November 2013
In this issue
Charity accounts are changing
– page 2
digital giving
– page 4
VAT and Christmas mailings
– page 6
Private
Client
Private
Client
July 2014
In this issue
Pensions freedom and choice
We outline the changes announced to pensions over recent months, allowing individuals greater control of their pension pot – page 1
Funding a business
From loans to issuing shares, there are various ways to expand your business. We look at some of the common routes and the tax implications – page 2
High value property taxes
Our article considers both current and proposed taxes levied on high value residential property in the UK – page 5
Editor’s comment
Proposals for up front tax payments
Page 8
High value residential property taxes
Page 5
Funding a business: the tax implications
Page 2
Pensions freedom and choice Page 1
Your questions answered
Page 7
Welcome to the July 2014 issue of Private Client. Now that the dust has settled
from this year’s Budget, we have had time to reflect on the key changes which were
announced and the impact that these changes will have on our clients.
Our initial article is a summary of measures announced since the last issue of Private
Client, under which individuals will have much greater flexibility over how they access
their pension savings.
Our article on the tax implications of funding your business follows our other articles
in recent issues that have explored the various tax issues which arise when you start
your own business. From issuing shares to taking out business loans, the method you
choose for expanding your business could have significant implications in the future.
The Chancellor has extended the lucrative Annual Tax on Enveloped Dwellings
regime in the Budget. We look at who else will now be caught.
There has been significant coverage in the press about tax avoidance schemes and we
look at how HM Revenue & Customs is hoping to drive home the final nail in the coffin.
We finish with an ‘in brief’ section to update readers on proposals to end Principal
Private Residence elections, as well as noting a welcome ruling, under which the sale
of a masterpiece was exempt from capital gains tax.
I hope you find this issue both interesting and informative. Please do not hesitate
to contact me or your usual Saffery Champness partner if you would like more
information on any of the topics featured here.
James Hender
In brief
Earlier this year, the Chancellor of the Exchequer proposed significant new
measures to give individuals greater freedom to access their pension savings,
together with immediate changes to allow small pension pots to be taken as a
lump sum and permit greater flexibility on draw-down.
Under current rules, members of defined contribution schemes can withdraw up to 25% of their pension fund as a tax-free lump sum on retirement and the balance can be used to purchase an annuity. Alternatively, the individual can choose to remain in drawdown, allowing withdrawal of an income of up to 120% of an equivalent annuity each year, or withdrawal without a yearly limit provided the individual has a guaranteed income of at least £20,000 from other pensions.
From 6 April 2015, it is proposed that individuals aged 55 and over will be able to take their defined contribution pension pot however they wish. Up to 25% can still be taken as a tax-free lump sum; but any excess will be treated as income and liable to income tax in the relevant tax year.
In recognition of the potential risks posed by this much greater flexibility, free and impartial face-to-face guidance on the range of options is to be made available to individuals at the time of their retirement.
The proposals represent a far-reaching change to pensions and an industry-wide consultation is underway on the details before implementation of the changes in April 2015.
Between now and next April some transitional rules apply:
y Individuals aged 60 and over with pension savings of less than £30,000 can take them all in one lump sum. This is an increase of the previous limit for ‘trivial commutation’ of £18,000.
y In addition, the size of a small pension pot that can be taken as a lump sum, regardless of an individual’s total pensions savings, has increased from £2,000 to £10,000 and the number of such pots which can be accessed in this way has increased from two to three.
y For individuals in capped drawdown, the maximum capped drawdown permitted has increased from 120% to 150% of an equivalent annuity.
y For those wanting to take advantage of flexible drawdown, the guaranteed income requirement has been reduced from £20,000 to £12,000 per annum. These changes will give much greater flexibility, which will no doubt make pensions more attractive to many people. However, it is vital that individuals review their own situations and take advice on the options available to them on retirement.
For example, although annuities may currently seem unattractive, many of those who hold pension plans which started in the 1980s (or earlier) may find that those contracts include high guaranteed annuity rates. Alternatively, those not in good health may find that they can still secure very attractive terms when buying an annuity. As a result, we probably will not see the rush to extract all funds from pension pots that some commentators predicted immediately after the Budget.
