UK: Family Wealth Management: Personal Financial Planning, Tax And Investment - Summer 2012

Last Updated: 29 May 2012
Article by Smith & Williamson

FOREWORD - FINDING THE PERFECT BALANCE

Globally, the economic picture is improving. The US is making great strides towards recovery, creating jobs and showing a moderate and sustained gross domestic product (GDP) growth trajectory.

Yet Europe continues to suffer amid growing concerns that the respite from the eurozone debt crisis is coming to an end. With poor growth prospects, Spain is a particular worry with fears that the country will need bailing out. Let's hope the US economy continues its recovery and can provide a guiding light for the rest of the world's struggling markets.

At home, many of the changes announced in the Chancellor's March Budget mean the balance between spending and taxes will stay the same. As the UK economy continues to struggle, the focus was on pushing for growth and clamping down on tax avoidance. Mr Osborne made renewed efforts to hang an 'open for business' sign outside Britain's shop door. By lowering corporation tax to 24% from April, and to 22% by 2014, he aims to boost the UK's global competitiveness.

Balance is also key when looking at personal finances. In this issue of Family wealth management, we consider how the right investment portfolio can deliver a good inflation-beating income in the form of dividends. We also look at the importance of getting the right balance of liquidity in your portfolio so that cash can be easily raised when required.

We examine the new inheritance tax (IHT) incentives for charitable giving in your will, and the outcome of a recent tax case, which could help secure valuable business property relief for owners of holiday home businesses. We look at 'relevant life plans' a little known but tax-efficient staff benefit provided by employers, which pay out a lump sum in the event of death or diagnosis of terminal illness during employment.

We also look at philanthropy in the art market and how donors of pre-eminent works of art are set to receive lifetime tax savings.

BUDGET 2012 - GETTING THE BALANCE RIGHT

The Chancellor's third Budget speech emphasised the need to raise revenue by closing loopholes and further cracking down on tax avoidance.

In the weeks leading up to the 2012 Budget the rumour mill was working overtime. There was much speculation about what would be announced, particularly concerning the 50% higher rate of income tax, further restrictions on pensions tax relief, a rise in the personal allowance and a new mansion tax. This was no doubt in part a by-product of having a Coalition Government in power, with the two parties setting out their aspirations in public.

Tax rates and allowances

The Coalition Government has established what it calls the 'Tax Policy Framework'. This includes a strict timetable following the announcement of changes in a spring Budget. Consultation should take place in the summer, with draft legislation published in the autumn and taking effect the following 6 April.

This means that most changes to tax rates and allowances will be fixed a year in advance. So, we now know that the top rate of tax will fall to 45% and the personal allowance will rise from £8,105 to £9,205 from April 2013.

For 2013/14, taxpayers earning up to about £41,400 will see their tax liability fall by £220 because of the increase in the personal allowance. Similarly, those with income over £158,500 will see their tax bills fall because of the cut in the top rate of tax to 45%, such that an individual with an income over £198,000 will suffer £2,000 less income tax.

However, taxpayers with an income between £118,410 and £150,000 will be £425 worse off because of the adjustment to the higher-rate tax threshold.

Closing loopholes

The theme of the Budget seemed to be to help less well-off families by closing tax loopholes. The Government introduced disclosure of tax-avoidance schemes in 2004. It has been so successful in giving them a heads up on contrived tax-planning schemes, enabling them to shut down schemes where appropriate, that the Government is now planning to consult on how to beef up the system.

The Government also announced a consultation on introducing a general anti-abuse rule. The Chancellor set the tone for this announcement in his Budget speech when he said: "I regard tax evasion and, indeed, aggressive tax avoidance as morally repugnant."

SDLT changes

Ahead of the Budget it was clear that steps would be taken to tax expensive properties. The only question was the precise form this tax would take. In the end, the following changes were announced.

The rate of stamp duty land tax (SDLT) on residential properties bought for over £2m will increase to 7%. (The highest rate of SDLT for residential properties was previously 5%.) A new 15% tax will be charged where such properties are bought by 'non-natural' persons or through a company.

