Falling assets? A tax opportunity.

Mar 24, 2020 | Taxation, Tax Tuesday

Falling money

The immediate challenge facing the world (we don’t need to mention its name) has already had, and may well continue to have, a significantly negative impact upon asset values. We are all are too well aware of this.

We hope and believe that this will be a temporary phenomenon, but, in the meantime, there are some things which you may wish to contemplate at this time. Consider just three illustrations, covering some of the main taxes:

Inheritance Tax planning and the use of trusts

As we have no doubt already blogged (possibly more than once), we continue to use trusts extensively in the management of our clients’ estates.

Transfers of assets into trust, typically to be held there for the benefit of the next generation(s), can achieve a number of valuable objectives. When well-designed, the trust enables Mum and Dad (say) to keep control of the assets they want to pass down, to protect those assets from risks (like matrimonial risk), and to put the value outside their estate for IHT purposes (avoiding a 40% charge on death). The trust may be subject to a small IHT charge every ten years, depending on values at each ten year anniversary, but even this is often capable of management.

We are, however, limited as to how much value we can inject into a trust in any 7 year period. Above a cumulative £325,000 (the value of our “nil rate band”), assets transferred into trust give rise to an unwelcome 20% lifetime IHT charge. When asset values are low, however, it clearly becomes easier to get more into the tax-free limit and still avoid the “entry charge”. This works very well where those assets values are likely to recover in the short or medium term.

Income Tax and locking in employees

There are many different ways of bringing employees into stakeholding.

Whether this involves outright award of shares or the grant of options (or whatever), the employment status of the individual underpins the proposition from a tax point of view and this often presents an obstacle. That obstacle comes in the form of the Income Tax because any award of value to an employee is taxable at their marginal rate. We always have some work to do, and a solution to craft, in order to minimise or avoid this “employment income” spoiler.

Addressing the issue of stakeholding with employees at a time like now, however, might mean (i) that we hold on to those individuals who can help bring the business through and beyond this challenging period; and (ii) that we introduce then to stakeholding on the basis of values which involve very low amounts of tax (even though those values might be expected to return to normal).

Capital Gains Tax, Corporation Tax and reorganising other ownership structures

The illustration above in relation to IHT and the use of trusts is one of many examples of a “reorganisation of ownership structure”. Most changes in ownership which involve transfers of chargeable assets do not involve trusts, however. Instead of IHT, these transfers normally have exposure to Capital Gains Tax (CGT) or Corporation Tax (CT).

Outright gifts of assets to family members (or others), incorporation of business, disincorporation of business, carving up of assets on divorce, “swaps” of commercial assets, etc., etc., will all typically involve CGT (or CT) based open “open market values” of the assets involved, at the dates of transfer.

Where asset values have fallen, these proposals can be substantially easier and more affordable (if not tax-free altogether, depending upon how the current marketplace in those assets might have become). Significant commercial and domestic steps can usefully be freed up for execution in these short-term circumstances.

If you would like to discuss any planning or transactions which you can see might take advantage of lower than normal asset values at the moment or in the coming weeks, please contact your relationship principal here or email tax@haroldsharp.co.uk.