We have covered some of the property related dilemmas
faced by couples about to marry (or enter into a civil partnership
after 5 December 2005). We have also highlighted the dangers
of failing to take account of the tax rules applied to "Agency
Workers", the use of Nil Rate Band Trusts for inheritance
tax planning and a quick reminder of the benefits of stakeholder
pensions for minors.
We were going to include an article this month on
the changes to the Construction Industry Scheme to be introduced
April 2006. You will be relieved to know that this has been
set back a year, the changes will not now be implemented until
6 April 2007!
Property decisions and tax - on marriage
All comments that follow apply equally to married couples
and partners registered under the Civil Partnership Act (from
5 December 2005).
One of the most critical pieces of tax planning for couples
prior to marriage concerns property.
If both parties own their own home prior to marriage then
a choice needs to be made as only one of the properties can
qualify as a tax exempt principal private residence after
marriage.
Factors that can influence the best tax strategy include:
-
Are both properties to be kept after marriage, or one
sold shortly afterwards?
-
Should the properties be owned jointly or continue to
be owned separately?
-
If retained what are the future plans for the second
property after marriage - will it be let?
-
Which property has the most equity, and so on?
After marriage any transfer of property between partners
is free of both Capital Gains Tax and Inheritance Tax. Typical
tax planning objectives might be:
Capital Gains Tax
-
If both properties are retained, and the non-principal
private residence is let post marriage, then no capital
gains tax will apply on a sale up to three years after
marriage.
-
Whatever the decision, to keep a second property or to
sell, it is likely that actions will have to be taken
after marriage. This being so it is vital that proper
elections are made to choose which property is to be considered
the couple's main residence for tax purposes. This involves
signing and lodging the appropriate piece of paper with
the tax office. This only applies if both properties are
actually used as residences.
-
These elections can be varied. There is also a two year
time limit for filing which starts from the date of marriage
in most cases.
Inheritance Tax
-
Depending on the mix of assets in each parties ownership,
moving properties into joint ownership can help to equalise
estates and reduce overall tax risk.
-
Marriage or formal partnership should trigger a visit
to your advisors to revise your wills. This again should
aim to equalise your joint or separate ownership of property
and other assets. See the separate article we have written
this month on the use of Nil Rate Band Trusts.
So if you are planning to marry, or enter into a civil partnership,
please call so that we can make the most of the tax benefits
available.
Agency Workers - some danger areas
What is an agency worker?
If you supply labour only to your clients, your relationship
with your subcontractor is likely to be that of employer and
employee. You may need to stop tax and national insurance
from their pay.
For instance if you are a contractor and your client asks
you to build a house, then any subcontract labour that you
use can be dealt with under the construction industry rules
as long as the workers present a correct CIS4 certificate.
However, if your client decides to build the house himself
and asks you to supply a plumber (rather than merely introduce
him), then you would be considered an agent, and the plumber
your agency worker. Even if the tradesman had a valid CIS4
certificate you would still need to stop tax and national
insurance on the wages paid to him for that labour only contract.
Of course this sort of situation is not restricted to the
construction industry but to most business contracts where
a supply is made on a labour only basis.
The rules apply if your subcontractor is a sole trader or
a partnership. The rules DO NOT apply if your subcontractor
is a limited company.
If you trade on a labour only basis and use subcontract labour
to do the work, then potentially the Agency Worker tax rules
may apply. Please call if you would like us to review your
contracts to ensure that you are keeping the right side of
the legislation.
Inheritance Tax planning that still works
There have been a number of anti-avoidance provisions enacted
in recent times that have stopped the benefits of a number
of complicated inheritance tax planning schemes.
However the use of a Nil Rate Band Trust, as part of a properly
executed will, is still a perfectly legal and workable tax
planning tool.
Essentially the trust allows married couples (and, from the
5 December 2005, couples registered under the new Civil Partnership
Act) to use up their individual exempt estate values for inheritance
tax purposes. Presently the exempt estate value is set at
£275,000. Without the use of this planning tool it is possible
that on the first death up to £275,000 of exemption may be
lost.
There are risks to be avoided which can be achieved by using
a particular type of variant trust.
If you would like more details of this scheme please call.
Stakeholder pensions for minors - tax benefits to
continue
It is perfectly acceptable for parents, grandparents or other
interested persons to set up and pay for a stakeholder pension
for your children.
The rules allow for a gross contribution of up to £3,600
per year. After notional tax has been deducted the net amount
payable is £2,808. Payment up to this amount can be made even
when the beneficiary has no relevant earnings.
The £3,600 will be invested in a tax exempt fund and the
minor will not be able to withdraw any cash benefits until
age 50 (Note. The pensionable age is due to rise to age 55
by the year 2010) - so this is a long term and tax effective
investment.
The good news is that this favourable tax treatment will
not be affected by the new rules on pensions which start on
the 1 April 2006.
Tax Diary November/December 2005
1 November 2005 - Due date for corporation tax for the year
ending 31 January 2005.
19 November 2005 - PAYE and NIC deductions due for month
ending 5 November 2005. (If you pay your tax electronically
the due date is 22 November 2005)
1 December 2005 - Due date for corporation tax for the year
ending 28 February 2005.
19 December 2005 - PAYE and NIC deductions due for month
ending 5 December 2005. (If you pay your tax electronically
the due date is 22 December 2005)
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DISCLAIMER - PLEASE NOTE: The ideas shared with you in this
email are intended to inform rather than advise. Taxpayers'
circumstances do vary and if you feel that tax strategies
we have outlined may be beneficial it is important that you
contact us before implementation. If you do or do not take
action as a result of reading this newsletter, before receiving
our written endorsement, we will accept no responsibility
for any financial loss incurred
