acting for the high net wealth client · up to 2016/17, full income tax relief was normally...
TRANSCRIPT
ACTING FOR THE HIGH NET
WEALTH CLIENT
Robert Jamieson
MA FCA CTA (Fellow) TEP
7 November 2017
2016/17 TAX RETURNS
• For many years, PA has been offset in
following order:
• non-savings income; then
• interest; and finally
• dividends.
• This normally produced most tax-efficient
end result – see S25(2) ITA 2007.
• No longer position for 2016/17 onwards.
2016/17 TAX RETURNS
(CONT)
• Caused by introduction in FA 2016 of:
• personal savings allowance; and
• dividend tax allowance.
• Individual’s personal savings allowance
can be £1,000, £500 or zero (depending on
marginal rate of tax).
• But dividend tax allowance is £5,000 for
everyone.
2016/17 TAX RETURNS
(CONT)
• 0% starting rate is only in point for those
whose non-savings income does not
exceed PA plus maximum of £5,000.
• Where individual’s total income includes
interest received, it is important to try and
maximise benefit of:
• 0% starting rate for savings income;
and
• personal savings allowance.
2016/17 TAX RETURNS
(CONT)
• Problem with HMRC’s online filing
parameters for 2 groups of taxpayer:
• those with income (including interest)
of > £32,000 where non-savings income
is between £11,000 and £16,000; and
• those with non-dividend income of
between £27,000 to £32,000 where total
income (including dividends) is >
£145,000.
2016/17 TAX RETURNS
(CONT)
• In first case, software will not apply 0%
starting rate to income falling within
starting rate band, ie. there will be charge
of 20% (rather than 0%).
• In second case, software will treat
dividend higher rate band as reduced by
full amount of dividend tax allowance,
even though there may have been spare
capacity in basic rate band, ie. more
dividends will be pushed into 38.1% band.
2016/17 TAX RETURNS
(CONT)
• Affected taxpayers should submit paper
tax returns for 2016/17.
• Normally, this had to be done by 31
October 2017.
• However, HMRC confirm that taxpayers
will have until 31 January 2018 – there is
“reasonable excuse” for late filing.
• Correction difficulty if return is
inadvertently filed online.
2016/17 TAX RETURNS
(CONT)
• HMRC promise that this will be sorted for
2017/18 tax returns.
• Not fault of tax software providers – their
software must follow HMRC’s parameters.
• If it does not, none of their online tax
returns will be accepted.
• They had no choice but to code their
products to give incorrect outcome.
BUY-TO-LET TAX CHANGES
• Up to 2016/17, full income tax relief was
normally available for interest on loan
taken out in connection with individual’s
property letting business.
• W.e.f. 6 April 2017, tax relief for such
interest is being progressively restricted
so that, by 2020/21, there will only be 20%
income tax reduction.
• S24 F(No2)A 2015 does not apply to FHLs.
BUY-TO-LET TAX CHANGES
(CONT)
• Nor does it apply to landlords of rented
commercial property.
• Worst affected will be individuals with
substantial property portfolio and large
borrowings.
• And what about property letting losses?
• Alternative restructuring.
• What about incorporation of business?
BUY-TO-LET TAX CHANGES
(CONT)
• Can CGT and SDLT charges be avoided?
• Take advantage of Upper Tribunal
decision in Ramsay v HMRC (2013).
• Non-statutory clearance service can be
used in order to determine whether or not
business is being carried on.
• SDLT – MV rule in S53 FA 2003.
• 2 main ways of mitigating SDLT charge:
BUY-TO-LET TAX CHANGES
(CONT)
• multiple dwellings relief in S116(7) FA
2003; and
• use of partnership SDLT provisions –
see Para 18 Sch 15 FA 2003.
• Partnership tests.
• Anti-avoidance legislation: S75A FA 2003.
• Case study illustrating tax benefit of
incorporation.
COMPANY DISTRIBUTIONS
• Following liquidation, shareholder will
receive capital distribution liable to CGT –
preferable to receiving income payment.
