Tax on selling your home - All Change!

As part of the Chancellor's Autumn Statement, the Coalition Government have announced today that Principal Private Residence Relief (PPR) will see a reduction in the final period exemption (from 36 to 18 months), effective from April 6th 2014.  For those of you that don't know what PPR is, it is the relief from Capital Gains Tax (CGT) that applies when we sell our own homes, and for eventualities where people have have a period of overlap (not uncommon over the last few years) there has always been three year window in which you are still exempt.

Under the current rules a property that has been a person’s private residence in the past, even though they may not be living in the property at the time they sell it, and where they are claiming PPR on another property at the same time, can benefit from the last three years being tax free.

Halving this final period exemption from 36 months to 18 months makes sense to the Government who wishes to reduce the benefits of reliefs available to second home owners. It will however make life more difficult for anyone moving home who is unable to sell their first property within 18 months of buying their new home.  The original rule when CGT (and PPR) was introduced in 1965 was for 12 months. This was increased to 24 months in 1980, so the Chancellor is taking us back to limits that last applied over 30 years ago!

As I have mentioned above, since 2007-08 we have seen a lot of "accidental landlords", those who needed to move, but couldn't sell their existing property and so rented it out.  Normally this is a short term position and these "accidental landlords" will sell within the 36 month window.  The three year rule was introduced in 1991 so that those trying to move house (particularly those moving to follow work) are not disadvantaged when it is difficult to sell a house in a property slump.  Given what we have seen of the last few years resulting from the deep recession, will a reduced 18 month window really be enough?

It is also interesting to note that the Government expect to raise considerably more from this measure than the measure to tax the gains on non-resident second home owners, indeed they expect that the revenue from this measure by 2016/17 is expected to be £90m, whereas the yield from the CGT application to non-residents is expected to be £15m.

Overall this is something which can only be seen as an opportunistic attack on those who have found themselves in this position as a result of the economic climate over the last few years.  The fact that it snuck under the radar in the main speech would seem to back that up.

It will also be interesting to see how many MP's get caught out when "flipping" their family and official residences!

HMRC Spotlight on bonus tax avoidance schemes

HM Revenue & Customs have published a new tax avoidance Spotlight about an employee bonuses tax avoidance scheme involving restricted securities.

Referring to the decision in LM Ferro Ltd [2013] TC 02853, HMRC's new Spotlight confirms the view of the tax authority that such schemes to avoid tax do not work because if an employer pays what is really a bonus, tax and NICs are due no matter how it is dressed it up.  The First-tier Tribunal found that the tax avoidance scheme entered into by the taxpayer amounted to a bonus in ‘money’ liable to income tax under PAYE and National Insurance contributions (NICs), rather than a bonus in shares.

HMRC is looking at similar avoidance schemes marketed by other promoters and has indicated that cash received by beneficiaries of awards in those schemes is also chargeable to income tax and NICs.

Those that make use of such schemes are expected to make full payment of the tax and NICs due, plus interest.

Those companies and employees affected should contact HMRC to settle their liabilities and prevent additional interest accruing. You can contact HMRC on Telephone 03000 532624.

HMRC has also pointed out that failure to take reasonable care when making returns may result in penalties.

HMRC's exact position can be read here... http://www.hmrc.gov.uk/avoidance/spotlights.htm 

October can be a little taxing...

October is a pretty innocuous month really, other than the onset of autumnal showers and cold northerly winds there's not too much to worry about, or is there?

Actually in the world of tax, there is I'm afraid.  Not least the filing of your tax return by the end of this month, assuming of course you're doing it on paper rather than online.  So, if you send a paper tax return it must reach HMRC by midnight on 31 October.  So for the 2012-13 tax year (ending on 5 April 2013), the deadline for paper returns is midnight on 31 October 2013.

As for penalties, if you miss the deadline, the longer you delay, the more you'll have to pay. So it's important to send your tax return online to HMRC as soon as you can.

Of course, if you file your tax return online then you have until midnight on the 31 January, but beware as HMRC systems have failed before, so don't leave it until the last minute.

The other nasty little spike that has been inserted by the master inquisitors at HMRC (and the Treasury of course) this year is of course the Child Benefit Tax Charge.  You may be liable to this new tax charge if you, or your partner, have an individual income of more than £50,000 and one of you gets Child Benefit or contributions towards the upkeep of a child.

If you are liable and have received a Child Benefit payment since 7 January then you must have registered for Self Assessment by 5 October 2013 to pay the charge.  It is of course possible that HMRC could impose a penalty for failing to register, so if you haven't already get online and do it today at http://www.hmrc.gov.uk/childbenefitcharge/ .

