Budgeting for growth?

APRIL 14TH, 2011 By DAVID
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It is now three weeks since George Osborne presented his second Budget to Parliament. Given the fragile state of the economy and the desire to bring the budget deficit under control, it was unlikely that we would get a giveaway Budget and this proved to be the case. The Budget highlights include:

1) Income Tax

There were no major policy changes. As well as reiterating that the 50% tax rate is only a temporary measure, the Chancellor also announced that HM Revenue & Customs has been asked to investigate how much tax is being raised by the 50% tax rate. The implication being that if it is found to be generating significantly less revenue than was originally anticipated, then it could be scrapped by as early as the 2013 Budget.

2) Capital Gains Tax

There was good news for business owners as it was announced that the lifetime limit on gains qualifying for Entrepreneurs’ Relief has been increased from £5 million to £10 million for disposals after 6 April 2011
(qualifying gains are taxed at 10%).

3) Pensions

There were no new developments as all the changes had already been announced (please refer to my previous blogs for details of the new pre and post retirement rules).

4) Tax Efficient Investments

Prior to the Budget there was much speculation that Venture Capital Trusts (VCTs) and Enterprise Investment Schemes (EISs) would either be abolished or altered to reduce their attractiveness. The good news is that neither of these concerns materialised, as the Chancellor acknowledged the benefits that these schemes provide in helping small companies to develop. The key policy announcements include:

• From 6 April 2011 the rate of EIS income tax relief will increase from 20% to 30%.

• From 6 April 2012 the Government will increase the annual EIS investment limit for individuals to £1 million.

• The Government will consult on options to provide further support for seed investment, simplify EIS rules, and refocus both EISs and VCTs to ensure they are targeted at genuine risk capital investments.

5) Inheritance Tax

In an attempt to encourage charitable giving, the Chancellor announced that for deaths occurring on and after 6 April 2012, where an individual leaves at least 10% of their net estate to charity, a reduced rate of inheritance tax of 36% will apply instead of 40%. However, the nil rate band will stay frozen at £325,000 until 5 April 2015.

Pitfalls and opportunities

APRIL 5TH, 2011 By DAVID
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From 6 April 2011 the pension annual allowance will be reduced from £255,000 to £50,000, which is fairly easy to comprehend when dealing with defined contribution pension schemes.

Deemed contributions to defined benefit pension schemes will now be valued using a factor of 16. Previously it was 10, a more generous factor. The opening value for the input period will be increased in line with the consumer price index to partially offset the change in the factor used.

The tax charge for exceeding the annual allowance will be based on an individual’s marginal rate of tax (e.g. 20%, 40% or 50%) rather than simply 40%.

As some individuals previously unaffected by the anti-forestalling rules will now be caught by the lower annual allowance e.g. individuals whose pension accrual spikes following a promotion, the Coalition Government has introduced carry forward which will apply to defined benefit/defined contribution pensions that have a pension input period ending in the 2011/12 tax year and thereafter.

Carry forward will enable individuals to add any unused annual allowance from up to three previous tax years to their annual allowance for the current tax year. To qualify for carry forward an individual must have been a member of a registered pension scheme in the tax year they wish to carry forward the unused annual allowance.

With regard to the lifetime allowance, from 6 April 2012 the lifetime allowance will be reduced from £1.8 million to £1.5 million.

If at the point of crystallising benefits the lifetime allowance is exceeded, then the excess is subject to a 55% lifetime allowance charge if it is taken as a lump sum or a 25% lifetime allowance charge if it is taken as a taxable income. The charge is taken by the pension provider before benefits are paid out.

Individuals who expect their pension savings to be more than £1.5 million when they come to take their benefits on or after 6 April 2012 can use fixed protection to protect them from the lifetime allowance charge. An individual does not need to already have built up pension rights of more than £1.5 million to apply. Once an individual applies for fixed protection they need to cease building up benefits under every registered pension scheme that they belong to by 5 April 2012.

Applications for fixed protection will only be accepted by HM Revenue & Customs up to 5 April 2012. Those with existing primary or enhanced protection will be unaffected by the reduction in the lifetime allowance.

Tax simplification…yes please!

MARCH 4TH, 2011 By DAVID
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The Chancellor created the Office of Tax Simplification in July 2010 to provide the Coalition Government with independent advice on simplifying the UK tax system. The Office of Tax Simplification was initially asked to carry out two reviews, one of which concentrated on tax reliefs.

