Capital Taxes Update and Planning September 2016

Transcription

1 Capital Taxes Update and Planning September 2016 Martyn Ingles FCA CTA CGT Update - Agenda PPR refresher Relief for gifts business assets and using trusts Goodwill on incorporation worth doing again? Transfer of rental business to Ltd company Entrepreneurs relief watch 5% rule Making Seed EIS work for your clients IHT planning including the new downsizing relief 1

2 Private Residences Taxpayer s main residence exempt Includes grounds of 0.5ha Or required for reasonable enjoyment having regard to size and character Includes servants quarters And buildings in curtilage Private Residence Planning If 2 or more residences May elect which is principal residence Only one at time Switch back and forth Last 18 months owned then exempt (was 36m) Acceptable tax avoidance per GAAR guidance 2

3 Not a Residence for CGT PPR Moore v HMRC FTT decision Property initially a Buy to Let Marriage break up moved in to property Council tax records support this Property sold = 8 months later Put property on market with Estate Agent Date moved in with new girlfriend? unclear Post delivered to girlfriend s address (2 nd wife) Not a Residence for CGT PPR HMRC s view - Mr Moore s occupation did not have the degree of permanence, continuity or expectation of continuity necessary for the property to qualify as his only or main residence for the purposes of sections 222 and 223 TCGA. Goodwin v Curtis A person s home was to be distinguished from a property which the person temporarily occupied FTT rejected taxpayers appeal NOT PPR 3

4 Child at University? Extra PPR Trustees get PPR if beneficiary lives in house Martyn s daughter Hannah buy flat in Manchester? 3 options: 1. Martyn buys not PPR 2. Hannah buys, Martyn as guarantor (her PPR) 3. Buy via trust PPR available to trustees (With 3, Martyn should not lend funds to trust could invoke the settlements rule he should g tee the Trust borrowing or settle funds absolutely) CGT payable by nonresidents from 2015/16 4

5 CGT payable by non-residents Consultation in Summer 2014 New charge from 6 April 2015 on disposal of UK residential properties (dwellings) Applies to NR individuals, trustees and close companies Rebase at 6 April 2015 Numerous exclusions e.g. property development and properties for communal use Can they claim PPR relief? CGT payable by non-residents Frau Merkel lives in Germany bought a holiday cottage in England April 2005 for 500,000, uses 2 weeks/ year. Sells the cottage in April 2020 for 650,000. Market value of the cottage on 6 April 2015 was 550,000. Gain computed with ref to 6 April 2015 value 100,000. Time apportioned gain on cost 150,000 x 5/15 = 50,000 Elect to use the time apportionment basis 5

6 Private Residence Relief for Non-Residents PPR will still be available to non-residents disposing of main residence in Uk Consultation considered 2 options: 1. Remove election - HMRC may seek evidence that defacto main residence mail delivery, electoral roll. 2. A fixed rule to identify the main residence based on number of days spent there New legislation requires occupation for at least 90 days in the tax year concerned to qualify for PPR Relief for gifts Business assets and trust planning 6

7 Hold over (gift) relief Two alternatives S165 gift of business assets Are the shares a business asset? S260 transfers subject to immediate IHT charge Lifetime transfers to most trusts now Can be any asset S165 business gift relief Shares in trading company Up to linked to retirement relief definition Trading company = wholly or mainly test CBA/CA restriction if personal company Now linked to trading company 20% test 7

8 CBA/ CA restriction Where shareholder has >25% or personal company Restrict gain available for holdover To MV chargeable business assets portion Goodwill? Old or new? CBA/ CA restriction Example Business premises 300,000 CBA Fixed plant 50,000 CBA Goodwill 1,250,000 CBA? Investments 150,000 CA Other net assets 250,000 Total value 2,000,000 < 20% thus trading company 8

9 Old Goodwill Bloggs Trading Ltd Business premises 300,000 CBA Fixed plant 50,000 CBA Goodwill 1,250,000 CBA 1,600,000 Investments 150,000 CA Total chargeable assets 1,750,000 S165 holdover restricted to 91.4% If 40,000 then 3,439 chargeable (< annual exemption) New Goodwill Bloggs Trading Ltd Business premises 300,000 CBA Fixed plant 50,000 CBA 350,000 Investments 150,000 CA Total chargeable assets 500,000 S165 holdover restricted to just 70% If 40,000 gain = 12,000 chargeable 9

