Author Archives: Aidan Roberson - Tax Manager

About Aidan Roberson - Tax Manager

T +44 (0)20 7874 8845

Aidan helps company directors, partners and private individuals and families with their personal tax with an emphasis on inheritance tax. He enjoys bringing clarity to the complex problems which arise in these areas, providing people with clear, actionable advice.

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Family businesses could see three key areas impacted by changes to capital gains tax proposed by the Office for Tax Simplification

What do the changes to CGT mean for family businesses?

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 2nd December 2020

Categories:

Family businesses could see three key areas impacted by changes to capital gains tax proposed by the Office for Tax Simplification last month:

Succession planning
Cash extraction
Share options for retaining key employees

The key changes

In their report released on 11 November 2020, the Office for Tax Simplification (OTS) made the following recommendations:

Align capital gains tax (CGT) rates with those of income tax.
Replacing entrepreneurs’ relief with retirement relief
Slashing of the CGT annual exemption
Removal of CGT uplift on death

Succession planning

Succession planning with a family business usually involves getting company shares into the hands family members or managers. This can be done during the lifetime of the owner, upon their death, or a mix of the two. However succession is approached, there will be CGT and inheritance tax (IHT) consequences:

If shares are gifted during lifetime, CGT can be deferred if the company is trading and there shouldn’t be IHT to pay due to business property relief (BPR).
If shares are sold, then CGT will be payable but potentially only at 10% if entrepreneurs’ relief is available.
If shares are gifted on death via a Will, then there is a CGT-free uplift to market value, and again IHT should be nil due to BPR.

The OTS report could make the latter two options more expensive. They have proposed changing business asset disposal relief (aka entrepreneurs’ relief) to retirement relief, which would restrict the 10% tax rate to those at retirement age, whilst increasing the 5% shareholding test to 25% and the holding period from 2 years to 10 years. For certain shareholders selling their shares, this would mean 20% tax, or up 45% if CGT rates are aligned with income tax.

The OTS also suggest removing the CGT uplift on death, so that the base cost of inherited shares is no longer their value at the date of death, but instead the value that the deceased acquired them for. For family businesses this is often a negligible amount, so this proposal would greatly the future CGT liability if the shares were subsequently sold.

It is possible to pass on shares to the next generation without incurring CGT by spreading gifts out over many years, utilising annual exemptions. This has been generally used by owners of non-trading companies who cannot use hold-over relief to defer capital gains. However, this practice would be curtailed by proposals to reduce the annual exemption from £12,300 per year to between £2,000 and £4,000.

Cash extraction

Companies often accumulate excess profits over the years, which the owners haven’t needed to draw on as salary or dividends. If the business comes to the end of its life, the company can be liquidated and this excess cash extracted at capital gains tax rates of 20% (or sometimes 10% with entrepreneurs’ relief), rather than treated as income.

If CGT rates are aligned with income tax rates then extracting these rolled-up profits will get much more expensive. Even if the Government decide to keep CGT rates as they are, the OTS has recommended that distributions of rolled-up profits are treated as dividends and tax at rates of up to 38.1%.

Share options for retaining key employees

The EMI scheme, which allows selected employees to enjoy CGT rates on gains on share options, is a very tax efficient way to reward key employees and to retain them by giving them a stake in the company. However, the scheme is at risk of being scrapped due to the ability to target certain employees.

Planning

Rishi Sunak prepared the ground for future tax rises in his recent spending review, so these proposals could be implemented in the Budget expected next spring. It would seem prudent to accelerate existing plans for company liquidations ahead of this, or to put in place an EMI scheme in case these are scrapped going forward.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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With glimpses of the end of the pandemic in sight, it would seem prudent to accelerate existing plans for company liquidations and asset disposals ahead of the Budget expected next spring.

Back to the Future for CGT?

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 12th November 2020

Categories:

Removing distortions and raising taxes

In July, Rishi Sunak tasked the Office for Tax Simplification (OTS) with investigating possible changes to capital gains tax (CGT). The report was released yesterday (11 November 2020) and made a series of recommendations aimed at removing distortions and raising taxes.

Philosophy and tax

In 1998 Gordon Brown stated that the ‘capital taxation system should better…reward risk taking and promote enterprise.’ It took him until his final Budget almost a decade later to put this philosophy into practice when he slashed CGT rates to 18%. At the same time, he introduced entrepreneurs’ relief and abolished indexation allowance for individuals.

The OTS look back further to Nigel Lawson for the inspiration for their report, who in 1988 said that there is ‘little economic difference between income and capital gains’ as his justification for the aligning CGT and income tax rates which would stay in place until Brown’s final Budget.

Back to the future

The headline-grabbing recommendation from the OTS is to once against realign CGT rates with those of income tax. This would not only raise a substantial amount of tax, but would remove the incentive to re-characterise income as gains in order to take advantage of lower rates. They suggest reintroducing indexation allowance to compensate for inflation and increasing the flexibility in the use of capital losses.

