Tax & Accounting News

Post Budget Planning Points

27/03/2008

Thankfully, the 2008 Budget did not contain any major new measures that had not already been announced, and the postponement of the ‘income shifting’ proposals was very welcome indeed. We trust that the government will now listen to what everyone has been saying about these plans, and seriously reconsider them.

It was disappointing that the capital gains tax and non-domicile reforms were not also postponed for a year, because the draft legislation appeared so late that it was very difficult to make plans in advance of their introduction. Indeed, the Budget contained further amendments in relation to the non-domicile changes, and it is only now that planning measures can be taken with any certainty.

Although very little time remains until 5 April, we list below, in bullet point form, the main possible planning points before the commencement of the new regimes on 6 April 2008.

We must stress the following points:

1. Triggering a disposal involving the payment of tax before any proceeds are received should only really be considered where a sale to a third party in the near future is envisaged, or as part of a succession planning exercise.
2. Other taxes (for example inheritance tax and stamp taxes) and commercial considerations must also be taken into account.
3. It would normally be advisable to obtain clearances in respect of some transactions, and this may not now be possible before 6 April 2008.
4. The possible measures are briefly listed as suggestions only, and detailed advice should be taken in each case.

 

Capital gains tax reforms

Banking taper relief if entrepreneurs’ relief will not be available or beneficial

1. If a sale to third party is not possible, consider triggering a disposal by means of:
1. A transfer to another individual or a trust
2. The incorporation of a sole trade or partnership business
3. A disincorporation or share buy-back. (Please note that a disincorporation may involve the crystallisation of a gain by the company, and the overall picture needs to be considered.)
2. Employers may wish to consider setting up a trust to facilitate share disposals by employees who would not qualify for entrepreneurs’ relief.

EMI share options

1. Consider exercising any unexercised options that have been held for at least a year, and triggering a disposal before 6 April 2008.

Loan notes

1. Consider redeeming loan notes before 6 April 2008 (if possible, amend terms so that this can be done).
2. Consider gifting loan notes to a trust – HMRC has indicated that this doesn’t contravene the 6-month no redemption rule.
3. Consider selling loan notes to a different group company.

Earn-outs

1. Consider selling an earn-out-back to the company instead of waiting for it to crystallise under the normal terms.
2. Consider gifting an earn-out to a settler interested trust

Offshore trust beneficiaries

Consider delaying remitting capital payments until after 5 April 2008 so that the maximum effective tax rate is 28.8% rather than 64%. However, see also the ‘Remittance basis’ section below, in case this might conflict with advice in relation to the proposed new remittance basis regime.

Kink test and halving relief

Check asset histories to see whether either of these reliefs can be used:

1. The kink test applies where an asset was acquired before 31 March 1982 at a cost higher than the 31 March 1982 value. Taxpayers can currently choose whether to use the original cost or the 31 March 1982 value as the base cost.
2. Halving relief applies where an asset was acquired before 31 March 1982 and was then the subject of a transfer before 6 April 1988 in which a gain was deferred. When the transferee disposes of the asset, the deferred gain is halved.

Share identification rules

From 6 April 2008, all shares of the same class in the same company will form one pool. Where a holding consists of some shares that were acquired some time ago at a low cost, plus other shares acquired more recently at a much higher cost, the base cost of the latter shares will be diluted after 5 April 2008. If a disposal of some of the shares is contemplated in the near future, it may be worth selling the recently
acquired shares at a low gain before 5 April 2008. If a holding was acquired at a low cost, and it is intended to acquire more shares at a much higher current value, their high base cost will be preserved if they are acquired by a spouse or civil partner, or through a trust.

 

Non-domicile changes

1. Consider remitting any unremitted income before 6 April 2008 from a source that was closed before 6 April 2007.
2. Consider opting for the arising basis to apply for 2007/08, and remitting previously unremitted income before 6 April 2008.
3. Consider making a gift abroad to a family member who then brings the sum into the UK before 6 April 2008. This should be effective, provided the donor does not directly or indirectly benefit from the sum gifted.
4. Consider buying assets offshore and bringing them into the UK before 6 April 2008. Ensure that assets are not taken out of the UK and then brought back in.
5. Where an asset is held by an offshore close company in which a non-domiciled UK resident individual is a participator, consider transferring the asset to a jurisdiction that gives treaty protection against a charge under S13 TCGA 1992. This could be done by exporting the company or setting up a subsidiary and transferring the asset.
6. Consider appointing assets out of trusts, and winding up structures that will no longer have tax benefits, before 6 April 2008.

Please contact us to discuss any of these suggestions.

 

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