Author Archives: lee blackshaw

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

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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

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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?

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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

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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)

QNUPS – for pension or tax purposes?

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Having posted a slightly negative view of FICs in the last blog, it is a natural step to also do something similar for another fairly common structure with apparent tax savings, QNUPS.

Tax objective or pension?

QNUPS are Qualifying Non-UK Pension Schemes. The main selling point is the possibility of IHT exemption and a tax deferral of income and gains. These benefits feel vulnerable to HMRC attack or legislative change.

If the desire is wholly or mainly to have a top up pension scheme (in addition to a fully funded normal UK pension), the concept may work. But, the more that tax is the driver, the risk of unexpected tax charges increase.

Legislation

The rules are rather thin, being mainly one paragraph of IHT legislation and a Statutory Instrument. These were introduced to amend a tax anomaly with another type of offshore pension (QROPS). The idea of a QNUPS is to piggy back on another country’s pension rules applying to its residents, subject to certain qualifying criteria.

As complex structures, advisers and offshore companies like them, as they generate relatively high or recurring fees.

What could go wrong?

  • The income and gains of a QNUPS may be taxable on the person funding it, under the UK anti-avoidance rules, although these rules have been relaxed recently, to be more proportionate in line with EU law
  • HMRC may argue that the IHT breaks do not apply
  • The press may see it, rightly or wrongly, as the next tax scam
  • Targeted legislation may be introduced to negate the tax advantages, possibly with retroactive effect
  • QNUPS may be difficult to unwind, if attacked by the tax system, as they are long term pension-like structures
  • The structure might not fully meet the requirements to be a valid pension in the other country (some countries have adapted their rules to make QNUPS attractive to UK residents – but is that enough?)
  • Even if it works, you may face the costs and uncertainty of defending it from HMRC attack

Safeguards

To safeguard against these, you should involve a pensions adviser as well as a tax adviser and I suggest taking a specific opinion from Tax Counsel, based on your own circumstances, to fully explore the risk areas.

A general opinion from Counsel may not be enough – that will be addressed to the those selling the idea to you (check that you also read the instructions to see what was asked). It may not cover downsides or specifics (eg it may say “if entered into as a pension scheme” but that doesn’t mean that you are entering into it as a pension scheme). Ensure that you ask for a review of possible downsides.

Also assume that a tax challenge will take place – does all the evidence genuinely point in the right direction? Who is responsible if ultimately tax is charged? An “audit” of the live paperwork by a tax investigation specialist may be useful to stress test the structure, advice, file notes and email trail in anticipation of a HMRC enquiry.

HMRC consultation

There is an impression that HMRC and the Treasury do not like QNUPS. There was a hint that a consultation would take place, with draft tax changes, but nothing has appeared. It would have to fit within EU law, which may limit what could be done, although a possible Brexit impacts on that, of course.

Overall, tread carefully when considering QNUPS, if the reason is any wider than “I wish to have an additional pension fund”.

 

Family Investment Companies to save income tax and inheritance tax – problems ahead?

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Family investment companies (“FIC”) are popular for three reasons. For clients, (i) they can reduce or defer taxes on income from 45% to 19% (now 25%) or less and (ii) give away wealth for IHT purposes but retain some element of control. For advisers, (iii) there are large fees, as such structures are complex and require detailed advice.

Advantage (i) is as a result of the continued fall in corporation tax rates, compared to higher income tax rates. Advantage (ii) is a response to the restriction on the use of trusts via the tax system in 2006. Advantage (iii) may tempt some to “sell” as many FICs as possible to clients, rather than it being part of an adviser’s toolkit, suitable in only some circumstances.

What could go wrong?

The challenges FICs face are:

  1. complexity – in many cases there is a more simple and cheaper solution than a FIC
  2. future tax rates change (companies were a very bad idea for private assets several years ago and may be again in the future)
  3. company law changes
  4. targeted legislation (see-through legislation taxing the income / apportionment rules?)
  5. existing settlement anti-avoidance legislation (if there is an element of bounty eg uncommercial loans) or transactions in securities (there are rumours of HMRC attack in this area)
  6. costs, administration and reporting requirements can be expensive or burdensome
  7. they are difficult to unravel (more so than trusts)
  8. publicity, unless an unlimited or offshore company is used to limit that
  9. will the press see them (rightly or wrongly) as the next tax dodge, resulting in penal taxes in response?
  10. double tax charge on assets that grow in value and are extracted
  11. family/shareholder disputes (getting the bespoke company articles and shareholder agreement right first time)
  12. unknown unknowns (FICs are a very young idea compared to the tested ground of trusts)

These should all be considered in detail before putting a FIC into place, ie not just the advantages now but how future-proof are they, what stress tests and “what ifs?” should be considered?

