More issues, more solutions….
Hello again, dear reader. Life continues to be busy at Barnes Roffe; here is a sample of some of the matters that have been dealt with:-
A client has an external consultant, who operates via a personal service company. That’s fine from the client’s perspective, but the consultant will have to bear in mind the rules regarding personal service companies (the so-called IR35 legislation, under which dividends can the taxed as employment income). That’s the consultant’s problem, not my client’s (or, indeed, mine).
The issue that concerns the client is that to bind the consultant ever closer to the client, he would like to offer him a share option, which he wants to be “tax-efficient”. It is tempting to think that the rules regarding employment-related share options will not apply to the consultant, as he is not an employee of the client. However, he is an employee of his service company and it seems to be eminently arguable that any such options would be provided by reason of his employment with that company. Such an analysis would be disastrous from a tax (and NICs) perspective, as unapproved employment-related share option gains are chargeable to income tax (and, usually, NICs) based on the full value of the underlying shares at the time the option is exercised. CGT and Entrepreneur’s Relief are simply not in point!
There is a solution (other than hoping HMRC do not take the rather obvious point!); if the consultant were to buy the shares at their current market value with non-recourse debt, that structure would behave exactly like an approved option arrangement. The consultant would benefit from the growth in value of the shares; he would not lose money if the shares went down in value (due to the non-recourse nature of the loan) and any gains would be taxed under the CGT regime, probably at only 10%. A good result.
A final question – if the client company makes the loan to the consultant, who then uses that loan to subscribe for shares in the company, could the “loans to participators of close companies” rules apply so that the company has a liability to tax under s455 CTA 2010 (previously s419 ICTA 1988)? The (happy) answer is no. The legislation applies if loans are made to persons who are participators, not to people who will become participators. Thus, it’s all systems go!
A happy result to a long running battle with HMRC regarding the availability of inheritance tax business property relief (“BPR”) – HMRC finally accept that BPR is due (fully, at 100%) in respect of a holding of shares that was transferred into trust some years ago and at the trust’s first 10-year anniversary. The case was quite complex (but not as complex as HMRC tried to make-out) and involved shares in a company that had a trade of providing management services and a business of property investment. The correct test is a “wholly or mainly” one, namely, was the company’s business wholly or mainly making or holding investments? If so, no BPR would have been due, but if not, 100% BPR was due. It’s all or nothing, no middle ground. And it is widely recognised that “wholly or mainly” means more than half.
After a good deal of correspondence and argument, HMRC finally accept that the company’s property investment activities amount, taking an broad view, to less than half of the company’s overall activities, so BPR is available on the whole share value, including the value attributable to the investment business.
HMRC might not like the idea of BPR extending to non-trading activities, but the law is the law!
Another trust client, which owns an investment bond, which is standing at a sizeable gain but which is perceived to be underperforming on account of high charges being levied. The plan is to cash in the bond and acquire a new bond with lower charges and better investment performance. The question is how much CGT will be payable and can the gain be rolled-over. The answer is easy, but unappealing – the CGT liability will be nil, because such gains will be chargeable to income tax at the new, eye-watering rate of 50%. No roll-over is available for such investments. That will be a huge income tax bill.
Can the liability be reduced? It’s high because the income tax rate for discretionary trusts has been increased to 50%, although beneficiaries who receive income appointments can obtain full credit for the underlying tax, resulting in tax repayments for zero or low taxpayers. However, the income tax rate for non-discretionary trusts is only 20%, so perhaps the solution is to appoint a revocable interest in possession to appropriate beneficiaries.
A meeting is urgently arranged with the trustees and the investment advisors, so that all options can be discussed and understood.
A client asks for advice regarding the CGT effect of his occupation of various houses and flats. Over the years, he has acquired various properties for his own use and for investment purposes and certain impending sales have focused his mind on the CGT aspects of the arrangements.
The news is generally good. As he made a main residence election when he first acquired a second residence, he can chop and change that election as he sees fit. However, the election only specifies which of two or more residences is “main”; it does allow a taxpayer to elect for any property to be a “residence”. Thus, he needs to be very certain that his periods of occupation of any property that he wants to elect to be his main residence satisfy the qualitative tests of occupation to show that it was indeed a “residence”. Basically, any such property must have genuinely been lived in with a degree of permanence and regularity. It should be furnished, lit, heated etc and clothes and other personal possessions should be kept there.
The planning point is that if a property has been a main residence at any time, it is CGT exempt not only for that time, but also for the final 36 months of ownership. Also, a chargeable gain that relates to a time when the property was let as residential accommodation can qualify for a further exemption of up to £80,000 (£40,000 for each spouse).
Thus, as the client is contemplating selling a property that is his main residence, he is advised immediately to move his main residence election away from that property with effect from three years before the anticipated date of sale (as that three year period will automatically be CGT exempt), so that additional relief can accrue to his secondary residence. In view of the new 28% rate of CGT, this strategy could save many thousands of pounds of CGT. A happy client!
A client has subscribed for shares in a trading company, which is now in difficulties – big difficulties. Administrators have been appointed and an insolvent liquidation is in sight.
A modest silver lining to this cloud is a tax reclaim that he can make. A capital loss will not be of very much use to the client as he has little or no capital gains against which to offset such a loss. However, he is (since April 2010) a 50% income tax payer, and income tax relief would be very welcome.
The good news is that he can make a negligible value claim for the 2010/11 tax year, thereby crystallising the capital loss, and then make an election (under s131 ITA 2007, since you ask) for this loss to be relieved against his income for income tax purposes. Now he has only lost half of his investment; HMRC are bearing the other half, which provides a certain amount of comfort.
The weekend arrives; I have to visit the son-and-heir at university in Newcastle, which will involve buying hungry young men food and drink, and walking in the Northumberland countryside. I might even find a way of watching England’s finest rugby players teach the All-Blacks a thing or two.
And so to bed…Talk to Barnes Roffe today