B SINESS RO ERT RELIE B R
OTENTIALL E E T TRANS ER ET
IE I T O SHARES
Gift+of+painting+(non+b/s+asset)+from+father+to+son Gift+of+business+asset+from+father+to+son 1 s X and Y (uncle) are
connected and X would not be
buying the asset from Y, is
CGT: CGT: substituted for sales proceeds to
calc a gain of £X.
1. Chargeable#disposal#subject#to#CGT 1. Chargeable#disposal#subject#to#CGT
2. MV#gain#(connected#part) 2. MV#gain#(connected#part) qualify
2 s the asset is used by Y in business, it will
for GR. No gain would arise on disposal of
3. No#gift#relief#(not#business#asset) 3. Gift#relief#(business#asset) the asset and therefore no CGT arises.
4. Gain#at#28% 4. Gain#at#28%#or#10%#ER#on#actual#SP#>#cost
5. Son#base#cost#=#MV 3 X's deemed cost of acq which is the at the
date of the gift is reduced by the 'a' of gain which
CGT+J+Gift+Relief: would have been chargeable had GR not applied.
IHT: 1. Joint#election#with#son#(donee) 4 oint election must
1. Gift#to#son#=#PET#less#any#payment#received 2. 14/15#by#5#April#2019#or#15/16#by#5#April#2020 be mae by both the
donee, X, and the donor,
2. No#life#time#IHT 3. Son#(donee)#revised#base#cost#(MV#less#GR) Y, for GR to apply.
3. Use#AE#£3,000#x#2 [Nil Rate Band NRB?]
5 The gift of the
4. Survive#7#years#=#Exempt#PET IHT: building will be
5. Survive##<7#years: 1. Gift#to#son#=#PET#less#any#payment#received treated as a P T for
IHT purposes. If Y dies
- PET#chargeable 2. No#life#time#IHT within years of
- Taper#relief#(>3#yrs) 3. IHT#BPR#if#donor#owned#asset#for#2#years ma ing the gift it will
be treated as a C T
- Tax#at#40% 4. BPR#withdrawn#if#donee#does#not#hold#b/s#asset and taper relief may
- Son#(donee#liable) or#not#reinvested#in#another#b/s#asset apply. However, it is
li ely to be treated as
6. No#BPR#non#b/s#asset 4. Survive#7#years#=#Exempt#PET relevant property for
5. Survive##<7#years: BPR
]#PET#chargeable
]#Taper#relief#(>3#yrs)
]#Tax#at#40%#if#BPR#not#available
]#Son#(donee#liable)
If the partnership is incorporated under method 1, the building will continue to be
used in the trade. It is relevant business property because it has been used as a business
asset for a partnership in which Y was a partner, and owned by Y for at least 2 years
before the gift. The relief available will be 50%.
BPR will no longer apply to the gift of the building if X disposes of the building before Y
dies. However, a replacement business property can be treated as the original property if
the original property was sold before death and the whole of the consideration received
was used to acquire the property within 3 years from disposal.
, 1 If they created a trust and transferred the shares to the trust, it could either Method 1 Method 2
be an or a . Gross income įſĢ̊ ĠűɐĔſḺБſЬɐБ 25,000 25,000
Less s64 loss relief - (3,125)
Less PA (12,500) (12,500)
5 The creation of the I T O SHARES TO A TR ST Taxable 12,500 9,375
trust would bring about Tax @ 20% 2,500 1,875
the same CGT [1] Generally a disposal of shares to a trust is subject to Tax suffered on trust income (45%) (11,250) (11,250)
consequences as both CGT and IHT. Tax repayment 8,750 9,375
mentiioned above,
except that GR is Gift+of+any+asset+into+a+trust+by+a+father C T
available on the
creation of the trust [4 or CGT, if you made a gift to a trust you would be treated as disposing of the shares to the trust for their at the
due to the immediate CGT: time of the gift. To the extent that this is greater than their probate value (ie, their value at the time of your mother's
charge to IHT on the death), a gain will airse.
creation of the trust. In 1. Chargeable#disposal#subject#to#CGT - This will be taxed at a rate of 20%, after deducting your A A of 12,300 to the extent that it has not been used against
these circumstances 2. MV#gain#(connected#part) other gains. If the gain is more than your A A, you could eliminate the CGT charge in oneof two ways: either make a claim
for CGT G or enter into a deed of ariation of your mother's will, indicating that you intend the variation to be effective
the cash and
investments would not 3. Gift#relief#(any#asset#into#a#trust) for CGT purposes.
restrict the 'a' of - The effect in both cases is that the trust is treated as ac uiring the shares for their probate value (ie, the value at which
available GR and the you were treated as ac uiring them from your mother). This means that the CGT that you would otherwise have paid ont he
full gain of £5 0K (ie CGT+J+Gift+Relief: disposal to the trust is effectively deferred until the trust sells the shares.
valuation of 30% 00K 1. Single#election#by#father#(donor) nce the shares are in the trust the trust will pay tax on any dividend income arising from the shares (at
the rate of 3 .1% for a discretionary trust and at .5% for IIP trusts). Payments to beneficiaries will be paid
- cost 30K) each is
eligible for GR. 2. 14/15#by#5#April#2019#or#15/16#by#5#April#2020 under deduction of a tax credit.
