Business Asset Disposal Relief: A Change of Name for ER

I seem to be having lots of conversations about Entrepreneurs Relief (now Business Asset Disposal Relief of course), and much like Business Asset Taper Relief before it (pre-2008), I'm pretty sure both practitioners and clients alike will use the old nomenclature rather than the new for a little while yet.

However, what is more important than the change of name is the reduction of the lifetime allowance from a generous £10m back to the original £1m that was granted when it was introduced over 12 years ago. Now, whilst most people will have been aware of that, what a lot of (admittedly non-tax) people will have overlooked is the anti-forestalling provisions, i.e. banging a contract in quickly before the deadline date! This has been a favourite of lawmakers for some years now.

So, what is "anti-forestalling" and what does it mean for you? Well, although the reduction of the business asset disposal relief lifetime limit from £10m to £1m only applies to disposals on or after 11 March 2020 the anti-forestalling provisions mean that there are circumstances in which the reduction of the allowance can apply to transactions as far back as 6 April 2019 (and potentially even earlier). Generally, these circumstances fall into these main areas:

• Unconditional Contracts, where normally the "tax point" for a capital gains tax transfer is the date of contract rather than the date of exchange, so where one has exchanged contracts (i.e. ones on which there are no qualifying conditions to be met) it could have been quite simple to exchange contracts before 11 March 2020, but not complete for some months thereafter. If you find yourself in this position seek advice immediately as there are some "get-out" clauses in the provisions that might apply.

• Reorganisations and Share exchanges, being what we would usually refer to as a paper transaction, but where an election has been made to disapply the no disposal treatment (arising under s127 TCGA 1992) to have the effect to trigger a taxable gain on what would normally be a tax-neutral event. The rules around these have many similarities, but a few distinct differences as well, and both can apply to transactions occurring on or after 6 April 2019 but before 11 March 2020.

Interestingly you'll notice there is no "start date" for unconditional contracts, so they can be caught by the anti-forestalling measures if they've been in site for an extended period of time. It would seem odd, but believe me, it happens.

So, if you entered into an unconditional contract before 11 March 2020, or performed a "taxable" exchange of shares or reorganisation, then you might want to revisit those contracts and see whether you're caught by these new measures...

IHT: Beware the Claw(back)...

After my last blog I've had a few people reach out to me about the potential clawback that can occur with the Main Residence Nil Rate Band, and as it's a bit confusing I thought it might be worth explaining further. Most people have by now heard of it, some even carry the misconception that the first £1million pound of a joint estate is IHT exempt. Well, it's far from that simple and can lead to problems if not properly planned for...

The Main Residence Nil Rate Band is tapered by £1 for every £2 that the net value exceeds £2million. The £2million is calculated using the value of the estate before reliefs such as Business Property and Agricultural Property Relief. The effect of this means that, for example, shareholders of unquoted trading companies may find that they do not qualify for the Main Residence Nil Rate Band if the shareholding is valuable, even if the shares themselves are not subject to IHT!

The relief is restricted where the total net value of an individual's IHT estate, after deduction of liabilities but before deducting any reliefs and exemptions, is more than £2million.

The threshold means that no additional relief will be available for an unmarried individual’s estate that exceeds £2.35million in 2020/21.

For the second death in qualifying married couples and civil partnerships, the upper limits will be  £2.7m in 2020/21 (i.e. the £700,000 over £2m will reduce the Main Residence Nil Rate Band by £350,000, cancelling out the 2 x £175,000 residence Main Residence Nil Rate Band’s).

Even if you can get your head around the numbers, you need to make sure you're current Wills and estate planning are up to task. Many with "care fees planning" trusts could find themselves not qualifying. Those with Wills that don't specify the property passes to a lineal descendant could well be in the same predicament. If you're in any doubt I'd recommend a review today!

Do you want to save 80% tax?

I know, hey if you're here looking for the latest dodgy tax scheme I'm going to have to disappoint you, as all of my clients and contacts know I just don't do them, never have, never will. So, that leaves you asking how on earth I can title a blog like this if I'm not bending the rules somewhere right? Throughout my various businesses over the years I've only ever undertaken tax planning with my clients within the bounds of the legal framework we're given. In almost all cases I've found more than enough scope to make sure that my clients only end up paying the tax that they're due to pay. So the first thing I do is make sure that they're positioning all of their assets in the best possible way to obtain the maximum reliefs.

