Capital Taxes Update and Planning 2016 26 September 2016 Martyn Ingles FCA CTA CGT Update - Agenda • PPR refresher • Relief for gifts – business assets and using trusts • Goodwill on incorporation – worth doing again? • Transfer of rental business to Ltd company • Entrepreneurs’ relief – watch 5% rule • Making Seed EIS work for your clients • IHT planning including the new “downsizing” relief 1
Private Residences • Taxpayer’s main residence exempt • Includes grounds of 0.5ha • Or “required for reasonable enjoyment having regard to size and character” • Includes servants quarters • And buildings in “curtilage” Private Residence Planning • If 2 or more residences • May elect which is principal residence • Only one at time • Switch back and forth • Last 18 months owned then exempt (was 36m) • Acceptable tax avoidance per GAAR guidance 2
Not a Residence for CGT PPR • Moore v HMRC – FTT decision • Property initially a “Buy to Let” • Marriage break up – “moved in” to property 12.11.06 • Council tax records support this • Property sold 22.7.2007 = 8 months later • Put property on market with Estate Agent – 22.4.2007 • Date moved in with new girlfriend? – unclear • Post delivered to girlfriend’s address (2 nd wife) Not a Residence for CGT PPR • HMRC’s view - Mr Moore’s occupation did not have the degree of permanence, continuity or expectation of continuity necessary for the property to qualify as his only or main residence for the purposes of sections 222 and 223 TCGA. • Goodwin v Curtis – “ A person’s ‘home’ was to be distinguished from a property which the person temporarily occupied” • FTT rejected taxpayers appeal – NOT PPR 3
Child at University? Extra PPR • Trustees get PPR if beneficiary lives in house • Martyn’s daughter Hannah – buy flat in Manchester? 3 options: • 1. Martyn buys – not PPR • 2. Hannah buys, Martyn as guarantor (her PPR) • 3. Buy via trust – PPR available to trustees • (With 3, Martyn should not lend funds to trust – could invoke the settlements rule – he should g’tee the Trust borrowing or settle funds absolutely) CGT payable by non- residents from 2015/16 4
CGT payable by non-residents • Consultation in Summer 2014 • New charge from 6 April 2015 on disposal of UK residential properties (dwellings) • Applies to NR individuals, trustees and close companies • Rebase at 6 April 2015 • Numerous exclusions e.g. property development and properties for communal use • Can they claim PPR relief? CGT payable by non-residents • Frau Merkel lives in Germany bought a holiday cottage in England April 2005 for £500,000, uses 2 weeks/ year. • Sells the cottage in April 2020 for £650,000. Market value of the cottage on 6 April 2015 was £550,000. • Gain computed with ref to 6 April 2015 value £100,000. • Time apportioned gain on cost £150,000 x 5/15 = £50,000 • Elect to use the time apportionment basis 5
Private Residence Relief for Non-Residents • PPR will still be available to non-residents disposing of main residence in Uk • Consultation considered 2 options: 1. Remove election - HMRC may seek evidence that de- facto main residence – mail delivery, electoral roll. 2. A fixed rule to identify the main residence based on number of days spent there New legislation requires occupation for at least 90 days in the tax year concerned to qualify for PPR Relief for gifts Business assets and trust planning 6
Hold over (gift) relief • Two alternatives • S165 – gift of business assets • Are the shares a business asset? • S260 – transfers subject to immediate IHT charge • Lifetime transfers to most trusts now • Can be any asset S165 business gift relief • Shares in trading company • Up to 5.4.03 linked to retirement relief definition • Trading company = “wholly or mainly” test • CBA/CA restriction if personal company • Now linked to “trading company” 20% test 7
CBA/ CA restriction • Where shareholder has >25% • or personal company • Restrict gain available for holdover • To MV chargeable business assets portion • Goodwill? Old or new? CBA/ CA restriction – Example • Business premises 300,000 CBA • Fixed plant 50,000 CBA • Goodwill 1,250,000 CBA? • Investments 150,000 CA • Other net assets 250,000 • Total value 2,000,000 • < 20% thus trading company 8
