UK: Weekly Tax Update - 4 January 2016

Last Updated: 7 January 2016
Article by Smith & Williamson

1. General news

1.1 Happy New Year

First of all we wish all our readers a happy and successful New Year.

1.2 Right to rent checks

Legislation is due to come into effect from February 2016 requiring all domestic landlords to carry out checks on their tenants. Although not a tax matter, landlords need to be aware of this.

Residential landlords, including trusts, will have to confirm that a tenant or lodger can legally rent a property by inspecting original documents permitting the tenant to live in the UK. Failure to do so may result in a civil penalty. Retained agents may often carry out this task, but the onus is on the landlord.

www.gov.uk/government/uploads/system/uploads/attachment_data/file/370559/guidance_0_summary_checklist.pdf

www.gov.uk/government/uploads/system/uploads/attachment_data/file/370484/document_guidance_for_landlords.pdf

1.3 HMT Consultation: Higher rates of SDLT consultation – residential properties

HM Treasury (HMT) has launched a consultation on higher rates of Stamp Duty Land Tax (SDLT) on purchases of additional residential properties by individuals and trustees, with different rules for companies. This follows the announcement in the Autumn Statement of the Government's 'Five Point Plan for housing' that includes increasing the rates on second homes, buy-to-let and other additional residential properties by 3% from 1 April 2016. Although the consultation asks for views on several areas, many decisions have already been taken. The condoc highlights a number of complexities and possible unfairness. Responses are due by 1 February 2016.

The consultation document (condoc) states that the higher SDLT rates will apply to most purchases above £40,000 of additional residential properties in England, Wales and Northern Ireland where, at the end of the day of the transaction, individual purchasers own two or more residential properties anywhere in the world and are not replacing their main residence.

(The Scottish Government has already announced that there will also be an additional 3% land and buildings transaction tax (LBTT) from 1 April 2016 on the purchase of additional residential properties, to effectively match the SDLT rate change in the rest of the UK.)

HMT states that around 90% of transactions will be unaffected, including first time buyers purchasing their first property or home owners moving from one main residence to another. Looked at the other way, this means that around 10% of transactions will be affected, a substantial proportion.

The Autumn Statement had indicated that the higher rates would generally apply to purchases of residential property by companies, apart from where at least 15 properties were already owned. However, the condoc indicates that the government is considering a different exemption from the higher rates for both corporates and individuals making 'significant investments in residential property', given the role of this investment in supporting the government's housing agenda.

HMT flowchart for individuals

Overlapping properties

Concerns have been raised over the implications for home owners who move from one property to another, where there is an overlap in ownership of the properties, for example, due to difficulties in selling the first property. This has, to some extent, been taken into account in the condoc by proposing that where the previous main residence is sold within 18 months the home owner can apply for a refund. There will be no election for this – it is to be based on the facts, unlike for CGT.

This measure will obviously have significant cash flow issues for affected taxpayers, many of whom will already face bridging fees, although it will make it easier for HMRC than having to pursue SDLT on properties not sold within 18 months. The consultation does however raise the idea of making the test of owning two properties on the date of submission of the SDLT return, although there are plans to reduce that to 14 days from the date of the transaction.

Gaps in owning main homes

Where a taxpayer owning a buy-to-let property subsequently buys a main home, the higher rate will apply to the second purchase, unless he is replacing a previous main residence sold within the last 18 months.

This could mean a person owning a buy-to-let property who has a gap of more than 18 months between selling a main home and buying a replacement, for example, due to working abroad, would also have to pay the higher rate on the purchase of their main home, even if they had already paid the higher rate on the other property. This will strike many expats or other internationally mobile workers as unfair.

Joint owners

The government proposes that married couples or civil partners who own one property at the end of the day of a transaction will not pay the higher rates of SDLT, but if one already owns a residential property and they jointly buy a second property then the higher rates may apply.

For other joint owners (eg unmarried couples or friends purchasing a property together), if, at the end of the day of a transaction, any of the joint purchasers has two or more properties and is not replacing a main residence, the higher rates will apply to the entire consideration for the transaction, irrespective of the amount of the interest in either property. However, if the taxpayer who already owns a property merely acts as a guarantor on the mortgage (for example, a parent assisting a child) the higher rates will not apply.

Each member of an unmarried couple could purchase a residential property to use as a home without being subject to the higher rate of SDLT on either property. A single person or married couple first buying a buy-to-let property would pay the lower rate of SDLT on the transaction. The higher rate of SDLT would be payable on a subsequent purchase of a home as this would be their second property that is not replacing a main home.

Transitional provisions

The higher rates will only apply to purchases of additional residential property that complete on or after 1 April 2016. If contracts are exchanged after 25 November 2015 then the higher rates will apply if the purchase is completed on or after 1 April 2016. However, if contracts were exchanged on or before 25 November 2015 but not completed until on or after 1 April 2016, the higher rates will not apply.

Mixed use

The rules will only apply to residential property purchases. The government has also confirmed that it does not intend to change the treatment for mixed use transactions, which are currently considered non- residential transactions for SDLT purposes.

Multiple dwellings relief

For purchases of six or more residential properties in the same transaction, the purchaser will be able to choose whether multiple dwellings relief, with the higher rates, will apply, or the non-residential rates (which will be charged on the total purchase price).

Bulk purchases

The government is also considering an exemption from the higher rates, which is targeted at the bulk purchase of at least 15 residential properties in one transaction, and whether there is evidence to suggest that this exemption should be available to individual investors as well as non-natural persons. The intention otherwise is that the first purchase of a residential property by a company or collective investment vehicle is subject to the higher rates of SDLT.

