Financial Help

General Election

2005-04-15T11:36:00.000Z

Here is a guide showing where the UK's three main parties stand on 14 key issues - it will be updated as new policies are announced.
LABOUR
CONSERVATIVE
LIB DEMS
ASYLUM/ IMMIGRATION
Labour: Will reduce asylum numbers by tougher rules on settlement and more deportations; electronic register of all crossing borders; skills-based points system for permanent immigrants.
Conservative: Annual refugee and immigrant quotas; bonds for temporary workers; compulsory health checks; offshore asylum processing centres; new border police; quit UN refugee convention
Liberal Democrat: Back common EU asylum policy with fair sharing of asylum settlement; allow asylum seekers to work so don't rely on benefits; quota for immigrant workers from outside EU.
HEALTH devolved in Scotland, Wales and Northern Ireland
Labour: Patients able to choose their NHS hospital; waiting times down to 18 weeks; 100 new hospital schemes; 2,700 GMP premises to be improved; no "cut price" hospital cleaning contracts.
Conservative: Patients able to choose hospital or take 50% of NHS operation price to go private; matrons to keep hospitals MRSA-free; Whitehall targets scrapped; foundation status for all hospitals
Liberal Democrat: £8bn more on health; reduce diagnostic waiting lists for tests ; free long term care for elderly; free eye tests, drugs for long-term illnesses; ban smoking in public places.
CRIME devolved in Scotland
Labour: Dedicated policing teams for every area; record police numbers already; plans total of 25,000 community support officers; 1,300 more prison places; double cash for drug treatment.
Conservative: 40,000 extra police; 10-fold rise in drug rehab places; addicts to choose rehab or prison; end some early releases; 20,000 more prison places; judges to set min and max sentences.
Liberal Democrat: 10,000 extra police; tackle drug dealers rather than cannabis users; out-of-hours school courses against yob culture; local communities decide sentences for low level criminals.
EDUCATION devolved in Scotland, Wales and Northern Ireland
Labour: Parents can select specialist schools; 200 new City Academies; new powers to control truancy and disruption; university top-up fees up to £3,000, with grants for poorest students.
Conservative: 600,000 new school places to boost choice; allow good schools to expand and new ones created; heads able to expel disruptive pupils; no student fees - charge interest on loans.
Liberal Democrat: Cut class sizes for youngest children; ensure all children are taught by a qualified teacher in each subject; abolish "unnecessary tests"; scrap university fees.
WAR ON TERROR/IRAQ
Labour: Stand by Iraq war - even if weapons intelligence was wrong, Saddam flouted UN resolutions; want new powers for Home Secretary to detain terror suspects at home; £3.7bn more on defence
Conservative: Still back Iraq war but say Tony Blair lied over the intelligence; oppose "internment without trial" and want wiretap evidence admitted; spend £2.7bn more on defence, save regiments.
Liberal Democrat: Opposed Iraq war and demand Blair reveal when he promised to commit UK forces; would start phased withdrawal of troops after Iraqi polls; want only judges to imprison terror suspects
PENSIONS
Labour: Use benefits savings to design system with basic state pension at core; state pension age stays same; lump sums/higher payments for those working longer; special help for poorest.
Conservative: Restore link between state pension and earnings by replacing New Deal; fund free long-term residential care via three-year state sponsored insurance scheme.
Liberal Democrat: Boost basic state pension by £100+ a month and restore pensions-earnings link for over-75s; link pension to residency not national insurance payments; free long-term personal care.
TAX/ ECONOMY partially devolved in Scotland
Labour: Takes credit for low mortgage rates, more jobs; would reform the "unsustainable" council tax; say spending plans affordable without tax rises; tax reliefs for "hard working families".
Conservatives: Would prevent "Labour third term tax rises"; will use £4bn to cut taxes including £1.3bn cut in council tax for pensioners; also considering cuts to inheritance tax and stamp duty.
Liberal Democrat: Replace council tax with a local income tax; new 50% tax rate on earnings over £100,000 a year; raise stamp duty threshold to £150,000 to help first-time buyers.
EUROPE
Labour: Want adoption of proposed EU constitution after referendum; support joining the single currency if five economic tests show it is in UK interests; UK should be at "heart" of Europe.
Conservative: Oppose EU constitution and would hold early vote; would let other nations integrate while UK gets powers back over fishing and quits social chapter; oppose adopting euro.
Liberal Democrat: Would work towards the right conditions for joining the euro and then call referendum; back EU constitution, saying it will make clear the limits on Brussels powers.
FAMILIES partially devolved in Scotland, Wales and Northern Ireland
Labour: "Universal, affordable and flexible" childcare for parents of all 3 to 14 year-olds; a Sure Start children's centre in every area; extend maternity pay from 6 to 9 months, allow fathers to share.
Conservative: Paid maternity leave extended to 9 months, or higher pay for 6 months; £50/wk childcare subsidies for all with children under 5; replace child tax credits with tax allowances.
Liberal Democrat: Maternity pay of £170 per week for first 6 months; create Early Years Centre for pre-school education; no presumption in favour of mothers in child custody cases.
ENVIRONMENT devolved in Scotland, Wales and Northern Ireland
Labour: Signed up to Kyoto and 60% target for cutting CO2 emissions by 2050; tax incentives for fuel efficient cars; backing research into hydrogen powered vehicles.
Conservative: "Better leadership" on Kyoto targets; make fly-tipping arrestable offence; push tidal, wave and offshore wind power; use taxes to make greenest fuels cheaper; protect green fields.
Liberal Democrat: 60% CO2 reduction target for 2050 and new global targets based on allocation by country; 20% renewable electricity by 2020; 60% household waste recycled in 7 years
TRANSPORT devolved in Scotland, Wales and Northern Ireland
Labour: Spending in 2015 to be 60% up on 1997; rail reorganisation so ministers set strategy and Network Rail owns all track; road building but car sharing lanes/road use charge plans too.
Conservative: Expand roads/speed up repairs; remove speed cameras which only make money; give best rail firms longer contracts; use retailers to fund improving train stations.
Liberal Democrat: Replace fuel tax/VED with national road user charging; congestion charging; shift spending from roads to public transport; free off-peak local bus travel for pensioners/disabled.
RURAL AFFAIRS partially devolved in Scotland, Wales and Northern Ireland
Labour: Boost rural economy; save rural post offices; build more new homes; more rural bus services; reform CAP; more aid for fisherman; enforce fox hunting ban
Conservative: Greater say for local people in planning, stop illegal traveller sites; repeal hunting ban; ban GM crops; reform CAP to boost farm income.
Liberal Democrat: OFT check on farmers' prices; more reform of CFP and CAP; no GM crops without strict controls; more affordable shared ownership homes.
CONSTITUTIONAL REFORM
Labour: Limited number of hereditary peers, further Lords reform promised; created Scottish Parliament, Welsh and NI Assembly, want elected regional assemblies; new Supreme Court.
Conservative: Make House of Lords mostly-elected chamber; strengthen Parliament; oppose postal voting; scrap supreme court plan; hold vote on future of Welsh Assembly.
Liberal Democrat: Referendum on electoral reform; extend vote to 16 year-olds; make House of Lords elected chamber; PR for local elections; more powers for Welsh, NI Assembly; written Constitution.
EQUALITY/RIGHTS
Labour: Equality commission by 2007; passed Human Rights Act; civil union for gay couples; to ban incitement to religious hatred; stronger disability, race laws.
Conservative: Reservations over equalities commission red tape; oppose 'politically correct' use of human rights laws; introduced disability discrimination act.
Liberal Democrat: A single, comprehensive equality act; action on age discrimination; played key role in 1998 Human Rights Act; want UK Bill of Rights.

Budget 2005

2005-03-17T12:26:00.000Z

THE YEAR 2005
BUDGET BULLETIN

INTRODUCTION

This year’s Budget was bound to be a bit different. With a General Election around the corner, it was clear that the March 2005 Budget would primarily be used for election sweeteners with some of the proposed more technical measures reserved for the Budget that will inevitably follow the General Election.

There were, of course, areas where the Government were being put under pressure to make changes. This was especially the case in the area of housing where it was clear that the £60,000 starting point for stamp duty land tax was way out of line with the current average price of a first time purchase.

Those who jumped on the house purchase ladder some years ago now face another type of problem - that of a potential inheritance tax bill on the private residence on the homeowner’s death or the death of a surviving spouse. Here the problem was very much one of the nil rate band (the starting point for inheritance tax) not keeping up with house price inflation. The fact that the nil rate band has only increased by 18% over the last 8 years whilst house prices have increased by about 84% means that many more houses are caught. Indeed the results of one recent research indicate that as many as 2.4 million houses are caught. How would the Chancellor deal with this problem, if at all?

Whilst on the subject of inheritance tax, another question was whether we would be treated to more information on proposed regulations on the new pre-owned assets tax to go with last week’s press releases dealing with valuation (amount and dates) and family equity release arrangements?

And would any announcement be made on the post A-Day inheritance tax implications of the transfer of a pension fund (under alternatively secured pension) to a deceased member’s beneficiaries via a SIPP of which they were also members?

There were, of course, other areas where change could have taken place. For example:

- tax avoidance: would the Government announce an extension to the disclosure rules introduced last year?

- residence and domicile: would further action be taken to implement change following the consultative document in 2003?

- trust tax reform: whilst some measures have been implemented, a number are still in the consultation phase. Would these now be introduced?

And what did we get?

· Further extension to the anti-avoidance measure requiring disclosure of information on tax avoidance schemes to be given to the Revenue

· More specific anti-avoidance provisions

· An increase in the income tax personal allowance, age allowance and the CGT annual exemption

· Introduction of a standard rate band for some trusts and special treatment of trusts with vulnerable beneficiaries

· Announcement of further consultation on Real Estate Investment Trusts

· The announcement of further consultation on the subject of trust tax reform

· An increase in the threshold for stamp duty land tax to £120,000

· An increase in the nil-rate band for inheritance tax to £275,000 with a phased increase to £300,000 in 2007/08

· A commitment to keep the maximum annual ISA investment at £7,000 until 2010

· Tax equality for civil partners

In our view, it is important to ensure that you are equipped to have sensible discussions with your key clients and distributors (as appropriate) on the key taxation issues arising from this year's Budget. Our Budget Bulletin seeks to provide you with the relevant information you need.

YOUR GUIDE TO THE BUDGET BULLETIN

Page Nos

1. INCOME TAX 6-12
1.1 Rates of tax
1.2 Personal allowances, reliefs and credits
1.3 Mortgage interest relief
1.4 Other reliefs
1.5 Tax on savings income
1.6 Tax reclaim/payable chart

2. TAX AVOIDANCE 13-16
2.1 Disclosure rules
2.2 Avoidance through arbitrage
2.3 Abuse of double taxation relief
2.4 Tax on capital gains
2.5 Financial products
2.6 Corporate intangible assets
2.7 Stamp duty land tax
2.8 Partial exemption
2.9 Customs’ warehousing regimes
2.10 Tobacco & alcohol strategy
2.11 Film partnerships

3. NATIONAL INSURANCE 17-18
3.1 Rates

4. EMPLOYEE BENEFITS 19-21
4.1 Company cars, vans and emergency vehicles
4.2 Outplacement counselling and training expenses
4.3 Employees in full-time education
4.4 Computers and bicycles

5. CAPITAL GAINS TAX 22-25
5.1 Annual exemption
5.2 Rates of tax
5.3 New measures – location of assets
5.4 New anti-avoidance measures

6. SAVINGS AND INVESTMENTS 26-30
6.1 Overview
6.2 ISAs
6.3 Child Trust Fund
6.4 Collective investments
6.5 Film partnerships
6.6 Real Estate Investment Trusts

7. LIFE POLICYHOLDER/LIFE COMPANY TAXATION 31

8. TRUST TAXATION 32-35
8.1 The process so far
8.2 Definite measures announced today
8.3 Further specific items subject to reform
8.4 Other issues still subject to consultation/discussion

9. INHERITANCE TAX 36-44
9.1 Nil-rate band
9.2 General planning
9.3 The income tax charge on pre-owned assets

10. CORPORATION TAX 44-45
10.1 Rates of corporation tax
10.2 Reform of corporation tax

11. CAPITAL ALLOWANCES 46

12. REMUNERATION STRATEGIES FOR
SHAREHOLDING DIRECTORS 47-52

13. PENSIONS 53-58
13.1 The earnings cap
13.2 The new simplified tax regime
13.3 Planning for the new simplified tax regime
13.4 The Pensions Act 2004
13.5 State pension changes

14. STAMP DUTY LAND TAX/STAMP DUTY 59-60
14.1 Stamp duty land tax
14.1.1 Residential property
14.1.2 Non-residential property
14.1.3 Disclosure
14.1.4 Anti-avoidance
14.2 Stamp duty reserve tax

15. RESIDENCE AND DOMICILE 61-63

16. CIVIL PARTNERSHIPS

APPENDIX – TAX FACTS AND FIGURES AND NICs 64-75

All the information and views given in this Bulletin are presented for general consideration only. Accordingly, Technical Connection can accept no responsibility for any loss occasioned as a result of any action taken or refrained from as a result of the contents hereof. Readers and clients of readers must always seek independent advice before taking or refraining from taking any action.

The contents of this Budget Bulletin are based on the proposals put forward by the Chancellor in his Budget speech. These need to be approached with caution as the details may change during the passage of the Finance Bill through Parliament.
1. INCOME TAX

1.1 RATES OF TAX

1.1.1 THE STARTING RATE OF INCOME TAX

The starting rate of 10% for the tax year 2005/2006 applies on the first £2,090 of taxable income (i.e. after allowances and reliefs).

It should be noted that the starting rate does not apply to trusts.

1.1.2 THE BASIC RATE OF INCOME TAX

For 2005/2006, the basic rate of income tax will be 22%. The higher rate threshold has been increased to £32,400. The basic rate will apply to income in the band £2,091 to £32,400. The basic rate of tax is relevant to:-

· Contributions to personal pensions, stakeholder pensions and FSAVC arrangements which will be made net of tax;

· Charitable covenants and Gift Aid;

· Annual payments.

WHICH MEANS THAT ...

Subject to the special rules which apply to jointly owned shares in a close company, by allocating income and possibly gains between spouses, particularly where the income is currently concentrated in the hands of one spouse and especially for those where one spouse pays income tax at a higher rate than the other, it is possible to save tax. This reallocation can be achieved by transferring assets (including capital investment bonds to be encashed) unconditionally from one spouse to the other. No capital gains tax liability or inheritance tax liability will arise on such transfers. Tax saved will mean that taxpayers are even better placed to invest in other investment products. There is no better time than the beginning of the tax year to implement “income splitting” plans.

The Inland Revenue attack using S660A ICTA 1988 to argue that certain payments in connection with small businesses to “non-contributing” spouses are settlements of income and thus assessable on the “main contributor” is relatively well known now. The Inland Revenue through their Tax Bulletins have explained their approach and have given many examples. Case law has emerged with the Inland Revenue winning the Arctic Systems case before the Special Commissioners although the taxpayer has been given leave to appeal. The appeal is scheduled to be heard about now. A risk clearly exists and planners and their clients must be made aware of it. We have certainly not seen the end of this issue.

1.1.3 THE HIGHER RATE THRESHOLD

The higher rate threshold has been raised to £32,400.

Whilst this appears good news, over the last 10 years or so the number of higher rate taxpayers in fact has increased because the higher rate tax threshold has not increased in line with earnings. Higher rate taxpayers will still have a need to shelter income from tax. This will be particularly relevant to income generated by investments.

WHICH MEANS THAT ...

Where a person is or is likely to be a higher rate taxpayer, consideration should be given to:-

· Reducing taxable income by offsetting pension contributions against earned income

· Individual savings accounts (ISAs);

· Capital growth oriented unit trusts;

· Capital investment bonds with their tax deferring qualities; and

· Investments which secure tax relief on investment such as the enterprise investment scheme, venture capital trust and enterprise zone property.

CAPITAL INVESTMENT BONDS

Although gains under capital investment bonds are subject to income tax (not capital gains tax) when realised, these products can be particularly useful in income tax planning because:-

· they are non-income producing – there is no need to make an entry in the annual tax return until a chargeable event gain is made, say on full encashment or a withdrawal of more than the cumulative unused 5% allowances;

· no personal liability to basic rate tax or the equivalent arises on income and growth (although the income and gains generated by the investments underlying UK bonds are taxable in the hands of the insurance company). An insurance fund represents a particularly tax attractive environment for reinvested dividends as no further tax is payable by the life company on this “franked” income;

· tax efficient “income” can be taken in the form of partial encashments; and

· the basic rules that apply to capital investment bonds with UK life companies mean that, when an investor encashes his bond, the gain will be added to his other taxable income and, if appropriate, (after top-slicing relief), he will suffer higher rate income tax. The gain under a UK bond is treated as having suffered lower rate (20%) tax and so the maximum rate of income tax that will arise on such a gain if an encashment is made in 2005/2006 will be 20%, i.e. 40% higher rate tax less 20% lower rate tax. Two particular points need to be noted here:-

1. the gain is not grossed up to reflect the lower rate tax paid within the insurance company’s funds – it is the net gain that is chargeable; and

2. although the gain is treated as if lower rate tax has been paid, it is likely that the insurance company has in fact paid tax at a rate less than the lower rate. For example, insurance company policyholder funds would currently only suffer 20% corporation tax on income other than dividend income. Dividends received with a 10% tax credit would bear no further tax. Moreover, although a life assurance company is liable to 20% corporation tax on capital gains, in practice this liability will be at a lower effective rate reflecting loss relief and the ability to only realise assets at the best “tax time”. As indexation allowance is still available to companies, this will apply to the insurance company’s investments meaning that indirectly the policyholder benefits from this allowance.