On 3 March 2011, the Office of Tax Simplification published its final report on the review of tax reliefs. The main objective of this review was to identify reliefs that should be simplified or repealed.

The Office of Tax Simplification originally identified 1,042 reliefs for review and then narrowed this down to 155. Of the 155, the report recommended that 54 should be retained, 37 examined in more detail, 17 simplified and 47 abolished altogether (as they had either time expired, there is no ongoing policy rationale, the value is negligible or the benefit is outweighed by the administrative cost).

The Chancellor will now decide whether to act on the report’s findings when formulating the Budget 2011.

Areas that the Office of Tax Simplification feel are in need of simplification include Enterprise Investment Schemes, Venture Capital Trusts and Entrepreneurs’ Relief.

A subject that has been identified for further review is inheritance tax reliefs. Of the 1,042 reliefs that were originally identified, 89 relate to inheritance tax. To give an example, the report highlighted the reliefs surrounding small monetary gifts e.g. gifts on the occasion of marriage/civil partnerships and the £3,000 annual exemption which have not increased since 1975 and 1981 respectively.

On this subject, the Office of Tax Simplification suggested that it may be sensible to increase the reliefs given the time that has elapsed, but countered this by saying that any amendment should be considered in context with subsequent developments, such as the effect of potentially exempt transfers and the transferrable nil rate band.

The Office of Tax Simplification therefore believes that a more appropriate approach to reviewing inheritance tax reliefs is to review inheritance tax altogether. It also believes that any review of inheritance tax should include a review of the taxation of trusts, as these are often used to mitigate inheritance tax.

Finally, an example of a relief that the report has suggested be abolished concerns black beer, which is currently exempt from excise duty. The rationale behind abolishing this relief, which dates back to the 1930s, is that there is only one company that benefits from the relief and black beer is mainly consumed in Yorkshire.

Tricks of the Trade

FEBRUARY 25TH, 2011 By ADAM
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At Xentum we are continually looking for solutions for our clients. Every now and then we will give you snippets of this within our blog. One such solution is aimed at entrepreneurs or high earning employees within a company where a group life scheme is inadequate or unnecessary.

I don’t want to give away all our secrets but the plan that we use offers the following for a company:

• No National Insurance liability
• No benefit-in-kind liability
• The likelihood of the policy premiums being classed as allowable deductions for your business, which may help to reduce any potential Corporation Tax liability

And for the individual:

• A lump sum paid tax free to the selected beneficiaries in the same way a personal policy would
• The policy premiums not counting towards an individual’s lifetime or annual allowances
• Possibility of no IHT if the lump sum was directed through a discretionary trust
• No income tax liability for the premiums
• No National Insurance liability

As you can see these are quite impressive benefits for using such a plan and is a very useful tool for both small businesses and entrepreneurs, but what does this all mean in numbers. Let’s have a look at a brief case study:

Mr B is a shareholding director of Bridgewater Ltd. He currently pays for his life assurance personally at a cost of £200 per month out of his post tax salary. As Mr B is also a business owner, we will look at both his personal and business costs and the effect of taxation of providing this cover.

Mr B is a higher rate taxpayer, he pays 40% Income Tax on the higher part of his salary. He also pays the additional 1% rate above the upper earnings limit for National Insurance. We have assumed the policy premiums for his plan are taken from his higher marginal rate of tax and have used these rates in our calculations. Bridgewater Ltd pay employer’s National Insurance contributions at the ‘contracted in’ rate of 12.8%. So how does this look?

For Mr B paying for Life Insurance personally:

• Monthly policy premium paid from his post salary = £200pm
• Pre-tax income needed to fund £200 at Income Tax rate of 40% and employee National Insurance at 1% additional rate = £338.98
• Employer’s National Insurance contributions at 12.8% on this amount of salary paid by Bridgewater Ltd = £43.39
• Total cost to Bridgewater Ltd and Mr B = £382.37pm
• Less Corporation Tax at 21% as an allowable deduction
• Total cost to Mr B and Bridgewater Ltd = £302.07pm

For Bridgewater Ltd paying for Life Insurance for Mr B through a Xentum solution:

• Monthly policy premium paid by Bridgewater Ltd = £200pm
• No Income Tax rate, employee’s or employer’s National Insurance payable = £200pm
• No employer’s National Insurance contribution
• Less Corporation Tax at 21% as the plan is an allowable deduction
• Total cost to Bridgewater Ltd = £158.00pm

This equates to a saving of £144.07pm or over 47% by using the strategy implemented by Xentum. Obviously the savings could be even more for a 50% rate tax payer.

