UK Real Estate Conference 2010 Budget the end of tax planning? 17 June 2010

Transcription

1 Budget the end of tax planning? PwC PwC

2 Budget the end of tax planning? Contents Introduction - the changing tax climate Amanda Berridge Capital gains banking - SDLT developments Stephen Coleclough Personal taxes - Is there anything I can do? Julian Sansum Close & questions Amanda Berridge Slide 2

3 The changing tax climate Is a Lib-Con government good for tax? Slide 3

4 The changing tax climate Budget predictions Corporate taxes Corporation tax Capital allowances Carbon taxes VAT Personal taxes Income tax Capital gains tax Non-dom rules Review Slide 4

5 The changing tax climate What does this mean for real estate? Uncertainty Higher tax leakage on transactions GAAR? Slide 5

6 The changing tax climate A level playing field? Offshore funds Acquisition costs SDLT? Ongoing tax Basic rate IT 20% Exit taxes Nil Onshore corporate Acquisition costs SDLT? Ongoing tax Corporation tax 28% Exit taxes 28% Slide 6

7 The changing tax climate So what is the good news? EU treaty reliefs International fiscal competition HMRC settlement strategy Slide 7

8 The changing tax climate Future proofing your structure Finco TopCo Holdco Offshore fund or personal holding company or trust EU Holdco Offshore SPVs UK and overseas assets Benefits Minimise UK footprint EU treaty reliefs protect Holdco Efficient recycling of capital Internal debt can improve income tax and IHT position Maintenance Need real substance in EU Overseas board meetings Administration costs Plan for cash and profit repatriation Slide 8

9 Budget the end of tax planning? Contents Introduction - the changing tax climate Amanda Berridge Capital gains banking - SDLT developments Stephen Coleclough Personal taxes - Is there anything I can do? Julian Sansum Close & questions Amanda Berridge Slide 9

10 CGT Banking and SDLT Potential impact on post tax return for a 1m gain HMRC tax take Net amount retained after tax Current Rates Potential Rates 10% 18% 25% 36% 50% Slide 10

11 CGT Banking and SDLT Summary of Ideas Idea Applies to all Assets SD / SDRT / SDLT Cost IHT Issues 1. Sale to Trust 4 Yes Yes 2. Sale to Offshore Company 4 Yes Yes / No 3. Sale to Trust with incomplete contract 4 Yes Yes 4. Sale to Offshore Company with incomplete contract 4 Yes Yes / No 5. Gift to Trust 4 No Yes 6. Private company shareholders share buyback Yes No 7. Preference Share Carve Out Yes No 8. Sale to Newco and Subsequent Liquidation No No 9. Sale to Newco for Unascertainable Consideration Yes Yes / No 10. Sale to Double Newco Yes No 11. Non-UK Domicile Individuals Incomplete Contracts 4 Yes Yes 12. Non-UK Domicile Individuals Gift to Trust 4 No Yes 12. Crystallising Gain within a Trust 4 No No Slide 11

12 CGT Banking and SDLT SDLT Post Finance Act 2010 Main change was a carve out from the general anti-avoidance rule for sales to partnerships. Either partnership rules apply to no-one or everyone? HMRC have issued some guidelines but clear their main target is sub-sale based schemes. Slide 12

13 CGT Banking and SDLT Schemes which HMRC say do not work Sub-sale based into partnership into Islamic finance (originally into and then out of unlimited companies we understand these are going to court). Partnership as leasehold nominee Slide 13

14 CGT Banking and SDLT Sub-sale into Alternative Finance V P Sub-sale 125 yr lease back and option Financial institution Sub-sales HMRC introduced s.75a-c in December 2006 to stop these otherwise a genuine looking alternative finance transport although no finance actually provided. Slide 14

15 CGT Banking and SDLT [Partnership as leasehold nominee (1) (S ) stopped by 2010 Budget] V P Transfer to partnership as nominee for purchaser. No SDLT as Vendor is main partner in what is a pure nominee [s.75a concerns] cash GP P sets up partnership as nominee for it Slide 15

16 CGT Banking and SDLT Partnership as leasehold nominee (2) (also stopped by 2010 Budget] V P GP grant of lease to partnership as a nominee of the Vendor no SDLT P pays partnership for beneficial interest no SDLT as P has income rights Slide 16

