French Property - Changes in Capital Gains Tax For Non-Residents

British owners of holiday homes in the Dordogne tend to think that French tax is irrelevant to them. It can come as a surprise when they're told on a sale that French capital gains tax will be payable. It comes as a further surprise when they learn the conditions for deductible capital expenditure. But the real sting in the tail is paying someone else to validate the figures they produce.

The basic principle

Capital gains tax is levied on the difference between the purchase and sale prices, less allowable capital expenditure. The purchase price is increased by the agency commission and notarial fees in order to give the true cost of purchase. The sale price is reduced by expenses incurred in connection with the sale - principally the survey costs associated with the obligatory "seller's pack".

The difference between these two figures will produce the gross capital gain.

Deductible expenditure

A vendor will be able to deduct from the gross capital gain certain capital expenditure - subject to conditions.

First, the expenditure must relate to "construction, reconstruction, enlargement or improvement". Construction, reconstruction and enlargement are easily understood: they will cover the extension or rebuilding of a house or building. "Construction" will extend to the installation of a swimming-pool.

The deceptive term is "improvement" - the French word used is "amelioration". You would have thought this broad enough to cover replacement kitchens and bathrooms. However, "improvement" is defined as installing equipment or raising the level of comfort without changing the structure of the property. Installing an elevator, central heating or air-conditioning are recognised as improvements, as would be the installation of a new bathroom. The refurbishment of an existing kitchen in that Dordogne home of yours may however not qualify.

Secondly, the work concerned must have been carried out by a French-registered tradesman. You cannot deduct materials you have purchased yourself - even if they are for use by the tradesman.

Thirdly, you must be able to produce supporting evidence of the expenditure in the form of invoices from the workmen concerned, and bank statements showing the payment.

If you are unable to meet these conditions, you can use instead a lump-sum allowance for expenses of 15% of the original purchase price, net of agency commission and notarial fees.

Deducting allowable capital expenditure from the gross capital gain brings you to a net figure.

Period of ownership

There is then a further allowance depending on the period of ownership. For every complete year of ownership after five years the gain is reduced by ten per cent. This means that if you own the property for fifteen years or more no capital gains tax will be payable in France.

Lump sum allowance

Once you have calculated the net capital gain you are allowed to deduct from it a fixed sum of 1,000 euros per individual owner - i.e. if the vendors are a married couple they will be able to deduct 2,000 euros.

Sting in the tail

Some of our British clients, selling their Dordogne homes, find the conditions for deductible expenses not only baffling but difficult to comply with - particularly where they have imported foreign labour or undertaken work themselves. Or they may simply not have retained the records needed by way of proof.

But the real sting in the tail comes with the requirement to appoint a French-resident tax representative in the case of all sales above a threshold of €150,000 - even if you are making a capital loss.

The tax representative assumes personal liability to the French tax authorities for the correctness of the return. And it goes without saying that he will charge a fee. In a recent straightforward case that we have had, a vendor selling at a considerable capital loss has had to pay the tax representative close to €1,000. If non-residents resent the system in the first place, the cost of a tax representative adds salt to the wound.

Distribution of Capital Gains and Dividends

The whole idea of investing is that every time the investor invests they expect to get a return on their in vestment. The concept of the mutual fund is one wanting to be grasped by most people, particularly what are the necessary procedures for getting their capital gains and dividends distributed.

The issue most times depend on the company you are involved with as they set the particular time of the when these funds can be distributed. The dividends are from the interest gained off the various securities put in place, and also from the portfolio itself. A lot of the companies doing trading will pay out certain dividends to their investors; meanwhile other companies will reinvest that particular sum and then in turn pay out a higher dividend at a later date.

Most of the times when an investor gets his or her return they are thinking that this is too small but they should be fully inclined with the rules of the particular contract that they signed, as there are taxable returns. The capital gains are the one's that are left for more than a year, all these securities have to be dealt with and a report given to the investor for proof of what transpired.

Capital gains are taxable by dealing with certain investments as if they were long term investments no matter how long they were purchased. As the necessary funds are being shared out they are reported on a special form known as the 1099-DIV. These procedures are required by law and are subject to a personal tax obligation on your part as the investor.

Why Pay Corporation Tax If You Can Set Up Offshore?

In the offshore jurisdictions of Guernsey and Jersey in the Channel Islands, no tax is payable on any income generated outside of the Islands. In other words there is no income tax payable on non Jersey or non Guernsey income. In addition, there is no corporation tax, no capital gains tax, no vat, no inheritance tax or gift tax.

Corporation tax is payable by UK companies on its profits in the UK. It is payable on all their income sources for income tax and capital gains purposes. It's also payable on their worldwide profits regardless of where they arise.

Non UK resident companies pays corporation tax only on their UK source income but only if the company both trade through a UK branch or permanent establishment and derive its UK source profits through that branch or permanent establishment. UK and international Companies can be restructured offshore in such a way to benefit from this.

The current corporation tax rate in the UK is 28%. For small companies with profits up to £300 000, the rate is 21%. Setting up or restructuring offshore would enable a saving on these taxes. The benefit of no vat would in addition allow your business to compete with competitors at a better price as no vat would be chargeable on products or services to clients. In the UK this would mean a discount to clients of 20% on products or services which is the current rate of vat payable in the UK.

If you are a UK company conducting business locally or internationally you should look at ways of restructuring your business or part of it offshore to benefit from non corporation tax and vat.

New businesses or companies who intend to do business in the UK and or globally should also consider such an option to benefit from the saving.

Structuring offshore also allows for other tax benefits like no capital gains tax, inheritance tax or gift tax.

Many well known large, recognised and reputable UK and international companies are incorporated in the Channel Islands or have a Channel Islands element/presence and make use of offshore tax benefits.

The question you have to ask yourself is, if large companies and organizations make use of the tax advantages offshore, why shouldn't your business also benefit from that. Every one is entitled to structure their affairs in such a way to pay less tax. There is a huge difference between evading tax and structuring for tax efficiency.

A number of companies listed on the London Stock Exchange, the Alternative Investment Market or other recognised stock exchanges have their incorporation in either Guernsey or Jersey.

Everyone's needs and tax consequences are different and should always take professional advice. The information provided in this article is for information purposes only and advice should be taken on each and every proposed transaction or structure.

Capital Gains Taxes and Their Issues

Most people have been wondering about the issue of capital gains tax and directly the long term investments, this is applied to assets that are held for over one year and these are taxed at a lower rate that income. This capital tax goes up and down every era as it is not as steady as it should be, in the era of Reagan it was 28%, in the time of the Bush administration it was cut in half to about 15% and also now in this present day of Obama's presidency you are seeing a hike in it by about 8-9%, which is 22.9 percent for the capital tax and this works out to a 52% increase for the previous 15% tax rate.

During the era of Reagan the capital gains tax went up by 40%, this was because of the increase from 20 - 28%. These very high rates could in turn help to decrease to deficit for 2011 by $12.2 billion and 2014 by about $19.7 billion and so on. The whole capital gains tax is something not to play with as it is never yet steady and you wonder if and when they are going to put a hike on it.

The issue of the this tax is sparking heated debates and having people wonder if this is a positive or a negative change. The best thing to do is take notice of it before it gets too late, if there is an event of a tax increase then you will see property selling rapidly to and with a slit decrease in the prices.

The Tax Laws Favor Capital Gains Over Regular Income!

The government gives tax advantages to capital gains because investments build businesses that provide jobs.

Also, someone with investments is less likely to need government assistance in old age. As a result, traders and investors do not have to pay Social Security and Medicare taxes on stock profits.

Also, there are no taxes for buying stocks!

Taxes do not become a consideration for traders and investors until they sell a stock or fund. At that point, they either have a capital gain or capital loss.

For every sale, you need to figure out which shares were sold.

This information is called the Cost Basis, and is important for figuring out if the sale results in a gain or loss, as well as whether the gain or loss is long term or short term.

A capital gain or loss is Short Term if the sale happened less than a year and a day after the purchase - otherwise it is a Long Term gain or loss.

Long term capital gains are especially favored. While short term gains are taxed at the same rate as your regular income (currently up to 35%), long term gains are currently capped at a maximum rate of 15% (though this cap rises to 20% in 2011).

For stocks and ETFs, you can choose two options for figuring out the cost basis: "First in, First Out" (FIFO) or Specific Shares.

For mutual funds, you have three options: FIFO, Specific Shares, or Average Cost.

You cannot use the Average Cost method for stocks and ETFs.

Paying Capital Gains in Real Estate

Let's start this out by learning what a capital gain is. A capital gain is considered the difference between what you paid for your investment and what you received as a return on that same investment.

