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Taxation Guide UK TY 2010

Apr 10, 2018

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    Practical Tax Tips to help guide you through the tax system

    Tax Tips 2009/10

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    Tax Tip

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    The tax system in the UK is increasingly complex. It maya ect you, your amily and your business; or instance...

    The FamilyCould you save tax by a more e cient distribution o

    assets and income around the amily?

    Your Business Do you have a business plan?

    Is your business structured in the most e ective way?

    Selling your AssetsHave you planned to make the most o

    capital gains tax relie s?

    Tax E fcient Savings Are you making the most o them?

    Looking AheadHave you made adequate provision

    or your retirement?

    This guide will answer all o these questions and more!It will help you make sense o the system and make sure

    you get the most out o it.

    Please use it to identi y areas where youcould take action (weve included a handy notes page at

    the back o the booklet). Then contact us or advice and todiscuss the most appropriate way orward.

    Practical Tax Tips to help guide you through

    the tax system

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    Contents

    Taxation o the Family 3-5

    Married couples 3

    Children 4Child Trust Fund 4Child Tax Credit 5Marriage breakdown 5

    Tax and the Employee 6-9Expense payments 6Mileage claims 6Company cars 7Private petrol 7Medical insurance 8Phones 8Broadband 8Social unctions or employees 8Cheap or interest-free loans 8National insurance 8Childcare costs 8

    Pensions, Savings andInvestments 10-12Looking ahead 10Tax- ree savings 11

    ISAs

    Other Investments 11-12 National Savings products Single premium insurance bonds The Enterprise Investment

    Scheme Venture Capital Trusts

    Capital Gains Tax 13-15CGT changes 13Entrepreneurs' Relie 13-14Main residence 14Bed and break ast alternatives 15De erring gains through

    EIS investments 15

    Inheritance Tax Planning 16-18Estate planning 16

    Wills 16Using the nil rate band 16-17

    Exemptions 17

    Annual exemption Small gifts Normal expenditure out of

    income Family maintenance Wedding presents

    Gifts to charitiesRelie s 18Li e assurance 18

    Tax and your Business 19-21Sole trader 19Partnership 19Company 19Limited LiabilityPartnerships (LLPs) 19Important choices 19-20

    Year end Expenses

    Capital allowancesUnincorporated businesses 20Limited companies 21Paying the tax 21

    And nally - a word o warning 21

    Value Added Tax 22-23 What does VAT apply to? 22Supplies 22Do I need to register? 22Record keeping 22

    When do I have to make areturn to HMRC? 23Inspection o records 23O ences and penalties 23Cash accounting scheme 23Retail schemes 23Flat rate scheme 23

    Notes 2 4

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    Taxation o the Family

    Married couples are subject to a

    system o independent taxationwhich means that husbands andwives are taxed separately ontheir income and capital gains.The e ect is that both have theirown allowances and tax bands orincome and capital gains tax (CGT)

    purposes and are responsible ortheir own tax a airs.

    2009/10 IncomeTax Rates

    %

    0 - 2,440 10*2,441 - 37,400 20**

    Over 37,400 40 t

    * Only applicable to dividendsand savings income

    ** Except dividends (10%)t Except dividends (32.5%)Other income taxed rst, thensavings income and nallydividends.

    Children are independent peopleor tax purposes and are there ore

    entitled to their own allowancesand tax bands. It may be possibleto save tax by generating incomeor capital gains in the childrenshands.

    Separation and divorce can havesigni cant tax implications. Inparticular, the ollowing areaswarrant care ul consideration:

    current and uture tax allowances

    trans ers o assets betweenspouses.

    Married Couples

    Everyone is entitled to a basic personalallowance. This allowance cannot betrans erred between spouses. Whereone spouse was born be ore 6 April1935, a married couples allowanceis available. This is generally given tothe husband although it is possible, byelection, to trans er it to the wi e.

    In general, married couples shouldtry to arrange their ownership o income producing assets so as toensure that personal allowancesare ully utilised and any higher rateliabilities minimised. Generally, whenhusband and wi e jointly own assets,any income arising is assumed tobe shared equally or tax purposes.This applies even where the asset isowned in unequal shares unless anelection is made to split the incomein proportion to the ownership o theasset.

    The one exception is dividendsrom jointly owned shares in

    close companies which are taxedaccording to the actual ownershipo the shares. Close companiesare broadly those owned by thedirectors or ve or ewer people.For example i a spouse is entitledto 95% o the income rom jointlyowned shares that spouse willpay tax on 95% o the dividends

    rom those shares. This measureis designed to close a perceivedloophole in the rules and does notapply to income rom any other

    jointly owned assets.

    Throughout this bookletre erences to the tax treatmento married couples extends tosame-sex couples who haveentered into a civil partnershipunder the Civil Partnership Act.

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    Taxation o the Family

    Tax TipReview the income split betweenhusband and wi e. Considertrans erring assets to even upincomes. I the husband or wi eis sel employed their spousecould be employed or takeninto partnership as a means o redistributing income. HMRC mayhowever look closely at suchsituations to ensure that it doesnot amount to an arrangementto trans er income rom a higherrate taxpaying spouse to oneliable at the basic rate.

