ACCA Articles

Finance Act 2008: Final Considerations

This article is the final article in the series which looks at the impact Finance Act 2008 will have on students studying taxation papers for May and June 2009 exams.

This final Finance Act 2008 article will look at:

• Capital Gains Tax changes;
• Inheritance Tax; and
• Residency and Domicile.

Capital Gains Tax

The annual CGT exemption for 2008/9 is £9,600 and is available to each individual, whether single, married or in a civil partnership.

A new ‘Entrepreneurs Relief’ is available for disposals taking place after 5 April 2008.  The effect of the relief is to reduce the effective rate of CGT from 18% to 10%.  The following are qualifying disposals:

• A material disposal of business assets;
• A disposal of trust business assets where there is a qualifying beneficiary of the trust; and
• A disposal associated with a relevant material disposal e.g. the disposal of a business property used by a company where that disposal is associated with a disposal of shares in the company.

There is a lifetime limit of £1m of gains in respect of qualifying business disposals.  Therefore gains in excess of £1m on such disposals will not be eligible for relief.

Claims to Entrepreneurs Relief
Entrepreneurs relief must be claimed on or before the first anniversary of 31 January following the tax year in which the disposal is made.  The relief is not applied retrospectively and does not apply to past disposals.

How it Works
The gains and losses arising on a qualifying business disposal are aggregated and the losses are deducted from the gains.  Relief is available only if the resulting amount is a positive amount.  The positive amount is then reduced by 4/9ths.

However, in the event that the taxpayer makes a qualifying investment under the Enterprise Investment Scheme (EIS), then this gain may be deferred.

Illustration

Taxpayer sells her business which results in a gain of £500,000 before entrepreneurs relief.  The taxpayer in question has made no other claims to entrepreneurs relief and as a result the whole of the gains are eligible for relief.  On the assumption the taxpayer claims the relief, the gain is reduced by (£500,000 x 4/9) = £222,222 which means (£500,000 - £222,222) £278,000 will be liable to CGT at 18% (subject of course to any allowable losses and the annual exemption).

Inheritance Tax

IHT is not payable by everyone.

IHT only applies if the taxable value of your estate (excluding your share of any jointly owned assets and assets held in some types of trust) exceeds £312,000 in the tax year 2008/09.

There are some exemptions which allow you to pass on amounts during your lifetime without any IHT implications.  A couple of examples of these are:

• If your estate passes to your husband, wife or civil partner and you are both domiciled in the UK. These sorts of transactions are still outside the scope of IHT even if the value exceeds £312,000
• Gifts made more than seven years before your death.
• Other gifts exempt of IHT include Wedding gifts, and gifts in anticipation of a civil partnership up to £5,000.

In 2008-09 the rate of tax applicable in respect of IHT is 40% and tax is payable six months from the end of the month in which the death occurs.  However, tax on some assets (e.g. land and buildings) can be deferred and paid in instalments over 10 years.

Residency and Domicile

Residency
A person is UK resident if s/he:

• Is present in the UK for 183 days or more in the tax year
• Makes visits to the UK that average 91 days or more a year for four tax years.

Previously the normal rule was that days on arrival and departure from the UK did not count as days spent in the UK.  From 6 April 2008, any day on which an individual is present at midnight will count as a day spent in the UK.  There is an exception, however, for ‘transit passengers’.

Ordinary Residence
An individual is ordinarily resident in the UK if they have been resident for three tax years or has taken up residence in the UK and their intentions are to remain in the UK for the next tax year.  HMRC will also look at whether or not it ‘looks like’ the person plans to remain in the UK for the next three tax years.

Individuals will continue to be ordinarily resident in the UK even if not resident in the UK unless they go and take up permanent residence elsewhere.

Domicile
A persons domicile is essentially their home and temporary residence does not affect domicile.  It is very difficult to change your domicile.

There are 3 types of domicile:

Domicile of Origin
This is a person’s ‘default’ domicile and is essentially their father’s domicile at the time of the individual’s birth.  Where a child is born after the father dies, the mother’s domicile is taken.

Domicile of Dependence
A child under the age of 16 will change its domicile if their parents change theirs.  Children over the age of 16 are capable of adopting a domicile of their choice.

Domicile of Choice
It is difficult to change your domicile by choice.  In order to do this, an individual would have to leave the UK and go to another country with the purpose of living there permanently.

There have been changes in respect of the income tax consequences affecting persons who are non-domiciled or not ordinarily resident in the UK.

Until 5 April 2008, persons who were non-domiciled or not ordinarily resident were taxed on overseas income and gains brought into the UK.  However, from 6 April 2008, non-domiciled individuals who are not ordinarily resident are taxed for any given tax year on their worldwide income and gains, unless:

• The unremitted foreign income and gains for the tax year are less than £2,000; or
• They have no UK income or gains in that year and remit no foreign income or gains; and
• they are under 18 throughout the tax year; and
• the individual has been UK resident in not more than six of the nine tax years immediately preceding that year; or
• They make a claim to be taxed on the remittance basis.

Where a claim is made for the remittance basis to apply, the taxpayer will not be entitled to the personal allowance or CGT exemption for that year.  In addition, if the individual has been UK resident in at least seven of the nine tax years immediately preceding that year and is aged 18 or over the taxpayer must pay the new annual £30,000 remittance basis charge.  A taxpayer can only claim the remittance basis annually.

Illustration
A taxpayer who is resident but not ordinarily resident who performs duties partly outside the UK prior to 5 April 2008 would be taxed on the remittance basis.  From 6 April 2008 unless the individual is entitled, or makes a claim to use the remittance basis and paying the £30,000 annual charge where appropriate, duties performed partly outside of the UK will be taxable in full.

Students are advised to refer to the table relating to ‘income arising outside of the UK’.  Any items marked ‘remittance basis’ are all taxable in full unless the individual is entitled to, or makes a claim to use the remittance basis and pays the £30,000 annual charge, where appropriate.

Steve Collings FMAAT ACCA DipIFRS is Audit Manager at Leavitt Walmsley Associates and is a partner in AccountancyStudents.