Private Client

HMRC consultation: a significant shake-up of partnership taxation

The more eagle eyed of you may be aware that HM Revenue & Customs’ (HMRC) released a consultation document on partnerships this week, representing the biggest shake up of partnership taxation for decades.

A very quiet revolution has been going on in the world of partnerships over the last few months, starting with low-key announcements in the Autumn Statement and further announcements in the Budget. Ordinarily, this would largely be of interest to partners in professional service firms and other businesses that traditionally operate in partnership (and I admit to a certain level of personal interest). But these changes are likely to be far wider reaching given the number of businesses that have in recent times incorporated limited liability partnerships (LLPs) for good commercial reasons. 

There are two parts to the consultation.  The first focuses on the presumption of self-employed status for a member (partner) of an LLP and the National Insurance that arises as a result.

The second focuses on countering the reduction of tax liabilities by firms that have introduced corporate partners to shelter their profits. While this kind of structuring has received mixed levels of interest, a number of businesses have explored it, often in order to preserve cash flow in the increasingly difficult market place.

The changes are expected to generate additional revenues for the Government of around £300m a year, so these changes are clearly significant. So the impact of the consultation may feel like yet more bad news for many firms struggling in a difficult economic climate. There have been well-reported victims of the downturn while others have seen cash flow become increasingly difficult in recent times – especially around tax payment deadlines. 

In particular, firms with fixed share equity partners as a normal step in career progression and those that have introduced corporate partners for reasons such as partner ‘lock in’ or long-term incentivisation will need to keep an eye on what the changes mean for them.

While the new rules won't come into effect until 2014, firms and partners that could be affected need to follow these developments closely over the coming weeks and months so they can prepare well in advance for the changes.

 The full consultation can be found at here.

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Katherine Bullock:
Read profile | Contact by email | Tel: 0113 289 4268

We’re Accountancy Firm of the Year

Our Private Client team has won the Accountancy Firm of the Year award at the Citywealth Magic Circle Awards 2013.  I am sure you can tell from the photo how surprised and happy we were!

The awards recognise the achievements of leading law firms, trust companies, family offices, tax advisors, investment managers and bankers in the wealth sector during the past year.

As the UK Head of the Private Client team, I’m over the moon that we won this award, especially as it’s decided partly by a public vote. We were up against some tough competition and it’s great to know that both the industry and the public recognise us as leaders in the market.

Thank you for all your support and votes and to the Private Client team here at PwC for all their continued hard work and commitment.

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Katherine Bullock:
Read profile | Contact by email | Tel: 0113 289 4268

Taking a more strategic approach to succession planning

Over the years I’ve had the privilege of meeting many family business owners. For me, it’s always fascinating to understand the way they manage the interaction between the personal relationships and the business.

I recently visited a third generation business, based in London, and was fascinated to discuss, with the current CEO, his approach to succession planning. With a son and a daughter, both with fantastic academic records and a desire to join the business, you may think that not much planning is needed. But this very forward-thinking gentleman has taken an extremely strategic approach; looking at where the business may be in five years time and looking at the new skills they may need and the new territories they may have to embrace.

He’s planned work experience and internship opportunities and has had really open dialogue with both children about their areas of interest and what they may want to bring to the business. And this means he and they can already see where they may fit in the company. Both children are already able to steer and influence business decisions; taking real ownership and, perhaps most importantly, having an opportunity to tread new ground, not just follow in footsteps – as with freshly laid snow this must be more exciting!

I wonder if you could take this approach with family tasks? If so my teenage boys really could do with some experience of plumbing, electrical and decorating!

Sian Steele is a director in our Family Business team. You can contact her on 01223 55 2226 or by email at sian.steele@uk.pwc.com.

Incorporation of your family owned business

If you’re a sole trader, as the business grows you’ll eventually face the decision of whether to incorporate. There are a number of points to consider when making this very important decision.

Firstly, by incorporating the risk of personal liability is reduced. Your liability is limited to the total value you subscribed for or invested in your new company. Incorporation also allows the business owner flexibility in extracting value from the business. With a new shareholding, it’s possible to extract profits from the business by way of dividend, which can be at a lower effective tax rate than taking out drawings or salary. The income tax benefits can be even larger for higher earners.

But you should also bear in mind that the incorporation of your business can lead to a greater administrative burden, such as the filing of accounts, tax returns and possibly an audit. To add to this, as the owner/director of the business, you must make sure that you adhere to all directors’ duties under the Companies Act.

