Take That! - Tax Avoidance and the Media

Well, according to the media another celebrity has been caught with their fingers in the Exchequer's till and should be punished accordingly.

There are time's when the press's response to such news relating to tax is a little more akin to Granville at Arkwright's till! One would, and should, expect better of our free, objective and independent news outlets in the UK, but alas it is not so.

Yes, I am of course talking about Mr Barlow and his chums (who indeed I myself have poked a little fun at on twitter).  

However, what the media seem to have lost sight of here is that Gary et al have not actually done anything wrong.

Yes they have invested (presumably upon advice) into a product that provided tax advantages, and believe it or not people do this every day, indeed certain forms of which the Government actually encourage you to invest in, such as the Enterprise Investment Scheme.

There have always been people who look to minimise their clients' tax bills, and some of those will go a little too far in creating schemes that really do push the envelope of what is acceptable to the world in general. However, it is rarely the investor who is at fault, and let us not forget here that this scheme, as with Chris Moyles and Jimmy Carr's recent outings, isn't actually illegal.  The courts have simply adjudged that the scheme does not work, and so the tax relieved under the scheme now has to be paid back to HM Revenue & Customs. Also, let us not forget that this was not a scheme set up purely for the Take That stars, many, many people would have invested in this (for various reasons of course). 

However, it is unfortunate that the facts get in the way of "selling" the news, and make for nowhere near as sensational a story. The real tragedy though is that stories like this put people off the idea of considering their own tax affairs as all forms of tax planning begin to be considered "immoral", and one would have to question whether this is indeed the central motive with such coverage.

Employers: Tax and Termination Payments

"What are termination payments?" I hear you ask.

Well termination payments are severance payments made to employees on termination of their employment. They can arise in a number of ways, for example:

• In the event of their dismissal (or constructive dismissal);
• Redundancy;
• Retirement;
• Departure because of medical reasons.

Quite often under the circumstances neither the employer or the employee pay sufficient attention to the tax implications of termination payments, as the focus is normally on securing the best possible terms for settlement.  This means that both parties often 'miss a trick' as the correct tax structuring can result in a higher "net" payment for the employee, and vice-versa a lower "gross" payment for the employer.

"Why do employers need to know about the taxation of termination payments?" you ask "Surely any tax due is the liability of the employee."

Well, termination payments must be taxed correctly by the employer as HM Revenue & Customs (HMRC) can recover unpaid tax, national insurance contributions (NICs), penalties and interest from the employer! Consider both income tax and National Insurance Contributions (NICs). In addition to employee's NICs, employers have to pay employer's NICs on payments that constitute earnings from employment. This can significantly add to the costs of settlement.

If an employer does not deduct tax or NICs from a termination payment, it is, generally, liable for the tax and NICs not deducted, plus interest and penalties.

Both the employer and former employee will want the termination payment to be legitimately structured to reduce the tax liability and will also want certainty that no future tax liability will arise. How much of a termination payment is taxable will depend on the nature and amount of the payment. Accordingly, it is important to ascertain why the payment is being made and all the background facts.

Payments usually fall into a number of defined categories, including:

• Sums that the employee was contractually entitled to or which relate to past or future service. These are generally taxable in;
• Consideration for entering into restrictive covenants. This is taxable in full also;
• Payments where termination results from a disability or from a discrimination claim not connected to the termination. These are tax-free without limit;
• Share options and share awards. Employees may be entitled to exercise share options and receive share awards either before or at some point after termination;
• Employer contributions to registered pension schemes. These may be made tax free subject to the annual allowance and lifetime allowance limits.

NICs are generally payable for all termination payments that the employee is entitled to under the employment contract. HMRC may argue that NICs are payable where there is an established practice of making termination payments, even where there is no express contractual right.

There are also certain tax-free benefits can be provided to employees upon termination, and provided that payment is made directly to the provider of the service, the following services can be made available to the employee without attracting tax:

• Legal fees in connection with the settlement agreement;
• Outplacement counselling;
• Re-training.