    Each spouses CGT liability iscomputed by re erence to theirown disposals o assets and eachis entitled to their own annualexemption, currently 10,100.Gains above this level are chargedto tax at a fat rate o 18%.

    CGT savings may be made byensuring that maximum advantageis taken o annual exemptions.

    This can o ten be achieved bytrans erring assets between spousesbe ore sale - a course o actiongenerally having no adverse CGT orinheritance tax (IHT) implications.

    Advance planning is vital and thepossible income tax e ects o trans erring assets should not beoverlooked.

    Children It may be possible or tax savingsto be achieved by the trans er o income producing assets to a childso as to take advantage o thechilds personal allowance, startingrate (10%) and basic rate (20%)tax bands. This cannot be done by the parent i the annual income arising is above100 (gross). The income will stillbe taxed on the parent. However,trans ers o income producingassets by others (eg grandparents)may still be e ective.

    Children or any other person whosepersonal allowances exceed theirincome are not liable to tax. Whereincome has had tax deducted atsource, a repayment claim shouldbe made. Remember that tax creditson dividends are not repayable.

    Tax Tip A parent can allow a child to useany entitlement to the CGT annualexemption by using a bare trust,ie an arrangement whereby abene ciary has an absolute rightto property and income but thetrustees are the legal owners.

    Child Trust Fund

    The Child Trust Fund was introducedrom April 2005 or all children

    born rom 1 September 2002.The government provides an initial

    endowment o 250 (500 or lowincome amilies) and urther suchpayments at the age o seven. Other

    eatures o the und include:

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    Taxation o the Family

    allowing additional contributions

    to be made by others ( amily andriends) o up to 1,200 a year,

    although there is no tax relie or contributions made to a CTF

    account

    children not being taxable on the

    income and gains they makeon the investments in their CTFaccount

    unds accessible at age 18.

    From April 2010 the government

    will make payments o 100 per year into the Child Trust Fundaccounts o all disabled children.Severely disabled children (thosewho receive the High Care elemento Disability Living Allowance)will receive 200 per year. These

    payments will not count towards the1,200 yearly contribution limit.

    Child Tax Credit

    The Child Tax Credit is means testedand potentially available to amilies

    who have responsibility or one ormore children.

    It is a tax- ree payment made directto the main carer.

    There are several elements to the

    credit but broadly the maximumis an annual amount o 2,235per child together with a amilyelement (one per amily) o 545per annum.

    Tax TipMany amilies with children,whether or not the adults in the

    amily are in work, are eligibleor the Child Tax Credit. Some

    credit is likely to be payable in2009/10 i a amilys incomeis less than 58,175 a year or66,350 i there is a child underone year old.

    Marriage Breakdown Marriage breakdown o ten involvesthe trans er o assets betweenhusbands and wives. Unless thetiming o any such trans ers iscare ully planned there can beadverse CGT consequences.

    I an asset is trans erred betweena husband and wi e who are livingtogether, the asset is deemed to betrans erred at a price that does notgive rise to a gain or a loss. Thistreatment continues up to the end o the tax year in which the separationtakes place. CGT can there ore present a problemwhere trans ers take place a ter theend o the tax year o separation.IHT, on the other hand, will notcause a problem i trans ers takeplace be ore the granting o a decreeabsolute on divorce. Trans ers a terthis date may still not be a problemas o ten there is no gratuitousintent.

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    Tax and the Employee

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    Employees income tax is collected

    by HMRC under the Pay As You Earn(PAYE) system. Each employee isgiven a tax code number and theemployer deducts tax rom earningsby re erence to that number.

    Many code numbers are incorrect

    and you should always check yournumber and contact HMRC i youare unsure. Code numbers refectmany items, including tax you mayowe on bene ts in kind.

    Common bene ts include cars and

    private medical insurance.

    Expense Payments

    I your employer reimburses you orexpenses you incur whilst out onbusiness, you would have thought

    that there could be no tax bill.However, this is not always the caseand you should check the systemused by your employer. Otherwise,

    you could end up paying too muchtax.

    At the end o each tax year, youremployer has to send a summaryo all o your bene ts to HMRC,generally on orm P11D. This willinclude all payments made to you tocover expenses such as subsistenceand hotel bills. You, as an individual,

    can then write to HMRC and claimtax relie on expenses you originallypaid out o your own pocket wholly

    or business purposes. O course,the answer may be that nothing istaxable and so employers can ask to be excluded rom this process i

    they write to HMRC. This is knownas a dispensation.

    Tax TipCheck whether your employerhas a dispensation. I not you willneed to make entries on your taxreturn to:

    record the bene ts and

    expenses as incomeclaim a deduction or the businesselement o the expenses.

    I you do not receive a tax return you should write directly to HMRCto make a claim.

    Mileage Claims

    Many employers pay a standard rateo mileage to all employees who usetheir own cars or business. Themaximum rates that can be paid

    tax- ree are set out in the legislationand are as ollows:

    Up to 10,000 miles - 40pOver 10,000 miles - 25p

    I you are paid or business miles at

    less than the authorised rate, youcan write to HMRC and ask or taxrelie on the di erence.

