Film partnership avoidance scheme was mis-sold – Horner v Allison

A recent case was heard at the High Court (Horner v Allison) concerning the sale of a film partnership avoindance scheme.

In this case, the Claimant, was Mr Horner who was a chartered accountant as a managing director at Atos KPMG Consulting Ltd.

On recommendation by a colleague (whom received commission for the recommendation), Mr Horner attended a presentation by Taipan Creative LLP.  The scheme was described as ‘a unique low risk high return investment proposition’.  One of the directors, Miss Allison called herself a specialist in film tax investment schemes and led him to beleive that the scheme had been approved by HMRC.

Under the scheme, Mr Horner initially received a refund from HMRC which was paid over to Taipan who deducted 80% of the refund as their fee before paying it over to Mr Horner.  A tax refund of £168,756.30 was received and Mr Horner was given his 20% by the defendants (£33,750).

HMRC investigated the scheme and, found that the scheme failed to meet the necessary requirements for the relief for film patnerships. Mr Horner therefore faced a demand to repay the whole tax rebate with interest and penalties;  at a total of £207,000. There had been no HMRC approval of the scheme.

The court found in favour of Mr Horner, finding that Miss Allison had made representations which she knew to be untrue and as a result was liable to Mr Horner in deceit. Mr Horner was entitled to recover damages from Miss Horner amounting to £185,832.25.  However it appears unlikely that Miss Allison will be able to pay over the sum.

Inheritance Tax Series – Relief for Falls in Value (Part 2 – Transfers on Death)

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Inheritance Tax & Relief for Falls in Value (Part 2)

In the current economic climate reliefs that reduce the amount of inheritance tax payable where assets have fallen in value may be of particular interest to taxpayers and their advisors.

Transfers on Death 

Inheritance tax is generally calculated based on the value of the property at the date of death.

However, in some circumstances it may be possible to reduce the value on which inheritance tax is payable where the asset is later sold at a loss.

Where the claim is made, the base cost of the asset for capital gains tax purposes will be reduced to the new probate value so as to avoid the loss being relieved twice.

Sales of Listed Shares/Unit Trust Units

Where the personal representatives sell listed shares, units in an authorised unit trust or shares in an open ended investment company at a loss within 12 months of death a claim may be made to reduce the value that is subject to inheritance tax.

The claim will normally be made by the personal representatives (as the person liable for inheritance tax on the free estate) therefore the relief is unlikely to be available where the shares/units are distributed and later sold by the beneficiaries.

In the case of a trust in which the deceased had a qualifying interest in possession, there are provisions which permit the trustees to make a similar claim.

The relief is calculated in accordance with special rules and it is important to note that the amount of relief will be affected by:

  • All sales (whether at a gain or loss) by the personal representatives/trustees  in the 12 month period,
  • Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 2 months after the last sale in the 12 month period.
  • Costs of sale and purchase are ignored

Sales of Land & Buildings

Where the personal representatives sell land at a loss within 4 years of death, a claim may be made to reduce the probate value for inheritance tax purposes.

Again, the relief is not available where the property has been appropriated to a beneficiary and later sold.

Furthermore, the relief is restricted where the sale is to certain connected parties with an interest in the property.

The amount of relief will be affected by:

  • Sales at a loss by the personal representatives/trustees within 4 years of death,
  •  Sales at a gain by the personal representatives/trustees within 3 years of death,
  • Profits and losses that are less than the lower of £1,500 or 5% of probate value are ignored.
  • Purchases by the personal representatives/trustees in the period commencing with the date of death and ending 4 months after the last sale in the 3 year period.

Sales of ‘Related Property’

Where assets were valued using the related property rules and there is a sale at a loss within 3 years, a claim for relief may be made.

The relief is given by reducing the probate value to the standalone value of the asset at the date of death (i.e. ignoring the related property rules) and not to the sale value.

Inheritance Tax Series – Relief for Falls in Value (Part 1 – Lifetime Transfers)

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Inheritance Tax & Relief for Falls in Value (Part 1)

In the current economic climate reliefs that reduce the amount of inheritance tax payable where assets have fallen in value may be of particular interest to taxpayers and their advisors.

Lifetime Transfers

Where an asset is transferred during lifetime and the transferor does not survive 7 years from the date of the gift, inheritance tax at death will normally be calculated based on the value as at the date of the gift.

