Tax Planning

A Thorogood Special Briefing
TAX PLANNING FOR

BUSINESSES AND THEIR
OWNERS
2ND EDITION
Peter Hughes
IFC
TAX PLANNING
FOR BUSINESSES AND
THEIR OWNERS
2ND EDITION
Peter Hughes
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Dedication
To my wife Jenny and, as always, to my parents for their

unstinting love and support.
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Contents
The author .................................................................................................viii

Foreword .....................................................................................................ix
1 INCOME FROM COMPANIES 2

Dividends or salary?....................................................................................2
Implications of the ‘Arctic Systems’ case..................................................6
Benefits in kind.............................................................................................7
Company cars ..............................................................................................7
Car fuel..........................................................................................................9
Termination payments...............................................................................12
Employee share schemes ..........................................................................13
2 SAVINGS AND INVESTMENT SCHEMES 24

Enterprise Investment Scheme ................................................................24
Venture Capital Trusts ...............................................................................26
Community Investment Tax Relief ...........................................................27
Tax-exempt savings income......................................................................29
3 SOLE TRADERS AND PARTNERSHIP 32

Loss Relief...................................................................................................32
Property income.........................................................................................39
4 INCOME TAX OF INDIVIDUALS 44

Allowances .................................................................................................44
Extension of basic rate band ....................................................................45
Overseas income........................................................................................47
A THOROGOOD SPECIAL BRIEFING v

TA X P L A N N I N G F O R B U S I N E S S E S A N D T H E I R O W N E R S
5 CORPORATION TAX 56
Losses ..........................................................................................................56
Groups ........................................................................................................60
Purchase of a company’s own shares......................................................66
Substantial shareholding relief ................................................................67
Corporate Venturing Scheme...................................................................68
6 CAPITAL ALLOWANCES 72
Plant and machinery – general principles...............................................72
Cars .............................................................................................................74
First-year allowances ................................................................................75
Short-life assets..........................................................................................78
Industrial buildings allowances ...............................................................79
Disclaiming capital allowances ................................................................80
7 CAPITAL GAINS 82
Basic principles ..........................................................................................82
Annual exemptions....................................................................................84
Transfers between spouses.......................................................................85
Capital losses..............................................................................................86
Principal private residences .....................................................................88
Reliefs ..........................................................................................................90
Chattels .......................................................................................................94
8 INHERITANCE TAX 98
General principles .....................................................................................98
Taper relief..................................................................................................99
Exempt transfers......................................................................................101
Reliefs ........................................................................................................106
Domicile ....................................................................................................109
Interaction with Capital Gains Tax ........................................................110
vi A THOROGOOD SPECIAL BRIEFING

CONTENTS
9 TRUSTS 112
Interest in possession trusts ...................................................................112
Discretionary trusts .................................................................................114
Accumulation and maintenance trusts..................................................116
Charitable trusts ......................................................................................117
Overseas trusts.........................................................................................118
Business Property Relief and trusts.......................................................118
Comparison of trusts...............................................................................120
10 VALUE ADDED TAX 122

Registration ..............................................................................................122
Land and buildings ..................................................................................124
Special schemes .......................................................................................125
APPENDIX 130
Income Tax – personal and married couple’s allowances ...................130
Income Tax – rates and bands ................................................................131
Gift Aid – limit on benefit received by donor .......................................131
Cash equivalent of company car............................................................132
Corporation Tax – rates and bands........................................................133
Capital Gains Tax – annual exemption ..................................................133
Capital Gains Tax – taper relief ..............................................................134
Inheritance Tax – nil rate band ...............................................................134
A THOROGOOD SPECIAL BRIEFING vii

The author
Peter Hughes is a Chartered Accountant. Having qualified in a vibrant Liver-

pool City Centre practice, he worked for a time in property management before
setting up his own consultancy in 2003, based initially in Birkenhead and then,
since 2008, in York. He writes and presents seminars on taxation and other subjects
including International Financial Reporting Standards, Company Law and
Employment Law, and he advises private clients in these matters. Details of the
seminars can be found at www.uktrainingworldwide.com. He has a wide
experience of advising small and medium-sized businesses on the tax implica-
tions of their business decisions.
viii A THOROGOOD SPECIAL BRIEFING

Foreword
This Report is aimed at owners and managers of businesses – businesses of

all sizes but with particular emphasis on small and medium-sized entities. It
focuses both on the tax implications of business decisions and on opportuni-
ties for the reduction of the owners’ personal taxation.
Since the first edition of the Report in 2006, there have been some significant
changes to taxation. The ten-year experiment with taper relief for Capital Gains
Tax of individuals has come to an end, and in its place we have a flat rate of
18% on all gains, which may be good for owners of investment property but
not necessarily as good for business owners. Capital allowances have been
overhauled; the starting rate of Income Tax for non-savings income has disap-
peared; and married couples now benefit from a transferable nil rate band for
Inheritance Tax. Further changes are planned for 2010/11 and 2011/12 which
will adversely affect those with income above £100,000.
The information given has been updated following the Budget of 22 April 2009
and of course assumes that the announcements on that date will pass into legis-
lation in the form of Finance Acts.
The ten chapters will, I hope, be readable, interesting and informative. They
do not pretend to be a comprehensive guide to all aspects of taxation – there
are plenty of volumes which already serve that purpose – but they should set
the manager or adviser on the right track towards reduction of the tax burden.
Peter Hughes
York
May 2009
A THOROGOOD SPECIAL BRIEFING ix

Blank
Chapter 1
Income from companies
Dividends or salary?
Implications of the ‘Arctic Systems’ case
Benefits in kind
Company cars
Car fuel
Termination payments
Employee share schemes

Chapter 1
Income from companies
Dividends or salary?
In an owner-managed company, the shareholders are usually the directors. In
addition to a monthly salary, they may wish to pay themselves periodic bonuses.
Should these sums be paid as an addition to their salaries – in other words, as
a bonus – or would a dividend be more advantageous?
Bonuses are straightforward in that they are taxed at the director’s marginal
Income Tax rate and are subject to employee’s and employer’s National Insur-
ance. Timing may need to be considered: for a director, a bonus is taxed at the
earliest of the following dates:
• the payment date;
• the date on which the director becomes entitled to the bonus;
• the date on which the bonus is recorded in the company’s books.
Any of the above can be overridden by the company’s year-end if the amount
of the director’s earnings for that year has been determined before the year-
end. If the financial year has already ended, the earnings are assessable on the
date on which they are determined if this falls earlier than the three dates above.
EXAMPLE
A bonus in respect of the year ended 31 December 2008 is decided at a
board meeting on 15 December 2008 and is paid on 1 August 2009. When
is it taxable?
• The date of assessment is 31 December 2008, which falls in 2008/09.
• The bonus would become taxable in 2009/10 if it were not discussed

at the board meeting and were instead determined on 1 May 2009.
2 A THOROGOOD SPECIAL BRIEFING

1 I N C O M E F R O M C O M PA N I E S
Dividends are taxed on a wholly different basis, being treated as the ‘top slice’
of an individual’s income. The dividend is deemed to have been paid net of Income
Tax of 10%. The director must therefore gross the dividend payment up by multi-
plying it by 100/90 and add the gross dividend to other income.
If the director still falls within the basic rate band, no extra Income Tax is payable.
A higher rate taxpayer is, however, liable for Income Tax of 32.5% of the gross
dividend, of which 10% is deemed to have been paid already. The effect is that
tax is paid at 25% of the net dividend.
National Insurance is not payable on dividends. The complex rules on timing

which often lead a bonus to be taxed before it is received do not apply to
dividends, which are simply assessable on the date of payment.
There is no Corporation Tax deduction for dividend payments, whereas a

company paying a bonus will be able to reduce its taxable profits accordingly.
The relative tax advantages of bonuses or dividends depend principally on

whether the director falls into the higher rate band; they also depend on the
Corporation Tax rate which applies to the company.
EXAMPLE
A director, whose taxable income from other sources after the standard
personal allowance of £6,475 is £40,000, is to be paid an additional cash
sum of £10,000 after settling any tax arising therefrom. The company has
taxable profits (before payment of this sum) of £100,000 and therefore pays
Corporation Tax at 21%.
What are the relative tax advantages of paying the sum as a bonus or a
dividend?
The key to this calculation is to work out the gross payment which is needed
in order to leave the director with a net receipt of £10,000. In order to receive
a net payment of £10,000 (after Income Tax at a marginal rate of 40% and National
Insurance at a marginal rate of 1%) by way of bonus, the gross amount of the
bonus would need to be £16,949 (£10,000 x 100/59). If the director is to be left
with £10,000 by way of dividend, the actual amount payable by the company,
assuming that the director pays Income Tax at the higher rate, is £13,333 (£10,000
x 100/75).
A THOROGOOD SPECIAL BRIEFING 3

Bonus Dividend
£ £
DIRECTOR
Other taxable income 40,000 40,000
Bonus 16,949
Dividend (£13,333 x 100/90) – 14,814
Taxable income 56,949 54,814
Tax:
Non-dividend income
20% x £37,400 7,480 7,480
40% x £19,549/£2,600 7,820 1,040

Dividend income
32.5% x £14,814 – 4,815
15,300 13,335
Less tax deducted at source – (1,482)
Tax liability 15,300 11,853
Bonus Dividend
£ £
Employee’s NIC:
11% x £38,160* 4,198 4,198
1% x £19,549/£2,600** 195 26
4,393 4,224
* Upper earnings limit £43,875 less earnings threshold £5,715
** Taxable earned income plus personal allowance £6,475 less

upper earnings limit

Bonus Dividend
£ £
COMPANY
Profit before bonus/dividend 100,000 100,000
Bonus (16,949)
Employer’s NIC (additional):

12.8% x £16,949 (2,169) –
Profit chargeable to Corporation Tax 80,882 100,000
Corporation Tax at 21% 16,985 21,000
Tax burden:
Income Tax 15,300 11,853
Employee’s NIC 4,393 4,224
Employer’s NIC (additional) 2,169 –
Corporation Tax 16,985 21,000
38,847 37,077
The dividend option results in a lower tax burden of £1,770. If the company
were paying Corporation Tax at the full rate of 28%, the dividend would still
be the better option, although the difference would be less marked. It is neces-
sary to tailor such calculations to each particular situation, and they will not
always be straightforward, especially if the additional payment takes the director
from the basic rate to the higher rate band or moves the company down from
the full Corporation Tax rate to the marginal rate.
A final point is that dividends are not ‘earnings’ for pension purposes. From
6 April 2006 the maximum annual contribution to a personal pension scheme
is the higher of £3,600 and ‘earnings’ (subject to a maximum of £235,000 in
2008/09, rising to £245,000 in 2009/10 and £255,000 in 2010/11 but then to be
frozen for five years). This may be a consideration if the bulk of a director’s
earnings arise from dividends and there is an intention to pay more than £3,600
into a pension scheme.

Implications of the ‘Arctic Systems’ case

It is common for directors to pay their spouses a salary and achieve an Income
Tax saving, particularly if the director is a higher rate taxpayer and the spouse
has no other income. This ensures that the spouse’s personal allowance and
lower rate tax band are utilised. The spouse’s salary will be deductible for Corpo-
ration Tax purposes provided that it is reasonable in relation to the work actually
performed.
The facts in Jones v Garnett related not to a salary payment but to a dividend.
Mr and Mrs Jones acquired Arctic Systems Ltd and each paid £1 for their shares.
Mr Jones, a higher rate taxpayer, was the sole director. The bulk of the company’s
profits were paid out as a dividend, shared equally between Mr and Mrs Jones.
A small salary was also paid to Mrs Jones, which reflected the work she did
for the company as bookkeeper and company secretary.
The Inland Revenue (as it was then known) challenged the share arrangement
on the grounds of section 660A of the Income and Corporation Taxes Act 1988.
The purpose of this legislation is to stop an individual settling his income on
another individual who pays tax at a lower rate. This settlement legislation dates
back to the 1920s when it was designed to prevent wealthy individuals from
diverting income to family members.
The High Court found in favour of Revenue & Customs in April 2005, resulting
in an additional tax bill for Mr and Mrs Jones of £6,000.
However, in December 2005 the Court of Appeal reversed the High Court’s
decision. There was no gift of shares: Mrs Jones had subscribed to her share
at the time the company was set up, dividends depended on the future trading
fortunes of the company and there could be no certainty at that time that the
company would be profitable. The settlements legislation could apply, said the
Court, only if there was an element of ‘bounty’ – a clear intention by one party
to confer some benefit on another.
An appeal by Revenue & Customs to the House of Lords again found in favour
of the taxpayer. The Lords held that there was a settlement between Mr and
Mrs Jones but that this was exempt from the settlements legislation as an inter-
spouse transfer. The Treasury then announced plans to change the law in order
to catch couples involved in ‘income shifting’ as this is known, but these plans
were shelved following the Pre-Budget Report of November 2008.

Benefits in kind
Employees and directors are most commonly remunerated in the form of
monetary payments. Special rules exist for the valuation and taxation of benefits
in kind.
The tax implications for both employer and employee may need to be consid-
ered in deciding whether to pay an employee in the form of cash or benefits,
particularly if the employee is a director. The most common benefits are discussed
here, with the emphasis on the overall tax burden for employer and employee.
Except where stated, benefits are taxable only on employees earning more than
£8,500 per annum and on directors.
Company cars
VAT on the purchase of cars is irrecoverable if there is to be any private use.
In practice, even pool cars are usually deemed to be available for private use
because an employee may take them home at night before a business trip the
next day, or used for a diversion to a supermarket. The case Elm Milk Ltd 2005
established that, where a company minutes a resolution that a pool car is for
business use and that it will be a breach of the employee’s contract of employ-
ment to use it privately, the VAT on purchase may be recoverable.
An employer will be able to claim capital allowances on the car at 10% or 20%
of the written down value (which includes any irrecoverable VAT). This is
explained in more detail at Chapter 6.
The employee will then be taxed on the cash equivalent of the car, which is its
list price multiplied by the relevant percentage. The percentage is dependent
on the car’s carbon dioxide emission (see Appendix) and this may therefore
influence the choice of car. No employee’s National Insurance is due, though
the employer must pay Class 1A National Insurance on the amount of the benefit.
EXAMPLE
A company buys a car with CO2 emissions of below 160 for £15,000 for
an employee paying higher rate tax. The relevant percentage is 25%, and
the company pays Corporation Tax at the small companies rate (21%).

A second company, which pays Corporation Tax at the full rate, buys a
similar car for an employee paying basic rate tax.
Would there be an overall tax advantage in the first year in paying the
employee the cost of the car in cash over four years?
The benefit is £3,750 (£15,000 x 25%).
Company 1 Company 2
£ £
Car option
Corporation Tax saving:

Capital allowances £3,000 x 21%/28% (630) (840)
Employer’s NIC:
Benefit £3,750 x 12.8% 480 480
Less Corporation Tax saving:

£480 x 21%/28% (101) (134)
Employee’s Income Tax:

Benefit £3,750 x 40%/20% 1,500 750
Tax burden 1,249 256
Cash option
Corporation Tax saving:

£3,750 x 21%/28% (788) (1,050)
Employer’s NIC:
£3,750 x 12.8% 480 480
Less Corporation Tax saving:

£480 x 21%/28% (101) (134)
Employee’s Income Tax:

£3,750 x 40%/20% 1,500 750
Employee’s NIC:
£3,750 x 1%/11% 38 413
Tax burden 1,129 459

The overall tax burden for the first company and its employee is lower by £120
as a result of giving the cash option, but the second company would find the
car option more beneficial by £203. Other factors would need to be considered,
for example the cash flow implications of the purchase of the car now as opposed
to paying the same amount over four years, although the latter course may be
less attractive to the employee.
Car fuel
Fuel provided for an employee’s private use is taxable on the employee, while
the employer receives a Corporation Tax deduction. If the fuel relates to an
employee’s private car, the benefit is the cost of the fuel. More commonly, private
fuel is provided with a company car. Unless all fuel is reimbursed to the employer
by the employee, the benefit is a fixed sum (£16,900 since 6 April 2008) multi-
plied by the relevant percentage, which is the same as the percentage applied
in arriving at the car benefit.
The employer will be liable for Class 1A National Insurance on the fuel benefit.
Input VAT will have been incurred by the employer on the purchase of the fuel.
This can be recovered in full, in which case the employer must account for output
tax (known as the scale charge – see Appendix) because the employee has been
supplied with fuel. Alternatively, the employer can ask the employee to keep
detailed mileage records, and only the business proportion of the input tax will
be recovered. This dispenses with the need to account for any output tax. The
same method must be used for all employees. Which method is more benefi-
cial will depend primarily on the amount of private mileage travelled by
employees and also on engine-sizes.
The principal tax planning issue here is for the employee to decide whether or
not to take the benefit in kind.

EXAMPLE
A higher rate taxpayer drives 10,000 miles per annum and has the option
of having all private fuel paid for by the company. The relevant percentage
is 25% and the estimated cost of fuel per mile is 10p. The employer pays
Corporation Tax at the small companies rate. No input tax is reclaimed
on private fuel.
£
Cost to employee if fuel paid by employer:
Benefit £16,900 x 25% = £4,225
Income Tax £4,225 x 40% 1,690
Class 1A NIC £4,225 x 12.8% 541

Corporation Tax saving on NIC £541 x 21% (114)
Corporation Tax saving on fuel

10,000 x 10p x 21% (210)
Extra tax paid by employer 217
There is an overall tax burden of £1,907 which would be avoided if the employee
paid for fuel privately – though of course the employee would then expect to
be paid a higher salary in compensation, which itself would carry additional
tax, albeit less than that outlined above. It should be noted from the above
example that the tax payable by the employee (£1,690) actually exceeds the cost
of the fuel (£1,000). This may change if the private mileage increases or the
employee is a basic rate taxpayer, but in general the tax burden on private fuel
is now quite punitive, which has the effect of discouraging employers from
providing private fuel.
Assets used privately or transferred for cash

An asset (other than a car or a van) made available to an employee for private
use is taxed on an annual value of 20% of the market value when the asset was
first made available.
All employees, including those paid less than £8,500 per annum, are taxable
on assets transferred to them. The benefit to a lower paid employee is the second-
hand value of the asset. To directors and to all other employees, the benefit is

the higher of the market value at the date of transfer and the market value when
the asset was first made available, less any amounts already taxed.
Company vans made available for private use are taxed as an annual benefit
of £3,000. There is no taxable benefit if private use consists largely of
commuting and any other private use is insignificant, unlike for company cars.
If private fuel is provided, the employee is assessed on a benefit of £500.
EXAMPLE
An asset qualifying for the annual investment allowance is made avail-
able to an employee in 2008/09 immediately after it is purchased for £2,500.
Ownership of the asset is transferred to the employee in 2009/10 when
its market value is £1,500. The employee is a higher rate taxpayer and
the company pays Corporation Tax at the small companies rate.
Benefit in 2008/09 £2,500 x 20% 500
Benefit in 2009/10 £2,500 – £500 2,000
Tax burden in 2008/09: Income Tax £500 x 40% 200

Class 1A NIC £500 x 12.8% 64
Corporation Tax saving on capital allowances
£2,500 x 100% x 21% (525)
(274)
Tax burden in 2009/10: Income Tax £2,000 x 40% 800

Class 1A NIC £2,000 x 12.8% 256
1,002
If the employee were simply to buy the asset himself and draw an extra £2,500
as salary, the tax burden would be slightly greater as employee’s National
Insurance would be payable.

There may also be VAT implications. A business which purchases assets and
then makes them available for private use normally reclaims only the percentage
of input tax on purchase which is attributable to the intended business use. A
second option may also be available, namely the immediate full reclaim of input
tax followed by the subsequent payment of output tax over the period in which
the private use takes place. This is known as the ‘Lennartz’ mechanism after the
case Lennartz v Finanzamt München 1991.
On transfer of the asset to the employee, there will also be a VAT implication.
This is classed as a business gift, and output tax must be accounted for on the
value of the gift unless this is below £50.
Termination payments
Payments may be made to an employee as compensation for loss of office. While
these are almost always deductible expenses for Corporation Tax purposes,
they may be exempt from Income Tax, which may be a consideration in deciding
how much to pay.
Statutory redundancy payments are calculated using the rules in the Employ-
ment Rights Act 1996, which broadly give a week and a half’s pay for each year
of service from age 41 upwards, and a week’s pay for each year of service below
age 41, subject to a maximum of 20 years’ service. They are never taxable as
earnings.
In addition, an employer may also pay an amount as compensation for loss

of office. The first £30,000 of any such payment is exempt from Income Tax
and National Insurance, provided it is genuine compensation and not payable
under a service agreement or rights conferred by the company’s Articles of
Association.
Payments in lieu of notice (PILONs) follow the same principle, but only if there
is no contractual arrangement nor even an existing understanding that such
a payment was to be made. Employers who have an established practice of
making PILONs may be construed to have an implied contractual arrangement
– this is known as an ‘auto-PILON’.
It is recommended that PILONs are made following a genuine critical assess-

ment and on an individual by individual basis, reflecting the likelihood of the
employee finding alternative employment within the notice period.

‘Garden leave’ is, however, always taxable as employment earnings. This term
describes a situation in which an employee remains bound by the contract of
employment but remains at home having handed in the required notice.
Payments made under a non-statutory redundancy scheme are also exempt from
Income Tax and National Insurance up to the limit of £30,000. However, Revenue
& Customs often view such payments as terminal bonuses, which would bring
them within the charge to tax. It is recommended that employers proposing a
non-statutory redundancy scheme should write to Revenue & Customs in
advance for clearance.
The exemption limit of £30,000 applies to the overall total of compensation

payments, PILONs and non-statutory redundancy payments and is reduced by
any statutory redundancy payment. Any excess over £30,000 is subject to Income
Tax (though still not to National Insurance).
EXAMPLE
An employee receives statutory redundancy of £5,000, compensation for
loss of office of £10,000, a PILON of £7,500 and a non-statutory redun-
dancy payment of £12,000.
The total of all four payments is £34,500, and therefore £4,500 is chargeable to
Income Tax.
Employee share schemes

In addition to cash payments and benefits in kind, an employer may wish to
reward an employee by means of shares in the company. The relative tax advan-
tages of each scheme may be an issue in choosing such a scheme and deciding
how many shares to grant.
Unapproved share schemes

Being free of conditions, unapproved share schemes do not carry the same tax
advantages as approved schemes.

