Capital Gains Tax - The Insider
THE SHARP END OF TAX PLANNING
By Michael Taylor, Pearson May Chartered Accountants
Chartwell, and Chartered Accountants, Pearson May, have a co- operative relationship that we believe is mutually beneficial to our clients. As experienced tax advisers, in this article, we invite Michael Taylor of Pearson May to talk about recent changes to tax legislation and its effects.
"It seems to us at the sharp end of tax planning, that over the last year or so, the Government has changed some aspects of tax legislation, almost at monthly intervals. In truth it is not quite as bad as that.
Probably one of the most major changes of all of the tax changes was Capital Gains Tax, particularly in relation to business assets.
Fundamentally of course, as we all know, the minimum tax rate was recently increased from 10% to 18% and perhaps more seriously for assets which have been owned for many years, Indexation (an allowance for increases in value as a result of inflation, applicable up to 5th April 1998) was also abolished. Under considerable pressure from various trade associations and professional bodies, Entrepreneur's Relief was introduced which can reduce the Capital Gains Tax rate back down again from 18% to 10%, but only under very limited circumstances.
This once again makes it appropriate for those who own freehold properties which are used by their businesses, either directly or rented to their businesses, to consider selling proportions of their properties to their SIPPs (Self Invested Personal Pensions) each year, or if they are acquiring additional premises to consider acquiring them through a SIPP. Up to 40% Income Tax relief can be obtained on monies paid into the SIPP as premiums with those sums being utilised to acquire the property. The business will also obtain tax relief at its marginal rate on the rent which is then paid to the SIPP to occupy that proportion of the premises. For those who run their businesses as limited companies, premiums can also be paid directly by the company to the SIPP as employer contributions and thus attract no National Insurance charges and of course do not trigger any Income Tax liabilities. For most of us the amounts which can be contributed annually are likely to be limited by cash flow considerations. Although there are technical limits, these are normally substantial and require a more detailed explanation than the space available here.
From an Inheritance Tax point of view, there is normally a saving from the use of a SIPP if the correct type of Trust is set up in relation to the proceeds from the SIPP in the event of the death of the policyholder before the policy matures. The reason for this being that the assets are normally then outside the estate of the policyholder from an Inheritance Tax point of view, whereas if he or she personally owns the asset the maximum potential Inheritance Tax relief is 50% if it is owned outside the business and rented to the business,
whether that business is a partnership or limited company. For many individuals renting properties to limited companies there is actually no Inheritance Tax relief, since it is only available to individuals who control a company."
If you feel that advice on any of the situations above might benefit you, then please contact either Pearson May Chartered Accounts, quoting Chartwell Insider Newsletter on 01225 764441 or Chartwell on 01225 448 732.
