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Keep it – Grow it – Pass it on

Clare Clifford & Rebecca Colmey

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

Mr Johnson Mrs Johnson Daughter 1 Daughter 2 Son

Keep it – Grow it – Pass it on: Our family

Mr Johnson Mrs Johnson Farming Retail outlet Rental income including:

• Residential and holiday let
• Shooting let – 3rd party
• 1 barn let to local building firm

800 acres Listed farm house Farm Shop Farm Two cottages (ASTs) 1 x holiday cottage (converted barn) 5 acres of development land £200k Cash ISAs Various Stocks & Shares The business – One partnership The assets – personally owned – joint tenants (subject to a 30% mortgage of overall value)

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

• 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: Business property relief

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% ?

CURRENT

• Relief position:

― 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 ― Shooting let – 3rd party – Investment activity if passive rent ― 1 barn let to local building firm – Investment activity

Keep it – Understanding capital tax basics: Our family

Mr Johnson Mrs Johnson The assets – Personally owned The business – One partnership

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

Improvements to tax position

• 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

Keep it – Tax basics, business structures & asset

• wnership: Our family

Mr Johnson Mrs Johnson

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

• Reason

― Person owning the assets does not operate the business using the asset

• Solution

― Comprehensive partnership agreement with asset owner becoming a partner

Daughter 1 Son

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

• Up to £250 to each recipient per year
• Cannot be combined with annual gift exemption

Annual Gifts

• Up to £3,000 per year
• Can be carried forward one year

Gifts on consideration of marriage

• £5,000 from parents
• £2,500 from grandparents
• £1,000 from anyone else

Gifts which are normal expenditure out

• f income
• No limit
• Must be regular gifts
• Made out of income
• Must be able to maintain their standard of living

Gifts to political parties

• No limit
• Must be a qualifying political party

Gifts to charities or registered clubs

• No limit

Family maintenance

Exempt if for maintenance of:

• Spouse/civil partner
• Own child if under 18 or in FTE
• Dependent relative

Gifts for national purposes

• All gifts to certain bodies to preserve the national heritage

Gifts of UK land to certain housing providers

• All gifts of land to UK housing associations and registered social

landlords are exempt

Spouse / Civil partner exemption

• No limit unless spouse not UK domiciled (then £325,000)

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 Head of Tax (East Midlands) T: 07831 573369 E: Clare.Clifford@BaldwinsGroup.com Rebecca Colmey Senior Tax Advisory Manager T: 01827 302070 E: Rebecca.Colmey@BaldwinsGroup.com

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