Most commonly, they will result in the acquisition of shares by the employee
at a discount to market value. The employee is then taxed as if there were an
interest-free loan for the difference between the market value of the shares and
the amount actually paid, if any. The official rate of interest (6.1% in 2008/09)
is applied to this notional loan, and the result is taxed as a benefit in kind – though
it is ignored if all the beneficial loans to the employee in the year do not exceed
£5,000.
When the employee sells the shares to an unconnected third party, Income Tax
will be calculated as if the loan had been written off. The amount written off
is taxed as a benefit in kind.
Unapproved share option schemes

An option scheme gives the employee the right to buy a specified number of
shares at a specified price before an expiry date. There are no tax implications
at the date of grant of the option.
On exercise of the option, there is a charge to Income Tax and National Insur-
ance on the difference between the market value at the exercise date and the
amount actually paid.
On disposal of the shares, the employee is subject to Capital Gains Tax on the
difference between the sale proceeds and the original cost.
Approved company share option plans

There are various conditions which must be met for an approved company share
option plan (ACSOP):
• No individual may hold options over shares with an aggregate

market value of above £30,000, measured at the time of grant of the
option. Holdings of other approved or savings-related share option
schemes are included.
• The acquisition price must not be manifestly less than the market value
at the date of grant.
• Only employees and full-time directors (those working more than 25

hours per week for the company) may participate.
• Participants may not hold a ‘material interest’ in the company if it is

a ‘close company’. A ‘close company’ is one which is controlled by
five or fewer shareholders or by its directors. A ‘material interest’ is

one of 25% in the company or in any company which controls it. The
participant must not have held a material interest at any time during
the past twelve months, and holdings of associates are taken into
account.
EXAMPLE
The shareholders of Oakham Ltd are:
%
A (director) 15
B (director) 13
C (director) 10
D (director) 6
E 5
F (director) 4
G (director) 4
Others 43
A and B are husband and wife. Can either of them participate in an ACSOP?
Oakham Ltd is a close company. It is not controlled by five shareholders, as

the largest five between them hold only 49%. However, the directors own 52%.
A and B are associated persons who together hold 28%. They are therefore
not eligible for an ACSOP.
There is usually no Income Tax charge at the date of grant, except where the
market value is greater than the subscription price. (This may happen where
a company floats.)
Share options exercised less than three or more than ten years after the date
of grant attract an Income Tax charge and National Insurance in the same way
as for unapproved share options. If they are exercised between three and ten
years after the date of grant, there is no Income Tax or National Insurance.
On sale, the shares are subject to Capital Gains Tax based on the sale proceeds
less the acquisition cost. The acquisition price is the actual price paid for the
shares, plus any amount already charged to Income Tax on grant or exercise.

Enterprise management incentives

The conditions which must be met for an Enterprise Management Incentive
(EMI) are:
• Participating employees must work 25 hours per week or spend 75%

of their working time on company business.
• An employee with a material interest – defined in this case as 30% of

the share capital or (in the case of close companies) 30% of the assets
– may not participate.
• There are strict limitations on the type of company which is eligible:

– It cannot be a subsidiary of another company and arrangements
must be not in place to allow it to become a subsidiary in the future.
– Its gross assets (and those of the group of which it is the parent)
must not exceed £30 million.
– From 22 July 2008, there must be no more than 250 employees

(part-time employees count pro rata towards this total).
– It must be a trading company. Numerous activities are excluded

from the definition of ‘trading’, most notably property, banking,
insurance, leasing, farming, legal and accountancy services and
the management of hotels and nursing homes.
– If it owns any subsidiaries, no arrangements must exist whereby

control of any subsidiary will pass to another person.
• The maximum value of shares over which unexercised options are

held is £3 million. No one employee may hold unexercised options
over shares with a total value of over £120,000, for which ACSOPs
are also taken into account. In both cases, the value is measured at
the date of grant.
• The options must be capable of exercise within ten years of the date
of grant.
There is no charge to Income Tax at the date of grant. Likewise, there is none
on exercise unless the exercise price is below the market value at the date of
grant, in which case Income Tax is charged on the difference between the amount
paid and the market value at the date of grant or exercise, whichever is the
lower.
If a ‘disqualifying event’ occurs and the option is not then exercised within 40
days, Income Tax is charged on the subsequent exercise on the difference

between the market value on exercise and the market value immediately before
the disqualifying event. This is in addition to any Income Tax charged because
the exercise price is below the market value at the date of grant.
The most common ‘disqualifying events’ are:
• The company becomes a subsidiary of another company.
• The company ceases to carry on a qualifying activity.
• The employee breaches the working time conditions.
• ACSOP options are granted which take the employee beyond the
£120,000 limit.
EXAMPLE
On 1 January 2008 an employee is granted options over 10,000 shares in
an EMI scheme. Market value per share at the date of grant is £3.50, and
exercise price is £1.50.
On 1 January 2009, the company is taken over by another company when

the share price is £6. The employee exercises the option on 1 March 2009
when the share price is £7.50.
Income Tax is chargeable because the market value at the date of grant is higher
than the exercise price by £2 (£3.50 less £1.50).
Additional Income Tax is chargeable because exercise took place more than
40 days after a disqualifying event. This is charged on £1.50 per share (£7.50
less £6).
The total taxable amount per share is £3.50, and Income Tax is therefore payable
on £35,000.
Capital Gains Tax is charged on the disposal of the shares. The acquisition cost
is deemed to be the exercise price. Since the abolition of the taper relief system
from 6 April 2008, there is no longer a Capital Gains Tax advantage to this scheme
over other schemes.

Share incentive plans

The conditions for a share incentive plan (SIP) are as follows:
• The scheme must be made available to all employees who meet the
qualifying criteria and are UK resident, and participation must be on
the same terms for all.
• A qualifying period of employment may be specified, which broadly

must be no more than 18 months.
• If the company is a close company, the employee must not hold a

material interest (defined as for ACSOPs).
The purpose is to give employees a continuing stake in the company. Shares

fall into one of four categories: free, partnership, matching and dividend. In
each case, shares are held in a trust until they are withdrawn.
FREE SHARES
The market value of shares allotted to any employee, measured at the date of
grant, must not exceed £3,000 in any tax year. The shares are held in trust for
between three and five years.
If the shares are withdrawn within three years, there is a charge to Income Tax
based on the market value of the shares on withdrawal.
If the shares are withdrawn between three and five years, there is a charge to
Income Tax based on the lower of the market value on the date of grant or the
date of withdrawal.
There is no tax charge if the shares are withdrawn after more than five years.
PARTNERSHIP SHARES
These are paid for by way of a deduction from the employee’s salary. The
maximum deduction in a tax year is £1,500 or 10% of an employee’s salary,
whichever is lower. The shares are acquired at the lower of market value on
the first day of the period specified in the partnership share agreement (which
can be no more than twelve months) and the acquisition date.
There is no charge to Income Tax when the amount is deducted from salary.
The deduction is allowable against Income Tax.

EXAMPLE
Mr Ashley has an annual salary of £40,000 and a deduction of £150 per
month is made in respect of partnership shares.
Income Tax is charged on £38,200, being the salary of £40,000 less twelve
instalments of £150.
Income Tax on withdrawal operates on similar principles to free shares in that

there is no tax charge if the shares are held for five years. If they are withdrawn
within three years, there is a charge to Income Tax based on the market value
at the date of withdrawal; and if they are withdrawn between three and five
years the Income Tax charge is based on the lower of the salary deductions
and the market value at the date of withdrawal.
MATCHING SHARES
These are offered in conjunction with partnership shares: the company

provides free shares in proportion to the partnership shares. The maximum is
two matching shares to each partnership share.
Taxation is on the same basis as for free shares.
DIVIDEND SHARES
A company may provide that dividends due on shares held in SIPs may be used
to buy further shares if the participant wishes, subject to a maximum reinvest-
ment of £1,500 per participant per annum.
Dividend income reinvested is not treated as taxable income in the hands of

the employee.
Shares withdrawn more than three years after the date of reinvestment are not
subject to Income Tax. Otherwise, the employee is taxed in the year of withdrawal
on the amount of the related dividend.
In all four cases, when the shares are withdrawn from the plan they are deemed
to have been disposed of and immediately re-acquired by the employee at market
value.

Savings-related share option schemes

The conditions for savings-related share option schemes (SRSOSs) are as follows:
• The scheme must be available to all employees and full-time directors

who have been employed throughout the qualifying period. Part-time
directors, and employees who have worked for part of the qualifying
period, may be included.
• The company may impose a qualifying period of up to five years.
• Those with a material interest (defined as for ACSOPs) in a close

company may not participate.
• Shares must be acquired out of savings with a contractual savings

(SAYE) scheme approved by Revenue & Customs.
• Options cannot be exercised before the bonus date or more than six
months afterwards. The bonus date may be selected as three, five or
seven years after commencement of the scheme.
• Contributions must fall between £10 and £250 per month.
• The acquisition price must not be manifestly less than 80% of the
market value of the shares at the time of grant.
No Income Tax is charged on grant or exercise.
There is a charge to Capital Gains Tax on sale of the shares. This is based on
the sale proceeds less the actual price paid.
The following table summarises the essential points of the various approved
share option schemes.

Scheme Conditions Tax on exercise Tax on sale
ACSOP Employees & full-time directors None if exercised 3-10 years after CGT
Maximum £30,000 per person grant
Option price = MV at grant date

No material interest (25%) in close
company
EMI Full-time employees Income Tax if exercise price < MV at CGT

No material interest (30%) date of grant
Gross assets of company < £30 Disqualifying events may attract

million Income Tax
Must be a trading company with no

more than 250 employees
Maximum £120,000 per employee
(£3 million total)
SIP All employees (subject to qualifying Free, partnership and matching CGT
period) shares: no tax if withdrawn after
No material interest (25%) in close > 5 years
company Dividend shares: no tax if withdrawn
Free shares up to £3,000 per annum after > 3 years
Partnership shares up to £1,500

per annum
Matching shares (maximum 2 for
every partnership share)
Dividend shares (maximum
reinvestment £1,500 per annum)
SRSOS All employees (subject to qualifying None CGT

period)
No material interest (25%) in close
company
Shares acquired from SAYE scheme
within 6 months after bonus date
(3, 5 or 7 years)
Contributions £10 to £250 per month
Option price > 80% of MV at grant
date

Blank
Chapter 2
Savings and Investment Schemes
Enterprise Investment Scheme
Venture Capital Trusts
Community Investment Tax Relief
Tax-exempt savings income

Chapter 2
Savings and Investment Schemes
The government has set up various schemes to encourage investors to subscribe

for shares in certain ventures. Three of these schemes are considered here.

Investors with a portfolio in which they wish to include high-risk companies
may find Enterprise Investment Scheme (EIS) shares appropriate. There are
strict limitations on the types of company which qualify for EIS relief. The
company must be carrying on a qualifying trade, defined as a business operating
within the UK on a commercial basis with a view to profit. There are numerous
non-qualifying activities which are broadly the same as for Enterprise Manage-
ment Incentives (see Chapter 1); if these activities comprise more than 20% of
a company’s business, it will not qualify for EIS relief.
The company must be unquoted and must not be a subsidiary nor itself own
any subsidiaries which do not carry on a qualifying trade. Perhaps the most
significant qualifying criterion is the ‘relevant assets test’: the company’s gross
assets before the share issue must not exceed £7 million nor must they exceed
£8 million immediately after the share issue. These figures were £15 million and
£16 million respectively before 6 April 2006. Shares listed on the Alternative
Investment Market (AIM) are classed as unquoted; it is estimated that the number
of AIM shares eligible for the EIS have halved as a result of the change to the
relevant assets test. From 22 April 2009, there is a requirement to use all of the
money raised by the issue of EIS-qualifying shares within two years of the date
of issue.
Ordinarily, such investments would be considered too risky for many investors.
Under the EIS, generous tax relief is available to encourage investors to back
these companies.
If at least £500 is invested in new ordinary shares, the investor’s Income Tax
liability is reduced by 20% of the investment. There is no maximum investment,
but relief will be given on a maximum amount of £500,000. The tax reduction
is restricted to the amount of Income Tax payable during the tax year.

2 S AV I N G S A N D I N V E S T M E N T S C H E M E S
Relief can be carried back to the previous year, which is useful if the potential
relief exceeds the investor’s Income Tax liability for the year. For 2009/10 onwards,
the total investment can be carried back without restriction. Previously, carry-
back was available only if the shares were issued before 5 October in the tax
year and was restricted to the lowest of:
• half of the amount subscribed for the share issue;
• £50,000;
• the unused balance in the previous year.
Relief will normally be withdrawn if the shares are sold within three years of
their purchase, or within three years of the commencement of the company’s
trade if later. This is calculated as the lower of the relief already given and 20%
of the disposal proceeds, unless the disposal is not at arm’s length, in which
case all of the relief already given is withdrawn.
If the shares are disposed of after this three-year period, any gain is not subject
to Capital Gains Tax. However, if the shares are sold at a loss, the loss is allow-
able for Capital Gains Tax purposes, although the loss is reduced by any EIS
relief given.
EXAMPLE
Mr Leonard buys EIS shares for £30,000, holds them for four years and
sells them for £20,000. What is the allowable loss?
£ £
Proceeds 20,000
Cost 30,000
Less EIS relief given (£30,000 x 20%) (6,000)
(24,000)
Allowable loss (4,000)
Additionally, the investment will almost certainly qualify for Business Property
Relief (see Chapter 8) and, if held for a minimum of two years, will be exempt
from Inheritance Tax.

Venture Capital Trusts

Venture Capital Trusts (VCTs) are quoted companies which invest funds in
unquoted companies. Individuals who subscribe for new ordinary shares in a
VCT may avail themselves of certain tax advantages, though they are not as
attractive as they used to be, Income Tax relief having fallen from 40% to 30%
in 2006/07, and the minimum holding period having increased from three to
five years.
The maximum annual subscription is £200,000. Like EIS shares, shares in a VCT
must be subscribed for and not purchased from a third party and must be new
ordinary shares, otherwise Income Tax relief will not be available. The
subscriber must be aged at least 18, and the shares must be acquired for bona
fide commercial reasons.
The company will be given Revenue & Customs approval to be a VCT only if
it meets certain conditions. Broadly, these are that its income must arise mainly
from investments, and at least 70% of those investments must be in unquoted
companies which carry on a ‘qualifying trade’. Qualifying trades are the same
as those defined for the purposes of EIS shares (see above). No more than £1
million can be invested in a single company, no single company can comprise
more than 15% of the total investments, and the VCT may not invest in compa-
nies with gross assets of £7 million before the share purchase or £8 million
immediately afterwards (these limits were £15 million and £16 million respec-
tively before 6 April 2006). From 22 April 2009 a VCT must use all of the money
it receives for the relevant trade within two years.
Tax relief is given at 30% of the investment (40% before 6 April 2006) but is
restricted to the Income Tax liability for the year. Unlike for EIS investments,
there is no carry-back available if the potential relief exceeds the Income Tax
liability.
Dividends received by a private investor from a VCT do not give rise to an Income
Tax liability, even if the investor is a higher rate taxpayer, provided that the
investor has not subscribed more than the permitted annual maximum of
£200,000.
VCTs do not incur chargeable gains on the disposal of investments, and conse-
quently these gains can be distributed as tax-free dividends. Likewise, an investor
who sells VCT shares will not be liable to Capital Gains Tax provided that the
company is still a VCT at the time of disposal. It is not possible to defer Capital
Gains Tax on other gains by reinvesting the proceeds in a VCT.

As stated above, investors who have purchased shares and are not the original
shareholder are not eligible for Income Tax relief. However, they do not suffer
Capital Gains Tax when they sell their VCT shares. This can be a double-edged
sword, as any losses on VCT shares are not available for set-off against charge-
able gains.
Relief is withdrawn if the investor disposes of the shares within five years of
the date of acquisition. The amount of relief withdrawn is calculated in the same
way as for EIS shares.
VCTs do have certain disadvantages. The combined effect of the initial and annual
charges, together with the fact that shares are often illiquid and trade at a
discount to net assets, can mean that shareholders will lose about 20% of their
money – which eats a long way into the 30% relief. According to one source,
the average VCT lost 23% of investors’ money in the five years to December
2005, although there have been some good performers. VCTs do at least offer
a diversified portfolio, unlike most EIS shares.
Community Investment Tax Relief

The Community Investment Tax Relief (CITR) scheme aims to help investors
to attain a return on their investments in the knowledge that the funds invested
will be put to good use.
The investment is made in an accredited Community Development Finance Insti-

tution (CDFI) and is in the form of a loan or a subscription for shares. A loan
may not be repayable within two years and thereafter can be repaid by a
maximum of 25% per year. Consequently, full repayment can be required no
earlier than five years after the date of drawdown.
Shares may not carry any right of redemption within five years.
CDFIs lend to and invest in deprived areas or underserved sectors which might
otherwise struggle to gain access to funds. They may be household names such
as high street banks, or smaller organisations like credit unions. Among organ-
isations which have benefited from funds provided by CDFIs is a furniture
manufacturer in the West Midlands which struggled to convince its bankers
that its business plan was viable; it approached its local CDFI, a Reinvestment
Trust, which helped it increase its turnover and staff numbers and broaden its
range of products. Another beneficiary is a charity which works to enhance

the quality of life of older people by using their reminiscences for exhibitions
in museums.
Income Tax relief is given as a tax reducer at 5% of the amount invested and
outstanding for each of the five years and cannot exceed the individual’s Income
Tax liability for the year.
EXAMPLE
An individual lends £100,000 to a CDFI on 6 April 2009. Repayments are
due at £25,000 on 6 April 2011, 6 April 2012, 6 April 2013 and 6 April
2014.
Tax relief is available as follows:
Balance Relief
£ £
2009/10 100,000 5,000

2010/11 100,000 5,000
2011/12 75,000 3,750
2012/13 50,000 2,500
2013/14 25,000 1,250
Relief is withdrawn retrospectively if the loan is repaid or the shares disposed

of.

The following table compares the three schemes:
EIS VCT CITR
Type of company Qualifying trade Investment company CITF which in turn

investing in qualifying finances deserving
trading companies charities or businesses
Investment limit £500,000 per annum £200,000 per annum None

(minimum £500) (no minimum)
Type of investment New ordinary shares New ordinary shares Loan or new ordinary
shares
Income Tax relief 20% (can be carried 30% (no carry-back) 5% per annum for five
back one year) years
Minimum holding Three years Five years Five years (special

period for Income Tax rules for repayment of
relief loans)
Capital Gains Tax relief No CGT if shares held No CGT Normal CGT rules
for three years apply
Tax-exempt savings income
Individual savings accounts

The scope for tax savings on Individual Savings Accounts (ISAs) is relatively
small – £61 a year for a higher rate taxpayer with £5,100 invested at 3% – yet
the scheme is worth a mention, not least because a cash ISA avoids the risk
associated with EIS shares and VCTs.
Investors can take out cash ISAs or stocks and shares ISAs for each tax year,
designated as such at the time of subscription. The total allowable annual invest-
ment s £7,200, which can be invested totally in stocks and shares, although up
to £3,600 can be held as cash.
Any interest earned is exempt from Income Tax. Dividends are not subject to
higher rate tax, though the 10% tax credit which they carried when ISAs were
introduced has now been abolished.

ISAs are often said to be less tax-efficient than pension contributions because
no Income Tax relief is available on contributions to an ISA. However, they are
very flexible and can be cashed in at any time. They have become more popular
of late because commercial property funds are now included in the list of
permitted investments.
The 2009 Budget announced an increase in the overall ISA limit to £10,200 for
the tax year 2010/11, of which £5,100 can be held in cash. These limits take effect
for people over the age of 50 on 6 October 2009.
National Savings
Premium Bond winnings and interest from National Savings Certificates and
Children’s Bonus Bonds are exempt from Income Tax.

Chapter 3
Sole Traders and Partnership
Loss Relief
Property income
Chapter 3
Sole Traders and Partnership
Loss Relief
Sole traders and partnerships who incur a loss in the course of a trade are eligible
for loss relief, provided that the trade was carried on with a view to profit and
on a commercial basis. (Income from the rental of property does not qualify
as a trade and is dealt with separately below.) Trading losses can be set off against
other income, carried forward and set off against future profits from the same
trade, or used in reduction of capital gains. Special provisions apply in the
opening and closing years of a trade.
Set-off against other income

A trader incurring a loss in a tax year may set the loss against other income,
which may arise for example from salary, savings, property income or another
separate trade. The loss can be set off against other income for the same tax
year or the preceding tax year in any order, provided that, whichever year is
chosen first, the other income in that year must be exhausted in full before the
balance is used against the other year. This may mean that personal allowances
will be wasted; in this case it may be more beneficial to carry the loss forward
against future trading profits (see below).
In the case of a continuing business, the loss for a tax year will be the loss for
the accounting period ending in that year. For example, a loss for the year ended
30 April 2009 will be treated as incurred in 2009/10.
A claim must be made to relieve a loss in this way. The time limit is twelve months
from 31 January following the end of the tax year of the loss.

3 S O L E T R A D E R S A N D PA R T N E R S H I P
EXAMPLE
Mrs Newland has the following income:
2008/09 2009/10
£ £
Salary 30,000 34,000
Interest 2,000 1,500
Rental income 8,000 4,500
Trading profit 10,000 –
Trading loss – (18,000)
How should the loss be utilised?

2008/09 2009/10
£ £
Other income 50,000 40,000
Loss carried back (18,000) –
Loss relief is claimed in the year in which a larger slice of income falls within
the higher rate band. In 2008/09, assuming that she claims the standard personal
allowance, the amount of income before the loss relief claim falling within the
higher rate band is £9,165 (£50,000 – £6,035 – £34,800). Having decided to set
the loss against the income in 2008/09 first, Mrs Newland cannot restrict this
in order to set it partly against the higher rate income in 2009/10.
As a temporary measure, trading losses incurred in the tax years 2008/09 and
2009/10 may be carried back three years. The maximum loss which may be
carried back is £50,000 for each of 2008/09 and 2009/10, with the loss being
set against later years first.
Carry-forward against profits of same trade

Losses not utilised against other income or chargeable gains may be carried
forward and set off against profits of the same trade. There is no time limit –
the loss is carried forward indefinitely, although an election for carry-forward
must be made within five years of 31 January following the tax year of the loss.

EXAMPLE
Taking the previous example further, Mrs Newland has the following income
in 2010/11:
£
Salary 35,000
Interest 2,500
Rental income 6,000
Trading profit 20,000
63,500
The biggest tax saving would be achieved if she were not to carry the loss back
but instead to carry it forward and set it off against the trading profit in 2010/11.
In this way, all of the loss would be used in the reduction of income within the
higher rate band. However, she would have to wait longer for the relief.
Set-off against capital gains

Trading losses may be set off against capital gains for the same or the previous
tax year. The time limit for the claim is the same as for a claim to utilise the loss
against other income.
Set-off against capital gains is allowed only if all other income for the year in
question has been exhausted. This may mean that personal allowances will be
wasted.
The maximum set-off under these provisions is the capital gains for the year
less any capital losses for the same year and capital losses brought forward.
The annual exempt amount (see Chapter 7) may therefore be wasted.

EXAMPLE
Miss Claypole has the following income and chargeable gains:
2008/09 2009/10
£ £
Salary 10,000 11,000
Trading profits 3,000 –
Trading losses – (18,000)
Capital gains 10,000 3,000
She could elect to set the 2009/10 loss against income and capital gains for 2008/09
but would thereby waste personal allowances and part of the annual exemp-
tion. Income would be reduced to nil and chargeable gains would be reduced
to £5,000, leaving £4,600 of the annual exemption unused. If future trading profits
are reasonably certain, a better option would be to carry the loss forward.
If capital gains were above £14,600 in 2008/09, a claim might be more worthwhile,
although the personal allowance would still be wasted.
Opening year losses

Losses arising in any of the first four tax years of a new trade can be carried
back and utilised against the trader’s total income for the three years preceding
the year of loss. They must be set off against earlier years first.
For example, a trade’s first year of assessment is 2009/10. Losses can be set
against other income in 2006/07, then – if all of the income of 2006/07 is exhausted
– 2007/08, and finally 2008/09. A loss in 2012/13 can be set off against income
in 2009/10 and the following two years.
The potential advantage over the loss claims previously discussed is that an
individual may have been paying Income Tax at the higher rate in earlier years,
perhaps while in salaried employment. Tax relief is also available more quickly
than if the loss were carried forward.
A claim for relief of a loss in this way should be made within twelve months
of 31 January following the tax year in which the loss arises.
Many traders mistakenly believe that losses can be utilised twice, in the same
way that profits can be taxed twice in the early years.

