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Finance Act 2015 Update

Presented by

Robert Jamieson

No responsibility for loss occasioned to any person acting or refraining from action as a result of the material in these notes can be accepted by the author or 2020 Innovation Training Limited

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FINANCE ACT 2015

Robert Jamieson MA FCA CTA (Fellow) TEP

Wayfarers Barn, Steventon, Basingstoke, Hampshire RG25 3AY Tel: 01256 782828 Fax: 01256 782076 Mob: 07801 932500

E-mail: robertianjamieson@hotmail.com

Contents Page No. Income tax rates and allowances for 2015/16 2 New starting rate for savings 4 Income tax in 2016/17 and 2017/18 5 NICs for 2015/16 6 Company car benefits 8 Benefits in kind – zero-emission vans 10 Benefits in kind – loans 11 Automatic tax relief for employee expense claims 12 Extension of the benefits in kind code 15 PAYE and benefits in kind 16 Board and lodging provided for carers 17 Lump sums paid to armed forces personnel 18 B share schemes 19 Remittance basis changes 20 Pension flexibility – annuities 21 Investment reliefs – excluded activities 22 Annual CGT exemption 24 Goodwill on incorporation 25 Further unexpected entrepreneurs’ relief amendments 28 Deferred entrepreneurs’ relief on invested gains 31 Can a work of art be plant? 33 The new CGT charge for non-UK residents 35 The end of the road for pilot trusts? 40 New IHT exemptions 45 The reform of SDLT 47 ATED in 2015 51 Averaging for farmers 54 Contributions to partnership funding schemes for flood defence projects 55 Enhanced capital allowances (ECAs) and zero-emission goods vehicles 56 Corporation tax rates going forward 57 Corporation tax – loss refresh prevention 58 Loan relationships and late paid interest 61 Expenditure on R&D 63 Disclosure of tax avoidance schemes (DOTAS) 65 Accelerated payments and group relief 67 Redemption of undated Government Stocks 68 Appendix – FB 2015 69 © September 2015

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1. Income tax rates and allowances for 2015/16

(a) The basic, higher and additional rates of income tax for 2015/16 have been set at 20%, 40% and 45% respectively by S1(2) FA 2015. This is the same as for 2014/15.

(b) Because of the £600 increase in the standard personal allowance which has

effect for 2015/16 (see (e) below), the upper limit for the basic rate band was lowered by £80 to £31,785 by S2(1)(a) FA 2014. This was designed to ensure that higher rate taxpayers only receive a proportion of the benefit from the new personal allowance. The income tax table reads as follows for 2015/16:

Cumulative Rate tax % £

0 – 31,785 20 6,357 31,785 – 150,000 40 53,643 Over 150,000 45

(c) The rates for dividends in 2015/16 are as follows:

(i) 10% for dividends falling within the basic rate band;

(ii) 32.5% for dividends falling within the higher rate band; and

(iii) 37.5% for all other dividends.

The effective rate of tax on dividends where taxable income exceeds £150,000 is 30.56%.

(d) The trust rate, which applies to the income of discretionary and accumulation

trusts above the standard rate band limit of £1,000, is 45% for 2015/16 and the dividend trust rate is 37.5%.

(e) The personal reliefs for 2015/16 are:

£

Personal (born on or after 6 April 1938) 10,600 Personal (born before 6 April 1938) 10,660 Blind person’s 2,290

These allowances continue to attract relief at the taxpayer’s top marginal rate. The married couple’s allowance was abolished 15 years ago. However, couples where at least one of the spouses (or civil partners) was born before 6 April 1935 can still claim the relief. This allowance, which is relieved at 10%, rises to £8,355 for 2015/16 (S2(1)(d) FA 2015). The income limit for the pre-6 April 1938 personal allowance becomes £27,700 (S2(1)(a) FA 2015). If this limit is exceeded, the elderly person’s allowances are reduced by £1 for every £2 of excess income, with the personal allowance being abated before

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the married couple’s allowance (if that is available). On the assumption that the rule in (f) below is not in point, this abatement can never take:

(i) the personal allowance down to a figure of less than £10,600; and

(ii) the married couple’s allowance down to a figure of less than £3,220

(S2(1)(c) FA 2015).

(f) By virtue of S35 ITA 2007, where an individual’s ‘adjusted net income’ for 2015/16 exceeds £100,000, the personal allowance of £10,600 is withdrawn at the rate of £1 for every £2 of excess income. If relevant, the restriction is rounded down. Adjusted net income is defined in S58 ITA 2007 as an individual’s total income less:

(i) trading losses;

(ii) allowable interest;

(iii) pension contributions paid gross;

(iv) the grossed up amount of pension contributions paid net; and

(v) the grossed up amount of Gift Aid donations.

Thus 45% taxpayers never receive a personal allowance nor do those in the upper echelons of the 40% tax bracket. The income cut-off figure for 2015/16 is £121,200. Note that this rule applies to high income taxpayers of all ages.

(g) In FA 2014, legislation was passed which allows individuals who are married

(or in a civil partnership) to transfer 10% of the standard personal allowance for 2015/16 and subsequent tax years to their other half. The relevant details can be found in Ss55A – 55E ITA 2007. Thus, say, a wife who has little or no income can transfer £1,060 in 2015/16 to her husband, subject to the requirement that he must not be liable to income tax at the higher or additional rate. In other words, the tax benefit of what is now known as the ‘marriage allowance’ is 20% x £1,060 = £212.

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2. New starting rate for savings

(a) In 2015/16, there is a new 0% starting rate which applies to an individual’s savings income (S3 FA 2014). The upper limit for this rate is £5,000.

(b) S16 ITA 2007 sets out the ordering rules for the different sources of income

received by an individual: broadly speaking, dividends are treated as the highest part of an individual’s total income followed by savings income (ie. bank and building society interest). The lowest slice is the individual’s non-savings income (that is, salary, benefits, business profits, pensions and income from property) which is effectively taxed first. The 0% starting rate is only in point for recipients of interest whose non-savings income does not exceed their personal allowance plus £5,000. In many cases, these will be elderly people with modest pensions and a certain amount of interest.

(c) Illustration 1

In 2015/16, Robert receives a state retirement pension of £8,700 (no tax deducted), income from a rental property of £1,400 and building society interest of £4,800 (net). His personal allowance is £10,600.

Robert’s tax position for 2015/16 is:

£

Pension 8,700 Property income 1,400 BSI (x 100/80) 6,000 –––––– 16,100 Less: PA 10,600 –––––– £5,500 ––––––

Robert’s personal allowance for 2015/16 is set against his pension and his property income and so neither of these will be taxable. The whole of Robert’s taxable income of £5,500 represents savings income. The first £5,000 is charged at the 0% starting rate for savings, with the balance being taxed at the basic rate of 20%. Thus:

£

5,000 @ 10% – 1,500 @ 20% 100 –––––– 100 Less: Tax deducted at source (20% x 6,000) 1,200 –––––– REPAYMENT DUE £(1,100) ––––––

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3. Income tax in 2016/17 and 2017/18

(a) Looking ahead, Cls 5 and 6 FB 2015 spell out the main income tax details for 2016/17 and 2017/18. The income tax table for 2016/17 will be as follows:

Cumulative

Rate tax % £ 0 – 32,000 20 6,400 32,000 – 150,000 40 53,600 Over 150,000 45

(b) In addition, the personal allowance will rise to £11,000 for 2016/17. As a result, the remaining age allowance for those born before 6 April 1938 will become redundant and so references to it are to be removed with effect from 6 April 2016.

(c) The point at which an individual is liable for higher rate income tax in 2016/17

will be £11,000 + £32,000 = £43,000. This represents an increase of just under 1.5% compared with the equivalent figure for 2015/16 (£10,600 + £31,785 = £42,385).

(d) The income tax table for 2017/18 will show:

Cumulative Rate tax % £ 0 – 32,400 20 6,480 32,400 – 150,000 40 53,520 Over 150,000 45

Given that the personal allowance for 2017/18 will increase to £11,200, the point at which higher rate income tax for that year becomes payable will be £11,200 + £32,400 = £43,600. It should be noted that this threshold is lower than the equivalent figure for 2009/10 which stood at £43,875.

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4. NICs for 2015/16

(a) Class 1

For 2015/16, the starting-point for the payment of Class 1 NICs by employees rises to £155 per week (£8,060 per annum). This figure is known as the ‘primary threshold’ and, several years ago, it was aligned with the level of the standard personal allowance so that the figure at which individuals began paying both income tax and Class 1 NICs was the same. However, following the unexpected £600 rise in the 2008/09 personal allowance after the start of that tax year (which was not matched with a corresponding step-up in the primary threshold) and the further inflation-beating increase for the 2009/10 allowance, it was decided to uncouple the two thresholds for the time being. Sadly, it does not look as though this gap is likely to close in the near future. The lower earnings limit for 2014/15 goes up to £112 per week (£5,824 per annum) and, although Class 1 NICs only become payable once earnings exceed the primary threshold, earnings between the lower earnings limit and the primary threshold protect an entitlement to basic state retirement benefits without incurring an NIC liability – family businesses, in particular, should consider whether they are taking full advantage of this rule.

(b) The upper earnings limit for 2015/16 rises to £815 per week (£42,385 per

annum). The Class 1 percentage for standard-rated employees remains at 12%. Remember that the upper earnings limit is calculated by the taking the higher rate threshold and adding the standard personal allowance, ie. £31,785 + £10,600 = £42,385.

(c) Earnings in excess of the upper earnings limit are subject to a 2% charge on

the employee.

(d) The employer rate for 2015/16 stays at 13.8% on all earnings in excess of the ‘secondary threshold’ which has been set at £156 per week (£8,112 per annum).

(e) A new concept for 2009/10 was the ‘upper accruals point’ which was fixed at

£770 per week (£40,040 per annum) and is unaltered for 2015/16. It marks the point at which primary contributions from employees stop being contributory. Between the upper accruals point and the upper earnings limit, Class 1 NICs simply become a non-contributory levy (ie. like Class 4 NICs).

(f) Class 1A

Fixed percentage – 13.8% (employers only). This relates to taxable benefits of employees.

(g) Class 1B

Fixed percentage – 13.8% (employers only). This relates to PAYE Settlement Agreements.

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(h) Class 2

Flat rate – £2.80 per week. The small earnings exception is £5,965. However, on 18 March 2015, the Chancellor announced that the Government intended to abolish Class 2 NICs during the next Parliament and to reform the structure of Class 4. It is understood that the Government will be consulting on the detail and timing of these important changes later this year.

(i) Class 3

Flat rate – £14.10 per week.

(j) Class 4

9% on trading profits between £8,060 and £42,385, together with an uncapped 2% payable on all profits above £42,385. In consequence, a self-employed individual with business profits of £400,000 in 2015/16 will pay Class 4 NICs as follows:

£ £

Upper profits limit 42,385 Less: Lower profits limit 8,060 ––––––

9% x £34,325 = 3,089 –––––– £

Business profits 400,000 Less: Upper profits limit 42,385 –––––––

2% x £357,615 = 7,152 ––––––– –––––– £10,241 –––––– (k) Employment Allowance

The Employment Allowance began in 2014/15. For 2015/16, eligible employers are able to reduce their employer Class 1 NICs by up to £2,000 for the tax year. The allowance operates on a FIFO basis. Most businesses and charities paying secondary Class 1 NICs on employees’ and directors’ earnings can claim the relief. However, with a group of companies, only one company is allowed to make a claim.

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5. Company car benefits

(a) Car benefits

Where a car is made available to an employee by reason of his employment, the income tax charge is based on a percentage of the car’s list price, graduated according to the level of the car’s CO2 emissions measured in grams per kilometre (g/km). For 2015/16, the table of percentages reads as follows: Percentage of car’s CO2 emissions in g/km list price taxed

0 – 50 5% 51 – 75 9% 76 – 94 13% 95 – 99 14% 100 – 104 15% 105 – 109 16% 110 – 114 17% 115 – 119 18% 120 – 124 19% 125 – 129 20% 130 – 134 21% 135 – 139 22% 140 – 144 23% 145 – 149 24% 150 – 154 25% 155 – 159 26% 160 – 164 27% 165 – 169 28% 170 – 174 29% 175 – 179 30% 180 – 184 31% 185 – 189 32% 190 – 194 33% 195 – 199 34% 200 – 204 35% 205 – 209 36% 210 or over 37%

Note: A 3% supplement is added to the appropriate percentage in respect of diesel cars, although this can never take the percentage above 37% (see S9 FA 2015). 2015/16 is the final year for which this rule applies.

(b) Car fuel benefits

Under the car fuel regime introduced by FA 2002, where employees have private fuel paid for by their employer, the same percentage which applies to the car’s list price for car benefit purposes is also applied to a statutory fuel

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figure known as a ‘multiplier’. For 2015/16, this figure has risen by £400 to £22,100 (SI 2014/2896).

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6. Benefits in kind – zero-emission vans

(a) For the last five tax years, S155 ITEPA 2003 has ensured that a company van is not subject to a benefit in kind charge for private use provided that it cannot in any circumstances emit CO2 by being driven. This means that the van will be powered entirely by electricity or by a hydrogen fuel cell.

(b) This nil rate charge came to an end with effect from 6 April 2015. For

2015/16, a figure of 20% of the normal van benefit for that tax year (ie. 20% x £3,150 = £630) will be chargeable on drivers of zero-emission vans (S10 FA 2015).

(c) Thereafter, the rate will rise on a tapered basis as follows:

Relevant

Tax year percentage

2016/17 40% 2017/18 60% 2018/19 80% 2019/20 90% 2020/21 100%

The percentage is applied to the van benefit for that tax year so that the benefit for zero-emission vans in 2020/21 is precisely the same as for vans which emit CO2.

(d) However, if the driver of a zero-emission van (or, indeed, any other van)

meets the restricted private use condition set out in S155(4) ITEPA 2003, the cash equivalent of his benefit will remain at nil.

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7. Benefits in kind – loans

(a) Where an employer provides an employee with a loan which is either interest-free or subject to a low rate of interest, there is no taxable benefit if the aggregate of all such loans does not exceed £10,000 in the tax year – see S180 ITEPA 2003. Nor is there a Class 1A NIC charge.

(b) When considering whether the limit of £10,000 has been exceeded, any

employer-provided loans which would attract income tax relief (ie. because they were made for a qualifying purpose) are ignored.

(c) The official rate of interest for beneficial loans has been reduced to 3% for

2015/16 (SI 2015/411).

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8. Automatic tax relief for employee expense claims

(a) In his Budget last year, the Chancellor announced a number of measures aimed at simplifying the administration of benefits in kind and employee expenses. This followed on from the January 2014 report by the Office of Tax Simplification (OTS) of the review which they conducted into the tax regime for employee benefits and expenses.

(b) With regard to these matters, there were four main changes which the

Government planned to include in FA 2015:

(i) abolishing the threshold for the taxation of benefits in kind for employees who earn less than £8,500 per annum;

(ii) introducing a statutory exemption for trivial benefits;

(iii) introducing a system of voluntary payrolling for benefits in kind; and

(iv) replacing the present dispensation system with an exemption for paid

and reimbursed expenses.

This chapter looks at the last of these areas. Rather strangely, FA 2015 does not include the statutory exemption for trivial benefits – the other provisions (ie. (i) and (iii) above) are discussed in the next two chapters.

(c) The existing system operates at two levels. Employers can apply to HMRC

for a dispensation, allowing them to pay specified expenses to their staff without having to report these items to HMRC and, of course, without having to deduct income tax and NICs.

(d) Unfortunately, HMRC do not make dispensations available to all employers,

mainly because of their concern about the misuse of expense payments in connection with tax avoidance. Employees of a company without a dispensation arrangement are thus charged to tax on their expense claims which they then have to recover from HMRC after the end of the tax year.

(e) This regime was condemned by the OTS in their report. The OTS

recommendation was that it should be replaced with a straightforward exemption for qualifying expenses, allowing all employers to determine for themselves whether an expense payment is taxable or not. All employees of all companies would automatically receive tax relief on their legitimate expenses, subject only to checks being made by HMRC on the employer’s records.

(f) HM Treasury accepted this recommendation. With effect from 6 April 2016,

the dispensation regime is being abolished. Ss65 and 96 ITEPA 2003, which govern:

(i) the application for;

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(ii) the issue of; and

(iii) the revocation of

dispensations, are repealed (S12(2) – (5) FA 2015). However, HMRC’s powers are preserved by S12(6) – (8) FA 2015 to allow them, if necessary, to revoke dispensations retrospectively in respect of those which were in place before 6 April 2016.

