01.08.2011

Looking to the future - investing for children and leaving inheritance, correct company car mileage, benefits of furnished holiday lettings and register for our development workshops.

Please click on the links below to read each article in this business alert -

Tax-efficient investing for children 

Can you afford to leave an inheritance? 

Company car fuel rates move up a gear 

Benefits of furnished holiday lettings 

Development Workshops - Managing Change  

 

 

Tax-efficient investing for children 

The basics
Children are entitled to their own personal allowances for income tax, and annual exemptions for capital gains tax (£7,475 and £10,600 respectively, for 2011/12), with the result that income and gains up to these limits are free of tax. In addition, the normal tax-rate bands apply to children’s income and gains, so that the first £35,000 of taxable income is charged at 20% and above that figure at the 40% or 50% rates as appropriate. 

An exception arises on income from investments funded by gifts from parents. In this case the income is treated as that of the parent who provided the funds, unless it is £100 or less (per parent) in the tax year. This is to prevent parents transferring capital simply to take advantage of the children’s personal allowance and basic-rate band. The £100 limit does not apply to the first £100 of a larger sum.

Tax-advantaged savings and investments
Under 16s may invest in National Savings ‘Children’s Bonus Bonds’, the return on which is tax-free.

Under 18s are not eligible for stocks-and-shares ISAs, but over 16s may subscribe to a cash ISA (maximum £5,340 pa for 2011/12). Income from ISAs is tax-free and need not be declared on the investor’s tax return. However, if the funds invested came from the parents the £100 limit mentioned above applies to the total of ISA income and other income.

Child Trust Funds (CTFs) under which the government made payments into accounts for children born on or after 1 September 2002, have been abolished for children born on or after 2 January 2011. However, family and friends can still pay into existing accounts, up to the annual limit of £1,200 (with the year in question running to the child’s birthday). Any interest arising is tax-free. 

The government proposes to introduce Junior ISAs from Autumn 2011 for UK-resident children (under 18) who do not have a CTF . Under current proposals children will be able to hold a stocks-and-shares ISA and/or a cash ISA. The subscription limit will be £3,000, spread across the two accounts where relevant. The child may only access the money on reaching the age of 18, but will assume management responsibility for the account at age 16.

Children are also eligible to have their own pension fund to which payments up to an annual maximum of £3,600 gross can be made. Basic rate tax relief of 20% on contributions is obtained by deduction from the premiums paid. This amount is recovered from HMRC by the pension provider, so that a net investment of £2,880 results in funds invested of £3,600. Any income arising within the scheme is tax free but withdrawals cannot be made until, currently, age 55. 

‘Bare trusts’
A ‘bare trust’ exists where property is held in the name of a trustee or trustees (typically parents) but the beneficial owner (the child) is fully entitled to both the capital and income. In these circumstances the income is treated for tax purposes as that of the child rather than of the trustees unless (again) the funds concerned were provided by the parents and the income exceeds £100 (per parent). In this case it will be treated as income of the parents for tax purposes.

When are tax returns required and who is responsible for completing them?
Any person, including a child, is required to file a tax return if they have:

• £10,000 or more income from savings and investments; or
• £2,500 or more income from savings and investments not taxed at source; or
• capital gains in excess of their annual exemption (£10,600 for 2011/12).
  

(These are not the only criteria for a return being required, but they are the ones most likely to apply to children.)

The income and gains to be reported include those of bare trusts of which the child is the beneficiary. Trustees of such trusts are not required to complete returns of income, but they can register to do so (and to account for tax) if they wish. However, they cannot make returns of capital gains.

Reclaiming tax
If the interest on a child’s savings (excluding tax-exempt amounts) is less than their personal allowance, the child is entitled to repayment of all tax deducted from savings income and will have no liability to account for tax on savings income received gross. Similarly, children may be entitled to a refund of tax if they fall into the lower 10% rate tax band for savings income (£2,560 for 2011/12).

If the child’s total income is expected to be less than his or her personal allowance in a tax year, an application to have the interest on investments paid gross can be made by completing a form R85. In some instances this may avoid the need to file a repayment claim. 

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Can you afford to leave an inheritance?  

Recent research from the Prudential suggests that only 52% of people questioned feel they will be able to leave an inheritance.  Leaving an inheritance once you are gone, whilst nice, is perhaps not the be all and end all it may seem - it is surely far better to be able to help family whilst you are alive.  There remains a common misconception that inheritance tax should only be thought about in relation to death.  Not so.  So much can be put in place during one lifetime to ensure that family is the main beneficiary, not the Exchequer.   

With the nil rate band effectively frozen at £650,000 for a married couple, any estate in excess of this figure will be subject to 40% tax on death.  Even a couple who do not consider themselves wealthy may find their combined estate over this limit, primarily due to the value of the family home.  Talking about inheritance tax can be very emotive for families and it is often therefore put off until it is too late.  The family home itself can be the biggest stumbling block, but consider other areas where planning might be implemented. 