EXAMPLE
A profitable business commences trade on 1 January 2009 and has a year-
end of 31 October. It will be assessed as follows:
2008/09 Date of commencement (1 January 2009) to 5 April 2009

2009/10 Twelve months from the date of commencement
1 January to 31 December 2009
2010/11 Twelve months to the accounting date
1 November 2009 to 31 October 2010
(Note that, where an accounting period ends in the second tax year and is less
than twelve months as above, the basis period for tax is the first twelve months
of the business. If this period is twelve months or more, the basis period is the
twelve months to the accounting date. Where there is no accounting period
ending in the second tax year, the basis year is the twelve months from 6 April
to 5 April.)
The profits for the periods from 1 January to 5 April 2009 and from 1 November
to 31 December 2009 are taxed twice, though overlap relief is given when the
business ceases.
The same does not apply to losses, so any loss made from 1 January to 5 April
2009 can be attributed to 2008/09 only and not to 2009/10.
EXAMPLE
A trader commences trading on 1 September 2009 and makes a loss of
£24,000 in the year ended 31 August 2010. In the year ended 31 August
2011 he makes a profit of £30,000.
He was previously an employee on a salary of £40,000 which did not change

from 1 January 2006 until 31 March 2009, when he left to start his own
business. After 31 March 2009, he had no other income apart from the
business.
What is the best way to utilise the loss?

£
Loss in 2009/10: £24,000 x 7/12 14,000
Loss in 2010/11: 12 months to 31 August 2010 24,000
Less already given (14,000)
10,000
The loss could be carried forward to 2011/12, but he is then only a basic-rate
taxpayer. A better option is to carry the loss back and use it against higher rate
income.
2006/07 2007/08 2008/09
£ £ £
Salary 40,000 40,000 40,000
Loss relief (14,000) (10,000) –
26,000 30,000 40,000
The loss in 2009/10 could of course be set against the income in 2008/09 under
the usual rules of set-off against other income, but the loss in 2010/11 could
not be used in this way because there is no taxable income either in 2009/10
or in 2010/11.
Terminal losses
When a trade ceases, the losses in the last twelve months of trading can be
relieved against profits for the last tax year and the preceding three tax years.
The loss is utilised against profits of later years first.
The final twelve months of trading are split into two periods: the period to 5
April and the period from 6 April. The loss available for relief is the total of the
losses in the two periods (note that, if either period produces a profit, it is ignored
and netted off the loss).

EXAMPLE
Mr Bishop’s trading results prior to cessation of trade on 31 August 2010
are as follows:
£
Year ended 31 December 2006 Profit 50,000
31 December 2007 Profit 20,000
Period ended 31 August 2010 Loss 25,000
Under normal rules, the loss of £25,000 is treated as incurred in 2010/11 and
may be carried back to 2009/10. However, it could not then be relieved in full.
Mr Bishop will benefit from a terminal loss relief claim as follows:
£
1 September 2009 to 5 April 2010
£25,000 x 3/8 less £5,000 x 4/12 (7,708)
6 April 2010 to 31 August 2010
£25,000 x 5/8 (15,625)
Total loss (23,333)
The loss is relieved as follows:

2007/08 2008/09 2009/10
£ £ £
Profit 20,000 5,000 5,000
Loss relief (13,333) (5,000) (5,000)
6,667 – –
A claim for relief of a terminal loss should be made within five years from 31
January following the tax year of discontinuance.
Partnerships
Profits of a partnership are distributed between the partners in accordance with
the partnership sharing agreement, and losses are treated similarly. Each
individual partner can therefore decide how best to utilise losses.

EXAMPLE
Mr Stanton and Miss Berkeley are in partnership. They make a profit of
£60,000 in the year to 31 December 2008, and a loss of £15,000 in the year
to 31 December 2009. The partnership sharing agreement states that profits
and losses are shared between Mr Stanton and Miss Berkeley in the ratio
80:20. Miss Berkeley has income from another source in the form of salary
of £50,000 from 1 April 2009 onwards.
Mr Stanton’s share of the profit is £48,000 and his share of the loss is £12,000.
He is therefore a higher rate taxpayer in 2008/09 and should elect to carry the
loss back.
Miss Berkeley’s share of the profit is £12,000 and her share of the loss is £3,000.
She is a higher rate taxpayer in 2009/10 because of her salary, and she should
therefore elect to set the loss against income in 2009/10.
Property income
Income from property is not treated as trading income and any profits or losses
are taxed separately. It is not possible to treat it as earned income for pension
purposes.
Rental income is always treated as property income. However, property dealing,

which involves the purchase of properties with a view to generating profits by
reselling them, is considered to be a trade. Profits from hotels, market gardening
and mining are also taxed as trading income.
Revenue or capital?
Taxable profits from property consist of rental income from all UK properties
less allowable expenditure. There is a wealth of case law on what constitutes
revenue and capital expenditure. Work is normally of a capital nature (and there-
fore disallowable) if it improves the building, whereas if it simply restores the
building to its original state, it is usually considered to be revenue expenditure
(and therefore allowable).

Some capital expenditure nevertheless qualifies for capital allowances (see

Chapter 6) as it falls under the definition of ‘plant’. This will be the case if it is
part of the apparatus for carrying on the business within the property. Alarm
systems, cookers, lifts and electrical systems have been held to be plant, though
the last of these depends on the nature of the business being carried on.
It can sometimes be more tax-efficient for the tenant to carry out repairs instead
of the landlord and for the landlord to offer a rent-free period in return. This
is because the test of whether an item qualifies as ‘plant’ – and is therefore eligible
for capital allowances – revolves around whether it performs a business function.
A landlord may have difficulty in arguing that a refurbishment qualifies as plant,
whereas tenants may be judged to be carrying out the work for the specific
needs of their business.
Loss relief
Losses from a property business can normally only be carried forward and used
against future profits from property.
If works are to be carried out during a tenancy, the tenant may have more flexi-
bility than the landlord for the relief of the expenditure. The tenant may be able
to carry losses back or claim group relief, whereas the landlord’s options are
far more restrictive. In these circumstances it may be more tax-efficient for the
tenant to carry out the repairs in return for a reduction in rent.
Losses may be set against total income of the same or the following tax year
if they include capital allowances. The loss which can be utilised in this way is
restricted to the capital allowances for the year net of balancing charges.
Other situations
FURNISHED LETTINGS
Capital allowances are available only on property let commercially. If residen-

tial property is let furnished, there are two options:
• Claim expenditure on replacement furniture as it occurs (but not on

the initial purchase of furniture).
• Claim an annual allowance for wear and tear, which is 10% of the
rental income net of council taxes and water rates paid by the landlord.

The landlord will need to consider the likely amount of future renewals of furni-
ture before deciding which treatment to adopt, as the treatment must usually
be adopted consistently from one year to the next. Faster relief is normally given
by claiming the annual 10% allowance.
FURNISHED HOLIDAY LETTINGS
Until 5 April 2010, furnished holiday lettings are taxed as trading income and
therefore a more generous treatment is available for losses. Additionally, they
can be treated as earnings for pension purposes and they qualify for certain
Capital Gains Tax reliefs when sold (see Chapter 7). This special treatment will
be withdrawn from 6 April 2010.
The criteria for furnished holiday lettings are very detailed, but the most impor-
tant are that, during a tax year, the property must be available for letting for
140 days and actually let for 70 days, and no one person should occupy it contin-
uously for more than 31 days in a five-month period.
RENT A ROOM RELIEF
The rent a room relief provisions give scope for tax savings. They allow an
individual to let furnished residential accommodation within his own residence
for up to £4,250 per annum free of tax. Note that the accommodation must be
let for residential purposes, and a director cannot therefore let an office to his
company within his home.
If the annual gross rental income exceeds £4,250, there is a choice of treatments.
Either the excess over £4,250 can be taxed (the taxpayer must make a written
election to do this within twelve months of 31 January following the tax year),
or the net rent after allowable expenditure is taxed (this will apply if no election
is made).

EXAMPLE
Mr Walden lets a room in his house. The income and expenditure are as
follows:
2008/09 2009/10 2010/11
£ £ £
Rental income 4,000 4,500 5,000
Expenditure (1,000) (3,000) (4,500)
Profit 3,000 1,500 500
There is no tax in 2008/09 as the rental income falls below £4,250. In 2009/10
he should elect to tax the excess over £4,250 (£250).
In 2010/11 he should withdraw the election and will be taxed on the net rents
of £500.

Chapter 4
Chapter – Income Tax of Individuals
Allowances
Extension of basic rate band
Overseas income
Chapter 4
Income Tax of Individuals
Allowances
Most Income Tax allowances are a matter of fact and there is no scope for tax
planning. They include the personal allowance, which may be increased beyond
the age of 65 if income is below certain levels (see Appendix).
The personal allowance is gradually reduced to nil from 6 April 2010 for those
earning over £100,000. For every £2 of income above £100,000, the personal
allowance is reduced by £1. Based on the 2009/10 personal allowance of £6,475,
a person with income of above £112,950 will have no personal allowance. The
marginal Income Tax rate for those earning just above £100,000 will therefore
be 60%.
The married couple’s allowance may be transferred between spouses, but it

has been eroded in recent years and is now available only where one spouse
was born before 6 April 1935. A husband may claim a married couple’s allowance
of £2,670 if he lives with his wife at any point in the tax year 2009/10. This is
given as a tax reducer and attracts tax relief at 10% – a tax reduction of £267.
This £2,670 is, however, a minimum, and it can be increased to a maximum of

£6,965 if the husband is 75 or over at the end of the tax year and has an income
of £22,900 or less. The allowance is given on a sliding scale depending on the
age of both spouses and the level of the husband’s income. Details are given
in the Appendix.
The opportunity for tax planning arises because the allowance can be trans-
ferred between spouses. Because it is simply given as a tax reducer, however,
it makes no difference if the wife pays Income Tax at the higher rate and the
husband does not.
The wife may claim half of the minimum allowance (£1,335) unilaterally. If both
parties make a claim before the start of the tax year, the full minimum amount
may be transferred.

4 C H A P T E R – I N C O M E TA X O F I N D I V I D U A L S
If the husband’s (or wife’s, if the joint election has been made) tax liability is
insufficient to take advantage of the married couple’s allowance, the unused
amount can be transferred to the wife (or husband). A notice must be given
by five years after 31 January following the tax year.
EXAMPLE
Mr Hatfield has annual income of £12,000 and Mrs Hatfield £20,000. Mr
Hatfield is 71 at 5 April 2010 and Mrs Hatfield 76.
What is the most beneficial use of the married couple’s allowance?
Mr Hatfield Mrs Hatfield

£ £
Income 12,000 20,000
Personal allowance (age-related) (9,490) (9,640)
Tax liability at 20% 502 2,072
Married couple’s allowance £6,965 x 10%

Excess to Mrs Hatfield (502) (194)
– 1,878
There has been an extension to the married couple’s allowance for marriages
and civil partnerships entered into from 5 December 2005: the allowance is given
to whichever individual has the higher total income for the year. The right to
transfer all or half of the allowance remains. A couple who married before 5
December 2005 may make a joint election to be brought within these rules.
Extension of basic rate band

Taxpayers who are in the higher rate band may bring some or all of their income
back into the basic rate band by making payments either to charities or to
personal pension schemes. In both cases, the payment is deemed to have been
made net of basic rate tax. The grossed-up payment is then added to the basic
rate band.

Gift Aid
Individuals who wish to make donations to a charity while reducing their tax
liabilities can do so by making a donation (which must be in the form of cash,
as opposed to goods and services) and signing a declaration that they have
paid sufficient Income and Capital Gains Tax in the year to cover the tax reclaimed
by the charity. Gift Aid donations, as these are known, can be made to UK-
registered charities only.
EXAMPLE
Mr Hitchin has income of £46,000. How much should he donate by way
of Gift Aid in order to bring his income below the higher rate band?
£
Income 46,000
Personal allowance (6,475)
Taxable income 39,525
Excess over higher rate band £39,525 less £37,400 = £2,125.
Net payment needed £2,125 x 80% = £1,700.
Mr Hitchin will pay £1,700 and the charity will reclaim tax of £425 (20/80). His
higher rate band will rise to £39,525. The effect of this is that his Income Tax
is reduced by 20% of the gross gift.
For the three years 2008/09 to 2010/11, the charity can reclaim a transitional
Gift Aid supplement to bring it up to the amount it would have been able to
claim at the old 22/78 rate which applied up to 2007/08.
A pitfall of Gift Aid is that there are restrictions on benefits which can be received
by the donor from the charity. In principle, if any benefit is received in return
for the payment, it is not a bona fide donation. This does not apply to newslet-
ters or to reduced or free entry to properties managed by the charity for public
benefit (which is why subscriptions to the National Trust qualify for Gift Aid).
There are limits on other benefits (see Appendix).
It is possible to carry back a Gift Aid donation to the previous year – for example,
a payment made in 2009/10 can be treated as made in 2008/09 if a claim is made

by 31 January 2010. This would be beneficial if the taxpayer were in the higher
rate band in 2008/09 but not in 2009/10.
Personal pension contributions

A payment to a personal pension scheme is grossed up and increases the higher
rate band in exactly the same way as a Gift Aid donation. Individuals who pay
tax at the higher rate can make a pension payment to reduce their Income Tax.
A new regime for personal pensions came into force on 6 April 2006. The
maximum gross contribution is now the higher of £3,600 and 100% of
‘earnings’ (subject to a maximum of £245,000). ‘Earnings’ arise from employ-
ment or trading income, but not from savings, dividends or rental income. Until
5 April 2006, contributions were restricted to an age-related percentage of ‘net
relevant earnings’, and earnings from pensionable employment (where the
employer operated an occupational pension scheme) did not count towards
net relevant earnings. Under the new regime, an individual can be a member
of both occupational and personal schemes.
The 2009 Budget announced a number of measures which adversely affect high
earners. The withdrawal of the personal allowance for those earning over
£100,000 was mentioned earlier in this chapter. Taxpayers with income of over
£150,000 will be subject to a new top rate of Income Tax of 50%. For these
taxpayers, higher rate pension relief will be restricted. Those earning above
£180,000 will obtain relief at only 20% on pension contributions. Between
£150,000 and £180,000, a taper relief will apply. The detailed rules have yet to
be published at the time of writing.
Overseas income
There is scope for very large tax savings by ceasing to be resident in the UK.
Of course, drastic action is required in order to bring about non-residence, but
some individuals consider this worthwhile.
An individual may be resident, ordinarily resident or domiciled in the UK. These

terms are considered in turn.

Residence
An individual who is physically in the UK for at least 183 days in a tax year
(usually ignoring days of arrival and departure) is UK-resident.
If an individual is physically in the UK for an average of 91 days per year over

four successive tax years, residence begins on the first day of the fifth year.
Individuals are non-resident if they do not visit the UK at all in a tax year, even
if their average over the last four tax years has been 91 days or more.
Ordinary residence
Ordinary residence is more difficult to define than residence, and it implies greater
permanence. Normally individuals who have lived in the UK throughout their
lives are ordinarily resident, even if they are not resident as a result of being
absent for an entire tax year.
If an individual regularly visits the UK and has accommodation which is avail-

able to him for at least three years, that individual is ordinarily resident. The
91-day test for residence also applies to ordinary residence.
Domicile
An individual can have only one domicile, which up to age 16 is normally the
parents’ domicile (the ‘domicile of origin’).
After the age of 16, the individual may acquire a ‘domicile of choice’ which
involves physically moving to another country and severing ties with the former
domicile. Strong evidence is needed before Revenue & Customs will accept this
– for example, the sale of all UK property and the purchase of property in the
new country of domicile; marriage to an individual already domiciled in the
new country, or the movement of family to that country; the statement of a desire
to be buried in the new country, such as the purchase of a burial plot there.
Foreign income
Foreign income is usually taxed on an arising basis. This means that, regard-
less of whether the income is remitted to the UK, it is taxable in the UK, though
any expenses outside the UK which are directly related to the collection of the
income (for example, bank charges) are deductible.

Individuals who are not ordinarily resident or non-domiciled in the UK can,

however, claim to have foreign income (except income arising in Eire) taxed
on a remittance basis. This means that the income is not taxed in the UK until
it is received there, probably to a UK bank account. Consequently if the funds
are never remitted, they are never taxable. It is possible to use the foreign income
to buy an asset abroad and then bring this asset into the UK, thus avoiding the
taxation of the income on the remittance basis.
Employment income
Many employees carry out part or all of their duties abroad or for an employer
who is not resident in the UK.
An individual who is non-domiciled in the UK – even if resident or ordinarily

resident – is not liable to UK Income Tax on earnings from employment with
a foreign employer carried out wholly outside the UK unless those earnings
are remitted to the UK. However, if any part of the duties is performed in the
UK, there is a liability to UK Income Tax on the whole.
Many foreigners working in London as city bankers take advantage of this by

persuading their employers to give them two contracts of employment – one
for their work in London and one for their work elsewhere. The latter contract
is with an overseas subsidiary and the income is remitted to an offshore bank
account. If, for example, 70% of their work is in London, they will pay tax on
only 70% of their income – an effective rate of 28%.
There was a change to the taxation of non-domiciles from 6 April 2008. Those
with more than £2,000 of unremitted income and gains and who have been UK-
resident for seven of the previous nine tax years have to pay a £30,000 ‘remittance
basis charge’ each tax year. Alternatively, they may choose to be taxed on all
income arising, irrespective of whether it is remitted to the UK.
Irrespective of domicile or residence, an individual not ordinarily resident in

the UK is able to have salary apportioned between income earned from working
days within the UK and working days abroad. There does not in this case need
to be a separate contract for time abroad, unlike for those who are resident
and ordinarily resident but non-domiciled. The proportion of salary which relates
to work abroad is taxed only if it is remitted to the UK.

EXAMPLE
Mrs Romney, domiciled in the US, has a contract with a London bank,
working 65% of the time in the UK and 35% in the US. For the years 2006/07
to 2009/10, she spends an average of 85 days in the UK and rents property
on one-year leases. Her income is £100,000, paid direct to a US bank.
She is not ordinarily resident as she neither has accommodation available to

her for a three-year period nor spends an average of 91 days or more in the
UK. Her income is therefore apportioned. She is taxed in the UK on £65,000
but the remaining £35,000 is free of tax unless it is remitted to the UK.
She is not required to pay the remittance basis charge as she is not UK resident.
If in future years she spends an average of at least 91 days in the UK and becomes
UK-resident for seven out of nine years, she will have to pay the £30,000 charge.
It will then be more tax-efficient if she elects to be taxed on the arising basis.
Trading income
Any trade carried on at least in part in the UK is taxed as UK income except

in the case of an individual who is non-resident, when the profits are appor-
tioned between the UK part and the overseas part.
A trade carried on wholly outside the UK is still wholly taxable in the UK if carried
on by an individual who is resident and ordinarily resident. For a non-resident,
it is not taxable in the UK. For an individual who is resident but not ordinarily
resident, or resident but non-domiciled, it is taxed on a remittance basis.
EXAMPLE
Mr Wade carries on a trade which makes 40% of its sales in the UK and
60% in Germany. He is not ordinarily resident in the UK, but in 2009/10
he spends 200 days in the UK.
He is resident and therefore the whole of the profits are taxable in the UK.
If he were to restrict his time in the UK to 180 days, he would be non-resident

and then only 40% of the profits would be taxable in the UK.

Dividends and interest

Individuals who are non-resident can avoid the higher rate on dividends and
interest. Broadly, their tax liability cannot exceed the total of tax charged on
non-savings income (ignoring the personal allowance) and tax deducted at source
on interest and dividends.
Individuals who make a declaration that they are not ordinarily resident can
receive interest from UK banks gross.
EXAMPLE
Miss Stone has employment income of £10,000 in the UK. She also has
net interest income of £12,000 and net dividend income of £90,000.
Her income is summarised thus:

£
Employment income 10,000
Interest £12,000 x 100/80 15,000
Dividends £90,000 x 100/90 100,000
125,000
Personal allowance (6,475)
Taxable income 118,525
If she is resident, her tax liability is calculated as follows:

Tax on non-savings income: 20% x £3,525 705
Tax on interest income: 20% x £15,000 3,000
Tax on dividend income:

10% x £18,875 1,888
32.5% x £81,125 26,366
31,959
Less deducted at source (13,000)
Tax liability 18,959

If she is non-resident, her tax liability is calculated as follows:
Tax on non-savings income: £10,000 x 20% 2,000

Tax on interest income: 20% x £15,000 3,000
Tax on dividend income: 10% x £100,000 10,000
15,000
Less deducted at source (13,000)
Tax liability 2,000
By being non-resident, it is possible to achieve significant tax reductions – in

this case £16,959. Monaco, a well-known tax haven, houses many wealthy British
business people who fly to the UK on a Monday and return on a Thursday for
most weeks of the year. Because days of travel to and from the UK do not count
towards the 91-day threshold, it is easy to remain non-resident and therefore
only suffer tax deduction at source on dividends. According to one report, there
are 650 directors of UK companies who give their address as Monaco.
Tax in more than one country

If individuals become non-resident, their income will generally be taxable in
the country of residence, though it is possible to be resident in no country. A
detailed analysis of the tax rates and rules in other countries is beyond the scope
of this work, although for individuals with a mid-range retirement income there
is no significant difference between the tax burden in the UK and that in popular
retirement destinations such as France, Italy, Spain and Portugal. Certain
countries do impose a wealth tax, such as France (starting at 0.55% per annum
on assets of more than €750,000) and Spain.
Income may in theory be taxable in two countries. An example would be foreign

income which is taxed in the country of origin and also on the remittance basis
in the UK. Double tax agreements exist between the UK and many other countries
so that income is not taxed twice.
If a non-resident owns and lets property in the UK, the income will be taxed in
the UK and maybe also the country of residence, but it is usually possible to obtain
a credit for the UK tax paid so that the tax in the country of residence is corre-
spondingly reduced. A further point to note here is that the letting agent acting

for a non-resident landlord must deduct 20% of the rent and send it to Revenue
& Customs. If there is no letting agent, the tenant must make the deduction.
In some cases, tax relief may not be available under a double tax agreement.
UK residents in this position may set the foreign tax against their UK tax, provided
that this arises from the same type of income as the foreign tax. This is known
as unilateral relief.
The 2009 Budget announced that from 6 April 2010 the personal allowance would
be withdrawn from individuals who are not resident in the UK but who claim
UK personal allowances and reliefs as Commonwealth citizens.