17 CGT Banking and SDLT SDLT so what works? Easy and available De-group by winding-up vendor/vendor s parent - more likely post 2010 Budget Acquisition relief e.g. hotels, pubs, cinemas, hospitals Prudential planning Hive down and wait 3 years or less Single property vehicles JPUTs more likely to be the vogue going forward Use of reliefs e.g. no SDLT on VAT if an exchange or TOGC, use of s.106 TCPA agreements and nomination rights. Slide 17

18 CGT Banking and SDLT Partnership planning Vendor often requires security for SDLT risk V Sale of property right to income profit for a few quarters LP P right to everything else Bank and Partner loans Slide 18

19 CGT Banking and SDLT SDLT free partnership where SDLT not paid in full in the past (facilitates SDLT free Type B transfers) X Y X Y LP price left outstanding loan LLP If Purchaser buys an interest or joins partnership and X or Y retire and withdraw capital then SDLT triggered but if X & Y have no or minimal capital, no charge or minimal charge. transfer of properties at full value Slide 19

20 CGT Banking and SDLT Vendor with low nominal issued share capital - Stopped by 2010 Budget? PLC Trustee Purchaser Vendor Issue of fixed rate preference shares ( 50,000) Trust 99.9% Sale at market value LP 0.1% GP Slide 20

21 CGT Banking and SDLT Close Vendor Stopped by 2010 Budget? Close V Individual who Settles Trust Purchaser Sale at market value Trust 99.9% 0.1% GP LP Slide 21

22 CGT Banking and SDLT Budget on 22 nd June 2010 Lib Dem Manifesto Tackling tax avoidance and evasion, with new powers for HM Revenue & Customs and a law to ensure properties can t avoid stamp duty if they are put into an offshore trust. Also sale of property rich SPV s looked at in 2003 tried to exclude traders Selfridges plc? other countries apply multi-tier structures? Slide 22

23 Budget the end of tax planning? Contents Introduction - the changing tax climate Amanda Berridge Capital gains banking - SDLT developments Stephen Coleclough Personal taxes - Is there anything I can do? Julian Sansum Close & questions Amanda Berridge Slide 23

24 Personal taxes is there anything I can do? Summary Summary of tax changes Improving efficiency Long-term wealth creation Slide 24

25 Personal taxes is there anything I can do? Tax Overview Income Tax Top rate of tax increased from 40% to 50% for higher earners on > 150,000 Personal allowance tapered for incomes > 100k pa Applies from April 2010 Capital Gains No change to CGT rate of 18% Entrepreneurs relief increased to 2,000,000 (with 10% CGT rate) NI Further increase in employee s contribution of 1% (to 2%) Increase in employers contributions to 13.8% Applies from April 2011 Pensions Basic tax relief remains in situ. However, for higher earners pension membership generates a benefit-in-kind tax charge (all income > 130k pa). The calculation of the taxable benefit differs depending on whether you are in a defined benefits (DB) or defined contributions (DC) scheme. Special anti-forestalling measures for pensions were introduced from 5 April Applies from April 2011 Slide 25

26 80,000 88,000 96, , , , , , , , , , , , , , , , , , , ,000 Personal taxes is there anything I can do? Marginal tax rates under new rules Effective Marginal Rate of Tax 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Effective Marginal Rate of Tax Slide 26

27 Personal taxes is there anything I can do? Reduction in take home pay Basic Pay Benefits (e.g. car, medical) Bonus Reduction in net pay Tax rate increase NIC rate increase Loss of personal allowance Pension tax relief restriction 80,000 5,000 10, ,000 5,000 10,000 3,783 1,193 2, ,000 10,000 25,000 14,783 2,852 1,943 3,328 6, ,000 20,000 50,000 26,433 11,352 2,843 3,328 9, ,000 20,000 75,000 44,783 23,852 4,193 3,328 13,000 Assumes: 5% employee pension contributions plus 10% employer contributions Slide 27

28 Personal taxes is there anything I can do? Pension changes a summary Pensions tax relief restricted for higher earners Higher earners = people with total income of 150,000+ a year (impact to be tapered between 150k and 180k) Total income = all earnings from employment + personal income 2011 anti avoidance? From April 2011 Membership of a company pension arrangement taxable like a benefit-in-kind Immediate Anti-forestalling measures designed to stop people increasing pension savings in advance of April 2011 Slide 28

