Spring Budget 2017 and End of Year Tax Planning

This year’s budget did not bring a great deal for advisors to get their teeth into.  There are some points that will certainly affect millions of taxpayers though, so we have summarised the key points below.

There are also steps that taxpayers should consider taking before the end of the tax year, when various new rules and rates will come into effect.

  • The tax-free dividend allowance (the band on which dividends could be received free of income tax) is to be reduced from £5,000 to £2,000 from April 2018. Having only been introduced in April 2017 the allowance is already being reduced which will affect all taxpayers receiving dividends, including business owners and investors.

 

  • There will be a 1 year delay for quarterly reporting under the Making Tax Digital (MTD) rules for businesses that have a turnover below the VAT threshold (£85,000 for 2017-18). This will be good news for those businesses but unfortunately there do not appear to be any changes to these controversial proposals for other businesses.  Plus, the so-called pilot scheme will not have run its full course, so there is no chance of everyone learning lessons from the process.

 

End of Year Planning

 

  • Residential property rental. From April 2017 the phasing in of restrictions on relief for interest costs for higher rate taxpayers will begin. Initially 25% of such costs will be affected, however this will rise 25% each tax year until all higher rate relief on finance interest is blocked.

 

  • If pension contributions or pension scheme planning might be desired, setting up and contributing to a pension scheme before the end of the tax year (if one is not already in place) could ‘bank’ allowances for the year under the carry-back rules. Those with existing pension schemes have until the end of this year to use up any unused annual allowance from 2013-14.

 

  • If possible, consider declaring dividends where the tax free allowance of £5,000 has not been used up yet.

 

  • Consider new deemed domicile rules if non-UK domiciled. From April 2017 deemed domicile rules may apply to individuals who have been resident for 17 of the previous 20 years.  Previously these only applied to inheritance tax but the new rules extend to income tax and capital gains tax meaning those affected will have to report their worldwide income and gains on an arising basis.

A Property Business Can Qualify for Incorporation Relief

Ramsay v CRC – A Property Business Can Qualify for Incorporation Relief

Mrs Ramsay appealed against HMRC’s decision to deny her rollover relief under TCGA 1992 s.162 on the transfer of a property into a company – otherwise known as incorporation relief.

HMRC said the gain did not qualify for the relief as the property was not a business when the transfer was made.

The case was initially decided in favour of HMRC at the First-tier Tribunal.  However, the case was subsequently appealed to, and heard by the Upper-tier Tribunal.

Background & Relevant Facts

The taxpayer inherited a one-third share of a block of flats in 1987. She took over the administration for the whole building in 2002 and gifted half of her share to her husband in February the following year.

The couple spent about 20 hours a week attending to the building, making sure the rent was paid on time, cleaning communal areas, forwarding post to tenants who had left, and ensuring the property was insured and complied with fire regulations.

The taxpayer purchased the rest of the building from her brothers, and in September 2004, she and her husband transferred the property to TPQ Developments Ltd in exchange for shares in the company – incorporation relief was claimed. The couple made a gift in August 2005 of all their shares in TPQ to their son, who became the sole shareholder and director of the firm.

The Case

HMRC claimed the incorporation did not qualify for rollover relief under TCGA 1992, s 162 because the property was not a business when the transfer was made. The First-tier Tribunal (FTT) agreed the Revenue’s arguments.

The taxpayer appealed to the Upper-tier Tribunal (UTT).  The UTT found that the FTT’s finding was based on an error of law.

The question which was required to be addressed was a straightforward one; ‘whether the activities of Mrs Ramsay in relation to the Property constituted a business’.

Unfortunately, however, the FTT had concerned itself whether the property activities were sufficient to be taxed as trading income (rather than property income), and whether the property would have attracted business property relief.

The UTT said “business” in the context of s.162 should be interpreted broadly – there was no set test under the legislation.

The judge remarked that the criteria as to what constituted a business in Customs and Excise Commissioners v Lord Fisher [1981] STC 238 were helpful, even though that case concerned VAT.

In this instance, the work carried out by the taxpayer satisfied the tests laid out in Lord Fisher. As to the question of degree, the taxpayer’s activities in respect of the property amounted to a business for the purpose of s.162.

The taxpayer’s appeal was allowed.