DEDUCTION OF INCOME TAX FROM INTEREST (CONT) • This latest change takes effect on 6 April 2017. • Also no tax deduction at source from interest paid to investors in peer-to-peer lending. • See Sch 5 FA 2017.
EIS AND SEIS CHANGES • For shares issued on or after 5 December 2016, EIS and SEIS rules amended to allow companies to have shares with rights for conversion or exchange at later stage into shares of different class. • However, conversion or exchange should not take place during “qualifying period” (normally next 3 years).
SOCIAL INVESTMENT TAX RELIEF • Original 5-year time limit for qualifying SITR investment extended by further 2 years, ie. up until 5 April 2021. • SITR investor must be independent of social enterprise, ie. he must hold no other shares or debentures in social enterprise.
SOCIAL INVESTMENT TAX RELIEF (CONT) • New stipulation that there must be “no arrangements”, disqualifying ie. no arrangements entered into with main purpose of securing any of following venture capital reliefs: • SITR; • EIS/SEIS/VCT relief; and • share loss relief.
SOCIAL INVESTMENT TAX RELIEF (CONT) • Uprated investment limit of £1,500,000 for any social enterprise. • Employee limit is fewer than 250 full-time equivalent employees. • Social enterprise must be in sound financial health at time of investment. • Several new prohibited activities (eg. leasing). • These all have effect from 6 April 2017.
BUSINESS INVESTMENT RELIEF • BIR allows remittance basis taxpayers to bring in overseas income and gains without paying tax, provided they use money to make commercial investment in company. • Needs claim. • Qualifying investment can be made directly or indirectly – this must be done within 45 days.
BUSINESS INVESTMENT RELIEF (CONT) • Originally, BIR investment covered: • subscription of new shares or securities; or • making of loan. • Company (known as “target company”) had to be: • eligible trading company; or • eligible stakeholder company; or
BUSINESS INVESTMENT RELIEF (CONT) • eligible holding company. • No requirement for target company to be UK-incorporated. • Investment must always be in private company (with no shares listed on recognised stock exchange). • LLPs and other non-corporate structures are excluded. • 2-year start-up rule for trading companies.
BUSINESS INVESTMENT RELIEF (CONT) • 2 points to note: • property letting counts as commercial trade; and • at least 80% of company’s activities must be trading (measured by reference to turnover). • At time of investment, individual must not obtain “related benefit” (ie. any benefit attributable to making of investment).
BUSINESS INVESTMENT RELIEF (CONT) • Director’s fees and normal benefits in kind are OK. • No monetary limits to remittance or size of investment. • Relief is not restricted to UK-resident companies nor does company’s business have to be carried on wholly or mainly in UK. • All types of trade qualify (cf. EIS relief).
BUSINESS INVESTMENT RELIEF (CONT) • No embargo on investor working for his company – indeed, company can be family concern. • Clawback of relief in certain circumstances (eg. sale or “abnormal” extraction of value), but can be set aside by “appropriate mitigation steps” . • Changes in F(No2)B 2017 to make BIR more attractive (all w.e.f. 6 April 2017):
BUSINESS INVESTMENT RELIEF (CONT) • BIR to be allowed on acquisition of existing shares; • start-up period for company planning to trade extended from 2 to 5 years; • company can be both trading and stakeholder entity (ie. hybrid); • company which is member of LLP is not regarded as carrying on LLP’s trade;
BUSINESS INVESTMENT RELIEF (CONT) • “extraction of value” rule will only be treated as having been breached if “abnormal” benefit is received in circumstances attributable to taxpayer’s investment; and • longer grace period allowed where company fails to satisfy 5-year start-up time limit.
APPROPRIATION TO TRADING STOCK • Where chargeable asset is appropriated for use as trading stock, trader is deemed to have sold asset for current MV. • Potential difficulty of collecting CGT – “dry” tax charge. • Election under S161(3) TCGA 1992: • no gain or loss; but • MV of asset in trading accounts is adjusted.
