lower rate in the future
– Diversion of profits
– Extraction as a capital gain
• Conversion of revenue profits to capital profits
– On creation of corporate partner
– On exit of corporate partner ownership
46
47. Areas of caution in various structures
• Employment related securities rules
• Personal service companies (IR35)
• Valuation of goodwill transaction
• Capital obligations and profit share rights
• Sale of future income
• Disguised remuneration rules
• Transfer pricing
• Non commercial arrangements
• Attention to detail and order of events
47
50. PPR relief (ss222 – 226A TCGA 1992)
• Only or main residence
• Let property relief
• Dependent relative relief
• Property occupied under terms of a trust
• Sales by executors where property occupied by beneficiaries
•
• Divorce issues
50
51. PPR – residence?
• Dictionary meaning
• Case law
• Degree of permanence
• Distinction with main residence
• Council tax tests
51
52. PPR - elections
• 2 year time limit
• Married couples – only one main residence
• Where more than one residence (NOT owned
property)
• Re-starting time limit techniques
• Client review procedures
52
53. Extent of PPR relief
• Permitted area
• ½ hectare/ 1 ¼ acres
• Garden and grounds
• Outbuildings
53
54. PPR – self builds
• Short delay in taking up occupation
• ESC D49
• Tie in with VAT claim
• Dates readily available
54
55. PPR – let property relief
• £40,000 (max)
• £80,000 for a couple
• Record keeping and income tax compliance
• Can include hotels/FHLs
• Also check permitted absences rules
55
56. PPR – exclusive business use
• Business use should be non-exclusive
• Only claim 95% (max)
• B&Bs
– Closely question as to usage
– Problem over separate staircases/guest rooms etc
• Rent a room/lodgers
56
57. PPR – property for dependents
• Old dependent relative relief (pre 06/04/88)
• Trust arrangements
• Basis of occupation of property
– Under terms of trust
– Land law
• Need to document
• HMRC enquiry experiences
57
58. PPR - estates
• Occupation by beneficiaries?
• Property must be occupied both before and after
death by beneficiaries entitled to at least 75% of
the property (s226A).
• Deed of variation point.
58
59. Furnished holiday lets (FHLs)
Capital gains tax reliefs available:
• Roll-over
• Hold-over
• Entrepreneurs’ relief
• SSE
• Relief for loans to traders
59
60. FHLs – qualifying criteria
• Day count from April 2012
– Available 210
– Actual 105
• Commercial
• Period of grace
• Relevant periods
• UK and overseas properties
60
61. FHLs – points to watch
• Hold-over/roll-over
– Non FHL usage
• Entrepreneurs’ relief
– Whole or part of a business
– Sale within 3 years
• Foreign tax on EEA properties
61
62. Exchange of joint interests in land
• Now in legislation
• Statutory tests (s248A onwards)
• Watch private residences
• Trust tax cases
• SDLT issues
62
64. Entrepreneurs’ relief - trustees
• Beneficiary has to qualify
• No relief for discretionary trustees
• Possibility is to grant a defeasible life interest
• No relief if trustees are trading
• Review existing arrangements
• Has FA 2006 been addressed?
64
65. Family trusts - OMBs
• Appoint onto interest in possession
• Outright appointment to achieve 5%
• £10m lifetime limit
• Easy to overlook this planning
65
66. PPR - Trusts
• Occupied under the terms of a trust
• Occupied by beneficiaries of an estate
• Previous held-over gain under s260
• Debt/charge scheme issues
66
67. Wills/family trusts
• Wills in place/up to date
• Existing trust arrangements
• Succession planning
• Transferable NRB/NRB discretionary trust
• Re-marriages
67
70. Part disposal - example
• Land cost £50k (10 acres)
• 1 acre sold for £100k
• Remaining 9 acres worth £25k
• Base cost used - £5k or £40k
70
71. Hold-over reliefs
• Business assets (s165)
• Trust assets (s260)
• S260 has priority
• Wide ranging and important relief
71
72. Gains held over
• No gain, no loss transfers
– Spouse/civil partner transfers
– Hold-over transfers
– Rolled-over gains
– Partnership changes
• “Banked” indexation planning
• Permanent files
• Care required – watch for this
72
73. No gain/no loss transfers - example
Mr P owned White Horse Hotel in 1982. In 1991, he
gifted half the property to Mrs P.
Base costs:
Mr P – half share of property in 1982
Mrs P – half share of property in 1982 indexed to 1991
73
74. Example
Mr X inherited a property and land from his mother
in 1980. It was worth £50,000 in March 1982. After
taking tax advice, he transfers ½ share to his wife in
March 2008 when it was worth £450,000.
The property is sold in March 2012 for £400,000.
74
75. Example (continued)
Under old rules, could treat this as a joint disposal,
with husband and wife both having acquired the
asset pre-1982.
No longer correct as husband and wife tax position is
different.
75
76. March 2008 – No gain, no loss transfer
£
Proceeds 51,175
Cost (half share MV82) (25,000)
Indexation allowance (1.047) (26,175)
-----------
Gain £nil
======
76
77. Sale March 2012
Mr X Mrs X
£ £
Proceeds 200,000 200,000
Cost/MV82 (25,000) (51,175)
----------- -----------
Gain 175,000 148,825
------------ -----------
Tax @ 28% £49,000 £41,671
======= =======
77
78. Permanent file records
• Did a transfer between spouses take place at any
time before 6 April 2008?
• Held-over gain computations
• Partnership changes
78
79. Hold-over relief – opportunities and pitfalls
• Major relief
• Extension to agricultural property
• Non-business usage
• Trading status of companies
• Investment assets
79
80. Offshore trusts
• UK domiciled and resident beneficiaries of offshore
trusts
• Gains not taxed on trustees, but instead attributed to
beneficiaries matched with payments of capital
• Stockpiled gains also suffer a supplement of 10% for
each year (up to 6 years)
• Offshore income gains
80
82. Key points
• No gain/no loss – whilst living together as man
and wife
• Date of separation
• Buy to let properties
• Hold-over on business assets
82
85. Non-doms
• Remittance basis rules in ITA 2007
• Remittance basis charge - £30,000
• Can elect year by year
• Careful review of non-domicilliaries required for:
– De minimis (£2,000 of income and gains)
– Residency requirement
85
86. Section 13 gains
• Gains made by offshore companies
• Watch overseas structures
– Can be easily missed
86
87. HMRC enquiries
• Increase in CGT enquiries
• Greater specialisation
• Need to consider appropriate disclosure
87
88. Follow-up
• Slides on linkedin
• Slideshare page
• Follow on Twitter at john_endacott
• Winter Rule LLP merged with Francis Clark LLP
88
89. JOHN ENDACOTT
Francis Clark LLP
Lowin House
Tregolls Road
Truro
Cornwall
TR1 2NA
Email: john.endacott@francisclark.co.uk
Telephone: 01872 276477
89
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