At the National Financial Directors’ Excellence Awards, Broadcaster Peter Sissons commented:

“...with a score of nearly nine-out-of-ten for quality of service, the highest marks ever for an audit firm in ten years.”

Francis Clark LLP, National Auditor of the Year – Mid Tier 2011

CAPITAL GAINS TAX PLANNING FOR THE GENERAL

PRACTITIONER

Areas to cover

• Business structuring

• Residences

• Gifting and succession

• Trusts

• Divorce

• Residency in other matters

2

Basic planning

• 28% - significant tax rate

• Income related

• Pension contributions/gift aid

• Annual exemption£10,600 @ 28% = £2,968

£10,600 @ 18% = £1,908

3

Capital gains regimes

Post 5 April Companies

Rate of tax 10%, 18% or 28% 20%, 26% or Marginal Rate

Indexation Allowance No Yes

Kink Test No Yes

Halving Relief No Yes

4

Inflation - RPI

• September 2011 237.9

• April 2008 214.0

• Inflation over period – 11.2%

• Real CGT rates over period– 35.6% (higher rate)

– 23.1% (basic rate)

5

6

Business Structuring

Business structuring

• Primacy of income tax (s37)

• Partnership

• LLP v LTD

• Availability of entrepreneurs’ relief

• Exclusion of investments/trading status

7

Income tax on trading

• Period of ownership

• Frequency of transactions

• Structure of funding

• Motive

8

Employment income

• Acquisition by reason of employment

• Restricted securities

• Table A

• s431 election (ITEPA 2003)

9

Transactions in securities

• Legislation since 1960 (pt 13 ITA 2007)

• New reforms (simplification)

• Counters converting retained reserves into capital receipt

• Cleary case/Joiner case

• John and Marion Coll (2010)

• Advance clearance procedure

10

Partnerships

• Statement of Practice D12

• Revaluation and change in PSR

• Residual indexation

• Calculations required

• Permanent files

11

Intangible fixed assets – pt 8 CTA 2009

• Corporation tax only

• Differentiation in roll-over relief rules

– Companies

– Individuals

• Applies on or after 1 April 2002

12

Goodwill inherent in properties

• HMRC view

• SDLT issues

• Valuation approach

• Balloon promotions case

13

Substantial shareholdings – sch 7AC

• 12 month period within 24 months before transaction –vendor holds 10% of target

• Vendor and target are traders for 12 month period, anyinterim period and immediately thereafter

• Capital gain/loss is exempt

• Anti-avoidance provisions and other complexities

• Dividend stripping

14

De-grouping charges – s179

• Anti-avoidance provision to stop envelope trick

• New reforms (simplification)

• SSE can now apply

• Hard to pick up and difficult to deal with

15

Roll-over – s152

• Deferral of tax

• Letting restriction

• Non-business use

• Assets owned outside of companies

16

Entrepreneurs’ relief – when?

• Sale of whole or part of business

• Sale of shares

• Disposal of partnership interest

• Disposal by trustees

• Associated disposal

17

Entrepreneurs’ relief – share sales

IF• Personal company qualification

– 5% of votes/ordinary shares– Officer or employer– 12 months

THEN• All shares or securities qualify• Including

– Other shares– Loan notes, etc

BUT care over earn-outs required

18

5% limit

• Attraction of LLPs

• Check family holdings

• Watch preference and unusual shares

• Planning possible

19

Management joint venture arrangements

20

Mr A Mr B Mr C Mr D Mr E Mr F

TradeCo

2%4%

4%20%35%

35%

Management joint venture arrangements

21

Mr A Mr B Mr C Mr D Mr E Mr F

TradeCo

2%

4%4%

20%35%

35%

Mgmt Co10%

Entrepreneurs’ relief not available if:

• No cessation of a business at disposal

• No disposal at cessation of a business (withinpermitted period)

• Planning options

– Trust or

– Incorporation

22

Associated disposals

• Not available for sole traders – accounts issues

• Not just land and buildings

• Payment of rent and transitional relief (para 6 Sch 3FA 2008)

• Other restrictions

• Careful planning required

23

Properties outside companies/partnerships

• Review and advise clients

• Farms, hotels and shops

• Lifetime limit now £10m

• Easy to overlook

24

Loan notes

• QCBs – deferred gain is pre-taper

• Non-QCBs

• Clearance issues

• Entrepreneurs’ relief entitlement

25

Deferred consideration – loan notes

• Transitional relief

• Paras 7 and 8, Sch 3 FA 2008

• Applies to EIS shares and QCBs

• Careful review required

26

Earn-outs

• Application of entrepreneurs’ relief

• Personal company qualification

• Transactions in securities

• Cash or securities?

