The New Year is here and yes it is time to look at your assets and see what you can do to exploit the favourable taxation of capital assets. There is little time to plan and to execute tax planning strategies before the 5th April so review your assets and act now.
Planning:
I always advocate planning; do not cheat! You will never be able to wipe out entire tax liabilities but with careful planning you should be able to save several small to medium amounts thus justifying the overall plan.
Is it a capital gain?
Obvious but some people jump in and do not realize that what they are planning does not give rise to a Capital Gain. Ensure that when you consider the taxation of the sale of an asset the correct charge is to Capital Gains Tax rather than Income Tax.
In your planning also consider Inheritance Tax.
I find that when taxpayers sell assets they are drawn immediately to considering capital gains tax. The first option to tax is as trading profits rather than capital gains. The deciding factor is whether or not the intention at the time of purchase is to make a profit from the resale, with or without improving the asset, within a short time scale.
As the sale of land and property are the sale of capital assets, a high percentage of taxpayers are drawn to capital gains to tax the profit. HMR&C does not. They fully review the transaction to see if it is a transaction in the nature of trade.
If this fails, the next attempt is to tax it under a little known provision where land, or any property deriving its value from land, is acquired with the sole or main objective of realizing a gain from the disposal of the land, or land is held as trading stock, or land is developed with the sole or main object of realising a gain from the land when developed. The section states that it is enacted to prevent the avoidance of tax by persons concerned with land or the development of land.
You can see that a transaction resulting in a profit of a capital nature could result in the profit being taxed as income. This legislation covers all individuals whether resident in the U.K. or not, so long as the land is situated in the U.K.
Tax free amount:
Every individual has £10,100 tax free each year. Although tax rates are lower for Capital Gains than they are for Income Tax it is still a worthwhile saving especially as you can take advantage on an annual basis.
The £10,100 not used by one person cannot be transferred to an other, married or not. If not used it is lost.
The strategy is to annually review your assets and see what you can realize to make a gain of less than £10,100 rather than wait for the natural disposal. The result is that the tax free amount can be compounded in value by reinvesting in a profitable investment.
Bed & breakfast to spouse & ISA:
A married couple can transfer assets between them without attracting liability, the asset passing to the other at a value that gives rise to neither gain nor loss. By spreading the ownership you immediately have a further tax free amount of £10,100.
You may want to bed and breakfast your investments at the end of the year in order to wipe out some of the accrued gain.
There is legislation that prevents this but there is nothing that stops you bed and breakfasting with your spouse/civil partner.
You sell and your spouse/civil partner buys thus keeping the holding in the family but having removed part of the taxable gain.
It appears from a guidance note issued by HMR&C that they find the sale of an asset standing at a loss and with the other spouse/civil partner repurchasing it to be unacceptable so take care and seek professional advice.
An alterative strategy is to sell the shares and buy them back through an ISA.
You can then have them in a tax-free vehicle for the rest of your ownership.
An ISA is in effect a tax haven. You can sell assets into the ISA and capital gains up
to £10,100 are tax-free.
Joint Tenants v Tenants in Common:
Usually spouses/civil partners hold property as joint tenants. This means on death the property passes automatically to the surviving spouse/civil partner.
If the property is transferred to ownership as tenants in common, you are free to dispose of your share as you please either during your lifetime or by your will.
This adds to the planning opportunities and should be discussed with your adviser.
If you own property solely I suggest you see a solicitor as you could transfer the ownership to tenants in common.
Only transfer 1% and retain 99%. If you do not elect for the income to be split in that proportion it will automatically be dealt with under the 50:50 rule so the income is shared but the capital remains 99% yours.
This could be done by declaring a trust in favour of your spouse. HMR&C will accept the transfer took place on the date the document is signed. HMR&C have confirmed that such a trust is effective.
Residence:
Co habitees have an advantage over married couples where two houses are owned as each of the co habitees is entitled to a principle residence free of tax if the other conditions are met, whereas a married couple is only entitled to the one exemption.
Losses:
In your annual review if you have made profits see if there are any assets that you could sell at a loss which can then be set against the chargeable gains thus reducing the tax payable.
If you have an asset that has become worthless you do not have to wait for the ultimate sale; you can claim the loss. For shares there is a published list which shows when HMR&C have accepted that a share has either become worthless or has negligible value.
If you have subscribed for shares in a trading company that is not listed on a recognized stock exchange and have lost your investment due to the shares becoming worthless, you can claim to have your capital loss set against your other income for that year or the previous year.
Losses c/f:
Where there is a capital loss brought forward and the chargeable gains do not exceed the annual exemption no deduction is made for the losses brought forward. They are preserved and are available to be carried forward.
Timing:
The date of disposal of an asset is the time when the contract is made and not when the asset is conveyed or transferred.
This means the exchange of contracts and not completion. For a conditional contract it is the date on which the condition is satisfied.
A sale timed for February 2011 delayed until after 6th April, 2011 will delay the tax payable from 31st January, 2013 to 31st January, 2014
This is a simple tactic but the interest earned could be substantial.
Purchase of own shares:
If you want to retire from your company, one way is for the company to buy back your shares.
If this happens you should seek advice as the transaction can be treated as giving rise to either an income or a capital distribution.
It will depend on your circumstances which is best for you; especially with the high Income Tax rates and as after Entrepreneurs Relief Capital Gains are taxable at 10%. I know the rate at which I would prefer to pay.
Peter Clare
The Poacher turned Gamekeeper
This information has been honesty written with a view to helping you: I am, like most people, not perfect and I apologise for any in corrections. I cannot be held responsible for any consequences of you using the information unless I have been made aware of the full facts of the matter and have expressed an opinion thereon.
Peter Clare
The Poacher turned Gamekeeper
www.mrtax.co.uk
Follow me on Twitter: @peterclaremrtax
check out my Facebook Fan Page: www.facebook.com/mrtaxltd
This information has been honesty written with a view to helping you: I am, like most people, not perfect and I apologise for any in corrections. I cannot be held responsible for any consequences of you using the information unless I have been made aware of the full facts of the matter and have expressed an opinion thereon.
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