2014 Autumn Statement – Inheritance Tax

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1. IHT: exemption for emergency service personnel and humanitarian aid workers

The existing inheritance tax (IHT) exemption for members of the armed forces who die or whose death is caused or hastened by injury while on active service will be extended to emergency service personnel and humanitarian aid workers responding to emergencies. The extension will have effect for deaths on or after 19 March 2014.

2. IHT: exemption for medals and other awards

The existing inheritance tax (IHT) exemption for medals and other decorations for valour or gallantry will be extended to all medals and decorations awarded to the armed services or emergency service personnel, and awards made by the Crown for achievements and service in public life. The measure will have effect from 3 December 2014.

3. Trusts – settlement nil rate band shelved

The government has dropped plans to introduce a single settlement nil rate band  to be shared between all trusts set up by a settlor in lifetime or on death. The government included the original proposal in its plans to change the inheritance tax rules for relevant property trusts in a consultation published on 6 June 2014. It will still introduce measures to prevent the use of multiple trusts to avoid inheritance tax and to simplify the inheritance tax rules for relevant property trusts in Finance Bill 2015.

 

The settlement nil rate band proposal was heavily criticised as an overly complex, and unfairly retrospective solution to inheritance tax avoidance. However, it is something of a surprise that it has been shelved. Professional bodies have pointed out that widening the related settlements rules in section 62 of the Inheritance Tax Act 1984 would deter taxpayers from using multiple trusts. This may be the form that the new measure takes.

 

Why does the Tax Year end on 5th April?

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This is a question often asked of us tax advisers in pubs (usually after the person speaking to us has stopped shouting at us about having to pay too much tax).

Prior to the eighteenth century, the calendar year began on 25th March and so it was quite natural for the tax year to start on the same date.  In 1752 we moved to the Gregorian Calendar, because the old (Julian) calendar was 11 days adrift from the rest of Europe.

So 4 September 1752 was followed by 15 September 1752 and there was uproar by people wanting their 11 days back (not surprisingly since they weren’t compensated for the loss of income from a short month). At the same time we moved New Year to 1 January.  In such a climate the Inland Revenue felt that they could not start the next tax year on 25th March as usual (applying a degree of common sense), as the already irate taxpayers would effectively be paying a full year’s tax for only 354 days. The “solution” was to move the start of the following tax year back by the equivalent 11 days to April 5th.

Which almost brings us to the tax year starting on 6th April – the additional day came about because an additional day was added to take account of the skipped Leap Day in 1800.  Since then, the Revenue have left well alone and further Leap Days (missed or otherwise) have not impacted on the tax year.

This is also the reason why the “Quarter Days” that many landlords still use for rental periods are to the 25th of each calendar quarter – this dates back to the Julian calendar.

Whilst some people say that this should be tidied up to match up with Calendar years, The good reason to keep it as it is, is that it’s a real pain for lots of people in countries where the end of year holidays (Christmas and New Year) are taken over by the end of financial year chaos. It’s much better, in my opinion, to have a mad rush to finish the year in March than in December. For whatever reason it happened, I think it works.  And there is always the prospect of chocolate Easter eggs to keep us going through the busy period!

Tax changes next month: in a nutshell!

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The Media may focus on the Budget this week, but business owners should reflect on the changes announced already, that are due to come into effect from 1 April for companies and 6 April for everyone else.  Here is a roundup of the Top 5 of those changes that we anticipate will affect the most people:


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Insurance proceeds and inheritance tax

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The personal representative or Executors of a deceased individual must value the deceased’s estate at the date of his death to determine its liability to inheritance tax (IHT).

A deceased’s estate is defined (section 5, Inheritance Tax Act 1984 (IHTA 1984)) as the aggregate of all the property to which he is beneficially entitled immediately before his death. One question faced by Executors is whether any potential insurance claims that have not yet paid out before death need to be taken into account.

If the insurance claim is an asset of the estate within section 5 IHTA then the value of the claim will be liable to IHT.