Old Goodwill – Bloggs Trading Ltd • Business premises 300,000 CBA • Fixed plant 50,000 CBA • Goodwill 1,250,000 CBA • 1,600,000 • Investments 150,000 CA • Total chargeable assets 1,750,000 • S165 holdover restricted to 91.4% • If £40,000 then £3,439 chargeable (< annual exemption) New Goodwill – Bloggs Trading Ltd • Business premises 300,000 CBA • Fixed plant 50,000 CBA • 350,000 • Investments 150,000 CA • Total chargeable assets 500,000 • S165 holdover restricted to just 70% • If £40,000 gain = £12,000 chargeable 9
S260 TCGA gift relief • Gift of any asset where there is immediate IHT charge • Lifetime transfer to all trusts now • If < £325,000 then no IHT (< nil band) • Also transfers out of trust • Planning? Passing on a Buy to Let using a trust • S260 TCGA – hold over gain where there is IHT charge e.g. transfer into and out of trust • Simple planning technique • Dad wants to give daughter £300K investment property. Base cost £60K • CG = major deterrent • Gain = £240,000 – 28% CGT = £67,200 10
Passing on a Buy to Let property • Simple planning technique • Dad transfers property into trust = if immediately chargeable = CG holdover (s260 TCGA) • IHT charge? – likely to be within nil rate band (£325K) • Property into trust for daughter without tax charge • No CGT, no IHT Passing on a Buy to Let Property • Simple planning technique • Property in trust • If trust is felt to be inappropriate… • Wait at least 3 months… • …. Or if trust suits, for longer • Appoint out property to daughter • Holdover under s260 TCGA on way out – No CGT • If gifted directly no holdover = CGT for Dad 11
Rollover relief Replacement of business assets Rollover relief • Replacement of business assets • Reinvest proceeds from old asset within period 1 yr before to 3 yrs after disposal • Gain either held over or deferred • Depends upon type of asset 12
Rollover relief 1.4.15 1.4.16 1.4.19 12M 36M BUY NEW ASSET SELL OLD ASSET Rollover relief - qualifying assets • Land and buildings • *Goodwill • Fixed plant & machinery • Ships, aircraft, hovercraft • Satellites and space craft!! • *Quotas • * Entitlement to SFP and its 2015 replacement 13
Depreciating assets • Expected life < 60 years • E.G. Leasehold premises • Gain on old asset merely deferred • Deferred until earlier of • Sale of asset • Cease using asset in trade • 10 years after acquisition CGT on incorporation 14
CGT on incorporation MR A MR A A LTD TRADE AND ASSETS SOLD TO A LTD DR ASSETS CR LOAN A/C USE MV TO COMPUTE GAINS Goodwill on Incorporation Mr Jones Mr Jones Jones Ltd TRADE AND GOODWILL SOLD TO JONES LTD DR G/WILL £1million CR LOAN A/C £1 million 15
Goodwill – What we used top be able to do… • Incorporate business 30 November 2014 • “Sell” goodwill to Jones Ltd leaving balance outstanding on loan account • Gain on goodwill £1,000,000 • With entrepreneurs’ relief just 10% CGT = £100,000 • Can then withdraw loan account “tax free” • If post 1.4. 2002 goodwill could even claim a CT deduction… say 10 years = £100,000 Goodwill – Autumn Statement Mr Jones Mr Jones Jones Ltd TRADE AND GOODWILL SOLD TO JONES LTD DR G/WILL £1,000,000 CR LOAN A/C £1,000,000 ****CGT Entrepreneurs’ Relief no longer available from 3 December 2014 **** 16
Goodwill – CT deduction also blocked • Sole trader/ Partnership to Ltd company • Related parties • Thus no write off of OLD goodwill (pre 1.4.2002) *** Can no longer write off if transferred from 3 December 2014 onwards *** Goodwill – Additional tax • Before • Mr Jones £1,000,000 gain = £100,000 CGT • Jones Ltd : £100,000 a year profit - £100,000 amortisation = NIL taxable profits, CT NIL • Now: • Mr Jones £1,000,000 gain = £280,000 CGT • Jones Ltd: Accounting profit NIL= no dividends • Taxable profits £100,000 p.a. = £20,000 CT p.a. x 10. • 10 years = £480,000 tax (£280,000 + £200,000) 17
Incorporation – CGT reliefs still available • Small goodwill gains – covered by £11,000 annual exemption but 18%/28% thereafter • S165 – gift of business assets • Hold gain over into cost of assets • Assets have low base cost • Use if property to be retained personally • S162 – transfer of a business in exchange for shares • Hold gains into base cost of shares • Assets at market value • No gain if asset sold shortly after Incorporation – other strategies • Use brought forward capital losses • If recently acquired on death – uplift to probate value • Allocate more of the value of the business to other assets e.g. properties rather than goodwill – watch SDLT • Note that ER still available against gains on other chargeable assets transferred 18
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