As Nisa day approaches, don’t forget the rest of the tax ‘jigsaw puzzle’,

Savers who are anticipating the launch of the Nisa on July 1^st shouldn't forget the other options available to them to save tax, says leading wealth manager Brewin Dolphin.

Tim Walker - Brewin Dolphin Exeter

“It’s possible to shelter many more of your assets from the taxman than most realise, as long as you remember to put together all the pieces of the tax jigsaw puzzle,” says Tim Walker, Head of Office at Brewin Dolphin Exeter. “While the increased flexibility and rise in Isa limits is welcome, it is also important that savers consider other forms of tax planning.”

Here are some tips to complete the jigsaw puzzle:

·         Use your NISA Allowances

As well as the extra £5940 you can now put in this year’s Isa, you can also add to your child’s JISA (Junior ISA) or CTF (Child Trust Fund). The limit for these rises to £4000 on July 1^st, so make sure you use all you can. “Income and capital gains from ISAs are tax free, so consider using the allowance for your risk based investments rather than your cash,” suggests Mr Walker.

·         Make a pension contribution

The pension Lifetime Allowance (LTA) reduced to £1.25m on 6^th April this year. You need to ensure that you won’t exceed that or you will be hit with a hefty tax charge. Ignoring this, you’ve got £40,000 gross that you can put into your pension. You should check this year and contribute your maximum if your UK relevant earnings allow it. If you have neglected your pension in previous years you might also be able to add up to £50k a year for the last three years and get tax relief on that as well.

You can also make a Stakeholder contribution of up to £3600 gross for your children or non-working spouse and receive 20% tax relief on their pension.

For parents: if making a further pension payment brings your individual taxable income(s) below £50,000, you may be able to reclaim or retain child benefit.

·         Transfer your assets

Consider transferring income producing assets to your spouse or civil partner. If one of you is a lower-rate taxpayer than the other, work out the income from the asset per £1 and transfer enough to use up the lower tax band. The same applies for Capital Gains Tax, which is charged at 28% for high rate taxpayers and 18% for basic rate. Transfer assets with gains to the lower rate taxpayer and use up both of your allowances. Also remember to use y0ur annual exemption allowances for Inheritance Tax.

·         Invest into an EIS or VCT

For those with a higher risk appetite, an Enterprise Investment Scheme (EIS) or Venture Capital Trust (VCT) can offer some great tax incentives. 

http://www.brewin.co.uk/offices/exeter  

Farmer's Tax Win

HM Revenue and Customs has a longstanding policy of not reopening settled cases, even when subsequent decisions change the case law. So it was a significant victory for Doug Robshaw, tax manager at Haines Watts in Hereford, and his client when they persuaded HMRC to review a claim for Agricultural Property Relief (APR) on a farmhouse and secure a rebate.

The decision to appeal was promoted by the 2013 Tax Tribunal case (HMRC v Hanson) which successfully challenged HMRC’s view that APR could not be granted on farm houses where the surrounding land was not in common ownership.

The farmhouse was occupied by the deceased’s son, who farmed the land, but the ownership of the land had been split between family members.  The tribunal found the occupation of the land was also relevant in assessing eligibility and APR was therefore granted on the farmhouse.  The situation where farmland is not in common ownership with the farmhouse is not usual, but HMRC’s willingness to review settled cases is.

Although the client’s circumstances were similar to Hanson – he owned and farmed the land but prior to her death his mother owned and occupied the farmhouse – there was no guarantee that HMRC would reopen the case which dated back to 2009.

However Doug, having previously worked for HMRC for 12 years, had a good understanding of how the system works and the best approach. “Having submitted the necessary paperwork, I engaged with the tax inspector who originally handled the case and there was a continued dialogue throughout the whole process. This was I was able to move the case along and provide supporting evidence.”

“I think I was also assisted by a general tide of good will towards a farming community facing adversities after the recent floods.”

Both Doug and his client were delighted when HMRC agreed to refund the Inheritance Tax paid on the farmhouse, which amounted to £120,000 along with £9,500 of accrued interest.

