UK Tax, Trusts & Estates Conference 2017

Transcription

1 UK Tax, Trusts & Estates Conference 2017 Family Company Taxation post-fa 2016/Budget 2017 Spring 2017 Delegate notes and slides to accompany talk given by Peter Rayney, CTA (Fellow) FCA TEP Peter Rayney Tax Consulting Ltd Follow us on Peter Rayney March 2017 This material is copyright and may not be reproduced in whole or part without the express permission of the author or his company. Whilst every care has been taken to ensure the accuracy of the contents, no responsibility for loss occasioned to any person acting or refraining from action as a result of any information in the material can be accepted by the author. The material is intended to be a general guide for the purposes of the lecture and professional advice should always be obtained in relation to each specific case.

2 TABLE OF CONTENTS These notes should be read in conjunction with the slides for this lecture DEALING WITH THE NEW DIVIDEND REGIME... 2 An outline of dividend taxation post-5 April The 5,000 nil rate band... 2 Bonus v dividend comparison 2017/ DO SPOUSAL DIVIDENDS STILL WORK?... 5 Tax efficient spousal dividends for 2017/ Potential HMRC challenge to spousal dividends under settlement legislation... 5 Arctic Systems... 5 Vulnerable dividend waivers... 6 Alphabet shares... 7 DIVIDEND TAXATION FOR TRUSTS... 8 Bare trusts... 8 Interest in possession trusts... 8 Discretionary trusts... 9 UPDATE ON SECTION 455 LOANS TO PARTICIPATORS Scope of s455, CTA % tax charge CLOSE COMPANY DISTRIBUTIONS IN A WINDING-UP THE NEW TAAR Case study The Andrea Consultancy Ltd The new anti-phoenixing TAAR main conditions Applying the TAAR in practice Spring 2017 Page 1

3 DEALING WITH THE NEW DIVIDEND REGIME An outline of dividend taxation post-5 April 2016 For many years owner-managers have typically extracted most of their companies profits through dividends. However, profit extraction methods should be reviewed in the light of the radical post-5 April 2016 changes to dividend taxation. The main aspects of the new dividend tax rules are summarised as follows: Dividends do not carry any form of tax credit. The cash dividend or value of the distribution received is reported on the tax return (there is no grossing-up). Taxpayers benefit from a 5,000 dividend tax allowance (which reduces to 2,000 from 6 April 2018), which effectively represents a nil-rate band for dividend income. Dividend income is treated as the highest slice of income and is allocated to the various tax rate bands before taking the 5,000 dividend allowance into account. Dividend income cannot benefit from the current 5,000 savings allowance Subject to personal allowances and the current 5,000 dividend allowance, dividends received by individuals are taxed at the following rates in 2017/18. Dividend tax rates for individuals 2017/18 Taxable dividend income received Tax rate Up to basic rate band ( 33,500 for 2017/18) 7.5% Between basic rate and 150, % Above 150, % It will be appreciated that the FA 2016 tax rates on dividend income increased by 7.5% across each income tax band from the previous levels. The 5,000 nil rate band Under the new dividend tax regime, everyone has a nil tax rate band of 5,000 ( 2,000 from 2018/19) for dividend income, which is often referred to as the 5,000 dividend allowance or exemption. However, it is best to consider this as a nil rate band, since the allocation of dividend income (which is treated as the highest slice of income) across the various tax bands takes place before taking into account the 5,000 nil-rate band, as shown in example 1 below. Page 2 Spring 2017

