EsmartMoney Nov_Dec 2007 by IanMerkel

The electronic personal finance magazine

eSmartmoney NOVEMBER/DECEMBER 2007

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Inheritance tax update Pre-Budget Report changes

Retirement muscle

pension simplification gives greater flexibility

Knocked off course

Tax increases to fill the remaining hole

Transferring YOUR assets

Tax gift rule comes under scrutiny

Changes on the horizon for capital gains tax

Also inside this issue Taking a tax break…

Savvy savings checklist

Owning a property abroad…

Have you taken the basic financial precautions?

Buy-to-let…

The sector still holds attractions

PRE BUDGET REPORT… THE PRICE OF WEALTH… SIPP SNIPPETS... NEWS IN BRIEF…

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JULY/AUGUST2007

CONTENTS

eSmartmoney

NOVEMBER/DECEMBER 2007

05 06 08 09 10 11 12 14 15 15 16 17 17 18 19 20 22 23 24 26 28 29 30

Pre-Budget Report… Non-domiciled individuals

Taking a tax break! Savvy savings checklist

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

Capital gains tax… Who were the winners and losers?

Retirement Muscle… Pension simplification gives greater flexibility

Growing a retirement income… Do you need a review of your investment strategy?

Multiple home owners… Gain without the pain

Buy-to-let… The sector still holds attractions

News in brief… Self assessment key dates

Comprehensive spending review… The NHS the biggest beneficiary

Inheritance tax… One-minute guide

Knocked off course… Tax increases to fill the remaining hole

SIPP snippets… A cut above the rest

Transferring assets… Tax gift rule comes under scrutiny

Making the most of your savings… The basics!

The price of wealth… Failure to plan could be costly

Changes on the horizon for capital gains tax… Tax system returned to where it started!

News in brief… Four out of five married couples with dependent children don’t have a Will

Inheritance tax update… Pre-Budget Report changes

Maximise the return when you exit your business Succession planning is the key

A more straightforward and sustainable system? Tax changes not welcomed

News in brief… Potential fines for house sellers

Inheritance tax… Biggest overhaul in more than 20 years 02

CONTENTS (Continued)

12 10 The articles featured in this publication are for your general information and use only and are not intended to address your particular requirements. Although endeavours have been made to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough examination of their particular situation. Articles that make reference to the Pre-Budget Report are subject to the Finance Bill becoming law. 02 06

To discuss your financial planning requirements or to obtain further information, please contact us.

eSmartmoney

NOVEMBER/DECEMBER 2007

PRE-BUDGET REPORT

Non-domiciled individuals The rules on non-domiciled individuals will affect a diverse group that includes sports people, the super-rich, entrepreneurs and employees in financial services, the oil industry, high-technology companies and the health service. Individuals can claim non-domiciled status if the country with which they have the deepest connections, usually their place of birth, is outside the UK. The rules will affect people who have been living in the UK for more than seven out of the past 10 years from next April. As well as paying the £30,000 charge, individuals opting for non-domiciled status will not be able to claim personal allowances. The Treasury said it would consult on the question of whether non-domiciled individuals living in the UK for more than 10 years should pay more tax. People with unremitted foreign income of less than £1,000 will be exempt from the new rules.

The Treasury also announced changes to “anomalies” in the rules, which mean that individuals can avoid paying UK tax on foreign income and gains brought into the UK. The proposed changes would remove the “ceased source” rule and reduce the scope to use offshore structures, such as companies and trusts, which convert taxable income and gains into nontaxable payments.

As well as paying the £30,000 charge, individuals opting for non-domiciled status will not be able to claim personal allowances.

To discuss your financial planning requirements or to obtain further information, please contact us.

eSmartmoney

NOVEMBER/DECEMBER 2007

WEALTH PROTECTION

Take a break! Savvy savings checklist

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WEALTH PROTECTION

Tax Code Make sure you have been paying the correct amount of tax over the past year. Mistakes do happen and can go unspotted. If you are over 65, you should check that you are getting the correct personal allowance. The income allowance for the 2007-08 tax year is £5,225 to age 64, £7,550 for people aged 65-74 and £7,690 for people aged 75 and over. This extra allowance can be reduced if a pensioner’s earnings are relatively high. The personal allowance falls by £1 for every £2 earned above £20,900, although the personal allowance cannot be cut below the normal level of £5,225. If you are married and one of you was born before 1935, you can also claim an additional allowance called the married couple’s allowance. This allowance is restricted to give relief at a fixed rate of 10 per cent. This means that, unlike the personal allowance, the married couple’s allowance is not income you can receive without having to pay tax. Instead, it reduces your tax bill by 10 per cent of the amount of the allowance you are entitled to.

Savings If your spouse is a non-taxpayer, consider transferring any spare savings into their name. This makes use of their personal allowance to avoid being taxed on the interest earned.

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Make sure that you are protecting as much of your savings and investments as possible from income tax and capital gains tax. Make sure that you are protecting as much of your savings and investments as possible from income tax and capital gains tax. You can shelter £3,000 of your bank or building society savings in a mini cash ISA in any one tax year, or invest £7,000 of equities in a maxi ISA. Alternatively, invest £3,000 in a mini cash ISA and £4,000 in a stocks and shares mini. You cannot open a maxi and a mini in the same tax year. Pensioners with an ordinary savings account should fill in form R85 to receive bank and building society interest without tax being deducted. If you are a higher-rate taxpayer, it is also worth looking at tax-free savings certificates from National Savings & Investments.