Blank
Chapter 5
Corporation Tax
Losses
Groups
Purchase of a company’s own shares
Substantial shareholding relief
Corporate Venturing Scheme

Chapter 5
Corporation Tax
Losses
This section focuses chiefly on losses incurred by a company in its trading activ-
ities. Apart from the carry-forward of trading losses, which happens
automatically, a claim must be made to utilise trading losses against other income
of the same or a different accounting period.
In order to aid an understanding of the relative advantages of the various options

for utilisation of losses, it is necessary to outline the rules for computation of
Corporation Tax. The thresholds and rates are in the Appendix.
Basic computation
Trading income, income from other sources (such as property income and
interest) and chargeable gains are added together. Charges on income are then
deducted. Charges on income comprise only payments to charity. The result
is the profit chargeable to Corporation Tax (PCTCT). The relevant Corporation
Tax rate is applied to this.
Note that dividends receivable do not form part of PCTCT, in the same way as
dividends payable are not a deduction.
There are three Corporation Tax rates for the year commencing 1 April 2009:
companies with PCTCT of up to £300,000 pay tax at 21%, and companies with
PCTCT of £1,500,000 pay tax at 28%. Between £300,000 and £1,500,000, a
marginal rate applies. If a company has received no dividend income in the
period, the marginal rate is 29.75%.
The method of calculation is first to apply the main rate of 28% to PCTCT and
then to apply the following fraction by way of marginal relief:
(U – P) x I/P x 7/400
U = the upper limit (£1,500,000)
P = PCTCT plus franked investment income
I = PCTCT

5 C O R P O R AT I O N TA X
Franked investment income consists of dividends received from another UK

company, grossed up by 100/90.
EXAMPLE
Tenterden Ltd has PCTCT of £1,000,000 and has received net dividends
of £90,000. The Corporation Tax is computed as follows:
Tax at full rate: £1,000,000 x 28% 280,000
Marginal relief:
(£1,500,000 – £1,100,000) x £1,000,000/£1,100,000 x 7/400 (6,364)
273,636
Tenterden Ltd’s marginal rate is 30.09%:
Tax 273,636
Less tax at small companies rate: £300,000 x 21% (63,000)
Tax at marginal rate 210,636
Marginal rate £210,636/ (£1,000,000 – £300,000) = 30.09%
The marginal rate will always be 29.75% if there is no franked investment income.
Note that the upper and lower limits are reduced accordingly if the accounting
period is less than twelve months.
The limits are also reduced if the company has any associated companies. Compa-
nies are associated if one controls another or both are under common control.
The size limits are divided by the number of associated companies – for example,
if Tenterden Ltd has two subsidiaries and is owned by another company, the
upper limit will be £375,000 and the lower limit £75,000. The purpose of this is
to stop companies with, say, a profit of £2,000,000 from splitting into seven
companies and thus taking advantage of the small companies rate.

Set-off of losses against other income

A company may set a trading loss off against other income from any source,
which includes chargeable gains. A claim for set-off in this manner must be
made within two years of the end of the accounting period in which the loss
arises.
Carry-back of losses
If the trading loss is set off against other income for the same year and this
other income is insufficient to relieve the loss in its entirety, the remaining loss
may be carried back and used against the income of the previous twelve months.
A separate claim must be made within the same time limit as for set-off against
other income of the same year.
As a temporary measure, losses in periods ending between 24 November 2008

and 23 November 2010 may be carried back three years, being relieved against
later years first. The amount of the loss which can be carried back in this manner
is restricted to £50,000 for each the accounting periods in which a loss is made.
Carry-forward of losses
If no claim is made to utilise trading losses against income of the same year or
to carry them back, they are carried forward and utilised against profits of the
same trade only.
EXAMPLE
Hampstead Ltd has the following results:
Year ended 31.3.09 31.3.10 31.3.11

(Budget)
£ £ £
Trading profit 2,100,000 – 500,000
Trading loss – (100,000) –
Chargeable gain 100,000 20,000 70,000

How is the loss best utilised?

The tax rate in the year to March 2009 is 28%. In the following year it is 21%.
In the year to March 2011 the loss, if carried forward, will reduce the PCTCT
from £570,000 to £470,000, still within the marginal rate band. The tax saving
will therefore be at 29.75%. This is the best option, proving that losses should
not necessarily be set off against the year with the largest PCTCT.
Cash flow might be an issue, however, as Hampstead Ltd will have to wait until
2011 to gain relief if the loss is carried forward, whereas immediate relief could
be claimed for carry-back.
Terminal losses
Losses incurred in the final twelve months of a company’s trading may be set
off against the other income for the previous three years. Complications arise
when the final period is shorter than twelve months: part of the loss for the
penultimate period can then also be carried back. This will usually mean that
they can be carried back three years to a date which is midway through an
accounting period; in this case, the profit for that period must be apportioned.
EXAMPLE
Harrow Ltd has the following results prior to ceasing to trade on 31
December 2009. All the periods are of twelve months except for the final
period.
Period ended 30.6.06 30.6.07 30.6.08 30.6.09 31.12.09

£ £ £ £ £
Result 20,000 3,000 5,000 (20,000) (10,000)
Profit 20,000 3,000 5,000
Loss utilised (10,000) (3,000) (5,000)
10,000 – –

Loss memorandum:
Terminal loss 20,000 (last period and 6/12 x y/e 30.6.09)
30.6.08 (5,000)
30.6.07 (3,000)
30.6.06 (10,000) (6/12 – carried back to 1.1.06)
Unrelieved 2,000
The remaining £10,000 of the loss in the year ended 30 June 2009 is also
unrelieved.
Schedule A (property) losses

Property losses are automatically set off against other income of the same
accounting period. No claim is required. Any loss remaining is carried
forward and utilised against total income of subsequent periods.
Groups
Companies associated by various means can form a group, which gives oppor-
tunities for the saving of tax by setting the losses of one company off against
the profits of another, or by reducing tax on chargeable gains.
Group loss relief

Companies which are members of a 75% group can utilise losses by setting
the loss of one company against the profits of another. This is a very flexible
way of gaining immediate Corporation Tax relief for losses, rather than having
to carry them forward for set-off against future profits.
Taking a simple example, A Ltd owns 75% of B Ltd. This 75% interest must
meet three conditions:
1. It owns 75% of B Ltd’s ordinary share capital.
2. It is entitled to 75% of B Ltd’s distributable profits.
3. It is entitled to 75% of B Ltd’s assets on winding up.
If these conditions are met, A Ltd and B Ltd are in a 75% group.

An interest may be indirect. Take the following more complex example:
A
90% 30%
B
90% 70% E
C
90%
A has an indirect interest of 81% in C, and therefore A, B and C form a 75%

group.
A’s interest in D is only 72.9%, but B’s interest in D is 81%. Therefore B, C and
D form a 75% group.
E can be added to the first group. This is because A’s effective interest in E is
93% (an actual holding of 30% and a 90% share of B’s 70%).
Losses may be surrendered between any companies in a group. Most

commonly, the losses in question will be trading losses. The surrendering
company need not first set the losses against its other income for the year.
Schedule A (property) losses can also be surrendered, but they must first be
set against the company’s other income for the year.
When deciding how or whether to apply group relief, the group should always
consider setting losses off against the company with the highest marginal tax
rate.

EXAMPLE
Cromer Ltd and Salthouse Ltd have the following results:
Year ended 31 December 2007 2008 2009

£ £ £
Cromer Ltd:
Trading result 170,000 (30,000) 75,000
Salthouse Ltd:
Trading result 100,000 700,000 (12,000)
Chargeable gain – 160,000 –
What is the most beneficial way of claiming group relief?

Cromer Ltd could carry its loss back to 2007. In that year it paid tax at the small
companies rate on the first £150,000 (remember that the small companies
threshold is halved because there are two associated companies) and at the
marginal rate on the next £20,000.
It could carry the loss forward to 2009 and save tax at the small companies rate.
It could set the loss against Salthouse Ltd’s profits for 2008. Salthouse Ltd is a
large company paying tax at the full rate
The best option for Cromer Ltd is to carry £20,000 back and save tax at the
marginal rate and apply group relief to the remaining £10,000.
Salthouse Ltd can carry its loss back and save tax at the full rate. It can alter-
natively carry it forward but future results are uncertain.
Salthouse Ltd could set its loss against Cromer Ltd’s profits for 2006, saving
tax at the small companies rate.
The best option for Salthouse Ltd is to carry its loss back.
Group relief is simplest to operate when all companies have the same
accounting period. If the companies have different accounting periods, the loss
can only be surrendered within the overlapping period.

EXAMPLE
Brixworth Ltd and Stanford Ltd have the following results:
Profit Loss
£ £
Brixworth Ltd – year ended 31 December
2008 30,000
2009 20,000
2010 10,000
Stanford Ltd – year ended 30 September

2009 25,000
2010 10,000
Brixworth Ltd made a loss in the year ended 31 December 2009, of which 9/12
fell in Stanford Ltd’s year ended 30 September 2009. Therefore only 9/12 of the
loss (£15,000) is available for group relief.
The same principle will apply to Stanford Ltd’s loss in the year ended 30
September 2010, of which 9/12 fell in Brixworth’s year ended 31 December 2010.
Therefore only 9/12 of the loss (£7,500) is available for group relief.
Consortia
For a consortium to be in place, 20 or fewer companies (the consortium members)
must each own 5% of another company (the consortium company). Addition-
ally, the consortium members must in total hold at least 75% of the ordinary
share capital. Consortium companies must be trading companies.
Consortium relief operates on broadly similar lines to group loss relief, except
that losses may be surrendered only between the consortium company and the
members (and not between members), and that when losses are surrendered
from the consortium company to the members, the relief is restricted in propor-
tion to the member’s interest in the consortium company.

EXAMPLE
Addlethorpe Ltd is owned as follows:
Bibury Ltd 30%
Crediton Ltd 30%
Dorney Ltd 37%
Evesham Ltd 3%
Addlethorpe Ltd makes a loss of £200,000. The profits of the consortium

members are:
Bibury Ltd £50,000
Crediton Ltd £80,000
Dorney Ltd £90,000
Addlethorpe Ltd’s loss is surrendered as follows:
Bibury Ltd Crediton Ltd Dorney Ltd

£ £ £
Profit 50,000 80,000 90,000
Less surrendered (50,000) (60,000) (74,000)
– 20,000 16,000
The loss not surrendered is £16,000 (Evesham Ltd’s share and excess not
claimable against Bibury Ltd).
Gains groups
For a gains group to exist, the parent must own 75% of the subsidiary and must
have an indirect interest of at least 51% in each of the subsidiary’s subsidiaries.
As for group loss relief, ownership of share capital and entitlement to profits
and assets are all taken into account.

EXAMPLE
Albury Ltd owns 75% of Birtles Ltd, which owns 75% of Chewton Ltd,
which in turn owns 75% of Dunsfold Ltd.
Albury Ltd, Birtles Ltd and Chewton Ltd are in a gains group, as Albury Ltd’s
effective interest in Chewton Ltd is 56.25%, but Dunsfold Ltd is not in the group.
Note that a company cannot be a member of more than one gains group, and
a company which is itself a 75% subsidiary cannot stand at the head of a gains
group. Hence Birtles Ltd cannot head a group which includes Chewton Ltd and
Dunsfold Ltd.
Gains groups provide an opportunity to save tax on chargeable gains. If a capital

asset is transferred from one group company to another, the transfer is deemed
to have been made at ‘no gain no loss’ – in other words, the transferor is deemed
to have sold it for its original cost plus indexation, and the transferee is deemed
to have acquired it for the same value.
A company wishing to dispose of a capital asset may therefore wish to transfer

the asset to a group company which has a lower Corporation Tax rate. The trans-
feree company then sells the asset with a consequent tax saving.
Capital losses of one group company cannot be relieved against chargeable

gains of another. In theory, if one company is about to sell an asset which gener-
ates a capital loss and another company has chargeable gains, it is necessary
to transfer the asset from one to the other and sell it to relieve the capital loss.
However, if both companies make a joint claim to do so, they can treat the asset
as if it had been transferred immediately before sale, which removes the neces-
sity to effect a physical transfer of the asset.
Companies sometimes buy other companies which own assets on which there
is a potential loss. They then transfer those assets on a ‘no gain no loss’ basis
and sell the assets outside the group, using the ensuing capital loss against
existing chargeable gains. Special provisions exist to prevent this from
happening. The pre-entry loss cannot be set against chargeable gains. This pre-
entry loss is normally computed by time-apportioning the loss between the
periods before and after the company joined the group.

Purchase of a company’s own shares

Usually when a company repurchases its shares from shareholders, the trans-
action is treated in the hands of the shareholder in the same way as a distribution
(in other words, as a dividend). If certain conditions are met, however, it is taxed
as a capital gain. More often than not – but not always – this latter treatment
is more favourable for the shareholder, because higher rate taxpayers are liable
for additional Income Tax on distributions, whereas there is an annual exemp-
tion of £10,100 available before Capital Gains Tax becomes payable.
The capital treatment applies only to unquoted trading companies, and the
purchase must be for the benefit of the trade. Generally this second condition
will be satisfied if a shareholder has retired, died or simply wishes to withdraw
equity finance. Perhaps most commonly, there is a dissenting shareholder. For
example Ashton, Barton and Chester are equal shareholders in Zennor Ltd but
Ashton increasingly disagrees with Barton and Chester, which leads to diffi-
culties in the management of the group. Barton and Chester do not have the
funds to buy out Ashton, but Zennor Ltd has surplus funds. Zennor Ltd there-
fore repurchases the shares from Ashton.
The capital treatment also applies if the purpose of the transaction is to enable
Inheritance Tax to be paid on the death of a shareholder.
The vendor must also be UK-resident and ordinarily resident, must have held
the shares for five years (or three if they were inherited), and must not be
connected with the company immediately after the sale. Broadly, a shareholder
with more than 30% of the ordinary share capital of a company is connected
with it.
Occasionally it will be more beneficial for the shareholder to have the trans-
action treated as a distribution – if there are already gains above the annual
exemption, for example.

EXAMPLE
Mr Leigh has taxable income after personal allowances of £10,000 and
chargeable gains of £10,000 in the current year. He has a shareholding in
Martock Ltd which the company wishes to repurchase for £20,000. The
shares were purchased five years ago for £5,000. Would it be more benefi-
cial for Mr Leigh to have this treated as a distribution or as a capital payment?
£
Tax on distribution
No additional tax – basic-rate taxpayer.
Tax on capital payment

Proceeds 20,000
Cost (5,000)
Gain 15,000
Capital Gains Tax at 18% 2,700
In the above example, there is a tax saving of £2,700 by treating the transac-
tion as a distribution. It will therefore be necessary for the company to ensure
that it breaches one of the conditions for a capital payment, perhaps by manip-
ulating the transaction so that the shareholder retains a holding of at least 30%.
Note that, if the conditions are met, the transaction must be treated as a capital
payment. Advance clearance for one treatment or the other may be obtained
from Revenue & Customs.
Substantial shareholding relief

Substantial shareholding relief was introduced with effect from 1 April 2002.
The principal feature is that there is no chargeable gain when a company disposes
of a shareholding in another company, provided that certain conditions are met.
A substantial shareholding is one of at least 10%, taking into account the interest
in ordinary share capital and the entitlement to profits and to assets on winding
up. The shares must have been held in any continuous twelve-month period
in the two years prior to disposal. So if a company buys 20% of another company
on 1 January 2007 and sells it on 1 January 2008, this is an exempt disposal. If
it then buys another 5% on 1 July 2008 and sells it by 31 December 2008, this

is also an exempt disposal because a 10% shareholding was held for a twelve-
month period in the previous two years. However, if it delays the sale of the
5% holding beyond 1 January 2009, it will not be an exempt disposal.
Both investor and investee must be trading companies both for the twelve-month
period and immediately after the sale.
EXAMPLE
Lullington Ltd owns 100% of Shepton Ltd, which owns chargeable assets.
Lullington Ltd has an opportunity to sell Shepton Ltd’s trade to Taunton
Ltd. Should Shepton Ltd sell its assets and goodwill, or should Lullington
Ltd sell Shepton Ltd in its entirety?
If Shepton Ltd sells the assets and goodwill, there will be a chargeable gain on
the goodwill. There may also be a chargeable gain on any plant and machinery
if it is sold for more than its written-down value.
However, if Lullington Ltd sells Shepton Ltd, there is no chargeable gain provided
that the twelve-month criterion is met and both are trading companies.
Taunton Ltd may not be as enthusiastic, however. If it purchases goodwill, it

can amortise this in its own profit and loss account and claim the amortisation
as a Corporation Tax deduction under the new regime for intangible assets which
was introduced on 1 April 2002. However, if it purchases Shepton Ltd, there
will be no tax allowance – though, if it in turn holds Shepton Ltd for twelve
months, it will benefit from substantial shareholding relief. In such a situation,
the seller may have to consider the buyer’s wishes.
Corporate Venturing Scheme

The Corporate Venturing Scheme operates in a broadly similar way to the Enter-
prise Investment Scheme (see Chapter 2). If a company subscribes for new
ordinary share capital in a company which meets the conditions, the investing
company may gain tax relief at 20% on the amount invested.
There are numerous conditions. The investor company, which must be a trading
company, must not hold an interest of more than 30% of the investee company.

The investee company must be unquoted, must not be controlled by another

company, must be at least 20% owned by individuals who are not directors
nor employees nor their relatives, and must be a trading company (broadly
defined in the same way as for the Enterprise Investment Scheme). Immedi-
ately before the purchase of the shares, the investee company must have had
gross assets of no more than £7 million, and immediately afterwards no more
than £8 million. It must not have subsidiaries for which there are arrangements
in force which would pass control to a third party.
When the investee company has traded for at least four months following the
date of the investment, the relief is given, subject to a claim on the Corpora-
tion Tax Return. Relief will, however, be withdrawn if the shares are sold within
three years of their purchase.

Blank
Chapter 6
Capital Allowances
Plant and machinery – general principles
Cars
First-year allowances
Short-life assets
Industrial buildings allowances
Disclaiming capital allowances

Chapter 6
Capital Allowances
A business, whether it is a sole trader, partnership or company, will be able to

treat most of its expenditure as revenue items and will therefore be able to claim
a deduction against Income or Corporation Tax as appropriate. Certain items,
however, do not qualify as revenue items and are therefore capital in nature.
Consequently they do not qualify for a full tax deduction in the year in which
the expenditure is incurred.
The question of what is capital and what is revenue has formed the subject of
many a case. There is no simple test, and a balanced judgement will often be
necessary. Broadly, the day-to-day running costs of a business, such as wages
and salaries, heat and light, stationery and raw materials are classed as revenue
expenditure. Capital items are those with which the business does not part but
which belong to the capital structure, such as property, plant and machinery
and goodwill. These items provide the opportunity to make profits or losses.
A rule of thumb is that capital items tend to be used over more than one year.
Relief for capital items can be given in two ways. First, the cost can be taken
into account when computing a chargeable gain (see Chapter 7). Second, certain
items qualify for capital allowances, so the cost is allowable as a deduction from
profit, but this is spread over the life of the asset. It is capital allowances, and
the opportunities for increasing the amount of the allowance and claiming it
as early as possible, which form the subject of this chapter.
Plant and machinery – general principles

There is no statutory definition of plant and machinery, but it forms by far the
largest part of assets eligible for capital allowances. Broadly, it covers
machinery in its widely understood sense, and plant. The meaning of ‘plant’
has been considered by the courts in many cases. The essential features are
that it is kept for permanent use in the trade and performs a function in the
business operations. Items which merely provide the place or setting in which
the business operations are performed are not considered to be plant and are
therefore ineligible for capital allowances on plant and machinery.

6 C A P I TA L A L L O WA N C E S
Items held by the courts to be plant include movable office partitions, swimming
pools on a caravan site, Building Society window screens and a barrister’s books.
Items held not to be plant include a canopy over a filling-station, false ceilings,
shop fronts and stairs. As can be seen, the distinction is a fine one.
If an item qualifies as plant and machinery, a writing-down allowance of 20%

of the cost is given in the accounting year of purchase (unless first-year
allowances are available – see below). It does not matter when in the year the
purchase is made: a business with a year-end of 30 September would gain faster
tax relief by purchasing an asset on 29 September than it would if the same
purchase were made on 2 October.
Most plant and machinery goes into a ‘pool’, and the annual allowance given
is 20% of the written-down value of the pool, which is the amount carried forward
at the end of the previous year, plus any additions in the year, less the disposal
proceeds of any assets sold in the year.
However, since 6 April 2008 for Income Tax purposes (1 April 2008 for compa-
nies) an annual investment allowance of 100% is available on the first £50,000
spent on plant and machinery. Additionally, the 2009 Budget announced that
a first-year allowance of 40% is available for 2009/10 (see below).
EXAMPLE
Fryerning Ltd has a pool of plant and machinery of £200,000 at 1 July 2009.
It wishes to sell an asset from the pool for £20,000 on or about 30 June
2010. What are the consequences of delaying the sale to 1 July 2010,
assuming a Corporation Tax rate of 28%?
Before 30 June After 30 June
£ £
Year ended 30 June 2010:

WDV* at 1 July 2009 200,000 200,000
Disposal proceeds (20,000) –
180,000 200,000
WDA* at 20% (36,000) (40,000)
WDV* at 30 June 2010 144,000 160,000

WDV at 30 June 2010 144,000 160,000

Year ended 30 June 2011: Disposals (20,000)
140,000
WDA at 20% (28,800) (28,000)
WDV at 30 June 2011 115,200 112,000
The tax saving in the first year achieved by delaying the disposal is £1,120 (£4,000
x 28%). This is partially offset in the second and subsequent years.
* WDA: writing-down allowance

WDV: written-down value
The writing-down allowance is increased or reduced accordingly for long or

short accounting periods. If the written down value of the pool after deducting
disposal proceeds but before making the 20% writing down allowance is less
than £1,000, the business may claim the entire value of the pool as a writing-
down allowance.
Cars
For cars purchased for more than £12,000 before the tax year 2009/10, there
is a special treatment (those costing £12,000 or less are simply treated as part
of the general pool – there is no longer a separate pool for them). They are treated
individually and given a maximum annual writing-down allowance of £3,000.
When the car is sold, a balancing allowance or charge arises by comparing
the sale proceeds with the written-down value at the start of the year.
From the tax year 2009/10, this treatment changes, though expensive cars already
purchased continue to be treated under the old rules for a transitional period
of five years. If a car purchased from 1 April 2009 for a company (6 April 2009
for Income Tax purposes) has CO2 emissions of up to 160, it is added to the
general pool. Otherwise, it is added to a special rate pool and is subject to an
annual writing-down allowance of 10%.
A sole trader with a turnover not exceeding the VAT registration threshold
(currently £68,000) has a choice of two treatments for the use of a car. The private
use element of all of the expenses – including capital allowances, petrol, insur-
ance, road tax and other running costs – can be claimed. Alternatively, the
Revenue & Customs approved mileage rates can be used (40p per mile up to

10,000 miles per annum, 25p per mile thereafter). The basis can be changed
only when the car is changed.
EXAMPLE
Miss Lawford, a sole trader with a turnover of £50,000, buys a car with
CO2 emissions of 145 for £15,000 on 1 April 2009. The running costs
including petrol in the year ended 31 March 2010 are £2,000. Her total
mileage is 15,000 of which half is estimated to be business mileage.
Should she claim actual costs or the mileage rate?
£
Actual costs (50% private use)
Capital allowances – WDA £15,000 x 20% x 50% 1,500
Running costs £2,000 x 50% 1,000
Amount claimable 2,500
Mileage
7,500 x 40p 3,000
There is a clear advantage here in claiming the mileage rate. The position in
future years is less clear – capital allowances will reduce after the second year,
but running costs tend to increase with the age of the car.
First-year allowances
First-year allowances are designed to allow faster tax relief for purchases of
assets. The temporary first-year allowance of 40% in the tax year 2009/10
announced in the 2009 Budget is available to businesses of all sizes, unlike
previous first-year allowances which were available only to small and medium-
sized businesses.
First-year allowances are available on all plant and machinery except cars or
assets used for leasing. It is anticipated that there will be no first-year
allowance for the tax year 2010/11, which may be a consideration in timing
the purchase of an asset. Unlike standard writing-down allowances, these

percentages do not change if the accounting period is longer or shorter than

twelve months.
The advantage of bringing a purchase forward so that it happens just before

a year-end was highlighted earlier. This advantage is even greater if a first-year
allowance is available.
However, it is not always the best course of action to claim first-year allowances
in full. If an asset is disposed of and the proceeds exceed the balance in the
general pool, there will be a balancing charge. This can be avoided by not
claiming the full amount of the first-year allowance and instead adding part
of the cost of the asset to the general pool. The part added to the general pool
is computed using the following fraction:
First-year allowance unclaimed/Full first-year allowance x Cost of asset
EXAMPLE
Maldon Ltd has a general pool brought forward of £10,000 and has
exhausted its annual investment allowance for the year ended 31 March
2010. An asset is sold in the year ended 31 March 2010 for £12,000 and
one is bought for £15,000.
How much of the first-year allowance should not be claimed, and how much
Corporation Tax will thereby be saved in the year of purchase (assuming
a rate of 21%)?