The United States government already offers many homeowners all kinds of tax breaks. The biggest ones are the property tax deductions and the mortgage interest. Now if you're a home seller you also have a great advantage. You won't owe the government anything off the sale of your home. The way it works is like this. When you decide to sell your home and your single you can make up to a $250,000 profit and not have to worry about paying any capital gain taxes. What's even better is if you're married you can make up to $500,000 in profit and not owe a dime. Many home sellers are shocked by this huge break. You can utilize this new law an unlimited number of times. There are still some requirements that need to be met. The first requirement is the home has to be your principal residence. It doesn't apply to investment housing. You also must live in the home for at least two out of the five years prior to the sale of it.

The first step in the calculation of capital gains in Canada is you need to determine whether or not the property sold was capital property and then determine if the proceeds of this sale exceed the total sum of the adjusted cost base. Adjusted cost base along with the expenses that were incurred at the time of the sale. Claiming any type of reserve or any kind of capital gains deduction could have an affect on your capital gain reporting as well as your capital gain tax amount. If the payment will be received over several years claiming a reserve will allow you to report any capital gains from only the portion of the proceeds of the disposition you had received during that year. The lifetime total exemption for any person is $250,000. This isn't too bad especially if you made a small investment.

Capital Gains Tax Explained - CGT UK Checklist and How To Pay CGT

Capital Gains Tax ( CGT)

What is CGT?

It is a tax imposed by the government on individuals who make a gain by selling assets other than their main home, such as making a profit on stocks or profiting from properties which are bought for the purpose of resale.

Why is it important to know about CGT?

You may end up receiving a hefty bill on your personal earnings as each year the CGT tax alone contributes arround 3 billion pounds a year to HM Revenue and customs.
Who is liable to Pay CGT

All UK residents are subject to CGT if they make a gain over the given limit.

Whats the CGT exemption limit?

In the last 10 years CGT allowance has risen from just 6500 to 9200, which means anything earned outside the 9200 bracket will be held liable for CGT.

Secondly exemption applies on assets such as your

* Personal home

* Premium Bonds

* Stocks and shares held in ISAs or PEPs

* Child Trust Funds

* National Savings Certificates

* Personal Cars and posessions worth upto 6000

* Also in the event of death the assets belonging to a person are not liable to CGT

When is CGT Paid?

This is payable on 31st January following the end of the tax year in which the gain has been made.

Any Concessions under CGT?

Taper Relief policy has been made available to precisely calculate and reduce the amount of CGT by assessing the duration the asset has been kept.
How to pay GCT?

All gains made over the set government limit must be reported to HM Revenue & Customs.
For further help and guidance hmrc.gov.uk has detailed information and reliefs available on CGT.

French Capital Gains Tax Increase For Home-Owners

All sales of French second homes completing after 1st January 2011 will be subject to capital gains tax at the new rate of 19% instead of the existing rate of 16%. This is part of the French government's attempt to raise extra revenue to resolve their national indebtedness.

There have been debates in the French Parliament relating to other reforms of the capital gains tax regime, but it does not so far appear that they are to be implemented. This means that the existing regime will be continued, under which the taxable capital gain is reduced by 10% for each complete year of ownership after five years, resulting in a sale being tax-free if a property is owned for fifteen years or more.

Deductible Capital Expenditure

Capital expenditure that can be set against the gain remains limited to expenses arising from building, rebuilding, enlargement or improvement. The improvement category is restrictively interpreted. It relates to expenditure intended to raise the comfort level of the property without changing the structure of the building, such as the installation of a lift, central heating or air condition and work improving insulation. It is unlikely that replacement of items such as an existing kitchen or bathroom will be covered. On the other hand, the installation of a new bathroom probably would be.

To be deductible, expenses have to be supported with both invoices from registered French tradesmen and evidence of payment of the same in the form of bank statements showing the payment concerned.

UK Capital Gains Tax Liability

UK residents will also have to account to the Inland Revenue for capital gains arising, and will be able to set off French tax paid. Since the French rate of 19% will exceed the UK base rate of 18%, no UK tax will be payable. However, where the higher UK rate of 28% becomes applicable, local advice needs to be taken about the ability to set off capital expenditure disallowed under French rules, as well as the French tax paid.

Tax Representative

To add insult to injury, non-resident sellers of second homes for a price in excess of €150,000 will also have to appoint a tax representative, at a cost of at least €1,000, even if they are making a loss.

Avoid Paying Capital Gains Until The Ripe Old Age of 70

How, you might ask, can I avoid paying capital gains taxes until the ripe old age of 70? Well, this tool, which has been around since the 1950's, is shockingly unknown to the vast majority of Americans. Sadly, who knows how many millions of dollars have been paid in capital gains taxes that could have been used toward retirement, college education, medical expenses, or even a trip around the world.

The Private Annuity Trust, (or PAT for short) is an IRS-authorized program outlined under Section 72 of the Internal Revenue Code, which allows a seller of property to defer capital gains taxes at the time of the sale. There is no maximum to the size of the transaction and the PAT can be used on any kind of real estate transaction, whether it is your primary residence, a vacation home, or a commercial and retail developments.

Here's a brief outline of how it works:

Let's say you sell your home for $500,000. The property owner (known as the "Annuitant") transfers ownership of the property to the PAT. Then, the Trust "pays" the Annuitant for the property with a special payment contract call a "private annuity." The form of payment is a life annuity. Then, the trust sells the property to the buyer, getting cash for the property.

A private annuity is similar to an installment sale. However, in this case, the private annuity promises to make payments to the Annuitant for the rest of his life. For example, if the value of the property is $500,000, then the face value of the annuity is also $500,000.

The Annuitant is not taxed on the sale since he has not yet received any cash for the sale. In fact, if the Annuitant has other income or doesn't need the annuity payments, he or she can choose to defer the payments until the age of 70. Of course, he or she can also choose to start the payments immediately. However, the payments must begin by the age of 70. As each payment is made to the Annuitant, the calculated installment of the capital gains is paid.

This tax-deferral strategy has many investment and financial options, so it is important to have a very knowledgeable and experienced financial and estate planner who can explain the process thoroughly and will make sure you don't miss any crucial steps. It is also important that you have a real estate agent who is knowledgeable in this area and who can also help make sure the transactions goes as smooth as possible. It is also important for you to have an understanding of this strategy and you must know the Pros and Cons before getting involved. But remember, it's just another option.

Real Estate Tax Deduction - Have Your Cake And Eat It Too

Owning a property can help you benefit from the property tax deduction. This can actually be broken down in to several separate advantages. This tax deduction is actually a general deduction encompassing many. Some of the areas that advantages can be taken in that are included in the deduction are listed below.

One area that is included in this tax deduction is any interest paid on your mortgage. This is because the interest you collect on your house is also deductible up to a maximum of $1 million.

Another part of this deduction is what is called fee points, which are points that are associated with a home acquisition mortgage. Because each one is worth 1% this can really add up when it comes to taking advantage of this portion of the deduction.

Something else that is part of this deduction is equity loan interest. This interest that is the amount that you would pay on a home equity loan is only partly deductible, not fully. This part of it has a few regulations that must be followed according to the Internal Revenue Service.

A few other things that can be included in applying for the tax deduction includes home improvement loan interest and the home office deduction. With the home improvement interest you cannot include anything considered a repair. But with the home office deduction you can include any part of your home used for business, and can include repairs.

One thing that is a fairly big part of the deduction is the selling costs. These can include the real estate broker's commissions, title insurance, legal fees, advertising costs, administrative costs, and inspection fees. By taking advantage of this part of the property deduction you can lower your taxable capital gains.

This leads us to the capital gains exclusion that is part of the property tax deduction. If you have lived at your residence for at least two of the last five years then you are excluded from having to pay a capital gains tax. Married who file jointly have a limit of $500,000, while single or married filing single have a limit of $250,000 in the amount than keep in profits from any sale.

A small side note regarding moving and this deduction, is that if you relocate due to your job, you can include deductions related to the cost of this move. This deduction though is not quite as easy to take advantage of because of some of the IRS regulations regarding it.

The fact also that your property tax deduction is completely deductible from your federal income taxes among these other benefits, definitely makes it worth looking into.

Capital Gains

In finance, a capital gain is profit that results from the sale or exchange of an asset over its purchase price. If the price of the capital asset has declined instead of appreciated, this is called sa capital loss. Capital gains occur in both real assets, such as property, as well as financial assets, such as stocks or bonds.

Gains or losses from the sale or exchange of a capital asset are considered capital gains or losses. Per the IRS, almost everything you own and use for personal or investment purposes is considered to be a capital asset. Some examples are your home, your furniture, and any stocks or bonds you might hold in your personal account. So if a person decides to sell any of these asset for more than what they were originally purchased at, the gain is considered taxable. The reverse side is also true that capital losses can be used to offset your tax liability. However, this is not true when it comes to personal-use capital assets like automobiles. They do not affect tax liability.

It's very important that, in this business, you be very well versed in tax laws when it comes to capital gains. If you fail to pay close attention to these laws, you can quickly find yourself in trouble with the IRS.

There are some things to remember when dealing with taxes pertaining to capital gains.

