Main residence relief and periods of deemed occupation

31 March 2016

Most taxpayers are aware of Private Residence Relief (PRR) when it comes to capital gains tax on their main place of residence however there are aspects to this relief that are less commonly known.

If for any period of time the taxpayer occupied the property as their main private residence then the last 18 months of ownership would be exempt from capital gains tax (CGT). This would apply even if the taxpayer has another property as their main place of residence at the time of sale.

Any periods of absence under the following circumstances would be deemed as occupying period:

  • Period(s) of absence not exceeding three years in total may be treated as period of occupation.
  • Period(s) of absence not exceeding four years in total which the individual was prevented from residing in their main residence due to work situations  or their place of work or any conditions imposed by their employer.
  • Any period(s) of absence where the individual works and performs all of their duties outside of the UK.

In order for any of the above reliefs to apply:

  • Both before and after the period of absence the taxpayer must have occupied  the property as their main place of residence, reoccupation is not necessary if the terms of employment require residence elsewhere.
  • For disposals before 5th April 2015 it was also necessary that the individual does not have another place of residence during the period of absence (the individual does not live in a property which they own or rent during that period.)

The complexities of Main residence Relief are often understated, if you are considering any transaction involving a property that you have lived in, or intend to live in at some point in the future you should always consult a tax advisor to discuss your intentions.

A common pitfall is that when a couple get together already owning their own main residences they might decide after marriage to move into a new home together, rent out the old main residences and put them in joint names, this exposes at least half of their eventual gains to CGT.

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993. 

Inheritance Tax - Gifts and Passing on your home.

23 March 2016

Passing the family home down through the generations can be an effective inheritance tax (IHT) planning exercise. The original owner (the donor) can escape inheritance tax on gifts as long as they live for seven years after making the gift.

If the donor does not survive the gift by 7 years then any gifts made within the seven years before death become chargeable to IHT and count towards the £325,000 inheritance tax threshold known as ‘the Nil Rate Band’.

However such gifts that become chargeable to IHT not covered by the Nil rate Band benefit from “taper relief” which gives an effective rate of IHT on gifts made between 3 and 7 years before the donor dies as follows:

IHT.JPG

The seven year rule applies to anyone who passes their home to their children before they die, however if they continue to have the benefit of living in the house rent free then their estate has to pay IHT on the home even if the donor survives for seven years or more after giving it away, this is due to an anti-avoidance provision called “gift with reservation of benefit” (GWR).

If the original donor leaves the property or rents the property at market rate then the seven year rule applies and the gift  is a potentially exempt transfer (PET).

The donor could give away half of their home to their children (or anyone else) and as long as they survive seven years or more and the bills are split between them in the same proportion then the half given away won’t be included in their estate.

A new ‘Residence Nil Rate Band’ is being introduced from 2017-18 onwards, but this is not as generous as it could be and comes with so many conditions many have seen it as worthless.

It is still possible to give away the value of your home to the next generation whilst continuing to live in it in limited circumstances.

An IHT review has the potential to save huge amounts of tax on death, ultimately you have been taxed on the income that has generated your wealth throughout your lifetime, often at higher rates of up to 50%, so why should you suffer tax again at 40% on death?

If you require more information regarding inheritance tax (IHT) please contact us or call us on 0203 039 3993.

2016 Budget

17 March 2016

Following a more detailed review of the documentation on Budget Day these are a few of the more interesting developments in more detail.

Reform of the intermediaries legislation for public sector engagements

From April 2017, and following further consultation, the intermediaries legislation (IR35) will be extended such that all public sector bodies must ensure that any worker engaged via a Personal Service Company (PSC) is compliant with the legislation otherwise they must account for tax and national insurance on any payments made.

Currently it is the responsibility of the PSC to decide if it is caught by IR35 or not, the proposed change shifts the responsibility to the engaging body. If there are more intermediaries in the supply chain such as an agency then the entity closest to the PSC in the supply chain will be responsible.

HMRC have said they will provide assistance for public sector employers and agencies by introducing clear, objective tests for employers at the point of hire. For more complex cases where the result is not clear cut new tools will be designed to enable the engager to obtain a real-time HMRC view.

PSC's that provide their services outside of the public sector are unaffected by these changes, however the new tools will also be made available to them to assist them in their compliance with the rules.

The new Lifetime ISA

The possibility of a new Pension ISA had been suggested by commentators, the Chancellor has taken the idea a step further with the Lifetime ISA.

The Chancellor stated that often young people are faced with a difficult choice, either save for a deposit to buy their first home, or save for their retirement. The Lifetime ISA effectively enables young people to do both at the same time.

From 6th April 2017 those under 40 will be able to save up to £4,000 into the Lifetime ISA each year and receive an additional 25% bonus from the government. This bonus is the equivalent to receiving basic rate tax relief on the investment.

