Inheritance Tax – How to Protect Your Money

When an individual dies, any belongings that they leave behind, collectively known as their estate, become subject to inheritance tax. Their estate could include:

  • money
  • property
  • vehicles
  • personal possessions
  • shares and investments

An individual’s estate could also include money or other assets that they have gifted and upon which inheritance tax is chargeable under the following conditions:

  • gifts made by the deceased individual within the seven years before their death
  • gifts made by the deceased where they benefitted in some way from the gift and that benefit was still current at the time of their death
  • certain gifts made during their lifetime, such as transfers of cash or assets into a trust

Inheritance tax may also come into play in the case of a trust arrangement where the beneficiary does not have absolute rights over the trust-held assets or any resulting income. In this case, the trustees would become liable to pay inheritance tax.

A trust is required to make a tax payment at a corresponding rate on the tenth anniversary of the setting up of the trust, the decennial charge. A further tax payment is made where any assets are sold or otherwise leave the trust, and should the trust be closed. Both payments are referred to as exit charges. Neither of these charges are connected with inheritance tax.

What exemptions and reliefs may be applied to a deceased person’s estate?

The executors of a deceased estate are responsible for paying inheritance tax at a rate of 40% of the estate value. When calculating whether there is an inheritance tax liability, the executors should take into account the following factors:

  • the value of the estate, including any gifts made within the seven years before death, that amounts to more than the nil rate band
  • transferable nil rate band
  • residence nil rate band
  • other applicable reliefs or exemptions

The current inheritance tax nil rate band is £325,000. This means that if the deceased estate is valued at more than £325,000, there is an inheritance tax liability.

Transferable nil rate band

Where the deceased is survived by their spouse or civil partner, the value of any portion of the deceased’s nil rate band that is not used may be transferred to the surviving partner’s nil rate band.

Residence nil rate band

This nil rate band relates to the residential property of the deceased and only applies to deaths that have occurred since 6 April 2017.

The first £100,000 of the value of the deceased’s home will be exempt from inheritance tax should the property be inherited by a direct descendant.

It is planned to increase the value of the residence nil rate band by £25,000 each tax year. This means that by the 2020/21 tax year, this relief will stand at £175,000.

There are however, certain conditions:

  • The property in question must have been used by the deceased as their home for a period of time.
  • Other properties that the deceased owned at the time of their death will not be eligible for this relief.
  • Where the deceased had more than one residence, ie. more than one property that they lived in as a home, only one of those properties will be eligible.
  • The residential property in question must be left to a direct descendant, such as a child, grandchild, stepchild, adopted child, foster child, or spouse.
  • Where the deceased estate is worth more than £2 million, there will be a reduction made to the residence nil rate band of £1 for every £2 in excess.

Spouse exemption

Should a surviving spouse or civil partner receive any assets from the deceased estate by will, joint ownership, or other disposition, these assets will not be chargeable for the purposes of inheritance tax.

Business property relief

The taxable value of any business assets that form part of the deceased estate may be reduced where business property relief is applicable. Assets that are eligible for this form of relief include:

  • a business or an interest in that business – rate of relief 100%
  • unquoted securities and unquoted shares amounting to control of an unquoted company – rate of relief 100%
  • unquoted shares listed on the Alternative Investment Market – rate of relief 100%
  • quoted shares which amount to control of a company – rate of relief 50%
  • land, property, machinery and plant, used by a company or partnership – 50%
  • land, property, machinery and plant, used by a beneficiary’s business – 50%

Eligibility for business property relief relies on the fact that the deceased owned the asset, or business, for a minimum of 2 years before their death.

The following are not eligible for business property relief:

  • businesses dealing mainly in securities, land or property
  • businesses who make or hold investments
  • not-for-profit organisations

Where the business is being sold, this form of relief is not available unless the new owner of the business will carry it on and payment to the estate is made largely of company shares.

Equally, business property relief is not available where the business is closed down, except for specific corporate reorganisations.

Agricultural property relief

This type of relief is available on some agricultural property in the UK, the Isle of Man, the Channel Islands, or in European Economic Area countries.

Eligible agricultural property includes land or pasture used for the following:

  • growing crops
  • rearing animals
  • stud farms
  • the planting and harvesting of trees
  • unfarmed land under the Habitat Scheme
  • unfarmed land under a crop rotation scheme
  • land associated with the value of milk quota
  • farm property (cottage, house or other building) appropriate to the farming activity
  • certain agricultural securities and shares

Agricultural property relief does not cover farm equipment and machinery, derelict buildings, livestock, harvested crops or any property linked to a binding sales contract.

This relief is applied to the ‘agricultural value’, that is, the value of property whose sole purpose is agricultural. Where a farmhouse, for instance, is worth more than the agricultural value, no relief will be available on the excess value.

For a farm house or cottage to be eligible for relief, it must be the residence of:

  • an individual involved in farming
  • a retired farm worker
  • or the spouse or civil partner of a deceased farm worker

Further eligibility rests on the condition that they be a tenant under an employment related contract or a protected tenant with statutory rights of residence.

Any property must have been owned by the deceased and occupied by them for the purpose of agriculture for at least two years before their death. This two year condition also applies where the property was occupied by a company whom the deceased controlled or by the spouse or civil partner of the deceased. Where anyone else occupied the property instead, this two year period stretches to seven years.

The value that is eligible for relief does not include any mortgage on the property or debts secured against it.

The Agricultural Property Relief rate is 100% in any of the following circumstances:

  • The property owner farmed it in hand.
  • The property was rented to a third party on a short term grazing licence.
  • The property was subject to a tenancy dating from 1 September 1995 or later.
  • The deceased owned the property before 10 March 1981 and it was rented before that date, the property was eligible for relief under the old estate duty rules, and the deceased had no right to vacant possession between 10 March 1981 and their death.

