20 June 2011
editorial
Welcome to the Summer 2011 edition of the haysmacintyre private client briefing which covers a broad range of topics including family wealth planning, offshore penalties and an update on furnished holiday lettings.
The Spring Budget confirmed the details that had already been made available beforehand, however, there were two announcements of interest to private clients. The first of these was that consideration is being given to the merger of National Insurance and Income Tax which makes sense given that there are some differences in the rules. This proposal is currently under review and is seen as a major step towards the simplification of the UK tax system. The major sticking point will of course be that by combining the two systems it will become more obvious what the real “rate of tax” on income actually is.
The second announcement was that there will be a review of the rules for residence and that a new statutory test will be introduced following consultation. This will be welcomed by anyone who is affected as it will give some clarity to an area that seems to have become increasingly uncertain of late (see the later article on residence). The consultation is due to take place this summer and so there is an expectation of the new rules being introduced in the not too distant future.
I hope you enjoy this edition and please do contact us if you have any questions or suggestions for future publications.
Nigel Landsman
head of private client
020 7969 5549
nlandsman@haysmacintyre.com
resident/non-resident tax implications
The current law on the question of residence is very unclear. There is a considerable degree of uncertainty as to what ties need to be severed in order to establish non-residence or conversely how long you need to be in the UK to establish you are a resident.
There are only two clear rules: first, the only statutory test, which is that if you spend 183 days in the UK you are resident here. Secondly it is clear that if you go abroad under a full time contract of employment, that lasts at least a year, you will be non-resident from the date you go; you do not have to take any other steps to be non-resident.
Recently HMRC have thrown some confusion into the second of these rules by making it known that if you are abroad under a full time contract any UK work cannot be substantive. Generally, HMRC now say, if you work in the UK for less than 10 days in a year this will not affect the residence position. However if you work in the UK for more than 10 days a year it will depend upon the circumstances whether you remain non-resident.
Let us hope the Spring Budget announcement of a statutory residence test by April 2012 is forthcoming to clarify this increasingly complex area.
Anne Gregory-Jones
partner
020 7969 5520
agregory-jones@haysmacintyre.com
family wealth issues
inheritance tax
The Spring Budget confirmed that the Inheritance Tax (IHT) nil rate band is to remain frozen at £325,000 until April 2015. Significant reform of the IHT regime is not expected ahead of the next General Election, while increases in the nil rate band thereafter will be limited to the uplift in the consumer prices index. The prospect of a charge at 40% on estates in excess of this level means that, for the foreseeable future, anticipated IHT liabilities on death should continue to be reviewed periodically. This is to ensure that they can be minimised, typically within the context of the evolving family situation and having regard to the particular needs of the older generation.
An individual will usually be fully exempt from IHT on transfers of value to a spouse (or civil partner, whether during lifetime or on death). The nil rate band may be enhanced to the extent that the nil rate band was not fully utilised on the earlier death of the other spouse. Known as the transferrable nil rate band, this applies where the later death occurs on or after 9 October 2007, even if the earlier death was before that date. However, where the earlier death is more recent, HMRC now expect comprehensive evidence supporting the unused nil rate band to be available for an IHT return following the second death.
While gifts to charity are already exempt from IHT, a boost for charitable legacies is to take effect from 6 April 2012. Subject to consultation, it is intended that for a death on or after that date, provided at least 10% of the “net estate” is left to charity, the IHT rate applicable will be reduced from 40% to 36%.
Trusts continue to feature in IHT planning, subject generally to a 6% IHT 10 yearly charge comparing favourably with the 40% charge on deceased estates. However, planning needs to address the potential 20% IHT charge on entry, which can become 40% if the settlor does not survive a further seven years.
exemptions
There are a number of other IHT exemptions, including:
· Potential exempt transfers (PETs) – lifetime gifts between individuals are PETs and become free of IHT once the donor has survived 7 years from the date of gift.
· The annual exemption enables an individual to gift up to £3,000 free of IHT each tax year on a “use it or lose it” basis. Any unused exemption for a particular year can be utilised in the following year only, provided the exemption for that following year is used first.
· Small gifts to any individual (other than to donees within the annual exemption) of up to £250 can be made each tax year IHT free.
· Normal expenditure out of income will be IHT exempt where the transfers of value are regular, are made out of income and do not affect the individual’s usual standard of living.
· Marriage – gifts on the occasion of a marriage to a value of £5,000 by a parent, £2,500 by a grandparent or £1,000 otherwise are IHT exempt.
the main IHT reliefs
· Business Property Relief (BPR) discounts the value on which IHT is chargeable, where the asset concerned qualifies for Business Property Relief (BPR). Qualifying business assets are generally those associated with a trade (but excluding that of dealing in land, shares or other securities). For interests in unincorporated businesses or unquoted shares (including AIM), the BPR discount is 100%, while only 50% for a controlling shareholding in a listed company or an asset used in the qualifying business. BPR is not available unless the asset concerned has been owned (or treated as owned) for at least two years.
