Credits About to Roll on Film Schemes

The government is pulling the plug on plans that offer tax perks for investors who back British productions, writes Philip Scott.

Investors are being offered the last few opportunities to shelter money from the taxman by putting their cash into a British film, with little risk to their capital.

Invicta Capital, a finance firm that was behind film schemes that invested in Wallace & Gromit: The Curse of the Were-Rabbit, Woody Allens Match Point, The Da Vinci Code and Casino Royale.

It is not the only scheme on the market: Crossover Capital has a plan that backs Provoked, starring Robbie Coltrane and Miranda Richardson.

The Invicta Capital scheme uses a tax break known as Section 42, while the Provoked plan uses a more attractive perk called Section 48. In both cases, investors get a 40 per cent tax break, but this is spread over a 36-month period with Section 42, and only one year with Section 48.

The tax has to be paid back eventually, but the idea is that you invest it in the meantime to earn a return greater than the tax you have to repay effectively a discount on your tax bill.

The deals currently on the market are likely to be the last because chancellor Gordon Brown brought the curtain down on both Sections 42 and 48 on April 1, although films that started production before that date and are completed by the end of December still qualify.

How it Works

With a sale and leaseback scheme, investors pool their cash to purchase a film and lease it back to the company which made it. This means the investors own the film and the production company has to pay rent to the investors to retain the rights to it, in the same way that a leaseholder pays a freeholder. The benefit for the production company is that it gets a cash injection to fund post-production costs. It uses only some of the cash in this way, and puts the rest on deposit to cover the rent.

An investor would typically put up 20,000 and borrow another 80,000 from a bank, giving a total contribution of 100,000. The 80,000 loan would be repaid with the rent from the production company.

The investor would get 40 per cent tax relief on their total contribution of 100,000 40,000, or 20,000 after his or her initial outlay. They could then invest this money as they chose. Barclays pays interest of 10 per cent fixed for a year, but you could just as easily put the money in property or, for more sophisticated investors, a hedge fund.

Suppose you earned interest of 10 per cent a year, or 6 per cent after tax, over 15 years. At the end of the period, you would have 47,930 a return of 27,930. However, you would be liable for tax on the rental income that you have received from the production company over that period, which would amount to 11,400 reducing your return to 16,530, or 82 per cent. So you have effectively received a rebate of 82 per cent on your tax bill.

Contact us now for more information.
paulraven@kpsk.co.uk

"A Lottery of Confusion" - The Telegraph

According to The Telegraph, holders of life assurance policies face bewilderment.

Many people set up life assurance policies with a view to using the lump sum paid out on death to meet inheritance tax (IHT) liabilities.

This has always been one of the simplest ways to protect your beneficiaries from IHT. But recent tax changes have created great uncertainty about how hundreds of thousands of families holding these policies will be affected.

The tax changes on existing, as well as new, life policies in trust are reported by The Telegraph to be a complete lottery.

Colin Jelley puts forward an example; if Charlie effects a life policy today and places it in trust for his family and dies after nine years and 11 months, then IHT of up to 6pc will be payable at the 10-year point and also when the cash is distributed to the family.

Similarly, if David effects a life policy today and places it in trust for his family and becomes terminally ill after nine years and 11 months then IHT (up to 6pc) will be payable at the 10-year point (as the open market value of the policy will be close to the amount of lifecover).

Unfortunately, the trustees will not have any cash to pay the tax, as all they have is a life policy. How will they meet their liability? Borrow it? Who would lend them the money when David may recover and they have no way of servicing the loan? Assuming they can borrow the money to pay the tax and that David does not recover but dies, then - when the cash is distributed to the family - as there was a tax charge at the previous 10-year point, there will be also be tax to pay on any distribution.

However, if Esther effects a life policy today and places it in trust for her family and dies after 10 years and one month, then no tax will have been payable at the 10-year point, assuming she was in normal health for her age at that time. Also, when the cash is distributed to the family, as there was no tax charge at the previous 10 year-point, there will be no tax on any distribution before the next 10-year point.

Confused? Now consider Fred, who has used his annual gifts exemption elsewhere and who takes a policy to repay his equity release mortgage on his death. He pays premiums from some of the equity released, as he has little or no income, and then dies. As the premiums paid after Budget Day 2006 are not exempt - because they are not from income - Fred will have to pay an IHT charge (at up to 20pc) on each premium and a further amount on his death.

Even if there is no actual tax to pay, because the premiums (due over any seven-year period) fall below the 285,000 threshold, there will be less of this nil rate band threshold available to his executors and thus more IHT at 40pc to pay on his death.

The intentional (according to HMRC) interaction of the Budget proposals for existing interest in possession (IIP) trusts with the new Gift with Reservation (GWR) provisions limits substantially the value of the protection of trusts from the Budget proposals.