4 Example 1 - Dividend tax in 2017/18 and 5,000 nil rate band Terry s expected taxable income during the year ended 5 April 2018 is as follows: - Employment income - 11,500 - Dividend from Bewlay Brothers Ltd - 41,500 For 2017/18, the personal allowance is 11,500 and the basic rate band is 33,500. Terry s 2017/18 income tax liability is 4,738, calculated as follows: Total Personal allowance Basic rate band Higher rate Employment income 11,500 11,500 - Dividend income 41,500 33,500 8,000 Zero-rate dividend (5,000) * (5,000) - band Taxable dividend 36,500 28,500 8, % 32.5% Tax liability 4,738 2,138 2,600 Bonus v dividend comparison 2017/18 For the owner-managed company, the comparison between extracting profits via a bonus or a dividend must take both the company s and owner-manager s tax costs into account. The increase in dividend taxation has narrowed the tax advantage of paying dividends as compared with paying bonuses. Example 2 bonus v dividend (higher rate taxpayer) Robert already draws a salary of about 52,000 from his company, Zimmerman Ltd. Assume that there are surplus profits of 100,000 available for the year-end 31 March Which is best bonus or dividend? Bonus Dividend Surplus profits Less: Employer s NIC@13.8% (12) Less: Corporation 19% (19) Income 40%/32.5% (35) (25)* Employees 2% (2) Net cash available Effective rate 49% 44% * Dividend tax - 81,000-5,000 (dividend allowance) = 76,000 x 32.5% = 24,700 Spring 2017 Page 3

5 Example 3 bonus v dividend (top-rate taxpayer) Assume Reginald has taxable income of 200,000 from various sources. His company, Dwight Ltd, is likely to have surplus profits of 100,000 for the year ended 31 March The bonus v dividend comparison is shown below. Bonus Dividend Surplus profits Less: Employer s NIC@13.8% (12) Less: Corporation 19% (19) Income 45%/38.1% (45) (29) Employees 2% (2) Net cash available Effective rate 54% 48% * Dividend tax - 81,000-5,000 (dividend allowance) = 76,000 x 38.1% = 28,956 Page 4 Spring 2017

6 DO SPOUSAL DIVIDENDS STILL WORK? Tax efficient spousal dividends for 2017/18 Following the changes to the dividend tax regime, a (non-tax-paying) spouse can only take a tax-free dividend of 16,500 in 2017/18 (i.e. equal to the combined personal allowance and 5,000 dividend allowance). Spousal dividend planning remains effective after 5 April 2016 provided it is implemented properly (see below). Owner managers will still consider it beneficial to pay spousal dividends within their spouse s basic rate band this only attracts a 7.5% tax rate see example 4 below. Example 4 Possible spousal dividend for 2017/18 Cash dividend 45,000 Less: Personal allowance (11,500) Taxable income 33,500 BR band - 33,500 but First 5,000 dividend nil rate band (-) Next 7.5% 2,138 Tax liability 2,138 Potential HMRC challenge to spousal dividends under settlement legislation Prior to the landmark ruling in Jones v Garnett [2007] UKHL 35 (the Arctic Systems case), the (then) Revenue was trying to apply the settlement legislation to counter what it considered to be unacceptable tax avoidance, being the passing of dividends (through split-share ownership) to lower tax paying spouses in micro/small owner managed companies. Where these arrangements are caught by the settlement rules, the relevant dividend income is treated as the settlor s income under s625, ITTOIA 2005 (previously s660a, ICTA 1988). The Revenue s challenge in this area finally came to a head in the Arctic Systems case, which was heard by the House of Lords in July Arctic Systems Briefly, Mr and Mrs Jones had formed Arctic Systems Ltd many years ago, each having equal shares. The company provided computer consultancy services, which were carried out by Mr Jones. He took only a small salary and most of the Spring 2017 Page 5

