Category Archives: Capital gains tax

5 April 2020 year end tax planning – in three minutes

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A quick checklist before 5 April (and before the 11 March Budget, where lots of things may change!)

  1. Maximise ISA savings
  2. Review pension contributions
  3. Consider pension tax breaks for your children (even minors)?
  4. Use your capital gains tax allowance
  5. Use your £2k dividend 0% tax band
  6. 30% income tax relief, using EIS/VCT investments?
  7. Review and note gift aid tax relief
  8. Pay any outstanding 31 January 2020 tax before the end of February, to avoid a penalty
  9. Check your PAYE coding notice and benefits package
  10. Will your tax on rental income rise, due to the interest restrictions?
  11. Use personal allowances of spouse, children and grandchildren
  12. Are you paying high marginal rates of tax?
  13. Business – extract cash in a tax efficient way (salary, loan, dividend, rent, pension?)
  14. Trusts – create new ones; distributions from existing ones; close down old ones; do you need to complete the trusts register and keep sufficient records?
  15. Inheritance tax – gifts, update will or letter of wishes, create lasting power of attorney
  16. Get a fixed fee quote for your 2020 tax return
  17. Are you a Scottish or Welsh taxpayer?
  18. Are any overseas assets or income taxed correctly in the UK and overseas?
  19. Have you set up your online personal tax account with HMRC?
  20. Do you have a tax payment on account to make on 31 July 2020?

These are prompts rather than fine detail – for further information please contact me.

Tax return required within 30 days of residential property disposal?

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What has changed?

Tax returns are no longer required just once a year.

If you sell a residential property (eg rental property) after 5 April 2020, you will probably need to file a special tax return and pay the estimated capital gains tax within 30 days.

This is a major change. (At the moment a sale in, for example, May 2019 would not need to be reported and tax paid until 31 January 2021.)

What about my main home?

If you sell your main home and are certain that it is exempt, due to private residence relief, no return is required. But – are you sure it is fully exempt? If not, you are at the risk of penalties. Take advice several months before the sale.

When will your tax adviser know about the sale?

Will your tax adviser know? Often it is the estate agent and lawyer who know about the sale before the tax adviser. This now needs to change.

What action is needed?

Find out the property base cost, improvement costs, your estimated income and likely proceeds. Inform your tax adviser of these, as soon as possible before the sale.

Tax relief and losses

You can take into account losses made before the disposal in computing the 30 day tax estimate but not losses or other reliefs that have not yet crystallised (such as Enterprise Investment Scheme deferral, unless you have the EIS3).

What about the normal tax return?

The disposal still has to be reported on your normal tax return, with the final tax computation taking place and credit given for the capital gains tax already paid.

Key dates

The return is required 30 days after completion, even though the tax disposal date is exchange of contracts (the binding contract).

Why is this change important?

It is likely that, due to not being aware of the change, or making assumptions on tax or relief, that many taxpayers will face penalties for errors or late filing.

 

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.

 

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)

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

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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.

Investors’ CGT relief – will it work for you?

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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.