FYA* General pool Allowances

£ £ £ £
FYA claimed in full
WDV brought forward 10,000
Disposal (12,000)
(2,000)
Balancing charge 2,000 (2,000)
–
Addition 15,000
FYA at 40% (6,000) 6,000
9,000
WDV carried forward 9,000
4,000
FYA restricted
WDV brought forward 10,000
Addition 15,000
FYA (6,000)
FYA not claimed 800
(5,200) 5,200
9,800
Added to general pool
£800/£6,000 x £15,000 (2,000) 2,000
Disposal (12,000)
–
Transfer from FYA 9,800 9,800
WDV carried forward 9,800
5,200
* FYA: First-year allowance
There is a tax saving of £252 (£1,200 x 21%) in the year by restricting the first-
year allowance claimed.

Short-life assets
Not all plant and machinery goes into the general pool. Amongst other assets,
long-life assets – those with an expected life of more than 25 years where the
business spends more than £100,000 in a year on such assets – are another.
Long-life assets enter the special rate pool (like cars with high fuel emissions)
and attract a writing-down allowance of 10%.
By contrast, faster capital allowances can be claimed on assets which the taxpayer
elects to treat as short-life assets. These are generally assets with an expected
useful life of four years or less. There is no practical benefit where the item
remains in use for five years or more.
Cars, assets used for leasing and those used partly for non-business purposes
cannot be treated as short-life assets.
Every short-life asset is placed in a pool on its own and a writing-down allowance
is given in the usual way. The consequence is that, when it is sold or otherwise
disposed of, a balancing allowance is given, being the difference between the
written-down value and the sale proceeds (if any). If the proceeds exceed the
written-down value, there will be a balancing charge; if this is expected to happen,
there is a tax disadvantage and the asset should simply be placed in the general
pool at the outset.
If the short-life asset has not been disposed of by the end of the fourth year
after its acquisition, its written-down value is transferred to the general pool.

EXAMPLE
Thaxted Ltd purchases an asset for £100,000 in the year ended 31 December
2009. It has exhausted its annual investment allowance for the year, and
first-year allowances are available. What is the advantage of treating it
as a short-life asset if it is to be sold for £10,000 in 2011?
Short-life General pool
£ £
Year ended 31 December 2009:

Addition 100,000 100,000
WDA at 40% (40,000) (40,000)
WDV carried forward 60,000 60,000

WDA at 20% (12,000) (12,000)
WDV carried forward 48,000 48,000

Disposal (10,000) (10,000)
38,000 38,000
Balancing allowance (38,000)

WDA at 20% (7,600)
WDV carried forward – 30,400
There is an additional allowance of £30,400 in year 3 which at the full rate of

Corporation Tax translates into a saving of £8,512. Of course, correspondingly
more tax will be paid in future years.
Industrial buildings allowances

Other than the timing of purchases to ensure that they fall shortly before the
year-end (and disposals to fall shortly afterwards), there is little scope for planning
in the claim of industrial buildings allowances, so the basic rules are included
here purely for completeness.

Broadly, industrial buildings allowances are available only on buildings used

for manufacture, storage or processing and are restricted to the costs of construc-
tion. The purchase of land is not eligible, and the only tax allowance claimable
on land will usually be in reduction of a chargeable gain when the land is
ultimately sold.
Industrial buildings have a tax life of 25 years from the date they are first brought
into industrial use. This means that an allowance of 4% of the cost is given in
the year of first use and every year as long as the building remains in indus-
trial use.
There is no balancing adjustment for disposals on or after 21 March 2007.
Disclaiming capital allowances

It may sometimes be desirable not to claim full capital allowances on plant and
machinery. If a sole trader’s profit before capital allowances is only £8,000, for
example, the personal allowance of £6,475 will be wasted if capital allowances
of more than £1,525 are claimed. An election can be made to reduce capital
allowances to this amount, and consequently greater allowances can be claimed
in subsequent years.
The same may apply if the business has losses brought forward which it wishes
to utilise against the profit for the year. In these circumstances it may wish to
maximise the taxable profit in order to relieve the losses, and the deferral of
capital allowances might be a way of achieving this.

Chapter 7
Capital Gains
Basic principles
Annual exemptions
Transfers between spouses
Capital losses
Principal private residences
Reliefs
Chattels
Chapter 7
Capital Gains
Basic principles
If a chargeable asset is sold, whether by an individual, partnership or company,
a chargeable gain or capital loss may arise. Most assets are chargeable assets,
but items sold as part of trading activities are taxed under the provisions for
Income and Corporation Tax.
Commonly, a business may find itself with chargeable gains on land and build-
ings, goodwill and other intangible assets, and investments in other companies
(but see substantial shareholding relief at Chapter 5).
An individual may find himself with chargeable gains on a second property

(see principal private residence below), shares, antiques and paintings.
This chapter explains how to minimise tax on chargeable gains but starts with
a brief explanation of how Capital Gains Tax for individuals and Corporation
Tax on chargeable gains for companies work.
Computation – companies
The pro forma computation for companies is:
£
Disposal proceeds x
Original cost (x)
Enhancement expenditure (x)
Unindexed gain x
Indexation allowance (x)
Chargeable gain x
There is no annual exempt amount for companies.

7 C A P I TA L G A I N S
The indexation allowance is computed by reference to the retail price index

on the date of acquisition and the date of sale. Indexation can never be used
to create or increase a loss – for example, if the gain before indexation is £10,000
and indexation is computed at £15,000, there will be no gain and no loss. If there
is a loss before indexation, this is the allowable loss and no indexation is added.
Computation – individuals
The pro forma computation for an individual is:
£
Disposal proceeds x
Original cost (x)
Enhancement expenditure (x)
Chargeable gain x
Indexation ceased to apply for individuals, partnerships and trusts from April
1998 following a major review of the Capital Gains Tax regime. For disposals
before 6 April 2008, assets held at 5 April 1998 were indexed up to that date.
Taper relief was then applied and varied depending on whether the asset is a
business or non-business asset and on the period of ownership. Broadly, a
business asset was one used by the taxpayer in carrying on a trade or profes-
sion. Much faster taper relief was given for business assets – 75% after two
years’ ownership, compared to 40% after ten years for a non-business asset.
Taper relief was abolished for disposals on or after 6 April 2008, and indexa-
tion no longer applies to assets disposed of by individuals, even if those assets
were owned before 6 April 1998. A flat Capital Gains Tax rate of 18% now applies
to all chargeable gains by individuals, though the annual exempt amount is first
deducted (see below). With the abolition of taper relief, many of the opportu-
nities for tax planning in relation to chargeable gains have been removed. Tables
showing how taper relief operated up to 5 April 2008 are in the Appendix.
For assets held before 1 April 1982, cost is ignored and the market value at 31
March 1982 substituted. For disposals by individuals prior to 6 April 2008, two
calculations were prepared: one using the actual cost and the other using the
market value at 31 March 1982. The lower of the two gains was taxed. If one
produced a gain and one a loss, there was deemed to be no gain and no loss.
If both produced a loss, the lower loss was allowable. This still applies to disposals
by companies of assets held at 31 March 1982.

Companies may still make a global rebasing election. This is irrevocable once
made. The result is that, for all assets held before 1 April 1982, cost is ignored
and the market value at 31 March 1982 substituted. This is likely to be of benefit
if all or most of the pre-1982 assets which the taxpayer intends to sell in the
future rose in value between the date of their acquisition and 31 March 1982,
and some of them are likely to be sold with a capital loss.
EXAMPLE
Hale Ltd wishes to dispose of shares bought on 1 January 1974 for £20,000.
By 31 March 1982 their market value had risen to £80,000 but the likely
sale proceeds are only £50,000. Should it make a rebasing election? (Ignore
indexation.)
Computation based on: Cost Value in 1982

£ £
Proceeds 50,000 50,000

Cost/1982 value (20,000) (80,000)
Chargeable gain/Capital loss 30,000 (30,000)
In the absence of a rebasing election, the disposal will be treated as no gain

and no loss. If the election is made, a loss of £30,000 can be claimed. Hale Ltd
would need to be aware that if it later sold any assets whose value had fallen
between the date of the acquisition and March 1982, a higher gain could result
from having made this election.
Annual exemptions
Although companies are not entitled to an annual exemption, individuals are.
This is set at £10,100 for 2009/10. The result is that the first £10,100 of gains
are free of Capital Gains Tax, which is payable only if chargeable gains less
capital losses (see later) exceed this figure.
The annual exemption cannot be carried forward and used in future years. If
an individual wishes to dispose of shares with an estimated gain of £15,000,
for example, it may make sense to sell half in one tax year and half in the next,

thus ensuring that both gains are covered by annual exemptions. The tax saving
should outweigh any additional dealing costs.
Before 1998, there was a practice known as ‘bed and breakfasting’. An individual
would sell shares, realising a gain just below the annual exemption, and buy
them back the next day, thus reducing any future gain. This is no longer possible,
because an individual selling shares and then buying the same class of shares
back within the next 30 days is deemed to have sold the shares which were
bought subsequently.
EXAMPLE
Mrs Lyndhurst buys 2,000 shares in Portchester plc for £3,000 on 1 January
1999. She sells the shares on 1 June 2009 for £10,000 and buys them back
on 2 June 2009 for £10,100. She sells them for £13,000 on 1 March 2011.
The disposal on 1 June 2009 is deemed to relate to the shares bought on 2 June
2009 and there is a capital loss of £100.
The disposal on 1 March 2011 is deemed to relate to the purchase on 1 January

1999 and there is a gain of £10,000.
Anyone wishing to sell and buy back shares since 1998 must wait more than
30 days before repurchase if the above rule is not to apply. This of course runs
the risk of a rise in the share price in the meantime. It is possible for the taxpayer’s
spouse or even an ISA (Individual Savings Account) to repurchase the shares.
However, for acquisitions since 22 March 2006, the 30-day rule does not apply
to individuals who are non-resident and not ordinarily resident. Any gain or
loss on disposal will be calculated on the basis that the shares were acquired
before the disposal rather than within 30 days afterwards.
Transfers between spouses

Since 5 December 2005, the following applies also to civil partners.
The annual exemption cannot be transferred between spouses, but nevertheless

there is a tax planning opportunity here. A transfer between spouses living together
is deemed to be at no gain and no loss, so that the receiving spouse takes over
the asset at its original cost. The annual exemption of both can be utilised.

EXAMPLE
Mr Kenton has gains of £4,000 and Mrs Kenton £12,000 in 2009/10. What
would have been the best way to reduce their tax liabilities?
Mrs Kenton should have transferred assets to Mr Kenton. The assets transferred
should have been those which would produce gains of £1,900 when sold to a
third party. Her gains would then have totalled only £10,100. The inter-spouse
transfer must be made before the assets are sold.
Alternatively, if one spouse is a higher rate taxpayer but the other is not, it may
be beneficial to transfer an asset to the spouse and then sell it.
Capital losses
A capital loss arises when the original cost exceeds the disposal proceeds. Capital
losses on assets disposed of before 6 April 2008 are set against chargeable gains
before taper relief is given. An individual with numerous gains and losses on
pre-April 2008 disposals should therefore allocate the losses against the gains
with the lowest taper relief first.
EXAMPLE
Mr Hartland disposes of three non-business assets in 2007/08 as follows:
Gain/(loss) Years
£ owned
Asset 1 20,000 8
Asset 2 10,000 2
Asset 3 (5,000) 4

If the loss is set against asset 1, the gains for the year will be:
Gain on asset 1 20,000

Loss on asset 3 (5,000)
Gain before taper relief 15,000

Taper relief at 30% (4,500)
Net chargeable gain 10,500
Total gains 20,500
If the loss is set against asset 2, the gains for the year will be:

Chargeable gain 14,000

Loss on asset 3 (5,000)
Net chargeable gain 5,000
Total gains 19,000
The difference is the 30% taper relief on the amount of the loss. The loss should
be set against asset 2, which attracts no taper relief.
Losses unused in the tax year are carried forward and set against chargeable
gains in future years. This is more beneficial than using the losses in the year
in which they are incurred, because carried forward losses are used only to the
extent that they reduce the gains to the annual exempt amount. Losses set against
gains in the same year are used even if they bring the gains below the annual
exempt amount.

Principal private residences

There is no chargeable gain when an individual sells a house which has been
the principal private residence throughout the period of ownership. In
principle, a property which at some time has not been the principal residence
of the individual is subject to Capital Gains Tax. There are numerous relaxations
of this rule, and large tax savings can result from careful forward planning.
If the property has never been the principal residence, there will be a charge-
able gain calculated in the normal way. But if it has been the principal residence
at some stage during the period of ownership, there will be an exemption for
the last three years of ownership whether or not it was occupied during that
period. It will also be exempt for the period of actual occupation. Hence the
chargeable gain is time-apportioned over the period of ownership (ignoring
periods before 1 April 1982).
The stumbling block is that, if an individual acquires a second residence and

wishes to claim exemptions on this, he must nominate it as the principal residence
within two years of the date of acquisition. Many taxpayers fail to do this and
in this case Revenue & Customs will decide which was the principal residence
based on the facts.
Taxpayers often assume that there is a disadvantage in nominating the holiday

home as the principal residence because it limits relief on the main residence.
In fact there is nothing to prevent the taxpayer nominating the holiday home
as the principal residence and then re-nominating the main residence after a
very short period, perhaps as little as one week. This enables exemption to be
claimed for the last three years of ownership of the holiday home.
Even if the two-year deadline is missed, there can be another window of oppor-
tunity if a third residence is acquired. A nomination of any of the three properties
can be made within two years of the date of acquisition of the third. Note, though,
that a property never occupied by the taxpayer as a residence – for example,
one acquired and simply let to a third party – can never be nominated as a
principal residence.
There are further exemptions available. If the owner was employed abroad for
any of the period of ownership, no chargeable gain accrues in respect of that
period, provided that the house was actually occupied as the principal
residence at some stage both before and after (not necessarily immediately before
and after) the period of absence. The same applies if the owner was required
to live elsewhere in the UK by reason of his employment, but in this case the
exemption is limited to four years.

Additionally, any other period of absence of up to three years will be exempt,

subject to the same provisions regarding occupation both before and afterwards.
EXAMPLE
Miss Melbourne owns a property from 1 January 1990 to 31 December
2009. She occupies it as her main residence except for the following periods:
1 January 1991 to 31 December 1993 Working elsewhere in the UK

1 January 1995 to 31 December 1999 Working abroad
1 January 2001 to 31 December 2009 Moved to a larger property
The exemptions total eleven years – the three years working elsewhere, the five
years working abroad and the last three years. There is no three-year exemp-
tion for any of the period from 1 January 2001 to 31 December 2006 as this
was not followed by a period of actual occupation.
The gain is calculated in the normal way but only nine-twentieths of it will be
chargeable.
There is also a letting exemption. If the property has been let at any time and
has at some stage been the principal residence, letting relief is given at the lower
of £40,000 and the relief attributable to owner occupation.
EXAMPLE
Miss Bakewell owns and occupies a property for 20 years. For the last
eight years she lets out 80% of the property. There is a gain on sale of
£200,000 before time-apportionment.
£ £
Gain 200,000
Attributable to owner-occupation:
£200,000 x 12/20 120,000
£200,000 x 8/20 x 20% 16,000
(136,000)
Gain before letting relief 64,000

Gain before letting relief 64,000

Letting relief – lower of:
£40,000
Principal residence relief £136,000 (40,000)
Note that a couple jointly owning and letting a property will be able to claim
relief of £40,000 each.
If a couple is divorcing or separating and one party moves out of the marital
home, he or she should ensure that the house is sold within three years in order
to ensure that the sale is free of Capital Gains Tax. If the party moves to a house
which was previously let, this will become the principal private residence
(although it is wise to make an election to this effect) and the usual reliefs will
then apply, including letting relief.
Reliefs
Rollover relief
A business which sells an asset with a chargeable gain may opt to claim rollover
relief if it reinvests the proceeds in another asset. This means that the charge-
able gain will be deferred; no tax will be payable straightaway, but the base
cost of the replacement asset will be reduced, with the effect that any charge-
able gain on the eventual sale of the replacement asset will be correspondingly
increased.
Both the asset disposed of and the replacement asset must be ‘qualifying assets’,
which includes land and buildings, fixed plant and machinery and goodwill.
The replacement asset must be acquired within the period starting one year
before and ending three years after the disposal.
EXAMPLE
Morley Ltd sells an unincorporated business for £1,000,000, of which
£400,000 relates to goodwill, on 1 July 2009. A chargeable gain of £300,000
ensues on the goodwill. On 1 January 2011 the company buys land and
buildings for £600,000.

The base cost of the new land and buildings is:

£
Actual cost 600,000
Gain rolled over (300,000)
Deemed cost 300,000
Note that if only part of the proceeds were reinvested, the relief would be
restricted. The gain would be limited to the proceeds not reinvested. For example,
if Morley Ltd reinvested only £300,000, the gain chargeable now would be as
follows:
£
Gain before relief 300,000
Actual cost 300,000
Deemed cost 100,000
It was at one time possible to gain rollover relief by reinvesting in the shares
of an ordinary trading company. This relief became unavailable in 1998. A similar
relief is, however, still available via the Enterprise Investment Scheme (see below).
Holdover relief
Owners of businesses may wish to gift certain business assets, or more especially
shares in their companies, to third parties. These third parties will generally,
but not always, be family members. Gifts are usually treated as if the asset had
been sold for its market value. This also applies to any transfers to connected
persons, whether for value or as a gift. The definition of ‘connected persons’
includes the spouse, relatives (siblings and direct ancestors and descendants)
and the relatives of the spouse. Since 2005, civil partners have been treated in
the same way as spouses.
Holdover relief, often also known as gift relief, is given by deferring any charge-
able gain and deducting the whole gain from the deemed cost of the new asset

to the donee. This deemed cost will be the market value. Holdover relief is avail-
able whether the transfer is made as a gift or at an undervalue. A claim for
holdover relief may result in extra Capital Gains Tax being payable by the donee
at a later date, so the claim, which is irrevocable, must be signed both by the
donor and by the donee.
Broadly, the only assets qualifying for holdover relief are business assets and
unlisted shares in trading companies (though transfers into a trust also qualify
if Inheritance Tax is payable – see Chapter 9). Business assets are those used
in the taxpayer’s trade or in a company in which the taxpayer holds at least
5% of the voting rights. Gifts of shares qualify for holdover relief if the shares
are in an unquoted trading company. If the company has investments which
form more than 20% of its net worth, no relief is available. (Until April 2003,
partial relief was available in these circumstances.)
EXAMPLE
Mrs Appleby gifts shares in an unquoted trading company to her daughter.
The market value of the shares is £200,000. She acquired the shares in April
2000 for £80,000. Both parties sign a claim for holdover relief.
£
Chargeable gain:
Market value 200,000
Cost (80,000)
Gain held over 120,000
Allowable cost:
Gain held over (120,000)
Deemed cost 80,000
Relief will be clawed back if the donee emigrates within six years of the end
of the tax year of the gift. The held-over gain will become chargeable in the
year of emigration.

Gifts to charities
A gift to a charity is an exempt disposal for Capital Gains Tax purposes.
Incorporation relief
Often the owner of an unincorporated business will make the decision to transfer
the business to a company. This entails the disposal of the assets of the business
and a consequent chargeable gain on assets such as land and buildings and
goodwill. The gain will be computed by taking the disposal proceeds to be their
market value at the date of transfer. The deemed cost of the shares issued to
the shareholder of the new company will be the lower of the market value of
the shares and the value of the assets transferred.
Incorporation relief works by rolling the chargeable gain over into this deemed
cost of the shares.
EXAMPLE
Mr Swaffham has run a business as a sole trader for many years. He incor-
porates the business, realising chargeable gains of £50,000 on the assets.
The market value of the shares received is £150,000.
The acquisition cost will be:

£
Deemed cost 100,000
If any other consideration is received in return for the assets, the gain is
proportionately reduced. For example, if Mr Swaffham received shares of £100,000
and cash of £50,000, the gain held over would be £33,333 (£100,000/£150,000 x
£50,000) and the cost of the shares would be £66,667 (£100,000 less £33,333).
Negligible value claims

If an investment has gone badly wrong and the taxpayer paid an amount for
the shares but they have fallen to a very small value, it may be difficult to find
a purchaser and thus realise a capital loss. The investment can, on a claim to

Revenue & Customs, be treated as if it had been sold and immediately re-acquired
at market value, thus allowing the loss to crystallise and be used to reduce charge-
able gains.
Revenue & Customs maintain a list of quoted shares which have fallen to negli-
gible value and on which claims will automatically be allowed.

The Income Tax benefits of investing in companies under the Enterprise Invest-
ment Scheme (EIS) were highlighted in Chapter 2, where it was also explained
that EIS shares sold after more than three years are not treated as chargeable
gains, although a capital loss can be claimed if appropriate.
There is a further Capital Gains Tax relief under the EIS, which is known as
EIS deferral relief. If an individual who is resident and ordinarily resident incurs
a chargeable gain on any asset and, during a period starting one year before
and ending three years after the disposal, acquires ordinary shares in an
unquoted trading company, the gain can be deferred and rolled over into the
base cost of the shares. There are restrictions on the type of company eligible
for this investment and they are broadly the same as for Enterprise Manage-
ment Incentive companies (see Chapter 1). Unlike for EIS Income Tax relief,
there is no maximum limit on the investment, and it can be claimed even by
investors who hold more than 30% of the ordinary share capital. There is no
need for EIS Income Tax relief to have been claimed.
Chattels
Chattels are defined as tangible movable property and often consist of paint-
ings, antiques and jewellery. Chattels with a predicted useful life of 50 years
or less which have not been used for business purposes are exempt from Capital
Gains Tax. Other chattels may attract Capital Gains Tax when sold, but not if
the proceeds fall below £6,000.
In the case of an asset owned jointly, the exemption limit of £6,000 is multi-
plied by the number of joint owners. This can create a tax planning opportunity.

