Clearly each individual case will have its own characteristics, so while some of the cases illustrated below may appear to be of relevance to your own situation, we would strongly urge you to contact us to discuss your own unique position to ensure that you obtain the best/optimum relief/savings specifically relevant to you.
Capital Gains Tax
How can I reduce my liability for Capital Gain?
What is my tax position on a second home abroad?
Am I liable for Tax if I sell part of my garden?
Inheritance Tax
How can I save my family money on Inheritance Tax?
Can I claim IHT relief on my business?
Income Tax
How do I calculate residency for tax purposes?
Can I minimise my tax liability using dividends in a family business?
Can I claim 100% tax relief on refurbishment expenditure for unoccupied commercial property?
Can HMRC Recover Tax Debts via my PAYE?
Offshore Matters
What is my tax position on a second home abroad?
What is my tax position on buying and owning a property abroad via a limited company?
Property
What is my tax position on a second home abroad?
Am I liable for Tax if I sell part of my garden?
How do I calculate residency for tax purposes?
What is my tax position on buying and owning a property abroad via a limited company?
Can I claim 100% tax relief on refurbishment expenditure for unoccupied commercial property?
Am I better off owning property personally or through a dedicated business?
Am I going to lose my tax benefit from my furnished holiday let?
How can I reduce my liability for Capital Gain?
I have built up a portfolio of 8 houses over the last 10 years that I rent out to students. I manage the lettings myself and deal with all of the repairs, rent collection and re-decoration in the holiday periods.
This takes up many hours of my time and I want to move away from student properties and into investing in City Centre Flats. As the value of the properties has increased by over £250,000, my accountant says that I am looking at a tax bill of over £75,000 if I sell them all.
Is there any way that I can put off paying this tax and reinvest the whole of the sale proceeds into the new apartments?
Our Solution...
This is a common problem faced by people who have been investing in properties for many years. They want to “upgrade” their property portfolio but face a significant capital gains tax bill if they sell their existing properties. We have helped a number of clients who have this problem realise the full sale proceeds from their present business, allowing them to reinvest 100% of those proceeds into new property.
As with all good planning, the facts of each case have to exactly match the conditions set out in legislation and covered by HMRC guidance notes to ensure that the relevant relief(s) is (are) available. The relief that may be available in this situation is well documented and has been available for many years. We will happily discuss your particular situation with you to see what options are available.
How can I save my family money on Inheritance Tax?
My husband and I have lived in the same house for 37 years and have no mortgage. One across the road has just sold for £750,000 and I am worried about Inheritance Tax.
A friend has told me that she sold her house to a family trust about five years ago and so doesn’t need to worry about tax when she dies. Is she right? Can I do the same?
Our Solution...
Since the 6 April 2005 Budget, it has become increasingly difficult to remove the value of the family home from your estate for Inheritance Tax purposes and still continue to live there.
A whole new raft of legislation was introduced to prevent perceived tax avoidance in this area. The effect of this was to either negate any inheritance tax saving, or to create a change to income tax on the value of your house.
Although your friend carried out the planning many years before the legislation was brought into effect, she may still be caught by it. It may be a good idea for her to go back to the person who set up the trust for her, just to check that their original advice is still correct.
In your instance, it is highly unlikely that you would be able to implement similar planning to remove the value of your property from your estate. There are, however, still a small number of opportunities that arise that may be available to you.
We have recently been able to deal with a situation where a widower’s daughter came to live in his house to look after him and reduced the value attributable to his house in his estate.
We are also looking into the possibility of a different client creating a debt against his property that will reduce his estate and then using the money generated into an asset that may itself become outside the scope of Inheritance Tax.
Again, very different solutions may be available in apparently similar situations, depending on the particular wishes of our client. This case also highlights the ever changing nature of tax planning and that you should not rely on solutions provided in the past to yourself or others.
How do I calculate residency for tax purposes?
I was born in the UK and have lived here all my life. I have been thinking about selling up and going to live in the Isle of Man.
I am a self-employed computer programmer and so will still be able to work from home and communicate with my clients via e-mail etc. I will need to come to the UK from time to time on business (probably five days a month) and I will also come back to see friends and family for birthdays, Christmas etc.
I understand that I can be in the UK for up to 90 days and still be classed as non-Resident for tax purposes. I have read that days of arrival and departure do not count in working out those 90 days. Is that right?
Our Response...
In the 2008 Budget, the Chancellor announced that with effect from 6 April 2008, any day where an individual is present in the UK at midnight will be counted as a day of presence in the UK for residence purposes.