The above is merely a taster of the types of solutions we are continually looking at and does not in any way constitute financial advice. If you would like to know more about this type of policy then please feel free to get in touch with the Xentum team.

A pensions lifeline

FEBRUARY 4TH, 2011 By DAVID
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The new pension tax relief rules which are due to take effect on 6 April 2011 would appear to reduce the attraction of using pensions as a tax planning vehicle. This is because the annual allowance (the limit on tax relieved pension contributions from all sources in a tax year) is due to be reduced from £255,000 to £50,000.

The change is being introduced by the Coalition Government in an attempt to reduce the amount of pension tax relief that it pays out. In that respect it continues the policy initiated by the Labour Government in 2009.

Whilst it is true that the change ends the practice of paying large pension contributions, it is nevertheless an improvement on the system that Labour had planned to introduce, as it still allows individuals to make
contributions and receive tax relief at their highest marginal rate i.e. up to 50%.

Under Labour’s scheme (which has now been repealed) it would have been possible to claim tax relief on
contributions up to £255,000, however, individuals whose total income exceeded £150,000 would have suffered a tax charge of up to 30% in respect of their own contributions and their employer’s contributions.

As some individuals previously unaffected by the anti-forestalling rules will now be caught by the lower annual allowance e.g. individuals whose pension accrual spikes following a promotion, the Coalition Government has introduced carry forward which will apply to pensions that have a pension input period ending in the 2011/12 tax year and onwards.

Carry forward will enable individuals to add any unused annual allowance from up to three previous tax years to the annual allowance for the current tax year.

To qualify for carry forward an individual must have been a member of a registered pension scheme in the tax year they wish to carry forward the unused annual allowance. There is no requirement for an individual to have accrued benefits or paid contributions in the tax year in question. For the purposes of the carry forward calculations the annual allowance for each of the tax years 2008/09, 2009/10 and 2010/11 will be £50,000.

One thing that is not clear is whether high income individuals will be able to take advantage of carry forward for the tax years that their pension contributions were restricted by the anti-forestalling rules.

The original guidance stated that it was being introduced to protect those on moderate incomes who fall foul of the reduced annual allowance. This implied that high income individuals would be excluded.

To date I have not read anything to suggest that high income individuals will be prevented from using carry
forward. If high income individuals are able to take advantage of carry forward then this provides a valuable tax planning opportunity.

Restricting pensions tax relief

OCTOBER 14TH, 2010 By DAVID
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In the Emergency Budget, the Government confirmed its commitment to the Labour Government’s plan to reduce the cost of pensions tax relief by £4 billion per annum.

Mark Hoban, the Financial Secretary to the Treasury, has today announced the changes that the Government intends to make with pensions tax relief.

The exact details of the changes will not be known until the draft legislation has been finalised, however, a summary of the key points from the ministerial statement can be found below:

• From April 2011, the annual allowance will be reduced from £255,000 to £50,000

• From April 2012, the lifetime allowance will be reduced from £1.8 million to £1.5 million

• Deemed contributions to defined benefit pension schemes will be valued using a flat factor of 16

• To mitigate the impact of the reduction in the annual allowance, the Government proposes to allow the unused annual allowance from up to three previous years to be carried forward to offset against the excess contribution

• Further measures will be introduced to ensure that individuals will not have to pay large tax charges from their current income

• The Government will consult on the options for collecting the charges in November 2010

These changes could have considerable implications for individuals in both defined benefit and defined contribution pension schemes. We will endeavour to keep you up to date with any developments as and when they are announced.

In the meantime, if you have any queries regarding the above, then please do not hesitate to contact us.

Restrictions to pension tax relief…yet to be decided

OCTOBER 1ST, 2010 By DAVID
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One measure that the Coalition Government chose not to repeal in the Emergency Budget was the Labour Government’s decision to reduce the personal allowance of every individual with a net adjusted income above £100,000 by £1 for every £2 of income above £100,000, with effect from 6 April 2010.

Net adjusted income in this instance is the total income on which an individual is liable to tax minus any gross personal pension contributions that they make and/or any third party pension contributions that they receive (excluding employer contributions).

Individuals will lose their personal allowance altogether if their income exceeds £112,950.