29 Personal taxes is there anything I can do? Pre April 2011, the Protected Pension Input Amount Impacts employees with relevant income of more than 130,000 in current or either of previous two tax years Regular (at least quarterly) pension savings pattern Irregular pension savings pattern If no increase in regular saving pattern, unlikely to be caught by the charge If increase savings beyond regular pattern, subject to charge on savings above 20,000 Caught by charge on savings above higher of: A: 20,000 (includes employer contributions for defined contribution plans); and B: Average savings over last three tax years, up to 30,000 Came into force wef 22 April 2009 Normal salary increases and promotional benefit changes generally not impacted Need to ensure redundancy benefits, salary/bonus sacrifice, AVC and flex arrangement do not trigger Slide 29

30 Personal taxes is there anything I can do? Defined benefits pension scheme: Tax impact for higher earners from 2011 Example: 50th final salary scheme, 10 years service, 300k pa salary April 2011 April 2012 Salary Service 300,000 10% increase 330, years 11 years Accrued pension 10/50 x 300,000 = 60,000 p.a. 12,600 increase Taxable benefit: 10 x 12,600 = 126,000 Tax paid in year of accrual = 30% x 126,000 = 37,800 Overall tax rate increased from 36% to 54% 11/50 x 330,000 = 72,600 p.a. Multiples will vary subject to Age Related Factors PLUS pension taxed when drawn in retirement as income! Slide 30

31 Personal taxes is there anything I can do? Practical approaches Equity plans, EFRBS and EBTs are tactical solutions to providing long-term incentives and wealth creation opportunities. There is a spectrum of choice and the final structures the business settles on should be considered as part of the overall reward strategy. All employee Distressed debt Long-term incentives Share Incentive Plan CSOP Contracts for difference Sharesave Company cars Private fuel Salary sacrifice Travel & pension subsistence Cash LTIP Co-investment Self funding Simple equity plans New classes of shares Simpler Hold fixed pay Limited Liability Partnership Long-term incentives Month 13 payrise DC / GPP pension Simple bonus Post tax wrapper ISA / MIP / OEIC DB pension Remuneration Strategy Co-investment Deferred bonus Simple EBT Complex EBT EFRBS Move offshore Wealth Creation More complex Slide 31

32 Personal taxes is there anything I can do? What is the relative efficiency of these mechanisms? Corporation tax 28.0% Old rules New rules Employee Cash, unapproved shares / options Cash, unapproved shares / options CGT effective shares Approved plan Gross bonus 100, , , ,000 Tax / NIC / CGT (41,000) (52,000) (18,000) (18,000) Net 59,000 48,000 82,000 82,000 Employer Gross bonus 100, , , ,000 Employer NIC less CT relief (18,784) (18,064) 0 (28,000) Net 81,216 81, ,000 72,000 Efficiency ratio 73% 59% 82% 114% Gross company cost to deliver a net , , ,951 87,805 Reduction in efficiency v old cash -24% Improvement in efficiency v new cash 29% 49% Slide 32

33 Personal taxes is there anything I can do? What is the relative efficiency of these mechanisms? Corporation tax 28.0% Old rules New rules Employee Cash, unapproved shares / options Cash, unapproved shares / options CGT effective shares Approved plan Gross bonus 100, , , ,000 Tax / NIC / CGT (41,000) (52,000) (18,000) (18,000) Net 59,000 48,000 82,000 82,000 Employer Gross bonus 100, , , ,000 Employer NIC less CT relief (18,784) (18,064) 0 (28,000) Net 81,216 81, ,000 72,000 Efficiency ratio 73% 59% 82% 114% Gross company cost to deliver a net , , ,951 87,805 Reduction in efficiency v old cash -24% Improvement in efficiency v new cash 29% 49% Slide 33

34 Personal taxes is there anything I can do? What is the relative efficiency of these mechanisms? Corporation tax 28.0% Old rules New rules Employee Cash, unapproved shares / options Cash, unapproved shares / options CGT effective shares Approved plan Gross bonus 100, , , ,000 Tax / NIC / CGT (41,000) (52,000) (18,000) (18,000) Net 59,000 48,000 82,000 82,000 Employer Gross bonus 100, , , ,000 Employer NIC less CT relief (18,784) (18,064) 0 (28,000) Net 81,216 81, ,000 72,000 Efficiency ratio 73% 59% 82% 114% Gross company cost to deliver a net , , ,951 87,805 Reduction in efficiency v old cash -24% Improvement in efficiency v new cash 29% 49% Slide 34

