Welcome to taxbreaks, your regular update on topical developments and opportunities in the world of tax.
Notify HMRC of new or untaxed income by 5 October
If you do not currently complete a tax return but have received untaxed income or disposed of assets subject to Capital Gains Tax during the 2012/13 tax year, the deadline for you to inform HMRC is 5th October. If you do not the consequences could involve interest charges on any unpaid tax and possibly penalties of up to 100% of the tax due. These rules also apply to trustees, who need to consider this as part of their many duties.
There are various types of income that are not subject to tax at source. The most common type of untaxed income our clients receive is rental income from property; however, there are also others such as foreign income. In addition, Capital Gains Tax on the disposal of capital assets is very rarely taxed at source. Anyone who is caught by the High Income Child Benefit charge for 2012/13 and isn’t currently receiving a self-assessment tax return will also need to notify HMRC by 5 October.
Under current tax law, if you do not complete self-assessment tax returns each year, it is your responsibility to inform HMRC within 6 months of the end of the tax year if you have received untaxed income or made a chargeable capital disposal, i.e. by 5 October 2013 for the 2012/13 tax year.
If you do not declare the income or capital gain by this date, you may be subject to interest charges, a surcharge on the unpaid tax, and/or penalties of up to 100% of the tax due. It may also result in HMRC making further investigations into your general affairs.
If you are not under the self-assessment regime and have received untaxed income or disposed of a capital asset during 2012/13, please contact your usual BHP contact or Elaine Skelton to discuss your reporting requirements.
Trusts
As well as applying to individuals these rules also apply to trusts and therefore the trustees. Occasionally trusts are not required to file annual tax returns, perhaps because all the income is correctly taxed at source, or the income is mandated directly to the beneficiaries.
However, if the trust has been newly created or has untaxed income, it is liable to the same rules as individuals, and therefore subject to the same potential consequences (which can be applied to the trustees personally).
Should you feel that the above affects you, or a trustee you know, please contact Liz Rogers, Head of Trusts & Estates.
Reducing Inheritance Tax for investment property owners
Investment properties attract no relief from Inheritance Tax (IHT) regardless of whether they are owned by the individual personally, or through an investment company. Individuals who are concerned about the level of Inheritance Tax payable by their beneficiaries may wish to consider reviewing their finance arrangements to see if their Inheritance Tax position can be improved.
Individuals who hold investment properties with significant equity value (either personally or through an investment company) are likely to leave behind large IHT liabilities on their death. Additionally, individuals who make gifts of shares in investment companies during their lifetime may trigger immediate Capital Gains Tax charges, and may not even reduce the IHT bill if the gift is not survived by at least 7 years.
Individuals caught by these rules may be able to benefit from a review of their property investment financing arrangements. Recent case law has shown that if financing is structured in a particular way the individual concerned may be able to benefit from Business Property Relief (BPR) which provides 100% relief from Inheritance Tax.
If you are concerned about your potential IHT liabilities we are happy to offer a 1 hour no obligation consultation to discuss your affairs and how we may be able to help you. Please contact Elaine Skelton (Head of our Private Client Team) for more information.
Trusts can still be an effective tool for Inheritance Tax Planning
In 2006 significant changes were made to the Inheritance Tax treatment of transfers into a trust during the settlor’s lifetime. However, that does not mean people wishing to undertake lifetime Inheritance Tax planning should discount using a trust completely.
The law relating to Inheritance Tax and trusts was significantly revised in March 2006, the main change being the introduction of an immediate IHT charge on lifetime transfers into trust in excess of the settlor’s Nil Rate Band (NRB).
Despite the 2006 changes, people still continue to use trusts as a tax planning tool for a variety of reasons, we have highlighted two such reasons below:
Nil Rate Band Trust
In this type of trust, assets are transferred to it by the settlor up to the value of his/her available NRB (currently fixed at £325,000 until 2018). Assuming the settlor survives the transfer by seven years, the value of the assets in the trust no longer form part of the settlor’s taxable estate for IHT purposes. Therefore, the settlor is able to repeat the process every seven years and potentially enables significant sums to be removed from a settlor’s taxable estate.
Spouses and civil partners are each entitled to a NRB enabling them to make combined gifts of £650,000 every seven years.
Pre-transaction trusts
It is possible in some cases to transfer assets into a trust which have a value in excess of the settlor’s available NRB if certain IHT relief is available. Business Property Relief (BPR) allows for up to 100% relief from IHT on assets transferred into a trust by the settlor.
If an individual is planning to sell an asset that qualifies for BPR and pass the sale proceeds to their family, then they should consider transferring some or the entire asset into a trust before the sale. The trustees would then dispose of the asset and retain the proceeds. The proceeds would no longer qualify for BPR, but would fall outside the settlor’s estate after seven years.
Capital Gains Tax advice would also be needed in respect of the sale of this asset.
If you would like any further information or would like to discuss setting up a trust, please contact Liz Rogers in our specialist trust department.