If there is one area of tax for which this couldn't be more true, its inheritance tax, be that from making sure there are no investment assets in a clients trading business (to make sure they qualify for business property relief) to helping them structure family investment companies, it is all about having the right pieces on the right parts of the board, and like chess, you're always having to plan several moves ahead.

So, this is where I hear everyone screaming:

"What about this 80% tax saving Steve!"

and the answer to that is relatively easy. If you've heard of the Main Residence Nil Rate Band (MRNRB) then great, but if not the long and short of it is that it is an extra inheritance tax allowance that you receive on death up to £175,000 per spouse/civil partner. So for a married couple or civil partners, there's a potential £350,000 worth of extra relief there at 40%. Now, that relief can be lost for any number of reasons, but the most common is that the property doesn't go directly to a lineal descendant due to poor drafting of a Will. So, you'll need to review that and make sure it's right.

"But that's still only 40%, right? 

£350,000 x 40% = £140,000 tax saved"

You'd be right if you'd said this, but the other area where people lose out is where their estate exceeds £2million. For every £2 over £2million you lose a £1 of relief, so by the time you get to an estate of £2.35million, you've lost all your MRNRB. The chess players amongst you might be seeing where this is going, let me give you an example. Mrs Smith has died leaving her estate to her children, her husband died several years ago, but she qualifies for his transferable nil rate band...

Mrs Smith has an estate of £2,350,000.

Her house is left to her two children in her Will.

Due to clawback she loses her MRNRB.

IHT due on her estate is £680,000.

Now, let us say I'd advised Mrs Smith to make a gift of £350,000 to her two children during her lifetime (and of course assume that she'd survived 7 years!). Her estate on death is now £2million, so not only does she get her husband transferrable nil rate band still, but she also gets the MRNRB for both estates. This increases her IHT allowances to £1million, so she's only liable for 40% IHT on £1million, a total of £400,000.

The numerically minded will have spotted that a reduction from £680k to £400k isn't 80%. The 80% saving I'm talking about is on the planning. In order to save 80% total IHT Mrs Smith would have had to make a much larger gift than £350k. The purpose of this planning is to make the smallest possible gift to make the largest marginal gain. Where the 80% comes in is :

Mrs Smith had saved 40% on the gift of £350k = £140k.

As a result she also GOT BACK her MRNRB allowances.

This resulted in another £350k x 40% = £140k. 

So, the planning around a single £350k gift saved £280k of IHT = 80%, voila!

Simple planning, but crucial for estates like Mrs Smith...

Tax in a Post-Covid World

I've been reading some very interesting commentary recently on this subject, from the International Monetary Fund to our domestic policy experts such as the London School of Economics and the University of Warwick. Even the FT weighs in with stories about potential tax increases on the horizon. It must be apparent to all who've been paying attention that our tax system is going to be due some painful attention in the coming weeks, months, even years. 

However, what is clear is that we're not alone in this, and we could very well be looking at a new age of not just national, but international tax change, the IMF state:

"...aggressive tax minimization by large taxpayers – however legal it may appear – will become even more intolerable to society at large."

Now, that's a trend that I think almost everyone can agree has been playing out in the UK for some time now, and not just with large taxpayers. The effect of the loan scheme charge is still being very acutely felt by many contractors and self-employed, and that's before we even get on to IR35 and off-payroll working!

Looking to the FT's views, a survey of 75 MPs across all major parties showed 72 percent agreed taxes would increase while 83 percent thought the state would play a greater role in the economy post-Covid. Should this come to pass, which it inevitably must, it's reasonable to assume the greatest changes will be to income tax, as it makes up the largest part of the exchequer's purse. I've been in practice for 20 years now, and when I started out basic rate income tax was 23%, and the personal allowance was only £4,385. Compare that now to a basic rate of 20%, and a personal allowance of £12,500. Even through most of the noughties, income tax has been higher, so it would seem likely to see that change fairly soon post-lockdown.

