2020 Innovation September Tax Webinar Martyn Ingles Agenda - - PDF document

July 2015 1

2020 Innovation September Tax Webinar

Martyn Ingles

• Finance Bill progress
• More consultations
• HMRC announcements , other developments
• Recent tax cases
• Tax Planning strategies

Agenda

July 2015 2

• IHT – Residence Nil Rate Band – clause 9 amended
• Other key issues:
• CT rate to be reduced to 19% then 18%
• AIA to be set at £200,000 from 1.1.2016
• Pensions – Annual Allowance restriction for HNWIs
• “Buy to Let” interest to be restricted from 6 April

2017

• No CT deduction for goodwill acquired after 7.7.2015
• Direct recovery of tax debts from bank accounts

Finance Bill 2015

Further Consultations

July 2015 3

• OTS review of employee benefits and expenses
• Many employers treat termination payments incorrectly
• Deduct too much or insufficient tax
• Current £30,000 tax free ex-gratia payment to go?
• Align treatment for income tax and NICs
• New limit to be based on years service and level of

earnings?

Consultation on Termination Payments

5

• Mistaken belief amongst employees and employers that

the first £30,000 of any pay-off is free of IT and NICs;

• Lack of understanding by employers of difference

between contractual and non-contractual payments; and

• Difficult and time-consuming to establish the true nature
• f each separate element of a termination payment.
• In particular the treatment of PILONs (contractual) and

non-contractual payments in lieu of notice; and payments around retirement age.

Termination Payments – common errors

6

July 2015 4

• Additional £175,000 NRB for family home left to direct

descendants

• No IHT on transfer of family home <£1,000,000 =

(£325,000 + £175,000) x 2

• Like NRB transferred to surviving spouse if un+used
• Also available if downsize
• Taper relief by £1 for £2 over £2,000,000 before IHT

reliefs – e.g. BPR, APR

• May need to review client’s Will’s and estate

planning

IHT Residence Nil Rate Band (RNRB)

• Additional NRB for family home, phased in:
• £100,000 – 2017/18
• £125,000 – 2018/19
• £150,000 – 2019/20
• £175,000 – 2020/21
• Then increased with CPI

IHT Residence Nil rate Band

July 2015 5

• HMRC have issued Technical Note on how additional nil

band will work if downsize:

• 1. to a less valuable residence and that residence,

together with assets of an equivalent value to the ‘lost’ RNRB, has been left to direct descendants, or

• 2. sold their only residence, and the sale proceeds, or

assets of an equivalent value, have been left to direct descendants, or

• 3. has otherwise ceased to own their only residence,

and other assets of an equivalent value have been left to direct descendants

Residence Nil Rate Band - Downsizing

• Individual dies on or after 6 April 2017
• The property disposed of must have been owned by

the individual and it would have qualified for the RNRB had the individual retained it

• Less valuable property, or other assets of an

equivalent value if the property has been disposed of, are in the deceased’s estate

• Less valuable property, and any other assets of an

equivalent value, are inherited by the individual’s direct descendants on that person’s death

RNRB – Downsizing Conditions

July 2015 6

• Downsizing or the disposal occurs after 8 July 2015
• No time limit on the period in which the downsizing or

the disposals took place before death

• Any number of downsizing moves between 8 July

2015 and the date of death of the individual

• Would also include disposing of part of a property

(including land occupied and used as a garden or grounds) or a share in it

• Where a property is given away, assets of an

equivalent value to the value of the property when the gift was made must be left to direct descendants

RNRB – Downsizing – Further Conditions

• Value of the property would be the net value i.e. after

deducting any mortgage or other debts charged on the property

• Additional RNRB would be tapered away in the same if

the value of the estate at death is above £2m

• Additional RNRB would be applied together with the

available RNRB but the total for the two would still be capped so that they would not exceed the limit of the total available RNRB for a particular year

• A claim would have to be made for the additional RNRB

RNRB – Downsizing – Further Conditions

July 2015 7

• Widow sells a home worth £400,000 in August 2020

and moves to a home worth £210,000.

• At the time of the sale the available RNRB is £350,000
• By downsizing, she has potentially lost the chance to

use £140,000 or 40% of the available RNRB

• When the widow later dies in October 2020, the home is

worth £225,000 and is left to her children together with £500,000 of other assets.