Pensions
Funding a business:
the tax implications of various funding methods
Many businesses will find that at some point they need to raise cash, whether to
fund capital investment, provide working capital, or facilitate expansion. With the
UK economy back on the road to recovery, now may be a good time to consider
the financing options available to your business. What is best will depend on
individual circumstances and we run through the headline issues which you will
need to consider.
Business loans
The first port of call for most business owners will be their bank. However, bank lenders will often require security, in the form of a legal charge over business assets or a personal guarantee. If you operate through a company, providing a personal guarantee will negate the protection of limited liability, which a corporate structure usually affords. The rate of interest charged on a bank loan will depend on the terms of the loan and any security attached to it. The more risky the lending is considered to be, the higher the rate of interest a bank will charge. However, interest paid on a business loan should be deductible for tax purposes against profits. As an alternative, the business owner might consider lending his own money and charging interest to the company. This will provide the necessary financing, but also enable funds to be extracted without the National Insurance cost associated with additional salary. The company should also be able to obtain tax relief for the payments of interest, if charged at a commercial rate.
Lending personal funds to a company controlled by the business owner offers a flexible solution, in that the loan can be repaid in the future without tax consequences. However, it does put at risk the owner’s own capital in the event of future business failure. If the owner does not have personal funds readily available, it may be possible to take
out a bank loan and on-lend to the company carrying on the trade. Provided that any such personal borrowing does not take the form of an overdraft, interest paid by the business owner to the bank should be deductible for tax purposes against his income.
As long as strict criteria are met, interest payments will qualify for relief in the business owner’s hands. The amount of interest deductible is now capped at the higher of £50,000 and 25% of the individual’s gross income.
Issuing shares
A company also has the option of raising funds through an issue of shares. These may be either preference or ordinary shares. As the name suggests, the former are repayable in priority to ordinary shares. They also usually entitle the holder to a preferential return in terms of income and capital, so are generally perceived as less risky than ordinary shares. However, in the event of the issuing company becoming insolvent, preference shares will rank behind debt in terms of priority on repayment.
Ordinary shares stand at the ‘back of the queue’ on repayment but, unlike both debt and preference shares, offer the holder the opportunity to profit from the company’s financial success on a sale or planned winding up. In the right circumstances they can provide a valuable source of finance, but care needs to be exercised where they are issued
to third parties, who will become part-owners by virtue of any shares they own.
A shareholder will receive income in the form of a dividend. The effective tax rate on a dividend is 25% for a higher rate taxpayer, just over 30% for an additional rate taxpayer, but zero for a basic rate taxpayer. However, any dividends paid will not be deductible in calculating the taxable profits of the company. If an individual needs to borrow in order to subscribe for shares, tax relief for interest on such borrowings may be available, provided the loan is structured correctly and the funds are used to subscribe for ordinary shares in a closely controlled trading company. In order to qualify, the individual borrowing to invest
Lending personal funds
to a company controlled
by the business owner
offers a flexible solution,
in that the loan can be
repaid in the future
without tax consequences.
However, it does put at
risk the owner’s own
capital.
must either work full-time in the management or conduct of the business or own more than 5% of the ordinary share capital.
A third party wishing to invest in shares may be able to claim Enterprise Investment Scheme (EIS) relief on the investment. This relief will potentially allow the investor to claim an income tax deduction equal to 30% of the amount subscribed, subject to an annual maximum deduction of £300,000. In addition, a future sale of the EIS shares will be free of capital gains tax (CGT), provided the shares are held for at least three years and the qualifying conditions for both investor and company are met throughout that time. There may also be scope for the investor to defer CGT on other gains ‘rolled over’ into the EIS shares, until such time as the EIS shares are disposed of.
As the economy expands once more, employees who have been reluctant to move may begin to feel more confident about changing jobs. For any employer this will be a problem, particularly if the employee concerned is pivotal to the business. With the recovery still in its early stages, an employer may be unwilling or unable to commit to a significant salary increase in order to retain the individual’s services, so offering shares as part of the remuneration package may be the answer.