NOVEMBER/DECEMBER 2007

Inheritance tax Consider giving away assets where possible, but only those that you are quite sure you will not need later on. Gifts made at least seven years before you die are not subject to IHT, although HM Revenue & Customs are looking very closely at this area. You can also give away money that may be described as ‘excess income’ without incurring an IHT liability. In addition, £3,000 may be given away tax-free each tax year.

Charities While doing your tax housekeeping, remember that any donations to charity can attract tax relief. Giving to charity through Gift Aid allows the charity to reclaim tax at your highest rate.

Need more information? Please email or contact us with your enquiry. If you would like us to email a copy of our electronic magazine to someone you know, please email us with their details and we’ll send them a copy.

TAX

Owning a property

abroad

Have you taken the basic financial precautions? For Britons who own a property abroad, one of the most overlooked aspects concerns inheritance tax (IHT). Many people are unaware that an overseas property can be taxed twice - in Britain and locally. Whether your property is a holiday home, an investment property or a place to retire to, it is important to look at IHT planning, as there are steps you can take to mitigate this liability, particularly if you are hoping to retire abroad. Ideally, you should take these steps before moving, as your options will be seriously curtailed once you have left the UK. Two common mistakes are made by those buying overseas. Firstly, there is an assumption that because the property is overseas it is out of the reach of the UK tax authorities, which is not the case. Secondly, people make the mistake of overlooking the local tax rules that will be applied on the death of one of the property’s owners.

Many people assume that HM Revenue & Customs (HMRC) cannot levy a charge on overseas property, particularly if they live or have retired abroad and are no longer deemed resident in the UK for tax purposes. If you are ‘UK-domiciled’ HMRC will look at your worldwide assets when calculating an inheritance tax liability. And assets over the current IHT threshold could be taxed at 40 per cent, including any overseas property or shares in a property you own.

The Chancellor announced in his Pre-Budget Report constraints on Britons living abroad, who make frequent return visits to the UK.

To be deemed ‘non-resident’, you have to work abroad for a full tax year and spend no more than an average of 90 days a year in Britain. But individuals acquire a ‘domicile of origin’ at birth, which is normally the country in which they were born, and it is far harder to change this at a later date, even if you live abroad for years. Most expats remain UK-domiciled, particularly those who retire overseas. The Chancellor announced in his Pre-Budget Report constraints on Britons living abroad, who make frequent return visits to the UK. The existing rules, which allow individuals to spend 90 days in the UK, without becoming taxable as a resident, will be amended and days of arrival and departure will count as days spent in the UK. If you want to be domiciled in the country to which you have retired, you must submit a DOM1 form from your local revenue and customs office and sever all ties. This means closing all British bank accounts, selling all assets in Britain and even organising your funeral abroad. If you are granted a new domicile of choice, it takes three years for the loss of UK domicile to become effective for IHT purposes. But there are some financial advantages to cutting these ties. Once you are no longer domiciled in Britain, you can create a discretionary property trust, and any asset held within this will not be subject to IHT, even if you later return to Britain and become domiciled again. All property owners should ensure they have a Will drafted both in the UK and in the local country. This should take account of both the local IHT rules and any ‘succession rules.’ It may also be possible to avoid paying tax on a property twice by taking advantage of the doubletaxation treaties Britain has with various overseas countries. For example, there is an arrangement like this with France, so any tax paid there is deducted from the amount due in Britain on your worldwide assets. But there is no similar agreement with Spain.

eSmartmoney

NOVEMBER/DECEMBER 2007

PRE-BUDGET REPORT

CAPITAL GAINS TAX

Who were the winners and losers?

Your questions answered Q: What is the current rate of capital gains tax (CGT)? A: At the moment the actual rate of CGT you pay is determined by your top rate of income tax. So for higher rate taxpayers you will pay 40 per cent CGT in the 2007-08 tax year and lower rate taxpayers will only pay CGT at 20 per cent. But you can also pay as little as 5 per cent depending on the assets you are disposing of. Q: What are the benefits of utilising ‘taper relief’? A: Taper relief can help reduce a potential CGT bill. If your chargeable gains after allowable losses are more than the annual exempt amount for the year you can qualify for taper relief, which is calculated depending on how long the asset has been held. The longer the asset has been held the more relief you will get. After ten years only 60 per cent of the gains are chargeable to CGT. This tapering can reduce the effective rate of CGT to 12 per cent for basic rate taxpayers and 24 per cent to higher rate taxpayers after a decade. Q: How are the CGT rules changing? A: The current system will cease from April 5, 2008. The Chancellor, Alistair Darling, has decided to move to a single rate of CGT for everyone which will be paid 18 per cent.