    ExampleDave is a basic rate taxpayer andtravels 4,100 business miles per

    year in his car and is paid 32p perbusiness mile by his employer.Daves tax relie claim is: 4,100 miles @ 40p: 1,640Less: actually paid4,100 @ 32p: (1,312)Total: 328Repayment due:328 x 20% = 65.60

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    Tax and the Employee

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    Furthermore, the employer is able

    to pay an additional 5p per miletax- ree to the employee i they takea ellow employee on a business

    journey as a passenger.

    Tax TipRemember to check yourmileage allowances and write toHMRC or your repayment o taxi appropriate.

    Company Cars

    Company cars are taxed byre erence to the list price and thecarbon dioxide (CO2) emissionsmeasured in grams per kilometre.Low emission cars (up to 135 gm/km in 2009/10) are charged at15% o the list price building upto a maximum o 35% or highemission cars (235 gm/km andabove in 2009/10).

    CO2 emissions are recorded onthe Vehicle Registration Document(V5). I the car has a diesel enginethere is a 3% supplement, up toa maximum o 35%, unless thecar meets the Euro IV emissionstandards and was registered be ore1 January 2006, in which case thesupplement is waived.

    Discounts apply to certainenvironmentally riendly cars. A 10% rate applies to non-electriccars with emissions o no morethan 120gm/km. Environmentally

    riendly discounts do not apply tothese cars but the diesel supplementdoes. For cars registered be ore1 January 1998, the charge isbased on engine size.

    Tax TipRemember to check your taxcode to make sure the valueo the bene ts refected in it,especially the company car,are correct. HMRC o ten makemistakes!

    Private Fuel

    A separate charge applies whereprivate uel is provided in additionto a company car, unless theemployee reimburses the employer

    or all private mileage (includingtravel between home and work).

    The charge is calculated by applyingthe percentage gure used tocalculate the company car bene t toa xed gure which or 2009/10 isset at 16,900.

    Tax TipI you are provided with private

    uel, check the amount o tax

    you are paying compared tothe actual cost o uel on yourprivate mileage. It may be that itis cheaper to opt out o employerprovided private uel and pay orit yoursel .

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    Tax and the Employee

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    Medical Insurance

    The provision o private medicalinsurance is a taxable bene t.

    Phones

    Private home telephone bills,including rental charges, whichare paid or by the employer willbe taxed as a bene t. There is notaxable bene t or private callsusing a company mobile phone,limited to one phone per employee.

    Broadband

    There is generally no bene t onthe provision o home broadbandaccess where the employersubscribes or the service or theemployee's home and the employeeneeds this access to carry out their

    job.

    Social Functions orEmployees

    HMRC will not tax as a bene t aChristmas party or other annual

    unctions provided the total VAT-inclusive cost o the events in a tax

    year is less than 150 per head.

    Cheap or Interest-FreeLoans

    I loans made by the employerexceed 5,000 in a tax year, taxis chargeable on the di erencebetween the interest paid and theinterest due at the o cial rate,currently 4.75%. This situationo ten occurs with directors whooverdraw their loan or currentaccount and special attentionshould be paid to this issue, asHMRC o ten check up on it.

    National Insurance

    In general employees nationalinsurance (NI) is not due onbene ts in kind except vouchers,stocks and shares, the payment o an employees personal liability andbene ts provided by way o readilyconvertible assets.

    Most bene ts in kind however aresubject to Class 1A (an employersNI contribution). As this currentlyamounts to 12.8% o the taxablevalue o the bene t, businessesmay need to consider the taxe ciency o providing bene ts.

    Tax TipContributions by your employerto a pension scheme are tax andNI ree. This may be ar betterthan any other perk. I you planto give up some o your normalsalary to do this, talk to us tomake sure your salary sacri cescheme is e ective.

    Childcare Costs

    Employees are exempt rom bothtax and NI on childcare providedin an employer operated nursery.This includes employees o other

    organisations i they work at thesame location as the employerssta . There is no nancial limit onthe relie .

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    Tax and the Employee

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    Childcare vouchers provided by the

    employer are also exempt rom taxand NI. However the exemptionis limited to 55 per week or2009/10 and any excess is liableto both tax and NI.

    Any ormal registered childcare

    or approved home childcarecontracted or by the employer suchas a local nursery, out-o -schoolclub or childminder is exempt

    rom both tax and NI but as withvouchers the exemption is limited to55 per week or 2009/10.

    Where schemes operate theyshould be open to all employees.

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    Pensions, Savings and Investments

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    Looking Ahead

    Pensions are one o the mostimportant areas o long-term savingsconsiderations and one o the mosttax e cient. A higher rate taxpayercan contribute 100 to a pension

    und at a cost o only 60, so whydo so many o us put the matter o ?

    A new pensions regime took e ectin April 2006 and created a singleset o tax rules or all registeredpension schemes.