Where none of the above apply, the Agricultural Property Relief rate is 50%.

The connection between inheritance tax and gifts

Often people forget to take gifts into account when considering inheritance tax, so how exactly could making a gift impact on inheritance tax liability?

Potentially exempt transfers

Should the person making a gift live for seven years afterwards, that gift becomes exempt from inheritance tax.

Trust-held gifts

Any gift made into a trust is generally seen as a chargeable lifetime transfer, however, there may be no inheritance tax liability where assets transferred into a trust in a seven year period are of less value than the nil rate band or other reliefs are applicable.

Annual exemption

The annual exemption allows gifts to be made up to a value of £3,000 per year without incurring inheritance tax. Unused annual exemption may be carried forward to the following year.

Wedding or civil ceremony gifts

Wedding or civil ceremony gifts may be made each year without incurring inheritance tax up to the following amounts:

  • for your child, up to £5,000
  • for your grandchild or great-grandchild, up to £2,500
  • in all other cases, up to £1,000

Gifts to political parties and charities

This category of gift incurs no inheritance tax.

Normal expenditure from income

Where your income amounts to more than your usual expenditure, it may be possible to gift all or part of the remaining amount without incurring inheritance tax under the following conditions:

  • the gifts are a regular part of the donor’s expenditure, and
  • the gifts are from the donor’s income, and
  • the donor is left with sufficient income to maintain their current lifestyle

Gifts up to a value of £250

There is no limit on the number of gifts up to the value of £250 that a person may make in any tax year.

Life assurance

When planning ahead for the possibility of inheritance tax, a life assurance policy may go some way towards helping with this. However, this will depend on personal circumstances and the specific policy.

Deed of Variation

It may be possible to change the terms of a will within two years of a death, where all beneficiaries are in agreement. This Deed of Variation, usually drawn up in the form of an election, may prove effective in reducing inheritance tax liability.

Inheritance tax – final word

It is always advised that once you have drawn up a will, you investigate all available paths that may lead to a reduction in inheritance tax for your heirs, and that you continue to keep up to date with any changes in inheritance tax legislation which may impact your estate.

How to Determine your Estate Planning Needs

To make sure that your intended beneficiaries reap the maximum rewards from your estate, it is always recommended to fully investigate your future estate planning needs and aims to ultimately guard against any part of your estate benefiting other parties, such as HMRC.

However, there is no single answer to handling your estate planning needs because no estate is the same. Every case is individual.

Regardless of the value of your estate, or the assets that make it up, there are many factors that can threaten your wealth, from taxation, to commercial creditors, or even more personal circumstances such as disagreement between family members. Any of these factors could have a negative effect on how your estate is handled after your death, and even during your lifetime.

It will be almost impossible to plan ahead for certain factors, whilst other possible threats to your estate can be foreseen. Whatever the factor, examining your estate planning needs well in advance is always the best way to safeguard the interests of your heirs.

One of the biggest threats to passing on your estate is that of Inheritance Tax, generally weighing in at 40%. At its current lower level, Inheritance Tax is a concern for many people, not just those with a high level of wealth.

Add to this the fact that HMRC may seek to restrict reliefs that could alleviate the level of Inheritance Tax payable, and it is easy to see why planning ahead and taking early advantage of any of these reliefs is important.

By examining your estate planning needs and objectives well ahead of the time when there is any need to act, you can identify the various ways to protect your estate and the interests of your beneficiaries.

What are your aims?

Knowing exactly what you want to achieve is the first step towards informing your estate planning needs, for instance:

  • Is your main aim that your estate be handled with tax efficiency in mind?
  • Are there particular assets that you wish to protect?
  • Are there conditions to a family member inheriting from your estate?
  • Do you wish to protect the interests of your beneficiaries overall, regardless of what this may mean for certain assets?
  • Do you wish to pass on a family business?
  • Is it necessary to protect your estate against bankruptcy after your death to safeguard your beneficiaries’ inheritance?
  • Does your estate include property that you want to pass on but with the least inheritance tax to pay as possible?

Once you’ve identified your aims for your estate, you can then put corresponding plans in action.

Tax efficiency

Planning ahead for how your estate is taxed after your death is often a balancing act between protecting your estate from taxation and maintaining an acceptable level of control and access to your finances and assets while you are alive. Unfortunately, a higher level of tax efficiency generally means a lower level of accessibility.

So what methods can be used for estate planning in the light of tax efficiency?

Wills

A will is an efficient method of transferring assets, including finances, to your heirs when you die. Generally, the higher the value of an estate and the more complicated it is, the greater the need to take professional advice in drawing up a corresponding will.

A will allows you to:

  • state your intended heirs, guarding against claims from individuals who may feel they have a claim on your estate
  • stipulate the conditions of inheritance and the apportionment of estate held assets
  • remove the burden of decision making from your family and friends on how your estate should be handled

A will should always be kept relevant to your current circumstances and updated as changes occur.

Lifetime gifts

It is possible to reduce the value of your estate by making a lifetime gift to a beneficiary. Certain gifts are exempt from inheritance tax, for instance, those made for maintenance of dependants and gifts made up to the value of £3,000.

Trusts

Trusts are a tax efficient method of protecting assets, limiting tax liability to the individual though the transfer of assets to the trust, and thus reducing the estate.

The benefits of using a discretionary trust include:

  • a level of control over the assets, including finances, placed in the trust and any income from those assets
  • control over who benefits from the trust
  • assets held in a trust are not seen as part of your estate
  • any gain made from the increased value of the assets is outside your estate for taxation purposes

The main tax benefit is where assets are gifted into a trust. Such gifts may, however, incur inheritance tax and capital gains tax may also apply. Further tax implications may arise as a result of the category of asset and the particular situation.