The taxation of termination payments is a complex topic and this blog post is only a brief overview. For more information please contact me at HCB Solicitors Ltd to discuss your personal circumstances.

TOP Client Tax Problems

This post won't be what you might expect at first glance, given the title that is. As some of you will know, I volunteer for the tax charity Tax Help for Older People, or TOP as it's affectionately known.

TOP is a charity providing free, independent and expert help and advice for older people on lower incomes who cannot afford to pay for professional tax advice. With over 450 volunteers and a national call centre, it doesn't matter where you live. They provide a caring and friendly help and advice service on personal tax issues through their own expert advisers that is jargon-free, independent, confidential and individual to your needs. More details of the charity, and what they do can be found here www.taxvol.org.uk

There are two main issues that I come across time and time again when I am volunteering my services for TOP clients and both relate to tax coding issues.

Married Couples Allowance (MCA) is an amount that is taken off your tax bill - so it only applies if you pay tax. If you don't pay tax, or if your tax bill isn't high enough to use up all of your MCA, you can transfer any unused allowance to your spouse or civil partner if they pay tax.If you are married and living together and at least one spouse was born before 6 April 1935, the husband can claim MCA. HM Revenue & Customs (HMRC) reduces your tax bill by 10 per cent of the MCA to which you're entitled.

The problem here arises where the spouse of the person claiming MCA passes away, and either their state pension alone, or with other personal pensions exceeds the Personal Allowance for income tax (currently £10,660 for those qualifying for MCA).  In most circumstances HMRC will update their records correctly and remove the MCA from the surviving spouses tax code in the following year, but I have seen a number of cases where this is not done.  The result is that the surviving spouse continues to benefit from MCA, and so doesn't pay the correct income tax.  Now, although this is a HMRC error, they will still ask you to pay the tax due as it is your responsibility to challenge anything that may be wrong.  So, if your spouse (or civil partner) has recently passed away and you were in receipt of MCA, get it checked out!

The second problem, which is far more common, usually arises in the year in which you start to receive your state pension.  Now this can occur as a result of a number of issues, mainly centered around ceasing (or in some cases continuing) employment, or drawing a personal pension alongside the state one.  Again, this is an issue caused by errors in tax coding. Unfortunately, a lot of people are oblivious to the fact that state pension is actually taxable. However, this will never affect most people, as their income (including state pension) will be below the personal allowance in retirement.  Where people can get caught out is upon the receipt of an enhanced widow's pension following the death of a spouse, or upon state retirement age when their tax status changes. The message here is, if something has affected your state pension, either by drawing it, or an increase related to the death of your partner, get someone to look at your coding for you.

Both of these problems are easily remedied (usually over the phone these days), so don't worry about them, but do take action.

Budget 2014: Private Client Update

Budget Summary

George Osborne delivered a Budget for bingo-playing baby-boomers who have yet to draw their private pensions, announcing sweeping reforms to the taxation of pensions and halved bingo duty.

Most taxpayers aged under 67 will benefit from an increase in the personal allowance from £10,000 to £10,500 from April 2015. A new transferable married couples' allowance of £1,050 will be introduced, but will only help basic rate taxpayers. Good news too for savers, who will enjoy higher tax-free limits for ISAs and premium bonds later this year, plus a cut in tax on savings income from 2015.

The traditional “bad habit” taxes on booze and fuel have largely been frozen or even reduced, although tobacco suffers a 2% above inflation tax rise. The new "sins" appear to be; owning a valuable home through a company and operating a high-stakes gaming machine.

Businesses continue to be encouraged to invest in equipment by an increase in the annual investment allowance to £500,000 from April 2014, and reliefs for investing in small trading companies and social enterprises are enhanced. Small and medium sized companies who undertake R&D are also given additional tax relief.

The losers are those who use tax avoidance schemes, as those sinners will have to pay the tax avoided up front. Several other tax loopholes used by groups of companies are blocked, and the rules for VCT schemes are tightened-up to deter abuse.