Consider Barbara who has a pre-Budget policy in trust for her son and daughter equally. She falls out with her son and so removes him as a beneficiary. Perhaps 20 years later, her son dies. Despite being removed as a beneficiary all that time ago, Barbara's son's estate will include half the value of his mother's policy. This is because he is treated as making a gift of his half share to his sister and, as Barbara is empowered to include him again in future - should their relationship be reinstated - it is treated as a GWR. So, 20pc - that is IHT at 40pc on half the policy value - will go in IHT.

Still confused? - Contact Paul at KPSK. paulraven@kpsk.co.uk

We Want Our Money to Go to Our Children!

Despite the clampdown on many avoidance schemes, Alec and Barbara Davis, from Hunmanby near Scarborough, believe they will reduce the inheritance tax bill on their estate by 40,000 through setting up a discretionary will trust.

The retired couple, who have three children and 11 grandchildren or great-grandchildren, admitted that setting up the trust "took a bit of time, however it was definitely worth the effort.

The discretionary will trusts enable married couples and civil partners to take advantage of two nil-rate bands provided there are sufficient assets in their estates. Each nil-rate band currently reduces an inheritance tax liability by 114,000, if fully used.

How does this avoidance scheme work?

Wills drafted by specialist lawyers can specify that, on first death, an amount up to the nil-rate band passes to a discretionary trust instead of directly to the surviving spouse or partner.

This transfer of assets to the trust is potentially liable to inheritance tax but no tax is due because it does not exceed the nil-rate band. The balance of the estate passes to the surviving spouse or civil partner and is therefore exempt from inheritance tax.

The surviving spouse or partner would be among the potential beneficiaries of the trust and, therefore, can have access to the property placed in it, although specialist legal advice is vital to preserve the tax benefits. When the second person dies, the assets in the trust are passed to the remaining beneficiaries and are not included in the estate of the second person to die, saving inheritance tax. There is a risk that the trust may have to pay relatively small amounts of tax every 10 years and when it is terminated.

Penalties for Incorrect Returns

HMRC has published a consultation document setting out how penalties for incorrect tax returns and accompanying safeguards could be updated. Proposed are:

• a single penalty structure to apply for incorrect returns for income tax, corporation tax, PAYE and NICs, and VAT.
• no penalties where a taxpayer has taken reasonable care to complete the return correctly but makes a mistake that understates their tax liability.
• a moderate penalty if a taxpayer understates their liability by failing to take reasonable care.
• higher penalties if a taxpayer deliberately understates their liability.
• substantial reductions, or even complete waiver, of penalties if a taxpayer voluntarily discloses irregularities and gives HMRC all the help they need to quantify the tax lost.
• smaller reductions of penalties if a taxpayer discloses an irregularity at a time when they had reason to believe HMRC suspected it.
• suspended penalties for taxpayers who fail to take reasonable care when completing their return but agree to take steps to ensure that the problem will not recur.

For more information visit HMRC Tax Penalities

Tax Law Online

www.statutelaw.gov.uk is a new government website from which it is possible to access current legislation as updated by subsequent legal changes. It should be possible to access all legislation created from 1991 onwards as well as all Acts extant at that time. However, not all the tax and benefits legislation is yet available and is being added as quickly as possible.

Tax and Ebay Traders

Following recent stories of HMRC cracking down on people who trade on eBay and similar websites but without declaring their income, HMRC has issued a guide for people who sell items online, through classified advertisements and at car boot sales. The guide will help taxpayers to decide whether they have to notify HMRC and pay tax on the profits they make from such sales.

The guide covers:

• Income Tax
• Capital Gains Tax
• Tell HMRC you are liable of tax
• Losses
• VAT and VAT Registration
• Custom Charges
• Examples and Further Advice
• The Badges or Indicators of Trading

For more information visit - HMRC Selling Through Ebay

Residency

It has been suggested that following the Special Commissioners decision in Robert Gaines-Cooper v HMRC (SpC 568) that HMRC has changed the basis on which it calculates the 91-day test. This is incorrect. The 91-day test is set out in booklet IR120 (PDF Booklet IR120).

This guidance is clear that the 91-day test applies only to individuals who have either left the UK and live elsewhere or who visit the UK on a regular basis.
Where an individual has lived in the UK, the question of whether he has left the UK has to be decided first.

Individuals who have left the UK will continue to be regarded as UK-resident if their visits to the UK average 91 days or more a tax year, taken over a maximum of up to 4 tax years.

HMRCs normal practice, as set out in booklet IR20, is to disregard days of arrival and departure in calculating days under the 91-day test.

HMRC can confirm that there has been no change to its practice in relation to residence and the 91-day test. HMRC Residency