Company Tax planning

Company

Reorganisation

Company A Limited owned an asset worth a substantial amount. The asset was in a company in which the owners were involved in entrepreneurial ventures. The directors were looking to continue with their speculative business ventures yet wanted to protect the asset from the commercial risk.

Comment: Shipleys Tax undertook a group reconstruction which resulted in the asset being transferred to another entity without any immediate tax liability to the company or its shareholders.

Partial Sale

Company X Group Limited was looking to sell off two subsidiaries to a buyer in exchange for shares. With the structure the client had in place, the sale of the two companies would have resulted in a tax liability of around £1.8 million on a paper gain and also caused the shareholders to lose favoured tax status.

Comment: Shipleys devised a group reorganisation which resulted in the two companies being sold with no immediate tax liability to the group or its shareholders.

Share schemes

Company Y Limited wished to reward and tie in employees. Bonus schemes were expensive and arbitrary and caused cash constraints.

Comment: Shipleys implemented a tax efficient share scheme arrangement. This achieved the client’s objectives and also gave the founder shareholders the opportunity to establish an alternative exit strategy.

Parallel companies

Company A Limited had a very complex company structure comprising of a number of non-trading intermediate holding and parallel companies which served no particular purpose and was not a tax efficient structure. The structure had arisen as a result of a piecemeal acquisitions and shareholder changes which was administratively difficult to manage. The parallel companies were related and had numerous inter company loans which the directors wanted to make tax efficient.

Comment: Shipleys implemented a tax efficient group reorganisation and put measures into place which would enable them to take full control of their inter company loans with minimal tax consequences.

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UK Inheritance Tax – Changes which affect Non residents

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From 6 April 2017 a UK residential property will now be subject to UK Inheritance Tax regardless of ownership structure and residence or domicile status of the ultimate owner.

Who will be affected?

The new rules will affect all non-UK domiciliaries and the trustees of trusts they have established who hold an interest in an offshore structure which derives its value from:

  • a UK residential property;
  • loans (is provision applies to all loans not just those between connected parties) used to acquire, maintain or improve UK residential property; or
  • collateral for such loans or who have thereunder made or provided collateral for such loans.

    Which assets are relevant?

    The new legislation imposes an inheritance tax charge on three categories of property:

    Interests (e.g. loans or shares) in closely held companies which derive, directly or indirectly, their value from UK residential property. The interest in the parent company will still be caught even if there is a chain of companies underneath before you get to the residential property. However, if any of the companies is widely held (for example a real estate fund), this will not be caught.

    An interest in a partnership, the value of which is directly or indirectly attributable to UK residential property. Unlike companies, it does not make any difference how many partners there are and whether or not they are connected. A real estate fund which is structured as a partnership will therefore fall within the new rules.

    The benefit of loans made to enable an individual, trustees or a partnership to acquire, maintain or improve a UK residential property or to invest in a close company or a partnership which uses the money to acquire, maintain or improve UK residential property.

To avoid back-to-back lending arrangements, assets used as collateral for such a loan will also be subject to inheritance tax under the new rules.

An interest in a close company, or a partnership which holds the benefit of the debt or the assets which are used as collateral, are also caught.

UK residential property

The rules will apply where the shares’ (or other interest’s) value is attributable to any UK residential property, whether that property is occupied or let and whatever the property’s value (subject to limited exceptions such as care homes). A property which is being constructed or adapted for residential use will be treated as UK residential property.

The rules will not apply to the extent that the asset’s value is derived from commercial property. It is to be welcomed that previous proposals to include a property which had had a residential use at any time in the last two years have been dropped. Rather, it will simply be the use of the property at the time that the IHT charge arises that will be relevant.

Legislation is still awaited for properties used for both residential and non-residential purposes. Based on the 2016 consultation paper this will be on an apportionment basis.

Value subject to IHT and debts

Where an IHT charge arises on shares etc. under the new rules, the IHT liability will be calculated on the open market value of the shares (or other interest) to the extent that their value is attributable to UK residential property. In determining the value of an interest in a close company, the liabilities of the close company will be attributed to all of its property pro rata. The liabilities attributable to the residential property will be deductible in determining the value within the scope of IHT.

Under the original proposals, debts that related exclusively to the property were to be deductible when calculating the value for IHT purposes, unless the borrowing was from a connected party. In response to concerns that this could result in a double IHT charge, the Government’s solution contained in the legislation and other documentation published on 5 December 2016 is to treat any debt used to finance the acquisition, maintenance or repair of UK residential property as an asset subject to IHT in the hands of the lender, with look through provisions where the lender is itself a non-UK close company or partnership. Similarly, any security or collateral for such a debt will be within the scope of IHT in the estate of the provider of the security.

Whilst this removes the potential for double counting, it would appear to defeat certain IHT mitigation options which the Government previously appeared to accept when the provisions relating to debts were revised in 2013. The application of these rules to debts, whenever created, seems unduly harsh and a restriction to debts created after 19 August 2016 (when an iteration of the provision was first announced), if not to commencement date, would be welcomed.