The upshot of all this is that although because of the lower rate tax credit a policyholder’s gain will be treated as having suffered tax at 20%, it may in fact have only suffered tax at (say) 18%. This, combined with the fact that the chargeable event gain will not be grossed up for income tax purposes, will mean that the effective rate of tax on the gain may be as low as 34.4% for 2005/2006 notwithstanding that the policyholder is a 40% taxpayer. For this reason UK capital investment bonds continue to look very attractive for the higher rate taxpayer seeking capital growth in a tax-sheltered environment and especially to the extent that the growth is driven by reinvested income.

Of course, complete tax sheltering is available via an offshore bond but, on encashment, all gains will then be taxed as the taxpayer’s top slice of income without a 20% tax credit. Whether an offshore or UK bond is more appropriate in any particular case will depend on many factors including likely investment terms, returns, withholding taxes and charges.

It is also important to remember that neither taper relief nor the annual capital gains tax exemption can be used in respect of capital investment bond gains although, as mentioned above, capital gains made by a UK life fund will currently qualify for indexation allowance which will have a downward impact on the effective rate of tax that the fund suffers.

COLLECTIVE INVESTMENTS THAT DISTRIBUTE INCOME

For those with minor children/grandchildren, opportunities that existed for using their personal income tax allowance by setting up trusts for their benefit under which the trustees invest in distribution units of unit trusts, OEICs and investment trusts ceased to exist from 6 April 1999. This is because the tax credit attaching to dividends from UK companies and distributions from equity collectives can no longer be reclaimed.

In relation to trusts established for a minor unmarried child where that child has a vested right to income, if the income exceeds £100 gross in a tax year it is automatically taxed on the parental settlor irrespective of whether the income is paid to or for the child’s benefit. However, scope exists for trusts for grandchildren where consideration should be given to investing offshore to obtain the benefit of gross dividends or distributions. If it is desired to achieve tax effective accumulation of income from UK investments held in a trust under which the grandchild has an interest in possession then, subject to investment considerations, it will be necessary to invest in areas that produce income other than UK dividend income. As well as interest from cash deposits, this will include income from corporate bonds and certain collectives whose income payments are treated as interest distributions rather than dividends.

1.2 PERSONAL ALLOWANCES, RELIEFS AND CREDITS

All allowances and thresholds other than the age allowance (increased in line with earnings) have been raised in line with statutory indexation. This means:-

· the personal allowance is increased to £4,895.

· an increase in the level of age allowance from £6,830 to £7,090 (for those aged 65 – 74) and from £6,950 to £7,220 (for those aged 75 and over).

· an increase in the level of income that a person can enjoy before age allowance is cut back. This figure has risen from £18,900 to £19,500.

· the married couples allowance (MCA) for those aged between 65 and 74 (provided at least one spouse was aged 65 or over before 6 April 2000) will increase to £5,905, and for those aged 75 and over will increase to £5,975.

· the standard MCA was of course withdrawn from 6 April 2000. In calculating the reduction in age allowance when income exceeds £19,500, the increased MCA is cut back to not less than £2,280 (the “minimum amount”).

· tax relief for maintenance payments will be available only where at least one party was 65 or over at 5 April 2000. The relief is increased to £2,280.

· relief in respect of the MCA and maintenance payments continues to be given as a tax credit at the rate of 10%.

WHICH MEANS THAT...

· Bearing in mind that a husband and wife each have their own personal allowance and their own starting and basic rate tax bands, more tax can be saved with planning. Both personal allowances and starting/basic rate tax bands should, if possible, be used to the full, particularly where only one of the spouses is a higher rate taxpayer. As well as a transfer of investments, considerable scope may exist for a business owner to employ his or her spouse and possibly then provide a pension for him/her. Care should be exercised to ensure that all payments made will be a deductible expense for the payer. The greater the remuneration, the greater the care! Special care needs to be taken by those considering taking their spouse into partnership. The Inland Revenue can sometimes argue that a settlement of income exists resulting in an assessment of all the income on the “settlor” spouse. This risk may be less where the “lesser working spouse” is a partner from outset.

Where dividends are paid on shares in private companies to a non-working spouse who owns shares, it will not be possible to reclaim any tax credit. The latest Inland Revenue attack using the settlements legislation where dividends are paid to “non-working” spouses (see 1.1.2 above) also needs to be borne in mind since, if successful, it would result in the dividends being assessed on the “working” spouse on the basis that it is his or her effort which generates the income.

· Age allowances apply separately to a husband and wife as does the total income limit of £19,500 above which the allowance reduces. By careful planning both spouses can possibly qualify for full age allowance. When investment income is in the “age allowance trap” it can suffer an effective rate of tax of between 30% and 33% so reinvestment in non-income producing assets should be considered. Capital investment bonds, capital growth oriented unit trusts, OEICs and ISAs may be attractive as, (subject to guarding against “capital erosion”), “income” can be taken without loss of age allowance. With the capital investment bond, this will commonly be in the form of utilisation of the 5% annual withdrawal facility. In some cases, more than 5% can be taken (without an addition to total income which may impact on the age allowance) provided the first withdrawal is made in the second policy year.

Under current tax rules care should be exercised on final encashment of the bond or on part encashment over the cumulative unused 5% allowances as the entire chargeable event gain without top-slicing relief will count as income for age allowance purposes. However, careful advance planning can help to substantially reduce this problem.

In the case of unit trusts and OEICs, units or shares can be regularly encashed to make use of the annual capital gains tax exemption, after due allowance for any taper relief.

1.3 MORTGAGE INTEREST RELIEF

No changes have been announced with regard to mortgage interest relief in respect of principal residences which was generally abolished from 6 April 2000.

Interest payable on loans used to buy land or property which is used in a rental business, which would include buy-to-let property, is deductible in computing profits or losses of the rental business.

WHICH MEANS THAT...

Whilst there are no new reasons to address this issue there is every reason to ascertain whether those who could improve their financial position in relation to their mortgage have done all they can do to do so. Key categories of borrower for whom effective action may be possible are partners and shareholding directors with a credit balance loan or capital account. These should give some thought to withdrawing funds to repay non-qualifying borrowing (which includes mortgage borrowing from April 2000). Any interest due on borrowing arranged in the future to introduce capital into the business for business purposes should qualify for tax relief in full. Care and professional advice is however necessary before taking any action.

1.4 OTHER RELIEFS

The threshold for tax exempt rents under the Rent a Room scheme for tax year 2005/2006 remains at £4,250.

1.5 TAX ON SAVINGS INCOME

The starting rate of 10% will apply to the first £2,090 of taxable income. Savings income which falls within the band £2,091 to £32,400 will be taxed at 20%.

WHICH MEANS THAT ...

This is good news for those on lower incomes.

Non-taxpayers must reclaim the 20% tax deducted at source using Inland Revenue form R40 unless they have certified for gross interest from a bank/building society account (form R85), or for a gross annuity (form R89). A 10% taxpayer will need to complete form R40 to reclaim overpaid tax.

1.6 TAX RECLAIM/PAYABLE CHART (UK RESIDENT AND DOMICILED INVESTOR) 2005/2006

Source
Tax deducted at source?
Tax reclaim by non-taxpayer?
Tax reclaim by 10% taxpayer?
Tax payable by basic rate taxpayer?
Tax payable by higher rate taxpayer?

BUILDING SOCIETY/BANK INTEREST
YES
20%
(R85)
YES
20%
(R40)
YES
10%
(R40)
NO
YES
(40% WITH
20% TAX CREDIT)
NON-UK BUILDING SOCIETY/BANK INTEREST
NO
NO
(NO NEED)
NO
(NO NEED)
YES
20%
YES
40%
UK DIVIDENDS
NO
(10% TAX CREDIT)

NO
NO
NO
YES
(32.5% WITH 10% TAX CREDIT)
GILT INTEREST
NO
(IN MOST CASES)
NO
(NO NEED)
NO
(NO NEED)
YES
20%
YES
40%
TAXABLE ELEMENT OF ANNUITY
YES
(R89)

YES
(R40)
YES
(R40)
NO
YES
(40% WITH 20% TAX CREDIT)
UK BOND GAINS
NO
(BUT UP TO 20% SUFFERED IN FUND)
NO

(NOT POSSIBLE)
NO

(NOT POSSIBLE)
NO
YES
20%
NON-UK BOND GAINS
NO

NO
(NO NEED)
NO
(NO NEED)
YES
20%
YES
40%
OFFSHORE ROLL-UP FUNDS
NO

NO
(NO NEED)
NO
(NO NEED)
YES
22%
YES
40%
OFFSHORE DISTRIBUTOR FUNDS – DIVIDENDS DERIVED TOTALLY FROM EQUITY INCOME
NO
NO
(NO NEED)
NO
(NO NEED)
YES
10%
YES
32.5%
OFFSHORE DISTRIBUTOR FUNDS – DIVIDENDS NOT DERIVED TOTALLY FROM EQUITY INCOME
NO
NO
(NO NEED)
NO
(NO NEED)
YES
20%
YES
40%

2. TAX AVOIDANCE

Last year the Government announced their intention to get much tougher with schemes designed to enable people to avoid tax. This was achieved by the implementation of a rule that required details of certain schemes or arrangements with a tax avoidance purpose to be disclosed to them. The precise scope of the rule was dealt with by regulations published in the Summer of 2004.

The Government have reaffirmed their view to get tough on tax avoidance in their March 2005 Budget with the announcement of a number of measures designed to tackle tax avoidance and tax fraud.

2.1 DISCLOSURE RULES

The disclosure rules require promoters or users of certain tax avoidance schemes or arrangements to provide information to the Revenue Departments. These only apply to schemes described in the regulations issued in August. The Chancellor has today announced an extension of the rules to include:

schemes involving stamp duty land tax on commercial property; and
two more listed VAT schemes and an additional VAT hallmark.

2.2 AVOIDANCE THROUGH ARBITRAGE

Measures have been introduced to prevent companies playing off different sets of tax rules to gain a UK tax advantage. This will prevent companies exploiting differences in the way tax rules apply to them but will only apply where a UK tax advantage is sought. The legislation will only apply if the Inland Revenue issue a notice and will not apply if the tax reduction is minimal. The Inland Revenue is publishing detailed guidance and will provide informal clearances from today.

2.3 ABUSE OF DOUBLE TAXATION RELIEF

A new measure is being introduced to prevent tax avoidance schemes that exploit double taxation relief (DTR). The legislation takes effect from 16 March 2005 and will deny excessive DTR where:

relief results from a scheme or arrangement that has tax avoidance as a sole or main objective; and
one or more of five circumstances, as specified in the legislation, apply.

The legislation also means that claims will be denied in respect of income acquired for the purposes of securing excessive DTR (for example, foreign dividend buying).

The legislation only applies if the Inland Revenue issue a notice and will not apply if the tax reduction is minimal. The Inland Revenue is publishing detailed guidance and will provide informal clearances from today.

2.4 TAX ON CAPITAL GAINS

Two new measures to counter avoidance of tax on capital gains by exploiting double taxation agreements have been introduced with effect from 16 March 2005. In addition the range of assets treated as located in the UK for CGT purposes will be expanded. These are dealt with in section 5.4 (capital gains tax) below.

2.5 FINANCIAL PRODUCTS

A package of measures targeting avoidance by companies and individuals using financial products is being introduced. The following schemes, reported under the disclosure rules, are being blocked:

conversion by companies of interest-like income into a form that it is subject to lower tax or no tax;
exploitation of the group continuity rules for loan relationships and derivative contracts to convert income into capital, or take advantage of different accounting methods used by different companies within a group;
exploitation of the relief available to companies for annual payments as charges on income; and
rent factoring schemes that attempt to circumvent the Finance Act 2000 anti-avoidance rules by arranging deals that exceed the 15 year exception limit.

A further measure blocks an income tax scheme involving a stock loan of gilts, which is said to result in a double deduction under the manufactured interest and Accrued Income Scheme (AIS) anti-avoidance rules.

2.6 CORPORATE INTANGIBLE ASSETS

A marketed avoidance scheme for the corporate intangible assets regime is being blocked. This will ensure that intangible assets existing before the regime commenced in April 2002 only qualify for tax relief under the regime when acquired by companies from unrelated parties. This measure ensures that the regime operates as intended.

Changes will also be made to the market value rules within the intangibles regime to ensure that other tax provisions work as intended.

2.7 STAMP DUTY LAND TAX

A number of avoidance schemes, which have been used to reduce or eliminate liability to stamp duty land tax (SDLT) on land transactions are blocked. These include:

exploitation of group relief and acquisition relief to enable land to be transferred out of a group without the purchaser paying SDLT or tax at 0.5 per cent;
use of nominees to avoid the charge on leases; and
schemes purporting to disguise the purchase price as a (potentially repayable) loan or deposit.
2.8 PARTIAL EXEMPTION

The aim of the VAT partial exemption rules is to achieve fair recovery of input tax for businesses that make a mixture of exempt and taxable supplies. Four measures are being introduced to prevent certain revenue losses and ensure fair recovery of VAT. These measures include widening the circumstances in which Customs will issue a Special Method Override Notice and will come into effect from 1 April 2005.

2.9 CUSTOMS’ WAREHOUSING REGIMES

A loophole that has allowed some businesses to exploit the VAT-free status of sales within UK Customs’ warehouses will be closed after Royal Assent to the Finance Bill. The measure will allow Customs to make regulations requiring certain types of supplies of goods in Customs’ warehouses to be taxed according to normal domestic VAT rules, rather than benefiting from the tax-free status that is normally applied to supplies of warehoused goods.

The measure will ensure that correct amounts of VAT are paid overall. The regulations will only be used to target artificial arrangements designed to avoid tax and will not affect the overwhelming majority of businesses enjoying the trade facilitation measure of VAT-free trading within Customs’ warehouses.

2.10 TOBACCO & ALCOHOL STRATEGY

Provisions dealing with tobacco smuggling and alcohol fraud are also introduced.

2.11 FILM PARTNERSHIPS

The Budget confirms the anti-avoidance measures announced in the Pre-Budget Report last December. The measures applying from 2 December 2004 are as follows:-

1. It will no longer be possible for tax relief to be claimed by more than one party for one film. It appears that films were sold by one party who had already claimed tax relief under section 42 (Finance (No 2) Act 1992) or 48 (Finance (No 2) Act 1997) to another party who then claimed the same relief. In future a new owner will only be able to claim relief if the previous owner has not claimed relief and has also elected not to claim relief.

2. Tax relief under section 42 is limited to the total production costs – as it was for relief under section 48 on 17 April 2002.

3. The deferral period is limited by law to 15 years. In the past the Inland Revenue had generally accepted 15 years without question but would allow longer periods on a case by case basis. However, it is concerned that investors seek to extend the period further into the future to increase the benefit of tax deferral. This will apply only where there is a guaranteed income return on the lease-back of the film (which occurs in most film partnership cases). Tax relief is given only on the expenditure multiplied by 15 and divided by the agreed lease period. Therefore if the lease period is 20 years only 75% of the expenditure will get relief.

4. Measures are to be introduced to stop groups of companies avoiding the tax charge on future rental receipts by using an “exit” scheme. This converts the deferral of tax into a permanent tax advantage. Under this measure companies will be required to bring in the value of the film right not yet brought into the tax charge as a trading receipt at the time of the exit event.

5. Measure will prevent partners obtaining loss relief in excess of their capital contribution for which they are fully at risk and also prevent such non-risk contributions from being counted when computing the exit charge for individuals benefited by film relief.

3. NATIONAL INSURANCE

3.1 Rates

National Insurance rates and contribution limits are as follows for 2005/2006:-

· The employee’s Primary Class 1 National Insurance rate is 11% on earnings between the Primary Threshold (£94 per week) and Upper Earnings Limit (£630 per week).

· Employees, in addition, pay 1% Primary Class 1 National Insurance on all earnings above the Upper Earnings Limit.

· The Employer’s Secondary Class 1 contribution rate on earnings above the Secondary Threshold (£94 per week) is 12.8%.

· The self-employed Class 4 rate on profits between the lower (£4,895 pa) and upper profits limit (£32,760 pa) is 8%.

· The self-employed, in addition, pay Class 4 contributions at a rate of 1% on all profits above the upper profits limit.

WHICH MEANS THAT...

The changes in the thresholds should give advisers an incentive to visit their business clients to discuss effective methods of remuneration.