Income Tax

The standard personal allowance rises to £10,500 from 6 April 2015. The age related allowances are gradually falling in line with age-related allowances given to taxpayers born since April 1948.

The transferrable allowance will apply from 6 April 2015 to couples (married or civil partners) where neither person pays tax at the 40% or 45% rates. The spouse who cannot use all their personal allowance against their own income will be able to opt to transfer 10% of their personal allowance to their spouse or civil partner.

The personal allowance is tapered away for individuals who have income over £100,000, at the rate of £1 for every £2 of income above that threshold.

         

Income tax rates are to remain the same to 5 April 2016, with the exception of the savings rate. This will be cut to 0% from 6 April 2015. However, the savings rate only applies if individual's net non-savings taxable income does not exceed the savings rate limit.

When the personal allowance is taken into account an individual will start to pay tax at 40% when their total income exceeds £41,865 in 2014/15 and £42,285 in 2015/16. This is compared to a 40% threshold of £41,450 in 2013/14. This threshold (and the 45% threshold) can be increased if the taxpayer pays personal pension contributions or makes gift aid donations.

Pensions

Pensions

The following changes will be introduced from 27 March 2014:

•         A person who wishes to take their pension as "draw-down" instead of buying an annuity will have to prove they have £12,000 of other income in retirement, rather than £20,000.
•         The capped drawdown withdrawal limit will increase from 120% to 150% of an equivalent annuity.
•         The total pension savings which can be taken as a lump sum will increase from £18,000 to £30,000.
•         The maximum size of a small pension pot which can be taken as a lump sum (regardless of total pension wealth) will increase from £2,000 to £10,000; and
•         The number of personal pots that can be taken under these small pot rules will increase from two to three.

In addition the chancellor proposes to change the rules for defined contribution pension schemes from 2015 so that:

•         Individuals will have complete freedom in how they access their pension savings;
•         Buying an annuity will not be a requirement on retirement;
•         The 55% tax charge on withdrawing too much from a pension fund will be removed; and
•         Everyone will be offered free and impartial advice on how to best use their pension savings.

Inheritance Tax

The inheritance tax (IHT) nil rate band will remain frozen at £325,000 until 2017/18, and the rates of IHT payable on death remain unchanged at 40% or 36% where at least 10% of the net estate is left to charity.

The government will consult on extending the existing IHT exemption for the estates of members of the armed forces, whose death is caused or hastened by injury while on active service, to members of the emergency services.

This newsletter is a summary of some of the key points from the Budget, based on the documents released on 19 March 2014. It is possible that a different position will be shown by the draft legislation which will be published on 27 March 2014. If you have any queries please call Steven Holden on 0844 556 8674 or 07805 417829, or via email on steveholden@hcbsolicitors.com

Playing the game?

How many times have we seen in both the mainstream and specialist media reference to the "game" of tax planning?

The never ending game of cat and mouse between those peddling the latest "tax scheme" on one side and HM Revenue & Customs and the UK Treasury seeking to challenge them on the other.  

If we were to believe everything in the media, then the conclusion could easily be drawn that tax planning is a bit like Monopoly really.  It seems to go on for ever and no-one ever seems too certain about who's actually won given the levels of appeal to which such cases can go.  So to continue the analogy, like a game of Monopoly although you know who has technically "won", the question is at what expense?

Well, with the introduction of the UK GAAR (General Anti Abuse Rule) we all expected to see that game brought to a much shorter conclusion, with a lot of scheme providers pulling out of the market place.  At present this doesn't seem to be the case, but as with all "new and shiny" powers that are given to Government bodies I think it will be some time until we see the GAAR used in anger.

However, the purpose of this blog is to point out that one doesn't have to enter this seedy and uncertain world of tax planning, because what I've described above is actually all about tax schemes, not (as the media would have it) tax planning.