Q: I own a second home, how could the rule changes affect me? A: At the moment the minimum CGT you will pay on the chargeable gain is 24 per cent, but it could be more depending on how long you have owned the property. If you have been a landlord for less than three years you face a CGT bill paid at 40 per cent. From next April you will only pay 18 per cent, irrespective of how long you have owned your property. However, if you are a basic rate tax payer you may pay more. For example, a basic rate taxpayer who has held a buy-to-let property for 9 years will pay CGT at 18 per cent, rather than 13 per cent. Q: What are the new tax implications of owning a holiday let? A: If you own a qualifying furnished holiday let it is a business asset and so you will pay CGT at 18 per cent, rather than the current 10 per cent as a higher rate taxpayer. Q: Will I now pay less tax when I sell my shares? A: If they are fully listed shares you will pay CGT on the chargeable gain at 18 per cent, rather than a minimum of 24 per cent. But the new rules will disadvantage owners of qualifying “trading assets”, such as unincorporated business or AIM listed shares in unlisted trading

companies. The effective tax rate after two years of ownership which, after business asset taper relief, until now has been only 10 per cent, will now increase significantly to 18 per cent. Q: Will my AIM share portfolio that was set up to shelter inheritance tax (IHT) be affected? A: Provided you have held shares, which are eligible for business asset taper relief, for a minimum of two years, the original investment plus any subsequent growth continues to fall outside your estate for IHT. However, if you dispose of your shares after two years you will have to pay CGT at 18 per cent after April 2008, rather than the 10 per cent you would today as a higher rate taxpayer. Q: What changes will the new system bring to venture capital trusts (VCTs) and enterprise investment schemes (EISs)? A: If you took advantage of the old rules that allowed you to defer your capital gains by investing in a VCT pre-2004 you will be benefit. Before you could have faced a tax bill of 40 per cent, but now you will pay just 18 per cent. Those who rolled over capital gains with a 10 per cent tax charge into Enterprise Investment Scheme shares will not fair so well. When they sell the EIS shares, the rolled over gain will be taxed at 18 per cent rather than at the 10 per cent they would have paid had they not done the roll over in the first place. Gains made on the EIS itself remain CGT free.

Need more information?

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NOVEMBER/DECEMBER 2007

RETIREMENT

Retirement

Muscle

Pension simplification gives greater flexibility Changes to pension rules in April last year widened the options available to people looking to maximise their retirement income. The rules on the amount you can withdraw through an unsecured pension, another name for income drawdown, have been relaxed. It is now possible to take more of your money out of your pension before you buy an annuity.

n unsecured pension allows you to draw an income from your pension fund while leaving your fund invested. People with defined contribution pensions often opt for an unsecured pension because of the flexibility it offers in terms of income levels and death benefits. Since April 2006, you can vary your income from this type of plan between nil and around 120 per cent of the equivalent of the annuity you could buy with the same pension fund. These income limits are reviewed every five years. Unlike a conventional annuity, all is not lost on death as your beneficiary can have the remaining pension fund, less a 35 per cent tax charge. Alternatively, they can continue with the income drawdown from the fund or use the fund to buy an annuity in their own right. This means that the unsecured pension route can be a particularly attractive option for people in poor health who are keen to provide for dependants.

Prior to the age of 75, the death benefits can be in the form of an income for your dependant or a lump sum for your beneficiaries. This could provide a useful route for passing funds to the next generation without incurring inheritance tax (IHT). Unsecured pensions can also be particularly useful for those who are partially retired and who are receiving some form of income. The ability to draw income directly from the fund rather than purchasing an annuity can provide you with a great deal of flexibility in the amount of income you take and the timing of that income. You need not necessarily choose between an unsecured pension versus an annuity. You could do a bit of both. You may consider using part of your pension fund to buy an annuity to deliver a core level of income, the level being set by the minimum income that you require. You could draw an income directly from the balance of the

fund, thereby utilising some of the advantages of unsecured pensions. Another change introduced by the pension simplification rules makes it possible to take up to 25 per cent tax-free cash from any form of defined contribution or money-purchase pension without having to take an income at the same time. This could be particularly useful for those who wish to access some capital before they really need their pension. You can take a quarter of your pension pot as a tax-free lump sum when you reach the age of 50. This will rise to 55 from 2010.

Before considering annuity alternatives, it is essential to get professional financial advice. The range of retirement options today makes it especially important to seek good advice on this subject. If you would like more information, please contact us.

eSmartmoney

NOVEMBER/DECEMBER 2007

RETIREMENT

Growing a retirement income

Do you need a review of your investment strategy? Converting your retirement savings into an income is one of the most important financial decisions you are ever likely to make. The traditional way has been to use the capital to buy an annuity that provides an annual income, but there are ways in which you could delay such a purchase.

ne option is to consider an unsecured pension, also known as ‘income drawdown’ or ‘pension fund withdrawal’. You draw an income directly from your pension fund while the fund remains invested. The maximum level of income you can draw is approximately 120 per cent of the level lifetime annuity payable to a single person of your age and sex, with the minimum being zero. You could then use your remaining fund to buy a lifetime annuity at any time. Anyone in a personal or stakeholder scheme can use an unsecured pension, apart from those with very small funds. If you want an unsecured pension but your employer’s scheme doesn’t offer it, you may wish to consider transferring your pension rights from that scheme into a personal pension scheme. However, you may lose any entitlement to a tax-free cash sum greater than 25 per cent of the fund value. Alternatively there is ‘staggered vesting’. This is also known as ‘phased retirement’ and is a way of drawing an income from your pension fund while delaying the purchase of an annuity. Personal pensions are broken into segments, allowing you to take benefits from segments in stages over a number of years. Each time you draw on a segment, a tax-free lump sum of 25 per cent can be taken and the balance used to buy an annuity. The remaining funds remain invested.

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With both of these options you need a careful review of your retirement strategy. If you are over-cautious you might not achieve enough growth to maintain your income, and equities may need to play a part in your portfolio.

The maximum level of income you can draw is approximately 120 per cent of the level lifetime annuity payable to a single person of your age and sex, with the minimum being zero. You could then use your remaining fund to buy a lifetime annuity at any time.

NOVEMBER/DECEMBER 2007

If you would like any further information about how to maximise your retirement income, please contact us.

