Tax Services from Coutts

Immediate Capital Gains Tax rate increase for higher rate taxpayers.

As widely expected, the Chancellor announced in his Budget that there would be an increase in the rate of Capital Gains Tax (CGT) for higher rate taxpayers to 28%. The change takes place from 23 June 2010. Any gains before this date are still taxed at 18%. The annual exempt amount remains at £10,100.

In practice, this means that if your total taxable income and gains after all allowances (capital losses, the income tax personal allowance and the CGT annual exempt amount) add up to less than £37,400, then capital gains tax is charged at 18%. For gains (after 22 June) above this amount the tax will be 28%. Gains before 23 June are still taxed at 18% and you do not have to take them into account in working out the rate at which your post-22 June gains are taxed.

The coalition document promised “generous relief for entrepreneurs” and this is reflected in the increase in the lifetime limit for entrepreneurs’ relief to £5m. In outline, entrepreneurs’ relief applies to people who sell trading businesses when they have worked in the business for at least a year. If the business is a company, they need to have held at least 5% of the ordinary shares for at least a year. From 23 June, a gain of up to £5 million is taxed at only 10%.

The 28% CGT rate applies to trustees and to the personal representatives of deceased persons. Also, if you are not domiciled in the UK and pay the £30,000 “remittance basis charge” you are deemed to use your full basic rate band allowance and any capital gains will be taxed at 28%.

There are a number of planning strategies still available. Although the CGT rate has increased, it is still some way below the income tax rates of 40% and 50%, meaning that investments which produce capital returns might still be worth considering from a tax point of view. More than ever, it is worth spouses and civil partners ensuring that they take full advantage of both parties’ basic rate bands and annual exempt amounts to minimise tax.

Other headlines

The Liberal Democrats’ influence appears to have led to the income tax personal allowance being raised from 2011/12 to £7,475. However, the basic rate limit will be reduced so that higher rate taxpayers do not benefit.

VAT is to be increased from 17½% to 20% from 4 January 2011, with anti-forestalling legislation in place to stop people bringing forward larger transactions to avoid paying the higher rate.

The main rate of corporation tax is to reduce from 28% to 27% from April 2011, and then gradually to 24% by April 2014. Small companies will pay 20% from April 2011.

People who are members of pension schemes will not be required to buy an annuity at age 75. The precise details are still to be agreed.

Watch this space

A number of consultations have been announced, covering a variety of topics, such as:

• Pension Contributions – possibly a partial reversal of the high income excess relief charge announced last year. (consultation now published)
• Improving the Gift Aid system (consultation now published)
• A review of the tax legislation for non-domiciliaries
• Tax policy making
• A possible general anti-avoidance rule

We expect to see some of the results of these in the 2011 Budget.

Entrepreneurs’ relief was introduced from 6 April 2008, initially with the first £1 million of gains qualifying for relief charged to Capital Gains Tax (CGT) at an effective rate of 10%. The lifetime limit was then increased to £2 million from 6 April 2010.

In a further move to encourage entrepreneurial business activity, George Osbourne announced in his Budget on 22 June 2010 that the lifetime limit would be more than doubled to £5 million with effect from 23 June. Gains qualifying for the relief will be subject to CGT at a flat rate of 10%.

Any gains in excess of the limit will usually be subject to CGT at 28%.

Based on the current rules, the relevant period for determining whether the conditions for entrepreneurs’ relief are met is 12 months prior to sale. Early planning is therefore essential.

With regard to the disposal of shares in a company, it must be a trading company. You should ensure cash balances and investments do not jeopardise this.

To qualify, an individual must hold at least 5% of the ordinary share capital and be an officer or employee of the company. If family members (particularly spouses/civil partners or adult children) hold shares and/or work for the business do they meet the conditions? Planning around this could save up to £900,000 for each individual.

There have been a number of tax cases recently on the subject of people leaving the UK and becoming non-resident for tax purposes. A common theme has been HMRC’s published guidance and how much this can be relied on.

The latest episode in the saga of Robert Gaines-Cooper took place in the Court of Appeal in February 2010. Mr Gaines-Cooper is an entrepreneur with businesses around the world, and houses in the Seychelles and the UK. He has for many years spent less than 91 days in the UK, a significant figure in HMRC’s booklet IR20 which until recently was the main guidance published by HMRC about the criteria for residence. The Court of Appeal ruled that the 91-day limit was not relevant in his case, because he had previously been resident in the UK, and England had remained “the centre of gravity of his life and interests”. According to HMRC he had failed to show that he had made a clean break from his social and family ties in the UK, especially as his wife and son were mainly based in the UK.

Other cases have involved people who claim to have full-time contracts of employment abroad. In general, a full time contract of employment makes it much easier to claim non-residence. However, there are a number of pitfalls. One case concerned Robert Davies and Michael James. The Court of Appeal accepted that they were indeed not resident in the UK, but that their non-residence did not begin until they had actually started their full-time employment. They were both claiming not to be liable to Capital Gains Tax (CGT), for which they would have had to be non-resident for a complete tax year; so the fact that their full time employment did not begin until after 6 April meant that they were not exempt from CGT for the tax year.

A further case involved a Derek Hankinson, who was employed by a Dutch subsidiary of a UK company. The tribunal was given a great deal of evidence about Mr Hankinson’s whereabouts, including board minutes, records of site visits, travel information, cash withdrawals, medical appointments and records. They concluded that his UK activities were too significant to be consistent with full time work abroad.

Insofar as there is a consistent message from these cases, it would seem to be that HMRC will look very closely at claims for non-residence, to ensure that the break with the UK is definite. Any of these cases could still be taken to higher courts, and we will continue to report any developments.