• Informal dissolutions – S1030A CTA 2010.
• Government believe shareholders are
increasingly seeking tax advantage of
being charged to tax on gains rather than
income.
• New anti-avoidance – individuals only.
COMPANY DISTRIBUTIONS
(CONT)
• But consultation about more wide-ranging
approach to stop future conversion of
income to capital (eg. reintroduction of
close company apportionments?).
• W.e.f. 6 April 2016, new TAAR applies to
distributions in respect of share capital
on winding up (S396B ITTOIA 2005).
• No statutory clearance procedure, but
HMRC guidance has now been published.
COMPANY DISTRIBUTIONS
(CONT)
• See Paras CTM36300 – CTM36350.
• Treats distribution on winding up as
income receipt where:
• individual, having interest of at least
5%, receives distribution on winding
up;
• company was close when it was wound
up (or had been at some point in
previous 2 years);
COMPANY DISTRIBUTIONS
(CONT)
• within 2 years following distribution, he
(or connected person) is involved in
similar trade or activity; and
• it is reasonable to assume that main
purpose, or 1 of main purposes, is
avoidance or reduction of income tax
liability.
• Aimed at “phoenixism”.
• HMRC’s original examples:
COMPANY DISTRIBUTIONS
(CONT)
• landscape gardener;
• IT contractor; and
• accountant.
• Exemption from TAAR where distribution
received by individual:
• does not exceed his CGT base cost; or
• only comprises irredeemable shares.
COMPANY DISTRIBUTIONS
(CONT)
• In addition, “transaction in securities”
rules changed and updated w.e.f. 6 April
2016:
• new “connected parties” regime;
• look at reserves on group-wide basis
rather than on company by company
basis;
• “fundamental change of ownership” let-
out made tougher; and
COMPANY DISTRIBUTIONS
(CONT)
• liquidation to be treated as transaction
in securities.
• Procedural rules for counteraction to
operate in similar fashion to self-
assessment compliance provisions.
TAKE CARE WITH
PERCENTAGES
• Castledine v HMRC (2016).
• In order to qualify for ER on disposal of
shares, it is necessary for individual,
throughout period of 12 months, to have:
• held at least 5% of O.S.C. and voting
rights; and
• been officer or employee.
• Definition of O.S.C. in S989 ITA 2007.
TAKE CARE WITH
PERCENTAGES (CONT)
• O.S.C. means “all the company’s issued
share capital (however described), other
than capital the holders of which have a
right to a dividend at a fixed rate but have
no other right to share in the company’s
profits”.
TAKE CARE WITH
PERCENTAGES (CONT)
• Case concerned disposal of loan notes in
company where taxpayer held exactly 5%
of ordinary shares.
• Unfortunately, company had also issued
some deferred shares with no right to
dividends or votes.
• In reality, these deferred shares were
worthless.
TAKE CARE WITH
PERCENTAGES (CONT)
• But they counted as O.S.C. and so
taxpayer’s interest in company dropped
to 4.99%.
• Company was not “personal company” –
disposal of loan notes did not qualify for
ER.
• Consideration of decision in stamp duty
case of Collector of Stamp Revenue v
Arrowtown Assets Ltd (2003).
TAKE CARE WITH
PERCENTAGES (CONT)
• In that case, issue of deferred shares
purely for tax planning reasons was
ignored.
• Why, then, was decision in Castledine
case different?
• Important for tax advisers to keep careful
eye on shareholders’ percentage
interests, particularly where there are
unexercised share options.
MEANING OF “ORDINARY
SHARE CAPITAL”
• HMRC v McQuillan (2017).
• Sandwich shop business started in 1999
by M and Mrs M.
• Immediate success.
• Company formed in 2004 (Streat) with
view to franchising business – Streat’s
initial share capital of £100 was held as
follows:
MEANING OF “ORDINARY
SHARE CAPITAL” (CONT)
M – 33 ordinary shares;
Mrs M – 33 ordinary shares;
P – 17 ordinary shares; and
Mrs P (M’s sister) – 17 ordinary shares.