7 company s profits were extracted in the form of dividends. Mrs Jones, a basic rate taxpayer, did some basic bookkeeping work and received a small salary for that. The Revenue contended that the dividends received by Mrs Jones were bounteous and not commercial, and therefore argued that the settlement legislation should apply. In broad terms, the House of Lords held that the arrangements for the issue of shares to Mrs Jones, 'which enabled her to receive dividends on the shares which were expected to be paid' constituted a settlement. (Mr Jones would not have transferred the shares to a stranger - who undertook to do the same work as Mrs Jones - on the same basis.) However, having concluded there was a settlement, the Law Lords then went on to find that it was exempt under the inter-spousal settlement exemption in what is now s626, ITTOIA 2005 (previously in s660a (6), ICTA 1988) This exemption only applied if the outright gift was more that simply a right (or substantially a right) to income. Their Lordships confirmed that this exemption would generally be capable of applying to a gift of ordinary shares. (Ordinary shares contained a bundle of rights, such as voting rights and capital rights on a sale/winding-up, and so on. These rights go beyond a right to a dividend (income) if one is declared.) Vulnerable dividend waivers Donovan and McLaren v HMRC [2014] Mr D and Mr M each had a 50% shareholding in Victory Fire Ltd (VFL). In 2001, they agreed to issue a 10% shareholding in VFL to each of their wives. In a later tax year, dividends were paid to the four shareholders but, following dividend waivers by Mr D and Mr M, their wives each received 24.62% of the total dividend, being a disproportionate share in relation to their 10% holding. HMRC argued that the settlements legislation applied to the dividend waivers, so that the arrangements were ineffective i.e. Mr D and Mr M would be taxed on all the dividend income as settlors. The taxpayers appealed. The First-tier Tribunal dismissed the taxpayers appeal on the following grounds: The dividend waivers were intended to take advantage of the wives' lower rate of income tax to make an overall saving. Mr D's and Mr M's contention that the waivers were motivated by commercial reasons was not convincing. The settlement rules would apply where there were arrangements, which used a company's shares to divert income there did not necessarily have to be a tax avoidance motive (Jones v Garnett at para 48). A key question was whether Mr D and Mr M would have entered into the relevant arrangements with a third party at arm's length. Page 6 Spring 2017

8 Based on the facts, the waivers would not have taken when dealing at arm's length with a third party, since they involved an element of bounty (which is sufficient to create a settlement s620 ITTOIA The wives had clearly benefited from the dividend waivers. The dividend income was property in which Mr D and Mr M had an interest within the terms of s625, ITTOIA 2005 since the income was payable to their wives The arrangement did not fall within the spousal settlement exemption in s626, ITTOIA 2005 since it was simply a right to income. This was distinguished from the Jones v Garnett ruling because the essential arrangement here was not the allotment of the shares to Mr D s/mr M s wives but the waiver of dividends. It seems surprising that this case was taken since this is a classic case of 'poor advice' and how not to structure payment of the spousal dividends. The taxpayer was always going to lose since dividend waivers that give spouses more than they would be entitled to on a pro-rata distribution of the reserves will always be a settlement involving a transfer of income. This means they would not be entitled to the benefit of the inter-spousal gifts exemption (which does not apply where the arrangements (only) provide a right to income With careful implementation, the same problem should not arise if a different class of shares is used for spouses, which carries full share rights (including voting and capital). Alphabet shares HMRC have always contended that the post-acquisition benefits legislation in Pt 7, Ch 4, ITEPA 2003, enables it to challenge dividends paid under so-called alphabet share arrangements which are mainly driven by tax or NIC avoidance. However, the Ministerial statement made by Dawn Primarolo on 21 June 2005 provided some comfort that HMRC would not generally seek to apply the special post-acquisition benefits legislation to dividends paid to shareholders of ownermanaged companies. It confirmed that these rules were only intended to deal with contrived schemes to disguise remuneration so as to avoid PAYE and NIC. HMRC s Employment related Securities at ERSM90060 confirms that: Where an owner-managed company run as a genuine business, pays dividends out of profits and there is no contrived scheme to avoid income tax or NIC on remuneration or to avoid the IR35 rules, HMRC will not seek to argue that a chapter 4 benefit had been received by the directors because of the exclusion provided by ITEPA 2003, s 447(4) (i.e. there is no main tax/ NIC avoidance motive). The PA Holdings case is a pretty good example of the type of contrived tax avoidance scheme that HMRC has in mind when looking at such arrangements! However, the post-5 April 2016 dividend rates are likely to reduce the appetite for arrangements designed to pay senior employees/management dividend income (as opposed to their full commercial salaries/bonuses). Spring 2017 Page 7