Those running their business through a company may well consider paying themselves dividends as opposed to salary. The main reason for this will, of course, be that dividends are not subject to National Insurance. The pros and cons of salary and dividends have been well rehearsed many times in the past and these should be revisited before any meetings are arranged with clients. This is covered in greater detail in Section 12

In addition, a review of the opportunities for payment of salary to working spouses could be beneficial. Of course, in any remuneration planning for a spouse it is important that payments, in order to be fully tax deductible, can be justified on the basis of work carried out.

Any planning carried out with a view to taking a spouse into partnership (where appropriate) or issuing shares to a spouse in order to pay dividends must be carefully discussed with professional advisers before being implemented, especially in light of the Inland Revenue’s intention to apply the settlements legislation in cases where arrangements are entered with a tax avoidance motive. The Special Commissioner’s decision in the Arctic Systems case has affirmed the Revenue stance although the decision is being appealed.

There may be an additional benefit to incorporation in the shape of the avoidance of the “unlimited” 1% Class 4 NICs on earnings over the upper profits limit that could be avoided on profits that accrue to a company. NICs could continue to be legitimately avoided, even if the money leaves the company, provided it is paid to the shareholders by way of dividend. Of course, before taking this important step (incorporating an unincorporated business), there are many other factors to be taken into account and professional advice is essential.

4. EMPLOYEE BENEFITS

4.1 COMPANY CARS, VANS AND EMERGENCY VEHICLES

Cars

Where a car is made available for an employee’s private use a taxable benefit arises. Since April 2002 the taxable benefit has been calculated by applying a percentage to the list price of the car. The percentage is related to the CO2 emissions of the car and ranges from 15% to 35% (in 1% increments) for a petrol car. Diesel cars that do not meet Euro IV emissions standards attract a 3% supplement on the petrol percentages (capped at 35%). Cars that run on alternative fuels attract discounts to the petrol percentage. The CO2 emissions qualifying for the minimum petrol percentage charge have been set as follows:

· 2005/06 140 grams per kilometre of CO2
· 2006/07 140 grams per kilometre of CO2
· 2007/08 140 grams per kilometre of CO2

Car fuel

An additional taxable benefit arises if the employee receives free fuel for the company car for their private use. The taxable benefit calculation was reformed in April 2003 to align the charge with the environmental principles of the company car tax system. Since April 2003 the fuel benefit charge has been calculated by applying the company car tax appropriate percentage to a set figure. In 2004/05 the set figure was £14,400 and continues to be £14,400 for 2005/06.

Cars that are capable of running on alternative fuel such as liquefied petroleum gas (LPG), compressed natural gas (CNG) or battery-propelled cars, currently enjoy a discount from the equivalent company car percentage. There are different calculations of the discounts for bi-fuel gas and petrol cars depending on whether they are manufactured or converted to run on gas as well as petrol before or after the type approval.

The current discounts are:

§ cost of conversion disregarded plus 1% discount for bi-fuel gas and petrol cars converted after type approval;
§ 1% discount plus an additional 1% for each 20g/km the car’s emissions fall below the level of CO2 qualifying for the minimum petrol percentage charge for bi-fuel gas and petrol cars manufactured or converted before type approval;
§ 2% discount plus an additional 1% for each 20g/km the car’s emissions fall below the level of CO2 qualifying for the minimum petrol percentage charge for hybrid petrol and electric cars; and
§ 6% discount for electric-only cars.

For 2006/07 the discounts for cars that run on alternative fuels will be simplified to:

§ cost of conversion disregarded for bi-fuel gas and petrol cars converted after type approval, no additional percentage discount;
§ 2% discount for bi-fuel gas and petrol cars manufactured or converted before type approval;
§ 3% discount for hybrid electric and petrol cars; and
§ the 6% discount for electric-only cars will be maintained.

Vans

Under the current rules, the benefit charge that arises where a van is available to an employee for private use is £500 (or £350 for a van that is 4 or more years old at the end of the tax year) and has been in place and unchanged since 1993. The charge also includes any private fuel provided.

From 6 April 2005 a nil charge will apply to employees who have to take their van home and are not allowed other private use. Where private use is unrestricted the existing £500 or £350 scale charge will apply dependent upon the age of the van. From 6 April 2007 the discount for older vans will be removed and the scale charge for unrestricted private use will increase to £3000 and if an employer provides fuel for unrestricted private use an additional fuel charge of £500 will also apply.

WHICH MEANS THAT....

For many years now it has been recognised that the provision of a company car for private use is expensive for both the employee and employer. Other ways of compensating employees (for instance a cash substitute) should be sought where the tax and NI on company vehicles is seen as a burden.

4.2 OUTPLACEMENT COUNSELLING AND TRAINING EXPENSES

Currently an employer is allowed to provide outplacement counselling and retraining courses for employees who lose their jobs without the employee incurring an income tax charge. One of the conditions for this exemption is that the employee must work full-time; another is that any course undertaken should last no more than a year.

The proposed revision extends the current exemption to include part-time workers and provides that any course undertaken can last up to a maximum of two years.

The new rules take effect from 6 April 2005.

4.3 EMPLOYEES IN FULL-TIME EDUCATION

Statement of Practice 4/86 is updated and modernised. The current statement of practice (SP 4/86 “Scholarship And Apprenticeship Schemes At Universities And Technical Colleges”) sets out the circumstances when payments made by an employer to an employee for periods of attendance on a full-time course can be exempted from income tax. The statement of practice states that:

§ the employee must be attending a full-time course at a recognised educational establishment, for at least twenty weeks a year;
§ the payments can cover lodging allowance, subsistence and travelling allowances, but exclude any university fees or fees payable by the employee;
§ the payments do not exceed the higher of £7,000 or an amount, which an individual in similar personal circumstances would have received as a grant from a public awarding body (e.g. studentship from one of the research councils).

In the revised statement of practice (which has been renamed) most of the conditions and limitations remain the same, but the revised statement of practice:

§ raises the limit from £7,000 to £15,000;
§ has simpler language and layout, for example, clarifying that this measure is linked to an academic year;
§ removes the link to amounts paid by awarding bodies;
§ will be reviewed annually.

Although statements of practice do not relate to National Insurance the government has taken the opportunity to exempt such payments from National Insurance as well as tax.

4.4 COMPUTERS AND BICYCLES

Computers and bicycles loaned to employees by their employer are exempt from the tax charge on the benefit arising. For computers the exemption applies to the first £500 of annual benefit.

The Government-sponsored Home Computer Initiative (HCI) encourages employers to set up computer loan schemes allowing employees to take advantage of the exemption for computers and generally envisages that employees will buy computers from their employer after the loan period ends at market value. Currently if the employee decides to buy the computer or bicycle at the end of the loan period for market value a tax charge may still arise as the benefits-in-kind rules provide for an alternative basis. This alternative basis is the market value at the time the asset was first lent to the employee less the total value of the benefit-in-kind tax charges that the employee has suffered in each tax year he has used the asset. This could effectively mean that the annual £500 exemption is clawed-back.

Therefore, this measure will disapply the alternative basis of valuation for computers and bicycles that have benefited from the exemption. This will mean that where ownership of a computer or bicycle that has previously been loaned to an employee is transferred to an employee the valuation rule which applies in deciding whether any benefit arises at transfer will always be the market value.

5. CAPITAL GAINS TAX

Very little change was announced on capital gains tax (CGT) in the Budget as far as UK domiciled and resident individuals are concerned . It was however confirmed – presumably to combat the speculation of recent weeks – that gains arising on the disposal of a principal private residence will continue to be exempt from CGT.

New measures were announced dealing with the location of assets owned by non-domiciled UK residents and persons who are non resident but carry on a business in the UK.

There are also new anti-avoidance measures to combat the exploitation of any Double Taxation Agreements by temporary non-residents, including individuals and trustees.

5.1 ANNUAL EXEMPTION

This is increased from £8,200 in 2004/05 to £ 8,500 in 2005/06 for individuals and personal representatives. For trustees the exemption increases from £4,100 to £ 4,250.

WHICH MEANS THAT…

(i) Planning for individuals

· The annual CGT exemption is one of the most important weapons in an individual’s CGT planning armoury. Each individual (in a family this means a separate annual CGT exemption for each spouse and each child) can realise gains each tax year within his/her CGT annual exemption tax free. A simple way for parents and grandparents to facilitate use of the annual exemption by children is for investments, such as growth-oriented unit trusts/OEICs, to be held on an absolute (or bare) trust or for the designated benefit of the child. By using this method, the child’s annual CGT exemption can be used to cover capital gains of the trust.

It needs to be borne in mind that bare trusts offer little control to the investor should there be a desire to prevent the child from benefiting at a later date. Also the Government have made it clear in the trust reform discussion documents that where the beneficiary of such a trust is the minor unmarried child of a settlor, they would in future prefer to tax capital gains on the settlor. If such strategies are to be adopted, it would therefore be better to:-

- confine them to situations where the settlor is somebody other than a parent

- ensure that capital gains are not realised until after the child beneficiary attains age 18 (or marries under that age)

The second of these situations, of course, ties in nicely with an arrangement where the investment has been made with a view to encashments to assist meeting the child’s university costs at age 18.

· Transfers between spouses continue to be treated on a “no gain/no loss “ basis. This means that as long as any transfer is outright and unconditional, a prior transfer from a spouse holding investments to a spouse with no investments could effectively double the use of the family’s annual exemption. Following the 1998 Budget changes it is much harder to utilise the annual exemption through “bed and breakfast” transactions although “bed and spouse” and “bed and ISA” arrangements still work.

· The annual exemption is applied after taper relief. This can have the effect of “stretching” the annual exemption. For example, if gains on an investment were, say, £14,166 and the investment had been held (or treated as held) for 10 years of ownership that qualified for taper relief, then taper relief at 40% would reduce the gain to £8,500 which would be wholly exempt within the annual exemption. It may well be higher in ten years time!

· Despite the benefits of taper relief and the annual exemption it is also important to remember that, in determining taper relief, any investments that generate capital gains will be subject to the “identification” rules which can give rise to complexity when, say, dividend income is reinvested and new units or shares are acquired as a result. Holding investments within the wrapper of a capital investment bond can avoid this problem so that while use of the annual CGT exemption and taper relief is foregone for the investments in question, on an actively managed income producing portfolio (especially where the income is reinvested) the “loss” of the stated exemption/relief may not be too harsh. Each case must of course be dealt with on its own facts.

(ii) Planning for Trustees

Trustees will be entitled to an annual CGT exemption of £4,250 but where a settlor has created more than one trust, then this £4,250 is diluted by the number of trusts concerned subject to a minimum exemption of £850. There are certain planning points that arise out of the use of the trustees’ annual exemption, as follows:-

· Trustees should invest in ways in which they can effectively use the annual CGT exemption. Areas such as growth collective investments and unit trusts would be appropriate.

· In the case of larger trusts, if the trustees are likely to realise capital gains that exceed their annual exemption, the rate of CGT on such gains will normally be 40% (see 5.3 below). Growth investments that are not subject to CGT, such as capital investment bonds, may therefore be appropriate to shelter likely bigger gains.

· Where the settlor and/or the settlor’s spouse can benefit under the trust, all capital gains will be assessed on the settlor and so the trustees will not have an annual CGT exemption. In these circumstances, it may be appropriate for the trustees to invest in areas which will not incur a CGT liability. Capital investment bonds may be an attractive investment – especially as they are non-income producing and so reduce the trust’s tax administration.

5.2 RATES OF TAX

The rates of CGT for individuals have not changed and, after taper relief and the annual CGT exemption, gains will be taxed as if they were the top slice of a taxpayer’s income and so be subject to CGT at 10%, 20% (for a basic rate taxpayer) or 40% as appropriate. Trustees, pay CGT at 40%.

WHICH MEANS THAT…

Transfers between spouses, where one pays tax at 40% and the other at the basic rate, are still attractive as the effective tax saving is still at 20% although the difference in income tax rates may be only 18%. Moreover, existing taper relief will not be lost on a transfer between spouses. Of course, it should be remembered that such transfers should be bona fide – ie. the proceeds of sale should not be passed, directly or indirectly, back to the original owner of the property – otherwise the procedure may be challenged by the Inland Revenue and assessed for tax on the original owner.

5.3 NEW MEASURES – LOCATION OF ASSETS

The location of an asset that is being disposed of is relevant ( for CGT purposes) to individuals who are UK resident or ordinarily resident but not UK domiciled and to persons neither resident nor ordinarily resident but carrying on business in the UK.

In most cases , non domiciled individuals will have no CGT liability on the disposal of an asset situated outside the UK unless the gains are remitted to the UK. Persons who are non-UK resident but carrying on business in the UK only have a CGT liability on disposals of assets situated in the UK which were used for the purpose of the business.

Section 275 TCGA 1992 provides rules which determine the location of certain assets but is apparently not comprehensive enough. It seems that people have taken advantage of the absence of a specific rule in certain cases to enable that asset to not be treated as situated in the UK even if most or all of its value derives from the UK.

A new measure will provide specific rules for certain assets which are currently not within the scope of section 275. For example all shares in and debentures of companies incorporated in the UK, whether registered or not, will be treated as situated in the UK. There are further detailed provisions dealing with certain other rights in a company, rights corresponding to patents, copyright and intangibles including options and futures.

WHICH MEANS THAT ...

Any clarification of such an important matter is clearly welcome. It seems that the main reason this new measure was required was to stop certain planning strategies – clearly considered as tax avoidance by the Revenue. For example under the old rules it was possible for a UK resident but non-UK domiciled individual to arrange for a disposal of bearer shares in a UK company to take place outside the UK. Under common law the shares disposed of were situated where the bearer instrument was present at the time of disposal – and so if this was abroad any potential CGT was avoided. Such a strategy will no longer work.

5.4 NEW ANTI-AVOIDANCE MEASURES – EXPLOITATION OF DOUBLE TAXATION AGREEMENTS ( DTAs)

There are two separate measures being introduced – one dealing with temporary non-resident individuals and one with the changes of residence by trustees.

In both cases the perceived avoidance turned on using certain DTAs to avoid UK tax on chargeable gains by securing residence in a territory outside the UK for treaty purposes.

To be subject to gains tax (CGT) an individual must be UK resident. To prevent people going abroad to establishing residence elsewhere and then disposing of an asset with a view to avoiding UK CGT, section 10A of the Finance Act 1998 introduced the concept of “temporary non-residence”. This means that individuals who are non UK resident for fewer than five complete tax years, may be chargeable to CGT in the tax year of their return as if all the capital gains and losses which arose to them during the “intervening tax years” (that is, the tax years between the tax year of departure and the tax year of return) had instead arisen to them in the tax year of return. (This is subject to then satisfying certain UK residency conditions before departure)

However, if assets were disposed of in the intervening years when the individual was resident in a territory where no, or only a small, liability to tax would arise in respect of the gain in question but the terms of the relevant DTA would prevent the UK from taxing the gain, no charge to UK tax could arise under section 10A TCGA 1992. Apparently the Inland Revenue now considers that those DTAs do not in fact preclude a tax charge under section 10A and the matter is being put beyond doubt by the changes announced in the Budget.

Similar measures are being introduced with regard to trustees, who at some time in a tax year are resident in the UK and at a different time in the same tax year are resident, by virtue of a DTA, in a territory outside the UK. These measures prevent such trustees avoiding UK tax by disposing of assets during the latter period.

WHICH MEANS THAT...

This reflects the continuing Inland Revenue trend to stop any kind of tax avoidance. Following the introduction of the rules on temporary non-residence in 1998, disposing of an asset in a DTA territory has been one of the more “popular” strategies. It is perhaps not entirely surprising to see the above measures being introduced.

6. SAVINGS AND INVESTMENTS

6.1 OVERVIEW

When managing ones investments (incorporating appropriate asset allocation) to produce acceptable returns whilst managing risk takes absolute priority in portfolio planning, maximising the tax efficiency to minimise tax on investments can substantially add to the bottom line. This year the Chancellor tinkered with some of the rules of existing tax efficient investments.

We cover pensions and life assurance policies elsewhere in this bulletin but in this section we will look at

· ISAs
· Child Trust Fund
· Collective investments
· Film partnerships
· Real Estate Investment Trusts

6.2 ISAs

The Chancellor has announced that the £7,000 maximum investment limit and £3,000 for cash is to be retained until 5 April 2010. The limits were due to fall to £5,000 and £1,000 respectively from 6 April 2006 subject to Inland Revenue consultation to retain the limits until 5 April 2009.

He has also announced that from 6 April the scope of qualifying investments for ISAs will be widened. All retail collective investment schemes authorised by the Financial Services Authority (FSA), both UCITS and non-UCITS retail schemes, will qualify provided they do not restrict savers’ ability to access their savings. Schemes which apply the “limited redemption” rule, introduced by the FSA, will not qualify.

Further, the qualification will be extended to any similar overseas non-UCITS retail scheme, provided it is regulated by the FSA.

The “cash-like” test will continue to apply to ISAs so that those schemes promising cash-like returns on investment will be limited to the cash component of the ISA.

WHICH MEANS THAT...

