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- News & Updates
The Pulse - Summer 2016
In this issue:
- So What Happens Next?
- Rob Hull Promoted to Partner
- The Main Residence Nil Rate Band
- Chris Erwood joins the Private Client Team
- Be Wary of the VAT Flat Rate Scheme
- Investors Relief
- Incorporation for Buy to Let Landlords
So What Happens Next?
Since our last issue we have seen a Brexit referendum victory, a new Prime Minister and the end of George Osborne, the architect of so many structural changes to our tax system.
The new Prime Minister, Theresa May tells us that “Brexit means Brexit” and negotiations to settle the terms of our departure is commencing shortly. Her new Chancellor is Philip Hammond, and we expect him to be a very different Chancellor to the previous incumbent, who combined running the economy with future political and electoral strategy.
Hammond has stated there will be no Emergency Budget. Instead he will monitor developments over the coming months before invoking what is certain to be a new strategy in the upcoming Autumn Statement, which if it follows the pattern of previous years will be held in late November or early December.
There can be no doubt this Autumn Statement is going to be eagerly awaited. Hammond has already stated he could use it to “reset” the country’s economic policy. Already predictions are being made over reductions in SDLT, with a view to encouraging the housing market, and substantial reductions in Corporation Tax to illustrate the UK remains open for business. Predictions by their very nature are hazardous, as much will depend on how events unfold in terms of economic performance and the trading models adopted to reshape our relationship with Europe. It is, however, very clear that Brexit is going to bring about wide structural changes, in which some sectors and businesses will be winners, and others will be losers. The Bank of England and the Treasury are going to have to react to how events unfold, as are we and our client base. An interesting road lies ahead.
Rob Hull Promoted to Partner
We were delighted that in early April, Rob Hull, who has been with us for 17 years, joined the partnership. It is always pleasing when a long time employee works their way through the ranks in this manner, and particularly so when it is due to increased client activity in the corporate market, and the resultant expansion of our corporate department that created the growth required for Rob to move into his new role.
The firm will next year be entering its 25th year as an independent practice, and it is essential that our growth does not prevent our clients from receiving the individual partner attention they have become so used to, and which has been the hallmark of the service we seek to provide. Rob fully understands the needs of our client base and the ethos of the firm, which we see as a key factor in ensuring we can sustain our continuing growth.
The Main Residence Nil Rate Band
Last summer in his first post-election Budget, George Osborne announced a new additional nil rate band for Inheritance Tax (IHT), intended to apply where an individual passes their main residence to a direct descendant on death. The Main Residence Nil Rate Band (MRNRB) will generate significant IHT savings, as long as qualifying criteria are met, and will need to be fully incorporated into wider IHT planning.
This relief in headline terms gives potential for an effective additional £350,000 of nil rate band to a married couple from 6 April 2020, but the terms of the relief are quite specific and the key features are as follows:-
MRNRB commences on 6 April 2017 and the allowance will be phased in as follows:-
- 2017/18 - £100,000.
- 2018/19 - £125,000.
- 2019/20 - £150,000.
- 2020/21 - £175,000.
From 2021, the allowance will increase by the consumer price index. In the meantime, the individual transferable nil rate band (NRB) will be frozen at £325,000 until 2021.
The value of the allowance will either be the net value of the interest in the main residence after deduction of liabilities (but before reliefs and exemptions), or the maximum amount of the band. Any unused band will be transferable to the estate of the surviving spouse/civil partner, irrespective of when first death occurs, provided second death occurs after the introduction of the band on 6 April 2017.
Where the value of the deceased’s net estate exceeds £2 million (again, after deduction of liabilities but before reliefs and exemptions), the band will be reduced by £1 for every £2 that the net estate exceeds the limit. Larger estates will therefore not benefit from this new relief.
For the purposes of the allowance, the main residence must be left to a direct descendant which is defined as a child, step, adopted or foster child of the deceased and their lineal descendants. It will also include spouses/civil partners of the direct descendant, or their widow/widower, provided that the spouse/civil partner has not re-married before the death of the deceased. Any existing wills that have not left the main residence to a direct descendent will not be eligible for this relief. The common use of Will Trusts following second death will therefore need to be reviewed.
It is intended that the MRNRB will be applied to the deceased’s interest in a residential property, which has been their residence at some point. The band will only be available on one residential property, although the executors will be able to elect which property to apply the allowance to, if there is more than one qualifying residential property in the estate.
In situations where the deceased has downsized or sold their residence, the allowance will still be available, provided the sale took place after 8 July 2015. The technical detail of how the band will be calculated in cases where downsizing has occurred is complex and specific advice needs to be obtained.
Please contact us if you would like to review your IHT planning.
Chris Erwood joins the Private Client Team
In the Spring of this year we joined forces with Erwood & Associates, the North Devon practice headed up by Chris Erwood. Chris provides high level private client and trust tax advice to clients across the South West and Midlands. She had worked with us on a consultancy basis for a number of years, so bringing her skills in house was a natural progression and one which will greatly benefit clients and strengthen the offering we provide to our personal client base.