What else could we see change? Well, some within the UK, and already in Europe are mooting a cut to VAT to encourage post-lockdown spending, and that could well be popular with consumers and business, especially if we see an increase in personal and corporate income taxes.

Of course, with the tax-climate as it is in the UK, I doubt we'll see wealthier taxpayers evade the burning eye of HM Treasury either. Low tax rates on dividends and gains almost exclusively benefit investors and business owners rather than employed or self-employed earners. The LSE report says  that up to £20 billion a year could be raised from taxing all income and capital gains at the same rate as earnings. Good news for the exchequer I'm sure, but could it be potentially catastrophic for the nation's business community?

Regardless of the outcome, it is helpful to the profession and to business to gain an understanding of the research and thought that is likely to drive government thinking in the coming years. We should also remember that it is not all doom and gloom either. In recent years the UK has become a "tax-haven" for many as we've enjoyed the lowest percentage income (personal and corporate) tax take we've ever known. In the words of the market makers, think of it as a rebalancing of the scales...

SEISS Update: HMRC finally attempt to define "adversely affected"

Following on from my blog last week, HM Revenue & Customs have produced some useful examples (read them here) to help illustrate exactly what they view being "adversely affected" might mean for the purposes of the first and second grants under the scheme.

To recap on my recent blogs, it's important to remember that in order to be eligible for the scheme, you have to have been (and continue to intend to) carrying on a trade which has been adversely affected by COVID-19 and the lockdown measures put in place by the Government and various sectors of the economy (building sites shutting down is a good example, as the Government didn't mandate that). 

Unfortunately, when looking through HMRC's examples of whether a trade has been adversely affected, there seems to be no specific monetary threshold, and no requirement for income or profits to have fallen by a certain amount as many (including myself) had hoped. Given that HMRC has used builders as their chosen example, it's worth noting that in conversation with clients in that sector many have now returned to work (equally many have not), but those that have are reporting having greatly reduced quantities of work that is impacting their turnover by as much as 50-60%. So financial impact has explicitly not been cited by HMRC as an example of being "adversely affected".

Instead, it seems to hinge on whether or not the person carrying on said trade was "able" to go back to work or not. So following on from the examples given it would seem the only way for anyone to qualify for the second tranche of SEISS is to either have their workplace closed down, or contract the illness (or someone else in their household does) and have to self-isolate as a result.

So, unfortunately for all you builders out there that have been able to go back to work, no second grant for you, it would seem. However, if you're unable to find work (even though the sites are open) as a result of social distancing requirements, then maybe there's some hope.

Those claiming under the scheme should evidence how and why their business has been adversely affected by COVID-19 and keep a record of this. For the first round that will be relatively easy for most, but the second dose of SEISS is most likely to be of no help to the beleaguered self-employed construction industry. 

So, if you were hoping for a second bite of the cherry in August please be wary as HMRC's systems will allow you to make the claim without having to prove being "adversely affected" at the time of claim. However, when you file your 2020/21 self-assessment tax return you might get a nasty surprise (check out this blog for further details)! This is especially important as HMRC and the Government has been quite clear that advisers shouldn't be making claims for their clients (the word fraud was used I believe).

Round 2 for SEISS

HMRC has announced that in August, self-employed individuals who meet the criteria for the Self-Employed Income Support Scheme (SEISS) will be invited to apply for a second grant. This will be in addition to anything they received in May/June under the first round of the same scheme.

There are some significant changes as to how the grant is calculated, although many of the rules applying with the regard to the first grant will apply with regard to the second grant meaning that effectively the same eligibility criteria will apply. The principal change is a drop from 80% of averaged profits to 70% of the same figure. So, the second grant is equal to the lower of A and B where:

• A is the self-employed person’s average monthly trade profits × 70% × 3; and
• B is £6,570.

Although applications for the first grant must be made on or before 13 July, failure to make a claim for the first grant does not prevent you from claiming the second grant.