However relief is available where:

  1. The asset is retained by the transferee (or their spouse/civil partner) and the value at death is lower than the value at the date of the gift, or
  2. The asset is sold by the transferee (or their spouse/civil partner) at a loss prior to the date of death and the sale does not fall foul of anti-avoidance provisions aimed at transfers not at arm’s length.

The rules apply to most types of assets except wasting chattels (tangible movable property with a wasting life of no more than 50 years such as plant and machinery).

The relief is available in respect of inheritance tax on both failed Potentially Exempt Transfers (PETs) and the additional inheritance tax payable on death in respect of Chargeable Lifetime Transfers (CLTs).

However, the relief does not affect the original computation (i.e. in the case of a CLT there will be no change to the computation of the lifetime tax payable at the date of gift) or the cumulative total for calculating the available nil rate band on subsequent gifts and the death estate.

The claim must be made by person that is liable to pay the inheritance tax in respect of the PET/CLT which will normally be the donee.

Inheritance Tax Series – Overseas Issues

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

Inheritance Tax – Overseas Issues

General Rules

Where a person is UK domiciled their estate will be subject to inheritance tax on their worldwide assets.

Therefore overseas assets such as foreign bank accounts, holiday homes etc. will be subject to inheritance tax in the UK.

Relief is given for foreign liabilities (for example an overseas mortgage) by deducting the amount of the liability from the value of non UK property.  Any excess can then be set off against UK property.

 Foreign Property – Deduction for Expenses

Where the estate includes overseas property, the personal representatives may incur additional expenses in connection with the disposal.

It is possible to claim a deduction for expenses of administering or selling overseas property up to a maximum of 5% of the value of all foreign property in the estate.

Thus, where the estate of a UK domiciled person includes a house in Spain worth £250,000, the personal representatives may claim a deduction for expenses of up to £12,500 (£250,000 x 5%), potentially saving inheritance tax of £5,000 (£12,500 x 40%).

Double Tax Relief

Where an estate is subject to inheritance tax in both the UK and another country on the same assets the estate may be subject to double tax.

The UK has double tax treaties for inheritance tax purposes with the Republic of Ireland, USA, South Africa, France, Netherlands, Sweden, Switzerland, Italy, India and Pakistan.

These double tax treaties set out the taxes that qualify for relief under the agreement, the taxing rights of each country in respect of different types of assets as well as the mechanism for double tax relief where inheritance tax is payable in both countries.

It is important that care is taken to review the appropriate double tax treaty carefully because the personal representatives will need to understand whether relief should be claimed in the UK or abroad.

Where inheritance tax is payable in the UK and a similar tax is payable in a country that does not have a double tax treaty with the UK, double tax credit relief should be available in relation to assets situated in the other country under the unilateral relief provisions.

For these purposes the location of the asset is determined in reference to UK law.

The amount of double tax relief under the unilateral provisions is limited to the lower of (i) the UK inheritance tax, or (ii) the foreign inheritance tax.

In cases where tax is payable in both the UK and another country in relation to an asset that is situated in a third country, or treated as situated in the UK under UK law and the other country under that country’s law, a proportion of the tax may be relieved in the UK.

Partnership Tax Update

In this article on Partnership Tax, we will take a look at some of the latest developments in practical tax matters relating to Partnerships. 

Incorporation of a Business within an LLP

The increased usage of LLPs as business vehicles has raised thoughts over how a business owned by an LLP could be transferred to a company.

Routes for incorporation must be carefully considered and options include transferring the business of the LLP to the company or transfer of the members’ interests to the company.   Generally commentators opinion is that HMRC are indifferent to the structure utilised but the incorporation relief rules regarding CGT must be reviewed thoroughly in the planning phase.

Also solicitors should be consulted to make sure implementation is carried out properly.

Incorporation Relief

Key tests for the relief from capital gains tax include whether a business is being operated and whether the whole business is transferred.

The Tribunal Case of Elizabeth Ramsey looked at whether a property portfolio could be a business.  The Tribunal Judges held that in her case, it wasn’t a business, but there is some doubt as to whether this decision was appropriate.  It isn’t binding given that it was a Tribunal case.