When transferring assets into a trust, rather than gifting them, there may also be an inheritance tax and capital gains tax implication. Should the value of a transfer of assets into a trust be higher than the nil rate band, £325,000 as of January 2019, and where business property relief is not applicable, an immediate inheritance tax liability of 20% will be incurred. There will be no further inheritance tax payable, should the donor live for another seven years. Should the donor die within seven years, however, inheritance tax will generally apply.

Trusts are subject to their own rate of inheritance tax (6%) at 10 year intervals from the setting up of the trust, or when capital is paid out from the trust.

The transfer of an asset to a trust is regarded as a disposal in a capital gains tax context, but it may be possible to defer any resulting gain. Generally, capital gains tax will not apply where the transfer is of cash alone.

It may be possible to transfer assets to an employer trust to avoid inheritance tax or capital gains tax, but this would depend on the details of the transfer, donor, and other circumstances. Using an employer trust in this way could still prove useful for a family investment company.

Business relief and business property relief

With regard to Inheritance Tax, business property may be liable for Business Property Relief. Generally, 100% business relief is available where a deceased individual owned a business or had an interest in that business, and 50% relief is available on land, buildings or machinery.

Equally, shares in an unlisted company and shares controlling over 50% of voting rights of a listed company may qualify, once they have been owned for more than two years.

Agricultural property

Certain agricultural property may qualify for Agricultural Relief. Such agricultural property includes land used to grow crops or rear animals, and farm buildings that are in current use.

Nil rate band

This is also known as the inheritance tax threshold. As at January 2019, the basic nil rate band is £325,000.

A double nil rate band can be brought into play where the deceased transfers their complete estate to their spouse or civil partner at the time of death. The surviving partner will receive the deceased’s nil rate band on top of their own, and therefore when that partner dies, their estate will benefit from a double nil rate band.

Since 2017, there has been an additional Residence nil rate band available for the passing of property to a direct descendant. For the 2018/2019 tax year, this amount is £125,000, rising in 2019/2020 to £150,000, and then in 2020/2021 to £175,000. Further to that, it is intended to increase the nil rate band in line with the Consumer Prices Index.

Once the Residence nil rate band has been taken into account, the standard nil rate band can then be applied to the remainder of the estate.

For estates that are valued at a net amount of over £2 million, the Residence nil rate band will be subject to a tapered withdrawal.

Family partnerships and family investment companies

Investment assets transferred into a family trust will often incur a heavy inheritance tax liability, so the use of family partnerships and family investment companies may prove more tax efficient.

Family partnerships, whether limited liability partnerships or limited partnerships, are often used to protect family assets in the context of capital gains tax and stamp duty.

Family investment companies, however, are more often used when the asset in question is cash. The transfer of cash to a company generally does not incur capital gains tax or stamp duty. Where property is transferred, however, stamp duty could be incurred, and a transfer of any chargeable assets could equally incur capital gains tax.

When shares in a family investment company are gifted to family members, a tax liability will generally only arise where the donor does not survive for seven years after the gift is made.

Pension schemes

The use of a pension scheme can be extremely tax efficient and as such, it is recommended as a valuable tool in your estate planning considerations.

Keeping your estate planning up to date

Over the years, your personal circumstances, assets and estate planning needs are sure to change but alongside this, tax legislation will is also likely to be altered.

To ensure that your estate planning meets the needs of your changing requirements and takes best advantage of any changes in tax law, it is always recommended to regularly review and update your plans.

How Does a Trust Protect Personal Assets – An Overview

When considering asset protection, there are many tools and paths open to you. One specific option is that of a trust.

Trusts have historically been used for the purpose of asset protection, but have also been linked with tax planning and often tax avoidance. Nowadays, the likelihood of tax avoidance through the use of a trust is relatively rare due to the almost complete removal of any related tax benefits to UK residents or domiciled persons.

So are trusts still relevant nowadays and in what context could a trust protect personal assets?

The answer to these questions is a resounding yes, perfectly demonstrated where a trust is used to protect assets from the possibility of a failed marriage, from children who may squander away capital assets, or even commercial creditors.

A trust may be used to gift shares, cash and other assets, under specific tax rules, allowing the donor to retain some control of their gift and not necessarily incur an immediate tax liability. Furthermore, the beneficiary involved may receive an income from the trust-held assets, for instance, dividends from shares placed in a trust. The trustees retain control and thus protect the gifted assets from the beneficiary, creditors and under certain circumstances, tax.

Assets cannot, however, be placed in a trust once a creditor has made a claim on them.

What are the tax issues involved in transferring assets into a trust?

Generally, gifting of assets will have a tax consequence. Where the asset is chargeable and stands at a gain, this will incur a capital gains tax liability. Chargeable assets do not include cash and there are several other exempt assets.

In certain cases, a transfer of a business asset may be eligible for holdover relief under the condition that the person receiving the business asset signs a joint election with the donor, agreeing to take on the gain once the asset is sold. In this situation, no tax liability will be incurred.

Where an asset is transferred to a trust, the gain on an asset may be held over under the following conditions:

  • The trust is UK resident.
  • The trust is not settlor interested.
  • Minor children of the settlor will not benefit.

For example, a property which stands at a gain is transferred to a trust. The trustees agree to take over that gain with the understanding that should they sell the property, they will pay the incurred tax. Alternatively, where they assign the property to a beneficiary, the trustees and the beneficiary will sign a joint election.

For the purposes of inheritance tax, it is often more straightforward to simply make a gift. Should the donor live for more than seven years after the gift is made, they will not incur inheritance tax. If they do not live past the seven years, the gift is added to their estate on death and becomes subject to inheritance tax. Any inheritance tax must always be considered alongside any reliefs that may apply.