To continue the board games analogy, "proper tax planning" is a bit more like that other perennial holiday favourite Scrabble, insofar as its an awful lot more certain where things are going, and leaves you with plenty of input rather than a simple casting of fate's dice.

The idea of planning one's affairs to maximum tax advantage has been around as long as there has been tax , and given that the UK has one of the oldest regimes in the modern world its no surprise that things are a little complex.  However, like that game of Scrabble its a matter of building a solid foundation, with moments of brilliance, before arriving at the ultimate conclusion, i.e. there is no quick fix (well, at least very rarely).  As far as tax planning is concerned it should be like most things in life, if it sounds too good to be true, it most likely is (or soon will be given the authorities attitudes to such aggressive and noncommercial structuring).

Therefore, for a "tax plan" that's going to work you need to take your time and create it steadily using the safest of building blocks, letting the savings accumulate over time. Working within the legislative framework that is our tax system, rather than trying to crack it with a sledgehammer.  It works you know...

Did you get that tax return in on time?

Well, tax filing deadline day has been and gone in the UK, and hopefully you all got your tax returns in to HM Revenue & Customs on time and paid your taxes too, I know my clients did.  If you didn't here's what you need to be aware of...

If you didn't get around to filing your tax return by 31st January this year, unfortunately you'll already have incurred a £100 penalty from HMRC.  You need to make sure you get it sorted out before 1st May, otherwise you'll start incurring further charges at £10 per day up to a total of £900.  If you still haven't done it by 1st August there will be a further £300 added to that, making a total of £1,300!

Well, if you did manage to do your tax return on time, I'm assuming you managed to get it paid too?  If not, you need to get it paid within 30 days from the 31st January, otherwise you will be fined 5% of the tax you owe. There are further 5% penalties arising after 6 months and 12 months too, this is also in addition to interest charges on the tax unpaid.

So, if that return, or payment of tax is still outstanding I'd recommend getting it sorted out in the next few weeks to avoid getting hit by these harsh penalties as well as the tax bill!

Time to think about year end tax planning?

As the end of the tax year approaches on Saturday 5 April 2014, now is the time to give some thought to year-end tax planning opportunities.

Income tax and personal allowances The Chancellor confirmed that in 2014/15 the personal allowance would rise by £560 to £10,000. At the same time, the basic rate band 

will shrink by £145 to £31,865, leaving the higher rate threshold just 1% higher next tax year, at £41,865. There is no change to the £150,000 starting point for 45% tax, nor the £100,000 threshold at which the personal allowance starts to be phased out.

The basic personal allowance for 2013/14 is £9,440. If it is not used before the end of the tax year it will be lost. The personal allowance is reduced by £1 for every £2 by which income exceeds £100,000. It may be possible to avoid losing the personal allowance by reducing income below £100,000. This could be achieved by making pension contributions, deferring some income until after 5 April 2014, making charitable donations or transferring income-producing assets to a spouse or civil partner. This strategy will save tax at an effective marginal rate of 60% for income between £100,000 and £118,880. 

The best way to pick up and use any unused personal allowance is for the company to pay interest on any current account balance held by the shareholder or director. Although this would require the company to deduct tax and complete form CT61 to report the interest paid and pay over the tax deducted to HMRC, the individual will be able to recover the tax deducted later. Of course, this is only possible if the individual has a positive balance on their account with the company.

Pension contributions It is possible to benefit from full tax relief on contributions to registered pension schemes, and this can help to make them very tax-efficient investments. The tax relief is capped at the higher of £3,600 and 100% of earnings, although this is restricted to the annual allowance, which is set at £50,000 

for 2013/14 but will reduce to £40,000 from 2014/15. The annual allowance can be carried forward for three years, after which time it is lost. 

Tax-efficient savings It could be wise to invest in an individual savings account (ISA) by 5 April 2014. The ISA allowance for 2013/14 is £11,520, of which £5,760 can be in cash.

