Everyone’s favourite activity: a 3-letter word ending in “x” TAX

Planning for Death  “Death and taxes”  Will  Enduring power of attorney  Funeral arrangements  Be very prepared

The Taxes  Income tax  National Insurance contributions  Capital gains tax  Inheritance tax  [Corporation tax]

“Fairness”  Income tax – 40% (formerly 98%); and  National Insurance contributions – 12.8% + 10%; and  Capital gains tax – 40%; and  Inheritance tax – 40% (formerly 60%)

Income tax  Rate Applicable to Trusts (“RAT”)  A compromise abandoned  34% to 40%  Dividend Trust Rate – 32.5%  Lower rate band – income to £500  Rate according to type of income

Example  Rental income: £200; interest £200; dividends £200 (Total £600)  22% = £44  20% = £40  10% = £10  32.5%= £32.50  Total tax£126.50

Distributions of dividend income  Beneficiaries have tax credit of 40%  Trustees pay only 32.5%  Example;  Trustees’ net income: £ =£67.50  Tax paid by trustees (net of tax credit): £22.50  Gross income: £90.00  Tax credit:(£90x40%) = £36.00£36.00  Less paid by trustees:£22.50  Additional tax payable by trustees:£13.50  Net payment to beneficiary: £54.00

Possible alternatives  Mix dividend with other income - fixed rate preference shares pay interest  Flexible fixed interest trusts - overriding power of appointment - watch capital gains and inheritance tax

Capital Gains Tax  Tax on gains (not arithmetical differences)  Gain treated as highest slice of income  Annual exempt amount: normally £4,250  Fragmentation schemes – anti-aviodance  Beating the system – 10+ trusts

Serious avoidance – offshore trusts  Settlor-interested trusts  Planning for death: the joy of the dead settlor  Trust gains and beneficiaries  Non-resident beneficiaries

Inheritance tax  Business and agricultural property relief  Unquoted company shareholdings  100% relief after 2 years  “Business” – wider than “trade”, but -not dealing in land or securities; -not making or holding investments

Business property relief – the limits  The company’s predominant activity  Caravan park cases – depends on the facts  All or nothing approach  “Excepted assets” -let property -cash balances -investments

Business property relief – 2 years’ ownership  Deceased spouse’s holdings  Use of spouse exemption  Not for lifetime transfers

Business property relief  Reduces the value transferred  Value of shares:£2,500,000  Excluded assets:£300,000  Reduction in value transferred:£2,200,000  Subject to inheritance tax:£300,000

The Discretionary Trust Régime  Estate Duty  Capital Transfer Tax  Inheritance Tax -potentially exempt transfer (“PET”) -chargeable transfer - lifetime rate: 20%

Transfer into settlement  A chargeable transfer  Nil rate band (£275k) available  Cumulation of transfers in the previous 7 years  Lifetime rate: 20%  Additional tax (at 40%) on settlor’s death within 7 years  Taper relief

The periodic charge  Discretionary trusts do not die  Death of settlor or beneficiaries is irrelevant  Ten-year anniversaries  Maximum rate: 30% x 20% = 6%  Each settlement has its own nil rate band

The proportionate (exit) charge  Before a 10-year anniversary  Between 10-year anniversaries  Rate depends on quarters expired  “Topping-up” charge  Complex formulae

Accumulation and Maintenance (A&M) settlements  Transfers in are PETs  No periodic (10-year) charge  No fixed interest – trust to accumulate – interest-in-possession at or before age 25  Either: -all beneficiaries grandchildren of same grandparent; or -less than 25 years since creation  Overriding power of appointment

What has not been covered  Corporate reorganisations  Income access and other special shares  Substantial shareholding relief  Offshore structures  Structured finance opportunities  Business “competition” strategies  Asset and share sales  Utilisation of loss reliefs  Tactics on corporate insolvency  Orphans, charities and “unconnected persons”  Emigration  Corporation tax  Stamp duty and stamp duty land tax structures  Investment companies and structures  Use of derivatives and financial instruments  Etc, etc, etc