It's also probably worth a brief reminder of what the eligibility criteria are for both tranches of the SEISS. You can claim if you’re a self-employed individual or a member of a partnership and all of the following apply:

• you traded in the tax year 2018 to 2019 and submitted your Self Assessment tax return on or before 23 April 2020 for that year
• you traded in the tax year 2019 to 2020
• you intend to continue to trade in the tax year 2020 to 2021
• you carry on a trade which has been adversely affected by coronavirus

You can check your eligibility on HMRC's website here: https://www.gov.uk/guidance/claim-a-grant-through-the-coronavirus-covid-19-self-employment-income-support-scheme#eligible

It's also worth mentioning that you don't have to be "out of work" to claim under SEISS, that final point of eligibility is the interesting one, that your trade has been adversely affected by coronavirus. HM Treasury have published a Direction setting out the legal framework of SEISS, unfortunately (as with a lot of legislation) it doesn't helpfully define what "adversely affected by coronavirus" means. So, that must leave us to assume (for now) that it relates to a period of non-working, or of reduced profits due to reduced working. It would seem to prove to be a very grey area for now at least.

Finally, of course SEISS is going to be taxable in 2020/21, so check out my blog on that here.

How is your self-assessment tax affected by Coronavirus?

Due to the government’s measures to keep the economy running during the coronavirus pandemic, the 31st January 2020 is set to be a Self Assessment deadline unlike anything we've seen before. Following on from my recent blog on the subject, HMRC and HM Treasury have made unprecedented changes to the tax system to support taxpayers, but how is it likely to affect your self-assessment in the long run?

The principal effect for self-assessment taxpayers (self-employed, landlords, company directors, members of partnerships and so forth) relates to the Chancellor's announcement that if you are due to make a payment on account on the 31st July 2020, you can defer this to the 31st January 2021. You don't need to tell HMRC that you’re deferring the payment, and they will not charge any of the normal interest and penalties for late payment as long as it is made in full either on or before 31st January 2021.

However, it's worth remembering that in terms of cashflow, pushing your payment on account back to January, you will effectively have to pay what you owe HMRC all in one month, which will potentially cause greater harm to your cash flow in the long run. This can be avoided by mapping out your finances ahead of time.

Also, see my blog on how you can use lockdown to your advantage in getting your taxes sorted early this year. The earlier you file your 2019/20 Self Assessment tax return, the sooner you’ll know how much you will owe come 31st January 2021 (especially if you've deferred your July payment on account).

Finally, it's worth remembering that if lockdown means you’re now working from home, you could also stand to make further savings on your 2020/21 tax bill. Start by monitoring your utility and phone bills. You can claim a proportion of certain bills as expenses, provided they’re deemed ‘allowable’ and are for business purposes.

Lockdown got your finances down? How can tax help...

So, if 2020 and the current UK #coronavirus lockdown has given some of us anything (useful I mean), it's time. As your friendly online tax practitioner, I thought I'd share some handy tips of what you could be looking at if you have some downtime on your hands.

1. GET YOUR TAX RETURN SORTED OUT!

Whether that means doing it yourself through your HMRC personal tax account, or working with your tax practitioner to get it filed early, now is a good time to do it, and not just because it gets it out of the way. For those with payments on account to make in July (although we all know you have the ability to defer those payments until January) it could result in a reduction in that payment. Similarly, if you work in the construction industry as a self-employed contractor you're probably owed a tax rebate from your CIS deductions. Working with some clients during lockdown I've seen 4 figure sum rebates, which have been really handy.

2. SEE IF YOU CAN MAKE A MARRIAGE ALLOWANCE CLAIM

If you're married or in a civil partnership, can you answer yes to both of these questions:

• Are you a basic rate taxpayer?
• Does your spouse earn less than £12,500 a year? 

If you can, then congratulations your spouse/civil partner might be able to transfer £1,250 of their personal allowance to you resulting in a tax rebate of up to £250 every tax year (6 April to 5 April the next year). You can backdate your claim to include any tax year since 5 April 2016 that you were eligible for Marriage Allowance. This is possible whether you're an employee or self-employed, check out THIS LINK to see if you can claim.

3. SELF EMPLOYED? HAVE YOU CLAIMED SEISS?

If you were self-employed in the 2019/20 tax year, have submitted your self-assessment tax return for the 2018/19 tax year, had your self-employment affected by coronavirus, and had profits under £50,000 for the last three years then you should be eligible and HMRC should have written to you.

