Offshore Client Notifications – Are you Affected?

We have written previously on this blog about various HMRC offshore disclosure facilities designed to encourage taxpayers to come forward and declare any unreported foreign income or gains.

HMRC continue to acquire new powers in order to pursue taxpayers and one of the latest requires advisors themselves to write to certain clients on their behalf.

These rules apply to financial institutions like banks but also to so-called “specified relevant persons” (SRPs). Accountants and tax advisors are likely to be an SRP if they provided offshore advice or services over and above simple preparation and delivery of tax returns in the year to 30 September 2016 regarding a client’s personal tax affairs.

If the advisors fall within the rules and are not covered by certain exemptions they will be required to send a standard HMRC headed document to these clients (although writing to all clients is also permitted) with a covering letter that includes certain wording which may not be altered (these are the Offshore Client Notifications).

One of the key things to note is that HMRC’s document directs clients to submit their own online disclosure. You may suspect they are thus attempting to bypass the advisors. We could not possibly comment! If you need to send such letters, we recommend highlighting to the client the dangers of doing so!

The wording SRPs must include in their covering letter is as follows:

“From 2016, HM Revenue & Customs (HMRC) is getting an unprecedented amount of information about people’s overseas accounts, structures, trusts, and investments from more than 100 jurisdictions worldwide, thanks to agreements to increase global tax transparency. This gives HMRC unprecedented levels of information to check that, as in most cases, the right tax has been paid.

If you have already declared all of your past and present income or gains to HMRC, including from overseas, you do not need to worry. But if you are in any doubt, HMRC recommends that you read the factsheet attached to help you decide now what to do next.”

If you are concerned about how these rules might affect your firm, or are an individual with unreported overseas income, please get in contact with us as we would be happy to assist.

Worldwide Disclosure Facility – Last Chance to Disclose?

HMRC have announced the Worldwide Disclosure Facility (WDF) the latest in a long line of disclosure facilities designed to encourage taxpayers to come forward to disclose previously unreported offshore tax liabilities.

Unlike its predecessors, the WDF does not offer any favourable terms, other than the fact that HMRC state that where the disclosure is correct and complete and the taxpayer fully co-operates by supplying any further information they ask for to check the disclosure, they’ll not seek to impose a ‘higher penalty’, except in specific circumstances (e.g. where the taxpayer was already under enquiry) and they will also agree not to publish details of the disclosure. This last ‘benefit’ may appeal to higher profile individuals who may prefer to remain anonymous in their previous failures.

This is a marked difference to previous disclosure facilities that offered much reduced penalties (such as the 10% rate offered by the Liechtenstein Disclosure Facility) and guarantees against prosecution.

The WDF is targeted as a ‘last chance’ by HMRC before even more strict penalties come into force, as well as their claims that automatic exchange and data from the Organisation for Economic Co-operation and Development Common Reporting Standard (CRS) will then be available.

After 30 September 2018, new sanctions will be introduced that reflect HMRC’s “toughening approach”. They state that you will still be able to make a disclosure after that date “but those new terms will not be as good as those currently available”.

Previous experiences suggest that making a disclosure under one of HMRC’s facilities is usually a more streamlined process compared to simply writing to HMRC.

Eaves and Co would be very happy to discuss matters if you are concerned that you or your clients may have an undisclosed offshore liability, suitable for the Worldwide Disclosure Facility. We have extensive experience of making disclosures under previous facilities that HMRC have offered.

IHT Developments (APR and BPR)

Two of the most generous IHT reliefs are Agricultural Property Relief (APR) and Business Property Relief (BPR).

With them each providing up to 100% relief it is perhaps unsurprising that the borders of each tend to be closely monitored by HMRC.  Their challenges often end up in court, giving guidance into the legislation.

One area HMRC are keen to block is making an APR claim on an expensive executive house.  With changes in modern agriculture and common place use of cars for work commuting, houses which were historically farm houses are now often owned by city dwellers with nebulous connections to agriculture.  APR is generally blocked in these cases, because of the need for the dwelling to be used for agriculture and be of an appropriate ‘character’ in relation to the farming operation.

Historically, HMRC have argued that this nexus between the house and land requires common use and ownership.  In a recent case (Hanson) the Tribunal held that this was not the case.  Agricultural use was required, along with appropriate character for the relevant farming operation, but not necessarily common ownership.  This conclusion may prove very useful, especially in certain farming situations where different generations of a farming family may have different interests.  Often these evolve over time, without the parties necessarily taking the advice at each stage.

In another recent case (Zetland) the Tribunal found that no BPR was due, because the business was mainly one of dealing in land or the making or holding of investments.  Interestingly, the judgement does not seem to imply that the activities in managing commercial property were not a ‘business’.  The problem was rather that the nature of that business caused a disallowance of BPR.

As ever, understanding the consequences of dealing with valuable assets is important – even if it may mean paying for professional advice!

Budget 2013: The Best of The Rest

Budget 2013

Budget 2013

With all the fanfare of the increase in personal allowance to £10,000 ahead of schedule, the accelerated alignment of Corporation Tax rates and the £2,000 NICs break for small employers you may have missed some of these other important taxation announcements in the 2013 Budget:

New Close Company Loan Rules – Overdrawn Directors Loan Accounts (s.455 Tax)

Inheritance Tax Exempt Amount to Non UK Domiciled Spouses

Above the Line R&D Tax Credit

Budget 2013: Non UK Domiciled Spouse IHT Changes

Increase in the Lifetime Inheritance Tax Exempt Amount to Non UK Domiciled Spouses

The lifetime Inheritance Tax exempt amount for transfers between UK-domiciled individuals and their non UK domiciled spouse or civil partner is to be increased from £55,000 to £325,000 (i.e. in line with the nil rate band).