Given that the top rate of income tax is currently 45%, with capital gains taxed at a maximum of 28%, delivering some of an employee’s reward in the form of a capital gain will also provide a tax benefit for the employee.
At its simplest, an employee could be given shares or allowed to buy them. The employee will need to pay market value for the shares or otherwise will suffer income tax on the difference between their market value and the price paid. If the shares are also subject to restrictions (eg they have to be sold back
if the individual leaves employment) there can be further complications, so care will be needed in determining the terms of issue.
Share options
An alternative to allowing an employee to acquire shares may be to use share options, whereby an employee is given the right (an option) to acquire shares at a future point. Such arrangements can be ‘approved’ or ‘unapproved’. As the name suggests, an approved share option scheme is one which is specifically provided for in tax legislation. Provided the relevant conditions are met, it will bring with it a number of tax breaks. Some approved schemes require the inclusion of a majority of the workforce, and whilst they may be appropriate in the case of a large employer, for the smaller, unquoted company, the share scheme which tends to be seen most in practice is an Enterprise
Management Incentive (EMI) scheme. There are conditions which will need to be satisfied by the employing company, the employee and the option grant itself. Subject to these, an employee will not pay tax when he is granted the option or when it is exercised, as the price he has to pay under the option is at least equal to the market value of the shares when the option was granted.
Shares acquired now on exercise of an EMI option can also qualify for Entrepreneurs’ Relief (effectively giving a 10% tax rate on realised capital gains) provided that the period during which the option was held, when added to the period of ownership of the shares following exercise of the option, is at least 12 months. The shareholder must also have been an officer or employee of the business for at least 12 months, ending with the date of disposal. In this circumstance, he does not need to hold at least 5% of the share capital in order to qualify for Entrepreneurs’ Relief.
As an added bonus, the employing company can also, in many cases, claim a corporation tax deduction for the gain on exercise of the option (ie the difference between the market value of the shares on exercise and the price payable under the option).
Finance Act 2013 also saw the introduction of Employee Shareholder Shares, whereby employees can receive shares in their employing company (of which shares up to a value of £2,000 may be received tax-free) in exchange for giving up certain employment rights (for example rights to claim unfair dismissal and statutory redundancy pay, and to request flexible working). Whilst such shares can undoubtedly provide some benefits (for example the first disposal will be CGT-free), these will need to be balanced against the loss of employment rights. As a result, we have only seen limited take-up of such shares.
Finance Act 2013 also
saw the introduction of
Employee Shareholder
Shares, whereby employees
can receive shares in their
employing company (of
which shares up to a value of
£2,000 may be received
tax-free) in exchange for giving
up certain employment
rights.
Readers whose family
structures own UK
residential property
valued at £2 million
or above through
corporate vehicles will
already be aware of
the tax regime for such
properties introduced
last year. However, plans
announced in this year’s
Budget to extend the new
regime to lower value
properties mean that
many more individuals
will be affected in the
future.
The Annual Tax on Enveloped Dwellings (ATED) regime has raised much more tax than the Chancellor had expected. Whilst it was originally aimed at properties owned by wealthy non-residents, it is now going to catch a wide range of houses where tax mitigation has never been the driving force. From 1 April 2015, the charge will be imposed on residential properties worth between £1 million and £2 million which are held by ‘non-natural persons’ (broadly, but not exclusively, UK and non-UK companies). From 1 April 2016, the threshold will be reduced further to £500,000.
For those properties falling within the £1 million to £2 million band, the annual tax charge will be £7,000. For those properties in the £500,000 to £1 million band, it will be £3,500. The annual tax figures will be indexed in line with the Consumer Prices Index.
The reliefs which currently apply to ATED properties (including letting the properties to third parties) will also apply to lower value residences falling within the new bands.
Changes to capital gains tax
All properties affected by the new ATED bands will also be subject to a 28% capital gains tax (CGT) charge.
What action is required?
y Seek advice on whether UK properties held within a family structure could be affected by these changes. The relevant valuation date is generally 1 April 2012, or later if the property was acquired subsequently, so a retrospective valuation may be required.