Alternatively, where the gift is made by transferring it to a trust, the transfer becomes a chargeable lifetime transfer. A bare trust may not be used in this way. Where the value of the asset is more than the nil rate band, and once any reliefs have been taken into account, any excess will incur a 20% inheritance tax liability at the time of the transfer. Should the donor die before seven years has passed, a 20% tax liability will be incurred at that point also.

What kind of trusts are there?

When considering using a trust for asset protection, it is important to understand the different kinds of trusts available and how useful each of those could be to you.

There are several kinds of trust available but the most commonly used are:

Bare trusts

This is the simplest form of trust, with the beneficiaries and arrangements for distribution of capital and income defined from the outset. The bare trust offers no flexibility to change either of these factors at a later date, for instance, to add a beneficiary such as when a new child is born.

A bare trust demands regular meetings and communications between the trustees to discuss investment of trust funds, but they do not have the power to make any changes to the initial conditions of the trust, such as distribution of income. This means that the administration of a bare trust is generally straightforward and simple.

This type of trust offers little opportunity to protect assets because the beneficiaries are deemed to have ownership of the trust-held assets and any derived income or gains, for tax purposes.

Once a beneficiary reaches 18 years of age, they gain control of any trust-held assets, or of their share of the assets.

Bare trusts do, however, offer a number of advantages, including the fact that any gift made into a bare trust becomes a potentially exempt transfer. Should the settlor survive seven years after, the gift will not be subject to inheritance tax because it will not be seen as part of their estate.

Discretionary trusts

A discretionary trust, as the name points to, is one where there is a level of ‘discretion’ involved, in this context, the discretion of the trustees.

This kind of trust offers the flexibility to alter the original arrangements made when the trust was formed, for instance, adding a beneficiary or changing the arrangements for distribution of gains. However, any change made must be in the best interests of the beneficiaries.

This flexibility makes the discretionary trust advantageous in regard to protection of assets. However, a discretionary trust is generally not a tax efficient structure.

Discretionary trusts are often used with regard to family businesses, subsequently holding shares, controlling any income from those shares, and generally paving the way to hand down the business to the next generation. A discretionary trust used in this context can also protect the trust-held capital and assets from external threats, such as a failed marriage or creditors.

The added flexibility of a discretionary trust, however, does demand more involvement from the trustees, can be more complicated to run, and often is more expensive to operate than other forms of trust.

What about offshore trusts?

As changes in UK tax legislation has reduced the possibility of tax avoidance through the use of a trust, offshore trusts have been similarly affected and therefore offer very little tax benefit to UK residents and domiciled persons.

The situation is different, however, for non-UK domiciles and non-UK residents. For these individuals, offshore trusts still offer a level of tax efficiency. However, the use of offshore trusts is not clear-cut and must be approached with caution.

Changes in UK tax legislation have less consequence for offshore trusts when it comes to protecting assets.

One benefit of using an offshore trust is the high level of protection of the trust-held assets from creditors. The reason for this high level of protection is the fact that the trust, by its nature of being ‘offshore’, will likely be subject to the tax and legal laws of more than one country or territory.

However, the rules for protecting assets through the use of an offshore trust is complicated and consideration must be taken of whether the trust, through a settlor or beneficiary, could be proved to have close ties to the UK, and hence have a UK tax liability with regard to income or gains.

Whether you are thinking of entering into a trust, or already have a trust in place, it is always advised that you take appropriate professional advice to ensure you are fully aware of all tax and legal implications.

How does a trust protect personal assets – final thoughts

Protecting your assets is a complicated tax planning process, especially where residence or domicile comes into play.
When considering whether a trust would be an effective structure to use for asset protection, it is always recommended to investigate how the related tax and legal implications will affect your personal situation.

How do Employee Share Schemes Work?

Many employers offer employee share schemes in a bid to not only attract top talent, but to retain that talent by ensuring that both employee and employer interests are on the same path.

With strict and detailed HMRC legislation to adhere to, however, it is important to fully plan an employee share scheme before it is put into place to ensure tax compliance.

So how do employee share schemes work? Simply put, an employee share scheme offers company shares to employees at a set price within a defined time period, under either an approved scheme or an unapproved scheme.

Approved schemes, including Save As You Earn (SAYE), company share option plans (CSOP), share incentive plans (SIP), and Enterprise Management Incentives (EMI), are generally a tax efficient option because due to HMRC approval of the scheme, employees may not have to pay related income tax or national insurance.

Unapproved schemes, including long term incentive plans and growth share plans, that are without HMRC approval, do not benefit from the same tax relief, although they may still offer a level of tax efficiency.

Each category of scheme has its own rules and suitability and as such, it is always advised to take professional advice before entering into one, whether as an employee or an employer.

Unapproved employee share schemes

Under an unapproved employee share scheme, employees may be given the option to purchase shares in their employing company at an agreed price in the future.

An unapproved employee share scheme may be selective, in that shares are offered to specific employees, or a specific category of employee, only.

The potential to an employee of becoming a shareholder in their company is often used by employers as a motivation tool to achieve performance targets.

Unapproved employee share schemes do not carry the approval of the HMRC and the related tax benefits, however, they do offer more flexibility and control to the participating company than an approved scheme.

An unapproved scheme could be put in place where a company cannot comply with HMRC share scheme approval rules, such as the scenario where an employer wishes to grant share options in excess of those allowed in an approved scheme.

Where the share option has been exercised by an employee within ten years of it being offered, there will generally be no tax or national insurance liability.

It is possible to set the share price below the market value, but this will incur income tax when the share option is exercised. One option is for the employee to sell some of their newly acquired shares to pay this liability, however, many employers will make a bonus payment to cover this charge.

Capital gains tax may be incurred by the employee should the shares be disposed of at a profit. This will be calculated by comparing the sale price of the shares with the market value of the shares when they were originally acquired by the employee.
The choice of whether to set up an unapproved scheme, and in what form, will depend on the circumstances of the company and the aims of the scheme. This is a complex decision to make and it is always advised that professional advice is sought.