10 S260 TCGA gift relief Gift of any asset where there is immediate IHT charge Lifetime transfer to all trusts now If < 325,000 then no IHT (< nil band) Also transfers out of trust Planning? Passing on a Buy to Let using a trust S260 TCGA hold over gain where there is IHT charge e.g. transfer into and out of trust Simple planning technique Dad wants to give daughter 300K investment property. Base cost 60K CG = major deterrent Gain = 240,000 28% CGT = 67,200 10

11 Passing on a Buy to Let property Simple planning technique Dad transfers property into trust = if immediately chargeable = CG holdover (s260 TCGA) IHT charge? likely to be within nil rate band ( 325K) Property into trust for daughter without tax charge No CGT, no IHT Passing on a Buy to Let Property Simple planning technique Property in trust If trust is felt to be inappropriate Wait at least 3 months. Or if trust suits, for longer Appoint out property to daughter Holdover under s260 TCGA on way out No CGT If gifted directly no holdover = CGT for Dad 11

12 Rollover relief Replacement of business assets Rollover relief Replacement of business assets Reinvest proceeds from old asset within period 1 yr before to 3 yrs after disposal Gain either held over or deferred Depends upon type of asset 12

13 Rollover relief M SELL OLD ASSET 36M BUY NEW ASSET Rollover relief - qualifying assets Land and buildings *Goodwill Fixed plant & machinery Ships, aircraft, hovercraft Satellites and space craft!! *Quotas *Entitlement to SFP and its 2015 replacement 13

14 Depreciating assets Expected life < 60 years E.G. Leasehold premises Gain on old asset merely deferred Deferred until earlier of Sale of asset Cease using asset in trade 10 years after acquisition CGT on incorporation 14

15 CGT on incorporation MR A MR A TRADE AND ASSETS SOLD TO A LTD A LTD DR ASSETS CR LOAN A/C USE MV TO COMPUTE GAINS Goodwill on Incorporation Mr Jones Mr Jones Jones Ltd TRADE AND GOODWILL SOLD TO JONES LTD DR G/WILL 1million CR LOAN A/C 1 million 15

16 Goodwill What we used top be able to do Incorporate business 30 November 2014 Sell goodwill to Jones Ltd leaving balance outstanding on loan account Gain on goodwill 1,000,000 With entrepreneurs relief just 10% CGT = 100,000 Can then withdraw loan account tax free If post goodwill could even claim a CT deduction say 10 years = 100,000 Goodwill Autumn Statement Mr Jones Mr Jones Jones Ltd TRADE AND GOODWILL SOLD TO JONES LTD DR G/WILL 1,000,000 CR LOAN A/C 1,000,000 ****CGT Entrepreneurs Relief no longer available from 3 December 2014 **** 16

17 Goodwill CT deduction also blocked Sole trader/ Partnership to Ltd company Related parties Thus no write off of OLD goodwill (pre ) *** Can no longer write off if transferred from 3 December 2014 onwards *** Goodwill Additional tax Before Mr Jones 1,000,000 gain = 100,000 CGT Jones Ltd : 100,000 a year profit - 100,000 amortisation = NIL taxable profits, CT NIL Now: Mr Jones 1,000,000 gain = 280,000 CGT Jones Ltd: Accounting profit NIL= no dividends Taxable profits 100,000 p.a. = 20,000 CT p.a. x years = 480,000 tax ( 280, ,000) 17

18 Incorporation CGT reliefs still available Small goodwill gains covered by 11,000 annual exemption but 18%/28% thereafter S165 gift of business assets Hold gain over into cost of assets Assets have low base cost Use if property to be retained personally S162 transfer of a business in exchange for shares Hold gains into base cost of shares Assets at market value No gain if asset sold shortly after Incorporation other strategies Use brought forward capital losses If recently acquired on death uplift to probate value Allocate more of the value of the business to other assets e.g. properties rather than goodwill watch SDLT Note that ER still available against gains on other chargeable assets transferred 18