    Under this regime, there is norestriction on the amount o contributions an individual can payinto a registered scheme, only onthe amount o tax relie given. Thismeans that unlimited contributionsmay be made to, and retainedby, a registered pension scheme.Investment income and capitalgains will accrue tax- ree withinthe und.

    An individual will be entitled to taxrelie on personal contributions inany given tax year up to the highero 3,600 or 100% o relevantUK earnings (broadly employmentincome or trading pro t).

    Contributions are paid net o basicrate tax. The pension providerwill then recover this rom HMRC.Contributions will be eligible orhigher rate tax relie , i appropriate.

    Under the simpli ed regime thereis a single rule or allowing adeduction in respect o employercontributions to a registered pensionscheme. It provides or a deductionsubject to the contributions actuallybeing paid in the period and madewholly and exclusively or thepurpose o the business.

    Tax TipRelie may be available tobusinesses or substantialemployer contributions on behal o employees.

    Despite there being no limits oncontributions that can be paid intoregistered schemes, the annualallowance acts as a control.

    The annual allowance providesor the annual increase in an

    individuals rights under allregistered pension schemes to becalculated. This is then comparedwith the annual allowance andany excess charged to income taxat 40%. For 2009/10 the annualallowance is set at 245,000.

    The second key control under theregime is the li etime allowance.

    Although individuals can save asmuch as they like in registeredschemes, when they start to drawbene ts the value o their und istested against the li etime allowanceand any excess subject to theli etime allowance charge. Theli etime allowance or 2009/10 is1.75 million.

    Where unds in excess o theli etime allowance are be taken asa lump sum the rate o charge is55%. The li etime allowance chargeon the balance o unds in excess o the li etime allowance is 25%.

    From April 2009 new rules maylimit the higher rate tax relie available or those with incomeexceeding 150,000.

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    Pensions, Savings and Investments

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    Tax-Free Savings

    ISAs

    Individual savings accounts (ISAs)provide an income tax and CGT ree

    orm o investment. The maximuminvestment limits are set or tax

    years. To take advantage o thelimits available or 2009/10 theinvestment(s) must be made by5 April 2010.

    ISA Investment LimitsMax. investment per tax year

    2009/10

    Overall annualinvestment limit *7,200

    Comprising

    - cash up to *3,600- balance in stocks

    and shares *7,200

    * In 2009/10 the ISA limits orpeople aged 50 and over willbe raised to 10,200, o which5,100 can be held in cash.This change will be made rom 6October 2009. The current ISA limits(7,200 o which a maximum o 3,600 can be held in cash) willbe increased or all investors to thesame amount rom 6 April 2010. In practice most ISA providers sellISAs solely investing in stocksand shares. Banks and buildingsocieties provide cash ISAs.

    16 and 17 year olds are able toopen cash ISAs.

    Other Investments

    There are a variety o other taxe cient savings products, many o which work in completely di erentways. You should consider yourneeds in detail be ore enteringinto any commitments. Examples

    include:

    National Savings products - theseare taxed in a variety o ways.

    Some, such as Savings Certi cates,are tax- ree.

    Single premium insurance bondsand roll up unds provide a use ulmeans o de erring income into asubsequent period when it may betaxed at a lower rate.

    The Enterprise Investment Scheme(EIS) - income tax relie at 20% isavailable on new equity investment(in quali ying unquoted tradingcompanies) o up to 500,000in 2009/10. CGT exemption isgiven on shares held or at least

    three years. Where gains arereinvested in EIS shares, the capitalgains realised on the sale o anychargeable asset (including quotedshares, holiday homes etc) can bede erred.

    Venture Capital Trusts (VCT) investin the shares o unquoted tradingcompanies. An investor in theshares o a VCT will be exempt romtax on dividends and on any capitalgain arising rom disposal o theshares in the VCT. Income tax relie

    currently at 30% is available onsubscriptions or VCT shares, up to200,000 per tax year, so long asthe shares are held or at least ve

    years (three years or shares issuedbe ore 6 April 2006).

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    Pensions, Savings and Investments

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    NB - There is no possibility o

    de erring capital gains into VCTshares as there is with EIS.

    Tax Tip When choosing betweeninvestments always consider thediffering levels of risk and yourrequirements for income andcapital in both the short and longterm. An investment strategybased purely on saving tax is notappropriate.

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    Capital Gains Tax (CGT)

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    Do you sometimes have to pay CGT?

    Or do you own assets which mightgive rise to a capital gain whensold? I so then read on or importantin ormation about the CGT system.

    CGT Changes

    The government introducedsome major changes to CGT orindividuals and trustees rom April2008 onwards. These included, ordisposals and held over gains arisingon or a ter 6 April 2008, the doublewhammy that neither taper relie nor

    indexation allowance are available(even i assets were held be ore thisdate).

    The chargeable gain is liable totax at the rate o 18% (subject tothe deduction o allowable losses,

    any other relie s and the annualexemption).

    Entrepreneurs' Relie

    In addition, the governmentintroduced a new relie known asEntrepreneurs Relie (ER) rom April2008, available or capital gainsarising on the disposal o a business.

