BaldwinsGroup.com Keep it – Grow it – Pass it on Clare Clifford & Rebecca Colmey @BaldwinsandCo Tweet using the event hashtag #BaldwinsCLASeminar
Keep It – Grow it – Pass it on • Keep it ― Understanding capital tax basics ― Business structures and asset ownership • Grow it ― Diversifying the business ― Land options and sales ― Investing excess cash and utilising surplus assets • Pass it on ― Succession planning ― Passing assets on during life-time ― Passing assets on at death
Keep it – Grow it – Pass it on: Our family Mrs Johnson Mr Johnson Daughter 1 Son Daughter 2
Keep it – Grow it – Pass it on: Our family Mr Johnson Mrs Johnson The business – One partnership The assets – personally owned – joint tenants (subject to a 30% mortgage of overall value) Farming 800 acres Retail outlet Listed farm house Rental income including: Farm Shop Farm - Residential and holiday let Two cottages (ASTs) Shooting let – 3 rd party - 1 x holiday cottage (converted - 1 barn let to local building firm barn) 5 acres of development land £200k Cash ISAs Various Stocks & Shares
Keep it – Understanding capital tax basics • Capital gains tax ― 10%/20%/28% (entrepreneur’s relief?) ― Gifts to connected person ― Holdover relief (“gift relief”) • Stamp duty land tax/stamp duty ― Consideration – Market value & mortgages ― Reliefs • Inheritance tax ― Life-time transfers • Individual – PET • Trust (most) or company – CLT ― On death ― Nil rate band & residence nil rate band ― Reliefs/exemptions – See later – Pass it on ― BPR/APR – In brief
Keep it – Understanding capital tax basics: Business property relief • Main types of qualifying property: ― A business or an interest in a business (100%) ― Unquoted shares (including AIM investments) (100%) ― Quoted shares where have control (100%) ― Land, buildings and plant/machinery owned personally but used by your partnership or a company you control (50%) • Primary conditions: ― Owned for 2 years at date of transfer ― Business, partnership, company or group must be “mainly trading”
Keep it – Understanding capital tax basics: Business property relief • Problem areas: ― Rules are complex and intricate – Do not assume you qualify ― Sole traders – Relief only when transfer as a whole – Are the assets in the business? ― Partnerships – Assets held personally – Restrictions on relief ― Companies – Assets held personally – Need control and still restriction on relief ― Directors loan accounts – No BPR ― Mainly trading – More than 50% “in the round” ― Farming, woodland management, sporting, fishing and shooting can be trading ― Dealing in securities, stock or shares, land or buildings or in the making or holding of investments are not usually trading ― Some activities (e.g. furnished holiday lets) may be borderline – Depends on services offered ― Excepted assets ― Binding contract for sale
Keep it – Understanding capital tax basics – Agricultural property relief • Only on agricultural value • Agricultural property : ― Agricultural land, pasture & woodland ― Buildings used in connection with intensive rearing of livestock or fish ― Farm buildings used for farming activity ― Farmhouse and farm cottages if character appropriate and occupied with the farm business
Keep it – Understanding capital tax basics – Agricultural property relief • Problem areas : ― The farmhouse ― Other properties ― “Hope” value ― Ownership period – 2 or 7 years ― 100% or 50% ?