19 Goodwill on incorporation - back on? Worth considering selling goodwill again now CGT rate only 20%? Share of goodwill valued at 1,000,000 Transfer to Ltd company 30 June 2016 CGT due 31 January 2018 = 200,000 1,000,000 credit to loan account Net cost 800,000 No CT deduction for goodwill amortisation Say 10 years = 100,000 p.a. disallowed Sufficient profits to pay dividends? s162 incorporation relief is it a business? Ramsey v HMRC UKUTT S162 TCGA holdover applies on transfer of a business Does not have to be a trade Gains held over into base cost of new shares issued Property rental business transferred 10 flats FTT agreed with HMRC that not operated as a business! 20 hours a week arranging maintenance, collecting rent, cleaning between lets Wrong decision? Overturned at UTT 19

20 Entrepreneurs Relief 10% CGT on first 10,000,000 gains now Disposal of business assets Disposal of all or part of a business Disposal of shares in or securities of a company, or Disposal of assets following cessation of a business (3 years) (NB C16 striking off now gone must liquidate now) 20

21 Entrepreneurs Relief Trading Liquidation 4 YEARS 1 YEAR Entrepreneur relief on capital distribution if within 3 years Entrepreneurs relief Shares and Securities Shareholder conditions: Officer or employee 5% of shares and voting rights Company conditions: Trading company Min 1 year 21

22 Associated disposal? MR BLOGGS BLOGGS LTD Entrepreneur s Relief - associated disposal Asset used by partnership or personal company Relief available where disposal results from disposal of all or part of the business or shares AND Withdrawal from the business Just and reasonable apportionment of gain eligible if charge rent 22

23 Withdrawal from Business HMRC guidance CG63995 Associated disposal and material disposal of business assets linked Relief not due unless the disposal is related to the individual s reduction of his interest in the assets of the partnership or holding in the company From must dispose of at least 5% of shares or partnership interest Contrived Structures - ER on shares now? Managers (3% each) A B C D Private Equity Co ER on shares? Manco Ltd P-E Company 12% 88% Trading partnership 49 23

24 Corporate members and ER Is Corporate Member a Trading company? FA2015 inserted s169(4a) TCGA 1992 Activities of a company that is member of partnership treated as non-trading activities Thus unless cormpany also has significant trading activities in addition to partnership share no ER now! 50 Entrepreneurs Relief Castledine case Mr C held 5% of company s ordinary shares The company had also issued a number of deferred shares no rights to dividends, no votes, limited rights to capital on a winding up = worthless Should these shares be considered as ordinary share capital? If so Mr C only had 4.9% Held: deferred shares are ordinary shares Issued for a genuine commercial purpose As < 5% held by Mr C no entrepreneurs relief 24

25 Entrepreneurs Relief McQuillan case Mr and Mrs McQ each held 33% of company s ordinary shares (total 100) The company had also issued 30,000 redeemable nonvoting shares representing a loan to company No voting rights, no dividend rights, redeemable at par Should these shares be considered as ordinary share capital? If so Mr and Mrs McQ held <1% Held: the redeemable shares not ordinary shares Thus CGT entrepreneurs relief Entrepreneurs Relief Not officer/employee J K Moore v HMRC (2016) UKFTT Purchase by company of own shares Mr Moore owned 3,000 out of 10,000 shares Fell out with other directors benefit company trade to buy back 2,700 his shares (90% reduction) 300/7,300 after buy back (4.1%) = CGT But entrepreneurs relief? - NO Resigned as director 28 February 2009 Special resolution for buy back 29 May

26 Company distributions CGT or IT? 54 Company distributions anti-avoidance New dividend rules director/ shareholders may seek to access accumulated profits in capital form: Sale to friendly third party Liquidation Repayment of share capital Purchase of own shares? in the consultation Clauses in latest Finance Bill If enacted will apply from 6 April 2016 Extends Transaction in Securities rules and introduces Targeted Anti-Avoidance Rule 55 26

