Time for a tax rethink - Mazars - United Kingdom

With a raft of new taxes being introduced by the Chancellor aiming to claw back Britain’s national debt, Stacy Eden, head of property and construction at international accountancy firm Mazars, advises property investors on some of the devices that can be used to manage these future tax liabilities.

23/02/2010

In a desperate attempt to refill government coffers and regain public support, Alistair Darling has taken every opportunity to raise taxes on top earners. In the Pre-Budget report last month, he announced a one-off levy of 50% on discretionary staff bonuses of more than £25,000. Although the windfall tax is due to be paid by banks, rather than bank employees, the move has caused City workers to seriously consider relocating to more tax-friendly jurisdictions.

The new one-off bonus tax is clearly a populist move with an estimated yield of some £550 million in revenue. However, its introduction has already caused banking giants such as Goldman Sachs, who had reportedly earmarked £11.4 billion for its 2009 bonus pot, to explore the options of migrating parts of its UK business elsewhere.

This supertax on the City’s bonus pools comes on the heels of a controversial increase in the top rate of income tax, which was announced in the 2009 Budget. For those earning more than £150,000, the new 50% tax rate, up from 40%, is set to be introduced on 6th April 2010 and ranks as one of the highest rates amongst Western nations.

Nonetheless, the Chancellor’s appetite for revenue remains unsated, with an increase in national insurance contributions (NIC) on the cards. A 0.5% contributions hike was declared last month for individuals earning more than £20,000, on top of a 0.5% increase previously announced in April on earnings over £44,000, which will come into force in 18 months’ time. Together with the new 50% rate of income tax, this will mean anyone with an income exceeding £150,000 will have more than half (52%) of their earnings deducted as of April 2011.

Unlike the bonus tax, the latest rise in NIC rates is less about popularity and more about boosting revenue as the move is expected to yield £3 billion from 2011-2012.

With the impending April deadlines, both in 2010 and 2011, now is the right time for property investors to review their financial strategies and take the opportunity to restructure their property investments.

There are numerous ways available to minimise tax liabilities. One option to reduce tax bills would be to incorporate the business. Corporation tax currently stands at 22-28%, a much lower rate than income tax rates and therefore for ventures looking to retain or reinvest rental or trading income, incorporation can be a way of warehousing profits at these lower tax rates.

Of course, there is always the option of transferring the goodwill of an unincorporated business to a company at the relatively benign capital gains tax rates of 10-18%. Adding to this, unincorporated entities can also consider changing their accounting period to 31 March 2010 to bring forward profits into the tax year ended 5th April 2010 to benefit from being taxed at current income tax rates.

In a similar vein, dividends and bonuses that are declared before the introduction of the new income tax rate on 6th April 2010 are subject to lower income tax rates if earnings would otherwise be above £150,000. It is useful to compare 25% to 36.1% for dividends and 40% to 50% for bonuses, not including NIC.

As an alternative to full incorporation, the same tax advantages can be gained by admitting a company as a member or partner of an LLP or partnership. This structure could also provide the opportunity for capital gains to be diverted to individual partners, even if some or all of the income is attributed to the corporate partner.

At this time, it should also be noted that it is normally beneficial to hold investment properties outside a corporate structure to secure a single tier of tax at capital gains tax rates of 10-18%. If you have companies with significant property investments, consider restructuring to hold the properties personally.

For property investors, who have decided that they won’t be joining the stampede of City workers out of the UK, other tax mitigation measures to consider in anticipation of the new 50% rate are income splitting, pension contributions and ultimately holding property investments outside the UK.

ENDS

This article appeard in the January 2010 issue of Property Investor News.