If the Government decide against such a hike in CGT rates, the OTS recommend shifting two boundaries between capital gains and income:

‘Money boxing’ whereby income is rolled up in a personal company and then realised as capital upon liquidation. Instead, distributions of excess cash would be treated as dividends.
Employee share incentives, where Government-approved schemes allow share-based rewards to be taxed as capital. Notably, the OTS distinguishes between all-employee share schemes but takes aim at those which can be targeted at specific employees, such as EMI.

Relief reform

The OTS have taken aim at entrepreneurs’ relief (aka business asset disposal relief) once again. They reiterate the general consensus that a relief given on disposal of a business does little to incentivise investment at its inception. The OTS contrasts this with EIS, which gives upfront income tax relief and is considered far better at incentivising investment. Interestingly they make no mention of the exemption of EIS shares from CGT, which is an exceptionally generous relief that seems at odds with the rationale of giving relief at the time of investment rather than at disposal.

Once again the OTS looks to days gone by for its inspiration, and suggests converting entrepreneurs’ relief to retirement relief. It recommends reintroducing an age limit linked to retirement, upping the 5% minimum shareholding to 25% and a minimum holding period of 10 years.

The OTS are even more brutal in their assessment of investors’ relief, flatly stating that it should be abolished.

Reducing the annual exempt amount

The annual exempt amount is a threshold below which CGT is not paid, currently set at £12,300 per year.

An arresting graph from the 2017/18 tax year illustrates how this is used to wash out gains each year, primarily in investment portfolios. It should be obvious from the graph what this threshold was in 2017/18.

The strongest policy rationale for this is to reduce the administrative burden of reporting capital gains. Currently, 265,000 people pay CGT each year, which current data suggests would rise to 565,000 if the exemption was lowered to £4,000. However, many of these would simply wash out fewer gains each year and so this is likely to be a vast overestimate.

The OTS concludes that a reduction of the annual exempt amount to between £2,000 and £4,000 would be appropriate.

Death and taxes

Finally, the OTS restates its suggestions on the interaction of CGT and inheritance tax (IHT) from its IHT report last year. The key recommendation was removing the CGT uplift upon death where there is no IHT charge (e.g. because assets pass to a spouse, or business assets are exempted). This would be replaced by ‘no gain no loss’ where the recipient inherits the donor’s base cost of the asset.

However, this report goes further and suggests that the CGT uplift on death is removed “more widely” (presumably completely). This would create widespread issues with historical valuations, which the OTS proposes to mitigate by changing the general rebasing date for assets from 1982 to 2000.

The OTS notes that CGT is payable on lifetime intergenerational gifts, except for certain business assets which attract gift holdover relief. Again, this treats the recipient as inheriting the base cost of the asset. The OTS suggests expanding this to non-business assets in line with their recommendations upon death.

Planning

The OTS have released their report under two weeks before Rishi Sunak’s spending review on 25 November 2020. Implementing some or all of these recommendations then would leave very little time for planning, but it’s widely considered that Sunak is unlikely to raise taxes so soon.

However, with glimpses of the end of the pandemic in sight, it would seem prudent to accelerate existing plans for company liquidations and asset disposals ahead of the Budget expected next spring.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Unprecedented times give the opportunity for bold thinking and reform, which may be tempting for a Chancellor who has declared himself to be “unencumbered by dogma”. So what might he do?

Coronavirus and the Future of Tax

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 3rd September 2020

Categories:

The coronavirus crisis has left a hole in the public finances, with debt exceeding 100% of (a somewhat diminished) GDP. There are traditionally three main ways that this can be financed:

1. Increase borrowing
2. Increase taxes
3. Decrease public spending

The first has been the approach so far, although there is still the possibility of locking in debt for the long term by issuing long-dated government bonds as was the case after both world wars.

Prime Minister Boris Johnson has ruled out a return to austerity, which is politically toxic and arguably economically unwise at a time of subdued demand.

This leaves tax increases, although these will need to be carefully targeted and timed to avoid weakening a nascent recovery. Unprecedented times give the opportunity for bold thinking and reform, which may be tempting for a Chancellor who has declared himself to be “unencumbered by dogma”. So what might he do?

Capital gains tax rates

The rates of capital gains tax (CGT), broadly 20% for higher rate taxpayers, are very low by historical standards. Indeed, it wasn’t much more than a decade ago that CGT rates were aligned with those of income tax. With that in mind, it is not unreasonable to think that Mr Sunak may once again align CGT and income tax rates.

It is unlikely, though, that CGT will be subsumed entirely under the umbrella of income tax, as is the case in some countries. There are important differences between income and capital gains, notably that gains may be significant in one year but that there may be no gains or even capital losses in other years. Inflation is also an issue where assets have been held for long periods of time, which could be negated by reintroducing indexation allowance.

Aligning CGT rates with income tax rates would also reduce the incentive to avoid tax by recharacterising income as capital gains. This has been the subject of increasingly complex anti-avoidance rules, which could be rendered largely unnecessary.

The annual exemption could be abolished, although this tax-free allowance (currently £12,300 per year) cuts down on administration and its abolition would raise relatively little revenue.