If they have, and you haven't got around to applying, DO IT NOW! There's a mistaken belief amongst many in the self-employed community that they can only claim if they haven't been working at all. That is simply not true, it is only necessary that the coronavirus outbreak has had a detrimental effect on your business. But remember, any payment you receive under SEISS is taxable in 2020/21, so make sure you keep some aside to cover the tax if you can. You can also check out another of my blogs about HMRC's new powers should anyone make a fraudulent claim.

Do I need a holding company?

A question I’m often asked by SME business owners is whether they should form a holding company. Simply put, placing shares in an existing company into the ownership of a holding company can offer significant tax, legal and commercial benefits.

What is a holding company you might ask? A holding company is a business that exists to deal with the assets of other businesses and to invest in and manage other businesses. They are private limited companies with their own shares, and they normally undertake activities that do not involve the sale of products or services.

So, what are the benefits of creating a holding company:

• Should the situation arise whereby you may have to settle claims or debts from uncertain times of trade, then having a holding company could protect cash and valuable assets, such as property, by ringfencing them from such future claims.
• If you’re entering into a new trading activity that carries an element of risk, then a holding company will allow you to keep this riskier activity contained and partitioned away from existing trading activity whilst still being funded by it.
• Utilising a holding company and possibly a wider group structure allows you to ringfence certain assets to protect them from tax charges. For example, it’ll allow the movement of cash, tangible assets (e.g. property), and intangible assets (e.g. intellectual property) to different entities without incurring any tax charges.

With regard to accumulated cash deposits and investment property, a holding company can be created, and a group formed to allow assets to move within the group.

As for tax, when you exchange shares in your trading company for shares in the new holding company this will avoid a capital gains tax charge. Once the holding group has been formed; group relief and the taxation of dividends received by companies means the movement of the property and cash is achieved without a charge to tax between the holding company and its subsidiaries.

Taxation of UK Coronavirus Support Payments

There is new draft UK legislation for addition to FA 2020 for the taxation of coronavirus support payments:

https://www.gov.uk/government/consultations/draft-legislation-taxation-of-coronavirus-covid-19-support-payments

It applies to individuals, businesses, partnership members, and employers. The legislation confirms the taxability to Income Tax or Corporation Tax of all such receipts subject to business profits on normal principles.

The legislation also provides for Income Tax assessments at 100% of any amount to which the recipient was not entitled and gives HMRC the power to levy penalties upon any deliberately incorrect claims – subject to a 30-day self-reporting window. Furthermore, the legislation will make culpable company officers jointly and severally liable to Income Tax for deliberate false claims where the company could not pay the assessment.

What they giveth with one hand...

Well, here goes nothing...

For anyone who's been following this blog for a while you'll have noticed some changes today, they are driven by some exciting news!

Yes, during the current health and economic climate I've relocated me and my business to a new firm, Edwards Chartered Accountants in Aldridge, Walsall. Whilst it's a challenging time for business (I'll admit, starting with a new team whilst all working from home is a new one on me) it has already proven to be the right decision. I can't say how much I'm looking forward to working with Adrian, David, Neil, Paul and the rest of the team at Edwards, new challenges are always fun.

So, I just thought I'd share their press release with my followers...

Edwards Accountants expands & diversifies its tax services

with exciting appointment

Midlands firm, Edwards Accountants, has appointed a new Tax Director as it looks to expand and diversify its offering to clients across the UK.

Experienced tax specialist Steven Holden joins the fast-growing firm as it looks to deliver a wider range of services and advice to clients.

Steven has spent more than two decades advising clients on taxation, having previously worked at some of the UK’s leading accountancy and legal firms.

With a strong background in the taxation and administration of trust and estates, Steve brings with him a wealth of experience in both corporate and personal tax planning and compliance.

Speaking about his appointment, Steven said: “The Midlands may be a powerhouse for manufacturing, technology and industry in general but it is underserved when it comes to high-level tax advice for individuals, particularly support with complex trusts and estates.  “I hope that my appointment at Edwards Accountants rectifies this and we can enhance the existing tax offering to attract clients from across the UK to this fantastic, proactive practice.”

As well as bringing significant knowledge of personal taxation to the firm, Steven is also an expert in corporate re-organisations, employee incentive schemes and R&D credits.