It is never too early to seek professional assistance in inheritance tax planning.  People might start to think seriously about putting provisions in place when they are in their 50s.  By that time, they are hopefully through the most intensive spending phase (school fees, university fees, mortgages) and can turn their attention to the level of their estate and where they wish to be in income terms in retirement.  A long term plan can ensure that there is sufficient income available at that time, but it cannot be left to the last minute to meet these objectives.

There are many ways an individual can seek to reduce the level of their estate through sensible giving during their lifetime.  Ensure that the annual inheritance tax exemption of £3,000 per individual is used.  Over a period of time this can take a reasonable sum out of the inheritance tax net.  Look at making gifts to individuals at birthdays and Christmas which, per individual, come to £250 or less.  These gifts are immediately exempt from inheritance tax.  Consider making potentially exempt transfers to a family member.  Once the seven year anniversary is passed, these are completely exempt from inheritance tax, and there may even be scope to do another transfer and start the 7 year clock again.

It is worth considering the mix of your assets.  If you have considerable levels of cash look at maximising available inheritance tax reliefs, for example, by investing in a portfolio of Alternative Investment Market (AIM) stocks.  After two years, these shares qualify for full business property relief (BPR) giving 100% relief from inheritance tax.  This is also true of forestry run on a commercial basis.     

Inheritance tax is certainly not on the decline, despite the current gloomy economy.  What is more apparent than ever is the need for individuals to plan early and to be in control of where their wealth goes.

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Company car fuel rates move up a gear  

HM Revenue and Customs (HMRC) has published new ‘advisory fuel rates’ (AFR) for company cars, which now apply to journeys on or after 1 June 2011 until further notice.  Where these rates are paid by employers, HMRC will generally accept that the car fuel benefit does not apply but care should still be taken to ensure that mileage being claimed by employees is accurate.  The car fuel benefit is an all or nothing charge if an employee estimates mileage and as a result over claims, HMRC could argue that the car fuel benefit applies.  The employer would be expected to pay any outstanding tax and Class 1A NIC. 

Going forward these AFR rates will be reviewed four times a year on 1 March, 1 June, 1 September and 1 December. For more details from the HMRC website click here.  

 

Benefits of furnished holiday lettings    

Furnished holiday lettings (FHL) by individuals are treated more advantageously for tax purposes than other property lettings.

The benefits

• capital allowances are available on furniture, furnishings, etc in the let property, as well as on plant and machinery used outside the property (such as vans and tools);
• certain capital gains reliefs are available as if the activity were a trade, for example rollover relief on the replacement of business assets and the entrepreneurs’ relief that charges gains on certain business disposals at a reduced 10% rate;
• the income counts as earnings in calculating the maximum pension contributions that may be paid to a registered scheme; and
• 100% business property relief may be available for inheritance tax purposes where significant services are offered to holidaymakers, but there is no direct link to the FHL rules and HMRC is tightening up its approach in this area.

Additionally, although the income is treated in many ways as if it were from a trade, it remains assessable as rental income, so Class 4 National Insurance contributions on self-employed earnings are not payable. (Similar rules apply to lettings by companies, but these are not covered in this note.)

Relief for losses
The rules have changed for 2011/12 so that any losses incurred can no longer be offset against general income. However, losses may still be offset against future profits from the same FHL activity, as with ordinary lettings. For this purpose UK lettings count as one activity and lettings elsewhere in the EEA as another. (The EEA comprises the EU plus Iceland, Liechtenstein and Norway.)

What are the criteria to qualify as an FHL?
The property must be located within the UK or elsewhere in the EEA and must, broadly, satisfy the following three criteria:

1. Availability: The property must be available for commercial letting to the public for 140 days or more in a year (210 days with effect from 6 April 2012);
2. Letting: Actual occupation by holidaymakers must be 70 days or more (105 days with effect from 6 April 2012), excluding periods of continuous occupation by the same person of more than 31 days. A two-year period of grace for this test is being introduced. Once a property qualifies as an FHL for one tax year (2010/11 or a later year) the owner may elect to treat it as continuing to qualify for up to two subsequent years even if it does not meet the 70-day or 105-day letting condition in those years, provided there was a genuine intention to meet the condition; and
3. Pattern: For at least 155 days in the tax year the property must not normally be occupied by the same person for more than 31 days.

There is nothing to prevent the owner, or friends or family, from using the property, but any period for which it is occupied in this way does not count as ‘available to let’.

For multiple FHLs, as long as each property individually satisfies criteria (1) and (3), all of the properties will qualify as FHLs provided that criteria (2) is satisfied by the average actual occupation of the properties, provided an appropriate election is made. The calculation must be made separately for UK and EEA properties.

Rental income from FHLs is standard rated for VAT, so the taxpayer must be registered for VAT if turnover from this source, together with that from other sources in certain circumstances, exceeds the registration threshold, currently £73,000. If the FHL is abroad, it may be necessary to consider the VAT rules of the country where the property is situated.

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Contact:

Scott Craig, Partner, VAT

Morag Page, Director, Personal Tax

Patricia Goldie, Manager, Employment Tax