Capital gains tax rates reliefs

By far the biggest CGT relief is principal private residence relief. With most wealth tied up in people’s main homes, it will surely be tempting to reform or abolish this relief. However, it would be politically controversial, particularly for a party whose traditional supporters are homeowners.

The effects of abolishing the relief could be very uneven, hitting hard those who have owned their house for many years whilst leaving those who moved recently unscathed. To counteract this, it is likely that only increases in value from a given date (for example, the day of the Budget) would be taxed. However, this would mean that it would take years for the abolition of principal private residence relief to raise significant revenue, particularly as house prices are at a historic high.

Entrepreneurs’ relief (now Business Asset Disposal relief) was only recently changed when the lifetime allowance was reduced from £10m to £1m, but given criticism that it does little to increase investment, its abolition could be considered once more.

Wealth tax

The current crisis has hit many of the poorest hardest, and in an increasingly unequal society a wealth tax might seem like an obvious choice. However, it appears to have been ruled out by the Government. Beyond ideology, there are practical reasons for this.

A wealth tax would be an administratively difficult task, as it would require a declaration of wealth to be made by all individuals – not something that is required under the current tax compliance system. With records of wealth needing to be built from scratch, it would be prone to evasion and avoidance.

Annual land/property value tax

Property taxes, on the other hand, are much harder to avoid for the simple reason that it is rather tricky to move land. This could take the form of a land value tax or a property tax. The former is a levy on the unimproved value of land, ignoring the value of buildings which is included in a property tax.

A land value tax encourages productive use of the land and introduces a cost to land speculation, so could potentially spur development. The downside is the administration involved in valuing land across the country.

Such taxes could replace stamp duty land tax, which creates friction and distortions in the housing market by adding to the cost of moving home.

National Insurance

National Insurance could be abolished by merging it into income tax, creating instead higher income tax rates. This would align the tax rates for earnings and other forms of income, which due to National Insurance are effectively higher for earnings with seemingly little policy rationale. National Insurance is also a regressive tax, with higher earners charged at a lower rate than many lower paid workers.

Abolishing National Insurance would help level the playing field between the employed and self-employed, which is driven largely by the difference in National Insurance rates between the two. Combined with aligning dividend rates to those of other income (see below), this should eliminate much tax avoidance in this area and the burdensome red tape for businesses that has been and is being introduced to deal with this.

However, most National Insurance is paid not by individuals but by employers,. It seems unlikely that individuals will want to take on this burden in the form of higher tax on their wages, fearing (probably rightly) that their employers will be reticent to pass on their savings to their employees in the form of higher salaries. Instead, a payroll levy could be introduced to replace employer’s National Insurance, but this could undermine the levelling of the playing field between the employed and self-employed discussed above.

Abolishing National Insurance would impact the over-65s, who currently do not have to pay it. Raising income tax rates would be keenly felt by this group, who are a key Conservative demographic.

It should also be noted that the Conservative manifesto pledged not to raise National Insurance, income tax or VAT rates. Although it could be argued that the current crisis has changed everything, accusations of breaking promises would undoubtedly be made by some. A watered-down version of the above with aligning of income tax and National Insurance thresholds could raise revenue without technically changing and tax rates, although the manifesto also pledged to raise the National Insurance threshold to match the income tax personal allowance.

Pensions

The tax rules for pensions effectively defer tax, with tax relief given for contributions and later withdrawals being taxed. Given that earnings during a person’s working life are generally higher than the pension they receive once they retire, this often results in an overall tax saving. To counteract this, first an annual cap on pension contributions was introduced, followed by a lifetime cap on the value of pension pots. However, it’s still possible to get higher and additional rate tax relief on contributions of up to £40,000 per year – an amount well above the median earnings in the UK. It is quite possible, therefore, that this cap could be lowered again or that relief is restricted to basic rate tax.

Given the rationale of the tax rules for pensions, there seems to be little justification for the 25% tax-free pension lump sum. This could therefore also be scrapped, although this could be seen as a retrospective change for those who have saved into their pensions with the expectation of withdrawing 25% of their pension pot tax-free.

Dividends

Dividends have long been taxed at a lower rate than other income, as compensation for the fact that company profits have already been subject to corporation tax. In an era of low corporation tax rates this may seem unnecessary, but dividend rates were significantly increased four years ago to reflect this.

Even so, the Chancellor may be tempted to align dividend tax rates with general income tax rates as it is unlikely to be politically controversial. Depending on other reforms (particularly National Insurance and corporation tax), this may mean that it is no longer beneficial for business people who own their own companies to pay themselves with dividends.

Corporation tax

In the run up to the last general election, it was announced by Boris Johnson that a planned cut in corporation tax from 19% to 17% would no longer go ahead. This put a halt to reductions in corporation tax rates stretching all the way back to the Thatcher era.

The rationale behind lower corporation tax rates has been to attract multinational businesses to the UK and to increase investment. However, research suggests that other factors matter more to companies than headline tax rates, and a raising of rates to 24% has been mooted.

