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Readers will note that, as we initially covered in our overview of the Budget, the NIC Employment Allowance faced two changes from 6 April 2016: firstly, the amount of this allowance has increased from £2,000 to £3,000 per annum; and secondly, the availability has been restricted such that it is no longer available where a director is the sole employee of the company.

The restriction for sole employee companies represented an attempt by the Revenue to rule out the incentive for taxpayers to operate via a personal service company to benefit from the NIC savings. However, astute commentators have noted that by simply bringing a second employee into the company – such as a spouse or family member – and paying them a small wage for their activities, the “sole employee” condition would not be met. The more risk averse could of course highlight concerns with regards to the potential application of the general anti-abuse rule to this arrangement, but where the remuneration was commensurate with genuine services provided by this individual it is difficult to see how this could be considered abusive.

However, the ICAEW recently noted that the Revenue’s interpretation of the law in this area differs from the understanding set out above, with a recent Employer Bulletin containing guidance which does not appear to be in accordance with the law. Instead we are informed that: “from 6th April 2016, if you are a limited company where the director is the only employee who is paid earnings above the secondary threshold, you will no longer be eligible to claim the Employment Allowance.”

There is clearly a difference between whether someone is employed, and whether someone is employed and paid earnings above the secondary threshold for NIC purposes. The former is required to ensure that the NIC Employment Allowance is available, whereas, as far as The Employment Allowance (Excluded Companies) Regulations 2016 (SI 2016/344) sets out, the latter is not.

We agree with the ICAEW that the Revenue’s interpretation of these rules is incorrect, and commend their efforts in raising this. However, advisers would be recommend to recognise the writing on the wall – regardless of whether the Revenue’s interpretation is ultimately shown to be incorrect, it is unlikely to be long before the (really quite favourable) drafting of these regulations is amended.

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Clients may sometimes want to give away assets to reduce their estate for Inheritance Tax (IHT) purposes. However, to be effective, the donor must not benefit from any asset gifted. This is not always possible – for example, where the donor relies on the income to fund their lifestyle. However, there is a way to get the best of both worlds by using a Discounted Gift Trust (DGT).

A DGT is a type of trust arrangement that enables a settlor to gift a lump sum into a trust whilst retaining the right to a regular payment.

The lump sum is typically invested, perhaps into an investment bond, and the trustees of the trust will make regular income payments to the settlor during their lifetime. It gives an opportunity at the outset to choose the payment level and its frequency. The underlying capital is then held on trust for the nominated beneficiaries.

The IHT implications of using a discretionary trust are discussed below. From an IHT perspective, the lump sum gift is separated into two parts:

The discount – an actuarial calculation is carried out to place a current day value on
the annual payments that the settlor can expect to receive. As this entitlement will cease on death, this element of the gift immediately falls outside of the settlor’s death estate.
The discount will depend on the level of payments that the settlor expects to receive. It will also depend on factors such as the settlor’s age and state of health. The longer the life expectancy, the more payments an individual is likely to receive, so the discount is likely to be larger.
The remainder – the lump sum less the amount of the discount is treated as a gift by the settlor. As this is a gift by the settlor to the trust, it is a chargeable lifetime transfer if a discretionary trust is used. However, providing this element falls within the available nil rate band (£325,000 less any chargeable transfers in the seven years before the DGT is set up) there is no immediate IHT consequences.
If the remainder value is in excess of the available nil rate band, there will be an immediate IHT charge at a rate of 20% of the amount above the nil rate band.
The value of the trust fund is not included within the estate of the beneficiaries.

IHT – on death

If the settlor dies within seven years of setting up the trust, the immediate tax charge will be recalculated using the full IHT tax rate of 40%.

IHT – exit charges

When money is paid out of the trust to the beneficiaries, either while the settlor is alive or after their death, there may be an exit charge. Where there is an exit charge, the maximum rate that will apply is currently 6%.

The regular payments made to the settlor are not subject to any exit charge.

Income Tax

Any income tax liability will depend on the investment product chosen.

Anyone thinking of using the DGT, must seek and rely on the advice of a suitable investment adviser and a suitable trust and tax practitioner.

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The results are in. And despite polls indicating that the UK would remain in the EU, the Leave campaign was ultimately successful in securing an exit vote.

The initial impact has been significant, with both the resignation of David Cameron as Prime Minister and the tumbling of the pound to 30-year lows. But leaving short-term turbulence to one side, what will Exit mean for the UK and for our tax system in particular?

In truth, at this stage it is simply not possible to say with any certainty, though we broadly know the options:-

If we wish to continue with full access to the EU’s internal market the UK will remain subject to much of the EU’s regulations and laws as price for entry, as is the case with Norway and Switzerland. Once in place, this would likely result in little practical or economic change for the UK – essentially “Brexit lite”. While the UK remains subject to the laws of the EU many of the advantages that this affords from a tax planning perspective – such as the availability of anti-discrimination arguments against transfer of assets abroad rules, reliance on the freedom of movement of capital, and other matters – could well remain available to advisers.
The alternative would be for the UK to accept that access to EU markets will be restricted, in exchange for less EU law and regulation – the implications of which are much harder to determine. This is in many respects much more of a gamble, but given the Leave campaign’s heavy focused on migration, adherence to the principle of free movement of people is likely to be highly controversial. If the UK were simply to “opt out” entirely, this would result in much more radical change, and much of the tax planning making use of EU jurisdictions could face significant challenge in the future.
Only the negotiation process will determine which side will win out. All we can say for certain at this stage is that the UK will be exiting the EU, the process itself is likely to take a number of years and the resulting implications are yet to be decided.

We – like many others – will continue to monitor the position with great interest, and will update you further as developments arise.

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February 16 2017