    The e ect o the relie is to reducethe gains liable to CGT at 18% by4/9ths resulting in an e ective rateo 10% (18% x 5/9ths). The relie is available or gains o up to 1million on disposals o quali yingassets by an individual through theirli etime. The impact o this relie ondisposals o business assets canbe seen in the ollowing table below(ignoring the annual exemption).

    Gain Quali yingor ER

    Amounto ER

    Chargeablegain

    Tax E ectiverate

    250,000 250,000 111,111 138,889 25,000 10%500,000 500,000 222,222 277,778 50,000 10%750,000 750,000 333,333 416,667 75,000 10%

    1,000,000 1,000,000 444,444 555,556 100,000 10%1,250,000 1,000,000 444,444 805,556 145,000 11.6%1,500,000 1,000,000 444,444 1,055,556 190,000 12.6%1,750,000 1,000,000 444,444 1,305,556 235,000 13.4%2,000,000 1,000,000 444,444 1,555,556 280,000 14%

    3,000,000 1,000,000 444,444 2,555,556 460,000 15.3%4,000,000 1,000,000 444,444 3,555,556 640,000 16%5,000,000 1,000,000 444,444 4,555,556 820,000 16.4%

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    Capital Gains Tax (CGT)

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    The conditions or the new relie are

    based broadly on the old RetirementRelie but the new rules are designedto be simpler:

    there is no minimum age limit;and

    the relie is available where therelevant conditions are met or aperiod o one year.

    The relie applies to gains arising onthe disposal o the whole, or a part,o a trading business that is carried

    on by the individual, either alone or inpartnership. Where a business ceases,relie is available on gains on assetsused in the business and disposed o within three years o cessation.

    The relie also applies to gains on

    the disposal o shares in a tradingcompany, or holding company o a trading group, provided that theindividual making the disposal:

    has been an o cer or employeeo the company, or o a company

    in the same group o companies;and

    owned at least 5% o the sharecapital o the company and thatholding enables the individual toexercise at least 5% o the voting

    rights.

    Where an individual quali es or therelie on a disposal o shares, relie may also be available in respect o any associated disposals o assetswhich were owned personally and

    used in the company, or groups,business. A similar rule may allowrelie on an associated disposal bya member o a partnership whois entitled to relie on the disposalo their interest in the assets o thepartnership.

    Trustees are also able to bene t

    rom the relie i a bene ciary o thetrust with an interest in possessionrelating to those assets is involved incarrying on the business in question,personally or as a partner. In thecase o shares, the bene ciary mustquali y as an o cer or employee o

    the company in question and own atleast 5% o the shares personally.

    The above is only a brie summaryo the new relie . Please contact us i

    you would like to know more.

    Main Residence An individuals or married couplesonly or main residence includingland up to hal a hectare is exempt

    rom CGT. Land in excess o hal ahectare may also quali y or relie

    i certain conditions are met. I aproperty has not been the onlyresidence throughout the periodo ownership the relie may berestricted.

    Periods o absence rom the main

    residence may not quali y or therelie although the last three years o ownership will automatically quali yprovided the property has quali edat some point during the period o ownership. In addition i a propertyhas been let during any absences

    a urther letting relie may beavailable.

    Tax TipI you have more than onehome, you can choose whichone should bene t rom theCGT exemption. This requiresan election and needs care ulthought to ensure any availableexemption is maximised.

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    Capital Gains Tax (CGT)

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    Bed and Break ast - Alternatives

    Bed and break asting is the termused or the sale and almostimmediate repurchase o the sameshares. It used to be an e ectiveway o realising gains whichwould be covered by the annualCGT exemption or to utilise losses.However changes to the CGT ruleshave rendered this ine ective.

    Tax TipThere may be ways around this:

    sell shares rom your personalport olio and repurchasethrough an ISA

    a sale by one spouse ollowed

    by the repurchase in the nameo the other spouse

    wait 30 days be orerepurchase.

    De erring Gains Through

    EIS Investments

    The Enterprise Investment Scheme(EIS) scheme allows individualsto de er capital gains made on thedisposal o any asset so long asthe gain is reinvested in shares in

    an EIS quali ying unquoted tradingcompany.

    The de erred gain crystallises on asubsequent disposal o the sharesunless certain conditions arebreached be ore that time.

    Please note:

    certain trades (eg propertydevelopment and arming) areexcluded

    the shares must be acquired bysubscription - ie only new shares

    quali y

    the EIS scheme is complex andadvice is essential.

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    Inheritance Tax (IHT) Planning

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    Speculation that the government

    would tighten up the rulessurrounding IHT has so ar provedto be wrong.

    IHT is charged on a persons estatewhen they die and on certain gi tsmade during their li etime.

    The rate o tax on death is 40%and 20% on li etime chargeabletrans ers. The rst 325,000 isnot chargeable. This exemption isknown as the nil rate band.

    Most gi ts made more than seven years be ore death will escape tax.There ore, i you plan in advance,gi ts can be made tax- ree. Theresult can be a substantial taxsaving.

    We give guidance below on someo the main opportunities orminimising the impact o the tax.

