The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
THE ENTREPRENEUR’S TALE
For the owner of a business one of the most important tax reliefs around is ‘entrepreneur’s relief’. The benefit of the relief is felt when you dispose of a business. If you meet the relevant conditions you pay tax at only 10%.
In the case of a limited company the main conditions are that the business is a trade (as opposed to an investment type activity) and that the ‘entrepreneur’ owns at least 5% of the voting share capital and is an officer or employee of the company for a period of twelve months before the disposal.
I recently met a bright young man (BYM) who ran his own limited company and who met all the conditions for entitlement to entrepreneurs’ relief. He had never used the services of an accountant, figuring he could get by without the expense.
BYM was offered an attractive job by his company’s main client. He accepted, after which his company ceased to trade. As time went by he transferred the money in the company’s bank account to his own. Using the HMRC website as his guide he read about entrepreneur’s relief and concluded he was eligible. On his personal tax return he declared his post cessation drawings as a gain on his shares, eligible for entrepreneur’s relief.
Cases like this bring home to me just how easy it is for the non accountant to get things wrong.
BYM’s company was a trading company. BYM owned the necessary number of shares and was a director for the requisite period. But he overlooked the most important thing of all. He didn’t make a disposal of his shares. Without a disposal there can be no capital gain and therefore no entrepreneur’s relief. All the money he took out of the company is classified as dividend income. Tax rate 25%. Not 10%. In BYM’s case the extra tax cost is £10,000.
If BYM had consulted me before making the withdrawals from the company bank account I could have secured his retirement relief.
If he had his time again would BYM scrimp on accountancy services? Lesson learned.
Our Advice: If you don’t understand tax consult somebody who does. Do it before the transaction, not afterwards.
IF SOMETHING SOUNDS
From time to time I receive calls from clients who have received emails which seem to be from H M Revenue & Customs in which they are asked to click on a link to claim a tax refund. The gist of the telephone call is, “Is this email real or not? It seems real but I am not sure why I should be due a tax refund. Should I respond?”
The answer is NO!
H M Revenue & Customs never ever ever ever ever sends out emails offering tax refunds. Never. Under any circumstances. So if you get one it is a scam. The perpetrators are trying to obtain your financial details. Clicking on the link could give them access to your computer.
Our Advice: Just delete the email. It is always a scam.
OPTING OUT IS NOT THE ANSWER
On occasions clients ask me whether it is necessary to enter taxed bank or building society interest on tax returns. I suppose their thinking is that as the interest has already been taxed there is no point declaring it.
The short answer is that such interest should always be declared. There are good reasons for this. Firstly, your marginal rate of tax might be different to the rate of tax deducted from the interest. Accordingly, you may owe further tax or be owed a repayment. Secondly, the banks make returns of interest payments to HMRC. Accordingly, HMRC has a pretty good idea of how much interest you should be declaring. If HMRC notices you are not declaring your interest income it is going to wonder what else you are not telling them. Cue enquiry.
If you are a higher rate taxpayer you have to pay higher rate tax on your interest income. Ronald Farrell, a higher rate taxpayer, simply took exception to this and decided not to declare his taxed investment income. He deliberately omitted his interest income from his return. He argued that others in the same circumstances made no such disclosure and hence paid less tax than him and this was his way of getting even with them.
So determined was he, Ron took his case to the tax tribunal. Not surprisingly, he lost. The tribunal held equality between taxpayers is achieved by requiring everybody (higher rate taxpayers with investment income in this example) to file a tax return rather than allowing Ron and his like to decide what to disclose.
Our Advice: The law determines what you must disclose on your tax return. Even if it makes no difference to the outcome you must declare all your sources of income. The effort you expend in making the disclosure is less than the effort you might otherwise have to expend convincing HMRC you have made a complete and accurate return.
NOT QUITE LIKE THAT
“I gave my children £250,000 five years ago. So if I die tomorrow I shalln’t have to pay the full 40% rate of inheritance tax on these gifts.”
So said the fairly wealthy gentleman (FWG) I visited recently.
Hmmm. It is true there is a relief which, in the right circumstances, reduces the amount of inheritance tax payable on lifetime gifts. But whether the relief is available depends on the facts.
The relief is called tapering relief. If you make a gift during your lifetime and inheritance tax becomes payable on that gift upon your death then you will pay a lower rate of tax on that gift.
Here are the rates for gifts to individuals.
Years between Rate of
gift and inheritance
But the thing which is often forgotten is how the inheritance tax nil rate band interacts with tapering relief.
The inheritance tax nil rate band, currently £325,000, is allocated first to lifetime gifts and then to the estate.
If the nil rate band covers the lifetime gifts then there is no inheritance tax to pay on those gifts any way. Tapering relief is of no value if the amount of inheritance tax is nil.
FWG had fallen in to the trap of thinking his gift of £250,000 would benefit from tapering relief and his estate would benefit from the nil rate band.
Tax doesn’t always work the way you think it does.
That doesn’t, however, invalidate FWG’s broader plan. Affordable lifetime giving is good tax planning.
Gone are the times when the advisory fuel rates remained unchanged for long.
The rates change at least every six months so check regularly that the rates you are using are up to date.
The current and previous rates can be found on the tax data page of my website.
Two football agents are enjoying a round of golf on their local course.
Just as one is about to take a swing he notices a funeral procession making its way along the adjacent road. He respectfully lowers his club, removes his cap and bows his head while the procession goes by.
Afterwards his friend says, “that was one of the most dignified things I have ever seen.”
“Well,” says the agent, “we were married for 35 years.”
Copyright: K P Bonney & Co LLP 2011. All rights reserved. No part of this publication may be produced, stored in a retrieval system, or transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without prior written permission of the publishers. Disclaimer: The publishers have taken all due care in the preparation of this publication. No responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication can be accepted by the authors or the publisher.
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