RNRB – Downsizing – Example 1

• The estate can use an RNRB of £225,000. However,

the widow was eligible for an RNRB of £350,000 had she not downsized. The estate can therefore claim an additional RNRB of 40% of the available RNRB (40% x £350,000) or £140,000.

• This would give a total RNRB of £365,000 (£225,000 +

£140,000).

• But this is more than the maximum available RNRB

(£350,000) so the additional RNRB is restricted to £125,000

• Plus ex husband’s unused NRB

RNRB – Downsizing – Example 1

July 2015 8

• Announced in Summer Budget
• If enacted - effective from 6 April 2017
• New “deemed domicile” status where individual

has been resident in the UK for at least 15 of the past 20 tax years;

• restrictions on non-dom status for individuals

with a UK domicile of origin who have acquired a domicile of choice elsewhere, for periods when UK resident

Taxation of Non-Doms - Consultation

• Currently: no IHT if held via offshore company or trust
• Non-Doms only pay IHT on UK situs property
• Planning – transfer foreign assets into ‘excluded

property’ trust whilst non-domiciled

• Remain excluded property even if become domiciled

(17 year rule)

• Transfer offshore company owning UK house to

excluded property trust – no IHT

Non-Doms with UK Residential Property

July 2015 9

• Proposal:
• Trusts or individuals owning UK residential property

through an offshore company, partnership or other

• paque vehicle, will pay IHT on the value of such UK

property in the same way as UK domiciled individuals

• Will apply to all UK residential property whether it is
• ccupied or let and of whatever value
• Just UK residential property, not other assets
• To be in Finance Act 2017 – start date 6 April 2017

Non-Doms with UK Residential Property

• Main Chargeable events:
• Death of the individual wherever resident who owns the

company shares

• A gift of the company shares into trust
• 10 year anniversary of the trust
• Distribution of the company shares out of trust
• Death of the donor within 7 years of having given the

company that holds the UK property to an individual

Non-Doms with UK Residential Property

July 2015 10

• 4 consultations:
• 1. Strengthening civil deterrents for offshore evaders
• 2. Civil sanctions for enablers of offshore evasion
• 3. A new corporate criminal offence of failure to prevent

the facilitation of evasion

• 4. A new criminal offence for offshore evaders

Tackling Offshore Tax Evasion - Consultations

• OECD recommendation - tax avoidance by

multi-nationals – BEPS Action point 13

• OECD have developed template to collate data
• UK have legislated in FA 2015
• Applies to AP s commencing on or after 1

January 2016

• Where consolidated group revenue > £586 m

Country by Country Reporting - Consultation

July 2015 11

HMRC Announcements and other developments

“We have given you this factsheet because you have used a tax avoidance scheme, and we will soon ask you to make a payment of the amount that relates to your use of the scheme” Note: No formal right of appeal But may make representations if not correctly issued, or the amount is incorrect

HMRC Factsheet – Accelerated Payments

July 2015 12

• We may issue an accelerated payment notice to a

person who has used an avoidance scheme if:

• 1. there is a current compliance check into their

return or claim, (or for partnerships, into the partnership return or claim), or there is an open appeal (Condition A)

• 2. the return, or claim, or the appeal is made on the

basis that there is a tax advantage from the avoidance scheme used (Condition B)

• and one or more of the following applies(Condition C)

HMRC Factsheet – Accelerated Payments

• and one or more of the following applies (Condition C)
• 1. we have given the person (or the nominated partner) a

follower notice

• 2. the person (or the partnership) has used

arrangements that are disclosable under the DOTAS legislation

• 3. the person (or the partnership) is subject to a

counteraction notice under the GAAR

HMRC Factsheet – Accelerated Payments

July 2015 13

• Residence, Domicile and Remittance Basis
• Updated to reflect new CGT charge on Non-

residents disposing of UK residential property from 6 April 2015

• Also new remittance basis user charges for

2015/16

HMRC Guidance RDR1 Updated Remittance Basis User charge increase for Non Doms:

UK resident 2014/15 2015/16 7 out of last 9 tax years £30,000 £30,000 12 out of last 14 tax years £50,000 £60,000 17 out of last 20 tax years £50,000 £90,000

July 2015 14

• New Flat Rate State Pension Starts 6 April 2016
• Those retiring before that date may receive less
• Make capital payment to buy up to £25 extra a week
• Indexed = Government backed annuity
• Cost? Is it worth it?
• 83 year old = £11,350 = 8 ¾ year payback
• 65 year old = £22,250 = 17 years
• Currently 50% can be inherited by spouse

