News and Views – Positive Tax Solutions

ATED

The 5 year valuation rule trap

The Annual Tax on Enveloped Dwellings (ATED) contains a trap which can blow-up in your client’s face: the five-year valuation rule.

When a residential property is held through a company (or other non-natural person eg a trust) it must be valued on acquisition to determine whether it is worth over £500,000, and thus may be subject to ATED. However, the property must also be revalued every five years after acquisition, with the valuation undertaken on 1 April in 2012, 2017, 2022, 2027 etc.

The new valuation takes effect for the ATED reporting year starting on the following 1 April. Thus, the ATED return and payment for 2023/24 is based on the open market value of the property as assessed at 1 April 2022.

HMRC is writing to taxpayers who are currently paying ATED, to remind them to revalue their properties at 1 April 2022 using an open-market value.

This could result in the property moving up a valuation band for 2023/24, say from the £500,000 to £1m band, into the £1m to £2m band. Although the ATED charges for 2023/24 have not been announced yet, moving up a band will at least double the amount of ATED due, which needs to be budgeted for.

The bigger trap is when the property becomes subject to ATED for the first time, as the property value has exceeded £500,000. Even if the property is exempt from ATED, because it is commercially let to people unconnected with the company owners, an ATED relief return must be submitted by 30 April within the year. There are a number of other situations which give full relief from the ATED charge.

Failure to submit an ATED return on time will result in automatic late filing penalties. Also, failure to pay the right amount of ATED charge on time will generate a late payment penalty and an interest charge.

Enterprise Investment Schemes Uncategorized

Venture Capital Schemes

Following a consultation this Spring the Government has decided to overrule the sunset clauses for both the Enterprise Investment Scheme (EIS) and the Venture Capital Trust (VCT) scheme, which were both due to end by 6 April 2025.

The similar Seed Enterprise Investment Scheme (SEIS), designed for early stage trading companies, will be expanded.

The amount each investor can subscribe for new shares under the SEIS will be doubled to £200,000 per year from 6 April 2023. This would give an investor, who puts up the maximum amount in one year, £100,000 of income tax relief. The shares acquired are also free of CGT if they are held for at least three years and the income tax relief is not withdrawn.

SEIS also offers CGT reinvestment relief at the rate of 50% of the amount of gain reinvested in SEIS shares, if the investment is made within the same tax year as the gain was realised. However, the gain must be real gain, not a deemed gain, or a gain which has been held-over or deferred. To benefit from reinvestment relief the taxpayer must also claim the income tax relief on the subscription for the shares.

The cap on the amount for the company can raise under the SEIS will also be increased from £150,000 to £250,000. The gross assets cap for companies using the SEIS will be also be increased from £200,000 to £350,000.

Currently such companies must be within two years of starting their trade when they receive funds under SEIS, this age limit will be extended to three years.

For more information please contact us.

Personal Taxation

Dividend tax rises

On 8 September 2021, the Prime Minister outlined the Government’s plans for health and social care, including a new funding strategy designed to meet social care costs. The plans include increasing National Insurance for employers, employees and the self-employed by 1.25% for 2022/23 only, before launching a new social care levy of 1.25% from April 2023, and raising the dividend tax rates by 1.25% from April 2022.

For clients with personal and family companies, extracting profits as dividends once a small salary has been taken is a tax-efficient strategy. One of the advantages of taking dividends rather than a higher salary is that dividends do not attract National Insurance. As the salary level is typically set at a level such that little or no National Insurance is payable, the planned increase in the dividend tax will have the effect of collecting a social care levy from clients who effectively pay for themselves in dividends. However, it will also affect clients with share portfolios, who may also be paying higher National Insurance contributions on their salaries or self-employment profits.

As the planned increase in dividend tax does not take effect until April 2022, it is possible to plan ahead. Clients with profits to extract may wish to take dividends before 6 April 2022 to take advantage of the current dividend tax rates. This may be particularly advantageous where the client has not used all of their basic rate band. Where an alphabet share structure is in place, dividends can be tailored to utilise the basic rate band and dividend allowances of family members who are also shareholders, providing other options for extracting profits prior to April 2022. If there are significant retained profits to extract and it is likely that the basic rate band will be used for the foreseeable future, again it may be worthwhile extracting profits prior to 6 April 2022 to save tax of 1.25%, even where the dividends are taxed at the higher dividend rates. This may be worthwhile if the funds are likely to be needed outside the company.

When planning ahead, clients should also be mindful of the corporation tax changes that will apply from 6 April 2023, increasing the rate of corporation tax payable where profits are more than £50,000. As dividends are paid from post-tax profits, a higher rate of corporation tax will reduce the profits available for distribution as dividends.

Capital Gains Tax Uncategorized

CGT offset problems

Since 6 April 2020 gains made on the disposal of UK residential property have to be reported and the CGT paid within 30 days, using the UK Property Reporting Service. This online service doesn’t link into the annual self-assessment reporting system.