Doug feels the decision opens the doors for others to claim APR retrospectively.  But he added: “Each case needs to be assessed on its own merit. Potential claimants need to ensure they get expert advice on whether to proceed or risk incurring professional fees.” 

For  farm tax or agricultural advice contact Haines Watts North Devon and Haines Watts Rural Business LLP 

www.hwca.com/accountants-north-devon

01237 471736

northdevon@hwca.com

Ten Ways to Reduce Your Capital Gains Tax Liability

With changes to pension rules reducing the amount we can save for our retirement, it’s more important than ever to make the most of those assets we have managed to acquire

Capital Gains Tax (CGT) is a tax that may be charged on the profit or gain made when selling, gifting, transferring, exchanging or disposing of an asset. There are a number of assets, such as your home, and any personal belongings worth less than £6,000, that are exempt from CGT. However, assets such as shares, collective investments and second properties that generate a capital gain are generally liable to CGT. Each individual has a personal CGT allowance every year (6 April to 5 April), which for many investors is sufficient for avoiding a CGT liability. Any gains in excess of the allowance are charged to CGT at either 18% or 28%, depending on the individual’s other total taxable income in the year the gain arises. Although the current CGT rates are historically low (CGT has been charged at 40% in recent years) and many individuals will never pay it, there are a number of ways in which CGT can be reduced or even removed altogether.

1. Make use of the CGT Allowance

Every individual has an annual CGT allowance which currently lets them make gains on investments of up to £10,900 free of tax. If unused, the allowance cannot be carried forward into the next tax year, so it is advisable to use this tax-free allowance each year in order to reduce the risk of incurring a significant CGT bill in subsequent years.

2. Make use of losses

It might be wise to sell some assets at a loss if the overall gain in the tax year exceeds the annual allowance. Gains and losses established in the same tax year must be offset against each other, so will reduce the amount of gain that is subject to tax. Losses must be registered with HMRC within four years from the end of the tax year in which the loss has occurred.

3. Transfer assets to your Spouse or Civil Partner

Transfer between spouses is currently exempt from CGT. This means that assets can be transferred between husband and wife or civil partners so that both annual CGT allowances are used. This effectively doubles the CGT allowance for married couples and civil partners. The transfer must be a genuine, outright gift.

4. Bed AND Spouse

In the past it was possible to use up some of your CGT allowance by selling shares on which you had a gain, and then buying back the same shares the next day; this was known as ‘bed and breakfasting.’ However, investors are no longer allowed to buy back the same shares within 30 days if they intend to crystallise a capital gain. Spouses or civil partners are permitted to buy back the shares sold by their spouse or civil partner immediately, so the gain is realised CGT free while enabling the family to retain the assets.

5. Invest in an ISA/Bed AND ISA

Gains (and losses) held within an ISA are exempt from CGT so it makes sense, particularly for higher rate tax payers, to utilise the ISA allowance each year. From April 2014, an individual aged over

18 can invest up to £11,880 in a Stocks and Shares ISA. From July 2014, there will be a single new ISA (a NISA) of up to £15,000, which can be invested in stocks and shares or cash. This means that a married couple, or civil partners, can invest up to £30,000 per annum in this tax-privileged investment. Over many years, some investors have built up multiple six-figure sums in ISAs by utilising their allowance each year.

As with the bed and spouse option, a bed and ISA involves selling assets to realise a capital gain and then immediately buying back the same assets inside an ISA. This enables all future gains on the asset to be CGT free.

6. Contribute to a Pension

By making a pension contribution (where one has net relevant earnings), the tax on a capital gain can be reduced from 28% to 18%. A pension contribution extends the upper limit of an individual’s income tax band by the amount of the gross contribution. For example, if an investor is able to make a gross pension contribution of £10,000, the point at which higher rate tax becomes payable will increase from £41,865 (limit for 2014–2015) to £51,865. If the capital gain, once added to the other taxable income in the year the gain is realised, falls within the extended personal allowance, the CGT liability will become 18% instead of 28%.