Keep it – Understanding capital tax basics: Our family CURRENT • Relief position: Mr Johnson Mrs Johnson The assets – Personally owned ― 800 acres – APR ― Listed farmhouse – Character appropriate? APR ― Farm shop owned personally – BPR 50% ― Two cottages (ASTs) – No relief ― 1 x holiday cottage (converted barn) – BPR unlikely but dependent on services ― 5 acres development land – APR/BPR if used in farm trade and no contract for sale ― ISAs and share portfolio – No relief The business – One partnership ― Shooting let – 3 rd party – Investment activity if passive rent ― 1 barn let to local building firm – Investment activity
Keep it – Business structures & asset ownership • Business structure – Sole trader/Partnership/Company • Asset ownership • Moving from current to desired structure • Agreements – Partnership agreements / Shareholder agreements • Exit arrangements – Business protection / BPR protection • Insuring against IHT liabilities
Keep it – Tax basics, business structures & asset ownership: Our family Improvements to tax position Mrs Johnson Mr Johnson • Changes: ― Document anything used by the partnership farm and retail business as partnership assets ― Other assets – Look at their value and income from them – Could they be brought into the partnership without jeopardising the “mainly” trading rule? ― What remains – Should we: • Change investments to AIM • Insure against any liabilities • Make lifetime transfers (7 year) ― Trust (protection) – holdover gain ― Company (FIC?) ― Direct To name a few …. Beware of potential tax costs of moving assets
Grow it – Diversifying the business • Commonly ― Weddings/Events ― Furnished holiday lets ― Residential lets ― Letting/Storage ― Caravan and camping ― Farm shops ― Bed and breakfast
Grow it – Diversifying the business • Common problems: ― Loss of business property relief ― Dilution of trading ― Excepted assets ― Owner of asset – Interest in business ― Loss of entrepreneur’s relief ― Substantially trading – “80% in the round” ― Rental income/ Investment income ― Loss of holdover relief (“gift relief”) ― Substantially trading – “80% in the round”
Grow it – Diversifying the business: Our Family Daughter and son set up B&B and a barn is converted from which they run a wedding business in a separate partnership together • Problem ― No BPR on land and property used by son and daughter Daughter 1 Son • Reason ― Person owning the assets does not operate the business using the asset • Solution ― Comprehensive partnership agreement with asset owner becoming a partner
Grow it – Land options & sales • Commercial – Understand terms of any agreement • APR/BPR • Entrepreneur’s relief (2 qualifying years now)
Grow it – Investing excess cash & utilising surplus assets • Effect of surplus cash/Assets not used in business • Pensions • Making investments external to current business vehicle ― Family investment companies ― Trusts ― Tax efficient investments
Pass it on – Succession planning • Non-tax considerations: ― Ability/Skills of generations (training needed?) ― Desire to continue the business ― Family dynamics (ability to work together) ― Income for retiring partner ― Providing for family not involved in the business ― Honesty – Legal agreements – Set out understandings from start ― Protecting business assets – From children/Their spouses
Pass it on – Passing on assets during lifetime • Business structures • Direct gift ― Capital gains tax – Cash/Asset/Chattel ― Stamp duty land tax/Stamp duty ― Inheritance tax – 7 year clock ― PETs ― Gift exemptions ― APR/BPR
Pass it on – Passing on assets during lifetime – Gift exemptions - lifetime Small Gifts Gifts to charities or registered clubs • • Up to £250 to each recipient per year No limit • Cannot be combined with annual gift exemption Annual Gifts Family maintenance • Up to £3,000 per year Exempt if for maintenance of: • Can be carried forward one year • Spouse/civil partner • Own child if under 18 or in FTE • Dependent relative Gifts on consideration of marriage • £5,000 from parents • £2,500 from grandparents • £1,000 from anyone else Gifts for national purposes • All gifts to certain bodies to preserve the national heritage Gifts which are normal expenditure out of income • Gifts of UK land to certain housing providers No limit • Must be regular gifts • All gifts of land to UK housing associations and registered social • Made out of income landlords are exempt • Must be able to maintain their standard of living Spouse / Civil partner exemption Gifts to political parties • No limit unless spouse not UK domiciled (then £325,000) • No limit • Must be a qualifying political party
Pass it on – Passing on assets during lifetime • Transfer to trust ― Capital gains tax – holdover relief ― Stamp duty land tax/Stamp duty ― Inheritance tax ― CLT ― Nil rate band ― Gift exemptions ― APR/BPR • Documentation – Deed, letter of wishes, consistency with will
Passing it on – Passing on assets at death • Securing bequests • Securing IHT reliefs ― The estate ― Nil rate band ― Residence nil rate band ― Transferrable nil rate bands ― BPR ― APR
Keep it - Grow it - Pass it on – Stay in touch • Importance of professional advice ―Today’s discussion – Current law ― All reliefs – Detailed rules ― Proposed changes
Clare Clifford Rebecca Colmey Head of Tax (East Midlands) Senior Tax Advisory Manager T: 07831 573369 T: 01827 302070 E: Clare.Clifford@BaldwinsGroup.com E: Rebecca.Colmey@BaldwinsGroup.com
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