Remember Mungo Jerry and their claim that……..
“In the summertime when the weather is high
You can stretch right up and touch the sky.”
This summer, even if the weather may not have been too high, the passing of Finance Act 2009 holds out the prospect that next year tax rates for some people will be high even if they don’t quite touch the sky. That prospect is the main focus, although not the only focus of our Summer 2009 Square Circular.
If you want more details about any of the matters we’ve mentioned in this Issue, or indeed, about any of the matters we haven’t mentioned please do contact us on 0161 832 4841.
A warm welcome to Laura Mullan, a maths graduate from Manchester University, who joined us at the beginning of August on a graduate training contract.
A second graduate trainee is due to join us next week. We wish them both every success and hope they enjoy being with us.
Although money is still tight we are still managing to raise finance for clients from banks. If you are considering raising new finance or want to discuss your borrowings, please contact Adrian Berg or any of our partners.
INCOME TAX RATES “STRETCH RIGHT UP”
First, let’s have a few bald facts about what’s going to happen after next April:
• A top rate of income tax of 50% will hit you if your income exceeds £150,000;
• At that level of income your income tax rate on dividends increases from 32.5% to 42.5%;
• If your income exceeds £100,000 your personal allowance (£6,475 in 2009/10) will be tapered away at a rate of £1 for every £2 of income over that level;
• Trust income tax rates will also increase so as to be in line with the very top rates of income tax i.e. 50% for most types of income and 42.5% for dividend income.
If you think the bad news can’t get worse, don’t forget what’s in store after April 2011. The traditional tax shelter of pension contributions has afforded tax relief at your top rate of tax. Taxpayers with income over £150,000 expecting relief for pension contributions at their top rate of income tax can think again. Your relief will be tapered down to 20%. And don’t try to be clever and fund contributions now when you’ll still get 40% rate relief for them. HMRC have already thought of that with some complicated anti-forestalling measures.
If your income amounts to less than £100,000 or £150,000 we know how much your heart bleeds for those poor unfortunates who have income at a slightly higher level than yours. Just so you don’t think you’ve been forgotten, from April 2011 the employee, employer and self-employed rates of National Insurance contributions increase by 0.5%.
That’s the problem. So, what are you going to do?
One alternative, which we understand is being increasingly considered by non-domiciled individuals having difficulties with the changes targeted at them in 2008 is simply to wave goodbye to Old Blighty. That solution is neither feasible nor desirable for the substantial majority; so you might have to fall back on that well worn strategy of planning:
– Those with income between £100,000 and £112,950 who will pay an effective marginal rate of tax of 60% because of the loss of personal allowances may want to ensure that they fall just outside that particular tranche of income;
– High earning self-employed individuals may wish to consider incorporation;
– Shareholders/directors of companies may wish to consider advancing dividends/bonuses before April 2010 as long as the payment of tax cash flow implications are not forgotten;
– In the case of family companies a dividend policy favourable to lower earning family members may be considered as long as it does not fall foul of the “settlement” provisions;
– In some cases the use of Employer Funded Retirement Benefit Schemes or Employee Benefit Trusts may be appropriate;
– Strategies that re-categorise income into capital may reduce tax from 50% to 18%;
– Strategies which create losses allowing a claim to carry those losses sideways or backwards may be possible although the more artificial and the less commercial such schemes are, the more they are likely to be challenged by HMRC;
– Investment in EIS companies or VCTs.
The options vary from standard cautious planning through medium risk strategies to high risk strategies which we wouldn’t necessarily recommend. Why not come and have a chat with us about your options – time is running out!
We mentioned, earlier, the increased rate of income tax which trusts will have to pay. April 2008 saw the introduction of adverse Inheritance Tax rules for trusts. There is a distinct feeling that the Government is not overly impressed with the concept of trusts which they seem to regard as a tax “dodge” and would really like to tax them out of the water.
Using a trust need not always be tax disadvantageous and sometimes, even if it is, it can be a reasonable price to pay for what you achieve in non-tax terms. The trouble is that sometimes people park assets in a trust because it seems a good idea at the time but then don’t actively manage the trust and don’t stop to think whether the trust is still achieving what it originally set out to achieve and whether the terms of the trust should be varied.
If you are already a trustee of a family trust and want to review the position or are interested in settling property on trust please call either our tax partner, Simon Topperman, or your usual contact partner.
A couple of years ago HMRC gave recalcitrant taxpayers the opportunity to come clean about income from offshore bank accounts. Penalties for those who wanted to own up were limited. At the time it was billed as a “now or never” measure. Spill the beans now and pay only a 10% penalty; keep quiet at your peril!
Apparently, it was a bit of a money-spinner last time. HMRC raised £400 million out of 45,000 disclosures and it only cost them £6 million or thereabouts to do it all. Not a bad return. Why not try it again?
Guess what? That’s exactly what they’re doing on the back of information from banks, with branches in jurisdictions such as the Channel Islands and Luxembourg. This time it doesn’t just involve the major high street banks like last time. HMRC are seeking information from private banks, investment banks, building societies and the like. Apparently more than 300 banks have been ordered to hand over details to HMRC about customers with offshore accounts. In addition to but separate from this disclosure opportunity the governments of the UK and Liechtenstein have signed an agreement to “encourage” UK residents to disclose their investments in the principality.
Details of the new round of “confessions” started to emerge around July. You will have until 31 October to notify HMRC that you want to make a disclosure and then until
31 January or 12 March 2010 (depending upon whether your disclosure is on paper or electronic) to do it and pay the tax, interest and penalty arising. The penalty will be fixed at 10% except for those who received a letter from HMRC during the 2007 Offshore Disclosure Facility who will have penalties fixed at 20%. Those who still won’t disclose voluntarily will have a 30% penalty when HMRC catch up with them.
“Nuclear physics is much easier than tax law.
It is rational and always works the same way.”