7. Give shares to charity

If one gives land, property or qualifying shares to a charity, or sells them to a charity at less than the market value, income tax relief and CGT relief are available.

8. Invest in an EIS

Any gains that are made on investments in an EIS (Enterprise Investment Scheme) are free from CGT if held for three or more years. If the shares are disposed of at a loss, one can elect for the amount of the loss, less any income tax relief given, to be set against income for the year in which the shares were disposed of – or any income for the previous year – instead of being set against capital gains.

CGT deferral relief is available to individuals and Trustees of certain Trusts. The payment of tax on a capital gain can be deferred where the gain is invested in a share of an EIS qualifying company. The gain can arise from the disposal of any kind of asset, but the investment must be made within the period of one year before or three years after the gain arose. There is no minimum period for which the shares must be held; the deferred capital gain is brought back into charge whenever the shares are disposed of, or are deemed to have been disposed of under the EIS legislation. The downside of EIS is that generally these types of schemes are higher risk than traditional stocks and shares.

9. Hold over Relief

Hold over relief is available on certain assets. Where hold over relief is claimed the chargeable gain is postponed, usually until the transferee disposes of the assets.

Hold over relief may be claimed for:

• Gifts of business assets

• Gifts of unlisted shares in trading companies etc.

• Gifts of agricultural land

• Gifts which are chargeable transfers for inheritance tax (IHT) purposes

• Certain types of gifts which are specifically exempted from IHT

10. Chattels that escape CGT

Possessions such as antiques and collectibles are called chattels. Gains on some are tax-free. Items with a predicted life of 50 years or fewer, known as ‘wasting assets’, are CGT-free, provided they were not eligible for business capital allowances. Antique clocks and vintage cars are treated as ‘wasting assets’. Pleasure boats and caravans also fall into this category.

If the gain is not tax-free, CGT is charged in a special way. The taxable gain is the lower of the actual gain or five-thirds of the excess of the final value over £6,000.

For example, if you sell an antique clock for £7,000 which you originally bought for £5,000, the actual gain is £7,000 - £5,000 = £2,000. The gain under the special rules is 5/3 x (£7,000 - £6,000) = £1,666.

Since this is lower, your taxable gain is £1,666.

www.brewin.co.uk 

How to become an ISA Millionaire

Tim Walker - Head of Brewin Dolphin Exeter 

The traditional routes to becoming a millionaire – marriage, inheritance, the lottery or a genius business idea – might seem a bit fanciful to many of us but, with ISA season upon us, reports suggest that there may be many ISA millionaires in the UK already. In fact several ISA investors at Brewin Dolphin, through judicial investment directly in equities, have amassed ISAs worth over £1 million. Brewin Dolphin has 15 clients with ISAs worth millions each and 40 with ISAs over £750k; though these clients pursued a direct equity strategy and were certainly prepared to take risks. The total value of all Brewin Dolphin ISA portfolios is over £4.7 billion.

Analysts at Brewin Dolphin have calculated that it could take less than 30 years for anyone using their ISA allowance before the end of the tax year and annually thereafter to achieve millionaire status. With conservative assumptions on growth and income (5% combined) and inflation (2.5%), 2042 would see a total fund of £1,030,953 representing a gain of £522,180 on a total investment of £508,773. The total tax saving over this period would be an impressive £292,215 and a £1 million tax free fund for life.

Tim Walker, head of Brewin Dolphin Exeter said, “ISAs and Peps have been such a valuable savings medium over the past 27 years and we advise clients never to miss a chance to use their allowance, either alone or as a tax-free zone within their portfolio. The total investable amount in ISAs and their predecessors PEPs over the last 27 years now stands at £200,560k”.[1]

Tim Walker said, “Saving in a tax efficient wrapper remains one of the most compelling ways of realising your long term financial ambitions. During its life, the WMA Balanced Total Return index has returned compound annual growth of 8.5% - despite the so-called lost decade for equities after 2000.  Even now, with the FTSE paying seven times as much income as bank deposits, we have assumed a more conservative 5% return and still an investor using their full ISA allowance each year could be a millionaire in 27 years with no tax to pay on their gains.  The importance of compounding, and the benefits of tax efficient saving, can deliver life-changing wealth to those who seize the opportunity.”