There have been warnings from business groups that raising corporation tax rates could choke off a recovery. However, given that the tax is charged on profits it is not clear why this would be the case. Companies which have suffered losses would not be paying corporation tax in any event.

Interest deductibility

Interest paid on corporate debt is deductible against trading profits. There are restrictions on deductibility for the most highly geared companies, but the prevalence of debt financing has left some companies fragile in the face of economic shocks. There is a case to be made to remove the tax incentive to load companies with debt.

However, the time may not be right, as many companies have been forced to take on debt in order to make it through the coronavirus crisis.

The future?

The House of Commons Treasury Committee and the Office for Tax Simplification are currently both investigating potential changes to the tax system. Change seems inevitable, but it is unclear how bold the Government, bruised by its handling of the coronavirus crisis, will dare to be.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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If the crisis drags on for several more weeks then you could easily breach the 60 day limit in 2020/21.

Can’t travel due to COVID-19 – what happens about my tax residency?

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 16th April 2020

Categories:

The global response to COVID-19 has stranded some people in countries that they had expected to be able to leave. This is obviously inconvenient for everyone affected, but in certain situations could have an impact on tax residency.

Stuck in the UK

Tax residency in the UK is determined by the statutory residence test (SRT). This legislation allows for 60 days to be disregarded in “exceptional circumstances” each tax year (6 April to following 5 April). HMRC have confirmed that COVID-19 is exceptional in the following circumstances:

• You are quarantined or advised by a health professional or public health guidance to self-isolate in the UK as a result of the virus;
• You find yourself advised by official Government advice not to travel from the UK as a result of the virus;
• You are unable to leave the UK as a result of the closure of international borders; or
• You are asked by your employer to return to the UK temporarily as a result of the virus.

It is important to note, however, that the 60 day limit to disregarded days still applies. Unless you already had a high number of disregarded days in the 2019/20 tax year (to 5 April 2020) this is unlikely to be a problem in that year. However, if the crisis drags on for several more weeks then you could easily breach the 60 day limit in 2020/21. That would mean that further travel to the UK up to 5 April 2021 may have to be reduced if you are looking to be non-UK resident. It is possible that the UK tax authorities could amend the SRT if lockdown continues, but this cannot be relied upon.

If you work whilst in the UK, it is important to note that even if those workdays are disregarded as part of your overall number of days in the UK, they will still count as workdays for the “sufficient ties” test. This in turn affects the total number of days you can spend in the UK without becoming UK tax resident. Even if you do remain non-UK resident, the money you earn on such workdays may still be taxable in the UK. If you are a director of a non-UK resident company, you must take extra care not to become UK resident as this could result in your company becoming UK tax resident too. Another risk is creating a permanent establishment in the UK as a result of work carried out here. The OECD has issued guidance suggesting that they consider the risk to be low, but specialist tax advice is still recommended as the rules vary in each jurisdiction.

It may be that even if you become UK resident as a result of COVID-19 per the SRT, you could still be deemed to be non-UK resident if you are tax resident in another country with a double taxation treaty with the UK.

Stuck outside of the UK

If you are forced to remain outside of the UK, this may affect your tax residency in the country you are in. Certain countries, for example Australia and Ireland, have made provisions similar to the UK to prevent individuals becoming resident due to COVID-19. It is recommended that you get tax advice in the relevant country.

If you are stranded abroad and were UK tax resident before that and will only temporarily lose your UK tax residency, the OECD guidance recommends that this is disregarded by the countries involved. It is however up to the individual countries to implement this.

If you are intending on becoming UK tax resident but cannot meet the required day count due to COVID-19, then you will not be UK resident. This is true even if you would otherwise be resident in the UK under a double tax treaty, as this is predicated on being UK resident under UK domestic law.

Coming to the UK to tackle COVID-19

The UK Government to not wish to impede those coming to the UK to combat COVID-19. Becoming UK resident may bring your worldwide income into the UK tax net. The Chancellor has therefore announced that the SRT will be amended “to ensure that any period(s) between 1 March and 1 June 2020 spent in the UK by individuals working on COVID-19 related activities will not count towards the residence tests.” These activities will apparently be tightly defined, and the measure is most likely aimed at those in the medical and scientific community.

This is a complex and fast changing area, check our Covid hub for updates or get in touch to talk through your specific circumstances.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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Non-resident corporate landlords will need to file a SA700 income tax return for the year ended 5 April 2020 by 31 January 2021, after which they will be in the corporation tax regime.

Non-resident corporate landlord changes

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 10th March 2020

Categories:

Offshore companies holding UK property have long been taxed in a different way to UK companies.

Difference in tax treatment between offshore companies and UK companies holding UK property

Capital gains tax

The main disparity had been that offshore companies did not have to pay tax on capital gains when selling UK property, whereas UK companies did. This changed in two tranches – firstly for residential property in April 2015, and then for commercial property in April 2019. My colleague Richard Verge covered the latter change in his article last year on UK commercial property owned by non-residents .