APPROPRIATION TO TRADING STOCK (CONT) • Converts capital gain into trading profit – but is this always desirable? • Time limit for making election. • Hitherto, election has also been valid where there was allowable loss – effect was to replace loss with more flexible trading deduction. • Widely used planning point in recent times for, eg. property developers.
APPROPRIATION TO TRADING STOCK (CONT) • However, election facility removed for appropriations to trading stock made on or after 8 March 2017 where loss arises. • Loss now has to remain as capital item. • Election can still be made for chargeable gains.
EMPLOYEE SHAREHOLDER STATUS ABOLISHED • Favourable tax treatment for employee shareholder shares brought in 4 years ago has been abolished for schemes set up on or after 1 December 2016. • In FA 2013, employees were granted CGT- free shares worth up to £50,000 in return for waiving normal employment rights. • Income tax and NICs not chargeable on first £2,000 of share value received.
EMPLOYEE SHAREHOLDER STATUS ABOLISHED (CONT) • Tax advisers initially sceptical about idea. • But it was widely used, for example, by private equity firms. • Hence lifetime limit of £100,000 placed on CGT exemption by S88 FA 2016. • All tax advantages for employee shareholder status have been removed for schemes launched on or after 1 December 2016.
EMPLOYEE SHAREHOLDER STATUS ABOLISHED (CONT) • However, arrangements set up before 1 December 2016 are still OK – shares can be sold free of CGT (up to £100,000 limit). • Note own share purchase change – sale proceeds no longer treated as automatic capital receipt. • See Ss12 – 14 FA 2017.
ENVELOPED UK PROPERTY • Non-UK domiciliaries are chargeable to IHT on UK-situated property – this rule individual’s applies, regardless of residence status. • Standard practice for such individuals: hold UK residential property through overseas company (or similar vehicle). • This gives rise to excluded property, but potential exposure to ATED.
ENVELOPED UK PROPERTY (CONT) • W.e.f. 6 April 2017, Government are bringing UK residential properties within charge to IHT where they are held in overseas structure. • Such property is to be removed from definition of “excluded property” in Ss6 and 48 IHTA 1984. • No difference whether overseas structure is owned by individual or trust.
ENVELOPED UK PROPERTY (CONT) • Shares in “close” overseas company will no longer constitute excluded property to extent that value of any interest is attributable, directly or indirectly, to UK residential property. • Similar rules for non-UK domiciliaries who are partners in overseas partnerships holding residential property in UK.
ENVELOPED UK PROPERTY (CONT) • Normal IHT chargeable event legislation will bite. • Limited de minimis exemption – less than 5% interest (by value). • These changes do not affect other UK situs assets owned by offshore entities – only residential property is caught.
ENVELOPED UK PROPERTY (CONT) • Definition of UK residential property is wide – no minimum monetary threshold and no special reliefs for main residence or rental properties. • Government have decided to go with definition in FA 2015 for non-UK residents rather than that applying for ATED. • This covers any property suitable for use as dwelling (+ construction/adaptation).
ENVELOPED UK PROPERTY (CONT) • List of exceptions. • But what happens if residential property has previously been used for commercial purposes? • “Just and reasonable” apportionment is not considered to be appropriate. • Originally, Government planned to introduce rule adapted from IHT business relief legislation.
ENVELOPED UK PROPERTY (CONT) • Full value would be caught if it had been dwelling at any time within last 2 years. • But this idea has been dropped. • Only relevant factor = status of property at time of chargeable event. • Apportionment will, however, be needed where there is duality of use, eg. flat above shop premises.
ENVELOPED UK PROPERTY (CONT) • Valuation: use value of holding in overseas entity, and not value of underlying property itself. • Valuation: where overseas entity owns other assets in addition to UK residential property, make adjustment to ensure that only value deriving from UK residential property interest is caught.
ENVELOPED UK PROPERTY (CONT) • With debts, they can be offset against value of UK residential property, but, where there are other types of asset, liability must be allocated across all assets (in proportion to MVs). • This applies even if debt is specifically secured on UK residential property. • Illustration.