So, there's a fair bit more to worry about that just falling leaves and the onset of autumn.

HMRC Announces Let Property Campaign

Last week saw the announcement of the Let Property Campaign, however with an almost complete lack of supporting detail and  HM Revenue & Customs (HMRC) usual fanfare. Previous campaign launches by HMRC have been accompanied by a clear timetable of action and a raft of information on their website. Campaigns involving the declaration of previously undisclosed income/over claimed expenditure have typically required the completion of an online notification form by a certain date and the complete disclosure and full payment of additional tax/interest/penalty by a secondary date.

HMRC have since confirmed that the Let Property Campaign was not due to start until this December and the early announcement of the campaign had caught the HMRC campaign team ’by surprise’. We are reassured that they are now making efforts to get an online disclosure notification link available by the end of the month. Apparently a separate team of HMRC officers is also being brought together to handle the campaign.  Until the link is available, HMRC is handling any such disclosures manually.

The current procedure is this:

• Initial contact should be made with the Let Property Campaign team on 03000 514479. The number is available Monday to Friday between 9am and 5pm.
• The HMRC officer will request some basic information about the person wishing to make a disclosure including their name, address, national insurance number or Unique Taxpayer Reference (UTR), date of birth and contact telephone number.
• A disclosure record will then be set up by HMRC and a reference number allocated. The reference number is usually two letters followed by eight numbers.
• A blank disclosure form is then issued by post with a three month deadline for completion.
• The procedure outlined above can be followed at any time if someone wishes to make a voluntary disclosure of income to HMRC, in order to secure a beneficial penalty rate.

However, disclosures will not be accepted if:

• They are made by people who are already under investigation by HMRC.
• They are inaccurate or incomplete.
• HMRC believes the money that is the subject of the disclosure is the proceeds of serious organised crime.

HMRC would not confirm the Let Property Campaign had been brought forward prematurely because of Danny Alexander’s speech to the LibDem conference last Wednesday, when the campaign was initially announced.

Owner Managed Businesses and Tax Efficient Remuneration

If you own and/or run an Owner Managed Business (OMB) then at some point you will have considered not only the most tax efficient way to remunerate yourself, but also most likely the other key directors and employees of your family-owned business.

When looking at this there are several important factors to take into account. Ways of remunerating your directors will vary enormously from business to business, so it’s vital to weigh up the taxation and other implications of each profit extraction method: salary, bonus and/or dividends. Here are my top points to further aid your cogitation:

• Consider the tax rates – dividends are taxed at lower rates than salary. For higher/additional rate tax payers, dividends are taxed at 32.5/42.5% compared to 40/50% on salary/bonus. The dividend rates are further reduced by a 10% tax credit to 22.5/32.5% respectively. National Insurance contributions (NIC) are also not payable on dividend income.  However, dividends are taken after taxable profits, whereas salary is a deduction for corporation tax purposes.
• Certainty and timing of payments – With corporation tax rates reducing, there will be increased profits after tax available for distribution. But your business must have sufficient profits after tax to pay dividends, which is riskier for the parties involved. Dividend payments are flexible, in terms of timing and amount, while a monthly salary is fixed, providing less flexibility for the business.
• Cashflow considerations – if your director/employee is paid a salary/bonus, your company is responsible for deducting and paying the tax at source to HM Revenue & Customs (HMRC). If dividends are paid, these are included within the recipient’s personal tax return which they’re required to submit to HMRC annually and tax payments on account need to be made throughout the year.
• Pension considerations - dividends are not treated as ‘earned’ income for pension purposes, so your directors will need to consider whether they have sufficient pension provisions before reducing salary and increasing dividend payments.

You can contact me at HCB Solicitors on 0844 556 8674 if you would like to discuss any of these, or indeed other tax issues.

Selling your business?

As a tax professional I come across a lot of clients who are looking to sell their business within a certain time frame, some the next 12 months, usually the next 3 to 5 years, and occasionally some with a view to a longer game.  However, regardless of their respective time frames almost everyone I speak to has failed to consider the same vital question.  What is it I hear you ask?

"How do I make sure I receive the sale proceeds from my business tax efficiently?"

I appreciate that most of you reading this will think that an odd question to ask, but let me put it into context.   Primarily we are talking about Inheritance Tax (IHT) here, the great leveler.  Whilst you are running your business (provided its a trading business of course) you don't really need to worry about paying IHT on it's value should you die.  This is because shares in a trading company, or the assets of a trading business receive a 100% relief from IHT.  So, as long as you continue to own those assets, and either the company, or you as a sole trader continue to trade, there is nothing to worry about.  Hopefully you've started to spot the rub here.  When you sell this "tax free" asset, what does it become?  The answer is of course...