MEANING OF “ORDINARY
SHARE CAPITAL” (CONT)
• Subsequently, Mrs P and her husband
lent £30,000 to company.
• Streat continued to prosper.
• Streat approached Invest Northern Ireland
for grant – agreed on condition that loan
was converted into shares.
• On 12 June 2006, loan was converted into
30,000 redeemable ordinary shares.
MEANING OF “ORDINARY
SHARE CAPITAL” (CONT)
• These shares carried no votes and were
redeemable at par (but no earlier than
March 2009) – they had no dividend
entitlement.
• Streat was subject to takeover bid.
• Redeemable ordinary shares repaid on 14
December 2009.
• Dividend of £700 per share paid on 23
December 2009.
MEANING OF “ORDINARY
SHARE CAPITAL” (CONT)
• Takeover completed on 1 January 2010.
• Question: were M and his wife entitled to
ER for 2009/10?
• HMRC refused claim on ground that
redeemable shares counted as O.S.C. and
so 5% shareholding test was not satisfied.
• Case initially heard in 2016 by First-Tier
Tribunal.
MEANING OF “ORDINARY
SHARE CAPITAL” (CONT)
• Dividend of 0% = dividend at fixed rate?
• Comparison with VAT.
• Contrast with shares having fixed
dividend of purely nominal amount.
• First-Tier Tribunal also referred to change
in law on 6 April 2008 when ER was
introduced – no 5% shareholding test
under taper relief.
MEANING OF “ORDINARY
SHARE CAPITAL” (CONT)
• First-Tier Tribunal found in favour of Mr
and Mrs M.
• Redeemable ordinary shares were
excluded – taxpayers allowed to claim ER.
• Victory for common sense, but went
against long-standing HMRC view.
• Also at odds with decision in Castledine v
HMRC (2016).
MEANING OF “ORDINARY
SHARE CAPITAL” (CONT)
• HMRC appealed.
• Upper Tribunal did not consider that there
was any ambiguity or difficulty about
meaning of S989 ITA 2007.
• Any share capital with no right to
dividend was automatically O.S.C.
• Earlier decision reversed – Streat was not
“personal company” for M and his wife.
ER AND OWN SHARE
PURCHASES
• Significant difference between rates of
CGT (especially where ER is in point) and
higher rates of income tax.
• This encourages owner managers to
extract value from their companies in
form of capital gain.
• With own share purchases, proceeds are
prima facie taxed as income.
• However, CGT treatment is available.
ER AND OWN SHARE
PURCHASES (CONT)
• Requirements are:
• vendor has held shares for 5 years;
• vendor is UK-resident;
• purchase was made for benefit of
company’s trade (and was not part of
any tax avoidance arrangements);
• company is unquoted trading company
or holding company of trading group;
ER AND OWN SHARE
PURCHASES (CONT)
• vendor’s proportionate shareholding
has been substantially reduced – or
eliminated – by own share purchase;
and
• vendor is not connected with company
immediately after own share purchase.
• Formal clearance procedure.
• But what if company cannot afford to pay
shareholder in full?
ER AND OWN SHARE
PURCHASES (CONT)
• Customary nowadays to settle payment in
tranches spread over number of years.
• Known as “multiple completion contract”.
• Vendor gives up beneficial interest in
shares which are bought back – no
further dividends or votes.
• He will normally also resign directorship.
• CGT payment date.
ER AND OWN SHARE
PURCHASES (CONT)
• HMRC accept that multiple completion
contract is valid arrangement – see
ICAEW TR745.
• Is there new problem for ER claims
relating to sale proceeds for second and
subsequent tranches?
• Company does not “acquire” shares from
vendor, given that they are cancelled –
but no longer automatically.
ER AND OWN SHARE
PURCHASES (CONT)
• What if S28 TCGA 1992 does not apply?
