You have probably noticed by now that tax is back at the top of the political agenda. Proposals put forward by the Conservatives at their annual conference were followed by some eye-catching and, on the face of it, significant changes to inheritance tax and capital gains tax by the Government in the Pre-Budget Report (“PBR”) on 9 October.
Although things are not completely finalised yet, we believe that public spending commitments have limited the Chancellor’s room for further manoeuvre, so we can advise with a fair degree of certainty on what the new changes will mean for you and your business.
Inheritance Tax (“IHT”)
You have no doubt read the headlines eg “Chancellor Alistair Darling has doubled the value of assets which couples can leave behind when they die without incurring inheritance tax” (BBC website 9/10/07). Before the PBR it was possible for couples to plan so as to make wills using the “nil rate band” to ensure that between them they could shelter assets up to £600,000 from IHT. So after the PBR, can you guess the amount couples can now shelter from IHT? £1.2m? No, it’s still £600,000. The big difference is that now, you do not necessarily need to make nil rate band wills to do so, although that may still be a good idea in any event to preserve assets (perhaps thinking about care home fees, or to ensure that your wealth is not squandered by your children or others) and will still be essential planning for business owners.
The main point to note is that you no longer have to claim one IHT nil rate band when one of a couple dies. If Mr X dies leaving everything to Mrs X, when Mrs X dies she can claim two nil rate bands, which on current figures would mean no IHT on joint assets up to £600,000 (2 x £300,000). However, Mr X’s nil rate band is valued at Mrs X’s death, so that if he dies now and Mrs X dies in 2010/11 when the nil rate band will be £350,000, Mrs X can then claim nil rate bands worth £700,000 (2 x £350,000), not £650,000 (£300,000 + £350,000). Mr X’s nil rate band can only be claimed though on Mrs X’s death to the extent it is unused on his death. So if he leaves 50% of it (£150,000) to his children on his death now, on Mrs X’s death in 2010/11 only 50% of its value then (£175,000) will then be available.
It should be noted though that there is one definite winner under the new rules: any widow(er) whose spouse died before 9 October without using the full nil rate band available. In such a case, an extra nil rate band is potentially available when the widow(er) dies.
Do not necessarily assume that the nil rate band should not be used up when one of a couple dies. It is possible that, once the headlines have died down, the nil rate band may not increase quickly in subsequent years, and if assets are likely to increase in value over time it may be better to put them in a nil rate band trust on the first death rather than hope the extra nil rate band on the second death will exempt them from IHT. We can advise on this as necessary. The other scenario to be aware of is where an entrepreneur dies owning a business; if that business is sold after his death but before his spouse dies, IHT on the proceeds of sale at 40% can be avoided through the use of a nil rate band trust.
Capital Gains Tax (“CGT”)
At present CGT is charged on any gains made over and above the personal allowance (£9,200 for individuals for 2007/08, and half that for trusts). The rate varies according to whether the asset disposed of is a business or non-business asset; for a higher-rate taxpayer or a trust, CGT on a business asset is initially 40%, dropping to 20% after it has been owned for one year and 10% after two years. For a non-business asset, the rate is again initially 40%, but it drops by 2% to 38% after it has been owned for three years, and then by another 2% every year until it reaches a rate of 24% after ten years. There is also at the moment relief for indexation, which basically discounts the effect of inflation over the period from March 1982 until the introduction of taper relief in 1998.
All this is set to change from 6 April 2008. Indexation and taper relief will be swept away and the distinction between business and non-business assets will be abolished. There will be one single rate of CGT to replace all the other rates, and it will be set at 18% no matter how long an asset has been held, or what type of asset it is.
This immediately poses a question for anyone who currently holds an asset, be it a share portfolio or an interest in a business: what is the best time to sell for CGT purposes? No doubt business owners have heard the advice, “You have to sell before 6 April!” Equally, owners of non-business assets have probably been told, “Whatever you do, don’t sell until 6 April!” In many cases this advice may be right. But there are circumstances when the opposite may be the case. The availability of indexation may mean that the CGT bill on a sale on 5 April is actually lower than if that sale is postponed until 6 April. We can advise you on your individual circumstances and come up with preliminary CGT calculations to help you.
For businesses, there is a suggestion that a limited form of retirement relief may be introduced to exempt or minimise CGT on a business sale by retiring owners. We are watching this for further developments, but it is unlikely to significantly affect sums paid in large transactions, perhaps only the first £100,000. Another issue with larger deals is where individuals have taken deferred consideration such as loan notes on a business sale. The question is whether anything can be done to enable that consideration to be realised before 6 April at a rate of 10% rather than afterwards at 18%. Again, please contact us if that is something you would like to discuss.
It is vital generally though to make sure that non-tax considerations are given their proper weight. There is no point waiting until 6 April to dispose of a share portfolio at 18% if the market crashes in the meantime!