(g) S11 FA 2015, which inserts Ss289A – 289E ITEPA 2003, introduces the new

automatic exemption for 2016/17 onwards.

(h) S289A(1) ITEPA 2003 provides an exemption for the amount of any paid or reimbursed expenses which would be treated as earnings under the benefits code but where a deduction would otherwise be due under Chapters 2 or 5 of Part 5 ITEPA 2003. An example of such a deductible expense would be any costs necessarily incurred for travel in the performance of an employee’s duties. As is invariably the case nowadays, the exemption will not apply if the payment or reimbursement is offered in connection with what are described as ‘relevant salary sacrifice arrangements’ (see S289A(5) ITEPA 2003).

(i) In addition, S289A(2) ITEPA 2003 provides an exemption for payments of

expenses which are calculated in an ‘approved way’. An ‘approved way’ for these purposes is defined in S289A(6) ITEPA 2003. This requires that sums are calculated and paid in accordance with:

(i) regulations laid down by HMRC; or

(ii) an agreement made under S289B ITEPA 2003.

However, a further requirement is that Conditions A and B must be met. Condition A is that the employer or a third party must have a system in place to check that the employees are actually incurring expenses of the appropriate type and that they would otherwise be allowable (S289A(3) ITEPA 2003). Condition B, which is found in S289A(4) ITEPA 2003, prevents the exemption applying if the person operating the checking system knows or suspects that the employee is not incurring the expense or that the expense is not tax-deductible.

(j) S289B ITEPA 2003 introduces provisions which allow employers to apply to

HMRC for a flat rate payment to be made to employees in respect of deductible expenses. As part of this procedure, the employer must provide HMRC with a reasonable estimate of the actual costs incurred. However, this arrangement may only go ahead once an HMRC officer has approved the application and issued an approval notice. The legislation specifies the information which the approval notice should contain. Where it becomes necessary, S289C ITEPA 2003 sets out the mechanism for revoking approval notices.

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(k) S289D ITEPA 2003 brings in a separate exemption for benefits such as the use of company credit cards where the employee would otherwise be entitled to a deduction under Chapter 3 of Part 5 ITEPA 2003. Here, too, there is a ‘relevant salary sacrifice’ restriction.

(l) Over and above all this, there is a targeted anti-avoidance rule (TAAR) which

prevents the exemptions in Ss289A and 289D ITEPA 2003 from applying to expense payments and benefits which are given as part of certain types of arrangement (S289E ITEPA 2003). An arrangement is caught by this TAAR if its effect is to reduce the employee’s income subject to tax and NICs and its main purpose, or one of the main purposes, is the avoidance of tax or NICs.

(m) S11 FA 2015 introduces the necessary changes for income tax. Changes will

be made to the NIC legislation to mirror aspects of these rules for payments which are subject to Class 1 NICs. For benefits which fall within a liability for Class 1A NICs, current NIC legislation automatically mirrors the income tax position.

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9. Extension of the benefits in kind code

(a) In S13 and Sch 1 FA 2015, legislation has been introduced to repeal, with effect from 6 April 2016, the special income tax code for employees earning at the rate of less than £8,500 per tax year. In other words, all employees – whatever the level of their pay – will be subject to the same benefit in kind regime for 2016/17 onwards.

(b) However, the exemption currently provided in ITEPA 2003 for ministers of

religion in a ‘lower-paid’ employment will continue. This means that items like the reimbursement of accommodation costs and the provision of a car or a beneficial loan for such individuals will still not be subject to income tax or NICs, notwithstanding the abolition of the £8,500 threshold.

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10. PAYE and benefits in kind

(a) S17 FA 2015 brings in new powers to allow HMRC to make regulations authorising employers to deduct or repay income tax through the PAYE system on the benefits which they provide for their employees. This arrangement is known as ‘payrolling’ benefits and expenses and, to begin with, will be operated on a voluntary basis for 2016/17 onwards.

(b) Thus, where an employer opts to payroll benefits such as the provision of a

car, car fuel or medical insurance, the obligation to make a return of these benefits on Form P11D will be disapplied. Instead, employers will report the value of these benefits through Real Time Information. This should represent a useful reduction of the employer’s administrative responsibilities.

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11. Board and lodging provided for carers

(a) In addition to the special benefit and expenses legislation which has been introduced for ministers of religion, S14 FA 2015 inserts a new S306A ITEPA 2003 exemption covering the board and lodging expenses of employed home care workers.

(b) A home care worker is an individual employed wholly or mainly to provide

personal care to another individual (I) at I’s home where I is unable to care for himself or herself because of:

(i) old age;

(ii) mental or physical disability;

(iii) past or present dependence on alcohol or drugs;

(iv) past or present illness; or

(v) past or present mental disorder.

(c) S306A ITEPA 2003 states that no liability to income tax arises for 2016/17

onwards where board and/or lodging is provided on a reasonable scale for the home care worker at the home of the person who is being looked after. NIC charges are also exempted in these circumstances.

(d) The purpose of this measure is to ensure that the person who is in need of

care is not involved in additional employer-related administration or costs which might otherwise arise following the abolition of the £8,500 threshold.

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12. Lump sums paid to armed forces personnel

(a) Under the Early Departure Payments 2005 scheme, individuals leaving the armed forces before the age of 55 who are at least 40 years of age and have at least 18 years of service are entitled to a lump sum and monthly payments until they reach their 65th birthday, after which their normal pension rights mature.

(b) An existing exemption in S640A ITEPA 2003 enables lump sum payments

under the arrangements described in (a) above to be made without deduction of income tax and there is a corresponding disregard for NICs. The monthly amounts received under this scheme, however, are treated in the same way as regular pension payments and are subject to PAYE.

(c) The Ministry of Defence introduced the Early Departure Payments 2015

scheme on 1 April 2015 (see SI 2014/2328) and the change in S15 FA 2015 extends the income tax exemption to lump sum payments under this latest scheme with immediate effect. Note that there is now a requirement for a minimum period of service of 20 years.

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13. B share schemes

(a) The Chancellor announced in his Autumn Statement on 3 December 2014 that he intended to close down the tax planning opportunities offered by the implementation of special purpose share schemes (commonly referred to as ‘B share schemes’).

(b) These arrangements are usually set up by listed companies which want to

return cash to their shareholders. Although the actual structure will vary, typically a new class of share (often redeemable shares) is issued on a pro rata basis to the company’s shareholders. The main point of a B share scheme is that shareholders can choose what form their ‘dividend’ takes. They might receive an income dividend with its associated tax credit (after which the shares will convert into a different class with limited or no rights). Alternatively, the shares may be redeemed which normally involves the shareholders suffering a CGT charge on their gain.

(c) Accordingly, S19 FA 2015 has inserted a new S396A ITTOIA 2005, the

provisions of which will apply where a person has a choice between receiving an income distribution or alternatively something else which is essentially of the same value but which is not chargeable to income tax. This latter is called ‘the alternative receipt’. The test whether the alternative receipt is of ‘substantially the same value’ as the dividend can be applied at either the distributing company or the receiving shareholder level.

(d) The alternative receipt is treated as an income distribution in the tax year in

which it is received. This takes effect for receipts on or after 6 April 2015.

(e) S396A(3) ITTOIA 2005 explains that it does not matter if the choice is subject to the exercise of any conditions or power and also that this choice can include the failure to exercise a right.

(f) S396A(4) – (6) ITTOIA 2005 provides that a claim for relief can be made

where, as a result of the charge on the alternative receipt, there is a double charge. For example, where a company issues bonus B shares to shareholders who so elect and the B shares carry a right of purchase by a third party, both the issue of the shares and the sale to the third party will create separate tax liabilities (the first an income tax charge under S396A ITTOIA 2005 and the second as a capital gain). In these circumstances, HMRC are obliged to make a ‘just and reasonable’ adjustment to eliminate the double hit.

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14. Remittance basis changes

(a) The announcement in the Autumn Statement on 3 December 2014 that the annual charge is to rise to £90,000 for non-UK domiciliaries who wish to access the remittance basis once they have been resident in the UK for 17 out of the last 20 tax years was something of a surprise (S24 FA 2015). Initially, it seemed like a sensible linking with the deemed domicile rule for IHT purposes (see S267 IHTA 1984), but, on further reflection, this is clearly not the case. The provision creates a significant anomaly which is illustrated in (b) below.

(b) Illustration 2

Edwige is a wealthy French lady who has been resident in the UK for many years. She is married to a UK executive who is transferred abroad. Because of her husband’s job, she therefore leaves the UK and becomes non-UK resident for three consecutive tax years. She resumes her UK residence when her husband is posted back to the UK.

On Edwige’s return, she will not be liable to the standard £30,000 charge, given that she has not been resident in the UK for seven out of the preceding nine tax years. Nor will she be caught by the higher levy (now £60,000 for 2015/16 onwards – see S24 FA 2015), because she will not have been resident here for 12 out of the last 14 tax years.

But she will be subject to the new £90,000 charge, which also takes effect for 2015/16 onwards, under what the legislation calls ‘the 17-year residence test’. It seems absurd to suggest that someone who has not been UK-resident for long enough to pay the entry level £30,000 charge will instead be caught for the top rate liability.

(c) In order to be consistent with the other non-UK domiciliary charges, the test

should read:

‘Have you been resident in the UK for 17 out of the last 19 tax years?’

As one commentator has pointed out:

‘That would make complete sense of the regime and, although it would be out of kilter with the IHT rule, that does not really matter. IHT is an entirely different tax with entirely different consequences and that differential gives rise to no anomaly or trap for the taxpayer.’

However, the Government have not seen fit to make this adjustment.

(d) In addition, the Chancellor announced that the Government intended to

consult about the possibility of making the remittance basis election apply for a minimum of three tax years – at present, the basis of taxation for a non-UK domiciliary can be changed annually.

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15. Pension flexibility – annuities

(a) With effect from 6 April 2015, S34 and Sch 4 FA 2015 amend the pension tax rules in Part 4 of FA 2004 to allow anyone (including non-dependants) to receive payments from an annuity on the death of a member. FA 2015 also adds five new sections (Ss646B – 646F ITEPA 2003) to permit the transfer of annuities on a tax-free basis when an individual dies before the age of 75.

(b) These changes are similar to those made in the Taxation of Pensions Act

2014 relating to the withdrawal of income from a drawdown fund on the death of an individual. This legislation, which received Royal Assent on 17 December 2014, provides that individuals aged 55 or over can access their money purchase pension savings as they see fit from 6 April 2015 onwards. Such individuals will in future be able to take as much or as little as they want each year from their tax-relieved pension savings. The Taxation of Pensions Act 2014 also makes a number of changes in connection with the benefits payable on the death of a member, the individuals who can receive these and the way in which the payments are taxed.

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16. Investment reliefs – excluded activities

(a) Social Investment Tax Relief (SITR) was introduced in FA 2014 with effect from 6 April 2014 and provides tax benefits for individuals who invest in qualifying social enterprises. SITR is modelled on the EIS regime and investors are able to claim the same types of relief (ie. an income tax reduction on investment, a CGT exemption on disposal and the deferral of gains realised on other assets).

(b) The maximum amount which social enterprises are currently able to raise

through the issue of SITR shares or the receipt of SITR loans is €344,827 (ie. just under £250,000 at the current rate of exchange) over a three-year period. The Government have announced that they intend to increase the amount which social enterprises are able to obtain through SITR to £5,000,000 per tax year. This will, however, be subject to an overriding maximum of £15,000,000 over the life of the social enterprise (ie. a sixtyfold increase), but, before the change can go ahead, State aid approval is needed. FA 2014 includes a statutory power to increase the investment limit through secondary legislation once clearance has been received.

(c) The trades of agriculture and market gardening are excluded from de minimis

schemes like SITR on the ground that they already receive substantial public money through the Common Agricultural Policy. However, if and when State aid approval for the enlargement of SITR comes through, it is the Government’s intention to allow community organisations carrying out small-scale agricultural and horticultural activities to be eligible for this relief – organisations with land holdings of less than five hectares (ie. just under 12.5 acres) in England and Wales and less than three hectares (ie. just under 7.5 acres) in Scotland and Northern Ireland will qualify. This will be implemented through the use of a power in new S257MW ITA 2007 (as inserted by Para 1 Sch 6 FA 2015).

(d) The Government recognise that social enterprise community energy schemes

currently experience a considerably greater degree of difficulty than commercial renewable energy projects in accessing finance. That is why these are eligible for tax-advantaged investment under SITR as well as the venture capital reliefs (EIS, SEIS and VCTs). In practice, investment in most community energy schemes is at the moment made through EIS and the VCT regime, due in large part to:

(i) their earlier establishment;

(ii) their higher investment threshold relative to SITR; and

(iii) the exclusion of organisations receiving feed-in tariffs from SITR.

(e) Going forward, the Government believe that SITR is more appropriate for

organisations with a social benefit than the tax-advantaged venture capital schemes. SITR has been specifically designed to meet the needs of these institutions, for example by allowing tax relief for unsecured debt as well as for

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equity investment. These enhanced investment terms mean that SITR will become the more attractive option once the investment threshold has been raised.

(f) It has therefore been decided (see Part 4 of Sch 6 FA 2015) that all

community energy generation undertaken by qualifying organisations will be eligible for SITR with effect from the date of expansion of the relief, at which point such activities will cease to attract EIS, SEIS and VCT reliefs. And, by virtue of Para 13 Sch 6 FA 2015, the export or generation of electricity subsidised by way of a feed-in tariff will no longer be an excluded activity.

(g) In addition, for shares and other holdings issued on or after 6 April 2015,

companies (excluding community organisations) whose trade consists wholly or substantially of the subsidised generation of energy from renewable sources are not qualifying investments under the EIS, SEIS and VCT regimes (Paras 2 – 9 Sch 6 FA 2015). This measure applies in respect of both UK schemes and their overseas equivalents.

(h) The position has been summarised by HM Treasury as follows:

‘It is the Government’s intention that the special provisions for community groups involved in subsidised energy activities, to qualify under the venture capital schemes, will remain in place until State aid clearance is received for the enlargement of SITR.

When (this happens), the Government intend to introduce regulations to bring into effect the provisions of Sch 6 FA 2015 to:

(i) exclude community energy activities from the venture capital schemes;

and

(ii) allow community groups which would be eligible for SITR, but for the fact that they are carrying out excluded activities involving the generation of energy for which a feed-in tariff is due, to become eligible for SITR.’

It is understood that the Government have decided to allow a transitional period of six months following the receipt of State aid clearance for the expansion of SITR before eligibility for EIS, SEIS and VCT relief is withdrawn.

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17. Annual CGT exemption

(a) The annual CGT exemption for individuals and personal representatives has gone up by £100 to £11,100 for 2015/16 (S9 FA 2014). The exempt amount for most trusts is £5,550.

(b) There are no changes to any of the CGT rates nor to the maximum

entrepreneurs’ relief limit which remains at £10,000,000 for 2015/16.

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18. Goodwill on incorporation

(a) It is known that HMRC have recently been contemplating the position where a professional person incorporates his or her business. Their initial opinion was that a company could not carry on a profession with the result that it was impossible to transfer a professional activity to a company. Furthermore, HMRC argued that any such goodwill always resided in the individual concerned (ie. it was what is often called ‘personal goodwill’), in which case it could not be taken over by a company for that reason as well.

(b) A tax expert has commented:

‘This resulted in one interesting letter from HMRC in which they expressed the firm view that corporation tax cannot apply to profits from a profession, with the (rather unlikely) result that the company’s profits would presumably be tax-free – a view which . . . was doubtless a surprise to the Law Society, the ICAEW, the RIBA, the RICS and others.’

(c) HMRC have now concluded their review and they accept that a professional

activity can indeed be transferred to a company – as can the related goodwill.

(d) It is perhaps a coincidence that this change of opinion by HMRC arises at precisely the time when they have decided to remove entitlement to entrepreneurs’ relief in connection with transfers of goodwill from an unincorporated business to a related close company, but only where the transfer takes place on or after 3 December 2014 (see S169LA TCGA 1992 which has been inserted by S42 FA 2015).

(e) The tax planning which was possible before the Chancellor’s announcement

of this restriction in the latest Autumn Statement can be best illustrated by an example.

(f) Illustration 3

Rory has operated successfully as a sole trader since 2007. His business has grown substantially and is currently making annual profits in the order of £300,000. Rory has been advised to incorporate in order to enjoy the benefit of retaining his profits at a cost of only 20%.