One important detail is that once you bought a new property, you've got two years to sell it before you even get taxed on it. You may possibly choose to rent it for two years before you get taxed on it. If you sell the property after that, then you are going to pay capital gain on it. Long term capital gain would be around the 15% range.

Some may wonder if it is a good idea to move into the property for a period of time to avoid some of the capital gain taxes. This is something that you should discuss with your CPA. It may possibly be a good idea, but it depends on your own personal situation. If you have purchased a property that's in a high appreciating area, then you have a decision to make. Especially if you currently don't have the cash and can do without it. Forget about the tax ramifications and focus on the appreciation of the property. You won't get depreciation unless you do call it a rental.

It Is Time to Plan the Sale of Assets and Your Capital Gains Tax Liability

The New Year is here and yes it is time to look at your assets and see what you can do to exploit the favourable taxation of capital assets. There is little time to plan and to execute tax planning strategies before the 5th April so review your assets and act now.

Planning:

I always advocate planning; do not cheat! You will never be able to wipe out entire tax liabilities but with careful planning you should be able to save several small to medium amounts thus justifying the overall plan.

Is it a capital gain?

Obvious but some people jump in and do not realize that what they are planning does not give rise to a Capital Gain. Ensure that when you consider the taxation of the sale of an asset the correct charge is to Capital Gains Tax rather than Income Tax.

In your planning also consider Inheritance Tax.

I find that when taxpayers sell assets they are drawn immediately to considering capital gains tax. The first option to tax is as trading profits rather than capital gains. The deciding factor is whether or not the intention at the time of purchase is to make a profit from the resale, with or without improving the asset, within a short time scale.

As the sale of land and property are the sale of capital assets, a high percentage of taxpayers are drawn to capital gains to tax the profit. HMR&C does not. They fully review the transaction to see if it is a transaction in the nature of trade.

If this fails, the next attempt is to tax it under a little known provision where land, or any property deriving its value from land, is acquired with the sole or main objective of realizing a gain from the disposal of the land, or land is held as trading stock, or land is developed with the sole or main object of realising a gain from the land when developed. The section states that it is enacted to prevent the avoidance of tax by persons concerned with land or the development of land.

You can see that a transaction resulting in a profit of a capital nature could result in the profit being taxed as income. This legislation covers all individuals whether resident in the U.K. or not, so long as the land is situated in the U.K.

Tax free amount:

Every individual has £10,100 tax free each year. Although tax rates are lower for Capital Gains than they are for Income Tax it is still a worthwhile saving especially as you can take advantage on an annual basis.

The £10,100 not used by one person cannot be transferred to an other, married or not. If not used it is lost.

The strategy is to annually review your assets and see what you can realize to make a gain of less than £10,100 rather than wait for the natural disposal. The result is that the tax free amount can be compounded in value by reinvesting in a profitable investment.

Bed & breakfast to spouse & ISA:

A married couple can transfer assets between them without attracting liability, the asset passing to the other at a value that gives rise to neither gain nor loss. By spreading the ownership you immediately have a further tax free amount of £10,100.

You may want to bed and breakfast your investments at the end of the year in order to wipe out some of the accrued gain.

There is legislation that prevents this but there is nothing that stops you bed and breakfasting with your spouse/civil partner.

You sell and your spouse/civil partner buys thus keeping the holding in the family but having removed part of the taxable gain.

It appears from a guidance note issued by HMR&C that they find the sale of an asset standing at a loss and with the other spouse/civil partner repurchasing it to be unacceptable so take care and seek professional advice.

An alternative strategy is to sell the shares and buy them back through an ISA.

You can then have them in a tax-free vehicle for the rest of your ownership.

An ISA is in effect a tax haven. You can sell assets into the ISA and capital gains up to £10,100 are tax-free.

Joint Tenants v Tenants in Common:

Usually spouses/civil partners hold property as joint tenants. This means on death the property passes automatically to the surviving spouse/civil partner.

If the property is transferred to ownership as tenants in common, you are free to dispose of your share as you please either during your lifetime or by your will.

This adds to the planning opportunities and should be discussed with your adviser.

If you own property solely I suggest you see a solicitor as you could transfer the ownership to tenants in common.

Only transfer 1% and retain 99%. If you do not elect for the income to be split in that proportion it will automatically be dealt with under the 50:50 rule so the income is shared but the capital remains 99% yours.

This could be done by declaring a trust in favour of your spouse. HMR&C will accept the transfer took place on the date the document is signed. HMR&C have confirmed that such a trust is effective.

Residence:

Co habitees have an advantage over married couples where two houses are owned as each of the co-habitees is entitled to a principle residence free of tax if the other conditions are met, whereas a married couple is only entitled to the one exemption.

Losses:

In your annual review if you have made profits see if there are any assets that you could sell at a loss which can then be set against the chargeable gains thus reducing the tax payable.

If you have an asset that has become worthless you do not have to wait for the ultimate sale; you can claim the loss. For shares there is a published list which shows when HMR&C have accepted that a share has either become worthless or has negligible value.

If you have subscribed for shares in a trading company that is not listed on a recognized stock exchange and have lost your investment due to the shares becoming worthless, you can claim to have your capital loss set against your other income for that year or the previous year.

Losses c/f:

Where there is a capital loss brought forward and the chargeable gains do not exceed the annual exemption no deduction is made for the losses brought forward. They are preserved and are available to be carried forward.

Timing:

The date of disposal of an asset is the time when the contract is made and not when the asset is conveyed or transferred.

This means the exchange of contracts and not completion. For a conditional contract it is the date on which the condition is satisfied.

A sale timed for February 2011 delayed until after 6th April, 2011 will delay the tax payable from 31st January, 2013 to 31st January, 2014

This is a simple tactic but the interest earned could be substantial.

Purchase of own shares:

If you want to retire from your company, one way is for the company to buy back your shares.

If this happens you should seek advice as the transaction can be treated as giving rise to either an income or a capital distribution.

It will depend on your circumstances which is best for you; especially with the high Income Tax rates and as after Entrepreneurs Relief Capital Gains are taxable at 10%. I know the rate at which I would prefer to pay.

Peter Clare

The Poacher turned Gamekeeper

This information has been honesty written with a view to helping you: I am, like most people, not perfect and I apologise for any incorrections. I cannot be held responsible for any consequences of you using the information unless I have been made aware of the full facts of the matter and have expressed an opinion thereon.

A New Way to Avoid Inheritance Tax

With the freeze on the Nil Rate Band until 2015, Inheritance Tax (IHT) is back on the agenda for many people. If you have heard of Business Property Relief (BPR) but do not own a business you would be forgiven for assuming it wasn't something you could use. In fact BPR can be used to mitigate IHT by people that do not own a business.

BPR was introduced by the Treasury to enable business owners to pass on their family firms without paying IHT on any assets held for a minimum of two years. However, investors in assets such as portfolios of Alternative Investment Market (AIM) stocks and the Enterprise Investment Scheme (EIS) can also qualify for BPR.

Q: How much risk is involved in BPR assets?
A: Investing in AIM shares typically involves more risk than investing in quoted shares. BPR qualifying companies have been created that use less risky business trades that are backed by insurance and which focus on preserving your capital rather than growing it, which can make them less volatile than other AIM businesses, but they are still considered to be high risk.

Q: I thought ISAs the most tax efficient investment?
Once you have moved from accumulating assets to protecting them it may be worth moving your ISAs to BPR investments to avoid IHT. The reason for this is that whilst ISAs are free of Income Tax and Capital Gains Tax they are not free of IHT. However, tax is not the only consideration and you should also consider the potential differences in liquidity and risk.

Q: What happens if my spouse dies before the 2 year qualifying period ends?
A: Passing BPR investments from one spouse to another does not restart the two year clock, so if a husband owned them for a year and died and left them to his wife, and she died a year later, the assets would still be IHT exempt as long as they remain in BPR qualifying assets.

Q: I am in poor health or in my nineties. Will underwriting will be a problem?
A: There is no underwriting required so it can be used regardless of your age or health situation.

Q: Is it too late if I have already sold my business?
A: To qualify for BPR you must have owned qualifying assets for 2 years in the last 5 years and own them at your death, but the assets do not have to be the same as long as they all qualified. So if you sold a business or AIM shares 2 years ago which you had owned for 2 years, you can place the proceeds in another BPR asset now, and they will be IHT exempt immediately.

Q: Can I avoid Capital Gains Tax (CGT) as well as IHT?
A: If you have paid CGT on the sale of a business or other asset within the last 3 years, the proceeds can be reinvested into EIS assets so the CGT can be reclaimed and not paid until the EIS is sold. This means if the EIS is held until death, the CGT will never have to be paid as the liability dies with you. EIS investments can also benefit from 2 year BPR IHT exemption.

Q: Can a Power of Attorney (POA) use BPR?
A: BPR investments have to be held in the owner's name, so there is no relinquishing of assets which makes them suitable for POAs.