27 Liquidations taxed as income if: A close company is wound up and an individual (S) with a material interest (5%) receives proceeds from the shares Within two years of that distribution S (or a connected person) continues to be, or becomes, involved in a similar trade or activity; and One of the main purposes of the winding up is to obtain a tax advantage Note successor could be unincorporated business 56 Company distributions Company Liquidation or Reduction in Share Capital currently taxed as Gain = 10% with entrepreneurs relief Where income accumulated in company may be taxed as income in future? Finance Bill 2016 Profits 1,000,000 Less corporation tax 20% (200,000) Retained profit 800,000 10% (80,000) Net cash to shareholder 720,000 28% tax Dividends taxed at 7.5%,32.5%, 38.1% now 57 27

28 Company liquidations if income If distributed as a dividend: Profits 1,000,000 Less corporation tax 20% (200,000) Retained profit 800, % (AR) (304,800) Net cash to shareholder 495, % tax 58 S698 ITA - transaction in securities (was s703 ICTA) HMRC have power To cancel a tax advantage Taxes transaction as income distribution 32.5% (or 38.1% if > 150,000) Not CGT at 10% / 20% Apply for clearance s701 (was s707) 28

29 IRC v Cleary Clearys Clearys Developments Ltd MJG Ltd CASH AND PROFITS IRC v Cleary Clearys Clearys Developments Ltd MJG Ltd 29

30 IRC v Cleary 2 sisters owned 2 companies Developments significant accumulated profits, cash MJG Ltd significant assets Sold MJG to Developments for cash at MV Caught by old s704d = IT distribution Not for bona fide commercial reasons 62 Application to Buy Outs? Secondary Buy Out Original PE Fund investor wants to exit Seeks Replacement Investor, Management Team retained Set up Newco Share and Cash deal Managers could be subject to IT on cash element not if 75% shares change hands 63 30

31 Company distributions non-statutory clearance? Not HMRC general practice to offer clearances on recently introduced legislation with a purpose test. They have however drafted a standard reply with a couple of simple examples More detailed guidance being drafted expected later this year 64 Company distributions HMRC standard letter The new legislation is designed to focus on the situation where shareholders are using winding up procedures as a means of distributing company profits, rather than paying dividends, so receiving the profits taxed as capital rather than income. The legislation applies only where all four conditions are met. HMRC expect the vast majority of distributions in a winding up will remain to be treated as capital receipts.. Conditions A and B are relatively straightforward; the company being wound up must be a close company and the individual must have held at least a 5% interest in the company

32 Company distributions HMRC standard letter.condition C is that the individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution. Trade or activity is not defined, and is therefore to be interpreted widely as anything done by the company. Condition C goes on to set out the way in which the individual would be viewed as continuing the trade or activity It will include as a sole trader, through a partnership, through another company, and through connection to the company of an associate.. 66 Company distributions HMRC standard letter.condition D is that it is reasonable to assume, having regard to all of the circumstances that there is a main purpose of obtaining a tax advantage. The circumstances in particular include that condition C is met. HMRC s view is that Condition C is widely drawn but Condition D narrows the application to circumstances where, when considered as a whole, the arrangements appear to have a tax advantage as one of the main purposes.. HMRC Letter includes simple examples 67 32

33 Company distributions HMRC example 1 Mr A has been the sole shareholder of a company which carries on the trade of landscape gardening for ten years. Mr A decides to wind up the business and retire. Because he no longer needs a company he liquidates the company and receives a distribution in a winding up. To subsidise his pension, Mr A continues to do a small amount of gardening in his local village. When viewed as a whole, these arrangements do not appear to have tax as a main purpose HMRC view is that CGT treatment would apply 68 Company distributions HMRC example 2 Mrs B is an IT contractor. Whenever she receives a new contract, she sets up a limited company to carry out that contract. When the work is completed and the client has paid, Mrs B winds up the company. Here it looks like there is a main purpose of obtaining a tax advantage. All of the contracts could have been operated through the same company, and apart from the tax savings it would seem that would have been the most sensible option for Mrs B. HMRC view is that from 6 April 2016, in these circumstances the distribution will be treated as a dividend and subject to income tax

