UK: Private Client Tax: In The Spotlight – A Summary Of Current Tax Issues Affecting Individuals – June 2012

ONE MAN'S TAX PLANNING IS ANOTHER'S AVOIDANCE

By Richard Mannion

Over recent years there has been a continued focus by Government and HMRC on combatting artificial tax avoidance and filling in the 'gap' in expected tax revenues. In 2004, legislation was introduced requiring promoters of tax avoidance schemes to notify HMRC of any new arrangements which has enabled HMRC to take early counter-action.

During this time the tax courts have found new ways to interpret the legislation in the way 'that Government intended' or rather would have intended if it had realised that taxpayers would exploit a loophole.

In addition, HMRC has started to work in a smarter manner by marshalling its human and technological resources to find funds hidden in foreign bank accounts, seek out traders evading tax on their business profits and to investigate the fine details of complex schemes designed to mitigate tax, such as film finance schemes.

There is a clear distinction between tax evasion, which is illegal, and planning so as to avoid paying more tax than is required. Old tax case law had established that taxpayers are entitled to take action to minimise their contributions to the state and, in an often quoted 1929 judgement, Lord Clyde said the taxpayer was "entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue".

Over recent months the morality of both contrived and standard planning has come under scrutiny in the media, with the inference that anyone who pays less than the potential maximum is failing to do their bit for society. This has to perhaps be taken into account in tax planning as well as the technical basis for any tax computation.

So where do we go to from here?

On the one hand George Osborne said in the 2012 Budget that he regards tax evasion and aggressive tax avoidance as 'morally repugnant' and announced that the war against contrived avoidance will step up a gear next year with the introduction of the general anti-abuse rule (GAAR). In addition, new SDLT charges on expensive properties purchased by offshore companies have been introduced and a consultation is due shortly on the prospect of restricting tax reliefs.

On the other hand Government continues to offer tax advantages to selected investments like ISAs, EISs and VCTs and it gives special reliefs for worthy causes like R&D and business property renovation etc. There has also been much talk of giving support through the tax system to smaller businesses. Acceptable planning opportunities remain for the well advised client.

A MANSION TAX BY ANOTHER NAME

By Kari Campbell

The introduction of a form of 'mansions tax' was well trailed. The stamp duty land tax (SDLT) rate for purchase of residential property with a value of more than £2m has increased from 5% to 7% and we now have the consultation on the proposed annual SDLT charge for high value residential dwellings owned by non-natural persons, which is explained in the next article.

In order to escape paying SDLT at a rate of 15% on the purchase of single dwellings with a value in excess of £2m it is necessary for the residential property to be held personally or through a partnership structure (although if the partnership includes a company partner, then the 15% rate will apply). Our experience is that most non-UK resident and non-UK domiciled individuals choose to hold residential property through an offshore structure to avoid a charge to UK inheritance tax (IHT) on their death. The rate of UK IHT can be up to 40% and while most non-residents accept the payment of death duties in their country of residence and domicile, it is a high penalty to pay for a UK investment property.

In addition to the 15% SDLT charge, the UK Government is to consult on an annual SDLT charge for residential property held by certain 'non-natural' persons and the extension of CGT for residential properties to such persons who are non-UK resident. This is expected to be introduced from April 2013.

It should be noted that there are several practical issues arising from the SDLT changes and the further proposed changes are as follows.

  1. Where individuals/trustees are intending to acquire a residential property in the UK with a value in excess of £2m, early consideration needs to be given to the most appropriate holding structure.
  2. For existing structures, clients should be made aware of the proposed annual charges and capital gains tax changes.The changes could have a significant impact on expected UK tax costs going forward. It is recommended that individuals/trustees should now start to consider what is the most tax efficient structure to hold residential property from April 2013.The most appropriate structure will depend on the exact circumstances of each client including their current and prospective residence and domicile status.

It is recognised that many wealthy clients prefer anonymity and this will be an important factor in any considerations.