In the situation where an individual is in transit at midnight, such a day may not be counted as days of presence in the UK.
There have been three cases recently that have looked at the whole issue of residence. The same Special Commissioner has presided over each of them and so it is now possible to see her approach to deciding these cases. The number of days spent here is important, but it is far from the major one. She takes an overview of an individual’s lifestyle and looks at the reasons for being in the UK and the presence, or lack of, previous connections in the UK, and the existence of a genuine base elsewhere. What seems to be critical is a clear break in the pattern of a taxpayer’s life.
It is important therefore to look closely at your reasons for leaving the UK and what residue of your life will remain based in the UK.
What is my tax position on a second home abroad?
I am thinking of buying a second home in Cyprus which I will rent out during the summer but will spend at least 8 weeks a year there myself.
I understand that the local tax rates are quite low when I come to sell it but do I have to pay tax in the UK too? And if so, is there anything that I can do to reduce/avoid this?
Our response...
UK domiciled and resident individuals are subject to tax on their worldwide income and gains, wherever it arises, and so you may be liable to UK capital gains tax as well as any tax arising in Cyprus, when you sell it, subject to relief arising from the Double Tax Treaty between Cyprus and the UK.
Incidentally, as you are looking to rent the property out, you may also be liable to UK tax on any rental income you receive.
As you are going to live in the property, however, there may be some useful tax savings that are available to you. Most people know that there is no capital gains tax to pay when they sell their family home (principal private residence). This exception can also be extended to a second home, even one in Cyprus!
This relief can be extremely valuable. So, not surprisingly, there are strict criteria that need to be met to ensure that you qualify.
If you are in a position to elect for that other property to be your main home, so it qualifies for the relief, other benefits follow. You are entitled to claim the relief for the last 36 months of ownership of a principal private residence, even if you do not now continue to live there on a full time basis. So if you elect only for a year, you can effectively claim 4 years’ relief from UK capital gains tax.
With careful planning, and as long as your circumstances are right, then you can choose your second home in Cyprus to be your main home for capital gains tax purposes for a short period of time but also get a significant reduction in your UK tax bill when you sell it.
Am I liable for Tax if I sell part of my garden?
My house has a large garden and I am thinking of selling part of it to a builder (for £100,000). I have been told by my friend that there will be no tax to pay on this sale. Is this right?
Our Solution...
To paraphrase the advertising campaign for a famous brand of lager, “Probably”.
As with all tax planning, the devil is in the detail and it is important to get the facts right first.
You are relying on a part of the capital gains tax legislation that allows you to sell your house and gardens without paying any tax.
Firstly, we would have to look at the reason that you bought the house initially. If you bought it to sell on at a profit, then you will be taxed to income tax and not capital gains tax as you are deemed to have bought the house as a venture in the nature of a trade and so different rules apply.
Equally, if it can be proved that your intention was always to split off a piece of your land to develop and sell on, again you are likely to be taxed as a trading profit and not a capital gain.
If you bought the house to live in, and actually did live there as your main house then it is possible to structure the sale of the land in such a way as to benefit from the tax relief that covers the sale of your house and get the tax free disposal that you are looking for.
Careful planning is required to make sure that you do not fall foul of the various pitfalls that await you and advice is required at the earliest possible time. Such simple things as who apples for outline planning permission, may mean the difference between paying tax or not.
What is my tax position on buying and owning a property abroad via a limited company?
I’m thinking of using my limited company to buy a property abroad. Are there any tax implications/benefits of doing this?
Our response...
One of the main concerns for many prior to the 2007 budget was the tax effects of purchasing a holiday home via a limited company. There are still some major concerns in this area but in Budget Note 50 (BN50), the chancellor announced his intention to bring forward legislation in Finance Bill 2008, to ensure that individuals who have bought or will buy a home abroad, will not face a benefit in kind tax charge for any private use of the property if purchased through a company - providing certain conditions are met.
Normally it is most convenient (and recommended) to purchase a property as an individual or jointly, but in countries such as Bulgaria for instance, current domestic laws prohibit foreigners from owning an interest in land. In that case, you must purchase a Bulgarian company, and it will be taxed as a company in Bulgaria, and pay its local taxes. In other countries, of which France is a popular example, inheritance tax concerns mean that it is essential for foreigners to purchase property by using the equivalent of a company.
Prior to the Budget announcement HMRC suggested that if you did own your holiday home via some sort of company, then a benefit in kind charge under s 102 ITEPA 2003 would apply in respect of the accommodation, even if you were only a shadow director and the company was non-UK resident too.
