How to boost businesses tax efficiently

Investing in smaller, start-up businesses can be more risky, which is why the government offers tax incentives through specialist schemes. 

When you’re selling a business or shares in a qualifying company, it’s fairly well known that it’s possible to claim entrepreneurs’ relief, which will help limit your capital gains tax liability to just 10%. What’s more, if assets are being sold because you need to replace them, you may be able to avoid CGT liability with an application for ‘rollover’ relief.

As the economy picks up, it may be that you’re looking to dispose of investments or non-business assets which are increasing in value. The problem is that, if you’re a higher earner, your gains will be taxed at 28%. Unsurprisingly, many clients ask whether there might be a way of lessening the blow. 

One tax-planning option is simply to use your spouse or civil partner’s annual exemptions, as well as your own. It’s usually a sensible approach, but the savings are never going to be huge. The joint maximum figure will be £22,000, so the most you can save is approx. £6,000. Also, if your spouse or civil partner does not already use the whole of their basic rate tax band then it might be possible to reduce tax on part of the gain to 18%.

Another possibility is that you take advice from an IFA and consider options such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS), which are designed to encourage support for small, unquoted companies.

The government recognises that if you invest in up-and-coming businesses, there’s a greater degree of risk attached, which is one reason why they offer relief on both income and capital gains tax, provided certain conditions are met.

With EIS, where the maximum investment is £1m, you can obtain 30% income tax relief on the total amount invested in the tax year (which can also be carried back to the previous year, if preferred). Remember, you can’t have been an employee or director of the business and your interest in the company must be less than 30%. The relief is deducted from your income tax liability, which can be reduced to zero, but no further.

On the capital gains tax front, you can defer payment by reinvesting in EIS shares up to one year before – or three years after – your liability arises. In fact, the tax can be deferred until the point you dispose of the EIS shares and can be deferred again if you make a new EIS investment. If the gain is still deferred at the time of your death, then it won’t come back into charge. What’s more, EIS shares are themselves exempt from CGT on their disposal, provided income tax relief was obtained on the investment and you have held them for a minimum of three years.

SEIS was introduced in 2012 and is designed to support companies that are perceived as slightly riskier investments. If shares are acquired within two years of the business starting to trade, 50% income tax relief is available on the total amount invested in the tax year (or, again, a previous tax year if that’s more desirable). In this case, the maximum investment is £100,000, providing relief of up to £50,000, which is deducted from your income tax liability. As with EIS, it can only be used to reduce your tax liability to zero.

SEIS shares can be exempt from capital gains tax, but the gain and the SEIS investment must be made in the same year, subject to limited carry-back rules. A difference with EIS is that up to 50% of the gains reinvested in the SEIS are exempt from CGT rather than simply being deferred.

The investments mentioned above can in some circumstances have Inheritance Tax advantages but that should be considered as part of a larger IHT planning exercise.

You can, when you plan…

Time is ticking away if you want to do some serious tax planning in this financial year.

 

With a general election on the horizon, taxation – and each party’s various policies regarding wealth – will be high on the agenda in the coming weeks and months. You may therefore be forgiven for thinking that the money that remains in your pocket is entirely decided by those in power. In reality, you might be more in control than you imagine. 

 

At this stage, we can only guess what changes to legislation will be introduced in the future. As such, planning can only be based on the here and now, starting with the approach of the end of the tax year. 

 

It’s hard to believe, so soon after the 31st January self-assessment bombardment, that there are only two months remaining of the 2015 tax year to plan and adapt.

 

Tax planning itself will vary in complexity between individuals, but there are a number of things that we all should look at before 5th April 2015 in order to ensure we don’t miss out:

 

 

Individual Savings Accounts (ISAs) 

 

Have you taken advantage of your full annual entitlement to these tax-free accounts? The regulations for 2014/15 were relaxed last summer, meaning that you have an annual allowance of £15,000 which can be invested however you choose. The ability to select between cash and/or stocks and shares gives you much greater flexibility than ever before.

 

 

Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) 

 

Investments in these schemes may bring an increased risk, but the tax breaks are attractive. Is now the time to consider whether the relief offered is worth the additional risk?

 

 

Pension Contributions 

 

Have you used your full annual allowance of £40,000? Is there any unused allowance from the previous three tax years that you could take advantage of too? Remember, relief from 2011/12 tax year must be used by 5th April 2015.