ISA investors will benefit on two fronts, the amount they are allowed to invest over time has increased and their choice of investments has widened. ISAs remain highly tax efficient investments for taxpayers offering

- CGT freedom on capital gains
- Income tax freedom on income and
- The ability to recover the 20% tax credit on savings income and interest distributions.

ISAs continue to form, for many, the first “block” of their non-pension wrapped investments. It should be borne in mind that the £7,000 subscription limit is available for each of a couple so, for them, a combined £14,000 a year can be saved – more than enough over time to build a reasonable readily accessible tax free investment fund for many individuals and couples.

For those with more to invest it is important that they are made aware of the tremendous opportunity for further tax free (or at least tax reduced) growth that can be secured through investment in appropriate growth-oriented collective investments which, if held for 10 years, can qualify for full capital gains tax taper relief. This operates so that, after 10 years, 40% of the chargeable gains will be exempt and then any available annual exemption would apply.

For many investors this “combination” can operate to reduce the effective rate of tax due, possibly to nil. The maximum effective rate of tax payable, even if no annual exemption is available, for a higher rate taxpayer will be 24%.

Anyone who has a capital sum to invest in excess of the ISA subscription limit, and desires to use the annual CGT exemption each year, could consider investment in an appropriate non-ISA collective investment with yearly disposals (within the annual CGT exemption) to fund future ISA contributions. This strategy can provide an attractive way of “converting” a capital sum into a non-taxable investment. Care, of course, needs to be taken over the impact of charges on the overall viability of this strategy. Also encashments need to be made at the right “investment” time. It should be borne in mind that this strategy is open to each of a couple, married or not.

16 and 17 year olds are able to invest up to £3,000 a year in either a cash mini ISA or the cash component of a maxi ISA. Parents wishing to give money to their minor unmarried children to invest in an ISA must be made aware of the provisions of section 660B ICTA 1988. Any income from an ISA is taken into account for the purpose of calculating the £100 limit which is the maximum that can arise in a tax year from gifts made by the parent for that child if all the income (including the income from the ISA) is not to be taxed on the parent. This is so even though the income would arise in an otherwise tax free environment, i.e. in the ISA.

There is no ability for these investments to be funded by parents without consideration being given to the £100 annual ceiling on income produced. However, assuming an average interest rate of, say, 5% per annum and assuming no other income is produced in the year for the donee child from gifts made by the donor parent, the parent could give up to £2,000 to the child to make the cash ISA investment. The interest from that would amount to £100 per annum (provided that the interest is paid out each year) and would be tax free.

It is worth noting that the £100 “threshold” applies per parental donor so that up to £200 of tax free income could be received by a child provided both parents made the gift equally. This should, based on current interest rates, allow the parents to jointly fund a £3,000 cash ISA investment for each of their children if they wish. Also, this would offer an advantage to a child who is paying tax on other income and the parental donors could avoid the anti-avoidance provisions because the income would not exceed £100 for each child in respect of each donor.

From 6 April 2005 no doubt parents with “qualifying” children (those born on or after 1 September 2002) will seriously consider the tax benefits of investing (up to £1,200 pa) into a Child Trust Fund account to obtain a tax free income but with no possibility of the income being taxed on the parent.

6.3 CHILD TRUST FUND

The scope of qualifying investments for the Child Trust Fund has been widened as for ISAs. This means that all retail collective investment schemes authorised by the Financial Services Authority (FSA), both UCITS and non-UCITS retail schemes, will qualify provided they do not restrict savers’ ability to access their savings. Schemes which apply the “limited redemption” rule, introduced by the FSA, will not qualify. Further, the qualification will be extended to any similar overseas non-UCITS retail scheme, provided it is regulated by the FSA.

The Chancellor announced that the Government will now consult on what further payments should be made at secondary school age.

6.4 COLLECTIVE INVESTMENTS

Several minor technical changes will be made to the taxation regime that governs collective investment schemes in respect of certain chargeable capital gains arising to other than individuals. There are also powers to reform the taxation treatment of authorised unit trusts and OEICs. The most notable of these reforms is the proposal to allow a mixed fund to distribute both dividends and interest in the same accounting period. Collectives can invest in a mix of assets, including equities and bonds, but the ‘bond fund’ rules prevent them from making distributions fully reflecting that mix. The daily “bond fund” test is to be removed and funds will be able to make interest and dividend distributions in the same period in proportion to the interest and other income received. Funds will be able to elect to distribute profits only as dividends.

Further, the rules determining who can receive interest distributions gross will be aligned with the gross payment rules for bank interest.

WHICH MEANS THAT…

(a) OEICs, unit trusts and investment trusts (whether run on a single fund, fund of funds or manager of managers basis) continue to constitute tax effective structures within which capital gains can be made tax free by the fund managers with capital gains for the investor deferred until disposal/realisation by the investor. This makes these structures highly appropriate for making the most of taper relief – possibly in combination with the investor’s annual capital gains tax exemption.

(b) Depending on how the portfolio is managed, portfolio management accounts/platforms/wraps can offer slightly different CGT planning opportunities, in particular the ability to use the investor’s annual exemption in respect of any gains made on investments sold by the nominee – perhaps in the course of rebalancing. All gains will, of course, be assessed on the investor as there is no “outer shell” to the portfolio management or “wrap” service, it being a mere nomineeship from a legal standpoint.

(c) Although not a Budget measure, it should not be forgotten that holdings in authorised unit trusts/OEICs by non-UK domiciliaries are not now subject to a potential charge to IHT. This means that they can be IHT efficient for such investors even though the investments are sited in the UK.

6.5 FILM PARTNERSHIPS

The 100% tax relief available under section 48 Finance Act (No 2) 1997 to individuals who invest in British films via film partnerships was due to be withdrawn from 1 July 2005. The Chancellor has announced that the relief will be extended to 31 March 2006.

The basis for the film tax reliefs is that expenditure on the production or acquisition of the master version of a film is treated as revenue expenditure and there are detailed rules as to when that expenditure is to be written off.

When people use the term “film partnership” they are usually referring to relief given under section 48. Section 48 is the more generous of the reliefs as it allows the loss that arises on the production or acquisition of a film to be relieved in one year (rather than spread over several years). However, there are some conditions that have to be met, which are as follows:-

§ The film must be a “British” film as certified by the Department of Culture, Media and Sport
§ The production expenditure and completion of the film must occur between 2 July 1997 and 31 March 2006
§ Total production expenditure must be £15 million or less

Traditionally the partnership has a life of 15 years as this is the period the Inland Revenue will treat as acceptable for full returns on the film to be made. This 15 year period is now the period for which a guaranteed income arrangement must run to secure maximum tax relief.

WHICH MEANS THAT…

Those who find such arrangements attractive have one more year to invest.

6.6 REAL ESTATE INVESTMENT TRUSTS

Last year the Government published a consultation paper alongside Budget 2004 to
consider reform to the taxation of the property investment market in the UK.

The consultation considered the introduction of Property Investment Funds in the UK equivalent to Real Estate Investment Trusts (REITs), which are common to many economies around the world with developed property markets. Such reform would be of particular benefit to the commercial property market, helping to promote greater liquidity, more efficient investment decisions and wider access to smaller investors. It would also aim to address the unresponsive supply of housing through greater institutional investor participation in the residential market.

As part of the consultation, the Government set out four key objectives for
reform, as summarised below:

§ Improving the quality and quantity of finance for investment in commercial
and residential property;
§ Expanding access to a wider range of savings products on a stable and well
regulated basis;
§ Protecting all taxpayers by ensuring a fair level of tax is paid by the property
sector; and
§ Supporting structural change in property markets to reduce costs and
improve flexibility and quality for tenants.

The consultation closed in July 2004 which broadly endorsed the initial proposals. The
consultation process has enabled the Government to better define the key features of a
UK-REIT model, which allows for market flexibility within a framework of a closed-ended company structure. It has also highlighted three challenging issues around the tax treatment of this model, relating to non-UK resident investors, borrowing and group structures, which the Government will be looking to discuss further with industry.

A further consultation paper has now been issued which:

§ recaps the policy rationale for introducing a REIT in the UK;
§ highlights the key structural features that might apply to a REIT in the UK in the context of developing a model broadly along the lines envisaged in consultation responses;
§ outlines how the tax rules could be adapted to fit this model and then highlights some important and challenging issues, relating to non-UK resident investors, borrowing and group structures. These all pose a significant challenge to meeting the objective of closer alignment between the taxation of direct and indirect property investment. It is these issues that the Government will be looking to discuss with industry; and
§ invites the industry to work with Government and sets out the next steps, including establishing a working group to take forward discussion with industry representatives.

Following the consultation the Government hopes to introduce legislation in the Finance Bill 2006.

7. LIFE POLICYHOLDER/LIFE COMPANY TAXATION

For the first time in a few years no changes have been made to the taxation treatment of life assurance policies.

Draft legislation was produced at the time of the 2004 Pre-Budget Report aimed at closing a number of loopholes being exploited by life assurance companies. Following consultation some amendments have been made to this draft legislation which will be included in this year’s Finance Bill.

These new measures will

· from 2 December 2004, ensure that the rules on certain transfers of business from one life assurance company to another cannot be used to reduce taxable trading profits artificially;

· for accounting periods ending on or after 2 December 2004, clarify the circumstances in which companies can treat amounts as “notional” and therefore exclude them from their computations of taxable trading profits;

· for periods of account beginning on or after 1 January 2005, clarify the circumstances in which companies can use additional revenue accounts to obtain a more favourable tax apportionment of their investment return; and

· update the tax treatment of income and gains attributable to assets not needed to pay policyholder benefits and ensure that, for periods of account beginning on or after 1 January 2005, such income and gains will be taxed at normal corporation rates.

8. TRUST TAXATION

The reform of the tax system for trusts has been continuing since the Pre-Budget Report in December 2003. The progress is slow but the good news is that the Government continues to work with the industry to secure consensus on the best way to simplify trust taxation still further in order to help people manage their affairs, whilst ensuring that trusts are not used to achieve an unfair tax advantage.

8.1 The progress so far

In his 2004 Budget, the Chancellor announced that the tax rate applicable to trusts (RAT) would be raised to 40% to combat tax avoidance. This rate applies to income and capital gains. UK dividend income is taxed at 32.5%. He also announced that there would be new measures to prevent this change increasing burdens on certain trusts that have vulnerable beneficiaries.

Two measures were announced – a new tax regime for certain trusts with vulnerable beneficiaries, and a standard rate band of £500 for all trusts paying tax at the rate applicable to trusts. These two measures are confirmed in today’s Budget (Rev 10)

A number of other proposals were put forward in the Budget 2004 and in the Inland Revenue Consultation Document issued in August 2004. These included a set of common definitions and tests for trusts, and the streaming of income through trusts. These measures will simplify the taxation of trusts and were widely supported during consultation last year. However, during subsequent consultation, respondents also raised a number of concerns about some of the detailed aspects of the proposals. A summary of the findings of this consultation has been published with the Budget Press Releases.

In light of this, the Inland Revenue will carry out further development work on these measures and a discussion paper has been published today. It is intended that draft legislation will be published for consultation later this year, prior to the measures being included in next year’s Finance Bill.

8.2 Definite measures announced today

· Standard rate band

There will be a new “standard” rate band of £500 for all trusts liable at the rate applicable to trusts. Legislation giving full details of this will be in the Finance Bill. The effective date for this change is 6 April 2005. The term “standard” is used rather than “basic” as there are a number of different rates involved depending on the type of income. Presumably income will need to be grossed-up to determine whether it falls within the standard rate band.

Trusts which receive all their income up to the standard rate band either net of tax or with an associated tax credit will have no further tax to pay. Those which receive their income gross will have to pay tax at the appropriate rate depending on the nature of the income.

The Inland Revenue Press Release makes no reference to anti-fragmentation rules to prevent settlors establishing a number of trusts to each benefit from the standard rate tax band. However the Regulatory Impact Assessment for Modernising the Tax System for Trusts (also issued on Budget Day) makes the following comment under the heading “Unintended Consequences”

“There is a danger of people seeking to exploit the standard rate band by setting up several small trusts instead of one larger entity, but the savings from doing so are likely to be outweighed by additional administrative costs”.

· Trusts for the vulnerable

There will be a new tax regime for trusts for the most vulnerable, allowing these trusts to be taxed on the basis of the vulnerable beneficiary’s individual circumstances for both income tax and CGT. This measure is also to be included in the Finance Bill and the regime will be backdated to 6 April 2004.

Trustees will be able to use the individual beneficiary’s personal allowances, starting and basic rate bands, rather than being taxed at the rate applicable to trusts.

WHICH MEANS THAT...

The introduction of the standard rate band is meant to take around 30,000 of the smallest trusts out of the full self assessment system. This is a very welcome measure although the £500 limit is considered by many to be far too small. It should however serve to encourage individuals to create smaller trusts, especially for the benefit of minor children, where the reporting requirements and the additional tax in the case of discretionary trusts and accumulation and maintenance trusts have so far been an obstacle to such planning.

Where UK resident trustees of a discretionary trust or an accumulation and maintenance trust invest in a single premium bond, and that bond is encashed, if the tax charge will fall on the trustees (ie because the settlor died in a previous tax year or is non-UK resident) then it may now be necessary to consider whether the trustees should carry out a top slicing calculation to determine how much of the gain should be taxed at 20% (UK bond) or 40% (offshore bond.) This aspect is not addressed in the Inland Revenue Press Release and it will be necessary to await publication of Finance Bill to see if this will be the case.

8.3 Further specific items subject to reform

The Inland Revenue have published the Summary of Responses to the Consultation Document issued on 13 August 2004 together with it a new Discussion Paper on the Modernisation of the Taxation of Trusts. Following on from the responses to the August 2004 consultation the Government has asked the Inland Revenue to discuss further with interested parties some more detailed aspects of four of the suggested measures. These four topics are dealt with in the Discussion Paper issued today.

Income streaming

The proposal is that income that the trustees pass on to beneficiaries before the 31 December falling after the end of the relevant tax year in which the income was received by the trustees should be exempted from RAT and instead taxed on the beneficiary. There are a number of areas still under discussion, such as dealing with deemed income, management expenses, the proposed phased abolition of tax pool and others.

· Definition of a trust

A set of common definitions and tests will be introduced for income tax and CGT. The aim is to improve consistency and make it easier for all trustees, especially lay trustees, to correctly determine their tax status and treatment. The most important definitions under discussion are those of trust/settlement and settlor-interested trust. Different definitions exist currently for income tax, CGT and IHT. The suggested common definition is the one in section 43 IHT Act 1984. The areas under discussion relate to the practical implications of the new definitions, especially given the number of other relevant terms, egg. Settled property, disposition, trust, different legal basis of trust law in Scotland etc.

· Residence test for trusts

The proposal is to harmonise the income tax and CGT tests for trustee residence on the basis of the current income tax test although some respondents felt that the CGT test should be used instead. This remains the subject of consultation.

· Sub-funds

The proposal is that where trust assets have been split off into a separate sub-fund administered by a different group of trustees, the trustees should be able to elect for that sub-fund to be treated as if it were a separate trust for all income tax and CGT purposes. There are a large number of detailed considerations still under discussion.

8.4 Other issues still subject to consultation/discussion

One issue under discussion where no consensus was reached concerned whether trusts set up by approved pension funds should be included within the new regime for trusts with vulnerable beneficiaries (see above). It has been decided that the Inland Revenue will consult further with the pensions industry on this issue.

WHICH MEANS THAT...

Since many issues have still not been decided, it is clearly the case of “watch this space”.

The most important immediate issues are the standard rate band for certain trusts and the new provisions regarding trusts for the most vulnerable. Full details of the latter change are awaited.

One area of particular interest to financial planners is that of the CGT treatment of bare trusts created for minor children of the settlor. The original consultation document suggested that the CGT treatment of such trusts should be brought in line with the income tax treatment, i.e. the parental settlor anti-avoidance provisions where the beneficiary is a minor unmarried child of the settlor. If that were to happen the attraction of bare trusts for own minor children on grounds of CGT efficiency (at the moment all gains under such trusts are assessed on the child beneficiary regardless of who the settlor is) would be considerably reduced unless the realisation of capital gains was deferred until a time after the child’s eighteenth birthday or earlier marriage. However, as can be seen from the above, no such change had been proposed today which means that the current rules continue at least for another year.

9. INHERITANCE TAX

9.1 NIL-RATE BAND

The inheritance tax (IHT) nil-rate band has been increased from £263,000 to £ 275,000 which is more than statutory indexation. The increased threshold will apply to chargeable transfers occurring on or after 6 April 2005. The threshold is to be further increased to £285,000 for tax year 2006/07 and to £300,000 for tax year 2007/08. The Chancellor stated that 94% of estates will not be subject to IHT. The estimated number of estates that will be subject to inheritance tax in tax year 2005/06 will be about 37,000.

WHICH MEANS THAT ...

For a person with assets of over £275,000 the increase in the level of the nil-rate band will produce a potential increased IHT saving of £4,800. For a married couple the total saving could be £110,000 if both arrange their affairs so that the first to die fully uses his or her nil-rate band.