9 DIVIDEND TAXATION FOR TRUSTS Bare trusts It is common for bare trusts to hold funds on behalf of minor beneficiaries the adult trustees would hold the funds until the beneficiary is old enough to give a valid receipt. Once the beneficiary reaches their 18th birthday, they can insist that their share of the trust assets is transferred into their own name (this is not a taxable event since there is no change in beneficial ownership). Provided the bare trust is not caught by the parental settlement rules, the income would be taxed at the relevant child s own tax rates. In the case of dividend income, the child s dividend tax rates would be as summarised on page 2. Bare trusts therefore provide a useful tax planning device to give cash to children or grandchildren. Interest in possession trusts Under an interest in possession/life interest trust, the beneficiary/beneficiaries (life tenant(s)) have the right to receive the trust income as it arises, usually for life, but it can be for a fixed period. The capital would then normally vest in someone else (the remainderman ). Where the trustees receive dividend income, they will generally be subject to the 7.5% dividend tax rate. Other trust income is taxed at 20% (s6, 11 & 14, ITA 2007). This rule is disapplied in certain cases where the settlor is taxed on the trust income (such as in relation to a settlor-interested trust or parental settlement) The trustees are not subject to any higher rate taxation but are not entitled to any personal allowances or reliefs/exemptions (such as the 5,000 dividend nil rate band). Furthermore, no relief can be claimed for trust expenses, which must therefore be met out of the trust s post-tax income. The beneficiary/beneficiaries are personally liable to income tax at their personal dividend rate(s) on the dividend income received by the trust (net of the trust expenses). Where applicable, the beneficiary/beneficiaries can deduct the (7.5% or 20%, as appropriate) tax suffered by the trustees on the part that has not been used to satisfy the trust expenses. The beneficiary of the trust is provided with a form R185 (trust income) showing the trust income (broken down between the relevant income sources and the trust expenses) and the tax deemed to be deducted. The R185 income is then taxed at the relevant income tax rates in the beneficiary s hands (with a credit for the tax suffered by the trustees). Page 8 Spring 2017

10 Example 5 Dividend income arising in life interest trust in 2017/18 Tito enjoys a life interest under The Jackson Family Settlement. During the year ended 31 March 2018, the trustees received a dividend of 200,000 from ABC Ltd (which was 80% owned by the family members and 20% by the trust) Trust expenses properly allocated to the trust income were 2,000. Assuming this is the only income of the trust in 2017/18, the trust s taxable income would be as follows: Net Tax Gross Cash dividend 185,000 15, ,000 Less: Trust expenses Regarded as net amount, grossed-up (2,000) (150) (2,150) Taxable dividend income 183,000 14, ,850 The trustees would issue Tito an R185 certificate showing the following Net Tax Gross Net dividend 183,000 14, ,850 Tito would be taxed on the above gross amount of 197,850 at his marginal dividend tax rates (with a credit for the 14,850 tax suffered by the trustees). Thus, no relief is given for the part of the trust tax charge that is used to meet expenses. However, in practice, most trusts mandate dividends directly to the beneficiaries. Trustees can elect to pass their tax liability to a beneficiary who receives the income direct. The income is then directly taxed at the beneficiary s personal tax rates. HMRC accept that trustees do not have to submit a tax return where the income is mandated direct to a beneficiary/beneficiaries (HMRC Trusts, Settlements, and Estates Manual para 30400). Discretionary trusts Different rules apply to trust where the trustees have the power to accumulate or exercise their discretion over the amount that may be distributed to beneficiaries. In such cases (and subject to the 1,000 basic or dividend ordinary rate band (subject to anti-fragmentation rules), the trust income (except dividend/distribution income) is taxed at 45% with dividends being subject to the dividend trust rate of 38.1% (s9, s11, s11, s14, s479, ITA 2007). Spring 2017 Page 9