SDLT on Incorporation

It is thought that there could be an interpretation of the current rules where SDLT is avoided on the transfer of a property as part of a business from a partnership to a limited company.  Such an interpretation may be in contravention to HMRC’s view and specific written advice should be obtained.

Certainly conversation to a partnership business from a sole trader and then incorporation could be caught by anti-avoidance rules.

Corporate Partner

Consideration of the introduction of a company into a  partnership of natural persons is still a consideration in terms of allowing a structure that works commercially for a business.

If commercial reasons dictate that a company would be a useful partner then tax savings might be achieved, especially as we are still to have a highest rate of income tax of 45% + 2% NI.

It is important to note that the introduction of a company needs bespoke consideration and could cause difficulties  in terms of partnership succession, unless a careful plan is set out.  There are a number of different options under which a company could interact with a partnership.

Inheritance Tax Series – Reduced Rate of IHT & Gifts to Charity

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Reduced Rate of Inheritance Tax – Charitable Donations

 

Gifts to registered charities, whether in lifetime or on death, are as a general rule exempt from inheritance tax.

 

In addition, with effect from 6 April 2012 where a person gives 10% of their ‘net estate’ to charity, the estate may benefit from a reduced rate of inheritance tax of 36%.

 

There are specific rules to determine the amount of the net estate for these purposes. Furthermore, assets can be owned in different ways (for example; joint ownership, tenants in common and trusts), and the 10% test must be applied to the different ownership types when considering whether the relief is due.

 

In cases where the 10% test is not currently met it should be possible to either (1) amend the Will during lifetime to increase the amount of charitable gifts, or (2) where the taxpayer is already deceased the personal representatives could enter into a deed of variation within two years of death.

 

In certain circumstances, it may be possible to achieve an overall tax saving by increasing the amount of the charitable gift.

 

However, in the majority of cases this is unlikely to be the case because the benefit of the lower tax rate will be offset by the increased cost of increasing the amount of the donation.

Inheritance Tax Series – Transfer to Spouse

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Transfer to Spouse

 

The general rule is that transfers between spouses whether on death or during lifetime are normally exempt from inheritance tax.

 

However, where the gift is made by a UK domiciled person to a non UK domiciled person, the spousal exemption is currently limited to £55,000.

 

The Draft Finance Bill 2013 includes legislation that will increase the exempt amount to the amount of the nil rate band at the date of the transfer.

 

Thus increasing the amount that may be transferred free of inheritance tax to a non UK domiciled spouse from £380,000 (£325,000 + £55,000) to £650,000 (£325,000 + £325,000).

 

Furthermore, the non UK domiciled spouse will be able to elect to be treated as though they are UK domiciled for inheritance tax purposes. However, such an election will bring the entirety of the spouse’s estate into the UK inheritance tax net, therefore advice should be taken before an election is made.

 

These changes are expected to come into effect from 6 April 2013, although the precise wording of the legislation may change before the provisions are enacted into law.

Inheritance Tax Series – Nil Rate Band

A series of articles highlighting key areas that affect taxpayers and practitioners involved with inheritance tax and estates and identifying opportunities to mitigate inheritance tax.

 

Nil Rate Band

 

The amount that may be passed on to a person’s beneficiaries free of inheritance tax is determined by the nil rate band at the date of death.

 

The nil rate band for inheritance tax has been frozen at £325,000 per person since 2010.

 

The Chancellor announced in the Autumn Statement that the amount of the nil rate band will rise to £329,000 with effect from 6 April 2015.

 

Since October 2007 it has been possible to transfer the unused proportion of the nil rate band between spouses, although the benefit of this can only be realised on the death of the second person and not in respect of a lifetime transfer, such as a transfer to trust.

 

Where a person survives more than one spouse, the maximum amount of the nil rate that may be transferred is equivalent to one full nil rate band.

 

However, with careful tax planning, it may be possible for their combined estate to benefit from 3 full nil rate bands. Thus reducing the overall amount of inheritance tax payable.

 

Ideally inheritance tax planning such as this should be undertaken during lifetime through careful drafting of Wills, although it may also be possible to implement the planning post death through a deed of variation.

UK Swiss Tax Treaty: Letter Received From Swiss Bank

As the UK Swiss Tax treaty came into force on the 1 January 2013 the majority of UK residents with Swiss bank accounts should now have received correspondence from their Swiss bank informing of their options.