CONSULTATION ON CGT AND ANNUAL SDLT CHARGE ON RESIDENTIAL PROPERTY

By Mark Wingate

HM Treasury has announced a consultation on an annual SDLT charge on high value residential property (applying from 1 April 2013) and the application of capital gains tax (CGT) to gains on such property by certain non-natural persons (for gains made on or after 6 April 2013). Both charges will only apply to residential dwellings with a value of more than £2m. They will not apply to non-residential or commercial property nor to any property held directly by a non-resident individual.

The annual charge would apply to corporate owners, and partnerships with a corporate member, whether UK resident or not. The charge will not apply to ownership by property developers or charities.

The charge will be based on the property value assessed at five-yearly intervals from 1 April 2013. Where the property interest was already in existence on 1 April 2012 it will be the value at that date which is used. This earlier valuation date for existing owners has been chosen so that valuations can be undertaken before the charge applies.

Valuations will be subject to checking by the Valuation Office Agency (VOA). The use of a professional valuation will reduce the chance of the need for the VOA to make an internal inspection of the property, and the VOA will offer a pre-return valuation checking service to property owners.

The charge will be as noted in the following table and the rates will be indexed in April each year (commencing 1 April 2014) in line with CPI in September of the previous year.

Property value

£2m - £5m

£5m - £10m

£10m - £20m

Greater than £20m

Annual charge

£15,000

£35,000

£70,000

£140,000

The due date for payment of the charge will be 15 days after the commencement of the period of account. For existing owners this will be by 15 April each year, though for the first year of operation the later of 1 October 2013 or 30 days after Royal Assent of Finance Bill 2013.

The proposed CGT charge on disposal would apply to non-residents owning high value residential property and for this purpose will include trustees, collective investment schemes and personal representatives as well as companies and other bodies corporate. Partnerships will be treated as transparent, so that any non-resident non-natural member of a partnership disposing of a property within the charge would be apportioned their share of the gain.

The charge will apply to the disposal or part disposal of relevant UK residential property and it will also apply to gains accruing on a disposal, whatever the form of disposal. Thus it is proposed that the charge would apply to the disposal of shares or interests in securities in a property owning company where more than 50% of the value of assets is derived from UK residential property.

The charge will apply to the total gain accruing in the period of ownership, not just the gain from April 2013. Non-UK resident companies currently liable to corporation tax on gains from disposal of UK residential property will be charged at corporation tax rates. Those not within the charge to UK corporation tax on such gains will be within the charge to CGT, according to rates in force at the relevant time.

CAP ON UNLIMITED RELIEFS

By Toby Tallon

Cap in hand

The 2012 Budget proposed that, with effect from 6 April 2013, the maximum amount of aggregated unrestricted reliefs that an individual can claim will be capped at the higher of £50,000 or 25% of their income. The stated policy aim for the cap is to "increase effective tax rates and help ensure that those with the highest incomes pay a fairer share". There will be a formal consultation over the summer, followed by draft legislation in the autumn/winter.

There will be a new definition of income to calculate the reliefs that an individual can claim.

What a relief – what is not caught?

  • Capped reliefs e.g. relief for subscriptions into EISs, SEIS and VCTs and relief for allowable contributions to pensions schemes.
  • Structural credits that acknowledge double taxation such as foreign and dividend tax credits and notional tax on life insurance gains.
  • Computational reliefs that determine only how income from a particular source is calculated, e.g. mortgage interest on a rented property, is unaffected.
  • Gift aid had been included in the original proposals, but it was removed following an announcement by the Chancellor at the end of May.
  • Carrying losses forward or back against profits of the same trade.
  • The new business investment incentive for UK resident non-UK domiciliaries.
  • Capital losses are unaffected by this proposal.

I can't relieve it – what is caught?

  • Trading losses from sole trades or an individual's share of partnership/LLP losses that are relieved 'sideways' against general income.
  • Losses on original subscriptions for shares in qualifying trading companies.
  • Qualifying interest including on a loan to fund buying shares in a trading close company or to fund a capital contribution to a trading partnership or LLP.
  • Tax-geared schemes, even ones predicated on statutory reliefs e.g. business property renovation allowance schemes.
  • Any other type of uncapped relief.
  • Losses arising on liquidation or sale of shares in an EIS. Currently the Treasury considers that such losses would be uncapped and therefore subject to the restrictions.

