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eSmartTax The Electronic Tax magazine October / November / December 2007

Pantheon Capital Strategies Unit 4 Beech Court Wokingham Road, Hurst, Berkshire RG10 0RU Tel: 0845 2410207 Web Site: www.total-planning.co.uk E-mail: info@pantheon-capital.co.uk

Capital gains tax who were the winners and losers?

Tax regime takes AIM…

shareholders faced with some important decisions!

Also inside this issue

Tax reforming U-turn… token £100,000 tax relief aimed at softening the blow! Selling your business… maximise the value of your fortunes Taxing times ahead… safeguarding an inheritance

Company share schemes

Increased tax bills on the horizon?

“Non-domiciled” individuals face new rules…

tax system to receive a shake-up

TAX CALENDAR • NEW COMPANIES ACT • Tax Saving Strategies • COMPANY CARS AND THE FUEL SCALE CHARGES • VAT THRESHOLDS


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Contents

In this Issue

Company share schemes… increased tax bills on the horizon?

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07 The articles featured in this publication are for your general information and use only and are not intended to address your particular requirements. The articles are based on our understanding as at the 7 November 2007. They should not be relied upon in their entirety. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Articles that make reference to the Pre-Budget Report are subject to the Finance Bill becoming law.

eSmartTax - October / November / December 2007

Owning a property abroad… have you taken the basic financial precautions?

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Inheritance tax… one-minute guide

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Trust in your family… estate planning with a twist

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£6.5bn hole knocked in the Chancellor’s current budget balance next year… tax increases make perfect filler

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Multiple home owners… how can I gain without the pain?

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Tax reforming U-turn… token £100,000 tax relief aimed at softening the blow! Selling your business… maximise the value of your fortunes Tax calendar 2007/2008 Pre-Budget Report Capital gains tax… who were the winners and losers?

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Inheritance tax… the biggest overhaul in more than 20 years

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Inheritance tax update… Pre-Budget Report changes…your questions answered

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Taxing times ahead… safeguarding an inheritance… your questions answered

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Companies Act 2006… the most significant changes to company law in the last 20 years

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Contents

In this Issue

(continued)

Corporate matters… tackling the changes

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TAx regime takes AIM… shareholders faced with some important decisions!

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“Non-domiciled” individuals face new rules… tax system to receive a shake-up

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Tax trivia… company cars and the fuel scale charge

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Company pension schemes… plans unveiled to reduce some of the protection against inflation

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WILLS four out of five married couples with dependent children don’t have a Will

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News in brief… Compensation Scheme limit increased

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Tax facts… cash accounting schemes… did you know?

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VAT thresholds

News in brief… the Chancellors numbers

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Pre-Budget Report… main points at a glance

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Tax trivia… self assessment key dates

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2008-09 TAX YEAR The numbers revealed

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Tax savings strategies Keeping what is rightfully yours!

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Pre-Budget Report… overflow

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what is a P60?

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eSmartTax - October / November / December 2007


Pre-Budget Report

Company share schemes Increased tax bills on the horizon?

Many employees who have joined their company’s share scheme could be subject to increased tax bills following the proposed changes to capital gains tax (CGT) that were announced during the Pre-Budget Report. These schemes have cost the Government in the region of £3.6bn in tax relief since 1985 according to ifs ProShare, and there are over 1,300 approved employee Sharesave schemes in the UK with around 2.6m investors. In his pre-Budget Report, Alistair Darling, the Chancellor, announced that he proposed to introduce an 18 per cent flat rate of CGT and intended to abolish the current system of taper relief. The new rate of 18 per cent would apply equally to both basic rate and higher rate taxpayers.

The effect of this for a higher rate taxpayer participating in a SAYE scheme, could mean that they are 8 per cent worse off than before and that a basic rate taxpayer is 13 per cent worse off. These schemes are known as Sharesave, Save As You Earn (SAYE) plans or Savings Related Share Option Schemes and were introduced in 1980. They are tax-advantageous savings schemes combined with a share option arrangement designed to encourage employees to take a direct stake in their company and

eSmartTax - October / November / December 2007

so participate in its future. As a consequence the proposed changes may discourage employees from taking out such schemes due to the potentially higher tax charges. A variation on the Sharesave idea was introduced in 2000 in the shape of Share Incentive Plans (Sips): A Sip is an investment vehicle offering tax and National Insurance breaks to employees provided that they hold shares in their employer for five years. Employees may invest up to £1,500 or 10 per cent of their

salary (whichever is lower) in “partnership’’ shares, so called because the company can choose to match your purchases at a maximum ratio of two to one. Firms may also give free shares up to a limit of £3,000. Dividends from shares can be reinvested up to a maximum of £1,500 a year.

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Tax

Owning a property abroad Have you taken the basic financial precautions? For Britons who own a property abroad, one of the most overlooked aspects concerns inheritance tax (IHT). Many people are unaware that an overseas property can be taxed twice - in Britain and locally. Whether your property is a holiday home, an investment property or a place to retire to, it is important to look at IHT planning, as there are steps you can take to mitigate this liability, particularly if you are hoping to retire abroad.

Ideally, you should take these steps before moving, as your options will be seriously curtailed once you have left the UK. Two common mistakes are made by those buying overseas. Firstly, there is an assumption that because the property is overseas it is out of the reach of the UK tax authorities, which is not the case. Secondly, people make the mistake of overlooking the local tax rules that will be applied on the death of one of the property’s owners. Many people assume that HM Revenue & Customs (HMRC) cannot levy a charge on overseas property, particularly if they live or have retired abroad and are no longer deemed resident in the UK for tax purposes.

If you are ‘UK-domiciled’ HMRC will look at your worldwide assets when calculating an inheritance tax liability. And assets over the current IHT threshold could be taxed at 40 per cent, including any overseas property or shares in a property you own.

return visits to the UK. The existing rules, which allow individuals to spend 90 days in the UK, without becoming taxable as a resident, it is proposed will be amended and days of arrival and departure would count as days spent in the UK.

To be deemed ‘non-resident’, you have to work abroad for a full tax year and spend no more than an average of 90 days a year in Britain. But individuals acquire a ‘domicile

If you want to be domiciled in the country to which you have retired, you must submit a DOM1 form from your local revenue and customs office and sever all

The Chancellor announced in his Pre-Budget Report proposed constraints on Britons living abroad that make frequent return visits to the UK. of origin’ at birth, which is normally the country in which they were born, and it is far harder to change this at a later date, even if you live abroad for years. Most expats remain UKdomiciled, particularly those who retire overseas. The Chancellor announced in his Pre-Budget Report constraints on Britons living abroad that make frequent

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ties. This means closing all British bank accounts, selling all assets in Britain and even organising your funeral abroad. If you are granted a new domicile of choice, it takes three years for the loss of UK domicile to become effective for IHT purposes. But there are some financial advantages to cutting these ties. Once you are no longer

domiciled in Britain, you can create a discretionary property trust, and any asset held within this will not be subject to IHT, even if you later return to Britain and become domiciled again. All property owners should ensure they have a Will drafted both in the UK and in the local country. This should take account of both the local IHT rules and any ‘succession rules.’ It may also be possible to avoid paying tax on a property twice by taking advantage of the doubletaxation treaties Britain has with various overseas countries. For example, there is an arrangement like this with France, so any tax paid there is deducted from the amount due in Britain on your worldwide assets. But there is no similar agreement with Spain.

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eSmartTax - October / November / December 2007


Tax

tax Inheritance

One-minute guide Who needs to worry about inheritance tax? Following the announcement made by the Chancellor during his Pre-Budget Report, anyone whose estate exceeds £300,000 when they die could face paying 40 per cent in tax on the sum above the threshold. Many ordinary people may now become higher rate taxpayers for the first time after death, as rising property prices have pushed many homes above the inheritance tax threshold.

What can I do to cut my inheritance tax bill?

By giving away money and assets early and often, you could cut the amount of tax paid by your beneficiaries after your death. For example, everyone can give away £250 a year to any number of people, plus gifts totalling £3,000 a year. Regular gifts out of income, such as contributing to your grandchildren’s school fees, are also exempt from inheritance tax.