High value residential
y Seek advice on whether the costs of retaining your current structure may be less than those (including taxation) associated with unwinding it.
y If a structure is to be retained, you should consider budgeting for future liabilities, particularly where there is little or no cash available within the structure to meet them.
y Where properties fall within the new ATED bandings, ATED return(s) (including any related claims for relief from the charge) will need to be filed by 30 April each year. There will be a transitional rule for the £1 million to £2 million band, where returns will need to be filed by 1 October 2015 and any tax must be settled by 31 October 2015.
New acquisitions
Previously, a higher Stamp Duty Land Tax (SDLT) charge of 15% applied to properties valued above £2 million purchased by a non-natural person. From 20 March 2014, this threshold has been reduced to £500,000 and it is now more important than ever that anyone acquiring residential property seeks professional advice on the optimal ownership structure, having regard not just to SDLT and ATED but to other taxes, notably
I hold shares in an unquoted company. The company lets out commercial units
on various short and long-term lets and I want to ensure that I obtain Business
Property Relief on the shares. What can I do?
For the majority of people, the holding of let property within a company is regarded as an investment activity. The downside to this is that there are no reliefs available to reduce the inheritance tax (IHT) liability on the shares when you die, therefore leaving your estate with the burden of paying the IHT. However, if the argument can be made that the business of the company is not mainly one of the holding of investments, you could be eligible for Business Property Relief (BPR) on the shares, exempting all or part of their value from a charge to IHT.
The availability of BPR is on an ‘all or nothing’ basis. The more that the company has a ‘business’, rather than a series of investments, the higher the chance of getting BPR.
What can you do to obtain BPR?
In order to qualify for BPR, you need to be able to demonstrate that the investment activities of the company are not the predominant ones. The provision of services on-site, which generate additional income streams that are not normally associated with the services a landlord would commonly provide to occupiers, would be one way to demonstrate this.
What types of service distinguish
my company from others?
There are certain services which are commonplace for every landlord to offer. Examples include marketing and advertising for new tenants, drawing up tenancy agreements, the provision of buildings insurance, the maintenance and cleaning of common areas, and the provision of basic utilities.
There are other services which are not supplied by every landlord and which, if offered, would normally require a landlord to charge the tenant additional fees to cover both the overhead costs and to generate a profit. Examples of what may be considered additional services are shown below, although the list is not exhaustive:
y The provision of a receptionist to answer and divert calls to various units, deal with deliveries and act as the primary customer interface. This could be extended to include services such as stationery and ordering, photocopying and post room activities.
y Providing security both on-site during the day and out of hours.
y The provision of serviced meeting rooms for tenants’ use.
y Canteen services on-site.
y It will be advisable to separate such services from the normal letting contract, so that you can record the different income and profit streams.
It will be important to demonstrate that any additional services provided are not merely incidental to the company’s investment activities, but rather fundamental drivers of the business in the round.
With any planning such as this, the difficulty is not knowing the date of the IHT event. As a result, it is important to get the business set up correctly early on and keep detailed evidence which will help your case for eventual tax relief.
Your questions
answered
Another building block in HM Revenue & Customs’ (HMRC’s) strategy to
eradicate “aggressive tax avoidance” is coming into force. From July, new rules
will require taxpayers to pay disputed tax up front in certain circumstances.
HMRC has been growing increasingly frustrated over recent years that taxpayers have been sitting on (and enjoying) large amounts of disputed tax, whilst tax return enquiries have been in a log jam going through the courts. Taxpayers have, in effect, been using HMRC as a lending facility and only paying interest if the tax has finally been payable.
To counter this, new rules will mean that people who enter certain aggressive tax schemes (or who have done so in the past) will have to pay the disputed tax up front and then argue the case with HMRC. This changes the economics of such schemes and HMRC hopes it will finally put an end to aggressive planning.
The legislation, once enacted, will require an accelerated payment of tax during an enquiry or appeal relating to tax avoidance, where
the avoidance scheme used by the taxpayer is the same or similar to one which has been defeated in a court or tribunal, and where a ‘follower notice’ has been issued by HMRC. The government is also extending
the accelerated payments regime to arrangements within the Disclosure of Tax Avoidance Scheme (DOTAS) rules, or where HMRC are undertaking counteraction under the General Anti-Abuse Rule (GAAR). The new rules will come into effect when Finance Bill 2014 receives Royal Assent in July. They will apply to income tax, capital gains tax, corporation tax, inheritance tax, Stamp Duty Land Tax, the Annual Tax on Enveloped Dwellings (ATED) and National Insurance contributions.
