Some advisers claim that by taking a series of pre-planned steps, the value of shares in a property company are completely sheltered from Inheritance Tax (IHT).
When something looks too good to be true….
Unfortunately, the reality is that properties held personally, in a trust or in a company will be liable to IHT. Of course with a Labour Budget on 30 October, IHT may be increased. There is also speculation is that the capital gains tax tax-free uplift on death may also be removed, meaning there is effectively a “double death tax”. This could mean that a gain on a buy-to-let property is effectively taxed at just over 54%.
So, what can you do to protect against IHT changes? This will depend on how the properties are held.
Incorporating your property business
If there are a number of properties being run as a business you may consider incorporating the business. Incorporation Relief should be available so that there is no capital gains tax payable and the company takes over the properties at current market value. Stamp Duty Land Tax would however be payable, although this can be reduced by applying commercial rates of SDLT where six or more properties are transferred.
You can then consider gifting shares either outright or into trust to family members. This might trigger a capital gains tax charge but currently the maximum rate of CGT on shares is 20%. The value of the shares gifted will be outside your estate after 7 years.
You can also create growth shares which only participate in future growth in value over a pre-determined hurdle rate. With careful planning HMRC should accept that these shares have little value on issue.
Where properties are owned through an existing partnership, incorporation can take place without SDLT being payable.
Alternatively, you could simply “sell” the properties to your own limited company. Yes, this will create capital gains tax and SDLT liabilities but it would “bank” these at the current rates. It would be necessary to crunch the numbers to calculate what the overall effective tax rate is.
The advantage of this would be that it would create a significant director’s loan account credit. You could immediately gift some or all of this to your children. This would be a Potentially Exempt Transfer (PET) and outside your estate after 7 years. Whilst you have “given away” the loan account (or part of it) your children can only access the funds on your say so.
Forming a property partnership
Forget forming a partnership to incorporate later on. The extensive SDLT anti-avoidance rules mean that on incorporation SDLR relief will not be available.
Instead, it is possible to form a partnership with family members entitled to a future share in the growth in value of the properties. With care, this can be achieved without any tax cost and will mean that the majority of future growth in value falls outside your estate.
Direct gifts of property to your children
You can make outright gifts of property to your children. There will be no SDLT payable but there will be capital gains tax to pay on any increase in value of the property since it was acquired. Any gain would have to be reported to HMRC and the tax paid within 60 days of completion.
Using a family trust
The capital gains tax payable on direct gifts of property may make this option unattractive. As an alternative, you could consider using a trust. The transfer into the trust is a Chargeable Lifetime Transfer, so any transfer of value over £325,000 (£650,000 for a married couple) would incur a lifetime IHT charge at 20%. However, as it’s a gift into trust any capital gain can be held over, meaning that the trust effectively takes over the original base cost of the property.
At a later date the property can be transferred out of the trust to your children and again the gain can be held over. This means that the trust can act as a “stepping stone” to pass properties indirectly to the children without suffering a capital gains tax charge.
I’ll stay on me own…
You can of course opt to do nothing and see what the Budget brings. It may be that nothing changes, although this appears increasingly unlikely.
Next Steps with inheritance tax for landlords
If you want to learn more about sheltering the value of shares in a property from IHT or maybe you are interesting in learning more about making outright gifts of property to your children then get in touch.
Non-Domiciled Investment Banker Loses Appeal Against £675,000 Tax Bill Over Director Loans
Mr X, originally from Spain and residing in Italy, faced a significant tax bill from HMRC after investing £1.5 million of his foreign income into his UK-based company.
The investment was intended to qualify for business investment relief, exempting it from tax. Business Investment Relief (BIR) is a potentially valuable tax relief for UK taxpayers, particularly non-domiciled individuals (non-doms), who have used or are currently using the remittance basis. BIR enables these remittance basis users (RBUs) to invest their offshore income and gains in the UK without incurring taxes on those remittances. In this particular case, however, complications arose when he used a director’s loan account for personal expenses. A director’s loan is money withdrawn from your company’s accounts that does not qualify as salary, dividends, or legitimate expenses.