3. Trust#(donee)#revised#base#cost#(MV#less#GR) - There will be tax consequences of removing the assets from the trust.
- IHT will also be payable on every exit from the trust and every 10-yr anniversary of the creation of a
2 or IHT purposes
the creation of a trust discretionary trust.
is a C T, charged to IHT:
IHT at the rate of 20% [2] However, as these are shares in an T, it is likely that there would be no IHT charge because they
or 25% depending on
1. Gift#to#trust#=#CLT would ualify for 100% . ormally this only applies if the asset has been owned for at least 2 years,
whether the trust or 2. Life#time#IHT#due:#25%#if#donor#pays#or#20%#by#trust but that limitation would not apply here (gift of shares to a trust) so long as the relief also applied to
the shares in calc. IHT du on your mother's estate (this would need to be confirmed).
the donor pays the IHT
due in lifetime. 3. Use#AE#£3,000#x#2 [3] There could also be a further IHT charge (of up to a further 20% of
4. Survive#7#years#=#Exempt#CLT the original gift plus any IHT which you pay) if you die within yrs of the
3 ssuming that original gift.
both donors still have 5. Survive##<7#years: - If the shares are still owned by the trust, and are still ins hares in an
a NRB of £325K ]#CLT#chargeable T at the time of your death, 100% should also apply in
available and also calculating the further charge.
have two available, ]#Taper#relief#(>3#yrs) - Any original IHT charge, and the risk of a further charge on your death
the tax payable in ]#Tax#at#40% could be eliminated by entering into a deed of ariation in relation to
lifetime would be your mother's will including a statement that it was intended to be
£10 . K ( 5 value ]#Trust#(donee#liable) effective for IHT purposes.
of gift - K - 325K) x
20% or £13 K if X & Y
6. No# #re#non#b/s#asset#transferred
pay the T ( 25%). 4 BPR at the rate of 100% could reduce this tax to nil, if the Co is regarded as a trading Co with no
excepted assets.
N
BPR
R BPR
C T
Gift+with+reservation+of+benefit [1] The gift of your shares for CGT purposes would be covered by G as
described previously and no tax would be payable on the transfer.
However, the gain would crystallise when and if Y came to sell the shares.
Definition:
1. Donor#makes#a#gift#but#continues#to#enjoy#some IHT
benefit#from#the#gift [2] ormally the transfer of the shares themselves is a T.
I would make an outright gift of shares to Y. I will, however, receive the dividends from the shares. He has agreed
that he would be happy to own the shares but to pass the right to receive the dividends to me if I need the income.
GWROB+will+not+apply:
[3] However, given your serious illness you need to consider the IHT conse uences. There are
1. Donor#pays#MV#rent#re#use#of#asset special rules which apply when you as transferor make a transfer of value but continue to
2. Circumstances#of#donor#changed#(unforeseen)#+ enjoy some of the benefits of the gifted asset.
- If you continue to receive dividends from the shares, then you are receiving a benefit and the gift is known as a gift
2A.#Benefit#represents#care#and#maintenance#as#an with reservation of benefit.
#######elderly#or#infirm#relative - If you retain the benefit in the asset transferred ie, receiving dividends until death, the value of the shares will be
treated as part of the death estate and charged to IHT.
- If the asset ceases to be subject to the benefit, the transferor is treated as making a T at the date of cessation.
IHT+implications+of+GWROB:
- If the asset could be charged twice to IHT, two calculations will be re uired but only the treatment which generates
1. Charge#to#IHT#will#be#higher#of: the higher tax liability will be payable - for an appreciating asset this will normally be by treating this as part of the
(i) Original#transfer death estate.
(ii) Death - o IHT would be due in either case if the shares ualify for - it appears that the conditions for this relief are
BPR IMPACT met (subject to any expected assets owned by Co , and to Y retaining the shares until 's death), and as un uoted
trading co shares they would ualify for relief at 100%.
- If still needs the income from the shares, my recommendation would be to retain the shares and ocntinue to
receive income. The shares will pass to her son as part of her estate.
,CHARITABLE DONATIONS VARIATIONS TO WILLS
- [2] If you enter into a deed of variation, which varies your mother's will, the cash will be
- [1] There would be no tax charge on the proposed donations of cash to charity. Cash is not treated as exempt from fro IHT (whereas it would have been fully taxable under the original
subject to CGT, and gifts to charities are exempt from IHT. There are two alternatives to will).
minmise the tax:
[4] The saving would come as a repayment of some of the IHT which has already been paid.
- If you make the donations yourself, you should be able to make the donations under the Gfit Details of the IHT payable on your mother's estate, as well as of your projected income for
Aid rules. This would mean that the charity would be able to claim back basic rate IT on the the next few years, would be needed to determine which alternative would produce the
gift provided you had paid at least that amount of tax in the tax year of the donation. You greater tax saving.
woul dthen be able to claim to top up the IT relief to the highest rate at which you pay IT on - A deed of variation needs to be executed within 2 years of your mother's death, and needs
your tax return. to include a special statement that it is intended to be effective for IHT.
[3] In addition, if more than 10% of the net value of an individual's estate is left to charity, the
rate of IHT which applies to the estate is reduced from 40% to 36%
s el
- if they give the shares directly to their children, they will incur CGT consequences, as follows
- X & Y will both have cash in their estates rather than shares after the sale. - personal gift of the shares to the children gives rise to a capital gain for each of X & Y , of
- The shares in Co B may qualify for BPR at the rate of 100% (assuming the co is a trading co £5 K 00K (using table of valuation of Co B shares ie 30% gift £0. m) - 30K cost .
and not an investment co; and this relief will be restricted by an 'excepted assets'). However, - This gain may be reduced by claiming GR, assuming that Co B qualifies as an T personal
cash does not qualify. Therefore their estates will suffer a greater IHT charge on death if cash trading co for the purposes of GR.
is held. - However, the 'a' of GR available is restricted because of the investments held by the Co.
- The rate of IHT on death is 40% but the amount chargeable is determined after considering - The gain eligible for GR would be calculated as
the amount of NRB and the value of the other assets in their death estates. The £325K NRB
will have been used up against the value of the gift of the shares to their children, if the Gift on gift of shares x MV CBA/MV CA = £ 2 5K
shares do not qualify for BPR. I £5 0K x 250K (retail premises) 1m (retail premises residential investment properties)
I ignoring totally P& , cash, total of other assets less liabilities etc.