Individuals whose income falls between £100,000 and the income figure mentioned above will still receive a personal allowance but it will be a reduced amount.

Losing some or all of your personal allowance will increase your tax liability and thus reduce your net income. Some of you who are reading this now may earn above £100,000 and so will have received a new tax code earlier this year. If you did not understand the significance of this at the time then I hope that this blog clarifies the current situation.

For example, in the case of a 50 year old male with a net adjusted income of £112,950, the effective marginal rate of income tax on the income above £100,000 is 60%.

The marginal rate of tax in this example is greater than 40% because the first £6,475 of income that would not have been taxed (as it fell within the personal allowance) will now be taxed at 20% and the £6,475 previously just below the higher rate tax threshold (which would have been taxed at 20%) will now be taxed at 40%.

One solution to this problem is to pay a personal pension contribution and if this reduces your net adjusted income below the £100,000 threshold, then you will regain your personal allowance for this tax year and thus pay less tax.

Please note that care must be taken to avoid falling foul of the anti-forestalling legislation. You must also be under 75 and have relevant earnings to justify the pension contribution. Non-pension solutions to this problem include investing in an Enterprise Investment Scheme or a Venture Capital Trust as they also provide tax relief.

Given the complexity of this issue and the fact that the Coalition Government has yet to decide on the alternative measures it intends to introduce to restrict pension tax relief from 6 April 2011, it is vitally important that independent financial advice should be sought before taking any further action.

Reducing your tax burden by means of inter-spouse transfers

JULY 14TH, 2010 By GUEST
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Part and parcel of what I do every day entails reducing my clients’ tax burden. As part of this many clients expect weird, wonderful and complex structures that will be expensive and high risk. However, before going down this route we should always explore the basic tax planning routes.

Simple family tax planning exercises involving the transfer of assets between spouses or civil partners can be a simple way of ensuring that the various tax exemptions available to each individual are fully utilised. If one spouse owns all the family assets this would not be possible.

Each spouse should ideally own assets amounting to at least the value of the inheritance tax (IHT) nil rate band (£325,000 for the tax year 2010/11); own assets which, on sale enables full use of the capital gains tax (CGT) annual exemption (£10,100 for tax year 2010/11) and own assets generating income so as to mitigate any exposure to the higher rates of income tax.

Transfers for IHT purposes are exempt transfers so long as the spouses remain married at the time of transfer, although they do not necessarily need to be living together. It should be mentioned that transfers from a UK-domiciled spouse to a non-UK domiciled spouse are only exempt up to the first £55,000. Despite this risk, such transfers enable overseas property such as holiday homes overseas that would otherwise be subject to IHT, to then qualify as ‘excluded property’ and therefore not be subject to IHT.
Transfers between spouses are not technically exempt from CGT. The way it works is that there is a CGT computation such that neither a gain nor a loss arises.

Inter spouse transfers can generally be carried out tax effectively. However, the transfer of an interest in, for example, the holiday home can be problematic as seen in the following example:
Mr A owns the holiday home. The family are selling the main residence and plan to move in to the holiday home and for it to become the main residence. Therefore Mr A gives 50% of the holiday home to Mrs A. If this transfer is made just before moving in, then the whole of the gain attributable to Mrs A on a future sale is to be free of CGT. If the transfer is made after moving in then she is assumed to have acquired her interest at the same time it was originally purchased by Mr A. The result of this is that on future sale of the property, her capital gain will not benefit entirely from main residence relief as her period of ownership includes the first ten years when the holiday home was not her main residence.

What this example highlights is the need for care on making inter spouse transfers as, if not properly undertaken, they can worsen the overall CGT position.

Make sure you take professional advice before any such transactions!

Xentum’s guest blogger is Richard Cunningham BA (Hons) ACA CTA of Wellington Guscott.

For more information please contact 0845 4751017 or visit www.wellingtonguscott.com/

CGT top rate rises to 28%

JULY 6TH, 2010 By DAVID
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We are still digesting the implications of the Budget announcement from a couple of weeks ago and one element of it which we’ve had quite a few calls about is the new 28% top rate of capital gains tax (CGT).

Previously CGT was a flat rate of 18% and was charged on any capital gains above the annual exempt amount (£10,100 for 2010/11) after deducting allowable expenses and losses. The main concern prior to the Budget was that the annual exempt amount would be reduced and CGT increased to 40% or 50%.