Savings along with the government bonus will be available in retirement or to assist in buying a first home.

If funds are withdrawn at any other time then the government bonus and any investment growth must be returned to the government along with what is described as a 'small' 5% charge.

Savers can continue to make investments and receive the government bonus up to the age of 50.

Funds can be drawn to assist in the purchase of a new house 12 months after the account has been opened and from the age of 60 for use in retirement.

Corporation Tax losses

Currently there are complex loss relief rules for companies that generally allow losses carried forward only to be set against the same income stream.

From 1 April 2017 losses arising that can’t be utilised in the current period can be carried forward and used against profits from other income streams or from other group company’s income streams.

A restriction will apply such that only 50% of the profits in excess of £5 Mil will be relievable but this will only affect the largest 1% of companies.

Loans to Participators 

Currently when a participator becomes indebted to a company the company must account for tax at a rate of 25% of the balance owing at the year end unless the loan has been repaid within 9 months of the year end. The tax will be repaid to the company on the normal tax payment date for the accounting period in which the balance is repaid.

There are complex anti avoidance rules regarding repayment.

The new rules will apply to any indebtedness that arises on or after 6 April 2016, current balances will NOT attract the increased charge.
 

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

2016 Budget Summary

16 March 2016

Earlier today the Chancellor of the Exchequer delivered his 2016 Budget, one that many predicted would be a ‘boring’ budget.

As ever the devil is in the detail, following a review of the official budget documentation we can confirm the main tax headlines are:

  • Personal Allowance to rise to £11,500 and Higher Rate threshold to rise to £45,000 from 6 April 2017.
  • Fuel Duty frozen for sixth year in a row.
  • New Lifetime ISA for the under 40's enabling savings of £4,000 each year with a government bonus of 25% of the years savings up to the age of 50.
  • 'Help to Save' scheme for claimants of Universal Credit or Working Tax Credits enabling savings of up to £50 per month and after 2 years the government will apply a 50% bonus with an option to continue for another 2 years for a further bonus.
  • Corporation Tax rate to drop to 17% in 2020.
  • Corporation Tax loss relief rules to become more flexible from 1 April 2017.
  • Loans to Participators charge to increase to 32.5% for loans arising from 1 April 2016.
  • Capital Gains Tax rates to drop to 10% basic rate and 20% higher rate (except for residential properties and carried interest).
  • Capital Gains Tax rate of 10% for gains up to a lifetime limit of £10 Mil for long term investors in unlisted companies.
  • Entrepreneurs Relief for goodwill on incorporation to be allowed in certain circumstances (backdated to 3/12/2014) - This amends the rules for tax returns that have already been submitted.
  • Stamp Duty Land Tax (SDLT) on non-residential properties to change to slice system with rates of 0% on £0 to £150,000, 2% on £150,001 to £250,000, and 5% above £250,000.
  • New 'micro-entrepreneurs' allowance of £1,000 for property or trading income.
  • 100% First Year Allowances for businesses investing in low emissions cars to be extended to April 2021.
  • A new Sugar Levy on the soft drinks industry.

A more detailed analysis, including some of the headline statements, can be found in our more detailed guidance to be published tomorrow

If you require any assistance with any aspect of your tax affairs please contact us or get in touch today by calling 0203 039 3993.

 

Loan Account Problems

02 March 2016

Where a company makes a loan or advance to a participator a tax charge is imposed on the company of 25% of the balance outstanding at the accounting date unless the balance is cleared before the due date for the payment of the tax charge.

If a company has paid tax on a loan to a participator in an earlier accounting period then once the loan or advance is cleared then the company may claim a repayment of the tax paid in respect of the loan or advance and HMRC will issue a refund on the normal tax payment date for the accounting period in which the loan or advance was cleared.

Normally the loan or advance will be cleared by 1) Repayment, 2) Declaration of a dividend or a bonus, or 3) Writing off. In the case of writing off the participator is taxed as if he/she had received a dividend, and the company must pay primary and secondary class 1 national insurance as if it had made a payment employment income.

There is however a rarely used fourth option.

In the fourth option an asset of value can be transferred to the company by the participator in satisfaction of the loan or advance. If this is done before the tax payment due date for the accounting period in which the loan or advance was made then the tax charge is cancelled and no payment needs to be made by the company. If this is done subsequently then HMRC will repay the tax paid as outlined above.

There are obviously traps within the tax legislation that must be carefully navigated, such as the new ‘bed and breakfasting’ rules brought in in 2013.

TT Intelligence has a number of options to facilitate clearing the balance on the loan or advance, each being appropriate for different companies in different situations.

For a review of your options and a report specifically tailored to your company’s circumstances please get in touch today on 0203 039 3993.

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