EXAMPLE
Mr and Mrs Langley wish to raise funds to build an extension to their house.
Mr Langley owns a painting worth £10,000 on which the chargeable gain
is £8,000. Provided that he has no other gains, he will be covered by the
annual exemption; but if he does have other gains, how could the Capital
Gains Tax have been avoided?
Mr Langley should have transferred a 50% share of the painting to Mrs Langley
well before the sale. The chattels exemption would then have applied as the
proceeds fall below the limit of £12,000.

Blank
Chapter 8
Inheritance Tax
General principles
Taper relief
Exempt transfers
Reliefs
Domicile
Interaction with Capital Gains Tax

Chapter 8
Inheritance Tax
Capital Transfer Tax was introduced in 1975 and was replaced by Inheritance
Tax in 1986. The difference between the two taxes is that, under Inheritance Tax,
most gifts are exempt except for gifts made in the last seven years of a individual’s
life – which are potentially taxable on death – and a small number of other gifts,
notably gifts to trusts, which may be taxable during an individual’s lifetime.
Inheritance Tax has become a political issue. Originally designed to catch only
the very wealthy in its net, its tentacles have now spread to a very large number
of home-owners, especially in London and the South-East, where house prices
tend to be higher than the average. Between 1998 and 2007, the average house
price nationwide rose from £72,000 to £182,000 while the Inheritance Tax
threshold rose from £223,000 to only £300,000. So a house alone will in many
cases be sufficient to ensure an Inheritance Tax liability. In the five years to 2004,
the number of estates paying Inheritance Tax rose by 72%. Owners of
businesses will generally own other assets in addition to their houses, and careful
planning is necessary to maximise the wealth which can be passed on to the
next generation.
General principles
Lifetime transfers
Most transfers made during an individual’s lifetime are exempt from Inheri-
tance Tax at the time of the transfer. They may, however, fall within the scope
of Inheritance Tax on the individual’s death if they are ‘transfers of value’ – in
other words, a gift or a sale made at an undervalue. In this case, they become
potentially exempt transfers.
If the transferor survives more than seven years after the date of the gift, there
is no Inheritance Tax. Death within seven years of the transfer will mean that
it will form part of the transferor’s estate for Inheritance Tax purposes, although
taper relief (see below) will apply to transfers made between three and seven
years before death.

8 I N H E R I TA N C E TA X
The most common example of a chargeable lifetime transfer is one into a trust.
As explained at Chapter 9, since 22 March 2006 transfers to interest in posses-
sion trusts and accumulation and maintenance trusts are brought into the charge,
which previously applied only to discretionary trusts.
When a chargeable lifetime transfer is made, it is aggregated with the total of

all the chargeable lifetime transfers in the previous seven years. If the total
exceeds the nil rate band for the year of the transfer (£325,000 in 2009/10), Inher-
itance Tax is payable on the excess at 20%.
Death estate
The estate on death includes all property owned by the individual less liabili-
ties. To this are added potentially exempt transfers and chargeable lifetime
transfers made in the seven years before death, and the excess over the nil rate
band is charged at 40%. Any tax paid on chargeable lifetime transfers within
the last seven years is deducted from the Inheritance Tax bill.
There are several means of reducing the death estate and therefore the Inheri-
tance Tax liability, and the remainder of this chapter explains how to achieve this.
Taper relief
If death occurs within three years of a potentially exempt transfer, the full amount
of the transfer is added to the estate. If, however, death occurs between three
and seven years, taper relief is applied, reducing the Inheritance Tax payable
as follows:
Death between Reduction
3 and 4 years 20%
4 and 5 years 40%
5 and 6 years 60%
6 and 7 years 80%
Although precise planning is by nature impossible, prudent individuals will plan

ahead and distribute gifts during their lifetimes in the hope that they will survive
long enough for Inheritance Tax to be reduced or even not to apply at all.

EXAMPLE
Mr Shere dies on 1 January 2010 leaving an estate of £100,000. He made
potentially exempt transfers (net of the annual exemption) of £150,000 on
1 February 2004 and £200,000 on 1 March 2006.
Calculate his Inheritance Tax liability on death.
£ £
Potentially exempt transfer 1 February 2004 150,000

Nil rate band (325,000)
Chargeable to Inheritance Tax –
Potentially exempt transfer 1 March 2006 200,000

Nil rate band 325,000
Less transfers in previous seven years (150,000)
(175,000)
Chargeable to Inheritance Tax 25,000
Inheritance Tax at 40% 10,000

Inheritance Tax payable 8,000
Death estate 100,000
Inheritance Tax at 40% (nil rate band fully utilised

by potentially exempt transfers) 40,000
Total Inheritance Tax 48,000
Gifts with reservation

A word of warning – a potentially exempt transfer may be seen as a ‘gift with
reservation’ if the transferee does not genuinely take possession of it. Parents
may give an antique to their children but continue to have it in their home. They
are still enjoying and benefiting from it, and therefore the transfer is treated
as if it had never been made. It will not be a potentially exempt transfer and
instead will form part of the death estate.

Likewise, parents often transfer their home into the name of their children but
continue to live in it. Again, this is seen as a gift with reservation. The only way
to avoid this is by paying the children a market rent for occupation.
Gifts made before 18 March 1986 can never be treated as gifts with reservation.
There is an important let-out from the gifts with reservation rule. An individual
transferring a half share in a property to another individual is not seen as having
made a gift with reservation if the transferor continues to meet the relevant
share of the expenses. This is often used by parents who wish to give a share
of the family home to their children who live with them, but professional advice
is recommended before relying on this. A gift of more than a 50% share may
well fail.
Some individuals use equity release schemes to generate a potentially exempt

transfer. The cash from the equity release is used to buy a life policy paying
out a lump sum on death. The cash paid to buy the policy is a potentially exempt
transfer, while the payout on death is exempt from Inheritance Tax. However,
on death there will be a chargeable gain which is calculated as the increase in
value from the premium to the surrender value on the day before death.
Exempt transfers
Annual exemption
The wise individual will make lifetime gifts with sufficient regularity to utilise
the annual exemption of £3,000. Potentially, Inheritance Tax of £8,400 could be
saved (seven years’ annual exemptions of £3,000 at 40%). Note that the annual
exemption does not apply to death transfers.
The annual exemption can be carried forward for one year only if unused.

EXAMPLE
Mrs Harting makes potentially exempt transfers of £2,000 in year one,
£2,500 in year two and £4,000 in year three.
£
Year one
Transfer 2,000
Annual exemption (2,000)
Annual exemption carried forward 1,000
Year two
Transfer 3,500
Annual exemption brought forward (500)
No annual exemption carried forward – the remaining £500 from year one is
lost.
Year three
Transfer 4,000
1,000
Small gifts exemption

Individuals may make unlimited gifts during their lifetimes (though not on death)
of up to £250 per person per tax year. Note that this is a maximum – a gift of
£250 will be exempt from Inheritance Tax but a gift of £300 will be a potentially
exempt transfer in full.

Gifts of assets which rise in value

If the individual owns an asset – such as a property or a stamp collection – which
is expected to rise sharply in value over the coming years, it is more tax-effec-
tive to give it away now, as the increase in value will be outside the estate.
Normal expenditure out of income

Gifts made during an individual’s lifetime which can be shown to be normal
expenditure paid out of after-tax income (as opposed to capital) are exempt from
Inheritance Tax. The pattern of these gifts must have left the individual with
enough income to live on without having to draw on capital.
Usually, birthday and Christmas presents, life policy premiums on behalf of

another person and payments under deeds of covenant qualify for this exemp-
tion. Until a landmark case (Bennett) in 1995, the Inland Revenue (as it was then
known) was more likely to allow this exemption if payments were made over
at least three years, but this is no longer the case. All that is now sought is
evidence of a commitment to continue making the payments.
Marriage gifts
Lifetime gifts to either party to a marriage, provided that they are made before
the wedding or there is a binding promise, are exempt from Inheritance Tax
up to the following amounts:
Gift made by Exemption

£
Either parent 5,000
Grandparent or great grandparent 2,500
Bride or groom 2,500
Any other person 1,000
If a gift exceeds the maximum amount, the excess is subject to Inheritance Tax.
Gifts should be conditional on the marriage taking place.
Gifts to spouse
Transfers to a spouse are exempt whether made during the lifetime or as part
of the death estate. Prudent individuals will draw up their wills accordingly,
ensuring that, if they so desire, an amount up to the Inheritance Tax threshold
is bequeathed to other parties and the remainder to the spouse.

Since 9 October 2007 there has been a transferable nil rate band. Where one
spouse or civil partner dies and leaves a survivor who dies on or after 9 October
2007, the unused nil rate band of the pre-deceased is transferred to the survivor.
(This cannot be claimed by co-habitees.) It is immaterial that the pre-deceased
may have died many years before 9 October 2007.
The amount of the nil rate band transferred is the percentage of the pre-deceased
nil rate band unused on death multiplied by the survivor’s nil rate band. Given
that transfers to spouses are exempt, if the pre-deceased estate is left entirely
to the survivor, the survivor has two nil rate bands on death (£650,000 in the
tax year 2009/10).
EXAMPLE
Mr Hampton owns assets of £600,000 and Mrs Hampton owns assets of
£200,000. They have two children. How should Mr Hampton draw up his
will?
If Mr Hampton leaves his entire estate to his wife in the event of his pre-deceasing
her, it will be exempt from Inheritance Tax. On her subsequent death, her estate
will be £800,000. She will have benefited from the transfer of his nil rate band.
Assuming that the nil rate band has risen to £380,000 by the time of her death,
her total nil rate band will be £760,000 and Inheritance Tax will be due on £40,000.
If instead he leaves £162,500 to his children and the remainder to his wife, half
of his nil rate band in 2009/10 of £325,000 will have been unused. On her subse-
quent death, and again assuming a nil rate band at that time of £380,000, an
extra £190,000 (50% of his nil rate band was unused and this 50% is applied
to the nil rate band in the year of her death) will be transferred to her, giving
her a total of £570,000. Her estate will be her own £200,000 plus the amount
left to her by her husband (£437,500), giving a total of £637,500. Inheritance
Tax is therefore due on £67,500.
The better option would therefore have been for Mr Hampton to transfer his
entire estate to his wife. She would therefore benefit from the entire nil rate
band at the date of her death. (Note that if the nil rate band did not change
between the date of his death and the date of her death, the amount of Inheritance
Tax would be the same using either option.)

The exemption is limited to £55,000 where a UK-domiciled spouse makes trans-

fers to a non-domiciled spouse. Domicile rules are discussed later.
The intestacy rules treat surviving spouses harshly. If there are no children,
the surviving spouse receives all the personal chattels – such as cars, furniture
and jewellery – plus a legacy of £200,000 and half of the balance. The
remainder passes to various relatives. If there are children, the surviving spouse
again receives all the personal chattels, plus £125,000. The remainder of the
estate is divided into two halves. One half passes to the children as they reach
the age of majority; the surviving spouse has a life interest in the other half
and receives interest from it, but it passes to the children when he or she dies.
Problems may arise if the matrimonial home is in the deceased spouse’s sole
name, as this may have to be sold to meet the share attributable to the children.
The surviving spouse does, however, have the right to apply to the courts under
the Provision for Family and Dependants Act 1975.
The Civil Partnership Act 2004 came into effect on 5 December 2005 and gives
civil partners the same rights as spouses. The biggest tax advantage is the right
to leave assets to a surviving partner without an Inheritance Tax liability. Cousins
may become civil partners, but not parents, grandparents, siblings, aunts or
uncles. Civil partners need not live together, be of any particular sexual orien-
tation or be in a sexual relationship. Civil partnerships do also carry pitfalls:
if one partner wanted to leave his or her estate to children or anyone else, the
surviving partner might try to thwart that; pre-existing wills are revoked on
registration of a civil partnership (as indeed they are on marriage); and if each
partner has a minority shareholding in an unquoted company but the two added
together form a majority holding, the valuation – and potential Inheritance Tax
liability – may increase considerably.
Other gifts exempt both as lifetime transfers and on death

Given that the following are exempt from Inheritance Tax on death, there is
no tax benefit to be gained from making them during an individual’s lifetime.
If Inheritance Tax is the only consideration, it is wiser to make gifts which are
exempt during one’s lifetime only – the small gifts exemption, for example –
and leave the following in the will.
Gifts to charities which either are registered or operate within the UK are exempt
from Inheritance Tax.

Gifts to political parties are exempt if the party had two Members of Parlia-
ment elected at the last General Election, or one Member of Parliament and a
total of 150,000 votes polled.
Gifts to numerous national bodies are exempt. They include the National Trust,
the National Gallery, the British Museum, a health service body and any govern-
ment department.
Reliefs
So far in this chapter we have looked at various ways of reducing Inheritance
Tax by making gifts largely of personal assets. There are two reliefs which relate
specifically to businesses and provide significant opportunities for tax planning:
business property relief and agricultural property relief.
Business property relief

Business property relief (BPR) reduces the value of business property in the
death estate and in lifetime transfers. In most cases, provided that certain condi-
tions are met, the value is reduced by 100% – in other words, no Inheritance
Tax is payable.
The principal classes of business property are:
• A sole trader’s business, or a partner’s share in a partnership (100%

relief).
• Shares in an unquoted company (100% relief).
• Shares in a quoted company controlled by the transferor (50% relief).
• Land and buildings or plant and machinery owned by the transferor

and used in the transferor’s business or in a company which the
transferor controls (50% relief).
It is important that businesses must be trading. The definition of a trading

company is more relaxed than in other areas (for example, holdover relief from
Capital Gains Tax, which requires that less than 20% of the net worth of a
company be made up of investments – see Chapter 7). As long as a business
is predominantly trading and does not hold investments which are worth more
than half its value, it will qualify for BPR. It is important to take this into account
when planning for Inheritance Tax, as the tax saving can be significant.

Although furnished holiday lettings qualify as a trade for Income Tax and Capital
Gains Tax purposes – for example, they are a business asset for Capital Gains
Tax taper relief – they do not qualify for BPR.
There is a minimum ownership period of two years. Shares must have been
owned for two years, and other assets must have been used in the business
for two years.
There is a relaxation of the two-year rule. If the shares or assets have been owned
for less than two years but they replaced other property which would have met
the criteria for BPR, they will qualify provided that the combined ownership
period is at least two out of the last five years before the transfer.
EXAMPLE
Mrs Warwick owns a building which she uses in a company controlled
by her between 1 January 2007 and 31 December 2007. She sells the
building and buys a replacement on 1 June 2008.
In order to claim BPR on the replacement building, she must own it at least
until 1 June 2009 before transferring it.
BPR is given automatically on property which forms part of an individual’s estate.

If the property is transferred during an individual’s lifetime, it will be a potentially
exempt transfer and will be exempt from Inheritance Tax if the transferor survives
for seven years. If the transferor dies within seven years, there will potentially
be a charge to Inheritance Tax, and BPR can then apply. There is, however, an
important condition: the transferee must still own the property at the
transferor’s death. If the property has been sold on in the meantime, or even
if it is the subject of a binding contract for sale, BPR will not apply. It is important
to make the transferee aware of this condition, as the potential Inheritance Tax
bill could be significant.

EXAMPLE
Mr Alton has an estate of £450,000 which includes shares in an unquoted
company valued at £150,000. He dies on 1 January 2010 having made a
potentially exempt transfer of £50,000 on 1 January 2008.
£ £
Cumulative total brought forward

(after annual exemptions) 44,000
Estate 450,000
Less BPR (150,000)
300,000
344,000
Inheritance Tax:
£325,000 at nil
£19,000 at 40% 7,600
Agricultural property relief

Less common than business property relief, agricultural property relief (APR)
nevertheless deserves a mention. In principle it operates in the same way as
business property relief, but it applies to agricultural land or pasture, including
buildings used in connection with the rearing of livestock or fish, farm build-
ings, stud farms and shares in a farming company. From 22 April 2009 it applies
to such land anywhere within the European Economic Area.
Relief is usually given at 100% of the agricultural value, provided that the trans-
feror occupied the property for the two years prior to the transfer, or owned
it for seven years while it was in agricultural use. The agricultural value is not
necessarily the value of the land, but the value it would carry if there were a
covenant restricting it to agricultural use.
Taxpayers frequently confuse Capital Gains Tax and Inheritance Tax and assume
that private residences are exempt from Inheritance Tax. This is not usually the
case. However, the APR provisions often result in a farmhouse becoming exempt.
Farmers who wish to retire from farming should plan carefully if they wish to

minimise Inheritance Tax. If they sell the land but continue to live in the house,
APR will be lost because it is no longer being used for agricultural purposes.
The same will apply if they rent the farm out and continue to live in the house.
It may be more beneficial to continue farming but enter into an arrangement
with a subcontractor.
Domicile
Domicile was defined for Income Tax purposes in Chapter 4. Individuals
domiciled in the UK are liable to Inheritance Tax on lifetime and death trans-
fers of property situated anywhere in the world.
The definition of domicile for Inheritance Tax purposes, however, goes further
than for Income Tax. Individuals who have been domiciled in the UK at any
time during the last three years before a transfer are treated for Inheritance
Tax purposes as if they were domiciled at the time of transfer. Additionally, an
individual who has been UK-resident for at least 17 of the last 20 tax years ending
with the year of transfer is also treated as UK-domiciled for Inheritance Tax
purposes.
An individual who is not UK-domiciled is liable to Inheritance Tax only on UK

property. This includes bank accounts in the UK, shares registered in the UK
and life policies payable in the UK. Becoming non-domiciled will therefore not
affect the Inheritance Tax treatment of these assets. An individual becoming
non-domiciled who wishes to transfer non-UK property, however, should wait
until at least three tax years have passed since becoming non-resident. The trans-
fers will then fall outside the scope of UK Inheritance Tax – although they may
be taxed in the new country of domicile.
In certain circumstances, Inheritance Tax may be payable in two countries –

for example, if an individual is domiciled elsewhere but has property in the UK.
In most cases, double taxation agreements exist, and even if they do not in a
particular case, a credit for the foreign tax may be allowed against the UK Inher-
itance Tax liability.
The £55,000 limit on transfers to a non-domiciled spouse could create problems

and opportunities. A couple retiring abroad will find that any transfers
between them – even of UK property – will be exempt from Inheritance Tax
but only to the extent of £55,000. To avoid this situation, transfers of property
should be made either before they leave the UK or in the first three years after

they leave, when they will still both be treated as UK-domiciled for Inheritance
Tax purposes.
Transferred assets are not only exempt from Inheritance Tax but may also be
exempt from Capital Gains Tax if only one spouse is non-domiciled. The asset
can be gifted from a UK-domiciled spouse to a non-domiciled spouse, transferred
out of the UK and then sold. This is because individuals who are not domiciled
in the UK are taxed only on gains on assets situated in the UK. Gains on assets
situated overseas are taxed only if the proceeds are remitted to the UK.
Interaction with Capital Gains Tax

The death estate is not subject to Capital Gains Tax. This is just as well, as legatees
would otherwise be hit with both Capital Gains Tax and Inheritance Tax. This
rule is extended so that transfers made donatio mortis causa – in contempla-
tion of death, usually when the transferor is on the death-bed – are treated in
the same way as death transfers.
Legatees are deemed to have acquired the asset at its market value at the date
of death, which is important for the future computation of Capital Gains Tax.
Unfortunately, lifetime transfers may be subject to both Capital Gains Tax (the
disposal proceeds of a gift being treated as market value) and Inheritance Tax.
If the resultant chargeable gains fall below the annual exemption of £10,100
for Capital Gains Tax, this should not be a problem. By using the annual exemp-
tion and making only small gifts, both taxes can be avoided.
As outlined at Chapter 7, gifts of certain assets can qualify for holdover relief,
whereby the chargeable gain at the time of the gift is deferred and rolled into
the deemed cost to the donee. If the transferor subsequently dies within seven
years, this may create an Inheritance Tax charge. The donee may reduce any
chargeable gain on the subsequent sale of the asset by any Inheritance Tax attrib-
utable to the asset.

Chapter 9
Trusts
Interest in possession trusts
Discretionary trusts
Accumulation and maintenance trusts
Charitable trusts
Overseas trusts
Business Property Relief and trusts
Comparison of trusts
Chapter 9
Trusts
An individual who wishes to give away ownership of assets, including money,

but still control how those assets are used will often place them into a trust. If
handled properly, a trust can be an effective means of reducing Inheritance Tax.
Apart from certain tax advantages, trusts are attractive to wealthy families
wishing to protect assets from large divorce settlements which deplete assets.
It was reported in July 2006 that a family which has occupied an estate in North
Wales over twenty generations since the fifteenth century will be forced to sell
the property following a £1.5 million divorce settlement. Alternatively, the
individual to whom the family wishes to make gifts may not be good at handling
money, and so the family wishes to retain control over that individual’s access
to the money.
Three conditions must be met when a trust is set up: there must be an inten-
tion to create a trust; the trust must own clearly-defined property; and the
beneficiaries must be clearly identified. The settlor is the person who gives the
assets to the trust, the trustees are the legal owners of the trust’s assets, and
the beneficiaries are those who may share the property and any income arising
from it.
This chapter focuses on the different types of trust available and the tax advan-
tages and disadvantages of each.
Interest in possession trusts

Interest in possession trusts are also known as life interest or fixed interest trusts.
Property remains in the trust and the beneficiaries have the right to receive
the income earned or to use the assets. At a future date, or once a future event
has occurred, the assets are distributed to the persons who hold a reversionary
interest. These are the remaindermen.
For example, a man wishing to ensure that his wife is provided for if he prede-
ceases her but wanting his assets to pass to his children on her subsequent
death (which they might not if she were to re-marry) should set up an interest
in possession trust.