The announcement by the Chancellor that the annual exempt amount will remain at £10,100 (and continue to be indexed), and that basic rate taxpayers will continue to pay CGT at 18% seemed at first to be perfectly reasonable, as it implied that only higher and additional rate taxpayers would be subject to the new top rate of CGT.

However, on closer inspection it is clear that this is not strictly the case as you have to take into account an individual’s total taxable income and gains to establish the rate of CGT to apply against the net capital gain.

If an individual’s total taxable income and gains after all allowable deductions (including losses, the income tax personal allowance and the CGT annual exempt amount) are less than the upper limit of the basic rate income tax band (£37,400 for 2010/11), then the rate of CGT will be 18%. For gains (and any parts of gains) above that limit the rate will be 28%.

This means that basic rate taxpayers (who are close to the upper limit of the basic rate income tax band) will need to be careful when they make any future disposals, as they may subject the net gains to the top rate of CGT. Similarly it also means that landlords sitting on large buy-to-let capital gains face the prospect of paying 28% CGT on part or all of a gain when they make a future disposal.

All is not lost though, as the last time that income and capital gains were linked together for CGT purposes, it was possible to pay a single contribution into a pension and/or to make a charitable donation and thus increase the upper limit of the basic rate income tax band. The effect of which was to reduce the amount of a gain subject to tax at the higher rate and hence the CGT liability. We have not read anything in the small print of the Budget or in any technical journals so far to contradict this planning opportunity.

Please note that the chargeable gains of spouses/civil partners are taxed separately and transfers between spouses/civil partners do not give rise to a charge to tax. It is still possible to set registered losses against future gains.

NS & I Index-Linked Savings Certificates back in vogue

APRIL 19TH, 2010 By ADAM
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I am currently studying for my last few exams towards becoming a Chartered Financial Planner. This is the minimum standard for any adviser at Xentum and highlights the belief that our firm has in qualifications. The long hours of study will hopefully pay off but it has been tough, particularly when the sun is out!

One thing that has caught my attention during this study has been the in depth look that is required on all financial products, both old and new. One of the financial products that seem to have been lost in time is National Savings & Investments (NS & I) Index Linked Savings Certificates, an investment that has rather unfortunately fallen out of fashion in recent years. At Xentum, however, we think that they should be at the very forefront of investors’ minds for a number of reasons.

The first and probably most important reason is inflation protection. We talk to fund managers every week and one thing that remains consistent is the lack of certainty regarding inflation. Some commentators are talking up inflation, while others are stating that deflation is a serious risk. The election also brings more uncertainty to this topic. Our in house view is that inflation is a bigger threat, however why not pick an investment that protects you against both possibilities? Index Linked Certificates tick this box. They track the Retail Prices Index (RPI) and also offer a guaranteed 1% AER compound interest regardless of what RPI is.

The likelihood is that interest rates are due to stay low for the foreseeable future although inflation remains higher than analysts expected. The returns that you can receive from a deposit account are not much better than the Bank of England Base Rate of 0.5% unless you are prepared to put your capital at risk with a bank that we would probably not be comfortable with. The last two years or so has also taught us that your capital is not always secure in a deposit account.

In addition to inflation protection, the monies held within Index Linked Certificates are exempt from Income Tax and Capital Gains Tax so this is a great way of building up an inflation protected pot that the taxman cannot touch.

I guess the final issue here is that of security. An issue that has been thrust into the spotlight when many people learnt that money in a bank carries a risk. The underlying security for Index Linked Certificates is provided by the UK Government. The UK Government has never defaulted on its debt obligations.

As you can see, NS & I Index Linked Savings Certificates provides a pretty compelling investment story in the current economic climate for surplus cash holdings that are not likely to be needed for the mid to long term. Although you will not get the fixed rates and certainty of return that are offered by some cash ISA accounts, they probably provide more inflation protection than cash ISAs and you do not have to seek the best interest rate each year as your Index Linked Savings Certificates will increase in line with RPI plus the guaranteed rate (1% AER for current issue). Over the past year a 3 year issue would have provided you with returns equivalent to:

• 4.55% for a non tax payer
• 5.69% gross for a basic rate tax payer (20%)
• 7.58% gross for a higher rate tax payer (40%)

Even better, each person can put up to £15,000 in each issue of which there are two terms (3 and 5 years). Therefore a couple could place up to £60,000 in NS & I Index Linked Certificates at any one time, not bad for an investment that you can pick up at your local post office!