It would appear that any expensive residential property bought by 'non-natural' persons will be caught by the 15% rate. Therefore, unless there is a carve out introduced in amendments in the Finance Bill, a UK property investment company that invests in such property will have to pay the higher rate of SDLT despite there being no intention to avoid tax.

The 15% charge may be seen as akin to an entry fee, since future sales can still be achieved SDLT-free by selling the company. However, the proposed changes constitute a serious disincentive for individuals to holding expensive residential property through a company.

The Government has also announced plans to consult on the introduction of an annual SDLT charge from 2013, where such properties are 'enveloped'.

Furthermore, there will be consultation on charging capital gains on the disposal of such properties held by non-UK residents. At present, non-UK residents are only subject to UK capital gains tax (CGT) where an asset is used in a trade carried on in the UK or they operate from a UK permanent establishment.

The Government has also said that it will take action to close down future SDLT avoidance schemes with effect from 21 March 2012. Retrospective legislation will be considered, where appropriate.

LIQUIDITY – NOT A DRY SUBJECT

Investors need a balance of liquid and illiquid assets in their portfolios if they are to take advantage of potential investment opportunities.

In the context of portfolio management, the term 'liquidity' describes how easy it is to convert an asset into cash. An asset that is difficult to convert quickly into cash and without significant loss of market value is known as 'illiquid'.

Cash is usually the most liquid asset, with real estate typically sitting at the opposite end of the spectrum. Equities and bonds lie somewhere in between, although there can be significant variations within these broader categories. Government bonds and FTSE 100 stocks are generally highly liquid, while smaller company stocks and sub-investment grade bonds can be illiquid. Cash itself can sometimes be illiquid if, for instance, it is placed on term deposit.

Liquidity squeezed by the credit crunch

Liquidity concerns have been at the fore since the run on Northern Rock in 2007 and the collapse of Lehman Brothers in 2008. In the depths of the credit crisis, a dramatic tightening in the funding market for financial institutions resulted in it becoming more difficult for investors to sell a variety of different assets.

In extreme cases, liquidity in some of the more esoteric areas dried up completely and fund managers were forced to suspend redemptions. Having invested in funds that allowed quarterly or monthly redemptions at the outset, investors often found that they had to wait months or even years to receive all their money back. Moreover, the lack of buyers in the market for these types of assets meant the price at which they could be sold was often markedly reduced.

Market dislocation has, however, produced many opportunities for cash-rich investors to buy decent assets at cheap prices, a technique demonstrated to great effect by Warren Buffett. For less liquid investments, a commensurately higher rate of return should be sought.

The key lesson learnt from the crisis was that liquid markets can become illiquid with surprising speed. Never was the aphorism 'cash is king' more true. That said, with interest rates at historic lows, cash is unattractive in pure investment terms and inflation has the effect of reducing its value over time.

Get the right balance

Overall, investors should always try to ensure that their portfolios have a balance between liquid and illiquid assets that is appropriate to their circumstances. In most cases, this means a majority of liquid assets. This ensures that cash can be raised as and when it is needed and that holdings in a portfolio can be bought and sold quickly, so that opportunities can be taken advantage of in these fast-changing times. It's not just the early bird that catches the worm, but the one with ready cash to hand as well!

RELEVANT LIFE PLANS - TAX RELIEF ON LIFE ASSURANCE

Individuals could benefit from employer-provided life cover, which is both tax efficient and doesn't affect their pension contributions.

Directors and employees may be eligible for life cover in the form of a 'relevant life plan', a little known but highly tax-efficient staff benefit provided by employers. A relevant life plan is an individual death-in-service life policy. It is designed to pay out a lump sum death benefit in the event that the person covered should die or be diagnosed with a terminal illness during their employment.

Qualifying criteria

Any director or employee can be covered under a relevant life plan. However, because the benefits of relevant life plans are written on the lives of individual employees, it is not possible to offer joint life policies on spouses or partners.

Insurers will usually cover a multiple of between 10 and 25 times an individual's employment package including salary, bonuses, benefits and dividends payable from the employer. Because of the tax relief available the cost of providing the life cover is usually substantially cheaper than conventional life policies. But as this is a policy that is provided to employees, the self-employed, partners or equity members of limited liability partnerships are not eligible for this type of plan.