TAX

Multiple homeowners Gain without the pain

eSmartmoney

NOVEMBER/DECEMBER 2007

TAX

In the UK, no one pays tax on the sale of a main home, because it is exempt from capital gains tax (CGT). If the value has increased since your purchase, the profit is tax-free. Owners of second properties, however, could face sizable tax demands if they sell to try and cash in on recent property price increases. But with the appropriate planning, a potentially high CGT bill could be reduced considerably.

ver the past few years, the number of people buying multiple homes has increased, as more families purchase holiday homes or student accommodation for their offspring to live in while at university. Others have turned to the buy-to-let market to help plan for their retirement. The Chancellor, Alistair Darling, announced in his Pre-Budget Report that he had decided to move to a single rate of CGT for everyone. From 6 April 2008 you will pay 18 per cent irrespective of how long you have owned your property. So if you find yourself in this position, what should you do?

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

Principal private residence Consider switching ‘principal private residence’ exemptions between properties. All gains on property are taxable with the exception of the home you live in, which HM Revenue & Customs (HMRC) calls your principal private residence. However, if you own more than one home you could elect which you wish to be classed as your primary residence, provided there is some evidence that you have actually resided there. If you live for even a matter of weeks at any stage in your ‘second’ home, this could enable you to write off the last three years of capital gains when you come to sell. You must elect which will be your primary residence within two years of the purchase of one of the various properties you own. Having made your choice, you could then change it. But if you fail to elect, the opportunity is lost.

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Writing off a gain If the property was bought before 1982, HMRC assumes you paid its value at April 1982, which wipes out any gains to that point. Between 1982 and 1998, a further indexation allowance is granted. As the retail prices doubled between these years, the Revenue will write off that amount again for tax purposes.

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

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

From 6 April 2008 you will pay 18 per cent irrespective of how long you have owned your property.

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

Deduct overseas taxes If you own a property abroad but are resident for UK tax purposes, you are liable for CGT in exactly the same way as if the property were here, but you could claim the same exemptions. You may, however, also find yourself liable for local property taxes. Where these have to be paid, it may be permitted to deduct them from the UK bill.

NOVEMBER/DECEMBER 2007

If you would like a review of your financial planning strategy, please contact us for further information.

PROPERTY

Buy-to-let

The sector still holds attractions There are approximately 900,000 private landlords in the UK according to the Council of Mortgage Lenders. The two key factors of rising house prices and good rental incomes have encouraged almost one million Britons to enter the buy-to-let sector. But if we experience future interest rate rises, possible tax rule changes and more expensive and increased regulation, can a property investment still really make money? A dwindling supply of new homes has fed a 20 per cent rise in rents in two years, while a recent survey by Nationwide found that house prices have remained robust after the numerous interest rate rises.

are now on offer for 100 per cent cover. The key fact that borrowers need to address is that, if their rental cover is only 100 per cent, they require additional resources such as savings.

The mortgage price war over the past year or so has been more aggressive in the buyto-let market. It has got to the point where the best buy-to-let mortgages are in line with mainstream rates. With so much competition on rates, lenders have looked at other ways to encourage borrowers. One is to cut the amount of â&#x20AC;&#x2DC;rental coverâ&#x20AC;&#x2122; the borrower needs. This is the expected rental income compared with the cost of the mortgage repayments. Borrowers have generally required rental cover of up to 150 per cent, but most deals

The mortgage price war over the past year or so has been more aggressive in the buy-to-let market. It has got to the point where the best buy-to-let mortgages are in line with mainstream rates.

eSmartmoney

NOVEMBER/DECEMBER 2007

TAX

Comprehensive

Self assessment

key dates If you completed a paper Tax Return for 2006-07 and sent it back by 30 September 2007, HM Revenue & Customs (HMRC) will: Calculate your tax Tell you what to pay by 31 January 2008 Collect tax through your tax code, if possible, where you owe less than £2,000 If HMRC received your paper Tax Return after 30 September and process it by 30 December, they will still calculate your tax and endeavour to collect tax through your tax code but they can’t guarantee to tell you what to pay by 31 January 2008.

If you were sent a Tax Return by 31 October 2007, you will be charged a penalty of £100 if HMRC have not received your return by 1 February 2008. The new tax year starts 6 April 2008. A Tax Return or Notice to Complete a Tax Return (SA316) will be sent out to all those who meet the criteria to get a Tax Return each year.

If you were sent a Tax Return by 31 October 2007, the deadline for sending back your completed 2006-07 Tax Return is 31 January 2008.

Need more information?

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spending review

The NHS the biggest beneficiary

Health emerged as the biggest winner in the comprehensive spending review with council tax payers the likely losers. The National Health Service (NHS) it was announced will receive a 4 per cent realterm increase, taking NHS spending in England up by nearly £19.5bn to £110bn by 2010-11. Total health spending across the UK will rise from just under £105bn this year to £126.7bn next. Spending will now rise by 2.1 per cent a year on average until 2010, rather than the 2.0 per cent announced at the time of the Budget. Total managed expenditure will now increase from an estimated £589bn this year to just over £678bn in 2010-11. The extra cash announced will ultimately benefit education, counter-terrorism and security, and social housing. Local government at the other end of the spectrum secured only a 1 per cent real-terms rise. Education spending rises by 2.8 per cent a year in real terms, with an extra £250m of revenue allocated over three years and £200m of capital to build an extra 75 schools. Counter-terrorism and security receives a boost, with the budget for the intelligence agencies rising by 9.6 per cent a year in real terms, with £3.5bn a year being spent on the police, security and intelligence services by 2010-11. The Home Office will now see 1 per cent real-terms growth. The work and pensions and revenue and customs are to face cuts in their administrative budgets, down 5 per cent a year in real terms over the next three years.

eSmartmoney

NOVEMBER/DECEMBER 2007

TAX

Inheritancetax One-minute guide Who needs to worry about inheritance tax? Following the announcement made by the Chancellor during his Pre-Budget Report, anyone whose estate exceeds £600,000 when they die could face paying 40 per cent in tax on the sum above the threshold. Many ordinary people may now become higher rate taxpayers for the first time after death, as rising property prices have pushed many homes above the inheritance tax threshold.

