Capital Taxes Update and Planning

Transcription

1 Capital Taxes Update and Planning Martyn Ingles FCA CTA CGT Update - Agenda Does my property qualify as my PPR? CGT payable by non-residents 2015 impact on PPR Relief for gifts business assets and using trusts Relief on incorporation no ER on goodwill now Entrepreneurs relief watch premises owned personally Making Seed EIS work for your clients IHT planning 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 Self-settlement anti-avoidance S165 and s260 hold over denied Where transfer to settlor interested trust (= Settlor, spouse or minor child now) Relief also clawed back if becomes settlor interested Within 6 years of end of tax year of transfer Rollover relief Replacement of business assets 12

13 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 Rollover relief M SELL OLD ASSET 36M BUY NEW ASSET 13

14 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 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 14

15 CGT on incorporation 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 15

16 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 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 16

17 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 **** 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 *** 17

18 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) 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 18

19 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 Incorporation - CGT S165 Hold gain over into cost of assets Assets have low base cost Use if property retained personally S162 Hold gains into base cost of shares Assets at market value No gain if asset sold shortly after 19

20 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 Entrepreneurs Relief 10% CGT on first 10,000,000 gains now 20

21 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) Entrepreneurs Relief Trading Liquidation 4 YEARS 1 YEAR Entrepreneur relief on capital distribution if within 3 years 21

22 Entrepreneurs relief Shares and Securities Shareholder conditions: Officer or employee 5% of shares and voting rights Company conditions: Trading company Min 1 year Associated disposal? MR BLOGGS BLOGGS LTD 22

23 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 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 23

24 Withdrawal from Business G owns shop from which trades in partnership with son 60%:40% Reduces involvement and ratio changed to 20%: 80% G also gifts premises to son Continues to work full time Entrepreneurs relief applies to both disposals Associated disposal - Example Mr and Mrs Bloggs own 100% of trading company Premises used by company owned personally Retire, close business and sell shares to competitor 2015 Later in 2015 sell premises to developer, having stood empty NB not used Entrepreneurs relief applies as within 3 years NB if they develop premises NO ER 24

25 Associated disposal Rental restriction Restrict entrepreneurs relief if charge rent for usage of property Or not 100% used in the business Just and reasonable apportionment from when starts being used in the business Only consider rent from 6 April 2008 Rental restriction - 80,000 gain years 6 years If full MV rent charged then restrict relief to 10/16ths if 80,000 gain, 50,000 qualifies 25

26 Associated disposal problem Does client want to retain premises long term? Reduce/ stop charging rent if selling with the business Mortgage on property? Lease agreement? Hold property in pension fund in future? 0% CGT v 28% Transfer to SIPP? 40% relief v 10% CGT 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 54 26

27 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! 55 Corporate Member ER on shares now? A B C PROFITS CORPORATE A B C member 20% CT 45% IT + 2% NIC ABC LLP 56 27

28 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 28

29 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 29

30 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 30

31 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 31

32 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 32

33 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 33

34 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) Capital gains by companies 34

35 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 35

36 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 36

37 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! 37

38 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! 38

39 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? 39

40 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 40

41 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 41

42 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 42

43 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 43

44 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 44

45 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 45

46 IHT Family Home Allowance 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 46

47 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 Business Property Relief 47

48 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 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? 48

49 Barclays Bank Trust Co. Excepted assets rule Deceased died 1990 Owned 50% of trading company 450,000 cash mountain at death - t/o 600,000 In 1990 made offer for new premises? 1997 spent 355,000 new venture 300,000 of cash - no BPR Own property personally - BPR? MR BLOGGS BLOGGS LTD 49

50 Brander (PRs of the Earl of Balfour) v HMRC Liferent interest in estate - Core elements: farming, forestry, shooting, let properties and a private water supply Operated for years - Entered limited partnership with successor and nephew HMRC denied BPR on death Did deceased's interest in the partnership replace the previous business carried out by the deceased for the purposes of IHTA 1984 s 107, and if so, what was the nature of that business? Brander Case BPR available on Scottish Estate Various activities on estate were interlaced Factors to be examined: T/O, profit etc (Farmer case) No precise quantitative assessment possible Matter of general assessment Overall mainly a trading activity Letting was ancillary to other activities 50

51 IHT No BPR on holiday lettings Pawson v HMRC Holiday bungalow on Suffolk coast Fully furnished and run as a business although occupied by the family 3 weeks each summer Cleaner and gardener employed Limited services provided FTT held that it was operated as a business Not wholly or mainly the making or holding of investments HMRC appealed to UTT = BPR NOT DUE Finally - Pensions and Estate Planning No tax on fund where deceased was under 75 and fund passes to nominee 55% charge abolished Over 75 - Where pension fund passes on death the nominee will inherit the tax treatment marginal tax rate on amounts drawn 45% if take lump sum 51

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