This will still apply if you do not meet the ownership criteria envisaged in BN50. BN 50 applies only to domestic arrangements and will no doubt contain some anti-avoidance clauses.
The measure is intended to ensure that no benefit in kind tax charge arises if a company is used by an individual as a vehicle to purchase a holiday home and its only activities are incidental to its ownership of that property, which is its main asset.
There is another condition and that is that the property is not funded directly or indirectly by a connected company. This measure applies to all holiday home owners since acquisition.
European law will surely try and equalise the various tax treatments of these special property companies eventually, but then maybe only if they are ever tested.
Can I minimise my tax liability using dividends in a family business?
I have a Limited Company where not all of the shareholders contribute to the fee-earning of the company and wondered if I can I safely use dividends to minimise my tax liability?
There have been a number of articles in the press following the recent House of Lords decision in the ‘Arctic Case’ and wonder what the decision means to me?
Our response...
The long running case of ‘Jones v Garnett’ was heard in the House of Lords recently and the decision is widely seen as a landmark victory for family-run businesses.
Some background: Mr & Mrs Jones set up a company (‘Arctic Systems Ltd’), and Mr Jones was the main fee earner. He took a modest salary, as did Mrs Jones, and then voted a dividend that was split 50:50, in line with their shareholding. HMRC contended that this arrangement constituted a settlement by Mr Jones in favour of his wife and claimed that her dividend should in fact be treated as his and that he should be assessed on all of the dividend, not just half. Mr & Mrs Jones appealed this decision, and eventually the case reached the House of Lords. Following a very short hearing, their appeal was upheld and it was agreed that Mr & Mrs Jones should be assessed separately on their individual dividends.
The Inland Revenue have already announced that they will look at the tax treatment of what they call ‘income splitting’. They have promised that they will “bring forward proposals for charges to legislation” to ensure that “non-commercial arrangements to divert income to others that minimise their tax liability”, will be caught, so that “individuals involved in these arrangements should pay tax on what is, in substance, their own income”. In the Autumn Statement 2007, Mr Darling confirmed that the Government are looking at income splitting in companies and partnerships and are likely to bring out some guidance in the 2008 Budget.
If you have already, or intend to, form a Limited Company where not all of the shareholders will contribute to the fee-earning capacity of the company, then you should plan very carefully how you set up the company - and how you deal with any dividends paid out in the future.
We have considerable experience in dealing with tax planning issues arising from family companies - and dividend and remuneration planning is just one aspect of this. If you would like to talk to us on this or similar issues, please do not hesitate to contact us.
Click here to view a full version of the House of Lords report.
Can I claim 100% tax relief on refurbishment expenditure for unoccupied commercial property?
I’ve heard that is possible to claim 100% tax relief on refurbishment expenditure for commercial property that has been unoccupied for 12 months, within certain designated areas. Is this correct and if so are there any restrictions?
Our response...
As of 11 April 2007 Business premises renovation allowance came into effect, having been legislated for in the Finance Act 2005.
The allowance has been designed to accelerate regeneration in designated areas, by bringing empty property back into use. This will not only improve the environment for those living and working in the area, it will provide employment once the properties are brought back into use for business.
The law provides a capital allowance of up to 100% of the renovation expenditure (but not the purchase price) which would be capital expenditure.
Revenue expenditure will attract tax relief in the normal way. If the claimant does not claim the full 100% in the first year, an allowance of 25% on cost (that is, on a straight line basis) will be available in subsequent years, until the full cost has been allowed.
The scheme is broadly similar in structure to the flat conversion allowance introduced in Finance Act 2001, but under this scheme the premises must be situated in a designated development area and must be non-residential premises, which have been empty for at least 12 months when work starts.
The investor may rent out the premises or occupy them for the purpose of his trade, when complete but disposal within 7 years will produce a balancing adjustment, likely to claw back the allowances given.
Designated Development areas were re-designated early this year and there is no doubt that this favourable relief, which is available for five years only, will be of interest to many.
Can I claim IHT relief on my business?
I am a company director and have built up a decent business that I plan to pass on to my children. Is it true that in the event of my death, my entire business will qualify for100% relief from inheritance tax?
Our response...
It all depends! Most business owners are aware of the 100 per cent relief from Inheritance Tax (IHT) for trading businesses. This covers both the value of the business, as well as the assets owned by the business. Unfortunately, however, Business Property Relief (BPR) can only be applied to assets that are being used solely for trading purposes.
For example: Where a business owns a shop/office/factory from which the business trades, then the value of that property should also be expected to be covered by BPR. If, however, part of that property is rented out to a third party then it is not used wholly for trading purposes and so may not be covered by BPR.