What about larger amounts?

All outright gifts of any value made at least seven years before the donor’s death escape

inheritance tax completely. Even gifts made more than three years before death may benefit from a reduced tax bill under taper relief rules.

What can I do to make life easier for my family after I die?

Make a Will and nominate your executors. Dying intestate without making a Will can cause complications and delay. Keep a file with a copy of your Will, a reference to where to find all the important papers and details of filing cabinets or safes.

How can I avoid causing problems after the current clampdown on lifetime gifts?

As the person giving away money and assets, write down what you have given to whom, and when.

What if I am the executor of an estate?

Consider seeking professional help from a solicitor or other qualified person. Prepare to face supplementary questions from HM Revenue & Customs about lifetime gifts.

eSmartTax - October / November / December 2007

Many ordinary people may now become higher rate taxpayers for the first time after death, as rising property prices have pushed many homes above the inheritance tax threshold.

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Wealth Protection

Trust in your family Estate planning with a twist

Following the Pre-Budget Report the surviving spouse is now able to bequeath up to £600,000 tax-free. By 2010, this figure will increase to £700,000. The new rules also apply to people in civil partnerships. In the current tax year, assets held over the nil rate band for IHT are taxed at 40 per cent. For married couples and civil partnership couples, assets passing to the survivor are not subject to IHT. As the affects of inheritance tax (IHT) continue to blight an increasing number of individuals, one solution if appropriate, is to consider using a family trust as part of your estate planning. Trusts have long been used as one of the many potential solutions to family financial planning issues, including mitigating an IHT liability. In more recent years however their have been some significant developments and legislative changes in the way trusts are treated in relation to IHT. A trust is one way of moving money out of a person’s estate with the object of reducing an IHT bill. Many different assets can be held in trust, including investments, life insurance policies and pension scheme death benefits. The value of life insurance policies that are not written in to an appropriate trust, when combined with the value of the family home, can further compound the problem and subject families to an even larger IHT problem. If a life assurance policy is placed into an appropriate trust, when the settlor dies the proceeds become payable to the trust. Provided the premiums were paid out of surplus income or were less than the annual gift exemption of £3,000, IHT is avoided. In addition, as the proceeds are outside the estate, the trustees have access to them without having to wait for probate, allowing the people who should benefit to do so as quickly as possible. Trusts work by allowing the settlor (the person who establishes the trust), to entrust their assets to a group of people (the trustees). The trustees are the legal owners of the assets and manage and ultimately distribute them for the benefit of the beneficiaries (the people who the settlor wishes to benefit from the trust).

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Trusts can also provide people with the peace of mind that their wishes will be carried out and offer a solution to enable them to control their assets, for example, to pass them on to children or grandchildren or withholding assets until children reach a certain age. All gifts are considered as either chargeable lifetime transfers (CLTs) or potentially exempt transfers (PETs), depending on the type of recipient. The IHT treatment for each is slightly different. The IHT treatment of gifts to most trusts was significantly changed by the Government last year. Previously gifts to most trusts were treated as PETs. However, most are now treated as CLTs and so are subject to entry, exit and ten-yearly tax charges.

The main types of trusts likely to be considered by families are:

Absolute trusts (also known as bare trusts). These ensure that a specified person will benefit from the trust. From the outset, each beneficiary has a precisely defined share of the trust property that the trustees or the settlor can never change. Transfers into absolute trusts are treated as PETs. Discretionary trusts. Unlike the Absolute trust, discretionary trusts offer flexibility. The trustees have complete discretion over when they pay the trust benefits and to whom (from a wide class of beneficiaries) they make payments of income or capital. Transfers into discretionary trusts are treated as CLTs.

With PETs there is no IHT to pay, assuming the person making the transfer lives for seven years following the gift. However, only outright gifts to individuals, or to trusts where the beneficiary is fixed and cannot be changed, qualify for this treatment. Most other gifts to trusts will now be treated as CLTs and so may be subject to an immediate tax charge, as well as charges every ten years and also when capital is paid to beneficiaries. However, these trusts give families the flexibility to change the beneficiaries of the trust in future.

eSmartTax - October / November / December 2007


Pre-Budget Report

£6.5bn hole knocked in the Chancellor’s current budget balance next year Tax increases make perfect filler

The first Pre-Budget Report from Alistair Darling raised taxes by a total of £1.5bn according to The Institute of Fiscal Studies (IFS). The IFS also commented that recent financial market problems and a weaker outlook for wages had knocked a £6.5bn hole in the Chancellor’s current budget balance next year, but they believe this will shrink to £1.5bn after three years. By then the IFS expects the remaining hole will be filled with the tax increases and other measures that the Chancellor announced in the Pre-Budget Report. These include increases in capital gains tax and aviation taxes, further “antiavoidance” measures and a decision to bring forward the end of the earningsrelated component of state pensions, all of which together should raise around twice the money he will be giving away through his £1.4bn cut in inheritance tax. The IFS also warned that while Mr Darling promised to spend £2bn more on investment in public services over the coming years, this money would be

borrowed, rather than raised through tax rises or cuts in spending elsewhere. The Chancellor, in his Pre-Budget Report doubled the amount a surviving spouse can leave to their children tax-free, up now to £600,000 - a measure costing £1.4bn a year by 2010/11. However, this cost is only around half what the Treasury will raise from tax increases on air travel, capital gains, the closure of loopholes and changes to the way pensions are treated.

eSmartTax - October / November / December 2007

The IFS also commented that Mr Darling’s £2bn of extra borrowing meant he was likely to break one of the key borrowing rules laid down by Gordon Brown, that the national debt should not exceed 40 per cent of Britain’s gross domestic product. Mr Darling said: “The reason that I downgraded my expectation of growth next year was, quite simply, because of the problems that I saw coming out of America this summer which are now affecting economies right across the world. I am optimistic that because of the strength of the British economy we can get through these difficulties, just as we got through difficulties in the past and we will be able to continue to see growth in the economy.”

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Wealth Protection

Multiple home owners How can I gain without the pain?

In the UK, most people do not pay tax on the sale of a main home, because it is exempt from capital gains tax (CGT). If the value has increased since the purchase, the profit is tax-free. Owners of second properties, however, could face sizeable tax demands if they sell to try and cash in on recent property price increases. But with the appropriate planning, a potentially high CGT bill could be reduced considerably. Over the past few years, the number of people buying multiple homes has increased, as more families purchase holiday homes or student accommodation for their offspring to live in while at university. Others have turned to the buy-to-let market to help plan for their retirement. The Chancellor, Alistair Darling, announced in his Pre-Budget Report that he had decided to move to a single rate of CGT for everyone. From 6 April 2008 you will pay 18 per cent irrespective of how long you have owned your property. So if you find yourself in this position, what should you do?

Claim all allowable expenses Your taxable capital gain is the difference between what you buy and sell the property for. But you can add all professional estate agent’s and solicitor’s fees to the purchase price, plus stamp duty and the cost of any improvements. Make sure you keep receipts for all these items.

Principal private residence

Consider switching ‘principal private residence’ exemptions between properties. All gains on property are taxable with the exception of the home you live in, which HM Revenue & Customs (HMRC) calls your principal private residence. However, if you own more than one home you could elect which you wish to be classed as your primary residence, provided there is some evidence that you have actually

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resided there. If you live for even a matter of weeks at any stage in your ‘second’ home, this could enable you to write off the last three years of capital gains when you come to sell. You must elect which will be your primary residence within two years of the purchase of one of the various properties you own. Having made your choice, you could then change it. But if you fail to elect, the opportunity is lost.