These proposals replace the outline proposals announced in the Autumn Statement, which indicated that corporates or funds making significant investments in residential property would be exempt, potentially defined as those owning more than 15 residential properties, as opposed to those making bulk purchases.

Trusts

Purchases by trustees for beneficiaries with life interests or interests in possession are to be treated as if the purchase were made by the beneficiary. Other trustee purchases will be liable to the higher rates.

Administration

The condoc also considers and asks for suggestions on changes to the SDLT form, the type of questions a conveyancer may need to ask purchasers to determine whether a property was/is the main home and the refund process, which might be linked to the SDLT return on the later sale.

www.gov.uk/government/consultations/consultation-on-higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties/higher-rates-of-stamp-duty-land-tax-sdlt-on-purchases-of-additional-residential-properties

1.4 HMRC's approach to criminal investigations

HMRC has published several documents covering its policy on and approach in criminal investigations together with details of the related powers and safeguards.

The recent changes include:

  • HMRC Code of Practice for EU Directive 2012/13/EU: the right to information in criminal proceeding. - Under this, HMRC officers taking suspects into detention in Scotland must provide certain information and carry out particular duties to ensure the rights of the detainee are observed.
  • HMRC responsibilities for standards on the rights, support and protections of victims of crime (EU Victims Directive 2012/29/EU). HMRC are included as a competent authority in England and Wales under the Ministry of Justice's Code of Practice for the Victims of Crime (2015), which came into force on 16 November 2015. Under this, HMRC will consider whether there is a victim of crime in any criminal cases being investigated and for any victim to be afforded their rights under the code.

www.gov.uk/government/publications/criminal-investigation

2. Private client

2.1 SA returns – deadline and security

HMRC has issued a reminder of the 31 January self assessment (SA) tax return deadline together with some updated guidance on security around the submission of returns. The notice includes a reminder that taxpayers new to SA filing their own return also need to register for online filing if they are to file their return online – in previous years it has taken about 12 days for the activation code to arrive in the post once the registration process has been completed, so taxpayers should do this as soon as possible to ensure the deadline is met.

Alternatively taxpayers can of course use a tax agent already registered to file online for clients. This year HMRC says it plans to email about 1m people who have not yet submitted their returns. We assume they will be using the email address used when registering for online filing, in which case this will be largely to unrepresented taxpayers.

The note also includes reminders around keeping safe online, not clicking on links in phishing emails that appear to come from HMRC and changing passwords regularly. HMRC says it has closed 22,210 fake websites since 1 July 2014.

www.gov.uk/government/news/have-you-returned-your-safe-assessment

3. PAYE and employment

3.1 National Insurance Contributions (Rate Ceilings) Act 2015

The NIC(RC)A 2015 gained Royal Assent on 17 December 2015. The purpose of the Act is merely to set a ceiling on the main and additional primary percentages the secondary percentage and the upper earnings limit in relation to Class 1 NIC. It applies to tax years 2016/17 until the last tax year that starts before the next election, so is likely to be until 2020/21.

The rates cannot exceed the current levels:

  • Main rate for employees: 12%
  • Additional primary rate for employees: 2%
  • Secondary rate for employers: 13.8%

In addition, the NIC upper earnings limit cannot be increased above the equivalent of the higher rate threshold (ie basic rate limit plus personal allowance) for income tax for any year.

The Act provides an element of certainty around the Government's manifesto commitment not to raise the main rates of NIC. However, there is no mention around rates for the self-employed, which leaves it open to the government to raise these if it wishes.

www.legislation.gov.uk/ukpga/2015/35/contents/enacted/data.htm

4. Business tax

4.1 Annual report on the operation of the Banking Code

HMRC has published its first annual report on the operation of the Code of Practice on Taxation for Banks, covering the period from 5 December 2013, the date at which the strengthened Code arrangements took effect, up to 31 March 2015. The code was designed to change the attitudes and behaviours of banks towards avoidance given their unique position as potential users, promoters and funders of tax avoidance and there is strong evidence that this is being achieved.

The report confirms that 303 banks adopted the Code and names the six banks that had not adopted the Code as at 31 March 2015 (although most of those have adopted the code since that date) and HMRC indicate that there is evidence of the code being a significant factor in changing behaviour.

The number of disclosures of avoidance schemes under DOTAS from banks who have adopted the Code had reduced markedly since the Code was introduced in 2009 and in the 16 month report period banks made fewer than five disclosures under the DOTAS regime, each of which was discussed in advance with HMRC to confirm that the tax result was not contrary to the intentions of Parliament. In addition, tax under consideration in legacy schemes has fallen to less than one third over the previous two years.

None of the banks that had adopted the Code by 31 March 2015 has been determined to be in breach of the Code during the period covered by the report. The report also covers the work HMRC has done to monitor Code compliance, and HMRC's response where banks have approached HMRC for its view on whether a particular transaction is Code compliant.

HMRC plans to issue new consolidated guidance on the Code in the coming months, replacing the guidance first published before the Code was strengthened in 2013, and will include some additional material, for example on the intentions of Parliament. This might be useful to other businesses and their advisers.

www.gov.uk/government/publications/the-code-of-practice-on-taxation-for-banks-annual-report-2015

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Smith & Williamson LLP: Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. The word partner is used to refer to a member of Smith & Williamson LLP The Financial Conduct Authority does not regulate all of the services or products discussed in this publication.

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