Other conditions apply. The terms of the policy cannot exceed the individual's 75th birthday; there must be no surrender value; the employer must not be a beneficiary; and it must not be set up for tax avoidance.

Tax reliefs available

Relevant life plans are similar to most other types of life cover but attract various tax reliefs, which significantly reduce the cost of providing this cover.

  • Employer premiums to a relevant life plan are usually a corporation tax deductible expense.
  • The premiums paid by an employer towards a relevant life plan are not a benefit in kind for the employee. So the employee does not suffer any income tax liability on the premiums paid and neither employer nor employee are subject to any national insurance contribution liability.
  • Because a relevant life plan is not a registered pension scheme, any contributions towards the plan do not count towards the employee's annual allowance for pension purposes. This means that full pension contributions can be made and the provision of relevant life plans will not interfere with pension protections, such as primary, enhanced or fixed protection, that an individual may have.
  • Upon death, the benefits of a relevant life plan are usually paid under a discretionary trust to the dependants of the individual covered.

EQUITY PAYS DIVIDENDS

An investment portfolio of dividend-paying UK equities can provide a steady income.

Many people think that you make money from shares by selling them when the price goes up. In fact, income from equities in the form of dividends can provide the lion's share of total returns from an investment portfolio over time. Since 1950, UK equities have returned 6.1% per annum, of which almost 4.5% has come from dividends (Source: Barclays 2012 Equity Gilt Study).

The yield on the UK equity market, as measured by the FTSE All-Share Index, appears very attractive compared to almost all other asset classes. The current yield of 4% for the overall market compares to UK 10-year bonds yielding just over 2% (Source: FT UK Benchmark 10-year Government Bonds, April 2012), with bank deposit rates equally low. Looking at the largest ten stocks in the FTSE 100 – often known as blue-chip companies – the attractions of some equities from a yield perspective seem even more compelling. For example, the largest stock in the UK equity market Royal Dutch Shell yields 5.2%, as does GlaxoSmithKline, while HSBC yields 5% and BP just under 5%.

Beat inflation

An investor can build a portfolio – either by buying individual shares or investing in a unitised vehicle – and expect to achieve a current running yield in excess of many other asset classes, such as cash and bonds. Equities also have an advantage over conventional bonds in that they provide a hedge against inflation. History shows that over time, dividends more than match inflation, with all of the above-named stocks expected to grow their dividends by over the forecast rate of inflation.

Of course, equities are high risk and more volatile than cash or bonds, but a diversified portfolio of the largest stocks in the equity market reduces this risk. Because of their yield and the type of industries they tend to operate in, income shares may be less volatile than the wider equity market.

Spread the risk

The UK-listed companies that pay respectable yields also tend to be geographically well diversified. This reduces the risk to the investor of a recession in one particular market and often gives exposure to fast-growing emerging markets. Companies are reticent to cut dividends because of the negative signals it sends to investors about their long-term prospects, and for the wider overall equity market, there are few years when dividends are cut in nominal terms (Source: Barclays 2012 Equity Gilt Study).

In conclusion, a portfolio of high-yielding, blue-chip, UK equities can offer investors a current running yield higher than most asset classes, a growing income stream over time and one with a degree of protection against inflation. Generally, these companies should provide a lower risk to capital than the overall equity market, with some exposure to the fastest-growing regions and countries around the world.

Risk warning: The value of investments can go down as well as up and investors may not receive back the original amount invested.

PHILANTHROPY IN THE ART MARKET - TAX BREAKS FOR DONORS

Art donors are set to receive significant lifetime tax savings as part of a new Government scheme.

A new scheme introduced in April 2012 will allow donors of pre-eminent works of art to offer them to the nation at a self-assessed value. In return the donor will receive a tax reduction as a fixed percentage (30%) of the object's agreed value, which can be offset against the income tax and CGT payable under the self-assessment tax rules. The gift will be free from IHT.

Companies can also donate artwork, although the fixed percentage corporation tax reduction is slightly lower at 20%. The scheme is not available to trustees.