Writing off a gain

If the property was bought before 1982, HMRC assumes you paid its value at April 1982, which wipes out any gains to that point. Between 1982 and 1998, a further indexation allowance is granted. As the retail prices doubled between these years, the Revenue will write off that amount again for tax purposes. Mr Darling announced in his Pre-Budget Report that he proposed to abolish the indexation allowance from April 6 2008.

let out. Not only can you gain three years’ exemption, but you also get a up to a further £40,000 allowance to offset against any gain. A husband and wife both receive this allowance, allowing them to write off a further £80,000 of the gain, provided they are joint owners. As with the election of a principal private residence, the length of time required to live there is not written in statute, although there is a general consensus that three to four months, or preferably six months, is required.

Crystallise losses

If, after these measures, you are still facing a potential tax bill, take a look at your other assets, not least your share portfolio, to see if you are sitting on any losses. If you sell these shares in the same tax year and crystallise the loss, this could be offset against the property gain.

You may, however, also find yourself liable for local property taxes. Where these have to be paid, it may be permitted to deduct them from the UK bill.

Marriage can bring new challenges

Tax bills can arise where the two people in a couple each has a property when they meet but decide to rent one out when they move in together. Until they marry, they can enjoy two lots of ‘principal primary residence’ exemptions. But once they marry, they have only one between them. They must then rely on the other exemptions listed above. However, it’s worth remembering that unmarried couples cannot transfer assets between each other free from inheritance tax and capital gains tax as married couples can.

Deduct overseas taxes

If you own a property abroad but are resident for UK tax purposes, you are liable for CGT in exactly the same way as if the property were here, but you could claim the same exemptions.

Move in to reduce a gain

It makes sense at some stage to live in a property you have bought to

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eSmartTax - October / November / December 2007


Tax

Tax reforming U-turn Token £100,000 tax relief aimed at softening the blow! Tax changes announced during the Pre-Budget Report by the Chancellor aimed at cracking down on high-earning private equity executives that would have also affected thousands of small companies, employees and shareholders are about to see a U-turn.

Mr Darling had originally argued that by introducing a flat 18 per cent rate of capital gains tax (CGT) for all investors, he would “make the system more straightforward and sustainable”. He also added it would ensure “those working in private equity pay a fairer share.” This tax reforming U-turn would see a single 18 per cent rate of CGT softened by giving £100,000 in tax relief for small businessmen who sell up and retire. The result being that business owners who may have faced a near-doubling in the tax they paid on selling their assets from 10 per cent to 18 per cent, will now pay less. This retreat by the Government comes after sustained pressure from the CBI, the British Chambers of Commerce, the Federation of Small Businesses and

eSmartTax - October / November / December 2007

the Institute of Directors, which joined forces against the Government after being flooded with complaints from their members. The changes could affect other groups apart from private equity. These are likely to include entrepreneurs selling their companies, employee shareholders, investors in AIM-listed companies, startups and “angel investors” in unlisted firms. The winners from these proposed tax reforms are the landlords, second home owners and private investors who could end-up paying substantially less tax on their capital gains. Currently, higher rate taxpayers who sell a property that is not their main residence, or shares in companies listed

on the main stock market and make a profit of more than £9,200 could pay as much as 40 per cent tax on their profits if they sell within three years. After ten years, the effective rate of tax falls to 24 per cent. Under the Pre-Budget Report proposals they will pay the new 18 per cent CGT flat rate from 6 April 2008. Mr Darling also announced that he intended to end “taper relief,” the result being that the current CGT rates charged between 40 per cent and 10 per cent would be standardised to a new flat rate of 18 per cent. Business assets held for more than two years are currently taxed at 10 per cent but this will go up to 18 per cent under the proposed Pre-Budget Report announcements. The new rules apply for disposals on or after 6 April next year (2008).

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Selling Your Business

Selling your business Maximise the value of your fortunes

It’s never too early to work out a strategy for exiting your business. Planning is the key to securing a successful business sale. Sellers who haven’t prepared may even find themselves receiving less money for their businesses than those who have planned. When a business is sold, any well advised potential buyer will typically wish to undertake a full due diligence process in order to obtain as much information as possible regarding the business they are seeking to acquire. It is common practice to undertake a 3 to 5 year grooming period in order to present a business favourably and thereby achieving the maximum return on a sale. A valuation will be required as a starting point for negotiations with a prospective buyer. While there is a ready made market and market price for the owners of listed public limited company shares, those needing a valuation for a private company need to be more creative. Various valuation methods have developed over the years.

“Earnings multiples” are commonly used to value businesses with an established, profitable history. Often, a price earnings ratio (P/E ratio) is used, which represents the value of a business divided by its profits after tax. To obtain a valuation, this ratio is then multiplied by current profits. The calculation of the profit figure

itself however will depend on circumstances and is likely to be adjusted for relevant factors. Another method is “discounted cash flow” which is generally appropriate for cash-generating, mature, stable businesses and those with good longterm prospects. This more technical method depends heavily

on the assumptions made about long-term business conditions. The valuation is based essentially on a cash flow forecast for a number of years forward plus a residual business value. The current value is then calculated using a discount rate, so that the value of the business can be established in today’s terms. Valuations based on an “entry cost” reflect the costs involved in setting up a business from scratch. Here the costs of purchasing assets, recruiting and training staff, developing products, building up a customer base, etc are the starting point for the valuation. A prospective buyer may look to reduce this for any cost savings they believe they could make. An “asset based” valuation method is typically most suited to businesses with a significant amount of tangible assets. The method does not however take account of future earnings and is based on the sum of assets less liabilities. The starting point for the valuation is the assets per the accounts, which will then be adjusted to reflect current market rates.

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eSmartTax - October / November / December 2007


Tax Calander 2007/2008

Tax calendar 2007/2008 November 2007 Nov 30 Filing date for Corporation Tax Return Form CT600 for period ended 30 November 2006

December 2007 Dec 1 Due date for payment of Corporation Tax for period ended 28 February 2007 Dec 29  Last date to file your 2007 Tax Return electronically if you are an employee and wish to have a 2006/07 balancing payment of less than £2,000 collected through your 2008/09 PAYE code. Date dependant upon who is filing Dec 31  Last day for non-EC traders to reclaim recoverable UK VAT suffered in the year to 30 June 2007   End of relevant year for taxable distance supplies to UK for VAT registration purposes   End of relevant year for cross-border acquisitions of taxable goods in the UK for VAT registration purposes   End of CT61 quarterly period

Filing date for Corporation Tax Return Form CT600 for period ended 31 December 2006

Filing date for Corporation Tax Return Form CT600 for period ended 31 January 2007

January 2008

February 2008

Jan 1 Due date for payment of Corporation Tax for period ended 31 March 2007

Feb 1 Due date for payment of Corporation Tax for period ended 30 April 2007

Jan 19 PAYE/NIC due for the month to 5 January 2008   PAYE and CIS quarterly payment date for small employers and contractors

Feb 2 Deadline for submitting P46 (car) for employees whose car/fuel benefits changed during the quarter to 5 January 2008

Jan 31 Deadline for submitting your 2006/07 income tax self assessment return (up to £100 penalty if your return is late)   Balance of your 2006/07 income tax due, plus first payment on account for 2007/08 (interest will run on any payments due and not paid)   

eSmartTax - October / November / December 2007

Feb 19 PAYE/NIC due for month to 5 February 2008 Feb 28  5% penalty surcharge on any 2006/07 outstanding tax due on 31 January 2008 still remaining unpaid   Filing date for Corporation Tax Return Form CT600 for period ended 28 February 2007

March 2008 March 1 Due date for payment of Corporation Tax for period ended 31 May 2007 March 19  PAYE/NIC due for the month 5 March 2008 March 31  End of Corporation Tax financial year   End of CT61 quarterly period   Last minute planning for the tax year 2007/08. Make sure you use any capital gains tax and inheritance tax annual exemptions   Last minute planning for tax-free investments. Make sure you use your ISA allowances   Filing date for Corporation Tax Return Form CT600 for period ended 31 March 2007

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Pre-Budget Report

Capital gains tax

Who were the winners and losers? Q: What is the current rate of capital gains tax (CGT)?

A: At the moment the actual rate of CGT you pay is determined by your top rate of income tax. So for higher rate taxpayers you will pay 40 per cent CGT in the 2007-08 tax year and lower rate taxpayers will only pay CGT at 20 per cent. But you can also pay as little as 5 per cent depending on the assets you are disposing of.

