Tax Efficient Savings and Investments - Essay Example

Advanced Taxation Capital Gain on Sale of Boston Manor Plc Shares If one owned shares at 31st March of 1982, the market value of the shares on that day is employed in calculating the cost of the shares (HMRC.com, 2013). Bob and Isobel were holding shares at Boston Manor plc on 31st March of 1982. Thus, the cost of the shares and capital gain of the shares Bob and Isobel intends to sell is as computed below. Number of shares = 8,000 Market value of share on 31.3.82 = £1.50 Cost of the shares = 8,000 * £1.50 = £12,000 Selling value of the shares = £80,000 Capital gain = £80,000 - £12,000 = £68,000 Thus, the capital gain tax payable that Bob and Isobel should expect from the sale of the shares is £68,000. Owing to the huge tax amount that Bob and Isobel would be required to pay due to the capital gain accrued, there are a number of strategies that can be applied to reduce the tax amount to be paid for 2013/14. One of the strategies the couple can use to reduce the tax amount of the capital gain expected is to time carefully the disposal of the shares to fall into diverse tax years and take advantage of annual exemptions in each year (King & Carey, 2014). This strategy has the potential of reducing significantly the amount of tax that the couple will pay for the capital gain accumulated from the sale of the shares. This is because capital gains less than £10,600 per annum are not taxed on individuals (Mclaughlin, 2013). Thus, the couple can spread the sale of the shares in seven different periods to ensure the capital gains fall in different years. This will ensure the capital gains accumulated are exempted from taxation. The capital gain that will be realized if the disposal is timed in seven different periods will be (£68,000/ 7 = £9,714.286). This capital gain is below £10,600 per annum that will allow the gain to be exempted from taxation completely. Similarly, the shares can held under individual savings account (ISA) that will ensure the CGT liability is exempted from capital gains accumulated after disposal of the shares (King & Carey, 2014). Currently, the maximum value of shares that can be held under the ISA is £11,520 for tax year 2013/14 (HMRC, 2013). Thus, the couple can hold £11,520 of the £12,000 share value to exempt the capital gain from these shares from capital gain tax liability. This implies that only (£11,520/ £1.50 = 7,680) share of the 8,000 will be held under the ISA. Thus, the capital gain that will be accumulated from the extra shares held outside ISA will be as computed below. Excess shares = 8,000 – 7,680 = 320 shares Cost of 320 shares = 320 * £1.50 = £480 Selling price per share = £80,000/ 8,000 = £10 Value of the 320 shares = 320 * £10 = £3,200 Capital gain = £3,200 - £480 = £2,720 Owing to the limit of £10,600 per annum of the capital gain that can be taxed, the couple will be exempted from the taxation since the capital gain is below the limit. Another strategy Bob can use to reduce the tax amount liability from the disposal of the shares is transferring the shares prior to ensuing disposal to his wife Isobel. This is because share transfers between civil partners do not carry gain or loss valuation (Spencer, 2013). Thus, tax-free on both transactions of annual exemptions will be employed through this strategy. The shares will be transferred to the wife at the current value without been taxed since the transfer is undertaken without valuation of the loss or gain (James, 2010). Consequently, the shares will be disposed in the market at the current price. Since the disposal value and transfer value will be equal, the capital gain that will be accrued from the disposal of the shares will be equal to zero as illustrated in the computation below. Thus, the tax amount that the couple will be required to pay will be zero since the capital gain is zero. Value of shares at transfer = £80,000 Selling value of the shares = £80,000 Capital gain = £80,000 - £80,000 = £0 Gain from Sale of Brown Ltd Shares Initial value of the investment = £400,000 + £1,000,000 = £1,400,000 Current value of the investment = £3,100,000 Chargeable gain = £3,100,000 - £1,400,000 = £1,700,000 Thus, chargeable tax from the transaction = £1,700,000 * 50% = £850,000 Capital Gains Tax Payable Capital gains tax payable under the two assumptions listed will have different consequences when the shares are given to the two sons. When the gift hold-over relief is claimed and whole of relief is payable, capital gains tax of the shares given will not be paid (King & Carey, 2014). The gain in whole is held over or postponed until a time the person receiving the shares disposes the shares. In contrast, capital gains tax of the shares given will be paid if gift hold-over relief is not claimed (Finney, 2009). Consequently, if Bob intends to limit