• “Clawback” arrangement (s48)

27

Entrepreneurs’ relief – planning points

• Review shareholdings

• Officer or employee status

• Share ownership type

• Review ownership of assets outside of company

• Trading status

• Parallel ownership vs group structure

28

Entrepreneurs’ relief – business structuring

• Partnership structuring– Husband and wife v sole trader– No 5% ownership requirement for LLP (unlike LTD)

• BUT– Partnership – exclusion of investments– LTD – trading status

• Properties– How owned?– Rent charged?

• Is the SSE an answer?

29

EIS possibilities

• Full relief or CGT deferral

• Restrictions on trades– Hotels

– Farming

• Financial limits

• Employee numbers

30

EIS structuring for OMBS

• Careful structuring of set-up– Optos plc– Blackburn– R J Taylor

• On-going restrictions– Receipt of value– Overdrawn loan accounts

• Fee levels!

31

EIS planning

Investments made can defer gains made up to threeyears before and one year after the investment.

Income tax relief also available.

Gains exempt if shares held for three years.

32

Shareholder/family loan

• Capitalise to strengthen balance sheets

• Documentation

• Security

• S131 ITA/s253 TCGA

• Debt for equity swap – loan relationships

33

Loans to companies

• Loans to traders (s253)

• s131 ITA 2007 relief – capital loss on shares offset against income

• Share capital reduction rules

• Capitalise loans?

34

Planning for the worst

• Income tax relief available if:– Subsciprtion for shares– Unquoted trading company (including AIM)– Adjust for tax relief (EIS)

BUT – watch value of shares subscribed (warning)

• Capital loss on loan if:– UK trading company– Includes guarantees– Who’s making gains?

35

Non-cash remuneration

• Share incentive schemes – EMI

• Entrepreneurs’ relief

– 5%/one year qualification criteria

– If not met, then 18% or 28%

– But better than 42%/52% (or more)

36

Properties owned outside of companies/partnerships

• Lease terms

• Insolvency arrangements

• Entrepreneurs’ relief

• Business property relief

37

BPR Pitfalls

A B

AB LIMITED PROPERTY

38

BPR on properties – planning issues

• Disincorporation?

• Parallel and non-group structures

• Future tax changes– Restriction of APR– Rates of BPR

• No restriction if rent paid

BUT need to review previous planning approaches

39

Pension schemes - overview

• Asset protection

• Use of existing funds

• Options– SSAS

– SIPP

• New pension rules

40

Planning possibilities

• Tax free extraction of profits

• IHT exemption

• Property asset succession/protection

• Low gearing strategy

• No CGT

• Life cover etc for dependents

41

Ownership for SMES

• Unincorporated – family partnership

• Limited liability partnerships (LLP)

• Limited company - singleton

- parallel

- Group

• Combination of above

42

LTD vs LLP

• Nature of exit route

• Nature of participators

• Source of financing – debt/equity

• ITEPA issues

• Profit expectations and use of funds

• Use of SSAS/EMI/EIS

43

Group v Parallel?

• Exit – CGT vs SSE

• Likelihood of trading losses

• Asset protection

• Debt/equity proportion planning

• Commonly used property - BPR

44

Combination – LTD & LLP

A A BB

AB LTD

LLP

45

Corporate partner benefits

• Deferral of income tax

• Refinancing existing capital (income tax holiday)

• Mitigation of income tax– Taxation of profits at a lower rate in the future– Diversion of profits– Extraction as a capital gain

• Conversion of revenue profits to capital profits– On creation of corporate partner– On exit of corporate partner ownership

46

Areas of caution in various structures

• Employment related securities rules• Personal service companies (IR35)• Valuation of goodwill transaction• Capital obligations and profit share rights• Sale of future income• Disguised remuneration rules• Transfer pricing• Non commercial arrangements• Attention to detail and order of events

47

Tea Break

48

Residences

49

PPR relief (ss222 – 226A TCGA 1992)

• Only or main residence

• Let property relief

• Dependent relative relief

• Property occupied under terms of a trust

• Sales by executors where property occupied by beneficiaries•

• Divorce issues

50

PPR – residence?