Q: Can BPR help reduce the IHT payable on my home?
A: If you have capital tied up in your home above the Nil Rate Band value, you can use an equity release mortgage to release cash to invest in a BPR asset. However this could have significant downsides if the value of your BPR investment was to fall compared with your outstanding debt.

Q: What if I have previously invested in a trust to reduce my IHT?
A: If you have invested in a loan trust within the last 10 years it is possible that you will have had little or no investment growth and therefore little or no IHT saving. One option you have is to cancel the loan trust and invest the proceeds into BPR assets.

Q: What pitfalls should I watch out for?
A: AIM shares are not generally as liquid as large company shares so you may not be able to realise your investment as quickly as you would with a mainstream investment. The schemes that focus on capital preservation tend to invest in one company and as such do not provide diversification between different shares which makes them high risk compared with a diversified portfolio of shares.

Summary

Whilst BPR assets do potentially involve high level of risk and less liquidity than mainstream investments; to some extent they do have the potential to allow you to have your cake and eat it by saving IHT whilst at the same time giving you access to your money and doing so without the usual risk level of AIM shares. They are certainly worth a closer investigation.

Find Your Real Estate Investing Tax Breaks

Real estate investing tax breaks are one of the big reasons many investors buy property. As an investor, you can write off all sorts of things that will end up reducing your taxable income, and therefore, reducing the amount that you owe.

Just to give you a feel, here are some of the things you can deduct that you're probably already spending money on in your real estate investing activities:

Travel to go see your property (Maybe it's even in the same city as your in-laws or your favorite beach vacation spot)
Interest on your mortgage for the property
Insurance on the property
Property Management, Accounting, Legal Fees, Accounting, and other professional advice
Training and education associated with your property
Repairs and Maintenance at the property

But remember, you can't charge for your own time working at the property, you can only account for things that you pay someone else to do. So, the next time you're wondering whether to pay the neighbor's kid to mow the lawn at your rental property or do it yourself, remember, you'd be paying him with pre-tax dollars.

Don't buy a property JUST to save money on taxes...

Tax savings can really add up! They can turn a property that puts money into your pocket every month into a tax write-off. But remember, it's not all fun and games. You still have the responsibility of finding a good deal, managing your property, and selling it when the time is right. Don't buy a property JUST for the tax benefits alone (a lot of people who did that got wiped out - bankrupted! - in the 1980's when the tax law changed and their tax write-off's went away.) Always make sure your property fundamentals are sound!

Knowing When To Sell To Maximize Tax Breaks

Knowing When To Sell To Maximize Tax Breaks Speaking of selling property, bear in mind that one of the purposes of the tax law is creating incentives for you to do certain things. The government is rewarding you (with tax breaks) for taking desired actions.

In the case of real estate investing, the government wants to reward you for holding property long term (over 1 year) as affordable rental housing in many cases - rather than having you get rich with short term fix-and-flip strategies.

If you hold the property for less than a year, the government treats your income as short-term capital gains tax, which is taxed at your ordinary income tax rate (that's HIGHEST of your tax brackets, usually).

To get the lowest tax rates, hold the property for at least a year and your profit on the sale will be considered long-term capital gains and the tax treatment will be much better. Currently, long term capital gains tax rates are just 15%, but President Obama has suggested he will raise the tax rates to 20-25%... so stay tuned!)

If you don't want to pay any taxes at all when you go to sell your property, consider participating in a 1031 Exchange, or Starker Exchange (same thing, different names). This is a transaction in which an intermediary helps you sell one property and then buy another similar investment property. You can roll all your profits from the sale of the first building into the purchase of the second building. If you do - you won't pay any tax on the new building! Do your own research, but it's worth getting more information on 1031's if you're selling a property with a lot of equity and want to make sure you'll minimize your tax bill!

Real Estate Professional Status

Long term capital gains tax treatment isn't the only real estate investing tax break in jeopardy... The Real Estate Professional status is also getting harder to qualify for. Real Estate Professional is an IRS designation which says you spend at least 750 hours a year working in real estate investing, and that real estate is your primary business. If you qualify for this designation, you have the ability to deduct ALL your losses from real estate, even if they are in excess of $25,000/year. If you don't qualify, your real estate deductions may be limited, especially if you are a passive investor not actively involved in real estate investing, or you have an especially high income.

Another bug-a-boo in the land of real estate investing tax benefits is the AMT or Alternative Minimum Tax. This is a tax that hits high income earners if they have too many tax deductions, even if those deductions are legitimate. Congress keeps patching this, but it's hitting - and hurting the middle class. If you earn more than about $130,000/year this may affect your family, so consult with a tax advisor to see if you'll be able to take advantage of the real estate tax breaks you're expecting.

More Real Estate Investing Information

Please, as you read through this article, bear in mind that I am not an accountant or tax attorney. I am another investor like you and I am just sharing from my own personal experience. Tax law is complicated and changing, so I encourage you to consult with your own team of professionals on any topics that you need more information on or strategies you plan on implementing.

Entrepreneurs' Relief - Will You Actually Qualify?

Entrepreneurs' Relief was introduced following the abolition of the Capital Gains Tax taper relief scheme in April 2008.

At the time, the government was intent on imposing an 18% flat rate on all capital gains, whether business or non-business assets.

However, after a period of lobbying from business, the government backtracked (or actually listened?) on their original decision.

Quite rightly, business pointed out that the new 18% rate was an 80% increase over the old 10% rate that applied to business assets that had been held for a certain number of years.

Entrepreneurs' Relief was introduced with a 10% flat rate on all qualifying business gains up to £1m. Following the March 2010 budget, the lifetime allowance doubled to £2m (and increased to £5m by George Osborne in the Emergency Budget on June 22, 2010 - the exact implementation date is yet to be announced).

The relief can be claimed any number of times up to the limit and a business disposal can apply to the whole business or only part of it.

In order to qualify for Entrepreneurs' Relief, you must satisfy certain criteria:

the business must meet the definition of a trading company, that is it must not undertake "to a substantial extent activities other than trading activities"
this is referred to as the "20%" test; 20% is a measure of the maximum non-trading activities that can be ignored for the purposes of Entrepreneurs' Relief
the shareholding must be in the individual's "personal company". In other words, you must hold at least 5% of the ordinary share capital (which will entitle you to 5% of the voting rights)
you must be an officer or employee of the company

One possible trap that could lead to an individual losing the relief is if they hold too much cash in the company.

For example, let's say that at the time of winding up/selling the business the value of the company's net assets is £3m. At the time the company ceases to trade, it is holding £750,000. There is one owner holding 100% of the ordinary shares carrying all the voting rights.

Only £120,000 of this amount was earmarked for business purposes. The surplus £630,000 in cash amounts to 21% of the company's net assets, assuming net assets have remained broadly the same.

As this example fails the "20% test", it is likely that the conditions have not been met to qualify for the relief.

The Capital Gains calculation would be (assuming the shares were originally acquired for a nominal amount):

2010/11 gains - £3m

Annual Exemption - £10,100

Taxable Gain - £2,989,900

CGT - £538,182 (18%)

Effective Tax Rate - 17.94%

Net Proceeds - £2,461,818

One Possible Solution

One idea is for the company to contribute to a pension scheme on behalf of the 100% shareholder (the owner).

For example, if the company contributes £100,000 to a pension scheme more than a year before the cessation of trade, the situation looks like:

as long as it receives 28% corporation tax relief on the pension contribution, its net assets will reduce by £72,000 (£100,000 x 28% = £28,000. £100,000 - £28,000 = £72,000)
corporation tax relief is available provided the contributions are made "wholly and exclusively" for the purposes of the business
the effect of the pension contribution is that the company's net assets will reduce by £72,000, to £2,928,000
the result is that the company's level of surplus cash would reduce to £558,000 (£630,000 - £72,000), which is below 20% of its net assets (£558,000 / £2,928,000 x 100% = 19.06%)
as long as this remains the case for at least one year before the date the company ceases trading, Entrepreneurs' Relief will be available

Let's have a look at the calculation now:

2010/11 gains - £2,928,000

Entrepreneurs' Relief (4/9 x £2,928,000) - £1,301,333

Gain after relief - £1,626,667

Annual Exemption - £10,100

Taxable Gain - £1,616,657

CGT - £290,982 (18%)

Effective Tax Rate - 9.94%

Net Proceeds - £2,637,018

For this example, I have assumed that the business owner's relevant income is below £130,000 for the current and previous two tax years. This is to ensure the company is not restricted by the amount of pension it can make for the owner because of the temporary anti-forestalling measures that apply in respect of contributions to pension schemes for high earners.

The Financial Tips Bottom Line

Entrepreneurs' Relief is a valuable benefit that could save you a sizable amount of tax, providing that you qualify. The pension contribution option may be worth considering, however make sure you speak to your professional advisers before taking any action.

ACTION POINT

If you are within a few years of contemplating the sale of your business, speak to your accountant now to ensure that your affairs are structured in such a way that you are likely to qualify in full for Entrepreneurs' Relief.

