Author Archives: lee blackshaw

QNUPS – for pension or tax purposes?

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?

Family investment companies (“FIC”) are popular for three reasons. For clients, (i) they can reduce or defer taxes on income from 45% to 19% 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.

[This note was drafted in December 2016, updated in March 2017 and February 2018]

Common tax return errors

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?

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

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 – my policy

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 my clients wish to submit theirs before November.

My policy on January tax returns

Before I begin work on a tax return in January, my 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
  • my fee paid in advance and with a 25% premium on my 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 January, and on making the process as quick and simple as possible, please contact me for my tips and advice.

Holiday home sale – is the profit in £ or €?

A common cause of confusion for UK residents when selling a foreign holiday home is the UK tax treatment of the gain, especially where there doesn’t appear to be a profit.

Currency gains

For example, a Spanish holiday home is purchased for €250,000 and sold a few years later, also for €250,000. There is no gain in Euros but there may be gain (or loss) in Sterling. That is because the cost and proceeds are converted into Sterling on the respective acquisition and sale dates, so currency fluctuations will cause a UK tax issue.

The case law on this point can be found in a 1981 case Bentley v Pike and, from 1993, Capcount Trading v Evans. HMRC’s view can be found here.

Foreign taxes

Other points to remember are local and foreign taxes, including withholding taxes on the proceeds. Double tax relief usually is available to offset foreign tax against the UK tax. Further care is required if the property is held in a structure, such as a UK or overseas company (or trust), as the tax position can be unexpectedly complex and penal.

Foreign advice

It is important that foreign tax and legal advice is taken – for example, having a Spanish will for Spanish assets, to prevent the forced heirship rules applying.

For US, French and Spanish property, I have links to UK advisers who can advise on the foreign tax position. That can be better than relying on a local adviser, who may not have a working knowledge of the UK rules.

What do HMRC know about foreign assets?

Finally, with the common reporting standards automatic exchange of information between most countries’ tax authorities (being phased in between 2015 and 2018), HMRC has access to foreign ownership details, which will trigger more enquires into such properties to identify undisclosed income and gains.

Discretionary trusts and the new dividend tax rate

The nature of an income source changes as it passes through a discretionary trust. Dividend income loses its character and so doesn’t qualify for the £5,000 nil rate income tax band in the hands of the beneficiary when distributed.

A better result may be to create a revocable interest in possession for the beneficiary, if that meets the trustees’ wider objectives to give the beneficiary a regular income stream. The income then does remain dividend income and they are left with an increased net of tax amount of income.

Following the 2006 changes to IHT and trusts the revocable interest shouldn’t create any other tax problems for the trust.

As ever, care is required over the drafting of the deed of appointment, completion of the tax returns and the practical consequences for the trustees and beneficiary.

Another factor to consider, at the time of writing, is that s498 ITA 2007 appears to need amendment in the 2016 Finance Bill to allow full credit for the dividend tax in a discretionary trust tax pool. (Edit: this issue has now been corrected.)

10 questions for family business owners

As a business begins to pass to the next generation three common themes tend to develop:

  • “too many” children in the next generation (also known as a great talent pool!)
  • a divergence in objectives from those of the founder – eg “this company will never have debt”
  • new skills required as the business grows

A written agreement or family constitution may help to address these issues. Before that is drafted, here are an initial ten questions for the family to consider:

  1. What are the main reasons to continue, rather than sell?
  2. What education, skills and outside business experience should a family member have before becoming a director of the company, shareholder or trustee of a family trust?
  3. Do family members not working in the business rely on dividends or seek external employment?
  4. What future family conflicts may arise?
  5. Should the business always be wholly owned and run by the family or will it benefit from external hires?
  6. What core business and family values need to be maintained?
  7. What should happen if a family member wants to sell their shares?
  8. What criteria should be in place to remove a family member as director or shareholder?
  9. At what age should family members retire as a director of the company or trustee of the family trust?
  10. Will dividends and pension be enough to support the lifestyle of the retiring members?

Investors’ CGT relief – will it work for you?

A surprise in the March 2016 Budget was the extension of entrepreneurs’ relief (“ER”) to a new investors’ relief (“IR”), aimed at external investors into trading companies. Will it be a success?

Some key points:

  • Like ER, it provides a reduced 10% capital gains tax rate on up to £10m of lifetime gains (in addition to any that qualify for ER)
  • Unlike ER it doesn’t apply to employees, directors, offices holders etc, so is aimed at “hands off” external investors (and care is required over connected persons)
  • It doesn’t apply to trustees (Edit: the Finance Bill amendments of 13 June 2016 now appear to address this issue, so that it will apply to trustees in limited circumstances)
  • The shares need to be held for three years, in an unlisted company (which can include some AIM shares) and subscribed for (newly issued shares) after 16 March 2016
  • The company needs to be a trading company but the rules are different to, and slightly lighter than,the ER ones
  • As ever, there is anti-avoidance and complexity in the rules

Alternatives to IR include the Enterprise Investment Scheme (“EIS”) which can give a better tax position, including upfront income tax relief, but with more complexity.

An oddity of the new rules could be that an investor subscribes for shares with the intention of IR, then becomes an employee, so no longer qualifies. They may then need to wait 12 months to qualify for the ER 10% rate (if they meet those rules) rather than being exposed to 20% CGT.

At the time of writing the legislation is draft, so do take advice based on the final rules.