Q: What are the benefits of utilising ‘taper relief’?

A: Taper relief can help reduce a potential CGT bill. If your chargeable gains after allowable losses are more than the annual exempt amount for the year you can qualify for taper relief, which is calculated depending on how long the asset has been held. The longer the asset has been held the more relief you will get. After ten years only 60 per cent of the gains are chargeable to CGT. This tapering can reduce the effective rate of CGT to 12 per cent for basic rate taxpayers and 24 per cent to higher rate taxpayers after a decade.

Q: How are the CGT rules changing?

A: The current system will cease from April 5, 2008. The Chancellor, Alistair

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Darling, has decided to move to a single rate of CGT for everyone which will be paid 18 per cent.

Q: I own a second home, how could the rule changes affect me?

A: At the moment the minimum CGT you will pay on the chargeable gain is 24 per cent, but it could be more depending on how long you have owned the property. If you have been a landlord for less than three years you face a CGT bill paid at 40 per cent. From next April you will only pay 18 per cent, irrespective of how long you have owned your property. However, if you are a basic rate tax payer you may pay more. For example, a basic rate taxpayer who has held a buyto-let property for 9 years will pay CGT at 18 per cent, rather than 13 per cent.

Q: What are the new tax implications of owning a holiday let?

A: If you own a qualifying furnished holiday let, it is a business asset and so you will pay CGT at 18 per cent, rather than the current 10 per cent as a higher rate taxpayer.

Q: Will I now pay less tax when I sell my shares?

A: If they are fully listed shares you will pay CGT on the chargeable gain at 18 per cent, rather than a minimum of 24 per cent. But the new rules will disadvantage owners of qualifying “trading assets”, such as unincorporated business or AIM listed shares in unlisted trading companies. The effective tax rate after two years of ownership which, after business asset taper relief, until now has been only 10 per cent, will now increase significantly to 18 per cent.

Q: Will my AIM share portfolio that was set up to shelter inheritance tax (IHT) be affected?

A: Provided you have held shares, which are eligible for business asset taper relief, for a minimum of two years, the original investment plus any subsequent growth continues to fall outside your estate for IHT. However, if you dispose of your shares after two years you will have to pay CGT at 18 per cent after April 2008, rather than the 10 per cent you would today as a higher rate taxpayer.

Q: What changes will the new system bring to venture capital trusts (VCTs) and enterprise investment schemes (EISs) ?

A: If you took advantage of the old rules that allowed you to defer your capital gains by investing in a VCT pre-2004 you will benefit. Before you could have faced a tax bill of 40 per cent, but now you will pay just 18 per cent. Those who rolled over capital gains with a 10 per cent tax charge into Enterprise Investment Scheme shares will not fair so well. When they sell the EIS shares, the rolled over gain will be taxed at 18 per cent rather than at the 10 per cent they would have paid had they not done the roll over in the first place. Gains made on the EIS itself remain CGT free.

eSmartTax - October / November / December 2007


Wealth Protection

Inheritance tax The biggest overhaul in more than 20 years

The rules on inheritance tax (IHT) received their biggest overhaul in more than 20 when the Chancellor announced that married couples would now be allowed to transfer their allowances to each other, doubling to £600,000 the amount that a surviving husband or wife can bequeath without paying the tax. Prior to the Pre-Budget Report, married couples could transfer an almost unlimited amount of assets to each other without paying IHT when one spouse died. But when the surviving spouse died, the estate was taxed at 40 per cent above the previous £300,000 nil-rate band. Now the surviving spouse may be able to bequeath £600,000 tax-free. By 2010, this figure will increase to £700,000. The new rules will also apply to people in civil partnerships. The Chancellor also said he would backdate the rules so every widow or widower would benefit from the increased threshold. He said: “These changes mean certainty for up to 12

million married couples, with up to a £600,000 allowance rising to £700,000; the same entitlement for three million widows and widowers.” The Treasury expects the proposals to cost £1 billion in 2008-09, rising to £1.4 billion by 2010-11. Mr Darling said that in future the threshold for paying inheritance tax would increase in line with house prices as well as inflation. While death duty is relatively insignificant in tax terms, it is deeply unpopular among those who expect to pay it. More people are paying death duties because house prices have risen far more quickly than the IHT threshold.

eSmartTax - October / November / December 2007

Changes to inheritance tax

n IHT allowance (the nil-rate band before the tax is paid) is now a combined allowance of £600,000 between spouses or between civil partners n The IHT allowance rises to £350,000 per person in April 2010, giving couples a combined allowance of £700,000 n Widows, widowers and bereaved civil partners can now claim the combined allowance n The increased IHT allowance from April 2010 is not a tax cut, the £350,000 allowance was announced in this year’s Budget

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Tax

Inheritance tax update Pre-Budget Report changes… your questions answered Q: Do I need to worry about inheritance tax (IHT) even though I intend to leave everything to my spouse?

A: There is no IHT payable on assets transferred between spouses or those in a civil partnership. But this doesn’t mean you should ignore IHT completely if you have assets exceeding £600,000. Following the recent announcements made by the Chancellor in his first Pre-Budget Report, the surviving spouse may now be able to bequeath up to £600,000 tax-free. By 2010, this figure will increase to £700,000.

Q: If I give away my home and survive for seven years, do I have an IHT problem?

A: There is no guarantee that this will work, but you would need to pay a market rent on your home while you continued to live there. If you live there rent free, then this is considered a ‘gift with reservation’ by HM Revenue & Customs (HMRC), which will not make it exempt from IHT. In practice, even if you pay the correct rent, this is seldom a tax-saving move. Many older people are asset-rich but cash poor, so paying rent on their own home would seriously impact their standard of living. Beneficiaries who received this rent would have to pay income tax on this money. They are also likely to be subject to capital gains tax if they sold this home after your death, as it is not their primary residence. This means they could have to pay capital gains tax (CGT) currently at 40 per cent on any gains in the property’s value from the day it was given to them to the day it was sold. So the potential tax saving for

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your heirs may be negligible, but the cost could be significant. The current CGT system is being scrapped from April 5, 2008. The Chancellor, Alistair Darling, has decided to move to a single rate of CGT for everyone which will be paid at 18 per cent.

Q: Do I have to declare money that I have given away?

A: HMRC has the power to prosecute and fine executors and potentially beneficiaries who fail to declare lifetime gifts on the appropriate IHT form. They intend to step up investigations and clamp down firmly on any incidents of tax evasion. Under current rules, you can give away money or assets, and provided you live for more than seven years after making the gifts, they are not included within your estate for IHT purposes. You should make a note of any such gifts and pass them on to the executors of your Will.

spouse dies and leaves the remainder to the next generation. One solution is to ensure the pension is paid into a trust on your death, with the spouse being the main beneficiary. The trustees can forward funds to the surviving spouse and also ensure that other beneficiaries, such as children, can benefit from these funds without paying IHT.

Q: What can I do to reduce an IHT liability on my property?

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A: Handing the deeds of your property over to your children is not an effective means of escaping IHT. But there are steps you could take if it is simply the value of your family home that is pushing you into the IHT bracket. Taking out a debt secured against the property could reduce the value of your property.

If you die within the seven-year period, depending on the total value of the gifts and when your death occurred, this would determine if there was any further tax to pay, after taper relief had been taken in to consideration.

Q: Could my pension be subject to IHT?

A: There may be no immediate IHT problems, because pension funds are not subject to IHT. But this does not mean that you should ignore pensions altogether. Most people nominate their spouse to receive their pension should they die. While there is no IHT to pay at this point, the funds could be taxable when your

eSmartTax - October / November / December 2007


Wealth Protection

Taxing times ahead

Safeguarding an inheritance… your questions answered Q: After hearing the announcements in the Pre-Budget Report relating to inheritance tax, I always thought I could leave everything to my spouse without paying this tax?

