HMRC Challenges on Entrepreneurs’ Relief and Dividend Planning – BEWARE

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Keeping up to date with technical developments is difficult, especially with so many updates these days, when it is difficult to sort the wood from the trees.

With the possibility of dividend planning many companies have chosen to have different classes of shares. In our experience they have not always thought through the wording of the proposed amended Articles or had legal advice, which has led on occasion to HMRC challenges. Many though have probably not been subject to HMRC enquiries so have muddled through, because the parties internally ‘knew what they meant to say’.

Attacks on dividend planning are now getting more ‘fashionable’ with HMRC seems to be the underlying message, taking in certain arrangements with ‘alphabet shares’ and dividend waivers.

The latest development may go beyond those arrangements and affect long term capital gains tax planning.

The current Finance Bill contains provisions whereby if there are different classes of shares in a company it may be difficult for a shareholder to show he has met all the new requirements to qualify for Entrepreneurs’ Relief. Of course, this is not yet law, but checking the position on such a valuable relief would be prudent. With the new qualifying period due to increase to 2 years from 1 year it would be wise to do this sooner rather than later, so as to implement any changes necessary as early as can be managed.

To the Battlements!

Here is a Tax Exempt Castle

castle

“That’s not a Castle!  It’s a cardboard cut-out!”

All together now;

“Oh No It Isn’t!”

“Oh Yes It Is!”

As the Pantomime Season approaches there may be a lot of it about?  By this, I do not mean the standard of scenery in the local production of Robin Hood, but the naïve way many people seem to view the “exemption” due under what strictly is private residence relief S222 TCGA 1992.  It is a relief because the rules apply to give a deduction against real chargeable assets.  The need to do a computation of a gain applies invariably.  The quantum of tax is subject to the amount of relief.  Admittedly, in many circumstances, this relief may amount to 100% of the gain, but that is by no means all circumstances.

There are (no doubt) many parents eagerly awaiting the return of their beloved offspring from University for Christmas.  They may even have helped purchase accommodation for them away from the family home.  How many are hoping any gain on such property will slip through, as a gain the particular child is “entitled to” on their “own home”?

Might they be correct in such interpretation?

Well, it depends ~ to use a famous technical phrase.

The recent case of K Lo demonstrates this.  In this case the taxpayer claimed private residence relief on a flat but this was rejected by the Tribunal.  They found it was for the taxpayer to show she was entitled to it, not HMRC to disprove her claim.  They found her story regarding her long term intentions for it to be her main home did not quite ring true.  Although they accepted the taxpayer stayed in the accommodation at weekends and during University vacations, they did not accept the “quality of residence” was sufficient to make it her main residence.  This “quality of residence” point was based on the Tribunal’s view of the facts, perhaps with an implication the taxpayer and her boyfriend would have done more (in the few months she owned the property) to clean up what was plainly a run-down, badly maintained house, full of rubbish hoarded by the previous elderly tenant, if they had truly intended to make it their first home.

The fact that she was not on the electoral roll at this address was another factor against the property being treated as her residence.  Thus, the Courts found not only was she chargeable to CGT with no private residence relief but also exposed to penalties because she had been negligent in not making proper disclosure and not taking professional advice to understand the areas of possible doubt.

The result equals one unhappy taxpayer, I imagine.

Interestingly, if she had taken professional advice, it may have been perfectly possible legally to make an appropriate election and thus eliminate both the capital gains tax and also the associated penalty.

Another Tax Tribunal noted recently (in George Edwards Consulting Ltd) it was ironic that by trying to save costs by not seeking professional advice, this inaction cost the taxpayer 3 times as much in penalties!

The penalty regime is now raising significant money for Government.  Getting professional advice to get things rights is a prudent protection.

An Englishman’s Home is his Castle?

Or is HMRC undermining it?

CardiffCastle-Exterior41-med-A0013928-1

  1. “Everyone” knows a capital gain on your own residence is “tax exempt”.

 

  1. “Everyone” knows offshore gains are “tax exempt”.  Isn’t this in the Press on a regular basis?

 

Hence, people with “circumstances” which in reality encompass an awful lot of the nation, may actually discover that they need professional advice, because what they thought was tax exempt is not – in reality.

 

Things which may affect the above “tax exempt” analysis potentially include:-

 

a).   Being UK tax resident.

 

b).  Not being UK tax resident, but having property here.

 

(That just about covers everyone!)

 

Crucially, Private Residence Relief is a relief for qualifying periods of ownership.  This may (or may not) include the whole period of ownership as case law shows.  It is a very complex area; plus the changes in the October 2018 Budget may reduce the length of qualifying periods, particularly for those involved in “strange” lifestyle matters, such as moving house for career, inheriting property, getting divorced etc.

 

For many people their family home is the most valuable asset they will ever own.

 

There are opportunities to plan to mitigate tax.  Such steps are lawful and (presuming you love and respect your family more than HMRC) I believe, appropriate.

 

The only thing to note is, when you accidentally fall into assumptions (1) or (2) noted above, not only will HMRC lawfully demand the tax, plus interest for not paying on time, but also penalties.  The penalties may be up to 200% of the original tax, so you could be paying 3x the original undeclared bill.  For those not of an arithmetic mind, for a typical 28% tax rate on a residential property that is 84% of the gain, going to the Government.  In other words on a gain of £100,000, that is £84,000 plus interest that could go to the Government, just because you assumed ….

 

Of course, some people may say well that still leaves 16% of the gain, but that excludes interest, and experience says trauma and cost of getting caught.  Plus those who actually wished to use the money may have to sell their dream home.  Maybe leading to further complications?

 

However, with appropriate planning and making the right tax elections in some circumstances, the gain may be legitimately eliminated altogether.  A much better result!

 

  1. Get advice.
  2. Get it right.
  3. Document it.

 

No one likes spending money on professional advice – until they haven’t!