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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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What could affect private individuals, both in the UK and abroad, who may be watching what the UK does with interest?

Who will pay for the Government’s Coronavirus support? – What higher rate tax-payers need to consider now

Janet Pilborough-Skinner - jpilborough-skinner@goodmanjones.com

Posted on 29th June 2020

Categories:

As all of us start to think more about the future and less about the day-to-day in these strange times, what could be ahead for us as individuals?

Most commentators agree that the government’s focus in the short-term should be to stimulate the economy; what about the long-term need to cut the Budget deficit? As we know, there are really only two ways of doing that, by reducing spending or increasing taxes.

So, what could affect private individuals, both in the UK and abroad, who may be watching what the UK does with interest? Early indications are that people still want to remain in, come to or invest in the UK, but other countries are getting their act together and in this new world, the UK may find it has to work harder to attract and keep wealthy investors and entrepreneurs both in and outside of the UK.

Short-term Stimuli

Some stimulus methods which would directly affect private individuals could be exemptions or reductions in Stamp Duty Land Tax; a reduction in VAT, perhaps only for certain sectors; and fresh/revamped tax incentives aimed at start-ups. Any of these are likely to only be temporary to kickstart the economy.

Balancing the Books

Turning to the longer-term, raising taxes appears to be the most likely option, particularly as the public appear to be somewhat resigned to this; they do not want services cut further.

Income Taxes

The difficulty here lies in public perception; raising the higher and possibly the additional rates of tax by 1% will raise a fraction of the extra revenue needed compared to raising the basic rate of tax by 1%. This would suggest therefore that any increase in income tax rates should be across the board, rather than targeted at one section of society.

Another possibility is aligning the dividend rates of tax with the income tax rates. Removing this differential would probably be seen to be fair in the current climate.

It would also be possible to introduce a withholding tax on dividends paid to non-residents receiving UK dividends which are currently outside the scope of UK tax. This may not bring much additional tax into the UK as the withholding tax would be relieved in many cases under the UK’s extensive double-tax treaties with other countries, but politically it may be attractive.

Capital Gains Tax

Capital taxes in the UK account for a fraction of the overall tax take and changes in the capital gains tax rate are widely expected. The current rates for higher rate taxpayers of 20% (most disposals) and 28% (mainly residential property) could be standardised to 28% across all disposals or at least a higher flat rate. It would also be relatively easy to align the rates with income tax rates or perhaps penalise UK resident non-domiciled individuals with standard income tax rates on their capital disposals.

New Taxes?

This article focusses on private clients rather than corporate entities, so the usual rumours of introducing a wealth tax in addition to inheritance tax are already resurfacing, especially as over the years many countries have abolished their version of inheritance tax and brought in a wealth tax. However, the cost of administrating such a tax would seriously outweigh the overall tax-take and although this rumour may be popular with the public, for that reason it is unlikely to gain further traction.

Cutting Reliefs

The other side of the coin is to consider restricting or withdrawing certain reliefs. This may be the final nail in the coffin for certain capital gains tax and inheritance tax reliefs which tend to disproportionately benefit the wealthy. In this category could be the inheritance tax relief for business property which could increase the inheritance tax-take by a substantial amount should the government feel able to make such a bold move.

Steps to consider before the Autumn

Crystal ball gazing can never be more than someone’s opinion on what might happen, but experience shows that during a recession individuals tend to want to regularise their affairs, and the pandemic has given people more time to consider their personal position.

• Think about your short, medium, and long-term plans for you and your family
• Take time to evaluate the areas which need attention now
• Consider taking dividends where appropriate
• Consider taking distributions from trusts
• Check assets held with inherent gains
• Actively look at lifetime giving

All the above bullet-points have tax implications and advice should be sought before implementation. Goodman Jones’ Private Client team are well versed in helping you make the right decisions at the right time.

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.

Comment on this...

A few simple steps carried out by the end of the tax year on 5 April can yield great results.

5 Tips to Save You Tax before 5 April 2018

Aidan Roberson - Tax Manager - aroberson@goodmanjones.com

Posted on 7th March 2018

Categories:

For the vast majority of people the best tax planning is not complicated. A few simple steps carried out by the end of the tax year on 5 April can yield great results. We look at 5 of the most effective things you can do to reduce your tax bill.

1. ISAs

ISAs have been around for nearly 20 years and remain one of the simplest and best ways to shield your investments from tax. The annual contributions limits have jumped up in the past few years, and there are now many types of ISA to choose from:

• Cash ISA
• Stocks and shares ISA
• Innovative Finance ISA
• Help to Buy ISA
• Lifetime ISA
• Junior ISA

Cash ISAs are simply savings accounts in which you do not pay tax on interest. Stocks and shares ISAs can contain shares, unit trusts, corporate bonds and gilts. Innovative Finance ISAs can contain new peer-to-peer loans and crowdfunding investments (debt only, no equity).