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

What about larger amounts? All outright gifts of any value made at least seven years before the donor’s death escape inheritance tax completely. Even gifts made more than three years before death may benefit from a reduced tax bill under taper relief rules.

What can I do to make life easier for my family after I die? Make a Will and nominate your executors. Dying intestate without making a Will can

cause complications and delay. Keep a file with a copy of your Will, a reference to where to find all the important papers and details of filing cabinets or safes.

How can I avoid causing problems after the current clampdown on lifetime gifts? As the person giving away money and assets, write down what you have given to whom, and when.

What if I am the executor of an estate? Consider seeking professional help from a solicitor or other qualified person. Prepare to face supplementary questions from HM Revenue & Customs about lifetime gifts.

Many ordinary people may now become higher rate taxpayers for the first time after death, as rising property prices have pushed many homes above the inheritance tax threshold. If you would like more information, please contact us.

eSmartmoney

NOVEMBER/DECEMBER 2007

RETIREMENT?

Knocked off course

Tax increases to fill the remaining hole The first Pre-Budget Report from Alistair Darling raised taxes by a total of £1.5bn according to The Institute of Fiscal Studies (IFS). The IFS’s director, Robert Chote, said: “Recent financial market problems and a weaker outlook for wages have knocked a £6.5bn hole in the Chancellor’s current budget balance next year, but he believes that this will shrink to £1.5bn after three years. By then he expects to fill the remaining hole with the tax increases and other measures that he announced in the Pre-Budget Report.” These include increases in capital gains tax and aviation taxes, further “anti-avoidance” measures and a decision to bring forward the end of the earnings-related component of state pensions, all of which together will raise around twice the money he will be giving away through his £1.4bn cut in inheritance tax.

now affecting economies right across the world. I am optimistic that because of the strength of the British economy we can get through these difficulties, just as we got through difficulties in the past and we will be able to continue to see growth in the economy.”

The IFS also warned that while Mr Darling promised to spend £2bn more on investment in public services over the coming years, this money would be borrowed, rather than raised through tax rises or cuts in spending elsewhere. In the PBR, the Chancellor doubled the amount a married couple can leave to their children tax-free to £600,000 - a measure costing £1.4bn a year by 2010/11. However, this cost is only around half what the Treasury will raise from tax increases on air travel, capital gains, the closure of loopholes and changes to the way pensions are treated. The IFS also commented that Mr Darling’s £2bn of extra borrowing meant he was likely to break one of the key borrowing rules laid down by Gordon Brown - that the national debt should not exceed 40 per cent of Britain’s gross domestic product. Mr Darling said: “The reason that I downgraded my expectation of growth next year was, quite simply, because of the problems that I saw coming out of America this summer which are

eSmartmoney

NOVEMBER/DECEMBER 2007

SIPP snippets A cut above the rest Self-invested personal pensions (SIPPs) are very much part of the mainstream pensions arena today. Introduced in 1991, they were designed to give people more flexibility and control over their pensions. SIPPs are a pensions ‘wrapper’ for a portfolio of investments, enabling individuals to invest in shares of all major stock markets, unit trusts, investment trusts, bonds and even commercial property, both freehold and leasehold. If appropriate, anyone in a money purchase occupational pension scheme or personal pension scheme could set up a SIPP. Phased retirement and income drawdown schemes can also be operated in conjunction with a SIPP.

SIPPs are a pensions ‘wrapper’ for a portfolio of investments. If you would like more information, please contact us.

TAX

Transferring

assets Tax gift rule comes under scrutiny A new inheritance tax (IHT) initiative has been launched against families who use the seven-year gift rule to reduce their bill, it has been disclosed. The scrutiny focuses in particular on ‘lifetime gifts’ involving transfers of assets made before a person dies. Gifts made more than seven years before a donor’s death are exempt from IHT. Bereaved families could face not only bills for any unpaid tax, but also financial penalties if information relating to transfers as long as seven years ago is incomplete or unclear.

HM Revenue & Customs has announced a thorough investigation into how people use the seven-year gift rule, which is intended to stop families avoiding the tax. Any gift made seven years before a person’s death is not subject to IHT, but money given within seven years may be taxed at 40 per cent. Fact-finding exercises are being conducted and may subsequently be used to change the law on lifetime gifts, tighten the requirements for inheritance tax returns, or increase the resources to police inheritance tax. The authorities are looking through financial information such as bank statements and pension plans to make sure any gifts made during the seven years before the donor’s death have been accurately declared. If families fail to complete paperwork accurately they could be fined. Government figures show the number of families paying the tax rose 72 per cent in five years. While only 33,000 estates paid the tax last year, research by Halifax found that more than 1.5 million properties fall within the IHT net. If the tax increases continue at the present level, this will be 4.6 million by 2020.