 

 

Personal Allowance 

 

With a tax free earnings allowance of £10,000 per person, it may well be that planning between spouses is necessary in order to obtain maximum advantage. At the other end of the scale, the personal allowance decreases by £1 for every £2 that your adjusted net income exceeds £100,000, giving nil allowances to an individual earning £120,000 or above. Could your adjusted net income perhaps be reduced via pension contributions and gift aid?

 

 

Capital Gains 

 

Remember to make use of your Annual Exemption of £11,000 before the end of the tax year. This exemption is per individual, so think carefully about the ownership of any assets that you intend to sell.

 

 

Capital Allowances 

 

Consider the timing of asset purchases. Would it be beneficial to buy earlier, in order to take advantage of the allowances at the earliest possible point in time?

 

 

It’s easy to see that it’s a really great time to take careful stock of your finances, but the suggestions above are only a starting point. Are you doing everything that you can to help yourself? Why not sit down with your accountant and draw up a plan for maximum tax efficiency?

 

 

Property a hot topic as CGT changes loom

Draft legislation is about to herald a new era in capital gains tax. The changes – due to come into effect in April this year – will have an impact on all non-UK residents who dispose of a residential property located in the UK. Any gains realised by either a sale or a gift will be subject to CGT, regardless of the value of the sale.

  

It’s not just individuals who will be affected by the change. The rule also applies to non-resident companies, partnerships, trustees and personal representatives of deceased non-UK residents. Although institutional investors (non-UK resident pension schemes or foreign real estate investment trusts investing in UK residential property) will be exempt, no reliefs or exemptions are generally available if the property is held for investment purposes, even if it has always been rented out. 

  

What’s more, the charge will apply to properties under construction and being adapted for residential use – including land that forms the garden or grounds of a residential building.

  

Only gains from 6th April 2015 will be charged. Normally, the property will be rebased to its market value at that date. Time apportionment can, however, be used to calculate the gain after 6th April or the gain and loss can be computed over the whole period of ownership.

  

Companies with properties already subject to Capital Gains Tax on Enveloped Dwellings (CGTED) for the entire period from 6th April 2015 to the date of sale, will not be subject to the new provisions.

  

Can Main Residence relief be claimed? 

If a nomination is made, it’s possible for Main Residence relief to be granted. The property does, however, have to be located in the same country in which the taxpayer is resident for tax purposes. It’s also essential that the taxpayer spends 90 midnights in the property during the tax year. 

  

Facts and figures at a glance

• The annual exemption amount (£11,000 for 2014/15) is available to non-resident individuals.

• CGT for non-resident individuals will be 18% at basic rate and 28% for higher rate taxpayers.

• Non-resident trusts will pay 28%, while non-residents will be charged at 20% and indexation allowance will be available to take inflation into account. 

If you are affected by these changes and would like to know more, please contact DNG Dove Naish. 

 

Own a second home? The taxman may be ringing the doorbell.

Don’t assume that the Revenue won’t investigate you for the profit on your rented property. A new campaign is under way and it’s time to take action.

According to HMRC, landlords may owe more than £500m in unpaid tax from the profit they make on renting out homes. Although there are 1.4m people who let property in the UK, half a million of them aren’t even registered with the taxman. It’s figures like these which have led to the creation of the Let Property campaign, in which the Revenue may investigate as many as 900,000 property owners renting out homes in the UK and overseas.

Although the news may come as a shock if you’re currently a landlord of a second home or investment property, it’s worth thinking calmly and seeing the initiative as an opportunity to perhaps get your affairs in order. 

You can make a voluntary disclosure to HMRC about any undeclared income by phoning the Let Property campaign helpline on 03000 514 479. Tell the Revenue that you want to fill out a notification form and they’ll then give you three months to calculate and pay what you owe. 

Many categories of individual landlord can benefit. It doesn’t matter whether you have a single property or more than one. You can be living abroad and renting out a property in the UK or doing the reverse. Specialist landlords – dealing in student or workforce rentals – can take advantage of the scheme, as can someone renting out their main home for more than £4,250 a year. 

It’s important to stress, however, that Let Property is not designed to be used by companies or trusts renting out residential property or anyone letting commercial property. 

If you have any queries, it’s well worth discussing your position with your accountant who can deal with HMRC on your behalf.