35 Personal taxes is there anything I can do? What is the relative efficiency of these mechanisms? Corporation tax 28.0% Old rules New rules Employee Cash, unapproved shares / options Cash, unapproved shares / options CGT effective shares Approved plan Gross bonus 100, , , ,000 Tax / NIC / CGT (41,000) (52,000) (18,000) (18,000) Net 59,000 48,000 82,000 82,000 Employer Gross bonus 100, , , ,000 Employer NIC less CT relief (18,784) (18,064) 0 (28,000) Net 81,216 81, ,000 72,000 Efficiency ratio 73% 59% 82% 114% Gross company cost to deliver a net , , ,951 87,805 Reduction in efficiency v old cash -24% Improvement in efficiency v new cash 29% 49% Slide 35

36 Personal taxes is there anything I can do? What is the relative efficiency of these mechanisms? Corporation tax 0.0% Old rules New rules Employee Cash, unapproved shares / options Cash, unapproved shares / options CGT effective shares Approved plan Gross bonus 100, , , ,000 Tax / NIC / CGT (41,000) (52,000) (18,000) (18,000) Net 59,000 48,000 82,000 82,000 Employer Gross bonus 100, , , ,000 Employer NIC less CT relief 12,800 13, Net 112, , , ,000 Efficiency ratio 52% 42% 82% 82% Gross company cost to deliver a net , , , ,951 Reduction in efficiency v old cash -24% Improvement in efficiency v new cash 49% 49% Slide 36

37 Personal taxes is there anything I can do? Employee risk increases under capital structures Capital gains tax only applies where an employee acquires an asset Either: Employee buys asset for market value Company gifts asset to employee tax is payable on market value Employee loaned funds to buy shares at market value interest BIK Market value of shares is not typically nominal Example Plan provides interest in 100,000 of shares. If value is >= 150,000 after three years, employee receives shares equal to the growth, eg if value is 160,000, employee receives shares worth 60,000. Fair market value of this award could be in the range of 5% - 25% of initial value, ie 5,000-25,000. This value can be lost. Slide 37

38 Personal taxes is there anything I can do? Employer Financed Retirement Benefit Scheme (EFRBS) Typically operates using an offshore trust established to provide pension like benefits Benefits provided from age 55 Employer makes contribution to trust. No tax on employee at contribution date but corporation tax deduction also deferred and restricted Can accrue tax free Taxed on payment. If taken like a pension, no NIC Significant benefits on retiring overseas Slide 38

39 Personal taxes is there anything I can do? Employee Benefit Trust (EBT) Typically operates using an offshore trust established to provide benefits to employees Employer makes contribution to trust. No tax on employee at contribution date but corporation tax deduction also deferred and restricted Flexible no age restriction on draw down Benefits taxed as income when drawn, subject to income tax and national insurance Can accrue tax free In some cases employees take loans from EBT charged as a benefit-in-kind Slide 39

40 Personal taxes is there anything I can do? Limited liability partnership (LLP) Common structure for professional services and some smaller businesses Can operate for large businesses Collegiate approach, governed by partnership deed, not employment law Taxed as self employed not PAYE Deferral of tax payment point No employer s NIC Increasingly common in private companies Under review in listed companies Split employment / partnership Slide 40

41 Personal taxes is there anything I can do? Practical approaches Equity plans, EFRBS and EBTs are tactical solutions to providing long-term incentives and wealth creation opportunities. There is a spectrum of choice and the final structures the business settles on should be considered as part of the overall reward strategy. All employee Distressed debt Long-term incentives Share Incentive Plan CSOP Contracts for difference Sharesave Company cars Private fuel Salary sacrifice Travel & pension subsistence Cash LTIP Co-investment Self funding Simple equity plans New classes of shares Long-term incentives Month 13 payrise Simple bonus Remuneration Strategy Co-investment Deferred bonus Wealth Creation Simpler More complex Slide 41 Hold fixed pay Limited Liability Partnership DC / GPP pension Post tax wrapper ISA / MIP / OEIC DB pension Simple EBT Complex EBT EFRBS Move offshore

42 Budget the end of tax planning? Contents Introduction - the changing tax climate Amanda Berridge Capital gains banking - SDLT developments Stephen Coleclough Personal taxes - Is there anything I can do? Julian Sansum Close & questions Amanda Berridge Slide 42

43 Questions? This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it LLP. All rights reserved. '' refers to LLP (a limited liability partnership in the United Kingdom) or, as the context requires, the global network or other member firms of the network, each of which is a separate and independent legal entity. PwC