HM Revenue & Customs has announced a thorough investigation into how people use the sevenyear gift rule, which is intended to stop families avoiding the tax.

If you would like to review your current position, please contact us for further information.

eSmartmoney

NOVEMBER/DECEMBER 2007

WEALTH CREATION

Making the most of your savings The basics! n Use your cash-ISA allowance of £3,000 (£3,600 for the tax year 2008-09) to earn tax-free, risk-free interest n Regularly check the interest rates paid on your savings accounts and switch if they are no longer competitive n Build up an emergency fund equal to a minimum of three months’ salary in a savings account that provides instant access n Consider using an offset mortgage which provides a tax-free return equivalent to your mortgage rate on your savings n Stop your children paying unnecessary tax on their savings by filling in an R85 form. Some banks will accept verbal registration rather than a signature n Savers who put away up to £250 a month should consider switching to a regular savings account that offers higher returns n Consider using products such as index-linked savings certificates n If appropriate, switch your savings into your spouse’s name if your spouse is not making use of his or her tax-free allowance

eSmartmoney

NOVEMBER/DECEMBER 2007

WEALTH PROTECTION

The price of wealth

Failure to plan could be costly Wealth protection planning is the process of reviewing your complete financial situation and creating a step-by-step strategy to shield and preserve your wealth from all potential threats. Letâ&#x20AC;&#x2122;s take a look at some of the basic elements that you should consider.

eSmartmoney

NOVEMBER/DECEMBER 2007

WEALTH PROTECTION

Making a Will Without a Will, the state decides who receives the money and assets in your estate. When this happens in England and Wales, your spouse takes the first £125,000 as well as your personal possessions and an interest for life in half the balance. The rest goes in equal shares to your children. It is also important to consider the effects of inheritance tax (IHT) in the event of your premature death. The rules on IHT received their biggest overhaul in more than 20 years following the Chancellor’s Pre-Budget Report when he announced that the threshold at which the 40 per cent duty is levied on inherited assets was to be raised for married couples and civil partners from £300,000 to £600,000. Mr Darling also said this threshold would rise further to £700,000 in three years’ time. Assets left by a husband or wife to their spouse have always been free of IHT, no matter what their value. However, when the second spouse died, they could only use their own tax allowance of £300,000 when leaving their assets to their family. With property prices rising sharply in recent years, many bereaved families have lost out to IHT.

Following Mr Darling’s announcement, couples whether married or in a civil partnership can merge their two tax-free allowances of £300,000 to create a larger allowance of £600,000. Mr Darling said the announcement would benefit 12 million married couples and civil partners. This figure includes an estimated 3 million widows and widowers, who may now be able to take advantage of the combined allowance and make backdated claims.

Immediate tax savings

Investing tax-efficiently

Where husbands and wives or members of civil partnerships trust each other sufficiently to equalise assets, they may even achieve immediate tax savings through making more use of the personal allowance for income tax, currently £5,225 per person aged under 65, and capital gains tax of £9,200 per person during the tax year ending on 5 April 2008.

Several investments are free of IHT after they have been held for two years. These are shares quoted on the Alternative Investment Market (AIM), forestry land, farming land, provided you farm it rather than rent it out, and partnerships or shares in a private business. These types of investments may not be suitable, and individual advice should be sought regarding these types of contracts.

It can be good to give

Potentially exempt transfers

You can give money and assets away before you die but there are strict limits under the IHT regime. Each person can give away £250 a year to any number of people as well as £3,000 in total annually to different people. If you didn’t use the £3,000 allowance last year, you can give away an extra £3,000 this year. There are no limits on the amount you can give away regularly out of your income, but it must not reduce your lifestyle. It’s important to keep records of your expenditure, as your remaining income has to be sufficient to cover your expenses. It is also important to record what you’ve given away.

A matter of trust When you die, providing your life insurance is written under an appropriate trust, it will automatically pay out to the beneficiaries without having to go through the IHT regime. The death benefit passes directly to them without being counted towards your estate.

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Passing pensions Employers’ pensions are normally written in trust, meaning that any death-in-service lumpsum payment passes directly to whoever you nominate, but this is at the employer’s discretion. Pension benefits for a widow or widower do not affect IHT, although they may be subject to income tax. Personal pensions should be written in trust, too, so that the pension savings can pass tax-free to whoever you wish.

JULY/AUGUST2007 NOVEMBER/DECEMBER 2007

Potentially exempt transfers (PETs) are gifts of assets, cash or property you make before you die but you have to survive for seven years before they become IHT-free. After three years, the beneficiary may get some tax relief which can increase each year until the seven years is up. However, if the gift is less than the nil-rate band the whole amount is added back into your estate when calculating how much you owe in death duties.

If you would like to discuss ways in which we can help you to protect your wealth, please contact us for further information.

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PRE-BUDGET REPORT

Changes on the horizon for capital gains tax

Tax system returned to where it started!

The Chancellorâ&#x20AC;&#x2122;s new 18 per cent tax rate is set to benefit many landlords, second home owners and private investors who could pay substantially less tax on their capital gains (CGT). Currently, higher rate taxpayers who sell a property that is not their main residence, or shares in companies listed on the main stock market and make a profit of more than ÂŁ9,200, pay as much as 40 per cent tax on their profits if they sell within three years. After ten years, the effective rate of tax falls to 24 per cent. They will now just pay the 18 per cent flat rate.

eSmartmoney

NOVEMBER/DECEMBER 2007

NEWS IN BRIEF

This is the largest change to CGT since Gordon Brown instituted taper relief a decade ago and fundamentally returns the tax system to where it started, albeit at a lower rate. Taper relief was introduced by Mr Brown in one of his first acts as Chancellor as a way of encouraging enterprise.

meant that capital gains tax in Britain was now higher than in France, Italy or America. “The British private equity industry is core to maintaining London as the world’s financial capital. We regret the rise in the effective rate our investors will pay.”