11 Example 6 Income tax payable by discretionary trust The trustees of The Robinson Family 2014 Discretionary Settlement received the following income during the year ended 5 April Dividend from 20% holding in Smokey Ltd ( related family company) 15,000 Net rental income receivable 24,700 Bank Interest 2,900 The trust incurred administrative expenses of 520 and accountancy charges of 450. The balance on the trustee s tax pool at 6 April 2017 was 7,200. On 3 March 2018, the trustees distributed 20,000 to Smokey Jnr. The trustees income tax computation for 2017/18 is as follows: Tax deducted Cash dividend 15,000 - Net rental income 24,700 Bank interest 2,900 - Taxable income 42,600 Nil Income tax liability On bank interest and rental income 24, ,900 = 27,600 First 1,000 x 20% 200 Next 26,600 x 45% 11,970 On dividend income 15,000 less Trust expenses 970 = 14,030 Dividend - 14,030 x 38.1% 5,345 Trust expenses x 7.5%* 73 Trust tax liability on income 17,588 * Trust expenses not deductible for ordinary rate purposes The distribution to Smokey Jnr will be deemed to have had 45% tax deducted from it (i.e. the distributed trust income loses the individual character of the various amounts received by the trust). Therefore, the distribution will be deemed to have suffered tax of 16,364 (i.e. Page 10 Spring 2017

12 20,000 x 45%/55%). This tax must be franked by the tax that has been paid by the trustees as follows Tax pool brought forward at 6 April ,200 Tax paid by trust in 2017/18 17,588 Available 24,788 Less: Tax deducted on distribution (16,364) Tax pool carried forward at 6 April ,424 What would the position be if the trust had instead distributed 55,000 to Smokey Jnr? Spring 2017 Page 11

13 UPDATE ON SECTION 455 LOANS TO PARTICIPATORS Scope of s455, CTA 2010 A s455 CTA 2010 tax charge arises where a close company makes a loan or advances money to an individual participator (normally a shareholder) OR an associate of a participator UNLESS the loan/advance is made in the ordinary course of a lending trade (very rare!). The charge only arises if the company is close when the loan/advance is made. Following FA 2013, the s455 CTA 2010 charging provisions were extended and now cover loans and advances to the following: - An individual shareholder of the relevant company (or their associate) - Trustees of a trust where at least one of the trustees or a beneficiary (actual or contingent) is a shareholder in the relevant company - A partnership/llp where at least one partner/member is a shareholder of the relevant company It does NOT (normally) apply to loans made to another company, even if that company is connected. Example 6 Loans to related trusts Imran and The Bowie Family Will Trust (the trust) own 51% and 49% of the ordinary share capital of Starman Ltd respectively. Shortly before the Starman Ltd s 31 December 2017 year-end, it advanced a 200,000 loan to the trust. The loan to the trustees is caught by s455, CTA 2010 for a number of reasons for example, by Iman being a trustee of a trust and a participator in the company. Even if she were not a trustee, she would be a contingent beneficiary, which would also bring the loan within s455, CTA The trustees would need to repay the loan by 1 October 2018 for Starman Ltd to avoid an actual s455 CTA 2010 liability of 65,000 (32.5% x 200,000). 32.5% tax charge Following the Budget 2016, s455 loans/advances made after 5 April 2016 are taxed at 32.5% (i.e. at the dividend upper rate for the tax year in which the loan is made). Loans/advances made before 6 April 2016 are taxed at 25%. The s455 tax charge strictly arises on overdrawn loans at the year-end date but provided the overdrawn amount is cleared (by repayment or release) within nine months of the year-end, no s455 tax is payable (under the s458 CTA 2010 discharge rules). In practice, most overdrawn loan accounts are cleared by a suitable dividend or bonus. Overdrawn director s loan accounts may also be subject to a beneficial loan charge if they become overdrawn at any time in the tax year. Page 12 Spring 2017

