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 Islands.

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:

• 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 than 40%.
• 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.