Top Rate Of Tax Driving Entrepreneurs From UK
by Robert Lee, Tax-News.com, London
16 November 2009
The results of a new survey suggest that one-fifth of UK-based entrepreneurs
earning more than GBP150,000 are planning to flee Britain in search of countries
with more favorable tax rates.
The poll of more than 300 entrepreneurs by business advisors Tenon also found
that many more may follow in an attempt to escape the 50% rate of income tax,
due to be introduced from next April on annual incomes above GBP150,000, with
nearly half of the respondents (48%) still deciding what action to take.
According to the survey, 75% of entrepreneurs feel that the government has not
done enough to support small businesses. Of the initiatives the government has
introduced since the financial crisis, only 37% of small- and medium-sized businesses
(SMEs) have felt any benefit.
Tenon points out that in the last month, high profile names such as the actor Sir Michael Caine and the artist Tracey Emin have threatened to change their
tax residency to countries with more favorable tax rates. Popular locations
for redomiciling include Monte Carlo, Guernsey, Liechtenstein, and the Cayman
Andy Raynor, Chief Executive of Tenon Group, noted that entrepreneurs are showing
their disapproval of the tax measures by "letting their feet do the talking."
"They are unhappy with the government’s new taxing structure and
making it plain for everyone to see. It is their way of showing this rise in
income tax will be self-defeating," he observed.
“Feedback from clients shows this tax increase is the final nail in the
coffin," he added. "They feel they have been on the receiving end
of a long list of blows from the government which has continued to remove incentives
for small businesses."
Although the new 50% rate is now just a few months from becoming reality, advisors
say there are several options that those with incomes above GBP150,000 have
to lessen its impact, for example by using all tax-free Individual Savings Accounts
allowances and disposing of assets before April 6, 2010, to take advantage
of the relatively low 18% capital gains tax – especially as Chancellor Alistair
Darling may target this tax for an increase in the next budget.
"By being smart about the timing of financial decisions and ensuring that
you take full advantage of tax allowances and tax-efficient savings vehicles,
people can, to some extent, mitigate the effects of the new top rate of tax,"
said David Kilshaw, head of private client advisory at KPMG in the UK.
KPMG's private client team have compiled a list of their top ten tips for high
earners in anticipation of the new tax rate:
A comprehensive report in our Intelligence Report series
examining tax-sheltering arrangements for investors, including Venture Capital,
Forest Finance and Film Finance in a number of key jurisdictions, is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp
and a description of the report can be seen at
- Consider whether you can bring forward income to the current tax year.
Is there scope to take bonuses or dividends before April 5 so that they will
be taxed at the current lower tax rates? Your employer may even be willing
to pay a few months' salary in advance. You should be aware that by advancing
the income you will also bring forward the date the tax is payable.
- Review your deposit accounts. If they pay interest only once a year and
that will fall after April 5, consider closing the account so that the bank
will pay closing interest accrued to date before April 5 so that the interest
will be taxed in the current tax year.
- Review life assurance based investments where you can currently take a
5% withdrawal tax free each year. On encashment the profits are subject to
income tax, so consider whether you should encash before April 5, 2010. Similarly,
the growth in value of treasury stock can be subject to income tax so consider
realizing the value before April 5.
- If you have family trusts which will be affected by the new rates, consider
making distributions to the beneficiaries before April 5 of all accrued income
to avoid a further 10% tax charge on this income.
- Review your investment portfolio. Consider holding investments that produce
growth in a capital form which is therefore subject to capital gains tax rather
than income tax. Annual cash requirements could be met through the disposal
of assets within the portfolio rather than relying on dividend income.
- Equalize income between spouses. If you earn more than GBP150,000 and your
spouse does not, consider transferring income-producing assets to your spouse
to take advantage of their lower rate tax bands. Similarly, consider who acquires
future income-producing assets to ensure lower rate bands and unused allowances
of your spouse and other family members are utilized.
- Ask your employer to consider implementing a share incentive scheme as
part of your remuneration package. There are a number of government-approved
schemes which allow employees to benefit in the growth in value of the company
at capital gains tax rates which, for high earners, will be considerably lower
than the income tax payable on a cash bonus.
- Discuss with your financial advisor whether you should, as part of your
overall investment strategy, make an investment in a qualifying Enterprise
Investment Scheme (EIS) company or a Venture Capital Trust (VCT). These are
higher risk investments with generous tax breaks. You can get 20% income tax
relief on a qualifying EIS investment up to GBP500,000 – i.e. an absolute saving
of GBP100,000, plus after three years you can sell the shares completely free of
capital gains tax. Relief is available at 30% on a VCT investment up to GBP200,000.
In addition, VCT dividends are tax free and the investment can be cashed in
tax free after five years.
- Consider deferring claims for tax reliefs such as income tax losses until
the tax year ended April 5, 2011 where tax relief will be available at 50%
rather than 40%. Similarly consider deferring claims for capital allowances
to the year ended April 5, 2011 so that tax relief is available at 50% rather
- Consider deferring gift aid payments until after April 6, 2010 when you
should get relief at 30% rather than 20% on your donation. Obviously you need
to consider the impact on the charity as well.