Mr X accumulated £75,000 in personal expenses through a director’s loan account, which included costs such as hiring private jets, an iTunes subscription, and gifts for his wife. HMRC viewed this as an “extraction of value” in breach of the remittance basis. Consequently, HMRC denied the business investment relief for the entire £1.5 million and issued a tax bill of £675,000.
In response to the tax bill, Mr X appealed, arguing that the legislation should be interpreted as requiring the net extraction of value to breach the rule. It was claimed that the director’s loan was provided in the ordinary course of business. HMRC maintained that any extraction of value, not just net, constituted a breach.
A tribunal judge sided with HMRC, ruling that the legislation did not specify net extraction of value. The tribunal found that Mr X had received value in the ordinary course of business and that personal use of company funds was exactly what the extraction of value rule was designed to prevent. Despite the client’s claims of following legal advice, the appeal was dismissed, and he was held liable for the full £675,000 tax bill.
With election fever hotting up and only 3 weeks to go, we take a look at the key tax proposals from each party’s manifesto.
Conservative Party’s Tax Proposals
National Insurance Reduction: The Conservative Party plans to halve employee National Insurance contributions from 12% to 6% by April 2027, with the ultimate goal of eliminating it when economically feasible.
Self-Employed National Insurance: The manifesto proposes abolishing Class 4 National Insurance contributions for the self-employed, simplifying the tax system and benefiting approximately 93% of self-employed individuals.
Tackling Tax Evasion and Avoidance: The Conservatives aim to raise an additional £6 billion annually by targeting tax avoidance and evasion. This includes increasing HMRC staffing, investing in technology, and focusing on areas such as umbrella companies and tax advice regulation.
Inheritance Tax: A shift from a domicile-based to a residence-based system for inheritance tax is planned. This would subject individuals who have been UK residents for 10 years to UK inheritance tax on their worldwide assets.
Temporary Repatriation Facility: A proposed Temporary Repatriation Facility would allow non-doms to bring foreign income and gains into the UK at a flat rate of 12% tax during the 2025/26 or 2026/27 tax years.
These proposals aim to simplify the tax system, boost economic activity, and increase tax revenues to support public services. Their implementation depends on economic conditions and parliamentary approval.
Labour Party’s Tax Proposals
Taxation of High Earners: Labour plans to raise an additional £5 billion annually for health and education by cracking down on tax dodging. This includes boosting compliance, investing in technology, and making legal changes to close the tax gap.
Non-Dom Taxation: Labour supports replacing the non-dom rules with a residence-based system similar to the Conservatives’ proposal. They aim to close perceived loopholes, such as including all foreign assets in inheritance tax and removing a 50% discount on income during the transition.
Investment Incentives: Labour is considering introducing investment incentives during the initial four-year window of the new non-dom rules to encourage UK investment income and discourage moving funds offshore.
Tax Evasion and Avoidance: Like the Conservatives, Labour targets an increase in tax revenues by tackling tax evasion and avoidance, though their specific measures may differ.
Labour’s tax policies emphasise fairness and closing perceived loopholes while generating revenue to fund public services. This approach contrasts with the Conservative focus on reducing tax rates and simplifying the tax system.
These proposals reflect Labour’s stance on tax fairness, economic policy, and funding priorities, aiming to redistribute wealth and ensure equitable contributions to public services.
Liberal Democrats’ Tax Proposals
Taxing Wealth: The Liberal Democrats propose an overhaul of wealth taxation, including higher taxes on income from capital gains and dividends, and reforming inheritance tax to make it fairer.
Income Tax: They plan to introduce a 1% rise in all income tax rates to fund the NHS and social care, targeting higher earners.
Corporate Taxes: The party aims to increase corporate tax rates and implement a “Digital Sales Tax” on large technology firms.
Environmental Taxes: They advocate for green taxes, including a frequent flyer levy and higher taxes on single-use plastics.
Tax Evasion and Avoidance: The Liberal Democrats pledge to increase resources for HMRC to tackle tax evasion and avoidance, aiming to close loopholes and ensure fair tax contributions.