Applying the tax benefit

Donors can apply the tax reduction against their tax liability in the year the gift is registered or any of the succeeding four tax years. There is also the option to spread the tax benefit across the five years in varying amounts, should the donor wish.

Defining 'pre-eminent'

Objects or collections may be defined as pre-eminent if they have an especially close association with our history and national life; are of special artistic or art historical interest; are of special importance for the study of a particular form of art, learning or history; or have an especially close association with a particular historic setting.

The existing Acceptance in Lieu (AIL) panel of experts will assess and value the gifts in the first instance. Once values have been agreed the panel will decide where to locate the objects. They will be loaned to an appropriate establishment in the UK, which is open to the public. It will be the responsibility of the establishment to ensure that the object remains in good condition and is fully protected.

Annual fund

The annual fund for both the AIL and pre-eminent objects regimes is £30m in total, an increase of £10m on last year's budget. Offers of donation will be accepted on a first-come, first-served basis from the start of the tax year. So, interested taxpayers should plan to make an application as soon as possible to maximise their chances of acceptance.

THE TIME FOR ENTERPRISE?

Proposed changes to VCT and EIS schemes could see them becoming more widely available.

As a brief recap, both venture capital trusts (VCTs) and enterprise investment schemes (EISs) seek to provide capital to small and expanding companies with the aim of growing the business and generating a profit. The main difference between the two schemes is that while a VCT invests in a series of companies, the EIS only invests in a single company, which increases the element of risk to the investor.

The Treasury has proposed a relaxation of the legislation governing both VCTs and EISs, which could shift a previously esoteric area of investment into the mainstream for many individuals.

VCTs

Individuals can invest up to £200,000 per tax year and benefit from 30% income tax relief, which is claimed via their self-assessment tax return. Dividends are tax-free and there is no CGT should the VCT be sold. There is, however, a minimum holding period of five years to continue to benefit from the 30% tax relief.

EISs

Following a change in legislation in April 2011, the EIS now provides the same level of income tax relief upon investment as a VCT at 30% (increased from the previous level of 20%) for investments up to £500,000. There is a minimum holding period of three years and the EIS also provides CGT deferral.

Any capital gain realised on sale is not taxable, provided income tax relief has been received and not withdrawn. Losses may also be allowable for income tax purposes. After two years the EIS investment is exempt from IHT.

It is now possible to carry back all of the income tax relief to the previous tax year. For example, relief for investments made in 2012/13 can be set back to 2011/12.

Proposed changes

While the changes noted in the table below came into force for EIS on 6 April 2012 the Treasury recently announced that the proposed new rule for VCTs which disqualifies their VCT status if they invest in companies breaching the investment limit (the maximum funds raised from EIS, VCT and SEIS sources, which is £2m prior to EU state aid approval and £5m if the new proposals are approved), will take effect on or after the Finance Bill 2012 receives Royal Assent. This means that before that date, provided VCTs meet the test of at least 70% of their investments meeting the current £2m funding limit, they can invest in companies raising more than that without disqualification in the event the higher £5m limit does not receive EU state aid approval.

The proposed changes will provide VCT and EIS managers with much greater flexibility to invest in larger and, ultimately, more established companies, which should reduce the level of risk to which the investor is exposed.

As these VCT and EIS tax reliefs constitute EU State Aid, any rule changes require EU approval, and this has still to be secured.

With many small businesses continuing to have difficulty in raising finance through the traditional bank route, VCTs and EISs are ideally placed to strike attractive deals with these businesses. In many cases, the manager will take a seat on the board to provide expertise in decision-making and help guide the business forward and represent investors' interests.

Previous opportunities

There are a variety of offers in the VCT and EIS markets each year and Smith & Williamson meets with each manager to assess their investment strategy and the track record of previous offerings.

VCTs

Dealing first with VCTs, our buy list for the last tax year included those providers who were offering 'limited life' VCTs. This means they aim to maintain capital and intend to return around 110p against an initial cost of 70p after the minimum holding period of five years. Typically this will occur around year six. Generally speaking, these are normally lower risk VCTs as the investments they make may include a minimum return to the VCT of 70p, i.e. the net subscription of investors.