ENVELOPED UK PROPERTY (CONT) • In addition, there will be exposure to IHT where: • there is “relevant loan” ; • money or money’s worth is used as security, collateral or guarantee; or • interest of shareholder or partner is directly or indirectly attributable to loan or collateral for it.
ENVELOPED UK PROPERTY (CONT) • “Relevant loan” refers to situation where money’s money or worth is made available to finance: • acquisition of UK residential property; • maintenance or enhancement of UK residential property; or • acquisition of interest in company or partnership where funds are used for UK residential property.
ENVELOPED UK PROPERTY (CONT) • Term is not limited to loans between connected parties. • “duplicate” Can these rules create liabilities? • Illustration. • Anti-avoidance provisions are aimed at catching situations where, on or after 6 April 2017, UK residential property is sold or “relevant loan” is repaid.
ENVELOPED UK PROPERTY (CONT) • But only if this takes place within 2 years prior to chargeable IHT event. • This applies to sales of interests in company or partnership, and not to disposals of underlying UK property. • Watch 2-year “run - off” period. • HMRC are keen that extension of IHT to enveloped properties should not be circumvented.
ENVELOPED UK PROPERTY (CONT) • Introduction of TAAR: arrangements will be disregarded if main purpose is to secure “tax advantage” . • Does this mean that TAAR can only apply to transactions entered into on or after 6 April 2017? • No transitional reliefs to come – collapse structures now? • Collection of tax.
DEEMED DOMICILE • Widening of scope of deemed domicile w.e.f. 6 April 2017. • Applies for income tax, CGT and IHT. • New terminology: • anyone born in UK with UK domicile who is UK-resident but is at present “formerly non-UK domiciled = domiciled resident” (FDR); and
DEEMED DOMICILE (CONT) • anyone who has been resident in UK for at least 15 out of last 20 tax years = “long -term resident” . • Both categories are classified as “deemed domiciled” – but only for tax purposes. • Circumstances of parents do not impact on children. • FDRs are unable to access remittance basis for income tax and CGT.
DEEMED DOMICILE (CONT) • However, remittance basis will still apply for pre-2017/18 foreign income and gains remitted on or after 6 April 2017. • Anti-avoidance legislation – FDRs, where they are settlors, will have income and gains of offshore trusts attributed to them on arising basis. • Reporting requirements for trustees of offshore trusts.
DEEMED DOMICILE (CONT) • FDRs caught by IHT on worldwide basis. • Similarly, any trust of which FDR is settlor will be denied excluded property status as long as settlor remains resident in UK. • Special IHT “period of grace” relaxation: new IHT rule will only bite where FDR: • is resident in UK; and • was UK-resident for at least 1 out of last 2 tax years.
DEEMED DOMICILE (CONT) • When determining 10-year anniversary charges, key factor is whether settlor was deemed domiciled at 10-year anniversary date – if so, look at number of quarters in last 40 when he was deemed domiciled. • “grandfathering” No for excluded property trusts set up before 8 July 2015. • FDR will lose deemed domicile in first tax year of non-UK residence, provided he:
DEEMED DOMICILE (CONT) • retains his foreign domicile under general law; and • has not become deemed domiciled by virtue of long-term residence. • It does not matter how many years FDR has been abroad before he re-establishes residence in UK. • For long-term residents, there is 1 transitional exception where:
DEEMED DOMICILE (CONT) • individual is not resident in UK for tax year in question; and • there is no tax year beginning after 5 April 2017 and preceding tax year in question when he was UK-resident. • Anomaly – will it be sorted out? No. • Remittance basis can continue for those with less than £2,000 of unremitted foreign income and gains.
DEEMED DOMICILE (CONT) • Remittance basis charges of £30,000 and £60,000 are remaining in place. • But £90,000 charge became obsolete on 6 April 2017. • What happens if individual is both FDR and long-term resident? • FDR rules take precedence. • For long-term residents, necessary to reconsider relief for capital losses.
