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WE CHERISH OUR partners for a multitude of reasons, yet tax planning rarely ranks among the top. Nevertheless, in light of the unprecedented tax burden faced by taxpayers today, planning with shares and spouses can be a valuable tool for both individuals and businesses to manage their tax liabilities effectively.

In today’s Shipleys Tax article, we explore some of the basic considerations for tax planning with shares and spouses and the traps that one should avoid.

Shares and Spouses

One of the most common tax planning strategies involving shares and spouses is the transfer of shares between spouses. This can be done to take advantage of lower tax rates or to transfer ownership of a company or business. By utilising tax free allowances by paying a spouse a small salary, usually up to the primary threshold, so as to incur no PAYE or NICs but still maintain entitlement to state benefits and the state pension. The company gets corporation tax relief on the salaries, and earnings are then topped up by dividends.

However, it is essential to understand the tax implications of such transfers and to ensure that they are done correctly.

One of the most common tax planning strategies involving shares and spouses is the transfer of shares between spouses

Firstly, when transferring shares between spouses, it is important to consider the capital gains tax (CGT) implications. In the UK, CGT is a tax on the profits made from selling assets, including shares. The current CGT allowance for individuals is £12,300 for the tax year 2022/23. However, when transferring shares between spouses, the transfer is not subject to CGT. Instead, the transfer is deemed to take place at market value, and the new owner of the shares takes on the original cost of the shares for future CGT calculations.

Secondly, it is important to consider the income tax implications of transferring shares between spouses. Dividends from shares are subject to income tax, and if a higher-earning spouse transfers shares to a lower-earning spouse, they may be able to take advantage of the lower tax rates. However, there are rules in place to prevent spouses from using this strategy to avoid tax. The so-called “settlements legislation” applies to situations where income is transferred between spouses in order to take advantage of lower tax rates. In such cases, the income will be taxed as if it had been earned by the higher-earning spouse.

The Traps to Avoid

When it comes to tax planning with shares and spouses, there are several traps that individuals must avoid. These include:

1. Failing to properly document the transfer of shares between spouses – It is essential to document any transfers of shares between spouses to ensure that the transfer is valid and to avoid any disputes with HMRC.
2. Failing to consider the long-term implications of the transfer – Transferring shares between spouses can have long-term implications, such as future CGT liabilities, and individuals must consider these implications before making any transfers.
3. Failing to comply with the rules on settlements – The settlements legislation can be complex, and individuals must ensure that they comply with the rules to avoid being subject to additional tax liabilities.

Dividends from shares are subject to income tax, and if a higher-earning spouse transfers shares to a lower-earning spouse, they may be able to take advantage of the lower tax rates

• Alphabet share schemes – companies may issue so-called “Alphabet shares” to spouses, which restrict shareholders voting rights, and/or their right of income to dividends, or capital on a winding up, based on performance or some other metric. Gifting or issuing such shares to such key individuals could be argued by HMRC to be “substantially a right to income”, and therefore would fall foul of settlements legislation above.

If however such shares issued under a carefully drafted alphabet share scheme, have equal and full minority voting rights applied, then broadly HMRC would not be able to attack this arrangement as a “settlement”, as always there are exceptions to this however and it is best to take professional advice.

Conclusion

Tax planning with shares and spouses can be a valuable tool for managing tax liabilities effectively. However, individuals must be aware of the potential traps and pitfalls that can arise when using this strategy. By properly documenting any transfers of shares, considering the long-term implications of the transfer, and complying with the rules on settlements, individuals can avoid these traps and ensure that their tax planning strategies are effective and compliant with tax rules.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

AFTER THE PREVIOUS blockbuster Budgets, today’s Spring Budget 2023 announcement was bit of a damp squib. While the Chancellor’s may not have been the most exciting event, it did have some notable highlights worth mentioning.

The main focus of the speech was on incentives for working parents, older individuals, and carers, rather than on tax changes. However, it was confirmed that the corporation tax increase previously announced in 2021 will go ahead from April 1, 2023, with the main rate increasing to 25%.