There are several options on what form the unapproved scheme could take, including:

Growth share plans

This form of plan is employed to reward particular members of staff for an increase in the company’s value. The employee is offered shares in their employing company, without investment, that will only provide income or dividends once the value of the company passes a specified amount.

Generally, a growth share plan is tax efficient for participating employees in that it does not incur income tax or national insurance.
Long term incentive plans (L-TIPs)

These free shares are used to reward particular members of staff for achieving their performance targets and to retain them as an employee.

The shares are held in an Employee Benefit Trust which is arranged and overseen by the company. When an employee achieves their performance target, they have the option to:

  • allocate the shares,
  • transfer the shares,
  • sell the shares, or
    take beneficial ownership of the shares.

Should the employee not meet their performance targets, or leave before their performance targets have been achieved, they will lose the L-TIPs benefit.

Employees will generally incur income tax on any L-TIPs they own, and there may also be a national insurance implication for both the employee and the employer. Finally, there may be deductions against chargeable profits in the context of corporation tax.

Entrepreneurs’ Relief

When disposing of shares, Entrepreneurs’ Relief can be used to reduce the capital gains tax calculation from 18% to 10%, chargeable after taking into account the employee’s tax free allowance, £11,700 as at February 2019.

An employee may only use Entrepreneurs’ Relief for gains up to a maximum of £10 million. Once that amount of gains has been claimed for, this type of relief can no longer be used.

Eligibility for Entrepreneur’s Relief relies on the following:

  • the shareholder owns a minimum of 5% of the company’s ordinary shares and has a corresponding voting power
  • employment with the company, or an office holder of the company such as a company secretary
  • the company is largely a trading company or a holding company of a trading company
  • the shareholder has owned the shares for a minimum of one year

The factor of 5% ownership of the company’s ordinary shares and corresponding voting power means that Entrepreneurs’ Relief generally isn’t available to employee shareholders, although this may not always be the case.

Approved employee share schemes

Due to the fact that these types of schemes carry HMRC approval, they must comply with the related statutory laws. The benefit of an approved scheme, however, is that no tax is incurred at the point of the share option being exercised. It is only if the shares are sold, that tax may become liable.

There are numerous approved share schemes available:

Company share option plans (CSOP)

Under this type of scheme, share options are offered to employees at a set future date. The shares are offered at market value and granting of the share options may be dependent on the employee meeting performance targets. Share options up to £30,000 in value may be offered.

Any CSOP must receive approval by HMRC and agreement to the market value of the shares being offered.
CSOPs are discretionary and targeted at particular members of staff, leading to the popularity of this type of employee share scheme with family or owner-managed companies.

CSOPs are not available to employees owning over 25% of the company.

Share options must be exercised between three and ten years after being granted. Generally, income tax and national insurance will not be incurred as long as the share options are exercised after three years, although capital gains tax will come into play should the shares be sold.

Enterprise management incentives (EMI)

EMI schemes are generally best suited to:

  • small, independent companies
  • companies with gross assets valued at £30 million or less
  • companies who have 250 employees or less

EMI schemes are intended to be used as a tool for smaller companies to attract top talent individuals and keep them in their employ.

Approval from HMRC is required for an EMI scheme but it is not necessary to obtain that approval before setting up the scheme.

Instead, HMRC must be informed no later than 92 days after each share option is granted.

Save as you earn (SAYE)

SAYE schemes must be HMRC approved and made available to all employees under the same rules and conditions, allowing employees to pay into a savings scheme with the intent of using those savings to later pay for company shares.

Employees agree to a savings contract for a period of three or five years, with the chance to save up to £500 each month. The amount paid into the savings scheme is taken straight from the employee’s monthly salary payment after deductions.

The advantage of an SAYE scheme to an employee is that any interest or bonus earned by the end of the scheme are tax free, and no income tax or national insurance is incurred by the difference between the price the employee paid for the shares and their value.

Should the employee sell the shares, there may be capital gains tax to pay, unless the shares are placed in a pension at the point of purchase or in an individual savings account (ISA) no later than 90 days after purchase.

Share incentive plans (SIP)

An employer with a SIP scheme in place may annually award up to £3,600 of free shares to employees, with no income tax or national insurance liability.

Where a company has a SIP scheme in place, it must be offered to all their employees. However, it is possible for an employer to state that the SIP will only be offered once an employee has worked for the company for a set period of time, at a maximum of 18 months.

An employee can purchase up to a maximum £1,800 of partnership shares from their salary before deductions. The employer may also offer up to two matching partnership shares, tax free, for each one share purchased by the employee.

Employees may also buy more shares from the company using dividends received from the free, partnership or matching shares they own. This arrangement is not required by HMRC, however, and must be agreed by the company itself. Where dividend shares are retained for at least three years, income tax will not be incurred.

Where there is a SIP in place, a company will be eligible for corporation tax relief for the cost of any free or matching shares given to employees, and the cost of making the shares available.

HMRC TAX INVESTIGATION – What to do next

HMRC tax investigations into whether a person or business have met their tax obligations vary greatly depending on the details of the individual case, from relatively informal checks to a more in-depth investigation into your tax situation.

It may be that an HMRC tax investigation is opened to confirm that the information supplied in a filed tax return is accurate and complete. In more serious tax investigations, where HMRC suspect that tax fraud has occurred, the investigation will be handled by the HMRC’s Fraud Investigation Service. In this situation, information on the tax payer for up to the past twenty years may be gathered as evidence.

How will you know you are the subject of an HMRC tax investigation?

Your first contact will be a letter from the Fraud Investigation Service, under one of the following:

  • HMRC Code of Practice 8 (“COP8”) – used where tax avoidance resulting in loss of tax is suspected by the HMRC, but not fraud.
  • HMRC Code of Practice 9 (“COP9”) – used where the HMRC suspect tax fraud.

