Disclosure of tax avoidance schemes;
- disclose, reference and tax return
- have to disclose arrangement to HMRC
- issued reference number under DOTAS
- taxpayers must then show this ref in their tax return
General Anti-Abuse Rule - GAAR;
- targets what, attack, works alongside (2) and applies to what
Enablers;
- penalty and who are they (4)
- targets tax avoidance schemes that are out of legislation because they are complex or novel
- attack TA schemes not covered by TAARs
- works alongside TAARS & DOTAS
- applies to all tax bar VAT
Enablers
- given penalty for defeated schemes
- enablers are those that design, manage, market or facilitate tax avoidance
Drawbacks of using tax avoidance schemes;
- investigate, cost, penalties, success and retroactive
- HMRC may investigate
- cost of implementation may be more than cost of defending and negotiating with HMRC
- schemes turn out to be ineffective
- if scheme fails, HMRC may charge penalties
- HMRC successful at identifying
- Gov introduces retroactive tax legislation
Income tax planning;
- transfer, transfer and not married, CGT for spouse and joint
- can transfer assets to spouse to lower tax bill
- transferring assets when not married may result in CGT liability and potential IHT
- if married and living together in that tax year, then no CGT payable on transfer
- savings can be held in a joint name and taxed on half the income each
Income from business and companies;
- can do what for partner (2, simple), profits, contracting, shareholders and dividends
- higher income spouse could pay partner salary via business. If above between £120 & £184 then build state bens
- can pay pension contribution into spouses plan
- profits can be shared if operating business as partnership
- no scope for reducing tax if contractor
- if limited company, spouse can be shareholder
- should pay at least 2k to spouse in dividends
Income tax - directors and employees;
- choose to take (2), delay, share options (tax position and CGT), NIC reduction and accumulated profits
- can choose to take bonus or dividends
- may be possible to delay dividend when lower tax payer
- share options tax position needs to be considered when exercising based on marginal rate. May be beneficial to do asap due to potential changes in CGT legislation
- may be able to reduce NICs by taking dividends instead of renumeration
- accumulated profits to avoid charge on income tax and get more favourable CGT rates when company sold or liquidated
Income tax - self employed;
- accounting date and tax, retire and tax, 2023
- choice of accounting date makes a difference on when tax payable
- date on which self-employed retired or ceases can effect tax liability
- tax increase in 2023 will mean limited companies will no longer be attractive
NIC planning - minimising NICs;
- dividends and pension
- take dividends instead of salary
- increase the amount the er contributes to company pension schemes by sal sac
Pension planning;
- effect on dividends and effective tax relief
- effect on CGT
- usual pension stuff
- can remove dividends from higher rate tax bracket and produce an effective tax relief of 45% (if higher rate). Basic tax band extended therefore 25% saving (32.5-7.5) + 20% basic rate tax relief.
- has same effect on CGT - tax can be reduced based on basic rate extension
Estate & IHT planning - sharing assets;
- outright lifetime transfers, non-uk spouse and when can they do this and back dating
Non UK domiciled spouse;
- limited to NRB
- to counter, can make outright lifetime transfers to them which will rank as PETs
- non-uk spouse can elect to be treated as uk domiciled. Can be made during lifetime or on death
- can choose this to be back dated to any point in last 7 year
IHT planning - sharing assets - RNRB;
- total IHT saving per couple, not available when, value of residence and considerations, downsizing and how maintained (2) and tapering
- for a couple, represents IHT saving of up to £140k (175kx2*40%)
- not available if property left in discretionary trust
- value of residence is after repaying mortgage therefore may be advisable to pay off prior death as, if residence valued at less than RNRB, the RNRB is reduced to the value of the residence
- RNRB protected if indi has downsized or ceased owning home. Must pass on assets of equivalent amount and be written in will
- tapering effect if >£2m. Can reduce by making lifetime gifts
IHT planning - PETs;
- main advantage, 7 year, CGT payable when, term assurance and outright gifts
Factors to consider when making PET;
- income, relief, other type of relief and pension
- main advantage is that there is no IHT charge regardless of amount gifted
- if donor does not survive 7 year period, IHT will be payable (if over NRB)
- CGT will be payable if gift disposed of and not spouse
- seven year level term policy can be taken out to cover potential IHT if die within this period
- only outright gift considered as PET
Factors to consider when making PET;
- asset produces income that is needed
- level of business relief on gifts such as shares
- CGT holdover relief
- pension provision
IHT planning - exemptions;
- amount, best way to use this exemption, can be used to pay into (2) and also use (2)
- annual exemption of £3k
- paying premiums on life assurance policy in trust a good way to provide as much benefit using this exemption as possible (due to tax-free lump sum on death)
- can use annual exemption to pay into pension or junior ISA
- can also use £250 small gifts and gifts to charity
IHT and trusts - advantages;
- probate, control, protect from (3), beneficiary and privacy
Advantages;
- can provide cash when estate is tied up whilst gaining probate
- settlor can be trustee allowing some control over asset
- trust can protect from creditors, divorce and step-relatives
- certainty that chosen person will receive
- confidential
Bare trust;
- classed as and IHT payable, 7 years, beneficiary and estate
- under this type, donor makes PET for IHT purposes. Therefore no lifetime IHT payable regardless of amount.
- if die within 7 years, will have to pay IHT on anything above NRB
- trust is fixed at outset and cannot be changed therefore forms part of beneficiaries estate
Interest in possession & Discretionary trusts;
- chargeable as what, taxation above what, other charges
- chargeable as CLTs for IHT purposes
- amount gifted above NRB taxed at 20%
- ongoing IHT exit and periodic charges apply at 6% on assets above NRB
Strategy for lifetime gifts;
- gifts and dis trust then bare trusts
Charitable legacies;
- rate of IHT if what amount of estate left to charity
Basic strategy is to;
- make gifts into dis trust within NRB and can be repeated at 7 year intervals
- make outright gifts or gifts into bare trusts when donor has reached NRB
Charitable legacies;
- reduced rate of IHT taxed in 10% or more left to charity.
- IHT reduced to 36%
Disposal of direct and indirect investments;
- gifts and HR, HR available when (2)
Minimising CGT;
- loss, spread to maximise bens of what (2), defer and transfer
Gifts;
- gifts of investment will not qualify for holdover relief
- HR may be available if shares in donors company or a furnished holiday letting
Minimising CGT from gifts;
- if standing at a loss, can dispose of then
- diposals spread over more than one tax year to maximise benefit for AEA and basic rate tax band
- consider deferring or exempting gains through an EIS or SEIS
- transfer assets to spouse