The incorporation of Rory’s business involves the transfer of goodwill (professionally valued at £480,000) to his new company.

Rory decided to sell the goodwill to the company for full value on 1 December 2014. He claims entrepreneurs’ relief. This produces a chargeable gain as follows:

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£ Gain (assume that market value = gain) 480,000 Less: Annual CGT exemption 11,000 –––––––

£469,000 –––––––

CGT @ 10% £46,900 –––––––

This represents an effective tax rate of 9.77%. £480,000 will be credited to Rory’s loan account which will be repaid by the company – tax-free – over the next few years instead of the company paying Rory a salary or dividends, either of which would be taxable at much higher rates. Alternatively, before drawing down his loan account, the payment of a salary of, say, £8,000 (to avoid both income tax and NICs) and dividends to utilise his basic rate band would be even more tax-efficient.

(g) If Rory had instead made the transfer on 1 March 2015 (so that an

entrepreneurs' relief claim was no longer competent), his effective tax rate would be 27.36% which is unlikely still to be attractive.

(h) When the draft legislation was published on 3 December 2014, it was pointed

out that the restriction in S169LA TCGA 1992 would apply to all the partners on the incorporation of a partnership business, even though one of the partners was retiring and was not going into the company. This arose by virtue of the fact that the retiree is an associate of his former partners. As a result, any gain on his share of goodwill would be precluded from attracting the 10% tax rate. This seemed unreasonable. Fortunately, the wording in S169LA TCGA 1992 has been relaxed so that a retiring partner can indeed enjoy the benefit of entrepreneurs’ relief on his goodwill disposal, provided that he is not a shareholder in the new company and cannot subsequently become one. This is a helpful amendment following comments received on the draft proposals and is to be welcomed. The retired partner may still perform services for the company as a consultant, although such an agreement should be structured with care – under S169LA(6) TCGA 1992, HMRC can deny relief if the individual is involved in ‘relevant avoidance arrangements’ (as defined in S169LA(7) TCGA 1992).

(i) Whatever the motivation for the Chancellor’s decision in FA 2015, the future

position is clear and the two key issues going forward will be:

(i) whether there has been a valid transfer of the business to the company; and

(ii) whether the goodwill has been correctly valued.

It is reasonable to expect that HMRC will remain vigilant about the possibility of goodwill being transferred at an overvalue. As long ago as April 2005, HMRC published a detailed statement explaining that, where the amount paid

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for goodwill is excessive, the excess value will be treated either as a distribution or as earnings, although there would always be the possibility of remedial action (such as a repayment to the company of the overvalue element) by the taxpayer. This was set out in Issue 76 of ‘Tax Bulletin’.

(j) It should not be overlooked that entrepreneurs’ relief will also be denied in a

S162 TCGA 1992 incorporation where all or part of the consideration takes the form of, say, a director’s loan account balance. If there are other business assets than goodwill being transferred (eg. premises or plant and machinery), any gain in excess of the taxpayer’s annual CGT exemption would need to be apportioned on a pro rata basis in order to establish what part of the gain was taxable at 10% and what part was taxable at a higher rate.

(k) What alternative courses of action are available to sole traders and

partnerships who currently wish to incorporate? Some may decide simply to gift their goodwill to the company (or to sell it at an undervalue) and claim holdover relief under S165 TCGA 1992. Corporate profits would then be extracted by way of dividend. This effectively turns the tax planning clock back to a time before FA 2002 (when 75% business asset taper first became available after only two years).

(l) Another possibility would be for the individual to retain personal ownership of

his goodwill but to license his company to use it. When the business is sold at a later date, the majority of the disposal consideration will be attributed to the shares which should of course attract entrepreneurs’ relief.

(m) For transfers made on or after 3 December 2014, a company is no longer

able to claim amortisation relief for internally-generated goodwill when such an asset is acquired from a person who is related to the company, typically on incorporation (S26 FA 2015). This means that relief cannot be claimed on an annual basis for goodwill transferred to a company unless it was externally purchased. However, the change does not affect past incorporations and tax relief will continue to be available for the amortisation of existing goodwill if the incorporation predated 3 December 2014.

(n) See the Appendix at the end of these notes which points out that the

legislation in FB 2015 supersedes S26 FA 2015

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19. Further unexpected entrepreneurs’ relief amendments

(a) Associated disposals

Where an individual qualifies for entrepreneurs’ relief on the disposal of shares, he can also obtain relief under S169K TCGA 1992 for the associated disposal of an asset used by his company. Typically, this will be property which is personally owned by the individual and has been used by the company for business purposes, but it can also cover the sale of intellectual property such as goodwill which is held outside the company by the vending shareholder.

(b) There are similar provisions for a partner who owns premises or other

business assets which are used for the purposes of the partnership trade.

(c) The legislation requires various conditions to be satisfied before an associated disposal can attract relief. Until recently, the main one has been that the vendor making the associated disposal must do so as part of his ‘withdrawal from participation’ in the business carried on by his company or partnership. HMRC interpreted this requirement in the same way as they did for the corresponding retirement relief provisions. Thus the ‘withdrawal from participation’ test could be met by simply disposing of part of the individual’s shareholding or partnership interest. Indeed, in early 2012, HMRC confirmed that, in the case of shares, the disposal of a single share would suffice – see page 8 of ‘Entrepreneurs’ Relief – Practical Points’ which is a guide for members of the CIOT on technical aspects of the relief raised with HMRC (this guide can still be accessed on the CIOT’s website). There is no requirement that the disposal of the owner’s business interest has to give rise to a gain or, if it does, that it must be the subject of an entrepreneurs’ relief claim. Nor is there any need for the vendor to reduce his workload, ie. he does not have to stop working for the company or partnership.

(d) S41 FA 2015 has made important changes to S169K TCGA 1992 in relation

to disposals on or after 18 March 2015. It is now a prerequisite that the disposal of the asset owned personally must be accompanied by a significant reduction in the claimant’s participation in the business. This condition is met if the interest disposed of represents, in the case of a company, at least 5% of the company’s ordinary share capital carrying at least 5% of the voting rights. With partnerships, the equivalent rule is that a 5% minimum interest in the assets of the partnership must be disposed of. And there cannot be any arrangements for repurchasing further shares in the company or a further partnership interest.

(e) Illustration 4

Anthony is aged 48 and has been the managing director of, and largest shareholder in, his family company for the last 10 years. He holds 35 ordinary shares of £1 each out of a total of 100 in issue.

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Anthony also owns the business premises from which his company trades. He has recently been approached by Sainsbury’s who would like to acquire the property and convert it into one of their town centre supermarkets. They offer Anthony a substantial sum which, if accepted, would give rise to a gain of £2,850,000.

If Anthony decides not to do any tax planning, he will suffer a CGT charge of 28% on the sale. However, if he is able to bring S169K TCGA 1992 into play, he can claim entrepreneurs’ relief on the disposal of the business premises which should reduce his CGT liability by more than £500,000. Clearly, this is an important consideration.

Accordingly, Anthony chooses to give his 25-year old son five shares in the company at the same time as the Sainsbury’s sale goes through. Holdover relief under S165 TCGA 1992 is claimed in respect of this family transaction. As a result, Anthony is entitled to claim entrepreneurs’ relief on the property sale.

In the past, a gift of one share to his son would have been good enough.

(f) HM Treasury have explained the rationale for the restriction as follows:

‘This measure removes an unintended facility under the entrepreneurs’ relief rules. Under these rules, the relief could be claimed by an individual on a disposal of a private asset used in a business without the individual permanently reducing their participation in the business by a meaningful amount. Allowing relief in these circumstances (was) not consistent with the purpose of entrepreneurs’ relief on associated disposals, which is to promote the transfer of a business to new proprietors along with all the assets used in that business, including assets which are not owned by the trading entity.

This measure ensures that entrepreneurs’ relief is better targeted at people who have genuinely reduced their participation in a business.’

(g) It should be emphasised that there is still no need for the vendor to reduce his

working hours in order to qualify for associated disposal relief.

(h) There has been no alteration to the legislation in S169P TCGA 1992 under which entrepreneurs’ relief on an associated disposal can be scaled down on a ‘just and reasonable basis’ in the event of various circumstances such as the charging of rent to the company or partnership for its use of the business premises.

(i) Meaning of ‘trading company’ and ‘trading group’

In the context of entrepreneurs’ relief, the terms ‘trading company’ and ‘trading group’ are stated in S169S(5) TCGA 1992 as having the same meaning as in S165A TCGA 1992. One of the side-effects of this definition was that, if a company held 10% or more of the ordinary share capital of a joint venture company, a proportionate part of the joint venture company’s

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activities was treated as belonging to the investing company. A joint venture company is a company:

(i) which is a trading company or the holding company of a trading group;

and

(ii) at least 75% of the ordinary share capital of which is held by not more than five persons.

Thus, if I Ltd owns 32% of JV Ltd (a qualifying joint venture company), I Ltd was treated as owning 32% of JV Ltd’s trading activities – normally, a minority stake would count as an investment.

(j) Structures have been set up under which individuals hold a 5% stake in I Ltd

(and they must of course also be officers or employees) so that they will qualify for entrepreneurs’ relief when they sell their shares. This is despite the fact that I Ltd does not itself carry on a trade but only has a 32% interest in JV Ltd. I Ltd is treated as a trading company because of its investment in JV Ltd.

(k) With effect from 18 March 2015, activities of joint venture companies in which

a company holds shares will no longer be regarded as carried on by the shareholder company (S43 FA 2015). Similarly, activities carried on by a company in its capacity as a partner in a firm will not be treated as trading activities. In HMRC’s words:

‘Allowing relief in these circumstances (was) inconsistent with the relief’s purpose of supporting significant participation by claimants in businesses.’

(l) This new measure will mean that many of the joint venture structures which

have been put in place to secure entrepreneurs’ relief for individuals who would not otherwise have satisfied the 5% requirement in the main trading company will now be ineffective and will have to be reviewed.

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20. Deferred entrepreneurs’ relief on invested gains

(a) It will be recalled that the mechanism for calculating entrepreneurs’ relief was amended in 2010. As a result of the changes in F(No2)A 2010, it was no longer possible for an individual to claim entrepreneurs’ relief on a business gain and also to defer the accrual of that gain where the sale proceeds were reinvested in EIS shares. It was one thing or the other, ie. the taxpayer could either claim entrepreneurs’ relief in connection with his disposal but he could not then obtain relief under Sch 5B TCGA 1992 when he made his EIS investment or alternatively he could eschew an entrepreneurs’ relief claim, in which case a deferral claim under Sch 5B TCGA 1992 was competent.

(b) Nor could entrepreneurs’ relief be claimed when the gain was eventually

treated as accruing (usually when the EIS shares were sold).

(c) When Social Investment Tax Relief (SITR) was introduced in FA 2014, the same constraints applied. In the words of HM Treasury:

‘This has tended to deter investment in EIS shares or in social enterprises in some circumstances.’

(d) Accordingly, the Chancellor has decided to allow potential EIS and SITR

investors to benefit both from the deferral of gains and from entrepreneurs’ relief on those same gains in the hope that this measure will encourage more investment in businesses via the EIS and SITR.

(e) S44 FA 2015 includes new Ss169U and 169V TCGA 1992 to deal with these

changes. S169U TCGA 1992 specifies a number of requirements which must be met in order for a gain, which has been deferred under the EIS or SITR legislation, to qualify for entrepreneurs’ relief when it is finally treated as accruing. When all these conditions have been satisfied, S169V TCGA 1992 applies to govern the way in which entrepreneurs’ relief is to be given.

(f) The four conditions in S169U TCGA 1992 are as follows:

(i) A gain representing all or part of a gain which has previously been

held over under the EIS or SITR legislation must be treated as accruing (S169U(2) TCGA 1992). This gain is known for the purposes of these rules as ‘the first eventual gain’.

(ii) The disposal which originally gave rise to the first eventual gain must

have been a ‘relevant business disposal’ (S169U(4) TCGA 1992), ie. a material disposal of business assets or an associated disposal – see S169H(2) TCGA 1992.

(iii) A timely entrepreneurs’ relief claim must have been made in respect of

the first eventual gain (S169U(5) TCGA 1992).

(iv) The first eventual gain must be the first gain which is treated as accruing in respect of a particular held over gain (S169U(6) TCGA

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1992). This means that, where part of a deferred gain had previously accrued without an entrepreneurs’ relief claim being made, it is not possible to claim entrepreneurs’ relief under these new provisions when another part of the same gain comes into charge.

(g) S169V(2) TCGA 1992 treats the first eventual gain as an amount computed

under S169N TCGA 1992 and therefore as a gain on which entrepreneurs’ relief is due, subject only to all or part of the £10,000,000 lifetime limit being available.

(h) If the first eventual gain does not represent the entirety of the held over gain,

the rest of the gain (when it is finally treated as accruing) is deemed to be a qualifying business disposal without the need for a further entrepreneurs’ relief claim (S169V(3) TCGA 1992).

(i) If the source of the first eventual gain was an associated disposal, the first

eventual gain is also deemed to be an associated disposal and will be governed by the rules in S169P TCGA 1992 (S169V(4) TCGA 1992).

(j) This new regime applies to business gains which, but for the deferral, would

originally have accrued on or after 3 December 2014 (S44(2) FA 2015).

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21. Can a work of art be plant?

(a) The unanimous decision last year of the Court of Appeal in HMRC v Lord Howard (2014) had a surprising outcome. However, when one examined the background of the relevant legislation, the position became rather more clear-cut.

(b) Lord Howard’s personal representatives claimed that an 18th century picture

entitled ‘Omai’ painted by Sir Joshua Reynolds, which had been sold at auction in November 2001 for nearly £9,500,000, was a wasting asset and therefore exempt from CGT.

(c) It is well known that wasting assets, ie. assets which have a predictable life of

less than 50 years (see S44 TCGA 1992), do not attract CGT. Typical examples include motor cars and clocks, given that mechanical objects generally cease to function within 50 years of being manufactured. Durable assets, on the other hand, like buildings, antiques and paintings are usually chargeable to CGT, if sold at a profit.

(d) Since the painting was nearly 230 years old at the time of its sale, it might be

thought that the personal representatives would have an uphill struggle to establish that it constituted a wasting asset. As it turned out, their argument was a particularly ingenious one. They claimed that ‘Omai’, which had been hanging in one of the public areas of Castle Howard and was recognised to be a significant visitor attraction, should be regarded as ‘plant and machinery’ on the basis that it had been exhibited there for nearly 50 years and therefore met both the ‘functional’ and the ‘permanence’ tests. Because S44 TCGA 1992 provides that plant and machinery is regarded as having a predictable life of less than 50 years ‘in every case’, irrespective of its actual characteristics, such items are automatically classified as exempt wasting assets.

(e) The case gave rise to this comment from one eminent tax expert:

‘So this case was nothing to do with CGT or wasting assets – it was another case about plant and machinery and all those famous cases regarding the meaning of plant and machinery were analysed in depth. The upshot was that the (Court) felt that the painting was used for the promotion of the trade carried on at Castle Howard and was sufficiently permanent (even though it could be taken away at any moment) to be regarded as plant.’

(f) In the opinion of the Court of Appeal, the painting qualified for the CGT

exemption.

(g) It should be noted that S44 TCGA 1992 is overridden by S45 TCGA 1992 which withdraws the exemption in cases where the asset is used for the purposes of a trade. In this particular instance, however, the relevant part of S45 TCGA 1992 did not apply due to the fact that the business of opening Castle Howard to the public was carried on by a company (Castle Howard Estate Ltd), whereas the painting was owned by Lord Howard personally.

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Since the TCGA 1992 exemption did not stipulate that the owner of the asset must also be the person who carries on the business, the override did not apply here – an important technical detail which was accepted by both sides.

(h) This decision was seen as a significant boost to landed families who own

valuable collections of art or antiques but are engaged in what one commentator called ‘a perennial fight to maintain their inheritance against the depredations of capital taxes’. It seemed very possible that a similar scenario to that of ‘Omai’ could exist elsewhere, ie. a painting or item of furniture which has long been exhibited in a stately home open to the public. At the time of the Court of Appeal’s decision, the speaker remarked:

‘It remains to be seen whether this extraordinary case will irritate HMRC sufficiently to prompt them to push for a change in the CGT rules in the near future.’

(i) Sadly, this has turned out to be true. S40 FA 2015, which adds S45(3A) –

(3D) TCGA 1992, provides that the let-out in S45(1) TCGA 1992 will not apply where a person disposes of an asset:

(i) which has been used for the purposes of a trade, profession or

vocation carried on by another person; and

(ii) which, because of that use, has become plant for the purposes of S44(1)(c) TCGA 1992 but was not otherwise a wasting asset at the time of its disposal.