Mr Darling announced the abolition of taper relief saying it was designed to make private equity “pay a fair share”. It is hoped that the measure will raise an additional £2 billion in taxes over the next three years.

There will be winners and losers from the new reforms, with those who have spent years building up family businesses set to lose out, as currently they can potentially pay just 10 per cent, under business asset taper relief. The new rules apply for disposals on or after 6 April next year (2008).

This year there has been much media interest in private equity firms which buy companies using huge amounts of debt, and how they have been using the tax rules to pay low levels of tax on the “carried interest”, or profits, that they made on their investments. Private equity executives who come from abroad but live and work in Britain face a double blow after the Chancellor said he would tighten the rules on residence. Mr Darling proposes to count the days on which people arrive and leave the country as periods of residency. Individuals are considered to be resident if they have been in the country for 90 days in any one tax year. The British Venture Capital Association criticised the move, saying that the 18 per cent tax rate

The British private equity industry is core to maintaining London as the world’s financial capital. We regret the rise in the effective rate our investors will pay.

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NOVEMBER/DECEMBER 2007

Four out of five married couples with dependent children don’t have a Will The National Consumer Council (NCC) stated recently that close to four out of five married couples with dependent children don’t have a Will. For unmarried couples the figure is even higher, making them particularly vulnerable. A surviving partner can risk losing personal possessions, cash and property, as current inheritance laws do little to protect unmarried couples. NCC who carried out the survey of over 2,500 people describes the results as a ticking time bomb and is now calling on the Government for urgent action. Dying without a Will can leave all sorts of headaches for those left behind. Creating family feuds, and leaving relatives short of their inheritance.

Dying without a Will can leave all sorts of headaches for those left behind

? PRE-BUDGET REPORT CHANGES

Inheritance TAX UPDATE 24

eSmartmoney

NOVEMBER/DECEMBER 2007

PRE-BUDGET REPORT CHANGES?

your questions answered Q: Do I need to worry about inheritance tax even though I intend to leave everything to my spouse? A: There is no IHT payable on assets transferred between spouses or those in a civil partnership. But this doesn’t mean you should ignore IHT completely if you have assets exceeding £600,000. Following the recent announcements made by the Chancellor in his first Pre-Budget Report, the surviving spouse will now be able to bequeath £600,000 tax-free. By 2010, this figure will increase to £700,000. Q: If I give away my home and survive for seven years, do I have an IHT problem? A: There is no guarantee that this will work, but you would need to pay a market rent on your home while you continued to live there. If you live there rent free, then this is considered a ‘gift with reservation’ by HM Revenue & Customs (HMRC), which will not make it exempt from IHT. In practice, even if you pay the correct rent, this is seldom a taxsaving move. Many older people are asset-rich but cash poor, so paying rent on their own home would seriously impact their standard of living. Beneficiaries who received this rent would have to pay income tax on this money. They are also likely to be subject to capital gains tax if they sold this home after your death, as it is not their primary residence. This means they could have to pay capital gains tax at 40 per cent on any gains in the property’s value from the day it was given to them to the day it was sold. So the potential tax saving for your heirs may be

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negligible, but the cost could be significant. The current CGT system is being scrapped from 5 April 2008. The Chancellor, Alistair Darling, has decided to move to a single rate of CGT for everyone which will be paid at 18 per cent. Q: Do I have to declare money that I have given away? A: HMRC has the power to prosecute and fine executors and potentially beneficiaries who fail to declare lifetime gifts on the appropriate IHT form. They intend to step up investigations and clamp down firmly on any incidents of tax evasion. Under current rules, you can give away money or assets, and provided you live for more than seven years after making the gifts, they are not included within your estate for IHT purposes. You should make a note of any such gifts and pass them on to the executors of your Will. If you die within the seven-year period, depending on the total value of the gifts and when your death occurred, this would determine if there was any further tax to pay, after taper relief had been taken in to consideration. Q: Could my pension be subject to IHT? A: There may be no immediate IHT problems, because pension funds are not subject to IHT. But this does not mean that you should ignore pensions altogether. Most people nominate their spouse to receive their pension should they die. While there is no IHT to pay at this point, the funds will be taxable when your

NOVEMBER/DECEMBER 2007

spouse dies and leaves the remainder to the next generation. One solution is to ensure the pension is paid into a trust on your death, with the spouse being the main beneficiary. The trustees can forward funds to the surviving spouse and also ensure that other beneficiaries, such as children, can also benefit from these funds without paying IHT. Q: What can I do to reduce an IHT liability on my property? A: Handing the deeds of your property over to your children is not an effective means of escaping IHT. But there are steps you could take if it is simply the value of your family home that is pushing you into the IHT bracket. Taking out a debt secured against the property could reduce the value of your property. Putting in place an IHT strategy can be very complex issue and you should always receive independent legal and financial advice before proceeding.

If you would like us to email a copy of our electronic magazine to someone you know, please email us with their details and we’ll send them a copy.

ENTERPRISE ?