A: The Chancellor has not changed the so-called “spousal exemption” which means that assets passed between spouses, or civil partners are free of IHT regardless of their worth. The change relates to the amount of money a couple can leave to their heirs, in most cases their children.

Q: Prior to the Pre-Budget Report I thought that both my wife and I had a £300,000 allowance, and were able to leave up to £600,000 between us without incurring inheritance tax? A: This is correct but the reality was that many people never took advantage of this, particularly in regards to the inheritance of the family home, as this involved changing the ownership of the home, drafting new Wills and setting up a trust. The changes announced in the Pre-Budget Report mean that far more couples will utilise their joint inheritance tax exemption, and it will be far simpler for families to ensure that more of their assets go to their heirs, rather than end up in the hands of the taxman.

Q: Who can take advantage of this new ‘couple’s allowance’?

A: It is estimated that this change will benefit 12m married couples and those in civil partnerships plus a further 3m widows and widowers. For the first time they will be able to transfer their individual allowance, so when the first spouse dies, their share of the home and any other assets can be simply be transferred to the surviving spouse. But on the death of the second spouse inheritance tax will only be paid if assets exceed £600,000. Previously in the above example only the second spouse’s personal allowance of £300,000 would have been used.

Q: So how much less tax will people have to pay?

A: Assuming you have avoided paying IHT on the full £300,000 (in other words your estate is worth at least £600,000), this means that your children will have avoided a tax bill of £120,000.

Q: I have lived with my partner for 39 years, but have not married. Will we be able to benefit?

A: No. This change is for married couples and civil partners only. Single people and those who co-habit will not benefit. However, as you both have an individual allowance of £300,000 you will collectively be able to pass on £600,000 tax-free to children or

eSmartTax - October / November / December 2007

other heirs. The crucial difference is that you cannot leave assets of more than £300,000 to each other without being subject to inheritance tax. And of course, if assets are transferred between you on the death of the first partner this will “mop-up” any inheritance tax allowance.

will be a codicil in your Will that will set up the trust on the death of the first spouse. Following the Pre-Budget Report changes announced it would be a good time to review your Will and estate planning.

Q: My spouse died before these changes were announced, will I be able to benefit?

A: Trusts still have a key role to play in many people’s estate planning, and the inheritance tax changes do not alter this. These trusts can be particularly useful if you want to ensure that money is passed directly to children or grandchildren, if they are from a previous marriage. If you are passing assets to minors you will need a trust structure to ensure they are managed in their interest until they come of age. In some cases people also like to ensure that a large financial estate is managed on behalf of a surviving spouse.

A: The Government has back-dated tax legislation and for once this will be beneficial for taxpayers. Anyone whose spouse has already died, regardless of how long ago this was, should be able to utilise the full “couple’s allowance”. There will be a couple of things to look out for: if your wife or husband did leave significant gifts elsewhere for example to children, grandchildren or into a trust, these will be deducted from their £300,000 allowance. But any unused allowance will be bolted on to your own exemption when distributing your estate to heirs.

Q: I already have a trust in place in order to make the most of both my and my husband’s IHT allowances, how is this affected?

A: The chances are this is a nil-rate band discretionary trust. These are fairly straightforward to set up, and are usually included in your Wills. If both you and your spouse are still alive the trust hasn’t been created yet, there

Q: Are there any cases where I should keep the trust?

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Legal Matters

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Companies Act 2006

The most significant changes to company law in the last 20 years

The Companies Act 2006 is one of the most significant changes to company law in the last 20 years. The Government’s aim is to simplify company law and make it easier to understand, especially for small businesses. It has been eight years in the making, the Act runs to 1,300 sections and 701 pages. It affects virtually every aspect of how a company is run by introducing wide-ranging reforms with hundreds of changes in the Act.

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Legal Matters

A number of parts of the Act are already in force. They were put on the statute book on November 8, 2006, it is being introduced in stages over two years. The Government intends that it will be fully in force by October 2008. Among the parts of the Act that are already in place are: n companies being able to communicate more easily with shareholders by email and the internet (came into force in January) n transparency obligations requiring listed companies to disclose periodic financial information (January) n the repeal of the obligation on directors and their families to disclose their dealings in the company’s shares, which means that directors of private and public companies need no longer disclose but quoted companies must continue to do so under the regulatory rules to which they are subject (April) n takeovers provisions, which apply to bids for public companies, putting the Takeovers Panel on a statutory footing (April) The Act introduces a statutory statement of directors’ general duties. Currently, there is no definitive single statement of directors’ general duties. Instead, their duties are set out in case law, much of which dates back to the 19th century. That makes it difficult for first time directors or those from overseas to know what their legal obligations are. In future, directors will, in theory, simply be able to refer to the Act to know what they can and cannot do under company law. One of the Act’s key changes is to set out in one place the seven general duties with which directors must comply: n act within their powers; n promote the success of the company; n exercise independent judgment n exercise reasonable care, skill and diligence n avoid conflicts of interest; n not accept benefits from third parties n declare interests in proposed transactions or arrangements The Government has replaced the obligation to act in the best interests of the company with a new duty to promote the success of the company for the benefit of shareholders. This new duty requires directors to act in the interests of the company’s shareholders but to

also have regard to a wide range of specified factors when making decisions, including the likely longterm consequences of a decision, its impact on the environment, the community, employees, customers and suppliers and so on. It will be easier for shareholders to claim against directors for negligence and breach of directors’ duties. The Act extends shareholders’ current rights to sue directors for wrongs done to the company. Shareholders will be able to sue directors for negligence even where the director concerned has not benefited from his negligence. They will, however, need the court’s permission to do so, and the courts have the power to speedily dismiss unmeritorious claims. Private companies will no longer need to appoint company secretaries. Instead from April 2008, a sole director of a private company will also be able to act as secretary or to outsource the secretary’s duties to a third party. Auditors will be able to limit their liability. From April 2008, provided that the company’s shareholders consent, auditors will be able to sign an agreement with the company limiting their liability. Coupled with the introduction of limited liability, there are also two new offences of knowingly or recklessly including materially misleading information in an audit report or failing to include required information in the audit report. Investors who are not the registered shareholders but who hold shares through nominee accounts such as ISAs and PEPs will have greater rights, including the right to receive information available to registered shareholders. Extended rights for indirect investors to participate in company business by, for instance, requiring the directors to call a meeting or appointing a proxy to attend a meeting, will only apply if a company’s articles of association allow for it, and if the registered shareholder nominates the indirect investor to enjoy these rights. It is an opt-in provision for companies. Indirect investors in listed companies will have greater rights to receive information, such as the company’s annual report and accounts and shareholder notices, irrespective of the relevant company’s articles. The right does, however, depend on the indirect investor having been nominated by the registered shareholder. Indirect investors in listed companies wishing to enjoy such rights should therefore contact their nominee broker to ensure that it will nominate them.

eSmartTax - October / November / December 2007

The Act will mean deregulation for small businesses. Private companies can take decisions more easily and quickly, without holding formal meetings. Instead, they will be able to take almost all decisions in writing. The only decisions that will still require a meeting to be held are those to remove a director or the company’s auditors. They will also no longer need to hold annual general meetings. From April next year, there will be a separate code of accounting and reporting requirements for private companies. From October next year, they will have a special constitutional document, the articles of association, tailored to their needs rather than having to adapt something designed with public companies in mind. It will also be quicker and easier to form a company than currently. And they will be able to give financial assistance for the purchase of their own shares and to reduce their share capital more easily without having to go to court. Companies are able to use electronic means, including email and the internet, to communicate more easily with shareholders. This came into force in January and should result in considerable cost savings for businesses. Provided that shareholders consent, the use of the Internet will be the default position. Individual shareholders can, however, ask that information is sent to them by post. Shareholders’ addresses will only be available on request to the company, rather than freely available. The Act requires anyone who wishes to inspect a company’s shareholder register, including shareholders themselves to obtain the company’s permission and disclose the reason for requesting the information. Companies will have to go to court if they want to refuse a request. From October 2008, to ensure that the access requirements cannot be circumvented by obtaining shareholder details from a company’s annual return, companies will only need to disclose limited shareholder information in their annual return, with the obligations on private and most public companies being limited to disclosure of shareholder names and shareholdings only.