9.2 GENERAL PLANNING

It is perhaps unsurprising that no major changes to inheritance tax have been announced just before the General Election and that the increase in the nil-rate band is relatively greater than in the last few years – inheritance tax and its effect on Middle England voters has recently been much talked about in the press.

On the other hand , there has been considerable activity in combating IHT avoidance schemes, for example the pre-owned assets income tax rules introduced last year and coming into effect next month.

As things stand a number of opportunities for mitigating IHT still exist and so it would be prudent to continue planning to make maximum use of the current rules.

In very brief terms the main advantages of the current inheritance tax regime are as follows:-

· a nil-rate band of £275,000 exists per individual with a flat rate of tax on death (40%) over that amount

· the potentially exempt transfer rules remain on the statute book

· a 100% maximum level of business property relief and agricultural property relief is available, subject to satisfying appropriate conditions

· planning using deeds of variation can still take place

· certain lump sum inheritance tax schemes that avoid the gift with reservation rules and the rules on pre-owned assets can be implemented and

· there are advantageous rules for excluded property trusts.

(1) Rates of tax

The nil-rate band has been increased as indicated above. Individuals who have a potential inheritance tax liability may well be inclined to use their nil-rate band sooner rather than later (see potentially exempt transfers below) and, if they are married, to arrange their asset ownership so that each spouse can utilise their nil-rate band either during lifetime, or on death via their Will.

If the nil-rate band of the first of a married couple to die can be fully utilised by, say, legacies to children, an IHT saving of £110,000 on the second death can be achieved. If there is concern over continuing access to capital for the surviving spouse a suitable Will trust could be used under which capital can be advanced by trustees or loans made.

Given the future possibility of change in the nil-rate band, where clients wish to make such arrangements, it may be best to use a wording that gifts the available nil-rate band at death rather than a specified figure equal to the current nil-rate band because, if this figure reduces and no action is taken, future unnecessary IHT liabilities may arise. However, if the nil-rate band subsequently increases substantially in value, the clause may need review.

(2) Potentially exempt transfers (PETs)

Gifts that are PETs give rise to no IHT at the time they are made. Moreover, there will be no IHT at all if the donor survives the gift by 7 years. Even if death occurs within 7 years, provided the donor survives for at least 3 years taper relief will apply to reduce any tax charge. Control over the asset gifted can be maintained by the donor using a trust under which he/she is a trustee.

Anybody contemplating making substantial lifetime gifts in order to save IHT should sensibly consider doing so whilst PET treatment is available. All growth in the value of the gift will be free of IHT. Gifts to certain trusts count as PETs, for example an accumulation and maintenance trust and a power of appointment interest in possession (flexible) trust. By using a trust, continuing control can be maintained by the donor acting as trustee and, in the case of the flexible trust, maximum flexibility can be included over who will be the ultimate beneficiary under the trust. Life assurance can be effected to cover any potential IHT liability on the death of the donor within 7 years. Careful consideration needs to be given to the capital gains tax (CGT) implications of making gifts and the CGT cost of making a gift balanced against the potential IHT saving.

If cash gifts are to be made into trust, capital investment bonds can be a tax attractive trustee investment because:-

(a) they are non-income producing and not subject to CGT and therefore reduce trust administration;

(b) they can provide tax deferral especially where the rate of tax paid by the trustees is at a higher rate than that suffered within the insurance company’s funds;

(c) the trustees can switch investment funds of the bond without triggering a tax charge; and

(d) if the trustees require cash they can make use of the annual 5% tax- deferred withdrawal facility. It may also be possible to reduce tax on ultimate encashment by assigning individual policies of the bond out of the trust so that adult beneficiaries can make the encashment.

Capital investment bonds will not, however, enable trustees to benefit from taper relief, use their annual CGT exemption of £4,250 (maximum) in 2005/2006 or make use of a beneficiary’s personal income tax allowance. In these circumstances, unit trusts or OEICs may be more appropriate investments.

(3) Deeds of variation

Under current legislation, within two years of a person’s death, it may be possible for the beneficiary(ies) of a gift under the Will (or on an intestacy) to vary the destination of the gift. Such a variation can, depending on the circumstances, save IHT.

(4) Lump sum inheritance tax plans

Retention of the right to income and/or capital will normally mean that the gift with reservation provisions will neutralise any IHT benefit of a gift. The many lump sum inheritance tax plans available seek to overcome this problem. These plans, of which there are a number, will often enable an investor to establish a trust and enjoy some form of “income” (normally in the form of a capital payment), possibly provide a level of access to capital and provide some control and flexibility via a trust. Ignoring annuity/life assurance (back to back) arrangements, there are four primary forms of lump sum inheritance tax plan, which are all based on the combination of a trust with a capital investment bond:-

(a) The gift and loan (or “loan only”) scheme – a gift is made to a trust (or a trust declared with no gift) and an interest-free loan, repayable on demand, made to the trustees. The trustees invest in a capital investment bond. Income is enjoyed in the form of tax free loan repayments financed by the trustees making 5% part surrenders from the bond. The investment growth is outside the investor’s taxable estate and free of IHT. The Inland Revenue has confirmed to the ABI that this type of plan remains effective for IHT and is not caught by the new rules on pre-owned assets (POAT) – see section 9.3 below.

(b) A discounted gift plan – a policy is effected subject to a trust where “income rights” in the form of payments of capital are retained for the benefit of the settlor (funded out of the maturity of individual policies or a 5% withdrawal from the underlying bond) with rights on death passing to trustees. Part of the initial investment is regarded as a PET. As with the loan plans in (a) above, these plans are safe from the POAT charge . See section 9.3. below for more details.

(c) A retained interest trust – a capital investment bond is effected subject to a split trust under which a part of the trust is held for the absolute benefit of the settlor and a part on flexible trust under which the settlor is excluded from benefit. The part of the bond initially held on flexible trust is regarded as a PET. The donor can draw down from his side of the trust fund with the 5% part surrender calculation being based on the whole of the initial investment in the bond. This type of plan should also be safe from the POAT.

(d) The reversionary interest plan – where, after an initial gift to trust, in successive years amounts revert to the settlor. Here, similar considerations may well apply to those mentioned in (b) above.

There is little doubt of the appeal that lump sum insurance-based inheritance tax schemes hold for people who have investment capital and wish to plan to reduce inheritance tax but wish to retain some access to “income” or capital. It seems that some of these plans can achieve such objectives but without the application of the gift with reservation provisions or the POAT charge.

The question of which type of scheme is most appropriate will depend on all the personal and financial circumstances of an investor – not least the age of the investor and the flexibility he or she requires over the future rights to income/capital.

(5) Business/agricultural property relief

Currently business and agricultural assets qualify for 100% relief, subject to certain conditions being satisfied, which effectively removes the assets from the inheritance tax net.

For persons who desire to make gifts of business/agricultural assets now in order to take advantage of the 100% relief currently available, they may be advised to use a discretionary trust that crystallises a chargeable transfer at the date of gift rather than making a gift that is a PET. Any concern over lifetime gifts subsequently suffering inheritance tax because of a reduction in the rates of relief can be tempered by taking out a temporary assurance policy in trust to cover the “at worst” position.

Of course, before a gift of business/agricultural assets is made, the CGT position will need to be considered. Also, for a gift to be effective for IHT purposes, potential donors cannot benefit. They should also be satisfied that they have sufficient financial security and, in this respect, a well funded pension scheme can be very useful. In order to avoid the gift with reservation rules, any increased benefits for a shareholding director from the company should be established (preferably by service agreement) prior to the gift.

(6) Excluded property trusts

Where a person who is non-UK domiciled (for inheritance tax purposes) establishes a (normally discretionary) trust and that trust invests in non-UK situs property, under current law the trust will be outside the IHT net forever – even if the settlor later becomes UK domiciled for IHT purposes. This is what is known as an excluded property trust and the trust will not be subject to IHT even if the settlor is a potential beneficiary. Further details are given in section 15.

Since the Government published a consultation document on residence and domicile in March 2003 , it has been expected that some changes in this area may be announced. However nothing has yet materialised. The existence of excluded property trusts and their effectiveness for IHT was confirmed at para 2.8 of the consultation document mentioned above. This was helpful given the somewhat confused statements from the Revenue on this point in the past. However, there is no guarantee that the rules will not change. Non-UK domiciled people who are currently resident in the UK may therefore be very interested in establishing such a trust before any possible changes. As such a trust must invest in non-UK situs assets to achieve excluded property status, offshore capital investment bonds or appropriate capital growth oriented offshore funds can be ideal investments both from a tax standpoint and as a means of minimising trust administration.

9.3 THE INCOME TAX CHARGE ON PRE-OWNED ASSETS

In the Pre-Budget Report in December 2003 the Chancellor announced the Government’s intention to combat certain IHT avoidance schemes where assets are disposed of but the previous owner continues to enjoy benefit from the asset without making a commercial payment.

The legislation is now in Schedule 15 Finance Act 2004. This imposes an income tax charge on the benefit of a free or low-cost enjoyment of a previously owned “substantial capital” asset (or an asset that had been accrued with funds provided by the person who then enjoyed a benefit), similar to a benefit in kind charge on an employee enjoying the benefit of free accommodation provided by an employer. The main features of the charge are as follows:-

· The charge can apply to both tangible assets (land, chattels) and intangible assets (e.g. life assurance policies)

· The charge can apply regardless of when the property was disposed of as long as it was after 17 March 1986. There is therefore an element of retrospection

· A number of exclusions have been confirmed (many introduced after protests from professional advisers/organisations during the consultation period).

· The exclusions (i.e when the charge will not apply) are as follows

- The property in question ceased to be owned before 18 March 1986

- Property formerly owned by a taxpayer is currently owned by their spouse

- The asset in question still counts as part of the taxpayer’s estate for IHT under the gift with reservation (GWR) rules (e.g the taxpayer is one of the beneficiaries of the trust he established)

- The property was sold by the taxpayer at arm’s length price paid in cash (even if to a connected party)

- The taxpayer was formerly the owner of the asset only by virtue of a Will or intestacy which has subsequently been varied by agreement between the beneficiaries

- Any enjoyment is no more than incidental.

· In the case of tangible assets the former owners will not be regarded as enjoying a taxable benefit if they retain an interest which is consistent with their ongoing enjoyment of the property, e.g. following a gift of a share in the property to a child who lives with them.

· In the case of intangible assets held in a settlement, they will be treated as giving rise to a taxable benefit only to the extent that the taxpayer may derive benefits from them and those benefits would diminish the benefits potentially available to others.

· The Revenue confirmed in correspondence with the Association of British Insurers in September 2004 that IHT schemes such as Loan trusts or discounted gift trusts were outside the POAT charge. This is because the settlor’s rights under such trusts are held on bare trust for the settlor and the settlor is not a beneficiary of the remainder of the trust (which is a settlement).

· Where an existing arrangement falls within the POAT charge taxpayers can elect to instead have the asset treated as part of their estate for IHT purposes. The type of scheme that is caught by the new tax would be, for example, a “double trust” scheme involving the principal residence or an Eversden-type scheme.

· No liability will arise if the value of the benefit (or potential benefit in the case of intangibles) is not more than £5,000.

A number of issues relating to the POAT were not covered in the Finance Act 2004 and given that the new tax becomes effective from 6 April 2005 we have been eagerly awaiting Regulations dealing with the outstanding matters.

PRE-OWNED ASSETS REGULATIONS

While there has been nothing in the Budget itself dealing with this matter, the Inland Revenue issued draft Regulations on 7 March 2005. The following is a summary of the key provisions. We are still awaiting Inland Revenue guidance on Schedule 15.

The proposed Regulations put some flesh on the bones in terms of how the tax charge will be calculated and charged. In particular they make provision for when gifted assets will be valued and the deemed rate of return that will be applied. The primary legislation contains the valuation rules. The value and deemed rate of return will together give a deemed income that the donor enjoys from the gifted asset.

The proposed Regulations result from the issue of an Inland Revenue consultative document on 16 August 2004 and responses to this.

WHAT THE REGULATIONS COVER

The regulations provide as follows:

(i) Valuation date

For the purpose of calculating the value of the gifted asset, the asset will be valued on 6 April or, if later, the beginning of the period for which the asset becomes chargeable.

(ii) Deemed rate of return

Called the “prescribed rate”, and used when the cash value of the benefit of chattels and intangibles (which includes life assurance policies) is being calculated, it will be fixed at the Inland Revenue’s “official rate” which is currently 5%.

(iii) Valuations at extended intervals

Land and chattels will be valued every 5 years. The first valuation year will occur when the asset is first chargeable to the POAT. There will be no adjustment to the valuation in a five year period due to the effects of inflation.

No mention is made of the valuation of intangibles, such as life assurance policies. Presumably these will therefore be valued annually.

(iv) Equity release

Reversion schemes, where the whole of the property is sold to a provider, is clearly outside the legislation. The regulations will cover the position where part only of a property is sold by exempting such a sale if done at arm’s length. For transactions carried out before 7 March 2005 which involve a part sale either at arm’s length or on arm’s length terms, these will be exempted also. Such disposals will also be exempt after 6 March 2005 if they are made for a consideration other than money or readily realisable assets.

WHAT THE PROPOSED REGULATIONS DO NOT COVER

The regulations make no provision in the following areas:

(i) Business protection trusts

Technically the trust of a protection life policy taken out as part of a business protection / continuation arrangement could be a settlement for inheritance tax purposes. This means that if the settlor is a potential beneficiary under the trust the POAT rules could apply.

Although there is nothing in these draft Regulations concerning business trusts, Technical Connection has obtained Revenue confirmation that Regulations are being drafted to address this so that policies held subject to trusts which are bona fide business arrangements will be removed from the POAT charge by the Regulations. Given the stated objective of the POAT charge (to combat IHT avoidance) this seems the only sensible approach.

(ii) Pre 18 March 1986 trusts

Inheritance tax (and the gift with reservation rules) were introduced in March 1986. The new POAT rules apply to all disposals since this date. In other words, at least according to Dawn Primarolo, the Government is not interested in the POAT rules applying to transactions carried out before the gift with reservation rules were introduced.

After all, the POAT rules were introduced to “shore-up” deficiencies in the IHT rules. However, it appears that this is not necessarily the case. Prior to 18 March 1986 life policies could be set up under a trust under which the settlor was a potential beneficiary. But did this mean that where regular premiums were paid after this date, a gift with reservation would arise ? The answer to this is no, provided premiums did not increase over and above a pre-existing optional level. However, the bad news is that because such premiums are paid post 18 March 1986 and are not gifts with reservation, they could be subject to the POAT.

It was thought that the Inland Revenue were sympathetic to this but no exemption has been forthcoming in the proposed Regulations. This means the POAT rules can apply to pre-18 March 1986 arrangements!

(iii) Life policies

The legislation in Schedule 15 deals with the valuation of life policies but does no more than state it is the value at the valuation date. It is clear how one values a single premium bond but what criteria do you take into account in valuing protection policies which do not normally have a surrender value. The market value based on the life assured’s health? If so using what evidence and when?

All these issues still need to be resolved.

WHICH MEANS THAT…

While the position concerning the application of the POAT is much clearer than a year ago, some areas are still waiting for clarification. Given that the tax comes into effect next month taxpayers potentially affected by the POAT, ie those with certain existing trust arrangements, must keep an eye on developments.

The good news is that a number of lump sum inheritance tax plans (see above ) appear to be safe from the new tax and therefore provide a continuing opportunity for IHT planning to investors.

10. CORPORATION TAX

10.1 RATES OF CORPORATION TAX

No changes to corporation tax rates were announced so the rates we are working with for the financial year starting 1st April 2005 are as follows:

· The small companies’ rate of corporation tax is 19%, and applies where a company has profits of between £50,001 and £300,000.

· Where a company’s profits do not exceed £10,000 the starting zero rate will apply (but see below). Any profits between £10,001 and £50,000 will continue to be assessable at the marginal rate of 23.75%.

· The main rate of corporation tax will continue to be at 30% and will apply to profits of a company of more than £1,500,000.

· Between £300,001 and £1,500,000 marginal rate relief applies. This operates to increase the overall rate of tax to somewhere between the small companies’ rate of 19% and the main rate of 30%. Profits in excess of £300,000 will effectively bear tax at the marginal rate of 32.75%.

However, it is important to note that the Government introduced from 1 April 2004 a corporation tax charge on dividends paid to non-corporate shareholders where corporation tax is not otherwise payable (i.e. the company’s profits do not exceed £10,000).

WHICH MEANS THAT ...

Subject to a company having a corporation tax liability, the structure and form of effective corporate tax reducing strategies can continue to be relevant.

In particular, contributions to approved pension arrangements (discussed elsewhere in this bulletin) will be particularly effective.

It will also be necessary to take full account of the relevant corporate tax rates in the determination of the best way to take funds from the business i.e. by remuneration or dividends or pension – also covered elsewhere in this bulletin.

10.2 CORPORATION TAX REFORM

At the time of the 2004 Pre-Budget Report the Inland Revenue issued another technical note on the subject of corporation tax reform. This note dealt with

§ Reform of the schedular system – the aim being to abolish schedules and pool all profits and losses.