ISA millionaire chart

Year	Annual Allowance Inflation Adjusted	Assumed Performance Total Return 5%         (growth & income)	Rolling ISA Pot With Long Run Performance Assumption of 5%	CGT Annual Allowance Inflation Adjusted
06/04/2013	£11,520	5.00	£11,520	£10,600
06/04/2014	£11,880	5.00	£23,976	£10,900
06/04/2015	£12,177	5.00	£37,352	£11,000
06/04/2016	£12,481	5.00	£51,701	£11,100
06/04/2017	£12,793	5.00	£67,079	£11,378
06/04/2018	£13,113	5.00	£83,547	£11,662
06/04/2019	£13,441	5.00	£101,165	£11,953
06/04/2020	£13,777	5.00	£120,000	£12,252
06/04/2021	£14,122	5.00	£140,122	£12,559
06/04/2022	£14,475	5.00	£161,603	£12,873
06/04/2023	£14,836	5.00	£184,519	£13,194
06/04/2024	£15,207	5.00	£208,953	£13,524
06/04/2025	£15,588	5.00	£234,988	£13,862
06/04/2026	£15,977	5.00	£262,715	£14,209
06/04/2027	£16,377	5.00	£292,227	£14,564
06/04/2028	£16,786	5.00	£323,625	£14,928
06/04/2029	£17,206	5.00	£357,012	£15,301
06/04/2030	£17,636	5.00	£392,498	£15,684
06/04/2031	£18,077	5.00	£430,200	£16,076
06/04/2032	£18,529	5.00	£470,239	£16,478
06/04/2033	£18,992	5.00	£512,743	£16,890
06/04/2034	£19,467	5.00	£557,846	£17,312
06/04/2035	£19,953	5.00	£605,692	£17,745
06/04/2036	£20,452	5.00	£656,429	£18,189
06/04/2037	£20,964	5.00	£710,214	£18,643
06/04/2038	£21,488	5.00	£767,212	£19,109
06/04/2039	£22,025	5.00	£827,598	£19,587
06/04/2040	£22,575	5.00	£891,553	£20,077
06/04/2041	£23,140	5.00	£959,271	£20,579
06/04/2042	£23,718	5.00	£1,030,953	£21,093
Source: Brewin Dolphin
	Actual
Inflation Assumption			2.5%
Total Invested			£508,773
Total Gain			£522,180
Total Capital Gain Assuming 60% of growth is gain			£313,308
Gains Tax Saving over 30 yrs			£292,215

“Taxation – a ‘moral’ issue, or a legal one?”

“Taxation – a ‘moral’ issue, or a legal one?”

 Chris Thorpe - Tax Director Haines Watts Chartered Accountants Exeter

As one of the two certainties in life, taxation is thus important – albeit one that is thoroughly disliked. Nonetheless it is accepted by society generally that taxation is a necessary part of life in order to defend our country and maintain law and order in order to provide an environment within which to live our lives. In the last 100 years an additional call upon our pockets is the provision and maintenance of public services. Income tax is the tax of which we are all aware (it was only supposed to be temporary, introduced in 1799 to pay for the war against France – hence its annual renewal by our Chancellors). In line with this legal requirement to pay income tax, the taxpayers of this country have been entitled to expect some certainty and proportionality on the part of H M Treasury. We have the right to be judged and held accountable to universally-applied laws passed by our elected representatives; those laws tell us how much tax to pay year after year, they tell us what actions are acceptable and which are not and the repercussions of straying over the boundaries of the law. Adam Smith, the founder of the theories of modern economics laid down the fundamental principles behind taxation in his “Canons of Taxation”. As well as “Equality” (payment being proportional to income) and “Convenience of payment” (collection at a time and manner convenient to the taxpayer), there is also “Certainty” (tax liabilities should be clear and certain) and “Economy of Collection” (taxes should not be expensive to collect and should not discourage business). Certainty is a very relevant point; but more significantly it has been coming under attack a great deal of late.