Income tax vs corporation tax

The second major difference is that offshore companies renting out UK property are subject to income tax on their profits, not corporation tax. From 6 April 2020 this is changing, increasing the alignment of tax treatment between offshore and UK companies. The new rules and their implications are detailed below.

Finally, this article will consider what differences remain between offshore companies and UK companies holding UK property.

The move to corporation tax for non-resident landlord companies

The 2019/20 tax year will be the last for which non-resident corporate landlords will need to file income tax returns (SA700). From 6 April 2020 such companies will instead need to file corporation tax returns. This involves different tax rules, transitional arrangements and an administrative burden.

New regime, new rules

For smaller companies the move to corporation tax is likely to be an advantageous one. Most notably there will be a drop in tax rates from 20% income tax to 19% corporation tax. Payment of tax will be simpler, with one payment due 9 months after the year end. However, large companies may fall into the more complex quarterly instalment regime.

Companies with significant finance costs (in excess of £2m per year for the group) will be hit by the corporate interest restriction rules. Broadly, these limit tax relief for finance costs to a percentage of taxable profits, potentially as low as 30%.

Financing costs will no longer be deductible as property business expenses; instead non-resident corporate landlords will enter into the loan relationship and derivative contract regimes.

Moreover, brought forward losses will only be able to be set off in full against the first £5m of profits in a given year; profits in excess of this can only be relieved by up to 50% using brought forward losses. There is no such restriction for income tax losses.

The transition

Existing income tax losses preserved in the switch to corporation tax. Although they can be set against profits under the corporation tax regime, they are still income tax losses and therefore their future use against profits will not be restricted as above. However, they cannot be set off against future capital gains.

If the company has profits in its final income tax return, HMRC have confirmed to us that no payments on account will need to be made and should be reduced to nil in the 2019/20 return.

Capital allowances are straight forward – the rules deem them to continue as normal.

Compliance

Non-resident corporate landlords will need to file a SA700 income tax return for the year ended 5 April 2020 by 31 January 2021, after which they will be in the corporation tax regime. HMRC are currently writing to all non-resident landlord companies to inform them about this change, issuing a unique tax reference (UTR) for corporation tax.

Where a company’s year end isn’t 5 April, the period will be split in two. For example, where the year end is 31 December, the period 1 January 2020 to 5 April 2020 will be in the old income tax regime and the period 6 April 2020 to 31 December 2020 will be in the new corporation tax regime. For the year ended 31 December 2020, they will need to:

• File an SA700 return by 31 January 2021 (and pay their final income tax payment) for the period 1 January 2020 to 5 April 2020; and
• File a corporation tax return by 31 December 2021 (and pay corporation tax by 1 October 2021 if not large) for the period 6 April 2020 to 31 December 2020.

Once in the corporation tax regime, all non-resident landlord companies will need to produce iXBRL-tagged accounts, for submission with the corporation tax return.

Non-resident landlord scheme

Currently, non-resident corporate landlords must apply to receive rents gross, otherwise tax at 20% must be withheld on rent payments. This will continue to be the case, although as the non-resident landlord scheme isn’t strictly compatible with the corporation tax regime, there are question marks about how it will apply in practice.

What differences remain between UK companies and offshore companies?

Inheritance tax

For non-UK domiciled individuals, who are not yet deemed domiciled, holding UK commercial property via an offshore company will keep it out of the UK inheritance tax net. However, such a structure is already ineffective for UK residential property, so it would not be surprising if UK commercial property followed suit in due course.

Stamp duties

The other difference is with stamp duties. SDLT can currently be avoided by selling the company holding UK land, rather than selling the land itself. Instead, shares in UK companies attract stamp duty. By contrast, shares offshore companies can in principle be sold without any stamp duty.

However, in February 2019 HMRC consulted on a 1% SDLT surcharge for non-UK purchasers of UK residential property, which was proposed to include offshore companies and certain UK companies with non-resident shareholders. This was quietly dropped, but was included in the Conservative manifesto in November 2019 at a rate of 3% so may be announced in the upcoming Budget.

The scales have long been tipped in favour of offshore companies; they may tip the other way in the not-too-distant future.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

Comment on this...

From 6 April 2020, HMRC require tax on capital gains on disposals of UK residential property to be reported and paid within 30 days. This means paying tax up to 21 months earlier than under the previous rules, which is likely to catch many people unawares.

Selling residential property? You may need to pay tax sooner than you think

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 9th March 2020

Categories:

Since 2015, non-UK residents have had to report and pay capital gains tax (CGT) on UK residential property within 30 days of completion (extended to UK commercial property from April 2019). This caught many people out, with late filing penalties reaching £1,600 for those who have not kept themselves up-to-date with tax rules.

Despite these issues, HMRC are now extending the reporting to UK residents disposing of UK residential property from 6 April 2020 as they seek to accelerate receipt of tax payments.

Who needs to file a return?

The new rules require a standalone CGT return to be made to HMRC in the following circumstances:

• A UK residential property is disposed of by an individual, trustee or personal representative; and
• A gain arises on the disposal; and
• The date of exchange is on or after 6 April 2020.