Both of the above are serious investigations and it is not unusual for an investigation initially raised under COP8, to be altered to COP9 once evidence has been inspected.

The aim of a COP9 HMRC tax investigation is to ensure that all outstanding tax, any interest incurred, and resulting penalties are paid, but there is also the possibility of criminal prosecution should you be unco-operative with the HMRC or supply false information. It is important, therefore, that any HMRC tax investigation be seen as a serious matter.

What’s the likelihood that you will face an HMRC tax investigation?

There are various factors that could flag up a tax payer for a level of investigation by the HMRC, the most common ones including:

  • Tax returns are filed late or include mistakes that require later correction
  • Late payment of tax
  • Major variances, or inconsistencies, between tax returns that are not explained, such as a sudden cut in income or where expenses greatly increase
  • There is an inconsistency between your tax returns and your standard of living or the success of your business
  • Your tax returns include a level of costs that is unusually high for the industry your business operates in
  • You receive property income
  • Your business operates in a high risk industry, for instance, where you receive cash payments
  • Your business operates in an industry that HMRC has decided to concentrate on
  • You have one or more offshore bank accounts

Finally, you may become the subject of an HMRC tax investigation if they receive a tip-off that you are not complying with your tax obligations.

What information can HMRC gather on you during a tax investigation?

The Connect database is used by the HMRC to search all records that may reveal information on any individual or business under investigation, including non HMRC records such as those kept by the Land Registry and financial institutions.

The HMRC may also gather information via the Common Reporting Standard and other international reporting practices, meaning that it is increasingly difficult to hide money.

Using all of these methods, the HMRC can gather the following:

  • Bank account details and information, both in the UK and from over 60 overseas countries
  • Land Registry information on property purchases and related stamp duty payments
  • DVLA details of vehicles bought and individual ownership
  • Earnings from employment, whether permanent, casual or ad hoc
  • Information from HMRC tax systems including how much tax you have paid, past tax returns, VAT registration, and whether you have been investigated previously
  • Information on your online trading from websites such as Amazon, eBay, Gumtree, Etsy etc
  • UK border information demonstrating your travel from and to UK airports
  • Social media accounts, including Facebook, Instagram, Twitter and LinkedIn

The Fraud Investigation Service also has the power to force any third party to provide information relevant to an HMRC tax investigation.

What should you do if you are the subject of an HMRC tax investigation?

Should you be investigated by the HMRC for tax evasion, this will naturally be a worrying time, especially if you are unsure as to why the investigation is taking place.

It may be that there has been a mistake made either by you or by the HMRC but whatever the situation, there are steps you can take to ensure that the whole process is as easy and pain-free as possible.

Remain calm

The worst thing you can do in the face of an HMRC tax investigation is to give in to your worries and frustration. Maintain your focus so that you can deal with the investigation in a level-headed manner.

Take professional advice immediately

A tax adviser has the experience and knowledge to help you through an HMRC tax investigation. Yes, you will be required to pay for their services but in the long run, their expertise can save you money. Even if you believe that you are innocent of any wrong-doing, having a tax adviser on hand to deal with the HMRC will not only act as a buffer for you personally but also allow you to carry on with your life, and your business, as usual.

Gather all the information you need

One of the main benefits of using a tax adviser is that they know exactly how HMRC carry out a tax investigation, including the information they are likely to request.

A tax adviser can assess your situation and your financial records with an eye for what HMRC will want to examine.

Be honest

Always be honest with the HMRC and do not try to hide anything from them. If it is discovered that you have lied during a tax investigation or purposefully withheld information, your dishonesty may well result in much higher penalty fees. There is also the possibility of criminal prosecution and in the most severe cases, imprisonment.

Talk about the investigation to your tax adviser only

It may be tempting to complain about the investigation to friends and family, especially on social media, but this can have a negative knock-on effect should your customers, suppliers, competitors, or business peers hear about it.

Keep your conversation for your tax adviser’s ears only.

Do not be tempted to destroy records

Destroying records and other materials is just as harmful to your case as having records which are found to be fraudulent.
Any HMRC investigator will find a lack of documentation suspicious.

Face up to the fact that HMRC will find out the truth

There is very little chance of hiding anything from HMRC so don’t try to make excuses, delay submitting information, or take any other course of action in an attempt to deceive. If you are found out, there is a possibility that the investigation will become a criminal one.

Co-operating with the tax investigation, whether you are innocent or guilty, will ensure the process is a much smoother one that will take less time to resolve.

Consider whether to make payments now

An HMRC tax investigation may take a long time to resolve. To avoid incurred interest on any outstanding amounts and to go some way towards a less severe outcome, you may wish to make payments now.

Making payments during the investigation will demonstrate your co-operation with HMRC and may lead to a quicker resolution.

Consider mediation

Where you feel that little progress is being made on either side, the investigation has been lengthy with no end in sight, and the threat of a tax tribunal is looming, mediation or alternative dispute resolution may be the answer.

Even where you finally pay more than you are happy with, mediation will likely bring a speedier end to the investigation.

Learn from the investigation

Once the tax investigation is resolved and any payments have been made, learn from the process by making sure that in future you are fully compliant with your tax obligations. It might be helpful to arrange for your tax adviser to carry out periodic checks on your tax compliance too.

HMRC tax investigations – breaking it down

Nobody wants to face tax investigation but in the case where you do, the best way to successfully handle the situation is straightforward.

Take professional advice. Be honest and co-operative with the HMRC. Prepare and make available all the relevant information.
With the possibility of increased penalty fees, incurred interest, and in some cases, criminal prosecution, taking those three steps is always the best course of action.