DEEMED DOMICILE (CONT) • Hitherto, UK-resident non-UK domiciliary who wants to access remittance basis has had to choose either to: • forfeit entitlement to relief for foreign capital losses; or • make irrevocable capital loss election. • This latter allows relief for all his capital losses, but in special prescribed order which is often unfavourable.
DEEMED DOMICILE (CONT) • Legislation has been revised: • When someone becomes deemed domiciled, he is now allowed to offset all his losses against gains without having to distinguish between UK and foreign disposals. • If he loses his deemed domicile but later returns to UK, he can once again access remittance basis and make capital loss election afresh.
DEEMED DOMICILE (CONT) • No special IHT provisions for long-term residents. • Rebasing relief – individuals who become deemed domiciled as long-term residents as at 6 April 2017 are able to rebase their foreign assets to MV on 5 April 2017. • Conditions for individual’s rebasing relief: • He must not be FDR.
DEEMED DOMICILE (CONT) • He must not be domiciled in UK under general law during tax year when asset is disposed of. • He must have held asset on 5 April 2017, with disposal taking place at later date. • Asset must have foreign situs throughout period from 16 March 2016 (or date of acquisition, if later) to 5 April 2017.
DEEMED DOMICILE (CONT) • Other stipulations: • He must have been resident in UK for at least 15 out of last 20 tax years up to 2016/17 and must remain UK-resident in 2017/18. • He must have paid remittance basis charge at least once prior to 2017/18 (this means that minors can never benefit from rebasing relief).
DEEMED DOMICILE (CONT) • Rebasing relief is only available for assets held directly by individuals – no rebasing for assets held by trusts or companies. • If asset is to be rebased, individual must make election which, once made, cannot be revoked. • This election operates on asset-by- asset basis.
CLEANSING OF MIXED FUNDS • For period of 2 years starting on 6 April 2017, non-UK domiciliaries who have claimed remittance basis can rearrange their bank accounts and separate different component parts into: • clean capital; • foreign income; and • foreign gains.
CLEANSING OF MIXED FUNDS (CONT) • They can then make tax-free remittance to UK from their clean capital. • Existing mixed fund rules are being disapplied for time being. • Requirements are: • transfer of money made during 2017/18 or 2018/19; • transfer is made from mixed fund;
CLEANSING OF MIXED FUNDS (CONT) • transfer is made into different receiving account; • transfer is appropriately nominated by non-UK domiciliary; • no other transfer has been nominated from that mixed fund into receiving account; and • “qualifying transfer is made by individual” .
CLEANSING OF MIXED FUNDS (CONT) • “Qualifying individual” means individual who has been taxed on remittance basis for any tax year prior to 2017/18 and who is not FDR. • Relief does not apply to non-monetary assets. • But non-monetary asset can be sold during 2-year transitional window, with sale proceeds then being separated out.
ATED IN 2017 • ATED is annual tax payable by companies and certain other NNPs owning UK residential property worth more than £500,000. • Tax charges for financial year 2017 (ie. 12 months to 31 March 2018). • 5-year revaluation on 1 April 2017. • ATED reliefs and exemptions (eg. for property let out commercially).
ATED IN 2017 (CONT) • Reliefs should be claimed on ATED Relief Declaration Return. • Do not overlook recent reductions in valuation thresholds.
NEW 100% FYA • For expenditure incurred on or after 23 November 2016, cost of new electric vehicle charging point qualifies for 100% FYA. • This form of tax relief will run until 31 March (or 5 April) 2019. • Intended to make installation of electric charge-points more common feature on high streets.
NEW 100% FYA (CONT) • Detailed guidance to be published by HMRC later this year.