The more traditional VCTs are those in the 'generalist' sector, which should be seen as a longer-term private equity play with investor return coming by way of tax-free dividends as the VCT makes profitable realisations. One of the offerings for the last tax year was effectively a fund of VCTs, which divides the investment between seven existing VCTs, all with differing investment strategies. The advantage of such a structure is that investors are immediately accessing mature VCTs and will receive tax-free dividends from day one, and on a monthly basis going forward.

EISs

With EISs it is much more difficult to track performance, so we concentrated on two very different structures – both of which have demonstrated their ability to produce investor returns.

The first offer was centred on mitigating risk as much as possible and invested in various television productions with the aim of producing a return of 105p after the minimum holding period of three years. The other EIS was a very exciting opportunity involving principals with an enviable track record in the pub freehold sector who were also committing personal funds. This opportunity benefited from the backing of pub freeholds, but EIS investment is not without risk so would not suit the low or lower-risk investor. VCTs tend to be more tax year-end driven while EISs will continue to be available throughout the year. We anticipate the launch of a number of offerings once the Finance Bill receives Royal Assent.

Seek advice

These types of investments are not suitable or appropriate for everyone. Investments of this nature, while aiming to mitigate tax, can carry a significant risk to capital. Specialist advice is therefore essential.

INVESTMENT OUTLOOK - EUROZONE WORRIES CONTINUE

Political uncertainty and increasing resentment towards austerity policies across Europe further risks financial stability.

After an impressive five-month rally fuelled by signs of improving economic data in the US and hopes a new eurozone crisis might have passed, financial markets have stalled in recent weeks with worries about the eurozone returning to the forefront of investor concerns. The release of several key first quarter GDP figures in April seemed to confirm what markets were beginning to fear: that any rebound in global economic growth will be more anaemic than many had begun to hope. Growing resentment towards 'austerity' policies is meanwhile leading to heightened political uncertainty across Europe and creating new risks to financial stability. With the effects of the European Central Bank's (ECB) liquidity tap now beginning to run dry, equity markets have lost momentum over the past month while volatility has increased somewhat, although it remains well below crisis levels.

UK's poor performance continues

The official first quarter GDP figures issued by the Office of National Statistics showed the UK economy slumping to its first double dip recession since the 1970s, with GDP contracting by 0.2%, following the 0.3% decline in the fourth quarter of 2011. GDP figures are notoriously prone to later upward revision and as the data is revised, it may turn out that fears of a new recession prove to be premature. Nothing can disguise the fact, however, that the UK economy is performing poorly, in both absolute and relative terms. Unlike the US and Germany, which have recovered all the output lost in the aftermath of the global financial crisis, UK output is still 4.3% below its pre-recession peak. The main driver behind the first quarter decline in growth was a 3% fall in construction output, which failed to be offset by any significant gains in services. More concerning was the overall decline in financial services output during the quarter. The one-time engine of the UK economy appears to be running out of steam. The UK's exposure to Europe, its biggest trading partner, remains a drag on potential growth and the economy is unlikely to export its way out of trouble if the current climate remains uncertain.

On a more positive note, April's CBI Industrial Trends Survey (a more forward looking indicator) suggested the UK manufacturing sector remains on the road to recovery. The CBI figure is consistent with growth in the sector of 2% over the quarter. With the Government's opinion poll ratings falling, more questions are likely to be asked over the Chancellor's austerity drive if the public sector net borrowing position deteriorates further and growth continues to contract. We continue to believe that the Coalition must pursue more active growth policies if the economy is to join the road to recovery. With inflation still well above the 2% target, the Bank of England's Monetary Policy Committee says it has little room to loosen monetary policy any further. It is unlikely, therefore, to introduce further quantitative easing (QE) when the current programme ends in June. Our view is that a further £25bn of easing in the autumn remains a real possibility, given the continued poor outlook for growth. Although equity markets have reacted calmly to the latest data, bond yields have declined (to 2.1%) and the UK equity market has started to underperform the world index. Somewhat surprisingly, perhaps, sterling has strengthened slightly.