Capital Gains Allowances & Relief on CGT

Capital gains tax becomes payable when the disposal of certain categories of asset leads to a profit, otherwise known as a ‘gain’. It is this gain which is taxed, not the sale value of the asset.

The amount of capital gains tax you pay, however, may be reduced by using available capital gains allowances.

What is chargeable to capital gains tax?

Where assets which are eligible for tax are disposed of by an individual, a business partnership or a trust, capital gains tax is chargeable on any resulting gain.

Capital gains tax does not apply to companies. Instead, a company will pay corporation tax on any gains they make, although capital gains legislation may come into play in certain circumstances.

Assets which may prove chargeable when disposed by an individual include:

  • business assets (the business itself, plant and machinery, registered trademarks)
  • residential property other than the main place of residence (holiday lets, rental properties)
  • non ISA or non PEP shares
  • personal belongings valued at over £6,000 (works of art, jewellery, antiques)

Exemption from capital gains tax includes gains made from the disposal of:

  • a private car
  • personal belongings up to the value of £6,000
  • a property that is your main home
  • gifts made to a spouse or civil partner
  • gifts made to a charity
  • ISAs or PEPs
  • UK government gilts and premium bonds
  • winnings from betting, lottery or pools

Although capital gains tax is not chargeable on gifts made to a charity, assets sold to a charity may be chargeable where the sale price was less than the market value but more than you originally bought it for.

The UK assets of non UK residents are generally not liable for capital gains tax unless the non UK resident returns to the UK in under 5 years of their initial move abroad. The exception to this is residential property which since 6 April 2015 is chargeable with regard to capital gains tax.

Capital gains reliefs and exemptions

A capital gains tax liability is incurred when a chargeable asset is disposed of and the gains for that specific tax year add up to more than your Annual Exemption Amount, that is, your yearly tax-free allowance.

The 2018/19 tax-free allowance is £11,700 for businesses and individuals, and £5,850 for trusts. The full annual tax-free allowance applies to each partner in a marriage or civil partnership individually, which can be advantageous when it comes to the disposal of jointly owned assets.

It is not possible to carry forward or back any capital gains annual exemption. It must be used within the current tax year.

How to calculate your capital gains tax liability?

The annual capital gains allowance makes it possible to receive gains up to a specific value within each tax year, before capital gains tax becomes payable.

Calculate the gain received by disposing of an asset by deducting the purchase price of the asset from the sale price, bearing in mind any permitted deductibles for the asset.

The relevant capital gains tax rate will depend on whether you are a higher rate tax payer (20%) or a basic rate tax payer (10%).

For a higher rate tax payer, your total capital gains, once any capital gains allowances have been accounted for, will be taxed at 20%. Where the gain is from the sale of residential property, there will be an 8% surcharge on top of the 20%, resulting in a 28% tax rate.

When calculating the capital gains tax liability for a basic rate tax payer, their annual taxable income (annual income less personal tax allowance) must be added to their total gains for the tax year, bearing in mind any applicable tax exemptions, reliefs or losses.

If the resulting figure, less any capital gains annual exemption, is below the basic income tax rate, it will be taxed at 10%, unless the gain was made from the disposal of residential property. In this situation, an 8% surcharge will be added to the 10%, resulting in an 18% tax rate.

Where the resulting figure, income and gains less any exemptions and allowances, is more than the basic income tax rate, the higher tax rate 20% charge will be incurred, with the possibility of an additional 8% surcharge in the case of the disposal of residential property.

For sole traders or trustees, the rates are:

  • 28% (20% higher tax rate plus the 8% surcharge) on gains from the disposal of residential property
  • 20% higher tax rate on all other chargeable assets
  • 10% where Entrepreneurs’ relief is applicable

Capital gains allowances – other factors to consider

There are several other factors that may affect how much capital gains tax you are charged and the availability of capital gains allowances. These include:

Married couples and civil partnerships

Where assets are jointly owned by a married couple or civil partners, each partner is assigned the full capital gains allowance, doubling the value of gain they are allowed to receive from the disposal of that asset before a capital gains tax liability is incurred.
Where one partner transfers an asset wholly to the other partner, however, the capital gains allowance will be reduced back down to that partner’s individual allowance.

Capital gains tax is generally not chargeable on assets given or sold to a spouse or civil partner, with the exception of when the couple have separated and are living apart in the tax year when the gift is made, and when the asset was gifted for the purpose of disposal through a business.

Should the partner in receipt of the gift dispose of it, capital gains tax may be chargeable to them.

Gains incurred from the disposal of a combination of assets

Where you have made gains from the disposal of a combination of assets that may be taxed differently, for instance, residential property and shares, your capital gains allowance may be used to offset the highest rate gains.

For instance, where the gains of a higher rate tax payer are from the sale of a holiday let cottage (28% tax rate) and a piece of art valued at over £6,000 (20% tax rate), the capital gains allowance may be used against the gains made from the sale of the holiday let cottage first.

Disposal of assets resulting in a loss

If the disposal of a chargeable asset means that you incur a loss, rather than a gain, this loss may be registered as an allowable loss and offset against any gains in that or a future tax year.

For instance, if your capital gains for a tax year amounts to more than your tax free allowance, you may reduce this amount by applying any unused loss from a previous tax year.

If the resulting reduction, means that your annual capital gains are within your tax free allowance, any leftover losses may be carried forward to the next or a future tax year.

Allowable losses must be reported to HMRC via your self-assessment tax return, registering them against the related asset no more than 4 years after the disposal.

Capital gains allowances – final word

When calculating annual capital gains made from the disposal of one or more assets, it is important to always take into account your personal tax situation and any factors that may reduce your capital gains tax liability to HMRC.

Capital Allowance: Which Do I Qualify For?

Capital allowance relief may be available on business assets purchased for use in your business, such as transport vehicles, machinery or equipment.