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Corporate Matters

Corporate matters Tackling the changes Income shifting

In July 2007 Mr and Mrs Jones won their case in the House of Lords. The profits of Arctic Systems (their company) which were paid equally to them by means of dividends would be taxed on each of them rather than solely on Mr Jones. The Government believes it is unfair for one person to arrange their affairs so that their income is diverted to a second person, subject to a lower tax rate, to obtain a tax advantage. The Government has announced that draft legislation to take effect from 2008/09 to address income shifting will shortly be issued for consultation. The legislation will work alongside the existing rules on businesses deductions and settlements, and will seek to remove the tax advantage obtained from income shifting. It would only apply when the income is in the form of distributions from a company (dividends) or partnership profits. HM Revenue & Customs (HMRC) will provide ‘practical guidance’ on the legislation as to the circumstances which may not be caught by the

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legislation. Relevant factors to consider when establishing whether or not income shifting has taken place could include the work done by the individuals in the business, the investments made and the risks to which they are subject through the business. Income from employment, interest on savings and any other source will not be affected.

Tax simplification reviews

The Government has announced the start of a ‘significant programme of tax simplification.’ Three reviews will be started in the autumn where HM Treasury and HMRC will work in partnership with business to evaluate how a range of tax policies could be simplified.

These initial reviews will cover:

n how to simplify VAT rules and administration in the UK and the EU n how anti avoidance legislation can best meet the aims of simplicity and revenue protection n how to simplify the corporation tax rules for related companies n VAT rules and administration

Areas where simplification will be of most significance to all VAT registered business include: n Partial Exemption and the Capital Goods Scheme n the frequency with which businesses submit returns n Corporation tax rules for related companies

Areas where simplification will be of most significance to UK companies include:

n associated company rules for small companies corporation tax rate n group aspects of corporation tax on chargeable gains n corporation tax self assessment filing and payment for groups n the burden of the transfer pricing rules

Spreading of tax relief for pension contributions

Employers generally get tax relief against their taxable profits for contributions paid to a registered pension scheme. Relief is given for the accounting period in which the contributions are paid. Tax relief

for some large contributions above £500,000 maybe spread over a period of up to four years. Legislation will be introduced in Finance Bill 2008 to ensure that the rules that spread tax relief for large employer pension contributions relative to their contribution in the previous year cannot be circumvented. This measure will have effect for payments made on or after 10 October 2007 under binding obligations entered into on or after 9 October 2007. The measure will ensure that the spreading of contributions cannot be avoided by routing them through a new company.

Other anti-avoidance measures

Action is being taken to counter various avoidance schemes:

n financial products - disguised interest (and thus taxable) as dividends (which are exempt from tax for companies)

eSmartTax - October / November / December 2007


Corporate Matters

n abusing the availability of interest relief through the payment of interest in advance n avoidance involving the sale and finance leaseback of plant or machinery and attempts to exploit long funding leases to create a tax loss where there is little or no commercial loss

Company gains on life policies

Legislation will be introduced in the Finance Bill 2008 to bring all life insurance policies and life annuity contracts to which a company is a party, other than protection-type policies, within the loan relationships legislation that is used to tax debts and debt-like instruments. The special legislation that currently applies to such policies held by companies (‘the chargeable events’ rules) will therefore be repealed.

Tax relief for business cars

In March 2007 the government issued a second discussion document about

business expenditure on cars. The proposals are that:

n the existing 100 per cent first year allowances for cars with CO2 emissions up to 120g/ km be retained n the general plant and machinery capital allowances pool will be used for cars with CO2 n emissions between 121 and 165g/km a new car pool would be introduced with a lower writing down allowance than the general plant n and machinery pool for other cars As a consequence there would no longer need to be a specific distinction between cars costing more or less than £12,000. The Government has issued a summary of the responses to the proposals. The majority of the respondents supported reform of the current system but views were divided as to what would be a preferable system. In the light of this, the Government has not indicated its next steps to modernise the tax relief system.

eSmartTax - October / November / December 2007

Capital gains tax (CGT) reform

The Chancellor surprised everyone with major changes to the CGT regime. Legislation will be introduced next year to give effect to a new single rate of charge to CGT at 18 per cent. A number of changes will be made for disposals made on or after 6 April 2008 to simplify the capital gains tax regime, including: n the withdrawal of taper relief n the withdrawal of indexation allowance n simplification of the share identification rules n CGT annual exemption The annual exemption allows the first element of chargeable gains made in a given tax year to be exempt from CGT. An annual exemption will remain in place and for 2007/08 this is currently £9,200.

CGT rates of tax

Individuals making capital gains currently treat those gains as the top slice of income. This means that, currently, tapered gains are charged at 10 per cent where

gains plus taxable income do not exceed £2,230; 20 per cent between £2,231 and £34,600; and 40 per cent on any balance. For trustees the rate of CGT is 40 per cent. For 2008/09 there will be a single rate of capital gains tax set at 18 per cent, which will apply to individuals, trustees and personal representatives.

CGT reliefs

Taper relief was introduced for disposals on or after 6 April 1998 and can reduce the amount of the gain chargeable to CGT. The amount of relief available depends on whether the asset is classed as a business or non-business asset and, also, on the length of time an asset has been held since 1998. For disposals on or after 6 April 2008 and any held over gains coming into charge on or after that date, taper relief will no longer be available. The chargeable gain will be liable to tax at 18 per cent, after deducting allowable losses, any other reliefs and the annual exemption. Indexation allowance was,

for individuals and trustees, the precursor to taper relief and gave relief for the effect of inflation on the costs incurred on assets. Indexation was frozen as at 5 April 1998. Currently, where an asset was held at 6 April 1998 and is disposed of after that date, any gain on the disposal may be eligible for indexation and taper relief. For disposals on or after 6 April 2008 indexation allowance will no longer be available.

Simplification of the share identification rules

The current rules for the identification of shares and securities for CGT purposes require a complex order of identification, which is dependent upon the dates when the assets were acquired. Due to the changes to taper relief and indexation allowance, all shares of the same class in the same company will be treated as forming a single asset from 6 April 2008, regardless of when they were originally acquired. However certain anti avoidance rules will remain.

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Pre-Budget Report

Tax regime takes AIM Shareholders faced with some important decisions!

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The Chancellor, Alistair Darling announced during his first Pre-Budget Report that he proposed to abolish taper relief from 6 April 2008. This would have the affect of increasing the minimum capital gains tax (CGT) paid on gains from selling certain types of Alternative Investment Market (AIM) shares from 10 per cent to 18 per cent. The announcement may also lead to some shareholders who had intended on holding on to their AIM shares for more than two years and then taking their profits, to sell them before 6 April 2008. Mr Darling also announced that he proposed to abolish

the indexation allowance, which provides relief from inflation. The allowance, which was frozen when taper relief was introduced in 1998, is set to disappear completely from April 6 2008, increasing the CGT bill for investors who sell their shareholdings after this date.

Under the current regime, people with a portfolio of shares listed on the main stock market would have to pay tax on their gains at 40 per cent if they sold their shares within three years, after which the percentage reduces gradually to 24 per cent from ten years. Following the Chancellors

proposed changes future investors would end up paying 18 per cent on their gains. This announcement may encourage some AIM and small company investors to sell their holdings before next April to take advantage of the current lower rates of taper relief.

eSmartTax - October / November / December 2007


Tax Trivia

“Non-domiciled” individuals face new rules

Company cars and the fuel scale charge

Tax system to receive a shake-up

The proposed rule changes announced for “non-domiciled” individuals could affect a diverse group of people. Currently individuals can claim “non-domiciled” status if the country with which they have the deepest connections, usually their place of birth, is outside the UK. The changes are targeted at “non-domiciled” foreigners who have been living in Britain for seven out of the past ten years. They could face an annual £30,000 charge for staying outside the tax system, or otherwise have to pay income tax on their offshore income of as much as 40 per cent. As well as paying the £30,000 charge, individuals opting for “non-domiciled” status would not be able to claim personal allowances. The Chancellor said that the new rules were aimed at “preventing people claiming that they are out of the country when they are actually here, from disguising income as capital and from claiming in effect two allowances.”