However, HMRC had assured the tax and accounting professional bodies that any under or over ‘payments on account’ of CGT would be sorted out in the taxpayer’s annual self-assessment. It appears that is not the case.

All taxable gains must be reported on the SA form whether or not they have also been reported through the UK Property Reporting Service. It is only at this stage that taxpayer’s total income for the year is determined and thus how much of the gains fall into the basic and higher rate tax bands. The incidence of capital losses can also reduce the final amount of CGT due compared to what was paid on account.

The SA computation will not automatically off-set any overpaid CGT against income tax and NIC due, or prompt HMRC to refund the excess CGT. In this situation the taxpayer has a choice of how to secure the refund of CGT:

Amend the UK Property Disposals return and claim a tax refund via that service, if an amendment to that particular calculation permitted under FA2019, Sch 2, para 15.
Complete the SA return using the original figures on the UK Property Disposal return, then view and print the tax calculation.

Note, action 1) should not be undertaken once the SA return for the year has been submitted.

If route 2) is taken and the total of income tax, CGT and NIC due is more than the amount of CGT overpaid, the taxpayer can pay the balance of tax by 31 January 2022. However, the taxpayer or his agent must first contact HMRC on 0300 200 3300 and ask for a manual adjustment to set off the amount of CGT overpaid against the other taxes due. An alternative solution is to pay all the income tax, NIC and CGT shown as due on the SA computation and contact HMRC for a repayment of any overpaid CGT.

This manual adjustment by HMRC is a temporary solution which creates more work for taxpayers, their tax advisers and HMRC. It is hoped that an automated solution will be provided in due course.

Note that non-resident taxpayers must report and pay the tax on gains from all UK commercial and residential properties, so the problem is much bigger for non-resident individuals.

See the advice from the CIOT, and an example, here

SDLT

Temporary rate reduction

Presenting the Summer Economic Update on 8 July 2020, the Chancellor, Rishi Sunak, announced a much-anticipated reduction in residential stamp duty land tax (SDLT). Where completions take place between 8 July 2020 and 31 March 2021, the residential SDLT threshold is raised to £500,000 from £125,000.

The reduction will also benefit those buying second homes and investment properties who will pay 3% on the first £500,000 of the consideration where the purchase price is at least £40,000.

First-time buyers will only feel the effects where the consideration tops £300,000; prior to 8 July 2020, first-time buyers paid no SDLT on the first £300,000 of the consideration.As a result of the reduction, the rates of residential SDLT in England from 8 July 2020 to 31 March 2020 are as set out in the table below.

Reductions have also been announced to the residential rates of Land and Buildings Transaction Tax (LBTT) in Scotland and Land Transaction Tax (LTT) in Wales.

The reduction only applies to residential property rates; the rates for commercial and mixed properties are unchanged.

It is therefore important to be clear whether a property is a residential property or not.

For SDLT purposes a residential property is defined (in FA 2003, s. 116) as a building used or suitable for use as:

a dwelling, or is in the process of being constructed or adapted for use as a dwelling;
the garden or grounds of such a building, including buildings of structures on such land;
an interest or right over land that subsists for the benefit of such a building or land (for example, a right of way)

The test is at the effective date of the transaction.

It should be noted, particularly as regards garden and grounds, the test of what counts as residence for SDLT is not the same as that for CGT, and a separate sale of a garden (but not a subsequent sale) will be regarded by HMRC as residential property for SDLT irrespective of whether it would qualify for main residence relief for CGT purposes.

Care should also be taken when purchasing a property is a dilapidated state; as shown in the Tribunal Decision is P N Bewley Ltd v HMRC [2019] TC06951, what HMRC may consider to be a ‘dwelling’ may differ from what a lay person may regard as being suitable for use as dwelling.

Prior to the rate reduction, it was in HMRC’s interests for SDLT to be payable at the residential rates; the arguments and case law used then in their favour may help the taxpayer now.

While the reduction applies, it makes sense for completions to take place prior to 1 April 2021. However, the reduced rates only apply to residential properties defined as such for SDLT purposes

Capital Gains Tax Property

CGT on Property

30 Day Reporting

In spite of the coronavirus crisis, the new system for paying and declaring CGT within 30 days of the completion of a UK property transaction came into effect for property completions on and after 6 April 2020.

There are exceptions from the 30-day regime for transactions where there is a loss, the gain is fully covered by a CGT relief or annual exemption, and where the contracts were exchanged prior to 6th April 2020. Otherwise if the CGT is not reported and paid within 30 days of completion, late filing penalties will be imposed in the same manner as for late Self Assessment tax returns.

However, HMRC has introduced a soft landing for the new CGT regime, such that disposals made from 6 April to 30 June 2020 inclusive can be reported by 31 July 2020 with no penalties due. Transactions completed on or after 1 July 2020 must be reported within 30 days through the taxpayer’s “CGT on UK property account”.

