Capital Tax Planning in changing times Brooks Macdonald National Academy 8 May 2019 at Merchant Taylor’s Hall, London John D. Bunker Head of Knowledge Development, Tax Trusts and Estates, Irwin Mitchell Private Wealth 1
Capital Tax Planning in changing times 1. Capital Tax planning: key themes in May 2019 1.1 Brexit & Minority government means 1.2 Reviews of (1) Taxation of Trusts – by HMRC (2) Inheritance Tax (IHT) - by OTS* 1.3 Increasing HMRC attacks on “tax avoidance ”. 1.4 Make the most of Tax reliefs and exemptions 2.1-2.4 Main Residence (PPR) Relief: What is being done to restrict CGT relief on main residences? 3.1-3.8 Residence Nil Rate Band (RNRB): How to help the moderately wealthy make the most of RNRB to save IHT? 4.1-4.5 Deeds of Variation and DOTAS : the issues to watch. 2
1.1 Capital Tax planning: key themes in May 2019 1. Brexit & Minority government means : – Little time for new tax legislation; – Look at tax cases & HMRC Guidance • for any changes in Tax policy ; – Meantime, tax policy for medium term: • 2 Reviews – of Taxation of Trusts & IHT 3
1.2 Capital Tax planning: key themes-May 2019: Reviews by HMRC & OTS 2. Reviews of (1) Taxation of Trusts – by HMRC – Nov 2018: a “green paper” consultation, concluded Feb 2019; – Seeking to balance proper family/personal uses of trusts • & apparent use of trusts to hide true ownership of assets – Await proposals for specific changes (2) Inheritance Tax ( IHT ) - by OTS* – 1st part of report – Nov 2018 - focussed on simplifying process • To improve the customer journey! – 2 nd part due out in Spring 2019 – on the difficult issues • (* Office of Tax Simplification is semi-independent in HM Treasury) 4
1.3 Capital Tax planning: key themes-May 2019: Attacks on tax avoidance 3. Increasing HMRC attacks on “egregious tax avoidance ”! – HMRC seek to restrict “Tax planning” more & more – Watch DOTAS application to IHT After DOTAS IHT Guidance: encourage making wills – Don’t leave tax planning to Deeds of Variation! • Testamentary Freedom to make wills = cannot be attacked by HMRC • But varying a will to use a tax relief/ allowance could be – See part 4 below. 5
1.4 Capital Tax planning: key themes - May 2019: Make good use of Reliefs & Exemptions 4. Make the most of Tax reliefs and exemptions; But HMRC limiting scope of reliefs & exemptions e.g. – CGT: Main residence (PPR) exemption • PPR exemption much litigated in Tax Tribunals; • PPR under Budget attack – change due April 2020: – See part 2. – IHT: Residence Nil Rate Band (RNRB) • Many traps for the unwary – See part 3. 6
2.1 Main Residence (PPR) Relief: • Principal Private Residence (PPR) Relief for main homes • HMRC attack many cases of short term residence – Factors to help show permanence? – Be careful & get timing right. • Election for PPR if 2 or more residences, – within 2 years of any combination of residences changing; – Subject to new residence rules since April 2015; – Worth making, even if choose the more obvious main home; • Can always change, once made, • or a question of fact; – Experience with SDLT shows HMRC often establish different view. 7
2.2 PPR Relief: 2 changes due in April 2020 • Budget Nov 2018: 2 changes to take effect in April 2020 – Consultation on details due in Spring 2019 1. Final period exemption: to be reduced to only 9 months? – Final period exemption allows time to sell one PPR • if need to move before sold • & invaluable on divorce/separation – Major reduction from 18 months 2. Letting Relief to be abolished – Currently a proportion of gain, up to max £40K can be relieved – To be replaced by a narrow type of rent a room relief – Await news on transitional relief? 8
2.3 PPR Relief: Preparing for April 2020 • Bizarre timing, with uncertainty in economy/housing market • Many clients need to keep records for potential CGT: – All purchase & improvement costs etc. – NB most blaze about CGT: assume no tax to pay on main residence • One further major change due in April 2020 : – All CGT on residential property to be payable within 30 days – So clients need to get figures sorted in advance, • Can no longer wait until Jan, 9 months after year end! 9
2.4 PPR Relief: Preparing for April 2020 (2) • PPR is invaluable if qualify – But increasingly contentious, as has been abused; • So don’t take it for granted – Encourage clients to take care of details • including record keeping – Gifts of residential property = disposals for CGT; • & actual tax may be payable 30 days after gift. • Separating couples need to plan ahead – to avoid risk of CGT being payable. 10