Overall, the Liberal Democrats’ tax policies prioritise wealth redistribution, environmental sustainability, and funding public services through increased taxation, particularly targeting higher-income individuals and corporations. Their emphasis is on fairness and environmental responsibility.
Reform’s Tax Proposal
The Reform Party’s manifesto outlines several key tax implications designed to simplify and reduce the tax burden:
Flat Tax Rate: The Reform Party proposes introducing a flat tax rate of 20% on income, aimed at simplifying the tax system and making it more transparent.
Abolishing Inheritance Tax: They plan to abolish inheritance tax entirely, arguing that it is an unfair tax on the savings and assets people leave to their families.
Reducing Corporation Tax: The manifesto includes a proposal to lower the corporation tax rate to 15%, intending to make the UK more competitive for businesses and encourage investment.
Simplifying VAT: They advocate for simplifying the VAT system by reducing the number of different rates and exemptions, aiming to streamline tax compliance for businesses. They also argue in opposition of Labour and propose they will not charge VAT on private school fees and instead will offer tax relief if you pay for private education.
National Insurance Overhaul: The Reform Party proposes merging National Insurance contributions with income tax to create a single, simpler tax on earnings.
The tax proposals outlined in the Conservative, Labour, Liberal Democrat and Reform manifestos signal significant changes to the UK’s tax landscape. From reductions in National Insurance and tackling tax evasion to fairness and closing loopholes and emphasis on wealth redistribution and environmental sustainability, these changes will impact individuals and businesses alike. Navigating these new tax policies can be complex and challenging.
Next Steps
Whilst the polls indicate that Labour are tipped to win, we know that things can change quickly. Whatever the party in power, it is likely that any tax changes won’t be properly debated and/or introduced until the first post-election budget which will likely take place in the Autumn so there is still time to act decisively if there is anything in any of the manifestos that concerns you.
Whilst it is highly unlikely (although not impossible) that legislation will apply retrospectively, acting now, could be the right thing in certain circumstances and we would be happy to chat through your options. Please do get in touch.
As the world eagerly anticipates the next milestone event in the realm of cryptocurrency, the Bitcoin halving is once again poised to captivate the attention of investors, enthusiasts, and analysts alike.
Scheduled to occur approximately every four years, this phenomenon, known as the ‘halving’. This has historically had a profound impact on the dynamics of the Bitcoin network, its price, and the broader crypto market.
As crypto markets change, so too do investors’ tax issues.
Whether it’s –
Reporting gains or losses subject to CGT
Reporting income from staked coins
The treatment of airdropped rewards
The impact of the Bitcoin halving increases the need to be on top of your affairs.
Understanding the Bitcoin Halving
To comprehend the significance of the halving, it’s essential to grasp its fundamental concept. Bitcoin operates on a deflationary monetary policy, with a fixed supply of 21 million coins. Unlike traditional fiat currencies, where central banks can print money at will, Bitcoin’s supply is algorithmically controlled through a process known as mining.
Mining
Mining is the process by which new bitcoins are created and transactions are verified on the blockchain. Miners compete to solve complex mathematical puzzles. The first to find the solution is rewarded with newly minted bitcoins and transaction fees. To maintain scarcity and control inflation, the reward for mining new blocks is halved approximately every four years. This mechanism known as the ‘halving’.
The Impact on Supply and Demand
The halving has a direct impact on the supply of new bitcoins entering circulation. With each halving event, the rate at which new coins are issued is cut in half. This reduction in supply serves to increase scarcity, aligning with the basic economic principle of supply and demand. As the supply of new bitcoins dwindles, assuming demand remains constant or increases, basic economic theory suggests that the price should rise. This anticipation of reduced supply and potential price appreciation often leads to increased speculative activity in the lead-up to the halving event (i.e more people buy into crypto, leading to increases in prices and bigger potential gains for investors.
Historical Precedent
Examining the historical data surrounding previous halving events provides valuable insights into potential market behaviour. Bitcoin has undergone two previous halvings, in 2012 and 2016, each followed by significant price rallies.