Enterprise Management Incentive Schemes – A new route to Entrepreneur’s Relief
The new rules brought in by Finance Act 2013 aimed at providing Entrepreneur’s Relief (ER) for individuals who acquire their shares through an EMI scheme, have opened up a planning opportunity for individuals who own shares that do not currently qualify for Entrepreneur’s Relief and envisage a sale in the future.
As many of you will be aware from previous editions of taxbreaks, in order for an individual to claim Entrepreneur’s Relief on the disposal of shares in a trading company, a number of criteria must be satisfied. With ER providing for a 10% rate of Capital Gains Tax (as opposed to 28%) on up to £10m of gains, meeting these criteria is very important. One of these conditions is that the individual must have held at least 5% of the shares in the company for twelve months prior to the date of disposal.
This causes a problem for employees with options to acquire shares under the Enterprise Management Incentive scheme, as often their options are over shares equating to less than a 5% holding and/or they are only allowed to exercise immediately before a sale, and so the twelve month ownership test is failed.
The Finance Act 2013 thankfully resolved this issue, and made ER available on shares acquired through an EMI scheme, where the 5% test is not met and as long as the combined ownership of the option and the shares exceeds twelve months before the disposal.
This change is obviously welcome news to EMI option holders, or companies looking to implement an EMI scheme, however, these new rules could also be of use to individuals who already have shares, but do not satisfy the criteria for ER relief. This includes those who do not have a 5% shareholding or whose shares are expected to be diluted in the future.
The new rules have opened up the possibility for minority shareholders to exchange their current shares for shares acquired under an EMI scheme, and thus qualify for ER, where previously they would not have qualified.
Detailed planning is required to achieve this outcome, including the company implementing an EMI scheme on specific terms. However, for many minority shareholders, the difference between 10% and 28% on the sale of their shares in the future may well be worth it.
Please contact Zoe Roberts (Tax Partner) for more information.
Tax Efficient Investments to Fund School Fees?
We are increasingly finding our clients are asking us about tax efficient methods to fund their children’s education. One possible option available to them may be to use tax efficient investments such as the Enterprise Incentive Scheme.
Recent Budgets have shown us that the Government is continuing to encourage the support of new/growing businesses by increasing the tax breaks available to individuals who have cash available, and are willing to take the risk of investing in small businesses. Individuals who invest cash under the Enterprise Investment Scheme (“EIS”) can qualify for a 30% Income Tax rebate on their investment, and can also benefit from the deferral of capital gains, growth in value on the EIS investments being exempt from Capital Gains Tax, and the value of the EIS investments being excluded from their estates for Inheritance Tax Purposes after two years.
The immediate cash benefit provided by the Income Tax rebate can be used to fund annual commitments such as school fees. Therefore, done repeatedly, the Income Tax relief provided on the investments can be used to cover this type of annual cost.
On the initial capital investment into the EIS scheme, the individual will claim back 30% of the amount invested (subject to having paid sufficient Income Tax in the tax year to cover the tax credit). As long as the capital is invested for a minimum period of 3 years the Income Tax rebate will not be clawed back. After three years it may be possible for the investment to be realised and reinvested into a further EIS qualifying investment on which a further Income Tax rebate can be claimed.
It is crucial to understand that:
- EIS investments are high risk and so there is an investment risk associated with this. It is recommended that financial advice should always be sought, which our financial planning team would be delighted to provide. Please contact Joy Clegg (Managing Director of BHP Financial Planning Limited) for details of our financial planning services.
- There is a need for some surplus capital to be invested at the outset, although after 3 years, this can potentially be “recycled” (subject to investment risk).
Please contact Amanda Waterhouse (Tax Partner) for more information.
HMRC consultation on employee benefits & expenses
The Office for Tax Simplification has recently published a report recommending a full policy review of the whole benefits and expenses system to ensure that it reflects current employment and commercial practices. This is a very complex area of tax law and efforts to clarify it are welcome.
Tax and National Insurance Contributions of approximately £3.5 billion are collected annually from 4.5 million P11D forms. It is generally accepted that this is a very complex area of tax law, and also a substantial administrative burden for employers, therefore, in our view a review is long overdue.
The key recommendation contained within the Office for Tax Simplification’s 110 page report is for a full policy review of the whole benefits and expenses system to re-establish some general principles, and to ensure they are in line with current employment practices. There is a substantial raft of further recommendations (including 43 measures described as “quick wins”), highlights of which include:
- further alignment of the tax & NIC rules
- simplifying the P11D process, to include the voluntary payrolling of benefits, thus dispensing with the need for P11Ds (a pilot scheme is already in place for this)
- simplifying the differentiation between employed/self-employed status
- review of the travel & subsistence rules, as currently they are overly complex and fail to reflect normal commercial behaviour
- review of the rules for termination payments, especially as the tax free limit of £30,000 for some payments has not been uprated since 1988
In our experience each of the above areas causes difficulty and confusion for employers, and efforts to simplify and bring clarity are to be welcomed. The report will now be subject to a consultation process, and we will play an active role in this to ensure that our clients’ views are heard. If you would like to discuss this or have any feedback which you would like us to include in the consultation process please contact Nick Davies (Senior Consultant – Employer Consulting).