The exempt limit will then mirror the nil rate band as it increases.

UK Domicile Election

In addition there will be a new election regime, whereby non-UK domiciled individuals who are married or in a civil partnership with a UK domiciled person will be able to elect to be treated as UK-domiciled for Inheritance tax purposes.

The non UK domiciled spouse who makes an election will benefit from uncapped Inheritance tax exempt transfers from their spouse or civil partner, but subsequent disposals by them would be liable to IHT (subject to their own nil-rate band), irrespective of the location of the assets.

If no election is made then the non UK domiciled spouse’s overseas assets would be exempt from Inheritance tax but any transfers from their UK domiciled spouse or civil partner would be subject to the lifetime exempt limit above.

Holiday Letting Business Does Not Qualify for Business Property Relief

CRC v Lockyer and Robertson (as the personal representatives of N Pawson, deceased) – Business Property Relief

HMRC have successfully appealed the landmark Business Property Relief case of N Pawson deceased which, if it is upheld at the Court of Appeal, is likely to have a significant on the potential Inheritance Tax liabilities of individuals with a holiday letting business.

HMRC success in this case is perhaps not as surprising as the fact they originally lost at Tribunal.  The judge gives some extra useful guidance on the distinction between active trading and property letting.

The First-tier Tribunal initially ruled that as long as additional services were provided in conjunction with a holiday let then the  business property relief (BPR) would be available and therefore obtain relief from Inheritance Tax (IHT) at 100%.

HMRC subsequently appealed the above ruling.

The Upper Tribunal Judge focused on “the proposition that the owning and holding of land in order to obtain an income from it is generally to be characterised as an investment activity”.

He said that a property could be managed actively and still be retained as an investment.

The services provided to clients, such as cleaning, providing a welcome pack, and being on call to deal with queries and problems, were unlikely to be significant or sufficient to stop the business from being “mainly one of property investment”.

These services all enhanced the capital value of the property and made it possible to obtain a regular income from its letting.

The judge concluded the First-tier Tribunal should have found that “the business… did indeed remain one which was mainly that of holding the property as an investment. The services provided were all of a relatively standard nature, and they were all aimed at maximising the income which the family could obtain from the short term holiday letting of the property”.

He did not accept the taxpayer’s argument that the innate character of a holiday letting business rendered it outside the scope of a normal property letting business. Rather, it was a typical example of a property letting business.

As a result business property relief was disallowed and the letting operation fully charged to IHT.

Penalties for deceased persons in prior years contradicts human rights | IHT Planning

Penalties for deceased persons have been an area of contention recently.  For those individuals who die not having their tax affairs in order, HM Revenue & Customs are able to go back and enquire into an individual’s tax affairs for the 6 tax years prior to the date of the deceased’s death, in the case of careless or deliberate understatement of tax.

However, HM Revenue & Customs are no longer allowed to apply penalties for deceased persons in relation to the tax affairs of the 6 tax years preceding the individual’s death as it is deemed to be a contravention of an individual’s human rights.

Eaves and Co have been able to apply this to a recent client situation where an individual had died not disclosing trading income to HM Revenue & Customs. This had led to undisclosed profits resulting in unpaid tax for the 6 years prior to their death. This would have incurred significant penalties for non-disclosure without the case law findings against the application of penalties.

Inheritance Tax Series – IHT Planning

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 & Estate Tax Planning

Overview

Inheritance tax and estate planning is an important tool to ensure that wealth is preserved for future generations.

The nature of the planning undertaken will depend on the type and value of assets in the estate as well as the overall objectives such as who is to benefit from the assets, degree of control and distribution of income.

Examples of inheritance tax and estate planning opportunities include:

  • Business Property Relief – up to 100% relief for the value of qualifying business interests, shareholdings and assets
  • Agricultural Property Relief – up to 100% relief for the value of qualifying land/property used for agricultural purposes
  • Woodlands Relief – up to 100% relief against the value of timber on the land, although a charge may subsequently arise if the timber is later sold
  • Gifts to charity
  • Making full use of allowances such as the annual allowance and gifts on marriage
  • Regular gifts out of income
  • Outright gifts to individuals/trusts
  • Trusts for vulnerable persons

Non-UK Domicile Tax Planning

Non-UK domiciled persons are usually only subject to inheritance tax on their UK situs assets, however where a person has been resident in the UK for 17 out of the last 20 tax years they are automatically deemed to be domiciled in the UK, potentially bringing their worldwide assets within the scope of UK inheritance tax.

However, where a person sets up an offshore trust to hold overseas assets whilst non-UK domiciled/deemed domiciled, the trust will be treated as excluded property and should remain outside the UK inheritance tax net.

In certain cases, it may be possible to restructure the ownership of assets to allow assets that would otherwise be treated as UK situs to qualify as excluded property. Although care will need to be taken, particularly where the recent changes to the stamp duty land tax rules are in point.

Inheritance tax and estate planning is a complex area and advice should be sought before any planning is undertaken.

Anti-Avoidance & Other Considerations

Where inheritance tax planning is to be utilised care should be taken to ensure that the planning does not fall foul of anti-avoidance legislation such as the rules for gifts with reservation of benefit, associated operations, pre-owned asset tax etc.

It will also be necessary to consider the potential impact of the proposed planning on other taxes such as capital gains tax, VAT, SDLT and relevant anti-avoidance rules such as the settlement provisions and transfer of assets abroad.

A further key consideration will be the commercial and practical aspects of the planning – in our experience bespoke advice that is tailored to the individual’s precise circumstances is more likely to achieve the desired result than one size fits all schemes.

 

 

 

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.