34 EIS and Seed EIS and CGT planning Tax breaks for EIS investor 30% income tax credit* Max 30% Disposal CGT exempt* Deferral of gains * Provided not connected Capital loss relief v income 34

35 Qualifying Trading Company Carry on qualifying trade, or Parent co of trading group Unquoted (includes AIM) Gross assets 15m before issue (was 7m) 16m after issue (was 8m) SP2/00 - gross assets per B/Sheet EIS / EMI - Qualifying Trades UK companies or those with UK PE (branch) Certain trades excluded (< 20%) : Dealing in land, shares, commodities, futures etc. Dealing in goods other than wholesale/ retail Banking, insurance, HP, financial Leasing, (royalties OK) Legal and accountancy 35

36 EIS / EMI Excluded activities: Property development Farming, market gardening Woodlands and forestry Operating/managing hotels Operating/managing nursing homes Companies receiving Feed In Tariffs Providing services for non-qualifying trade Seed EIS Qualifying Individual Unconnected investor Not > 30% of share capital (with associates) Not an employee of company (nor associates) May be a director however New issue of shares for cash Retain shares for 3 years or relief clawed back Clawback if value received from company 36

37 Seed EIS Associates Spouse, parent, child or Remoter forebear or issue Trustees of settlement where individual (or above) settlor Not brother, sister, in-laws Business partner Business Angels Investors may become paid directors and qualify Unless previously connected Or involved in carrying on any part of trade carried on by the company May make further investment within 3 years 37

38 Seed EIS relief made permanent Was to apply from 2012/13 for 5 years: 50% IT reducer up to 100,000 each tax year Plus CGT exemption on 50% of gains reinvested No CGT on disposal of shares (after 3 years) Total 150,000 investment per company Many rules based on EIS Unconnected investor New Qualifying trading company Seed EIS Qualifying Company Newly incorporated company: < 2 years prior to issue of shares < 200,000 gross assets prior to share issue < 25 employees when shares issued In good financial health not company in difficulty? Unquoted companies only Must not be in partnership Carrying out qualifying business activity (as EIS) Max 150,000 share issue qualifies for relief 38

39 Seed EIS - CGT exemption Catherine sells asset June ,000 making capital gain 80,000 Invests 80,000 in qualifying Seed EIS company(s) No CGT on 40,000 capital gains saves 14% Also gets 40,000 (50%) reduction in 2015/16 income tax liability Potentially 64% tax relief New Seed EIS Example Catherine now sells the SEIS shares in July 2018 for 350,000 Gain on seed EIS company shares EXEMPT No tax on reinvested gain of 80K But what if Co goes bust? What is her risk? SEIS cost her 80K ( 5, ,000) = 34,400 Set loss against Income saves 45% = 15,480 39

40 Making Seed EIS work for your clients Johnny started a new software company 2013 Needs 20,000 for new computers, plant His aunty Betty has 20,000 in bank minimal interest She buys shares in nephew s company 10,000 income tax relief (50%) Gains up to 10,000 exempt No CGT on disposal of shares after 3 years Company goes bust set loss against income (s131) Property disposals 20% instead of 28% CGT Reinvest the property gain in EIS company shares Defers the gain until the shares are sold Gain comes back into charge at the general rate of CGT, currently 20% for a higher rate taxpayer. No minimum holding period for EIS deferral relief (3 years for income tax relief and unconnected) The reinvestment must take place during the period of 12 months before to 36 months after the date of disposal of the property. 40

41 Property disposals 20% instead of 28% CGT Cliff sells property in November 2016 for 300,000 making a capital gain of 100,000. Reinvest the 100,000 gain in EIS shares Jan The 100,000 gain would be deferred until the EIS shares are sold and the 28,000 CGT not payable If unconnected deduct 30,000 (30%) IT liability Cliff sells the EIS shares in February 2020 for 105,000. 5,000 gain on the EIS shares exempt from CGT The 100,000 deferred gain comes back into charge at the general rate 20%, so just 20,000 CGT payable. Capital gains by companies 41