the gains his sons may incur in future, he should not claim for the hold-over relief. This will ensure that the capital gain from the current transaction is not postponed to the foreseeable future when his sons will dispose the investment. This implies if Bob and his sons do not claim the relief, the capital gains payable will be as computed below. The gift hold-over that was held in 1990 when Bob purchased the 50% from his father will be part of the capital gain tax payable under the current deal. This is because the gift hold-over gain is supposed to be faced when the owner of the asset or investment gives away or disposes part of the asset that was under the hold-over gain. Consequently, the capital gain tax payable that the transaction will face if the gift hold-over is not claimed will be as follows. Base cost = (£400,000 + £1,000,000)/2 = £700,000 Current value = £3,100,000/ 2 = £1,550,000 Capital gain = £1,550,000 - £700,000 = £850,000 Capital gain tax payable = £850,000 + 100,000 = £950,000 If hold-over claim is claimed by Bob and his sons, the capital tax that will be paid is the capital gain that was held-over when Bob acquired 50% of the investment from his father in 1990. This is because the gain is postponed until the day the owner disposes the assets (King & Carey, 2014). Consequently, the capital gain tax payable if the gift hold-over is claimed will be £100,000. Current Home Sale Capital Gains Tax Consequences Bob and Isobel will not be faced with capital gains tax for selling their current house since it is their main house. The private residence relief gives home owners the exemption of paying capital gains tax by selling their main house. This is because the current house has been the main residence and it has only been used as a home only under the private residence conditions (Curtis & Blake, 2006). Even though the couple has at one time shifted to a different home for one year, the length of their stay at the current house implies it qualifies to be nominated as the main house to enjoy the relief. Furthermore, the house has not been used for business purposes or partly rented. Similarly, selling the house before the separate garden is sold will qualify the couple for the capital gains tax exemption. Thus, the house must be sold at different time from the sale of the garden for the relief to be enjoyed by the couple. Second Home Sale Capital Gains Tax Consequences Selling the second house will attract capital gains tax since it does not qualify as the main house to enjoy tax relief. Thus, selling the second house currently will cause the couple to remit tax amounts from the capital gain that will be earned from the disposal. However, the couple can prevent the capital gains tax if it delays the sale. This is due to the recent reduction of the period within which to sell their prior house after moving to a new house to enjoy private residence relief. The government has reduced the exemption period for private residence relief from 36 months to 18 months (CIOT, 2014). Consequently, if the couple delays the sale of the second house up to 18 months after acquiring their new house, they will be able to apply for the private residence relief that will exempt them from paying the capital gains tax accrued from the disposal (Coleclough, 2013). Accordingly, the couple should ensure the second house is sold after of 18th month after acquiring the new house they are moving to avoid the capital gains tax from the sale of the house. Reference CIOT. (2014). Capital gains tax private residence relief final period exemption consultation draft clauses: Response by the Chartered Institute of Taxation. Retrieved 2014, from http://www.tax.org.uk/Resources/CIOT/Documents/2014/01/140124%20PPR%20Final%20Period%20Exemption%20-%20CIOT%20comments.pdf Coleclough, S. (2013, December 5). Press Release: Second home owners will need to watch overlapping ownership periods. Retrieved March 2014, from http://www.tax.org.uk/media_centre/LatestNews-migrated/second_home_overlap Curtis, R., & Blake, D. (2006, October 5). Permission to Land. Main Residence Exemption. Taxation Magazine. Finney, M. (2009). Wealth management planning: The UK tax principles. West Sussex, England: John Wiley & Sons. HMRC. (2013). Tax efficient savings and investments. Retrieved March 22, 2014, from http://www.hmrc.gov.uk/taxon/savings.htm HMRC.com. (2013). How to calculate capital gains and losses on shares. Retrieved March 22, 2014, from http://www.hmrc.gov.uk/cgt/shares/calc-cgt.htm James, M. (2010). The UK tax system: An introduction. London: Spiramus. King, J., & Carey, M. (2014). Personal finance: A practical approach. Oxford: Oxford University Press. Mclaughlin, M. (2013). Tax planning 2013/14. S.l: Bloomsbury Professional. Spencer, P. (2013). Property tax planning. Haywards Heath: Bloomsbury Professional. Read More