The View from No 50
K P Bonney & Co
Chartered Accountants and
Chartered Tax Advisers
Ilkley LS29 6JA
Tel: 01943 870933
Fax: 01943 870925
HOW TO GET 40% TAX RELIEF EVEN IF YOU ARE ONLY A BASIC RATE TAX PAYER
Claiming tax relief at the rate of 40% is usually a benefit reserved for those who pay tax at that rate. But here is a way you can claim income tax relief at the 40% rate whether you pay tax at 20%, 22% or 40%.
In the 2004 Finance Act the Chancellor increased the rate of tax relief on subscriptions to Venture Capital Trusts (VCT’s) from 20% to 40%.
VCT’s are companies listed on the Stock Exchange. They themselves invest in small, relatively high-risk, unquoted trading companies.
The amount of tax relief you are given for an investment in new VCT shares is restricted to the lowest of
· the amount of income tax paid by you in the year and
· 40% of the amount you invest in the year and
So, for example, a basic rate taxpayer paying income tax of £3,000 could receive a refund of all that tax by making an investment in a VCT of £7,500.
VCT’s have other tax advantages. Dividends from VCT’s are exempt from income tax. Capital gains made on the disposal of VCT shares are exempt from capital gains tax.
VCT shares can be sold at any time but they must be held for a period of three years if the tax reliefs mentioned above are to be preserved.
Our Advice: This is the time of year to be looking at investments of this kind. Do not make investment decisions for tax reasons alone. A suitably qualified financial adviser will be able to point you towards VCT and other investments which are appropriate to your needs.
ENCOURAGING A GIVING CULTURE
In January of this year the Home Office launched an initiative to stimulate giving to charity through the payroll.
Employers who set up payroll giving schemes will be rewarded with a grant of up to £500. The level of grant depends on the number of employees participating in the scheme.
Employees who participate agree to have an amount of their salary paid over to a charity of their choice. They pay no income tax on that part of their salary. The Home Office promises to match the charitable contributions of the employees up to a limit of £10 per employee per month for the first six months.
Advice: If you are
setting up a payroll giving scheme, visit www.payrollgivinggrants.org.uk for more information.
6 April sees the introduction of a new tax - the pre-owned assets tax, or POT for short.
The government has introduced this new tax because people were using complex trust arrangements to avoid inheritance tax, particularly on their homes.
It has always been difficult to avoid inheritance tax on your home. If you give your home away but continue to live in it, you are caught by the ‘gift with reservation of benefit’ rules, or GROB for short. If a gift is a GROB it is treated as part of your estate on your death even though you don’t actually own it.
In the years leading up to 2003, a number of tax avoidance schemes were developed which exploited gaps in the GROB legislation. Using these schemes, individuals were able to give away their homes and continue to live there without the GROB rules applying.
Instead of reinforcing the existing inheritance tax legislation the government responded by introducing a new tax - the POT.
In essence the POT applies if you succeed in avoiding the GROB. So the Revenue gets you one way or the other.
What exactly is the POT?
POT is a bit like income tax. It is a tax payable through the self assessment tax return.
Suppose Davina took some clever tax planning advice several years ago pursuant to which she gave away her home to her daughter Cat, continued to live there and (so she thought) escaped the clutches of the inheritance tax GROB.
Along comes Gordon in 2003 and he introduces the POT.
Under the POT Davina is deemed to be in receipt of an annual income equal to the arm’s length market rent of the house. So, if the market rent for the house is £12,000, that is the amount on which Davina must pay income tax. This could cost Davina as much as £4,800 per annum whilst the arrangement remains in place.
If Davina does not like the idea of the POT she can elect to be ‘caught’ by the inheritance tax GROB instead. In other words if she doesn’t fancy the income tax charge she (but in practice, Cat) can suffer instead the inheritance tax charge which she previously thought she had avoided.
who carried out the clever inheritance tax planning will be affected by the new
It is not only gifts of land which are caught by the POT. Gifts of cash can also be caught.
Suppose Richard gives his son Dominic a sum of money and Dominic uses the money to buy a bungalow as his own residence.
If Richard later moves in with Dominic, then unless certain circumstances prevail, the amount of the gift is caught by the POT. Richard is deemed to be in receipt of an annual income equal to the rental value of the bungalow and he must pay income tax on this deemed income.
Our Advice: Many people will fall into potholes in years to come. Make sure you are not one of them. If you have made gifts in the past in the expectation that your family would not have to pay inheritance tax on the value given away, you now need to take advice on whether you are caught by the POT.
The annual piece of theatre which is the budget speech takes place on 16 March.
The Chancellor will announce that thanks to his careful management of the economy he has stuck to his golden rule of borrowing only to invest. (Moved the goal-posts. Expenditure on road repairs is now accounted for as investment in road improvements).
will announce to the grateful home owners of the
He will delight in announcing new measures to clamp down on the evil minority who avoid tax, causing others to pay more than their ‘fair share’. (Introduce ill thought out, scattergun style legislation in the hope that if he shoots everybody he might succeed in shooting some of the bad guys).
He will remind us that the Child Trust Fund (which he first announced in 2002 and proceeded to re-announce in every budget speech since) is now paying money into the funds of all children born since September 2002. (Wonderful timing with an election round the corner). This will instil in them a culture of saving. (Give them some money to pay off some of their student loans).
A City fan and United fan are in a bank when armed robbers burst in. Whilst several of the robbers take the money from the tellers, others line the customers, including the two football fans, up against a wall and proceed to take their wallets, watches and other valuables.
While this is going on the City fan jams something in the hand of the United fan. Without looking down the United fan whispers, “What’s this?” to which the City fan replies, “It’s the £50 I owe you.”
Copyright: K P Bonney & Co LLP 2005. 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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