42 Should we form a group? Mr Bloggs 100% of A and B 10% CGT if sell B Ltd (entrepreneurs relief) A Ltd B Ltd ER or SSE? SSE for serial entrepreneur: Mr Bloggs No tax if sell B Ltd (SS exemption) Bloggs Holdings Ltd A Ltd B Ltd 42

43 Subst. Shareholding exemption TRADE CO. 10% CG EXEMPTION NO CAPITAL LOSS TRADE CO SSE - Conditions Investing company =trading company or trading group Target - trading co or group Substantial = 10% issued shares Direct or indirect holding Must hold shares >1 year 43

44 SSE - interpretations Trading company and trading group Essentially same as CGT business taper: company carrying on trading activities whose activities do not include substantial activities other than trading activities Substantial = 20% Appropriations to/from stock Stock => fixed asset = DI profit or loss! Use mv - Sharkey v Wernher Fixed asset => stock = gain Again use mv Or elect mv less gain (Mv plus capital loss) turns into trading loss! 44

45 Inheritance Tax Refresher and Update IHT Basics Tax on value of estate at death + Gifts within 7 years of death 40% tax after 325,000 => 2017/18 Conservative manifesto 1,000,000??? Therefore give away early? Retain sufficient to live on! 45

46 IHT Basics Importance of Domicile UK domiciled IHT on worldwide assets Remain UK domiciled for 3 years if emigrate Non UK domiciled IHT on UK situs assets only Deemed UK domiciled for IHT if resident for 17 years Planning: Put Foreign assets into trust while non Domiciled Assets are Excluded Property No UK IHT Annual IHT Planning Exemptions what are there? Annual Wedding Normal expenditure (gifts out of income) Family Maintenance Charity Watch interspouse if one non dom (now 325K) Watch interaction between chargeable gifts and PETs = 14 year planning? 46

47 Exempt transfers -lifetime only Annual exemption - 3,000 Small gifts Marriage exemption Parents - each 5,000 Grandparents,remoter 2,500 Spouses 2,500 Others 1,000 Normal expenditure out of income 36% IHT if leave 10% to charity Applies to deaths after 6 April 2012: 36% IHT rate if bequeath >10% of estate to charity 10% of estate after exemptions, reliefs, NRB Add back charitable legacy = 10% of baseline amount Example: George, single man, dies leaving estate 2,325,000 after exemptions and reliefs 47

48 IHT charity bequest example No charitable bequest: IHT payable 40% = 800,000 Net estate 1,200,000 (+ 325,000) 200,000 left to charity: IHT payable 36% = 648,000 Net estate 1,152,000 (+ 325,000) 200,000 bequest saves 152,000 tax (76%) 10% IHT if leave 10% to charity Divide estate into 3 components: Survivorship component = property which passes automatically to a surviving joint owner. Settled property component = assets in trusts where deceased had a life interest General component = the rest, i.e. free estate 10% test applied to each component separately, or can combine 48

49 Gifts out of income THREE CONDITIONS - S21(1) IHTA 84 Part of the normal expenditure of transferor (Taking one year with another) it was made out of his income Was left with sufficient income to maintain his normal standard of living Lifetime gifts Potentially exempt transfers: Outright gift to individual to life tenant trust to to A&M trust to Other transfers chargeable at time of gift, E.g. Transfer to discretionary trust Most trusts from Transfer of value by close company 49

50 Exemptions during lifetime and death Spouse exemption (Non domiciled 325,000 limit) Charities Political parties Heritage assets absolute and conditional exemption Lifetime gifts PETS can be done very late in life for IHT Gifts within annual exemptions - 3,000 pa Over 10 years - couple can give away 66,000 Watch CGT on gifts not if cash Hold over? S165 or s260 TCGA Take gain if within 11,100 AE 50

51 Terminal Illness planning Care in dealing with assets qualifying for APR/BPR Sale of shares/business for cash = no BPR on cash + CGT due Retention of share /business = 100% BPR and no CGT on death Consider transfer of assets between spouses to wash out CGT no CGT on death, uplift to MV Married couples & IHT nil band transfer From 9 October 2007 Unused nil band (%) from first spouses death transferred to survivor Utilised on second death No action required on first death Claimed by LPR on second death 51