With that, a fully informed decision can be made. FICs can be very useful in specific limited circumstances but beware having one just because it is in fashion or that somebody wants to earn a nice fee selling you one.

The ICAEW Tax Faculty, on 3 July 2025, noted that care with FICs is required around:

              • corporate tax loan relationships
              • inheritance tax on additions and reservation of benefit (eg interest free loans)
              • settlements legislation
              • share valuations
              • share rights
              • articles of association
            • generally (“… it would be wrong to conclude that FICs are beyond challenge or that there are not traps for the unwary. HMRC has not precluded itself from challenging the structure of FICs in future…”

[This note was drafted in December 2016, updated in March 2017, February 2018 & July 2025]

Common tax return errors

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In my experience, the most common tax return errors made by taxpayers are in ten areas:

  1. selling a property or other asset
  2. one-off interest on deposits (eg when long term investments mature)
  3. new bank accounts or investments
  4. payments/benefits/expenses from other company directorships
  5. temporary employments
  6. accrued income scheme interest on government gilts
  7. joint ownership of rental properties or other assets
  8. assuming low bank interest is the same as nil
  9. not realising child benefit can have a tax impact
  10. pension contribution misunderstandings

Good ways to spot or prevent these are:

  • using the checklist of 10 items above, as a prompt
  • getting the tax return done early (eg August to November, not December and January)
  • checking your personal bank statements for unusual credits
  • giving your adviser a full list of your assets, including non-income producing ones
  • regular updates to your adviser of activity and transactions during the year
  • not relying on just checking comparatives with last year – instead ask “what might have changed?”
  • reconciling the tax due: why is it that figure? (eg PAYE overpayment due to benefit in kind change = £A; higher rate on dividends = £B; gift aid tax relief = £C; £A+B+C = tax due)

These help prevent unexpected tax, interest and penalties.

If you have submitted your tax return with an error, speak to us about how to correct this before HMRC spot it and to help minimise potential penalties.

Tax interim payments on account – a simple guide?

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Those making payments on account for the first time on 31 January may be confused by the system. I hope that the explanation below is simple – but questions and suggestions are welcome:

A summary

Employment taxes collect most of your tax immediately. The tax on other sources of income (eg self employment) can take many months to collect, so the system attempts to collect it by using estimates. The first interim payment may seem to to be doubling up on your tax or paying in advance but you are actually still paying slightly in arrears.

A bit more detail

  1. If you are employed and suffer tax at source under Pay As You Earn (“PAYE”), you are paying tax immediately – an amount earned in May 2018 is taxed in May 2018;
  2. If you have non-employment income (rents, investment income, self employed income) the delay before paying tax can be many months – the tax on an amount earned in May 2018 would not be paid until 31 January 2020 (20 months later);
  3. The interim payments on account system attempts to reduce that delay, if that source of income is regular;
  4. In the first year of assessment, as well as collecting tax for that year, it also collects an estimate for the current year;
  5. Half of that estimate is payable on 31 January and half on 31 July;
  6. If the tax due on the income source is £6,000 for the year, as well as paying that on 31 January 2019, you also pay an extra £3,000 on that date and another £3,000 on 31 July;
  7. The first time that happens, that may feel as if you are paying a lot of tax on the income, perhaps double the amount or even paying in advance (you are not!);
  8. By the time of that interim payment on 31 January 2019, you will have earned income from that source in the year to 5 April 2018 and also for most of the year to 5 April 2019;
  9. In doing so, you will (I hope) have budgeted for tax as it is earned;
  10. If your income, tax rates and allowances stayed exactly the same year on year the tax  payments would then settle down (eg £3,000 twice a year covering your liability in full);
  11. Instead, if things change, you will have a balancing payment on 31 January or repayment adjustment each 31 January;
  12. The tax on the income source for the year to 5 April 2019 is being paid half (estimated) on 31 January 2019 (during the year), half on 31 July 2019 (slightly after the year) and a balancing payment or repayment on 31 January 2020 (several months later);
  13. If your source of income rises each year, you will be paying slightly in arrears compared to someone taxed under PAYE. If your source of such income drops or ceases you should consider reducing your payments on account (but speak to your tax adviser first);
  14. Ask your adviser how to budget for your tax payments.