Capital gains planning Each individual can realise capital gains of up to £10,900 in the current tax year free of capital gains tax. Married couples and civil partners can therefore realise gains of up to £21,800 tax-free in 2013/14. 

What is the most important thing about inheritance tax planning?

This is a question not oft asked, but it really should be considered more often, by advisers as well as their clients.  I am sure most would quickly respond with "paying no more than you owe", "making sure you pay as little as possible" or even "taking advantage of the tax system, without breaking it".  Whilst all of these would have their place (except perhaps the last), they overlook matters such as affordability, desirability and of course the topic of the moment, moral suitability.

In short, inheritance tax planning is becoming, and should always have been a lifestyle choice.  A favourite example of mine when speaking with clients is that I can ensure they pay no more inheritance tax than they want to, however, this may well involve them downsizing their property, driving a smaller car and taking less holidays (if any at all).  This is because in order to do so they would need to reduce their estate down to under £650,000 (for a married couple, or £325,000 for a single person).  Not surprisingly over the years very few have thought this a good idea, and whilst it is never intended as such it illustrates the point well, that the elimination of tax has undesirable side effects and that what we must look to do is rather mitigate it so far as possible without affecting the clients lifestyle.

This means that with my clients I take a very different approach to how we look at this journey, and it often is one, taken over many years if the planning is to be successful.  Inheritance tax planning is not a "band-aid" moment for most, it is the careful structuring of their affairs over a number of years either to protect against inheritance tax, or even other detractions from the estate you intend to pass to your children.  First and foremost in this process is the need to establish a clients goals and objectives, what do they really want out of life.  There is little point in me advising them to give away the family holiday home if they intend to retire to it in their dotage, or to make a gift of the vintage car that they enjoy tinkering with so much.

On top of this one should also look to mitigate the financial pain of such planning, ultimately inheritance tax planning means giving assets away, or altering their structure so that they fall within certain reliefs and exemptions of tax law.  In doing this a proper assessment of a client's income is needed.  If one had to choose between making a gift from two assets, is it not pertinent to give away the one that generates the least income?  Coupled to this of course must be questions about access to the remaining capital, one should not seek to give away access to all of your liquid assets without being able to readily replace them.

When making such gifts you should also consider how they are made, are they simply made outright, or would you prefer to retain a measure of control over the gift?  Indeed, might you want to protect against your intended beneficiaries suffering an unpleasant life event, such as divorce or bankruptcy?  These are questions that raise their head more often than not in the course of such a journey, and the answers are of course relatively straightforward as a clients needs, whatever the answer to these questions, can easily be met with a little forethought as to the structure of their planning.

Funnily enough, the tax actually comes last, but that is not to say it is unimportant.  Countless times I have seen new clients that have made mistakes in their planning by not considering how one tax might affect another.  Capital gains tax for example, just because you are gifting something rather than selling it does not mean that a tax liability will not arise, and I have seen such things result in some unpleasant enquiries by the tax authorities in the past.  I cannot stress enough the importance of getting proper advice from a qualified tax professional, often simply speaking with your accountant will not be enough.

Hopefully I shown you the important things to think about, and I'll end with one last word of advice, if ultimately undertaking a tax planning exercise is to painful in terms of loss of income or enjoyment of assets you can always do nothing.  Yes, paying 40% inheritance tax is a galling prospect, however it won't be you paying it, as you'll no longer be here, it is in effect your children's problem rather than yours.  Therefore, there is always the option to "do nothing", which in my opinion is not considered often enough by advisers.

Exploding the 'Care Costs' myths...

Care costs are a very emotive subject for those that have either been affect by, or even seen their parent's generation affected by the spiraling costs of care and having to sell their home to cover those costs.  Most people view their home as their principal asset, and method of leaving an inheritance to the next generation.  There was some hope for those so affected with the introduction of a cap to these fees, but the circumstances around that cap can be a little misleading to say the least.  Here I look to explode a few of the myths about the cost of care under the current structure...

