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Thoughts on the above topics following last weeks budget.

INCOME SHIFTING

It has been confirmed that further consultation is going to take place during the next year, and the operative date for the new rules put back from 5 April 2008 to 5 April 2009.

Our advice is:

– If you currently have your spouse as a shareholder, then all other things being equal there is no change necessary at present.

– If your spouse is not a shareholder, but (i) you are likely to be a Higher Rate tax payer (income over £40,000) and (ii) your spouse has unused Basic Rate allowances (their income below £40,000), then its likely to be worthwhile bringing your spouse in as a shareholder to utilise their allowances. If your spouse has no other income then a 50:50 split is likely to be best; if they have other income, then an appropriate split of the shares to make best use of the joint allowances is necessary – if you need advice on that please e-mail us, letting us know yours and yours spouses projected income.

NB in the context of the above advice, spouse includes common law and civil partners. Potentially the same issues / advice apply in respect of other family members, eg adult children, but we always advise clients to exercise caution in this regard anyway.

Given that the Arctic Systems case was finally decided in the tax payers favour, and HM Government acknowledged that, we are of the belief that there is no tax risk with spousal shareholdings until the Income Shifting rules finally come in to play. You do, of course, need to think about wider issues, eg the wisdom of placing assets in another persons name in the context of your marriage / relationship.

CAPITAL GAINS TAX

The new CGT rules apply from 6 April 2008 for individuals and partnerships. There are no change to the rules for Corporate gains, although the rules for directors / shareholders receiving gains from their company, eg on liquidation, do change.

The new rules apply a flat 18% charge on gains, calculated as proceeds less base cost (or 1982 value if held before 1982).

Taper relief and indexation are now abolished.

The following reliefs are still available:

– S165 Holdover (primarily on gifts of business assets)
– Rollover relief (again on business assets)
– EIS deferral relief
– Principle Private Residence relief (and associated Lettings relief)
– Annual exemption

Broadly the effect of the changes is to reduce or leave the same the tax for investors in non business assets, eg listed shares & collective investments, residential buy to lets, and to increase the tax on business assets eg commercial property, shares in your own business, goodwill, equipment, furnished holiday lets, commercial buy to lets.

To offer some measure of relief to businesses a “Entrepreneurs Relief” has been introduced. The key features are:

– 10% rate on £1m of qualifying gains, lifetime limit
– applies to the disposal of a business (sole trader / partnership), or to the disposal of shares in a company where (i) the individual is a employee / officer and (ii) has a 5% minimum holding
– applies to the disposal of assets used in a partnership or company (subject to being an employee and 5% shareholding) within three years of the business ceasing / being sold – NB this relief is apparently not extended to sole traders selling assets after they cease to trade

A few points to note:

– the 10% tax rate post entrepreneurs relief is not as beneficial as the 10% rate created by business asset taper relief. EG, 2007/08 rates, a gain of £36,800 with business asset tape relief would leave no tax payable; under the new rules £2,760 would be due even with the 10% Entrepreneurs relief.
– commercial property investment not associated with owning a business is no longer included.
– the entrepreneurs relief on properties owned by partners / shareholders but rented to their business is to be restricted in the ratio of rent charged to commercial market rent.
– it is not certain whether Entrepreneurs relief will apply to the liquidation / ESC C16 strike off of a company; the indications are that it will, but this is yet to be confirmed.