· Agricultural Property Relief (APR) provides a discount of 100% for agricultural property (including land devoted to habitat schemes, but only as regards the agricultural value, so excluding development value, sporting rights etc.) where either the transferor had vacant possession (or could obtain it within 12 months) or it has been let on a farm business tenancy. The discount is otherwise 50%, including in certain partnership situations. APR requires the agricultural property either to have been occupied by the transferor throughout the two years prior to the transfer, or to have been owned by the transferor during the previous seven years and, throughout that time, occupied for agricultural purposes (whether or not let).
anti-avoidance
IHT planning also needs to address various anti-avoidance rules.
In particular, where an asset is gifted but thereafter the donor continues to derive enjoyment or other benefit from it, such Gifts with Reservation of Benefit (GROB) are treated as part of the donor’s estate on death. These provisions can be avoided, as regards land and chattels, where the donor pays open-market consideration for post-gift use of such assets.
HMRC consider that certain planning techniques have successfully circumvented the above GROB rule. Instead of amending IHT legislation and in relevant circumstances, an annual income tax charge, known as Pre-Owned Assets tax, is levied from 2005/06 on the previous owner at his marginal rate of tax. For land this is based on the annual rental value (as defined), while for chattels taxable amount is 4% (currently) of the market value. These rules do not apply where ownership of the asset ceased before 17 March 1986, or where the aggregate taxable amount does not exceed £5,000.
other planning
In short this includes the following:
· Back to back schemes - for those in good health these schemes provide a guaranteed income for life and remove the capital from the estate immediately.
· Loan trusts - for those investors requiring a regular income with flexibility these schemes are likely to be of interest. They provide access to capital during one's lifetime with all future growth outside the estate for tax purposes. As income is taken the capital is removed from the estate.
· Discounted gift schemes - these provide an income for life and the capital falls outside the estate provided the donor lives for seven years. On death within seven years the value of the gift is heavily discounted.
· Enterprise Investment Schemes - income tax relief at 30% is available at inception, capital gains can be rolled over into the scheme and the capital is free from IHT after two years. These investments are generally higher risk but very tax efficient.
Charles Osborn
director of tax services
020 7969 5599
cosborn@haysmacintyre.com
probate services
Here at haysmacintyre, we have an experienced team in our trust department who administer estates and deal with probate. The services we provide meeting with the Executors and giving appropriate advice, preparation of the IHT return and the tax return to the date of death. Having prepared the relevant IHT return together with the required supplements we would advise on the tax payable overall and on application for probate. In association with a local solicitor, the executors would be able to visit our office to swear the oath. Once probate is granted we can assist in the collection and distribution of the assets to the residuary beneficiaries and deal with any tax matters arising during the period of administration. Finally we would prepare a set of estate accounts.
If you would like further information on these services please contact Anne Gregory-Jones, Nigel Landsman, or Jim Conway.
offshore penalties
Tax information from overseas is more difficult to obtain and this makes offshore non-compliance more difficult to detect and remedy. HMRC have over the past few years encouraged disclosure by use of the Offshore Disclosure Facility, the New Disclosure opportunity and the Liechtenstein Disclosure Facility. However they still believe there is significant non-disclosure and have enhanced the penalties to strengthen the deterrent against non-compliance where offshore income is involved.
From 6 April 2011, new penalties will apply for undeclared offshore income or gains arising in 2011-12 and onwards.
As with existing penalties, the level of penalty will be based on the behaviour leading to the understatement of tax. The penalties will also be linked to the tax transparency of the territory in which the income or gain arises.
There will be 3 levels of penalty:
Category 1 will be the same as under existing regulation – this applies to the UK and territories with automatic exchange of information on savings income with the UK.
Category 2 will be 1.5 times in the existing legislation i.e. up to 150% of tax – this applies to territories which exchange information on request with the UK and the least developed centres.
Category 3 will be double that in existing legislation i.e. up to 200% of tax – this applies to territories which do not exchange information with the UK and territories whose agreements, do not allow exchange of information to the international standard.
There will be no penalty if the individual can show they took reasonable care to get their tax right or where there is reasonable excuse. Penalties are reduced depending upon the amount of co-operation and for unprompted disclosures.
Anne Gregory-Jones
partner
020 7969 5520
agregory-jones@haysmacintyre.com
furnished holiday lettings (FHL)
The tax breaks for FHL have been the subject of much attention over recent years. FHLs have been treated as a “trade” for the purposes of loss relief claims (losses could be set against other income), capital gains tax reliefs (such as Entrepreneurs’ Relief, rollover relief and holdover relief) and capital allowances. These advantages historically applied only if the FHL was situated in the UK, however, as this may not have complied with European law the qualifying properties were expanded by the 2009 Budget to include those properties situated within the European Economic Area (EEA) for the year ended 5 April 2010. After this date, FHLs were to no longer qualify for the favourable tax treatment arising as a result of their “trading status”.
