1. Capital Gains Tax
The lifetime limit for Entrepreneurs’ Relief has been doubled from £1 million to £2 million for disposals on or after 6th April 2010. Essentially this means that up to £2 million of gains on qualifying disposals over a lifetime will be taxed at 10% only, compared with the normal 18% rate.
There is no guarantee that either of these rates will survive to the next Finance Act (due before the end of June 2010) so there may be merit in bringing forward any such disposals that are already planned in order to maximise the tax savings, subject to this not otherwise impacting adversely on other areas of financial planning already in place..
There may also be merit in reviewing investment portfolios with a view to generating capital gains (taxable at 18%) rather than additional income taxable at 20/40/50% depending on circumstances.
2. Furnished Holiday Lettings
Currently, properties qualifying as Furnished Holiday Lets are treated as a business, with consequent favourable treatment for both Income Tax and Capital Gains Tax.
In order to comply with EU Law the UK Government extended this treatment to cover properties in the EEA for 2009-10 but signalled that the entire scheme would be abolished for 2010-11 given the anticipated high cost to the Treasury year on year. However, the timing of the General Election meant that certain measures in the 2010 Finance Bill had to be withdrawn, and this was one of them.
Therefore, these investment/business operations are still favourably treated for tax purposes in the current year, but perhaps not for much longer.
3. Perpetuities and Accumulations Act 2009
This new legislation came into effect on 6th April 2010.
The previous trust perpetuity period (maximum lifespan) of 80 years is uplifted to 125 years for trusts established on or after 6th April 2010 irrespective of what the trust deed actually says on the point. The maximum period for accumulation of income has similarly been extended to 125 years (previously 21 years).
Where a trust is contained in a Will signed on or after 6th April 2010 the new periods will apply unless the provisions in the Will state otherwise.
Note that trusts already in existence on 6th April 2010 and those commencing after 6th April 2010 arising from a Will executed before that date will be subject to the old rules.
In many cases the old rules are more than adequate for the family’s needs and no review is necessary. However, there are circumstances where it may be advisable to re-execute Wills or cancel pilot trusts and re-establish them in order to take advantage of the extended accumulation period.
However, this new regime does not applyto trusts linked to pension schemes, which continue to be subject to their own special rules on perpetuity and accumulation periods.
4. Order of Gifting
When planning lifetime gifts (or investments with a gift element) the general advice is to ‘gift well and gift often’ into the correct structure, possibly using trusts of various types, in order to make maximum use of the reliefs and exemptions available over a lifetime.
Transfers that are liable to Inheritance Tax (Chargeable Lifetime Transfers (CLTs)) should be made first because, depending on values, they may utilise all or part of the nil-rate band available at the time. Such transfers are usually into a trust structure.
In an ideal world, trusts intended to receive death benefits would be established before trusts to receive other assets, due to the effect of cumulation in calculating future Inheritance Tax liabilities. However, each situation is unique and specialist advice should be taken.
Transfers that are potentially exempt from Inheritance Tax (PETs) should be made last, because if they are made before a CLT and subsequently fail (by reason of early death of the donor) that failed PET can adversely affect the ongoing IHT treatment of the earlier CLT for years to come.
Transfers that are wholly exempt, and never likely to be otherwise, can be made at any time.
However, it should be remembered that a transfer of value may not necessarily comprise actual payment or transfer of an asset – it can also come about by the failure to exercise a contractual right. This must be borne in mind when reviewing gifting/transfer history and planning for the future.
Disclaimer
These are brief notes on currently topical issues, based on our understanding of current legislation, and should not be regarded as advice. If you require further detailed information or advice tailored to your particular situation please contact either Jonathan Lee or Joyce Williamson in our Tax & Trusts Department, or your existing Financial Consultant at Pearson Jones.
The Financial Services Authority does not regulate taxation, trust advice or will writing.