A key area liable to scrutiny would be surplus profits that have built up as cash reserves and which are lying dormant in the company, i.e. that are not being used for the day-to-day running or development of the business. These may well be subject to an unexpected inheritance tax charge.
If you are genuinely planning on building up reserves to fund expansion of the business, you may be able to gain IHT relief, as long as you can prove your intention. It is likely that you would need a fair amount of documented evidence to convince HMRC of this and thus qualify for relief.
Another potential pitfall, is if you have reinvested any surplus profit in a non-trading venture, such as buying residential property that is available to rent out.
The main message is: ANY assets, not used within the trading business may not be eligible under BPR rules and therefore will not qualify for IHT relief.
A further problem area, is the restriction on relief for assets held outside the business even though they are used for trading.
No matter what age you are as a business owner, it is essential to plan properly for those who may eventually take over the business. Maximising tax relief both for the sake of the business and your heirs is prudent business practice.
If you are planning the most tax-efficient way to pass on your business, please contact either Peter or John, so that we can discuss the specifics of your situation and offer you the most appropriate advice.
Am I better off owning property personally or through a dedicated business?
I am a single man (age 27) and last year bought a property, which I am currently letting out. Following a redundancy payment, I am considering expanding my portfolio and setting up a property investment business and concentrating on this for a few years, since there are a number of good buys around, given the current economic climate.
A friend has told me that I’m better off tax-wise keeping the properties under personal ownership, rather than setting up a company, is this correct?
Our response...
As usual, the answer is not cut and dried. If your taxable income for the current year is less than £37,400, then you will pay tax at 20% on your rental profits. If your taxable income exceeds this, then you will pay tax at 40% on the excess.
So on the face of it, the company option looks tempting, as it would pay tax at 21% up to £300,000 profits but you need to be realistic about your likely profit levels, especially in the early days, when you might have significant set-up costs and possible voids. We’d need to look at a projection of how much profit you hope to make from your new property portfolio but it probably makes sense to buy the properties in your own name to start with.
You also need to take into consideration what income you need for yourself to live on. If you need all of the money that is generated from the property business, then the personal ownership option is also likely to be best. If, however, you can afford to keep some money invested in the business, then the limited company might become a better bet.
If you started off in business as a sole trader, then you can easily transfer into a limited company, whereas the transition the other way is much more difficult and may involve an additional tax bill.
If you are planning the most tax-efficient way to invest in property, please contact either Peter or John, so that we can discuss the specifics of your situation and offer you the most appropriate advice.
Peter gives his expert opinion on the pros and cons of incorporating for property investment in 2009, on our Resources page.
Can HMRC Recover Tax Debts via my PAYE?
I understand that HMRC will be getting new powers via the 2009 Finance Act to collect unpaid tax through my monthly wage slip. Surely that can’t be right?
Our response...
At the moment HMRC can only deduct underpaid Income Tax and Capital Gains Tax or overpaid tax credits via PAYE, either with the tax payer’s consent or by obtaining a court order.
However, once the Finance Bill 2009 becomes law later this summer, HMRC will be able to recover all taxes through PAYE - without seeking the permission of the courts. This means that tax payers will have to go through an appeals process in order to prevent deductions.
These new powers will allow HM Revenue and Customs to deduct £2,000 a year from tax payers’ salaries to recover tax debts – this could mean the tax payer losing some 34 per cent more tax from their salary.
HMRC has previously been unable to recover overpaid tax credits from taxpayers, however this legislation will mean that if tax credits are overpaid in future HMRC will be able to claw back the money very easily.
Since this legislation effectively helps HMRC jump to the front of the debt collection queue, there is a worry that if mistakes are made in the amount of tax deemed to be owed, tax payers could end up with other serious debt issues as a result.
Am I going to lose my tax benefit from my furnished holiday let?
I have a holiday home that I rent out on short-term lets. The rent that I get during the year barely covers the mortgage payments that I make but I am able to offset these losses against the income that I get as a florist.
I understand that this might be changing from next April. What is changing? Is there anything that I can do?
Our response...
From what you say, the income that you receive from your holiday home is taxed under the Furnished Holiday Lettings (FHL) regime. As such, you are correct in that from April 2010, individuals will no longer be able to offset losses from FHLs against other income. Instead, they will only be available to offset losses against other, similar rental income in the future.
There are other significant changes to both income tax and capital gains tax rukes that you will need to consider and I would refer you to our article on our Resources page for more details.
There may, however, be certain steps that you might take to enable you to continue to offset any future losses against your income as a florist, even after April 2010. Please contact us for further details.