CORPORATION TAX LOSS RELIEF • Reform of corporation tax rules for carry- forward of trading losses w.e.f. 1 April 2017. • Losses covered include: • trading losses; • management expenses; • non-trading loan relationship deficits; • UK property losses; and
CORPORATION TAX LOSS RELIEF (CONT) • non-trading losses on intangibles. • Consultation document published in May 2016. • Government has 2 aims in “modernising” tax system – these are to: • widen scope of carry-forward rules; and • restrict profits against which such losses can be set.
CORPORATION TAX LOSS RELIEF (CONT) • Government’s plans are twofold: • when corporate losses arise on or after 1 April 2017, they can be carried forward and set against other (ie. non- trading) profits or surrendered; and • w.e.f. 1 April 2017, amount of profits which can be relieved by losses carried forward will be limited to 50%, subject to annual allowance of £5,000,000.
CORPORATION TAX LOSS RELIEF (CONT) • This allowance will apply per company or per group (as case may be). • Capital losses are still to be ring-fenced (ie. they can only be relieved against chargeable gains). • Comprehensive pro forma for company’s loss position provided by F(No2)B 2017. • Other points to mention include:
CORPORATION TAX LOSS RELIEF (CONT) • where company’s profits include both trading and non-trading sources, in- year losses and group relief no longer have to be split on pro rata basis; • group/company has absolute discretion as to allocation of £5,000,000 limit; • meaning of “group” for this purpose is based on group relief definition; and
CORPORATION TAX LOSS RELIEF (CONT) • pre-1 April 2017 losses which are carried forward will still be subject to existing streaming rules, ie. they can only be carried forward against profits of same trade. • See Illustration. • New terminal loss relief regime on cessation of trade.
CORPORATION TAX LOSS RELIEF (CONT) • “Same trade” restriction for companies where trade, which once flourished, has now become small or negligible. • Anti-avoidance where there is: • change of ownership; and • major change in nature or conduct of trade within 3-year period.
CORPORATION TAX LOSS RELIEF (CONT) • 3-year period has been widened to 5 years. • On change of ownership, any pre- acquisition losses in acquired company cannot be group relieved for 5 years.
CORPORATE INTEREST TAX RELIEF • Consultation paper published on 22 October 2015. • Aimed at countering “aggressive” tax planning, mainly by large companies. • Idea for restriction of debt relief inspired by OECD’s BEPS initiative. • Hitherto, UK only had limited protection: • transfer pricing rules; and
CORPORATE INTEREST TAX RELIEF (CONT) • “large company” worldwide debt cap. • In addition, there are several TAARs to supplement transfer pricing legislation. • Some countries, eg. Australia, Germany and Japan, have general provision which limits interest relief. • W.e.f. 1 April 2017, corporate group’s net interest relief is to be capped at fixed percentage of taxable UK profits.
CORPORATE INTEREST TAX RELIEF (CONT) • Cap has been set at 30% of EBITDA, subject to de minimis threshold of £2,000,000. • Alternative group ratio rule which may produce higher percentage – this is found by expressing net group interest expense as percentage of group EBITDA. • Modified debt cap. • Unrelieved interest to be carried forward.
SSE REFORM • SSE introduced in FA 2002 – detailed rules found in Sch 7AC TCGA 1992. • Capital gains exemption for companies selling trading subsidiaries and corporate investments where they hold stake of at least 10% of O.S.C. (+ other economic rights). • No distinction between sales of shares in UK-resident and overseas companies.
SSE REFORM (CONT) • Main conditions for SSE are: • Investing company must be sole trading company or member of trading group through relevant 12-month period. • Immediately after disposal, this must still apply. • Relevant 12-month period can start no more than 2 years before disposal date.
SSE REFORM (CONT) • Investee company must be trading company or holding company of trading sub-group throughout relevant 12- month period. • Immediately after disposal, investee company must still be trading company or member of trading group. • Consultation on reform of SSE rules launched by Government in 2016.
SSE REFORM (CONT) • Perceived problem area was that both companies had to be undertaking trading activities – property investment business does not qualify. • Changes taking effect for disposals made on or after 1 April 2017 are: • removal of investing company trading condition;
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