See here for details of how to report and pay CGT on property, and here on how to manage a UK property account.

Property SDLT

SDLT Higher Rate

Home selling deadline relaxed

Second homes have been subject to a 3% SDLT surcharge since April 2016, and similar surcharges apply in Wales (3% LTT) and Scotland (4% LBTT). These surcharges are not supposed to apply to the purchase of a main home, but purchasers can be caught out if they buy a replacement main home before completing the sale on their old home.

Where the buyer holds two or more homes at the end of the day of completion the surcharge applies. But this surcharge can be reclaimed if the old home is sold within a specified window, set at three years for property purchases in England, Wales and Northern Ireland, but just 18 months in Scotland.

As the UK property market was effectively frozen due to the coronavirus shut-down many sales fell through and some buyers have been left holding two homes for longer than expected. The UK and Scottish Governments have reacted by extending the window for sale of the old home in slightly different ways.

Scottish home-owners can enjoy a limited extension to the window for sale to three years, where the new home was purchased between 24 September 2018 and 24 March 2020. This is legislated for in the Coronavirus (Scotland) (No.2) Act 2020, Schedule 4 part 5.

Home-owners in England or Northern Ireland have been given an open-ended flexibility for the sales window where the new home was purchased on or after 1 January 2017. If the buyer can show that exceptional circumstances applied to prevent the sale of the old home, such as the covid-19 pandemic, the sales window for the old home is extended.

The taxpayer will be expected to complete the sale of their old home as soon as reasonably possible after the exceptional circumstances have ceased. HMRC will only make a judgement on whether the exceptional circumstances condition applies once the former home is sold and a SDLT refund application has been submitted.

The Welsh Government has made no similar adjustment to the rules for the LTT surcharge.

Reorganisation

Asset Protection

The impact of the Coronavirus Pandemic (Covid-19)

There is no doubt that the current trading environment continues to place considerable pressure on businesses.

We have a number of clients, that are concerned about the impact on their businesses and the knock-on effect on assets, e.g. property, that they hold.

Their concern is clear, if the trading business fails then their assets are at risk.

In a corporate environment steps can be taken to protect those assets by moving them into a separate company without incurring any adverse tax consequences (with HMRC clearance), and in some cases achieving a mark-up of their book cost to current market value.

A spin-off is that in those cases where eligibility for entrepreneurs’ relief has been compromised by investment decisions it may be possible to restart the two year clock in respect of shares held in their trading company.

If you would like to discuss these opportunities, please do call or email.

Capital Gains Tax

Entrepreneurs’ Relief

Is the clock ticking ?

Speculation is always rife before a Budget as to what the Chancellor’s speech might contain. This year, one of the front runners is the potential abolition of entrepreneurs’ relief. Indeed, the Sunday Times reported on 1 March 2020 that the new Chancellor, Rishi Sunak, will scrap entrepreneurs’ relief to ‘fund a spending spree in the North of England’.

If this prediction does turn out to be true, what does it mean for those who would currently qualify for the relief?

To recap, entrepreneurs’ relief provides a favourable 10% rate of capital gains tax on qualifying disposals up to the £10 million lifetime limit provided that the qualifying conditions have been met for the qualifying period. The relief is available on qualifying disposal of business assets or on shares in a personal company. Changes announced in the 2018 Budget made the qualifying conditions more stringent, including an increase in the period for which the qualifying conditions must be met from 12 months to two years for disposals on or after 6 April 2019.

If indeed entrepreneurs’ relief is abolished, an unknown is whether this will take immediate effect from Budget day, from the end of the 2019/20 tax year or from another date. Assuming a worst case scenario and an immediate abolition from Budget day, should a sale already be in progress and it is possible to accelerate it to before 11 March, this may be prudent, particularly when the tax at stake is high, Likewise, where the qualifying conditions have been met by a personal company, consideration may be given to the disposal of shares by this date, possibly into a trust. However, as time is very short, professional advice should be taken as a matter of urgency to allow for contingency planning.

It must be borne in mind that any action will only affect any gain made to date. Any future gains will not benefit should the relief be withdrawn. Additionally, of course, in order to take advantage of entrepreneurs’ relief it is necessary to trigger a capital gain which will result in a tax charge.

It may, however, be the case, that the Chancellor adopts a less extreme approach and reforms the relief rather than abolishing it. This could take the form of yet more stringent qualifying conditions, a reduced lifetime allowance or an increase in the tax rate.

While all will not be revealed until the Budget, it is likely that the window of opportunity to benefit from the relief in its current, generous form is limited. It is advisable to review options ahead of 11 March and take protective action where possible.

The 5 year valuation rule trap

Award value to double

Temporary rate reduction

30 Day Reporting

Home selling deadline relaxed

Is the clock ticking ?