Blogging about tax and more …

Expected before Christmas, the draft legislation is a little late in being published last Friday, the 18th January. But better late than never? Well probably not. It does make more depressing reading than had been anticipated in certain areas.

Its not surprising that the 183 day and 90 day rules in the legislation and Revenue practice, in relation to establishing whether an individual is resident in the UK, will now include days of arrival and departure in the UK. Beware though if you are just arriving in the UK on transit to somewhere else make sure you do not go into a part of the airport accessible to members of the public. You need to stay ‘airside’ in the terminal so don’t think you can have a stroll and get a breath of fresh air. If you join the rest of the public on the other side you have arrived in the UK.

There are changes with regard to the remittance basis of tax. This mainly affects non domiciled individuals.A claim will need to be made each year on the tax return where there will be a tick  box. So if you want to claim the remittance basis you need to tick the box. Remittance basis means that where applicable you will not in that tax year be subject to UK tax on overseas income/gains unless you remit teh money to the UK. The good news is that individuals can claim to be taxed on remittance basis in one year but not the next. That may enable some individuals to plan to minimise their exposure to UK tax by choosing to claim in some years and not others. However there are pitfalls here so advice should be sought.

If an individual claims to use the remittance basis in a tax year then he will also be liable to a charge of £30k for that year. That charge is in addition to the tax charge on the moneys remitted. This £30k charge will only apply to individuals who have been UK resident for at least 8 of the last 10 years of assessment upto and including the year for which the remittance basis is being claimed.

When being taxed under the remittance basis those individuals cannot claim various personal allowances .

There have also been changes to stop the ability of non domiciled individuals from using various flaws in the remittance basis to remit monies without suffering a tax liability. They are still available till 5th April so seek advice to see if you should take action now..

Anyone with overseas companies or trusts should seek advice before 5th April. Gains arising in overseas companies with less than 5 ‘owners’ will be taxed on those owners as they arise if the asset is a UK asset or on a remittance basis if the asset is a non UK asset. If the owner or one of the owners of the company is a trust there is the ability to tax the gain on the settlor or even the beneficiaries.

Overseas trusts could face some unexpected tax charges as capital gains realised by non UK trusts will from 6th April either be taxed on the settlor or matched with capital payments to the beneficiaries.This means that some trusts which have realised gains pre 5th April could have gains still available to match against capital payments out to beneficiaries at a later date.So there is a retrospective element to the legislation or should that be retroactive element?

The tax rate could be as high as 29% where the payments are matched to old gains and it could be higher if the ’surcharge’ to penalise stockpiled gains in overseas trusts is increased. We have until recently seen tax rates of 64% on such situations.

There is of course not enough room to give a detailed review here but if you think you could be affected by any of the outlined information above you should seek advice sooner rather than later.

Well it’s taken a while to arrive but we now have the draft legislation on the capital gains tax reform. These will come into effect for the tax year 2008/09 onwards.

The changes, which only affect capital gains tax and do not apply to corporation tax, are as follows:-

• introduction of a single CGT rate of 18%
• abolish taper relief, indexation allowance and halving relief
• make rebasing of the cost to 31 March 1982 value compulsory for assets held at that date
• simplify rules for matching certain assets disposed of with assets acquired
• the introduction of a new Entrepreneurs’ Relief

The Entrepreneurs’ Relief has been introduced as a result of much lobbying by interested groups and is a very welcomed relief for most small businesses. It has the effect of retaining the effective 10% tax rate for the disposal of businesses and assets used in the owner’s business. Unfortunately it is only available on the first £1m of gains in a lifetime and we cannot give you more than one lifetime.  The limit can be used up on the disposal of a number of businesses but once the £1m limit has been reached then any further gains will be taxed at the new 18% CGT rate. Thought will no doubt turn in the future to using up other people’s limit as well but that’s for another day.

Some people will be better off in the new regime and some will be worse off. It is not really as clear cut as to say that those who rent out residential proeprties will be better off on or after 6th April just because the rate will be 18% rather than say 24% as the amount of indexation allowance available pre 6th April could reduce the effective rate of 24% considerably.

Also those who rent out commercial properties are not necessarily worse off on or after 6th April as they may not actually benefit from an effective 10% rate of tax pre 6th April if they had rented the property to the wrong type of client between 1998 and 2008.

As ever there is no short cut to the right advice. Every situation should really be reviewed pre 5th April to see what is the best action to take in advance of the changes, if any.

Any individual or trust who has realised a capital gain at a rate higher than 18% in the last three years may also want to consider seeking advice on how they may be able to defer that liability to tax and potentially benefit from the 18% rate of tax in the future.

Advice should be sought pre 6th April as we cannot turn the clock back after the 5th April has passed.

Everyone has been panicking since the pre-budget report announced the introduction of a flat rate of 18% for capital gains tax. The rate meant that property investors selling residential properties could be better off after 6th April 2008 but those selling business assets could lose out.

After much lobbying the Times reports that Darling and Brown are going to soften the blow with a retirement relief of £100k.

Some will remember that retirement relief was phased out with the introduction of taper relief. Looks like we may be going full circle with the abolition of taper relief and back to a retirement relief.

If this report is confirmed then this retirement relief will help those with small businesses but is it likely to soften the blow for property investors with commercial properties and those with larger unquoted businesses?

It is obvious though that clients cannot yet make decisions about their assets in advance of the new rate being introduced until they know what the final position is going to be. As ever we have an uncertain world of tax.

I am finally entering the world of blogging, my reasons, well mainly to keep my clients and potential clients out there up to date with the happenings in the world of tax. So watch out world, I am about to start blogging.

Tags: taxation, tax, chartered tax adviser, holden tax consulting, CIOT, STEP