3.1 Residence Nil Rate Band (RNRB) planning • How to help the moderately wealthy – make the most of RNRB to save IHT? • RNRB now worth £150K in 2019/20 – Or £300K if have a late spouse’s unused RNRB C/F – increases to £175K in 20/21 – So next year reach £500K each • incl NRB of £325K & • the target £1m tax free estate for a married couple/CPs 11
3.2 RNRB: closely inheriting homes • RNRB only works if meet all the rules, incl: – Leaving the right form of residential interest • Includes some trust interests – to descendants who “closely inherit” • Includes step children – but not children of unmarried partner • So real issues for unmarried couples – May be a trust solution • Trusts are a crucial part of planning, – can answer many – not all- problems! • Opportunities to vary wills & trusts in 2 years post death – Can often make RNRB work better. 12
3.3 RNRB reduced by Taper if over £2m • £2m taper threshold – A key element of RNRB – RNRB reduces by £1 for every £2 of capital over £2m = 60% marginal IHT rate on band of capital over £2m! • £2m includes value of any aggregated trust – e.g. IPDI – where deceased had a life interest • But disregards BPR & APR: so no deduction of these reliefs – So many may assume taper N/A when it will deny them RNRB 13
3.4 RNRB: planning to avoid taper -pensions • Major planning open to all with £1m- 5m of assets • Can he/she reduce assets below £2m? – Assets in own name & Life interest (aggregable) trust • Pensions in trust not included in the estate for £2m ; – So is there scope to hold back the pension? – Or pass onto family by designating to Drawdown (FAD)? • While we still have the beneficial pension death benefit rules! – Instead spending capital that is potentially subject to 60% IHT? • Meet living needs with reassuring help of cash flow analysis 14
3.5 RNRB: planning to avoid taper -spouses • Spouses & Civil partners should review their Estate planning: – Legal (wills & trusts), Tax & Financial planning – Financial planning review » (1) in joint lives, ideally ahead of retirement & » (2) after 1 st death, before draw on pension • Can they arrange assets so they don’t lose 1 or even both RNRBs? – Capital passing (outright or in trust) to surviving spouse » can take estate over the £2m threshold » = lose RNRB on 2 nd death 15
3.6 RNRB: planning – spouses & NRB D/T • Key planning issue for spouses: – to use or not use the NRB & the RNRB on 1 st death • Consider setting up Nil Rate Band Discretionary Trust on 1 st death – – better by Will – could be Deed of Variation – but see DOTAS – Surviving spouse can use home/assets & have income if needed – But if NRB D/T kept as a Relevant property trust » not aggregated » & not included in the estate for £2m threshold. In some cases worth using the RNRB on 1 st death too- as well as NRB • 16
3.7 RNRB: planning – spouses & NRB D/T – Using the NRB by NRB D/T can take out of estate: • £325K NRB – Up to £380K of value with a 15% discount » NRB can sometimes be used by appropriating interest in house A 2 nd NRB if 1 st spouse to die was widowed & a TNRB = £650K • • Extra value if any APR or BPR: – If 100% APR/BPR can go into NRB D/T + £325K on top – If 50% APR/BPR can put £650K of value into trust = £325K – Spouse can still have use of assets, • but not included in estate for £2m – & RNRB can be used by a share of property to trust for children 17
3.8 RNRB: estate planning solutions • RNRB has many more complex elements • Review estate planning with moderately wealthy – for single & widowed, cohabiting & married couples Re use of assets – look at future IHT » » What is inherited? What to pass on? – May be legal/tax solutions – not just trusts » E.g. ISAs to spouse, not trust, if can use & spend! • Death bed planning an option – as last resort – Gifts completed before die, can reduce estate below £2m even though don’t survive 7 years » » & revoking trust Life interest can = deemed gift . 18
4.1 Deeds of Variation and DOTAS • DOTAS: if reasonable to expect an informed observer – to conclude 2 conditions are met: (1) one of main reasons for arrangement is avoiding or reducing : – IHT charge on entry into a trust, 10 yearly or exit charge; – a GROB or a POAT charge where no benefit reserved; » i.e. a lot of mainstream lifetime planning (2) Involves one or more contrived or abnormal steps – Without which could not have obtained tax advantage; 19
Recommend
More recommend
