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Guest opinion: hot topics in direct taxation

"We are now well into the new tax year and changes are already coming into play for individual taxpayers that are having an impact on net pay, particularly where higher earners are concerned.

"A brief canter through these changes identifies the areas where taxes are high but planning to keep the exposure down can produce significant savings.

"Unfortunately what we thought we knew as a result of the March budget is now surrounded with uncertainty in many areas as a result in the change of government. In the emergency budget on June 22 the new coalition government has promised to announce changes to the tax regime to assist with economic recovery, in particular in relation to the taxation of capital gains.

There are no proposals currently announced suggesting any changes to the new income tax rate of 50% or the restriction of personal tax allowances.

For anyone with income in excess of £100,000 in the year, a gradual restriction of £1 of personal allowances for every £2 of income in excess of £100,000 will come into play.

Once income has reached £113,000, the personal allowance is gone altogether.

Where the annual income level exceeds £150,000 a new income tax rate of 50% will kick in, whilst receiving income in the form of dividends will result in an effective tax rate of 36.11% for higher rate tax payers.

In 2011/12 there is a further proposed increase in national insurance increasing that burden by an additional 1% for both the employer and the employee.

There will hopefully be some measures to relieve the increasing cost to the employer of employing people in recovering or expanding businesses.

It's not all bad though.

With a little bit of creative thought, packages can be made quite tax efficient by using cash free benefits such as holiday, or non taxable perks such as mobile phones.

With a flat rate of 18% capital gains tax, the current differential between this and up to 50% income tax plus 1% employees national insurance has made it very effective tax planning to consider cash extraction in a capital form.

However, the tax benefits of capital receipts may well be curtailed by the emergency budget. It is currently suggested that the rate of capital gains tax be raised to closer to 40% in relation to 'non business assets'.

Exactly what rates will apply and what the definition of a non business asset may be is unclear.

Particular causes for concern are private equity portfolios and second houses which appear most likely to fall within this category.

Many individuals had relied on these assets as retirement funds producing a level of income annually and with a potentially low tax charge in relation to any capital profit on sale.

If action is taken now, there are ways to 'lock in' any existing gain to give the taxpayer flexibility to trigger off a gain on assets at the current tax rates should the emergency budget result in an immediate increase in capital gains tax rates.

This planning has to be viewed in terms of the additional risk that any increase in rates of capital gains tax could be retrospective.

Whilst it is thought very unlikely that this will happen, it is not beyond the realms of possibility - desperate times lead to desperate measures.

In terms of mitigation of corporation tax there are a wealth of options to consider but one key relief that many retailers should perhaps reconsider is capital allowances.

Changes brought in a couple of years ago re-categorised a lot of building expenditure that previously didn't qualify for any tax relief as 'integral features'.

It may be worthwhile commissioning a review of building costs and tax relief claimed to ensure that the corporation tax burden is minimised and allowances have not been overlooked.

Allowances for industrial buildings are diminishing every year from a low starting point in the first place so maximising claims for plant and machinery and integral features can be a very good way to manage the corporation tax burden and consequently, cash flow.

At the point where an exit is planned from any business, the worst situation a tax adviser can come across is one where access to entrepreneurs’ relief has not be secured (currently 10% effective tax rate on the first £2m of profit on sale).

Although not always possible, with advance planning and a few simple changes it may be possible to tap into this relief and save £160,000 of tax.

Again, the emergency budget could impact on this should the definition of business assets alter - from the announcements made to date though, it would seem that relief for gains on business assets is only likely to be enhanced, not curtailed.

And finally looking more long term is the question of inheritance tax.

At the moment the threshold above which inheritance tax on death is paid at 40% has been frozen at £325,000.

Hardly enough to cover the value of the family home these days.

However, inheritance tax has always been classed as a voluntary tax because with careful thought and planning you can structure your affairs to at least minimise exposure to this tax charge, and at best avoid it completely.

Using the available reliefs and exemptions business interests and accumulated wealth can be passed down through the family virtually intact.

Definitely an area that the entrepreneur should give consideration to in terms of medium and long-term succession planning, both in terms of personal and business interests.

All in all a very interesting time for the tax adviser, if a little uncertain."

Jacqui Gudgion
Automotive Services Taxation
Grant Thornton

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