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THE UK HAS some of the most complex and voluminous tax legislation in the world, making it all too easy for taxpayers to miss out on valuable reliefs simply because they assume they will be applied automatically. Imagine losing thousands—if not millions—of pounds in tax relief, not because you didn’t qualify, but because you didn’t know how to claim it correctly. Taxpayers often assume that tax reliefs, especially valuable ones, will automatically apply to their financial situation.

In today’s Shipleys Tax brief we look at how misunderstanding tax laws can lead to missed opportunities and financial setbacks and how failing to actively manage and claim tax reliefs can result in costly mistakes using some basic case studies.

(NB: All rates and allowances are as at date of the article.)

The Importance of Actively Claiming Tax Relief

Tax reliefs (such as Business Property Relief (BPR), Capital Gains Tax (CGT) relief, Income Tax reliefs, and Inheritance Tax (IHT) reliefs) can significantly reduce a taxpayer’s liability. However, they are not automatically applied, and taxpayers must ensure they meet specific criteria, actively make claims, and regularly review their tax position to avoid unexpected pitfalls.

Case Study 1: Tribunal Denies Business Property Relief (BPR) Claim

Business Property Relief basics

In the right circumstances Business Property Relief (BPR) allows for the reduction or complete elimination of Inheritance Tax (IHT) on the value of business assets when they are passed on as part of an estate. This relief typically applies to businesses that are trading and do not have the hallmarks of investment trade, the aim being to help protect businesses from being dismantled to pay inheritance taxes.

…taxpayers must ensure they meet specific criteria, actively make claims, and regularly review their tax position to avoid unexpected pitfalls.

Background

A family-owned restaurant that has been actively trading for over a number of years would generally qualify for full BPR, meaning that if the owner passes away, the restaurant’s value would not be subject to IHT when transferred to the owner’s heirs. This ensures that the business can continue without needing to be sold to cover tax liabilities.

The Pitfall: Mrs T’s Fishery Business

In a recent case, Mrs T who had operated a fishery business for 17 years, saw her Business Property Relief (BPR) claim denied by the First-tier Tribunal. The fishery, initially run by her late husband, was once a profitable business involving the stocking of fish. However, after regulatory changes, the business shifted to maintaining a wild fishery with minimal services offered to customers. The tribunal concluded that the business had transitioned into one primarily holding land for investment purposes rather than operating a trading business, disqualifying it from BPR.

Key Takeaway: Regularly review your business model. A shift in business activities or external factors can result in your business being viewed differently for tax relief purposes. In Mrs Pearce’s case, the absence of services like tuition or equipment hire meant the business was classified as an investment, not an active trade.

Case Study 2: Denial of Entrepreneurs’ Relief (ER) on Property Sale (CGT)

Entrepreneurs’ Relief basics

Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) allows individuals to pay a reduced rate of Capital Gains Tax (CGT) of 10% when selling a qualifying business or shares in a trading company, up to a lifetime limit of £1 million. This relief is designed to incentivise business owners and entrepreneurs by lowering the tax burden on the sale of their business.

Background

If a small business owner sells their trading company for £500,000, under Entrepreneurs’ Relief, they would only pay a 10% CGT rate on the sale, rather than the standard rates of 20%. This could result in a significant tax saving of £50,000.

The Pitfall: Denial of Entrepreneurs’ Relief on Property Sale

In another case, a property developer sought to claim Entrepreneurs’ Relief on the sale of a commercial building. The developer believed that the building, held within his trading company, qualified for the relief under Capital Gains Tax (CGT) rules. However, upon review, it was determined that the building had been rented out for several years, and the income from this rental activity was considered non-trading. As a result, the company was no longer classified as a trading company for CGT purposes, and Entrepreneurs’ Relief was denied.

Key Takeaway: Ensure that qualifying conditions are maintained with regular monitoring, usually a good accountant will see to this on an annual review. Entrepreneurs’ Relief is only available if a company is trading. In this case, the shift to generating rental income changed the company’s classification, leading to loss of relief and a significant tax liability.

Ensure that qualifying conditions are maintained with regular monitoring, usually a goods accountant will see to this on an annual review.

Case Study 3: IHT Agricultural Property Relief (APR) Disallowed

Agricultural Property Relief basics

Agricultural Property Relief (APR) allows for up to 100% relief from Inheritance Tax (IHT) on agricultural property, such as farmland, farm buildings, and growing crops, when it is passed on as part of an estate. The goal is to preserve the value of agricultural businesses by reducing or eliminating the IHT burden, ensuring that the business can continue without disruption.

Background

A farmer who owns £1 million worth of farmland can pass that land on to their children with no Inheritance Tax liability, as long as the land qualifies for APR. This can save the heirs up to £400,000 in IHT.

