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• ARCTIC SYSTEMS: WHAT IS IT ALL ABOUT? ••
Current Position
It is actually all about a 2005 tax case called Jones v Garnett which has gone through the various tax processes until it finally (but not finally finally) came through the Court of Appeal. The tax payer won.
What this currently means is that the tax law concerned (known as ‘settlements legislation’) does not apply to many small husband and wife businesses in the way that was originally asserted by the Inland Revenue.
Background
The case is all to do with anti-avoidance. Legislation about this has been around since 1988 but the attempt by the Inland Revenue to apply legislation which related to a fairly narrow sector of the taxpaying public to a wider ‘audience’ is more recent. It was in 2003 that they gave notice of their intention to try and apply it to regular situations such as husband and wife partnerships and companies.
An oft-quoted example is that of a company being set up with a few shares and owned jointly by a husband and wife. One of the parties works full-time in the business whereas the other’s involvement may be nominal. However, the latter still receives dividends from the business. This was broadly the case with Mr & Mrs Jones and their company, Arctic Systems Limited.
The Inland Revenue took the line that this was a definite arrangement to ensure that part of the profits of the company was paid to Mrs Jones as dividends, which saved income tax. The Revenue tried to re-allocate the dividends to Mr Jones and then claim tax on them.
Appeal
The Inland Revenue has given notice that it intends to appeal against the judgement to the highest court in the land, the House of Lords.
Implications
The judgement in favour of Mr & Mrs Jones was obviously specific to their case and the House of Lords will also base their decision on these same facts. It cannot therefore be taken as a case which will automatically apply in all circumstances, whatever the final result.
Specific advice has been given by the Inland Revenue and Accountancy bodies about how to deal with tax affairs in the meantime. It is possible that the self-assessment tax return for 2004-05 for individuals may be affected as well as the current year.
Contact Us
If you feel that you might be threatened by this, please contact us as soon as possible.
• PENSION CHANGES: A SIMPLE SUMMARY AS A-DAY APPROACHES••
What to Contribute
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There is no limit to the amount you can put in to your pension scheme but there are restrictions on these amounts for taxation purposes.
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If you wish to contribute to a number of pension schemes, you can continue to do so.
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Contributions will no longer be based on age.
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Carrying back contributions will no longer be an option.
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As long as you are resident in the UK, tax relief is available on 100% of your earnings or £3,600, whichever is the higher figure (but see below).
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There is a limit on contributions called the ‘annual contribution allowance’. This will be £215,000 for the first year and it will be indexed annually. If a higher amount is contributed, tax at 40% will be payable on the excess.
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This limit will not apply in the year when pension benefits are taken or in the year of death.
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You can transfer existing pension schemes to a Self Invested Pension Scheme, for instance, and the above limits will not apply before transfer.
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Benefits
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It should be emphasised that you can save as much as you like in your pension scheme but there are limits for tax purposes.
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This limit is known as a ‘Lifetime Allowance’.
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The ‘Statutory Lifetime Allowance’ will be £1.5Million and it will be indexed annually.
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In certain cases, this allowance could be greater especially if pension rights before April 2006 exceed the limit.
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If the savings in your pension scheme exceed the Allowance, tax will be charged on the excess.
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If the excess is taken as a pension, it will be taxed at 25%; if taken as a lump sum, the charge will be 55%.
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25% of your pension fund (up to the Allowance) can be taken as a tax free lump sum.
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The benefits can be taken as unsecured, alternatively secured or secured pensions (consult an adviser for details).
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Death benefits relate to the type of pension but pension benefits can only be paid to your dependants whereas lump sum death benefits may be paid to anyone.
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Protecting you Pension Rights
You can protect your existing pension arrangements to ensure that they are not affected by the taxation charges involved in these changes. Some questions to ask are:
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Could the value of your pension rights exceed the magic figure of £1.5Million at 5th April 2006?
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Will the maximum annual income you receive from all your pension benefits be exceeding £60,000 gross by 5th April 2006?
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Even if the value of your rights is below £1.5Million at 5th April 2006, could it go above this in the future at the point where you take your benefits?
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Will the cash free lump sum from your existing pensions arrangements be greater than £375,000 at 5th April 2006?
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