28 corporate finance Are trusts dead?


Trusts have been widely used as vehicles to obtain tax advantages, writes Karen Harwood of Rice Associates


With the introduction of tax legislation specifically aimed at reducing such planning opportunities, the need for trusts as a tax planning tool has been greatly reduced. However tax advantages can still be obtained in certain circumstances.


Examples: Wealthy grandparents pay their grandchildren’s school fees out of net income having previously suffered tax at the higher rates (40%/50%) and lost the benefit of their personal allowances. If they were to make a gift onto trust for their grandchildren, any income distributions made for the benefit of the grandchildren are treated as the grandchildren’s income, against which each grandchild can offset his personal allowances and basic rate band. The overall rate of income tax payable can be significantly reduced.


The maximum lifetime gift to the trust without incurring an immediate charge to IHT is £325,000 (plus any unused annual IHT allowance). Assuming the grandparents each transfer assets with a value of £325,000 and the trustees generate annual income of £32,500, the yearly income tax saving can be as much as £16,250.


Transferring shares in a private company on to trust for the benefit of the next generation will reduce the value of the transferor’s shareholding. When valuing shares in a private company consideration is given to the size of the shareholding and the rights given to the shareholder. A controlling shareholding in a company will have a greater value than a minority holding, so when valuing the shares a discount is generally applied to smaller shareholdings. The overall reduction in the value of any shares remaining in the donor’s estate can be greater than the proportional amount.


Family Company Shares held


Gifted Retained


Shares % holding Discount 75


75%


(26) 49


Reduction in value of estate


(26%) 49%


0% 25%


£367,500 £382.500


Attracting investment You have a successful business that has only been trading for a few years but you need additional finance and expertise to expand it. How do you attract investment from outside individuals and experienced management to drive the business forward, wrires Chris Duggan of Griffins


Investment from outside individuals Enterprise Investment Scheme (EIS)


A qualifying trading company can raise money under the EIS scheme. This allows the company to offer shares to outside shareholders who then receive tax benefits for making the investment. The scheme, and the value of the shares being offered, must be approved in advance by HM Revenue & Customs.


If the shares are held for three years and the company continues to qualify, the benefits to investors are:


a) 30% up front income tax relief; b) 100% Capital Gains Tax deferral;


c) 100% Inheritance tax relief after two years if you are holding the investment at the date of death.


Should a capital loss arise on disposal, this loss is available but is restricted by the income tax relief originally obtained for the investment. This loss is also available to offset against the individual shareholder’s other income of the year of disposal.


www.businessmag.co.uk


Attracting experienced management Enterprise Management Incentive (EMI)


Share options can be offered to attract new management or retain existing key staff. An option is the right to acquire shares at a set price in the future. The employee will gain when the share price exceeds the option price.


This scheme is designed for small, independent companies with gross assets of less than £30 million.


A new or existing employee can be offered options on shares worth up to £120, 000 at the date of grant. The shares must be non- redeemable. They must be ordinary but can be non-voting.


If the exercise price is at least equal to the market value, as agreed with HM Revenue & Customs, on the date the option is granted then no tax or national insurance will be due when granting the options.


When the employee sells the shares he will be liable to pay Capital Gains Tax on the profit, either


THE BUSINESS MAGAZINE – THAMES VALLEY – JUNE 2011


18% or 28% - although it may even be as low as 10% if certain conditions are fulfilled. This is very favourable compared to income tax rates that could be as high as 50%.


Detailed information sheets can be downloaded from www.griffins.co.uk. As with all incentives, proper advice must be sought and careful planning must take place throughout.


Details: Christopher Duggan 0118-9635987 c.duggan@griffins.co.uk www.griffins.co.uk


Market Value £750,000


A proportionate reduction in the market value of the shares gifted would be £260,000. However, the actual reduction in the value of the transferor’s estate is £382,500.


Subject to meeting certain conditions, any capital gains arising on the transfer of shares to the trust can be held-over until the trustees subsequently dispose of the shares. The transferor can be appointed trustee if he wishes to retain a measure of control over the company.


Trusts can also be particularly beneficial


to resident persons who are considered to be domiciled outside of the U.K., providing long-term IHT and CGT advantages. Foreign property held by the trustees is excluded from the charge to UK IHT and capital gains realised by foreign trustees are not assessable to UK CGT until such time that a capital payment is made to beneficiaries resident in the UK.


The settlor can retain access to both trust income and trust capital. Any tax advantages can be enjoyed by the settlor during his lifetime and can continue long after his death, passing down to future generations even if they are considered to be domiciled in the UK.


As with all tax planning, it is important to seek professional advice prior to entering into any transactions, as the tax implications of getting it wrong can have serious consequences. The question of whether thrusts are dead...well that’s for you to decide but they do offer a very flexible platform which no other arrangement can offer.


Details: Karen Harwood 0118-9899780 Karen@rice-associates.co.uk


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