Bespoke Solutions for Entrepreneurs and their businesses
Author:Stephen Burwood
Stephen is recognised in the Tax and Accountancy world as an expert in Transactional Tax.
Stephen offers advice on Corporate reorganisations, sales and disposals ,EIS / SEIS, Share Schemes and Property Portfolios including SDLT.
He is commercially aware and always offers advice in a commercial and pragmantic way.
The government has now tabled an amendment to Paragraph 2 of Schedule 15 of the Finance Bill, which contains the changes to the definition of ‘personal company’ for ER purposes. See the proposed amendment here:
The amendment will add an alternative test based on the shareholder’s entitlement to proceeds in the event of a sale of the whole company, which can be used instead of the tests based on profits available for distribution and assets on a winding up.
The original tests have been left in to provide certainty to those with straightforward company structures, but the new test will help those who are not able to meet the original test for commercial reasons, and does not rely on the definitions in the Corporation Tax Act 2010.
The proportion of finance and interest charges which can be deducted from residential property income is gradually being reduced to nil as follows:
Tax Year in which interest is paid
Proportion of finance charges deductible
2017/2018
75%
2018/2019
50%
2019/2020
25%
2020/21 and later
Nil
The landlord will have a tax credit (20% x blocked interest) that reduces his income tax bill. This 20% rate applies irrespective the landlord’s actual marginal tax rate.
Some landlords will get a nasty shock when they see their tax bill for 2017/18 is much higher than what they paid on a similar level of profit for 2016/17. Their tax bill for 2018/19 may be even higher.
There are four ways out of this bind, but they all require careful thought around the knock-on tax implications;
Sell some residential property and reduce the level of debt for the remaining property business.
Let the property in such a fashion so it qualifies as furnished holiday lets for tax purposes.
Sell all residential property and reinvest in commercial property.
Transfer the let properties to a company controlled by the landlord.
Some landlords have no debt in their property businesses, and they are not affected by the interest and finance restrictions.
However, individual landlords (of all types of property), should draw up their accounts for 2017/18 using the cash basis for landlords (different to the cash basis for trading businesses).
Where the total receipts of the property business exceed £150,000 for the tax year, the cash basis should not be used, and GAAP accounting can be used instead. Any individual landlord can elect to use GAAP accounting rather than the cash basis, by ticking a box on the 2017/18 tax return.
We can help you advise your clients on restructuring, but time is running out for residential property businesses which are supported by large mortgages.
Entrepreneurs’ relief (ER) is widely misunderstood by people who don’t read the legislation. For ER to apply to a gain arising from the disposal of shares or securities, the company must be the individual’s personal company for a full 12 months ending with the disposal date, or the date the company ceases to trade (if earlier).
A company is the taxpayer’s personal company if he holds at least 5% of the ordinary share capital and at least 5% of the voting rights exercisable by virtue of that shareholding. This dual condition is relaxed if the shares were acquired by way of qualifying EMI options acquired on or after 6 April 2013.
A further relaxation is proposed where the shareholding is diluted below the 5% threshold as a result of issuing more shares to new investors on or after 6 April 2019. This change in the ER rules will be introduced by FA 2019.
The legal definition of ordinary share capital is: “all of a company’s issued share capital, except fixed dividend shares which have no other rights to share in the company’s profits,”. This definition means that the taxpayer must hold 5% of all the issued share capital (not just 5% of the ordinary shares), while ignoring any shares with a fixed dividend.
When the company has a complex share structure, working out exactly what proportion of the total issued share capital an individual holds can be tricky. HMRC has recently updated its view of ordinary share capital, to include more examples of situations where the position may be finely balanced. It is worth reading through those examples if shares in a company with a complicated share structure.
The voting rights part of the condition must also be met. In the case of Dieno George the taxpayer did not hold enough voting rights for the full 12 month period to take his voting power up to 5%, and so his claim for entrepreneurs’ relief failed.
When you wish to use a venture capital scheme to allow equity investors to claim tax relief, you need to understand the conditions for the company to qualify before the investments are made. The best way to do this is to read the law, or approach us for advice. It’s a pity that HMRC didn’t do this before declining an application to use the SEIS by a small company in Oxford.
The Seed Enterprise Investment Scheme is specifically designed for young companies to raise relative small amounts of start-up capital. The company is permitted to raise up to £150,000 over a three year period, and the maximum investment per taxpayer is £100,000 per tax year. There is no minimum investment for either the company or for the equity investor.
Oxbotica Ltd, a spin-out company from Oxford University, applied to use SEIS for part of its initial equity capital. It was formed with £1000 of share capital and three individuals wanted SEIS relief on their share of this which amounted to just £316. In addition the company received a substantial loan from the University.
As with any risky venture, the investors were looking to the long term gain on the shares, so they were not very interested in 50% income tax relief on the investment, but they were attracted by 100% exemption from CGT once the shares had been held for three years.
HMRC declined the company’s application to use SEIS on these grounds:
The shares were subscriber shares – this is irrelevant as long as the shares are subscribed for in cash and are fully paid up.
The small amount of funding wasn’t of meaningful use to the business – this is an invented condition as there is no minimum investment requirement.
The real purpose of the share issue was to provide CGT relief to investors – irrelevant if the money is used for the business’ expenses – which it was.