US election hindering policymakers

There were mixed messages to take from the somewhat disappointing first quarter GDP figures which came in at a less than expected 2.2% annualised. US consumers appear to be doing their part with a 2.9% increase in personal expenditure, a strong figure considering the impact of rising gasoline prices on disposable income over the quarter. Clearly the continued recovery in labour market conditions is helping to boost consumer confidence, despite real personal disposable income only rising by 0.4%. Signs that the US housing market is finally bottoming out in some parts of the US have also contributed. The rise in consumption was offset by declines in government spending, mainly defence, and a 2.1% fall in business investment.

The Federal Reserve has painted a brighter picture for growth in 2012, upgrading their forecasts and predicting unemployment will fall to a range of between 7.8% and 8% this year. The public stance of the Federal Reserve's rate-setting open market committee remains that it will hold interest rates at their current low levels until at least 2014. The committee has acknowledged the recent pick up in inflation and a more hawkish stance among committee members suggests another round of QE is off the table for now. In an election year, the prospects of policymakers in Washington making a decisive start on reducing the budget deficit are low to non-existent. Given the 'fiscal cliff ' that is approaching at the end of 2012, when expiring tax cuts and planned new reductions in public spending kick in, potentially reducing GDP by 4% (or US$1trn) in 2013/14, the deficit is set to become an important battleground once the new president and Congress have been elected in November.

Anti-austerity pressure in Europe

With much of Europe now technically in recession, the 'liquidity boost' provided by the ECB's second round of three-year cheap financing for European banks in February appears to be fading. While the ECB's liquidity measures have stemmed the immediate threat of a Lehman-style credit crunch, the deep-rooted challenges facing most of the region's peripheral countries have started to rise to the surface once more, with increasing signs of popular resistance to government austerity measures in several countries. The ECB president, Mario Draghi, emphasised in a recent speech the need for new pro-growth policy measures to supplement the austerity measures being implemented in the weaker southern European states. His call for a 'growth compact' to supplement the earlier 'fiscal compact' agreed by eurozone leaders (and now awaiting ratification) appears to have won the backing of the German leader Angela Merkel.

With the most recent surveys pointing to a further contraction in manufacturing and services output, and other forward-looking economic sentiment indicators all pointing down, political tensions across the eurozone are rising; all eyes are now on the outcome of elections in France and Greece. As expected, Francois Hollande defeated Nicolas Sarkozy in the French presidential election and has pledged to renegotiate the fiscal treaty, something Merkel has refused to countenance.

With economies in some of the peripheral countries heading backwards, fears about the solvency of banks in Spain and Italy have also intensified in recent weeks. Bond yields in both countries remain close to unsustainable levels. The German economy meanwhile continues to strengthen. Retail sales rose by 2.3% year-on-year in March, and unemployment is still at a two-decade low, underlining the increasing divergence in the fortunes of the north and south of the eurozone.

Risk warning: The value of investments can go down as well as up and investors may not receive back the original amount invested.

Investments in emerging markets may involve a higher element of risk due to political and economic instability and underdeveloped markets and systems. When investments are made in overseas securities, movements in exchange rates may have an effect on the value of that investment. The effect may be favourable or unfavourable.

NEW INCENTIVE TO BE MORE CHARITABLE IN YOUR WILL

Estates leaving 10% or more to charity are set to benefit from a new reduced rate of IHT.

The 2012 Finance Bill includes legislation which will reduce the rate of IHT to 36% in cases where 10% or more of an estate is left to charity. The new rules will apply to cases where the person's death occurred on 6 April 2012 or after this date.

An estate will be divided into three components:

  1. the free estate
  2. jointly owned assets passing on survivorship
  3. settled property (certain life interests in trust).

Calculating whether more than 10% of the net estate has been left to charity will be applied to each section in turn, although there will be the option to combine and consider component elements together. For this purpose, net estate is defined as the value of the estate after deducting the nil-rate band and all reliefs and exemptions, except for charitable gifts.