- Therefore £42 .5K (5 K 2 5K) of the gain would be taxable and £ 2 5K could be held
over against the base cost of the shares for (ie children they are gifting to)
- The tax on this gain (assuming and capital losses have already been used against the
gain on sale of shares to others) would be 20% x £42 .5K ie £ 5.5K each. This would reduce
the amount of cash they have available for retirement.
- B DR could be claimed on this gain, reducing the CGT due to £X, assuming that the
qualifying conditions are met and that the T limit for B DR of £1m has not been exceeded.
- This gift would also be a potentially exempt transfer for IHT purposes. The value of the P T,
would be the diminution in value of X & Y estates. The related property rules apply as the
0% of the shares are held by X & Y after the sale to . The value of a 0% holding is £1. 5
(using table of valuation), a value of £ 5K each to X & Y.
- No tax would be payable in lifetime and tax might be paable (after deduction of a maximum
of £ K of IHT annual exemptions and a maximum of £325K of NRB) at 40% on death.
- The IHT payable would be £21 . (ie 5 - 325 - x 40%), assuming the NRB and two
were available against the transfer.
- If BPR is available at the rate of 100%, the value of the gift would be nil. e need to now
more about the Co and its activities to decide whether BPR is available.
- H RC regard a company as train gin this context if it is wholly or mainly a trading Co. This
may loo at the level of income generated, the assets of the business of the level of activity.
o the Co may be regarded as trading and the value of the shares eligible for BPR, but there is
no certainty.
- ven if the shares qualify as business property, any assets not used for business purposes
will not be eligible for BPR and will be treated as a excepted assets, proportionally reducing
the BPR available - in this case the residential properties are unli ely to count as business
assets, as they are held as investment properties.
- The cash balance of £300K, as it is not held for C needs, but, instead, held for the purpose
of investment, would count as an excepted asset, if the cash were still held as part of the
business at the date of the gift.
- If BPR is available we need to ensure that the donees retain the shares, or replacement
property for years or at least until X & Y both die, in order to retain the elgibility to BPR
should they die within years of the gift.
, D
[ 1] Co is a tax-resident company and is therefore taxed to CT on its income and gains - this includes the
profits and gains of its in topia.
see foreign exchange
roceeds - cost gain - IA ch gain
2 X plc can ma e an election toe xempt the profits (and losses) of P from K tax. However, this
see losses
election only applies to P after the period in which the election is made and applies to all P and
UK+CO+OWNING+AN+OVERSEAS+PE is irrevocable. s X plc may be unsure about its future expansion strategy, it may be worthwhile
reflecting on possible future P , before ma ing such an election, to ma e usre there will not be any
1 The profits of an P disadv. in ma ing the election for X plc.
are sub ect to K CT on X plc. - In addition, as the TR is higher in topia, it is li ely any K CT on the P profits will be fully relieved
The profits will be added to UK++ by DTR (sub ect to local rules ont reatment of expenditure etc) and there therefore may be no tax
saving of ma ing the election. ny election made before the end of Dec 20 (C) would not have
the taxable profits of X plc. In Co+ removed the £P from the CT computation of the Y 31 Dec 20.
this case the gross profits are The (of OS)
added to the taxable profits means that Co. A will have a PE in BPT+10+SECOND+CHECKLIST
of the company and the DTR Utopia. This is not an additional
- lternatively, K Co could elect to exempt the profits from K CT. The election is irrevocable and
will be available on the lower related 51% group co.
would have to apply to all future P of K Co wherever located. This means that any losses generated
of the CT paid in topia OS+
by such entities in the future would not be relieved by the K Co.
of £X (40% x P) or the K tax. PE+
This is deductible from the CT - The client should be made aware of this election, which would apply to all s established by a Co.
liability of X plc. The decision to make this election will depend upon factors such as the future locations and T of those
jurisdictions. Also if losses may arise in the s then a branch exemption is less likely to be appropriate.
TAX+IMPLICATIONS+OF+OWNING+AN+OS+PE MAKING+THE+OS+PE+ELECTION Co's have an option to ma e an irrecovable
It needs to be confirmed whether the election election for foreign P s, located anywhere in the
has been made. world, to be exempt from K CT on their profits.
Co is taxed at on
its income inc . that Definition: When+not+to+make+the+election: s the tax on the topian branch profits is
of an . ]#Fixed#place#of#b/s#overseas - OS#PE#is#loss#making#(same#trade) higher than the K tax, there would be no
point in electing to exempt P profit.
or CT purposes, the ]#Example:#Shop,#office,#factory#etc ]#OS#PE#has#higher#CT#rate#(no#UK#tax#under#DTR)
taxable trading profits will ]#No#separate#legal#entity The operation in topia is a P of K Co and its s the P is li ely to show a profit in the next
be higher by approx. , profits will be taxed in the K as K Co is tax Y, it is normally advisable to consider
with only a 3% deduction resident in the K and is, therefore, liable to K When+to+make+the+election: incorporating the P or ma ing a branch
from trading profits for Tax+impact+on+UK+Co: CT on its income. - OS#PE#is#paying#CT#at#lower#rate exemption election.
capital purchases of
buildings if they ualify - OS#PE#profits#taxed#as#part#of#UK#profits - Without#the#election#there#will#be#additional UK
under the tructures - OS#PE#can#claim# lection is only CT here a P is in a urisdiction with a R than in the K and the K has
, a P election would be beneficial because the trading losses would not be
ui dings A o ance A effective from
rules. ]#No#extra#associate This is not an additional related 51% group Co.the start of the used against P profits.