Partnerships disposing of UK residential property will also be affected, as their partners are taxed on their share of gains as individuals. Therefore these partners will need to complete the CGT return.

When does a return not need to be filed?

For UK residents, a return only needs to be filed for disposals of UK residential property on which a gain arises. Commercial property is not included, and neither is non-UK residential property (although disposals of these will still need to be reported on Self Assessment tax returns). Where there is no gain then a standalone CGT return does not need to be filed, for example:

• The gain is fully covered by principal private residence relief;
• There is a loss on the disposal of UK residential property;
• The gain is covered by the annual exemption; or
• The gain is covered by capital losses prior to the UK residential property disposal;
• No CGT will be due because of EIS deferral relief (or similar), so long as conditions are met at the time of disposal (i.e. the EIS investment has already been made).

The rules for reporting disposals on Self Assessment tax returns remain the same, whether or not a standalone CGT return is filed. In particular, where a claim or election is made, this must be done via the Self Assessment tax return.

Be wary when disposing of main residences on which principal private residence relief is claimed, as this relief can be limited in certain circumstances. If the relief does not fully cover the gain then a CGT return will still need to be filed if there is CGT to pay.

When do the new rules apply from?

The rules apply for disposals on or after 6 April 2020. The disposal takes place when an unconditional contract is signed (or where a conditional contract becomes unconditional), which is generally the date of exchange. If the date of exchange occurs before 6 April 2020, then a CGT return is not required even if completion is on or after 6 April. There is a large incentive to exchange contracts before this date, as the following example illustrates:

Example 1: timing of payment
John is selling a buy-to-let property, on which there is a gain of £200,000.

If he exchanges on 4 April 2020 and completes on 20 April, the gain occurs in the 2019/20 tax year and tax will be due on 31 January 2021.

If he exchanges on 10 April 2020 and completes on 20 April, the gain occurs in the 2020/21 tax year and the tax will be due on 19 May 2020, bringing forward the payment date by over 7 months.

However, it could still be advantageous for John to exchange on 10 April, if he will crystallise capital losses in the 2020/21 tax year (see example 3).

When does the return need to be filed by?

The CGT return must be made within 30 days of completion (rather than exchange, which remains the tax point in the majority of circumstances), with payment due by the same deadline. Both late filing and late payment will result in penalties, which are the same as for Self Assessment tax returns. A CGT return must be made even if the individual already submits tax returns.

Where there is a gap of many months between exchange and completion, and a Self Assessment tax return reporting the gain is filed within 30 days of completion, then a CGT return is not required. For example:

Example 2: delayed completion
Jane is selling her holiday home in Cornwall, realising a gain of £60,000. She exchanges on 23 December 2020, but completion is delayed until 3 June 2021.

Jane files her Self Assessment tax return on 20 May 2021, prior to completion. She reports the gain on the holiday home on this, so a standalone CGT return is not required. The CGT is payable on 31 January 2022, rather than 3 July 2021.

How do I file a return?

In order to make the return, an individual will need to sign up to HMRC online services and apply for a CGT account (to be made available on 6 April 2020). Those completing their own tax returns will already have an HMRC online account, but those who do not will need to factor in the time it takes to do this. Tax agents can submit returns on behalf of their clients, but HMRC have confirmed that taxpayers will still need to set up a CGT account and then provide a reference number to their agents to enable them to file on their behalf through the agent portal.

How much tax is payable?

The tax rate on gains on residential properties is 18% for basic rate taxpayers (until the basic rate is used up) and 28% for higher and additional rate taxpayers (and trustees and personal representatives). Up until now, capital gains have been reported alongside income, creating certainty of which CGT rates should be used. Presumably HMRC will request an estimate of income on the standalone CGT return, but this is yet to be confirmed.

In addition, other gains and losses in the year (e.g. on an investment portfolio) are pooled with residential property gains when calculating the overall CGT due for a given year. Where losses are incurred before a residential property gain, these can be taken into account on the CGT return. However, where losses are incurred after a residential property gain, these cannot be taken into account (unless they are UK residential losses). Instead, such losses must be claimed on the Self Assessment tax return for the year, which will lead to a repayment of tax. This is best illustrated with an example:

Example 3: timing of losses
We return to our example of John, who is selling a buy-to-let property standing at a gain of £200,000. He has capital losses in the 2020/21 tax year, so decided to exchange on 10 April 2020 and complete on 20 April 2020.

His losses are:

1. 7 April 2020: capital loss on sale of shares of £20,000.
2. 10 May 2020: capital loss on sale of commercial unit of £50,000.
3. 23 October 2020: capital loss on sale of residential property of £30,000.

John is a higher rate taxpayer, and has an annual exempt amount of £12,500 in the 2020/21 tax year. His tax is as follows:

1. The losses on the shares were incurred before the residential property gain, so can be taken into account on the CGT return required by 19 May 2020. This gives tax due on 19 May 2020 of £46,900 (being £200,000 gain less losses of £20,000 and exempt amount of £12,500 at 28%).