Be Aware of the New Tax Laws For 2009

Each year, the IRS releases changes in the US Federal income tax laws. Much hasn't changed for the past years but the recession during the last quarter of 2008 has been a great deal of influence to the new changes in tax laws. Tough economic conditions such as a recession mean that the taxpayer should pay special attention to those changes because this change may greatly affect your finances. Now let's take a look at those new tax laws for 2009;

Lower-income capital gains tax removed

It's essentially a tax break. Single taxpayers with a taxable income under $32,000 and married taxpayers with a combined income under $65,000 used to pay off 5% on those gains. That percentage has been reduced to 0% for the 2008 tax year. You can also benefit from this change in law business wise. Found in box 2a of form 1099-DIV, this change in law allows you to avoid paying capital gains taxes in the event you sold off capital assets like real estate, stocks or bonds for a profit off the price in 2008.

Tax credit for first-time home buyers

There are a couple of new laws that can benefit first-time home buyers. Firstly, if you decided to buy a home between April 9, 2008 and June 30, 2009, you can take a staggering $7,500 tax credit. This can help anyone immensely because not only would you gain a large sum, but this would automatically reduce your total tax payments.

The second law concerns private mortgage insurance (PMI). If you both took out the first mortgage later than January 1, 2007, and put less than 20% down on the house, you are very likely to pay PMI. This payment, however, will be deducted in full for the 2008 tax year. This means you will get all of it back.

Recovery rebate credit

Some people were not able to benefit from the economic stimulus payments last summer by then-president Bush. If you were one of these people, you may still be able to avail of it. If you want to find out if you are still eligible, you would need to use the Recovery Rebate credit Calculator at website of the IRS.

Increased penalty for late tax filing

While the above mentioned law changes are beneficial to the taxpayer, this one does the opposite. In this scenario, procrastination pays. The penalty for filing your return more than 60 days after the deadline has increased to either 100% of the unpaid tax or $135, whichever is smaller. Do not waste money

These are some of the important laws. For a full listing of the new tax laws for 2009, log on to the IRS website. Knowing the tax laws and actually abiding by them are very important not because the IRS always has a way of finding out your little tax evading schemes. Though this is true, the reason tax laws should be followed is because disobedience can cost you a fortune. Your finances have already been hurt by the current economic crisis, don't let ignorance of the new tax laws hurt you more. Know them. Take advantage of the laws that can benefit you, as well as avoid those that can do otherwise.

Why The Tax Rate For Art Sales Should Be Lowered

"Man will begin to recover the moment he takes art as seriously as physics, chemistry or money" Ernst Levy

What's the best capital gains tax rate for the sale of artwork? There are currently several arguments being made against reducing the capital gains tax rate on the sale of artwork from the current level of 28% to the 15% rate enjoyed by sellers of real estate, securities and other assets. Arguments against the reduction center around the view that art is not an asset which plays any real role in economic activity, particularly job creation, and revenue generation. Nothing could be further from the truth.

When the forces against tax reduction argue that to do so might shift money into art at the expense of more productive activities they fail to appreciate the significant and documented economic impact that art has made and continues to make on everything from job creation, to neighborhood redevelopment to tourism.

Uneven tax policy has also played a role in reducing museum offerings, and hence the public's access to art as a result of the tax treatment of artists. Since they are only allowed to write off the cost of materials for donated works instead of the fair market value of the artwork, artists are less inclined to make donations. The negative impact on museums is compounded by the strength of the art market of late, particularly for Contemporary art, all of which reduces museums' ability to acquire work.

Nevertheless, the value of innovation to our society is becoming more and more clear. Businesses that own and display art are perceived as being more innovative, interesting and desirable places to work. Real estate developers are incorporating art galleries into new condominium towers to entice buyers seeking differentiable living experiences. In connection with its recent renovation, the Aventura Mall in South Florida now includes a twelve-piece, museum-quality art collection designed to be a destination in a clear indication that creativity is valued and valuable.

In the third study conducted by the group Americans for the Arts titled Arts and Economic Prosperity III, data was collected from 116 cities and counties, 35 multi-county regions, and five states. The areas stretched from Walnut Creek, California to Anchorage, Alaska. They found that nationally, the arts generate $166.2 billion in annual economic activity, up 24% over the past five years. That's greater than the 2006 GDP of either Malaysia, Chile, the Czech Republic, Columbia, Singapore, and the list goes on! Furthermore, the arts provide 5.7 million jobs and contribute $104.2 billion to household income,and, they produce $30 billion in annual local, state, and federal revenue.

Two specific examples: In Baltimore City, Maryland, the arts are responsible for $270 million annually, provide 6,500 jobs, and generate $12.6 million in local government revenue. In a study released in June, 2007, Rochester, New York (Monroe County) calculated that the attendance and sales revenues generated by its arts and cultural organizations were responsible for a total $199 million annual infusion into its economy.

Far from playing a neutral role in this country's economy, art continues to demonstrate its uniquely productive role as a strong generator of jobs and tax revenue, just as any other important industry. Therefore there really isn't any defensible rationale for penalizing art investors with an incremental 40% tax bill.

Your Day to Day Tax Journey

As we move closer to the budget, the political noise becomes louder and louder, but few can get away from the points in relation to capital gains tax we covered last week. Vince Cable is now telling us that wealth should be taxed the same way as income, commenting that 'it is quite wrong and an open invitation to tax avoidance to have people taxed at 40-50% on their income but only taxed at 18% on capital gains' and 'for reasons of fairness and practicality' he wants to overhaul the entire capital gains scheme.

And so I typed in 'daft idea' to Google to see if it could come up with anything more stupid, but unfortunately, at the top of the list (try it) is an entry slamming David Cameron in relation to his proposals for when a prime minister should be changed. Hey ho, you cant get away from it.

Mr Clegg should be mindful of the fact most people have paid tax on their income (at 20-40%) with employers' and employees' contributions for national insurance having already been taken out at close to 23%. They had decided to invest their money to protect the security of their families, so they proceeded from their house (which they pay council tax on) along a road, over a toll bridge in a car (which they are taxed on to buy and pay extortionate road tax on just to drive) to see an independent financial adviser. They are stopped by a policeman who they pay for via tax, who asks to see their insurance which they paid insurance premium tax on, and they then proceed to fill their car with petrol which has 67% tax. They park their car in the space that used to be free and pay a parking tax and trundle in to see their adviser.

Their adviser looks at their tax position, sees the capital they have is being taxed in the building society and recommends the most appropriate tax solution. They take the appropriate risk and invest. Their adviser charges a fee which has Vat added to it. Clearly a stressful day, they pop in for a beer which is battered with tax and consider taking up smoking to deal with the stress but realise it would kill them twice.

They pop back to see their family for a tax free hug and kiss and sit down to relax in front of their taxed TV. They sleep tax free. The years go by and their investments in property have been taxed each year and their liquid investments have been taxed as they grow apart from their ISAs and offshore bonds. And now, somehow, Vince reckons in the 'interests of fairness and practicality' they should pay 40-50% when they sell it. Get a grip of your life.

To what problem is that a solution?

All this will do is move capital offshore and into liquid investments that may or may not make their way into the UK. So instead of buying property in the UK, I buy an offshore bond which buys property investments elsewhere in the world. The result is that I am tax free and the UK is potless. Brilliant idea (which when googled brings you to a site telling you that to be entrepreneurial you need to create new ideas - work on it Vince).

It strikes me that they are trying to tackle the short sharp people (hedge funds et al) who make a mess of our markets but are missing them. Spread betting is amazingly tax free when it should be taxed as high as is possible for example.

They have already realised that upping CGT will create modest revenue so what's the point. Let us remember that 'mitigation' uses the tax rules that apply and makes sure you pay as little tax as you can. Avoidance is illegal avoidance of tax. Vince's use of the word 'avoidance' may have been unfortunate or deliberate. If deliberate he should aim the tax changes at those ruining the country, because the UK taxpayer will respond with more clever ideas to mitigate that tax. They have paid enough.

If you have a financial query for Peter that you would like answering call 0845 230 9876, e-mail info@wwfp.net

Author of article is Peter McGahan
Source of data is IFA online

Protecting Investments From Capital Gains Tax

It is widely believed that we will find ourselves with capital gains tax increased from the current 18% to as much as 40-50%, with the gain added to income. This will have two possible impacts on the housing market.

Consider how you can achieve returns on an investment property. There is a potential income and a potential capital increase. The risks lie with the possibility of a lack of occupancy affecting the income and property prices falling.

And so the potential for gain will have to offset this potential for loss.

How can the government expect us to become excited about investing in property where the income on the property is taxed at the highest rate and the gain on sale will also be taxed at the highest rate.

The potential for gain is so diminished that investors will be discouraged from investing at all.

The concern is that this will stifle demand (why would you buy) which will then lead to a fall in markets. As we are a debt driven economy each fall in house prices directly impacts consumer confidence and in turn spending on the high street which is a large impact on GDP (the economy).