Two year tail

Newly included in the 5 December 2016 draft legislation are provisions such that following sale of close company shares or partnership interests which would have been within the scope of the new IHT rules, or indeed repayment of a lender’s loan, the consideration received (or anything which represents it) will continue to be subject to IHT for a two year period following the sale or repayment. This appears to be a provision introduced to combat specific anticipated avoidance. However it will, as drafted, have a wider effect and give rise to an IHT charge in normal commercial situations even where UK residential property is no longer held.

Targeted anti-avoidance rule

Any arrangements whose whole or main purpose is to avoid or reduce the IHT charge on UK residential property will be disregarded. This anti-avoidance provision is extremely widely drawn.

If you are affected by any of the above and for advice and guidance on what actions you should take next please contact us on iht@shipleystax.com or 0114 275 6292.

The above is not intended to be advice, we strongly recommend professional advice is sought before taking any action.

Taxman’s spy computer checks your Facebook posts

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What with cyber-snooping being all the rage these days it seems the taxman is getting in on the act too.

HM Revenue & Customs has now fully unleashed its super-computer, costing over £100m and many years to make, to identify those who may have paid too little tax.

The powerful system, benignly dubbed “Connect”, now automatically gathers information from a myriad of government and corporate sources to create a detailed profile of each taxpayer’s financial position. Where this differs from the information provided by the taxpayer, the account is flagged up and subject to further possible investigation.

Connect now automatically collects information from over 30 databases, covering details of taxpayers’ salaries, bank accounts, loans, property and car ownership..

 The system’s data-hoarding does not just stop at the income people have received from work and investment. It also amasses data from the digital footprint left by taxpayers online.

 It collates data from diverse sources such as Airbnb and eBay, as well as obtaining anonymised information on all Visa and Mastercard transactions, enabling it to identify areas of likely underpayments which it can then target further.

HMRC also has powers to request one-off bulk data from third parties where there may be particular cause for concern. Insurance companies, hospitals and dentists supplied information to assist with the Tax Health Plan, for instance.

For those with investment properties, it can also access Land Registry records to see houses purchased/sold to check against information on a tax return. In addition, further sources enable it to determine if properties are being rented out and whether that income has been declared. Crucially, it can also determine if someone is likely to be able to afford such properties, or whether they are suspected of having used previously undeclared income or savings.

Particularly striking is the gathering of information from social media. HMRC are now monitoring online posts about holidays, parties and purchases. They may wish to ask questions where they do not feel lifestyle fits with an individual’s reported income.

The tax profession has raised concerns that HMRCs growing reliance on automated systems could mean an increasing number of innocent taxpayers facing investigation. Whilst many of the leads generated by Connect’s data collection maybe worth following up, a proportion will be unfounded causing unnecessary stress and anxiety to those targeted. A surface analysis of data or online information could quite easily lead to misinterpretation. An exaggeration over twitter or Facebook, for example, could paint a highly inaccurate picture resulting in false leads.

Shipleys Tax has many years of protecting taxpayers and succeeding in tax investigations with HMRC, if you need help please contact us 0114 275 6292 or email info@shipleystax.com.

 

What HMRC can find out about you

  • UK & overseas bank accounts, pensions: From 2017 HMRC will receive information from banks in more than 60 countries.
  • Web browsing and email records: Under the ‘Snoopers Charter’ HMRC will be able to access individual’s digital information
  • Property sites -adverts on the internet e.g. Rightmove and Zoopla
  • Land Registry records: To determine properties purchased, stamp duty paid and capital gains tax
  • Earnings: From any employer, including those you have worked for casually, or on an ad-hoc basis. This includes any company benefits received. It can also access child benefit and maintenance payments through the child support agency
  • Internal tax documents: Systems show council tax paid, relevant VAT registration, previous tax investigations, last year’s tax return (or absence of one)
  • Visa and Mastercard transactions: Anonymised information on all payments
  • DVLA: Details of cars purchased and owned by individuals
  • Online marketplaces: Websites such as eBay and Gumtree can be accessed to weed out regular traders
  • Social media: The Connect system can also look at public social media account information, including from Twitter, Facebook and Instagram

 Connect cross-references information from many other UK government databases, including:

  • Council tax
  • Companies House
  • DWP (former Benefits Agency)
  • The electoral roll
  • Gas Safe Register
  • Insurance companies

HMRC also independently looks at Google Earth.

 

Claiming Child Benefit could mean you get more State Pension?

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If your child is under 12 and you’re not working or don’t earn enough to pay National Insurance contributions, Child Benefit can help you qualify for National Insurance credits.These credits count towards your State Pension. They protect it by making sure you don’t have gaps in your National Insurance record.

Retirement may be the last thing on your mind when you’re looking after a new baby, but what you do now could have a big impact on your future finances.

Despite what you might think, no one automatically gets the full amount of State Pension when they retire. You’ll only get the full amount if you’ve paid, or been credited with, National Insurance contributions for 35 years.

The key word here is ‘credited’. Even if you’re not working while looking after your baby, you’ll get National Insurance credits when you claim Child Benefit until your youngest child is 12. The credits are automatically added to your National Insurance account when you claim Child Benefit, so you don’t need to do anything.

For more information please contact us on 0114 275 6292 or info@shipleystax.com.

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