(j) This amendment has effect for disposals:

(i) on or after 1 April 2015 (for corporation tax purposes); and

(ii) on or after 6 April 2015 (for CGT purposes).

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22. The new CGT charge for non-UK residents

(a) In his 2013 Autumn Statement, the Chancellor announced that a new CGT charge would be introduced for gains made by non-UK residents disposing of UK residential property. This charge came into effect on 6 April 2015 and covers gains arising from that date onwards.

(b) As well as non-UK resident individuals, partnerships, trustees and personal

representatives, the new regime applies to certain non-UK resident companies who will have to pay CGT rather than a corporation tax charge.

(c) Unlike many other countries which collect tax on gains relating to disposals of

residential property located within their jurisdiction, the UK has hitherto not charged CGT on disposals by non-UK residents. This has meant that any gain made by a non-UK resident individual on a UK house or flat was either taxed in his country of residence or, in some cases, not taxed at all. In contrast, UK-resident individuals are subject to CGT on disposals of residential property which is not their primary residence (including houses and flats which they own abroad). Similarly, UK-resident companies have always been subject to corporation tax on gains made on the disposal of any residential property. The Government believe that this should be the case for non-UK residents as well.

(d) Following a period of consultation, draft legislation was published on 10

December 2014 which made it clear that the new rules were being put in place to counter the perceived unfairness of the previous status quo and to bring the UK into line with ‘many other countries around the world that charge tax on the basis of where a property is located’. The main provisions are set out in S37 and Sch 7 FA 2015.

(e) Looking at the position in more detail, the disposal of UK residential property

worth £2,000,000 or less by any non-UK resident has not hitherto given rise to a CGT liability. Since 6 April 2013, non-natural persons such as companies and corporate partnerships which dispose of UK residential properties for more than £2,000,000 (£1,000,000 for disposals made on or after 6 April 2015 – see S38 and Sch 8 FA 2015) are subject to a special CGT charge introduced at the same time as ATED. The residence status of the property owner is irrelevant. There are a number of exemptions from this ATED-related CGT charge, for example, if the property is rented out on a commercial basis, if it is being redeveloped or if it is held for charitable purposes.

(f) As mentioned in (a) above, the new charge only taxes gains arising on or

after 6 April 2015. It applies to residential property used, or suitable for use, as a dwelling. Sch B1 TCGA 1992 (as inserted by Para 36 Sch 7 FA 2015) defines what counts as a UK residential property interest. The main points are summarised below. Qualifying properties of any value are caught (ie. there is no de minimis threshold). This includes property being built or converted for residential use, although building land is outside the scope of the charge until actual construction commences. This contrasts with the

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purchase of ‘off-plan’ residential property which is treated for these purposes as the purchase of a completed dwelling and which is therefore chargeable. Certain forms of communal residential property are not within the ambit of the charge, the main exceptions being boarding schools, army barracks, care homes, nursing homes, hospices, hotels and purpose-built student accommodation. Note, however, that other types of residence such as a portfolio of rental properties or converted houses for students will be caught.

(g) In (b) above, it was stated that the CGT charge will apply to ‘certain’ non-UK

resident companies. Broadly speaking, in order for a company to fall within this regime, it must be ‘closely-held’ (see Sch C1 TCGA 1992 (as inserted by Para 37 Sch 7 FA 2015)). The definition of a ‘closely-held’ company is one which is under the control of five or fewer shareholders, ie. it is a company which, if it were resident in the UK, would almost certainly be classified as a close company. Non-UK resident companies which are not ‘closely-held’ are not liable for the charge, even if they dispose of UK residential property. Other parties who fall outside the rules include:

(i) shareholders of property-owning companies;

(ii) pension funds; and

(iii) REITs.

(h) The next question to consider in cases where the property was originally

acquired prior to the 6 April 2015 commencement date is: how is the gain to be computed? The detailed rules are set out in a new Sch 4ZZB TCGA 1992 (as inserted by Para 39 Sch 7 FA 2015). In this context, the default position is that the non-UK resident taxpayer is treated as having rebased the cost of the property to its market value as at 5 April 2015 (Para 5(2) Sch 4ZZB TCGA 1992). The increase in value from that date produces the taxable gain. However, as might be expected, there are alternatives. Para 2 Sch 4ZZB TCGA 1992 allows the taxpayer to make an election for the chargeable gain to be calculated on a time-apportionment basis, taking into account the whole period of ownership (in days). The necessary steps to be taken are specified in Para 8 Sch 4ZZB TCGA 1992. Alternatively, the taxpayer can elect to compute his gain over the whole period of ownership (ie. including the period before 6 April 2015), if that would be preferable. In either case, the election is irrevocable.

(i) Illustration 5

Jean-Claude is a wealthy Frenchman who has owned a house in Chelsea for a number of years. The property was bought in his name. Jean-Claude visits London on a reasonably regular basis, but, unlike many of his fellow countrymen, he has not given up his residence status in France.

The house was acquired by Jean-Claude on 1 June 2012 for £3,600,000. On 5 April 2015, it was valued at £5,500,000. He sold the property on 1 March 2017 for £7,100,000. What is his chargeable gain?

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The default position is that Jean-Claude is taxable on: £

Sale proceeds 7,100,000 Less: Value as at 5 April 2015 5,500,000 –––––––– £1,600,000 ––––––––

If he made an election for straight-line time-apportionment, his gain becomes:

£

Sale proceeds 7,100,000 Less: Cost 3,600,000 –––––––– £3,500,000 ––––––––

His time-apportionment fraction (in days) is:

695 ––––– 1,734

Thus:

695/1,734 x 3,500,000 = £1,402,825 ––––––––

In this case, Jean-Claude should make the election under Para 2(1)(a) Sch 4ZZB TCGA 1992 so that his taxable gain is reduced from £1,600,000 to £1,402,825.

The alternative election, looking at Jean-Claude’s whole period of ownership, would not be sensible. In practice, this procedure is only likely to be relevant when there is a loss.

(j) There are special rules for losses which arise on the disposal of residential

property. In general, losses are ring-fenced and can only be used to offset gains on similar property. They can be carried forward.

(k) If a property has been used both as a dwelling and for other purposes (ie.

there is what the legislation calls ‘mixed use’), appropriate apportionment provisions apply.

(l) Aside from the ATED-related CGT charge, the new rules take priority over all

other anti-avoidance legislation relating to gains made by offshore companies and trusts. Practitioners were hopeful that, when the non-UK resident CGT arrangements were first mooted, they would replace the ATED-related CGT

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charge in toto. This has not happened. Two reasons have been given for this decision:

(i) Firstly, the two CGT charges seek to achieve different policy

objectives. The ATED-related provisions are there to discourage the enveloping of residential properties within a company, while the non-UK resident rules are intended to produce a level playing field regime for owners of UK residential property interests when they sell up.

(ii) Secondly, the rates involved are not the same: ATED-related CGT

uses a flat rate of 28%, whereas the FA 2015 charge utilises existing tax rates for the gains, ie. 18% and 28% for individuals and 20% for companies.

One commentator has remarked in this context:

‘The professional bodies are far from convinced that these are valid reasons for retaining ATED-related CGT, given the complexity and compliance costs (which) it is building into the new regime.’

(m) Non-UK resident companies are eligible for indexation relief (see Para 23 Sch

4ZZB TCGA 1992) and non-UK resident individuals and trusts are entitled to deduct the annual CGT exemption in arriving at their gains.

(n) A practical problem with imposing a CGT charge on a non-UK resident has

always been the difficulty of collecting the tax, especially if the individual or company does not otherwise have to submit a self-assessment return in the UK. It was originally proposed that the lawyer dealing with the transaction for the vendor should deduct a specified percentage of the sale proceeds and use this to settle the eventual liability. However, doubtless as a result of representations from the Law Society, this idea has been dispensed with! The fundamental principle is that a return (called a ‘NRCGT return’) must be delivered to HMRC by the non-UK resident vendor within 30 days of the property transaction being completed (see S12ZB TMA 1970 (as inserted by Para 43 Sch 7 FA 2015)). S12ZE TMA 1970 requires the NRCGT return to include an ‘advance self-assessment’ of the amount which is charged for the tax year in question and S12ZF TMA 1970 explains how to compute the relevant figure and what assumptions must be taken into account. In other words, as with ATED, the taxpayer will have to report and pay at the same time. Obviously, non-UK residents who are already within the self-assessment system will merely have to pay their tax on the normal due date. Amendments to returns will be allowed within 12 months of the appropriate filing date.

(o) The final part of the legislation applies to taxpayers who are UK-resident as

well as to those who are non-UK resident (see S39 and Sch 9 FA 2015). In essence, the main principal private residence relief rules are unaltered and so the ability to nominate a property as an individual’s only or main residence remains (it will be recalled that, at one stage, serious consideration was being given to the possibility of abolishing this facility). The reason why changes

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were thought to be necessary is because the Government want to ensure that relief cannot be claimed by a non-UK resident who does not occupy his UK property as an only or main residence but who might otherwise be tempted to make the necessary determination.

(p) Para 3 Sch 9 FA 2015 inserts new Ss222A – 222C TCGA 1992. S222A

TCGA 1992 provides that, where a non-UK resident makes a property disposal, any determination as to which of two or more residences should be regarded as his main residence for a particular period must be made in the NRCGT return which contains the details of the relevant disposal. However, this rule is subject to Ss222B and 222C TCGA 1992 which treat a property as not having been occupied as a residence for a tax year if:

(i) it is located in a territory in which the individual is not tax-resident; and

(ii) the individual does not spend at least 90 days in the property during

the year in question.

S222C(8) TCGA 1992 explains how this day count test works. Note that occupation by a spouse (or civil partner) counts as occupation by the individual for this purpose.

(q) Thus someone who owns a holiday home in, say, France is subject to these

rules in exactly the same way as a foreigner who has a house or flat in London.

(r) Where more than one property is owned in the same jurisdiction, the ’90-day’

requirement covers all the properties. However, if that individual has, say, a house in France and an apartment in southern Spain, the 90-day test would have to be satisfied in respect of each property.

(s) Where a non-UK resident individual disposes of a dwelling, any use of the

property prior to 6 April 2015 is ignored in determining eligibility for principal private residence relief, unless he otherwise elects and specifies the date from which the property is to be regarded as his only or main residence (see new S223A TCGA 1992).

(t) There are corresponding changes to the trust tax legislation in respect of

beneficiaries occupying a property under the terms of the settlement.

(u) The provisions discussed in (o) – (t) above have effect in relation to property disposals made on or after 6 April 2015 (Para 10 Sch 9 FA 2015).

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23. The end of the road for pilot trusts?

(a) On 31 May 2013, HMRC published a consultation document entitled ‘Inheritance Tax: Simplifying Charges On Trusts – The Next Stage’. The main purpose of this paper was to outline ways in which 10-year anniversary and exit charge calculations for relevant property trusts (eg. discretionary settlements) could be made more straightforward. As part of this process, HMRC proposed that the IHT nil rate band should be split equally between all relevant property trusts created by the settlor instead of continuing with the present system under which many settlements are entitled to a full IHT nil rate band of their own.

(b) This proposal was clearly intended to counter the established practice of

setting up multiple pilot trusts to which substantial property would be added in due course – often on death – in order to minimise IHT charges on the trusts going forward. It should be noted that the Court of Appeal accepted such arrangements in CIR v Rysaffe Trustee Company (CI) Ltd (2003). In addition, Para D26.6.1 of the GAAR Guidance confirmed that the use of pilot trusts was ‘not regarded as abusive’.

(c) However, the proposed idea did not go down well with most of the parties

who commented on the document and when the notes from the 2013 Autumn Statement said:

‘The Government will consult on proposals to split the IHT nil rate band available to trusts with a view to delivering this change alongside simplification of the trust calculations in 2015.’

it was clear that some sort of rethink was in the offing.

(d) On 6 June 2014, there was an announcement of a further consultation

document called ‘Inheritance Tax: A Fairer Way Of Calculating Trust Charges’. In effect, this was HMRC’s Plan B.

(e) The main details of this second proposal were that every individual would

be entitled to a single ‘settlement nil rate band’ (SNRB) which was to be equivalent to the existing IHT nil rate band. Each settlor was responsible for deciding how this SNRB was to be shared between his trusts when it came to calculating the tax on a 10-year anniversary or exit charge in relation to those settlements. Broadly, this revised regime was only to apply to new trusts created on or after 7 June 2014 – thus trusts set up before 7 June 2014 were to be protected from these changes. Formal SNRB elections were needed which specified, in percentage terms, how much SNRB was to be allocated to each settlement.

(f) Unfortunately, this plan, although in many respects a great deal more

satisfactory than its predecessor, still did not find favour with the main professional bodies and other influential commentators. As a result, it also bit the dust and, on 3 December 2014, the Chancellor announced what became HMRC’s Plan C, the details for which were unveiled in the draft

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Finance Bill which followed the Autumn Statement. Although these provisions did not go into FA 2015, they can be found in Cl 11 and Sch 1 FB 2015.

(g) The intention is to limit the advantages of multiple trusts by ensuring that,

where value is added to two or more settlements simultaneously, the value of such additions will in future have to be taken into account for the purpose of calculating the IHT charges for 10-year anniversaries and exits. A new concept of ‘same-day additions’ has been introduced by S62A IHTA 1984. This occurs if the settlor of two or more settlements has added value of more than £5,000 to such trusts on the same day – note the special anti-fragmentation rule in S62B(3) and (4) IHTA 1984 to stop individuals avoiding the same-day addition provisions by transferring larger amounts to the trust, but in multiples of £5,000. Where this has happened in relation to taxable events arising on or after the date of Royal Assent to FB 2015 (expected to be towards the end of October 2015), the subsequently added value must be included in any trust tax calculation together with the initial value of the property in the other trust(s).

(h) A comparison of the tax results under the current rules and under HMRC’s

proposed alternative is set out below. The illustration looks at a 10-year anniversary charge and assumes that the present IHT rates and nil rate band remain in place for the time being.

(i) Illustration 6

Christopher, whose cumulative total of chargeable transfers stood at £10,000, set up Pilot Trust A with £10 on 1 June 2015 and Pilot Trust B with another £10 on 2 June 2015. They are both discretionary settlements.

Christopher died on 1 January 2016 and his will instructed that £250,000 should be added to each trust.

When the first 10-year anniversary charge arrived in June 2025, the value of the property in each trust was:

Trust A (1 June 2025) £340,000 –––––––

Trust B (2 June 2025) £340,000 –––––––

There have been no exit charges.

Current rules

The IHT payable in connection with the 10-year anniversary charge on Trust A is calculated as follows:

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£ Christopher’s chargeable transfers prior to Trust A 10,000 Add: Value of Trust A property on 1 June 2025 340,000 ––––––– £350,000 –––––––

IHT at lifetime rates on the value of Trust A’s property is: £

On 10,000 – 325,000 = 315,000 @ 0% – On 325,000 – 350,000 = 25,000 @ 20% 5,000

––––– £5,000 –––––

Thus:

5,000/340,000 x 100 = 1.471% ––––––

On the assumption that the 10-year anniversary charge is wholly ascribable to the addition on 1 January 2016 (ie. the initial value settled is ignored), the number of quarters taken is 40 less the number of complete successive quarters prior to the addition – this comes to two. And so the fraction becomes 38/40ths.

The rate of IHT actually charged is:

1.471% x 30% x 38/40 = 0.419%

–––––– Therefore, the trustees of Trust A must settle a liability of 0.419% x £340,000 = £1,425.

The 10-year anniversary tax calculation for Trust B is taken to be the same, ie. another £1,425.

Proposed alternative

The IHT payable in connection with the 10-year anniversary charge on Trust A is calculated as follows:

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£ £ Christopher’s chargeable transfers prior to Trust A 10,000 Add: Value of Trust A property on 1 June 2025 340,000

Value of same-day addition to Trust B 250,000 Initial value of Trust B 10

–––––– 590,010

––––––– £600,010 –––––––

IHT at lifetime rates on the chargeable value for Trust A is:

£ On 10,000 – 325,000 = 315,000 @ 0% – On 325,000 – 600,010 = 275,010 @ 20% 55,002

–––––– £55,002 ––––––

Thus: 55,002/590,010 x 100 = 9.322% –––––

Making a similar assumption to the previous calculation, the rate of IHT actually charged is:

9.322% x 30% x 38/40 = 2.657% –––––

Therefore, the revised liability for the trustees of Trust A is 2.657% x £340,000 = £9,034, with the same sum being due from the trustees of Trust B, ie. a more than sixfold increase.