Follower notices
The legislation will enable HMRC to issue a follower notice to a taxpayer. The taxpayer can challenge the notice, but the appeal is made to HMRC, which will have the final say on the matter. There is no provision for a review of the facts by an independent body.
DOTAS cases
Payment of the disputed tax up front may be required in cases where a DOTAS reference number has been entered in a tax return; where a taxpayer features on a DOTAS client list; or details should have been disclosed to HMRC but have not been.
As the DOTAS scheme came into effect in 2004, there will be taxpayers who find that HMRC has retrospectively changed the rules
and that tax is suddenly payable long before they had anticipated it.
GAAR cases
For GAAR cases, a payment notice can only be issued after the GAAR Advisory Panel has given an opinion that counteraction is appropriate.
Administration
The amount of up-front tax to pay will be estimated by HMRC to the best of its judgement and, once an accelerated payment notice is issued, the taxpayer will have 90 days to settle the amount or make representations to HMRC for a review of the notice or the amount of tax in dispute. HMRC will then issue a decision notice confirming the amount of tax due to be paid up front, at which point the taxpayer will have a further 30 days to pay.
With Royal Assent due in July, it is likely that the first notices will be out by early August, and the tax will be due by early November. Should HMRC eventually lose its case through the courts, then it will repay the tax, plus a comparatively low rate of interest.
perceived avoidance
HM Revenue &
Customs... will have the
final say on the matter.
There is no provision for
a review of the facts by an
independent body.
In brief
Appeal exempts sale of
masterpiece from CGT
In a welcome decision, the Court of Appeal has recently dismissed HM Revenue & Customs’ (HMRC’s) appeal against a judgement which ruled no capital gains tax (CGT) was due on the sale of Sir Joshua Reynolds’ famous painting Omai.
Painted in 1775, the masterpiece was sold by the Custodians of Castle Howard at Sotheby’s for £9.4 million in 2001. Owned by the late Lord Howard, the painting had been on display at Castle Howard for visitors to see, both in his lifetime and after his death
It was successfully argued that the masterpiece constituted ‘plant’ and was a part of Castle Howard’s business. From the taxpayer’s point of view, this mattered as there is no CGT due on the disposal of ‘plant’.
The case hinged on the common law definition of what ‘plant’ was, drawing upon a decision in a case dating back to 1887 (Yarmouth v France), which stated that plant includes “all goods and
chattels, fixed or moveable, live or dead, which [a businessman] keeps for permanent employment in the business”.
HMRC argued, to no avail, that it was hard to see how a valuable masterpiece over 200 years old could be considered plant, with a predictable life of less than 50 years.
Proposals to end Principal
Private Residence elections
HMRC has Principal Private Residence (PPR) relief in its sights and there is currently a consultation on changes that may have far-reaching implications for the availability of this widely-used relief.
PPR relief exempts from capital gains tax (CGT) a profit made on the disposal of a property that has been an individual’s main residence.
Where an individual has two or more residences, it is currently possible to make an election to nominate which residence should be regarded as the main residence for the purposes of PPR relief.
With the proposed extension of CGT to non-residents who own residential property in the UK, HMRC is concerned that such people may simply elect for the UK property to be their PPR and so thus escape the tax.
The government has put forward two possible alternative approaches:
y To remove the ability for a person to elect which residence is their main residence for PPR purposes and instead to determine this based on the facts and evidence available.
y To replace the ability to elect with a rule that identifies a person’s main residence, eg the property in which the person spends the most time for any given year.
Whichever proposal is eventually brought in, the rules could result in quite different outcomes to the present situation where owners may elect which residence should be treated as their main residence.
This will have potential implications in a wide range of tax planning situations and we will be closely monitoring developments over the coming months.
Proposals for tax payments up front where there is
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