We’ve promised more than once in Square Circulars to tell you about corporate disposals of substantial shareholdings. We’ve not forgotten. It’s in this Issue. Indeed, how could we forget? To quote Lord Bramwell, “Like mothers, taxes are often misunderstood, but seldom forgotten”.
With the emphasis this Issue on corporate tax, just to show we’ve not forgotten other taxes, we’re also bringing to your attention a few points about E-filing PAYE returns, Capital Gains Tax and Inheritance Tax. In fact we’re doing all that first and saving the stuff for those of you who are corporate sophisticates until the end.
SWINGS AND ROUNDABOUTS
According to Halifax the average house price increase over the last year or so is running at approximately 18%. If you own a property which isn’t your main residence and you’re tempted to sell it now because the upward trend surely can’t last, what are you going to do about Capital Gains Tax?
Conversely, if you hold a portfolio of equities you don’t need us to tell you what’s happened to their average value over the last couple of years. Many shareholders are sitting on capital losses which could be set off against capital gains if they sold their shares.
What if you don’t want to sell your shares? Isn’t the bear soon going to become a bull and won’t share prices soon be on the up and up? Well, you can still crystallize a loss by selling the shares and having them bought back by a spouse or ISA.
We’ve told you about “Bed and Spousing” and “Bed and ISA’ing” before but the message doesn’t necessarily hit home until the circumstances are right. If we’ve identified an opportunity for you call Simon Topperman or your usual contact partner on 0161 832 4841.
FILING BY INTERNET
Did you read that extra page about E-filing that came with your 2002 Tax Return. It probably ended up in the waste-paper bin (together with the Tax Return, no doubt). E-filing has not proved too popular.
Forgetting your personal Tax Return for a moment, if you’re an employer E-filing is rather more serious. There are plans to force you to submit your year end PAYE forms electronically. If you have more than 250 employees you’ll have to file electronically from 2004-05; more than 50 and you’ll have to do it from 2005-06. If you’ve less than 50 employees you’ll get incentive payments to E-file starting at £250 in 2004-05 tapering to £75 by 2008-09. The Government proposes that electronic filing of employer returns will be a universal requirement from 2009-10 onwards.
If you employ less than 50 people, hate the idea of E-filing but fully intend to still be an employer in seven years you might want to learn to love E-filing sooner rather than later. If you’re going to have to go there anyway you might as well collect your cash prize on the way.
AIM TO PLEASE
Of course you know what the Alternative Investment Market (AIM) is. It’s the bit you don’t bother reading at the bottom of the page which tells you how much your FTSE shares fell in value yesterday.
The AIM companies tend to be younger, potentially more dynamic, but potentially riskier than London Stock Exchange companies. You know we’re not going to comment about the value of any particular investment. Our point is that for Inheritance Tax purposes and Capital Gains Tax purposes AIM companies are classified as unquoted rather than quoted companies and accordingly bring certain tax advantages.
Just a thought.
DEFEASIBLE LIFE INTEREST TRUSTS
That’s a bit of a mouthful but who cares if it saves Inheritance Tax.
You probably know that if you make gifts during your lifetime they’re called potentially exempt transfers (PET’s) and don’t count towards Inheritance Tax as long as you survive seven years after the gifts are made. What is important is that you should not reserve any benefit from the gifts for yourself. You have to give the money or assets away outright.
A few weeks ago, a High Court ruling against the Inland Revenue left open what has been described as a “loophole”. It could allow you to gift assets into a Trust of which you are a beneficiary but the way it is structured could enable it to still be an effective Inheritance Tax gift if you survive seven years.
Remember that tax loopholes usually have a short shelf life. The Revenue usually finds ways of blocking them and accepted wisdom is that it won’t be long till this one’s blocked as well.
Just another thought.
DISPOSALS OF SUBSTANTIAL SHAREHOLDINGS
A company (let’s be original and call it company A) has invested in (predictably) company B. It sells its shares in B. Time-honoured rules tell us that any profit on the sale is liable to corporation tax as part of the company’s chargeable gains. Any loss is regarded as a capital loss.
That’s now changed. If company A now sells company B or part of its shareholding it may be exempt from tax. Both need to be trading companies and the shareholding being sold must be 10% or more of company B. The investment in company B must have been owned for at least 12 months. There are a few other rules to be complied with but, in simplistic terms, that’s it.
The original Inland Revenue Press Release on 26 March heralded the change as part of the Government’s programme to modernise the system of company taxation and to provide stability for business in the longer term. It told us that groups wishing to restructure for commercial reasons would now be able to do so without essential business decisions being constrained by the tax system. It pointed out that there had been extensive consultation with “business” before drafting the legislation. Can’t argue with any of that.
The implications of selling a substantial shareholding at a loss were by no means hidden but are easily overlooked. To put it simply, if company A sells its stake in company B in circumstances where its gain would not be taxable because of the new rules any loss which it suffers is not allowable by virtue of those same rules. This logically extends to “negligible value” claims where there is not necessarily any real disposal of the shares. For example, company A buys company B which turns out to be a “dud” and it wants to just close down company B and make a claim for loss relief against other gains on the basis that company B shares have become of negligible value. Not any more for corporate shareholdings of 10% or more in trading companies.
Suppose you’re a shareholder in company A and you’re thinking of investing in the shares of a new trading venture, company B, where there’s a certain amount of risk involved. Whereas previously you might have had no hesitation in investing in company B through the medium of company A you may now prefer to hold the investment directly assuming you can afford to run the risk of losing money. If it goes wrong at least you’ll get tax relief for the loss. If it goes right you can always think about selling the shares to company A at a later stage, perhaps paying an effectively reduced rate of Capital Gains Tax depending on how long you’ve held the shares in company B.
Of course it’s more complicated than we make it sound. There are other factors to consider such as the use of group loss relief if permitted by the size of the shareholding. All we’re saying is that as tax rules keep on changing there are constantly new implications. The Government’s Press Release might exhort you to take business decisions without being constrained by the tax system but, with respect, we’d disagree. Ask us about the tax implications of that business decision before you take it rather than telling us about it later.
Talking about the moving goalposts of corporation tax ………..
REFORM OF CORPORATION TAX
Only a few weeks ago (in the August holiday period, of course) the Inland Revenue brought out a consultation document entitled Reform of Corporation Tax.
It asks for comments on the possibility of major changes in three key areas:-
Capital gains and depreciation
The “schedular” system of tax
The differing tax treatment of trading and investment companies.
Comments are requested by 29 October. It may be a year or two before any of the proposed possibilities actually happen, if indeed they happen at all. If they do happen it could turn traditional tax planning on its head in some areas. We’re still ploughing through the document and we’ll probably have some comments to make. If you want to get in your tuppence ha’penny worth you can get a copy of the consultation document from the Revenue’s internet site or from the Visitors Information Centre in Bush House, London. Or if you prefer the soft option call Simon Topperman on 0161 832 4841. He should be able to identify the extent to which your company is likely to be substantially affected by the proposals and in what way.