There is also the potential however that property investors realise they cannot sell their house due to the tax and so supply is greatly reduced and counterbalances the market. We will see.

Investors who normally buy shares, property and unit trusts, Oeics will be subject to the new capital gains hikes and so should look to realise some gains where they can, to crystallise them in this tax year pre budget.

After that budget the canny planning will begin. Consider however, what you can do right now.

Isas are tax free so you should maximise them and if you have a pension and are a higher rate tax payer, consider making a contribution now as higher rate tax relief will probably disappear.

In the meantime, there is a tax efficient vehicle that many investors are missing out on. That is the offshore bond. Before you think 'Cayman islands,' this is simply a normal investment bond which is held in tax beneficial regions such as the Isle of man, Ireland, Jersey and Guernsey. Norwich union or Standard Life may have a UK life office but they also have an offshore version in one of these tax constituencies.

The effect/benefit is that the investments do not pay tax as they grow and you benefit from compounding gross roll up of growth.

You can buy the same property and shares inside the bond as you can outside of it but they simply grow free of tax.

Investments are taxed as income rather than capital gains tax and so the gain at encashment is added to your income. However this is where you can potentially save.

Investment bonds allow you to assign parts of them to others who have a lower tax rate than you. For example if a segment of your investment bond was assigned to your child who was going to university and they encashed it, the gain would be added to their income for the year.

If their income tax allowance was, say £6475 (the government are talking about increasing the income tax allowance to over £10,000) and the bond was encashed with a £13000 value but the gain was less than £6475, there would be no tax to pay.

This is an excellent way to achieve tax free growth and tax free distribution, particularly if the government are signposting that income tax allowances will increase substantially.

Another option is to become non resident for a year and then encash and you will not be subjected to UK income tax.

Make sure you use a fee based independent financial adviser as the commissions (often disguised) on bonds are very high at c8%, but also a 2-3% fee to an adviser is far more efficient than a 2-3% commission on an offshore bond due to how the life office can reclaim that expense.

If you have a query on annuities, CGT offshore bonds, tax or property in tax efficient wrappers call Peter on 0845 230 9876

Author: Peter McGahan

Tax Benefits of Buying UK Properties Through an Offshore Structure

There are many advantages to creating an offshore structure and protecting your property in it. Tax advantages are only one of these - let's look at this in a little bit more detail:

In offshore jurisdictions like Guernsey and Jersey, no tax is payable on any income generated outside Guernsey and Jersey. There are no capital gains tax, no inheritance taxes and no exchange control regulations which allows for free and easy transfers of funds.

Both islands are widely recognised as two of the worlds premier international finance centres. The islands offer a first class infrastructure, stable economy, a transparent, comprehensive, sophisticated, modern and pragmatic law system, and easy access to courts, efficient company registries with cutting edge technology and established relationships with the United Kingdom which goes back a number of years. English is the main language.

Using property as an example let me illustrate an simple but dramatic advantage of buying property in an offshore company:

In the UK, stamp duty land tax ("SDLT") is payable on contracts for sale and purchase of UK property. The SDLT is payable by the purchaser. Just to highlight one of the most obvious and simplistic taxes payable.

When a UK property is purchased and transferred to an offshore company, the UK stamp duty land tax SDLT is payable by the offshore company as purchaser on the transaction. BUT when the shares of the offshore company, which owns the property, is eventually sold on, then SDLT is NOT payable in the UK by the new purchaser as there is no physical transfer of the property but only the transfer of the shares to the new purchaser. The shareholders of offshore company will also not pay capital gains tax on the sale price of the shares as no capital gains tax is payable in the Channel Islands.

The benefit that derives from the saving of SDLT for the purchaser is that it allows the seller to negotiate a better sale price for the sale of the shares of the offshore company.

Many UK properties are owned by international and listed companies, investment firms and funds through an offshore structure.

Typical offshore structures take the form of a trust with a Guernsey or a Jersey company. The Guernsey or Jersey company can conduct business anywhere in the world and this would have tax benefits and provide protection of investments and assets.

The costs for setting up a trust and a company structure in the Channel Islands starts from as little as £1,500 and could SAVE you more than that merely on the SDLT!

All regulatory requirements are met by the "offshore management team"which gives you PIECE OF MIND that all is in order with the structure's affairs. The annual management fees for each of a trust and a company ranges between £1,500 and £10,000. But make sure you deal with a reputable management firm that will deliver excellent service AND value for your money! Also check on HIDDEN COSTS by asking the management firm directly!

Management fees of the offshore company include the provision of company directors, the company secretary, the company treasurer, safe custody and the preparation of the accounts. Fees are charged in addition for time spent necessarily on the trust or company. The additional charges for time spent would depend on the nature of the structure, the activities of the structure and what needs done in addition to the scope of the work included under the annual management fees. Some structures only hold assets and wouldn't involve extra work so there could be no or minimal charges for additional time spent.

Many well known, recognised and reputable international companies are incorporated in the Channel Islands or have a Channel Islands element or presence. A number of companies listed on the London Stock Exchange, the Alternative Investment Market or other Recognised Stock Exchanges over the world have their incorporation in either Guernsey or Jersey.

Everyone's needs and tax consequences are different and should always take professional advice. The information in this article is for information purposes only and specialist advice should be taken on each and every transaction.

Tax Effectiveness For Charitable Donation Part II - Annual Donation Limit at Death

As we mention in a previous article, the federal government has creates a tax reduction program for people making donation to charities because giving money to charity provides many benefits to both the community and the donor, most people do not give much thought to developing a tax-effective strategy for charitable giving. Although many people make charitable bequests in their wills, other ways of giving may be less costly to them and their estates. In this article, we will focuses on the tax effectiveness of annual donation limit at death for individuals.

I. Definition
Any charitable made in a person will are deemed to be contributed in the year of death.

II. Limitation of contribution
a) The donation claim limit from 75% of net income to 100% in the year of death.
b) Any excess donations made in the year of death can be carried back one year.

III. Donation of capital property

Making a donation of capital property rather than selling the property and then donating the cash has become more attractive for taxpayers as result of recent changes in the income tax rules. These tax rules provide for preferential treatment of capital gains from specified securities. The following rules apply for gifts of capital property
a) Donation receipt

The charity must issue a donation receipt for an amount equal to the fair market value (FMV) of the property. Care must be taken to establish an appropriate FMV for the donated property and The receipt issued by the recipient will record their acceptance of the FMV of the donation. In some cases, more than one appraisal may be required.
b) Claim limit

In addition to the annual general charitable donation claim limit of 75%, the charitable donation claim limit will be increased by an amount equal to 25% of any taxable capital gains realized as a result of the donation.

c) Private company shares or debt
Gifts of this type of asset are limited by recent changes in the income tax rules. The donation of flow-through shares is made through the use of private corporations might resulting in additional tax savings, because this type of donation is not subject to capital gains tax, the full value of the flow-through shares donated would be non-taxable.

I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page:

How Property Investors Can Defer Capital Gains Tax By Using Section 1031

As a real estate investor, you must be aware that each and every dollar that you have working for you in an investment is making you money, and, conversely, every dollar that isn't working for you represents a lost opportunity to further compound your profits. So, when the time comes to put your property up for sale, you have two options. The 1st option that you have at your disposal is simply to make a outright sale and recognize a gain. This means you must pay capital gains taxes. Whenever you pay money to the United States government you are losing potential profits.

The second, and often more lucrative option is to conduct a 1031 exchange. A great way to keep more of your investment funds making you more money is to conduct an exchange instead of making an outright sale. Section 1031 has a non-recognition provision, meaning you do not have to pay the taxes immediately; in fact, you can defer the taxes indefinitely, while your wealth is compounded by the extra income produced by investing your tax deferment.

As an example, let's say you own some small investment properties, like duplexes, whose values have increased over time. At this juncture, your first inclination might be to make an outright sale and reap the benefits of your investments. But a wise investor with an eye to the future might decide to conduct a 1031 exchange and place the proceeds from these smaller investment properties towards the purchase of another, larger property, which will, itself go on to appreciate in value over time, meanwhile continuing to make you more money. Additionally, the money available to you from your capital gains deferral will function to increase your ability to leverage for greater loans, maximizing your potential profits.

1031 exchanges aren't just for land and buildings, either. It is possible to make a 1031 exchange on any sort of real estate held for investment in your business or trade, as well as certain kinds of personal property, from cranes or backhoes to an aircraft or collector car. Section 1031 is especially beneficial for those who have money in antiques or collectibles like collector cars, because of the higher capital gains liability on the sale of these items. It is important to note, however, that you cannot make a 1031 exchange on stock, bonds, or interest in an REIT.

So, next time you find that you are planning to sell an appreciated piece of real estate or other property, pause for a moment to think of the future dividends you could reap were you to make an exchange. If you decide to conduct an exchange instead of selling your property up front, you can maximize your wealth and come out on top.