It may be that increasing a charitable legacy will produce a tax saving and increase the amount left to beneficiaries. Beneficiaries can backdate any charitable gifts using a deed of variation.

Based on the figures in the example below, the non-charitable beneficiaries would be better off by £5,400 as a result of the charities receiving an additional £22,500. The tipping point for this 'win-win' position is where the current level of proposed charitable legacies exceeds 4% of the value of the net estate.

There will therefore be an incentive for those who already have a reasonable level of provision in their wills for gifts to charity to increase the amounts or for their families to do so after death. On the other hand, a married couple might decide to defer such legacies so that they are only made out of the estate of the surviving spouse so as not to 'waste' the value for IHT-rate purposes.

IHT is a particularly emotive tax, although government statistics indicate that only 3% of estates were liable to pay tax in 2010/11. Nevertheless, it may be that some people would prefer to increase legacies to charity if it means reducing the size of their tax bill.

CAPITAL LOSS RELIEF CLAIMS - MANSWORTH V JELLEY SAGA REVISITED

Taxpayers with cases under enquiry, where capital losses have been claimed on the disposal of shares acquired on the exercise of an employee share option, may soon be hearing from HMRC.

In January 2003, HM Revenue & Customs (HMRC) published guidance that said the gain or loss on the disposal of shares acquired by such options should be calculated by deducting from the disposal proceeds the market value of the shares at the time the option was exercised and any amount chargeable to income tax on the exercise of that option. This followed the decision in the Mansworth v Jelley case.

The issue of this guidance led to a flurry of claims being lodged with HMRC for capital losses on unapproved share option schemes, resulting in large amounts of losses being carried forward and/or claims for repayment of CGT previously paid to HMRC for an earlier year.

However, HMRC subsequently announced it had received legal advice that the guidance was incorrect and changed its mind with retroactive effect. This means that taxpayers who have claimed to carry forward capital losses calculated under HMRC's original guidance are now meeting resistance from HMRC. HMRC is writing to taxpayers who have claimed Mansworth v Jelley losses inviting them to withdraw their claim and asking for a response within 40 days. Those who are not prepared to withdraw their claim are asked to explain why they believe their claim remains valid. HMRC will review cases on an individual basis and decide how best to take them forward.

HMRC's letter says: "Where the shares are treated as having been acquired at market value, that value is the full measure of their deemed cost of acquisition. The cost is not augmented by any amount chargeable to income tax on the exercise of the option. Thus in computing any capital gain or loss accruing on a disposal of the shares, no deduction falls to be made of, or in respect of, any amount that is chargeable to income tax on exercising the option."

What to do now

HMRC intends to finalise the enquiries in cases where Mansworth v Jelley losses have been claimed. It is inviting affected taxpayers to withdraw their claim to losses in the period covered by the enquiry into their tax return or claim to losses. Enquiries will then be closed with an adjustment to the return, where appropriate, to remove the losses and make any other adjustments agreed.

Clients and their advisers will need to consider whether the capital loss relief claim made still stands, bearing in mind that more recent case law has indicated that a taxpayer should be able to rely on clear guidance published by HMRC.

INTERNATIONAL RETIREMENT BENEFIT SCHEMES

A look at Section 615 schemes, which provide retirement benefits for employees of UK companies working abroad.

Section 615(6) Trust schemes are UK-based retirement benefits schemes established under trust law for the purpose of providing bona fide retirement benefits for employees of UK companies working overseas. They are not approved pension schemes, so they do not attract exactly the same tax status as approved schemes – but this does not make them any less attractive. They do however have to be established for the sole purpose of providing superannuation benefits.

Section 615 schemes can be set up easily and both the employer and employee can contribute. The level of contributions is not capped and it is possible for employees to contribute through salary sacrifice which may mitigate tax and social security in the country they are working in. Money invested grows tax free, is outside the employee's estate for IHT and beneficiaries can be nominated. The sponsoring employer should obtain a corporation tax deduction.

Who is eligible?

The scheme is for individuals of any nationality who are carrying out duties outside the UK for a UK company or associated company elsewhere in the world, irrespective of domicile or residency. They are not only for expatriates but also for individuals resident in their own country – with the exception of UK and US residents. However, UK residents with a separate and distinct contract for overseas duties can be included.

