Category Archives: Risk

Tax tips

Here are my top ten tax tips:

  1. Have your tax return completed and submitted to HMRC as soon as possible after 5 April (ideally by 31 August);
  2. If you have substantial dividend income, or are self-employed, budget for your tax payment monthly;
  3. If your non-PAYE income is significant, understand the payments on account system as soon as possible (https://blackshawtax.com/2016/11/18/tax-interim-payments-on-account-a-simple-guide/);
  4. Pensions tax relief and ISA allowances are very generous – save as much as you can as early as you can, to maximise the tax breaks;
  5. Before you worry about inheritance tax, make sure you and your family have wills, powers of attorney and adequate life insurance (and even after that, don’t worry about it too much);
  6. Don’t introduce tax risk into your finances (https://blackshawtax.com/tax-risk-a-few-warnings/);
  7. If you buy a foreign holiday home (or even a helicopter or jet), at some point you will regret doing so (and, if you must buy one, don’t put a complex and costly structure around it that may work today but not tomorrow);
  8. If a slightly artifical structure (eg using a company for assets, paying yourself in dividends or loans) saves you tax today don’t assume that it will do so in a few years’ time (and don’t assume that it will be easy, in practical or tax terms, to collapse);
  9. Take advice before you do something – if the “something” is overseas, take foreign tax and legal advice first;
  10. If you run a business, remember that VAT and PAYE are not your money – don’t “borrow” or spend the taxes – instead keep an eye on your own business net cashflows.

Tax return required within 30 days of residential property disposal?

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.

 

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).

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

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.