The Tax Gifts Keep On Coming

Did you know that you can sell a stock at a profit and pay next to nothing in capital gains tax? Or that you may not owe any tax on dividends you receive? It's true. The Tax Increase Prevention and Reconciliation Act (TIPRA), which was signed into law in early 2006, reduces capital gains and dividend tax rates even further down to 0% in some cases. Read on to find out more and how you can save money through proper planning.

Capital gains tax must be paid when you sell an asset for a profit. For instance, if you buy a stock at $10 per share and sell it two years later for $15 per share, there is a $5 per share gain that is subject to tax. Most of us know that the maximum capital gains tax rate is 15%. But depending on your income, your capital gains rate might be 0%.

Your capital gains tax rate is based on your overall income tax bracket. If your overall tax bracket is greater than 15%, then your capital gains will be taxed at the maximum capital gains rate of 15%. Even if you are in the 35% tax bracket, you still only pay 15% on capital gains. But if you are in the 10% or 15% overall income tax bracket then your capital gains tax rate is only 5%!

There is also a big difference between the way that dividends and interest are taxed. Dividends are paid by preferred and common stocks. Interest is paid on bonds and Certificates of Deposit. Interest is taxed at your overall income tax rate, as are any gains from annuities. But dividends aren't. Just like capital gains, qualified dividends are taxed at a maximum rate of 15%. If you are in the 10% or 15% overall income tax bracket then your dividend tax rate is also only 5%!

TIPRA, passed in early 2006, changed this. Between 2008 and 2010, the maximum dividend and capital gains tax rate stays at 15%. But it drops to 0% for those in the 10% or 15% overall tax brackets. You can have capital gains and receive dividends and NOT pay any tax on them!

Assuming 2006 tax rates, you can have $61,300 in income (married filing jointly) and still be in the 15% overall tax bracket. You can have $60,000 in income and you will only pay 5% in tax on dividends and capital gains! Between 2008 and 2010 you wouldn't have to pay ANY tax on dividends and capital gains. It's the same for those who are single if they have $30,650 or less in income.

How should this affect your investments?

Regardless of your overall tax bracket, dividends and capital gains are more valuable than interest because of the tax savings. Let's say that you have the option of putting $10,000 into a Certificate of Deposit at 5% or a preferred stock that pays a 5% dividend. At the highest overall tax bracket, you will owe about $175 in taxes on the CD interest, leaving you $325 to spend.

You will only have to pay about $75 in taxes on the dividend from the preferred stock, giving you $425 to spend. That,s $100 more just off of a $10,000 investment. In percentage terms, you have 30% more to spend with the dividend-paying investment than with the Certificate of Deposit.

For those in the highest tax bracket, to produce the same spendable amount, a Certificate of Deposit would have to earn around 6.25%, or 5.75% for those in the 25% tax bracket.

It's possible to find dividend-paying investments that currently pay far more than Certificates of Deposit. For instance, I use several stocks for my clients that pay dividends of 7-10%. They may fluctuate in value whereas a Certificate of Deposit does not, but properly diversified and managed, they are a great way to receive a larger income stream from your investments. When taxes are taken into account, the amount of spendable income is close to double that provided by the CD.

The bottom line is this. If you pay any income taxes at all, you are better off (tax-wise) receiving dividends and capital gains than interest. That's even more true in 2008 when the minimum capital gains and dividend rate drops to 0%.

Changing a Will After Death

The newspapers are full of high profile instances whereby an adult child or relative is furiously fighting to have their parent's Will changed, after they have died. Modern family structure, internal politics and whirling emotions built up over years can all add up to an almighty battle - even after one of the parties dies. However, not all cases where a change of Will has been requested are acrimonious - most of them aren't. As a good working example, if, after a person has died, you wish to change their Will - to try and reduce the Inheritance Tax amount which will be incurred for example, or an important person has been left out for some reason, you can do so, usually with the minimum of fuss.

However, all beneficiaries of the Will must agree to this change in the first instance. If this is the case, then you can go ahead and have a "Deed of Variation" created, which must be signed by all the beneficiaries within two years of the person's death, for it to be effective. Remember, time can progress unfeasibly quickly so don't be caught out.

Remember that changing a Will means the amount of Inheritance Tax payable may change, as may the Capital Gains Tax fee. If the Deed of Variation includes a statement that it is to take effect for either Inheritance Tax, Capital Gains Tax or both, then the arrangements will be considered as if the deceased person themselves had made them.

The Difference Between Capital Gains and Ordinary Income

Most long-term capital gains are taxed at 15% for 2010. This rate is scheduled to increase to 20% in 2011. Unfortunately, we need to say "most" because there are some exceptions as follows:

Taxpayers in the 10% and 15% ordinary bracket-0%
Certain depreciation recapture on real estate-25%
Collectibles-28%

A long-term gain is from the sale of a capital asset held longer than a year. A capital asset includes stocks, bonds, mutual funds, and real estate (other than residence).

Short-term gains are those that are held one year or less. Short-term gains are taxed at ordinary income tax rates. Ordinary income tax brackets for married couples filing joint for 2010 are projected as follows:

Taxable Income Tax Rate

0€-16,750 - 10%
16,750€-68,000 - 15%
68,000€-137,300 - 25%
137,300€-209,250 - 28%
209,250€-373,650 - 33%
Over 373,650 - 35%

The highest ordinary income tax bracket is also scheduled to increase in 2011 to 39.6%.

Capital gains and losses are netted against each other. If this results in a net loss, this loss is limited to a $3,000 tax deduction for a married couple filing a joint return. Any loss above this is carried into future years.

However, be cautious. Some taxpayers may be subject to an Alternative Minimum Tax ("AMT"). Taxpayers need to calculate their income two ways. First, calculate the income tax under the regular method, and second, under the AMT method. Then pay the higher of the two taxes. For taxpayers subject to the AMT, it may make their effective tax rate on long-term capital gains higher than the stated rate of 15%.

It is important to know the holding period for any capital assets and whether the sale will result in a gain or loss.

Thomas F. Scanlon, CPA, CFP.

Tax Tips on a C Corp Asset Sale

First, unless you are planning on going public or have hundreds of stockholders do not form a C Corp to begin with. Use an S Corp or an LLC. If you currently are a C Corp ask your attorney or tax advisor about converting to an S Corp. If you sell your company within a 10 year period of converting to an S Corp the sale can be taxed as if you were still a C Corp.

Here is what happens when there is an asset sale of a C Corp. The assets that are sold are compared to their depreciated basis and the difference is treated as ordinary income to the C Corp. Any good will is a 100% gain and again is treated as ordinary income. This new found income drives up your corporate tax rate, often to the maximum rate of around 34%. You are not done yet. The corporation pays this tax bill and then there is a distribution of the remaining funds to the shareholders. They are taxed a second time at their long term capital gains rate.

Compare this to a C Corp stock sale. The stock is sold and there is no tax to the corporation. The distribution is made to the shareholders and they pay only their long term capital gain on the change in value over their basis. The difference can be hundreds of thousands of dollars.

Secondly, keep all assets that may appreciate in value outside the C Corp and in an LLC. Your real estate, patents, intellectual property, etc. should be held in a pass through entity so you avoid the potential high C Corp corporate tax rate and the double taxation if you do an asset sale.

Let's say that you are a C Corp and the buyer refuses to do a stock sale. If you can get the buyer to move as much of the transaction value to a covenant not to compete, you will be much better off. That will be taxed to you personally at the long term capital gains rate and not the corporate tax rate and the gain can be spread out over the non-compete period.

Another approach you can use is "Personal Good Will". This is where the seller's reputation, expertise, and relationships are in effect separated from the assets of the company and account for as much of the good will value as possible from the business. So let's say that the company sells for $8 million dollars and the amount allocated to the hard assets is $6 million. That leaves $2 million that can be classified as good will. If that good will is assigned to the C Corp, it will be taxed at the 34% rate and then taxed again when it is distributed to the shareholders at 15%.

If you can move that amount to personal goodwill for the owner, it is paid directly to him and he gets taxed at the 15% rate only. The calculation looks like this: If the good will is $2 million and is allocated to the C Corp. They pay $680,000 in corporate income taxes. The $1,320,000 remaining gets distributed to the shareholders and an additional 15% tax is paid or $198,000 for a total tax on that $2 million of $878,000. Moving it all to personal goodwill results in a total tax on that $2 million of $300,000, a savings of $578,000. This approach was pioneered in a classic IRS case called the Martin Ice Cream Case.

There is a built in bias on the part of buyers with the advice of their attorneys to avoid doing stock sales because you buy everything including any hidden liabilities. You as the seller want to convince the buyer to do a stock sale by demonstrating that there are no hidden liabilities. Another argument you can use is that most contracts are not assignable without the consent of the other party. In an asset sale it could be problematic to get assignments of a large quantity of contracts. An example is if your company is in a favorable long-term property lease the landlord will never agree to an assignment of that lease. If you have a long-term contract with a government entity, a change in ownership can trigger a contract end. In a stock sale these are not issues.