]#Asset#transfers:#No#gain#no#loss#(cost#+#indexation) A after the one Impact+of+the+election: However, this election only applies for
Additionally, the Annua in which the Ps after the period in which the
In estment A o ance election is made ]#Election#exempt#profits#from#UK#CT election is made and applies to all
may have been used by What+if+OS+PE+has+CY+trading+losses? and therefore it ]#Any#OS#PE#losses#cannot#be#relieved P s and is irrevocable.
other group companies, is too late for
such that relief for plant ]#If#same#trade#as#UK#Co:#Then#loss#(auto)#offset# Co to make this ]#OS#PE#cannot#claim#UK#capital#allowances ny election made
purchases is given more #against#UK#trading#profits election for the ]#Election#applies#to#subsequent#accounting#period before the end of Dec
slowly (1 % reducing Y . 20 (ie end of P)
balance each year). for £X If the did make losses, it is ]#Irrevocable#election would not have
likely that they could only be used
expenditure on P& J+If+OS+PE+has+separate+trade: against its own future trading ]#Election#applies#on#a#Co#basis#and#not#group#basis removed the £profits
from the CT
However, DT either in the (i) Its#trading#losses#ring#fenced profits. This is because it would be computation at the
form of treaty relief or a separate trade as it could not
unilateral DT should (ii) Offset#against#OS#PE#profits be part of an existing trade of What+if+OS+PE+was+loss+making+pre+election? Y 31-12-20.
apply to prevent Co only Co as it does not have an existing ]#Loss#recapture#rules#will#apply RECO ENDATION
suffering tax twice on this trade. As Co may be unsure about
income. The details of the OS+PE+pays+foreign+CT: ]#Delay#in#the#election#from#becoming#active its future expansion strategy, it
topian DT treaty should - UK#Co#can#obtain#DTR Trading profits of will also be taxed nti-diversion may be worthwhile reflecting
be reviewd since treaties in topia at 12%. DT will be available rules do not on possible future before
will take precedence over
- DTR#is#lower#of: on the lower of the CT paid in topia apply to prevent Election+will+be+denied: making such an election, to
and the tax.
tax law. (i) Foreign#tax#paid the exemption,
as the
]#If#CFC#exemptions#not#met make sure there will not be
any disadv in making the
(ii) UK#CT#x#OS#PE#profits This is deductible from the CT liability of business meets ]#If#CFC#trading#profits#gateway#not#met election for Co.
T S B VS E Co. the profit
DTR is allowed up to the K CT exemption (as
See+CFC+checklist+for+more+detail
attributable to the topian branch per the C C
profits. rules).
- s the foreign operation is li ely to be treated as a C C if it were to be incorporated, there
- The tax conse . of a would be that the profits of the topian would usually be incl. within the profits is also an anti-diversion rule, which means that profits of a P to which an exemption applies
of the parent co and taxed at the CT rate (this is because Co, as a res. Co, will be taxed on are not exempt if the C C rules would have applied if the P had been incorporated.
profits). This would give rise to CT at 1 % on those profits. This would mean a tax liability of for the - The application of C C rules may also need to be considered in the future. s a newly
period and for Y . incorp. Co. it does not fall within the initial 12 month exempt period although the TR appears
to be close to the K rate so the TR exemption may apply. There may be compliance costs
- If any tax is suffered on these profits in topia (e.g. if the is taxed at 5% rate ), this will be deductible from involved in incorporation.
the CT due. The taxation on these profits will be reduced by unilateral DT , to give relief fo rthe 5%
tax withheld on these profits in topia.
- I If taxed as , Co would suffer tax at 1 % in the , less 5% HT already paid in topia as DT . - Because of this anti-diversion rule, the use of a P rather than a ub would not be a tax
- The T suffered would therefore be 1 %, subject to any variation for different rules relating to adj. profits. advantage if the C C regime applied to the operation.
or the purposes of the calculations it is assumed that the taxable profits in topia are calculated in the same - It is probably preferable to set up the topian trade as a P and suffer a total tax liability
way as in the . on the topian profits of 1 %
- It appears incorp of the P would not lead to any saving in K CT and would increase the
S BSIDIAR OVERSEAS SHO LD BE ON NE T A E amount of time and money spent on compliance.
- hilst as a non-res entity, sub would not usually be liable to tax, there are a number of AA rules that could result
in a tax charge arising in connection with the profits to ub. irstly, if ub were considered to be centrally managed
and controlled in the the Co would be deemed resident for tax purposes.
- Assuming that there is independent mngt in topia, it is then necessary to consider whether the C C rules could
result in a tax charge arising for plc. [go to C C]
- If the operation were a P in topia, we would consider whether to ma e the election to exempt the income and losses of P s from K tax. It is possible that K Co would elect for the topian P to be exempt
from K taxation however...
- This election applies to all P s and is effective from the start of the P after the one in which the election is made and is irrevocable. Therefore, if the election were made now (1 an 21) it would only be in force from
1 pr 21 (ie end of 3-month P) and so profits of the period to 31 ar 21 would still be taxable in the K.
- It may appear advantageous in this case but might be disadvantageous when applied to P s set up by K Co in the future. s K Co intends to set up more P s in the future If K Co ma es the election, this would
preclude K Co from claiming loss relief for any losses made by any P s in the future.
- If an exempting election was made, there would be no K CT to pay on the profits of the P in either P. K Co would also not use any of its losses against the profits of the P . These losses could be cfwd in K Co
under s.45 and used against total profits and gains in future P.
- K Co would not be able to exempt the P 's profits for the current accounting period since the election must be made before the start of the P. This election may not also be appropriate since it would be irrecoverable.
ll P s created by K Co in the future would come within the exemption.
- s the P in topia made a loss in the initial periods and if other new ventures followed a similar model and made losses in the opening periods, then an election would certainly not be advisable since losses would not
be relivable against K profits of K Co.
- ven if the election is made in the future, the tax rate on the P s profits appears to be very similar to the K rate. verall, this proposal would not be recommended without careful consideration of future plans for
international expansion.
