NewsletterWinter 2013/14

Private Residence Relief

If the house you occupy as your main home has land attached it is important to consider how capital gains tax (“CGT”) on any subsequent sale might be reduced. The means of achieving this is Private Residence (“PR”) Relief but it is unwise to assume that PR Relief and the CGT exemption will automatically apply.

PR Relief is applicable where a homeowner has used the dwelling-house as their principal residence from the date when occupation was fi rst taken, or from 31 March 1982, whichever is the later. PR Relief applies on the house, its outbuildings and grounds and is generally limited to a maximum area of 0.5 hectare (1.23 acres). This area can be extended if it can be shown that a larger area is required for the ‘reasonable enjoyment of the property’ taking into account its size and character.

HM Revenue & Customs will consider the layout of the garden and grounds and it is important to demonstrate, as far as possible, that the gardens have long been

integral to the enjoyment of the property. Relief might be restricted where there are boundaries on the land such as walls or fencing, and experience shows that photographs of the house and active use of the land attached is persuasive evidence should HMRC choose to query a claim.

The extent of the dwelling house has been tested in the courts and it is possible for outbuildings to be eligible for PR Relief where they are integral to the ‘enjoyment’ and practical running of the main house.

It is essential for individuals to take tax advice on PR relief where circumstances might result in full relief being unavailable.

Private ClientWelcome to the second edition of our private client newsletter. I hope you fi nd something of interest to you. The Chancellor delivered his Autumn Statement on 5 December and whilst there was not a great deal of detail in his announcements, there was one change announced which will be of concern to many. This change was in respect of private residence relief for capital gains tax purposes, where the Chancellor announced that the fi nal period exemption will be reduced from 36 months to 18 months with effect from April 2014; although for the disabled and those in long term care, the exemption will remain at 36 months. Should you need advice in respect of this, or anything else covered in this newsletter, please contact us.

Steve CollinsHead of Tax

However, some individuals may have chosen to hold shares through an intermediary to protect their involvement from a company being known, or for other good reasons. New rules are being introduced to force companies to reveal who really owns the shares. Only limited exemptions from public disclosure will be permitted, for example in cases where it might be necessary to protect individuals whose safety might be at risk. Consequently, benefi cial owners of more than 25% of a UK company’s shares or voting rights, and those who “otherwise exercise control” over a company, should be aware that, at some point in the near future, their identity is likely to be disclosed on this new public register.

The plans will require companies to supply information about their benefi cial owners to a central registry, to be maintained by Companies House. What information must be held by the company and reported to Companies House, and how it should be updated, is yet to be confi rmed. However, the government will potentially use as a model the disclosure regime that currently applies in relation to information on company shareholders. This would mean that companies would declare and Companies House would hold – and make publicly accessible – the names of the benefi cial owners and details of their interest in the company.

For most private companies and their owners, this new public disclosure regime should be an additional but easily achieved reporting requirement. But for more complex corporate structures, including those involving overseas entities, it may be more time-consuming and diffi cult to manage. Conversely, making this new register public will be welcomed by campaigners for greater corporate transparency. For law enforcement and tax authorities, it should provide additional information that can be used to combat tax evasion, corruption and money-laundering.

David Cameron has announced plans to create a central registry of who really owns and controls UK companies which will be open to the public for scrutiny, not just the tax authorities, in a continuing effort to deter tax evasion.

Public register of companies’ benefi cial owners

Most readers will be familiar with the fact that one of the most effective forms of Inheritance Tax (“IHT”) planning is to make a lifetime gift and to live for at least seven years. Many people try to minimise their IHT bills by giving away an interest in property, however this can provide traps for the unwary.

If the donor can continue to benefit from the property then this is known as a ‘gift with reservation’. The gift is effectively ignored for IHT purposes. This can cause particular problems for gifts of property.

However, there is a statutory exemption from reservation of benefit where the recipient either shares the occupation of the property with the donor (provided that the costs of ownership are either shared or paid exclusively by the donor) or where the donor pays a full market rent for their share. If done properly and with careful planning this can be a very useful exemption.

Let’s contrast two examples:

1. Vera owned a property worth £600,000. In 2003 she gifted a 50% share to her son Terry who lived in the property with her. Vera continued to pay all of the running expenses. Vera died in 2012 owning no other assets.

Because of this exemption the only asset in her estate is a half share of the house worth £300,000. This is below the inheritance tax threshold of £325,000 and so no inheritance tax is due.

2. Dot owned a property worth £600,000. In 2003 she gifted a 50% share to her son Nick.

Nick never lived in the property and Dot never paid him any rent. Dot died in 2012 owning no other assets.

Because Nick never lived in the property nor received any rent from Dot, the exemption is not available. Dot is treated as having reserved a benefit in the property and inheritance tax of £110,000 will be due.

A further helpful factor is that ‘occupation’ does not require full time occupation, but could be something more limited. This would need careful consideration in each case.

This can be very useful planning and can save considerable amounts of inheritance tax. However, it is vital to ensure that proper professional advice is taken so that all of the potential traps (and there are many) are considered.

When is a gift not a gift?

On the trail

Intermediaries include advisers, fund managers, fund platforms, brokers and any other person acting as an intermediary between the fund and the investor. Payments that will be caught under the new arrangements include loyalty bonuses, incentives, discounts and refunds of fund management fees that are paid under a legal obligation and are of a recurring nature. Such payments include those that are used to meet the liabilities of, or provide a benefi t to, the investor, or are paid in the form of additional units.

Taxable trail commission in this context can arise from investment products such as life assurance,

shares or units in collective investment schemes and unit trusts, investment trust saving schemes, offshore bonds and SIPPs.

It has always been understood by the tax profession and by the fi nancial services industry that such trail commission was not taxable. Indeed HMRC in their note go on to say that they have no record that the matter has been considered by it previously, but confi rm it will not seek income tax on such payments for periods prior to 6 April 2013.

However, under new rules relating to the fi nancial services industry, the Retail Distribution Review (“RDR”), it

is no longer possible for intermediaries to make such annual payments arising from new business, although payments will continue for some time under pre-RDR contracts.

HMRC confi rm in their note that payments made by Individual Savings Accounts (“ISA”) managers to an ISA account, and those made to a SIPP and reinvested within the SIPP, are exempt under these rules.

It is advisable to discuss the matter with a tax and fi nancial adviser if you believe that this change applies to you as entries may be required on your tax return in respect of it.

HM Revenue & Customs (“HMRC”) surprisedmany by issuing guidance in April 2013, arisingfrom changes to the fi nancial services industry, advising that the receipt of annual payments of commission from intermediaries should be subject to income tax.

Such trail (or renewal) commission, as it is known, will from that date be subject to deduction of income tax at the basic rate by the payer. Any higher or additional rate income tax will need to be paid under the self-assessment regime by including the gross payment received and income tax deducted at source in the recipient’s tax return.

Francis Clark LLP is a limited liability partnership, registered in England and Wales with registered number OC349116.The registered offi ce is Sigma House, Oak View Close, Edginswell Park, Torquay TQ2 7FF where a list of members is available for inspection and at www.francisclark.co.uk.The term ‘Partner’ is used to refer to a member of Francis Clark LLP or to an employee or consultant with equivalent standing and qualifi cation.

This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specifi c professional advice should be obtained before acting on any of the information contained herein. Whilst Francis Clark LLP is confi dent of the accuracy of the information in this publication (as at the date of publication), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.

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