Chris has earned a high reputation in the field of trust and estate tax and is the editor of a number of established reference books in this field. Bringing her on board to work with Jane Hamilton and the rest of our private client team will be a major factor in ensuring clients are offered the best advice possible in this area.
Be Wary of the VAT Flat Rate Scheme
Small traders and businesses should be aware of a potentially expensive VAT cost when opting to join one of HMRC’s simplification schemes.
Many businesses opt to join the VAT Flat Rate Scheme because of an apparent small gain. This being that the “flat rate” VAT paid over to HMRC is seemingly less than the VAT due under the normal basis of calculating the net VAT liability. In many cases a slight advantage can be gained, however businesses and sole proprietors should be aware that the flat rate of VAT due is applied to virtually all income and not just the vatable income received, so consequently, under the Flat Rate Scheme, VAT can be due on otherwise VAT exempt income. Where a business therefore receives exempt income, adopting the Flat Rate Scheme might cause considerably more VAT to be payable than otherwise would be the case.
HMRC guidance does actually point out that joining the scheme might cause a VAT registered business to pay more VAT than would otherwise be the case. However, we have recently seen a case where 90% of income was exempt from VAT and instead of obtaining a slight advantage, the taxpayer was potentially lining themselves up with a substantial and unexpected VAT liability.
Also, when choosing the Flat Rate Scheme, businesses should ensure that they select the correct flat rate of VAT to pay. Depending on the type of business there are differing flat rates of VAT payable.
If you have any queries regarding the Flat Rate Scheme, please contact us.
The Budget announcement that a new Investors Relief (IR) would sit alongside, and be in addition to, Entrepreneurs’ Relief (ER) came as a welcome surprise to corporate investors.
IR means that Capital Gains Tax (CGT) is paid at the reduced rate of 10% on qualifying gains up to £10million, as is the case with ER. The key difference is that IR is available only to external investors, who are not involved in the management of the company, whereas ER is available only to the company’s directors, officers or employees.
IR requires investors to subscribe for new Ordinary shares in non-listed trading companies on or after 17 March 2016 and hold them for at least three years. Unlike ER however, a 5% minimum holding is not necessary.
As the general rate of CGT (excluding residential property) has been reduced to 20%, the new IR could produce tax savings of up to £1million. It is hoped that IR will be popular with investors, and it should particularly benefit companies which have difficulty in accessing external finance because they are not eligible for the Seed Enterprise Investment Scheme or Enterprise Investment Scheme.
Incorporation for Buy to Let Landlords
The property sector has endured more than its fair share of legislative, economic and political blows in recent years. Buy to Let landlords in particular may be starting to feel victimised.
First, the announcement in the Summer Budget of 2015 that tax relief for interest and finance costs for residential landlords was to be restricted from 2017, with tax relief only being available at the basic rate of Income Tax on a phased basis through to April 2020. The same Budget announced that wear and tear allowance would be abolished, with a new relief based on actual spend to be introduced.
This was followed by the 2015 Autumn Statement announcement that an additional 3% Stamp Duty Land Tax (SDLT) will be applied to the purchases of residential property, other than one main residence, from 1 April 2016 onwards.
So, not much to smile about for Buy to Let landlords, but could incorporation provide a ray of hope?
The reason for considering incorporation is now not only the difference between Income and Corporation Tax. The restriction of interest rate relief could have the effect of taxing the rental income of highly leveraged portfolios at effective rates that could, by 2021, be approaching 70%.
In this potentially hostile environment, incorporation is certainly worth considering, but there are drawbacks. The transfer of property into a company will be deemed to be a disposal at market value. As gains on residential property are still subject to Capital Gains Tax (CGT) at 28% for higher rate tax payers, a significant charge could be payable. SDLT at the enhanced rates will also be charged. Owners of portfolios with a low base cost are unlikely to choose incorporation, unless they can make use of the specific incorporation reliefs potentially available for both CGT and SDLT.
Incorporation relief allows CGT to be deferred until the shares in the new company are sold. To be eligible, it must be demonstrated that the landlord is running a business. There is no legal definition of what constitutes a business but HMRC have suggested that the landlord, or their direct employee, must spend a minimum of 20 hours a week managing the property portfolio. In addition, HMRC are also likely to take into account the size of the portfolio, whether additional services such as cleaning are provided and other evidence of a business such as an office, website, business cards or brand name.
To secure SDLT relief, the Buy to Let portfolio must be held in a partnership as a business and incorporated into a company in which the partners are the shareholders.
This is an area where one size does not fit all and landlords, particularly those with highly leveraged portfolios, should be assessing their structure now before the phased removal of higher rate interest relief takes full effect in 2020.
These materials are intended as a guide only and professional advice should always be taken before any action is taken. Davies Mayers Barnett accepts no responsibility for any loss to any person resulting from acting on the contents of this publication.
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