• Dictionary meaning

• Case law

• Degree of permanence

• Distinction with main residence

• Council tax tests

51

PPR - elections

• 2 year time limit

• Married couples – only one main residence

• Where more than one residence (NOT owned property)

• Re-starting time limit techniques

• Client review procedures

52

Extent of PPR relief

• Permitted area

• ½ hectare/ 1 ¼ acres

• Garden and grounds

• Outbuildings

53

PPR – self builds

• Short delay in taking up occupation

• ESC D49

• Tie in with VAT claim

• Dates readily available

54

PPR – let property relief

• £40,000 (max)

• £80,000 for a couple

• Record keeping and income tax compliance

• Can include hotels/FHLs

• Also check permitted absences rules

55

PPR – exclusive business use

• Business use should be non-exclusive

• Only claim 95% (max)

• B&Bs– Closely question as to usage

– Problem over separate staircases/guest rooms etc

• Rent a room/lodgers

56

PPR – property for dependents

• Old dependent relative relief (pre 06/04/88)

• Trust arrangements

• Basis of occupation of property– Under terms of trust– Land law

• Need to document

• HMRC enquiry experiences

57

PPR - estates

• Occupation by beneficiaries?

• Property must be occupied both before and after death by beneficiaries entitled to at least 75% of the property (s226A).

• Deed of variation point.

58

Furnished holiday lets (FHLs)

Capital gains tax reliefs available:

• Roll-over

• Hold-over

• Entrepreneurs’ relief

• SSE

• Relief for loans to traders

59

FHLs – qualifying criteria

• Day count from April 2012

– Available 210

– Actual 105

• Commercial

• Period of grace

• Relevant periods

• UK and overseas properties

60

FHLs – points to watch

• Hold-over/roll-over

– Non FHL usage

• Entrepreneurs’ relief

– Whole or part of a business

– Sale within 3 years

• Foreign tax on EEA properties

61

Exchange of joint interests in land

• Now in legislation

• Statutory tests (s248A onwards)

• Watch private residences

• Trust tax cases

• SDLT issues

62

Trusts

63

Entrepreneurs’ relief - trustees

• Beneficiary has to qualify

• No relief for discretionary trustees

• Possibility is to grant a defeasible life interest

• No relief if trustees are trading

• Review existing arrangements

• Has FA 2006 been addressed?

64

Family trusts - OMBs

• Appoint onto interest in possession

• Outright appointment to achieve 5%

• £10m lifetime limit

• Easy to overlook this planning

65

PPR - Trusts

• Occupied under the terms of a trust

• Occupied by beneficiaries of an estate

• Previous held-over gain under s260

• Debt/charge scheme issues

66

Wills/family trusts

• Wills in place/up to date

• Existing trust arrangements

• Succession planning

• Transferable NRB/NRB discretionary trust

• Re-marriages

67

Gifting and Succession

68

Part disposals

• Consider the asset involved

• Strict statutory approach

• SP D1

• Planning opportunity commonly missed

69

Part disposal - example

• Land cost £50k (10 acres)

• 1 acre sold for £100k

• Remaining 9 acres worth £25k

• Base cost used - £5k or £40k

70

Hold-over reliefs

• Business assets (s165)

• Trust assets (s260)

• S260 has priority

• Wide ranging and important relief

71

Gains held over

• No gain, no loss transfers– Spouse/civil partner transfers– Hold-over transfers– Rolled-over gains– Partnership changes

• “Banked” indexation planning

• Permanent files

• Care required – watch for this

72

No gain/no loss transfers - example

Mr P owned White Horse Hotel in 1982. In 1991, hegifted half the property to Mrs P.

Base costs:

Mr P – half share of property in 1982

Mrs P – half share of property in 1982 indexed to 1991

73

Example

Mr X inherited a property and land from his motherin 1980. It was worth £50,000 in March 1982. Aftertaking tax advice, he transfers ½ share to his wife inMarch 2008 when it was worth £450,000.

The property is sold in March 2012 for £400,000.