Comment

Taxpayers who make use of reliefs should review their affairs in advance of this new cap taking effect from 6 April 2013. Statutory targeted anti-avoidance to prevent perceived abuse in this area, e.g. the requirement for individuals to work at least ten hours a week in their unincorporated business to claim 'sideways' loss relief above £25,000, still remains.

HMRC'S CONTRACTUAL DISCLOSURE FACILITY

By Jeff Millington

HMRC's contractual disclosure facility came into force on 1 February 2012. This new tax investigation arrangement (replacing Code of Practice 9) will have a big impact on those who come under the investigation regime.

The important changes are as follows.

  • HMRC will issue a formal invitation to persons to enter into the contractual disclosure facility (CDF) and make full disclosure.
  • The department will allow a 60-day period so that a detailed outline of the disclosure can be made.
  • An initial formal opening meeting will no longer always take place.
  • Unlike the previous regime, criminal proceedings may now be used by HMRC even though the CDF has been offered.

What underpins the new CDF is the fact that at the outset, in addition to making the initial disclosure, the individual under investigation will be required to sign a letter agreeing to co-operate with the investigation. This forms a binding contract.

The most significant change is that even though HMRC has offered a civil investigation there are now more opportunities for HMRC to refer cases for criminal investigation if the individual fails to make a valid disclosure, or denies any irregularity or if a disclosure is incomplete.

The initial letter from HMRC is possibly the most important part of the investigation as a full disclosure of all irregularities made within the time limit should avoid criminal proceedings and help to secure minimum penalty levies. If such letters are not dealt with quickly and efficiently, HMRC may implement criminal proceedings, which can result in imprisonment or, at best, a drawn out, intrusive and expensive investigation.

For the first time HMRC recommends that the individual under investigation obtains advice from a specialist in this area. It is vital that anyone subject to such a regime takes professional advice as failure to do so can now result in prosecution and potential imprisonment. There are also serious ramifications for advisers if they are found to be at fault as part of the investigation.

INVESTING IN COMPANIES

By Nicki Shilston

Following announcements in 2011, the Government confirmed various changes to the Enterprise Investment Scheme (EIS) and Venture Capital Trust (VCT) rules and proposed Seed EIS (SEIS) rules in the March 2012 Budget. These changes are a welcome relaxation and should go some way to stimulating and boosting investment into 'smaller' companies.

Changes to EIS and VCT rules – for shares issued on or after 6 April 2012

The following changes are subject to State Aid approval:

  • employee limit for investee companies increased to fewer than 250 full-time employees
  • size threshold for the gross assets test for investee companies increased to no more than £15m immediately before investment, and £16m immediately thereafter
  • maximum annual amount that can be invested in a company through the EIS and from VCTs in aggregate in any 12-month period increased to £5m.

The amount that an individual can invest per tax year in EIS shares has been increased to £1m from 6 April 2012.

Other changes include:

  • clarification that investors are disqualified from claiming EIS income tax relief if, together with associates, their shareholding or voting power exceeds 30%
  • replicating the definition of eligible shares for EIS purposes to that used for VCTs with respect to certain preferential rights in relation to dividends
  • shares issued in connection with 'disqualifying arrangements' will not attract EIS or VCT relief
  • tax relief will also not be available under EIS or from VCTs where funds raised by a share issue are to be used to acquire shares in another company
  • removing the £1m per annum limit on investment by a VCT in a single company (except for companies in a partnership or a joint venture)
  • removing the £500 minimum investment limit for EIS investments.

Seed EIS

After consultation on the initial SEIS proposals, the following changes have been incorporated to this relief (available for investments made on or after 6 April 2012) for certain investors investing in a company or a group with gross assets not exceeding £200,000 prior to SEIS investment:

  • companies can qualify even if they have subsidiaries
  • eligibility is determined by reference to the age of the trade, rather than the company
  • the reference to holdings of other entities in calculating asset and employee tests has been removed
  • past (but not current) employees qualify for relief
  • directors who qualify under SEIS continue to qualify under EIS (provided the EIS shares are issued before the third anniversary of the date of issue of SEIS shares).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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