    Estate Planning

    Much estate planning involves

    making li etime gi ts o capital touse exemptions and relie s or tobene t rom a lower rate o tax onli etime trans ers.

    Any plan must take account o yourcircumstances and aspirations.

    The need to ensure your nancialsecurity (and your amilys) cannotbe ignored. I you propose to makegi ts, the interaction o IHT withother taxes needs to be consideredcare ully.

    I you do nothing you may becomeexposed to a large IHT liability.

    Wills

    As the main IHT liability is likely toarise on death, a sensible and up todate Will is important.

    ChecklistDo you have a Will?

    Where is it kept - do you and your amily know?

    Is it up-to-date?

    Does your Will make full use of IHT exemptions and reliefs?

    Do you have adequate li eassurance?

    Tax TipIn the two year period ollowing adeath, the terms o a Will can bevaried or disclaimed by using aDeed o Variation.

    Using the nil rate band

    On death it is vital to ensure that thenil rate band, currently 325,000,is used, assuming that it has notalready been utilised over the lastseven years.

    One historic problem is thattrans ers between spouses areexempt rom IHT. This could causea loss o the nil rate band to onespouse.

    Example

    John dies leaving the whole o his estate o 800,000 to hiswi e Jane. A ew years later Janedies, leaving her whole estate o 900,000 to her children.

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    Inheritance Tax (IHT) Planning

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    Under the old rules, on Johns

    death there was no IHT, as trans ersbetween husband and wi e wereexempt, but on Janes death the IHTpayable was based on 575,000(900,000 less the current nil rateband o 325,000).

    The government has moved toaddress this problem, by allowingthe proportion o the nil rate bandunused on the death o the rstspouse to be used against theestate o the surviving spouse whenthey die. These rules apply where

    the surviving spouse dies on or a ter9 October 2007.

    So to continue with the example,under the new rules, on Johnsdeath there will still be no IHT due,as trans ers between husband and

    wi e are still exempt. However, onJanes death the nil rate band notused on Johns death will availableagainst Janes estate, as well asher own nil rate band. The IHTpayable will be based on 250,000(900,000 less the current nil rate

    band o 325,000 x 2).

    Whilst the new rules certainlyhelp, urther care ul planning couldeliminate this bill entirely.

    Exemptions

    There are many valuable IHTexemptions. The main ones ollow.Ensure youre making ull use o them!

    Annual exemption

    3,000 per tax year may be givenby an individual without an IHTcharge. An annual exemption maybe carried orward to the next yearbut not therea ter.

    Small gi ts

    Gi ts to individuals not exceeding250 in total per tax year perrecipient are exempt.

    Normal expenditure out o income

    Gi ts made out o income whichare typical and habitual and donot result in a all in the standardo living o the donor are exempt.Payments under a deed o covenantand the payment o annualpremiums on li e insurance policies

    would usually all within thisexemption.

    Family maintenance

    A gi t or amily maintenance doesnot give rise to an IHT charge.

    This may include the trans er o property made on divorce under acourt order, gi ts or the educationo children or maintenance o adependent relative.

    Wedding presents

    Gi ts in consideration o marriageare exempt up to 5,000 i madeby a parent with lower limits orother donors.

    Gi ts to charities

    Gi ts to registered charities areexempt provided that the gi tbecomes the property o the charityor is held or charitable purposes.

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    Relie s

    When business or agriculturalproperty is trans erred there is apercentage reduction in the valueo the trans er. O ten this provides100% relie . In cases where ullrelie is available there is littleincentive, rom a tax point o view,to make li etime trans ers o suchassets. Additionally no CGT will bepayable where the asset is includedin the estate on death.

    However the relie s may not be sogenerous in the uture and there oregi ts now may be advisable.

    What will happen to any businessor agricultural property includedin your estate on death? Leavingit to your spouse will waste anyavailable relie . Consider leavingsuch property to someone else.

    Tax TipUse o trusts

    Trusts can provide an e ectivemeans o trans erring assetsout o an estate whilst stillallowing fexibility in the ultimatedestination and/or permittingthe donor to retain some controlover the assets. Provided that thedonor does not obtain any bene tor enjoyment rom the trust, theproperty is removed rom theestate.

    Li e Assurance

    Li e assurance arrangements canbe used as a means o removingvalue rom an estate and also as amethod o unding IHT liabilities.

    A policy can also be arrangedto cover IHT due on death. It isparticularly use ul in providing undsto meet an IHT liability where theassets are not easily realised, eg

    amily company shares.

    Tax TipHave you considered a trustto ensure any li e assuranceproceeds are not taxable as parto your estate on death?

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    Tax and your Business

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    The most important word to bear in

    mind when you start out in businessis preparation. Spending sometime creating a business plan canbe invaluable. It will bring to mindmany issues which you may nothave considered, such as nancing,numbers o employees and the

    business structure, which will help you meet your aims. Do you wantto run the business by yoursel orin partnership with someone else,or would you rather trade under theumbrella o a limited company?

    Sole TraderThis is the simplest orm o business since it can be establishedwithout legal ormality. However,the business o a sole trader is notdistinguished rom the proprietors

    personal a airs.