In today’s Shipleys Tax  note we look at the main Budget 2023 announcements.

Incentives for Working Parents, Older Individuals, and Carers

The Chancellor’s Spring Budget 2023 placed a significant emphasis on providing support for working parents, older individuals, and carers. Several measures were announced with the aim of incentivizing these groups to continue working and contributing to the economy. See here..

Pensions

Pensions were a major topic, with changes to both the annual allowance (AA) and lifetime allowance (LA) thresholds. The AA, which is the maximum amount of tax-relieved contributions that can be made in a pension input period, will increase from £40,000 to £60,000 starting in 2023/24. The LA charge will be removed for 2023/24 and completely abolished from 2024/25, instead of increasing to £1.8M as previously rumoured. The money purchase annual allowance will also increase from £4,000 to £10,000 from 2023/24.

The changes to the annual and lifetime allowances for pensions have been controversial, with some critics arguing that they primarily benefit the very wealthy. However, the removal of the lifetime allowance charge from 2023/24 is seen as a positive development for some GPs and dentists.

Many GPs and some dentists have been affected by the lifetime allowance charge, which can result in a significant tax bill for those with large pension savings. The removal of the charge is expected to provide relief for these individuals, who may have been considering early retirement or reducing their working hours to avoid the charge.

Despite the positive impact for GPs and some dentists, there is ongoing debate over the fairness and effectiveness of the pensions reforms, with some calling for further measures to address pension inequality and encourage more widespread saving for retirement.

Changes to System of Capital Allowances

In terms of businesses, there will be changes to the system of capital allowances. From April 1, 2023, until March 31, 2026, companies will be entitled to a 100% first-year allowance for capital expenditure on IT equipment and plant and machinery. The 50% deduction for special rate expenditure will also be extended during this period.

Expanding Cash Basis for Unincorporated Businesses

• There will be a consultation on expanding the cash basis for unincorporated businesses.
• This may lead to relaxations of restrictions on loss relief and the cap on deductible interest payments (currently £500).

Other announcements

Individuals:

Qualifying care relief

The income threshold at which qualifying carers begin paying tax on care income will increase to £18,140 per year plus £375-450 per person cared for per week for 2023/24. These levels will then be index-linked.

Fuel duty

The planned increase of 11p in fuel duty this year will be cancelled. For the next 12 months, rates will be kept the same.

Trusts and estates

An existing income tax concession for low-income trusts and estates will be extended. Further changes will simplify calculations and reporting. HMRC also intends to remove non-taxpaying trusts from reporting requirements by modifying inheritance tax regulations.

Businesses:

R&D tax relief

From 1 April 2023, there will be an increased rate of relief for loss-making R&D intensive SMEs. Eligible companies will receive £27 from HMRC for every £100 of R&D investment.

A company is considered R&D intensive where its qualifying R&D expenditure is 40% or more of its total expenditure.

Previously announced restrictions on some overseas expenditure will now come into effect from 1 April 2024 instead of 1 April 2023.

Cultural tax reliefs

The higher rates of the theatre, orchestra and museums and galleries tax reliefs will be extended for two years.

Creative tax reliefs

From 1 April 2024: 

• A new Audio-Visual Expenditure Credit will replace the current film, high-end TV, animation and children’s TV tax reliefs
• A new Video Games Expenditure Credit will be introduced

Tax avoidance measures

• A further £47.2m investment to support HMRC’s capability to collect tax debts
• Legislation to close an avoidance loophole that can leave HMRC out of time to assess tax due on capital gains when an asset is disposed of under an unconditional contract
• From the 2024/25 tax year, changes to the self-assessment tax return forms requiring amounts in respect of cryptoassets to be identified separately

A full overview of the announcements is available here.

TRUSTS CAN BE a very useful way to hold interests in land and property in the UK. One type of trust, called a bare trust, provides a simple and flexible way to manage and transfer property ownership and can be used in for basic tax planning. However, many people who have created such bare trusts are not aware of the HMRC registration requirements and the tax implications associated with them.