In 2012, the first halving saw Bitcoin’s price surge from around $12 to over $1,000 within a year. Similarly, after the 2016 halving, Bitcoin experienced a meteoric rise, peaking near $20,000 in late 2017. While past performance is not indicative of future results, many investors view these historical patterns as a bullish signal for Bitcoin’s price trajectory following the upcoming halving.
What does this mean for you as an investor?
The upcoming Bitcoin halving represents a pivotal moment in the evolution of the world’s leading cryptocurrency. With its potential to reshape market dynamics, ignite price rallies, and fuel speculation, the halving embodies the essence of Bitcoin’s decentralised and deflationary design and has historically led to massive gains.
As investors brace for the anticipated surge in price among the bigger coins like Bitcoin and Ethereum, the Altcoin market is the one which has the most volatility whether that’s significant gains on which tax will need to be paid, or losses which will need to be claimed. It’s important for all crypto investors to make sure their tax affairs are in order.
Next Steps
At ETC Tax, we specialise in the analysis of investors’ crypto activity and accurate reporting of gains, losses and income to ensure our client’s affairs are correct.
Landlords!! All your problems are solved according to Tax Scheme Promoter….
In recent years, individual landlords have found themselves navigating a challenging tax landscape.
Since 2017, limitations on claiming tax relief for borrowing costs have impacted those in higher tax brackets, prompting many to seek alternative solutions. One such solution that has gained attention is the incorporation of rental businesses into companies. Supporters of this strategy promote significant tax advantages, but is incorporation the panacea it’s made out to be?
While incorporating a rental business can indeed offer tax benefits, the process is not without its complexities. Corporate landlords operate under a different tax code, which can potentially reduce tax liabilities. However, transitioning from individual ownership to corporate structure involves navigating various considerations. This includes Capital Gains Tax (CGT) and Stamp Duty Land Tax (SDLT). Moreover, convincing banks to transfer mortgages can pose additional challenges.
Limited Liability Partnership
In light of these hurdles, some landlords have turned to Limited Liability Partnership (LLP) schemes as a potential workaround. These hybrid schemes aim to strategically allocate profits between individual landlords and corporate entities, to maximise tax benefits. However, the efficacy of such schemes is questionable.
Promoters of LLP schemes often promise significant tax savings, but their effectiveness is dubious. Not only do these schemes often fail to deliver on their tax-saving claims, but they also raise regulatory concerns. HMRC has issued warnings about the potential repercussions for those tempted, highlighting the risks of penalties and high fees.
The concept of distributing LLP income to capitalise on varying tax treatments among its members is not new. However, its success in minimising tax liabilities led HMRC to introduce anti-avoidance regulations in 2014. These rules aim to prevent the abuse of tax loopholes and ensure that any surplus profits directed toward the corporate member are ultimately redirected back to the individuals.
Moreover, contributing assets to an LLP triggers CGT, and redistributing profits to the corporate member constitutes a disposal, effectively transferring property interests. This triggers both CGT and SDLT, further complicating the tax implications of LLP schemes.
Despite claims by promoters that Business Property Relief (BPR) can nullify Inheritance Tax (IHT), it’s essential to recognise that BPR primarily benefits trading ventures. Property investment ventures are explicitly excluded from this relief, raising questions about the trade aspect of LLP schemes.
What to do next!
Before embarking on any form of tax planning, landlords must seek expert, independent advice and carefully evaluate the potential risks and benefits. Compliance with tax laws is paramount, and landlords must be aware of the regulatory landscape to avoid unintended consequences.
Conclusion
While incorporation and LLP schemes may seem like attractive options for landlords seeking to optimise their tax positions, the question of whether they even work or not is a significant one. Landlords must approach these strategies cautiously and prioritise compliance to ensure long-term financial stability and peace of mind.
Next Steps
The at ETC Tax have in-depth knowledge of landlord and property tax. Please contact us if you need further assistance.
With an election looming, what did you think of today’s budget? Sink or swim??
We have highlighted some of the main changes below.
VAT
The VAT registration threshold is to be increased to £90k per annum from 1st April 2024. The threshold has been at £85k since 2017 and during Autumn Statement 2022, it was suggested that this would be frozen until April 2026. As such, whilst the increase will be welcome for many small businesses, it had been hoped by some that the Chancellor may have increased this still further, perhaps even to £100k.