    Partnership

    A partnership is similar in natureto a sole trader but because morepeople are involved it is advisable

    to draw up a written agreement andor all partners to be aware o the

    terms o the partnership. Again thebusiness and personal a airs o thepartners are not legally separate.

    Company

    The business a airs are separaterom the personal a airs o

    the owners but there are legalregulations to comply with.

    The appropriate structure will

    depend on a number o actorsincluding consideration o taxationimplications, the legal entity,ownership and liability.

    Tax TipThere are various ways o extracting pro ts rom a companyalthough care ul consideration o the level and method needs tobe given. For example paymentsby the company to an approvedpension scheme are tax and NI

    ree!

    Limited LiabilityPartnerships (LLPs) LLPs are a hal -way house betweenpartnerships and companies.They are taxed in the same wayas a partnership but are legally acorporate body. This means thatthe personal a airs o the memberscan be separated rom the businessa airs.

    Important Choices

    Some matters are broadly the sameno matter which route you take.

    Year end

    Choosing the right year end may,in some circumstances, de er atax bill but there will also be othercommercial issues to consider.

    Expenses

    Tax will be due on the pro ts o yourbusiness but not all expenses thebusiness incurs are tax deductible.Care ul thought needs to be givenas to when and how much moneyis going to be spent.

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    In general, it is best to incur

    expenditure just be ore ratherthan just a ter the year end, asthis will accelerate your tax relie .However, it is important that youkeep proper and comprehensivebusiness records so that relie maybe claimed. Examples o the type

    o expenditure to consider bringingorward include:

    building repairs and redecoratingadvertising and marketingcampaignsredundancy and closure costs

    expenditure on plant and machinery.

    Capital allowances

    Major changes have beenimplemented or capital allowances.

    Plant and machinery - AnnualInvestment Allowance (AIA) The AIA gives a 100% write-o onmost types o plant and machinerycosts, including integral eatures

    and long li e assets but not cars, o up to 50,000 p.a. Any costs overthe AIA all into the normal capitalallowance pools at either 10% or20%. The AIA applies to expenditureincurred on or a ter 6 April 2008(1 April 2008 or companies) by

    all businesses. Special rules applyor accounting periods straddlingthese dates. The 50,000 limitmay need to be shared betweencertain businesses under commonownership.

    Other plant and machinery allowances

    The annual rate o allowance is20%. First year allowances areabolished except a 100% allowancemay still be available on certainenergy e cient plant and cars.

    A temporary rst year allowance

    may be available or certainexpenditure incurred in the 12 monthperiod rom 6 April 2009 (1 April2009 or companies). A 10% rateapplies rate applies to expenditureincurred on integral eatures and onlong li e assets.

    Cars

    The 20% rate also applies to cars,with an overriding maximum o 3,000 per car or expenditureincurred be ore April 2009. For

    expenditure incurred on cars on ora ter 6 April 2009 (1 April 2009

    or companies), costs will generallybe allocated to one o the two plantand machinery pools. Cars with CO 2 emissions not exceeding 160gm/km will receive a 20% allowance

    p.a. Cars with CO2 emissions over160gm/km will receive a 10%allowance p.a.

    Industrial and agricultural buildingsand hotels

    The annual rate o allowance is 2%rom 6 April 2009 (1 April 2009 orcompanies). Special rules apply oraccounting periods straddling thesedates.

    Unincorporated Businesses

    Whether you are a sole trader,partnership or LLP, your pro ts willbe taxed on a current year basis,so that the business is taxed on thepro ts it makes during its li etime; orexample, i the business makes up

    accounts to 30 April each year, thepro ts or the year ended 30 April2009 will be taxed in 2009/10.

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    By choosing the most appropriate

    accounting date, the payment o tax can be delayed, with signi cantcash fow advantages.

    Unincorporated businesses usuallypay higher rates o tax than acompany but signi cantly less NI.

    Administrative costs are generallylower but you are personally liable

    or debts the business may incur.LLPs go some way to addressingthis issue.

    Limited Companies

    A limited company may beadvantageous, as the directors are notpersonally liable or outstanding debts.However, a creditor, such as a bank,may require personal guarantees romthe director.

    Tax rates paid by the company maybe lower than those paid by anunincorporated business. However,there are e ectively two layers o tax,one payable by the company and theother payable by employees/directors.

    Thus, pro ts made by the companyneed to be extracted by the directors inthe most tax e cient manner.

    You may wish to consider extractingpro ts in the orm o dividends ratherthan as increased salary or bonus.

    This can result in substantial savingsin NI. Planning should be undertakenbe ore any money is taken out o thecompany.

    Paying the Tax

    The sel employed may have to paytax three times a year, namely:

    31 January in the tax year31 July ollowing the tax year31 January ollowing the tax

    year.

    In certain circumstances, the rst

    two payments can be waived.

    For limited companies, the paymentsystem can be more complicated:

    PAYE and NI needs to be paidmonthly even i the director is

    the only employee (although orsmaller businesses it can be paidquarterly)

    or most companies corporationtax is payable nine months andone day a ter the end o theaccounting period.