State Pension Top-Up (Class 3A)

• Full Flat Rate State Pension available if have made

contributions for 35 years

• May be better to pay in (Class 2 or 3) for missing years?
• Consider impact on other State Benefits
• As extra pension is taxable it may be taxed at higher

rates or result in restriction of PA (> £100,000)

• Deadline for top up 5 April 2017

State Pension Top-Up

July 2015 15

Recent Tax Cases

• 30% income tax credit*
• Max £1,000,000 @ 30%
• Disposal CGT exempt*
• Deferral of gains
• * Provided not connected
• Capital loss relief v income

Tax breaks for EIS investor

July 2015 16

• Ames v HMRC – UKFTT
• Invested £50,000 in shares in Skyventure UK Ltd
• HMRC accepted that qualifying company for EIS
• Company issued claim forms EIS2 and EIS3
• Mr Ames income was below personal allowance
• Did not claim EIS income tax relief
• Shares sold for £333,200 = gain £274,540 not exempt!

No EIS CGT exemption unless income tax relief claimed

• East Allenheads Estate Ltd v HMRC – UKFTT
• Connected party rules do not apply
• But company must carry on qualifying trading activity
• Grouse shoots for the super-rich
• Mr H invested £6.5m in shares EAE Ltd
• Spent £8.5m developing spa and outbuildings, antiques,

paintings

• NOT “conducted on a commercial basis and with a

view to the realisation of profits”, no relief

EIS CGT deferral relief – must be qualifying trading company

July 2015 17

• Mr and Mrs Fountain v HMRC – UKFTT
• Various plots of land owned by couple
• Plot 2 sold, PPR available if S222 (1) (b) applies:
• “land which he has for his own occupation and

enjoyment with that residence as its garden or grounds up to the permitted area”

• Used for storage of building materials to build new

house on plot 4 – Ariel photograph!

• Subsequently levelled and fenced off
• Was it the garden of the house on plot 4 when sold? NO

CGT PPR exemption – was it a “garden”?

Tax Planning Strategies

Transfer Buy to Let business to limited company?

July 2015 18

• Restriction phased in over 4 years from 2017/18:
• 2017/18 - the deduction from property income restricted

to 75% of finance costs, 25% available as BR reduction.

• 2018/19 - 50% finance costs deduction and 50% as BR

tax reduction

• 2019/20 - 25% finance costs deduction and 75% as BR

tax reduction

• From 2020/21 - all financing costs given as BR tax

reduction

Mortgage Interest Relief Restriction

• Cliff, a higher rate taxpayer pays interest on his Buy to

Let Mortgages of £40,000 a year = £16,000 tax relief

• 2017/18 - £30,000 allowed as deduction from rent,

£10,000 given as BR tax reduction = £14,000 tax relief

• 2018/19 - £20,000 allowed as deduction from rent,

£20,000 given as BR tax reduction = £12,000 tax relief

• 2019/20 - £10,000 allowed as deduction from rent,

£30,000 given as BR tax reduction = £10,000 tax relief

• 2020/21 onwards - no rental deduction £40,000 given

as BR tax reduction = £8,000 tax relief

Mortgage Interest Relief Example

July 2015 19

• Cliff has gross rental income £60,000, Less:
• Agents commission of £6,000, repairs etc. £8,000
• Mortgage interest £40,000 = Net rental profits £6,000
• Other Income say £30,000, rents taxed @ 20%
• From 2020/21 if figures stay the same:
• Rental profit = £46,000
• Other income £30,000 = £76,000 total income
• Some of rent taxed @ 40%!
• Tax reducer = £8,000

Mortgage interest relief example

• Companies will still receive interest relief against rental

and other profits

• Income and gains taxed at 20% => 18%
• Indexation available against gains
• Double taxation – taxed again when extract profit
• £5,000 dividend allowance
• Long term?
• No CGT or IHT relief on shares

Run Rental Business through a company?

July 2015 20

• Transfer existing rental business to company?
• CGT – properties transferred at MV + SDLT
• Hold over gain using s162 TCGA 1992
• Transfer of business in exchange for shares
• Gain held over into base cost of shares
• Is it a business?
• Mr and Mrs Ramsay v HMRC (UTT)
• 20 hours a week running rental business - YES

Run Rental Business through a company?

THE END

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