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TaxationWeb by Mark McLaughlin ATII TEP

The Fourth Estate Planning Conference: Current Issues 2005, 22 June 2005, reported by Mark McLaughlin CTA (Fellow) ATT TEP, Consultant and Editor of www.taxationweb.co.uk

Combining CGT reliefs

Prior to changes introduced in Finance Act 2003, it was possible to ‘wash out’ a chargeable gain on a second property through a combination of capital gains tax holdover relief on a transfer to a discretionary trust (TCGA 1992, s 260) and principal private residence relief upon disposal of the property if occupied by a beneficiary (s 225). The same result is still achievable in the case of furnished holiday lettings. The relief for gifts of business assets (s 165) is available as furnished holiday lettings are qualifying business assets for holdover relief purposes. Husband could give the second home which he owns to his wife on a no gain no loss basis under TCGA 1992 s58. She runs the property as qualifying furnished holiday accommodation for at least a year. She then gives the property to say a life interest trust for the children (and unlike a discretionary trust the value can exceed her nil rate band). One or more beneficiaries occupy under the terms of the trust. Private residence relief is available to the trustees on sale as before, without the restrictions introduced in Finance Act 2003.

Part interests in the home

Discretionary Will Trusts are commonly used in inheritance tax planning. However, the possibility of a life interest settlement for the surviving spouse and children should not be overlooked. This can be useful in the context of an interest in the family home. For example, suppose that Mr A’s Will establishes a life interest trust for three beneficiaries (Mrs A and two children), as to 20 per cent for Mrs A and 80 per cent for the children (or in shares calculated by reference to the nil rate band). For capital gains tax purposes, when the trustees eventually sell their interest in the family home, TCGA 1992, s 225 should enable a tax-free uplift in value. In addition, the widow’s estate on her death will be taxed on one-fifth of the value of the value of the settled property (plus her own half share) because, for inheritance tax purposes, the widow would have a life interest in no more than 20 per cent of the then value of the trust fund (IHTA 1984, s 50(1), (5)). In addition, there will be a measure of valuation discount for the widow’s 70 per cent total share.

Deathbed planning

For inheritance tax purposes, the business property relief (BPR) rules require a two year ownership period in respect of business property. However, the BPR rules do not generally require that the property has always been relevant business property. Deathbed planning for an investment company shareholder could therefore involve converting an investment company to a trading company before death. There would need to be clear evidence of the change in character of the company’s business (i.e. actual conversion as opposed to a mere intention). Alternatively, assets could be transferred to a trading company prior to death (subject to capital gains tax and stamp duty land tax implications), for use in the company’s business at the time of death.

Partnerships and SDLT

The stamp duty land tax (SDLT) rules as they apply to partnership transactions (i.e. the transfer of a chargeable interest to or from a partnership, and the transfer of an interest in a partnership) are technically complex, and liabilities can unexpectedly arise. This follows largely because a partnership interest is defined in terms of income (not capital) sharing ratios. However, there will be no SDLT issues to consider on land going into a partnership, if all the partners comprise the transferor and/or persons connected with him, and if no consideration is paid. However, note the rule in F(No. 2)A 2005 that, if the transferor withdraws value from the partnership within the following three years (other than representing income profit) there will be SDLT to pay at that point. On the transfer of a partnership interest, if no consideration is given for the transfer of a partnership interest, no SDLT liability should arise. Otherwise, the actual consideration is disregarded and SDLT is payable on the basis of market value. Overall, great care needs to be taken regarding land owned by one or more partners (or connected persons) outside the business, which starts (or stops) being used for partnership business. There is a transfer of a chargeable interest into (or from) the partnership even if legal ownership does not change. This point is confirmed in the SDLT Manual (at paragraph 33400). If rent is paid, it is the periodic tenancy (lease) which is transferred.

Tax-efficient Wills

For married couples (and registered civil partnerships, in due course), the optimum tax-efficient Will for inheritance tax (IHT) purposes on the first death is:

(a) any property attracting 100 per cent business or agricultural property relief should be left direct to issue or on trusts (as in (b));

(b) a nil rate band discretionary trust for a class of beneficiaries including the surviving spouse and issue; and

(c) residue should be left to the spouse on a flexible life interest trust.

This enables future IHT planning, i.e. with no reservation of benefit or pre-owned asset tax issues. However, care should be taken if the transferor spouse is, but the transferee spouse is not, domiciled in the UK for IHT purposes, due to the £55,000 limitation on the spouse exemption.

Non-domiciliaries

Finance Act 2005 made changes to the rules determining the situs of assets for Capital Gains Tax (CGT) purposes. Nevertheless, CGT still does not apply to the disposal by an individual not domiciled in the UK of a UK business owned by a company incorporated outside, but resident in, the UK. Consideration could therefore be given to the ‘roll over’ of an unincorporated business (under TCGA 1992, s 162) into such a company. However, in view of the changes in legislation in recent years affecting the territorial scope of CGT and widening the UK tax base, it is uncertain how long this planning opportunity will remain possible.

Matthew Hutton’s Estate Planning Conferences resume in September. They are well presented, highly informative and the supporting notes are very comprehensive. Overall, the Conference represents excellent value for money, and for professional advisers in Capital Taxes comes highly recommended by the author.

July 2005

Mark McLaughlin CTA (Fellow) ATT TEP

Matthew Hutton’s Autumn Series of Conferences

Thursday 15 September - Stratford Manor, Stratford-upon-Avon

Tuesday 20 September - Lord Haldon Hotel, Exeter

Tuesday 27 September - Spa Hotel, Tunbridge Wells

Tuesday 4 October - Wood Hall, Wetherby

Tuesday 18 October - Renaissance Hotel, nr Derby

For further details, brochures and booking forms please contact Matthew Hutton: email – mhutton@paston.co.uk or telephone – 01508 528388.