OTENTIALL E E T TRANS ER ET
IE I T O SHARES
Gift+of+painting+(non+b/s+asset)+from+father+to+son Gift+of+business+asset+from+father+to+son 1 s X and Y (uncle) are
connected and X would not be
buying the asset from Y, is
CGT: CGT: substituted for sales proceeds to
calc a gain of £X.
1. Chargeable#disposal#subject#to#CGT 1. Chargeable#disposal#subject#to#CGT
2. MV#gain#(connected#part) 2. MV#gain#(connected#part) qualify
2 s the asset is used by Y in business, it will
for GR. No gain would arise on disposal of
3. No#gift#relief#(not#business#asset) 3. Gift#relief#(business#asset) the asset and therefore no CGT arises.
4. Gain#at#28% 4. Gain#at#28%#or#10%#ER#on#actual#SP#>#cost
5. Son#base#cost#=#MV 3 X's deemed cost of acq which is the at the
date of the gift is reduced by the 'a' of gain which
CGT+J+Gift+Relief: would have been chargeable had GR not applied.
IHT: 1. Joint#election#with#son#(donee) 4 oint election must
1. Gift#to#son#=#PET#less#any#payment#received 2. 14/15#by#5#April#2019#or#15/16#by#5#April#2020 be mae by both the
donee, X, and the donor,
2. No#life#time#IHT 3. Son#(donee)#revised#base#cost#(MV#less#GR) Y, for GR to apply.
3. Use#AE#£3,000#x#2 [Nil Rate Band NRB?]
5 The gift of the
4. Survive#7#years#=#Exempt#PET IHT: building will be
5. Survive##<7#years: 1. Gift#to#son#=#PET#less#any#payment#received treated as a P T for
IHT purposes. If Y dies
- PET#chargeable 2. No#life#time#IHT within years of
- Taper#relief#(>3#yrs) 3. IHT#BPR#if#donor#owned#asset#for#2#years ma ing the gift it will
be treated as a C T
- Tax#at#40% 4. BPR#withdrawn#if#donee#does#not#hold#b/s#asset and taper relief may
- Son#(donee#liable) or#not#reinvested#in#another#b/s#asset apply. However, it is
li ely to be treated as
6. No#BPR#non#b/s#asset 4. Survive#7#years#=#Exempt#PET relevant property for
5. Survive##<7#years: BPR
]#PET#chargeable
]#Taper#relief#(>3#yrs)
]#Tax#at#40%#if#BPR#not#available
]#Son#(donee#liable)
If the partnership is incorporated under method 1, the building will continue to be
used in the trade. It is relevant business property because it has been used as a business
asset for a partnership in which Y was a partner, and owned by Y for at least 2 years
before the gift. The relief available will be 50%.
BPR will no longer apply to the gift of the building if X disposes of the building before Y
dies. However, a replacement business property can be treated as the original property if
the original property was sold before death and the whole of the consideration received
was used to acquire the property within 3 years from disposal.
, 1 If they created a trust and transferred the shares to the trust, it could either Method 1 Method 2
be an or a . Gross income įſĢ̊ ĠűɐĔſḺБſЬɐБ 25,000 25,000
Less s64 loss relief - (3,125)
Less PA (12,500) (12,500)
5 The creation of the I T O SHARES TO A TR ST Taxable 12,500 9,375
trust would bring about Tax @ 20% 2,500 1,875
the same CGT [1] Generally a disposal of shares to a trust is subject to Tax suffered on trust income (45%) (11,250) (11,250)
consequences as both CGT and IHT. Tax repayment 8,750 9,375
mentiioned above,
except that GR is Gift+of+any+asset+into+a+trust+by+a+father C T
available on the
creation of the trust [4 or CGT, if you made a gift to a trust you would be treated as disposing of the shares to the trust for their at the
due to the immediate CGT: time of the gift. To the extent that this is greater than their probate value (ie, their value at the time of your mother's
charge to IHT on the death), a gain will airse.
creation of the trust. In 1. Chargeable#disposal#subject#to#CGT - This will be taxed at a rate of 20%, after deducting your A A of 12,300 to the extent that it has not been used against
these circumstances 2. MV#gain#(connected#part) other gains. If the gain is more than your A A, you could eliminate the CGT charge in oneof two ways: either make a claim
for CGT G or enter into a deed of ariation of your mother's will, indicating that you intend the variation to be effective
the cash and
investments would not 3. Gift#relief#(any#asset#into#a#trust) for CGT purposes.
restrict the 'a' of - The effect in both cases is that the trust is treated as ac uiring the shares for their probate value (ie, the value at which
available GR and the you were treated as ac uiring them from your mother). This means that the CGT that you would otherwise have paid ont he
full gain of £5 0K (ie CGT+J+Gift+Relief: disposal to the trust is effectively deferred until the trust sells the shares.
valuation of 30% 00K 1. Single#election#by#father#(donor) nce the shares are in the trust the trust will pay tax on any dividend income arising from the shares (at
the rate of 3 .1% for a discretionary trust and at .5% for IIP trusts). Payments to beneficiaries will be paid
- cost 30K) each is
eligible for GR. 2. 14/15#by#5#April#2019#or#15/16#by#5#April#2020 under deduction of a tax credit.