2. The capital loss on the sale of the commercial unit cannot be taken into account until the Self Assessment tax return is filed.

3. A CGT return is not required for the capital loss on the residential property exchanged on 23 October 2020, but one can be filed to claim tax back of £8,400 (being £30,000 at 28%).

When John files his Self Assessment tax return, his overall CGT is £24,500. He has paid £46,900 and been refunded £8,400, giving a repayment of £14,000 (the £50,000 loss on the commercial property at 28%). The earliest he can get this refund is 6 April 2021.

What if I don’t have the necessary information?

It pays to plan ahead, rather than wait until completion. Keep information on acquisition costs and enhancement expenditure on file, so that the tight timescales can be met. However, where information is not available, the rules allow for estimates to be made. These can then be updated with actual figures either by amending the CGT return or through the Self Assessment tax return.

What about non-UK residents?

There are similarities and differences with the position for non-UK residents as compared to UK residents:

Similarities:

• Non-UK residents will be required to use the new system (including setting up an HMRC online account).
• Non-UK residents must pay CGT within 30 days (i.e. they will lose the option to defer payment).

Differences:

• Non-UK residents must report all disposals, whether or not a taxable gain arises.
• Non-UK residents must report disposals of UK commercial property as well as residential.
• Non-UK residents must report indirect disposals of UK land and property via a “property rich entity”.

Planning points

The new rules are likely to catch many people unawares and may lead to cashflow issues for some. These may be alleviated by:

• Exchange before 6 April 2020 to delay the payment of CGT, unless it is otherwise disadvantageous.
• Crystallise losses before making UK residential property gains, where possible.
• Where claiming EIS or SEIS relief, make the investments before completion.
• If completion is delayed beyond the end of the tax year, file a Self Assessment return within 30 days of completion to delay payment of CGT.

CGT rates have changed since this article was written and more up to date information can be found in our 2024 Spring Budget response.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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New trusts will need to be registered within 30 days of being settled, and changes to trusts must also be updated on the TRS within 30 days.

HMRC’s Trust Registration Service and the 5th Anti-Money Laundering Directive (5AMLD)

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 25th February 2020

Categories:

The UK may have officially left the EU on 31 January, but there are several EU directives which the UK is implementing into its domestic legislation. One is the 5th Anti-Money Laundering directive (5 AMLD), which builds on the transparency drive aimed at trusts introduced in the 4th Anti-Money Laundering directive (4 AMLD) .

A little history

In June 2017, 4AMLD heralded the introduction by HMRC of their trust registration service (TRS), which I wrote about at the time. Trustees were required to upload information to the register, including the names and other details of settlors, beneficiaries and trustees, but only where the trust had a tax liability or requirement to submit a tax return.

Widening the net

5AMLD broadens the scope of the TRS considerably by removing the link to UK tax. With limited exceptions, it is proposed that all UK express trusts will need to register with HMRC. Offshore trusts holding UK property or entering into a business relationship with an “obliged entity” in the UK will also be required to register.

Greater access

Currently only law enforcement (and HMRC!) have access to data held on the TRS. This will be extended to any third party where they have a “legitimate suspicion” of money laundering or terrorist financing. HMRC assert that “each request will be rigorously reviewed on its own merits”, but it remains to be seen how this will operate in practice.

Deadlines

New trusts will need to be registered within 30 days of being settled, and changes to trusts must also be updated on the TRS within 30 days. However, there is a two year transition period from the implementation date of 10 March 2020.

What’s next?

HMRC’s consultation on the new TRS closed on 21 February 2020, so more details are expected once the results of this have been published. For now, it is recommended that trustees prepare by ensuring that the data they hold on their trusts is up-to-date. We will report back with more information when it is made available.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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What happens if you withdraw valuable euros now? Back on 5 April 2012 the law said that you had to pay capital gains tax on the foreign exchange gains in bank accounts. Thankfully, the following day new rules came in which exempted gains (and losses) on bank accounts holding foreign currency.

Capital gains tax on foreign exchange gains and losses for individuals

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 5th December 2019

Categories:

Bank accounts

If you had opened a euro denominated bank account in 5 April 2012, when the Brexit referendum was a twinkle in David Cameron’s eye, €10,000 would have cost you just over £8,000. Fast forward to the summer of 2019, and that €10,000 would have been worth over £1,000 more.

So what happens if you withdraw those valuable euros now? Back on 5 April 2012 the law said that you had to pay capital gains tax on the foreign exchange gains in bank accounts. Thankfully, the following day new rules came in which exempted gains (and losses) on bank accounts holding foreign currency.

Foreign cash

What if, instead of opening a euro denominated bank account, you’d simply bought €10,000 in cash? Then it depends on why you purchased it. If you foresaw the political chaos to come in the UK and bought euros speculatively, then your gain should be taxable when you convert the euros back into sterling. If, however, you bought them for personal expenditure outside the UK – say, on holiday – then any gain should not be taxable.