Scenario planning and value extraction discussions can assist you in making this important decision. If you’d like to talk about the issues involved in incorporating your business, please do get in touch with me.

Susannah Simpson is a director in our Private Business Owners team. You can contact her on 0131 524 2436 or by email. 

Our Global Private Banking/Wealth Management Survey – a chance to have your say

Every two years, we conduct our Global Private Banking/Wealth Management Survey directed at private banks and wealth management firms. The aim of the survey is to provide these firms with a critical and objective perspective on topics currently driving change in the global marketplace.  

We firmly believe that addressing individual private clients’ needs must be at the heart of any decision that a private bank or wealth manager makes. This is more relevant than ever in today’s challenging regulatory and economic environment. This survey is one way we can make sure the input of a wide range of private clients of all nationalities reaches the top of the agenda.

So your involvement in this survey is very important to us. It will help us articulate and provide a better understanding of your needs to the private banking/wealth management institutions that serve you. With your help, our survey will give valuable directional information for potential service improvements from your private banks and wealth managers in the future.

We conduct the survey independently. Individual responses won’t be shared with anyone and will be kept confidential and anonymous. It doesn’t take very long to complete – around 20 minutes at most. If you want to take part and would like a chance to have your say, we’d love to hear from you.

You can find out more about the survey and how to register on our website here.

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Katherine Bullock:
Read profile | Contact by email | Tel: 0113 289 4268

Liquidity events: knowing when to move from family business to family office

As I was driving into the office today, there was a news item about office jargon, which not surprisingly is driving office workers to distraction – terms like ‘reaching out’, ‘low-hanging fruit’ and ‘win win scenarios’ being top of the list. My own pet hate for the last few months is ‘liquidity event’. It seems that some finance professionals are endlessly warning of the sudden impact of a liquidity event or to watch out for a liquidity event, by which I assume the speaker means someone realising assets and coming into cash.

Apparently these liquidity events are the key point at which family businesses turn into family offices. 

A family office is typically set up to manage investments and trust funds for a single wealthy family. The capital is the family's own wealth, sometimes accumulated over many generations. Traditionally, family offices have provided personal services such as managing household staff and making travel arrangements. They typically handle property management, payroll activities and management of legal affairs. The range of services can then extend to family governance, financial education, philanthropy and succession planning.

Once a family has sold its business or released capital, attention will turn to how that cash should be invested, managed and protected, as well as planning to avoid other liquidity events – for example, the inheritance of this capital at unsuitable ages by those of unsuitable dispositions. I’ve even been asked to advise on the training of young minds to take on the burden of wealth at the appropriate age. 

Managing wealth does require a different outlook to managing a business although many skills are interchangeable – financial skills, the ability to read and manage people, the ability to assess risk. Learning and teaching these skills and building the right team around the family to support and manage wealth is critical.  

When you strip out the jargon, there are of course important strategic objectives that occur at times of significant change. But many families would do well to consider how these could and should be managed well before a liquidity event.

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Katherine Bullock:
Read profile | Contact by email | Tel: 0113 289 4268

 

 

Offshore disclosure facilities – now’s the time to make a disclosure

We’ve seen a number of new disclosure facilities being announced recently. These allow taxpayers to disclose details of assets in income from a number of offshore locations to HM Revenue & Customs (HMRC) – you can read more on the detail of these facilities on our Tax blog here . The main locations recently announced are the Isle of Man, Jersey and Guernsey. 

These recent disclosure facilities are linked to information sharing arrangements which are going to be in place between the UK Government and the various jurisdictions. It’s also clear that HMRC already have some information in their hands.

Under the arrangements announced by HMRC there’s a set process to follow and some visibility on likely penalties – significantly less than those payable if HMRC have to open an enquiry!

So if you need to put your tax affairs right, it’s advisable to come forward now. There are strict deadlines to meet, so making a timely disclosure makes sense.

If you’d like to discuss how HMRC's disclosure facilities might affect you, please contact our specialist team on 0800 328 8215 or email tax.investigations@uk.pwc.com

Alan Gourley is a senior manager in our Private Client team in Belfast. You can contact him on 028 9041 5209 or by email at alan.r.gourley@uk.pwc.com

Welcome clarity on the general anti-abuse rule

 Last week saw the publication of HM Revenue & Customs' (HMRC) guidance notes on the new general anti-abuse rule (GAAR). The GAAR was principally introduced to tackle aggressive anti-avoidance and to deter taxpayers and promotors from entering into abusive arrangements to avoid paying tax. The guidance notes are a much anticipated insight into how the GAAR might be applied.