Help to Buy ISAs are aimed at first-time home buyers, and offer a 25% bonus up to £3,000 from the Government to be put towards buying a property worth up to £250,000 (£450,000 in London). They are being phased out in favour of Lifetime ISAs (LISAs), which are geared both towards first-time buyers and those looking to save for their retirement. You can put up to £4,000 into a LISA each year, and again you will receive a 25% bonus.

Thanks to the change from Help to Buy to Lifetime ISAs, there is a one-off opportunity in the current tax year. If you have a Help to Buy ISA and transfer the funds into a LISA before 6 April 2018 this will not count towards the LISA limit, allowing you to get a bonus twice.

You can contribute a total of £20,000 into a combination of these ISAs before 6 April 2018. There are various quirks and restrictions, especially around Help to Buy and Lifetime ISAs, so it is recommended that you seek professional advice.

2. Pensions

In contrast to ISAs, the level of pension contributions which attract tax relief has been falling, particularly for high earners. However, they are still a useful tax planning tool, and with the increased options on how to take out funds they have become a more flexible investment vehicle.

Both ISAs and pensions provide a tax-free wrapper for investments, but pensions provide upfront tax relief. However, they are taxable when funds are withdrawn, unlike an ISA. This makes them useful for year-end tax planning, so long as you know what your income will be for the year. For example, extra pension contributions can be used to bring your effective taxable income down to £100,000 to preserve your personal allowance. The restriction of the personal allowance results in an effective marginal tax rate of 60%, so this can save a significant amount of tax.

However, there are restrictions on both how much you can contribute to a pension annually and over your lifetime. The annual allowance is £40,000 gross in 2017/18, including contributions made by employers. This tapers down to £10,000 for higher earners, typically those with income over £150,000. Fortunately you can utilise unused allowances from the three previous years. This is particularly valuable for those caught by the tapered annual allowance, as this was not introduced until the 2016/17 tax year. This means that the unused portion of the full annual allowance of £40,000 from 2014/15 and 2015/16 can be brought forward to 2017/18, even for higher earners.

Finally, those with no income can benefit from a 20% uplift on pension contributions. You can make a contribution of up to £2,880 and the Government will top this up to £3,600. For example, if you have a spouse/civil partner who has no earnings, or a child/grandchild at university, this is a useful free top-up.

3. Inheritance tax gifts

The “7 year rule” for inheritance tax is widely known – if you gift money or assets then you need to survive 7 years for it to be free of inheritance tax. However, up to £3,000 can be given away each year which is immediately free of inheritance tax. If you have not gifted anything in the previous tax year then this can be brought forward, allowing £6,000 of gifts before 6 April 2018. This is per person, so a couple can give away up to £12,000 in a year. If one spouse/civil partner does not have sufficient funds to make their gift, the other can gift it to them first as a transfer between spouses is generally exempt from inheritance tax.

4. Capital Gains Tax planning

Each person can make capital gains of £11,300 in 2017/18 before paying capital gains tax. If your investments have done well then it can be advantageous to sell some of these to crystallise a gain of up to £11,300 without paying tax.

There are rules which prevent you from selling shares on 5 April and buying them back the next day (so-called “bed and breakfasting”). However, although selling shares and buying back the same shares ones back is caught, buying shares of a similar company in the same industry is not. It is also possible for your spouse/civil partner to buy shares in the same company (but not your shares), although care must be taken where you gift them money to do so.

You should ensure that you and your spouse/civil partner both hold assets so that you do not waste the annual CGT allowance.

5. VCT, EIS and Seed EIS investments

The Government encourages investment in riskier companies by giving tax advantages through the VCT, EIS and Seed EIS schemes. Such investments get income tax relief at 30% for VCT and EIS, and 50% for start-ups under Seed EIS. For example, if you subscribe for £10,000 of shares in an EIS-qualifying company before 6 April 2018 you should get £3,000 off your income tax liability in January 2019. Even better, you may be able to carry the relief back to the previous tax year and get a £3,000 refund from HMRC now.

If you have made a capital gain within the past 3 years, EIS and Seed EIS schemes can be used to provide relief from capital gains tax. For EIS schemes this is a deferral relief, delaying the payment of tax. Seed EIS schemes are more generous, exempting gain up to the value of 50% of the investment made.

The bigger picture

With all of these tips one must look beyond the tax advantages and ask if it is the right decision for you. VCT, EIS and Seed EIS investments can be risky. Equally, there’s no point in making a pension contribution or gifting money if you need the funds now.

If any of the above are right for you, we recommend that you seek professional advice to ensure that traps are avoided.

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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A Picture of Richard Verge - Tax Director

Some people have, however, attempted to incorporate via a partnership in order to reduce their exposure to SDLT.

Should I Incorporate my Buy-to-Let Business Revisited 2017

Richard Verge - Tax Director - rverge@goodmanjones.com

Posted on 10th May 2017

Categories:

The incorporation of buy-to-let businesses remains a hot topic given the many changes to the tax treatment of residential lettings. I have previously discussed the potential tax charges arising on the incorporation of an existing buy-to-let business, but am revisiting them here as this is one of the questions I get asked most frequently at the moment.

There are many landlords now sitting on mature investment portfolios and are asking themselves the questions of whether they should be moving that into a corporate structure. The tax issues to consider are Capital Gains Tax, Stamp Duty Land Tax, Inheritance Tax and in some instances VAT.

Capital Gains Tax (CGT)

Transferring a property to a company can create a tax point for Capital Gains Tax purposes. The disposal will be deemed to take place at market value. In some instances it may be possible to roll over the capital gains, however to do so you need to be able to take advantage of business roll over relief.

HMRC do not generally accept that passively owned property is a “business” for these purposes, but it appears that size does matter, as was borne out in the upper tribunal case of Ramsey v HMRC. In this case Mrs Ramsey owned a block of 15 flats. The case turned on the amount of activity that Mrs Ramsey spent in managing the “business”. This turned out to be around 20 hours per week plus she had no other occupation during that period. The tribunal ruled in her favour confirming that she was running a business.

I take from this that it is not the quantity of properties that any landlord owns that determines whether a business is being pursued but rather the active participation they take in running the business. As always with such matters the details will be important.

Stamp Duty Land Tax (SDLT) and incorporating via a partnership

As with all property transactions, SDLT has become a major factor. A corporate buying property would be subject to the higher rate of SDLT on residential property.

The reason why this may work is that special rules apply to the transfer of properties into and out of partnerships. The incorporation of a partnership owning property would be such a transfer. Broadly, provided the ownership of the corporate matches the ownership of the partnership prior to incorporation, and provided all qualified conditions apply the value of the transaction for SDLT purposes would be nil.

The problem being encountered by landlords attempting this route is that establishing an effective partnership is not necessarily so straight forward. If partnerships are to exist there must be a business being carried on. This brings us back to HMRC’s view that the passive ownership of property does not constitute the business. Arguably using a Limited Liability Partnership may be a more robust route for incorporation, but this creates an additional degree of complexity. Also it should not be overlooked that there is general anti-avoidance legislation for SDLT purposes which may be brought into play if it is considered that the introduction of a partnership as a route to incorporation is purely an SDLT avoidance mechanism.

Inheritance Tax (IHT)

Quite often overlooked in the context of transferring property to a corporate structure is that in certain circumstances this can constitute a transfer of value for Inheritance Tax purposes. As such there is a risk that an immediate lifetime chargeable transfer may take place which would give rise to a 20% Inheritance Tax charge.

VAT

VAT will only be an issue for incorporation of a buy to let business where there is commercial property involved on which an option to tax had been made. It is likely that this could be dealt with by way of a transfer of a going concern; however this is something that would need consideration before an incorporation would take place.

Summary

In my previous article I said that the incorporation of a buy-to-let business was most likely to suit a business which had low borrowing requirements, low turnover of properties and can afford to roll up profits to take advantage of low corporate tax rates. My view is that this remains the case. The route to incorporation is alive with complexity and potential tax traps for the unwary, but in the right circumstances incorporation could be the best route. As always, each person’s circumstances will be different and you should take full advice before taking any action.

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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Ideally there would be no tax on a gift and much succession planning is based around eliminating these taxes.

Family Giving: Passing family business and other wealth between the generations

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 15th December 2016

Categories:

To be successful in X Factor a competitor needs at least three yesses to follow their dreams. In the world of family giving you need to overcome only two hurdles. That doesn’t necessarily mean that family giving is any easier than progressing through the rounds of X Factor.

Grandson With Grandfather And Father Opening Christmas Gifts

When one gifts down through the family generations the two taxes which need to be considered are Capital Gains Tax and Inheritance Tax.

Capital Gains Tax

Capital Gains Tax (CGT) is the tax when an individual disposed of an asset, whilst Inheritance Tax can be considered the additional tax on transferring that asset. The Government appreciate that it wouldn’t be right to charge both on a single transaction and therefore there are various reliefs which can be claimed to prevent one of them applying. Ideally there would be no tax on a gift and much succession planning is based around eliminating these taxes.

Gifting Sterling

Capital Gains Tax is only chargeable on certain assets. A commonly gifted asset which has no CGT implication is gifts of Sterling. You will note that I am very specific about the currency. If a gift is made in a currency other than Sterling then there could be Capital Gains Tax considerations.

Gifting Shares

If the gift is of shares in a trading business and the recipient of the gift is a UK tax resident, then there may be the possibility to jointly elect with the donor to holdover or delay the gain element. This effectively means that the donor does not pay any CGT on the gift but the recipient acquires the asset at the same base cost as that applicable to the donor. At best this is a tax deferral as the recipient will pay more tax when they sell the shares.

If the business is not a trading business it may be possible to undertake a demerger to allow a business which would otherwise not qualify for this relief to become qualifying.

Potentially Exempt Transfers

Most gifts of assets are potentially exempt transfers (PETs) for Inheritance Tax (IHT) purposes. In simple terms this means that the gift becomes free of IHT should the donor survive seven years from the date of the gift. To be a PET the gift must be unfettered and there has been talk for many years about the risk of HMRC extending the seven year period to something longer. If the donor dies within the seven year window then not all of the gift falls into IHT. The potential liability tapers away within the seven years and it is possible to buy life assurance which would cover the tax should it become payable within that window.

IHT and CGT

If you pause at that point it would appear that Capital Gains Tax is the primary concern. This is because gifts could potentially be exempt from IHT due to the seven year rule.

Gifts into certain structures can give rise to an immediate IHT charge. In order to prevent both IHT and CGT being payable on the same commercial transaction it is then possible to make a tax election to prevent the CGT being payable. Depending on value and circumstance the IHT may be less than the CGT which would otherwise be payable. This can lead to planning whereby an IHT charge of nil or a modest value is deliberately generated in order to avoid a higher CGT cost. This planning needs to then be tempered with the cost of running the resulting structure or the future cost of unwinding it.

Gifting shares in a trading businesses in a Will

Many trading assets are exempt from IHT. As an alternative to gifting during life and having the recipient take on the donor’s Capital Gains Tax base cost it may be more efficient for the donor to retain the asset and leave it to the recipient in their Will. At death there is no IHT on the trading asset and the asset is transferred to the individual at its market value as at the date of death.

This has led to planning involving business owners and their elderly parents. The business person gifts shares in the family company to their elderly parents and holds over the capital gain. The understanding is that the Will of the elderly parent transfers the asset back to their child. With the right fact pattern the death of the parents does not lead to any Inheritance Tax on the shares and the business person reacquires the shares from the estate of their parent with an uplifted base cost of the assets.

You could say that was a yes, yes and yes.

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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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one of the concerns about incorporating a buy-to-let business is the Capital Gains Tax which is payable. With the cash resources and the appropriate appetite for risk this concern can be partially alleviated by use of EIS investments.

Should I Incorporate My Buy-To-Let Property? – Part 2

Graeme Blair - Partner - gblair@goodmanjones.com

Posted on 11th October 2016

Categories:

Thirty-two colourful British doors from the past few centuries. Full resolution is 300dpi.

Richard Verge’s blog of 25 January asked the question should I incorporate my buy-to-let business?

It was aimed at UK persons who were looking to mitigate the impact of a future restriction of the tax relief for interest payments on their buy-to-let mortgages and the impact of the 3% SDLT increase for second properties.

Capital Gains Tax

Incorporation comes at the cost of an SDLT charge on transfer of the property into a company and the Capital Gains Tax payable on the transfer. As the company is connected with the seller the CGT is payable on the full market value of the property irrespective of the price recorded in the documentation.

Residential property

When CGT rates were reduced to 10% or 20% on 6 April 2016 the reduction did not apply to gains on disposal of residential properties. The impact is that individuals who incorporate will pay Capital Gains Tax at rates of either 18% or 28% on the gain they make on that property. This “dry charge” is a disincentive for incorporation. However this CGT rate could be reduced to 10% or 20% by investment in Enterprise Investment Scheme (EIS) shares.

Enterprise Investment Scheme

Capital gains on sale of property can be deferred if the vendor invests in EIS qualifying shares. The reinvested gain would be deferred for the period that the shares are held. When the EIS shares are sold the deferred gain becomes taxable at the rate of CGT applying at the time of the share sale. The CGT which is payable is no longer classified as a disposal of residential property but a deferred gain and therefore charged at 10%/20%. Due to a technicality this opportunity only applies to investment in EIS qualifying shares and does not apply to Seed Enterprise Investment Scheme qualifying shares.