This change never took place so the position up to 5 April 2011 remained the same.
Draft legislation now proposes that with effect from 6 April 2011, loss relief is restricted to set off against the same FHL business and from 6 April 2012 the property must now be available for let for 210 days (previously 140 days) and must actually be let for 105 days (previously 70 days) per year.
The upshot of this is that it will be harder to qualify for the FHL treatment but when you do, you still receive the same favourable reliefs, except for ability to set losses against other income.
Mark Pattenden
senior tax manager
pension contributions
New rules on tax relief for pension contributions took effect in April 2011, this time bringing genuine simplification to pension planning. Sweeping away the previous government’s complex anti-forestalling legislation for high earning taxpayers, the new rules provide a clear framework whilst maintaining tax relief against the individual’s highest rate of tax.
With effect from 6 April 2011 the annual amount on which tax relief can be obtained for pension contributions is £50,000 gross. Relief is given at the individual’s marginal tax rate, so for higher rate taxpayers that is 40% or 50%. However the bad news is that in calculating the £50,000 limit you must add any contributions your employer makes into your scheme to those you make yourself. Contributions exceeding the £50,000 limit will be taxed as additional income at the individual’s marginal rate.
The ability to carry forward unused relief makes a welcome return and allows taxpayers with variable income, such as the self-employed, to make larger contributions in years where profits are higher by utilising any unused relief brought forward from the previous three years.
To cushion the impact of the new rules, the £50,000 limit is deemed to apply in the three years before its introduction. This means that, depending on past contributions, you may have unused relief brought forward from 2008/09 that can be used in 2011/12. In order to utilise any unused relief from prior years you must have been a member of a pension scheme, however it is not necessary to have made any contributions during that period.
Along with the reduced annual contribution limit, the lifetime allowance has been reduced to £1.5m. This will mean those who have already built up large pension pots will need to review their plans. Alternative strategies may therefore be required to supplement existing pension provisions.
Mark Pattenden
senior tax manager
020 7969 5590
mpattenden@haysmacintyre.com
the new penalty regime for late filing of tax returns and late payment of Income Tax
HM Revenue & Customs have introduced from new penalties for the late submission of the 2011 and future tax returns. The deadline for submission of paper returns is midnight on 31 October 2011 and for submission of online returns it is midnight on 31 January 2012. The penalty for sending your return in late remains at £100, however, it will no longer be abated should your outstanding tax liability be less than this amount.
Additionally, if your return is more than three months late you will be charged a daily penalty of up to £10 per day, over six months late an additional £300 (or 5% of the tax due if it is higher) will be charged and over twelve months a further £300 (or further 5% of the tax due if it is higher) will be charged. The deadline penalties also apply to each partner in a partnership.
The existing penalty for late payment of tax , in addition to an interest charge, is 5% on any tax outstanding 30 days after the 31 January due date together with a second 5% on any tax outstanding six months after 31January.
In addition, there will be from January 2012 a further 5% penalty on any tax still outstanding 12 months after 31 January.
Nigel Landsman
head of private client
020 7969 5549
nlandsman@haysmacintyre.com
Liechtenstein Disclosure Facility (LDF)
This facility was introduced in September 2009 (and ends March 2015) to provide a partial amnesty enabling people with assets in Liechtenstein to disclose previously undeclared income or gains on beneficial terms. The benefits are a fixed penalty of 10% of the tax owed and a disclosure period limited to undeclared income from April 1999.
At the moment, in order to qualify for the beneficial treatment, you must on 1September 2009 have owned an offshore asset and then simply open a Liechtenstein account.
The UK and Swiss Governments are we understand in talks over a new tax agreement. There is speculation that undeclared Swiss accounts will suffer withholding tax and a penalty charge perhaps less generous than under the LDF.
Our advice is therefore that if you have undeclared Swiss accounts you should consider making a disclosure under the LDF to ensure that you secure the beneficial treatment.
Nigel Landsman
head of private client
020 7969 5549
nlandsman@haysmacintyre.com
Internet Fraudsters - their fatal flaw
Email scams offering bogus tax refunds are becoming more sophisticated. Previously they were easily spotted by their references to “our review of your recent fiscal activity” and similar Americanised phrases not commonly used in the UK. Of course the spelling mistakes were an obvious giveaway too. More recently fraudsters are becoming cleverer, improving their wording and often using websites that mimic the official HMRC website in a quite convincing manner. However there is one fatal flaw which makes it very easy to spot a fraud – the email itself. HMRC does not contact taxpayers or their agents by email. So as soon as you receive one, you should assume it is a fraud and delete it. If you are in any doubt you can contact someone at haysmacintyre who can advise you further.
Anne Gregory-Jones
partner
020 7969 5520
agregory-jones@haysmacintyre.com
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