For example, in the past few months I’ve had a number of clients who’ve sold residential property that they have lived in at some point. Some have made multiple Principal Private Residence elections as the combination of properties owned by them have changed. You can elect which property should be treated as your main residence when you own more than one property and this allows you to potentially mitigate the tax on an eventual sale. This kind of election can be made within two years of the combination of properties changing and the election can then be varied at any time.

Second homes have been high on HMRC's agenda in recent times particularly where the property is claimed as a main residence. There have been numerous different tax cases looking at what’s required to provide evidence that the property was in fact the main residence and the quality of occupation.

So it will be a relief for many to see in the GAAR guidance notes that these kinds of election are not caught by the GAAR provisions. They’re not considered to be abusive, are afforded by tax legislation and HMRC has confirmed that it’s established practice to make multiple elections.

You can read about the GAAR in more detail on our Tax blog here.

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Katherine Bullock:
Read profile | Contact by email | Tel: 0113 289 4268

 

Moving away from home ownership – a potential new trend for renting

I was at a dinner for the property and construction industry recently where I heard that the average age of a first time buyer, if you exclude London, is 38. It drops to 32 if you include London. There was quite some debate around the table as to whether this meant a paradigm shift in the home ownership culture in the UK.  Perhaps we’re moving towards a European model where it’s more common to rent your home rather than buy. There was also some anecdotal evidence that more generations were sharing a home together regardless of class, even including the new ‘elite’ class identified by the BBC in its recent survey.

While the aspiration to own your home remains deeply embedded in UK culture, it may be starting to wane. This is due, in part, to the difficulties in securing a mortgage, the need to be mobile and the wider economic uncertainty. 

But there may be some unexpected consequences of a move to property rental. Many see their home as an extension of their retirement pot, either enabling them to live rent free when they retire or to realise capital when they downsize. With our current attitude towards saving and the average level of pension funding, there’s a risk that people could find themselves under-funded in retirement and unable to meet ongoing rental costs in retirement.  If we’re going to adopt a more European model as regards home ownership, we may need to make other social and cultural adjustments as well and property rents may need to decrease over the long term.

You can find out more about the changing property market in our recent Emerging trends in real estate 2013 publication here.

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Katherine Bullock:
Read profile | Contact by email | Tel: 0113 289 4268

 

 

Helping you understand Budget 2013 – the changes affecting individuals and private businesses

Budget 2013 was presented as a Budget for an ‘aspiration nation’, with measures introduced to support working families and reduce the tax and regulatory burdens for employers. A number of changes were announced that will have a specific impact on individuals and private businesses. So, which changes should you be aware of?

Income earned tax-free

An additional £560 can be earned tax-free in 2014/15, with the income tax personal allowance increasing to £10,0o0. Potentially, this can create a tax saving of £112 if you’re in the low to medium income tax brackets.   

Pension contributions

The lifetime allowance for pension contributions will reduce to £1.25m from 2014/15. If you have savings up to the current lifetime allowance of £1.5m, protection will be offered to prevent retrospective tax charges applying.  

To add to this, the pension contributions annual allowance will reduce to £40k from 2014/15. You may want to consider saving up to the maximum £50k in 2013/14 in order to maximise your tax-free savings – and don’t forget you can carry forward if you’ve not maximised your annual allowance contributions from the previous three years.

Seed Enterprise Investment Scheme

An opportunity to gain capital gains tax relief was announced.  This is a bid to encourage investment in the Seed Enterprise Investment Scheme (SEIS). The SEIS was launched in Budget 2012, offering 50% income tax relief on investments into early-stage companies. Relief can be gained if capital gains are reinvested into seed companies in either 2013/14 or 2014/15. This is a significant reduction so you may want to factor this in when making investment decisions.

National Insurance savings for employers

All businesses will benefit from an allowance of £2,000 per year from April 2014. The allowance will be offset against their employer Class 1 secondary NICs liability. It will be straightforward for you to claim the allowance through the new real-time information (RTI) payroll process.

Susannah Simpson is a director in our Private Business Owners team. You can contact her on 0131 524 2436 or by email. 

You can find out more about the measures announced in Budget 2013 on our website at http://www.pwc.co.uk/budget