3. Trust#(donee)#revised#base#cost#(MV#less#GR) - There will be tax consequences of removing the assets from the trust.
- IHT will also be payable on every exit from the trust and every 10-yr anniversary of the creation of a
2 or IHT purposes
the creation of a trust discretionary trust.
is a C T, charged to IHT:
IHT at the rate of 20% [2] However, as these are shares in an T, it is likely that there would be no IHT charge because they
or 25% depending on
1. Gift#to#trust#=#CLT would ualify for 100% . ormally this only applies if the asset has been owned for at least 2 years,
whether the trust or 2. Life#time#IHT#due:#25%#if#donor#pays#or#20%#by#trust but that limitation would not apply here (gift of shares to a trust) so long as the relief also applied to
the shares in calc. IHT du on your mother's estate (this would need to be confirmed).
the donor pays the IHT
due in lifetime. 3. Use#AE#£3,000#x#2 [3] There could also be a further IHT charge (of up to a further 20% of
4. Survive#7#years#=#Exempt#CLT the original gift plus any IHT which you pay) if you die within yrs of the
3 ssuming that original gift.
both donors still have 5. Survive##<7#years: - If the shares are still owned by the trust, and are still ins hares in an
a NRB of £325K ]#CLT#chargeable T at the time of your death, 100% should also apply in
available and also calculating the further charge.
have two available, ]#Taper#relief#(>3#yrs) - Any original IHT charge, and the risk of a further charge on your death
the tax payable in ]#Tax#at#40% could be eliminated by entering into a deed of ariation in relation to
lifetime would be your mother's will including a statement that it was intended to be
£10 . K ( 5 value ]#Trust#(donee#liable) effective for IHT purposes.
of gift - K - 325K) x
20% or £13 K if X & Y
6. No# #re#non#b/s#asset#transferred
pay the T ( 25%). 4 BPR at the rate of 100% could reduce this tax to nil, if the Co is regarded as a trading Co with no
excepted assets.
N
BPR
R BPR
C T
Gift+with+reservation+of+benefit [1] The gift of your shares for CGT purposes would be covered by G as
described previously and no tax would be payable on the transfer.
However, the gain would crystallise when and if Y came to sell the shares.
Definition:
1. Donor#makes#a#gift#but#continues#to#enjoy#some IHT
benefit#from#the#gift [2] ormally the transfer of the shares themselves is a T.
I would make an outright gift of shares to Y. I will, however, receive the dividends from the shares. He has agreed
that he would be happy to own the shares but to pass the right to receive the dividends to me if I need the income.
GWROB+will+not+apply:
[3] However, given your serious illness you need to consider the IHT conse uences. There are
1. Donor#pays#MV#rent#re#use#of#asset special rules which apply when you as transferor make a transfer of value but continue to
2. Circumstances#of#donor#changed#(unforeseen)#+ enjoy some of the benefits of the gifted asset.
- If you continue to receive dividends from the shares, then you are receiving a benefit and the gift is known as a gift
2A.#Benefit#represents#care#and#maintenance#as#an with reservation of benefit.
#######elderly#or#infirm#relative - If you retain the benefit in the asset transferred ie, receiving dividends until death, the value of the shares will be
treated as part of the death estate and charged to IHT.
- If the asset ceases to be subject to the benefit, the transferor is treated as making a T at the date of cessation.
IHT+implications+of+GWROB:
- If the asset could be charged twice to IHT, two calculations will be re uired but only the treatment which generates
1. Charge#to#IHT#will#be#higher#of: the higher tax liability will be payable - for an appreciating asset this will normally be by treating this as part of the
(i) Original#transfer death estate.
(ii) Death - o IHT would be due in either case if the shares ualify for - it appears that the conditions for this relief are
BPR IMPACT met (subject to any expected assets owned by Co , and to Y retaining the shares until 's death), and as un uoted
trading co shares they would ualify for relief at 100%.
- If still needs the income from the shares, my recommendation would be to retain the shares and ocntinue to
receive income. The shares will pass to her son as part of her estate.
,CHARITABLE DONATIONS VARIATIONS TO WILLS
- [2] If you enter into a deed of variation, which varies your mother's will, the cash will be
- [1] There would be no tax charge on the proposed donations of cash to charity. Cash is not treated as exempt from fro IHT (whereas it would have been fully taxable under the original
subject to CGT, and gifts to charities are exempt from IHT. There are two alternatives to will).
minmise the tax:
[4] The saving would come as a repayment of some of the IHT which has already been paid.
- If you make the donations yourself, you should be able to make the donations under the Gfit Details of the IHT payable on your mother's estate, as well as of your projected income for
Aid rules. This would mean that the charity would be able to claim back basic rate IT on the the next few years, would be needed to determine which alternative would produce the
gift provided you had paid at least that amount of tax in the tax year of the donation. You greater tax saving.
woul dthen be able to claim to top up the IT relief to the highest rate at which you pay IT on - A deed of variation needs to be executed within 2 years of your mother's death, and needs
your tax return. to include a special statement that it is intended to be effective for IHT.
[3] In addition, if more than 10% of the net value of an individual's estate is left to charity, the
rate of IHT which applies to the estate is reduced from 40% to 36%
s el
- if they give the shares directly to their children, they will incur CGT consequences, as follows
- X & Y will both have cash in their estates rather than shares after the sale. - personal gift of the shares to the children gives rise to a capital gain for each of X & Y , of
- The shares in Co B may qualify for BPR at the rate of 100% (assuming the co is a trading co £5 K 00K (using table of valuation of Co B shares ie 30% gift £0. m) - 30K cost .
and not an investment co; and this relief will be restricted by an 'excepted assets'). However, - This gain may be reduced by claiming GR, assuming that Co B qualifies as an T personal
cash does not qualify. Therefore their estates will suffer a greater IHT charge on death if cash trading co for the purposes of GR.
is held. - However, the 'a' of GR available is restricted because of the investments held by the Co.
- The rate of IHT on death is 40% but the amount chargeable is determined after considering - The gain eligible for GR would be calculated as
the amount of NRB and the value of the other assets in their death estates. The £325K NRB
will have been used up against the value of the gift of the shares to their children, if the Gift on gift of shares x MV CBA/MV CA = £ 2 5K
shares do not qualify for BPR. I £5 0K x 250K (retail premises) 1m (retail premises residential investment properties)
I ignoring totally P& , cash, total of other assets less liabilities etc.