Looking again at those “canons”, how in tact are they in the UK today? Equality? Our tax system is progressive i.e. the more you earn the more you pay – but that’s not equal, 40% is a greater proportion than 20%, whereas 20% of £300,000 is much more in taxes raised than 20% of £30,000. However, out of political necessary, the UK, like most other countries adopt this seemingly fair system. What about Convenience of Payment? Most people pay income tax through PAYE, and the other through Self Assessment Tax Returns – so that one is probably a tick in the box. Economy of Collection – taxes should not be expensive to collect, but H M Revenue & Customs do sometimes seem to make it an overly-arduous task; as for not discouraging business our tax system is wonting there – but that’s for another day. Certainty – until recently it could probably be said that our tax system was certain (if not necessarily clear!); but there is a new trend afoot amongst certain sections of our society which is undermining this fundamental principle.

Our tax statutes (the growing number of them), duly interpreted by the courts, tell us how much tax we should pay. Fellow members of my profession are often called upon to clarify the law, but essentially our tax regime is still governed by laws which are available and equally applicable to all. But to some people the outcome of this is unsatisfactory. Well-advised companies and individuals will follow the letter of the law and do what they are allowed to do to minimise their tax liability. In the House of Lords, Lord Clyde famously stated (in the 1929 case Ayrshire Pullman Motor Services v. Inland Revenue) that:

“No man in the country is under the smallest obligation, moral or other, so to arrange his legal relations to his business or property as to enable the Inland Revenue to put the largest possible shovel into his stores”

i.e. as long as you are obeying the law you can do as you please to lower your tax bill – or carry out “tax avoidance”. That is in stark contrast to “tax evasion” – which is a crime e.g. lying about your income, committing fraud etc.  However, we now have the likes of Margaret Hodge MP, Chair of the Public Accounts Committee and our tax conscience, condemning individuals for engaging in tax avoidance. It is apparently immoral. If it is immoral and so offensive to the common man, then it should not have been made law. What is so offensive is to have laws in place legalising an action but then being told that what you are doing is “immoral”, “egregious”, “not adhering to the spirit of the law”, “not paying your fair share” etc. Instead of obeying the law, we are being expected to obey the opinions of certain self-righteous individuals, many of whom are ignorant of our tax system and some of whom may well dabble in some egregious and immoral tax avoidance themselves. If we are to follow their call and pay our fair share and stop avoiding tax – then what is “our fair share”? How do we quantify it? What types of “tax avoidance” are acceptable? Is getting tax-free interest from an ISA acceptable in their view? Or getting tax relief on pension contributions? Do we have to consult Margaret Hodge on each of these matters and others to get the answers? We shouldn’t have to – we have the laws of the land that tell us what we can do and we should not be forced to follow these subjective and uncertain parallel rules laid down by the opinions of a few individuals.

We have a new development now - the General Anti-Abuse Rule (or GAAR). The word “Abuse” used to read “Avoidance” at the consultation stage of this new piece of legislation which came into effect as part of the Finance Act 2013. The GAAR is now an over-riding arbiter as to what is acceptable tax planning under the law. The change from an anti-“Avoidance” rule, to one of anti-“Abuse” is seemingly an acknowledgement of the fact that tax avoidance is legal and that the purpose of this new law was to combat abuses of the system. The change in words gives this law a more-acceptable face – abuse is never a good thing. Abuse is far worse than anything deemed as being Avoidance, but there is perhaps a fine line between the two as something that is abusive is more often than not still within the boundaries of the law.

Whilst it’s a shame it’s come to this, the GAAR would seem a sensible solution to the problem of abuse. The great thing about it is that at the very least it is a law. It is on the statute books. Some uncertainty with still linger for a while before its judgments over individual actions are passed and digested and passed on as guidance, but instead of the hysterical cat calls from a few individuals, we now have a law telling us how to obey the law. 


www.hwca.com/accountants-exeter/