• Payments for second and subsequent
tranches represent lump sums derived
from asset (ie. subject to tax under S22
TCGA 1992).
• If so, gain is taxed when tranche is
received rather than at original exchange
date.
• ER denied where vendor is not director.
ER AND OWN SHARE
PURCHASES (CONT)
• Note that clearance under S1044 CTA
2010 only confirms that transaction is not
treated as income distribution.
• It does not say that ER is available.
• HMRC’s argument goes against all
accepted technical analyses of multiple
completion contracts – they are not tax
avoidance schemes.
• Indeed, whole of CGT is paid up front!
ER AND OWN SHARE
PURCHASES (CONT)
• Since ICAEW TR745 has never been
retracted, is there possibility of running
“legitimate expectation” argument in
relation to deals which have already taken
place?
• Should shareholders be looking to retain
“sentimental” 5% stake following own
share purchases?
• And remaining as part-time employee?
PENSION DEVELOPMENTS
• Annual allowance.
• High-income individuals.
• Death benefits.
PENSION DEVELOPMENTS
(CONT)
• Annual allowance (AA) = £40,000 – this
covers individual’s own contributions (+
any contributions made by employer).
• W.e.f. 6 April 2016, AA is subject to taper
mechanism for those with income in
excess of £150,000.
• Taper is at rate of £1 for every £2 of
income above £150,000 until AA drops to
£10,000 (ie. for income of £210,000 +).
PENSION DEVELOPMENTS
(CONT)
• New restriction: taxpayer is high-income
individual if:
• “adjusted income” > £150,000; and
• “threshold income” > £110,000.
• “Adjusted income” = taxpayer’s total
income plus amount of any pension
inputs (including whole of employer’s
contributions).
PENSION DEVELOPMENTS
(CONT)
• “Threshold income” = taxpayer’s total
income, but after allowing for deductible
pension contributions – note special rule
for any salary sacrifice effected on or
after 9 July 2015.
• Special anti-avoidance legislation in
S228ZB FA 2004 – will this bite where
there are losses?
PENSION DEVELOPMENTS
(CONT)
• Death benefits – where pension holder
dies aged 75 or older, any lump sum
taken out before 6 April 2016 was taxable
at flat 45% rate.
• All other withdrawals (including taking
lump sum on or after 6 April 2016) are
chargeable at taxpayer’s marginal rate.
• Where pension holder dies under age of
75, his fund passes on IHT-free basis.
PENSION DEVELOPMENTS
(CONT)
• Nominated beneficiary is then able to take
lump sum or regular income withdrawals
without incurring any tax liability – this
can be done regardless of age.
• Incentive for individuals – particularly if
they are nearing retirement – to maximise
pension contributions instead of making
cash gifts to next generation.
PENSION DEVELOPMENTS
(CONT)
• Use pension plans as vehicle for passing
wealth to next generation in tax-efficient
manner.
• What about borrowing to finance large
pension contribution?
S162B IHTA 1984
• Rules governing deductible liabilities for
IHT purposes have been tightened.
• New S162B IHTA 1984.
• Restriction where loan has been used to
finance (directly or indirectly) purchase
of property qualifying for BR, AR or
woodlands relief.
• Stops practice of borrowing secured on
residence for purchase of AIM portfolio.
S162B IHTA 1984 (CONT)
• Liability must be set against value of
asset before relief.
• Commencement date was originally
intended to be transfers made on or after
17 July 2013, but this could have had
retroactive effect.
• Rule, as legislated, only applies to new
loans taken out on or after 6 April 2013.
• Welcome amendment.
S162B IHTA 1984 (CONT)
• Following planning points should be
noted (these are not caught):
• loan followed by PET;
• loan followed by gift of, say, AIM
shares to spouse; and
• certain equity release arrangements,
eg. home reversion plans.
RECYCLING BR
• Leave relevant business property to
children who then sell it to surviving
parent.
• Stamp duty downside.
• What if parent has insufficient cash?
• Previously, advice was to use IOU – this
is no longer possible.