Other assets purchased in a foreign currency

Exchange gains and losses when buying assets in foreign currencies are generally subject to capital gains tax. For example, if you bought €10,000 of shares and then sold them sometime later for there are two potential gains which need to be considered:

• Any gain/loss on the shares themselves; and
• The foreign exchange gain/loss.

This is dealt with by simply converting the acquisition and disposal costs into sterling at the prevailing exchange rate at each time. If you bought the €10,000 of shares for £8,000 and sold them for £19,000 when they were worth €20,000, then your capital gain should be £11,000, i.e. £19,000 less £8,000.

Cryptocurrencies

Despite the name, cryptocurrencies are not considered to be foreign currencies by HMRC. Although it’s tempting to draw parallels between an e-wallet and a bank account containing foreign currency, cryptocurrencies are not exempt from capital gains tax. Broadly, investing in a cryptocurrency is should be subject to capital gains tax, although trading may be subject to income tax.

There are now a bewildering array of cryptocurrencies and crypto-assets. The starting point is to ascertain what the nature of the crypto-asset is, and then work out the tax treatment from there.

If you have been trading or investing in crypto-assets and would like tax advice specific to your circumstances, please get in touch.

*This article does not consider forex trading.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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HMRC have told us that employers should not wait to receive confirmation of their PSA calculations. Instead, you should pay over the tax and NIC liability that you have calculated using the usual payment methods.

Where’s my PAYE settlement agreement letter?

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 10th October 2019

Categories:

What’s a PAYE settlement agreement?

PAYE settlement agreements (PSAs) are optional arrangements that allow employers to pay the tax and National Insurance contributions (NICs) for benefits-in-kind on behalf of their employees. They’re also useful when declaring benefits on P11D forms would be administratively burdensome.

PSAs have therefore proved popular with employers, even if they can be expensive; if you’re paying the tax and NICs on behalf of your employees, this is itself subject to tax and NIC.

However, this popularity is proving to be a headache for HMRC. Although it up to the employer (or their agent) to calculate that tax and NIC payable each year, PSAs are not strictly a self-assessment system. Each calculation needs to be approved by HMRC before the payment deadline of 19 October (22nd if paying electronically).

Processing delays

Over the past few years, HMRC have been getting further and further behind in approving PSA calculations sent to them by employers. For 2018/19 the situation has reached a new low. Less than two weeks before the payment deadline we have been informed by HMRC that they have not even started to process PSA calculations.

This means that employers won’t have a letter from HMRC confirming the amount to pay, where to pay it and, crucially, the payment reference to use. This reference is specific to each employer and tax year.

What to do

HMRC have told us that employers should not wait to receive confirmation of their PSA calculations. Instead, you should pay over the tax and NIC liability that you have calculated using the usual payment methods, detailed on HMRC’s website by the payment deadline above.

You must still use a payment reference, even though HMRC won’t have sent you a confirmation letter. Fortunately, a payment reference can be found in the letter from HMRC enclosing your countersigned P626 – the letter that put the agreement in place. Although it is not tax-year specific, it is unique to each employer and therefore HMRC have confirmed to us that it can be used in this situation. This is in the format XX0000123456789.

What next?

If you are in any doubt, we suggest that you contact the HMRC employer helpline on 0300 200 3200 to confirm your PSA payment reference as soon as possible, making sure that you have your PAYE reference number to hand.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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HMRC is considering harmonising the tax treatment of work-related training, so that tax relief would be available in all scenarios.

HMRC proposes overhaul of work-related training

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 13th March 2018

Categories:

If there is one idea that everyone across the political spectrum agrees upon, it is that having a more skilled workforce is a good thing. However, at present our tax system is very inconsistent in incentivising work-related training.

The existing rules

Consider these three scenarios:

1) The good employer

Gemma works at a reputable accountancy firm, who value their employees and wish to train them up for the benefit of both the employees and the firm. Gemma wishes to move into a specialist area and therefore wants to study for a new qualification. Her employer is happy to pay her course fees and reimburse her travel costs. They receive tax relief on these expenses, and Gemma is not taxed on the cost.

2) The bad employer

Daniel works for a miserly accountancy firm. Like Gemma, he wishes to gain a new qualification but he must pay for it out of his own pocket. However, as he is not on a training contract he cannot claim tax relief for his costs.

3) The self-employed

Jordan is a self-employed accountant, and so pays for all his own training. He can get tax relief for his costs of continuous professional development. However, if he wants to join Gemma and Daniel in studying for a new qualification then tax relief for these costs is denied.

A new approach

As part of the Government’s 2018 Spring Statement, they have released a consultation on how to redress this imbalance. They are considering harmonising the tax treatment of work-related training, so that in all the above scenarios tax relief would be available. Although as a firm we of course fall into the first scenario, we would welcome this change as being both fair and good for the UK economy.

The information in this article was correct at the date it was first published.

However it is of a generic nature and cannot constitute advice. Specific advice should be sought before any action taken.

If you would like to discuss how this applies to you, we would be delighted to talk to you. Please make contact with the author on the details shown below.

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