§ The tax treatment of capital assets – it is felt by the Government that the current capital allowances system does not work well and some sort of reform is required, though there appears to be no agreement yet on how

§ The tax differences between trading and investment companies, with the aim of bringing the computation of profits of investment companies liable to tax more into line with those of trading companies

§ Leasing – the Government feels that the tax rules encourage companies to lease capital assets rather than use loan finance. It would like to amend the rules to counter this perceived bias.

No further reference to corporation tax reform was made in the Budget.

11. CAPITAL ALLOWANCES

The Government continues to use tax as a lever to encourage particular activities or behaviours. Businesses as well as individuals benefit from the tax reliefs offered. Capital allowances are an obvious example of how substantial (sometimes 100%) tax relief on expenditure can positively affect investment decisions made by businesses.

The potential for significant reform to capital allowances was however raised in the consultative document of August 2002 on corporation tax reform. Broadly speaking, the possibility of aligning accounting and tax practice in respect of capital expenditure was discussed, meaning the possible abolition of capital allowances - as we know them. That hasn’t happened and it would appear that the Government has initially concluded against alignment of capital allowances with accounts depreciation. However, modernisation has not been ruled out. This year we have had a very attractive proposal made that will benefit all small businesses investing in plant and machinery.

Last year, for small businesses investing in plant and machinery rates of first year allowances for spending on or after 1 April 2004 on most plant and machinery was increased from 40% to 50% for a period to 31 March 2005. This increased allowance does not appear to have been extended.

Once state aid approval has been granted, a 100% first year allowance will be available for capital expenditure on renovating or converting vacant business properties that have been vacant for at least a year in designated disadvantaged areas. This allowance will be known as the business premises renovation allowance and will benefit any individual or company, who incurs capital expenditure on bringing qualifying business premises (owned or let) back into business use.

WHICH MEANS THAT ...

Capital allowances continue to be an important feature of tax life for businesses. Of course, as for any expenditure, businesses should consider carefully the commercial appropriateness of any investment. As ever, the tax tail should never be allowed to wag the dog - however attractive the tail is! Advisers must be fully aware of the capital allowance system so that they can properly advise their business clients on the tax impact of various expenditures.

12. REMUNERATION STRATEGIES FOR SHAREHOLDING DIRECTORS

Nothing new has been proposed in the Budget that will affect the numbers involving this important issue and no new Budget proposals have been made affecting the fundamental facts relevant in determining this key area for financial advisers.

We believe that it is important to address the dividend -v- salary debate in some detail given its importance to advisers and their clients.

The main issues that will affect the dividend -v- salary debate are summarised below.

Dividend -v- Salary

Especially towards their year end many corporate clients will wish to receive information and suitable planning ideas around the dividend/salary/pension debate with such corporate clients.

For example, assuming that a company currently paying corporation tax at a rate of 19% wishes to utilise £10,000 for the benefit of its shareholding director who is a 40% taxpayer and earning above the employee’s upper earnings limit, the following will be the position in respect of both dividends and bonuses for tax year 2005/06.

Dividend

Company

Pre-tax profit
£10,000
CT @ 19%
£ 1,900

_______
Net to distribute
£ 8,100 (1)

(1) Because the dividend is not deductible the corporate tax liability for the company remains at 19% ie. £1,900 so £8,100 is available for distribution.

Now looking at the director’s position:-

Director receives
£8,100

Grossed up by 10%
£ 900

______

Taxable
£9,000 (1)

Less tax @ 32.5%
£2,925 (2)

Less tax credit
£ 900

______

Net to pay

£2,025 (3)
Net dividend

£6,075 (4)
Effective rate of tax

39.25%

(1) The dividend is £8,100 grossed up by 10% (tax credit) to £9,000.

(2) The tax rate payable on the gross dividend by a higher rate taxpayer is 32.5%.

(3) Tax of £900 is already deemed to have been paid via the tax credit and so the balance liability is £2,025.

(4) The director is left with a net dividend of £6,075. The dividend has therefore suffered an effective rate of tax of 39.25%.

Bonus

Company

£

Bonus
8,865 (1)

Er’s NIC
1,135

_____

10,000 all deductible

Director

Bonus
8,865

Higher rate tax
3,546 (2)

NIC
89

______

Net received

5,230 (3)
Effective rate of tax

47.7%

(1) Where the £10,000 is paid by way of Schedule E bonus, the whole amount is deductible. However out of the £10,000, employer’s National Insurance of 12.8% is payable (again deductible).

So taking account of £1,135 employer’s National Insurance, £8,865 is available as a bonus.

(2) The director will suffer 40% higher rate tax and the 1% NIC charge via the PAYE system on the bonus and this liability equals £3,635.

(3) He is left with £5,230 net in his hands. The £10,000 available in the company has effectively suffered tax at 47.7%.

In these circumstances therefore, purely on tax grounds alone (and there are other factors to consider) the dividend will look most attractive. However, the position will change considerably depending on the rate of corporation tax paid by the company and the director’s marginal rate of income tax.

For the basic rate taxpayer the choice of dividend over salary for money that is to be extracted from the company for expenditure is even easier. Here, the fact that not only employer's but also employee's NICs will be due is a significant financial reason for seriously considering payment by way of dividend rather than salary.

This is best illustrated by an example that shows the effective rates of deduction (ie. combined income tax and National Insurance) borne by both higher and basic rate taxpayers receiving dividends from companies paying respectively the small companies', upper marginal and main rates of tax.

The assumptions used are as follows:-

(i) £10,000 available to company pre tax
(ii) 12.8% employer NICs payable in all “salary” examples
(iii) 11% employee NICs payable on salary only by 22% taxpayers.
(iv) 1% employee NICs payable on salary over £32,760 only by 40% taxpayers.

BEST OPTION?

NET DIV

ERD**
NET SAL
ERD**
DIVS OR SALARY

£

£

(a) 19% Taxpaying Company*

(i) 22% personal tax rate
8,100
19%
5,940
40.60%
DIV
(ii) 40% personal tax rate
6,075
39.25%
5,230
47.7%
DIV

(b) 30% Taxpaying Company

(i) 22% personal tax rate
7,000
30%
5,940
40.60%
DIV
(ii) 40% personal tax rate
5,250
47.50%
5,230
47.7%
DIV

(c) 32.75% Taxpaying Company

(i) 22% personal tax rate
6,725
32.75%
5,940
40.60%
DIV
(ii) 40% personal tax rate
5,043
49.57%
5,230
47.7%
SALARY

* This will be the minimum rate of corporation tax payable on any distribution to a non-corporate shareholder

** ERD = effective rate of deduction.

Despite the immediate attraction of dividends, in many cases (though there are obviously exceptions) it is essential that any taxpayer, in deciding how to extract funds from his company, makes the decision being fully aware of all the facts, including the impact that choosing dividends over salary can have on pension provision.

For non-taxpayers dividends will be positively disadvantageous as they will be unable to reclaim the tax credit.

Remember, (subject to what is said later in this section about salary, dividend and pension planning within the DC tax regime), receiving a dividend instead of salary may have a severely adverse impact on the provision of pension benefits.

Where a given sum is available for extraction for the benefit of the director, and it is established that the director does not need every £1 extracted for current expenditure, an effective presentation can sometimes be made demonstrating a lower rate of overall tax on extraction of funds for both the current and/or future benefit of the director.

Where the sum available could be contributed to the occupational pension scheme within current funding limits and based on current remuneration, the adviser’s presentation should (at least initially) be founded on the premise that funds available for extraction are invested by a direct employer contribution into a pension scheme. This will facilitate maximum investment to provide for the director’s future financial security with no NIC/income tax depletion.

Where no further contribution can be made based on current salary, a combination of additional salary and pension contribution can prove attractive - particularly for a higher rate taxpayer. So, for example, assuming a higher rate tax paying director and that no employee’s National Insurance is due, if a company has £10,000 available pre-tax and for each additional £1 of salary a further £1 of pension contribution is to be made, (e.g. employee aged around 50), the following will be the situation:-

PAID BY COMPANY
RECEIVED BY DIRECTOR

£
£
Salary
4,699
4,699
Tax

1,880
NI (employer’s)
602
-
NI (employee's)
-
47

______
______

5,301
2,772
Pension contribution
4,699
4,699

______
______
Total corporate expenditure
10,000

Total benefit received

7,471
Tax “lost”

2,529
Effective rate of tax on monies originally available (£10,000)

25.29%

In this case a bonus of £4,699 is paid. Net of income tax at 40% and the NIC surcharge of 1% this yields £2,772 for the director although of course it generates an employer’s NIC liability of £602. The salary payment enables a corporate pension contribution of £4,699 to be made for the benefit of the director. Out of the £10,000 available to the company pre-tax, the total amount therefore working for the director/shareholder is £7,471 which means that the £10,000 available has suffered an effective overall rate of tax of 25.29%.

A total of (over) £7,400 is extracted for the director’s benefit - £4,699 directly into the pension with no depletion and the balance (£2,772) is available for personal investment by the director.

Despite all of this it is reiterated that a careful consideration of the potential for creative planning with salary, dividends and DC regime pension contributions may prove well worthwhile. See below.

Most of the above has considered companies with profits in excess of £50,000.

Where the company has profits of less than £50,000 the position regarding dividends or salary in respect of £1,000 available for distribution on the assumption that the rule for applying a minimum corporation tax rate of 19% to the distribution is applicable, will be as follows, assuming that the £1,000 falls wholly into the personal tax bands shown:-

1. Company profits up to £10,000 (zero CT rate)

EFFECTIVE RATE OF DEDUCTION
(Income tax and National Insurance)

Personal tax rate
40%
22%
10%
0%
Dividend
25% *
19% **
19%
19%
Salary
47.7%
40.60%
29.9%
0%

* Assuming that the shareholder receives a 10% tax credit.
** Assuming that no further tax is payable by the basic rate taxpayer.

2. Company profits between £10,001 - £50,000 (23.75% CT rate)

EFFECTIVE RATE OF DEDUCTION
(Income tax and National Insurance)

Personal tax rate
40%
22%
10%
0%
Dividend
42.81%
23.75%
23.75%
23.75%
Salary
47.7%
40.60%
29.9%
0%

Remuneration Planning, The DC Tax Regime And The Proposed Simplified Pensions Tax Regime

The DC tax regime commenced on 6 April 2001. Section 646B of the Taxes Act 1988 opened up a new remuneration planning strategy for controlling directors who are not subject to the rigours of IR 35.

Under section 646B an individual can base their contributions to a DC tax regime scheme on their net relevant earnings in the tax year in which the contribution is paid or on their proven net relevant earnings in any of the previous five tax years. This is known as basis year earnings and its effect is that the earnings of one tax year can justify contributions to a DC tax regime scheme for up to six tax years.

One possible strategy that may have been followed previously by a controlling director, not subject to IR 35, was to draw a high salary in one tax year and then take remuneration over the subsequent five tax years largely in the form of dividends (with salary being kept to a level equal to the threshold for National Insurance contributions).

This strategy should not be started in tax year 2005/06 as all existing approved pensions tax regimes will be replaced by the new simplified tax regime from 6 April 2006 and the new regime does not include provision for basis year earnings.

In the current tax year, a return to the old strategy of remuneration as a combination of salary and executive pension plan contribution may make more sense. Alternatively, remuneration could be taken largely as dividends which will result in NIC savings, with substantial employer pension contributions being considered from 6 April 2006 when the new simplified tax regime commences.

Where a controlling director is already adopting the new remuneration strategy alongside the DC tax regime (i.e. he drew a large salary in, say, tax year 2001/02 or 2002/2003) he can safely continue with this in the current tax year. He can take advantage of section 646B by nominating earnings from the tax year in question as a "basis year" and make personal pension contributions based on those earnings. He can also keep his salary to perhaps £4,895, i.e. just below the threshold for tax and NIC, maximising his NIC savings.

13. PENSIONS

There is no surprise that the Budget contains little new on pensions as the major changes have already been set out in the Finance Act 2004 and the Pensions Act 2004.

The Finance Act 2004 sets out the new simplified tax regime that starts on 6 April 2006 (A-day). The Revenue recently issued a Technical Note indicating that after consultation some changes were going to be made “to provide additional flexibility, clarifying aspects of the new rules, smoothing the transition from the current regimes to the new regime and introducing further anti-avoidance and compliance rules”. These have been acknowledged in the Economic and Fiscal Strategy Report (published by the Treasury) which states that “the Government will introduce a package of supplementary measures, which will come into effect from April 2006”. Additionally, the Revenue has indicated that schemes will have until 6 April 2011 to make changes to their rules to cope with the new simplified regime rather than the previously understood 6 April 2009.

The Revenue has also acknowledged that the tax-free lump sum rules under the simplified regime need to be reconsidered because of the different calculation routines applying to scheme pensions and lifetime annuities. Further consultation will now take place and “an announcement will be made by the 2005 pre-budget report with the intention to change these rules in the Finance Bill 2006”.

13.1 The Earnings Cap

The earnings cap has been increased to £105,600 for tax year 2005/06.

In the past where directors have been unable to pension their earnings over the cap by means of an approved occupational scheme (as they are neither pre-87 nor 87/89 regime members) serious thought has been given to the use of a Funded Unapproved Retirement Benefits Scheme (FURBS) to pension these. While previously this has offered a number of attractions there are a number of new aspects that need to be considered before FURBS contributions are paid in 2005/06.

FURBS benefits accrued prior to A-day will be subject to special transitional arrangements, which will normally permit such benefits to be paid tax free where paid as a lump sum and to retain the pre A-day inheritance tax treatment. However, a member’s accumulated FURBS investment fund will, from 6 April 2006, lose its favourable income tax treatment and be subject to the normal tax rate for trusts (i.e. 40% and in respect of dividends 32.5%). The rate of tax on capital gains rose to 40% from 6 April 2004 in line with the general increase in the rate of tax applicable to trusts. This is likely to mean that FURBS contributions in 2005/06 may prove attractive for those individuals who are looking to draw their benefits shortly after A-day but far less attractive to individuals who do not wish to draw their benefits for some time thereafter. This is because the effect of the increased tax liability on the invested FURBS fund will become increasingly important the longer the fund remains invested.

It should be noted that the definition of final remuneration for pre ’87 and ’87-’89 members will also be changed from 6 April 2005 to tie in with the increase in the earnings cap to £105,600 from that date.

At present where an individual subject to the pre ’87 or ’87-’89 regimes has remuneration exceeding £100,000 subsequent to 5 April 1987, which is used for the purpose of calculating benefits, their final remuneration must be determined as either:

- the average of the best 3 or more consecutive years total emoluments from the employer ending in the 10 years before the member’s retirement date, or

- £100,000, if greater.

In addition a ’87-’89 member may only have his/her tax-free cash determined using a maximum final remuneration of £100,000.

In each case from 6 April 2005, the definitions will be amended so that the £100,000 is increased to £105,600 to tie in with the increase in the earnings cap from that date.

13.2 The New Simplified Tax Regime

On A-day the Government will be introducing the new simplified pensions tax regime. All the existing pension tax regimes for occupational pensions, personal and stakeholder pensions, and retirement annuity contracts will be swept away and replaced by one new tax regime.

The changes mean that all clients will need to review their existing pension provision in light of the changes and, where appropriate, take action both before and after 6 April 2006 in order to maximise their benefits.

The key changes are:

One new pensions tax regime will apply to members of all approved schemes (henceforward to be called registered schemes)

All existing approved schemes (occupational, personal, stakeholder and retirement annuity contracts) will be subject to the rules of the new tax regime.

A single Lifetime Allowance limiting the total amount of pension savings that can benefit from tax relief will be set. In tax year 2006/07 this will be £1.5 million. This will be increased in each subsequent tax year as indicated by the Treasury.

Special transitional rules will enable members, where appropriate, to protect their entitlement to pension and tax-free cash benefits secured prior to 6 April 2006.

Where the value of an individual’s retirement benefits exceeds the Lifetime Allowance a charge of 25% will be levied (55% where the excess is taken as a lump sum).

There will be an annual limit of inflows of value to a member’s pension funds. As at 6 April 2006 this will be £215,000. This amount will be increased each tax year as indicated by the Treasury.

The maximum member’s personal contribution in each tax year will be limited to the greater of £3,600 gross and 100% of earnings.

Up to 25% of the capital value of a member’s benefits within the Lifetime Allowance may be taken as a tax-free cash sum. The balance will be used to provide taxable annuity or income benefits. There is no specific limit on the maximum pension/income that can be provided other than that available from the capital value of the member’s fund within the Lifetime Allowance.

Where a member dies before drawing benefits a lump sum of up to the amount of the Lifetime Allowance can be paid free of IHT to one or more beneficiaries. Where a lump sum exceeds the Lifetime Allowance, the excess will be subject to tax at 55% on the recipients of the death benefit.

Provision may also be made for a spouse/dependant’s pension/income payments in the event of the death of the member before or after drawing benefits.

Benefits may be drawn from age 50 onwards (age 55 from 6 April 2010). A member may be able to draw their benefits in full or in part without having to retire from their employment.