(j) It should be noted that, if either of the settlements can be classified as a

‘protected settlement’, the new regime is not in point. S62C IHTA 1984 defines a protected settlement as a trust which commenced before 10 December 2014 where either Condition A or Condition B is met. Condition A is that there have been no transfers of value by the settlor on or after 10 December 2014 as a result of which the value of the trust property has increased. Thus a pre-10 December 2014 settlement to which there have been no subsequent additions is not caught. Condition B is met if:

(i) there has been a transfer of value by the settlor on or after 10

December 2014 as a result of which the value of the trust property has increased; and

(ii) that transfer took place on the death of the settlor before 6 April

2017 and it represented a ‘protected testamentary disposition’ – this means that the terms of the settlor’s will (even if changed on or after

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10 December 2014) were, in substance, the same as they had been immediately before 10 December 2014.

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24. New IHT exemptions

(a) The ending of the Frankland trap

It has been common practice to avoid making an appointment of capital out of a discretionary will trust within three months of the settlor’s death if reading back under S144 IHTA 1984 is being sought. In Frankland v CIR (1997), the trustees of such a trust appointed an interest in possession to the deceased’s husband within three months of her death. They had hoped to obtain relief under S144(1)(a) and S18 IHTA 1984, but, because of S65(4) IHTA 1984, there was no exit charge and therefore no event which could bring S144 IHTA 1984 into play. This is because reading back under S144 IHTA 1984 is only available where there is ‘an event on which tax would . . . be chargeable’ and there is no such event if the will trust comes to an end within three months of its creation. Of course, following FA 2006, it was no longer necessary to wait three months before appointing an interest in possession, but the trap remained after the enactment of that legislation for outright capital appointments.

(b) However, for deaths occurring on or after 10 December 2014, S144 IHTA

1984 is being amended so that, where a will trust is wound up within three months of the death and an appointment of property is made in favour of the deceased’s spouse (or civil partner), that appointment can be read back into the will. As a result, the spouse exemption under S18 IHTA 1984 will be available.

(c) This amendment removes what many people regarded as an unnecessary

anomaly in the IHT code. It can be found in Cl 14 FB 2015.

(d) Decorations and other awards

S6 IHTA 1984 states that a decoration or other award represents excluded property for IHT purposes if:

(i) it was awarded for valour or gallant conduct; and

(ii) it has never been the subject of a disposition for a consideration in

money or money’s worth.

(e) In the 2014 Autumn Statement, the Chancellor announced that this IHT exemption covering awards for valour and gallantry was to be extended with immediate effect (ie. for transfers made on or after 3 December 2014) to include awards for service in the armed forces and awards made by the State in recognition of achievements and service in public life (eg. OBEs). The new exemption, which is set out in S74 FA 2015, will also include similar orders, decorations and awards made by other countries and territories.

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(f) Emergency service personnel and others

The Government announced last year that they intended to introduce an IHT exemption for members of emergency services in line with the existing rule in S154 IHTA 1984 for members of the armed forces who die in the line of duty or whose death was hastened by an injury sustained in that line of duty. Subsequently, it was reported that the exemption would be extended to cover police constables and armed service personnel who die as a result of being attacked due to their professional status.

(g) The main result of these changes, which take effect for deaths occurring on or

after 19 March 2014, is that, where:

(i) a member of the emergency services or a humanitarian aid worker dies as a result of responding to an emergency (see new S153A IHTA 1984); or

(ii) a current or former police constable or member of the armed services

dies as a result of their status (see new S155A IHTA 1984),

their estate will be exempt from IHT (S75 FA 2015). In addition, any further IHT due on death for chargeable lifetime transfers and potentially exempt transfers will not be payable. This last point has also been included in S154 IHTA 1984 for soldiers, sailors and airmen.

(h) Because the new exemption applies from last year, it may be necessary to

revisit some IHT computations and claim a repayment.

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25. The reform of SDLT

(a) The biggest surprise to come out of the Autumn Statement on 3 December 2014 was the Chancellor’s announcement about the abolition of the long-established ‘slab’ system for SDLT on residential property acquisitions and its replacement with a progressive sliding scale (usually referred to as a ‘slice’ system). The relevant details can be found in SDLTA 2015 which received Royal Assent on 12 February 2015.

(b) Previously, SDLT had been calculated by reference to a percentage of the

chargeable consideration for the property. Since 2012, the relevant table has been as follows:

Purchase price Rate

Up to £125,000 0% Over £125,000 and up to £250,000 1% Over £250,000 and up to £500,000 3% Over £500,000 and up to £1,000,000 4% Over £1,000,000 and up to £2,000,000 5% Over £2,000,000 7%

Thus the SDLT on a property costing £760,000 in April 2014 was 4% x £760,000 = £30,400.

(c) The main criticism of the ‘slab’ system was its distorting ‘cliff edge’ effect. For

example, if a house was priced at £499,900, the SDLT was 3% x £499,900 = £14,997. If, instead, it had cost £500,100, the SDLT would have been 4% x £500,100 = £20,004. In other words, the addition of £200 to the purchase price would have cost the buyer an extra £5,007 in SDLT. This represents an impressive (but iniquitous) marginal rate of tax!

(d) Purchasers of residential property who complete on or after 4 December 2014

are subject to a completely different regime (which is much closer to the structure of income tax). The new rates, which are set out in S1 SDLTA 2015, read as follows:

Rate paid on part of price

Purchase price falling within each band

Up to £125,000 0% Over £125,000 and up to £250,000 2% Over £250,000 and up to £925,000 5% Over £925,000 and up to £1,500,000 10% Over £1,500,000 12%

If the property in (b) above was instead bought in April 2015, the SDLT calculation is:

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£ On 125,000 @ 0% – On 125,000 @ 2% 2,500 On 510,000 @ 5% 25,500

–––––– £28,000 ––––––

This produces a saving of £30,400 – £28,000 = £2,400, compared with the same property being bought 12 months earlier.

(e) HM Treasury have stated that the new SDLT rates will be the same as or

(usually) lower than the old rates for purchases of houses and flats costing up to £937,500 – this is the break-even point. However, it should be noted that not all properties which are more expensive than this amount will have higher SDLT charges. For example, a residential property priced at £1,005,000 will now cost the buyer:

£

On 125,000 @ 0% – On 125,000 @ 2% 2,500 On 675,000 @ 5% 33,750 On 80,000 @ 10% 8,000 –––––– £44,250 ––––––

in tax, whereas, under the old regime, the SDLT charge would have worked out at 5% x £1,005,000 = £50,250.

(f) SDLT is payable when a property transaction is completed by the purchaser.

As a result, the legislation has had to include a number of transitional measures for deals which took place towards the end of last year. For example, where contracts for the purchase of a property were exchanged before 4 December 2014 but the contract is not completed until on or after that date, purchasers can, if they wish, choose not to apply the new ‘slice’ rules so that they will end up paying SDLT under the old regime (S2 SDLTA 2015).

(g) Illustration 7

Contracts were exchanged for the purchase of a house by Alastair for £360,000 on 13 November 2014 and the purchase was completed on 23 January 2015.

Under the new SDLT rules, the tax payable by Alastair is:

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£ On 125,000 @ 0% – On 125,000 @ 2% 2,500 On 110,000 @ 5% 5,500 ––––––

£8,000 ––––––

Under the old rules, the SDLT is calculated as 3% x £360,000 = £10,800.

Alastair can choose whether to pay £8,000 or £10,800 by entering the appropriate amount on the land transaction return. In this case, Alastair will clearly go for the new rules.

(h) Illustration 8

Contracts were exchanged for the purchase of a London flat by Denis for £1,250,000 on 25 October 2014. Completion took place on 9 January 2015.

Under the new SDLT rules, the tax payable by Denis is:

£

On 125,000 @ 0% – On 125,000 @ 2% 2,500 On 675,000 @ 5% 33,750 On 325,000 @ 10% 32,500 –––––– £68,750 ––––––

Under the old rules, the SDLT is calculated as 5% x £1,250,000 = £62,500.

In this situation, Denis will opt for the old regime. Notice that, with transitional transactions, the purchaser is always entitled to choose the lower tax figure.

(i) But what happens if the land transaction return has already been submitted

under the new rules and the purchaser (eg. Denis in Illustration 8) wishes to pay under the ‘slab’ system? In that case, it is possible to amend the return within a period of 13 months following the date of completion. Care should be taken to ensure that this time limit is not overlooked.

(j) There are a number of general points about property transactions which need

to be borne in mind:

(i) Because SDLT is charged on the actual consideration given by the purchaser in money or money’s worth, a gift of property is exempt.

(ii) Note that there is no special exemption for transfers between spouses

(or civil partners). In other words, if a wife buys a half-share of a house from her husband, she will be liable for SDLT at the normal

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rates. In practice, it is more common for spousal transactions to be gifts, in which case there is no SDLT.

(iii) The assumption of a debt by the acquirer of property counts as

consideration given and SDLT will apply to the amount of debt assumed. In other words, if A gives a property worth £800,000 to his friend, B, but the property is charged with a £250,000 mortgage which B takes over, there will be no SDLT on the equity gifted. However, there will be a tax charge on the value of the mortgage taken over.

(iv) Occasionally, in the context of SDLT, a deemed market value rule can

apply to properties. The most common scenario is when a property is transferred to a connected company – see S1122 CTA 2010 for the definition of this term. SDLT is payable, based on the market value of the property acquired by the company.

(k) Rather oddly, there is no change to the rules for SDLT on the acquisition of

non-residential property. Thus commercial property transactions are still subject to tax on the ‘slab’ basis, as are acquisitions of ‘mixed use’ properties, ie. properties where there is both residential and non-residential use.

(l) The factors determining whether a particular property is residential or not

have been well summarised by one commentator as follows:

‘The status of a residential house or flat is normally clear-cut and, in HMRC’s view, this is based on its use at the effective date of the transaction. This overrides any past or intended future use. However, if an unused building was last used as a dwelling, it is generally taken to be “suitable for use as a dwelling” in the absence of any contrary evidence. Similarly, an existing building is treated as a dwelling if it is being adapted or marketed for, or restored to, domestic use (see HMRC’s Stamp Duty Land Tax Manual at Para SDLTM29955).

Various properties are specifically excluded from being residential, for example, student halls of residence, care homes, hospitals and hospices.’

(m) Finally, there is an important deeming rule in S116(7) FA 2003 which applies

to the transfer of six or more separate dwellings in a single transaction. This treats them collectively as non-residential for SDLT purposes. It is understood that, with the SDLT cost for upmarket residential properties (particularly in London and the South-East) having risen sharply as a result of SDLTA 2015, some property businesses have been taking advantage of this rule by acquiring an expensive London residence plus another five modest houses in, say, Gateshead as a job lot. This means that the SDLT is limited to the 4% maximum for commercial properties rather than the present 12% for residential properties.

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26. ATED in 2015

(a) ATED is an annual tax payable by non-natural persons such as companies and corporate partnerships which own UK residential property valued at more than £1,000,000.

(b) The ATED chargeable period is linked to financial years, ie. it runs from 1

April in one year to 31 March in the next. The amount of tax charged is based on the value of the property on a particular date. The annual chargeable amounts are subject to indexation by reference to the previous September’s Consumer Prices Index (rounded down to the nearest £50). However, Parliament can override the normal indexation by including a specific provision in the Finance Act. This is what has happened for 2015, given the Chancellor’s announcement of an increase in the ATED charges for the year to 31 March 2016 by ‘50% above inflation’. The tax figures for this chargeable period, taking into account the fact that the Consumer Prices Index grew by 1.2% in the year to September 2014, are set out in S70 FA 2015:

Property value

£ More than £2,000,000 but not more than £5,000,000 23,350 More than £5,000,000 but not more than £10,000,000 54,450 More than £10,000,000 but not more than £20,000,000 109,050 More than £20,000,000 218,200 These are huge increases over the previous year’s figures and are likely to cause some property owners to review their holding structures.

(c) In addition, it was legislated in FA 2014 that, with effect from 1 April 2015, a

new band would come into play for properties with a value of more than £1,000,000 but not more than £2,000,000, with this band being subject to a charge of £7,000 for the first year. The charge of £7,000 has not been increased.

(d) With effect from 1 April 2016, a further new band will be introduced for

properties with a value of more than £500,000 but not more than £1,000,000 where the annual ATED charge will initially be £3,500. This is also unchanged.

(e) As was the case in 2013, those falling into the band being brought in on 1

April 2015 will have until 1 October 2015 in which to file their first ATED return and until 31 October 2015 in which to pay the tax, reverting to the regular 30 April deadline thereafter.

(f) The ATED-related CGT charge will bite for disposals made on or after 6 April

following the introduction of the applicable ATED band (ie. from 6 April 2015 and 6 April 2016 respectively) and will only be levied on gains accruing from the relevant starting date onwards (S38 and Sch 8 FA 2015).

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(g) Other ATED amendments cover the following:

(i) Under ATED, the amount of tax charged is based on the value of the dwelling as at 1 April 2012 and thereafter at five-yearly intervals. It was the Government’s policy intention that a chargeable person, who has a property interest which falls within ATED because of its value on, say, 1 April 2017, had to file a return for that amount for the chargeable period beginning on 1 April 2018. This was to provide sufficient time to value the property in 2017 and submit a return by the due date of 30 April 2018. However, because of the way in which FA 2013 was drafted, this chargeable person would in fact have to value their property on 1 April 2017 and file their return 30 days later. This was patently unreasonable and so the anomaly has been corrected by S71 FA 2015 with a view to achieving the Government’s original intention.

(ii) The ATED legislation contains a rule which provides that, where two or

more interests are held in the same property by connected persons (eg. an individual and a company which he controls), those interests must be aggregated so that tax is then paid on the full amount, assuming of course that this falls within the ATED entry threshold. However, S110 FA 2013 provides a let-out: the company’s interest has to be worth more than £500,000 in order for this aggregation provision to apply. Following the lowering of the ATED entry threshold, an additional limit of £250,000 has been introduced for properties valued at up to £2,000,000 (S72 FA 2015).

(iii) As mentioned above, the Government announced last year that the

£2,000,000 ATED entry threshold was to be lowered in stages to £500,000. Recognising the additional administrative burden on businesses which hold residential property worth over £500,000, and in particular those entitled to claim one of the ATED reliefs, the Government published on 22 July 2014 a consultation document on ways to simplify the administration of ATED. Accordingly, S73 FA 2015 has introduced a new type of ATED return known as a ‘relief declaration return’. For each category of relief being claimed, the business has to submit a single return, stating that relief is being claimed in respect of one or more properties held at the relevant time. No details are required of the individual properties or of the number of properties which are eligible for the relief. A normal ATED return is required, as now, in respect of any property which does not qualify for relief or which ceases to qualify, ie. where tax is due. The overall result is that businesses with properties which qualify for relief will only be required to deliver one relief declaration return per annum for all properties covered by the particular relief instead of the present requirement of having to deliver multiple detailed returns for each property. This will produce a significant reduction in the overall administrative burden.

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(iv) All these changes have effect for chargeable periods beginning on or after 1 April 2015.

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27. Averaging for farmers

(a) Where, for two consecutive tax years, the profits of a farming sole trader or partner for one year do not exceed 70% of the profits for the other, a claim can be made to adjust those profits to a simple average of both years (S223(3) ITTOIA 2005).

(b) If either year’s profits exceed 70%, but are less than 75%, of the other’s, a

special partial averaging formula is applied (S223(4) ITTOIA 2005).

(c) There can be no averaging if the profits for one year are equal to, or are greater than, 75% of the profits for the other (S222(1) ITTOIA 2005).

(d) If the farmer makes a loss in one of the years, this counts as nil for averaging

purposes (S221(5) ITTOIA 2005).

(e) It was announced on 18 March 2015 that the Government plan to extend the period over which farmers can average their profits for income tax purposes from two years to five. This measure will come into effect on 6 April 2016 and will be legislated in FA 2016.

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28. Contributions to partnership funding schemes for flood defence projects

(a) Following the 2014 floods which affected many parts of the country (Somerset in particular), the Chancellor has announced that businesses which contribute to flood and coastal erosion risk management projects will obtain a tax deduction for such expenditure (S35 and Sch 5 FA 2015). The relief is available for both income tax and corporation tax purposes. Property businesses are specifically included.