74

Example (continued)

Under old rules, could treat this as a joint disposal,with husband and wife both having acquired theasset pre-1982.

No longer correct as husband and wife tax position isdifferent.

75

March 2008 – No gain, no loss transfer

£

Proceeds 51,175

Cost (half share MV82) (25,000)

Indexation allowance (1.047) (26,175)

-----------

Gain £nil

======

76

Sale March 2012

Mr X Mrs X

£ £

Proceeds 200,000 200,000

Cost/MV82 (25,000) (51,175)

----------- -----------

Gain 175,000 148,825

------------ -----------

Tax @ 28% £49,000 £41,671

======= =======

77

Permanent file records

• Did a transfer between spouses take place at any time before 6 April 2008?

• Held-over gain computations

• Partnership changes

78

Hold-over relief – opportunities and pitfalls

• Major relief

• Extension to agricultural property

• Non-business usage

• Trading status of companies

• Investment assets

79

Offshore trusts

• UK domiciled and resident beneficiaries of offshore trusts

• Gains not taxed on trustees, but instead attributed to beneficiaries matched with payments of capital

• Stockpiled gains also suffer a supplement of 10% for each year (up to 6 years)

• Offshore income gains

80

Divorce

81

Key points

• No gain/no loss – whilst living together as man and wife

• Date of separation

• Buy to let properties

• Hold-over on business assets

82

Residency and other matters

83

Residency issues

• HMRC6

• Statutory residence test condoc

• Gaines – Cooper

• Temporary non-residents (s10A)

• Hold-over claims (within 6 years)

84

Non-doms

• Remittance basis rules in ITA 2007

• Remittance basis charge - £30,000

• Can elect year by year

• Careful review of non-domicilliaries required for:– De minimis (£2,000 of income and gains)

– Residency requirement

85

Section 13 gains

• Gains made by offshore companies

• Watch overseas structures

– Can be easily missed

86

HMRC enquiries

• Increase in CGT enquiries

• Greater specialisation

• Need to consider appropriate disclosure

87

Follow-up

• Slides on linkedin

• Slideshare page

• Follow on Twitter at john_endacott

• Winter Rule LLP merged with Francis Clark LLP

88

JOHN ENDACOTTFrancis Clark LLP

Lowin HouseTregolls Road

TruroCornwallTR1 2NA

Email: john.endacott@francisclark.co.ukTelephone: 01872 276477

89

Disclaimer & Copyright

(c) copyright Francis Clark LLP, 2010

You shall not copy, make available, retransmit, reproduce, sell, disseminate, separate, licence, distribute, store electronically,publish, broadcast or otherwise circulate either within your business or for public or commercial purposes any of (or any part of)these materials and / or any services provided by Francis Clark LLP in any format whatsoever unless you have obtained priorwritten consent from Francis Clark LLP to do so and entered into a licence.

To the maximum extent permitted by applicable law Francis Clark LLP excludes all representations, warranties and conditions(including, without limitation, the conditions implied by law) in respect of these materials and /or any services provided byFrancis Clark LLP.

These materials and /or any services provided by Francis Clark LLP are designed solely for the benefit of delegates of Francis ClarkLLP. The content of these materials and / or any services provided by Francis Clark LLP does not constitute advice and whilstFrancis Clark LLP endeavours to ensure that the materials and / or any services provided by Francis Clark LLP are correct, we donot warrant the completeness or accuracy of the materials and /or any services provided by Francis Clark LLP; nor do we committo ensuring that these materials and / or any services provided by Francis Clark LLP are up-to-date or error or omission-free.

Where indicated, these materials are subject to Crown copyright protection. Re-use of any such Crown copyright-protectedmaterial is subject to current law and related regulations on the re-use of Crown copyright extracts in England and Wales.

These materials and / or any services provided by Francis Clark LLP are subject to our terms and conditions of business asamended from time to time, a copy of which is available on request.

Our liability is limited and to the maximum extent permitted under applicable law Francis Clark LLP will not be liable for anydirect, indirect or consequential loss or damage arising in connection with these materials and / or any services provided byFrancis Clark LLP, whether arising in tort, contract, or otherwise, including, without limitation, any loss of profit, contracts,business, goodwill, data, income or revenue. Please note however, that our liability for fraud, for death or personal injury causedby our negligence, or for any other liability is not excluded or limited.