The Pitfall: Agricultural Property Relief Disallowed

A recent IHT case involved a claim for Agricultural Property Relief (APR) on farmland that had been used for grazing cattle. The owner believed the land qualified for relief as agricultural property. However, the tribunal ruled that since the land had not been actively farmed for several years and was primarily used for renting out grazing rights, it did not meet the strict criteria for APR. Consequently, the estate was subject to inheritance tax on the full value of the land.

Key Takeaway: Again as above active farming and monitoring through compliance reviews is critical for APR qualification. Landowners must demonstrate ongoing agricultural use to qualify for this relief. A shift to passive income from land rental, even if it involves agricultural activities, can disqualify an estate from APR.

Conclusion: The Importance of Regular Tax Review

Taxpayers should not assume that valuable tax reliefs will automatically apply or continue to apply without a thorough review of their financial and business activities. Whether it’s Business Property Relief, Capital Gains Tax relief, or Inheritance Tax relief, the rules are intricate, and failing to meet the conditions can lead to substantial tax liabilities. To maximise tax savings, it’s crucial to stay informed, maintain the correct business structure, and consult with tax professionals to ensure ongoing eligibility.

By staying proactive, taxpayers can avoid the costly mistake of missing out on significant tax reliefs.

For further assistance or queries, please contact us.

Leeds: 0113 320 9284 Sheffield: 0114 272 4984

Email: info@shipleystax.com

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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WITH CRYPTO NOT going away anytime soon, HM REVENUE & CUSTOMS (HMRC) is writing to individuals who may need to pay tax on the disposal of cryptoassets such as Bitcoin.

These letters – known as “nudge letters” – which began circulating in August 2024, are part of a broader initiative to address underreported income related to digital assets, urging taxpayers to voluntarily disclose any outstanding liabilities before facing more serious repercussions.

In today’s Shipleys Tax brief overview, we take a look at HMRC’s latest crackdown on crypto investors through these targeted nudge letters aiming to reinforce the message that crypto investors must remain tax compliant and dispel the widespread misconception that using cryptocurrency is a loophole to hide wealth from the taxman. So, why might tax be due and what should you do if you receive a letter?

… to reinforce the message that crypto investors must remain tax compliant and dispel the widespread misconception that using cryptocurrency is a loophole to hide wealth from the taxman.

Understanding the Nudge Letters

The recent nudge letters specifically target individuals who may have disposed of cryptocurrency assets without fully declaring the resulting gains. These letters, which are based on data obtained from major crypto exchanges, warn that failure to disclose could lead to additional tax liabilities, including Capital Gains Tax (CGT) or Income Tax, as well as interest on late payments and significant penalties. A larger wave of these letters is expected to follow in September, as HMRC seeks to intensify its focus on this area.

Common Reasons for Underreporting Crypto Gains

One of the main reasons why many cryptocurrency gains go unreported is the complexity surrounding the tax treatment of digital assets. HMRC generally considers the profit or loss from buying and selling cryptocurrencies as subject to Capital Gains Tax. However, many investors are unaware that certain actions are considered taxable events. For example:

• using cryptocurrency to purchase goods or services
• exchanging one type of cryptoasset for another; or
• gifting cryptoassets.

In certain circumstances, income tax and NI may be payable.

These letters, which are based on data obtained from major crypto exchanges, warn that failure to disclose could lead to additional tax liabilities

Additionally, the constantly evolving nature of the cryptocurrency market, combined with the relative novelty of these assets, has left some investors unsure of their tax obligations. Misconceptions, such as the belief that holding assets in crypto without converting them to fiat currency exempts them from tax, further contribute to non-compliance.

Options for Voluntary Disclosure to HMRC

If you receive such a letter from HMRC, you must take action within 60 days even if no tax is due. If you submitted a tax return, the return should be amended where possible. If you did not submit a tax return, or the deadline has passed, you should use the dedicated Cryptoasset Disclosure Facility (CDF)to inform HMRC. 

While the CDF was specifically designed for cryptocurrency owners, there are other disclosure routes which might be more appropriate depending on individual circumstances:

1. Contractual Disclosure Facility (CDF) – This facility offers protection from prosecution for those making full disclosures of deliberate tax fraud, making it a critical option for those concerned about potential criminal liability.

2. Worldwide Disclosure Facility (WDF) – Suited for individuals with offshore holdings, the WDF allows for the disclosure of unpaid taxes on global assets.

3. Digital Disclosure Service (DDS) – Best for UK-based holdings or when multiple tax issues, such as inheritance or corporation tax, are involved.

If you receive such a letter from HMRC, you must take action within 60 days even if no tax is due.