(b) This measure, which applies to contributions made on or after 1 January

2015, is a worthy cause for expenditure where the availability of tax relief has hitherto been at best uncertain and at worst denied. It also supports the wider Government agenda to encourage private sector participation in flood and coastal defence projects and should certainly be of benefit to the environment.

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29. Enhanced capital allowances (ECAs) and zero-emission goods vehicles

(a) 100% ECAs for capital expenditure on zero-emission goods vehicles (ie. those powered entirely by electricity or by a hydrogen fuel cell) were first introduced in F(No3)A 2010 – see S45DA CAA 2001. The scheme, in HMRC’s words, ‘is one of a number of measures designed to help businesses reduce their CO2 emissions and to encourage a shift to cleaner goods vehicles’. This relief was originally due to terminate on 31 March 2015 (for corporation tax) and on 5 April 2015 (for income tax). However, the Chancellor announced on 19 March 2014 that the 100% regime would be extended for a further three years, ie. until 31 March 2018 for companies and 5 April 2018 for unincorporated businesses. Indeed, S64 FA 2014 gave the Treasury the power to extend by Treasury Order the duration of this ECA scheme along with three others.

(b) It is therefore interesting to see that S45 FA 2015 specifically includes a

statutory provision to prolong the lifespan of 100% ECAs for the purchase of zero-emission goods vehicles. Presumably, the reason for this is because that section contains additional conditions which must now be satisfied before the relief can be claimed. The effect of these new conditions is that a 100% ECA is not available or, if given, will be withdrawn:

(i) where qualifying expenditure has been incurred on or after 1 (or 6)

April 2015 and a State aid grant is received on or after 1 (or 6) April 2015;

(ii) where qualifying expenditure has been incurred before 1 (or 6) April

2015 and a State aid grant is received on or after 1 (or 6) April 2015; or

(iii) where qualifying expenditure has been incurred on or after 1 (or 6)

April 2015 and a State aid grant is received before 1 (or 6) April 2015.

In essence, the business has to make a decision whether to claim the 100% ECA or to receive a grant (or other payment) which ranks as a State aid. It is not possible to have both.

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30. Corporation tax rates going forward

(a) The main rate of corporation tax for the financial year 2015 was set at 20% by S6(1) FA 2013. The profits of all companies – large, medium-sized and small – are now taxed at the same rate. Marginal relief calculations are no longer relevant, with the small profits rate being abolished by S7 and Sch 1 FA 2014. This includes the rules for associated companies.

(b) Because these anti-fragmentation provisions are still needed for other parts of

the corporate taxation code (eg. S99 CAA 2001 which deals with the monetary limit for the purposes of the long-life asset legislation and Ss357CL – 357CM CTA 2010 which cover the election for small claims treatment under the patent box regime), they have been replaced by a simpler ‘related 51% group companies’ test. When determining the appropriate number of companies, it is necessary to add together the company in question together with all its ‘related 51% group companies’ (as defined in S279F CTA 2010) – note that genuinely dormant companies and passive holding companies do not count for this purpose.

(c) S6 FA 2015 has retained 20% as the main rate of corporation tax for the

financial year 2016.

(d) Cl 7 FB 2015 states that the main rate of corporation tax will fall to 19% for the financial year 2017 and the two following years. For the financial year 2020, it will fall further to 18%.

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31. Corporation tax – loss refresh prevention

(a) The Government have introduced new legislation in S33 and Sch 3 FA 2015 in order to, in the words of HM Treasury, ‘counteract the advantage for companies of entering into contrived arrangements to circumvent:

(i) the carry-forward rules . . . which limit the way in which relief can be

given; and

(ii) the group relief rules in Part 5 of CTA 2010 which only allow relief to be surrendered by a group company against profits arising in the same overlapping period, and not the surrender of relief that has been carried forward’.

(b) What is being attacked are certain tax-motivated arrangements under which

companies seek to ‘refresh’ accumulated tax losses brought forward by effectively converting them into current year deductions. These typically involve the creation of both taxable profits (which can be eliminated by brought forward losses) and current year tax-deductible amounts which are offset against other profits in the company concerned or in related group companies. Many of these arrangements were loans. An illustration of the type of tax planning at which Sch 3 FA 2015 is aimed is set out in (e) below.

(c) The new rule catches brought forward:

(i) trading losses;

(ii) non-trading loan relationship deficits; and

(iii) management expenses (S730F CTA 2010 (as inserted by Para 1 Sch

3 FA 2015)).

(d) Specifically, the regime will apply where:

(i) a company has profits arising as a result of arrangements against which it can offset accumulated losses or other amounts;

(ii) the arrangements give rise to tax deductions in the company or in a

connected company;

(iii) the main purpose, or one of the main purposes, of the arrangements is to secure a corporation tax advantage involving the creation of allowable tax deductions and the offset of brought forward amounts against profits; and

(iv) it would have been reasonable to assume that, when the

arrangements were entered into, the resulting tax benefits of the arrangements for the companies (taken together) would be greater than any non-tax benefits for those same persons (S730G CTA 2010 (as inserted by Para 1 Sch 3 FA 2015)).

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In these circumstances, the brought forward amounts are disallowed.

(e) Illustration 9

Lawrence Industries Ltd is part of a large group and has existing intra-group borrowing which it entered into for commercial reasons. The company also has a substantial non-trading loan relationship deficit brought forward which it has no realistic prospect of absorbing in the foreseeable future. The group therefore changes its funding structure to accelerate the recognition of non-trading credits in Lawrence Industries Ltd so as to utilise the brought forward deficit and create a replacement deficit which can be used more flexibly. This could be achieved by the following:

(i) Lawrence Industries Ltd’s existing loan is replaced by another loan

from a fellow group member which is interest-free. In all other respects, the terms of this new loan are the same as the original loan.

(ii) Under GAAP, the new loan is recognised at a discounted value. For

example, if it has a face value of £10,000,000, it will be recognised as a loan of £9,500,000, being the present value of the company’s obligation to repay £10,000,000 in, say, two years’ time. The value of this loan then gradually grows to £10,000,000 over the term of the instrument.

(iii) Lawrence Industries Ltd claims that the excess of £500,000 on

inception (cash received of £10,000,000 less the value of the debt recognised at £9,500,000) is an upfront taxable credit, to be covered by the deficit brought forward.

(iv) The company also claims that the accretion of the loan back to

£10,000,000 gives rise to a tax deduction of £500,000 over the life of the loan. This £500,000 will be surrendered to other members of the group as group relief. Thus a brought forward amount has been converted into a fresh current year deduction.

From an overall group perspective, there is no economic benefit to this planning. The arrangement is, in HMRC’s words, ‘wholly designed to use up old losses and create new ones’. The provisions of Sch 3 FA 2015 will therefore be invoked.

(f) This measure has effect for accounting periods beginning on or after 18

March 2015 (Para 4(1) Sch 3 FA 2015). Any profits of a company with an accounting period straddling 18 March 2015 need to be allocated into notional periods falling either side of that date and the rules then apply to the period commencing on 18 March 2015 – this apportionment should be done on a time basis, unless that would give rise to an unfair result in which case some other ‘just and reasonable’ basis should be used (Para 4(2) and (3) Sch 3 FA 2015).

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(g) Sch 3 FA 2015 is presented as anti-avoidance legislation aimed at ‘contrived’ arrangements. However, the rule could also prevent companies from being able to gain effective relief for tax losses which arose in genuine commercial circumstances, given that it focuses on the way in which the losses are used rather than the manner of their creation. Note that HMRC have indicated that it is not targeted at ‘simple’ arrangements such as shifting a profitable trade or an income-producing asset into a company with accumulated tax losses.

(h) In some instances such as those where the arrangements do not involve any

newly created tax-deductible amounts, it should be relatively straightforward for taxpayers (and their advisers) to conclude that the rule does not apply. However, in the case of more complex arrangements involving new tax deductions and groups of companies, there will be a need for companies to address the more difficult question of ‘main purpose’ as well as comparisons of tax values with non-tax values at a group level.

(i) There is also an element of retrospection in Sch 3 FA 2015. It is clear that the

legislation can apply to arrangements which were entered into several years ago but which are still giving rise to profits and deductible amounts.

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32. Loan relationships and late paid interest

(a) On 20 March 2013, the Government announced a review of the corporation tax rules governing loan relationships. There was consultation on a wide-ranging package of measures to update and simplify this regime and also to reduce its susceptibility to tax avoidance. S25 FA 2015 has been introduced as a forerunner of wider changes which are expected to be included in a later Finance Act.

(b) The ‘late paid interest’ rules were originally brought in as an anti-avoidance

measure in 1996 to prevent mismatches between the timing of relief for interest in debtor companies and its taxation in the hands of the creditor. Interest will normally be accrued in the accounts of the company which is due to pay it (and so is allowed for corporation tax), even though it may not be paid to the recipient and taxed until much later. Accordingly, Ss372 – 379 CTA 2009 set out four separate scenarios involving loans from ‘connected’ companies where the interest accrued in the accounts is paid more than 12 months after the end of that accounting period. If this is the case, the interest is only allowable in the accounting period in which it is actually paid, ie. the accruals basis does not apply.

(c) The four scenarios referred to in (b) above are as follows:

(i) where the two companies are connected under S466 CTA 2009 (S374

CTA 2009); (ii) where the creditor is a participator in a close company (S375 CTA

2009);

(iii) where one of the parties has a ‘major interest’ – see S473 CTA 2009 – in the other (S377 CTA 2009); and

(iv) where the loan is made by the trustees of an occupational pension

scheme (S378 CTA 2009).

However, FA 2009 significantly limited the scope of these late interest rules when they were found to be incompatible with EU law. As a result, Ss374 and 377 CTA 2009 have only applied in fairly restricted circumstances for the last six years. The main form of interest to be caught nowadays is where it is payable to a creditor who is resident in a ‘non-qualifying’ territory (this effectively means a tax haven). Following FA 2009, companies have generally been able to obtain relief on an accruals basis for all interest payable to UK and overseas group members and affiliates (irrespective of when the interest is actually paid).

(d) In recent years, these rules have been regularly used by some groups to, in

the words of HMRC, ‘manage and manipulate the emergence of profits and losses’. Loss relief legislation permits excess amounts (including trading losses and non-trading loan relationship deficits) to be set against a company’s other profits of the same period or surrendered to other group

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companies on a current year basis. A carry-back facility is also available. All these rules provide immediate relief. However, if trading losses or non-trading loan relationship deficits are not used in any of these ways, they can only be carried forward until such time as the company in which they arose is able to set them against future profits from the same source.

(e) For this reason, groups utilising structures which have companies in ‘non-

qualifying’ territories have been in the habit of deliberately deferring payment of interest so that losses can be timed to arise in accordance with profits elsewhere in the group which can then absorb them. This effectively sidesteps the intention behind the group relief rules, namely that relief should only be available for in-year losses and other items. Nor does it accord with the anti-avoidance intention of the late paid interest legislation discussed in (b) above.

(f) Accordingly, S25(6) FA 2015 repeals Ss374 and 377 CTA 2009 in relation to

loans entered into on or after 3 December 2014. For loans which started before 3 December 2014, the original legislation will continue to apply in respect of interest accruing up to 31 December 2015. However, where material changes are made to an existing loan between 3 December 2014 and 31 December 2015 (inclusive), the repeal will have effect from the date of the change (S25(10) FA 2015).

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33. Expenditure on R&D

(a) In computing their taxable profits, small and medium-sized companies are able to claim a special enhanced deduction for qualifying R&D expenditure (see S1044 CTA 2009). With effect from 1 April 2015, the allowable deduction (often referred to as a ‘super-deduction’) has been increased to 230% of the relevant expenditure (S27(3) and (5) FA 2015). For a company paying corporation tax at 20%, this represents an effective tax relief of 46%.

(b) In order for a company to be classified as medium-sized, it must have:

(i) fewer than 500 employees; and

(ii) either:

– a turnover not exceeding €100,000,000 (roughly equivalent to

£72,500,000); or

– a gross assets total in its balance sheet not exceeding €86,000,000 (roughly equivalent to £62,500,000).

In other words, such companies may still be very substantial enterprises.

(c) If such a company has been making losses, it is able instead to claim a

repayable R&D tax credit amounting to 14.5% of the lower of:

(i) its trading loss for the accounting period in question; or

(ii) 230% of its qualifying R&D expenditure incurred in that period.

The repayable tax credit rate remains at 14.5% for the current financial year. However, because of the increase in the super-deduction, loss-making companies will now be entitled to a maximum cash rebate equal to 33.35% of their original expenditure.

(d) Any company which does not meet the test in (b) above is classified as large.

Large companies enjoy a less generous super-deduction. Since 1 August 2008, this has been set at 130% of their qualifying R&D expenditure.

(e) However, in FA 2013, it was confirmed that large companies could claim an

alternative form of R&D tax relief. This is known as an ‘above the line’ (ATL) credit and was initially given at 10% (see S104M CTA 2009). The ATL regime, which is currently optional, will replace the existing super-deduction framework for all large companies from 1 April 2016 onwards.

(f) A key feature of the ATL credit, which is officially referred to as an ‘R&D

expenditure credit’, is that it is treated as a taxable receipt and is paid net of tax to companies with no corporation tax liability. Effectively, it is like a grant. For a simple example of how it works, see the illustration in (h) below.

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(g) By virtue of S27(2) and (5) FA 2015, the rate of the ATL credit has been increased to 11% of qualifying R&D expenditure incurred by the company on or after 1 April 2015.

(h) Illustration 10

Frederick Industries plc is a large company for R&D relief purposes. On the assumption that it has incurred qualifying R&D expenditure of 1000, the comparison below shows the difference between the super-deduction and the ATL systems:

Current ATL

Turnover 2700 2700 R&D expenditure (1000) (1000) ATL credit 110 Other expenditure (1200) (1200) –––– –––– 500 610 R&D relief (30%) (300) ––– ––– Taxable profit 200 610

––– –––

CT @ 20% 40 122 ATL credit (110) ––– ––– Tax payable 40 12 ––– –––

(i) The increases detailed above are being partially funded by a new measure which is applicable to all R&D schemes. With effect from 1 April 2015, expenditure will be excluded from a company’s R&D claim if it relates to consumable items incorporated into products which are subsequently sold (S28 FA 2015).

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34. Disclosure of tax avoidance schemes (DOTAS)

(a) The DOTAS legislation in Part 7 of FA 2004 is designed to give HMRC early warning of tax avoidance schemes and provides them with the opportunity to consider changes in the law in order to close loopholes or to challenge schemes which, in their opinion, should not succeed. It requires the person who designs or sells a tax avoidance scheme to furnish HMRC with details of the arrangement in question, but only if it meets certain specified criteria.

(b) Additional provisions have been introduced in S117 and Sch 17 FA 2015 for

the purpose of improving compliance with the DOTAS regime. The main points are set out below:

(i) New S310C FA 2004 requires promoters to notify HMRC within 30

days if the name of a scheme or the name and address of a promoter changes after a scheme reference number (SRN) has been issued under S311 FA 2004 (Para 1 Sch 17 FA 2015). This only takes effect for notified schemes which are issued with an SRN on or after 26 March 2015 (Para 19 Sch 17 FA 2015).

(ii) Para 4 Sch 17 FA 2015 amends S311 FA 2004 to lengthen the period

within which HMRC may allocate an SRN to notifiable arrangements under the new rules. They have 90 days in which to do this – the previous time limit was 30 days.

(iii) Where employers receive, or might reasonably be expected to receive,

a tax advantage from arrangements involving their employees, the employer must give details of the relevant SRN to each employee (Para 5 Sch 17 FA 2015). On top of that, there is a further duty on the part of employers, by virtue of new S313ZC FA 2004 (as inserted by Para 9 Sch 17 FA 2015), to notify HMRC of all relevant details relating to employees in respect of whom a tax advantage will or might be received.

(iv) S316C FA 2004 (as inserted by Para 17 Sch 17 FA 2015) is a new

provision which enables HMRC to publish information about promoters and notified schemes where an SRN has been issued. However, HMRC must inform a promoter first before publishing any information which could identify that person as a promoter. HMRC are never permitted to publish information which could lead to scheme users being identified. There is also a requirement on the part of HMRC to publish relevant information about final court rulings in relation to notified schemes (S316D FA 2004 (as inserted by Para 18 Sch 17 FA 2015)).