(To keep this simple, I’ve ignored some of the other complexities that arise, eg accounting periods for the self employed and the “80% test”.)

 

Who are you? Why we check client ID

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Why we check ID

If you are a new client, we need to check your identification. If I’ve known you for many years, I still need to perform the same checks. This may seem odd but is a legal requirement. If I don’t do it, my firm is exposed to a penalty.

The legal issues are discussed in the case of N Bevan Ltd TC5404, where a penalty of £3,094 was imposed. It is worth a read.

How we do it

The usual way of undertaking ID is to take a copy of your passport or driving licence when I meet you. I may also need to confirm your home address electronically. If you have a trust or company we need to identify the trustees and ultimate beneficial owners (see “additional information” below). It is important that I fully understand your assets, business structures and transactions, under the anti-money laundering regulations.

If you (our client) are another firm of advisers, we still need your underlying client ID before we can advise you.

Updating the information

I may have to refresh the information every few years or when you undertake a transaction. This can be frustrating and cause delays but is important and a legal requirement.

Making it easier

Where I hope we differ from large firms is to make that process as easy as possible, by doing the checks myself and calling out to see you to collect the information.

Source of funds

We may also need to identify and ask you to prove your source of funds and wealth. The questions may feel intrusive but we are required to ask them by law. It may also lead to better advice by fully understanding your circumstances and history, even if not linked directly to the specific tax project.

Taking it seriously

But being a small firm does not mean that it is given a lighter touch. If you do not provide adequate ID and explain sources of funds, we will not engage you as a client.

Additional information – trusts

Where a trust is involved we will need need ID on the settlor (if still alive), trustees and main beneficiaries. This may also include national insurance numbers, to assist with  trust register updates. We will also request a family tree, copies of the trust deed(s) and documentation provided to HMRC on the trust’s creation (eg inheritance tax returns, 41G or trust registration).

Additional information – companies and HMRC tax clearances

For HMRC tax clearance applications (eg demergers, new holding companies, company purchase of own shares), we will need:

  • Approximate values of the business(es)
  • Companies House reference number
  • Corporation tax reference number
  • Brief history of the business and future plans
  • Names, addresses, UTRs and NI numbers of shareholders and photo ID
  • Classes of shares
  • If there is a shareholders’ agreement
  • Relationships/connections between the shareholders
  • Latest management accounts
  • A brief note of the commercial advantages of the transaction, from the point of view of the businesses (not the shareholders)

“January” tax returns – our policy

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January is traditionally thought of as the busy season for tax professionals.

Many taxpayers and advisers default to January. The 2016 HMRC statistics showed “…29 January was the busiest day with 513,271 returns completed – that’s more than 21,386 returns received per hour…”

It doesn’t need to be this way.

In my view, leaving it to January creates additional tax risk. Fortunately almost all of our clients wish to submit theirs before November.

Even December is too late.

Our policy on “January” tax returns

Before we begin work on a tax return in December or January, our requirements are:

  • a copy of last year’s submitted tax return
  • a signed engagement letter
  • full details of all income and gains, with supporting evidence
  • a note of all assets, including non-income producing ones
  • our fee paid in advance, with at least a 25% premium on normal rates
  • agreement to approve the tax return electronically on or before 25th January
  • all the above to be provided before 20th January

Avoiding the January rush

Other tips before getting near January are:

  • offer a discount for payment of fees in advance or in instalments
  • meet your client before August (go and see them, where their papers are kept)
  • encourage them to do the return themselves (the HMRC software is really good, although does not cover all taxpayers)
  • explain why their tax bill is that amount and how it might be reduced
  • cease to act
  • book a January holiday

If you require help in preparing and submitting your tax return in any month before December, and on making the process as quick and simple as possible, please contact me for my tips and advice.