Strictly speaking the banks have until the 1 March 2013 to notify individuals that they have been identified as a ‘relevant person’ for the purpose of the UK Swiss treaty.

Under the terms of the treaty a ‘relevant person’ must make a notification of their intended option by 31 May 2013 to their bank, however from our experience banks have been requesting that individuals make their decision earlier.

A relevant person is broadly a UK resident who is the beneficial owner of a Swiss bank account or deposit.  For the purposes of the one-off charge of 21%-34% residency is determined as at 31 December 2010.

If an option has been selected and notified to the bank then it will become irrevocable as at 1 January 2013 therefore it is important the options are given due consideration before any action is taken.

Options Available 

A)     To retain anonymity but accept a one-off charge of 21%-34% plus withholding taxes on future income and gains received

 B)      Alternatively in order to avoid the one off levy and annual withholding taxes it is necessary that individuals either:

1)      Provide certification to the Swiss bank that you are a non UK domiciled taxpayer using the remittance basis, such that you are not subject to UK tax on your foreign income/gains (albeit that you may be subject to a remittance basis charge), or

2)      Make a voluntary disclosure to HM Revenue and Customs (possibly under the LDF) and either:

i)          Close your Swiss bank account , or

ii)       Authorise the Swiss bank to provide your details to HM Revenue and  Customs by signing a voluntary declaration.

 3)      Close the account and move the funds to another jurisdiction prior to 31 May 2013.

Note however that banks have agreed not to assist individuals in this process and will not, as far as we understand, re-book an existing UK customer’s account through, for example, their Hong Kong branch or subsidiary.

This is a high risk approach for the following reasons:

i)    Similar agreements may be signed with other jurisdictions in the future.

ii)     Significant resources are being channelled into tackling tax evasion; higher penalties, up to 200%, as well as a higher tax bill can be expected than if taxpayers make a voluntary disclosure or use the Swiss or Liechtenstein arrangement.

iii)      Criminal prosecution is a greater possibility

iv)       If HMRC make contact before the Swiss deal comes into force or a voluntary disclosure is made then the taxpayer will face an intrusive investigation into their affairs as well as the associated professional costs.

 How Eaves & Co Can Help

 If you have received a letter from a Swiss bank and would like to discuss which option is best for you, please get in touch for an initial consultation with Paul Davison on 0113 244 3502 or pdavison@eavesandco.co.uk.

Loan Loss Relief Claim Allowed in Part – Goldsmith (TC2197)

The recent tribunal case of Goldsmith (TC2197) dealt with availability of loan loss relief for capital gains tax purposes and its subsequent conversion as an Income Tax loss.

Mr Goldsmith was the Director of a property trading company. The company took out loans from a bank in order to purchase two flats, which Mr Goldsmith personally guaranteed.

One flat was sold and the other was let out, however the rent received from the flat was less than the interest payments on the loan. As a result Mr Goldsmith made payments directly to the bank to make up the shortfall.

As a result of the situation the bank demanded full repayment of the loan, with the second flat sold at a loss and the company dissolved.

The taxpayer claimed loan loss relief under TCGA 1992 s.253 (loans to traders) and for the loss to be offset against his other income under ICTA 1998 s.574.

HMRC denied the loan loss relief claim as they argued that the loan was irrecoverable at the outset and therefore did not become irrecoverable. Furthermore HMRC felt that there was no evidence that the repayment was required through the bank guarantee and therefore did not meet the statutory conditions.

The tribunal ruled in favour of the taxpayer in relation to the loan loss relief claim. They said because the bank had decided to lend money to the taxpayer’s company this meant that the loan cannot have been irrecoverable at the outset as a bank would not make such a loan.

It was also found that lack of evidence of a demand to the guarantor was not on its own sufficient to deny the loan loss relief claim.

The borrowed money was used for the purposes of the company’s trade and the money was paid by the taxpayer as interest on the loan. As a result the tribunal ruled he was entitled to claim loan loss relief under s.253 for the difference between the rent received and the interest payments made.

HMRC argued additionally that even if loan capital loss relief was allowed there was no basis for setting the amount against general income. The tribunal agreed and so the taxpayer’s appeal was only allowed in part.