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A selection of tax saving ideas this month, including a discussion of the possibilities for transferring your home into your pension fund!

Tax Diary July/August 2005

1 July 2005 - Due date for corporation tax due for the year ending 30 September 2004.

6 July 2005 - Ensure forms P11D(b), P9D and P11D are submitted to the Revenue.

19 July 2005 - PAYE and NIC deductions due for month ending 5 July 2005. (If you pay your tax electronically the due date is 22 July 2005)

19 July 2005 - Employers Class 1A National Insurance is due for payment, year to 5 April 2005

31 July 2005 - Second payment on account due for self-assessment tax 2004-2005.

1 August 2005 - Due date for corporation tax for the year ending 31 October 2004.

19 August 2005 - PAYE and NIC deductions due for month ending 5 August 2005. (If you pay your tax electronically the due date is 22 August 2005)

Inheritance Tax, Pension Funds and the Family Home

After 5 April 2006, you will be able to sell your family home to your pension scheme and various scenarios are then possible with regard to tax planning.

Some of the planning points to be aware of are:

1. Lump sum benefits on death can be written in trust - benefits are then outside the estate of the deceased person. If death occurs before age 75 and before pension benefits are drawn the total death benefit (including the family home if sold to the fund) can be paid to the beneficiaries IHT free. On death before age 75, having drawn pension benefits (by way of income drawdown), a 35% tax charge will be made on lump sums paid to the family - this is a small reduction on the 40% inheritance tax that would have otherwise been due. For death after age 75, the tax position is not yet clear.
2. You will need to sell your home to the pension fund at market value.
3. You will need to pay a market rent to the pension fund if you continue to live in the house - otherwise a tax charge will arise based on the deemed benefit. You may consider that this rent payment is another way to transfer regular amounts out of your estate for IHT purposes. The rent payment will also be excluded from calculations of contribution levels to the scheme.
4. The sale of the home to the pension fund could generate a large, tax free sum of cash for the owner, and fund settlement of any outstanding mortgage. (A sale of your principal private residence is generally free of tax - although liabilities may arise if you have not lived in the property for the entire period of ownership.) The lump sum could then be gifted and after 7 years all potential IHT liability will have disappeared.

There is no doubt that the relaxation in favour of investment in residential property, by pension funds, will open up an increasing number of tax opportunities. There is also no doubt that this is not a decision to make lightly - many other issues, including tax planning, should be taken into account.

The complexity of these arrangements mean that related paperwork must be correct and clear, and for this you may need our advice. We shall be happy to discuss any issues arising from inheritance tax scenarios if you believe they will benefit you or your family.

New VAT Invoicing Rules

A Reminder of the changes to VAT invoicing that came into effect on January 1st 2004.  From 31 December 2004, these changes have become mandatory, and all businesses must ensure that they follow them.

Your sales invoicing must observe the following changes:

• Unit price MUST be shown on VAT invoice.
• You may dispense with showing type of supply or different rates of VAT if you wish to do so.
• The limit for simplified retailers invoices is raised from £100 to £250 including VAT.
• Fewer items need to be shown in sterling.
• You no longer need approval to self-bill provided you meet regulations.
• There are also clearer rules to encourage electronic invoicing.

If you are at all unsure if your sales invoices comply with the new regulations send us a copy and we will advise.

Incorporating your Business - How to use Pre-incorporation losses

Offsetting Trading Losses

If you are currently managing an unincorporated business with unrelieved trading losses you can only take advantages of these losses if future profits arise from the same trade. These losses are not available to set against other income unless arising in the year the losses occur or the previous year.

So what can you do?

If you have other business interests that are profitable, you could consider the following:

1. Transfer the loss making, unincorporated business to an existing limited company that you own. You must transfer the trade in exchange for shares. The actual tax losses cannot be transferred direct to the limited company, BUT, you can claim to have the losses set off against any income you may receive from the company. i.e. your salary, rents and dividends. In this way you can effectively convert your trading losses into tax reductions!
2. Another interesting possibility is if you run two unincorporated businesses, one of which has accumulated unrelieved losses and the other is profitable. What you could consider is transferring both trades to the same limited company, again in exchange for shares. In this way any income generated by the profitable trade can be paid to you as salary and/or dividends, and you can then elect to have the accrued losses prior to incorporation set off as in the previous example.

Capital Gains Tax Trap - Giving Away Shares

Watch out for this one!

If you are considering giving away shares in your unquoted trading company then make sure you time the gift carefully. 

The following points should be considered:

• if you have held the shares for more than two years you may qualify for maximum taper relief when you dispose of the shares.
• when you make the gift the chances are you can elect to holdover any gain on disposal, however the held over gain is the gain BEFORE taper relief
• the recipient of the shares must hold them for two years before qualifying for the maximum rate of taper relief.

If therefore the recipient intends to sell the shares during the first two years, post the gift, his or her taper relief would be restricted. The resultant capital gains tax bill will be higher than it need be - your generosity may bear a hidden cost!