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UK Property Tax Portal
UK Property Tax Portal
Whilst everyone around the World is captivated by the Michael Jackson tragedy, the content of his Will and the value of his Estate; an important factor has been largely overlooked by both the Media and sadly probably Michael Jackson himself! The fact that at first no-one could find a Will points to a lack of any Tax planning for US Federal Estate Tax (the equivalent of UK’s Inheritance Tax). Whilst the US has comparatively low rates of Income and Capital Gains Tax, Federal Estate Tax is relatively high at 45%. As Michael Jackson was not married at the time of his death, there is no spouse exemption (that could have avoided any Estate Tax on his death). There is a $3.5 million exempt amount and after that the Federal Estate Tax rate is 45%! (compared to 40% for UK Inheritance Tax). The State of California has no State Estate Tax but has high probate fees, based on the gross value of an Estate (no deductions for debts). In the US there is some relief for Business Assets, such as Jackson’s own and the Beatle songs, based on the ability to argue what is the “fair market” on death. There is also the possibility of paying tax on Business Assets in instalments over 14 years. The only other good piece of news is that the Assets in an Estate are re-valued on death for US capital gains tax, effectively eliminating that tax. However, even taking all this into account, Michael Jackson’s Estate will still be facing a substantial Federal Estate tax bill that may end up taking between 30% and 40% of the value of the Estate, something that most commentators have simply ignored! Daniel Feingold, Senior Partner of Strategic Tax Planning Partnership commented, “Michael Jackson’s situation demonstrates the need for good Estate Tax planning in advance that sadly too many International High Net Worth Individuals put-off until it is too late! Tax planning on an Estate of this size could have saved hundreds of millions of Dollars in Federal Estate Tax!”.
Daniel Feingold There has been a great deal of excitement in the press about MPs “flipping” their properties in order to avoid capital gains tax on selling their second homes, but this is a game anyone with more than one “residence” can play. In view of the hysteria about this in the press, I should perhaps point out that it is perfectly legal tax planning! The basic rule is that you are exempt from CGT on a gain from selling your “main residence”. You can only have one main residence at the same time (and if you are married or in a civil partnership, you can only have one between the two of you). There is one exception to this rule - if a property has been your main residence at any time during your ownership of it, then this exemption extends to the last 36 months before you sell it, even if in fact you have another main residence during that period. The idea of the legislation is to take account of the fact that you may need to buy a new home before you manage to sell the old one, but it provides an opportunity for some useful tax planning. If you have more than one “residence”, the law allows you to nominate which one is to be treated as your “main residence” for tax purposes and so enjoy the exemption from CGT. You must do this within two years of it becoming necessary to decide which is your main residence. Once you have made this nomination, by writing to the tax office that deals with your tax affairs, you can subsequently vary that nomination at any time in the future, and the variation can be backdated by up to two years. In the case of a married couple or civil partnership, both must sign the nomination and any subsequent variation. For example: Joe lives in Devon with his family, in an old farmhouse. He gets a job in London, and buys a small flat there where he lives during the week. He (and his wife) write to the tax office, nominating the farmhouse as their “main residence”. Three years later, Joe decides to sell the London flat, which has increased in value by say £50,000. He and his wife write to their tax office and vary the nomination of their main residence in favour of the London flat, with effect from (say) 1 April 2009. A few weeks later, they write again, and vary the nomination back to the Devon farmhouse, with effect from 1 May 2009. Because the London flat was properly nominated as their “main residence” for one month (April 2009), the last 36 months of the gain (so in this case, all of it) are exempt from CGT. The Devon farmhouse has lost only one month of exemption, so if it were sold after they had owned it for ten years, only 1/120 of the gain would be taxable, and that would almost certainly be covered by their CGT annual exempt amounts (£10,200 each for 2009/10). |