In today’s Shipleys Tax note we look at in particular what bare trusts are and the consequences of failure to register with HMRC.

What is a bare trust?

Bare trusts are often used for holding interests in land and property, as they provide a simple and flexible way to manage and transfer property ownership. A bare trust is created when a settlor transfers legal ownership of property or assets to a trustee, who holds the property or assets on behalf of the beneficiary. Unlike other types of trusts the trustee has no discretion over how the trust assets are distributed, and the beneficiary has an immediate and absolute right to the trust assets.

Bare trusts are often used for holding interests in land and property, as they provide a simple and flexible way to manage and transfer property ownership.

Trust Registration

The UK government’s Trust Registration Service (TRS) requires trustees to register details of certain trusts with the government within certain deadlines. The registration requirements apply to all trusts that have UK tax consequences, including trusts that hold interests in land or property.

Despite this, many people who have created bare trusts may not be aware of the registration requirements and the potential consequences of failing to comply. (Surveys by YouGov in 2019 found that over half of UK adults were unaware of the TRS and the registration requirements for trusts; and NFU Mutual 2018 which found that more than a third of people with trusts were unaware of the registration requirements).

Failing to comply with the registration requirements for a bare trust in land or property can have serious consequences. Trustees who fail to register the trust with the TRS can face fines and penalties. In addition, failure to register the trust can result in delays and difficulties in transferring or selling the property.

Bare trusts  exempt?

Some trusts, such as those that hold only cash or simple assets, bare trusts, and those already regulated, are exempt from registration.

Trustees who fail to register the trust with the TRS can face fines and penalties. In addition, failure to register the trust can result in delays and difficulties in transferring or selling the property.

However, the exemption does not cover trusts that hold interests in land or property. If you have a bare trust that holds interests in land or property, you will need to register the trust with the TRS if it meets certain criteria. The registration requirements apply if the trust has a UK tax liability, such as income tax, capital gains tax, or inheritance tax.

How do you register a bare trust?

The registration process involves providing detailed information about the trust, including the names and addresses of the settlor, trustee, and beneficiary, as well as information about the trust’s assets, income, and tax liabilities. The trustees must also keep accurate records of the trust’s transactions and be able to provide them to HM Revenue & Customs (HMRC) if requested.

What are consequences on non-registration?

Penalties for non-compliance with the registration requirements can be significant. Trustees who fail to register a registrable trust within the required timeframe can be subject to penalties of up to £5,000, as well as daily penalties of up to £10 per day for each day that the registration is overdue. In addition, failure to register a trust can result in criminal sanctions, including fines and imprisonment.

If you have a bare trust that holds interests in land or property, you will need to register the trust with the TRS if it meets certain criteria.

Another potential consequence of failing to register a bare trust in land or property is the possibility of a tax investigation by HM Revenue & Customs (HMRC). If the trust generates income or has assets that are subject to income tax, capital gains tax, or inheritance tax, the trustees may be liable for tax penalties and fines if they fail to comply with the tax requirements.

What are the tax implications?

In addition to the registration requirements, bare trusts that hold interests in land or property may be subject to additional taxes, such as stamp duty land tax (SDLT) and capital gains tax (CGT). The tax liabilities associated with bare trusts in land or property can be complex, and it is important to seek professional advice to ensure that the trust is set up and administered in a tax-efficient manner.

One potential advantage of using a bare trust for holding interests in land and property is that it can provide greater privacy and confidentiality than other types of trusts. However, it is important to note that the registration requirements and tax implications associated with bare trusts in land and property can be significant. Failure to comply with the registration requirements or pay the appropriate tax can result in penalties and fines.

In conclusion, failing to register a bare trust in land or property with the government’s Trust Registration Service can have serious consequences, including fines, penalties, and delays in transferring or selling the property. You may need to register the trust and comply with complex tax requirements. It is important to seek professional advice to ensure that the trust is set up and administered in a tax-efficient manner, and to avoid penalties and fines.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.