Case studies are back!
Hello again, dear reader. Life has been hectic and I am sorry for neglecting you. However, the warm Spring weather has turned my mind to, er, blogging, so here are a few case studies to give you an idea of what matters I have been dealing with in the last couple of months.
A wealthy client has a spoilt daughter, who thinks that Daddy should buy her a flat. Daddy is minded so to do (he can afford it) but does not like the idea of tax inefficiency and likes far less the idea of the daughter falling in with the wrong sort of person (an accountant, perhaps?) and his investment being lost to the daughter’s “creditors and predators”. Who can blame him?
The solution is relatively painless and straightforward. Daddy can create a trust with a small amount of capital (say, £100). The trustees will be him and his wife; the beneficiaries will include the daughter. Daddy can then lend further money to the trustees to enable them to have the necessary funds to acquire the flat in question. The daughter will be given a revocable interest in possession, which means that she will have the right to occupy the flat rent-free. From a tax perspective, all is rather good. If the flat increases in value, the gain will be exempt CGT because the trustees will be able to claim main residence relief (as the flat will be the main residence of the trust’s primary beneficiary). Similarly, the increase in value of the flat will accrue outside Daddy’s estate for IHT purposes. When the daughter is more, how shall we say, settled, Daddy might waive the loan. That would be a chargeable transfer for IHT purposes, but will hopefully be covered by the available nil-rate band. When the daughter is very settled, the flat might be appointed to her, such appointment being a tax-free disposal by the trustees.
Daddy is pleased, particularly as, if things do not go swimmingly, he will have a loan secured against the flat which he can recover. The daughter is happy about the flat and is disinterested in some of the boring technical detail…
A relatively new client receives an unwelcome letter from HMRC’s Specialist Investigations team (“CIF” as they seem to want to be called nowadays) alleging conduct that might be “serious fraud”. Alarm bells ring and meetings are arranged. It seems that the client has previously been rather badly advised and various irregularities and oversights have previously come to HMRC’s attention. Further digging and delving reveals a couple of transactions that might require further explanation, but nothing that could remotely be construed as “serious fraud”.
Meeting take place with the CIF investigators and it becomes clear that a large mountain is being made out of a small molehill. But the problem is making them see it that way. Eventually, the terms of an investigative report are “scoped”, the scope being rather more limited than might otherwise be the case. However, there is still a good deal of work to do to keep the investigators happy.
The moral of the story is a straightforward one: great care must be taken to ensure that tax returns and business accounts accurately report all income, gains and transactions. It is very unwise to assume that a professional advisor, especially one who has shown a degree of incompetence previously, has full knowledge of all activities and the necessary expertise to quantify accurately the tax liabilities that can flow from certain, complex transactions.
A new client (really an old client with a new venture) comes in to discuss his latest project. He has a certain amount of form as a serial entrepreneur and he confirms that the new venture is expected to result in a trade sale in the medium term. What, he asks, is the best way to structure the business and are there any tax opportunities from which he could benefit?
We explain what is possibly the best tax structure currently available in the UK. He should commence the business as a limited liability partnership (“LLP”). If, as seems likely, the first year’s result is a modest profit or even a loss, the tax-transparent nature of the LLP will work perfectly as, if losses are to be made, they can be relieved against four-years’ worth of income, and low profits will not cause high rates of income tax and NICs to be paid. As profits rise and, consequently, the business’s goodwill value increases, the LLP’s business can be transferred to a company, with the company acquiring the goodwill of the business for as high a value as can be justified. The gain on the sale of the goodwill will be liable to CGT, but at only 10%. The company’s profits which will fund the paying-out of the goodwill value will be effectively tax-free, as the company will obtain corporation tax relief for the amortisation of the goodwill value.
The effect is that the members/directors will be able to access the company’s income whilst only paying 10% CGT. Then, when the company is ripe for a trade sale, the shareholder/directors will be able to receive another capital sum, also taxable to 10%.
The client is happy and the structure is implemented straightaway.
A client wants me to meet with his lawyers to discuss his Will and IHT planning generally. I explain that the shares that he owns in his main trading company will be quite valuable, but that IHT is not an issue because of the availability of business property relief (“BPR”). However, he has another company that owns an investment property and he is concerned that a large IHT bill might arise as that will not qualify for BPR.
It transpires that the investment company’s property is let to the trading company; it is that company’s main trading premises. The solution is, therefore, easy. If a holding company is put above the two companies so that they are within the same group, the value of both companies will then qualify for BPR as the “investment” property will be used for the purposes of the trade of a sister subsidiary. The client agrees that the group must be put in place as soon possible.
As an aside, the client is not domiciled in the UK. If a non-UK registered holding company were used, the shares would then be non-UK situated assets for IHT and CGT purposes, which could give long-term tax advantages. Will HMRC give clearance to a share exchange along such lines? Can they realistically resist, under EU law? There is only one way to find out; a suitable clearance application is submitted. Watch this space…
An interesting complication arises in respect of a proposed reconstruction of a trading group. The aim is to split the trading activities from the property investment activities and a suitable clearance has already been obtained from HMRC in this regard. However, the majority shareholder died before the reconstruction could be completed and this presents a CGT headache. His Will left the shares to his two sons contingent upon them reaching 21 years of age and one of them is still four years away from that age. The shares will, therefore, be settled property for CGT purposes and there will be a deemed disposal of the shares when the younger son becomes 21.
The potential CGT charge can be managed in respect of shares in trading companies, as the rules concerning CGT hold-over relief extend to these circumstances. But hold-over relief is not available in respect of shares in property investment companies and we want to create a property investment company out of the existing group.
Happily, the problem is identified and the solution is found in the nick of time. The Will can be varied by the execution of a Deed of Variation, with two years of death and we still have some weeks to go before that deadline expires. The executors are happy for the “not until 21 years of age” clause to be dropped and for the boys to benefit absolutely with immediate effect. As a result, there will be no settled property and no deemed disposals. The lawyers, in conjunction with Counsel, do the necessary drafting and matters are brought back on track.
So, another bank holiday weekend to look forward to, this one with a Royal Wedding to lift the nation’s spirits. Not mine though; I always cry at weddings, especially my own!
And so to bed…Talk to Barnes Roffe today