Items that are not eligible for a capital allowance claim include:

  • Items you do not own but instead rent from a third party
  • buildings, and any related doors, gates, shutters, mains water or gas systems
  • land
  • structures other than buildings such as a bridge or a road
  • business entertainment items

Any claimed amount may then be deducted from your taxable profit.

There are several categories of capital allowance, so before you make any claim against an eligible business asset, it is always worthwhile investigating which capital allowance scheme is the right one to use.

Most capital allowance claims are made under one of the following:

  • Annual Investment allowance (AIA)
  • Writing Down allowance (WDA)
  • Small Pools allowance
  • First-year allowance (FYA)
  • Balancing allowance

Ensuring that your claim is made through the correct capital allowance scheme will not only mean that you comply with HMRC tax legislation but can improve your overall tax efficiency.

Annual Investment allowance

Although the AIA limit has varied in previous years, it remained at £200,000 from 1 January 2016 until the end of 2018, when it increased to £1 million for a period of two years.

A claim made through AIA provides the full value paid for any eligible asset up to the AIA limit. The amount claimed may then be deducted from your taxable profit.

General and special rate equipment can be claimed for under AIA and there are also a number of green initiatives which may be eligible for relief.

Business assets that are not eligible for claiming under AIA include:

  • assets already in your possession that you later used in your business
  • assets that were given to you or to your business, rather than being purchased by you or your business
  • cars

The above items should generally be claimed for through WDA instead.

To work out the amount you can claim through AIA, total up the cost of any eligible purchases made within that tax year. If your total is less than the AIA limit, you can in effect claim 100% of the value of your purchased assets for that year, as long as they are eligible for AIA.

Where your total is more than the AIA limit, and the purchased assets are eligible, it may be possible to claim the excess through a

Writing Down allowance.

Writing Down allowance

Where your capital allowance claim exceeds the AIA limit, you may be able to claim for this extra amount through WDA.

Under WDA, a percentage of the cost of eligible business purchases can be claimed for. The specific percentage will depend on the asset itself.

When making a WDA claim, it is necessary to group the purchased assets into pools of items that bear the same percentage claim rate.

The resulting amounts for each pool may then be deducted from profits declared on your tax return for that year.

The remaining amount in each pool will form the starting balance for the following tax year or accounting period.

The pool rates are:

  • main pool – 18%
  • special rate pool – 8%
  • single asset pool – 18% or 8% depending on the specific asset

Where a purchased asset is not suitable for AIA, WDA may be used for certain items, including personal belongings that are later used in a business, gifts and cars.

Claiming for the purchase of a car

The type of claim you can make and the corresponding rate will depend on when the car was purchased and the car’s CO2 emissions.

Cars purchased between April 2015 and 1 April 2018

  • Electric car or CO2 emissions are 75g/km or lower – 100% – First year allowances
  • Electric car or CO2 emissions are 95g/km or lower – 100% – First year allowances
  • Electric car or CO2 emissions are 110g/km or lower – 18% – First year allowances
  • CO2 emissions between over 75g/km and 130g/km – 18% – Writing down allowance
  • CO2 emissions between over 110g/km and 160g/km – 18% – Writing down allowance
  • CO2 emissions over 130g/km – 8% – Writing down allowance
  • CO2 emissions over 160g/km – 8% – Writing down allowance

After 1 April 2018, it is the intention of the British government is to reduce emission thresholds to 50g/km and 110g/km.

Small Pools allowance

In certain circumstances, it may prove more tax efficient to make a Small Pools allowance claim, rather than WDA.

Where your total claim for purchased business assets exceeds the AIA limit, and the value of a pool, prior to the WDA calculation, is below £1,000 for a tax year, it may be possible to make a Small Pools allowance claim instead of a WDA claim. The balance of the small pool will then be written off.

First-year allowance (FYA)

Use FYA to claim for the full cost of an eligible asset during the first year of its purchase. The value of any FYA claim will not be deducted from your AIA annual limit.

Eligible assets to be claimed under FYA include:

  • certain cars which have low CO2 emissions
  • new zero-emission goods vehicles
  • energy saving equipment that appears on the energy technology product list
  • plant and machinery used by gas refuelling stations
  • water saving equipment that appears on the water efficient technologies product list
  • gas, biogas and hydrogen refuelling equipment

Assets that cannot be claimed under FYA include:

  • items given to you or the business
  • items that you already owned before using them in the business
  • items that were not new when they were first used in the business
  • items purchased for the purpose of renting out
  • items purchased for the purpose of being used in a rental residential property

Any first year allowance entitlement not used in a tax year, may be claimed in the following tax year through WDA.

Balancing allowance

If you claim for an asset and then later cease to use that asset in the business or dispose of the asset, it may be necessary to make adjustments to your capital allowances.

Balancing allowance

Where a loss is incurred in relation to the asset, it may be possible to deduct this from your taxable profit. This is known as a ‘balancing allowance’. To calculate a balancing allowance, deduct the sale price or market value from the purchase price, less the capital allowance claimed in the year before.

Balancing charge

Where the sale price or market value is more than the value of the pool, this will result in a ‘balancing charge’, resulting in an additional amount that must be added to your taxable profits.

Other capital allowances

Besides transport vehicles, machinery or equipment, it is possible to make other capital allowance claims for:

  • the renovation of business premises in disadvantaged areas of the country
  • the extraction of minerals
  • research and development
  • industrial intellectual property
  • patents
  • the process of dredging

through schemes such as Business Premises Renovation Allowance (BPRA), Research and Development allowance (RDA), and Patent allowance.

Capital allowances – what you need to know

The tax legislation that governs capital allowances is detailed, complex and regularly updated. It is important, therefore, to maintain an ongoing awareness of exactly which capital allowances are applicable to your purchases and tax situation.