9 TRUSTS
Interest in possession trusts are less flexible than discretionary trusts and accumu-
lation and maintenance trusts, and individuals wishing to give assets to children
may find an accumulation and maintenance trust more suitable. The popularity
of interest in possession trusts has waned because the favourable Capital Gains
Tax treatment was removed in 1998.
Tax treatment
Before 22 March 2006, a gift to an interest in possession trust was a potentially
exempt transfer and there was therefore no Inheritance Tax if the settlor survived
for seven years (see Chapter 8). From 22 March 2006, gifts to an interest in posses-
sion trust are treated as chargeable lifetime transfers in the same way as transfers
to a discretionary trust (see below). The ten-year charge which previously applied
only to discretionary trusts (see below) will now apply also to interest in posses-
sion trusts. Trusts set up for children under 18 or for disabled persons are not
affected, and transfers to such trusts will continue to be potentially exempt trans-
fers, nor will there be a ten-year charge.
For Capital Gains Tax purposes, the usual rules for gifts apply: broadly, gifts
are subject to Capital Gains Tax as if they were a transfer at market value, but
holdover relief may be available (see Chapter 7). Gifts of money are never subject
to Capital Gains Tax, nor are transfers of property which has been the principal
private residence throughout its ownership, nor transfers on death.
Any income is due to the beneficiaries, either being paid to them direct or to
the trust first. Income earned by the trust is taxed in the same way as Income
Tax on an individual, except that there is no higher rate. So there is no extra
tax on dividends and interest (which are received net of Income Tax), and any
other income such as property rental income is taxed at the basic rate of 20%.
Income paid out of the trust to beneficiaries is taxed on the beneficiaries at their
normal rates. So dividends and interest are paid net and other income is paid
with basic rate tax at 20% already deducted. Higher rate taxpayers will have
an additional liability of 22.5% on the grossed-up dividends, and 20% on the
grossed-up interest and grossed-up other income. There is a refund for non-
taxpayers on interest and on other income, but not on dividends.
When trust property is disposed of, a chargeable gain may arise. Until 1998,
Capital Gains Tax was payable by interest in possession trusts at the basic rate,
but this provided a useful loophole for higher rate taxpayers and the loophole
was closed. Now, interest in possession trusts are liable to Capital Gains Tax
in exactly the same way as other trusts.

An annual exemption is available for Capital Gains Tax purposes and this is
usually at half the amount applicable to an individual. So in 2009/10 it is £5,050.
The annual exemption is reduced if the same settlor puts assets into more than
one trust, in which case the annual exemption of £5,050 is divided by the number
of such trusts subject to a maximum of five. Thus, if the settlor has made eight
settlements, the annual exemption will still be £631.
Any gains above the annual exemption are taxed at 18%. All of this is the same
as for other types of trust.
The question often arises as to whether assets should be transferred to the benefi-
ciaries and holdover relief claimed. The beneficiaries may have unused annual
exemptions or capital losses which would lead to more favourable Capital Gains
Tax treatment.
When the beneficiary dies or that beneficiary’s interest in possession comes

to an end, the relevant share of the property will pass either to other benefici-
aries or to the remainderman. The beneficiary thus makes a transfer which will
be part of the death estate. If the event happens in the beneficiary’s lifetime,
there is a potentially exempt transfer and also a disposal for Capital Gains Tax
purposes, depending on the type of property involved.
Occasionally the remainderman comes into possession of trust property but

does not need it and wishes to pay it to another party – most commonly children.
This disposal is exempt from Inheritance Tax and Capital Gains Tax.
Discretionary trusts
Discretionary trusts are very flexible. Income can be accumulated within the
trust to be paid out at a later date, or it can be paid out at the discretion of the
trustees. Usually there is more than one beneficiary, and beneficiaries need not
have been born when the trust is set up – for example, the beneficiaries may
simply be stated as children or grandchildren.
The advantage of a discretionary trust is that the beneficiaries or their entitle-

ments can be altered. For example, individuals wishing to provide for their
children, who themselves currently have varying financial circumstances, may
want to give the trustees discretion to make payments to the children as they
see fit. The individual may specify that, on a certain date, the assets will pass
to the beneficiaries, and the trust will then cease to exist.

9 TRUSTS
Tax treatment
A transfer into a discretionary trust is a chargeable lifetime transfer as explained
in Chapter 8, and Inheritance Tax at 20% is payable if the total of such trans-
fers in the past seven years exceeds the nil rate band (currently £325,000). The
annual exemption of £3,000 may also apply. There may be a Capital Gains Tax
liability, though holdover relief may apply (see Chapter 7). The assets trans-
ferred need not be business assets in order to qualify for holdover relief.
Discretionary trusts attract a ten-year charge, which is in many ways similar

to the wealth tax imposed in some countries on individuals. This is charged
on the tenth anniversary of the setting up of the trust and is repeated every
ten years. Tax is charged on the value of the trust at a maximum of 6%. In practice
the rate will usually be the maximum only if the settlor at the date of settle-
ment had already used the nil rate band in full by making other chargeable
transfers in the previous seven years (the nil rate band used is the one which
applies in the year of charge, not the year of settlement). Distributions out of
the trust in the last ten years are added to the total of other chargeable trans-
fers in deciding whether the nil rate band has been breached. If it has not, the
rate will be lower and is calculated at 30% of the ‘effective Inheritance Tax rate’.
There is also an exit charge on distributions out of a discretionary trust, or when

the trust ends. Broadly, the tax rate is the appropriate rate for the ten-year charge
multiplied by 1/40 for each period of three months which has elapsed since the
previous charge. If the distributions occur in the first ten years, the calcula-
tion is broadly similar to that for the first ten-year charge, with the tax rate
again based on 1/40 for each complete quarter.
If distributions are planned around the ten-year mark, advice should be taken
as to whether to make the distributions before or after the ten-year charge falls
due. This will vary according to circumstances.
Income Tax rates on income received by the trust are punitive compared to
interest in possession trusts and have become even more so since April 2004.
All income is liable to Income Tax at the higher rate (32.5% for gross dividends,
40% for all other income). Previously it was taxed at 34%. However, since 6
April 2005 there has been a basic rate band, which has been £1,000 since 2006/07.
All income falling within this band is taxed at the same rate as for interest in
possession trusts, and the band is used against income taxed at 20% first, then
against interest and finally against dividends.

From 2010/11, the Income Tax rate will rise to 50% on income other than
dividends, and 42.5% on dividend income. This is in line with income for individ-
uals with earnings above £150,000.
The Capital Gains Tax position of discretionary trusts is exactly the same as
for interest in possession trusts.
Distributions out of a discretionary trust are paid net of Income Tax at 40%,
which has the beauty of simplicity. A beneficiary receiving £600 is issued with
a tax certificate for a gross amount of £1,000, and taxpayers below the higher
rate bracket can reclaim the excess Income Tax.
Interest in possession trust or discretionary trust?

If there are elderly beneficiaries, a discretionary trust may be the more suitable
vehicle. This is because trust property will not be deemed part of their death
estate. Beneficiaries of an interest in possession trust, by contrast, will have
trust property added to their estate when they die.
The settlor of a trust can obtain holdover relief when he makes a transfer into
the trust.
However, the higher Income Tax rates need also to be taken into account, The
Inheritance Tax advantage on transfers to an interest in possession trust has
been removed in most cases since 22 March 2006 (see above).
Accumulation and maintenance trusts

Accumulation and maintenance trusts have the same characteristics as discre-
tionary trusts but with the following restrictions:
• At least one beneficiary must become entitled to the property, or to

an income from it, on reaching the age of 25.
• Income must be accumulated, except that it can be paid out for

maintenance, education or another benefit of the beneficiaries.
• There is a maximum trust life of 25 years unless all the beneficiaries

are grandchildren of a common grandparent.
• There must be at least one living beneficiary when the trust is created.

9 TRUSTS
Tax position
Accumulation and maintenance trusts are, strictly speaking, discretionary trusts.
The more favourable Inheritance Tax treatment was largely negated from 22
March 2006, and transfers to accumulation and maintenance trusts are now
in most cases chargeable lifetime transfers in the same way as transfers to discre-
tionary trusts (see above). There is also a ten-year charge, as for discretionary
trusts. As for interest in possession trusts, trusts set up for children under 18
or for disabled persons are not affected, and transfers to such trusts will continue
to be potentially exempt transfers, nor will there be a ten-year charge.
As with interest in possession trusts, the new rules catch trusts set up on or
after 22 March 2006 from the outset.
It follows that the only way to avoid a transfer being a chargeable lifetime transfer
is to allow children control of assets at the age of 18, which could be seen as
irresponsible. Many families will be forced, in order to avoid Inheritance Tax,
to make outright gifts when young persons are not of sufficient maturity to handle
the money, and they could consequently be deflected from their studies.
Income Tax and Capital Gains Tax on accumulation and maintenance trusts are
broadly the same as for discretionary trusts, except that if a beneficiary
becomes entitled to income, that share of the trust’s income is taxed as if it were
an interest in possession trust. The settlor may therefore be tempted to put money
into an accumulation and maintenance trust for the benefit of children and have
interest paid out to them; however, any income of the trust exceeding £100 a
year paid out to an unmarried child under the age of 18 is treated as if it were
the settlor’s own income. It is therefore better to leave it in the trust to accumu-
late. The tax advantage of paying a sum of money into an accumulation and
maintenance trust rather than leaving it in one’s own bank account is not as
great as it was since the trust rate was increased from 34% to 40%, but the £1,000
basic rate band is now available, which potentially saves up to £225 a year.
Charitable trusts
Trusts which exist for charitable purposes only, which include poverty,
religion, education and other community purposes, can register with the Charity
Commission as charitable trusts. There is a ready-made scheme offered by the
Charities Aid Foundation. As would be expected, trust monies must not be used
for private benefit.

The settlor is able to make payments into the Trust via the Gift Aid scheme (see
Chapter 4). Income, including most trading income (the exception being a trade
which is not exercised in the course of carrying out a primary purpose of the
charity) is exempt from Income Tax, and gains are not subject to Capital Gains
Tax if they are applied for charitable purposes. However, the trustees will be
liable to immediate Capital Gains Tax if the trust ceases to be a charitable trust.
Overseas trusts
If a trust is UK-resident, it is liable to Income Tax on its worldwide income. There
is an advantage in having an overseas trust because the trustees are then liable
to Income Tax only on their UK income. Residence status depends on the
residence of the trustees. If all of the trustees are either resident or non-resident,
the residence status of the trust follows this. If some are resident and some are
not, the residence status of the trust depends on the status of the settlor. If the
settlor was resident, ordinarily resident or domiciled in the UK at the time the
settlement was made (or, if the settlement was created on the settlor’s death,
the settlor was resident, ordinarily resident or UK-domiciled immediately before
death), the trust is treated as resident for both Income Tax and Capital Gains
Tax purposes; otherwise it is not resident.
A word of warning – if a trust becomes non-resident, a Capital Gains Tax charge

may arise, as the trustees are then deemed to have disposed of the trust’s assets
and immediately re-acquired them at market value.
Business Property Relief and trusts

As outlined above, the changes introduced from 22 March 2006 have the effect
that transfers to most trusts are now chargeable lifetime transfers, which means
that to the extent that they exceed £325,000, they will attract Inheritance Tax
at 20%. The ten-year charge now applies to most trusts.
Business Property Relief (see Chapter 8) can, if applied with foresight, signif-
icantly reduce chargeable lifetime transfers and the ten-year charge. Many
advisors are recommending that transfers into the trust are made in the form
of shares listed on the Alternative Investment Market (AIM). AIM shares are
unquoted for the purposes of Inheritance Tax, provided that they are not quoted

9 TRUSTS
on a recognised Stock Exchange elsewhere in the world, and they therefore

attract Business Property Relief at 100%. Once the trusts have been set up, the
shares can be sold and the converted into cash, which is of course much less
volatile. The shares must have been owned for two years prior to the transfer
in order to qualify for the relief, which may be a drawback in the case of volatile
shares. There is little point in saving tax at 20% if the value of the shares has
fallen by more than that amount.
Likewise, if AIM shares are held for at least two years prior to the ten-year charge,
Business Property Relief will be available and will reduce the amount of trust
property subject to the charge.
Agricultural Property Relief (see Chapter 8) can also be used to reduce the charge-
able transfer and ten-year charge.

Comparison of trusts
The following table compares the salient features of the three principal types
of trust and their tax treatments.
Interest in possession Discretionary Accumulation &

maintenance
Beneficiaries’ right to Yes At trustees’ discretion At least one

receive income beneficiary must
receive property or
income at age 25
Income must be
accumulated except
that it can be paid out
for education and
maintenance
Inheritance Tax on Chargeable lifetime Chargeable lifetime Chargeable lifetime

settlement into trust transfer with limited transfer transfer with limited
exceptions exceptions
Income Tax rates on 10% dividends First £1,000 as for First £1,000 as for
trust income 20% savings interest in possession interest in possession
20% other income Otherwise 40% If a beneficiary is

(32.5% for dividends) entitled to income, that
part is as for interest in
possession
Otherwise 40%
(32.5% for dividends)
Income Tax rates Paid net of tax at 10% Paid net of tax at 40% Paid net of tax at 40%
–status of payments to or 20%
beneficiaries
Capital Gains Tax on Annual exemption Annual exemption Annual exemption

disposals of trust applies applies applies
assets Rate 40% Rate 40% Rate 40%
Taper relief Taper relief Taper relief
Death of beneficiary Property forms part of No Inheritance Tax No Inheritance Tax

death estate for
Inheritance Tax
Ten-year charge Yes with limited Yes Yes with limited

exceptions exceptions

Chapter 10
Value Added Tax
Registration
Land and buildings
Special schemes
Chapter 10
Value Added Tax
Registration
Businesses with an annual taxable turnover of over £68,000, or an expected
turnover of £68,000 in the next 30 days, must register for VAT. Businesses below
this threshold have the option of registering voluntarily, provided that they make
at least some taxable supplies. Taxable supplies include zero-rated supplies such
as books, most food, passenger transport, children’s clothing and construc-
tion of new residential or charitable buildings. Exempt supplies are not taxable
supplies, and a business making only exempt supplies cannot usually register
for VAT. Exempt supplies include insurance, education, finance, postal services
and many transactions in land (but see below).
Voluntary registration – for and against

A business which is VAT-registered is able to recover its input tax to the extent
that it makes taxable supplies. A bookshop makes zero-rated supplies, for
example, but may incur input tax on some of its costs, such as stationery,
computer equipment and maybe the rent it pays to its landlord. It would normally
be in the interests of such a business to register for VAT in order to obtain a
repayment of this input tax.
Another advantage is the image of the business, which will often be enhanced
by the existence of a VAT registration. Suppliers and customers may be less
reticent in dealing with a business which is VAT-registered. A final advantage
is the discipline which registration imposes on the business, forcing it to keep
its books up to date at least once a quarter.
Businesses with customers who are not VAT-registered – whether these

customers are individuals or small businesses – should think carefully before
registering voluntarily. In the case of the bookshop mentioned above, it would
make no difference because the supplies are zero-rated. But a plumber might
predominantly be carrying out work for private individuals, and his prices would
effectively rise by 15%. If all of his customers were themselves VAT-registered,
they would be in a position to reclaim the VAT which he charged, and in this
case there would be a good argument for voluntary registration.

1 0 VA L U E A D D E D TA X
Paperwork and penalties are also arguments against voluntary registration. A

business which submits late Returns or does not make timely VAT payments
is liable to penalties whether it registered voluntarily or compulsorily.
Deregistration
In many cases a business has no choice but to deregister, for example when it
has ceased to make taxable supplies. Businesses who can satisfy Revenue &
Customs that they will fall below the deregistration threshold (currently £66,000)
in the next twelve months have the option of deregistering. The same consid-
erations apply as for voluntary registration.
Timing may be an issue, because the business will be liable for VAT on any
tangible assets on hand at the date of deregistration, including stock, machinery
and fixtures. Assets on which the business incurred no input tax on purchase
can be excluded. The relevant assets are valued at market value and the business
must account for output tax at 15%. If the output tax thus calculated falls below
£1,000, the whole amount can be ignored.
EXAMPLE
Garway Ltd is a VAT-registered retail outlet with an expected turnover
in the next twelve months of £55,000. It wishes to deregister and has assets
on hand with the following VAT-inclusive market values:
£
Stock 6,000
Computers 2,000
Machinery bought from a non-registered supplier 1,000
It estimates that in a week’s time, its stock will have fallen to £3,000.
Should it delay its deregistration?
The machinery is ignored because no VAT was reclaimed on purchase.
The total of the stock and computers is £8,000, on which the VAT would be £1,043
(using the VAT fraction of 3/23).
However, in a week’s time, the total will be £5,000, on which the VAT would
be £652. The VAT could therefore be ignored.

Land and buildings

A business which owns property for use in a trade will be able to reclaim all
of the input tax it incurs on upkeep, provided that its trade consists of making
exclusively taxable supplies. Businesses which own property and rent it out as
a landlord face a different situation.
Rental – and, in most cases, sale – of land and buildings is exempt from VAT.
So a landlord will not charge VAT on the rent to the tenant. The consequence
of this is that any input tax incurred on upkeep, such as painting, re-roofing,
re-wiring and plumbing, will be irrecoverable.
There is a solution to this. The landlord may opt to tax the property, which is
done on a property by property basis. Once this has been done, the landlord
must charge VAT on all future supplies from this property, be they rental or
sales. The landlord is then able to recover any input tax on upkeep. Options to
tax are usually made internally and simply notified to Revenue & Customs, though
in the case of property from which exempt supplies have previously been made,
permission may be required.
The downside is that, once an option to tax has been made, it is not possible
to revoke it for 20 years, even by selling and repurchasing the property. So the
landlord needs to consider not only who the current tenant is, but also who
may wish to rent the property in the future. A property with an option to tax
will make no difference to a VAT-registered tenant, but for one who is not regis-
tered, the rent will increase by 15%.
A landlord renting a property to a VAT-registered tenant but considering

changing the use of the property to residential use in the future can safely opt
to tax. This is because the option to tax is disapplied if the building is used for
residential purposes.
Opting to tax can also have a beneficial effect on the recovery of input tax on
general overheads. A business making a mixture of taxable and exempt supplies
is known as ‘partially exempt’ and its input tax recovery on general overheads
is restricted to the percentage of its supplies which are taxable – for example,
a landlord with taxable supplies of £600,000 and exempt supplies of £400,000,
and input tax on general overheads of £10,000, could reclaim 60% of its input
tax on general overheads, which would be £6,000. If the landlord were to opt
to tax more and more properties, this percentage would rise and its input tax
recovery would be greater.

Special schemes
Cash accounting
A business with an expected taxable turnover below £1,350,000 per annum may
join the cash accounting scheme. Although in the long run this does not save
any VAT, it will for most businesses help with their cash flow.
Output tax is paid over only when cash has been received. Likewise, input tax
can be recovered only when the invoice has been settled. The great advantage
is that, with standard VAT accounting, it is necessary to wait six months from
the due date of payment before claiming bad debt relief. With cash accounting,
bad debt relief is automatic because the output tax is never paid over.
Businesses which usually receive VAT repayments when submitting their VAT
Return – for example those making mainly zero-rated supplies including exports
and sales of goods to other European Union countries, and those making a loss
– will find that cash accounting actually produces a cash flow disadvantage.
They should therefore not opt for it.
Second-hand goods scheme

By using the second-hand goods scheme, a business may opt to charge VAT
only on its profit margin if the sales meet certain criteria. This significantly reduces
the VAT and is an attractive scheme for motor traders, whose customers cannot
generally reclaim the VAT they pay at the point of sale.
A sale of goods qualifies only if no VAT was charged when the goods were
purchased. Motor dealers will invariably have purchased second-hand vehicles
from private individuals, in which case there will have been no VAT. No VAT
invoice must be produced on sale. However, when the dealer purchases the
goods from a private individual or unregistered trader, he must make out and
retain a purchase invoice with certain details specified by Revenue & Customs.
The scheme is not compulsory, and even goods which are eligible may be treated
normally and VAT charged on the full sale price.

Flat rate scheme

Businesses with an annual taxable turnover of up to £150,000 are eligible to
join the flat rate scheme. The aim is to simplify VAT accounting, but businesses
may find that the scheme leaves them with cash in hand.
The business charges VAT to its customers in the normal way. However, when
it comes to complete its VAT Return, it does not reclaim any input tax except
on the purchase of capital items costing over £2,000. It simply applies a given
percentage to its gross sales, including exempt supplies, and pays this over to
Revenue & Customs.
The given percentage varies according to the type of business. For example,
it is 11.5% for computer consultancy, 8.5% for photography and 5.5% for
farming. Note that these are temporary rates which will apply until 31
December 2009. When the standard rate of VAT reverts to 17.5% on 1 January
2010, the flat rates will increase.
EXAMPLE
Miss Newland estimates that she will make standard-rated supplies of
£50,000 plus VAT and exempt supplies of £10,000 in the year ended 30
June 2010. She will incur input tax of £4,000, of which £3,000 will be recov-
erable under the normal rules.
She is considering changing to the flat-rate scheme and the relevant

percentage would be 6.5%. Would this be of benefit to her?
£ £
Normal rules
Output tax £50,000 x 15% 7,500
Input tax (3,000)
Payable to Revenue & Customs 4,500
Flat rate scheme

Standard-rated supplies (gross) 57,500
Exempt supplies 10,000
67,500
Payable to Revenue & Customs:

£67,500 x 6.5% 4,388
The flat rate scheme would save VAT of £112 in the year.

The scheme cannot be used alongside the cash accounting or second-hand goods
schemes.
Not all small businesses would benefit from the scheme. Whether it will be worth-
while will depend on the relevant percentage for this type of business and the
relative values of outputs and inputs. As in all areas covered in these ten chapters,
advice should be taken before making the decision.

Blank
Appendix
Income Tax – personal and married couple’s allowances
Income Tax – rates and bands
Gift Aid – limit on benefit received by donor
Cash equivalent of company car
Corporation Tax – rates and bands
Capital Gains Tax – annual exemption
Capital Gains Tax – taper relief
Inheritance Tax – nil rate band

Appendix
Income Tax – personal and married

couple’s allowances
2008/09 2009/10
£ £
Personal allowance 6,035 6,475
Personal allowance for people 9,030 9,490

aged 65-74 (1)
Personal allowance for people 9,180 9,640

aged 75 and over (1)
Married couple’s allowance 6,535 Not applicable

(born before 6th April 1935 but
aged under 75) (1) (2) (3)
Married couple’s allowance 6,625 6,965

where one spouse is 75 or over
(1) (2)
Income limit for age-related 21,800 22,900

allowances
Minimum married couple’s 2,540 2,670

allowance
1) These allowances reduce where the income is above the income limit
by £1 for every £2 of income above the limit. They will never be less
than the basic personal allowance or minimum amount of married
couple’s allowance.
2) Tax relief for the married couple’s allowance is given at the rate of 10%.
3) In the 2009/10 tax year all married couple’s allowance claimants in

this category will become 75 or over at some point during the year
and will therefore be entitled to claim the higher amount of the
allowance – for those aged 75 or over.