Maximise the returnwhenyou exit your business

Succession planning is the key

eSmartmoney

NOVEMBER/DECEMBER 2007

ENTERPRISE?

If you are planning to exit your business, then having a succession plan in place is crucial. It’s never too early to work out your strategy for exiting your business. Sellers who haven’t prepared may even find themselves getting less for their businesses than those who do plan. These are some of the key points you need to consider. Strategy Consider your strategy. Can you add value to your business when you plan to sell? Should you be aiming to maximise shorter- or longerterm profits? Are you over-reliant on just a few customers?

Timing When will your business be worth the most, given changes in your supply chain, competitor activity or technological advances?

Tax Tax-efficient strategies for realising your investment in the business can take time to set up. Your company might need to make sizeable contributions to your pension fund for several years. You need to keep in touch with your professional advisors to make sure tax changes are factored into your plans.

of association say you must offer your shares to other shareholders before you can sell to an outsider, square things with them. Agree who will take over personal guarantees. If the company leases premises from you, discuss the alternatives. Ensure all key agreements are in place.

Employees, customers and suppliers Key workers must be retained for a good sale price. Clauses in customer or supplier contracts may give them termination rights if ownership changes. When will you talk to them to make sure they’ll do business under the new owner?

The offer Take advice on the different tax implications of selling company shares, compared to the sale of company assets. Selling shares is generally a better option for the seller than selling assets.

Legals

Systems

If you have legal disputes, sort them out. If a shareholders’ agreement or your company’s articles

Make sure management information systems, equipment and premises are in good order.

Finances If you want to keep a stake in the business, you can restructure the company’s finances. Increasing bank borrowings and selling some of your shares back to the company is an option.

Your company might need to make sizeable contributions to your pension fund for several years. You need to keep in touch with your professional advisors to make sure tax changes are factored into your plans .

If you would like us to email a copy of our electronic magazine to someone you know, please email us with their details and we’ll send them a copy.

eSmartmoney

NOVEMBER/DECEMBER 2007

? PRE-BUDGET REPORT

A more straight forward and sustainable system? Tax changes not welcomed 28

eSmartmoney

NOVEMBER/DECEMBER 2007

NEWS IB BRIEF

Potential fines for house sellers Town Halls have been ordered to fine house sellers if they fail to use Home Information Packs allowing local councils to rake in fortunes from sellers who flaunt the rules. Tax changes announced by the Chancellor aimed at cracking down on high-earning private equity executives could hit thousands of small companies, employees and shareholders. Mr Darling argued that by introducing a flat 18 per cent rate of capital gains tax for all investors, he would “make the system more straightforward and sustainable.” He also added it would ensure “those working in private equity pay a fairer share.” Many believe that the changes will hit other groups apart from private equity. These could include entrepreneurs selling their companies, employee shareholders, investors in AIM-listed companies, start-ups and “angel investors” in unlisted firms would see their tax bill increase from 10 per cent to 18 per cent. There was also a plan announced to levy a £30,000 charge on non-domiciles who have lived in the UK for seven years and a move to raise inheritance tax thresholds for couples. The rules on residence and domicile are expected to raise an extra £800m for the Treasury in 2009-10, falling to £500m in 2010-11.

borrowing. Treasury forecasts show public borrowing will be £7bn higher than expected in 2008-09, the result of slower pay growth and reduced City profits.

The effect of the credit squeeze on public finances forced Mr Darling to announce tax rises and a substantial increase in government borrowing.

The effect of the credit squeeze on public finances forced Mr Darling to announce tax rises and a substantial increase in government

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NOVEMBER/DECEMBER 2007

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The fines have been approved by housing Minister Yvette Cooper, enabling trading standards officers to impose the cash penalties on anyone who markets their three or four bedroom property without a HIP. The Council of Mortgage Lenders said: “This move places extra burden on home owners. We are hoping that councils will be consistent. It will not be fair if sellers in one area are treated differently from those in another.”

This move places extra burden on home owners. We are hoping that councils will be consistent. It will not be fair if sellers in one area are treated differently from those in another.

PRE-BUDGET REPORT

BIGGEST OVERHAUL IN MORETHAN

20 YEARS

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

Changes to inheritance tax n IHT allowance (the nil-rate band before the tax is paid) is now a combined allowance of £600,000 between spouses or between civil partners

married couples, with up to a £600,000 allowance rising to £700,000; the same entitlement for three million widows and widowers.”

n The IHT allowance rises to £350,000 per person in April 2010, giving couples a combined allowance of £700,000

The Treasury expects the proposals to cost £1 billion in 2008-09, rising to £1.4 billion by 2010-11. Mr Darling said that in future the threshold for paying inheritance tax would increase in line with house prices as well as inflation.

n Widows, widowers and bereaved civil partners can now claim the combined allowance n The increased IHT allowance from April 2010 is not a tax cut, the £350,000 allowance was announced in this year’s Budget

While death duty is relatively insignificant in tax terms, it is deeply unpopular among those who expect to pay it. More people are paying death duties because house prices have risen far more quickly than the IHT threshold.

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This magazine is for general guidance only and represents our understanding of the current law and HM Revenue and Customs practice. We cannot assume legal responsibility for any errors or omissions it might contain. Level and bases of, and reliefs from taxation are those currently applying but are subject to change and their value depends on the individual circumstances of the NOVEMBER/DECEMBER 2007 investor. The value of investments can go down as well as up, as can the income derived from them. You should remember that past performance does not guarantee future growth or income and you may not get back the full amount invested.

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