Section 1(1) of the Law Reform (Miscellaneous Provisions) Act 1934 provides that any cause of action existing at the date of an individual’s death survives either for the benefit of or against his estate (subject to certain exceptions being claims for defamation, and claims for bereavement under section 1A of the Fatal Injuries Act 1976).

Of particular interest at the moment is the treatment of Flood Damage Insurance.  Many claims from 2013 are still being processed and the Executors will need to consider the value of any claim, whether this is likely to succeed and the costs to the estate of completing the claim.

For further information in relation to the valuation of a property that is damaged at the date of death see HMRC InheritanceTax ManualIHTM23015 – Investigation of form IHT405: Page 4 of form IHT405 – special factors that affect the value andIHTM23203 – Special valuation matters: property subject to damage affecting its value.

 

Annual Tax on Enveloped Dwellings (ATED)

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The Annual Tax on Enveloped Dwellings (ATED) is a tax payable by companies that own high value residential property (a ‘dwelling’). It came into effect from 1 April 2013 and will be payable each year.

The deadline for filing the return for any properties owned on 6 April 2013 is 1 October 2013.

You’ll need to complete an ATED Tax Return for your property if all of the following apply:

  • it’s a dwelling situated in the UK
  • it was valued at more than £2 million on 1 April 2012, or at acquisition if later
  • it’s owned, completely or partly, by a company.

There are reliefs available that could reduce the tax completely .

The amount of ATED is worked out using a banding system based on the value of your property.

Rate bands

Property Value

Annual Tax 2013-14

£2,000,001 to £5,000,000 £15,000
£5,000,001 to £10,000,000 £35,000
£10,000,001 to £20,000,000 £70,000
£20,000,001 and over £140,000

 

If you only own the dwelling for part of a year, or you change how you use the property so that it moves into or out of ATED, then ATED applies on a proportionate basis.

What is a dwelling

ATED applies to residential properties (‘dwellings’) that are physically located in the UK. A dwelling may be all or part of a residential or mixed-use property. Sometimes a dwelling is part of a larger, mixed-use property that has parts not used for residential purposes. Only the residential part would have ATED payable on it. The residential part will need to be valued to work out which ATED band it falls into.

Historic houses

If a company owns an historic house that’s open to the public or provides access to the dwelling as part of its services (for example, as a wedding venue) with the intention of being open for at least 28 days per annum it may be able to claim a relief that will reduce its ATED charge to nil. The company’s activities in the historic house must be commercial and with a profit-seeking motive, even if that profit doesn’t cover the full costs of the house.

Working farmhouses

If a company owns a farmhouse that carries on a trade of farming commercially and with a profit seeking motive it may be able to claim a relief that will reduce its ATED charge to nil.

To qualify for this the criteria will include that a ‘farm worker’ must occupy the property.

What valuation?

A valuation at 1 April 2012 will decide which ATED band the property will fall into for five years.

Take note, if HMRC challenge a valuation and find that it’s wrong, the person responsible for paying ATED may have to pay penalties as well as the increased ATED payable, plus interest for late payment.

What next?

If you have a valuable property owned in whole or in part by a company you need to review this tax provision now, as the deadline for reporting to HMRC is 1 October 2013.

 

Research and Development (R&D) Tax Credits – are you eligible?

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Research & Development (R & D) tax credits are the topic of an annual report by HMRC, with the statistics broken down across the small medium sized enterprise scheme and the large company scheme, further analysed between regions and industry sectors.

For this purpose, an SME is a company with fewer than 500 employees and either annual turnover not exceeding 100 million euros or balance sheet total not exceeding 86 million euros (this is a more generous definition, solely for R&D purposes).

By way of reminder, there are two rates of R&D tax credits:

  1. For Small and Medium Enterprises (SME), the SME scheme enables an enhanced deduction of 125% of qualifying expenditure (225% in total), and the ability to surrender losses in exchange for a repayable tax credit.
  2. The large company scheme enables an enhanced deduction of 30% (130% in total), or by election a credit of 10%, which may be payable in certain circumstances where there is no liability to offset. SME’s would need to access the large company scheme where working for large companies as subcontractors.

