Tips for more effective tax planning
November 19, 2012
In the first of our series of blogs on wealth management issues, tax partner Tony Medcalf looks at how individuals can maximise their wealth through a variety of tax planning opportunities.
Capital gains tax
Entrepreneurs’ Relief can reduce the rate of capital gains tax charged when shareholders exit a business from 28 per cent for higher rate tax payers to just 10 per cent. The 10 per cent rate is available up to a lifetime limit of £10 million.
So it is essential to ensure businesses are structured correctly at least 12 months before any sale in order to take full advantage of the relief.
Funding the costs of university
With the costs of sending children to university rising it is important to explore tax efficient options.
Most parents fund the tuition fees out of post-tax income which has already been subject to income tax at 40 or 50 per cent.
It may be possible to restructure the shareholdings in the company to allow you to utilise your children’s personal allowances and basic rate tax bands. This can reduce the overall tax cost to about 20 per cent, with parents retaining ultimate control of the shares.
Enterprise management incentive share scheme
In these tough economic times employers are looking at ways of retaining and incentivising key employees to help grow their business without a substantial initial cashflow outlay.
The flexibility of the enterprise management incentive share scheme means it can be tailored to meet businesses’ needs and there are no immediate tax implications for the employee when the option is granted.
Structuring the options so they can only be exercised on sale means employees benefit from the capital growth they have helped to generate, without the drawbacks of becoming shareholders until the time is ripe.
Tax relief for business angels
The seed investment scheme (“SEIS”) is a new scheme that offers both income tax and capital gains tax breaks for individual investors who acquire new shares in start-up companies after April 6,2012, (start-ups are defined as companies less than two years old at the time of the investment.)
The tax reliefs are available to individuals making a maximum equity investment of 30 per cent in these companies.
Subject to the scheme’s conditions, the reliefs are:
• 50 per cent tax relief on up to £100,000 investment in share capital
• Capital gains tax exemption on ultimate sale on the SEIS shares
• The possibility to eliminate gains of up to £100,000 made on any asset disposals in 12/13.
In addition, the enterprise investment scheme (“EIS”) also offers incentives to investors in the share capital of a company through income tax relief and capital gains tax deferral. With effect from April 6, 2012 the maximum investment that can be made in an EIS company has been increased from £500,000 to £1 million. The rate of income tax relief available is currently 30 per cent.
Tax reliefs on pension contributions can create attractive options for funding the acquisition of commercial property.
Both the corporation tax relief available on employer pension contributions and the 20 per cent tax credit provided by HM Revenue and Customs on personal pension contributions can reduce the total cashflow impact on contributing to the fund.
The pension fund itself also benefits from a number of tax breaks that mean rents are free from income tax, capital appreciation is free from capital gains tax and the value is outside your estate for inheritance tax purposes until benefits are drawn.
Capital gains tax for owners of two homes
One of the most significant tax reliefs available to most people is ‘principal private residence (PPR) relief’.
The relief, which applies to both an individual’s home and gardens up to 0.5 hectares in size, can result in up to 100 per cent of the gain being exempt from capital gains tax.
Even if your garden is larger than 0.5 hectares you will still qualify if you can demonstrate that it is required for reasonable enjoyment of the property, given its size and character.
Part of the gain may also still qualify even if at the date of sale the property is no longer your PPR. Providing the property has at some time been your PPR, the last three years of ownership automatically qualify for the relief. In addition letting relief may also be available.
It is important to keep in mind that married and civil partnership couples can only have one principal private residence between them. When people acquire a second residential property it is crucial that tax advice is sought, as you only have two years in which to decide which property should be treated as your PPR.