14 Example 7 Mechanics of s455, CTA 2010 Michael holds 75% of the equity of REM Ltd. In October 2016, REM Ltd made an interest-free loan to Michael of 100,000, which remained outstanding at its 31 December 2016 balance sheet date. Michael repaid 80,000 of the loan on 11 October Does REM Ltd have a s455 CTA 2010 liability for the year ended 31 December 2016, and if so, how much? Are there any other tax issues? Spring 2017 Page 13

15 CLOSE COMPANY DISTRIBUTIONS IN A WINDING-UP THE NEW TAAR Case study The Andrea Consultancy Ltd Andrea holds 100% of the share capital of The Andrea Consultancy Ltd (TAC Ltd), which she set up in January TAC Ltd provides PR and communications consultancy services to UK and European clients. However, in the Spring of 2015, Andrea decided that she wished to become a selfemployed landscape gardener and therefore sought advice about closing-down TAC Ltd completely. The company had built up around 800,000 of reserves, largely represented by cash. Having spoken to her accountant, she has been told that the surplus cash may prevent the company from qualifying for the 10% entrepreneurs relief (ER) CGT rate, especially as the business is now closing down. For Andrea to qualify for ER on her capital distribution(s) from TAC Ltd, she/the company must satisfy the relevant ER conditions throughout the 12-month period prior to TAC Ltd s cessation of the trade. TAC Ltd s liquidation and capital distribution payment(s) were made before the introduction of the new anti-phoenix targeted anti-avoidance rule (TAAR). However, this type of arrangement was potentially vulnerable under the Transaction in Securities (TiS) rules in Part 1, Chapter 13, ITA It was therefore considered prudent to apply for an s701 ITA 2007 clearance. (An s701 ITA 2007 clearance was actually obtained in practice HMRC clearly accepting that the extraction of the funds on the liquidation was not predicated by tax avoidance reasons but due to a change in the owner s career!) Note If Andrea s winding-up and capital distributions took place after 5 April 2016; they would not be affected by the new TAAR since Andrea liquidated to pursue a completely different career (trade). The new anti-phoenixing TAAR main conditions The Finance Act 2016 introduces a targeted anti-avoidance (TAAR) rule to deny the beneficial capital gains treatment of tax-driven phoenix arrangements. Where the liquidation arrangements fall within the new s396b ITTOIA 2005, distributions paid during the winding-up (after 5 April 2016) will be treated as income dividends (taxed at dividend rates). The key TAAR conditions (all of which must be satisfied) are Condition A Immediately before the winding-up, the individual shareholder has at least a 5% equity (and voting) interest Condition B - The distributing company is a close company (or was a close company at some point within the two years before the winding-up); Page 14 Spring 2017

16 Condition C Within two years from the receipt of the liquidation distribution, the shareholder is involved with carrying on a similar trade to the distributing company. This can be through any business format e.g. as a sole trader, as a partner in a partnership/llp or as a 5% shareholder in limited company. Where a connected person carries on a similar trade, the relevant shareholder is effectively treated as doing so; and Condition D Having regard to all the circumstances, it is reasonable to assume that the main purpose or one of the main purposes of the liquidation or arrangements is the avoidance or reduction of income tax. Applying the TAAR in practice The new TAAR is specifically aimed at phoenix arrangements. Typically, this is where the shareholders retain profits within the company, extract them on liquidation as a beneficial capital gains receipt, but then subsequently continue to carry on the same or similar trade through another entity. The TAAR would not bite where a shareholder wishes to fully retire and extract the proceeds as capital (usually benefiting from the 10% ER CGT rate. However, it could potentially catch the use of special purpose companies used for specific projects. Some of the above tests give rise to a number of difficulties for example, what is meant by a similar trade? Can HMRC ever be satisfied no tax avoidance or reduction motive is involved in making a decision not to pay a pre-liquidation dividend? At present, the application of the TAAR is self-assessed and is not subject to any HMRC pre-clearance process. A repayment of share capital or an in-specie distribution of a 51% subsidiary (which often occurs on a s110 Insolvency Act 1986 reconstruction) is not caught by the TAAR. Arguably, such phoenix arrangements always fell within the existing Transactions in Securities rules but the introduction of the anti-phoenixing TAAR gives HMRC more certainty in pursuing such cases. Spring 2017 Page 15