    As you can see, there are manyissues to consider in deciding thebest vehicle or your business.Please contact us to discuss thesituation in detail.

    And fnally - a word o warning

    Many amily businesses overrecent years have sought tomaximise tax and NI savings byintroducing an otherwise non-

    working amily member or spouseinto the business, sometimes as aco-owner.

    Trans erring assets or interests in abusiness between husband and wi ehas always attracted the interest

    o HMRC. Trans er o ownership o assets have always had to be realand complete, with no right o returnand no right to the income on theasset given up.

    However, it appears that HMRC

    wish to introduce wide-ranging rulesto try and block what they see asabusive tax planning rom at somestage in the uture. I you have anyquestions or concerns, please donot hesitate to contact us.

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    Value Added Tax (VAT)

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    VAT is a tax payable by the

    consumer but many businessesare orced to act as unpaid taxcollectors. There are heavy nes

    or ailing to operate the systemproperly. Consequently, you cannot

    just ignore VAT and there are certainareas you should consider in detail.

    What does VAT apply to?

    VAT applies to businesses thatmake supplies o goods or services.Businesses charge VAT on theirsales and this is known as output

    VAT. Similarly, VAT will be su eredon purchases and this is known asinput VAT.

    I outputs exceed inputs, paymentso tax have to be made to HMRCon a regular basis. I inputs exceed

    outputs, a repayment o tax will bemade to the business. However,there are some types o input VAT,such as VAT on entertainment, thatmay not be reclaimable.

    Supplies

    Certain supplies are not taxableat all and are known as exemptsupplies. Others are taxable atthe zero rate (0%), reduced rate(5%) or standard rate (17.5%). A reduced standard rate o 15% has

    been introduced or supplies madebetween 1 December 2008 and 31December 2009. I the businessmakes totally exempt sales, youcannot register or VAT or reclaimany o the input VAT su ered. Thiscan a ect the competitiveness

    o your business. I the businessmakes zero rated sales, you canregister and reclaim the input taxsuffered. Your business can bene tsigni cantly in this situation.However, what constitutes anexempt or zero rated supply can

    be di cult to decide and may need

    care ul consideration.

    Do I Need to Register?

    You only have to register if thetaxable supplies made by thebusiness exceed an annual gure,

    currently 68,000. I your suppliesall below this you may be able to

    register voluntarily and obtain arepayment. This usually happenswhen you are making zero ratedsales.

    Tax TipI you are setting up a businessbut have not yet started makingsupplies, you should register sothat you can reclaim your inputtax on start-up expenses.

    Record Keeping

    You must keep detailed records ofpurchases, sales and expenses,as well as a summary o input and

    output tax. These records must bekept or six years. Failure to do socan lead to substantial penalties.

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    When do I have to Make aReturn to HMRC?

    Generally, once registered you willmake a quarterly return to HMRC,summarising the outputs andinputs. It must reach HMRC withinone month a ter the end o thequarter.

    Businesses that make zero ratedsupplies and receive repayments o

    VAT may nd it bene cial to submitmonthly returns.

    Businesses with expected annualtaxable supplies under 1,350,000may apply to join the annualaccounting scheme whereby theywill make monthly or quarterlypayments o VAT but will only haveto complete one tax return at theend o the year.

    Inspection o Records

    The maintenance o records andcalculation o the liability is theresponsibility o the registeredperson but HMRC will need tobe able to check that the correctamount o VAT is being paid over.From time to time there ore anHMRC o cer will come and inspectthe business records.

    The HMRC o cer will want toensure that VAT is applied correctlyand that the returns and other VATrecords are properly written up.

    O ences and Penalties

    HMRC have wide powers topenalise businesses who ignoreor incorrectly apply the VATregulations. Penalties can be leviedin respect o the ollowing:

    late returns/payments

    late registration

    errors in returns.

    Cash Accounting Scheme

    I your annual turnover is below1,350,000 you can account or

    VAT on the basis o the cash youpay and receive rather than on thebasis o invoices.

    Retail Schemes

    There are special schemes orretailers as it is impractical or mostretailers to maintain all the recordsrequired o a registered trader.

    Flat Rate Scheme

    This is a scheme allowingbusinesses with taxable turnovernot exceeding 150,000 and totalturnover not exceeding 187,500to pay VAT as a percentage o their total turnover. There ore no

    speci c claims to recover input taxneed to be made. The aim o thescheme is to simpli y the way smallbusinesses account or VAT.

    Please talk to us i you areinterested in any o the special

    schemes.

    The KeyMost problems with VAT arise

    rom poor record keeping andlack o understanding o the VATsystem. Remember, we can help

    you with both and make li e a lotsimpler.

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    This guide is published or the in ormation o clients. It provides only an overview o the regulations in orce at the date o publication,and no action should be taken without seeking pro essional advice. There ore no responsibility or loss occasioned by any person

    acting or re raining rom action as a result o the material contained in this booklet can be accepted by the authors or the frm.

    NotesMake a note o questions to ask and things to do

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