How does it work?

A Section 615(6) Trust will generally be established in the name of the employing company, similar to an individual pension arrangement in the UK for UK-resident employees.

Employer contributions

Provided certain conditions are met, the UK employer will obtain a corporation tax deduction for contributions made to the trust.

Qualifying companies

A non-UK company may make contributions into a scheme, but only if the company is associated with the UK employer (essentially common ownership between companies or a holding company or subsidiary relationship).

Investment strategy

Rather like a self-invested personal pension, individuals can choose their own investment strategy and there is a wide range of opportunities such as insurance policies, direct equity holdings, fixed interest securities, collective investment schemes, money funds, property and cash deposits.

Drawdown

The biggest attraction to a Section 615 scheme comes on drawdown of the pension. Benefits can be taken as one tax-free lump sum by UK residents from the age 55, or earlier if the employee leaves the company, but must be taken by the age of 75.

CLAIMING BUSINESS PROPERTY RELIEF - HOLIDAY HOMES

A recent tax case could help owners of holiday home businesses secure valuable business property relief.

Owners of holiday lettings businesses could save their loved ones 40% IHT due on the business if they qualify for business property relief (BPR). For example, someone with business assets worth £1m could potentially avoid a £400,000 tax bill if they are eligible for BPR.

Who qualifies?

To qualify for this valuable tax break, owners must be conducting a business that is not primarily an investment business. They need to provide ancillary services to holiday guests rather than just accommodation.

A recent court case considered the distinction between a property used for a qualifying business and a property held as an investment. In Nicollette Pawson (deceased) v HMRC, the taxpayer successfully argued that the holiday accommodation in question did qualify for BPR. The tribunal was convinced that the constant need to find new occupants, and that additional services were provided, over and above the bare upkeep of the property, meant that the property was a business asset and not just an investment. To date, HMRC has not appealed the decision.

This is a very useful ruling for owners of furnished holiday accommodation. The key point is to ensure that additional services are being provided and that it's not an ordinary property letting – but these additional services need not be onerous. For example, the additional services in the Pawson case included heating the accommodation and turning on the hot water before guests arrived, as well as cleaning the property between lettings. In addition, it was fully furnished and the kitchen was fully equipped. All these services were provided for each letting. Thankfully, these services are fairly typical of holiday home businesses – and far less onerous than HMRC's view, which would require owners to be more hands-on with their guests.

There are a number of other requirements to ensure BPR is available.

  • The property must have been owned for two years before the IHT event.
  • At the time of the IHT event there must be no contract in place to sell the property.

Professional advice should be sought to ensure all the necessary conditions are in place to protect potentially substantial IHT savings.

WHERE NEXT FOR REGULAR SAVERS?

With pensions capped, offshore regular investment accounts offer a tax-efficient alternative for savers.

Many investors are facing the prospect of not being able to make further pension contributions or accrue additional pension rights without breaching the new lifetime allowance of £1.5m. Added to this is the Chancellor's decision to effectively stop investment in UK-qualifying savings plans. So, what are the regular savings options now available to those affected?

Planning for the future

Individual savings accounts (ISAs) should be viewed as the optimum savings vehicle after pensions, but another option that may appeal to longer-term savers wishing to save more than the annual ISA allowance is an offshore regular investment account.

An offshore regular investment account can form part of a long-term financial plan and cater for a variety of scenarios such as expatriate life, career breaks and school/ university fees, as well as help with early retirement. Savings can be linked to a range of investment funds run by leading fund management groups and can be stopped at any time.

Tax advantages

The principal advantage of an offshore regular investment account is that savings accrue in a virtually tax-free environment. Tax is deferred until withdrawals are made, but can be managed in such a way as to mitigate the ultimate tax liability. So, as the old accountancy maxim goes, tax deferred is tax saved!

A safe haven

With the ability to save tax efficiently being attacked in the pursuit of increased tax revenues, these non-controversial regular savings arrangements should be considered as part of an overall financial plan for those wishing to save for the future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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