- Therefore £42 .5K (5 K 2 5K) of the gain would be taxable and £ 2 5K could be held
over against the base cost of the shares for (ie children they are gifting to)
- The tax on this gain (assuming and capital losses have already been used against the
gain on sale of shares to others) would be 20% x £42 .5K ie £ 5.5K each. This would reduce
the amount of cash they have available for retirement.
- B DR could be claimed on this gain, reducing the CGT due to £X, assuming that the
qualifying conditions are met and that the T limit for B DR of £1m has not been exceeded.
- This gift would also be a potentially exempt transfer for IHT purposes. The value of the P T,
would be the diminution in value of X & Y estates. The related property rules apply as the
0% of the shares are held by X & Y after the sale to . The value of a 0% holding is £1. 5
(using table of valuation), a value of £ 5K each to X & Y.
- No tax would be payable in lifetime and tax might be paable (after deduction of a maximum
of £ K of IHT annual exemptions and a maximum of £325K of NRB) at 40% on death.
- The IHT payable would be £21 . (ie 5 - 325 - x 40%), assuming the NRB and two
were available against the transfer.
- If BPR is available at the rate of 100%, the value of the gift would be nil. e need to now
more about the Co and its activities to decide whether BPR is available.
- H RC regard a company as train gin this context if it is wholly or mainly a trading Co. This
may loo at the level of income generated, the assets of the business of the level of activity.
o the Co may be regarded as trading and the value of the shares eligible for BPR, but there is
no certainty.
- ven if the shares qualify as business property, any assets not used for business purposes
will not be eligible for BPR and will be treated as a excepted assets, proportionally reducing
the BPR available - in this case the residential properties are unli ely to count as business
assets, as they are held as investment properties.
- The cash balance of £300K, as it is not held for C needs, but, instead, held for the purpose
of investment, would count as an excepted asset, if the cash were still held as part of the
business at the date of the gift.
- If BPR is available we need to ensure that the donees retain the shares, or replacement
property for years or at least until X & Y both die, in order to retain the elgibility to BPR
should they die within years of the gift.
, D
[ 1] Co is a tax-resident company and is therefore taxed to CT on its income and gains - this includes the
profits and gains of its in topia.
see foreign exchange
roceeds - cost gain - IA ch gain
2 X plc can ma e an election toe xempt the profits (and losses) of P from K tax. However, this
see losses
election only applies to P after the period in which the election is made and applies to all P and
UK+CO+OWNING+AN+OVERSEAS+PE is irrevocable. s X plc may be unsure about its future expansion strategy, it may be worthwhile
reflecting on possible future P , before ma ing such an election, to ma e usre there will not be any
1 The profits of an P disadv. in ma ing the election for X plc.
are sub ect to K CT on X plc. - In addition, as the TR is higher in topia, it is li ely any K CT on the P profits will be fully relieved
The profits will be added to UK++ by DTR (sub ect to local rules ont reatment of expenditure etc) and there therefore may be no tax
saving of ma ing the election. ny election made before the end of Dec 20 (C) would not have
the taxable profits of X plc. In Co+ removed the £P from the CT computation of the Y 31 Dec 20.
this case the gross profits are The (of OS)
added to the taxable profits means that Co. A will have a PE in BPT+10+SECOND+CHECKLIST
of the company and the DTR Utopia. This is not an additional
- lternatively, K Co could elect to exempt the profits from K CT. The election is irrevocable and
will be available on the lower related 51% group co.
would have to apply to all future P of K Co wherever located. This means that any losses generated
of the CT paid in topia OS+
by such entities in the future would not be relieved by the K Co.
of £X (40% x P) or the K tax. PE+
This is deductible from the CT - The client should be made aware of this election, which would apply to all s established by a Co.
liability of X plc. The decision to make this election will depend upon factors such as the future locations and T of those
jurisdictions. Also if losses may arise in the s then a branch exemption is less likely to be appropriate.
TAX+IMPLICATIONS+OF+OWNING+AN+OS+PE MAKING+THE+OS+PE+ELECTION Co's have an option to ma e an irrecovable
It needs to be confirmed whether the election election for foreign P s, located anywhere in the
has been made. world, to be exempt from K CT on their profits.
Co is taxed at on
its income inc . that Definition: When+not+to+make+the+election: s the tax on the topian branch profits is
of an . ]#Fixed#place#of#b/s#overseas - OS#PE#is#loss#making#(same#trade) higher than the K tax, there would be no
point in electing to exempt P profit.
or CT purposes, the ]#Example:#Shop,#office,#factory#etc ]#OS#PE#has#higher#CT#rate#(no#UK#tax#under#DTR)
taxable trading profits will ]#No#separate#legal#entity The operation in topia is a P of K Co and its s the P is li ely to show a profit in the next
be higher by approx. , profits will be taxed in the K as K Co is tax Y, it is normally advisable to consider
with only a 3% deduction resident in the K and is, therefore, liable to K When+to+make+the+election: incorporating the P or ma ing a branch
from trading profits for Tax+impact+on+UK+Co: CT on its income. - OS#PE#is#paying#CT#at#lower#rate exemption election.
capital purchases of
buildings if they ualify - OS#PE#profits#taxed#as#part#of#UK#profits - Without#the#election#there#will#be#additional UK
under the tructures - OS#PE#can#claim# lection is only CT here a P is in a urisdiction with a R than in the K and the K has
, a P election would be beneficial because the trading losses would not be
ui dings A o ance A effective from
rules. ]#No#extra#associate This is not an additional related 51% group Co.the start of the used against P profits.