These disclosure options allow taxpayers to notify HMRC of their intent to disclose and provide a 60-90 day window to make full disclosures and settle any outstanding liabilities. This flexibility is especially useful for addressing multiple tax issues at once, which is often the case with complex financial situations.

Take Prompt Action – Choose The Correct Disclosure Option

Receiving a nudge letter from HMRC should not be taken lightly. Whether you believe your tax filings are complete or suspect there may be discrepancies, it is crucial to act quickly. Consulting a tax adviser can help you choose the correct disclosure option and potentially reduce penalties.

Please note that Shipleys Tax do not give free advice by email or telephone. The content of this article is for general guidance only and should not be considered as tax or professional advice. Always consult with a qualified professional before taking action.

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CONTINUING WITH OUR focus on people pondering a life overseas as the UK faces a period of socio-economic upheaval, combined with the increasing cost of living and increasing tax burdens, in today’s Shipleys Tax brief we have a quick look at the upcoming changes to much maligned non-Dom tax status.

What exactly is Non-Domicile (Non-Dom) Status in the UK?

Non-domicile, or non-Dom status, is broadly a rule that allows individuals who have their permanent home (domicile) outside the UK to benefit from favourable tax treatment. If you are a non-Dom, you can choose to be taxed on a “remittance basis”, meaning you only pay UK tax on the income and gains you bring into the UK, not on your worldwide income or assets.

Domicile of Origin and Tax Planning – Domicile of origin refers to a concept that a UK based person can have another country as their “domicile’, usually based on their father’s domicile if the parents are married or their mother’s if not. For tax purposes, having a non-UK domicile of origin was used to reduce Inheritance Tax (IHT) liabilities by excluding assets from UK tax. Accordingly, individuals with non-UK parents can utilise their “domicile of origin” to reduce their tax liabilities, especially regarding Inheritance Tax (IHT).

For tax purposes, having a non-UK domicile of origin was used to reduce Inheritance Tax (IHT) liabilities by excluding assets from UK tax.

Budget Changes and Their Impact

The UK government announced, quite belatedly, significant changes in the Spring Budget 2024, set to take effect from April 2025. These changes will replace the domicile-based system with a residence-based tax system. Under the new rules:

• Abolition of Non-Dom Status – The concept of domicile will no longer determine tax liability. Instead, the tax regime will shift to a residence-based system. This means individuals will be taxed based on their UK residence rather than their domicile status​.

• Four-Year Relief for New Arrivals – New UK residents will benefit from a four-year period where foreign income and gains are exempt from UK tax. This applies only if they have been non-resident for the previous ten consecutive tax years.

The concept of domicile will no longer determine tax liability. Instead, the tax regime will shift to a residence-based system.

• Inheritance Tax (IHT) Changes – IHT will be based on residence rather than domicile. From April 2025, individuals who have been UK residents for more than ten years will be subject to IHT on their worldwide assets, not just UK assets. This includes assets held in trusts​.

• Transitional Arrangements – Transitional reliefs include a 50% reduction in the taxable amount of foreign income for the 2025/26 tax year and a temporary 12% tax rate for repatriating previously unremitted foreign income and gains​.

• Trusts – Foreign assets in some property trusts established before 6 April 2025 will remain outside the scope of IHT, but post-2025 trusts will follow the new residence-based rules​.

Implications for IHT Planning

Given these reforms, the client’s potential IHT exposure and planning strategies need careful reconsideration:

1. Non-UK Assets and IHT:

Currently, non-Doms are only subject to IHT on UK assets. Post-reform, non-doms resident in the UK for over ten years will face IHT on their worldwide assets. This significantly broadens the IHT net and impacts estate planning strategies​.

2. Residence-Based IHT:

For clients who have been UK residents for less than ten years, it is critical to understand the timing of their residency and how it will affect their IHT liability under the new rules. Planning should consider the ten-year residence rule to mitigate worldwide IHT exposure​.

3. Use of Trusts:

Establishing certain trusts before April 2025 may still provide IHT protection for non-UK assets. However, post-2025 trusts will be subject to the new regime, making early planning crucial to enable taxpayers to organise their affairs.

4. Foreign Income and Gains:

Utilising the transitional reliefs, such as the 50% tax reduction and the temporary repatriation facility, can optimise tax efficiency during the transition period. This may include moving assets before the new rules fully apply​.

Post-reform, non-doms resident in the UK for over ten years will face IHT on their worldwide assets. This significantly broadens the IHT net and impacts estate planning strategies​.

Conclusion

The abolition of the non-Dom regime and the shift to a residence-based IHT system from April 2025 represents a significant change in UK tax law. These reforms necessitate a thorough review of estate planning strategies to ensure tax efficiency and compliance with the new rules. Early planning and strategic use of transitional reliefs can help mitigate the impact of these changes.

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