APPENDIX
Income Tax – rates and bands

2008/09 2009/10
£ £
Starting rate for savings 10% 0 – 2,320 0 – 2,440
Basic rate 20% 0 – 34,800 0 – 37,400
Higher rate 40% Over 34,800 Over 37,400
There is a 10% starting rate for savings income only. If non-savings income is
above this limit then the 10% starting rate for savings will not apply.
Gift Aid – limit on benefit received by donor

Amount of gift Limit on benefit
£ £
Up to £100 25% of gift
£100 to £1,000 £25
Over £1,000 2.5% of gift, maximum £250

Cash equivalent of company car

2008/09 and 2009/10
CO2 emissions (g/km) Petrol Diesel

(rounded down)
% of list price
Up to 120 10 13
121 to 135 15 18
140 16 19
145 17 20
150 18 21
155 19 22
160 20 23
165 21 24
170 22 25
175 23 26
180 24 27
185 25 28
190 26 29
195 27 30
200 28 31
205 29 32
210 30 33
215 31 34
220 32 35
225 33 35
230 34 35
235 and over 35 35

APPENDIX
Corporation Tax – rates and bands
Rate Year starting Year starting

1 April 2008 1 April 2009
Small companies rate 21% £0 – £300,000 £0 – £300,000
Marginal relief £300,001 – £1,500,000 £300,001 – £1,500,000
Marginal relief fraction 7/400 7/400
Full rate 28% £1,500,001 or more £1,500,001 or more
Capital Gains Tax – annual exemption
2008/09 2009/10
£ £
Individuals 9,600 10,100
Trustees 4,800 9,600

Capital Gains Tax – taper relief
Number of complete years Business assets Non-business assets

% of gain chargeable % of gain chargeable
Disposal from 5 April 2002 Disposal from 5 April 1998
1 50 100
2 25 100
3 25 95
4 25 90
5 25 85
6 25 80
7 25 75
8 25 70
9 25 65
10 25 60
For non-business assets owned on 17 March 1998, the period of ownership is

increased by one year (the ‘bonus year’).
Taper relief applies to disposals by individuals and trusts from 6 April 1998 to
5 April 2008.
Inheritance Tax – nil rate band

2008/09 £312,000
2009/10 £325,000

Other specially commissioned reports
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BUSINESS AND COMMERCIAL LAW
Commercial Contracts: Drafting Email: Legal issues 2008 NEW EDITION
techniques and precedents Singleton, Susan £125

Ribeiro, Robert £169
ISBN: 978-185418630-0
ISBN: 978-185418271-5
What are the chances of either you or your employ-
This report takes you through the drafting process ees breaking the law? This report explains clearly:
giving practical guidance from start to finish. With • How to establish a sensible policy and whether
up-to-the-minute information on key cases and or not you are entitled to insist on it as binding
materials and in-depth analysis of the important
• The degree to which you may lawfully moni-
drafting issues, it is a must for all those who need
tor your employees’ e-mail and Internet use
to draft commercial contracts.
• The implications of the Regulation of Investi-
gatory Powers Act 2000 and the Electronic
Commercial Litigation: Damages and Communications Act 2000
other remedies for breach of contract
• How the Data Protection Act 1998 affects the
Ribeiro, Robert £169 degree to which you can monitor your staff
ISBN: 978-185418397-2 • What you need to watch for in the Human
Rights Act 1998 and TUC guidelines.
A great deal has changed in the last few years...
a new emphasis on claims for damages such as Freedom of Information Act
loss of business, opportunity, chance, use and data
in Practice 2008 NEW EDITION
and recent landmark cases have altered the
ground-rules. Completely updated, this report Singleton, Susan £125
includes accounts of all the most recent important ISBN: 978-185418632-4

cases and highlights significant changes in the way
The FOI Act gives companies and individuals
that the courts now assess damages.
important powers to request information from
public bodies. Are you equipped to take advantage
Corporate Governance and to protect yourself?
Martin, David £85
ISBN: 978-185418354-5 International Commercial Agreements
This report is a clear, accessible and jargon-free Attree, Rebecca £95
analysis of the practical application of Corporate ISBN: 978-185418286-9

Governance. With short case studies to illustrate
A major report on recent changes to the law and
legal requirements, the author guides the reader
their commercial implications and possibilities. The
through all aspects of the Corporate Governance
report explains the principles and techniques of
programme, concentrating specifically on its use
successful international negotiation and provides
by organisations who are not required to adopt
a valuable insight into the commercial points to
it, such as listed PLCs.
be considered as a result of the laws relating to:
pre-contract, private international law, resolving
disputes (including alternative methods, such as
mediation), competition law, drafting common
For full details of any title, and to view clauses and contracting electronically. It also
sample extracts, please visit: examines in more detail certain specific interna-
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distribution and licensing.
Insights into Successfully Managing Intellectual Property Protection
the In-house Legal Function and Enforcement
O’Meara, Barry £95 Brazell, Lorna £159
ISBN: 978-185418174-9 ISBN: 978-185418054-4
Negotiating the fault-line between private prac- Incorporating the latest developments in IP law,
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scope for conflicts of interests is greatly increased. intellectual property right available in the United
Insights into successfully managing the in-house Kingdom, describing the nature of the right itself
legal function discusses these and other issues. and explaining: How rights arise or can be
obtained, How rights can be exploited, What is
Software Contract Agreements necessary to protect rights from erosion or loss,
What actions will constitute infringement of a
Bond, Robert £80
right, under either civil (enforced by the owner)
ISBN: 978-185418146-6 or criminal (enforced by public authorities) law,
What remedies are available to the owner of the
Fully up-to-date with all changes to the law, this
right, once infringement has been proved.
report is a thorough explanation of the law com-
bined with expert guidance on negotiating and Each chapter can be read on its own for conven-
drafting the best contract for your client. ient reference, and the introduction to each chapter
also makes it clear where awareness of another
Achieving Business Excellence, Quality section may be useful.
and Performance Improvement
Chapman, Colin & Hopper, Dennis £95
Waste Management: The changing
legislative climate
ISBN: 978-185418018-6
Hand, Caroline £80
This valuable report identifies all the areas critical
ISBN: 978-185418367-5
to developing an effective performance improve-
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quality standards, benchmarking tools, self-assess- and what you need to do to stay within the law.
ment programmes and the latest performance Recent far-reaching changes to the law and prac-
improvement initiatives. tice affect everyone – commerce and industry,
central and local government and householders.
The Commercial Exploitation of
Intellectual Property Rights by Licensing Websites and the Law
DesForges, Charles £95 Singleton, Susan £95
ISBN: 978-185418285-2 ISBN: 978-185418331-6
This report will show you – whether as licensor Is your company/client website legal? Do you know
or licensee – how to identify and secure profitable what information you are required by law to put
opportunities, strategies and techniques for negoti- on it? What can you do with people’s personal data
ating the best agreement, and finally the techniques sent to your website? This report deals with all the
of successfully managing a license operation. practical legal issues which arise with websites –
both those sites which sell goods or services and
those which advertise.
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BUSINESS STRATEGY AND MANAGEMENT
A Practical Guide to Knowledge Understanding SMART Procurement

Management in the MOD
Brelade, Sue & Harman, Chris £99 Boyce, Tim £69
ISBN: 978-185418230-2 ISBN: 978-185418164-0
An expert but jargon-free guide to enable you to The main thrust of this report is on issues to do
manage the knowledge in your organisation with strategy, organisation and processes. The
successfully and to identify, gather and use that single most encouraging and exciting feature of
knowledge to maximum advantage. the SMART procurement initiative is that it
embraces the need to change the culture. There
Analyse your Business – A performance is a commitment within the high political echelon
of the MoD to make this change happen. Probably
health check
the greatest single challenge is to ensure that this
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ISBN: 978-185418170-1 changes of personality at the political and senior
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This briefing offers the tools and techniques for
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perspective and discourage the use of quick fix
ISBN: 978-185418371-2
solutions for bigger problems.
This specially commissioned report sets out what
the latest legislation says and what it means, its
Tendering & Negotiating MoD Contracts
impact on the organisation as a whole and on the
Boyce, Tim £95 IT group specifically, and how to implement an
ISBN: 978-185418276-0 effective IT governance initiative in your company.
This report aims to draw out the main principles,

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that the SPI embraces a conceptual shift in the role
ISBN: 978-185418099-5
of the MoD procurers’.
How to ensure you have a reliable system in place.
What does this ‘huge shift in thinking’ mean for
Spending money on projects automatically neces-
contractors? How exactly has the role of MoD
sitates an effective appraisal system – a way of
purchasing changed? This report covers every
deciding whether the correct decisions on invest-
aspect of competitive tendering, negotiation and
ment have been made.
contractual negotiations in this new era. There can
be few people who combine Tim Boyce’s experi-
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Boyce, Tim £95
ISBN: 978-185418257-9
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Strategy Implementation Through Surviving a Corporate Crisis:
Project Management 100 things you need to know
Grundy, Tony £99 Batchelor, Paul £80
ISBN: 978-185418250-0 ISBN: 978-185418208-1
The gap: Far too few managers know how to apply Seven out of ten organisations that experience
project management techniques to their strate- a corporate crisis go out of business within 18
gic planning. The result is often strategy that is months. This report not only covers remedial
poorly thought out and executed. action after the event but offers expert advice on
preparing every department and every key player
The answer: Strategic project management is a
of the organisation so that, should a crisis occur,
new and powerful process designed to manage
damage of every kind is limited as far as possible.
complex projects by combining traditional busi-
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Technical Aspects of Business Leases:
Overcoming the practical difficulties
Dowden, Malcolm £95
THE THOROGOOD PROMISE ISBN: 978-185418194-7

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FINANCE
Tax Planning for Businesses Trade Secrets of Business Acquisitons

and their Owners Pearson, Barrie £145
Hughes, Peter £95
ISBN: 978-185418366-8
ISBN: 978-185418334-7
In this invaluable new briefing one of the City’s most
Written for business owners and managers, this successful deal-makers distils 40 years’ experience
special briefing offers expert advice on the tax as both principal and advisor. “Losing a deal by
implications of your business decisions – guiding adopting the wrong tactics is unforgiveable” he
you in making the right business and personal writes, but it happens all too often. This briefing offers
choices for tax reduction. both professional advisors and principals the oppor-
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Trade Secrets of Business Disposals
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Pearson, Barrie £145 ensure that both deals and post-acquisition manage-
ISBN: 978-185418321-7 ment are carried out with maximum success.
If you’re like most people, you’ll only get one

chance to sell your business and to capitalise on VAT Liability and the Implications of
years of hard work and planning. You can either Commercial Property Transactions
fluff it, or make sure you get the best possible advi- Buss, Tim £149
sor and become financially secure for life, and
ISBN: 978-185418307-1
possibly very rich. This report shows you how to
make your business ‘investor-ready’ for maximum The option to tax is a major VAT planning tool but
capital return. you have got to get the detail right to take full
advantage – and getting it wrong can be very
costly. This report shows you how to plan for max-
imum advantage and avoid costly mistakes.
EMPLOYMENT LAW
Data Protection Law for NEW EDITION

THE THOROGOOD PROMISE
Employers 2008
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ISBN: 978-185418626-3
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The four-part Code of Practice under the Data Pro-
tection Act 1998 on employment and data
protection places a further burden of responsibil-
ity on employers and their advisers. The Data
Employee Sickness and Fitness
Protection Act also applies to manual data, not just
for Work: Successfully dealing with
computer data, and a tough enforcement policy
was announced in October 2002. the legal system
Howard, Gillian £95
Discrimination Law and ISBN: 978-185418281-4

Employment Issues
Many executives see employment law as an obsta-
Martin, David £55 cle course or, even worse, an opponent – but it can
ISBN: 978-185418339-2 contribute positively to keeping employees fit and
productive. This report will show you how to get
The Age Discrimination Act is billed by lawyers the best out of your employees, from recruitment
as the most significant change in employment law to retirement, while protecting yourself and your
since the 1970’s. In addition to sex and race dis- firm to the full.
crimination laws, in the last two years employers
have also had to cope with sexual orientation dis-
Employment Law Aspects of Mergers
crimination and religious discrimination. David
Martin, an expert on employment law and prac- and Acquisitions: A practical guide
tice, analyses the practical aspects of dealing Ryley, Michael £95
with each of the anti-discrimination laws. He
ISBN: 978-185418363-7
demonstrates how to ensure that paperwork and
systems comply totally with the law, and he pro- This Report will help you to understand the key
vides a range of helpful case studies to illustrate practical and legal issues, achieve consensus and
the key issues and bring them to life. involvement at all levels, understand and implement
TUPE regulations and identify the documentation
that needs to be drafted or reviewed within the con-
Effective Recruitment: A practical guide
text of a merger, acquisition or disposal.
to staying within the law
Leighton, Patricia & Proctor, Giles £85
ISBN: 978-185418303-3 For full details of any title, and to view

The ways to undertake the task continue to grow, sample extracts, please visit:
making the decision as to how best to recruit for www.thorogoodpublishing.co.uk
a given employment situation more complex.
This specialist text is responding to a number of
imperatives, including legal ones. There have
been, and are, anticipated changes that make it
essential that recruitment practitioners act both
effectively and within the law.
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Navigating Health and Safety Law: Successfully Defending Employment
Ensuring compliance and minimising risk Tribunal Cases
Pope, Chris £95 Hunt, Dennis £95
ISBN: 978-185418353-8 ISBN: 978-185418267-8
If you have already been challenged by the insurer, Sweeping changes to the way employment tribu-
inspector, or one of your workforce about the sta- nal claims are dealt with have increased the risk
tus of your health and safety this report will give of higher costs and more expensive claims. This
you a workable answer to questions like Is my health indispensable report covers all the changes and
and safety policy legally compliant? How do I avoid their implications for HR professionals.
being liable for an employees ill health arising from
previous employment? Who should carry out
safety inspections – is it my responsibility?
HR, RECRUITMENT AND TRAINING
Applying the Employment Act 2002: Enabling Beyond Empowerment

Crucial developments for employers Williams, Michael £95
and employees
ISBN: 978-185418084-1
Williams, Audrey £95
By applying the range of practical management
ISBN: 978-185418253-1 techniques detailed in this report, you can provide
The Act represents a major shift in the commer- the authority and means to empower in a way that
cial environment, with far-reaching changes for substantially reduces the dangers.
employers and employees. The consequences of
getting it wrong, for both employer and employee, Flexible Working
will be considerable – financial and otherwise. The
Williams, Audrey £95
Act affects nearly every aspect of the workplace.
ISBN: 978-185418306-4
Dismissal and Grievance Procedures Recent research shows that far too many individ-
Hunt, Dennis £95 uals, as well as firms, are unaware of flexible
working rights. How employers and employees
ISBN: 978-185418376-7 deal with them is of crucial – and increasing –
This report explains what all the regulations say importance to both. This report clarifies the law,
and what steps you need to take to operate effec- sets out the rights of employer and employee, and
tive dismissal, disciplinary and grievance offers valuable practical advice on best practice.
procedures. It covers all the requirements of the
Disputes Resolution Procedures that came into
effect in October 2004. It tells you where and when For full details of any title, and to view
the regulations apply – and what you need to do. sample extracts, please visit:
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New Ways of Working
If you are not totally satisfied and you return Jupp, Stephen £99
a publication in mint condition within 14 days
ISBN: 978-185418169-5
of receipt, we will refund the cost of the
publication, no questions asked. New ways of working examines the nature of the
work done in an organisation and seeks to opti-
mise the working practices and the whole context
in which the work takes place. It is more about pro-
How to Turn your HR Strategy moting the best ways of doing things than simple
into Reality cost driven change. Although it emphasises the
Grundy, Tony £85 importance of business and organisation, it spans
the concerns of people, property, technology,
ISBN: 978-185418183-1
community and environment.
From a diagnosis of HR issues to an analysis of
the external and internal future environment of
Power Over Stress at Work
your company and the effect on your human
resources – this is practical information aimed at Araoz, Daniel £99
HR and senior line managers. ISBN: 978-185418176-3
The HR manager can learn how to deal creatively

Internal Communications with stress from the information in this briefing
Farrant, James £95 and pass on their knowledge down the ranks. He
or she will then halt the downward spiral of dif-
ISBN: 978-185418149-7
fusing stress and produce a more positive knock-on
There is growing evidence that the organisations effect – namely to increase the productivity of the
that ‘get it right’ reap dividends in corporate entire workforce and reduce absenteeism result-
energy and enhanced performance. In these ing from this terrible illness.
organisations, internal communications have equal
status with the external communications functions.
Reviewing and Changing Contracts
This practical report will show you how internal
of Employment
communications, taken in their widest sense, can
improve the performance of organisations. Phillips, Annelise; Player, Tom & Rome, Paula £95
ISBN: 978-185418296-8
Mergers and Acquisitions: Confronting The Employment Act 2002 has raised the stakes.
the organisation and people issues Imperfect understanding of the law and poor draft-
Thomas, Mark £95 ing will now be very costly. This report will:
ISBN: 978-185418008-7 • Ensure that you have a total grip on what should
be in a contract and what should not
Why do so many mergers and acquisitions end in
• Explain step by step how to achieve changes
tears and reduced shareholder value? This report
in the contract of employment without causing
will help you to understand the key practical and
problems
legal issues, achieve consensus and involvement
at all levels, understand and implement TUPE reg- • Enable you to protect clients’ sensitive business
ulations and identify the documentation that needs information
to be drafted or reviewed. • Enhance your understanding of potential
conflict areas and your ability to manage
disputes effectively.
For full details of any title, and to view

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Trade Secrets of Using e-Learning Transforming HR
in Training Hunter, Ian and Saunders, Jane £95
Bray, Tony £95
ISBN: 978-185418361-3
ISBN: 978-185418326-2
The blue-print for the future of HR – how to deliver
Definitely not for ‘techies’, this report is practical proven value to your Board, business and col-
and jargon-free – giving you step-by-step skills and leagues. The report is based on interviews with 60
processes to enable you to design effective e-learn- HR leaders from across industry and public and
ing products with confidence. not for profit sectors. The report covers HR out-
sourcing and shared services.
MARKETING, PR AND SALES
Corporate Community Investment Insights into Understanding the

Genasi, Chris £99 Financial Media: An insider’s view
Scott, Simon £99
ISBN: 978-185418192-3
ISBN: 978-185418083-4
Supporting good causes is big business – and good
business. Corporate community investment (CCI) This briefing will help you understand the way the
is the general term for companies’ support of good financial print and broadcast media works in the
causes, and is a very fast growing area of PR and UK. It will also provide you with techniques and
marketing. guidelines on how to communicate with the finan-
cial media in the most effective way, to help you
Defending your Reputation achieve accurate and positive coverage of your
organisation and its operations.
Taylor, Simon £99
ISBN: 978-185418251-7 Lobbying and the Media: Working with

‘Buildings can be rebuilt, IT systems replaced, peo- politicians and journalists
ple can be recruited, but a reputation lost can never Burrell, Michael £99
be regained…The media will publish a story – you
may as well ensure it is your story’ Simon Taylor. ISBN: 978-185418240-1
‘News is whatever someone, somewhere, does not Lobbying is an art form rather than a science, so
want published’ William Randolph Hearst When there is inevitably an element of judgement in what
a major crisis does suddenly break, how ready will line to take. The best lobbying is always based on
you be to defend your reputation? accurate, up-to-date information and on a well-
argued case, founded on credible evidence, and
Implementing an Integrated Marketing delivered to the right audiences in the right tone
Communications Strategy of voice at the right time. Sounds simple, but it isn’t.
This expert report explains the knowledge and
Hart, Norman £99
techniques required.
ISBN: 978-185418120-6
Get ahead and stay ahead of your competition

through better integration of your marketing com-
munications. Norman Hart was an international
consultant, lecturer and author on marketing,
advertising and public relations. His books If you are not totally satisfied and you return a publication in
included The CIM Marketing Dictionary, Strate- mint condition within 14 days of receipt, we will refund the
gic Public Relations, The Practice of Advertising cost of the publication, no questions asked.
and Industrial Marketing Communications.
Managing Corporate Reputation: Strategic Customer Planning
The new currency Melkman, Alan & Simmonds, Ken £95
Dalton, John & Croft, Susan £95
ISBN: 978-185418388-0
ISBN: 978-185418272-2
This is very much a ‘how to’ report. After read-
ENRON, WORLDCOM… who next? At a time ing those parts that are relevant to your business,
when trust in corporations has plummeted to new you will be able to compile a powerful customer
depths, knowing how to manage corporate rep- plan that will work within your particular organ-
utation professionally and effectively has never isation for you. Charts, checklists and diagrams
been more crucial. This report shows you how to: throughout.
• Develop PR, brands and relationship manage-
ment as the vanguards of your corporate Strategic Planning in Public Relations
reputation Knights, Kieran £99
• Strengthen your internal as well as external
ISBN: 978-185418225-8
communications
• Improve the effective management of your Tips and techniques to aid you in a new approach
stakeholders to campaign planning. Strategic planning is a fresh
approach to PR. An approach that is fact-based
Practical Techniques for and scientific, clearly presenting the arguments for
Effective Lobbying a campaign proposal backed with evidence. This
report provides valuable tips and techniques to
Miller, Charles £95
improve your PR and campaign planning.
ISBN: 978-185418089-6
Understanding the system and the process in Successful Competitive Tendering

which it works is essential to lobbying effectively. Woodhams, Jeff £95
Uncoordinated, uncontrolled and badly planned
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A Thorogood Special Briefing

TAX PLANNING FOR

Other Titles from London EC2A 3DU

t: 020 7749 4748

Freedom of Information Act © Peter Hughes 2009

Corporate Governance prior consent in any form of

Technical Aspects of Business Leases

To my wife Jenny and, as always, to my parents for their

The author .................................................................................................viii

1 INCOME FROM COMPANIES 2

2 SAVINGS AND INVESTMENT SCHEMES 24

3 SOLE TRADERS AND PARTNERSHIP 32

4 INCOME TAX OF INDIVIDUALS 44

A THOROGOOD SPECIAL BRIEFING v

vi A THOROGOOD SPECIAL BRIEFING

10 VALUE ADDED TAX 122

A THOROGOOD SPECIAL BRIEFING vii

Peter Hughes is a Chartered Accountant. Having qualified in a vibrant Liver-

viii A THOROGOOD SPECIAL BRIEFING

This Report is aimed at owners and managers of businesses – businesses of

A THOROGOOD SPECIAL BRIEFING ix

Implications of the ‘Arctic Systems’ case

Employee share schemes

• the payment date;

• the date on which the director becomes entitled to the bonus;

• the date on which the bonus is recorded in the company’s books.

• The date of assessment is 31 December 2008, which falls in 2008/09.

• The bonus would become taxable in 2009/10 if it were not discussed

2 A THOROGOOD SPECIAL BRIEFING

National Insurance is not payable on dividends. The complex rules on timing

There is no Corporation Tax deduction for dividend payments, whereas a

The relative tax advantages of bonuses or dividends depend principally on

A THOROGOOD SPECIAL BRIEFING 3

Other taxable income 40,000 40,000

Dividend (£13,333 x 100/90) – 14,814

Taxable income 56,949 54,814

40% x £19,549/£2,600 7,820 1,040

32.5% x £14,814 – 4,815

Less tax deducted at source – (1,482)

Tax liability 15,300 11,853

11% x £38,160* 4,198 4,198

* Upper earnings limit £43,875 less earnings threshold £5,715

** Taxable earned income plus personal allowance £6,475 less

4 A THOROGOOD SPECIAL BRIEFING

Profit before bonus/dividend 100,000 100,000

Employer’s NIC (additional):

Profit chargeable to Corporation Tax 80,882 100,000

Corporation Tax at 21% 16,985 21,000

Income Tax 15,300 11,853

Employee’s NIC 4,393 4,224

Employer’s NIC (additional) 2,169 –

Corporation Tax 16,985 21,000

A THOROGOOD SPECIAL BRIEFING 5

Implications of the ‘Arctic Systems’ case

6 A THOROGOOD SPECIAL BRIEFING

A THOROGOOD SPECIAL BRIEFING 7

The benefit is £3,750 (£15,000 x 25%).

Corporation Tax saving:

Less Corporation Tax saving:

Employee’s Income Tax:

Tax burden 1,249 256

Corporation Tax saving: