Author Archives: lee blackshaw

Inheritance tax & houses – common errors

General election time tends to cause a spike in views being expressed on IHT and houses. By a combination of lack of awareness, the complex tax system, and sometimes political intent, common errors arise.

Some examples from the December 2019 election campaign are:

  • Not realising that only around 5% of death estates suffer IHT each year – see https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/832126/IHT_Commentary.pdf
  • Not being aware that the residence nil rate band can increase the normal £325k nil rate band by £150k* – see https://www.gov.uk/guidance/inheritance-tax-residence-nil-rate-band
  • Thinking IHT is double tax, rather than often being partly or mainly the result of otherwise tax free growth (or not much worse “double tax” than VAT)
  • Hoping that giving away all or part of the house saves IHT – in many cases it makes things worse, due to reservation of benefit, pre-owned asset tax and loss of capital gains tax free uplift
  • Forgetting the instalment option – see https://www.gov.uk/paying-inheritance-tax/yearly-instalments
  • Worrying, when young and healthy enough that life cover can cheaply cover the IHT risk
  • Forgetting the transferable nil rate band – see https://www.gov.uk/guidance/inheritance-tax-transfer-of-threshold
  • Focusing on “40%”, rather than what actual blended tax rate might apply – eg the estate of a married couple (or widow/widower) with £1.2m house might suffer 8.3% IHT on that asset
  • Not realising that a reduction in the IHT rate, or its abolishment, might be balanced by the removal of the tax free uplift on death or private residence relief
  • In hoping for IHT to be replaced with something else, that an annual wealth tax might cause more hardship than IHT on an elderly low income and valuable house owning taxpayer
  • Worrying about IHT but not taking advice

If any others are spotted, I am happy to add to the above list.

Some additions:

  • Even if IHT is payable on the house, there may be other resources to draw upon, such as the deceased’s pension fund
  • In some circumstances, where more than one generation live in the family home, it is possible to gift and share part of the property with the younger generation without it being a reservation of benefit – see https://www.gov.uk/hmrc-internal-manuals/inheritance-tax-manual/ihtm14360

*it is this residence nil rate band that Labour’s 2019 manifesto suggests should be removed, leaving just £325k (but not £125k as some suggest, which is from an earlier report commissioned, but not written, by Labour).

More record keeping for trusts in 2020?

Guidance on record keeping obligations as at 2019 can be found here: https://blackshawtax.com/2018/07/30/hmrc-guidance-on-trust-record-keeping/

The change

This is likely to change and become more onerous once the UK adopts the 5th EU anti-money laundering directive (“5thAML”). The number of trusts affected by this may increase tenfold to 2 million. It will include many dormant trusts simply holding land or other non-income producing assets that currently do not need to formally register. In many cases the trusts will not have cash resources to pay for professional help to complete the database requirements and trustees could face personal penalties for non-compliance.

One hope is that the HMRC trust register will be improved. The current version appears to have been programmed by someone who does not understand the concept of either a trust or a database!

Transparency

It may also lead to more transparency and information being available on trust asset ownership (which may be a good or bad thing, depending on ones views on privacy).

The use of trusts

As ever, it is worth remembering that trusts are a useful vehicle to protect assets, for example minors, vulnerable persons, plus inheritance tax and wills planning encouraged by the tax legislation.

Resources

The consultation can be found here: https://www.gov.uk/government/consultations/transposition-of-the-fifth-money-laundering-directive

The EU directive can be found here: https://eur-lex.europa.eu/eli/dir/2018/843/oj

The ICAEW response to the consultation can be found here: https://www.icaew.com/-/media/corporate/files/technical/icaew-representations/2020/icaew-rep-04-20-fifth-money-laundering-directive-and-trust-registration-service.ashx

HMRC guidance on trust record keeping

In July 2018, HMRC updated its guidance on trust record keeping. This is a mix of tax and anti-money laundering requirements.

Dormant trusts may not have to complete a tax return or trusts register but there are still record keeping obligations, such as under para 44 and 45 of the The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.

I recommend that all trusts have an annual trust meeting, asset review and simple accounts (even if just one page). Whenever I am asked to advise on a historic trust problems (eg missed IHT charge) a common theme is lack of annual meetings and accounts.

Here is the HMRC website link https://www.gov.uk/guidance/trust-record-keeping-for-tax-purposes

And a PDF version safari-30-jul-2018-at-1021.pdf

Don’t believe what you read in the press

This Telegraph article caught my eye. It explains a useful inheritance tax relief that can apply to larger gifts, after three years, in reducing the 40% rate. The original text made a common mistake in not noting that the gift needs to be in excess of the available nil rate band (otherwise it is tapering an already 0% tax rate).

It’s the type of article that can lead to a client saying “…but I read somewhere that…”.

(I sent a tweet to the writer, who corrected the original.)

IMG_0853

Trustee obligations and the HMRC Trusts Registration Service

All trustees need to retain more information on the settlor, trustees and beneficiaries. In addition certain trusts need to disclose details to HMRC.

[updates highlighted in orange]

These notes quickly became out of date, as HMRC struggle to provide a suitable service and extend deadlines/update guidance. As at January 2018, the registration service remains awful (almost as if HMRC do not understand basics of both trusts and databases). For further details please contact me, check the STEP forum and HMRC helpsheet.

ATT have provided a good guide here: https://www.att.org.uk/sites/default/files/The%20Trust%20Registration%20Service%2029%20November%202017%20ATT%20Technical%20Briefing%20note.pdf

Penalties

STEP have provided a note on penalties, which can be found here.

HMRC Trusts Registration Service

There is a trust registration service for new and old trusts. Trustees can register now. Agents will be able to do so by the end of October 2017. It replaces the form 41G(Trust).

Update: there was a HMRC webinar on this topic on 10 August, one due on 8 September 2017 and 17 November 2017.

New obligations on trustees

The legislation is contained in the The Money Laundering, Terrorist Financing and Transfer of
Funds (Information on the Payer) Regulations 2017, which came into force on 26 June 2017. This is part of the implementation of the EU Fourth Anti-Money Laundering Directive (4AML). A copy of the regulations can be found here.

Paragraphs 44 and 45 of the regulations are the key ones for trusts. The former requires trustees to keep written records of beneficial owners and provide those, if requested, when entering into business relationships or to law enforcement authorities. The latter requires HMRC to keep a register of certain trusts.

Which trusts need to register?

At the moment, it is just trusts with a UK tax consequence that need to register. The register is online only. It collects details of the settlor, trustees and beneficiaries. This includes date of birth, NI number (or address and passport number). It seems to require known discretionary beneficiaries to be logged, even if they have not (and may not) ever receive funds* from the trust. In some trusts, that could be a huge number of beneficiaries.

*Update: HMRC now appear to accept that that a beneficiary of an unnamed class (eg “the children of the settlor”) does not need to be provided until they receive funds.

The trigger for registration is “UK tax consequences*” which includes: income tax, capital gains tax, inheritance tax (eg 10 year or exit charge) and SDLT (eg buying land).

*Update: as noted on the STEP forum on 1 September 2017, this also includes stamp duty reserve tax, so looks like it includes the purchase of any shares.

The deadline for new trusts is extended to 5 January 2018.

For dormant trusts that have a taxable event, the event needs to be after 26 June 2017.

Agents will need to use a new Agent Services account, which does not appear to be part of the normal Government Gateway.

The register also collects details of the original trust assets but not additions or changes.

The HMRC software cannot handle all circumstances, in which case the online logging needs to be followed up by letter.

Future changes

There remain mismatches between the legislation and what HMRC require.

Penalties for not complying with the rules are separate from the usual tax penalties (eg failure to notify changeability) and part of the regulations, so much wider and severe.

It is possible that after the EU Fifth Anti-Money Laundering Directive (5AML), all trusts will need to register. Although cumbersome, that does make more sense from an AML point of view than just taxpaying trusts.

Actions

Obtain/update details on settlor, trustees and beneficiaries, both for the register or if any entity the trust enters into a business relationship with requests the information.

How much investment risk would you take to save inheritance tax?

The behavioural impact of tax on both advisers and taxpayers continues to fascinate me. Let’s say you have the certainty of being taxed at 40% – what percentage risk would you take to reduce that to nil?

An article in the FT (subscription required) suggests that those with inheritance tax (“IHT”) exposure as low as £15,000 are being sold business property relief (“BPR”) investments to reduce tax. As a tax adviser, the tax issues are relatively simple: invest in alternative investment market (“AIM”) shares that qualify* for BPR and survive for for two years. (*not all AIM shares qualify)

But, what about risk? It’s not too much of a tax risk but surely a significant investment risk. That’s outside my area of expertise but there is a general point here: driven by tax, why introduce the danger of overweight exposure in high risk investments to the elderly? I hear alarm bells.

Questions for the investment adviser:

  • How high risk are AIM shares?
  • Without the tax break, what proportion should an elderly person hold in such investments?
  • What is the percentage chance of the investments falling by more than the hoped for 40% tax saving?
  • Is there an AIM market bubble, caused in part by tax driven investments?
  • How active do the share/portfolio changes need to be to reduce risk (and perhaps rely on the replacement property BPR provisions)?
  • If the AIM market collapses, how many will suffer and will liquidity be an issue?
  • Is there a less risky way to save IHT?

I recall that insurance against AIM market falls used to be available with such investments. This option seems to have disappeared. If an insurer won’t take the risk, should an elderly client?

I have seen such BPR portfolios work, eg for those who were very wealthy, appreciated the risk, where BPR formed only a small part of their estate, they lived the two years and died soon afterwards and before any major fall in the investments – were their beneficiaries fortunate?

One to look back on in a few years’ time?

 

Buy to let – using a company may not be the answer

One of those situations where the question asked appears to contain the answer:

“I need a company for my buy to let portfolio – can you help me do that?”

It’s a common question at the moment.

Why a company? The restrictions to interest relief for individuals is the main driver, especially where the change pushes a basic rate taxpayer into higher or additional rate tax. Many with high rents covered by high debt don’t appreciate the impact this will have on their tax position.

Capital gains tax problems? Where properties stand at a gain, transferring these to a company may trigger tax. Although incorporation relief is available, property rental may not qualify. A taxpayer won on this issue (see this case) but on specific facts that will not apply to many landlords. If the properties are not standing at a gain, or just a small gain, this problem goes away.

Banking? some promote the idea of a beneficial trust company, in an attempt to use a company without telling the bank (see this article) but that would be foolish. An early discussion with the bank to get them onside with holding debt in a company is essential – it increases their risk and they may say “no” or increase their charges and interest.

What about SDLT? a transfer to a company usually will trigger Stamp Duty Land Tax. There is a relief for partnerships but two problems arise: have you really got a partnership (rather than just joint ownership) and have you put a partnership in place to avoid SDLT (in which case anti-avoidance rules probably catch it)?

Future how will you extract profits? Is there a double layer of tax on sales? What future changes to tax or company law could put you in a worse position? Will buy to let companies be targeted by anti-avoidance legislation? Will collapsing (liquidating) the company if things change cause additional taxes?

Overall there is a strong hint that the Treasury and Bank of England wish to discourage smaller buy to let landlords, to protect against a property crash, so any planning may be targeted by future legislative changes.

An outline plan

  1. work out your tax impact of the interest relief changes;
  2. consider if you need to adjust your debt, even if that means selling some property;
  3. speak to a financial adviser on commercial property (which tends to have a better tax treatment), indirect property investment, asset diversification, ISAs and pensions (ie generally, what exposure should you have in a balanced porfolio to debt funded residential property?);
  4. if an adviser says that you should qualify for incorporation or SDLT reliefs, do they mean will qualify? Are they or you taking that tax risk if HMRC challenge and win? (Beware the “we have Counsel’s opinion” line – to me that indicates they see risk, not safety.);
  5. Don’t pretend to be more actively involved than you are in reality in order to get incorporation relief and don’t set up a partnership just to avoid SDLT;
  6. Consider a company for new acquisitions;
  7. Consider a transfer of the existing property and debt to a company, if you are satisfied that it can be done with low or no tax and the bank are happy to do so;
  8. Work out the costs and administration of having a company;
  9. Expect future attacks on buy to let property.

 

Worried about an EBT loan?

The Finance Bill 2017 contains provisions enabling HMRC to tax outstanding EBT loans made since 6 April 1999 as if they were disguised pay.

The charge will not apply if the loan* is repaid before 5 April 2019 or has otherwise been fully taxed.

Update: in my view this means the legislation is not retrospective (unless the taxpayer knows it was a “pretend” loan, ie low or untaxed remuneration, rather than a real loan).

Those affected should take advice. That advice should be independent from that given by the scheme promoter or adviser who introduced them into the planning. There is a settlement opportunity available with HMRC and it can be possible to arrange time to pay agreements for the tax.

A bigger problem?

Some will struggle to pay the tax but is there a potentially bigger problem: what if the EBT trustees call in the loan for repayment?

In either case you may also need to take advice from an insolvency practitioner.

Also keep an eye on the leading tax case in this area, relating to Rangers FC https://www.supremecourt.uk/cases/uksc-2016-0073.html

Win or lose*, existing loans that remain unpaid will be taxable one way or another.

*update: the taxpayer lost

Thoughts on the 2017 Spring Budget – with later updates

Rather than a full analysis, here are quick points of interest:

  1. The NIC rise hit the headlines and broke a manifesto commitment but is in the (right?) direction of travel on levelling the taxation of employment v self employment v disguised employment v investment income; (Edit: The class 2 NIC issue continues to change – eg summer 2018 – perhaps we’ll see a final firm change in the 2018 Autumn Budget).
  2. Making Tax Digital may be a bigger cost for the self employed than NIC rises;
  3. The dividend 0% tax band reduction from £5k to £2k in 2018 is an example of previous changes impacting taxpayer behaviour;
  4. Anti-avoidance and financial information sharing continues, so the disingenuous “how will HMRC find out?” should (thankfully) cease to be a question advisers are asked;
  5. Some important 6 April 2017 changes previously announced include:
  • £1k Trading and Property income personal tax allowances
  • Lifetime ISAs
  • IHT main residence nil rate band begins to taper in
  • “Non dom” tax changes
  • Interest restrictions for buy to let landlords
  • Although not an area on which I advise…Flat Rate Scheme VAT users (with low costs on goods) – stay in or leave? (Edit: this impacted my business – I left the Flat Rate Scheme)