The Chancellor’s proposals include modifications to the so-called “90 day” residency rule for taxpayers. Individuals with unremitted foreign income of less than £1,000 would be exempt from the proposed new rules. The Treasury said it will consult on the question of whether “nondomiciled” individuals living in the UK for more than 10 years should pay more tax.

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eSmartTax - October / November / December 2007

Proposed changes were also announced by the Treasury in relation to anomalies in the rules, which may mean

that individuals could avoid paying UK tax on foreign income and gains brought into the UK. This would remove the ‘ceased source’ rule and reduce the scope to use offshore structures, such as companies and trusts, which convert taxable income and gains into non-taxable payments.

Where a car is provided for an employee’s private use, a taxable benefit arises which is based on the list price of the car and its CO2 emissions. The percentages range from 15 per cent to 35 per cent for most cars. There are currently discounts available for environmentally friendly cars and from 6 April 2008 there will be a 2 per cent discount for cars that have been manufactured to run on E85 fuel. If free fuel is provided for private motoring then a fuel benefit tax charge arises based on the percentage used for the car benefit and a ‘multiplier’, which is currently £14,400. For 2008/09 this figure will increase to £16,900.

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News in Brief

Company pension schemes Plans unveiled to reduce some of the protection against inflation The Government has unveiled plans to reduce some of the protection against inflation incorporated in company pension schemes. If the new rules come into effect, the revaluation of deferred pensions will be capped at 2.5 per cent. Currently, pension schemes are obliged to revalue deferred pensions by up to 5 per cent. The proposal, which aims to make it cheaper for employers to run schemes, is part of a rolling Government programme of deregulation. “These measures will reduce costs and will make it easier for schemes’ rules to take advantage of specific relaxations to legislation” said Mike O’Brien, Minister for Pensions Reform.

Pension Funds (NAPF). “These proposals will help sustain the future of defined benefit pensions, which provide valuable income to millions of working people in retirement,” said the NAPF’s Joanne Segars. However, the Trades Union

Congress (TUC) has criticised plans to reduce the cap on the revaluation. “This is particularly important for those with broken careers, typically women and carers,” said Brendan Barber, TUC general secretary.

”If we were to return to higher rates of inflation in the future this could quickly eat away at benefits built up early in a working life - something that seems to go against the Government’s message that we should all start saving as early as possible.”

The plans were welcomed by the National Association of

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eSmartTax - October / November / December 2007


Wills

News in Brief

Compensation Scheme limit increased The Financial Services Authority (FSA) has increased the limit of the Financial Services Compensation Scheme (FSCS) cover for deposits to 100 per cent of the first £35,000 of each depositor’s claim. This increase applied from 1 October 2007.

Four out of five married couples with dependent children don’t have a Will The National Consumer Council (NCC) stated recently that close to four out of five married couples with dependent children don’t have a Will. For unmarried couples the figure is even higher, making them particularly vulnerable.

A surviving partner can risk losing personal possessions, cash and property, as current inheritance laws do little to protect unmarried couples. NCC who carried out the survey of over 2,500 people describes the results as a

eSmartTax - October / November / December 2007

ticking time bomb and is now calling on the Government for urgent action. Dying without a Will can leave all sorts of headaches for those left behind. Creating family feuds, and leaving relatives short of their inheritance.

The previous compensation limit was a maximum of £31,700 (made up of 100 per cent of the first £2,000 and 90 per cent of the next £33,000).

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FSA regulated deposit takers will need to review customer terms and conditions to amend references to the financial limits. On top of this, the Chancellor, Alistair Darling says he is looking at ways of guaranteeing people’s savings held by a bank or building society up to £100,000.

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Tax Facts

News in Brief

Cash accounting schemes… did you know? The turnover limit for joining the cash accounting scheme is currently £1,350,000.

VAT thresholds The current VAT registration limits are: n the threshold for compulsory registration is £64,000 n the threshold for voluntary deregistration is £62,000

What is a P60? A P60 details your earnings and tax deductions for the last tax year and is provided by your employer each April. The law requires you to keep a record of your taxable income for at least 22 months after the end of the current tax year. It should be kept in a safe place as duplicates are not always easy to obtain. Self-employed people must keep records for up to six years after the relevant tax year.

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The Chancellors numbers The Chancellor, Mr Darling during his inaugural Pre-Budget Report cut the growth forecast for 2008 from between 2.5 and 3 per cent to between 2 and 2.5 per cent The forecasts for 2007, 2009 and subsequent years were unchanged with the economy neither overheating nor slumping The cyclically adjusted public sector net borrowing, the Treasury is expecting to rise from 2.2 per cent of gross

domestic product in 2006-07 to 2.8 per cent in 2007-08 The forecast for tax revenues has also been reduced by the Treasury by £7bn for 200809, some 1.2 per cent of total revenues. The main reason is that it expects slower aggregate earnings growth to wipe £4.2bn off income tax

revenues and lower financial sector profits to reduce corporation tax by £3bn. By the end of the next financial year, the Treasury announced that public borrowing over the two years would be £11bn higher than expected in the Budget.

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eSmartTax - October / November / December 2007


Pre-Budget Report

Main points at a glance Growth forecast for the UK economy in 2008 cut from 2.5 to 3 per cent to 2 to 2.25 per cent Capital gains tax ‘taper relief’ abolished to create single rate of 18 per cent from 6 April 2008. This change is designed to close a tax loophole that benefits private equity but its effect will be wider Inheritance tax thresholds increased to £600,000 immediately and to £700,000 from 2010 for all married couples and civil partnerships. Backdated for widows and widowers Changes to the state second pension, brought forward to 2009, raising £440m

Air passenger duty paid by customers on business classonly airlines doubled to £80 from November 2008, closing a loophole whereby they paid the economy class rate. The duty to be fundamentally reformed from November 2009 to a tax on aircraft rather than passengers, reflecting journey length and emissions. Total changes will raise £520m by 2010 Public borrowing in 2008-09 raised by £7bn to £36bn

Health spending rises by 4 per cent in real terms in 2008-09 and 2010-11 New single budget to cover the police, security services and other anti-terrorism operations. This will rise to £3.5bn in three years’ time

Tax Trivia

Self assessment key dates If you completed a paper Tax Return for 2006-07 and sent it back by 30 September 2007, HM Revenue & Customs (HMRC) will:

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n Calculate your tax n Tell you what to pay by 31 January 2008 n Collect tax through your tax code, if possible, where you owe less than £2,000 If HMRC received your paper Tax Return after 30 September and process it by 30 December, they will still calculate your tax and endeavour to collect tax through your tax code but they can’t guarantee to tell you what to pay by 31 January 2008. If you were sent a Tax Return by 31 October 2007, the deadline for sending back your completed 2006-07 Tax Return is 31 January 2008. If you were sent a Tax Return by 31 October 2007, you will be charged a penalty of £100 if HMRC have not received your return by 1 February 2008. The new tax year starts 6 April 2008. A Tax Return or Notice to Complete a Tax Return (SA316) will be sent out to all those who meet the criteria to get a Tax Return each year.

eSmartTax - October / November / December 2007

27


2008-09 Tax Year

2008-09 tax year The numbers revealed

This year’s Pre-Budget Report was around six weeks earlier than usual. And because of this, the inflation figures for September, used to set allowances and pensions for the following tax year, had not yet been calculated. The Chancellor, Mr Darling did not reveal in his speech how much taxpayers could earn before falling into the tax and national insurance net, or next year’s basic state pension. So how did the numbers work out for the new tax year? Most people’s personal tax allowances are estimated to increase by 4 per cent for the 2008-09 tax year, based on September’s 3.9 per cent gain in the retail price index. Unusually, this is higher than the 3.7 per cent average increase in earnings over the past year.