Employer contributions will normally be allowable as a business expense in the accounting period in which they are paid. Tax relief will be available on the member’s own contributions at the member’s highest rate(s).

The introduction of the new pensions tax regime in April 2006 is not, however, a reason for stopping or delaying pension contributions. Full advantage should be taken of the favourable provisions of the current pension tax regimes while they still exist. The ability of an individual to elect for enhanced transitional protection under the new regime should mean that he/she, where able, can safely maximise their pension benefits under current rules without running the risk of suffering a Lifetime Allowance charge under the new regime.

13.3 Planning For The New Simplified Tax Regime

During the coming year clients will be seeking advice on what action they should be taking on pensions before the introduction of the simplified regime.

For many individuals the introduction of the new tax regime will have little, if any, impact as their retirement fund is never likely to exceed the Lifetime Allowance. These clients should
continue with their current pension arrangements, perhaps considering an increase in their contributions where they can afford this.

However, where an individual’s retirement fund is close or already exceeds the initial £1.5 million Lifetime Allowance, or can be reasonably expected to exceed the Lifetime Allowance in the future after taking account of potential future contributions/benefit accrual/fund growth, advice will be needed on their future pension planning. The following is a list of some of the potential actions/considerations pre A-day. It will, of course, be dangerous to provide advice on how to deal with the new regime until the proposals are finalised.

1. Pre A-Day Valuation

Before an individual can consider what action to take he/she will need a valuation of his/her pre A-day pension rights in accordance with the provisions of the new regime. Without this he/she will not be in a position to determine whether to elect for primary or enhanced protection, or whether to elect for enhanced protection where his/her benefits are currently below the initial Lifetime Allowance.

Occupational scheme members will also require details of their maximum allowable tax-free cash sum under their current scheme(s) to establish whether they should seek to protect their pre A-day tax-free cash entitlement. This will be required irrespective of whether such members are electing primary or enhanced protection or are not seeking any transitional protection in respect of their pre A-day pension benefits.

2. Primary Or Enhanced Protection?

Where an individual wishes to protect their pre A-day pension rights they can opt for either primary or enhanced protection or, where their pension rights exceed £1.5 million at A-day, both.

Primary protection is only available where the capital value of the individual’s pre A-day benefits exceeds the Lifetime Allowance. The capital value of the individual’s pension benefits at A-day will be protected from any subsequent recovery charge provided the capital value of the member’s pension benefits at the time benefits are drawn does not exceed the original capital value increased in line with the increase in the Lifetime Allowance over the period up to when benefits are taken.

Enhanced protection can be elected irrespective of the capital value of the member’s fund at A-day. It provides full protection from any recovery charge but can only be elected where no further pension accrual and/or no further pension contributions are payable in respect of the member after A-day.

Although an individual has three years from A-day to elect for primary or enhanced protection, in practice, where they intend to elect for enhanced protection they must ensure that they stop contributions and pension accrual before A-day.

Perhaps the most difficult decision will be for those individuals who have accumulated significant pension benefits prior to A-day, but with a capital value of less than the Lifetime Allowance. They will have to choose between enhanced protection and no protection. They can either opt out of pension accrual/ further pension contributions at A-day, or continue to accrue benefits/pay contributions beyond A-day and risk paying a recovery charge on eventual retirement. Careful analysis will be required to determine the most appropriate option, particularly for members of money purchase schemes where the likely rates of future investment return will be a primary consideration.

3. Maximise Contributions

The ability to opt for enhanced protection, which will ensure that none of a member’s accrued pre-A-day pension rights will be subject to a recovery charge, means that a member can safely maximise his/her pension contributions under existing pension arrangements prior to A-day. Note however that the existing rules will be applied to determine the amount to be protected on the assumption that the member left service on 5 April 2006.

Such maximisation could take advantage of carry back in respect of personal pensions, carry back/carry forward in respect of retirement annuity contracts and sizeable special contributions for members of occupational schemes who have sufficient past service to justify such payments.

4. Funding For Tax-free Cash

The current rules permit occupational schemes to fund for tax-free cash only equivalent to 3/80ths of final salary for each year of service. This is not a feature of the new simplified regime although transitional provisions will protect those benefits already accumulated under existing schemes. If taking advantage of this facility it should be remembered that the maximum tax-free cash will be calculated at 5 April 2006 on a leaving service basis.

5. Defer Taking Benefits Until A-day

For many members of occupational schemes the new tax regime will permit a potentially larger tax-free cash sum to be drawn than under their existing rules. Provided the rules of their employer’s scheme are amended to permit advantage to be taken of the new tax-free cash entitlement, it would be advantageous for such members, due to retire prior to A-day, to defer retirement until A-day to obtain a higher tax-free cash sum. Any such deferment would, of course, be subject to the employer’s agreement. If the scheme rules are not to be amended or the employer is unprepared to agree to the deferral of the member’s retirement date, the member could consider opting out of the employer’s scheme shortly before retirement and effecting a transfer to a personal pension or a section 32 contract. It should, of course, be remembered that where any transfer is made within one year of the member’s Normal Retirement Date under the scheme it will be subject to the agreement of the scheme trustees as the member will not have a right to a cash equivalent transfer value.

6. Scheme Benefit Design

Scheme trustees, in association with the employer, will need to consider what changes, if any, need to be made to scheme benefit design. For example, occupational schemes with post 89 members subject to the earnings cap may wish to retain that limit (or a comparable salary-related limit) to contain employer pension costs. Decisions will need to be made regarding any realignment of death benefits, the introduction of the new flexibility over payment of retirement benefits, and whether the scheme will introduce the new tax-free cash rules or retain the existing tax-free cash calculation basis. Other issues include whether a scheme should re-admit a member who has opted out to claim enhanced protection.

7. Scheme Audit

With the benefits of all registered schemes after A-day being subject to the same rules, differences in benefits will no longer be an argument for selecting one scheme over another. Instead attention will focus increasingly on charges, investment and service. All schemes will need to be reviewed to see that they meet the member’s objectives. For example, would a member be better advised to switch his or her benefits to a new registered scheme with a lower charging structure? Would it be advantageous to transfer to a scheme with a wider or more appropriate range of investment options?

Of course great care must be taken when advising any member to transfer from one scheme to another. Aspects that need to be taken into account when making the recommendation will include:-

- whether an employer who contributes into the current scheme will continue to contribute at the same level to a new scheme

- any transfer charges that will be made by the transferring scheme (and/or loss of benefits for transferring before the member’s retirement date)

- any special features of the existing contract (e.g. guaranteed annuity rates)

8. Information To Scheme Members

Although one new tax regime sounds very simple, there are a good number of complexities that need to be explained to scheme members, particularly if they are likely to apply for transitional protection of their pre A-day benefits. Such information will need to be provided on a generic and a member specific basis.

13.4 The Pensions Act 2004

The Pensions Act 2004 contains 325 sections and 13 Schedules and will come into force gradually. A few minor provisions were introduced immediately but the main provisions are expected to be implemented in three stages.

To be implemented from April 2005:

- the new Pensions Regulator
- the Pension Protection Fund
- the Financial Assistance Scheme
- the changes to pension increases in payment (LPI)
- the stricter “debt on the employer” calculation in multi-employer schemes
- a new statutory priority order on winding up
- the new requirements for TUPE transfers
- changes relating to the internal dispute resolution procedure
- less prescriptive internal dispute resolution procedures
- new incentives to defer the taking of State benefits

The measures expected to be introduced in September 2005 are those required to comply with EU Pensions Directive and include:

- new scheme funding provisions
- cross-border pension provision

April 2006 will see the introduction of the bulk of the remaining provisions of the Act including:

- the changes to the MNT rules
- the replacement for s.67
- the changes to protected rights benefits (commutation and date benefits can be drawn)
- the introduction of the new early leaver provisions for occupational schemes
- the consultation requirement for employers

The Pensions Protection Fund (PPF) commences on 6 April 2005. The Revenue has confirmed that although the PPF is not a pension scheme it will be given tax treatment equivalent to that of a tax privileged pension scheme with effect from 6 April 2005. This will similarly apply at 6 April 2006 when the new simplified regime takes effect. The Revenue has indicated that “tax relief will be allowed for payment of the statutory levies to the PPF, for example, where a sponsoring employer provides a scheme with funding for the levy payments”. The Revenue has also stated that as the PPF is not a pension scheme it will not be able to pay tax-free lump sums. It will be interesting to see whether legislation will be passed to enable tax-free cash to be taken and if so how much and on what terms.

13.5 State Pension Changes

1. Council Tax Bills

Each pensioner household with someone over the age of 65 will receive a payment of £200 to help with their council tax bills. This will be paid at the same time as the 2005 Winter Fuel Payment and will mean that pensioners over 65 will receive a total of £400 and pensioners over 80 will receive £500.

2. Deferral Of State Pension

Those deferring their state pension by at least a year from April 2005 will be able to take a taxed lump sum instead of a higher weekly pension. From figures produced by the DWP this indicates that an individual who defers taking their weekly state pension of £82.05 for one year could receive a taxed lump sum of £4,412 instead of an increase in weekly state pension of £8.53. For a five year deferral thus would be a taxed lump sum of £25,244 instead of a weekly increase of £42.67. The lump sums will be taxed at the rate applicable to the individual’s other income.

14. STAMP DUTY LAND TAX / STAMP DUTY

The Chancellor made changes in the following areas in respect of Stamp Duty.

14.1 STAMP DUTY LAND TAX

14.1.1 Residential Property

With effect from 17 March 2005, the long-standing threshold for stamp duty land tax (SDLT) on residential property has been doubled to £120,000. The other rate bands remain the same. The position is now as follows

Consideration for property

Rate of SDLT
Up to £120,000
0%
£120,001 to £250,000
1%
Over £250,000
3%

There is no change to the higher threshold of £150,000 for residential transactions in designated disadvantaged areas.

14.1.2 Non-Residential Property

The exemption from SDLT for commercial land transactions in designated disadvantaged areas has been withdrawn with effect from 17 March 2005. However, the relief will continue for transactions entered into on or before 16 March 2005 but completed later.

14.1.3 Disclosure

The tax avoidance disclosure rules introduced last year apply to promoters of avoidance schemes aimed at avoiding income tax, corporation tax or capital gains tax. Now SDLT is to be added to the list where the property is non-residential property and its market value is at least £5m.

The rules will operate to schemes and arrangements made available or implemented on or 1 July 2005.

14.1.4 Anti-Avoidance

Measures are to be introduced, effective from 17 March 2005, which block avoidance schemes designed to avoid SDLT. These schemes cover

Use of group relief
Use of acquisition relief
Grants of leases by bare trustees to their principal
Certain variations of leases to remove restrictive covenants
Use of repayable loans or deposits as consideration
Reduction of market value by encumbrance
Use of “sub-sale relief” in alternative finance transactions
Use of partnerships

However, transactions effected in pursuance of contracts entered into on or before 16 Match 2005 will not be affected by the provisions, unless:

There is a variation of the contract, or an assignment of rights under the contract, after 16 March 2005;
The transaction is effected in consequence of the exercise after 16 March 2005 of any option, right of pre-emption or similar right; or
After 16 March 2005 there is an assignment, sub-sale or similar transaction in respect of all or part of the subject matter, as a result of which a person other than the contracting purchaser becomes entitled to call for a conveyance.

14.2 STAMP DUTY RESERVE TAX (SDRT)

In 1997 exemption from SDRT was given to mutually owned insurance companies that transfer investments as part of a restructure on demutualization. It appears that the changes made to stamp duty and SDRT since 1997 require that the law be amended in order that the relief continues to apply. The new measure will ensure that the transfer of investments in collective investment schemes from the mutual to the new company will continue to qualify for relief.

15. RESIDENCE AND DOMICILE

In the 2003 Budget, the Chancellor announced that there would be a review (and possible consultation) on changes to the residence and domicile rules affecting the taxation of individuals.

In this connection, the Government released a document entitled: “Reviewing the residence and domicile rules as they affect the taxation of individuals: a background paper”.

The stated aims of this paper were to:

· describe the current rules;
· analyse international experience; and
· develop the principles that the Government believes should underpin any change.

In particular, the Government stated that such principles:

· should be fair;
· should support the competitiveness of the UK economy; and
· should be clear and easy to operate.

These principles gave rise to a number of questions and issues, upon which the Government sought comment from all interested parties. In particular, contributions from those most affected – both employees and employers – were sought.

It is understood that the Inland Revenue received a number of representations and comments on the way the residence and domicile rules should operate. Indeed, following some activity as regards collecting data on non-UK domiciled employees, a number of commentators thought that a change to the rules would be announced in the 2004 Budget. However, nothing materialised.

The Government has as part of its 2005 Budget offering stated that it is continuing to review the residence and domicile rules as they affect the taxation of individuals and will proceed on the basis of evidence and in keeping with its principles. It would welcome further contributions to the debate, which will then be taken forward by the publication of a consultation paper setting out possible approaches to reform.

WHICH MEANS THAT…

All the current rules and planning opportunities continue to exist. The main planning opportunities are as follows:-

INHERITANCE TAX (IHT)

IHT planning opportunities continue to exist for those individuals who are UK resident and ordinarily resident but are neither domiciled in the UK (under general law) nor deemed to have acquired UK domicile (under the deemed domicile provisions pertaining to IHT).

Until UK domicile (deemed or otherwise) is acquired, such an individual will be liable to IHT only on those assets actually situated in the UK. An excluded property trust can be an attractive way whereby, under current rules, such an individual can place assets beyond the scope of UK IHT, whilst still being able to benefit from the trust. It is important that the trustees only invest in non-UK situs investments (such as offshore funds or offshore capital investment bonds) and provided this continues to be the case the trust will remain beyond the scope of UK IHT, even if the settlor subsequently becomes UK domiciled.

Clearly the establishment of such a trust could be an important planning strategy for somebody who may, in the near future, be deemed to be domiciled in the UK for IHT purposes due to a long period of residence in the UK. It should be appreciated that the current 17 out of the last 20 tax years of residence could be reduced in the future if any further definition of domicile is based on an individual's close connection with the UK.

Some doubt has been expressed in the past concerning the interaction between the excluded property and reservation of benefit provisions. It had long been understood that the Revenue considers that the excluded property provisions take precedence. It was therefore reassuring to see a written statement to this effect in the 2003 Inland Revenue document (paragraph 2.8).

It would also seem from Schedule 15 Finance Act 2004, that the income tax pre-owned asset tax rules will not generally apply to excluded property trusts. However, care needs to be taken in cases where the trust property consists of shares in an overseas private limited company that holds a UK situs private residence as its asset. In such cases it seems the POAT rules could apply if the settlor of the trust occupies the house without paying a market rent.

INCOME AND GAINS

An individual who is UK resident but non-UK domiciled continues to be taxed on the remittance basis for both income and gains, until such time as a new domicile is assumed. It is hoped that, even if some form of 'deeming' is introduced for income tax and capital gains tax purposes, the remittance basis will continue to be available until such domicile is assumed.

It should not be forgotten however that the remittance basis does not apply to chargeable event gains under an offshore life policy (although the 5% withdrawal rule does).

BUT DON’T FORGET

Given the fact that future changes could still take place, when implementing a strategy, it will be important to include, within that strategy, sufficient flexibility to permit adjustments to be made should any change to the law make these necessary.

16. CIVIL PARTNERSHIPS

The Civil Partnership Act 2004 will be brought into force on 5 December 2005. The broad effect of the Act will be to give equal rights to same-sex couples who enter into a civil partnership with each other.

For tax purposes, civil partners will be treated in the same way as a married couple, and the necessary changes will take effect from 5 December 2005. This will mean that tax charges, reliefs and anti-avoidance rules will apply equally to married couples and civil partners. Effect to the changes will be given by regulations.

These changes will, for example, enable a civil partner to make gifts to their partner which are exempt from inheritance tax, to transfer assets on a no gain/no loss basis for capital gains tax purposes and to be treated equally in respect of pension rights. However civil partners will have to accept the disadvantage of married couples tax treatment as well as the benefits. For example, a couple will only be able to have one principal residence for capital gains tax purposes and the settlements anti-avoidance legislation will apply to civil partners in the same way as it applies to husbands and wives.

WHICH MEANS THAT…

Same-sex couples will need to decide whether to register as civil partners and if so, to review their financial arrangements, starting with their Wills.

Financial advisers will need to be aware of the new rules in order to be able to advise accordingly. The proposed changes should be an opportunity to review financial affairs of many individuals falling into this category.

Especially in the area of inheritance tax planning, a number of plans, such as inheritance trusts, are currently being marketed to married couples. Life offices offering such plans will need to review their marketing literature (and any draft documentation provided) to ensure that it caters for civil partners with similar financial objectives.