(v) Finally, the penalties in S98C(3) and (4) TMA 1970 for users of tax

avoidance schemes who fail to provide correct information about SRNs to HMRC under S313 FA 2004 have been dramatically increased (Para 18 Sch 17 FA 2015). The new amounts are as follows:

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New Old

£ £ No failure in last 36 months 5,000 100 One failure in last 36 months 7,500 500 Two (or more) failures in last 36 months 10,000 1,000

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35. Accelerated payments and group relief

(a) The accelerated payment legislation was introduced in Ss219 – 229 FA 2014. It allows HMRC to issue an accelerated payment notice (APN), requiring the upfront payment of disputed tax in certain specified circumstances.

(b) Where a group company has losses or other amounts deriving from

arrangements which meet the FA 2014 criteria, an APN might not require the company to make a payment at that point given that it may have no actual tax to pay once the dispute is resolved. However, the company could still surrender some or all of such amounts as group relief so that the cash timing benefit passes to other members of the group.

(c) S118 and Sch 18 FA 2015, which took effect on 26 March 2015, prevent

those amounts being surrendered while the dispute is in progress. In other words, the group members end up paying more tax initially so that, as HM Treasury put it, ‘the relevant cash amount can be held by the Exchequer during the dispute’.

(d) There are similar rules for a corporate member of a partnership which

generates a disputed loss. The issue of a partner payment notice will, from now onwards, stop that company surrendering its share of the loss to another member of its group.

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36. Redemption of undated Government Stocks

(a) S124 FA 2015 allows the Government to redeem three undated Government

Stocks, provided that they give at least three months’ notice of this decision in the London Gazette. They are:

(i) 2¾% Annuities;

(ii) 2½% Annuities; and

(iii) 2½% Consolidated Stock.

(b) The original terms and conditions attached to these securities do not enable

their redemption. However, legislation was passed by Parliament in the 19th century which gave the Government the necessary authority. Unfortunately, for two of the securities, the relevant conditions can no longer be met and so new provision had to be made in FA 2015 for the redemption of all three. This has effect from 26 March 2015 onwards.

(c) In the Autumn Statement on 3 December 2014, the Chancellor reported that

the Government were adopting a strategy of removing the remaining undated Government Stocks from the debt portfolio as and when it is deemed appropriate. Accordingly, it has been announced that five further undated bonds would be repaid:

(i) 4% Consolidated Loan; (ii) 3½% War Loan;

(iii) 3½% Conversion Loan;

(iv) 3% Treasury Stock; and

(v) 2½% Treasury Stock.

The first two have already been redeemed.

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APPENDIX – FB 2015 1. Dividends – the end of an era

(a) The new regime

The announcement on 8 July 2015 of the death of the imputation system, which has been a key part of the UK tax code since the early 1970s, with effect from 6 April 2016 was one of the Chancellor’s more surprising decisions in his Summer Budget.

(b) In the words of HM Treasury found in Paras 1.185 and 1.186 of their Budget

Report:

‘The current system of tax credits on dividends was designed over 40 years ago when corporation tax was more than 50% and the total tax bill on dividends for some was more than 80%. Since then, tax rates (including corporation tax) have fallen, leaving the dividend tax credit as an arcane and complex feature of the tax system.

Alongside further cuts to corporation tax rates for all businesses (over the next five years), the Government will reform and simplify the system of dividend taxation, while maintaining the extensive tax reliefs for investments held in ISAs and pensions. From 6 April 2016, the Government will remove the dividend tax credit and replace it with a new tax-free dividend allowance of £5,000 a year for all taxpayers.’

It is understood that the detailed legislation will not be available until the publication of the draft Finance Bill following the Autumn Statement on 25 November 2015.

(c) The position for individuals generally

In place of the previous regime, the Chancellor has unveiled a progressive series of dividend tax rates which will take effect for 2016/17 onwards. However, all dividends will benefit from an annual tax-free allowance of £5,000 – in other words, dividend income will only be liable to tax to the extent that the amount received exceeds this tax-free allowance (plus, of course, any available personal reliefs).

(d) It is important to appreciate that the 1/9th tax credit will disappear. The

amount received will become the gross figure.

(e) Note that the £5,000 dividend allowance is separate from the previously announced £1,000 allowance for savings income (which excludes dividends and which is also due to come into force on 6 April 2016).

(f) The table of rates for dividend income in 2016/17 (together with the

comparative percentages for 2015/16) is as follows:

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Tax rate in Taxpayer’s marginal rate 2016/17 2015/16

Basic 7.5% Nil Higher 32.5% 25.0% Additional 38.1% 30.6%

Thus, when a taxpayer’s dividend income exceeds the £5,000 limit, the rate of tax applied to that income will be 7.5% higher across the board.

(g) Illustration 11

John receives dividend income of £3,000 per annum. He is a 40% taxpayer.

In 2015/16, John will pay income tax of 25% x £3,000 = £750 on his dividends. In 2016/17, his dividend income will be tax-free on account of the £5,000 allowance.

(h) Illustration 12

Susannah, John’s wife, has a much larger share portfolio. Her annual dividend income is £22,000. Susannah is a 45% taxpayer.

In 2015/16, Susannah will pay income tax of 30.6% x £22,000 = £6,732 on her dividends. In 2016/17, the income tax will be on £22,000 – £5,000 = £17,000 @ 38.1% = £6,477. In other words, her dividend tax bill will also be lower.

However, if Susannah’s dividend income were, say, £62,000 per annum, the comparative tax figures would be:

2015/16 (30.6% x £62,000) £18,972 –––––– 2016/17 (£62,000 – £5,000 = £57,000 @ 38.1%) £21,717 ––––––

This represents a substantial tax increase.

(i) Note that, in Illustration 12, it would be worthwhile for Susannah to transfer

some of her shares to John so that he could make full use of his £5,000 allowance in 2016/17.

(j) The breakeven points for higher and additional rate taxpayers where their

dividend income starts to suffer a greater tax burden on or after 6 April 2016 are:

40% taxpayer £21,667 ––––––

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45% taxpayer £25,400 ––––––

Thus it is only individuals with significant dividend income who are going to be worse off under the new regime.

(k) Family and owner-managed companies

The position for shareholder directors of family and owner-managed companies is less satisfactory, given that since the late 1980s many of these individuals have followed a ‘low salary high dividend’ profit extraction model which has normally been the most tax-efficient arrangement. The reason for this is simple: with a profitable company, a substantial proportion of the money taken out of the company is in the form of a dividend. Thus the tax bill in 2016/17 will be proportionately higher.

(l) A review of the total tax costs (including corporation tax) of paying dividends

out of a family or owner-managed company in 2016/17 produces the following results (in this instance, the £5,000 dividend allowance has been ignored):

Shareholder BR HR AR

Company profits 100.0 100.0 100.0 Less: Corporation tax @ 20% 20.0 20.0 20.0 –––– –––– –––– Post-tax profits (ie. dividend) 80.0 80.0 80.0 Less: Dividend tax @ 7.5%/32.5%/38.1% 6.0 26.0 30.5 –––– –––– –––– Net income 74.0 54.0 49.5 –––– –––– –––– Effective tax rate 26.0% 46.0% 50.5%

–––– –––– ––––

Note: The effective tax rate for 2015/16 is 6% lower.

(m) Where an owner manager wishes to pay a dividend to a spouse (who has no other income), a payment of, say, £37,500 would currently attract no tax. In 2016/17, a similar payment would cost a little over £1,600 after taking into account the tax-free dividend allowance. If that amount was paid to the owner manager himself (assumed to be a 40% or 45% taxpayer), the liability would be several times greater. Accordingly, a spousal payment will still be an appropriate tax planning strategy.

(n) Looking ahead, many owner managers whose companies have sufficient

reserves will clearly be keen to accelerate dividend payments to fall within the current regime rather than letting them be taxed in 2016/17. If the company needs the cash for working capital purposes, the money can always be transferred back to the company by way of a director’s loan.

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(o) In view of the fact that corporation tax rates will fall to 19% in 2017 and to

18% in 2020, it seems probable that some shareholder directors will deliberately seek to retain more profits within their companies as an alternative to paying them out. Company purchase of own shares on a retirement, which should in most cases attract CGT treatment, will become even more commonplace. And what about shareholder directors taking out loans or advances from their companies via an overdrawn director’s loan account? The Government have confirmed that they have no plans to increase the S455 CTA 2010 charge of 25% and an official rate of only 3% on beneficial loans may well be seen as entirely acceptable.

(p) An important point to make is that, when doing a ‘bonus v dividend’

calculation for 2016/17, the gap between the tax-efficiency of the two options will have narrowed significantly. Dividends are likely still to retain a small advantage, but in many cases it will be virtually nip and tuck.

(q) An unexpected difficulty

On 17 August 2015 (ie. nearly six weeks after the Summer Budget), HMRC published a factsheet relating to the £5,000 dividend allowance which made clear that the new allowance was not simply an exemption, as most people had assumed. The relevant paragraph of the factsheet reads as follows: ‘Dividends within your allowance will still count towards your basic and higher rate bands and may therefore affect the rate of tax that you pay on dividends you receive in excess of the £5,000 allowance.’ Put simply, the new regime is going to be more expensive than had initially been thought. Imagine an individual (James) with business profits of £40,000 and dividends of £8,000 for 2016/17. James’ income tax position is as follows:

£

Business profits 40,000 Dividends (8,000 – 5,000) 3,000 –––––– Less: PA 43,000

11,000 –––––– £32,000 ––––––

The £11,000 is set against James’ business profits, leaving £29,000 as taxable. If the dividend allowance represents an exemption, that would mean that his taxable income was £32,000, all of which would fall into the basic rate band for 2016/17. In other words, the £3,000 of taxable dividend income would be charged at the 7.5% rate.

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Unfortunately, it does not work like that. James’ £5,000 dividend allowance is deemed to use up the balance of his basic rate band (£3,000) and the first £2,000 of his higher rate band, but at 0%. Therefore, his taxable £3,000 is charged at 32.5% (instead of 7.5%) and so gives rise to a tax bill of £975 rather than £225, ie. an increase of £750 on what had originally been expected.

(r) Impact on restriction of personal allowances

Because the £5,000 dividend allowance does not reduce an individual’s taxable income, the full dividend received has to be included when calculating that person’s income for the purpose of the personal allowance restriction (as well as for the high income child benefit charge). However, some taxpayers will still benefit from the change in the rules, given that dividend income will no longer have to be grossed up for the tax credit from 2016/17 onwards.

(s) Illustration 13

Simon has earned income of £85,000 and receives dividends of £20,000 for both 2015/16 and 2016/17. His personal allowance computations for the two years are:

2015/16 2016/17

£ £ Earned income 85,000 85,000 Dividends (x 100/90) 22,222 Dividends 20,000 ––––––– –––––––

£107,222 £105,000 ––––––– –––––––

Excess income over limit £7,222 £5,000 –––––– ––––––

Abatement of personal allowance (50%) £3,611 £2,500 –––––– ––––––

(t) Impact on incorporations

In Para 1.189 of the Budget Report, the Chancellor’s underlying rationale for introducing the new dividend regime is set out in the following words:

‘These changes will . . . start to reduce the incentive to incorporate and remunerate through dividends rather than through wages to reduce tax liabilities. This will reduce the cost to the Exchequer of future tax-motivated incorporation by £500,000,000 a year from 2019/20.’

The Report points out that, over the last few years, companies have seen a significant drop in their corporation tax rates (ie. from 28% to 20% for large companies) and that this therefore justifies the Chancellor’s decision to try

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and close the tax gap between the self-employed and those who trade through a company and pay themselves in dividends. However, this argument does not hold good for the many thousands of smaller companies, for whom the rate reduction has been only 1% over the same time frame. And it is these smaller companies who are typically the successors to many of the former unincorporated businesses.

(u) It can be argued that the FA 2015 changes made on 3 December 2014

affecting goodwill have already made it less attractive for some taxpayers to run their business through a limited company. These new dividend arrangements will add significantly to the costs of incorporating many successful unincorporated businesses. They do not, however, rule out incorporation in all cases – there are still useful tax savings to be had. The Tax Faculty have calculated that it is now unlikely to be worth incorporating a business where the maintainable profits are less than £40,000 per annum. In the speaker’s view, this is probably an underestimate: a profit level of between £50,000 and £60,000 is likely to be the minimum requirement for 2016/17 onwards.

2. AIAs going forward

(a) Since April 2008, most businesses (regardless of size) have been able to claim a 100% AIA on all their plant or machinery expenditure – other than on cars – up to a specified annual maximum.

(b) At present, the limit stands at £500,000, but it was due to fall back to only

£25,000 on 1 January 2016 (see S10 and Sch 2 FA 2014). The temporary increase to £500,000 was designed to stimulate growth in the economy by providing an additional time-limited incentive for businesses – particularly small and medium-sized ones – to increase or bring forward their capital expenditure on plant or machinery.

(c) However, in his Budget Speech on 18 March 2015, the Chancellor announced

the Government’s commitment to set the 2016 limit at a more realistic level. Accordingly, Cl 8 FB 2015 has increased to £200,000, for expenditure incurred on or after 1 January 2016, the maximum AIA which can be claimed for a 12-month chargeable period. This limit is to apply for the foreseeable future.

(d) For companies and unincorporated businesses with a 31 December year end,

the new regime should cause no particular problem: the AIA limit for 2015 expenditure will remain at £500,000, reducing to £200,000 for expenditure incurred in 2016. But, for companies and unincorporated businesses with any other accounting date, the transitional rules set out in Para 4 Sch 2 FA 2014 are in point. These treat the actual chargeable period as two separate chargeable periods, one ending on 31 December 2015 and the other commencing on 1 January 2016. The maximum AIA entitlement is then the sum of the two parts.

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(e) Illustration 14

Mervyn Property Development Ltd has an accounting date of 31 March. For the chargeable period from 1 April 2015 to 31 March 2016, the company’s AIA limit for this period is based on:

(i) the proportion of the period from 1 April 2015 to 31 December 2015,

ie. 9/12 x £500,000 = £375,000; and

(ii) the proportion of the period from 1 January 2016 to 31 March 2016, ie. 3/12 x £200,000 = £50,000.

This produces a maximum of £425,000. In other words, if Mervyn Property Development Ltd has only incurred £310,000 on qualifying plant or machinery in that 12-month period, full relief will be due.

(f) Unfortunately, there is one rather unnecessary trap: the legislation provides a

restriction for the period which commences on 1 January 2016 such that, for expenditure incurred in that second period, no claim can be made for more than the maximum limit for the period. Thus, if the company in Illustration 14 had incurred capital expenditure for the year ended 31 March 2016 as follows:

Date of qualifying expenditure Amount

1 August 2015 £240,000 –––––––

1 March 2016 £70,000 ––––––

its AIA entitlement would be cut back to £240,000 + £50,000 = £290,000. The remaining unrelieved balance of £20,000 would only be eligible for writing down allowances. Notice that this rule does not apply in reverse.

3. No more tax relief for goodwill amortisation

(a) Under Ss711 – 906 CTA 2009, companies have been able to obtain corporation tax relief when expenditure on goodwill and other intangible assets is recognised in the accounts. This relief is available to companies acquiring a business through a direct purchase of a trade and assets. It also applies to self-created goodwill. It has never been in point for companies acquiring shares in other companies (ie. where the goodwill arises on consolidation).

(b) Cl 32 FB 2015 provides that relief will no longer be available for the

amortisation of goodwill and customer-related intangible assets acquired or created by a company on or after 8 July 2015. Furthermore, any debits arising on the realisation of such assets will henceforth be treated as non-trading items. The practical effect of these changes is that there will now be

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limited ways in which such debits can be utilised (other than in the year of the asset’s realisation).

(c) The definition of goodwill and customer-related intangible assets is widely

drafted. They are referred to in new S816A CTA 2009 as ‘relevant assets’ and include:

(i) goodwill;

(ii) information which relates to customers or potential customers of a

business;

(iii) the relationship (whether contractual or not) which the business owner has with his customers;

(iv) an unregistered trademark; and

(v) a licence or other right in respect of any of the above assets.

This mirrors the ‘incorporation’ definition introduced in S849B(2) CTA 2009 by S26 FA 2015 in connection with transfers of goodwill to a company by a related individual or firm. The FA 2015 provision has now been superseded.

(d) The changes do not apply in cases where a relevant asset is acquired before

8 July 2015. However, there is no such let-out for relevant assets created prior to 8 July 2015.

(e) The rationale for Cl 32 FB 2015 is explained as follows by HM Treasury:

‘This clause removes this relief with regard to the purchase of goodwill and other intangible assets closely related to goodwill. It will restrict the ability of companies to reduce their corporation tax profits following a merger or acquisition and removes this artificial incentive to buy assets rather than shares.’