As well as CGT reliefs, a qualifying investment in EIS shares which are held for a minimum period of (generally) three years results in a 30% income tax relief for the subscriber.

In summary, one of the concerns about incorporating a buy-to-let business is the Capital Gains Tax which is payable. With the cash resources and the appropriate appetite for risk this concern can be partially alleviated by use of EIS investments.

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...

A Picture of Alison Hayden - Assistant Manager

The mechanism for bringing such UK residential property held in this way into the UK tax net will be to remove these structures from the definition of excluded property – and therefore no longer excluded from IHT.

Update on the reforms to non-domiciliaries (non-doms)

Alison Hayden - Assistant Manager - alison.hayden@goodmanjones.com

Posted on 31st August 2016

Categories:

The long awaited further consultation document from HMRC has been released for individuals who are resident but not domiciled in the UK. This document provides further detail on the reforms but also importantly seeks responses on certain aspects of the proposed changes.
The main points to note are as follows: Nondom

UK Inheritance tax (IHT) on UK residential property

IHT will now be payable from 6 April 2017 on all UK residential property owned by non-doms either directly or indirectly via offshore companies, offshore trusts and overseas partnerships.
The mechanism for bringing such UK residential property held in this way into the UK tax net will be to remove these structures from the definition of excluded property – and therefore no longer excluded from IHT.
This will apply whether the overseas structure is owned by an individual or a trust. Shares in offshore close companies and similar entities will no longer be excluded property if, and to the extent that, the value of any interest in the entity is derived directly or indirectly from residential property in the UK. There will be no change to the treatment of companies other than close companies and similar entities.
The change will be effective for all chargeable events which take place after 5 April 2017, such as on death or the 10 year anniversary of a trust
There are questions in the consultation over how to define a residential property for these purposes. HMRC seem to favour the same definition as that of a ‘dwelling’ for Non-Resident Capital Gains Tax purposes; with the exception that no relief will be given for main homes.
HMRC raise concerns of being able to keep track over the charge to IHT on certain overseas structures and whether a block on property sales can be imposed until all IHT debts are paid.

Deemed domicile for long term residents

Individuals who have been resident in the UK for 15 out of the previous 20 tax years (the 15/20 test) will become deemed domicile in the UK for income tax, capital gains and IHT from 6 April 2017.
HMRC confirm that years spent as a child will count towards the 15/20 test. Split years of UK residence will also be included which means that proper planning for arrival and departure should be in place.

Rebasing of foreign assets

Individuals who become deemed domicile from April 2017 can elect to rebase their directly held foreign assets to market value at this date; thereby only paying capital gains tax on any increase in value. This will be restricted to those individuals who have previously paid the remittance basis charge in any year prior to April 2017. The rebasing will not be available to a non-dom who becomes deemed domiciled after April 2017 or to those with a UK domicile of origin (i.e. born in the UK).

Temporary window for separating mixed funds

The taxation of mixed funds is a complex area and HMRC are aware that it can prevent non-doms from remitting money to the UK.
For a period of one year commencing 6 April 2017, HMRC are introducing a temporary window to allow individuals to re-organise and separate their mixed funds into clean capital, foreign income and foreign gains. This will be available to all non-doms, apart from those with a UK domicile of origin.

Non resident trusts

There was some discussion in HMRC’s initial consultation to introduce a ‘benefits charge’ (taxing individuals on the benefits they receive from a trust rather than the income), however this has been scrapped.
Instead all deemed domiciles will be taxed on chargeable gains arising from a trust if they retain an interest in the trust. This is not extended to deemed domicile settlors where the trust was set up before becoming deemed domicile (unless they derive a benefit from the trust).

Foreign Capital Losses

The treatment of foreign capital losses will need to be changed. In particular a foreign loss election will last only until the individual becomes UK domiciled or deemed-domiciled.

Other changes

The annual £2,000 unremitted foreign income de-minimis will remain for non-doms, even after they become deemed domicile.
The initial consultation suggested that an individual’s deemed domicile status for IHT purposes would only be lost after 6 years of non-UK residence. This has now been agreed by HMRC to be 4 years and it also applies to the spousal election(which can be made where one party to a marriage or civil partnership is non-domiciled).

It seems that HMRC have listened to some of the responses given to the initial consultation. There are certainly some valuable transitional rules, such as the rebasing of foreign assets and separation of mixed fund accounts which will need to be considered. This is a complex area of taxation and any change to existing arrangements may require consideration of three different taxes. As always, anyone that is potentially affected by these changes must take advice in good time.

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...