Some tax enquiry cases…

IN DIFFICULT FINANCIAL times, many naturally look to put their affairs in order in case the worst happens. In such testing times many fall into tax traps without realising. One of most common misconceptions we come across here at Shipleys Tax is individuals transferring interest in properties to a spouse, child or relative in the belief that so long as no money has changed hands it must be tax free, right?

Wrong. As with most things in life, it’s not that simple, unfortunately. Although it is possible in certain circumstances to transfer assets between spouses tax free, giving a property to children or other family members may trigger an unwelcome tax bill, even if nothing was received it return.

In today’s Shipleys Tax note we briefly look at what tax traps could lay in wait for the unsuspecting person looking to organise their property affairs.

Family connections and market value 

The problem is that the legislation does not respect family connections. So, where an asset is transferred (or disposed) to a “connected person”, the transfer is deemed to take place at market value, regardless of whether any consideration is actually received and the amount of that consideration.

Although it is possible to transfer assets between spouses tax free, giving a property to children or other family members may trigger an unwelcome tax bill, even if nothing was received it return.

So, who are connected people? The list of connected persons includes:

• spouses and civil partners;
• relatives (siblings, ancestors or lineal descendants);
• spouse or civil partners of relatives; 
• relatives or spouses or of civil partners; and
• spouses or civil partners of those relatives.

However, as noted above, the tax-free transfer rule applies to transfer between spouses and civil partner rather than the market value rules. 

The following case study illustrates the potential cost of being caught out by the market value rule.

Case study

Adam has a buy to let property. To help his daughter to get on the property ladder, he decides to make a gift of the property to her. He receives nothing in exchange for the property.

At the time that he gifted the property to his daughter, the house was valued at £300,000. 

Adam purchased the property ten years earlier for £200,000. Costs of acquisition and disposal are £5,000.

However the tax-free transfer rule applies to transfer between spouses and civil partner rather than the market value rules. 

As his daughter is a connected person, Adam is deemed to have disposed of the property for £300,000, giving rise to a chargeable gain of £95,000 (£300,000 – (£200,000 + £5,000)).

Assuming Adam is a higher rate taxpayer and has used his annual exempt amount already, this will give rise to a capital gains tax bill of £26,600 (£95,000 @ 28%). This must be reported to HMRC within 30 days and capital gains tax paid within the same time frame.

Despite not receiving a penny for the property, Adam must find £26,600 to pay in capital gains tax!

Family Tax Planning?

However, with careful planning Adam may have been able to transfer the property to his daughter potentially tax free. There are planning options available in the right circumstances using a trust arrangement or an LLP/company structure to mitigate or at the very least defer some of the tax payable.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

IF YOU JOINTLY own property with family, an LLP might be the most tax-efficient way to run your property business, especially if you have a differing income split. In today’s short article Shipleys Tax explains some of the basic tax advantages in using an LLP.

What is an LLP?

A limited liability partnership (LLP) can be used for a property business and offers some advantages over unincorporated businesses and limited liability companies. A property LLP is something of a halfway house, providing the comfort of limited liability with the flexibility as to how profits are shared.

The use of a property LLP can be particularly useful in a family tax planning situation where the individuals each hold property in their own name, but a different income split would be beneficial from a tax perspective.

Setting up a property LLP

Like a company, a property LLP must be registered at Companies House.

An LLP can hold property in its own right. The LLP can acquire property or the partners can transfer property that they already own into the LLP.

The use of a property LLP can be particularly useful in a family tax planning situation where the individuals each hold property in their own name, but a different income split would be beneficial from a tax perspective.

Transferring property into the LLP can be advantageous from a tax perspective. The property is held on trust in the LLP, but the underlying legal ownership is unchanged, meaning there is no SDLT to pay. Where a member transfers property into the LLP, the value of that property at the time of transfer forms the opening balance on their equity account.

Flexibility to share profits and losses

One of the key benefits of the LLP is the flexibility to share profits and losses. This provides the potential for a tax efficient distribution.

Where a property is sold realising a gain, the individual partners pay capital gains tax on their share of the gain.

The default position is to share profits and losses in accordance with the ratios on the members’ capital accounts. However, the ability to pay salaries in a different ratio provides flexibility to tailor the distribution in a tax efficient manner. Providing or withdrawing capital will also change the default profit sharing ratio.

Tax position

From a tax perspective, an LLP is transparent for tax purposes.

This means that the individual partners are treated as being self-employed and must pay income tax on their share of the profits, and also Class 2 and Class 4 National Insurance contributions where relevant.

Where a property is sold realising a gain, the individual partners pay capital gains tax on their share of the gain.

Each individual partner must return their income from the LLP on their personal tax return. The LLP must file a partnership return.

It is important that the LLP is carried on with a view to making a profit as anti-avoidance rules may apply which have the effect of switching the tax transparency off.

If you are affected by any of the issues above or would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.

MANY BUSINESSES have been forced to close as a result of the national and local restrictions introduced to slow the spread of Coronavirus. Where this is the case, the business may be eligible for a grant from their local authority. In today’s Shipleys Tax note we look at some options currently available for struggling businesses.

The following grant support is available to businesses in England during the second national lockdown. Grants to businesses in Wales, Scotland and Northern Ireland are subject to devolved rules.

Businesses closed due to national retractions

Business that were previously open as usual, but which were required to close between 5 November 2020 and 2 December 2020 as a result of the second national lockdown in England may be eligible for a grant from their local council for the 28-day period for which the national lockdown applies.

A business may qualify for a grant if it meets the following conditions:

• it is based in England;
• it occupies premises in respect of which it pays business rates;
• it has been required to close between 5 November 2020 and 2 December 2020 as a result of the national lockdown; and
• it has been unable to provide its usual in-person service from those premises as a result.

Businesses that qualify may include non-essential shops, leisure and hospitality venues and sports centres.

Business that normally operate as an in-person venue but which have had to modify their services as a result of the lockdown also qualify. An example here would be a restaurant that is not allowed to provide eat-in dining but which stays open for takeaways.

Businesses are only entitled to claim one grant for each non-domestic property.

Amount of the grant

The amount of the grant is based on the rateable value of the business premises on the first day of the second national lockdown.

Where the rateable value of the business premises is £15,000 or less, the business will receive a grant of £1,334 for each 28-day period for which the restrictions apply.

Where the rateable value of the business premises is between £15,000 and £51,000, the business will receive a grant of £2,000 for each 28-day period for which the restrictions apply.

Where the rateable value of the business premises is £51,000 or above, the business will receive a grant for each 28-day period for which the restrictions apply.

Applications should be made to the local council following the application procedure on the relevant council’s website.

Excluded businesses

A business is not eligible for a grant if it can continue to operate during the restrictions because the business does not depend on providing in-person services from their premises. Businesses that would fall into this category would include accountants and solicitors.

Businesses that are not required to close, but which choose to, are also ineligible for a grant.

A business which has exceeded the permitted state aid limit – set at €200,000 over a three-year period – is not eligible for further funding but may qualify for help under temporary Covid-19 measures.

Local restrictions

Where local restrictions are in force, businesses may qualify for separate grants if they are either forced to close or, where they can remain open, their business is severely impacted as a result of those restrictions. Details of the grants available where local restrictions apply can be found on the Gov.uk website.

If you are affected by any of the issues above and would like more information, please call 0114 272 4984 or email info@shipleystax.com.

Please note that Shipleys Tax do not give free advice by email or telephone.