52 Nil band transfer example Dad dies January 2008 All of estate left to Mum, no lifetime gifts Nil band used = 0%, balance 100% Mum dies 2015, nil band 325,000 Mum gets 200% = 650,000 nil band Nil band transfer example Dad dies October 2007 Nil Band 300, ,000 to children, balance to Mum Nil band used = 1/3, balance 2/3 Mum dies 2025, say nil band 360,000 Mum gets 166.7% = 600,000 nil band 52

53 Additional Main Residence Nil Rate Band Additional 175,000 IHT relief for family home No IHT on transfer of family home < 1,000,000 = ( 325, ,000) x 2 Also available if downsize Like NRB transferred to surviving spouse if unused Taper relief by 1 for 2 over 2,000,000 before IHT reliefs e.g. BPR, APR May need to review client s Will s and estate planning IHT Family Home Allowance Additional IHT relief for family home, phased in: 100, /18 125, /19 150, /20 175, /21 Then increased with CPI 53

54 IHT Family Home Allowance - tapering Taper relief by 1 for 2 over 2,000,000 before IHT reliefs e.g. BPR, APR Family home 900,000, business worth 5m would mean no Family Home relief! Couple with 2m home plus 1m savings owned jointly = 1,500,000 Leave half share to spouse on first death On second death, estate = 3m, no relief Residence Nil Rate Band - Downsizing Additional NRB available if downsize: 1. to a less valuable residence and that residence, together with assets of an equivalent value to the lost RNRB, has been left to direct descendants, or 2. sold their only residence, and the sale proceeds, or assets of an equivalent value, have been left to direct descendants, or 3. has otherwise ceased to own their only residence, and other assets of an equivalent value have been left to direct descendants 54

55 RNRB Downsizing Conditions Individual dies on or after 6 April 2017 The property disposed of must have been owned by the individual and it would have qualified for the RNRB had the individual retained it Less valuable property, or other assets of an equivalent value if the property has been disposed of, are in the deceased s estate Less valuable property, and any other assets of an equivalent value, are inherited by the individual s direct descendants on that person s death RNRB Downsizing Further Conditions Downsizing or the disposal occurs after 8 July 2015 No time limit on the period in which the downsizing or the disposals took place before death Any number of downsizing moves between 8 July 2015 and the date of death of the individual Would also include disposing of part of a property (including land occupied and used as a garden or grounds) or a share in it Where a property is given away, assets of an equivalent value to the value of the property when the gift was made must be left to direct descendants 55

56 RNRB Downsizing Example 1 Widow sells a home worth 400,000 in August 2020 and moves to a home worth 210,000. At the time of the sale the available RNRB is 350,000 By downsizing, she has potentially lost the chance to use 140,000 or 40% of the available RNRB When the widow later dies in October 2020, the home is worth 225,000 and is left to her children together with 500,000 of other assets. RNRB Downsizing Example 1 The estate can use an RNRB of 225,000. However, the widow was eligible for an RNRB of 350,000 had she not downsized. The estate can therefore claim an additional RNRB of 40% of the available RNRB (40% x 350,000) or 140,000. This would give a total RNRB of 365,000 ( 225, ,000). But this is more than the maximum available RNRB ( 350,000) so the additional RNRB is restricted to 125,000 Plus ex husband s unused NRB 56

57 Business Property Relief Business property 100% on unquoted shares + AIM 50% for control of quoted co. 100% on partnership interest, sole trader 50% on assets used in company (controlled) or partnership Not investment, dealing cos IRC v George, Farmer Own relevant property for 2 years 57

58 Business property (APR) - danger areas Relief denied if binding contract for sale Lifetime gifts Asset must still be owned by donee at donor s death Must qualify for BPR/APR at death Excepted assets cash? Barclays Bank Trust Co Assets used by family company? Own property personally - BPR? MR BLOGGS BLOGGS LTD 58

59 The End Any Questions? 59