APPENDIX – TAX FACTS AND FIGURES AND NICs
MAIN INCOME TAX ALLOWANCES AND RELIEFS

2004/2005
2005/2006

£
£
Personal Allowance – standard
4,745
4,895
- Age 65 – 74
6,830
7,090
- Age 75 and over
6,950
7,220
Married Couple’s Allowance – minimum amount
2,210 (B)
2,280 (B)
- Age 65 - 74
5,725 (C)
5,905 (C)
- Age 75 and over
5,795 (A)
5,975 (A)
Age-related Allowances reduced if total income exceeds (D)
18,900
19,500
Maintenance to former spouse for all orders provided one party was 65 or over before 6 April 2000
2,210 (A)
2,280 (A)
(E) Loan interest relief on main residence [max]
30,000
30,000
Employment termination lump sum limit
30,000
30,000

(A) Relief at 10%.
(B) Minimum amount of MCA for age allowance purposes only.
(C) Relief available at 10% only if at least one of the couple was aged 65 before 6 April 2000.
(D) For 2005/2006 the reduction is £1 for every £2 additional income over £19,500 [£18,900 for 2004/2005]. Standard allowance(s) only are available if total income exceeds:-

2004/2005
2005/2006

£
£
Taxpayer aged 65 - 74 [personal allowance]
23,070
23,890
Taxpayer aged 65 - 74 [married couple’s allowance]
30,100
31,140
Taxpayer aged 75 and over [personal allowance]
23,310
24,150
Taxpayer aged 75 and over [married couple’s allowance]
30,480
31,540

(E) Relief at 23% available for certain home income plans.
INCOME TAX RATES

2004/2005
2005/06

£
£
Starting rate - 10%
1 – 2,020
1 - 2,090
Basic rate - 22%
2,021 – 31,400
2,091 - 32,400
Tax on first [£31,400] £32,400
6,665
6,877
Higher rate - 40%
Over 31,400
Over 32,400
Discretionary and accumulation trusts (except UK dividends)
40%
34%
Discretionary and accumulation trusts (UK dividends)
32.5%
25%
Savings income for a basic rate taxpayer
20%
20%
Schedule F ordinary rate on dividends
10%
10%
Schedule F upper rate on dividends
32½%
32½%

CAR AND CAR FUEL BENEFITS

CAR BENEFITS TO 5 APRIL 2002

1. The assessable amount is based on the "price" of the car which is the list price at the time the car was first registered plus the price of extras.

2. Where the "price" exceeds £80,000, the "price" used is restricted to £80,000.

3. The assessable amount is 35% of the "price" of the car if it is under 4 years old at the end of the tax year and business mileage is less than 2,500.

4. The percentage in 3. is reduced to 25% of the “price” of the car if business mileage exceeds 2,499 but is less than 18,000, and to 15% of the “price” of the car if business mileage is at least 18,000 miles.

5. For a car which is 4 or more years old at the end of the tax year the percentages under 4. (or 3. if applicable) are reduced by one-quarter.

CAR BENEFITS FROM 6 APRIL 2002

The charge is based on a percentage of the car’s “price”. “Price” for this purpose is

1. The list price at the time the car was first registered plus the price of extras.

2. Where the “price” exceeds £80,000, the “price” used is restricted to £80,000.

For cars first registered before 1 January 1998, the percentage of the "price" charged is based on engine size.

Engine Size (cc)
Percentage of car’s “price” charged to tax

0 – 1,400
15
1,401 – 2,000
22
2,001 and more
32

For cars first registered after 31 December 1997 the charge, based on the car’s “price”, is graduated according to the level of the car’s approved CO2 emissions.

For cars with no approved CO2 emissions figure, the charge is based on engine size.

Engine Size (cc)
Percentage of car’s “price” charged to tax

0 – 1,400
15
1,401 – 2,000
25
2,001 and more
35

There is a 3% supplement for diesel subject to the maximum charge of 35%.
If the car is one without a cylinder capacity (cc), it is taxed on 15 per cent of the car’s “price” (if it is a car propelled solely by electricity), and 35 per cent in all other cases (rotary engine cars).

For cars with an approved CO2 emission figure.

CO2 emissions in gram per kilometre (g/km)
Percentage of car’s “price” charged to tax
2004-05
2005-06
2006/07

145
140
140
15*
150
145
145
16*
155
150
150
17*
160
155
155
18*
165
160
160
19*
170
165
165
20*
175
170
170
21*
180
175
175
22*
185
180
180
23*
190
185
185
24*
195
190
190
25*
200
195
195
26*
205
200
200
27*
210
205
205
28*
215
210
210
29*
220
215
215
30*
225
220
220
31*
230
225
225
32*
235
230
230
33**
240
235
235
34***
245
240
240
35****

Notes

(1) * Diesel supplement = + 3%
** Diesel supplement = + 2%
*** Diesel supplement = + 1%
**** No diesel supplement - maximum charge of 35% already applies.

(2) The exact CO2 emissions figure should be rounded down to the nearest 5 g/km.

CAR FUEL BENEFITS – 2004/2005

For cars with an approved CO2 emission figure, the benefit is based on a flat amount of £14,400. To calculate the amount of the benefit the percentage figure in the above car benefits table (that is 15% to 35%), which is based on the approved C02 emission figure for 2004/2005, is multiplied by £14,400. The percentage figures allow for a diesel fuel surcharge. For example, a 1.8 litre car emitting 165 g/km in 2004/2005 would give rise to a petrol benefit of 19% of £14,400 = £2,736.

CAR FUEL BENEFITS – 2005/2006

The benefit is calculated as for 2004/2005 but based on the approved CO2 emission figure for 2005/2006. For example, a 1.8 litre car emitting 165g/km in 2005/2006 would give rise to a petrol benefit of 20% of £14,400 = £2,880.

VALUE ADDED TAX

From 1 April 2004
From 1 April 2005
Standard rate
17.5%
17.5%
Annual turnover limit for registration
£58,000
£60,000

INHERITANCE TAX

Cumulative chargeable transfers [gross]
% tax rate on death

2004/05
2005/06
2006/07
2007/08

£
£
£
£

Nil rate band
0 – 263,000
0 – 275,000
0 – 285,000
0 – 300,000
0
Excess
No Limit
No Limit
No Limit
No Limit
40

CAPITAL GAINS TAX

MAIN EXEMPTIONS & RELIEFS

2004/2005
2005/2006

£
£
Annual Exemption
8,200*
8,500 *

* Reduced by 50% for most trusts.

2004/2005 and 2005/2006
Principal Private Residence Exemption
No Limit
Chattels Exemption
£6,000

2001/2002 to 2003/04
Retirement Relief: Age 50 or over or retiring on ill-health grounds under age 50

2001/02 100% exempt
First £100,000 of gains
50% relief on
Next £300,000 of gains

2002/03 100% exempt
First £50,000 of gains
50% relief on
Next £150,000 of gains

2003/04 100% exempt
Nil
50% relief on
Nil

RATES OF TAX

Individuals: 10%, 20% and/or 40% [2004/2005 - 10%, 20% and/or 40%]
Discretionary and accumulation and maintenance trusts : 40% [2004/2005 - 40%]
Interest in possession trusts and personal representatives : 40% [2004/2005 - 40%]

TAPERING CHARGEABLE GAINS

Gains on business assets
Gains on non-business assets
Number of complete years after 5.4.98 for which asset held
Percentage of gain chargeable
Number of complete years after 5.4.98 for which asset held *
Percentage of gain chargeable
(i) Disposals before 6.4.2002 All disposals

0
100
0
100
1
87.5
1
100
2
75
2
100
3
50
3
95
4 or more
25
4
90

5
85
(ii) Disposals after 5.4.2002
6
80
0
100
7
75
1
50
8
70
2 or more
25
9
65

10 or more
60

* Assets held on 16 March 1998 qualify for a bonus year of ownership.

RELIEF ON PENSION CONTRIBUTIONS

2004/2005 and 2005/2006

Age on 6 April 2005
Personal Pensions
% of Earnings
Retirement Annuities
% of Earnings
35 or less
17.5
17.5
36 – 45
20.0
17.5
46 – 50
25.0
17.5
51 – 55
30.0
20.0
56 – 60
35.0
22.5
61 or over
40.0
27.5

Earnings cap £105,600 for 2005/2006 (£102,000 for 2004/2005)

CORPORATION TAX

Year Ending 31 March

2005 and 2006
Main Rate
30%
Small Companies’ Rate
19%
Small Companies’ Limit
£300,000
Upper Marginal Level
£1,500,000
Effective Marginal Rate
32.75%
Starting Rate
0%*
Starting Rate Limit
£10,000
Upper Marginal Level
£50,000
Effective Marginal Rate
23.75%

* Certain distributions will be taxed at 19%
TAX PRIVILEGED INVESTMENTS [MAXIMUM INVESTMENT]

2004/2005
£
2005/2006
£
ISA

§ Overall maximum to 5 April 2010

7,000
7,000
3,000 3,000
1,000 Nil
7,000 7,000

Maximum in

- Cash
- Life insurance
- Stocks and shares

Maximum in cash for 16 and 17 year olds
3,000
3,000

ENTERPRISE INVESTMENT SCHEME

200,000
200,000
Carry back to previous tax year for an investment made before 6 October - lower of amount shown and 50% of the investment

25,000

25,000

VENTURE CAPITAL TRUST
200,000
200,000

FAMILY TAX CREDITS

The main features of the tax credits are:

1. Child Tax Credit

· Eligibility is assessed on household income.

· The claimant must be responsible for one or more children aged 16 or under, or at least one child under age 19 and in full-time non-advanced education.

· The family element of the tax credit is £545 per annum and is doubled in the first year of a child’s life.

· The child element is £1,690 per annum for each child.

· The disabled child element is £2,285 per annum (where relevant).

· The Inland Revenue will pay the CTC to the main carer for the child.

2. Working Tax Credit

· The claimant, or one of the joint claimants, must be in qualifying remunerative work.

· The amount of WTC will be based on circumstances which are primarily the number of hours worked and the income of the claimant (or joint income for a couple).

· The age and working hours conditions are not straightforward. Generally, the minimum weekly working requirement will be:

a) 16 hours for families with children and workers with a disability. The claimant can be aged 16 or over.

b) 30 hours for workers with no children and no disability. The claimant has to be aged 25 or over.

· The basic element of the tax credit is £1,620 per annum.

· The couple or lone parent element is £1,595 per annum.

· A 30 hour element of £660 per annum is payable where the claimant or one of the claimants works at least 30 hours a week (couples with children may aggregate their hours for this purpose).

· A disabled worker element of £2,165 per annum or more is available where the claimant, or his or her partner, has a disability.

· There is 50-plus element and a childcare element.

· For employees, payment will normally be made by their employer with their wages (except the childcare element which is paid direct to the main carer). For the self-employed, payment is made directly by the Inland Revenue.

3. Calculating The Credits

It is necessary first to total the various elements available to arrive at the maximum available amount of tax credits before any reduction on account of income. Different elements can be reduced at different income levels.

NATIONAL INSURANCE CONTRIBUTIONS FOR TAX YEAR 2005/2006
Definitions

Lower Earnings Limit (LEL)
the minimum level of earnings at which an employee will qualify for a State Second Pension (S2P). This is also the lower level of earnings which will be used in determining any NI Rebate.

For tax year 2005/06 the Lower Earnings Limit is £82 per week.

Upper Earnings Limit (UEL)
the upper level of earnings on which an employee’s SERPS entitlement is based (or on which any NI Rebate is determined). For tax year 2005/06 the Upper Earnings Limit is £630 per week.

NI Rebate
the rebate of employer’s and employee’s National Insurance contributions that is available where an employee is contracted out of S2P. This is based on the employee’s earnings between the Lower Earnings Limit and Upper Earnings Limit.

The Rebate will vary depending on the type of pensions vehicle used to contract out of S2P. Where this is a final salary occupational scheme this will be 3.5% (employer) and 1.6% (employee) in respect of the employee’s earnings between the LEL and UEL.

Where this is a money purchase occupational scheme or contracted out money purchase stakeholder pension scheme the Rebate will be 1.0% (employer) and 1.6% (employee) in respect of the employee’s earnings between the LEL and UEL. The aggregate Rebate will be determined on an age related basis (varying from 2.6% to 10.5%) and any further Rebate due (i.e. over and above the amounts mentioned earlier in this paragraph) will be paid by the IR NICO to the scheme after the end of the tax year.

Where this is a personal pension or stakeholder scheme National Insurance contributions will be paid at the contracted in rate and the Rebate, which will be determined on an age related basis, will be paid directly to the member’s personal pension by the IR NICO after the end of the tax year to which it relates.

The Rebates will also vary in accordance with an individual’s earnings, in each of the following bands:

Band
Age related Rebate

1 (£4,264 - £12,100)
8.4% - 21%

2 (£12,101 - £27,800)
2.1% - 5.25%

3 (£27,801 - £32,760)
4.2% - 10.5%

Primary Threshold
the level of earnings at which employees start to pay Class 1 National Insurance contributions.

For tax year 2005/06 this is £94 per week.

Secondary Threshold
the level of an employee’s earnings at which the employer starts to pay Class 1 National Insurance contributions.

For tax year 2005/06 this is £94 per week.

Employees - Class 1

Contracted in
Nil on first £94 per week (i.e. up to Primary Threshold)

11% of £94.01 per week to £630 per week.

1% on earnings above £630 per week.

Contracted out
Nil on first £94 per week (i.e. up to Primary Threshold)

9.4% of £94.01 per week to £630 per week

1% on earnings above £630 per week.

The employee’s NI Rebate is still payable in respect of the employee’s earnings between the Lower Earnings Limit (LEL) and Upper Earnings Limit including those in excess of the LEL and up to and including the Primary Threshold. In the first instance, the Rebate reduces the National Insurance contributions payable by the employee. However, where the National Insurance contribution payable by the employee is reduced to nil, the excess Rebate will be available for the employer to set against his overall National Insurance contribution bill. Please see examples after the table for how this works.

Married Women and Widows Reduced Rate
4.85% of £94.01 to £630 per week.

1% on earnings above £630 per week.

Employer - Class 1 Contributions

Weekly Earnings
Contracted In
Contracted Out

COSR
COMP**

%
%
%
On first £94
Nil
Nil
Nil
£94.01-£630
12.8
9.3
11.8
Over £630
12.8
12.8
12.8

Although the reduced level of National Insurance contributions only applies to the employee’s earnings in the band between the Secondary Threshold (£94 per week) and the UEL (£630 per week), the NI Rebate is still available in respect of the employee’s earnings between the LEL and UEL, including those earnings between the LEL (£82 per week) and the Secondary Threshold (£94 per week). Employers are able to reduce their overall National Insurance contributions liability to reflect the Rebate applicable to the employer’s contributions on the employee’s earnings between £82 per week and £94 per week.

** Where a COMP (Contracted Out Money Purchase Occupational Scheme) is involved the Rebate is determined on an age related basis and any additional Rebate due over and above that shown above will be payable by the IR NICO to the scheme after the end of the tax year. This will also apply to a Contracted Out Money Purchase Stakeholder Pension Scheme (COMPSHP).

COSR is a Contracted Out Salary Related Occupational Scheme.

Self-Employed

Class 2
(lower profits limit)
£2.10 per week flat rate.
(applicable where profits are less than £4,345 per annum)

Class 4
8% of profits between £4,895 p.a. and £32,760 p.a.

1% on profits above £32,760 p.a.

Voluntary Contributions

Class 3
£7.35 per week

Examples of Class 1 NI Contributions for Employees Contracted Out Under Occupational Schemes

1. David Lovell earns £150 per week. He is contracted out of S2P under a final salary occupational scheme. David’s weekly National Insurance contributions are as follows:

Up to £94 per week - Nil
£94.01 per week to £150 per week - 9.4% x £55.99 = £5.26 per week.

However this is reduced by the employee Rebate (1.6%) payable on earnings between the LEL (£82 per week) and the Primary Threshold (£94 per week).
i.e. £12 x 1.6% - £0.19 per week.

David’s revised NI liability is £5.07 per week (i.e. £5.26 - £0.19).

His employer’s weekly National Insurance contributions are:

Up to £94 per week - Nil

£94.01 per week - £150 per week - 9.3% x £55.99 = £5.21 per week

However, this is reduced by the employer Rebate (3.5%) payable on earnings between the LEL (£82 per week) and the Secondary Threshold (£94 per week) - i.e. £12 x 3.5% - £0.42 per week.

The employer’s revised NI liability is £4.79 per week (£5.21 - £0.42)

2. Jane Redfearn earns £85 per week. She is contracted out of S2P under a final salary occupational scheme.

Jane pays no National Insurance contributions as her earnings are below the Primary Threshold.

However, the employee Rebate is available in respect of Jane’s earnings between the LEL (£82 per week) and £85 per week. (i.e. 1.6% x £3 = £0.05 per week).

As Jane is not paying any National Insurance contributions the £0.05 will be used to reduce the employer’s overall National Insurance contribution liability.

Her employer will pay no National Insurance contributions in respect of Jane as her earnings are below the Secondary Threshold. However, the employer’s Rebate is still available in respect of Jane’s earnings between the LEL (£82 per week) and £85 per week. (i.e. 3.5% x £3 = £0.10). This will be available to reduce the employer’s overall National Insurance contribution liability.

test

2005-03-12T16:24:00.000Z

Pound/Euro £1 = 1.38Euros

Baily Currency Conversion rate

2005-03-12T12:34:00.000Z

Pound/Euro £1 = 1.38 euros