"CASH!"

and as we all know, cash is very much taxable under the IHT regime.  So at a point around retirement (and hence closer to the date on which we will "shuffle off this mortal coil", to quote the Bard) we convert our single biggest asset from tax free to taxable!

In some cases clients will need the funds to provide them with an income in retirement, or may like the idea of having a large next egg behind them for life's unexpected events.  However, in my experience most business/company owners have already built those lifelines up through pensions, savings and other investments and are unlikely to make much of a dent in the monies they get from selling their business.  Of course this is good news for HM Revenue and Customs as they get 40% of whatever is left when you do pass away.

Of course, post sale you can go down the route of conventional tax planning, giving money away to the children, setting up trusts for the grandchildren and so forth.  You could even leave money to charity through your Will if you wished.  However, all of these measures take time, and in almost all cases rely on you surviving 7 years from implementing them, and in the case of trust giving are limited to £325,000 each (assuming you're married) in a 7 year period.  I don't want to discount these ideas, but there is a much quicker, easier way of saving IHT without these limitations and restrictions where the value involved comes from a business sale, all it takes is a little forward planning! It doesn't require the use of any outlandish or risky schemes, just a little forethought and consideration of your finances ahead of time.  I see clients put so much time and effort into getting their business ready for sale, but so little into getting ready for it on a personal level.

Obviously I don't want to give away all of my secrets here, but if this sounds like you and you'd like to discuss it further give me a call on 0844 556 8674 for a no obligation discussion about how I can help you to help yourself.

IHT and Tuna Fishing... (read on)

An unusual title for this post, but I'm hoping you'll understand the connection by the end of it! One of the lesser covered elements arising out of this years budget was the unheralded Inheritance Tax (IHT) anti-avoidance legislation that was brought in under the radar.  It has been some time since we have seen such wide ranging proposals hidden under the plethora of briefing notes released by the Treasury and HM Revenue & Customs, a move more reminiscent of the current chancellor's predecessors.

The particular measures that I am referring to relate to the offsetting of borrowing/debt against ones estate for the purposes of IHT.  It has long stood that if one has an outstanding debt upon death that this is deductible from your estate before arriving at the sum which is ultimately chargeable to IHT at the death rate of 40%.  The proposed changes turn this long standing pillar of IHT planning on its head, by disregarding certain borrowings.  If the rules are enacted as planned, the estate's outstanding loans will not be deductible in three particular situations. These are: 

• where money borrowed is either invested in assets for which IHT relief is given,
• invested in assets excluded from IHT, or
• where the loan is not repaid by the executors. 

The changes in the legislation are clearly designed to attack tax planning where home loans were taken for investment in third party assets qualifying for business and agricultural property reliefs, or arrangements such as Employee Benefit Trusts.

However, it is clear that is will potentially catch many more normal arrangements, such as someone borrowing funds against their main residence to invest in their business.  In theory they have borrowed funds against a taxable asset (their residence) and invested it into an asset benefiting from an IHT relief.  If this is indeed the case, and it is not cleared up by later guidance, then a lot of fledgling businesses will stand to be affected.

Another example is where an elderly testator receives a loan from a family member. Often such loans are written off on death, but under the new rules the executors will have to pay off the loan to make it allowable as a debt against the deceased’s estate.  Alternatively, where a trust was established under that testators death, and the assets (usually the house) are then loaned to his surviving spouse with an appropriate loan agreement in place.  In practice these loans are not repaid as the beneficiaries to the spouse's Will are usually the same as the trust and so the assets devolve to the same people, and the loan is subsequently cancelled out.

I think this will certainly make the IHT landscape interesting for a while yet in regard to Business Property and Agricultural Property Relief, and we will have to look at how the issue develops.  However, we could be looking at a situation where business owners are having to budget for unexpected IHT bills as a result of these moves, despite only having entered into the arrangements for purely commercial purposes.  Ultimately this sees the continuation of HMRC's "tuna-net" approach to tax avoidance, meaning that not only are the tuna caught, but everything else that swims in the tax ocean too!

Budget 2013 - a reward for hard work?

I know it's been a long time since my last blog entry, but what can I say as we've had little in the way of exciting tax news since Christmas!  However, that all changes today with George Osborne's latest budget which he has billed a s reward for hard work.  We've certainly seen some announcements that would seem to echo that, but others I'm not so sure...