17 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Family company taxation Post-FA 2016/Budget 2017 Presented by Peter Rayney FCA CTA (Fellow) TEP Peter Rayney Tax Consulting Ltd 1 Family company taxation Post-FA 2016/Budget New Dividend regime 2. Do spousal Dividends still work? 3. Trust Dividend tax 4. Section 455 update 5. FA 2016 Anti-phoenix regime 2 Family company taxation Post-FA 2016/Budget New Dividend regime 3 1

18 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Dividend tax rates /18 Dividend tax rates 2017/ /17 Up to basic rate ( 33,500) 7.5% 7.5% Balance up to 150, % 32.5% Above 150, % 38.1% 4 Employment income Total Personal allowance Basicrate band Higher rate 11,500 11,500 Dividend income 41,500 33,500 8,000 Div. nil rate band Taxable dividend Mechanics of dividend nil-rate band /18 (5,000) (5,000) 36,500 28,500 8, % 32.5% Tax liability 4,738 2,138 2,6005 Bonus v dividends /18 within 150k tax bracket Bonus Dividend Robert and Zimmerman Ltd Surplus profits Employer s 13.8% (12) Corporation 19% (19) Income 40% /32.5%* (35) (25) Employees 2% (2) Net cash available * Tax after 5k dividend allowance 6 2

19 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Bonus v dividends /18 above 150k tax bracket Bonus Dividend Reginald and Dwight Ltd Surplus profits Employer s 13.8% (12) Corporation 19% (19) Income 45% /38.1%* (40) (29) Employees 2% (2) Net cash available * Tax after 5k dividend allowance 7 Family company taxation Post-FA 2016/Budget Do spousal Dividends still work? 8 Possible spousal dividend for 2017/18 Cash dividend 45,000 Less: Personal allowance (11,500) Taxable dividend income 33,500 Basic rate band = 33,500 5,000 nil rate band - 28,500 x 7.5% 2,138 Dividend tax liability 2,

20 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Me & Mrs Jones! Diana Geoff 50% 50% ARCTIC SYSTEMS LTD Computer consultancy services 10 Outright gift exemption 626(1) The rule in section 624(1) does not apply in respect of an outright gift - (a) of property from which income arises, (b) made by one spouse to the other or one civil partner to the other, and (c) meeting conditions A and B. 626(2) Condition A is that the gift carries a right to the whole of the income. 626(3) Condition B is that the property is not wholly or substantially a right to income. 11 Donovan and McLaren v HMRC [2014] - 1 Ord. Shares Dividends in y/e 31 March 2010 Shareholding % Amount % of total Mr Donovan 40 40% 33, % Mrs Donovan 10 10% 32, % Mr McClaren 40 40% 33, % Mrs McClaren 10 10% 32, % % 130, % 12 4

21 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Donovan and McLaren v HMRC [2014] - 2 Extract from case report 13 Alphabet shares 14 Family company taxation Post-FA 2016/Budget Trust Dividend tax 15 5

22 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Dividends - bare trust 16 Discretionary trusts - dividend income - 1 The Robinson Family 2014 Discretionary Settlement 2017/18 Dividend from Smokey Ltd 15,000 Net rental income 24,700 Bank interest 2,900 Trust Management expenses Discretionary trusts - dividend income - 2 Trust tax liability /18 On bank interest/rental income First 1,000 x 20% 200 Next 26,600 x 45% 11,970 27,600 On dividend income less TMEs On 14,030 x 38.1% 5,345 On TMEs at div ord rate On 970 x 7.5% 73 Trust income tax liability 17,588 6