There are many variables in a business sale negotiation. Price, Cash at close, Stock versus Asset Sale, and allocation of purchase price. The IRS does not allow the buyer's allocation of purchase price to be different than the seller's. It also must be noted that from a tax standpoint, something favorable for the seller is correspondingly less favorable for the buyer. An experienced buyer will structure the deal in the most favorable way for himself. Sellers must get good advisors to help them negotiate to achieve the maximum after tax proceeds.

Self Directed Installment Sale Vs 1031 Exchange - When a SDIS Makes Sense (Part II)

In the last article, I pointed out when, as a real estate investor, doing a 1031 Exchange on the sale of a Real Estate Property may not be your best option.

So, let's assume you do want or need to sell a real estate investment, don't want to do an exchange, and don't want to pay a huge lump sum capital gains tax payment of 15-40% on your gains. Now is the time to see how a Self Directed Installment Sale can save you money.

It's important to know that you don't avoid paying your capital gains tax obligation, you just get to spread out the obligation over many years. The total of years is typically between 10 to 30 and it is possible to defer taking payments for a while depending on your circumstances.

So, how does that help you? Well, if someone were to offer you a 0% interest loan on let's say $300,000.00 for the next 30 years, and you only had to make minimum payments, would you jump at the chance? Most people sure would. Think of how you could invest that 300K so that you could enjoy the benefit of the interest it accrued. This is effectively what a Self Directed Installment Sale does for you. It allows you to keep most of your gains working to your advantage, while paying back the money owed to the IRS over a long period of time.

This also holds for the depreciation recapture if you owned your property for a long period of time and depreciated it according to a schedule to realize annual tax advantages of owning investment real estate. This is not true for accelerated depreciation taken.

If you do not put a tax strategy in place and sell outright, not only do you owe capital gains tax, but you also owe depreciation recapture, which can be another 25-35% of your total depreciation taken over the ownership cycle of your investment.

And, you will avoid the possibility of the dreaded Alternative Minimum Tax trap. This is something else that may catch you by surprise when you least expect it triggered by your outright sale of property. This could mean having other legitimate tax deductions disqualified and a higher tax payment owed by you.

As you can see, it's definitely worth it to consult with an expert in Capital Gains Tax saving strategies before you make the decision to sell your real property.

The SDIS can also work with the sale of a second home, vacation home, business, collection, or even your primary residence. With these assets, a 1031 exchange is not an option.

Federal Income Taxes - Top 10 Things To Like About The Tax Relief Act Of 2010

President Obama just signed into law the Tax Relief Act of 2010. The full name of this legislation is the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. But for purposes of this article, let's just call it the Tax Relief Act.

There are plenty of good things in this bill. Here are some of the highlights:

1. Personal income tax rates will remain the same for the next two years. If this bill had not been passed, individual tax rates would have increased on January 1, 2011 to 15, 28, 31, 36 and 39.6 percent. Instead, they will remain at the levels of 10, 15, 25, 28, 33, and 35 percent for 2011 and 2012.

2. Maximum capital gains tax rates will also remain unchanged for 2011 and 2012. The maximum rate of 15 percent (zero percent for folks in the 10 and 15 percent tax brackets) stays in effect instead of increasing to 20 percent (10 percent for those in the 15 percent bracket).

3. Maximum dividend tax rates also stay the same for the next two years - 15 percent rather than ordinary income tax rates.

4. The child tax credit of $1,000 is extended for the next two years, rather than returning to $500 per qualifying child.

5. The American Opportunity Tax Credit (a credit to offset qualified higher education expenses) remains in effect for 2011 and 2012.

6. Employers can continue to provide tax-free educational assistance to their employees up to $5,250 per year in 2011 and 2012.

7. Several tax breaks that had expired on December 31, 2009 have been extended for 2011 and 2012. These include the teacher's classroom expense deduction, the higher education expense deduction, and the state/local sales tax deduction.

8. The deduction for qualified mortgage insurance premiums has been extended for 2011.

9. The dependent care credit remains as is for the next two years.

10. Social Security taxes have been reduced by 2 percent for 2011. This reduction applies to both employees and the self-employed.

Of course, there's at least one thing to dislike about this bill - all these provisions are temporary. A few exist for only one year (2011). Most of them will expire at the end of 2012, and so in two years, we get to watch Congress and the President have yet another debate on what to do about tax rules that change repeatedly because our politicians created them that way. So enjoy these tax breaks while they last.

Reducing Your Capital Gains Tax (CGT) Liability

Capital Gains Tax (CGT) applies when chargeable assets are disposed of and is applicable to individuals and trustees but not to limited companies, although Limited Companies do pay Corporation Tax on the gains that they make.

Chargeable assets includes all forms of property unless it is specifically exempt. The main assets it tends to apply to are land and buildings, shares and business assets including goodwill. CGT can be very complex and the rules are far more detailed that can be explained in this brief blog post, so read the Helpsheet after this post.

How a Capital Gain occurs

A capital gain occurs when the value of an asset at the date it is disposed of is higher than when it was first acquired. An asset can be disposed of either by sale or by gift. If you give away an asset in an uncommercial transaction, the market value will replace any actual consideration paid.

For assets acquired before 31 March 1982 the cost usually taken to be the value on that day, although actual cost can be used in some circumstances.

The following also reduce the amount of the chargeable gain...

Incidental costs of acquisition
Expenditure to enhance the value of the asset
Incidental costs of disposal, and
Tax reliefs and allowances (see below)

Rate of Tax

From 23 June 2-1- a new CGT rate of 28% was introduced where the total taxable gains and income are above the income tax basic rate band. Prior to that and below that limit, the rate is 18%. For trustees and personal representatives of deceased persons the rate increased from 18% to 28% on all gains from 23 June 2010.

Tax Reliefs

There are several different tax reliefs which can reduce the chargeable gain, including...

Rollover/holdover relief on replacement of business assets - allowing you to defer the CGT on a gain of a business asset where this is matched with a replacement of a new business asset in the period commencing one year before and ending three years after the disposal.

Business incorporation relief - available when you transfer your business into a Limited Company in exchange for shares

"IRS Approves New Tax Deferment Program" - 1031 Exchange Without a Replacement Property?

For years, investors have taken advantage of the 1031 exchange as a method to delay or defer capital gains taxes on the sale of an investment property. By completing an exchange, the investor can sell or dispose of an appreciated investment property, use all of the equity to buy a like-kind property of equal or greater value, defer the capital gains tax and leverage all of their equity into a replacement property. The 1031 exchange is one of the last great vehicles to build wealth and save on taxes.

There still exists the investors who do not acquire a replacement property. Maybe the next move may be difficult to find the right property. The specific time-frame or an undesirable market is not conducive to executing an exchange? That investor may just want to move on with life, dispose of the asset without a replacement, but still not pay all of the capital gains upfront. Is there a solution?

There was such a solution called the private annuity trusts (PATs) which could be used to avoid capital gains taxes by transferring the title of a property to a trustee prior to the sale. Once the trustee sold the property, the proceeds from the sale would fall into the trust and then payments would be paid to the beneficiary. Most often, the trustor and beneficiary would be one and the same, therefore allowing the beneficiary (the original title holder) a method to collect payments while avoiding any upfront capital gains tax. In the fourth quarter of 2006, however, the IRS ruled that PATs were being used inappropriately to defer capital gains and estate taxes and could no longer be used in this manner.

The deferred sales trust (DST) has become the replacement strategy for the private annuity trust. Very similar to the PATs, the deferred sales trust, recognizes capital gain, but it is deferred over a predetermined period of time that is planned in advance of the sale.

Here is a breakdown of the process for a DST:
1- Private third-party company forms a trust
2- Owner sells the property to the trust
3- Trust and owner (beneficiary) put together an installment contract
4- Contract promises to pay beneficiary predetermined amount over an agreed period of time

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Example of DST vs. a Typical Sale (California)
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Assumptions:
Owned for 8 years
Purchase Price: $ 2,750,000
Sale Price: $ 4,100,000
Loan Amount: $1,750,000
Recapture Depreciation $ 800,000
Basis: $1,950,000
Taxable Gain: $2,150,000

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Standard Sale Transaction:
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Net Sale Proceeds: $ 2,350,000
Federal Tax (15%) $ 322,500
State Tax (9.3%) $ 199,950
Proceeds after tax: $ 1,827,550
Annual Interest of $ 146,204

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DST Transaction:
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Net Sale Proceeds: $ 2,350,000
Annual Interest of $ 188,000

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DST income difference of 22% or $41,796
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As you can see, the deferred sales trust can be a vehicle to defer taxes without having to acquire a new property and in the long run may actually be a more viable and lucrative choice than other tax deferment methods. To find out more information, contact a commercial real estate broker or tax professional in your area.