Tax Plan Now For The Upturn, UK Advisor Urges

by Phillip Morton, Investors Offshore.com

19 March 2009

Despite the constant flow of news about the downturn, owners of family businesses, entrepreneurs and their families should to start to think about planning for the upturn, according to tax firm Deloitte.

Paula Higgleton, head of the private clients practice at Deloitte, says: “For many individuals, passing on their hard earned wealth is an important consideration. Changes made over a number of years have given inheritance tax (IHT) real bite, making it more difficult than before to leave wealth in family trusts to benefit succeeding generations."

“Whilst declining asset and share values have provided many families with a continuing headache, the current historically low asset value in certain sectors may represent an opportunity for individuals and families to pass on wealth to the next generation, whilst minimising current and future inheritance tax charges."

“Many entrepreneurs are thinking carefully about passing on shares in family companies to benefit their children and grandchildren and there are a number of different ways in which this can be done in the form of gifts.”

Gifts can be made to adult children, but often gifts to family discretionary trusts are preferred. In any event the gifts must be made without strings in order to avoid having to tax the gifted asset as part of the donor’s estate on death. Where investment companies are involved a husband and wife could, between them, transfer assets worth up to GBP624,000 to a discretionary trust, free of inheritance tax provided their nil rate bands remained unused.

In the case of private trading companies, the IHT reliefs are much more generous.

Higgleton explains: “It may be possible to benefit from 100% business property relief which means that no IHT will arise on making the gift, even though it is into trust. However relief will not be available if, for example, a company has set up an investment business, which has started to dominate the trading related activities. This might mean that IHT was payable when the shares were given away. It is now possible to obtain an advance ruling on the business property relief position from HMRC where a shareholder is considering making a life time gift to the next generation.”

Whether investment or trading companies are involved, capital gains tax (CGT) considerations must also be taken into account. Gains can often be deferred where business assets are involved and may also be possible where a gift is made to a family trust. But capital gains tax will not be such an issue where assets are not currently standing at a gain, or where special growth shares are used.

Higgleton adds: “Weighing up whether to make a lifetime gift can be difficult. The trade off is that IHT might be saved, but the CGT position might sometimes be worse, as normally there is a tax free ‘step up’ of assets on death for CGT purposes. If there is 100% business property relief on death, there would be no IHT to pay, and the acquisition cost of the assets in the hands of the heirs would have been ‘stepped up’, resulting in the family having had the best of both worlds."

Current market conditions may enable some non-domiciles to establish offshore trusts to hold UK-based assets. The advantage of this is that future capital gains can be sheltered.

Inheritance tax considerations can be a real concern here, albeit low asset values will assist in mitigating the current charge to IHT. In addition there are ways of structuring investments so that there is no immediate charge to tax when the assets are transferred to the trustees. This opportunity can apply equally where the non-domicile is a long term resident.

Higgleton concludes: “Whilst it is important to keep on top of current market conditions, it is equally important for individuals and their families to look to the future, and at least to consider undertaking some long term estate planning. In all cases, though a proactive approach is important, the necessity of taking expert tax and investment advice is essential.”

The deepening credit crisis has erased around GBP1.9 trillion of UK household wealth since July 2007, according to analysis by PricewaterhouseCoopers LLP. In total, wealth from housing and equities is estimated to have fallen by around 28%, amounting to a total loss of wealth of around 130% of GDP.

With average UK house prices down by around 20% from their peak, estimated housing wealth losses are around GBP800 billion. Meanwhile sharp falls in stock markets (totalling around 40% since mid-2007) have pushed the estimated UK household wealth loss from equities up to around GBP1.1 trillion.

Based on published research into the relationship between changes in household wealth and expenditure, PwC estimates that the GBP1.9 trillion fall in UK wealth could ultimately reduce annual UK expenditure by around GBP45bn (around 3% of GDP or around 5% of household spending).

John Hawksworth, head of macroeconomics, PricewaterhouseCoopers LLP, said: “Translating these figures to a more individual perspective, the estimated loss of wealth of GBP1.9 trillion would equate to around GBP40,000 on average per adult (aged 18+) in the UK, although clearly these losses will vary considerably across the population."

“The knock-on effect of this level of wealth destruction will result in significantly more belt tightening and reduced spending by households over the next year and this situation could be exacerbated by expected further falls in house prices over this period."

Hawksworth concluded: “Nonetheless as we begin to see the positive effects of recent interest rate cuts, planned money supply increases and fiscal stimulus measures coming through, we would hope to see a gradual economic recovery taking effect later in 2010 and beyond.”

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