23 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Scope of s455 charge - trusts Trustees Iman & Alexandria Iman 100% STARMAN LTD The Bowie Family Will Trust Loan of 200,000 Beneficiaries Spouse + Children + their issue etc 19 S455 CTA loans to owner-managers Overdrawn loan a/c at 31/12/16= 100k (all arising in Oct 2016) Michael Peter 75% 25% REM LTD year ended 31 December Repayment of overdrawn loan account Dr Michael s loan account Cr Balance 1/1/17 100,000 11/10/17 Cash repaid Balance 31/12/17 80,000 20, , ,

24 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Family company taxation Post-FA 2016/Budget FA 2016 Anti-phoenix regime 22 Cessation of Andrea s PR consultancy company Andrea I now want to be a landscape gardener! 100% THE ANDREA CONSULTANCY LTD 23 ER capital distributions Cessation of trade SHAREHOLDERS QUALIFYING PERIOD (ONE YEAR) CAPITAL DISTRIBUTION > 5% of Ord shares (with > 5% votes) In Tradeco or Holdco of a Trading Group AND Director/Employee of that Tradeco/Fellow group company < 24 8

25 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 ER - Trading company/group definition TRADING Transfer of trade + selected assets NON- TRADING 80% 20% 25 TAC Ltd Balance sheet at 31 October 2015 Net current assets Debtors 18,458 Cash at bank 818,349 Trade and other creditors (32,847) 803,960 Financed by Share capital 100 Profit and loss account 803, , TAC Ltd P&L account for the year ended 31 October 2015 TURNOVER 256,850 Cost of sales (90,110) Administrative expenses (25,782) OPERATING PROFIT 140,958 Interest receivable 16,045 PROFIT ON ORDINARY ACTIVITIES BEFORE TAXATION 157,003 Tax on profit on ordinary activities (31,980) PROFIT FOR THE FINANCIAL YEAR 125,

26 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 Closure of TAC Ltd - timeline HMRC Non-stat business clearance Capital distribution 31 October Dec 2015 Capital Cease trade s701 ITA clearance Winding -up 28 CGT on capital distribution Capital distribution 795,000 Less: Base cost (100) Capital gain 794,900 Less: Annual exemption (11,100) Taxable gain 783,800 ER 10% 78, Anti-phoenixing TAAR (FA 2016) Start of winding-up Close company Distribution 5% test 2 years Carries on same or similar activity (company/sole trade/partnership) MAIN PURPOSE/ONE OF MAIN PURPOSES = AVOIDANCE OR REDUCTION IN INCOME TAX 30 10

27 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 HMRC guidance letter - example 1 Mr A has been the sole shareholder of a company, which carries on the trade of landscape gardening for ten years. Mr A decides to wind up the business and retire. Because he no longer needs a company he liquidates the company and receives a distribution in a winding up. 31 HMRC guidance letter - example 1 (continued) To subsidise his pension, Mr A continues to do a small amount of gardening in his local village. Conditions A to C are met, because gardening is a similar trade or activity to landscape gardening. 32 HMRC guidance letter - example 2 Mrs B is an IT contractor. Whenever she receives a new contract, she sets up a limited company to carry out that contract. When the work is completed and the client has paid, Mrs B winds up the company and receives the profits as capital

28 Family company taxation post-fa 2016/Budget 2017 Slides to accompany Peter Rayney s talk UK Tax, Trusts & Estates Conference 2017 HMRC guidance letter - example 2 Mrs C is an accountant who has operated through a limited company for three years. She decides that the risk involved with running her own business is not worth her effort, and so decides to accept a job at her brother s accountancy firm as an employee. Her brother s firm has been operating for eight years. Mrs C winds up her company and begins life as an employee. 34 Family company taxation Post-FA 2016/Budget New Dividend regime 2. Do spousal Dividends still work? 3. Trust Dividend tax 4. Section 455 update 5. FA 2016 Anti-phoenix regime 35 12