February Tax Tips & News

Welcome to the Benedicts Tax Tips & News monthly newsletter, bringing you the latest news to keep you one step ahead of the taxman.

If you need further assistance just let us know or send us a question for our Question and Answer Section.

We’re committed to ensuring none of our clients pay a penny more in tax than is necessary and they receive useful tax and business advice and support throughout the year.

Please contact us for advice on your own specific circumstances. We’re here to help!

Newsletter issue - February 07.

It has been widely reported that HMRC are now offering tax inspectors incentives of up to £2000 to meet their targets. This comes at a time when HMRC are under pressure to collect more tax in line with Government targets.

The top performing inspectors can now get a bonus of 3% while those with a good performance mark get a bonus of 1.8%. This information has been made available under the Freedom of Information Act.

Whilst HMRC has said this is a distortion of what is really happening, many tax experts believe it can only make the taxman more interested in making more enquiries with some inspectors possibly over-stepping the mark.

Newsletter issue - February 07.

When purchasing a business run through a Limited Company, a decision has to be made as to whether it is the assets and goodwill within the company that is being bought or whether it is better to purchase the shares of the company. In many situations it is the case that the buyer wants the assets but that the vendor wants to sell the shares. However, it has to be one or the other and here are some of the key points to note...

1. If you purchase shares you are taking over the company, warts and all. Any liabilities that later come out of the woodwork will be your responsibility. Warranties in the sale contract can help protect you but it means a more complicated sale contract and higher legal fees and relies on you being able to reclaim from the vendor, who by that time may have disappeared overseas in retirement.
2. By buying the assets you can claim capital allowances on the actual amounts you pay for plant and machinery, not on the reduced written down value they are at in the company tax computations.
3. By purchasing the shares you are purchasing the goodwill within the company and so when you subsequently come to sell the goodwill of the company yourself, you are effectively taking over the tax on the gain that occurred before you even bought the company.
4. If you are trading through a limited company and purchase intangible assets such as goodwill, you can claim tax write-downs on the purchase of those assets. This is not the case if you buy the shares.
5. Buying assets personally allows you to build up capital gains and only pay 10% CGT by using business assets taper relief. By buying the shares, the gains accrued are taxed within the company and you then have a tax problem in getting the funds out of the company and into your personal hands.
6. If the company has accumulated tax losses you will be able to use them to offset against future profits only if you purchase the shares.
7. If there is a property in the company, buying shares will reduce the stamp duty land tax payable from as much as 4% on the property to 0.5% stamp duty on the shares.

As one side in the transaction will often gain from a particular sale structure, you should make sure you know what you want and what it means to the other side to help in the purchase and sale negotiations. For a full tax appraisal considering the above and other issues on any business sale or purchase please contact us.

Newsletter issue - February 07.

There are single people, often widows and widowers with a valuable family home that want to pass it to their children but avoid IHT in the process. Whilst they still wish to live in the house, just giving it away to their children will not help their tax position.

For example, a widow with a house worth £500K and no other assets will pay 40% IHT on the amount in excess of £285K, making a tax bill of £86K.

However, by taking out a mortgage against the house for £215K, the net equity value of the house is reduced to £285K, which means IHT can be avoided altogether by gifting the cash from the mortgage to the children. The problem with this is that the widow still needs to live for another 7 years before the cash gift becomes completely IHT exempt.

An alternative is to invest the cash into assets that may be exempt from IHT so that IHT can then be avoided without having to give the assets away. For example an investment in business assets that qualify for Business Property Relief will be exempt from IHT after owning them for just two years. Such assets include shares in private trading companies including many listed on the Alternative Investment Market (AIM).

Consideration needs to be given as to how the interest on the mortgage is serviced and this itself may be tax deductible if structured correctly with the funds used to purchase business assets.

Newsletter issue - February 07.

Investment bonds are popular forms of investment with higher rate taxpayers who believe they will become basic rate taxpayers at a later time, often in retirement. These are the key tax advantages of investment bonds...

1. All income generated from investments within the bond is taxed within the bond at rates applicable to life assurance companies and is not taxed on you until you take money out of the bond.
2. You can make withdrawals of 5% of your original investment each year for 20 years without incurring an immediate tax liability and if the 5% is not taken in one year it can rolled up to be taken in future years. HMRC deem that 20% basic rate income tax has already been paid and only if you take more than the 5% would a higher rate taxpayer be liable to an additional 20% tax on the excess, subject to top slicing relief mentioned in the next point.
3. The gain on the final encashment is assessed in the tax year when it occurs. If there have been no withdrawals this is simply the encashment proceeds less the original cost. Any 5%'s encashed each year are added to the encashment proceeds in working out the gain. However, top slicing relief is available which takes the gain and divides it by the number of complete policy years that the policy has been held for and if when added to your income in that tax year does not make you a higher rate tax payer, there is no further tax to pay. So doing this in a year when you are a basic rate taxpayer, avoids all tax on the investment. If part of it is liable to higher rates, you pay the additional 20% tax on that part multiplied by the relevant number of years.
4. It is possible to switch investments within the bond without incurring any tax liability, unlike normal share and unit trust investments.
5. It is also possible to take out a number of smaller bonds to cash them in at different times to suit your tax position.
6. The over 65's should be aware that the final encashment is treated as income for age allowance purposes although the cashing in of 5% capital each year does not and so can help increase age allowances by replacing present investment income with capital encashments.

Newsletter issue - February 07.

Q. Can I reclaim VAT on car parking charges without a VAT invoice?

A. Yes you can if it is under £25 apart from on-street meter parking which is outside the scope of VAT. In addition, no VAT invoice is required to reclaim VAT on single transactions under £25 for any of the following...

1. Phone calls from public or private telephones.
2. Purchases from coin operated machines.
3. Road tolls.

Q. We've signed up for a lease and have got a rent free period in exchange for doing work on the building. What's the tax position?

A. Rent paid normally counts as a deductible tax expense but in general improvements of a capital nature to a building will not give you any tax deduction. However, it may be possible to classify some of the expenditure as repairs if it is of a repair nature as opposed to being of an improvement nature and so claim a tax deduction for that. If the building is an industrial building you may be eligible for Industrial Buildings Allowances which will allow you to claim a small part of the cost each year spread over many years. An alternative way to speed up the process of getting a tax deduction is to take the whole amount of rent you will pay over the lease term of say 10 years and divided this by 10 and claim this amount each year including the first year, as opposed to claiming the amount paid each year.

A final option would be to get the landlord to still charge you the rent and then you recharge him for the improvement costs. The landlord will however be in the same position of any improvement costs not being tax deductible and if you are VAT registered you will have to charge VAT which the landlord will only be able to recover if he is VAT registered.

Q. I understand that an effective tax strategy for an owner managed company is for the director to take a low salary with minimal national insurance and to take everything else in dividends. However, is there not a problem with the minimum wage legislation?

A. The Taxman has made it clear that the minimum wage legislation only applies when there is an explicit contract of employment between the company and the director. Therefore, to avoid the minimum wage legislation it is simply a case of ensuring you do NOT have such a contract in place. In most small companies this would be the position anyway. When adopting this strategy you must ensure proper procedures are followed when paying dividends or there is a risk of it being attacked by the Taxman. It's also the case the the minimum wage legislation doesn't apply to family members but in the case of a Limited Company it does not have any family members and so to keep the salary of a spouse at a low level you should consider making them a director.

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