• Increase in the personal allowance for income tax to £10,000 by April 2014, a year earlier than expected.  Making good on their promise has lifted millions of low earners out of tax altogether and provided a tax saving for those affected of around £700 since the beginning of this parliament.  However, none of this has been passed on to middle-England as it has always been accompanied by a lowering of the higher rate tax band.  Couple this with the loss of Child Benefit that any household with one person earning in excess of £50,000 per year, and those that work hard (and get paid accordingly) clearly aren't being rewarded, rather it looks like being penalised.

• The proposed cut in mainstream corporation tax is however a completely different story for businesses going forward, as if helps to remove the increase in tax as a business succeeds and becomes more profitable.  This coupled with the first £2,000 being taken off all employers National Insurance bills gives a real boost to small businesses too as they look to expand and take on staff.

• Pensions have taken a bit of a hammering though, with the Lifetime Allowance (LTA) being reduced from £1.5 million to £1.25 million, and the contribution limits from £50,000 to £40,000 per annum.  There is some good news in the form of fixed protection for those so affect though, and also the drawdown limits go up from 100 per cent to 120 per cent.

• Tax avoidance has come in for some special treatment over the last year, and this budget sees the introduction of the GAAR (or General Anti-Abuse Rule).  I must admit that having looked at the guidance my main concern is that it will initially at least be abused by HMRC in the same way that some promoters have abused avoidance strategies.  Until we see some cases come through to the tribunal it will be difficult to see how GAAR is going to work in practice.

I haven't covered everything that's been announced here, but these are just my initial thoughts following on from the budget and heading into this evenings seminar with HCB Solicitors where I'll be discussing these and other issues with Iain Wright from Claritas Tax.

VAT Man on the Rampage

HMRC have announced that from 9 January 2013 they are embarking on a new campaign to chase up businesses that have one or more VAT returns outstanding. Their announcement reminds businesses that failure to submit a VAT return is an offence and penalties could be levied on top of any additional VAT that might be due to HMRC.

However, somewhat unhelpfully, they have also stated that detailed information about how they plan to approach this campaign is not going to be released until the date the campaign is launched!

What to do?

The obvious answer is to get your outstanding VAT return(s) completed and submitted online as soon as possible and, preferably, before 9 January 2013 to avoid getting caught up in this campaign.

What if you cannot pay?

Get the VAT return completed and submitted anyway and, where possible, make whatever payment you can with the return.

You should also contact HMRC on 0845 302 1435 (Business Payment Support Service) or 0845 010 9000 (General Advice Line) to explain that the return has been submitted (with part payment where appropriate) and ask about the possibility of negotiating a Time To Pay (TTP) arrangement.

You will need to explain the circumstances why you are unable to make full payment and what steps you have taken to find funding to meet the debt. You will also be expected to make a proposal of the timescale over which you will meet the full liability taking into account that any TTP arrangement will only be entertained on the condition that future returns are submitted and paid in full by the due date.

HMRC’s agreement to a TTP arrangement is by no means guaranteed so you will need to be prepared to put forward a justifiable case for further deferral of payments.

Failure to submit a return or pay in full by the due date can result in a Default Surcharge ranging from 2% to 15% of the unpaid tax. However, worryingly in certain circumstances, HMRC might look to impose Civil Evasion Penalties.

Next steps

Until we are made aware of precisely how HMRC plan to approach this campaign, it is difficult to provide specific advice other than to get the returns into HMRC before they contact the client.

31 January Filing Deadline Looms

A stark warning in the New Year for business owners, the self-employed and those with pensions or investment income.  If they don’t get their tax affairs into shape and submitted online by the end of this month, they will face heavy penalties from HM Revenue & Customs.

The deadline for filing paper assessments passed on October 31 so filing tax returns online by January 31 is the only option.

Under the self-assessment system, people who file their returns online after the expiry date will face minimum fines of £100 even if no tax is due. And those who still fail to file could rack up the fines to as much as £1300.

The longer people delay the more they will have to pay brought on by late-filing penalties after three, six and twelve months, as well as a daily penalty of £10 for each day the return remains late and the tax unpaid.

The advice is quite simple, make sure your tax affairs are in order and file the information on the HMRC website  by January 31, and don't forget to pay the tax that's due too.

It worries me that more people each year are choosing to ignore the deadlines and are being hit by what are very severe penalties.  Looking the other way as the deadline approaches could prove to be a costly mistake. The complicated fines framework is rigidly enforced and I can’t stress enough it is crucial for taxpayers to straighten out their paperwork quickly and submit their tax returns online.

If this is something that you require assistance with, please contact Steven on 0844 556 8674.