What the numbers mean!

increase is compensation for the withdrawal of the 10 per cent starter tax rate from next April n The allowance for those over 75 also increases by more than inflation for the same reason by £1,490 from £7,690 to £9,180

n The personal allowance paid to everyone up to 65 rises by £210 from £5,225 to £5,435

n The earnings level where the higher allowances paid to older people starts to be withdrawn rises by £900 from £20,900 to £21,800

n The allowance for people aged 65 to 74 rises by £1,480 from £7,550 to £9,030. This above inflation

n Married couples where at least one person was born before April 6, 1935 see their allowances rise

28

by £250 from £6,285 to £6,535 with marginally more when one partner is at least 75. This is paid at 10 per cent, with better-off older couples receive a 10 per cent allowance on £2,540, £100 more, so they are £10 a year wealthier n The very highly paid will be able to invest £235,000 in pension plans in 2008-09, a £10,000 increase n National insurance starts next year at £105 a week (£5,460 a year), up £5 a week. Salary earners pay 11 per cent up to £770 a week (£40,040 a year), £100

a week more than this year. This reflects planned income tax changes and should leave, according to the Government, people no worse off. Beyond that, employed people pay 1 per cent n The self-employed will pay national insurance at 8 per cent of profits between £5,435 and £40,040 in 2008-09, with the 1 per cent surcharge after that. They also have to pay a £2.30 a week “stamp,” a 10p a week increase n The basic state pension rises by £3.40 from £87.30

to £90.70 a week for a single person and increases by £5.45 from £139.60 to £145.05 for a couple. The pension credit, the meanstested minimum income level for retired people on state benefits, rises by £5 from £119.05 to £124.05 for a single person and by £7.65 from £181.70 to £189.35 for a couple

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eSmartTax - October / November / December 2007


Tax

Tax saving strategies Keeping what is rightfully yours! It’s good to give

Using a combination of insurance bonds and charitable gifts could mean you avoid higher-rate tax on your investments. Insurance bonds are popular with higher-rate taxpayers because of the way they are taxed. Investors are permitted to withdraw 5 per cent a year of the original capital for 20 years without incurring a tax charge. When you cash in a bond, returns are treated as income, so higher-rate taxpayers pay 40 per cent and those on the basic rate are liable for 20 per cent. In an onshore bond the insurer pays 20 per cent before returns are paid out, so basic-rate taxpayers have nothing further to pay. Offshore bonds are taxed only when the individual sells. To keep your tax bill down it makes sense to ensure you are a basic-rate taxpayer in the year that you sell your bond, which is where gifts to charity come in. A contribution to a personal pension also raises the higher-rate threshold.

Tax in retirement

At retirement you are allowed to take up to 25 per cent of your pension fund as tax-free cash. But if you invest that in a standard savings account or fund you may pay tax on

any income it produces, so it’s not tax-free at all. If you put the money in an offshore bond you could withdraw 5 per cent a year without paying tax. The investments also grow tax-free until there is what is known as a “chargeable event,” when you cash the bond and bring the funds back into the UK or take out more than 5 per cent a year.

Wealth protection

Another way to protect your wealth in retirement is to consider taking your tax-free cash in instalments to provide an income, rather than drawing your pension which would be taxable. If you retire with a fund of £400,000 you are entitled to take up to £100,000 as tax-free cash. Rather than taking this all in one go you could take tax-free amounts, for example £20,000 for five years.

Take an alternative approach

If you buy wine, antiques or vintage cars, any gains made are often taxfree. If an asset has a predicted life of less than 50 years it is classed as a wasting asset and the profit you make on the sale is exempt from capital gains tax. This takes the sale of certain antiques, such as long case clocks, and vintage or collectable

eSmartTax - October / November / December 2007

cars outside the scope of capital gains tax (CGT) altogether. Wine is sometimes, but not always, classed as a wasting asset. If HM Revenue & Customs decides it will improve in quality and value after 50 years, the exemption may not apply. You also lose the exemption if it regards you as a trader running a business.

Family maintenance

Most people are aware that giving away assets during your lifetime is a legitimate way to reduce any potential death duty, but you have to wait seven years before most large gifts are exempt. Payments made for the maintenance of family members, though, are immediately inheritance tax (IHT) free: you don’t have to rely on relief or exemption. That way you can cut a bill even if you have left it too late to do other planning. The exemption covers payments to spouses or civil partners, dependent children, including those at university, or a dependent relative, including the elderly needing care.

Business perks

If you run a business, it escapes IHT once you have owned it for two years as long as it is “wholly or mainly” involved in a trade. You could put your investment portfolio into the business

and still get the IHT exemption as long as it did not form more than half of the company. This should only be considered if you do not want to sell your business in the future.

Repayment option

If you are faced with a considerable IHT bill after a relative dies, many people are unaware that the tax related to land and buildings can be paid in up to 10 equal yearly instalments. Beneficiaries could opt in to the instalment option. The IHT has to be eventually paid, and interest is charged on the outstanding amount of tax, but it could be a solution to keep payments at a manageable level.

Tax- free profits

If you sell personal belongings, known as chattels, for less than £6,000 any profit is tax-free and does not reduce your annual CGT allowance, £9,200 this year. Chattels include books, furniture, old coins, clocks, watches, silverware and ceramics. Even cars, lorries and motorcycles are included if they are bought as an investment. The sale of private vehicles is always exempt from CGT. If a chattel is sold for more than £6,000, you either pay tax on five thirds of the amount over the limit or the actual gain if it is smaller.

29


In the News

In the news Pre-Budget Report…overflow

Payments on account (POA) threshold: Individuals who complete a self assessment tax return have to make direct payments to HM Revenue & Customs (HMRC) of their income tax and Class 4 national insurance contributions. The POA are made on 31 January and 31 July each year with a balancing payment for the tax year being made by 31 January following the end of the tax year. The POA are broadly made by reference to the previous year’s liability. POA are not due where more than 80 per cent of the previous year’s liability was met by tax deductions at source from income such as employment or savings. Currently where the previous year’s liability is less than £500 no payments on account are due and the taxpayer just makes one payment on 31 January following the end of the tax year of their full liability. From 2009-10 the £500 threshold will be doubled to £1,000. The first POA affected by this change will be those due on 31 January and 31 July 2010.

Residence and domicile

The Government has announced the completion of the residence and domicile review with a package of reforms which will take effect

from April 2008. The main proposal is that UK residents who are non-domiciled, who wish to continue to be taxed on a ‘remittance basis’ rather than on their worldwide income and gains, will have to pay an annual charge of £30,000. This measure is being introduced to ensure that they contribute in respect of the foreign income and gains which they keep abroad and on which they do not pay UK tax. The charge will apply if they have been resident in the UK for more than seven years.

Other proposals include

Users of the remittance basis will lose their automatic

entitlement to certain allowances, such as the personal allowance, currently £5,225, subject to a de minimis

to make those individuals who are resident in the UK for more than ten years contribute more.

To ensure that when determining if an individual is resident in the UK, days of arrival and departure are counted to amend the current rules to remove flaws and anomalies that allow individuals who are assessed only on a remittance basis to sidestep UK tax where it is due on income and gains.

The Government proposes to extend the existing rules to prevent the abuse of pension’s tax reliefs through members surrendering rights under registered pension schemes during their lifetime or through reallocation of assets after a member’s death. The measures will have effect for surrenders made on or after 10 October 2007 and for increases in pension rights attributable to the death of a member when the member dies on or after 6 April 2008.

The Government will consult on the detail of these proposals and on a wider range of options, including an option

Pensions

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The articles featured in this publication are for your general information and use only and are not intended to address your particular requirements. The articles are based on our understanding as at the 7 November 2007. They should not be relied upon in their entirety. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without appropriate professional advice after a thorough examination of their particular situation. Articles that make reference to the Pre-Budget Report are subject to the Finance Bill becoming law.

eSmartTax Oct_Nov_Dec 07  

eSmart Tax Oct_Nov_Dec 07

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