]#Asset#transfers:#No#gain#no#loss#(cost#+#indexation) A after the one Impact+of+the+election: However, this election only applies for
Additionally, the Annua in which the Ps after the period in which the
In estment A o ance election is made ]#Election#exempt#profits#from#UK#CT election is made and applies to all
may have been used by What+if+OS+PE+has+CY+trading+losses? and therefore it ]#Any#OS#PE#losses#cannot#be#relieved P s and is irrevocable.
other group companies, is too late for
such that relief for plant ]#If#same#trade#as#UK#Co:#Then#loss#(auto)#offset# Co to make this ]#OS#PE#cannot#claim#UK#capital#allowances ny election made
purchases is given more #against#UK#trading#profits election for the ]#Election#applies#to#subsequent#accounting#period before the end of Dec
slowly (1 % reducing Y . 20 (ie end of P)
balance each year). for £X If the did make losses, it is ]#Irrevocable#election would not have
likely that they could only be used
expenditure on P& J+If+OS+PE+has+separate+trade: against its own future trading ]#Election#applies#on#a#Co#basis#and#not#group#basis removed the £profits
from the CT
However, DT either in the (i) Its#trading#losses#ring#fenced profits. This is because it would be computation at the
form of treaty relief or a separate trade as it could not
unilateral DT should (ii) Offset#against#OS#PE#profits be part of an existing trade of What+if+OS+PE+was+loss+making+pre+election? Y 31-12-20.
apply to prevent Co only Co as it does not have an existing ]#Loss#recapture#rules#will#apply RECO ENDATION
suffering tax twice on this trade. As Co may be unsure about
income. The details of the OS+PE+pays+foreign+CT: ]#Delay#in#the#election#from#becoming#active its future expansion strategy, it
topian DT treaty should - UK#Co#can#obtain#DTR Trading profits of will also be taxed nti-diversion may be worthwhile reflecting
be reviewd since treaties in topia at 12%. DT will be available rules do not on possible future before
will take precedence over
- DTR#is#lower#of: on the lower of the CT paid in topia apply to prevent Election+will+be+denied: making such an election, to
and the tax.
tax law. (i) Foreign#tax#paid the exemption,
as the
]#If#CFC#exemptions#not#met make sure there will not be
any disadv in making the
(ii) UK#CT#x#OS#PE#profits This is deductible from the CT liability of business meets ]#If#CFC#trading#profits#gateway#not#met election for Co.
T S B VS E Co. the profit
DTR is allowed up to the K CT exemption (as
See+CFC+checklist+for+more+detail
attributable to the topian branch per the C C
profits. rules).
- s the foreign operation is li ely to be treated as a C C if it were to be incorporated, there
- The tax conse . of a would be that the profits of the topian would usually be incl. within the profits is also an anti-diversion rule, which means that profits of a P to which an exemption applies
of the parent co and taxed at the CT rate (this is because Co, as a res. Co, will be taxed on are not exempt if the C C rules would have applied if the P had been incorporated.
profits). This would give rise to CT at 1 % on those profits. This would mean a tax liability of for the - The application of C C rules may also need to be considered in the future. s a newly
period and for Y . incorp. Co. it does not fall within the initial 12 month exempt period although the TR appears
to be close to the K rate so the TR exemption may apply. There may be compliance costs
- If any tax is suffered on these profits in topia (e.g. if the is taxed at 5% rate ), this will be deductible from involved in incorporation.
the CT due. The taxation on these profits will be reduced by unilateral DT , to give relief fo rthe 5%
tax withheld on these profits in topia.
- I If taxed as , Co would suffer tax at 1 % in the , less 5% HT already paid in topia as DT . - Because of this anti-diversion rule, the use of a P rather than a ub would not be a tax
- The T suffered would therefore be 1 %, subject to any variation for different rules relating to adj. profits. advantage if the C C regime applied to the operation.
or the purposes of the calculations it is assumed that the taxable profits in topia are calculated in the same - It is probably preferable to set up the topian trade as a P and suffer a total tax liability
way as in the . on the topian profits of 1 %
- It appears incorp of the P would not lead to any saving in K CT and would increase the
S BSIDIAR OVERSEAS SHO LD BE ON NE T A E amount of time and money spent on compliance.
- hilst as a non-res entity, sub would not usually be liable to tax, there are a number of AA rules that could result
in a tax charge arising in connection with the profits to ub. irstly, if ub were considered to be centrally managed
and controlled in the the Co would be deemed resident for tax purposes.
- Assuming that there is independent mngt in topia, it is then necessary to consider whether the C C rules could
result in a tax charge arising for plc. [go to C C]
- If the operation were a P in topia, we would consider whether to ma e the election to exempt the income and losses of P s from K tax. It is possible that K Co would elect for the topian P to be exempt
from K taxation however...
- This election applies to all P s and is effective from the start of the P after the one in which the election is made and is irrevocable. Therefore, if the election were made now (1 an 21) it would only be in force from
1 pr 21 (ie end of 3-month P) and so profits of the period to 31 ar 21 would still be taxable in the K.
- It may appear advantageous in this case but might be disadvantageous when applied to P s set up by K Co in the future. s K Co intends to set up more P s in the future If K Co ma es the election, this would
preclude K Co from claiming loss relief for any losses made by any P s in the future.
- If an exempting election was made, there would be no K CT to pay on the profits of the P in either P. K Co would also not use any of its losses against the profits of the P . These losses could be cfwd in K Co
under s.45 and used against total profits and gains in future P.
- K Co would not be able to exempt the P 's profits for the current accounting period since the election must be made before the start of the P. This election may not also be appropriate since it would be irrecoverable.
ll P s created by K Co in the future would come within the exemption.
- s the P in topia made a loss in the initial periods and if other new ventures followed a similar model and made losses in the opening periods, then an election would certainly not be advisable since losses would not
be relivable against K profits of K Co.
- ven if the election is made in the future, the tax rate on the P s profits appears to be very similar to the K rate. verall, this proposal would not be recommended without careful consideration of future plans for
international expansion.
