December Newsletter
Wilson Wright Newsletter - December 2007
The Pre-Election Pre-Budget - an overall view
Welcome to the December 2007 newsletter. In this issue we have features about the pre-Budget report, the abolition of taper relief, tax and non-domiciled individuals, fines and the new Construction Industry Tax scheme, and the new personal allowances and NIC thresholds.
The Pre Election Pre Budget
After reflecting on the Pre Budget report for some time, and taking time to assimilate all of the announcements, the overall view is probably one of attention grabbing headlines and disappointing detail.
IHT threshold increase
Mr Darling was pleased to announce his increase in the IHT threshold for couples. However, when the detail is examined, it is clear that the benefit of transferable nil rate bands between spouses has always been available to those couples who seek basic advice about IHT. Executing a nil rate band trust as a debt in the estate is very basic will planning, and very many couples have already done this to protect the value of the nil rate band in the estate of the first to die. The cost of this apparent increase in relief is minimal, as all it does is extend the availability of the nil rate band to those who haven't sought advice so far. This is, of course, a welcome change, but not as generous as it was first thought to be.
And what about those who have already planned, and have nil rate band trusts in their wills? Is there anything they should do? Is it acceptable to leave the planning step as it is, or would it be better to change wills in view of the availability of the transferable band. The only point to consider is that by deleting the provision relating to the trust, any nil rate band unused on the death of the first spouse is available as an extra proportion of nil rate band on the death of the second spouse. This means that if the husband dies when the nil rate band is 300,000 and leave his entire estate to his wife, without using a trust arrangement he has a full nil rate band available. On his widow's death some years later, when the IHT threshold has increased to 400,000, she will benefit from a total of 800,000 nil rate band, not 700,000, as his nil rate band is transferred as a proportion of the amount at the date of his widow's death. If the husband had used a nil rate band trust,
then the couple would only benefit from 700,000 between them.
Those who are presently widowed also benefit from the change, but in order to claim, they will need to show that their spouse did not use their nil rate band on their death. This means that claimants will need to be aware of the treatment of tax on the estate going back possibly as far as the second world war, and to that end, HMRCare to publish details of both Capital Transfer Tax and Estate
Duty on their website. It is likely that if a spouse died many years ago, leaving their entire estate to their surviving spouse, that the nil rate band was unused. Note that nobody will ever benefit from more than two nil rate bands on death.
Action Points
- Review wills and consider the impact of these changes. IT is not urgent to remove nil rate band trusts immediately, but over time this will be necessary, in order to benefit from the IHT threshold increases. This could be safely left until a convenient moment, particularly if the will is to be reviewed before 2008, in the light of the trust tax changes last year.
- All those who are widowed should review their IHT planning and wills in view of their new IHT nil band availability. Identify how to establish the disposition of the spouse's estate for the purposes of establishing a right to additional nil rate band.
- It does raise the question as to whether a couple who meet late in life, and are both widowed should marry. If they do, they will benefit from two nil rate bands between them. If they remain unmarried, there is potentially up to 4 x the nil rate band available - two each! Of course bequests from one to the other would not benefit from the spouse exemption, but this may not be necessary.
Taper Troubles
The Chancellor has managed to unite both the business community and unions in cries for the planned abolition of taper relief to be halted, to enable businesses to make representations about the impact this will have on them.
Particularly disappointed are those business people who have built up a successful business over the years with a view to a minimal tax charge on retirement. Some of these taxpayers saw old Retirement Relief for CGT removed on the introduction of Taper relief, and are now facing the removal of that relief too.
Investors and businesses are also up in arms about the impact of the loss of indexation allowance, which on assets purchased before 1982 means a penalty of 105% of the cost of the asset in extra gain - taxed at 18%. Many regard that particular change as "mean spirited".
What can businesses and investors do to mitigate the impact of these changes? There are plenty of ideas being put forward, but many of them may not be achievable in the time available. Most small businesses could not find a suitable purchaser and execute a deal to sell up within two years, let alone six months. For some, selling now is not an option - they need to run the business for a good time longer before they are able to retire and withdraw their money.
While various business organisations work in the background to represent the views of the business community, what should those affected be doing in the meantime? Those with share portfolios and property investments will need to consider their position in detail, and this can only be done on the basis of a detailed examination of the data. So collating information about costs and improvements, to the extend not no readily to hand, and trying to make an estimate of market value of properties will help you to consider whether the situation is as grim as some expect. Once the data is available it will be possible to compute the gains and tax for this year, and compare with the outcome under the new rules. Some disposals will be delayed until after 5 April 2008, as the overall effect of the changes is a reduction in tax payable, but once you have an idea of the sums involved, it will be easier to decide the appropriate course of action.
Action points
" Gather data on costs and likely market value so that the impact of the changes can be computed with reasonable certainty " Think carefully about your overall aims with regard to the assets concerned. If you are never going to sell them, but intend to leave them as part of your estate, then CGT will never be payable on them in any event " Perhaps seeing the realisation of the business as no longer the "Holy Grail" may give you ideas about extracting benefit in other ways. Maybe increasing pension contributions now makes more sense.
Business Features
Foreign matters
The taxation of non-domiciled individuals http://www.wilsonwright.com/common/business_features/foreign_matters.html
Construction Industry fines bite
Penalties for construction businesses that file late returns http://www.wilsonwright.com/common/business_features/cis_fines_bite.html
Tax and NIC thresholds
The new indexed personal tax allowances and NIC limits for next year http://www.wilsonwright.com/common/business_features/nic_thresholds_published.html