The tax tribunal had no problem in agreeing with the taxpayer that SEIS was applicable, but it’s disappointing that the statutory review process didn’t reverse the initial HMRC decision, which was it was so clearly outside the law.
HMRC has updated the payment terms for settlement of disguised remuneration avoidance cases, which can be found on GOV.UK
Disguised remuneration tax avoidance schemes claim to avoid the need to pay Income Tax and National Insurance contributions. They normally involve a loan or other payment from a third-party which is unlikely to ever be repaid.
These schemes are used by employers and individuals. If they’re used by contractors, they’re often known as contractor loans.
If you’re in a disguised remuneration scheme, you should settle your tax affairs as soon as possible. If you don’t, the new loan charge announced at Budget 2016 will apply to all disguised remuneration loans outstanding on 5 April 2019.
Since 1 April 2016 a supplement of 3% SDLT has applied to purchases of second and additional homes in England, Wales and Northern Ireland. This supplement was copied in Scotland and became the additional dwelling supplement (ADS) for LBTT, also set at 3% of the entire consideration for properties costing £40,000 or more. A similar 3% supplement applies to LTT in Wales from 1 April 2018.
However, the rules for the SDLT supplement and the ADS for LBTT do not mirror each other, as there are different conditions for relief from the 3% supplement in each country.
Scotland has just amended its law to provide relief from ADS where a couple buy a home together to replace their main home, but their former home was held the sole name of one of the individuals. Taxpayers who fall into this category, and who purchased the replacement home on or after 1 April 2016, can now apply for a refund of the additional LBTT paid.
There are a number of circumstances in which refunds of the SLDT supplement can be reclaimed as set out in the SDLT manual under condition D. Unfortunately, the SDLT manual is not written in plain English and the convoluted conditions and exceptions are difficult to follow. We can help you with questions in this area.
It is worth checking if a refund of the SDLT supplement is due, as it must be claimed within 3 months of the sale of the previous main residence or within 12 months of the filing date of the land transaction return, whichever comes later. Another point to check is whether the property acquired is 100% residential, as the supplement only applies to residential property.
A voluntary form of cash basis accounting was introduced from 6 April 2013, but only for unincorporated trading businesses with turnover under the VAT threshold. Until 6 April 2017 landlords were required to use accruals accounting for property income.
From 6 April 2017 the tables are turned as smaller unincorporated property businesses are required to use a form of cash basis accounting. The landlord can opt to use the cash basis for one property business and not for another different and separate property business. Say he has some property let as furnished holiday lettings, and other property let as normal residential lettings, the FHL accounts could be drawn up on an accruals basis and the other lettings on the cash basis.
The following unincorporated landlords are not permitted to use the cash basis:
those with annual turnover exceeding £150,000;
where business premises renovation allowance has been claimed and there is a balancing adjustment in the year;
LLPs, trustees, personal representatives or partnerships including a corporate member;
where the property is jointly held by spouses/ civil partners and one person does not use the cash basis.
If the landlord doesn’t fall into one of the exemptions listed above, he can opt to use accruals accounting by electing in his tax return for the relevant tax year, or by the deadline for amending that return: 31 January 2020 for the 2017/18 returns.
The cash basis for property business differs from the cash basis for trading businesses on these points:
security deposits are not counted as income while the funds are available to be returned to the tenant.
the cost of replacing domestic items in residential properties may be deducted, but not the cost of the original items.
interest and finance costs are not capped at £500 per year.
Finance costs are capped under the cash basis for property businesses, but the disallowed charges are based on the portion of loans which exceed the value of the let properties when they were first let by that landlord. This cap applies before, and in addition to, the restriction of deductions for finance charges relating to letting of residential property, which is phased in from 6 April 2017.
HMRC have today issued ERS bulletin 28 confirming that as the EU have prolongated the scheme the scheme continues to operate in the same way as before. Accordingly any options granted between 7th April and 15th May (the date the EU confirmed the prolongation) will qualify as approved options.
There is now huge pressure on indebted landlords to incorporate their property businesses, to avoid the restriction on the deduction of interest and other finance charges which has applied since 6 April 2017.
Where an actively-managed property portfolio is transferred to a company the gains arising maybe rolled into the value of the shares received, using incorporation relief (TCGA 1992, s 162), if it can be shown that the letting activity is a “business”. This was the essence of the EM Ramsey case, as decided by the Upper Tribunal in 2013. Following that case HMRC amended the guidance in its Capital Gains manual (para CG65715).
The new guidance sets out the reasoning of the judge in the EM Ramsey case, and HMRC believes that should be sufficient for any taxpayer to make a judgment on whether their business constitutes a “business” for incorporation relief. HMRC has also stated that it will no longer give a ruling on this point under the non-statutory clearance service.
We can help you decide whether the business you are planning to incorporate does fall within the boundaries of “business” for incorporation relief, and guide you through the other conditions required for that relief.
We have learned today that the EU has now approved a prolongation of the Enterprise Management Scheme (the “EMI scheme”). The commission decision only applies until the UK ceases to be a member state. See https://bit.ly/2k3mzo5 which deals with the latest EU decision.
HMRC are to issue a bulletin to confirm the position shortly.