Under the new rules I won't have to sell my home

MYTH The Government has made much fanfare of the fact that its new rules won't compel people to sell their homes when they go into care. Most have interpreted this to mean that they won't have to sell their homes at all, and will be able to leave it to their children. Unfortunately, this is not the case as all the new rules do is alter the timing of such a sale. Rather than be forced to sell it upfront when you go into care, the local authority will put a charge on your home, which will be recouped from your estate after your death.

The maximum I will spend on care will be £70,000.

MYTH It is expected that the cap will be set at this amount. However, this does not mean that this is the maximum that you will have to pay for care.

Despite common conception, the costs of accommodation and food (the 'hotel bill') are not included in the cap.  The 'cap' will also exclude some personal care costs, such as hairdressing costs, help with dressing etc.

If you need nursing care, the local authority will make an assessment of what it will pay towards this cost. If you cannot find a nursing home to deliver this care at this price, or you cannot find one you like within this budget, you or your family will have to 'top up' the difference. These additional payments are not covered by the care cap.

I will be able to leave a bigger inheritance under the new rules

PART MYTH This is not necessarily the case. The cap will help a small proportion of people who have substantial medical needs and spend years in care. But the average nursing home resident, who spends a little more than two years in care, will not really benefit from the change.

In addition, while it is possible for the local authority to put a charge on your home now, under the new rules it will also charge interest on what will effectively be an equity release scheme. Rather than just paying for the care fees from the sale of the home, people face paying care fees plus interest.

I own my home. There is nothing I can do to help cover care costs

MYTH If a family member needs care, it is a good idea to seek specialist legal help. A qualified adviser should be able to explain the different options available. This can deal with arranging one's affairs in such a way as to shelter assets, or to make better use of those assets to prevent their capital value from being eroded (i.e. by paying care costs out of income).  There are many solutions to this problem, beyond just selling the family home and spending the capital in care costs.

Tax on selling your home - All Change!

As part of the Chancellor's Autumn Statement, the Coalition Government have announced today that Principal Private Residence Relief (PPR) will see a reduction in the final period exemption (from 36 to 18 months), effective from April 6th 2014.  For those of you that don't know what PPR is, it is the relief from Capital Gains Tax (CGT) that applies when we sell our own homes, and for eventualities where people have have a period of overlap (not uncommon over the last few years) there has always been three year window in which you are still exempt.

Under the current rules a property that has been a person’s private residence in the past, even though they may not be living in the property at the time they sell it, and where they are claiming PPR on another property at the same time, can benefit from the last three years being tax free.

Halving this final period exemption from 36 months to 18 months makes sense to the Government who wishes to reduce the benefits of reliefs available to second home owners. It will however make life more difficult for anyone moving home who is unable to sell their first property within 18 months of buying their new home.  The original rule when CGT (and PPR) was introduced in 1965 was for 12 months. This was increased to 24 months in 1980, so the Chancellor is taking us back to limits that last applied over 30 years ago!

As I have mentioned above, since 2007-08 we have seen a lot of "accidental landlords", those who needed to move, but couldn't sell their existing property and so rented it out.  Normally this is a short term position and these "accidental landlords" will sell within the 36 month window.  The three year rule was introduced in 1991 so that those trying to move house (particularly those moving to follow work) are not disadvantaged when it is difficult to sell a house in a property slump.  Given what we have seen of the last few years resulting from the deep recession, will a reduced 18 month window really be enough?

It is also interesting to note that the Government expect to raise considerably more from this measure than the measure to tax the gains on non-resident second home owners, indeed they expect that the revenue from this measure by 2016/17 is expected to be £90m, whereas the yield from the CGT application to non-residents is expected to be £15m.

Overall this is something which can only be seen as an opportunistic attack on those who have found themselves in this position as a result of the economic climate over the last few years.  The fact that it snuck under the radar in the main speech would seem to back that up.

It will also be interesting to see how many MP's get caught out when "flipping" their family and official residences!