According to the HMRC report, a review of claims in 2009 found that the R&D tax credit had little impact on company decisions as to whether to carry out the R&D work.  However, the amount of R&D relief claimed is increasing, with the statistics showing an increase in the value of claims in 2011/12 of 20% for SME’s and 3% for large companies.  This may be due to larger companies having already sought advice on R&D, with smaller businesses looking to catch up.

For companies that are carrying out development work anyway, then the R&D review should form part of the end of year financial review – the enhanced deductions can save a considerable amount of tax.   Businesses should think about whether anything they do is innovative, or whether they are finding new approaches to achieve their objectives.  By its very nature, R&D cannot be closely defined and advice should be sought as to whether a company can qualify – the rules are more generous than most people think!

It is widely known that there is substantial qualifying expenditure that is still not being claimed, so to avoid being part of that group, or for more information and to see whether you could claim please contact Leanne Hathaway on leanne.h@ehltax.co.uk

Professional Negligence and Tax Planning?

Hossein Mehjoo v Harben Barker: Professional Negligence and Tax Planning?

The recently reported High Court case of Mehjoo v Harben Barker has attracted a lot of attention both in the media and amongst accountants, as it regards specialist tax advice.

Some reports are saying that the High Court requires accountants to advise on complex tax avoidance schemes, but this is not quite how I interpret the decision. Mr Mehjoo was born in Iraq in 1959 and his parents were of Iranian origin. His accountants were aware of this background as they had acted for him for a number of years, including preparing his first tax returns several years earlier.

The issue was whether the accountants had been negligent in failing to identify his non-domicile status and advise on the impact this would have on his UK tax position on making a gain.  The case found that a reasonably competent accountant would have known it was important to consider Mr Mehjoo’s domicile status in the context of his tax affairs. Of course, in practice it can be difficult to confirm a domicile status.

In October 2004 the accountants advised on the CGT position on Mr Mehjoo selling his shares in a company. The firm did not appear to have considered the non-domicile status of their client or the impact this could have. The firm provided tax advice, but failed to offer planning only available to non-domiciled individuals.

The accountants argued that they were not required to give tax planning advice due to the terms of their engagement letter, unless they were specifically asked to do so.  This was rejected by the High Court, in part due to the fact that they had provided such advice on a number of occasions without express instruction.

The judge therefore found that the accountants had been negligent in not considering the fact that Mr Mehjoo was non-domiciled, and that as this was outside of their area of expertise, they should have sought specialist tax advice or advised Mr Mehjoo to do so himself. It seems that the lesson to be learnt by professional advisers is to know when a second opinion is needed.

If you do need a second opinion, Edward Hands and Lewis provide specialist tax support.

Basic principles of agreeing a settlement of tax enquiries

In 2007, HMRC published the litigation and settlement strategy (LSS), which was revised in July 2011 following some key cases.

The LSS sets out the principles and standards which HMRC should apply when settling disputes with taxpayers. The general principles include:

1. Each dispute should be settled on its own merit. There should be no trade-off between unrelated points and no package deals should be offered.
2. If a dispute arises from an all-or-nothing point, the settlement terms should be on all-or-nothing terms.
3. Tax, interest and penalties should be not be undercharged in order to reach a quick settlement.

In tax avoidance cases, if HMRC’s position is strong, HMRC should not settle for less than 100% of the tax and interest due.

HMRC is responsible for collecting and managing the public revenue and by adhering to this approach the aim is to act consistently.

If it is possible to reach a settlement then HMRC are open to resolving matters without resorting to litigation. In many cases this is the best possible outcome, particularly if all relevant factors (such as interest, penalties and consequential tax charges) are taken into consideration at the time.

For assistance with HMRC enquiries, please contact Leanne Hathaway, our in house Chartered Tax Adviser.

Edward Hands & Lewis have offices at Leicester, Loughborough and Market Harborough.