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Death and Taxes
by David Whiscombe
Published in SAIF Insight Magazine
Benjamin Franklin famously observed that “in this world nothing can be said to be certain, except death and taxes”. And many businessmen and advisers would add that although one can reluctantly accept that taxes may be inevitable the one thing that we really seek in a tax system is certainty. Fairness is good; low tax rates are welcome; but knowing where you stand under the law is perhaps even more important than either of these. And it has to be said that in recent months the Chancellor Alistair Darling has signally failed to deliver certainty in three key areas of tax policy.
The first in relation to the so-called "income shifting". The background to this is that in a test case heard last summer the House of Lords held unanimously that it was perfectly legal for a married taxpayer to give shares in his company to his wife and to pay out profits in the form of dividend in order to take advantage of his wife's lower rate of tax. This result was reassuring given that this has been mainstream tax planning over many years and many advisers fiercely resented bitterly HMRC’s attempts to move the goalposts. However, bad losers as always, HMRC have unveiled draft legislation to counter what they now call "income shifting” of this kind. The problem is that the legislation is capricious in its approach (for example it is acceptable to gift a property by outright gift to a spouse but apparently unacceptable to own it in partnership with a spouse!); and unclear in its application. The legislation introduces huge uncertainty into pretty well every family business, requiring you to decide what each family member contributes to the business and to compare that with what income he or she actually derives from the business. The scope for difference of opinion is obvious and enormous, with potential penalties are getting it wrong (or rather, disagreeing with HMRC's analysis of the position).
As if that isn't enough, tax powers are also hit with the "double whammy" of major changes to the capital gains tax regime. In the name of “simplification of tax law” and to counter the alleged excesses of a few private equity funds (many of which are not resident in the UK and are therefore not subject to UK capital gains tax at all) Mr Darling has elected to abolish "taper relief". This tax relief currently reduces the effective rate of tax payable by individuals in respect of gains on "business assets" (typically shares in trading companies or other businesses) to a maximum of 10% in most circumstances, while fixing the rate of tax on "non-business" assets at anything between 24% to 40% depending on how long they have been held before sale. From 6 April 2008 all this is to be replaced by a single flat rate of 18%. Who gains? Investors making short-term speculative gains - for example on property. Who loses? Principally business owners selling companies or business they have built up, perhaps over many years. Joined-up thinking? We think not. Following considerable pressure Mr Darling recently relented and introduced a new "entrepreneurs" relief which will effectively maintain a 10% tax rate for some (but by no means all) business disposals - subject to a lifetime limit of £1 million. Good news so far as it goes – but with just a few weeks to go before the start of the new tax year the full detail of the new rules has not yet been announced and taxpayers are left uncertain as to whether to realise gains this tax year before taper relief goes or to rely upon whatever the new entrepreneurs relief brings in due course. Oh - and the rules for entrepreneurs relief are to be based broadly on the old "retirement relief" rules (whose abolition was about the first major change the incoming Labour government made 10 years ago in the name of - you’ve guessed it - simplification!)
And we have not in this short article even touched upon the debacle of the recent reform of the domicile rules where the Chancellor has performed more U-turns than a teenage joy-rider on a sink council estate and has left nothing but dismay and confusion in his wake. Certainty? Afraid not.
Recalling Benjamin Franklin, readers should perhaps be glad that they operate in an industry where at least one element of certainty can be expected to remain for the foreseeable future…