(f) Note that this new measure does not impose any restriction in respect of

intangible assets apart from goodwill and other specified ‘relevant assets’. Investment expenditure on intellectual property and other intangible assets will continue to qualify for relief under CTA 2009.

4. Replacing the 10% wear and tear allowance

(a) Prior to 6 April 2013, the landlord of a furnished residential property had a choice when he came to replace items in the house or flat. He could claim the renewals basis. Alternatively, he could claim a wear and tear allowance, calculated as 10% of the net rent, ie. rent less expenses such as utilities, council tax and anything else for which the tenant is usually responsible. In practice, the 10% wear and tear allowance was normally preferred.

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(b) If the property was not fully furnished (for example, if it only contained kitchen appliances), the 10% wear and tear allowance was not available. The renewals basis was the only option in these circumstances.

(c) This renewals allowance worked on the basis that one cannot have a tax

deduction for the first purchase of a piece of equipment. Instead, when that item needed to be replaced, the cost of the replacement could be claimed as a renewal. Thus, if an individual was fitting out a new rental property, there was no relief for buying a cooker or fridge-freezer. However, when, say, the fridge-freezer was replaced, the cost of the new one represented an allowable deduction.

(d) Following the publication of a technical note on 6 December 2011, HMRC

announced that the renewals basis would not be available for replacement expenditure on plant or equipment incurred on or after 6 April 2013. With effect from that date, the sole relief available to residential landlords was the 10% wear and tear allowance and, given that this could only be claimed in connection with fully furnished properties, it followed that landlords of unfurnished (or partly furnished) residential accommodation could not claim any tax relief for the cost of replacing items such as cookers, fridges, dishwashers and so on. This was manifestly unfair.

(e) As a result, a letter was sent to HMRC on 4 February 2014 under the joint

auspices of the CIOT and the Tax Faculty to try and establish precisely what the options were for landlords of non-fully furnished properties.

(f) HMRC replied on 7 April 2014 and there were some elements of their

response which were encouraging. For example, they confirmed that the more expensive built-in appliances are normally regarded as fixtures and so the replacement of such items would count as repairs. But that was as far as they were prepared to go. S68 ITTOIA 2005 did not, they said, provide a deduction for free-standing items like cookers, fridges and washing machines. Nor did the section help with carpets and curtains. It was only smaller items which are regularly replaced, eg. toasters, crockery, cutlery and glassware, which fell within the definition of ‘trade tools’ in S68 ITTOIA 2005.

(g) Following the submission of the most recent set of tax returns, it became clear

that the impact of the withdrawal of the renewals basis was only now being realised by landlords. In conjunction with the CIOT, the Tax Faculty therefore asked the Residential Landlords Association to survey their members in order to discover:

(i) whether landlords were aware of this change in the tax rules;

(ii) if the change would impact on the frequency with which they will be

replacing white goods, carpets and curtains; and

(iii) whether or not they would be reorganising their businesses so that they move away from having partly furnished lets to being fully furnished or totally unfurnished.

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(h) The results were interesting. Of the 628 responses from landlords, over 75%

were unaware of HMRC’s removal of the renewals basis. A clear majority of landlords said that they currently provide:

(i) white goods (74%);

(ii) carpets (98%); and

(iii) curtains (79%)

in their non-fully furnished rental properties and more than half confirmed that the lack of tax relief would have an effect on the frequency with which such items were replaced in the future.

(i) The Tax Faculty calculated that, if most of these landlords changed to having

fully furnished lets so that they became eligible for the 10% wear and tear allowance, this would cost HM Treasury more than allowing renewal costs in non-fully furnished properties!

(j) The Government have finally appreciated the sense of this argument

because, on 8 July 2015, the Chancellor announced that there would be a consultation about the possibility of abolishing the 10% wear and tear allowance with effect from 6 April 2016 and providing instead a deduction for the actual amount spent on replacement furnishings and white goods for all residential landlords. The consultation document was published on 17 July 2015 and is entitled ‘Replacing Wear And Tear Allowance With Tax Relief For Replacing Furnishings In Let Residential Dwelling-Houses’. The closing date for comments is 9 October 2015.

(k) The document confirms that the new arrangement will apply to landlords of

unfurnished, partly furnished and fully furnished residential properties. It will not be relevant for furnished holiday lettings and lettings of commercial properties, given that these businesses receive their tax relief through the capital allowances regime. HMRC confirm that landlords will be able to claim a deduction for the capital cost of replacing all types of furniture, furnishings, appliances and kitchenware provided for the tenant’s use in the property, including:

(i) movable furniture or furnishings such as beds and sofas;

(ii) televisions;

(iii) fridges and freezers;

(iv) carpets and floor coverings;

(v) curtains;

(vi) linen; and

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(vii) crockery and cutlery.

(l) Fixtures integral to the building which are not normally removed by the owner

if the property is sold are not included. This is because the replacement cost of such items would anyway be a deductible expense as a repair. Typical fixtures will be:

(i) baths and showers;

(ii) washbasins;

(iii) loos;

(iv) boilers; and

(v) fitted kitchen units.

(m) The amount of the relief will be the actual cost of the replacement (less any

proceeds from the sale of the old asset). If the replacement represents an improvement (for example, a washing machine is replaced by a washer-dryer), it will be necessary to deduct the cost of the improvement element from the replacement. Thus, if the washer-dryer cost £600 but the cost of buying a similar washing machine to the old one was £380, the replacement relief would be £600 – £220 = £380.

(n) Landlords will no longer need to decide whether their property is sufficiently

fully furnished in order to qualify for the 10% wear and tear allowance. Nor will they have to be concerned with whether the item being replaced is a fixture or not. This is all welcome news, except that the reason why the 10% wear and tear allowance came into existence many years ago was as an administrative simplification – it saved the landlord from having to keep detailed records of his actual costs! And it is now going.

5. Finance costs related to residential property businesses

(a) At present, landlords who receive rental income on residential property in the UK and elsewhere are entitled to full income tax relief for any finance costs such as mortgage interest incurred in connection with their property letting business. This is due to change for 2017/18 onwards.

(b) Cl 24 FB 2015 introduces a restriction on the deductibility of these expenses

and provides instead for a tax reduction for such costs, limited to the basic rate of income tax only. In the words of HM Treasury, this is to ‘ensure that landlords with higher incomes no longer receive the most generous tax treatment’. However, in order to give these individuals time to adjust, the legislation brings in the change over a four-year period.

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(c) With effect from 6 April 2017, landlords will be unable to deduct all their finance costs from their property income in order to arrive at a figure for their letting profits. This is to be phased in as follows:

(i) In 2017/18, the deduction from property income will be restricted to

75% of the finance costs, with the remaining 25% being available as a basic rate tax reduction.

(ii) In 2018/19, there will be a 50% finance costs deduction, with the other

50% given as a basic rate tax reduction.

(iii) In 2019/20, there will be a 25% finance costs deduction, with the other 75% given as a basic rate tax reduction.

(iv) For 2020/21 onwards, all finance costs incurred by a landlord will be

given as a basic rate tax reduction.

In addition to payments of mortgage interest, allowable finance costs include interest on loans to buy furnishings and white goods as well as fees incurred when taking out and repaying mortgages or loans. The full details relating to the progressive restriction of relief can be found in new S272A ITTOIA 2005 and the meaning of what FB 2015 terms the ‘costs of a dwelling-related loan’ is set out in new S272B ITTOIA 2005.

(d) As mentioned above, for 2017/18 onwards an individual will be able to claim a

basic rate tax reduction from his income tax liability on that part of his finance costs not deducted in arriving at his property letting profits. In practice, this tax reduction will be calculated as 20% of the lowest of:

(i) the relevant finance costs;

(ii) the profits of the property letting business for the tax year; or

(iii) the individual’s ‘adjusted total income’ for the tax year, ie. his total

income minus any savings and dividend income and after deducting his personal allowance.

Any unrelieved finance costs can be carried forward to the following tax year (and so on). This calculation is provided for in new S274A ITTOIA 2005.

(e) Note that none of these changes apply to the commercial letting of furnished

holiday accommodation (S272B(4) ITTOIA 2005).

(f) In order to prevent a well-advised individual sidestepping the rules described above by forming a partnership, there are similar restrictions to stop such a person taking out a loan to invest in a partnership for the purposes of a residential property business and claiming a tax deduction under S398 ITA 2007 (Ss399A and 399B ITA 2007).

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6. IHT and main residences

(a) Ever since George Osborne, when he was Shadow Chancellor, announced that the Conservatives intended to raise the IHT nil rate band to £1,000,000, there has been speculation as to how this might be achieved. Now we know. The main details are set out in Cl 9 FB 2015, although further legislation is promised next year.

(b) The first point to mention is that the standard nil rate band has been frozen at

£325,000 for three more years, ie. for 2018/19, 2019/20 and 2020/21 (Cl 10 FB 2015).

(c) The increase referred to in (a) above is to come about through the

introduction of an additional residence nil rate band when a home is passed on death to direct descendants of the deceased on or after 6 April 2017. The maximum amount of this new band will rise in stages to £175,000 in 2020/21 and any unused band will be transferable to a spouse or civil partner. There is also provision for a tapered withdrawal of the band for estates valued at more than £2,000,000. With this in mind, Cl 9 FB 2015 has inserted nine sections after S8C IHTA 1984. They are:

(i) S8D IHTA 1984 – extra nil rate band on death if interest in home goes

to descendants;

(ii) Ss8E and 8F IHTA 1984 – calculation of residence nil rate amount;

(iii) Ss8G, 8H, 8J and 8K IHTA 1984 – meaning of various terms used in new legislation;

(iv) S8L IHTA 1984 – claims for transferable allowances; and

(v) S8M IHTA 1984 – cases involving conditional exemption.

(d) New residence nil rate band

S8D(5) IHTA 1984 sets out the main parameters to be used in calculating the new residence nil rate band. It:

(i) states the maximum amounts of what the legislation calls the

‘residential enhancement’ for all years from 2017/18 onwards, ie:

– £100,000 for 2017/18;

– £125,000 for 2018/19;

– £150,000 for 2019/20; and

– £175,000 for 2020/21 and subsequent tax years;

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(ii) confirms that, where the value of a person’s estate (which takes its normal meaning of the assets less liabilities but before any reliefs and exemptions) is greater than a ‘taper threshold’ of £2,000,000, the residential enhancement will be withdrawn at the rate of £1 for every £2 by which the value of the estate exceeds the taper threshold; and

(iii) provides for the residential enhancement to be combined with any

unused residence nil rate band transferred from a spouse or civil partner to give a total residence nil rate band (or ‘default allowance’).

(e) The maximum amounts of the residence nil rate band and the taper threshold

are to be index-linked to the CPI for 2021/22 onwards, rounded up to the nearest £1,000 (S8D(6) – (8) IHTA 1984).

(f) Calculation of residence nil rate amount

S8E IHTA 1984 spells out the detailed rules for calculating both the amount of the residence nil rate band and the amount which can be transferred to a spouse or civil partner. These are the key points:

(i) The new regime only applies where a person’s estate includes a

qualifying residence and some or all of that property is left to one or more of the deceased’s direct descendants, ie. it is ‘closely inherited’. This term is widely defined – see S8K IHTA 1984 – and includes children, stepchildren, adopted children and foster children (plus their lineal descendants).

(ii) For estates valued at or below the taper threshold, where the value of

the residence passing is less than the deceased’s total residence nil rate band (ie. their default allowance), the amount of the residence nil rate band is limited to the value of that residence. Any unused excess is available for transfer to a spouse or civil partner. However, where the value of the property passing is greater than (or equal to) the default allowance, the amount of the residence nil rate band is the same as the default allowance. In this case, none of the residence nil rate band is available for transfer to a spouse or civil partner.

(iii) There are appropriate adjustments where the value of the estate is

greater than the taper threshold (so that the taper mechanism comes into play).

(g) Where an estate does not include a qualifying residence or where no part of

such a property passes to direct descendants, the new regime is not in point. However, any unused residence nil rate band can still be transferred to a spouse or civil partner (S8F IHTA 1984).

(h) Calculation of transferable residence nil rate band

S8G IHTA 1984 describes the rules for calculating the amount of any residence nil rate band which can be transferred to a person’s estate from

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their deceased spouse or civil partner. Broadly speaking, the procedure follows the principles laid down in S8A IHTA 1984 for ordinary transferable nil rate bands.

(i) No amount can be transferred unless a claim is made under S8L IHTA 1984

within two years from the end of the month in which the second spouse or civil partner died.

(j) Qualifying residences

S8H IHTA 1984 defines what qualifies as a residence for the purpose of this legislation. The main condition is that the deceased must have had an interest in a property which was occupied as that person’s residence when they owned it and which would have been part of their estate. If a person’s estate includes only one such property, that property will be the qualifying residence. Where a person’s estate includes more than one residence, it is up to the deceased’s personal representatives to make an appropriate nomination. In this context, a residence includes land which is occupied and used as the property’s garden or grounds. If the deceased lived in job-related accommodation and also owned a home which they intended to occupy in due course, that property can be treated as a qualifying residence.

(k) The following points should be noted:

(i) the property does not have to be the deceased’s principal private residence;

(ii) there is no restriction on the size of the garden or grounds attached to

the property (unlike the CGT rules); and (iii) it is sufficient that the property was at some stage the deceased’s

residence – it does not have to have been his residence throughout the ownership period.

For example, Jeremy returns to the UK to receive treatment for his terminal cancer. He ends the tenancy on his flat in Richmond (which he has owned and let out for 12 years) and lives in the flat for the last few months of his life. On Jeremy’s death, a residence nil rate band will be available.

(l) The Government recognise that these new arrangements might act as an incentive for the older generation to remain in homes which are bigger than they really need. In order to counteract this, those who downsize or sell their homes on or after 8 July 2015 will effectively be able to ‘bank’ the additional nil rate band for use against the remaining value of their estate when they pass a smaller home or equivalent value assets to a direct descendant. Precise details will be subject to a consultation which is due to take place later this year. The relevant legislation will be included in FA 2016.

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(m) Illustration 15

David died on 1 October 2016 at the age of 73. He left his entire estate to his widow, Sandra. The estate was valued at £1,280,000 and included David’s half-share of the couple’s home. This half-share was worth £425,000.

Sandra died on 1 July 2018 and left everything to their two sons equally. Sandra’s estate (including the assets which she inherited from David) was worth £2,050,000. The family home was valued at £980,000. What is Sandra’s IHT liability on the assumption that she had made no chargeable transfers in the seven years prior to her death?

David’s transferable nil rate bands are: £ Standard nil rate band 325,000 Residence nil rate band – 2018/19 figure used 125,000 ––––––– £450,000 –––––––

Because no part of David’s nil rate bands had been utilised on his death, the relevant percentage is 100%. Thus Sandra’s estate benefits from an additional nil rate band of 100% x £450,000 = £450,000.

Since Sandra’s estate exceeds the taper threshold of £2,000,000, her adjusted allowance is reduced by one half of the excess, ie. by £25,000. Thus Sandra’s nil rate band is:

£ £

Standard nil rate band (x 2) 650,000 Residence nil rate band (x 2) 250,000 Less: Excess 25,000

––––––– 225,000 ––––––– £875,000 –––––––

In other words, the IHT on Sandra’s death estate is: £

On 0 – 875,000 = 875,000 @ 0% – On 875,000 – 2,050,000 = 1,175,000 @ 40% 470,000

––––––– £470,000 –––––––

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(n) An important concern about the £2,000,000 taper threshold is to be mindful of the effect of ‘bunching’.

(o) Illustration 16

On Thomas’ death in May 2020, he leaves his entire estate (worth £1,320,000) to his wife, Catherine. Included in Thomas’ assets is a half-share in the family home which is valued at £500,000. There is no IHT to pay on Thomas’ death. Catherine dies in December 2021 and her total estate is then worth £2,500,000 so that no benefit can be taken of the residence nil rate band (including the amount which was unused by Thomas). Contrast the position if Thomas had left his interest in the property to his son, in which case the total nil rate band available to him (£325,000 + £175,000 = £500,000) would still have prevented an IHT charge, but his residence nil rate band would not have been wasted.

(p) Conclusion

While this relief will increase the number of homes which can be passed tax-free to the younger generation, the detail, particularly around the proposals for those who sell or downsize, adds considerable further complexity to the IHT code. Since, for many taxpayers, their most valuable asset will be their residence, one cannot help but wonder why the Chancellor has not chosen a more straightforward alternative by simply extending the nil rate band for all assets.