For further information on how the UK VAT system operates please click here.
Property tax
Furnished Holiday Lets (FHLs)
The FHL regime is to be abolished. The current FHL rules state that a property must be available for rent for at least 210 days in a tax year and rented for at least 105 days, and in those circumstances provides extra tax relief for costs incurred on furnishing holiday lets which aren’t otherwise available to private rentals. During his budget statement, the Chancellor outlined that this had created a distortion meaning that there were not enough properties available for long-term lets by local people.
The removal of the regime will be doubt be a huge blow to holiday-let businesses, which are likely to still be recovering from the effects of the Covid pandemic.
Mutiple-dwellings relief (MDR)
Multiple Dwellings Relief is also to be abolished with effect from 1st June 2024.
MDR was intended to support private investment in the rental sector, but during his budget statement, the Chancellor outlined that this relief had not been used as intended and had been “abused” by many.
This statement is likely to be primarily targeted at those who purchased residential properties with annexes, who in the past may well have been able to claim MDR.
It is unsurprising in many ways that this relief has been abolished as the government had previously launched a consultation on MDR during late 2021. As a result of that consultation, there had been some suggestions that MDR would be restricted to purchases of 3 or more properties. Clearly, this is not now to be the case.
Capital gains tax on the disposal of property
The higher rate of tax on disposal of property is to be reduced from 28% to 24%. The Chancellor outlined that having commissioned studies on this the results showed that this would be likely to increase the number of property transactions taking place and would free up the market.
We regularly work with property investors and developers and our initial thoughts is that this is not likely to make a substantial difference to many of them, but this remains to be seen.
Private client tax
Changes to the non-domicile regime
The non-domicile regime is to be abolished and replaced with a new more modern, simpler and fairer residency-based system.
The current regime applies to those who are UK-resident for tax purposes but who are non-UK domiciled. (Note – domicile is a complex concept and one which requires proper analysis).
The changes, which will be introduced from April 2025, mean that those arriving in the UK will pay no tax on their foreign income and gains for the first 4 years of their UK residency, but that after those 4 years if those individuals continue to live in the UK they will pay the same tax as other UK residents.
The Chancellor outlined that these changes were designed to protect the attractiveness of the UK for international investment, but to introduce a system which is fairer and still remains competitive with other countries. Transitional arrangements will apply over 2 years during which those individuals affected will be encouraged to bring wealth earned overseas to the UK where it can be spent here.
It remains to be seen what the impact of these changes will be on those overseas individuals looking to make the UK their permanent home. Will other countries become a more attractive proposition?
Child benefit
As the system works currently, child benefit is withdrawn where one person earns over £50k p.a. The Chancellor acknowledged that the system requires significant reform but this will mean giving HMRC the ability to collect household-based income data which will not be a quick fix. A new fairer system is to be introduced by April 2026, but in the meantime, the single earnings threshold will be raised from £50k to £60k, and the higher taper will be increased to £80k.
National Insurance
This one requires no further explanation.
From April 6th 2024, employee NI will be cut from 10% to 8%, and self-employed NI contributions will be cut from 8% to 6%. The Chancellor told us that this would mean the average earner will pay the lowest effective tax rate since 1975, and will pay a lower amount of taxes than in any other G7 country.
And for small business….
Initial feedback seems to be one of disappointment. Many small business owners seem uninspired by the budget. With the dividend allowance having been slashed over recent years and dividend rates and corporation tax rates increasing, many will be wondering if it is really worth running a small business. Is the reward worth the risk?
Other matters
British ISAs
There is to be a consultation on the implementation of a new ISA solely for investing in UK companies. This will have a separate £5,000 limit in addition to the existing £20,000 limit.
Tax advice consultation
The Government has asked for comments on how tax advice can be better regulated. The provision of tax advice is unregulated and, whilst firms such as ours are regulated by the Chartered Institute of Taxation, there are a significant number of unregulated advisers who do not adhere to any professional standards, and indeed do not have to.
Next Steps
If you have any questions on any of the changes and how they may affect you or your clients, please do get in touch.
